Impact Contracting Solutions Limited v The Commissioners for HMRC

Impact Contracting Solutions Limited (“ICSL” or “the Appellant”) operated in the labour provision market. Its customers were temporary work agencies and its suppliers were approximately 3,000 mini-umbrella companies (“MUCs”) which supplied labour. On 16 September 2019, HMRC decided to cancel ICSL’s VAT registration number with immediate effect. That decision was made in reliance on the principle in the decision of the Court of Justice of the European Union (the “CJEU” (Footnote: ¹)) in Valsts ienemumu dienests v Ablessio SIA (C-527/11) (“Ablessio”). HMRC considered that ICSL was registered for VAT principally or solely to abuse the VAT system by facilitating VAT fraud, and that, in such circumstances, they were empowered by the principle in Ablessio to cancel the registration. In particular, HMRC considered that the arrangements between ICSL and the MUCs were contrived, with the effect that the MUCs failed properly to account for VAT on their supplies to ICSL.

By reference to the same transactions which it considered justified deregistration, HMRC also denied ICSL various credits for input tax. That decision was the subject of a separate appeal by ICSL.

ICSL appealed against HMRC’s decision to cancel its registration. The First-tier Tribunal (Tax Chamber) (the “FTT”) directed that there be a hearing to determine various preliminary issues in relation to that appeal. Those preliminary issues were as follows:

The FTT concluded as follows in relation to these two questions, as set out at [106]-[108] of its decision:

The Appellant has been granted permission to appeal on the following grounds, with the permission of the FTT as to Grounds 1, 2 and 3 and the permission of the Upper Tribunal (Judge Richards as he then was) as to Ground 4:

While Grounds 1 and 2 were argued before the FTT (where the Appellant was represented by different counsel to the counsel in this appeal), Ground 4 was not, and Ground 3 was not argued as a separate ground in the same terms. That has implications for the form taken by our decision. While Grounds 1 and 2 give rise to conventional appeals against the findings of the FTT, in substance we are required to reach our own determinations of Grounds 3 and 4 as preliminary issues, and that is the basis on which we have proceeded.

In common with the parties, we will first consider Ground 4, since it is, in effect, a knockout blow for the Appellant if it succeeds. We then consider Grounds 1 and 2 together, since they are facets of the same challenge. Finally, we will consider Ground 3.

Before we do so, it is helpful not only to set out the relevant legislation, but also to put in context the decision in Ablessio.

The relevant legislation is set out below. References to the PVD are to the Principal VAT Directive, being Council Directive 2006/112/EC, and references to VATA 1994 are to the Value Added Tax Act 1994.

It was common ground that EU law remains applicable for the purposes of the appeal, because the decision by HMRC to deregister, and the appeal against that decision, gave rise to proceedings commenced prior to 31 December 2020 (Footnote: ²).

Article 9 defines “taxable person” and “economic activity” as follows:

Article 213 provides that every taxable person “shall state when his activity as a taxable person commences, changes or ceases”.

Article 214 deals with the provision of a VAT number as follows:

The following powers are conferred on Member States by Article 273:

Section 3(1) VATA 1994 provides as follows:

A “taxable supply” is defined by section 4(2) as a supply of goods or services in the United Kingdom other than an exempt supply.

Registration for VAT is dealt with primarily in Schedule 1 to VATA 1994. Liability to be registered is provided for by paragraph 1 of Schedule 1:

Paragraph 5 of Schedule 1 states that:

Cancellation of a VAT registration is provided for by paragraph 13 of Schedule 1 as follows:

Section 6 of the European Union (Withdrawal) Act 2018 provides as follows:

In relation to EU law regarding abuse of the VAT system, section 42 of the Taxation (Cross-border Trade) Act 2018 (“TCBTA”) states as follows:

Section 42(4A) TCBTA was inserted into the TCBTA with retrospective effect by section 98 of the Finance Act 2021 (“FA 2021”), headed “Continuing effect of principle preventing the abuse of the VAT system”, which states:

The issues in this appeal, which relate to the scope of the Ablessio principle, must be considered in the context of general EU law on the prohibition of abusive practices in relation to VAT, since Ablessio concerned the application of that general law to the particular situation of registration for VAT.

The genesis of the principle relating to abuse of law in the VAT context is found in the decision in Halifax plc and others v Commissioners of Customs & Excise C-255/02 (“Halifax”). As Advocate General Bobek somewhat floridly observed in 2017 (Footnote: ⁵):

In Halifax, one question referred to the CJEU was whether under the Sixth Directive a taxable person has no right to deduct input VAT where the transactions on which that right is based constitute an abusive practice. An “abusive practice” was a reference to the Community law principle of abuse of rights which was well established outside the field of tax.

The CJEU decided as follows, at [68]-[76] of its judgment:

The CJEU in Halifax therefore laid down a general principle of interpretation, which applies regardless of any specific provision in the relevant legislation. An abusive practice arises where the two conditions described at [74] and [75] of the decision apply, which is to be determined by the national court on a case-by-case basis.

The decision in Halifax left at large precisely how the principle of abusive practice might apply to particular provisions in the VAT legislation enacted by Member States pursuant to the PVD. Given that in practice two of the most significant rights arising in relation to VAT are the right to deduct input tax and the right to zero-rate certain exports, it is not surprising that the Halifax principle has spawned offspring in both of those contexts. In relation to zero-rating, Mecsek-Gabona Kft v Nemzeti Ado Foigazgatosaga (C-273/11) (“Mecsek-Gabona”) confirmed that the principle applies to a right to exemption from VAT. In relation to the right to deduct input tax, the application of the principle was confirmed in Axel Kittel v Belgium; Belgium v Recolta Recycling (C-439/04 and C/440-04) (“Kittel”).

Relevantly to this appeal, in Kittel the CJEU explained why the Halifax principle was not prevented from applying by the need for objective certainty in the application of the VAT provisions, and also addressed the position of a person who was not evading VAT but who knew or should have known that he was taking part in a transaction connected with fraudulent evasion of VAT, at [53]-[59] of its decision:

Since this appeal is concerned entirely with the scope of Ablessio, it is helpful to summarise the relevant passages in that decision.

Ablessio concerned a request for a preliminary ruling from the CJEU in relation to a refusal by the Latvian tax authority to register a company for VAT, on the basis that (1) the authority considered that the company did not have the resources or capacity to carry out the declared economic activity, and (2) its shareholder had made previous applications for VAT registration of undertakings which did not carry out any real economic activity. The Court held that the principle of abuse of law did not justify a refusal to register “solely” on those grounds, “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”.

The Court issued its ruling without an Advocate General’s opinion. It began by summarising the relevance and practical importance of VAT registration, at [18]-[21] of its decision:

It then stated that while Article 213 of the PVD confers a discretion on tax authorities as to registering a person, they cannot refuse registration without legitimate grounds:

The Court placed emphasis on the broad interpretation which should be given to the concept of a “taxable person”. Tax authorities could not refuse to register a person for VAT solely on the grounds relied on by the Latvian authority. However, it was legitimate to refuse registration where a risk of abuse existed, but within limits:

Importantly, the Court made clear what was necessary in order for a refusal to register to be proportionate:

It was necessary for a national court to assess whether the relevant tax authority had “established, on the basis of objective factors, that there is sound evidence leading to the suspicion that the VAT identification number assigned will be used fraudulently”: [39] of the decision.

The Appellant’s skeleton argument frames Ground 4 in the following terms:

For a summary of the contra legem limitation in the EU law context, the Appellant referred us to the description of Advocate General Bot in Dansk Industri (DI) v Estate of Karsten EigilRasmussen (Case C441/14) EU:C:2016:278 at [68]:

The skeleton argument clarifies that this ground is a submission that, by reading into Schedule 1 to VATA 1994 “a power to deregister a taxable person who at the time of deregistration was entitled, and indeed required, by an Act of Parliament to be registered”, the FTT adopted an interpretation of the legislation which was contra legem and crossed the boundary into impermissible judicial amendment of legislation.

It is clear that the argument presented in the Appellant’s skeleton is that the Ablessio principle cannot apply in any situation to allow HMRC to deregister a person on the basis of suspected involvement in VAT fraud. However, in Mr Margolin’s oral submissions in this appeal that argument was the subject of material revision. The revised argument was that the Ablessio principle cannot be relied on to deregister a person who is able to demonstrate that he has carried out non-fraudulent transactions which would cumulatively exceed the threshold for VAT registration, because in such circumstances that would be contra legem.

Mr Margolin confirmed that the argument in the form advanced in the skeleton argument was abandoned in favour of this narrower argument. To his credit, Mr Watkinson did not object on behalf of HMRC to the argument being presented in this revised fashion, and we have considered Ground 4 on this amended basis.

Mr Margolin’s arguments were as follows:

For HMRC, Mr Watkinson argued as follows:

In considering Ground 4, it is necessary to keep in mind that this does not seek to determine as a preliminary issue that deregistration by HMRC in reliance on Ablessio is disproportionate, or subject to limitations, but rather that it is never permissible when the person in question has taxable supplies unconnected with fraud which exceed the threshold for registration, because that requires an impermissible contra legem interpretation of the domestic legislation.

The first question raised by Ground 4 is whether the Halifax abuse principle is a principle which applies to the interpretation of domestic legislation (as the Appellant contends) or is a broad free-standing principle of EU law which applies regardless of domestic legislation (as HMRC contend).

This question is not really addressed in the Appellant’s skeleton argument, which proceeds on the basis that it is a principle applicable to the interpretation of specific domestic legislation. In his oral submissions, Mr Margolin sought to distinguish Cussens and Schoenimport on the basis that in the present case there were specific legislative provisions dealing with registration and deregistration. He also argued that the application of the abuse principle always required a process of statutory interpretation, and relied on a statement by Moses LJ in Mobilx Ltd (inadministration) v Revenue and Customs Commissioners [2010] EWCA Civ 517 (“Mobilx”).

Mobilx concerned a denial of input tax credits on the basis of Kittel. The first point to note is that the decision lends support to HMRC’s position as to the nature of the Halifax principle. In that case the taxpayers argued that Kittel could not be applied without specific domestic legislation: see [45] of the decision. The Court of Appeal firmly rejected that contention, Moses LJ stating as follows:

Mr Margolin relied on a statement by Moses LJ at [49] of Mobilx regarding the obligation of national courts to apply the Marleasing principle to domestic VAT legislation. However, that statement must be seen in its context. As we have just described, Moses LJ in fact rejected the argument that domestic legislation was required in order to apply Kittel. He then went on to consider the taxpayers’ argument that, in any event, Kittel could not be extended to deny input tax to a person other than the fraudster because this would “impose a new accessory liability for fraud which does not exist in domestic law”: [48]. This was in effect another attempt to argue that the imposition of the abuse principle required enabling domestic legislation. When the relevant paragraph of Mobilx is considered in full, it is apparent that Moses LJ was stating that, while the Marleasing principle is settled law, it does not necessarily lead to the conclusion that the abuse principle requires enabling domestic legislation:

We agree with HMRC that Cussens and Schoenimport alsosupport the view that the EU abuse principle is a free-standing principle which does not require domestic legislation (Footnote: ⁷). The following passage from the decision in Cussens, for example, is consistent with the reasoning of Moses LJ some years previously in Mobilx:

In 2019, the Court of Appeal in Butt conducted a comprehensive review of the relevant domestic and EU authorities in this area, and discussed the issue of whether a conforming interpretation of domestic law was necessary in applying the abuse of rights principle. Rose LJ (as she then was) delivered the judgment of the Court, summarising (at [21]-[23]) the conclusions and approach of Moses LJ in Mobilx, including in particular the passages set out above. There followed a discussion of Cussens and Schoenimport, prefaced by the following statement, at [23]:

Rose LJ summarised the central conclusions in those two decisions as follows, at [24]:

Importantly in relation to Ground 4, Rose LJ described the effect and application of Kittel, Cussens and Schoenimport as follows, at [39]:

We consider that these EU and domestic authorities establish that the abuse of rights principle, of which Ablessio forms part, is a free-standing principle, and its permissible application does not require a conforming interpretation of UK VAT legislation (Footnote: ⁸). If a conforming interpretation is not required, then Marleasing is not in point. If Marleasing is not in point, then it follows that the contra legem principle said to apply by the Appellant as a limitation on Marleasing is not relevant.

Mr Margolin asserted that deregistration by HMRC on an Ablessio basis is “specifically prohibited” by the legislation, because paragraph 13(5) of Schedule 1 VATA 1994 prohibits HMRC from cancelling a VAT registration “with effect from any time unless they are satisfied that it is not a time when that person would be subject to a requirement, or entitled, to be registered under this Act”. However, this submission ignores the opening words of paragraph 13(5), which begins “[HMRC] shall not under sub-paragraph (2) above cancel a person’s registration…” (emphasis added). The significance of this is that the prohibition extends only to a cancellation pursuant to paragraph 13(2). Where, as we have concluded, deregistration is based on the EU principle of abuse of rights, there is no applicable statutory code, and no statutory prohibition. There is no contradiction of “the very wording of the national provision at issue”: Opinion of the Advocate General in Dansk Industri (DI) v Estate of Karsten EigilRasmussen (Case C441/14) at [68].

This absence of any specific statutory code indeed forms part of the argument raised by the Appellant that the application of the Ablessio principle to an existing registered trader with untainted supplies above the VAT threshold breaches the EU principle of legal certainty. We consider the issue of legal certainty further below in our discussion of Ground 3.

The principle of legal certainty “requires, in particular, that rules of law be clear, precise and predictable in their effect, especially where they may have negative consequences for individuals and undertakings”: U.I. Srl v Agenzia delle Dogane e dei monopoli Case C-714/20 at [61]. As the CJEU stated in Netherlands v Commission Case 326/85 at [24], “Community legislation must be certain and its application foreseeable by those subject to it”.

We do not agree that the application of the Ablessio principle to an existing registered trader with untainted supplies above the VAT threshold breaches the EU principle of legal certainty. There is no indication in the decision in Ablessio that this was a concern, and, while we acknowledge that there may be uncertainties arising as a consequence of deregistration which do not arise following a refusal to register (as was considered in Ablessio), that does not mean that deregistration itself, pursuant to Ablessio, breaches the principle of legal certainty. A taxpayer who knew or should have known that his transactions were connected with the fraudulent evasion of VAT can be certain that if he is found out he will not be entitled to deduct input tax. We see no principled reason why the same should not be true in relation to entitlement to register. In relation to input tax, Moses LJ explained the position in Mobilx as follows, at [61] (emphasis added to original):

In relation to the amendment made by Mr Margolin to the formulation of Ground 4, we consider that this is in substance an argument about the scope of the Ablessio principle rather than an argument that the principle is contra legem. In any event, there is no indication in Ablessio that the existence of other untainted supplies would mean that registration could not be refused where the national authority could demonstrate the necessary “strong evidence” of the risk of fraud. Nor do we consider that such a limitation would be appropriate or justified. The existence of other legitimate transactions might be relevant to whether a refusal of registration or a deregistration was proportionate, but to exclude those actions completely solely on the basis that other legitimate transactions existed would create a charter for fraud.

These conclusions are sufficient to determine the preliminary issue raised by Ground 4. However, in addition we consider that the effect of section 42 TCBTA, read together with section 98 FA 2021, is that “the principle of EU law preventing the abuse of the VAT system (see, for example, the cases of Halifax and Kittel)” has a clear statutory basis in UK law and is deemed always to have applied. Ablessio is an aspect of that principle, and is therefore applicable (whatever its scope and limitations) to registration and deregistration for VAT. While that does not resolve any debate as to the scope of that principle, as we have said that is not what Ground 4 seeks to determine. Ground 4 seeks to determine that, for a trader with untainted supplies above the VAT threshold, deregistration by HMRC in reliance on Ablessio is necessarilycontra legem. In our opinion, section 42 TCBTA means that argument must fail, as Ablessio is an aspect of the principle described in section 42, and, whatever its scope, its application in applying the VAT legislation is not contra legem.

Our conclusions mean that we do not need to address Mr Watkinson’s fall-back argument that a deregistration based on Ablessio in any event falls within the wording of paragraph 13(2) of Schedule 1, and we prefer not to do so.

Our conclusion in relation to the preliminary issue raised by Ground 4 is as follows:

Ground 1 of the appeal is that the FTT erred in law when finding that the principle in Ablessio could be extended to deregistering existing taxable persons which did not themselves fraudulently evade VAT, and in particular those which conducted taxable transactions which were not connected with VAT fraud. Ground 2 is that in reaching its conclusions on this issue the FTT erred in finding that it was bound by certain previous decisions, and those decisions are, in any event, wrong.

Grounds 1 and 2 are integrated aspects of the same complaint by the Appellant. We will deal first with the substantive arguments, and then with the question of the relevance of the authorities.

Mr Margolin emphasised the use of the words “appropriate steps” by the CJEU in Ablessio at [28]:

He argued that what constitutes an “appropriate step” would depend on the risk of evasion, avoidance or abuse, taking into account principles such as fiscal neutrality. He pointed out that at [30] of Ablessio the CJEU warned that any measures taken by Member States to combat abuse “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 the tax”.

Mr Margolin argued that various references in Ablessio to the factual situations when refusal of registration might be an “appropriate step” showed that the CJEU did not consider that such a power extended to a taxable person without fraudulent intentions; that was doubtless because to do so would systematically undermine the right to deduct.

Additionally, he said, because CJEU authority establishes that registration is only a formal requirement, and cannot undermine the right to deduct where the substantive conditions to deduct are met, cancellation of registration cannot logically be a measure which prevents VAT fraud.

Mr Margolin submitted that the FTT was wrong to have regarded the decisions in ThamesWines and Ingenious as binding, because they were decisions on applications for permission to apply for judicial review, and therefore not binding precedent. In any event, those decisions were wrong, as were a number of other court and tribunal decisions, in holding or assuming that the Ablessio principle was not limited in the ways suggested by the Appellant.

HMRC argued as follows:

We first consider what can be gleaned from Ablessio itself in relation to the issues raised by Ground 1. We then consider those issues as a matter of principle, taking into account wider CJEU case-law in relation to abuse of rights. Finally, we consider the relevance of certain domestic authorities relating to the Ablessio principle.

The decision in Ablessio does not address the question of whether the right to refuse registration extends to a person who is not fraudulent but who knew or should have known that it was facilitating VAT fraud. As to whether the terms of the decision indicate or imply the CJEU’s position on this issue, each party essentially renewed the arguments before the FTT. References below in the form [x] are, unless stated otherwise, to paragraphs in Ablessio.

In relation to [28], set out above, the Appellant argues that the reference to Halifax indicates that the CJEU was solely concerned with evasion or fraud and not a tax loss in a transaction chain. We have no hesitation in rejecting that argument. As we have described, the abuse of law principle in the VAT contextis broad and extends to those who facilitate VAT fraud. The three decisions referred to at [28] and the remainder of the decision in Ablessio lend no support for this argument.

At [30], the CJEU refers to the ability of Member States to “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”. The Appellant argues that the words “in particular” mean that the measures must relate to purely fictitious undertakings. In fact, those words carry the opposite implication, namely that the measures are not so restricted. It is also of note that the CJEU refers to “misuse” rather than fraudulent use of identification numbers, the former being of wider import. Finally as regards [30], it is relevant that the CJEU did not refer to misuse by the taxpayer or undertaking, but misuse in general, which again is not suggestive of the restriction put forward by the Appellant.

At [34], reference is made to the requirement that “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 person will be used fraudulently”. The Appellant invites us to infer that this must be a reference to fraudulent use by the taxpayer who is refused registration. We do not accept that that is a reasonable inference; indeed, it is again of note that in fact the CJEU did not refer to the probability of the number being used fraudulently by that person.

At [36], the CJEU refers to the probability that a taxable person “intends to commit tax evasion”. While in isolation that does address the position of a fraudster and not a facilitator, in the following sentence the Court refers to the taxable person’s “fraudulent intentions”, which is somewhat wider wording. In any event, the Court’s focus at [36] is on the factors which might be relevant in “the overall assessment of the risk of tax evasion”, not on the question of the extent of the principle.

The CJEU refers at [38] to “the existence of sound evidence from which it may be concluded that the application for registration…by Ablessio might result in the misuse of the identification number or other VAT fraud”. This wording in our view points away from the Appellant’s narrow reading of the Ablessio principle, since it is encompassing either misuse or “other VAT fraud”. Additionally, we note once again the absence of any reference to misuse or other VAT fraud by Ablessio.

In its answer to the question referred, the CJEU refers to “the suspicion that the VAT identification number assigned will be used fraudulently” and to “the existence of a risk of tax evasion”. For the same reasons as those given above, we do not agree with the Appellant that these are impliedly references only to fraudulent activity by the person to whom the number is assigned.

In conclusion, while the CJEU in Ablessio does not address the question of whether registration may be refused to a facilitator of VAT fraud, there is nothing which suggests that the CJEU considered that it could not or should not. Rather, we consider that the language used is in several respects suggestive of the broader construction proposed by HMRC and confirmed by the FTT.

So, we have concluded, in agreement with the FTT, that the statements made and language used by the CJEU in Ablessio itself do not support the restrictions proposed in Ground 1, and indeed, in some respects, suggest that the CJEU did not intend such restrictions to apply.

While there have been several CJEU decisions which have referred with approval to Ablessio, none have proposed or suggested either of the restrictions contained in Ground 1.

We turn to whether, as a matter of principle, it is necessary or justifiable to import such restrictions, taking into account the principles established by CJEU jurisprudence, particularly regarding abuse of rights in relation to VAT.

As we have said, Ablessio must be seen in context. It was a decision issued without an Advocate General’s opinion, which is an indicator that the CJEU did not consider that it was breaking new ground. Like Kittel and Mecsek-Gabona, Ablessio is a manifestation in a particular situation of the Halifax principle, which was itself an application of the EU principle or concept of abuse of rights. Particularly as respects the application of the broad Halifax principle to the right to deduct input tax, it is helpful to consider the rationale for its application in relation to a person who facilitates VAT fraud by another.

In Kittel, the CJEU explained that rationale in the following terms, at [55]-[59]:

So, the rationale for extending the abuse principle to a facilitator of fraud was said by the CJEU to be that such a person must be regarded as a participant in that fraud, who aids the perpetrators and becomes their accomplice. The conduct of such a facilitator was described in Schoenimport (at [64]) as itself constituting fraudulent conduct. In Mobilx, the Court of Appeal said this about the approach in Kittel (at [41]):

As a matter of principle, we can see no good reason why this approach and rationale should not apply in relation to the right of a facilitator of VAT fraud to be or remain registered. As the CJEU emphasised in Schoenimport, in relation to the right to deduct, at [68]:

As set out above, in Kittel the CJEU noted that “such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them”. That observation is, it seems to us, particularly pertinent in relation to a refusal to register or a deregistration based on Ablessio, because such an action is prospective and forward-looking. Unlike a refusal to deduct input tax, it addresses future risk of abuse of the VAT system. The restriction proposed in Ground 1 would prevent that course of action in relation to a facilitator of VAT fraud, in circumstances where the CJEU’s rationale is that such a person is a participant in the VAT fraud. In our opinion, such an approach would not be consistent with the authorities, or, indeed, the broad scope of the abuse principle in Halifax.

We do not consider that the position differs simply because a facilitator of another’s VAT fraud is already registered for VAT, and/or has made taxable supplies untainted by VAT fraud which would exceed the threshold for VAT registration. In either situation, a tribunal would need to be satisfied, taking such factors into account, that HMRC’s decision to deregister on the basis of Ablessio was “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…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”: Ablessio at [34]. HMRC’s decision would also need to be proportionate in all the circumstances: Ablessio at [30]. To prevent Ablessio from ever applying to a facilitator of VAT fraud in such a situation would create a charter for fraud. If a decision to prevent registration of a person facilitating VAT fraud would otherwise satisfy the significant safeguards described at [34] and [30] of Ablessio, it cannot in our opinion be consistent with the Halifax principle as explained in authorities such as Kittel and Schoenimport for that person to be able to escape the risk of deregistration altogether merely by prior registration or the making of untainted supplies. Such a result would be directly contrary to the aim stated in the PVD of preventing fraud and abuse of the VAT system.

Mr Margolin argued that because the absence of registration could not undermine the right to deduct where the substantive conditions to deduct were met, refusal to register or deregistration could not logically be a measure which prevented VAT fraud. We reject that argument for two reasons. First, as we discuss below in relation to Ground 3, registration produces potential VAT benefits (and therefore potential for VAT fraud) which are much wider than the right to deduct, and a refusal to register or a deregistration based on Ablessio may in any event address not only the right to deduct of the taxpayer in question, but also that taxpayer’s participation in the VAT fraud of another. Second, there is a distinction between the existence of a right to deduct and the ability to exercise that right: Tower Bridge GP Ltd v HMRC [2022] EWCA Civ 998 at [107]. A refusal to register or a deregistration addresses the risk of future abuse because it curtails that ability to exercise.

For the reasons above, we have concluded that as a matter of principle the restrictions set out in Ground 1 are neither justified nor appropriate.

The FTT discussed certain domestic authorities on which HMRC relied to support the proposition that the principle in Ablessio extended to the facilitator of a VAT fraud. The authorities mainly relied on by HMRC were the High Court decisions in Thames Wines and Ingenious.

In Thames Wines a taxpayer who had been deregistered for VAT by HMRC in reliance on Ablessio sought permission to apply for judicial review of HMRC’s decision and for interim relief to suspend that decision. Mr Bedenham, who was counsel for Thames Wines, argued that (1) the decision was unlawful because it was not permitted by domestic VAT legislation, (2) insofar as the decision purported to rely on European law as confirmed in Ablessio, HMRC did not have sound evidence to demonstrate that the claimant's VAT registration was being used fraudulently, and (3) in any event deregistration was disproportionate. Relevantly to Ground 2, Mr Bedenham argued that the Ablessio principle did not extend to a person who merely facilitated the VAT fraud of another person in the chain, and did not encompass abusive action falling short of fraud: [14] of the decision. In rejecting the application for permission to apply for judicial review, Judge Purchas did not accept that submission as being arguable, stating (at [43]):

Ingenious also concerned an application for permission to apply for judicial review and interim relief in respect of a decision by HMRC to deregister the taxpayer in reliance on Ablessio. The taxpayer argued that there was no power in domestic law to deregister, and that Ablessio applied only to a refusal of registration, not cancellation of an existing registration. Sir Ross Cranston decided that it was not arguable that HMRC lacked power to deregister, because that power arose not under domestic legislation but under the EU principle, described in Halifax, of abuse of law: [44] and [45] of the decision. In relation to whether the principle extended to a facilitator of a VAT fraud, Sir Ross Cranston said this (at [48]);

The FTT rejected various challenges to the correctness of Thames Wines and Ingenious, and decided that it was bound by those decisions. In this appeal, by Ground 2, ICSL asserts that the FTT erred in finding that it was bound by those decisions, because they were decisions on applications for permission to apply for judicial review, and were therefore not authoritative. Further and in any event, says ICSL, in common with a number of other decisions of the High Court, FTT and Upper Tribunal relating to Ablessio, they were wrongly decided.

It is the case that decisions on applications for permission to apply for judicial review are “generally not regarded as authoritative”: see R(Burkett) v Hammersmith and Fulham LBC (No 1) [2002] UKHL 23 at [41]. Further, Practice Direction (Citation of Authorities) [2001] 1 WLR 1001 generally restricts the citation as case-law authority of “decisions on applications that only decide that the application is arguable” (Footnote: ⁹). We note, however, that in Ingenious Sir Ross Cranston cited Thames Wines as authority in reaching his decision even though, as he noted, Thames Wines was itself a decision on an application for permission to apply for judicial review.

In any event, in this appeal we are required to determine as a preliminary issue the substantive issues raised by Ground 1, so the real question in practical terms is whether Thames Wines, Ingenious, or any of the other decisions of the High Court, FTT and Upper Tribunal which have concerned Ablessio, cause us to alter the conclusions we have reached and set out above regarding those issues.

Decisions of the High Court are not binding on the Upper Tribunal: JP Gilchrist v HMRC [2014] UKUT 0169 (TCC) at [85]-[86]. The Upper Tribunal may depart from a decision of the High Court if the Upper Tribunal is convinced or satisfied that the decision is wrong: Gilchrist at [94]. The Upper Tribunal is also not bound as a matter of precedent by earlier decisions of this Tribunal: HMRC v Raftopoulou [2018] EWCA Civ 818 at [24]. However, as a matter of judicial comity, we would normally follow an earlier decision of this Tribunal as a court of co-ordinate jurisdiction unless we were satisfied that it was wrong: Leeds City Council v HMRC [2014] UKUT 0350 (TCC) at [12]. Decisions of the FTT are, of course, not binding on this Tribunal.

So, as a matter of precedent none of the domestic decisions which have concerned Ablessio is binding on us. However, for the reasons we have set out above we agree with the clear conclusions in Thames Wines and Ingenious to the effect that (a) HMRC have power pursuant to the principle in Ablessio to deregister an existing taxpayer and (b) that power extends to a taxpayer who has facilitated the VAT fraud of another where that taxpayer knows or should have known that his transactions were connected to VAT fraud.

Those conclusions are consistent with 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 (onthe application of Tidechain Ltd) v HMRC [2015] EWHC 4031 (Admin) and GB Fleet HireLtd v HMRC [2022] UKUT 307 (TCC). We note that in several of those cases those conclusions were common ground, so were not the subject of judicial consideration. Nevertheless, ICSL has identified no domestic authorities which would support the restrictions on Ablessio suggested by Ground 1, and, while only persuasive, ThamesWines and Ingenious are strongly supportive of the conclusions which we have reached.

Taking into account the terms of the decision in Ablessio, the applicable EU principles relating to the abuse of law doctrine and relevant domestic case law, we reject the appeal under Grounds 1 and 2.

Our conclusion in relation to the preliminary issues raised by Grounds 1 and 2 is as follows:

Ground 3 of the appeal is that deregistration pursuant to Ablessio of a person who has merely facilitated fraud and who has also made or intends to make taxable supplies that are not connected with fraud would breach the EU principles of proportionality, fiscal neutrality and legal certainty (Footnote: ¹⁰).

Mr Margolin’s submissions largely related to the argument regarding proportionality, but we discuss all three principles below.

Mr Margolin relied on the following passage from the judgments of Lord Reed and Lord Toulson JJSC (with whom the other judges agreed) in R (Lumsdon and others) v Legal ServicesBoard [2015] UKSC 41 at [33]:

Mr Margolin argued that (1) as to the first question, deregistration would not be appropriate to achieve the objective pursued because it does not prevent VAT fraud (an argument which we have rejected above), and it would systematically undermine the right to deduct by a taxable person, which is defined as a person registered or required to be registered under the VATA 1994, and (2) as to the second question, there are clearly less onerous ways in which the objective of preventing evasion could be achieved. These would include denying input tax under Kittel, and imposition by HMRC of a condition as to security and/or production of evidence (Footnote: ¹¹).

Mr Watkinson argued as follows:

In considering this ground, it is important to keep in mind that the preliminary issue we are asked to determine is whether it is necessarily, in any circumstances, a breach of the principle of proportionality to deregister a person who has facilitated fraud and who has made untainted supplies which would require VAT registration. The determination of this preliminary issue would therefore apply in the same way to a person who had facilitated a VAT fraud where the loss of tax was £10,000 and who had made untainted supplies of £100 million as it would to a person who had facilitated a VAT fraud where the loss of tax was £100 million and who had made untainted supplies of £85,000 (and regardless of whether those untainted supplies had been made in a deliberate attempt to engineer an entitlement to register).

Particularly given the requirement for proportionality (whatever the applicable legal test) to be assessed in light of all the facts and circumstances, we have serious doubts whether Ground 3 is really an appropriate matter to be determined as a preliminary issue. We note that in granting permission for this ground, Judge Richards identified this concern and encouraged the parties to consider this question. We think he was fully justified in doing so. In any event, we have considered the preliminary issue raised by Ground 3 as framed, and it would not be appropriate for us to comment in this decision on factual matters potentially relevant to ICSL’s substantive appeal which remain to be determined by the FTT.

In short, we reject Mr Margolin’s submissions.

The CJEU in Ablessio stated that a refusal to register must be based on “legitimate grounds” (Footnote: ¹²), and said this at [34]-[35]:

In reaching its decision in these terms, the CJEU was therefore concluding (1) that a refusal to register might or might not be proportionate and (2) that the assessment of proportionality in any particular case would be for the local court, to be made in light of all the circumstances and evidence. We have already decided that there is no good reason to approach a deregistration in a different way to a refusal to register as a matter of principle (though the circumstances relevant to an assessment of proportionality may differ in relation to a person who is already registered). There is no suggestion in Ablessio, or indeed in any subsequent CJEU or domestic decisions applying Ablessio, that neither of the CJEU’s conclusions in relation to proportionality should apply to a situation where the person in question is a facilitator of fraud and/or has made untainted supplies, because a deregistration in such circumstances requires no assessment of proportionality, since it could never be proportionate.

We do not accept Mr Margolin’s argument that deregistration of a person who has merely facilitated fraud and who has made untainted supplies would, by definition, “systematically undermine” the right to deduct VAT and therefore be disproportionate. A facilitator of VAT fraud is to be treated as a participant in that fraud, and, as explained in Kittel and Mobilx, such a person effectively forfeits the right to deduct by that participation. As regards input tax on supplies unrelated to fraud, and not denied by Kittel, input tax on any such supplies made prior to the effective date of deregistration would not be retrospectively prevented from being deductible by virtue of deregistration. Put another way, deregistration is a prospective measure. So, this argument properly understood relates only to the right to deduct in respect of potential future supplies made after the effective date of deregistration. However, the inability of a person who is not registered for VAT to exercise a right of deduction in respect of future supplies would also apply to any supplies by a person who has not been registered but who is refused registration, in reliance on Ablessio. At [30] of its decision, the CJEU in Ablessio stated that any measures to prevent the misuse of VAT identification numbers “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”. However, in then proceeding to decide that registration could nevertheless be legitimately refused in cases related to fraud where the necessary “sound evidence” is found to exist and the local court determines that such a course is proportionate, in our opinion the CJEU was concluding that, with those safeguards, a refusal to register would not systematically undermine the right to deduct. That is also our conclusion.

It is not necessary for us to decide in determining Ground 3 whether the approach to proportionality in considering a deregistration on the basis of Ablessio is that suggested by ICSL or that suggested by HMRC, and we prefer not to do so. However, even if we assume that Mr Margolin’s formulation, based on Lumsdon, is correct, we do not agree that alternative less onerous measures than deregistration would necessarily be available. A refusal to register or a deregistration is a measure with more far-reaching implications than other available measures. It is prospective, and, in addition to removing the ability to exercise a right to deduct input tax, as the CJEU recognised in Ablessio (at [18]-[20]), registration is also very important in proving the status for VAT purposes of a taxable person. Some counterparties might be less willing to transact with a person without a VAT identification number; as the CJEU said in Ablessio, at [20]:

In relation to both proportionality and legal certainty, Mr Margolin pointed out the damage that could be caused to a trader who is deregistered and then faces a substantial delay before his appeal against the deregistration decision can be heard. As he put it, in the meantime the trader’s business may “bleed to death”. We understand that argument, which also features in the various judicial review applications for permission and injunctive relief in relation to registration decisions. However, the procedural issues which may arise do not in our opinion mean that a decision in the circumstances posited by Ground 3 must necessarily breach the principle of proportionality or legal certainty.

In conclusion, we consider that deregistration in the circumstances described in Ground 3 is not a breach of the principle of proportionality. The question of whether a particular decision by HMRC to deregister a person is proportionate is to be determined by applying the approach described by the CJEU in Ablessio, “based on an overall assessment of all the circumstances of the case”.

The EU principle of fiscal neutrality broadly requires equal VAT treatment for similar supplies which are in competition. Mr Margolin argued that deregistration of a facilitator of fraud with untainted supplies “breaches the principle of fiscal neutrality by increasing the costs of supplies by the Appellant when compared to competitors (because competitors will be in a position to deduct input tax on their purchases)”.

We do not agree. If a refusal to register breached the EU principle of fiscal neutrality, then it is not evident why the CJEU approved it as a potential measure in Ablessio, subject to the safeguards described in the decision (Footnote: ¹³). In any event, the effect of deregistration is simply to place the registered person in the same position as any other unregistered competitor; they can neither charge output tax nor deduct input tax. That is not a breach of the principle of fiscal neutrality.

The principle of legal certainty requires that the application of Community legislation is foreseeable by those subject to it. We have already explained at paragraphs 55 to 57 above why we do not consider that deregistration in the circumstances described in Ground 3 would breach the principle of legal certainty, and we need not repeat those reasons here.

Our conclusion in relation to the preliminary issue raised by Ground 3 is as follows:

The appeal is dismissed.

Our decisions on the preliminary issues raised in this appeal are as follows: