Court allows HMRC to deregister business facilitating VAT fraud

In this recent case, the court concluded HMRC does have the power to deregister a business which has facilitated VAT fraud, provided it is a proportionate step. 

HMRC has denied Impact Contracting Solutions Limited (ICSL) a whopping £47m VAT claim by undoing its VAT registration on the basis ICSL knew, or should have known, there was fraudulent evasion of tax in its temporary workforce supply chain.

The court concluded that HMRC has the power to deregister a company who facilitates VAT fraud, provided it is a proportionate step. The court emphasised that deregistration could occur even if the person was making taxable supplies unconnected with fraud, and that such deregistration does not breach EU principles of proportionality, fiscal neutrality, or legal certainty.

ICSL, a large company in the labour provision market, found itself at the centre of a storm when HMRC uncovered its dealings with approximately 3,300 mini-umbrella companies (MUCs). 

A MUC is a type of micro-company that employs temporary workers or contractors, often set up with overseas directors and a consistent model used to avoid tax. These MUCs charged ICSL VAT but were accused of failing to account for VAT properly at their end. This led to HMRC denying ICSL, the recipient of the VAT charged, a staggering £47m in input tax deductions and cancelling its VAT registration. HMRC's decision was based on the assertion that ICSL knew, or should have known, about the fraudulent activities of its contractors.

The judgment highlights the VAT system cannot be relied on for "abusive or fraudulent ends" and measures to prevent tax evasion, avoidance, and abuse must be a legislative objective.

This ruling reinforces HMRC's ability to combat VAT and tax evasion by deregistering businesses that "facilitate" such fraud, even if they have legitimate business activities. 

Businesses which are the innocent victims of evasion should not be at risk. However, this case supports HMRC’s ability to take positive action against businesses interacting with fraudsters where they have any knowledge of the tax fraud, including those who had suspicions, or where they should have known of the tax fraud. 

This decision also underscores the importance of having suitable processes and due diligence checks, especially for businesses which use temporary workers.