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

At the start of the part of its decision entitled “Discussion”, which set out the reasoning for the decisions falling to be made in the case, the FTT summarised at [316] the position of HMRC that the Lead Appellants were part of “an organised and contrived structure with the purpose of defrauding the Revenue by claiming tax benefits (the FRS and EA) to which they were not entitled” and the “VAT numbers [of the Lead Appellants] were being used as part of that VAT fraud”. At [317] the FTT noted that this was disputed by the Lead Appellants who alleged, among other things, that HMRC had not pleaded allegations of fraud with sufficient particularity.

In relation to HMRC’s decision to de-register the Lead Appellants from VAT relying on Ablessio, the FTT recorded at [318] that the burden of proof was on HMRC and “no allegation of fraud or dishonesty is made against the directors of the Lead Appellants of whom, it is accepted, that they neither knew nor should have known of any alleged fraud”.

So far as the pleading was concerned, the FTT noted at [327] the submission on behalf of HMRC that it was plain from the outset that the case was one of fraud. This was, they submitted, made clear from the first paragraph of their statement of case, which said this:

“The Appellants in this litigation are participants in an organised and contrived structure with the purpose of defrauding the Revenue by claiming tax benefits to which they were not entitled. These tax benefits include registration for VAT, the use of the VAT Flat Rate Scheme (FRS), and the use of the Employment Allowance (EA). The Respondents estimate the tax lost from the scheme as a whole to be over £260 million.”

The FTT then went on to record at [329] fifteen different features of the scheme set out in the statement of the case that HMRC said were relevant to the fraud. Those features included the following: (1) the scheme involved the disaggregation of labour supplies into a network of interconnected MUCs each employing a small number of workers; (2) the initial directors of the MUCs were directors in name only; (3) the directors who replaced the initial directors and who were based in the Philippines were also directors in name only, making no investment in the MUCs and exercising no practical control over the companies; (4) the scheme depended on the tax advantages obtained from the misuse of the FRS and the employment allowance: in the absence of those advantages, the scheme did not make economic sense; and (5) control over the MUCs was exercised by the organisers/facilitators of the scheme.

The FTT also quoted from paragraphs 111 to 120 of HMRC’s statement of case, which HMRC said reinforced the clarity of their pleaded case. That run of paragraphs came under the heading “THE OPERATION OF THE MUCS – AN OVERALL SCHEME TO DEFRAUD THE REVENUE”. Paragraph 111 was in these terms:

“The Respondents assert that the MUCs were set up and controlled by the Scheme organisers as part of an orchestrated overall scheme to defraud the Revenue whether or not the directors of the MUCs themselves were aware of that fact.”

The FTT determined the pleading issue as follows:

“331.

…Mr Margolin contends that the SOC fails to give any adequate or sufficient particulars of the acts or omissions that are said to constitute the alleged fraud, who undertook dishonest acts and the basis on which any relevant acts or knowledge is to be attributed to the Lead Appellants. We agree with him that it should not be for the Lead Appellants or the Tribunal to wade through the SOC seeking to ascertain whether an act or omission is relied upon as a basis for the allegation of fraud. Additionally, we note that neither the words “dishonest” nor “dishonestly” appears anywhere in the SOC.

332.

That said, the SOC does contain references to certain individuals such as Mr Funtanilla being the director of Compass Star (which had a significant degree of control in the running of the MUCs) and other individuals who, like Mr Funtanilla, attended hospitality events such as “Director’s Nights” in the Philippines and are alleged to be “key players”, promotors, “closely linked” to Compass Star and “central to the MUC model”. However, as Officer Knowles accepted, there are no specific allegations particularised in the SOC that any individual or corporate entity is dishonest or has knowingly committed fraudulent acts.

333.

As such, although we do not consider that the SOC contains the particularisation necessary to enable us to identify the fraudster or fraudsters behind the MUC scheme, we do consider that it does just enough to make it clear to the Lead Appellants that HMRC’s case, the case they have to meet, is that the MUC scheme as whole was and is itself fraudulent. We also consider that the Lead Appellants were aware of the case they had to meet and that this is clear by the evidence served by them on 3 August 2023, in particular that of Mr Funtanilla who, as Mr Puzey put it, was, “at pains to address and dispute the allegation that the MUC scheme was dishonest”.”

Having come to that conclusion, the FTT recorded at [334] that it was then necessary to consider whether the MUC scheme “involved the fraudulent use of the Lead Appellants’ VAT numbers”. As to which, the FTT considered that:

“339… [The] evidence before us leads to an inevitable conclusion as to the lack of any independence or control by the directors of the Lead Appellants of “their” MUCs who, as alleged in the SOC are “directors in name only” and approve whatever is asked of them by the organisers of the fraud who clearly have a dominant influence over them.

345.

… Although we agree with Mr Margolin that control is not synonymous with fraud, it is clear that, without the tax advantages obtained by the FRS and EA, the MUCs were unable to make a profit, something that Mr Southern QC warned in his Opinion would undermine “their commercial credibility”.

346.

Therefore, having regard to all the circumstances, the organisers of the MUC scheme must have known that the Lead Appellants were not entitled to use the FRS as a result of their association with the organisers and being closely bound to one another by financial, economic and organisational links and only entitled to claim EA in consequence of avoidance arrangements.”

Having made those findings, the FTT stated its conclusion in relation to the decision of HMRC to de-register the Lead Appellants from VAT:

“347.

As such, we consider that there is sound evidence giving objective grounds for concluding that the VAT numbers of the Lead Appellants were used for fraudulent purposes and, subject to whether their directors knew or should have known that this was the case (which we consider next) we find, applying Ablessio, that the Lead Appellants were liable to be de-registered for VAT.”

The FTT determined whether knowledge on the part of the directors was required for the application of the Ablessio principle concluding that it was:

“353.

… We agree with Mr Margolin who, relying on the observations of both the Upper Tribunal and FTT in Impact, contends that any argument advanced by HMRC on the basis of Ablessio cannot succeed in the absence of any knowledge by the directors of the Lead Appellants that they were facilitating (enabling) the fraud of another, i.e. the organisers of that fraud.

354.

It is quite possible that we would have reached a different conclusion if it had been pleaded and put to the directors of the Lead Appellants in cross examination that, having regard to all the circumstances, particularly in light of how they were appointed, their limited duties and responsibilities, their lack of any real decision making and their receipt of payments from Compass Star rather than the companies of which they were directors, they had either known or should have known of the fraud.”

The FTT set out its reasoning in relation to the application of the FRS as follows:

“358 … [H]aving found that the Lead Appellants were not independent entities but under the control or “dominant influence” of others, the scheme organisers, we do not agree with Mr Margolin that HMRC were unreasonable to take into account their association with others within the meaning of Regulations 55L and 55A(2) of the 1995 Regulations.

361.

Accordingly, we find that HMRC’s decision to terminate the Lead Appellants’ use of the FRS, having considered it was necessary for the protection of the revenue, was reasonable as were the assessments issued in consequence of that decision. However, even if that were not the case, having concluded that the Lead Appellants were associated with another person and therefore ineligible for the FRS, we consider that it was inevitable that HMRC would have come to the same conclusion (see John Dee Limited v C&E Commissioners).”

Finally, it dealt with the issue of the entitlement to the employment allowance:

“363.

Given our conclusion that HMRC have established that the MUC scheme as a whole was fraudulent, it must follow that the Lead Appellants were only entitled to qualify for EA “in consequence of avoidance arrangements”. Therefore, under s 2(10) NICA the Lead Appellants “cannot qualify” for EA and their appeals against HMRC’s decisions that they were not entitled to the EA cannot succeed.”