Cancelling a VAT registration and abuse of law

The Court of Appeal has upheld the decision that HMRC may use EU principles based on abuse of law to cancel a taxpayer's VAT registration where that person knew or should have known that they are facilitating VAT fraud: Impact Contracting Solutions Ltd v HMRC [2025] EWCA Civ 623. The Court agreed with the tribunals below that that the principle would enable the cancellation of a VAT registration of a trader even where that trader also made genuine, untainted taxable supplies, subject to a requirement that such action was proportionate.

Background

The taxpayer company, ICSL, operated in the labour provision market. Its customers were temporary work agencies and its suppliers were around 3000 mini-umbrella companies. In 2019, HMRC decided to cancel ICSL's VAT registration in reliance of the principle set out in the decision of the CJEU in Ablessio (Case C-527/11). HMRC considered that ICSL was registered for VAT principally or solely to abuse the VAT system by facilitation VAT fraud by enabling the mini-umbrella companies to fail to account for VAT on their supplies. Ablessio was a Latvian case where the tax authority refused to register a company on the basis that there was a risk of tax fraud. In it, the CJEU held that a tax authority could refuse to register a company where it has established on the basis of objective evidence suspicion that the VAT identification number will be used fraudulently, provided that to do so was proportionate in all the circumstances.

ICSL appealed arguing the preliminary point of law that HMRC did not have the power to deregister a taxpayer who was not itself acting fraudulently and/or who otherwise made genuine, untainted taxable supplies. Both the FTT and Upper Tribunal rejected ICSL's appeal.

Decision of the Court of Appeal

The Court noted that permission to appeal in this case had been granted since it raises an important point of principle. Whilst Kittel [2008] STC 1537 is well-established authority that would justify the denial of input tax deductions if it is proved that ICSL knew or should have known that it was participating in transactions connected with VAT evasion, the CJEU has not in terms extended that formulation to deregistration (or denial of registration). Given the potential impact on a trader's ability to carry out legitimate transactions, it was appropriate for the Court to consider carefully the scope of HMRC's power to deregister.

Firstly, the Court reviewed the status of the EU principle of abuse of law (or Halifax principle) as that was the basis of the Ablessio decision. In particular, the Court confirmed that the Halifax principle is a broad free-standing principle of EU law which applies regardless of domestic legislation. Halifax established the principle that VAT is subject to an abuse principle, namely that it cannot be relied on for abusive or fraudulent ends. Moreover, the Court noted that the approach to the principle in Kittel was to treat participants in transaction chains who knew or should have known about a fraud as participants in that fraud. The principle that VAT rights do not extend to those participating in fraud (in the Kittel sense) or other abuse was confirmed in Italmoda (Case C-131/13). Whilst the CJEU did not expressly consider the position of a person merely facilitating fraud in Ablessio, there was nothing in that case to suggest that the principle could not or should not apply to a facilitator of VAT fraud.

It was clear to the Court that the wider abuse principle could entitle HMRC to deregister a taxable person as well as refusing to register a trader. The Court then agreed with HMRC that the correct approach to the question whether the deregistration of ICSL was lawful depends on (a) whether it knew or should have known that it was taking part in transactions connected with the fraudulent evasion of VAT and (b) whether deregistration was proportionate step on the facts.

Since this case was only an appeal based on a preliminary issue of law, the question whether or not ICSL knew or should have known of the fraudulent transactions or whether deregistration was proportionate were not before the Court. One effect of this was that ICSL was required to argue that HMRC did not have power to deregister a trader if the VAT fraud was by another party (even if they were a conspirator) or could never deregister a trader with genuine, untainted taxable supplies (no matter how small). The Court rejected these arguments. However, it did stress that the cases emphasise that deregistration must be a proportionate measure for HMRC to take and this means it must be based on "sound evidence giving objective grounds" for considering the VAT registration will be used for fraud and must also be based on an overall assessment of the situation. On this latter point, the Court noted that "the proximity and extent of a facilitator's involvement in VAT fraud are likely to be relevant factors in determining whether the tax authority's action is proportionate on the facts, alongside other factors including the extent of the anticipated untainted supplies, but that is very different to ruling out action in relation to VAT registration altogether".

Finally, the Court rejected ICSL's arguments that deregistration would undermine other principles of the VAT system, including fiscal neutrality and legal certainty.

Comment

The decision highlights the wide-ranging nature of the abuse of law principle in relation to VAT and the ability of tax authorities to counter abusive arrangements where a taxpayer knew or should have known that they are involved in abusive arrangements. In particular, a person who knew or should have known that they are facilitating fraud in the supply chain is, essentially, treated as participants in the fraud and, as such, the VAT system incorporates a duty of due diligence in addition to honesty on taxpayers.

It should be noted that HMRC's decision to deregister ICSL and also the appeal against the decision were both made before 31 December 2020, so it was common ground that EU law remained applicable in this case.