UK Court of Appeal confirms HMRC’s VAT deregistration powers in fraud linked cases

HMRC considered that Impact Contracting Solutions Ltd (ICSL), a labour supply company, was facilitating VAT fraud by its suppliers and that ICSL either knew or should have known of the fraud. Although ICSL did not directly evade VAT and also made legitimate supplies (that were unconnected to fraud), HMRC deregistered it for VAT. 

ICSL challenged the decision, arguing that deregistration under the Ablessio principle (C-527/11) should only apply to those who directly commit fraud or act dishonestly, and not to those who do not directly evade tax.

The UK First Tier Tribunal, Upper Tribunal and now the Court of Appeals rejected this argument.

The Court of Appeal confirmed that the “knew or should have known” test from Kittel v Belgium (C-439/04) – originally applied to deny input tax recovery – also applies to VAT registration status. The Court held that HMRC can deregister a business that facilitates fraud, even if it makes some untainted supplies, provided the decision is proportionate and based on the facts.

Key takeaway

This case strengthens HMRC’s ability to tackle VAT fraud by targeting not just direct evaders but also those who are knowingly or negligently involved. Businesses therefore must implement robust internal controls and carry out thorough VAT due diligence on both suppliers and customers. Failure to do so can lead to serious consequences – including deregistration – even where part of the business is legitimate.

Reference

Impact Contracting Solutions Ltd v Revenue and Customs [2025] EWCA Civ 623 (16 May 2025)