Impact Contracting Solutions Ltd v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 September 2023 |
| Neutral Citation | [2023] UKUT 215 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mr Justice Edwin Johnson, Judge Thomas Scott
Upper Tribunal (Tax and Chancery Chamber)
Value added tax – Preliminary issues – Scope of Ablessio principle in relation to HMRC's powers to remove the registration of a person for VAT where that person has facilitated the VAT fraud of another – Whether such powers are contrary to UK VAT legislation – Whether HMRC can deregister a taxpayer in reliance on Ablessio where that taxpayer has made supplies untainted by fraud which exceed registration threshold – Whether deregistration breaches EU law principles.
In Impact Contracting Solutions Ltd v R & C Commrs [2023] BVC 509, the Upper Tribunal dismissed an appeal against the First-tier Tribunal’s finding that the Ablessio principle permitted HMRC to deregister a person who had used their VAT registration to facilitate fraud. The appellant argued that the principle was restricted to those who had committed fraud. The case concerned only this issue of principle which needs to be resolved before a substantive hearing on the facts.
The appellant, ICSL, was deregistered by HMRC on the grounds that its VAT registration was being used to facilitate VAT fraud committed by others. ICSL operated in the labour provision market, its customers comprised ~3,000 mini-umbrella companies which supplied the labour. HMRC considered that the arrangements between ICSL and its customers were contrived and had the effect that the customers failed to properly account for VAT.
HMRC considered that the CJEU decision in Ablessio () which empowers it to deregister a taxpayer if their VAT registration was being used for fraudulent purposes applied in this case. ICSL challenged this position on principle. The FTT () considered the position. It concluded that the Ablessio principle could apply to persons whose VAT registration was used to facilitate fraud as well as persons who committed fraud, provided it could be demonstrated that the person facilitating the fraud knew or should have known of their involvement in fraudulent activity.
ICSL appealed this decision on four grounds. The UT comprehensively rejected ICSL’s submissions and confirmed the FTT’s findings.
Ground 1 and 2
ICSL’s first two grounds of appeal were considered together. ICSL considered that, first, the FTT had reached an incorrect conclusion in law that Ablessio applied to persons who facilitate fraud and that, second, it had incorrectly considered itself bound by decisions in judicial review cases. Judicial review cases are not binding on the FTT and the cases on which the FTT relied were incorrectly decided.
On the first point, the UT rejected the very narrow interpretation of Ablessio that ICSL argued for. It studied the wording of the decision in Ablessio and determined that it could not be read as ICSL wanted. For example, the CJEU referred to ‘the misuse of [VAT] identification numbers’ and ‘misuse’ is a wide term which encompasses activity in addition to outright fraud (para. [73]–[77]). In short the UT could find nothing in the CJEU’s decision which restricted the application of Ablessio as ICSL argued and found that in ‘several respects’ it was suggestive of the broader construction favoured by HMRC (para. [78]). The UT reviewed other CJEU case law, it noted that there were checks on the exercise of HMRC’s powers. ICSL was arguing that Ablessio could never be applied to a person who facilitated fraud. The UT concluded that ‘to prevent Ablessio from ever applying to a facilitator of VAT fraud in such a situation would create a charter for fraud’ (para. [87]). Ground 1 was dismissed.
In relation to ground 2, the UT agreed that the authorities on which the FTT had reached its decision were persuasive rather than binding, but it agreed with the decisions made and therefore Ground 2 was also dismissed. The authorities included R (on the application of Ingenious Construction Ltd) v R & C Commrs .
Ground 3
The third ground of appeal was that to extend the Ablessio principle to facilitators as well as perpetrators of fraud was a breach of the EU principles of proportionality, legal certainty and fiscal neutrality. The majority of ICSL’s argument was that this was disproportionate. The UT reminded itself that the issue of principle before it was ‘whether it is necessarily, in any circumstances, a breach of the principle of proportionality to deregister a person who has facilitated fraud and who has made untainted supplies which would require VAT registration’ (para. [106]). It rejected ICSL’s submissions on the grounds that whether HMRC’s actions were disproportionate was something which should be assessed in the ‘light of all the facts and circumstances’ (para. [107]), therefore this matter should be left to the substantive appeal at which the relevant facts would be established. Ground 3 was dismissed.
Ground 4
ICSL’s fourth ground of appeal (which the UT addressed first) was that it was contra legem (against the law) to deregister a person for VAT on Ablessio grounds if they made untainted supplies (i.e. supplies wholly unconnected to fraud) which exceeded the VAT registration threshold (para. [40]). The UT summed up the point on which it was asked to rule as being that it was never permissible to deregister a person in such circumstances because it requires an impermissible contra legem interpretation of domestic law (para. [44]).
The UT reviewed the CJEU jurisprudence on the abuse of rights, of which Ablessio is part, and found that it constituted a free-standing principle whose application does not require a conforming interpretation of UK law (para. [53]). It further concluded that the fact that there is no specific statutory code in UK law covering this did not breach the EU principle of legal certainty (para. [55]). The UT could see no principled reason why a taxpayer involved in fraud should not expect this to result in his loss of entitlement to register (para. [57]). Ground 4 was dismissed.
Back in 2019 Impact Contracting Solutions Ltd appealed to the FTT for its case to be expedited because the loss of its VAT registration meant that it couldn’t trade and was at risk of becoming insolvent (). Its request was granted but four years later a substantive appeal still has not been heard because it has challenged the legal principle on which HMRC deregistered it for VAT. This challenge has been comprehensively dismissed by both the FTT and the UT so the case may now move to a substantive hearing on the facts.
Comment by Sarah Kay, Lead Tax Writer, Croner-i Ltd.
Daniel Margolin KC, Iain MacWhannell and David Bedenham, instructed by Joseph Hage Aaronson LLP appeared for the appellant
Howard Watkinson and Joshua Carey, instructed by the General Counsel and Solicitor to His Majesty's Revenue and Customs appeared for the respondents
[1] Impact Contracting Solutions Limited (“ICSL” or “the Appellant”) operated in the labour provision market. Its customers were temporary work agencies and its suppliers were approximately 3,000 mini-umbrella companies (“MUCs”) which supplied labour. On 16 September 2019, HMRC decided to cancel ICSL's VAT registration number with immediate effect. That decision was made in reliance on the principle in the decision of the Court of Justice of the European Union (the “ECJ”1) in Valsts ienemumu dienests v Ablessio SIA(C-527/11) [2013] BVC 109 (“Ablessio”). HMRC considered that ICSL was registered for VAT principally or solely to abuse the VAT system by facilitating VAT fraud, and that, in such circumstances, they were empowered by the principle in Ablessio to cancel the registration. In particular, HMRC considered that the arrangements between ICSL and the MUCs were contrived, with the effect that the MUCs failed properly to account for VAT on their supplies to ICSL.
[2] By reference to the same transactions which it considered justified deregistration, HMRC also denied ICSL various credits for input tax. That decision was the subject of a separate appeal by ICSL.
[3] ICSL appealed against HMRC's decision to cancel its registration. The First-tier Tribunal (Tax Chamber) (the “FTT”) directed that there be a hearing to determine various preliminary issues in relation to that appeal. Those preliminary issues were as follows:
Question 1
Does the principle in Ablessio apply only to a party that has itself fraudulently defaulted on its VAT obligations, or does it similarly apply to a party who has facilitated the VAT fraud of another party?
Question 2
If the principle in Ablessio does apply to a party who has facilitated the VAT fraud of another party, is simple facilitation sufficient, or must it additionally be proved that:
- the facilitating party was itself dishonest; or
- the facilitating party knew that it was facilitating the fraud, and/or
- the facilitating party should have known that it was facilitating the fraud?
[4] The FTT concluded as follows in relation to these two questions, as set out at [106]–[108] of its decision:
Question 1
[106] The principle in Ablessio applies both to a party that has fraudulently defaulted on its VAT obligations and to a party who has facilitated the VAT fraud of another party.
Question 2
[107] Simple facilitation by a party of the VAT fraud of another is not sufficient to apply the principle in Ablessio.
[108] It is not necessary to prove that the facilitating party was itself dishonest. It must, however, be proved that the facilitating party knew or should have known that it was facilitating the VAT fraud of another party.
[5] The Appellant has been granted permission to appeal on the following grounds, with the permission of the FTT as to Grounds 1, 2 and 3 and the permission of the Upper Tribunal (Judge Richards as he then was) as to Ground 4:
- Ground 1: The FTT erred in law when finding that the principle in Ablessio could be extended to deregistering...
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