In Elphysic Limited & Ors v HMRC [2025] UKUT0236, the Upper Tribunal (UT) found that HMRC had the power to deregister a company for VAT, where the VAT registration number was used for fraudulent purposes.
Elphysic Limited, along with various others, was operating as a Mini-Umbrella Company (MUC). HMRC believed the companies were operating fraudulently and deregistered them for VAT.
An earlier hearing at the First Tier Tribunal (FTT) examined the common issues of fact and law:
- Whether HMRC had the power to deregister for VAT where they concluded the VAT registration would be used for fraudulent or abusive purposes.
- Whether the structure being used was organised and contrived to enable the appellants to wrongly register for VAT, use the VAT Flat Rate Scheme (FRS) and claim Employment Allowance (EA) for National Insurance purposes.
- Did the appellants use their VAT registrations for fraudulent or abusive purposes, or did they allow them to be so used, or were they likely to do so in the future and as such were liable to be de-registered for VAT?
- Were the appellants entitled to use the FRS?
- Did the appellants register in false trade classes to benefit from a more advantageous FRS rate?
- Were the appellants liable to HMRC for the assessed VAT?
- Were the appellants entitled to claim EA?
The FTT agreed with HMRC, in part, that the schemes were fraudulent arrangements and HMRC were right to terminate the appellant's use of the FRS and deny the EA.
The FTT, however, found that in line with the Ablessio principle, the directors did not knowingly enable fraud, and HMRC were wrong to enforce deregistration of VAT.
HMRC appealed the decision in relation to the Ablessio principle.
The Upper Tribunal (UT) found that:
- The directors did not need to be aware that their VAT numbers were being used for fraudulent behaviour for the Ablessio principles to apply.
- The FTT's conclusion that HMRC could not deregister the appellants for VAT in accordance with Ablessio unless it was shown that the directors of the MUCs were aware they were facilitating VAT fraud of the organisers was founded on a misunderstanding of the law.
- It was sufficient that HMRC found the whole structure to be fraudulent and there was no requirement for HMRC to name specific individuals in their plea.
- The overall fundamentals of the structure were understood by the MUCs. How HMRC pleaded their case was sufficient to make the appellants aware that fraud was being alleged.
- The decision made by the FTT concerning the Ablessio principle was set aside and remade, entitling HMRC to deregister the MUCs for VAT.
Useful guides on this topic
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
Deregistration
When do I have to deregister for VAT? When can I voluntarily deregister? What penalties might HMRC issue if I am late notifying them of mandatory deregistration?
Flat Rate Scheme
What is the VAT Flat Rate Scheme (FRS)? Who can apply? How do you apply? What are the rules? What are the rules for capital expenditure and pre-registration VAT?
Employment Allowance
The Employers' National Insurance Contributions (NICs) allowance or Employment Allowance is an allowance given to qualifying employers to offset against their annual Employers' National Insurance liabilities.
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