R S&S Consulting Services (UK) Ltd v The Commissioners for HM Revenue and Customs

Hearing date: 28 October 2021

Approved Judgment

Introduction

This is a renewed application for injunctive relief by the Claimant, S&S Consulting Services (UK) Limited (S&S), following refusal on the papers by the single judge.

S&S seeks a mandatory injunction under s 37 of the Senior Courts Act 1981 (SCA 1981) requiring the Defendant, the Commissioners for Her Majesty's Revenue and Customs (HMRC), to re-register it for VAT pending either: (a) the outcome of its application for judicial review of HMRC's decision of 27 August 2021 to de-register it for the purposes of VAT (the Decision); and/or (b) pending the outcome of its appeal to the First-tier Tribunal (Tax) (the FtT) against the Decision and a related VAT assessment.

HMRC cancelled S&S's registration because, following an investigation, they concluded that S&S was principally or solely registered to abuse the VAT system by facilitating VAT fraud.

It is right to make clear at the outset that S&S strongly denies that allegation and any wrongdoing.

It is common ground that the Decision has serious potential consequences for S&S's ability to carry on in business. It is now unable to issue VAT invoices for taxable supplies. S&S says it may even become insolvent as a result. For example, the Decision has the effect of limiting S&S's lawful turnover to the VAT threshold of £85 000; if S&S were to trade in excess of that figure then it might be acting unlawfully. It is also common ground that although S&S has lodged an appeal to the FtT against the Decision, the Tribunal has no power to require HMRC to re-register S&S by way of interim relief pending the outcome of the appeal.

S&S's application for permission to seek judicial review is outstanding and has not yet been considered on the papers. The parties were agreed that the only matter before me is the renewed application for injunctive relief.

Legislative framework: VAT registration and de-registration

VAT is a tax levied on goods and services provided in the UK in the course of business. It is charged on a percentage basis of the price of the goods and services provided. There are different percentage rates for different categories. The standard rate is currently 20%.

The principal domestic legislation concerning VAT is the Value Added Tax Act 1994 ( VATA), which gives effect to EU VAT law. The principal piece of EU legislation is the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ L 347, 11.12.2006) (the Directive).

Section 3(1) of VATA provides that a person is a taxable person for the purposes of VATA while he is, or is required to be, registered under the Act. Section 3(2) provides that Schs 1 to 3A shall have effect with respect to registration. Schedule 1 is the principal one for the purposes of this case.

Section 4(1) provides that VAT must be charged on any supply of goods or services made in the UK, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. By s 4(2), a taxable supply is a supply of goods or services made in the UK other than an exempt supply (a term defined in s 31 and Sch 9).

In summary terms, [1] of Sch 1 provides that a person who makes taxable supplies in excess of the prescribed levels in the prescribed circumstances, is liable to be registered if not registered. For example, [1(1)(a)] of Sch 1 provides that a person who makes taxable supplies but is not registered under the Act becomes liable to be registered under Sch 1 if at the end of any month, the person is UK-established and the value of his taxable supplies in the period of one year then ending has exceeded £85 000 (that figure being provided for in the Value Added Tax (Increase of Registration Limits) Order 2017 (SI 2017/290)).

A taxable person is required to account to HMRC for the VAT they charge on their taxable supplies in the manner specified in VATA and the regulations made under it. In very simple terms, at the end of each relevant period, the taxable person must: calculate the VAT he has charged his customers during that period on his taxable supplies (the output tax); calculate the VAT he has paid out on supplies to him during that period (the input tax); deduct the amount of input tax from the amount of output tax, and account to HMRC for the difference (or reclaim VAT if the figure is negative). This is done by the taxable person completing a VAT return for each period. If, on that return, the taxable person under-declares the value of the taxable supplies they have made during that period, and thus the amount of VAT owing, then there is scope to deprive HMRC of the VAT which is properly due to them.

By way of hypothetical illustration: suppose during the relevant accounting period the taxable person makes £100 000 of taxable supplies at the standard rate of 20%, with (for simplicity) zero input tax. He will have charged his customers £20 000 VAT, which is the amount owing to HMRC at the end of the period, for which he must account. But if on his VAT return he wrongly declares only having made £50 000 of supplies during that period, and hence having only charged £10 000 in VAT, and only accounts to HMRC for that amount, then HMRC is deprived of £10 000 in VAT which is due to it, and the taxable person stands to benefit in that amount. Obviously, HMRC has systems in place to try and ensure that taxable persons pay the proper amount of VAT owing on their taxable supplies. It has powers to carry out inspections and to require VAT registered traders to produce books and records to evidence what they have declared on their returns.

A person registered for VAT may be deregistered. Paragraph 13 of Sch 1 of VATA relevantly states:

“… (2) Subject to sub-paragraph (5) below, where the Commissioners are satisfied that a registered person has ceased to be registrable, they may cancel his registration with effect from the day on which he so ceased or from such later date as may be agreed between them and him.

…

(5) The Commissioners shall not under sub-paragraph (2) above cancel a person's registration with effect from any time unless they are satisfied that it is not a time when that person would be subject to a requirement, or entitled, to be 7 registered under this Act.”

Schedule 1 does not further specify the grounds on which a person's VAT registration may be cancelled on the basis they have ‘ceased to be registrable’. However, it is a principle of EU law that Member states have a legitimate interest in taking appropriate steps to protect their financial interests, and the prevention of tax evasion, avoidance and abuse is an objective recognised and encouraged by the Directive: see, in particular, Case C-255/02, Halifax and others [2006] ECR I-1609, [71]; Case C-285/09, R [2010] ECR I-12605, [36]; and Case C-525/11 Mednis [2012] ECR, [31]. Under well accepted principles, there was no need for national implementing legislation of the principle prohibiting abuse of the VAT system: Halifax; Advocate-General Maduro's Opinion, [62]–[82]; Pendragon Plc v Revenue and Customs Commissioners [2015] 1 WLR 2838, [27]; Mobilx Ltd (In Administration) v Revenue and Customs Commissioners [2010] STC 1436, [49].

Brexit has not altered the position. Section 42(4) and 42(4A) of the Taxation (Cross Border Trade) Act 2018 specifically preserves the effect of EU law principles preventing the abuse of the VAT system, following the UK's exit from the EU.

Thus, in accordance with these general principles, it was common ground before me that HMRC are entitled to cancel a person's VAT registration where they are satisfied that the registration is being used to facilitate fraud on the VAT system: Valsts ienemumu dienests v Ablessio SIA (C-527/11, 14 March 2013) (CJEU), [28]–[30]; R (Ingenious Construction Ltd) v Commissioners of HM Revenue and Customs [2020] EWHC 2255 (Admin), [6]. This is sometimes known as the Ablessio principle. In its judgment in that case the CJEU said:

“34. In order to be considered proportionate to the objective of preventing evasion, a refusal to identify a taxable person by an individual number must be based on sound evidence giving objective grounds for considering that it is probable that the VAT identification number assigned to that taxable person will be used fraudulently. Such a decision must be based on an overall assessment of all the circumstances of the case and of the evidence gathered when checking the information provided by the undertaking concerned.”

HMRC's internal manual on VAT Fraud ( VATF44500 — Basic interventions: other interventions: deregistering businesses that misuse their VAT number) provides:

“Using the Ablessio principle HMRC can, in certain circumstances, either refuse to allow a taxable person to register for VAT or deregister a taxable person from VAT where following an overall assessment of all the facts of the case there is objective evidence to conclude that the taxable person is solely or primarily:

• committing a VAT fraud

• participating in transactions connected with VAT fraud ie they knew or should have known that their transactions are connected with VAT fraud

• intending on committing VAT fraud or participating in a fraudulent scheme”

Sections 83A – 83C of VATA deal with the...