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Impact Contracting Solutions Ltd v Revenue and Customs
Factual and Procedural Background
This appeal concerns the scope of HMRC's authority to deregister a person for VAT purposes when that person has facilitated VAT fraud committed by another. The Appellant, Company A, challenges decisions by the Upper Tribunal ("UT") which held that HMRC may deregister a person who did not themselves fraudulently evade VAT but facilitated another's VAT fraud, provided the person knew or should have known of the facilitation. The UT also held that deregistration may occur even if the person was simultaneously making legitimate taxable supplies and that such deregistration does not breach EU principles of proportionality, fiscal neutrality, or legal certainty.
The UT decision arose on appeal from the First-tier Tribunal ("FTT"), which had determined preliminary legal issues without detailed factual findings. Company A was incorporated in 2015 and operated in the labour provision market, dealing with temporary work agencies and approximately 3,300 suppliers known as "mini-umbrella companies" ("MUCs"). HMRC considered the arrangements between Company A and the MUCs to be contrived, with the MUCs failing to properly account for VAT.
On 16 September 2019, HMRC wrote to Company A denying a deduction for approximately £47 million of input tax claimed on supplies between January 2016 and April 2019, relying on EU case law establishing that supplies connected with VAT fraud cannot support input tax deductions if the recipient knew or should have known of the fraud. The letter also informed Company A of immediate cancellation of its VAT registration on the basis that it was using its VAT registration principally for fraudulent purposes.
Company A appealed both the denial of input tax deduction and the deregistration decision. The FTT directed a hearing on preliminary issues concerning the scope of the principle established by the Court of Justice of the European Union ("CJEU") in Ablessio, which concerned refusal of VAT registration. Company A denies that the supplies from the MUCs were connected with fraud or that it knew or should have known of any fraud. The appeal before this court addresses the legal principles relevant to deregistration in these circumstances.
Legal Issues Presented
- Whether the principle in Ablessio applies only to persons who have themselves fraudulently defaulted on VAT obligations or also to persons who have facilitated VAT fraud by another.
- If the principle applies to facilitators, whether mere facilitation is sufficient or whether it must be shown that the facilitator was dishonest or knew or should have known of the fraud.
- Whether deregistration of a person facilitating VAT fraud is lawful even if that person is making legitimate taxable supplies unconnected with fraud.
- Whether deregistration in such circumstances breaches EU principles of proportionality, fiscal neutrality, or legal certainty.
Arguments of the Parties
Appellant's Arguments
- The principle in Ablessio applies only to persons who fraudulently default on their own VAT obligations or intend to do so; it does not apply to facilitators.
- If facilitation is within Ablessio, it only applies where the facilitator has actual knowledge of the fraud amounting to dishonesty.
- A facilitator who intends to make any legitimate ("untainted") supplies may not be deregistered, as deregistration would undermine the right to deduct input tax and breach principles of fiscal neutrality and legal certainty.
- The "knew or should have known" test derived from Kittel has no application to registration or deregistration.
- Deregistration based on facilitation without fraud would be disproportionate and contrary to EU law.
Respondent's Arguments (HMRC)
The opinion does not contain a detailed account of the Respondent's legal arguments beyond references to their submissions supporting the UT's conclusions and reliance on relevant EU case law.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Kittel v Belgium and Belgium v Recolta Recycling SPRL [2006] ECR I-6161 | Established the "knew or should have known" test for denying input tax deductions where the taxable person participates in VAT fraud. | Used to support that facilitators who knew or should have known of VAT fraud are to be treated as participants and can be denied VAT rights, including deregistration. |
| Valsts ienemumu dienests v Ablessio SIA EU:C:2013:168 | Addressed refusal of VAT registration and the requirement that tax authorities have sound evidence to prevent misuse of VAT numbers. | Interpreted to apply also to deregistration and to permit deregistration of facilitators with knowledge or constructive knowledge of fraud, subject to proportionality. |
| Halifax plc v Commissioners of Customs & Excise [2006] Ch 387 | Established the abuse of law principle in VAT, prohibiting reliance on VAT rules for abusive or fraudulent ends. | Provided foundational principle that VAT cannot be used for fraud and that tax authorities may act to prevent abuse. |
| Italmoda EU:C:2014:2455 | Confirmed that persons who knew or should have known they participated in VAT fraud are themselves fraudulent actors; extended denial of VAT rights beyond input tax deductions. | Supported the extension of the "knew or should have known" test to other VAT rights including registration and deregistration. |
| Cussens and others v Brosnan [2018] STC 1957 | Confirmed that the prohibition of abusive practices applies broadly to rights and advantages under EU law and does not require a specific legal basis for refusal of rights where fraud is involved. | Supported the principle that VAT rights may be refused in cases of fraud or abuse irrespective of national law. |
| Butt v Revenue and Customs Commissioners [2019] EWCA Civ 554 | Confirmed the application of the Halifax abuse principle and Kittel in domestic law, rejecting the need for explicit statutory language to impose penalties for VAT fraud. | Reinforced that EU principles apply and that national courts must apply abuse principles even absent explicit domestic provisions. |
| R (Thames Wines Ltd) v HMRC [2017] EWHC 452 (Admin) | This case was cited but noted as judicial review matters and non-binding on substantive VAT law. | The court found no binding authority in this case for the substantive VAT issues in the appeal. |
| R (Ingenious Construction Ltd) v HMRC [2020] EWHC 2255 (Admin) | Similar to Thames Wines, a judicial review case not binding on substantive VAT law. | Not determinative of the issues in this appeal. |
| R (on the application of Seabrook Warehousing Ltd) v Revenue and Customs Commissioners [2019] EWCA Civ 1357 | Addressed the standard of review for proportionality in judicial review challenges. | Referenced in discussion of proportionality but not determinative of the EU law proportionality standard. |
| R (Lumsdon and others) v Legal Services Board [2015] UKSC 41 | Set out a stricter standard of proportionality review in judicial review context. | Considered but found not directly relevant to the EU law proportionality question in this appeal. |
| GST-Sarviz AG Germania v Direktor na Direktsia [2015] STC 1883 | Explained fiscal neutrality principle in VAT law. | Used to discuss fiscal neutrality in relation to input tax deductions and deregistration. |
| Rank Group Plc v Revenue and Customs Commissioners EU:C:2011:719 | Addressed fiscal neutrality and equal treatment of competing supplies. | Referenced in the context of fiscal neutrality objections to deregistration. |
| Promexor Trade SRL v Directia Generala a Finantelor Publice Cluj (Case C-358/20) | Restated principles from Ablessio regarding VAT registration and fraud prevention. | Not binding but considered persuasive in confirming the principles from Ablessio. |
| Cityland EOOD v Direktor na Direktsia (Case C-164/24) | Addressed national legislation permitting deregistration without full examination of infringements and found it disproportionate and contrary to legal certainty. | Used to emphasize the requirement for proportionality and proper assessment before deregistration. |
Court's Reasoning and Analysis
The court began by acknowledging that the appeal raises an important point of principle concerning the extension of the "knew or should have known" test from input tax deduction denial to VAT deregistration. It observed that the CJEU has not explicitly extended this formulation to deregistration but found no principled distinction between refusal of registration and deregistration, both being prospective measures.
The court emphasised that the appeal concerns preliminary legal issues without factual findings, so the proportionality of deregistration in the specific case remains to be decided at trial.
It found ICSL's arguments difficult to reconcile with the significant problem of VAT fraud, noting that restricting HMRC's powers as ICSL suggests would limit effective prevention of abuse. Deregistration is prospective and prevents future misuse of VAT registration.
The court reviewed EU case law, including Halifax, Kittel, Italmoda, Ablessio, and Cityland, concluding that the principle prohibiting reliance on VAT rules for fraudulent ends applies broadly to registration and deregistration. It accepted that facilitators who knew or should have known of VAT fraud are to be treated as participants in the fraud and may be deregistered, even if they also make legitimate supplies.
The court interpreted Ablessio and Cityland as requiring sound evidence and an overall proportionality assessment before deregistration, rather than outright prohibiting deregistration of facilitators. It rejected ICSL's narrower interpretation that deregistration should not apply to facilitators or those making untainted supplies.
Regarding proportionality, the court held that EU law does not categorically preclude deregistration of facilitators, and whether deregistration is proportionate depends on the facts. The court clarified that the legal test for proportionality in this context is distinct from judicial review standards and focuses on whether deregistration is never lawful under EU law, which it is not.
The court also addressed legal certainty and fiscal neutrality objections, concluding these principles yield to the abuse principle established in Halifax and developed in subsequent case law. It noted that denial of VAT rights to participants in fraud does not breach these principles.
Ultimately, the court found the UT was correct to hold that HMRC may deregister a taxable person who facilitated VAT fraud and knew or should have known of it, even if that person also makes legitimate supplies, provided deregistration is proportionate.
Holding and Implications
The court's final decision is to DISMISS THE APPEAL.
The holding confirms that HMRC has the power to deregister a taxable person who has facilitated VAT fraud by another party and knew or should have known of the facilitation, even if that person also makes legitimate taxable supplies. Deregistration in such circumstances does not inherently violate EU principles of proportionality, fiscal neutrality, or legal certainty.
The decision means that deregistration is a lawful and proportionate tool available to tax authorities to prevent VAT fraud and abuse, subject to an overall assessment of the facts and proportionality. No new legal precedent was established beyond affirming the application of existing EU principles to deregistration in these circumstances.
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