R Tidechain Ltd v Commissioners for HM Revenue and Customs

Introduction

This is an application for permission to apply for judicial review and for urgent interim relief in circumstances that I shall describe.

Foskett J concluded that it was necessary to hear from the defendant, HMRC, before considering the interim relief application and, accordingly, the matter was listed for hearing yesterday. Because the parties only concluded their submissions at just before 5.30 pm last evening, I am delivering judgment now.

The claimant, Tidechain Limited, is an alcohol and beverages wholesaler and has been trading for 12 years. It pays VAT on its wholesale trades and, given that the value of its supplies exceed the threshold limit, it is required to be registered for VAT by reason of section 3 of the VAT Act 1994 and has been so registered since September 2002.

Its sole director is Mr Suleyman. It has no other staff nor any premises. Mr Suleyman explains that the claimant's business model is to buy and sell on a back-to-back basis with slender margins and minimal overheads. Although the profit on on a single transaction is small, when many transactions are performed, that generates a respectable commercial profit on low overheads and a reasonably good living for Mr Suleyman.

By a decision dated 17 November 2015, HMRC revoked the claimant's VAT registration with immediate effect. Though there are rights of review and appeal to the FTT, those have not yet been exercised. Instead, the claim form lodged on 24 November 2015 seeks permission to apply for judicial review to challenge the decision as unlawful.

Mr Suleyman describes the effect of cancellation on his company as being that it must trade without a VAT registration at a time when it is statutorily obliged to be registered or, alternatively, it cannot trade with those traders who will not trade with it whilst it does not have a VAT registration. That is problematic, and will affect its ability to trade and its profitability.

He says that the company's goodwill in and attaching to the business, which represents for him a capital asset, has been and will be diminished and further damaged to the point of being destroyed unless the claimant's VAT registration is restored swiftly. Accordingly, at the same time as seeking permission to apply for judicial review, the claimant seeks an urgent interim order requiring HMRC to re-register the claimant for VAT while it pursues this judicial review challenge.

The applicable law

The law is not in dispute. Section 3 of the VAT Act 1994 provides that a person is a taxable person for the purposes of the Act while he is or is required to be registered under the Act. Subsection 2, schedule 1 has effect with respect to registration and paragraph 1 of schedule 1 provides that a person who makes taxable supplies in excess of the prescribed level, which is currently £55,000, is liable to be registered if not registered. Accordingly, as Mr Jones QC for the claimant submits, the starting point in this case is to recognise in relation to VAT that the claimant is obliged by statute to be registered, absent some lawful basis for revoking his registration.

Paragraph 13 of schedule 1 sets out circumstances in which a person's registration may be cancelled. Cancellation is permissible if the registered person ceases to be liable to be registered. At HMRC's instance, cancellation is permissible where the Commissioners are satisfied that a registered person has ceased to be registrable; that is the effect of paragraph 13(2), but they shall not, under that paragraph, 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 registered. That is the effect of paragraph 13(5).

A number of remedies are available to a registered person who seeks to challenge the cancellation of his or her registration. First, there is a power of review under sections 83(a) to (f) of the VAT Act 1994, either by the decision-maker or a person not previously involved in the matter. An independent officer may uphold, vary or cancel the decision and may conduct a review whose nature and extent appears appropriate to HMRC in the circumstances.

Alternatively, by section 83 of the VAT Act there is a statutory right of appeal against the cancellation of registration and that appeal must be made to the First-tier Tribunal (Tax Chamber)("the FTT"). It is common ground that the FTT has no jurisdiction to grant interim relief of the kind sought in this application. Moreover, following the case of HMRC v Hock Limited [2012] UKUT 363, the FTT cannot rule on the lawfulness of the actions taken by HMRC.

Before turning to consider the decision letter and the grounds raised by Mr Jones on this application, it is helpful to consider the judgment of the Court of Justice of the European Union ("the CJEU") in Ablessio SIA, which has consequences for the proper interpretation of the VAT Act 1994.

The case involved a request for a preliminary ruling in circumstances where a Latvian VAT authority's refusal to register Ablessio for VAT arose. The refusal to register Ablessio was because it was said Ablessio did not have "the material, technical and financial capacity to carry out the declared economic activity, namely providing construction services."

Nothing turns for the purposes of this application on the fact that that case involved a refusal to register whereas this case involves cancellation of an existing registration. It is agreed that the principles established in Ablessio SIA apply equally although Mr Jones made a number of other points to which I shall return. In Ablessio SIA the CJEU held:

i. "28. However, according to the settled case-law of the Court, 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 Directive 2006/112 (see in particular, Case C-255/02 Halifax and Others [2006] ECR I-1609, paragraph 71; Case C-285/09 R. [2010] ECRI-12605, paragraph 26; and Case C-525/11 Mednis [2012] ECR, paragraph 31).

ii. 30. Therefore, Member States can, in accordance with Article 273, first paragraph, of Directive 2006/112, legitimately take measures that are necessary to prevent the misuse of identification numbers, in particular by undertakings whose activity, and consequently their status as taxable persons, is purely fictitious. However, these measures must not go beyond what is necessary for the correct collection of the tax and the prevention of evasion, and they must not systemically undermine the right to deduct VAT, and hence the neutrality of that tax (see, to that effect, case C-146/05 Collee [2007] ECR I-7861, paragraph 26; Nidera Handelscompagnie, paragraph 49; Dankowski, paragraph 37; and VSTR, paragraph 44)

b. ……

i. 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.

ii. 38. It is for the referring court to examine whether, having regard to all the circumstances of the case, the tax authority has established to the requisite legal standard the existence of sound evidence from which it may be concluded that the application for registration in the register of taxable persons subject to VAT by Ablessio might result in the misuse of the identification number or other VAT fraud."

On behalf of the claimant, Mr Jones submits that given the statutory requirement on the claimant to be registered, which is an obligation and not a privilege in contradistinction to the position in the CC&C case (see below), before cancellation can be lawful, HMRC must show as a matter of fact that all or substantially all of the trade is fraudulent or carried out with the intent to defraud. Moreover, the threshold set by Ablessio is high and unless HMRC can demonstrate these matters of fact, the cancellation will itself be unlawful.

It is unnecessary, in my view, to decide at this stage whether it is necessary that the sole or principal purpose of the trading is fraudulent as a prerequisite for taking action, since in any event it was the basis of the decision in this case. Mr Jones may well be right that it is a prerequisite but I need not go there.

To the extent that the criminal standard is invoked by Mr Jones and to the extent that he argues that to be lawful HMRC must demonstrate fraud as a matter of objective fact, I do not accept his submissions. National VAT regimes fall to be applied in accordance with a number of general principles of EU law whose origin is EU jurisprudence as well as the legislation that flows from the European Union organs. These include well...