The King on the application of Nourish Training Ltd v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Bourne |
| Judgment Date | 20 February 2023 |
| Neutral Citation | [2023] EWHC 350 (Admin) |
| Court | King's Bench Division (Administrative Court) |
| Docket Number | Case No: CO/3963/2022 |
[2023] EWHC 350 (Admin)
THE HON. Mr Justice Bourne
Case No: CO/3963/2022
IN THE HIGH COURT OF JUSTICE
KING'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Richard Clayton KC and Rebecca Murray (instructed by Jurit LLP) for the Claimant
Howard Watkinson (instructed by HMRC) for the Defendant
Hearing date: 1 February 2023
Approved Judgment
This judgment was handed down remotely at 10am on 20 February 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
Introduction and background
The claimant, Nourish Training Limited, applies for (1) permission to apply for judicial review, and (2) interim relief in the form of an injunction. The claimant has also made a late application for permission to rely on further evidence.
The judicial review claim is directed against a decision made by the defendant, HMRC, by a letter dated 5 September 2022, cancelling the claimant's VAT registration with immediate effect from that date.
The claimant describes itself as “an employment business which, principally, provides industrial blue-collar type workers including warehouse staff, food processors and pickers to industries such as recycling, food, and logistics”. Its clients are companies which, themselves, provide workers and recruitment services to businesses in areas such as retail, warehouse and food processing. Its Statement of Facts and Grounds (SFG) states that its top five clients account for around 82% of its total business turnover. The workers in question are themselves recruited by other companies who supply them to the claimant. So each worker is supplied by a recruiter to the claimant, supplied by a claimant to a provider and then supplied by the provider to an end-user. The recruiter charges the claimant for the worker's services, plus VAT at the current rate of 20%. The claimant in each quarter's VAT return will reclaim the VAT paid, or “input tax”, from HMRC. The claimant meanwhile charges the provider for the worker's services, plus VAT at 20%, and accounts to HMRC in each quarter's VAT return for the VAT received or “output tax”.
The effect of deregistration is that the claimant cannot reclaim the input tax. It would therefore need to increase the price it charges to providers by around 20% in order to maintain its current margins. It says that in a competitive market, that would not be realistic.
Paragraph 1 of schedule 1 to the Value Added Tax Act 1994 (“ VATA”) requires certain persons to be registered for VAT, based on the value of their taxable supplies. Paragraph 9 of schedule 1 entitles others to be registered where they make taxable supplies below the threshold. Paragraph 13 of schedule 1 empowers HMRC to cancel registration where they are satisfied that the person has ceased to be registrable and is not entitled to be registered.
In Ablessio SIA (Case C-527/11), the Court of Justice of the European Union ruled that a trader may be refused VAT registration where there is “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” (paragraph 34).
In such a case, VAT registration may be cancelled, subject to the power of domestic courts to decide whether the tax authority has established to the requisite standard the existence of such “sound evidence”: see R (Tidechain Ltd) v HMRC [2015] EWHC 4031 (Admin) at [21] per Simler J (as she then was).
Similarly, the CJEU has decided that the right to recover input tax can be denied where transactions are connected with the fraudulent evasion of VAT and the trader knew, or should have known, that they were so connected: Kittel (Case C-439/04).
It is common ground in this case that proof that the Kittel test is met is sufficient to satisfy the Ablessio test for refusal, or removal, of registration, and also that these principles have remained applicable following the UK's departure from the EU.
Section 83(1)(a) of VATA gives a statutory right of appeal to the FTT against the cancellation of a VAT registration. The question on such an appeal is whether, on all the evidence before the FTT (not limited to the evidence considered by HMRC), HMRC's decision was right. If it was wrong, HMRC must restore the registration.
The FTT has no jurisdiction to grant interim relief in such a case: see Tidechain at [14].
According to the defendant, the labour provision market is very vulnerable to fraud and tax evasion. Where there is a chain of suppliers as described above and where one supplier in the chain bears the overheads of employing the workers in question – such as payment of national minimum wage, NI contributions and taxes – margins may become too small to sustain a commercial enterprise. The defendant says that sometimes the supplier at the bottom of the chain may resort to practices such as fraudulently pocketing monies charged as VAT and failing to account to HMRC for it.
The decision letter of 5 September 2022 alleges that such practices occurred in the present case and that the claimant knew or ought to have known that supplies were connected with VAT fraud:
“I consider that the following factors indicate that you are principally or solely registered to abuse the VAT system by facilitating VAT fraud:
1. Labour charge rates from suppliers are too low and not commercial. For example, there are instances where labour was supplied to Nourish Training Limited in October 2020 at £8.72 per hour which was National Minimum Wage at time of supply. Therefore, based on rates Nourish Training Limited paid to its suppliers, it would not have been possible for their suppliers to comply with National Minimum Wage, meet its statutory obligations as an employer and make a sustainable profit. As Nourish Training Limited also employ temporary workers via PAYE, they would be aware of the additional costs associated with employing a worker such as Employers National Insurance Contributions and other statutory obligations e.g., holiday pay. Therefore, Nourish Training Limited ought to have known the rates they were being offered were too good to be true.
2. Timeline of engagements demonstrate that Nourish Training Limited have consistently used labour providers whose supplies are connected with VAT fraud resulting in substantial tax losses to HMRC. Once a provider is deregistered for VAT, they are immediately replaced by a new supplier, and in most cases, these transactions are later connected with fraudulent evasion of VAT. The only reasonable explanation for this pattern of behaviour is that the relationships between Nourish Training Limited and its suppliers were contrived to further an overall fraud.
3. £8,230,124 of input tax claimed by Nourish Training Limited from VAT period ending 09/18 up to and including 03/22 has been traced back to the fraudulent evasion of VAT. This represents a high percentage of total input tax claimed by Nourish Training Limited. In some periods all input tax reclaimed in relation to supplies of labour was connected with fraudulent evasion of VAT. Such high percentages are considered to be evidence for contrivance, and for Nourish Training Limited's complicity in such.
4. Nourish Training Limited finds the workers, then places them with labour providers who then supply them back to Nourish Training Limited – charging VAT on the whole supply. As Nourish Training Limited finds the workers, this arrangement does not make commercial sense as this would increase Nourish Training Limited costs, given it would be expected that the labour provider would be adding an additional profit margin on labour supplies made to Nourish Training Limited.
This arrangement also does not make sense from a cashflow perspective, as Nourish Training Limited would be paying out an additional 20% on each invoice to account for VAT, which would not be present if they engaged the workers directly via PAYE.
Therefore it is not clear what value if any, these labour providers provided to Nourish Training Limited. The fact that Nourish Training Limited did not seek to question the integrity of such outwardly uncommercial practises indicates at the very least it ought to have known that the supplies were connected with fraud.
5. Despite receiving education on due diligence and notifications from HMRC of suppliers being deregistered for VAT, Nourish Training Limited on several occasions, continued to trade with and/or obtain recommendations from the same individuals, resulting in further tax losses to HMRC. I have concluded that Nourish Training Limited chose to ignore the advice and warnings given to it by HMRC given its high incidence of participation in fraudulent supply chains over a sustained period.
Whilst Nourish Training Limited may satisfy the formal requirements for VAT registration under Schedule 1 of the VAT Act 1994, HMRC considers that the VAT registration is being used to facilitate VAT fraud, and in accordance with the principles recited above, its VAT registration should be cancelled.”
The claimant immediately lodged an appeal against the decision letter at the First Tier Tribunal (Tax) (“the FTT”). However, it is feared that a hearing before the FTT will not take place for some time, a subject to which I return below. Since the FTT cannot grant interim relief, the claimant has issued this claim in the hope of obtaining an order by way of interim relief to restore its VAT registration pending resolution of the issues. It contends that it will become insolvent if it does not obtain that relief.
HMRC opposes the grant of permission and interim relief, contending in...
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IMPACT CONTRACTING SOLUTIONS LIMITED v THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS [2023] UKUT 00215 (TCC)
...other decisions of the High Court and Upper Tribunal regarding Ablessio such as R (on the application of Nourish Trading Ltd) v HMRC [2023] EWHC 350 (Admin); R (on the application of S&S Consulting Services (UK) Ltd v HMRC [2021] EWHC 3174 (Admin); R (on the application of Tidechain Ltd) v ......