“(2) For the purposes of this Part, a person is associated with another person at any time if that other person makes supplies in the course or furtherance of a business carried on by him, and— (a) the business of one is under the dominant influence of the other, or (b) the persons are closely bound to one another by financial, economic and organisational links.”
“(10) A person cannot qualify for an employment allowance for a tax year if, apart from this subsection, the person would qualify in consequence of avoidance arrangements. (11) … (12) In subsections (10) and (11) “avoidance arrangements” means arrangements the main purpose, or one of the main purposes, of which is to secure that a person benefits, or benefits further, from the application of the employment allowance provisions. (13) In subsection (12) “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).”
“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 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.”
“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”
“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”
“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.”
“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.”
“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).”
“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”
“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...”
“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.”
“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’.”
“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…”
“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.”
“Articles 213, 214 and 273 of Council Directive 2006/112/EC of28 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.”
“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.”
“VAT fraud has proved to be a very significant problem. If the tools available to HMRC were limited in the way that ICSL maintains that they are, then they would be likely to be of limited effect in preventing future abuse. Importantly, there would be nothing to prevent the relevant person’s participation in further fraudulent schemes, with HMRC attempting to play “catch up”, trying to close the proverbial stable door after the horse has bolted. In contrast, deregistration is prospective in effect and, as is obvious, will prevent a trader from using its VAT number in fraudulent transaction chains in the future.”
“… Properly understood and in the context of that case law, I consider that those references are intended to make it clear that the decisions in those cases do not prevent tax authorities taking steps to counter VAT fraud, including in relation to VAT registration. However, and as HMRC accept, those steps must be proportionate.”
“63. … The reference to both misuse of a VAT number and “other VAT fraud” in Ablessio at [38] also indicates that the CJEU was not intending to be prescriptive in describing the particular type of fraud that was required. (The reference at [30] to fictitious activity “in particular” was rightly not relied on by Mr Margolin as limiting what was said only to activity of that nature.) 64. It is true that the reference in Ablessio at [36] to “the taxable person’s fraudulent intentions” is arguably more consistent with ICSL’s case. The same can be said of the reference to “tax fraud committed by that taxable person” in Cityland at [47]. However, I do not consider that, by those brief references, the CJEU was intending to limit the scope of the principle in that way ... 65. Further, even read as ICSL submits, the references in these paragraphs are far from definitive. Ablessio refers at [36] only to a “suspicion” of fraudulent intentions as a factor to take into account, and as already indicated other references to “misuse” are broader. In Cityland, the preceding paragraph, [46], refers more broadly to a “risk to tax revenue and a likelihood of VAT fraud”, and at [47] the immediate context is the stated need to examine the taxable person’s conduct to ascertain the “nature and extent” of “any” tax fraud committed by them, so as to assess whether deregistration is an “appropriate penalty for ensuring the collection of all the VAT and combating VAT fraud”
“67. What Ablessio and Cityland do emphasise is the requirement to comply with the principle of proportionality. Deregistration cannot be based on mere suspicion. Rather, there must be “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”, and the decision must be based on an “overall assessment” (Ablessio at [34]). The “nature and the degree of seriousness of the infringements committed” must be examined (Cityland at [45]). …. 72… I cannot see a logical basis to distinguish between those who evade or may evade VAT themselves and facilitators as a matter of principle. Of course, the proximity and extent of a facilitator’s involvement in VAT fraud are likely to be relevant factors in determining whether the tax authority’s action is proportionate on the facts, alongside other factors including the extent of the anticipated untainted supplies, but that is very different to ruling out action in relation to VAT registration altogether.”
“It is, I regret to say, elementary common fairness that neither parties to the litigation, their counsel nor judges should make serious imputations or findings in any litigation when the person concerned against whom such imputations or findings are made have not been given a proper opportunity of dealing with the imputations and defending themselves.”
“The MUCs only existed to supply the organisers/facilitators and to pay for associated services. The organisers/facilitators business model relied on it solely purchasing from the MUCs. The MUCs, and organisers/facilitators operated for the benefit of the Scheme as a whole. The Scheme would have been unworkable if the organisers/facilitators did not have a dominant influence over the MUCs, and if the MUCS were free to contract elsewhere.”
“The MUCs were all associated with another person. The MUCs were each under the dominant influence of at least one other person. Further, the MUCs and that other person were closely bound to one another by financial, economic, and organisational links. The organisers/facilitators were, either individually or cumulatively, that “other person”