UT/2024/000069 - [2025] UKUT 00236 (TCC)

The CJEU decisions in Halifax and Kittel establish that:

The CJEU addressed in Halifax and Kittel how this overarching principle of abuse related to the more particular, governing principles of the VAT system: see [76] in Halifax and [59] in Kittel. In the case of Kittel, it is clear that the CJEU gave priority to the prohibition of abusive practices even where the transactions in question met the objective criteria contained in the relevant VAT directive (see [59]). The underlying rationale of the decision is, in our view, most evident at [58] where the CJEU noted that by treating “accomplices” of a VAT fraud in the same way as the “perpetrators” the objective of preventing fraudulent transactions is furthered: it would make it more difficult to carry out fraudulent transactions.

However, there was no indication in either Halifax or Kittel that the principle of abuse was subject to a more closely articulated series of pre-conditions. On the contrary, the decisions in Halifax and Kittel make it clear that the focus was a more teleological and practical one, namely prohibiting abusive practices in a way that was effective.

The decision in Ablessio should, in our view, be read in the same way. As was the case in Halifax and Kittel, the focus in Ablessio was on the ultimate objective of taking steps that “are necessary to prevent the misuse of identification numbers” or “might result in the misuse of the identification number or other VAT fraud” ([34] and [38]) or “the objective of preventing evasion” ([35]). It was, consequently, wholly in keeping with a focus on those high-level objectives that in other parts of its judgment the court expressed itself in a very general way about how the abuse was being carried out: for example, at [34] it simply referred to the probability of a VAT number being used fraudulently without saying who was carrying out the fraud and who knew, or should have known, about the fraud. This was recognised as such by Falk LJ at [63] of Impact where, in discussing Ablessio, she noted that “the CJEU was not intending to be prescriptive in describing the particular type of fraud that was required”.

In our view, the reason for this is clear: a more granular focus on the precise way in which the fraud had been carried out would be likely to undermine the practical, operational effectiveness of the rule. In Impact Falk LJ made this point in clear terms at [56]: she referred to the significant problems caused by VAT fraud and implicitly recognised the need for HMRC to have an effective tool for combatting VAT fraud in the future (by means of controlling the use of VAT numbers) rather than playing “catch up” by raising assessments in relation to supplies already made. As she made clear elsewhere in the judgment, the protection given to taxpayers against an overzealous exercise of the power to de-register by HMRC came from the separate requirement for the power to be exercised in a proportionate way.

Falk LJ also made it clear at [67] of Impact that, relying on Cityland, the “nature and the degree of seriousness of the infringements” must be examined. Proportionality required an overall assessment of the circumstances. In that connection, Falk LJ went on to note at [72] 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”.

It is, in our view, difficult to conceive of a more proximate involvement of a company in VAT fraud than its being the very means by which the fraud is being carried out. It would be inconsistent with the Ablessio principle to impose a requirement about the knowledge of the directors of the company in relation to VAT fraud in circumstances where it was the company’s own VAT number that was the means by which the fraud was being carried out and where it was a critical design feature of the scheme that, as the FTT found, the directors of the company concerned were “in name” only. There is no need to establish that the directors knew or should have known that they were facilitating a fraud or that any other person was dishonest or fraudulent. A requirement to that effect in the circumstances of this case would seriously undermine the effectiveness of the Ablessio principle in meeting the objective of making it more difficult for fraudulent transactions to be carried out. It would, in our view, represent a simple opportunity to those seeking to secure the opposite outcome.

It is true that in certain but limited places in their judgment in Ablessio (see [36]) and Cityland (see [47]) the CJEU referred to the fraud of the taxable person whose VAT number was in issue. But, as Falk LJ explained in Impact at [64] to [66], those references, read in the context of the judgments as a whole, do not “limit the scope of the principle” ([64]). In the case of Ablessio, the reference at [36] was, in our view, merely addressing the particular facts of the particular case concerned: see the opening words of the paragraph “In the circumstances of the case in the main proceedings”.

For the reasons given above, we consider therefore that HMRC’s appeal must succeed. There was an error of law at [353] of the FTT’s decision. We deal with the consequences of this finding once we have considered the grounds of appeal advanced by the Lead Appellants.