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

The case of Ablessio also considered the abuse-of-law principle in the context of the VAT system but this time in relation to the requirement under EU law to maintain accurate registers of taxable persons. As Falk LJ noted in Impact, the CJEU made its decision without the benefit of an Advocate General’s opinion on the basis that the case raised no new point of law. In Ablessio the Latvian tax authorities had refused to register a company because they considered that it did not have the necessary financial and other resources to trade and that its shareholder had made previous applications to register undertakings in circumstances where the Latvian tax authorities considered that those undertakings did not carry on real economic activity.

The CJEU made at [18] to [23] a number of important, preliminary points about the VAT registration system: (1) the essential aim of identifying taxable persons was to ensure that the VAT system operated properly; (2) the allocation of a VAT number simplified the inspection of taxable persons with a view to ensuring the correct collection of VAT; (3) the VAT number was an important piece of evidence of the operations carried out; and (4) although no conditions were placed under the relevant VAT directive in respect of the issue of VAT numbers, the discretion to issue them was not unrestricted: a refusal to register could not be made without legitimate grounds.

The CJEU held that the grounds relied on by the Latvian tax authorities were insufficient in themselves to constitute legitimate grounds (see [27]) but went on to explain the circumstances in which a VAT registration could be refused:

“28.

However, according to 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 ...

29.

Furthermore, Member States are obliged to guarantee the accuracy of the entries in the register of taxable persons to ensure that the VAT system operates properly...

30.

Therefore, Member States can … 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 systematically undermine the right to deduct VAT, and hence the neutrality of that tax…”

The CJEU then considered when refusing to register a person for VAT could be considered proportionate:

“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.

35.

…

36.

In the circumstances of the case in the main proceedings, it must be noted that the fact that a taxable person is not in possession of the material, technical and financial resources to carry out the declared economic activity is not, in itself, sufficient to demonstrate that it is probable that the latter intends to commit tax evasion. However, it cannot be excluded that circumstances of this nature, corroborated by the presence of other objective elements leading to the suspicion of the taxable person’s fraudulent intentions, may constitute factors that have to be taken into account as part of the overall assessment of the risk of evasion.

37.

….

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.”

The CJEU concluded at [39] in these terms:

“Articles 213, 214 and 273 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the tax authority of a Member State may not refuse to assign a value added tax identification number to a company solely on the ground that, in the opinion of that authority, the company does not have at its disposal the material, technical and financial resources to carry out the economic activity declared, and that the owner of the shares in that company has already obtained, on various occasions, such an identification number for companies which never carried out any real economic activity, and the shares of which were transferred immediately after obtaining the individual number, where the tax authority concerned has not established, on the basis of objective factors, that there is sound evidence leading to the suspicion that the value added tax identification number assigned will be used fraudulently. It is for the referring court to assess whether that tax authority provided serious evidence of the existence of a risk of tax evasion in the case in the main proceedings.”

Before turning to the Court of Appeal’s decision in Impact, we must first deal briefly with Case C-164/24 ‘Cityland’ EOOD v Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ – Veliko Tarnovo (“Cityland”), which concerned Bulgarian legislation under which a person could be de-registered for a failure to comply with VAT obligations.

The CJEU considered that, for reasons set out at [46] and [47] of its decision, legislation of the kind in question was in substance a penalty and was not proportionate:

“46.

Legislation which allows the tax authorities to remove a taxable person from the VAT register without providing for an obligation on the part of those authorities to examine fully the conduct of that taxable person in order to assess whether there is a risk to tax revenue and a likelihood of VAT fraud goes beyond what is necessary for ensuring the collection of all the VAT and combating VAT fraud.

47.

Without such a full examination of the conduct of the taxable person at issue, it is impossible to ascertain exactly the nature and the extent of any tax fraud committed by that taxable person and, consequently, to assess whether the removal of that taxable person from the VAT register constitutes an appropriate penalty for ensuring the collection of all the VAT and combating VAT fraud.”