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

Shortly before the hearing before us, the Court of Appeal (in a judgment given by Falk LJ with which Popplewell LJ and Moylan LJ agreed) released its decision in Impact Contracting Solutions Limited v HMRC [2025] EWCA Civ 623 (“Impact”). In that case, the Court of Appeal held, agreeing with the Upper Tribunal, that HMRC could, relying on Ablessio, de-register a company which had not itself fraudulently evaded VAT but had facilitated the VAT fraud of another in circumstances where the company knew, or should have known, that it was facilitating that other person’s VAT fraud.

The FTT decided in this case that HMRC could not de-register any of the Lead Appellants, in reliance on Ablessio, unless, in the circumstances of this case, it was shown that the directors of the Lead Appellant concerned knew that they were facilitating (or enabling) the fraud of another, namely, the organisers of that fraud.

As we explain below, we consider that this is a conclusion founded on a misunderstanding of Ablessio andthe CJEU case law on abuse. The argument to the contrary involves reading in a qualification allegedly present in Impact for which there is, in our opinion, no proper basis.

In order to understand why these errors were made, it is necessary to start with the leading CJEU decisions on abuse so far as applicable to the VAT system, namely:

The case of Halifax concerned a complex avoidance scheme under which Halifax plc (which mainly made exempt supplies) sought to increase the effective rate of input VAT that it could recover through the use of two subsidiaries. The Commissioners of Customs & Excise disallowed the input tax deductions claimed by those subsidiaries. The CJEU held that the right to deduct input VAT was lost where the transactions from which the right derived constituted an abusive practice. The rationale for this was set out by the CJEU at [68] to [71] of its decision:

“68.

…according to settled case law, Community law cannot be relied on for abusive or fraudulent ends ...

69.

The application of Community rules cannot be extended to cover abusive practices by economic operators, that is to say transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law […]

70.

That principle of prohibiting abusive practices also applies to the sphere of VAT.

71.

Preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive...”

Accordingly, the CJEU held that the EU abuse-of-law principle operated in the context of the VAT system. At [76] the court said this:

“It is for the national court to verify in accordance with the rules of evidence of national law, provided that the effectiveness of Community law is not undermined, whether action constituting such an abusive practice has taken place in the case before it.”

The case of Kittel concerned the denial of deductions for input tax by the Belgian fiscal authorities. The court began its findings in that case by noting that the relevant VAT directive assigned a very wide scope to VAT ([40]) and that some of the key concepts relevant to the VAT system (such as ‘supply of goods’, ‘economic activities’ and ‘taxable person’) were objective in nature and applied without regard to the purpose or results of the transactions concerned ([41]). If the tax authorities were required to determine the intention of the taxable person in entering the transactions, that would undermine the common system of VAT ([42]). And that was even more so if they were required to determine the intentions of a trader other than the taxable person ([43]).

Accordingly, the court considered (at [52]) that the effect of Belgian law that transactions were void was not itself sufficient to displace the right to deduct input VAT. But the court then went on to consider whether there were other circumstances in which the right to deduct input VAT could be lost:

“53.

By contrast, the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’ are not met where tax is evaded by the taxable person himself…

54.

As the court has already observed, preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive... Community law cannot be relied on for abusive or fraudulent ends...

55.

Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively... It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends…

56.

In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.

57.

That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.

58.

In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.

59.

Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’.”