First-tier Tribunal (Tax)

[2009] UKFTT 166 (TC)

Late Editions Ltd v Revenue & Customs [2009] UKFTT 166 (TC) (14 July 2009)

TC00128

Appeal number: LON/2007/82

VAT – Input tax – MTIC fraud – Appellant exporting eight consignments of mobile phones all acquired from same trader – All traced back to defaulting traders – Whether Appellant know or should have known – Treatment of hearsay evidence by Customs – Relevance of fact that Kittel ECJ not reflected in UK statute – Appeal dismissed

FIRST-TIER TRIBUNAL

TAX CHAMBER

LATE EDITIONS LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: THEODORE WALLACE (Judge)

MRS SHAHWAR SADEQUE

Sitting in public London on 10-12 December 2007, 19 February, 6 May, 4 and 5 December, 8-12 December and 15 and 17 December 2008 as the VAT and Duties Tribunal

Andrew Young, instructed by Dass Solicitors, for the Appellant

Daniel Margolin, instructed by Howes Percival LLP, for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION

1. This is an appeal against a decision refusing input tax totalling £1,052,380 claimed on eight purchases of consignments of mobile telephones in April 2006 from Mitek Computer Components Ltd ("Mitek") all of which the Appellant sold to traders in France or Denmark. The decision was delayed to allow legal submissions following a number of High Court decisions delivered after this hearing.
2. The decision was made on the basis that the transactions by the Appellant formed part of chains leading back to three traders in the United Kingdom which had acquired the goods from abroad and which had not paid the VAT due on the onward sale, each chain involving the fraudulent evasion of VAT and that the Appellant knew or ought to have known of this. This type of case is known as "MTIC", the initials standing for Missing Trader Intra Community. Customs contend that there were direct chains leading to defaulting traders; it is not contended that the Appellant's immediate suppliers were contra-traders although it is contended that Midwest Communications Ltd ("Midwest"), one of the missing traders, was also attempting to contra-trade. Customs did not contend that there were any third party payments. Midwest did in fact render a return including the VAT on the supplies in four of the chains leading to the Appellant although it did not pay any VAT to Customs. The other two missing traders did not render returns for the relevant periods and did not pay the tax.
3. The Appellant does not admit the connections with fraudulent chains, putting Customs to proof of the fraudulent loss of tax and the connection between the Appellant's purchases and the missing traders, and contests the allegation that the Appellant was involved in fraud or knew or should have known that the transactions were part of fraudulent chains.
4. The allegation by Customs that the Appellant was a knowing participant in fraudulent chains is a clear allegation of dishonesty against the Appellant. The case for Customs also involves allegations of fraud against the defaulting traders.
5. Since much of the evidence for Customs was hearsay and documentary evidence, we start by considering the correct approach to such evidence and setting out briefly the history of this appeal.
6. Customs opened the case, calling three officers. A statement by a fourth officer, was admitted without cross-examination. Raman Tuli, director, gave evidence for the Appellant and was cross-examined; statements by two witnesses for the Appellant were admitted without cross-examination.

The nature of the evidence

7. Appeals of this type involve substantial documentary material. The bundles in this case contained over 2000 pages. The documents included the invoices and material produced by the Appellant to evidence the transactions giving rise to the claim for input tax, evidence of due diligence enquiries by the Appellant in particular in relation to Mitek and the Appellant's customers, and material produced by Customs to evidence the chains leading to missing traders.
8. Mr Munroe-Birt, the officer in charge of the case, had little direct knowledge of the enquiries by Customs, having in November 2007 shortly before the initial hearings taken over from Miss Whitcombe who issued the refusal decision but who was not fit to give evidence. He had regularly discussed her inquiries with her and had approved her recommendation to refuse repayment of the input tax. He produced a large number of documents which had been provided to Miss Whitcombe by other officers most of whom were not identified so that the provenance of the documents was not known. He produced print-outs from electronic folders for a number of traders including notes by Customs officers who were not called as witnesses. He produced print-outs from the Vision System database maintained by Customs which contained material entered by unidentified officers. He produced a log from the Customs unit at Redhill recording verification enquiries by the Appellant and other by other traders as to the VAT numbers of the Appellant and other traders : that material was entered by staff at Redhill engaged in verification. He produced a progress log and spreadsheets collating material some but not all of which was entered by Miss Whitcombe.
9. Mr Munroe-Birt made five witness statements and one consolidated statement. He told the Tribunal that he had himself decided what material to include in his statements. Although the officers responsible for the defaulting companies had made statements he decided to cover those himself rather than putting in statements by those officers. It appears that Mr Munroe-Birt and Miss Whitcombe before him decided which officers should give evidence.
10. In February 2007 the Appellant served a list of documents under Rule 20(1) of the VAT Tribunals Rules 1986 comprising 24 items and Customs served a list with 167 items. Agreed directions released on 18 April 2007 provided for the exchange of statements by all witnesses with all necessary exhibits, followed by supplementary statements. On 24 September 2007 the appeal was listed for 5 days in December 2007, the time estimate having been agreed by both parties. The time listed proved wholly unrealistic, even before further material which the Appellant had not seen, was produced by Customs during the initial hearing, including an unredacted form of the progress log referred to at paragraph 8 above.
11. The hearings on 19 February and 6 May 2008 concerned disclosure by Customs and timetabling the resumed hearing. At the hearing on 6 May the Tribunal directed that the witness statements should stand as evidence in chief, that no further statements or documents would be admitted without leave and that the adjourned hearing should be listed for 7 days with Customs having one hour to summarise the opening which had already occupied 2½ days.
12. During the initial opening of the case for Customs in December 2007 Mr Young objected to the production of a note by Mr Taylor, a Customs officer who was not a witness, and to the inclusion of documents to which Mr Munroe-Birt referred in his statements the provenance of which he did not know. These were admitted de bene esse subject to later submissions.
13. Normally the question whether a document should be admitted in evidence or excluded will fall to be considered when a witness seeks to produce the document when giving oral evidence. In appeals of this type it is now normal for the Tribunal to direct witness statements in advance which will stand as evidence in chief as happened here in May 2008. While this normally cuts down the length of hearings, it has the disadvantage that there is no obvious stage at which to object to evidence. The Tribunal is slow to exclude evidence at a prior directions hearing since at that stage it is difficult to conduct what is an exercise of discretion without a full grasp of the facts of the case and of the circumstances. It is for that reason that the Tribunal in the present case deferred ruling on the admission in evidence of substantial quantities of material until we had heard submissions in closing.
14. At the time of the hearing the basic rule as to evidence in the Tribunal was contained in Rule 28 of the VAT Tribunals Rules 1986 which provided as follows in paragraphs (1) and (3):

"(1) Subject to paragraph (4) and (5 ) of Rule 21 … a tribunal may direct or allow evidence of any fact to be given in any manner it may think fit and shall not refuse evidence tendered to it on the grounds only that such evidence would be inadmissible in a court of law.

…

(3) At the hearing of an appeal or application the tribunal shall allow a party to produce any document set out in his list of documents served under Rule 20 and unless a tribunal otherwise directs –

(a) any document contained in such a list of documents which appears to be an original document shall be deemed to be an original document printed, written, signed or executed as it respectively appears to have been; and

(b) any document contained in such a list of documents which appears to be a copy shall be deemed to be a true copy."

15. It is clear from Rule 28(1) that a Tribunal could not exclude a document merely because it is hearsay. It should be noted that the Civil Evidence Act 1968 does not apply to Tribunal proceedings. It is however also clear from Wayne Farley Ltd v Customs and Excise Commissioners [1986] STC 487, which was decided on the 1972 Rules which were essentially the same as the 1986 Rules, that the Tribunal has a discretion as to whether or not hearsay evidence should be admitted. Macpherson J said this at page 489e,

"… if a witness seeks to give hearsay evidence … the chairman may decide whether or not it is right that such evidence should be admitted."

In the following paragraph he said,

"If no objection is raised to hearsay evidence, and if the chairman does not decide of his own volition that it shall be excluded, it seems to me that the complaint simply falls to the ground. Hearsay evidence may be admitted. Care must obviously be taken as to what reliance is placed on such evidence and what weight is given to it …"

The complaint to which Macpherson J referred was as to the admission of hearsay evidence.

16. The reference in Rule 28(1) to Rule 21(4) is important. Under that provision if a party objected to a witness statement being read "the witness statement shall not be read or admitted in evidence at the hearing" although the maker could give oral evidence. The prohibition in Rule 21(4) was mandatory.
17. In Fitch v HM Revenue & Customs [2006] V&DR 196 the Tribunal refused to admit under Rule 28(1) witness statements which Customs had served late under Rule 21 and to which the Appellant had objected, holding that the matter should be considered as if Rule 21(4) applied.
18. In the present case Customs did not seek to adduce any statements by persons not called as witnesses but did seek to put in evidence notes by a number of officers who were not called, including Mr Taylor, to which it is clear Mr Young would have objected if they had been contained in statements served under Rule 21. If material to which an Appellant could and would object if contained in a statement served under Rule 21 could be introduced under Rule 28, the clear purpose of Rule 21(4) would have been circumvented. We did not understand Mr Margolin to argue otherwise. It is important to note that in Wayne Farley no objection had been raised at the tribunal hearing to the hearsay evidence which was the subject of the appeal to the High Court. Mr Margolin relied on Mobile Export 365 Ltd v Revenue and Customs Ltd [2007] TC 1794 where Lightman J said at [20], "The presumption must be that all relevant evidence should be admitted unless there is a compelling reason to the contrary". He said that the fact that cross-examination was not possible would be relevant when considering the weight to be given to the evidence.
19. The present case concerns allegations of the utmost gravity against the Appellant and other parties to the alleged chains. Quite apart from Rule 21, we consider that it would be wrong without good reason to take any account of contentious material in the form of notes by officers who were not called as witnesses and so could not be cross-examined. There was no suggestion that any officers other than Miss Whitcombe were not available. We did admit in evidence notes by her of the visit by her and Mr Rintoul on 27 June 2006, however this was as part of Mr Rintoul's evidence on which he was cross-examined.
20. When exercising its discretion as to hearsay evidence there are a number of relevant considerations. Clearly the nature of the evidence is important. The problem with hearsay evidence is that the other party does not have the chance of cross-examining the primary source if only to clarify the evidence; furthermore the tribunal has no opportunity of clarifying the evidence. The more contentious the content of hearsay evidence, the greater is the problem. On the other hand the more formal the evidence, the less the scope for cross-examination. Another factor is proportionality; as to this the nature of the issue in the appeal will be relevant as well as the nature of the evidence in question. Even where serious allegations are in issue as here, there are limits to the number of witnesses to be expected. A further factor is whether the person who is the source of the hearsay material is in fact available to give evidence or indeed is compellable. It is also important to bear in mind whether an objection has been made and when; an early objection will carry more weight than one at a late stage. The above are some of the considerations which we consider to be relevant.
21. We turn next to documentary material other than such notes, observing that the authenticity of a document is not the same as the truth of its contents although it may be evidence of facts.
22. Rule 28(3) permitted a party to produce a document which he had listed unless the tribunal otherwise directed; however production of a document did not oblige the tribunal to treat its contents as accurate or even true. Rule 28(3)(a) and (b) were directed to the authenticity of originals and copies; Rule 28(3)(b) must clearly be read together with (a). Documents such as invoices, assessments and bank statements were clearly within Rule 28(3). It would not be appropriate to allow a party to circumvent Rule 21(4) by listing documents such as notes of visits and seeking to produce them under Rule 28(3).
23. Mr Young for the Appellant accepted that copy invoices and intra account transfer statements by the First Curacao International Bank NV ("FCIB") should be admitted and did not submit that they were not evidence of the transactions to which they related. In the absence of contrary evidence we consider them to be clear evidence of such transactions.
24. Mr Young did however question the provenance of many of the documents in Bundle 5 consisting of pages 958-1521 which were exhibited to Mr Munroe-Birt's fifth witness statement dated 7 February 2008 as comprising exhibit LW1 of Lucy Whitcombe's statement. Mr Munroe-Birt stated that those were the "deal packs" making up items 160-167 of Customs' List of Documents served on 8 February 2007. We observe that he could not know this because he was not then in charge of the case. The Tribunal's understanding of items 160-167 had been that "deal packs" related to the material produced by the Appellant as opposed to the material collected by Customs for the whole of the chains. It was inappropriate to include 564 pages of material under such omnibus headings. However the documents had been included in the bundle which was produced for the hearing in December 2007 and Mr Munroe-Birt's evidence that Bundle 5 was covered by items 160-167 in the List of Documents was not challenged. Unfortunately the Appellant did not inspect the documents listed by Customs as it was entitled to do under Rule 20(5).
25. We have concluded that the documents in Bundle 5 should be admitted and that they are evidence of the transactions to which they appear to relate. We say "appear" because the cogency of any document depends on how it relates to other documents and how far it is consistent with other material.
26. The material contained in electronic folders and on the Vision System is at least for the most part hearsay material the accuracy of which depends on whoever fed in the material. The inclusion of a document in an electronic folder does not give it greater cogency than if it were not included. Thus the inclusion of an officer's visit notes on the electronic folder does not add to its authority. The same can be said of the Progress Log.
27. Reliance was placed by Mr Margolin on a log maintained by Redhill VAT office of verification enquiries by the Appellant to verify that other traders were registered and enquiries by other traders to verify the Appellant. That log which we call a "Verification Log" contains material entered by any one of a number of officers. Customs at Redhill were very busy at the relevant time; some of the responses in this case took a considerable time. There was obviously scope for human error. However we accept that the log was a record of enquiries and in the absence of contrary evidence we accept the log as accurate.

The facts

28. We now turn to those facts which were not disputed. In part these are derived from those parts of the witness evidence which were not challenged and in part from documents. There was no agreed statement of facts.
29. The Appellant company was registered for VAT in 1992 as a clothing wholesaler. The abbreviated balance sheet to March 2005 showed net liabilities of £851,651 with creditors exceeding £2.1 million; the financial statements were approved by the board on 30 June 2005. The accounts for the following year were not abbreviated and showed for the year to March 2005 a profit of £4,094 on turnover of £1,730,260 (page 1658 in the bundle). Turnover to March 2006 was £29,649,270, of which £28,266,125 comprised sales which had no comparator in the previous year. Like for like sales were down at £1,357,709. Note (2) to the accounts stated that turnover outside the UK was 77% compared with 26% in the previous year. Note (13) stated that the company owed Mr and Mrs Tuli £1,084,000 at 31 March 2006, compared with £1,553,500 a year earlier.
30. On 18 May 2005 Mr Tuli wrote to Customs (403) stating that the Appellant wished to change its trade classification "as we will be trading in many different types of items and require a classification for general trade." The letter stated that the company would be trading in clothing, furniture, televisions, hosiery, electronics, rugs and carpets, food products and household appliances and fabrics. An amended registration certificate was issued on 1 June giving the classification "Other non-specialised retailing". On 30 June Mr Tuli wrote that the classification should be "other wholesale" and asked to change to monthly returns.
31. On 5 July 2005 Customs replied seeking full details of the Appellant's business activity and asking why it was expected to be in a repayment position. On 12 July Mr Tuli wrote that the "business activities involve the import, export, wholesale and distribution of many different products" and broadly listed the products mentioned in his May letter; he estimated that 65% of sales would be zero-rated. The request for a change of stagger was refused in a letter dated 25 July but Mr Tuli was told that re-application was possible in six months.
32. On 2 August 2005 Customs wrote to Mr Tuli that it was experiencing problems with businesses in the Appellant's trade sector offering goods including computer equipment and mobile phones involved in MTIC fraud; the current VAT loss was estimated at £1.06 to £1.73 billion a year. The letter stated that "requests for verification of the VAT status of new customers/suppliers should be faxed to Redhill VAT office …" The letter stated that verification did not "absolve traders from undertaking their own enquiries in relation to proposed transactions." The letter enclosed a copy of Notice 726 - Joint and Several Liability, dated August 2003. Mr Tuli was also asked to forward a purchase and sales listing on a monthly basis.
33. On 3 August 2005 Mr Tuli faxed a circular letter (194) to various traders which he had contacted by telephone having obtained their details on the IPT website. The letter stated that the Appellant was "trading in electronics, clothing, computer components, toys, furniture, telephones and various other items" and that the Appellant had "built up a strong relationship with all our clients and suppliers". The letter enclosed a trade application form to be filled in and returned. Mr Tuli also enclosed the Appellant's certificate of incorporation and VAT registration documents and bank details. The banks listed were State Bank of India, King Street, EC2; HSBC, Leicester, and FCIB, in Curacao, Netherlands Antilles.
34. On 12 September 2005 Christopher Hodge, who was then a VAT assurance officer based at Luton, made an unannounced visit (1523-4) with another officer to the Appellant's premises at Leighton Buzzard which comprised a warehouse with 18,000 square feet and offices. This visit followed a verification enquiry to Redhill by Raptor Commerce Ltd ("Raptor") as to the Appellant. Mr Tuli told the officers that the Appellant had bought 1000 Nokias and some computer software from Raptor and that they had been sold to a Paris based trader. Mr Tuli told them that problems in the clothes sector had led to a change in items; he had got into the business by looking on the internet. He said that A1 Inspections carried out checks on the phones and that AFI Logistics ("AFI") handled the freight; the Appellant priced goods by offering a price to the customer and negotiating. Mr Tuli informed the officers of the bank accounts, including that with FCIB. Mr Hodge noted that the Appellant had purchased over a thousand units of accounting software, selling to a Dubai based business. Mr Hodge issued another copy of Notice 726, Notice 700/52 and an invalid invoice procedure. He told Mr Tuli that the next return would be verified and took copies of deal paperwork and letters of introduction.
35. On 27 October 2005, following receipt of the quarterly return for 09/05 reclaiming £311,172, Mr Hodge visited the Appellant by appointment accompanied by Geoffrey Swindon, Higher Officer. Both kept a note (1525-6, 1542-9, 1551-61). The visit lasted over two hours. The purpose of the visit was to verify the 09/05 return and to fill in a questionnaire directed to joint and several liability comprising 213 questions. Not all of the questions were relevant and many, including all those after Question 179, were not put.
36. They recorded that the Appellant advertised on phonetrader and the IPT website. Mr Tuli had always been involved in the wholesale trading of clothes and wished to move into other wholesale areas; he believed that phones and CPUs were easier to handle and to sell onwards as people were more likely to know about them. Mr Tuli had read Notice 726. The Appellant obtained limited credit from suppliers, paying when paid; no credit was given to customers and no credit checks were carried out. The Appellant did not make or receive any third party payments. There was no retention of title clause on invoices to customers.
37. Mr Tuli told them that he had not met any suppliers or customers so far. The customers approached the Appellant first. There were no written agreements or contracts. Three suppliers were used. Asked what steps were taken to ensure the integrity of the supply chains, Mr Tuli said that he could only check on his supplier. Inspection reports were carried out by A1 Inspections before transactions; he believed that physical checks were made with boxes opened but he could not definitely say what checks were made. No IMEI numbers were kept as this was too expensive. Mr Hodge did not tell Mr Tuli that IMEI numbers ought to be collected. Mr Tuli said that he carried out no research on prices but that 5% mark-up was standard. Title to goods passed when the Appellant was paid. The Appellant had up to £800,000 insurance cover.
38. At the end of the meeting Mr Tuli asked again for monthly returns saying that the Appellant historically had repayments. Mr Hodge said that the problems of MTIC fraud impacted on monthly returns.
39. On 3 November 2005 Mr Hodges telephoned Mr Tuli with further questions as to the 09/05 return (1528-31). He asked about 1350 copies of the Apollo Accounting System and recorded Mr Tuli as saying that he did not know much about it and did not know the authors or publishers. The customer had given a target price and Raptor could meet it. Later in the conversation Mr Tuli said that he had not yet enquired at A1 Inspections what they actually did during inspections but that he would do so. He said that he had not checked the box numbers on a transaction involving 1800 CPUs on 15 September with the supplier but passed the details to the customer who had been happy to buy the goods.
40. On 5 December 2005 (1532-33, 1936-7) Mr Hodge informed Mr Tuli by telephone that £9,601 VAT on a CPU purchase from Inter Communications UK Ltd ("Inter") on 19 September was being disallowed because the box numbers were not genuine. Mr Tuli said that he could not believe that the goods were not genuine as his customer was satisfied. The balance of the 09/05 repayment claim was paid by Customs.
41. Meanwhile on 21 November 2005 Customs agreed to the change from quarterly to monthly returns (191). Mr Hodge accepted that, with the information then to hand, he did not at that time consider that the Appellant posed a risk to the Revenue (Day 5/47)..
42. On 27 January 2006 Mr Hodge informed Mr Tuli that £4,725 input tax on CPUs supplied by Raptor would be withheld for period 12/05 and that the balance being £596,404 was being released (1536).
43. On 8 February 2006 Mr Hodge wrote to the Appellant stating that four of the Appellant's transactions in period 12/05 had been traced to defaulting traders, three involving mobile telephones and one involving CPUs. The letter warned of the possibility of joint and several liability for the unpaid tax (219-220). On 16 February the Appellant wrote to Raptor asking that company to make further checks with its suppliers as to two of the transactions (221). Raptor returned two forms confirming that checks on the supplier had been carried out (226-7). A letter to the other supplier, Intel Communications UK Ltd, drew no written response.
44. On 14 February 2006 Mr Tuli sent a fax to the Customs at Redhill requesting verification of the VAT details of Mitek. This was acknowledged on 16 February, "Awaiting further verification. Please resubmit after 10 working days." Mr Tuli sent requests again on 16 March, 24 March and 12 April. Confirmation was given by Redhill on 28 April that the registration was valid "at this time" (250-3).
45. At some date after 31 March 2006 the Appellant received a report from Veracis Ltd with enclosures (261-294). It was commissioned before 8 March when Veracis visited Mitek; the report was dated 8 March however it contained "key additional information since date of report : Companies House records show that on 31/3/06" Hardip Singh Deol resigned as director and Satbinderpal Singh Hyre was appointed (265). The report said that Mr Deol and Mr Hyre were interviewed on 8 March. Mr Hyre was recorded as saying that working capital was about £5 million and turnover for 2006 was estimated at about £20 million. The report said that the stated working capital was not reflected in the accounts: those were to March 2005 which showed net shareholders' funds of £379,439. Mr Hyre did not have details of the company's accountant to hand. Under "VAT and Compliance" the report said (263),

"In relation to the business Mr Hyre showed little awareness of the requirements of HM Revenue and Customs, and when questioned about VAT Notice 726 Mr Hyre was unaware of the implications."

The report recorded a number of positive indicators including, "Redhill checks and site visits carried out on new and existing suppliers and customers". Negative indicators included lack of home utility bill and that the bank details did not correspond with VAT certificate. Enclosures with the report emanating from Companies House on 14 March (275-6) showed the status of Mitek as "Voluntary Arrangement" and Hardip Singh Deol as being the sole director, following the resignation of two other directors earlier in 2006; Mr Deol was appointed on 9 December 2005.

46. The transactions giving rise to the appeal took place between 12 April and 26 April 2006. Deal 1 on 12 April involved 5000 Nokia 9500 which were sold to France Affaires International SARL ("France Affaires"). Deals 2 and 3 on 13 April also involved sales to France Affaires of 2000 Nokia 3250 and 3000 Sony Ericsson W900i respectively. Deal 4 on 18 April involved the sale of 2000 Nokia 8800 again to France Affaires.
47. Deal 5 involved the sale on 18 April of 2000 Nokia 9300i to J Corp ApS, a Danish company.
48. Deal 6 in 19 April involved the sale of 2000 Nokia 3250 to EC Trading ApS, another Danish company.
49. Deals 7 and 8 both on 26 April involved sales of 2000 1 Mate Jas Jav and 1100 Nokia 8800 to Francophone SARL, in France.
50. On 8 May 2006 the Appellant submitted a repayment claim for £1,102,413 net after £7,196 output tax for period 04/06 by e-mail with supporting material.
51. On 7 June 2006 the Appellant was informed by Miss Whitcombe that the Specialist Compliance Team at Croydon was carrying out the verification. Miss Whitcombe collected the paperwork relating to the repayment claim from Mr Hodge at Luton.
52. Miss Whitcombe and Mr Rintoul visited the Appellant by appointment on 27 June 2006 and saw Mr Tuli and Joseph Wilkins of NWT VAT Consultants. The visit lasted rather over 3 hours. The Appellant's original deal documents for 04/06 and 05/06 were in three large ring binders which Customs uplifted.
53. For the most part Miss Whitcombe put questions to Mr Tuli and Mr Rintoul took a note (346-349). Miss Whitcombe also took a note. We now set out a summary. Mr Tuli said that he dealt in mobile phones because he was a trader. He had looked at various possibilities but had not spoken to anyone in particular in the trade. He also looked at CPUs, toys and furniture. He used new suppliers in periods 04/06 and 05/06 instead of existing suppliers because they could supply goods at the right price: new suppliers contacted him.
54. He said that he got the goods within 2 or 3 hours to a day. His customers were wholesalers and his purchases were from wholesalers; he did not supply end users. He outlined checks on suppliers. Suppliers were always paid the full amount within 24 hours by bank transfer. The Appellant made no third party payments. The Appellant used a bank account in the Dutch Antilles because of ease of use for internet banking.
55. Customers were obtained via websites. Normally he approached them by telephone, following up by fax. He had not met any of the customers; currently they were all in the EC. The margins in the UK were too low. He carried out the same checks on customers as on suppliers. Customers normally paid within 24 hours by bank transfer, always paying the full amount. Refunds had never been made. Goods were only released on completion of checks on the phones and on payment being received in the bank. The Appellant did not obtain IMEI numbers.
56. Mr Tuli told them that the Appellant arranged insurance for goods being held at the freight forwarders. AI Inspections, who were introduced by AFI, checked the goods at the freight forwarders. The Appellant arranged transport to the EC customers. Mr Tuli was the only person involved on the trading side. He said that he had either traded with or knew of Raptor, Mitek, Dualite and Mobile Heaven (Europe) Ltd.
57. The Appellant produced the following documents as evidence of the transactions on which the input tax on Deal 1 was based; it appears that some were produced before and some during the visit:

(a) Supplier declaration (300) by Mitek for supply of 5000 Nokia 9500 mobile phones stating that the goods were not being sold for less than the purchase price, that they were bought from a VAT registered company, and that due diligence checks had been carried out on Mitek's supplier, including verification with Redhill;

(b) The Appellant's purchase order to Mitek (1884);

(c) Mitek's invoice (1885) dated 12 April 2006 to the Appellant for £1,550,000 plus £271,250 VAT for 5000 Nokia 9500 (SIM free) @ £310, the delivery address being TLS the products being "supplied subject to Mitek's current Terms and Conditions of Sale";

(d) Customer declaration (299) by France Affaires to the Appellant for 5000 Nokia 9500 mobile phones;

(e) Bon de Commande (1886) or order from France Affaires for 5000 Nokia 9500 @ £325.50 for delivery to AFI Logistique, Roissy, France;

(f) Invoice (1887) dated 12 April by the Appellant to France Affaires for 5000 Nokia 9500 in the sum of £1,627,500;

(g) Two intra account transfers Nos 0837306 and 0837314 by FCIB from France Affaires to the Appellant for a total of £1,627,500 on 13 April;

(h) Intra account transfer No. 0835714 from the Appellant to Mitek for £1,821,250 dated 13 April (1890);

(i) A report by AI Inspections dated 12 April (296-8);

(j) An invoice from Total Logistic Solutions (UK) Ltd ("TLS") dated 12 April for freight charges to Paris and for inspection charges (301);

(k) Marine insurance certificates by Total Logistic Solutions, UAE, Insurance Department (303-6);

(l) A letter to the freight forwarder authorising release of the goods;

(m) CMR for a consignment of 5000 Nokia 9500 from the Appellant to France Affaires, the departure date from Slough being 12 April with Eurotunnel Transport ticket showing a check-in time of 2057 hours; the goods were stamped as received by AFI Logistique, Roissy on 13 April.

58. Similar documents were produced for Deals 2 to 8.
59. The documents referred to above were all produced by the Appellant and related to the transactions with the Appellant's immediate supplier, Mitek, and with the Appellant's customers in France and Denmark. The sale in Deal 5 to J Corps ApS in Denmark but delivery was to AFI Logistique at Roissy (1277). The sale in Deal 6 was to EC Trading ApS in Denmark but was again delivered to AFI Logistique, Roissy (1340).
60. We next turn to the documents produced by Customs to establish the link between the acquisitions by the Appellant and the alleged defaulting traders, C&B Trading UK Ltd ("C&B") in respect of Deals 1, 3 and 6; Bullfinch Systems Ltd ("Bullfinch") in respect of Deal 2 and Midwest in respect of Deals 4, 5, 7 and 8.
61. In respect of Deal 1 Customs relied on the following documents. We find it convenient to work backwards from the acquisition by the Appellant. The sales invoice (986) which gave rise to the repayment claim was from Mitek to the Appellant dated 12 April 2006 for 5000 Nokia 9500 (Sim free) at a price of £310 per unit giving a total of £1,550,000 plus £271,250 VAT; the delivery address was TLS which is short for Total Logistics Solutions UK; the order was placed by Ramon (Mr Tuli) and taken by Kelly. On that day Mr Tuli instructed TLS to carry out a full inspection of "the consignment of 5000 Nokia 9500 Euro Spec Sim Free phones".
62. There was an invoice (983) from Raptor to Mitek for the same number of phones of the same description with "Ship via TLS" at £309.40 per unit making £1,817,725 including VAT.
63. An invoice (963) from SWEG trading as Mobile Phones World to Raptor also for 5000 Nokia 9500 Sim Free phones at £308.40 making £1,811,850 with VAT contained no reference to TLS.
64. An invoice (962) from V2 (UK) Ltd ("V2") to SWEG for the same number of Nokia 9500 Sim Free phones at £307.90 making £1,808,912.50 with VAT stated that the stock was held at TLS.
65. Finally an invoice (960) from C&B to V2 was for 5000 Nokia 9500 at £307.65 per unit making £1,807,443.75 including VAT. All the above invoices were on the same day.
66. Successive intra account transfers were effected by FCIB all on 13 April 2006 from the Appellant to Mitek (see paragraph 53(h) above), from Mitek to Raptor, thence to SWEG, to V2 and to C&B covered the sums due on the invoices, that for Raptor being by two separate transfers. The transaction numbers indicate that the payments to the Appellant by France Affaires preceded the payments by the Appellant to Mitek (1027, 982, 966-7, 965 and 961).
67. The invoices from V2 to SWEG and from Raptor to Mitek stated that ownership or property did not pass until payment. The Mitek invoice stated that the goods were supplied subject to Mitek's terms and conditions.
68. The Appellant made a further sale on the following day of goods purchased from Mitek (Deal 3) which Customs traced back to C&B, this sale being of 3000 Sony Ericsson w900i telephones. There were successive invoices from Mitek to the Appellant (1122), from Mobile Heaven (Europe) Ltd ("Mobile Heaven") to Mitek (1106), SWEG to Mobile Heaven (1100) and V2 to SWEG (1090) and V2 to C&B (1086) for the same quantity of the same type. There were FCIB payment instructions for the sums invoiced from the Appellant to Mitek, from Mobile Heaven to SWEG, from SWEG to V2 and from V2 to C&B (1148, 1101, 1093 and 1088). The goods sold by the Appellant and those sold by V2 were recorded as being at AFI.
69. A third disallowed purchase (Deal 6) on 19 April was traced back to C&B, this time of 2000 Nokia 3250 telephones. There were successive invoices from Mitek to the Appellant (1337), from AMR GB Ltd to Mitek (1328) from SWEG to AMR GB Ltd (1325) from V2 to SWEG (1316) and from C&B to V2 (1309) for the same quantities of the same goods on 19 April. The invoices by V2 and Mitek showed the goods as being at AFI. There were FCIB payment instructions for the sums invoiced from V2 to C&B (1311), SWEG to V2 (1318) and AMR GB Ltd to SWEG (1324).
70. Deals 1, 3 and 6 were thus traced back to C&B.
71. Deal 2 relating to 2000 Nokia 3250 Sim Free Euro Spec mobile phones on 13 April 2006 was traced back by Customs to Bullfinch. There were successive invoices from Mitek to the Appellant (1053), from Inter to Mitek (1044), from Dualite to Inter (1037) and from The Wireless Warehouse to Dualite (1030) and a purchase order from The Wireless Warehouse to Bullfinch the total price being £512,300 (1029). There were FCIB statements (1031-32, 1042, 1051) showing successive payments by Mitek, Inter, Dualite and The Wireless Warehouse, The Wireless Warehouse statement showing an intra-account transfer of £512,300, the sum shown on the purchase order to Bullfinch. Stock allocation instructions by Inter (1047) and The Wireless Warehouse (1035) were addressed to TLS and the invoice by Mitek gave the delivery address as TLS.
72. Customs traced the other four deals back to Midwest, starting with Deal 4 on 18 April involving 2000 Nokia 8800. There were successive invoices from Mitek to the Appellant (1200), from Technology Plus Ltd to Mitek (1179), from IT Players (UK) Ltd to Technology Plus Ltd (1168), from I H Technologies to IT Players (UK) Ltd (1160), from Midwest to I H Technologies (1152) and from Hardware Traders Ltd – Deutschland to Midwest (1150). There were FCIB Intra Account transfers showing payments matching the invoices from Mitek, Technology Plus Ltd, IT Players (UK) Ltd and I H Technologies Ltd (1232, 1195, 1196, 1161 and 1155). In each case back to Midwest there was evidence that the consignment was at TLS. An inspection report by AI Inspections for the Appellant stated that the software for phones with an English Manual only had crashed (1220).
73. Deal 5 also on 18 April 2006 was for 2000 Nokia 9300i. There were successive invoices from Mitek to the Appellant (1274), from Maystar Enterprises UK Ltd to Mitek (1272), from Dualite to Maystar Enterprises UK Ltd (1255), The Wireless Warehouse to Dualite (1252), from Midwest to The Wireless Warehouse (1242) and from Hardware Traders Ltd – Deutschland to Midwest (1234). There were FCIB Intra Account transfers from Maystar Enterprises UK Ltd to Dualite, from Dualite to The Wireless Warehouse and from The Wireless Warehouse to Midwest (1269, 1259 and 1243). The Mitek invoice to the Appellant showed the goods as at AFI (1274); there was an allocation note from Maystar Enterprises UK Ltd to AFI for the sale to Mitek and an allocation note to AFI for the sale by The Wireless Warehouse to Dualite (1248). The invoice by Midwest showed the stock as held at AFI. The shipping certificate issued by AFI Logistics UK Ltd (1276) showed the destination as AFI Logistique which from the notepaper was clearly an associated company as was AFI Logistics FZCO in Dubai which issued the insurance certificate (1275).
74. Deal 7 on 26 April 2006 was for 2000 1 Mate Jas Jav. There were sequential invoices (in reverse) from AMR GB Ltd to Mitek (1393), from Dualite to AMR GB Ltd (1395), from I H Technologies to Dualite (1385), from Midwest to I H Technologies (1382) and from Hardware Traders Ltd–Deutschland to Midwest (1374). There were FCIB statements showing the payments by Mitek (1401) and AMR GB Ltd (1450) and FCIB Intra Account transfers by Dualite and I H Technologies (1386 and 1380). The invoices by Midwest, I H Technologies and Mitek showed the goods as at AFI. The order by Mitek to AMR GB Ltd was for delivery at AFI.
75. Deal 8 also on 26 April 2006 was for 1100 Nokia 8800. There were sequential invoices (in reverse order) from AMR GB Ltd to Mitek (1458), from MT Phoenix Ltd to AMR GB Ltd (1460), from The Wireless Warehouse to MT Phoenix Ltd (1447), from Midwest to The Wireless Warehouse (1440) and from Hardware Traders Ltd-Deutschland to Midwest (1437). There was an FCIB statement showing a payment by Mitek to AMR GB Ltd (1466) and FCIB Intra Account transfers by AMV GB Ltd, MT Phoenix Ltd and The Wireless Warehouse (1454, 1455, 1443). The invoices by Midwest and Mitek showed the goods as at TLS. A stock allocation instruction by The Wireless Warehouse showed the stock as at TLS (1451). The purchase order by MT Phoenix Ltd however referred to delivery at AFI (1453). The inspection report by AI Inspections stated that the goods were situated at TLS (1470).

The evidence of Mr Munroe-Birt

76. Mr Munroe-Birt made four statements and one composite statement. Since 2001 he has been involved in teams combating MTIC fraud; since May 2006 he worked in a team advising officers and reviewing evidence. He was in regular contact with Miss Whitcombe who was moved to MTIC work in May 2006. He approved her recommendation that the Appellant's input tax for 04/06 and 05/06 be denied. She was absent due to work from June to October 2007 due to work related stress as a result of being moved to MTIC cases. She was then moved to other work.
77. He produced (paras 34-40 of composite) an application for VAT registration by C&B dated 1 May 2003 giving the activity as car valeting and a letter dated 16 March 2006 (1857) asking for a change of classification to "general trading". On 11 April 2006 C&B was advised of losses in the trade sector and asked to verify the VAT status of new or potential customers and suppliers with Redhill. He referred to an undated note by G A Taylor (1860). He produced a computer print-out dated 19 November 2007; from this it appears that a nil return was rendered for period 01/06 and no return was rendered thereafter; on 21 July 2007 there was shown a final assessment for £59,047,844 (1873); a calculation by G A Taylor showed that one component of the assessment was V2 £23,256,833. A print-out from the electronic folder for V2 showed inputs for April 2006 totalling the same figure for supplies of mobile phones from C&B; the print-out (1862) included an entry for 12 April 2006 for 5000 Nokia 9500 at £307.65 per unit from V2 sold to SWEG for £307.90 per unit; this matches the transactions shown at paragraphs 64 and 65 above. A further entry for 13 April for 3000 Sony w900i matched the transactions shown at paragraph 68 above. An entry for 19 April 2006 for 2000 Nokia 3250 matched the transactions shown at paragraph 69 above. The print-out dated 19 November 2007 showed C&B as insolvent on 10 January 2007.
78. Mr Munroe-Birt produced (composite paras 13-23) material relating to Bullfinch. An application for registration (1708) dated 25 June 2005 showed the activity as "software and security implementation no hardware" and estimated supplies in the next 12 months as £1 million. On 12 October 2005 Bullfinch agreed to provide a security bond to Customs of £42,800 (1715). Following a visit Bullfinch was advised on 19 January at length in a letter (1733-60) regarding trading procedure best practice in the trade sector to combat MTIC fraud. On 11 May 2006 (1747) Bullfinch was informed that its registration was cancelled and was directed to change the due date for its return for the three month period 04/06 to 12 May 2006. He exhibited a note of visit by D A Atkin on 11 May 2005. On 3 July 2006 Mr Atkin notified an assessment for £10,649,648 for period 04/06 and £4,292,718 for the period to 10 May 2006 because no returns had been received (1751-1753). Mr Munroe-Birt said that a print-out from the electronic folder for The Wireless Warehouse (1756-1757) showed a purchase of 2000 Nokia 3250 Sim Free Euro Spec Mobile phones for £512,300 inclusive of VAT, being one of 77 invoices from Bullfinch showed a total of £10,649,648. That purchase matched the transaction shown at paragraph 71 above. A vision print-out dated 16 November produced by Mr Munroe-Birt showed no VAT as having been declared (1762); in his statement (composite, para 22) he said that he had searched various systems and could find no record of an appeal.
79. He produced (at composite paras 24-33) material relating to Midwest. The registration application dated 9 July 2005 (1775-1780) gave estimated turnover as £100,000 and the activity as sale of telephones. He produced various visit reports and notebooks by officers who were not called as witnesses, including M Bycroft. He produced an input tax adjustment form (1818) and an assessment by Mr Bycroft (1819-20) for the period from 1 January to 1 May 2006 for £57,583,433 dated 10 August 2006. He produced (1822-1837) a "Schedule of Midwest Communications Invoices uplifted 28/4/06". The assessment was in the same sum as the VAT shown on the schedule in respect of nine invoices for 10,968,273 phone cards purchased from Bestleg Ltd on 14 April 2006 (1838). The letter to Midwest dated 10 August 2006 accompanying the assessment stated that the input tax claimed on supplies from Bestleg Ltd was being disallowed on the grounds that the transactions did not take place. The schedule also showed purchases on 18 April 2006 from Hardware Traders Deutchland matching the goods shown in paragraphs 72 and 73 above (1822) and two further purchases from Hardware Traders Deutchland on 26 April 2006 matching the goods shown in paragraphs 74 and 75 above (1829); no input tax was shown for those purchases. A return for the period 1 January to 12 May 2006 signed on behalf of Midwest (1842B) and dated 3 May 2006 and produced by Customs at a late stage in the hearing showed output VAT on sales of £58,170,883, VAT on EU acquisitions of £58,111,195, input tax claimed of £116,273,968 and net VAT payable as £8,109.83. A vision print-out showed Midwest as becoming insolvent on 11 August 2006 on a creditors voluntary winding-up (1840).
80. Cross-examined, Mr Munroe-Birt said that as far as he knew no mobile phones were manufactured in the UK; all were imported.
81. In his witness statement dated 19 November 2007 he stated that Mitek's VAT return for the period 06/06 was still subject to extended verification; Mitek had been deregistered from 26 January 2007. He told Mr Young that in order to avoid double taxation Mitek's input tax on the supplies to the Appellant had not been denied; Mitek's input tax had been denied on other transactions where it was the exporter.
82. He said that frequently traders would box four smaller boxes of four mobile phones with the necessary equipment including a charger in an outer box which would go onto a pallet; there would be a warranty with each phone. IMEI numbers would be on the outside of the boxes on a label to facilitate scanning. There might be 125 phones on a pallet. If the trader recorded the numbers they could check against a database. He accepted that Customs do not supply information to traders from Customs' database.
83. Mr Munroe-Birt said that he made no decisions as to whether statements obtained by Mr Rintoul as to the provenance of documents exhibited by Customs should be put in evidence. He said that he was not sure that such statements are produced in any appeals. He would not expect them to be put in evidence.
84. He said that there was no specific evidence that Bullfinch imported the goods in Deal 2. There was no evidence of third party payments involving Bullfinch. He assumed that Bullfinch had provided the security which Customs had required. He said that Bullfinch had not appealed against the assessment but he did not know whether the debt had been pursued for the £57 million outstanding. He said that he had not produced the release notes on which the assessment notified on 3 July 2006 (see paragraph 78) was based because he did not have them to hand. He said that he looked at all source documents that he could in order to provide the evidence of fraud and had put in all the evidence available. He accepted that the print-out which he had stated was from the electronic folder for Bullfinch was in fact from Bullfinch's customer, Wireless Warehouse: it was produced by the officer for Wireless Warehouse; there was no evidence from that officer as to its accuracy. He had not spoken to that officer. Bullfinch had not submitted VAT returns or produced records. He had no information that Bullfinch had been visited after the assessment.
85. Mr Munroe-Birt said that his witness statement covering Bullfinch, C&B and Midwest, was made about six weeks before the first Tribunal hearing and was put together at very short notice. It was not possible to get all of the officers to make separate witness statements at that time, so he had included all the evidence of fraud in his statements. That was why Mr Atkin was not speaking to his note of a visit on 11 May 2006. Asked about the reason given for the assertion that Bullfinch was a willing participant, he said it was given on an internal document which he did not produce. It was self-evident from the volume of transactions passing through Bullfinch which were not declared. He imagined that the reason was given by Mr Atkin.
86. Mr Munroe-Birt agreed that Midwest had been de-registered on 27 March 2006 and re-registered on 5 April 2006; he said that there had been feigned cooperation; he had read through the notebooks and visit reports. He said that one of the reasons that the Bestleg invoices for phone cards was disallowed was lack of documentary evidence of the transactions concerning exports to Italy. He said that Midwest was a failed contra trader (Dec 8, p.123). He referred to a note of an interview by Matthew Bycroft. He produced an unofficial translation of a report by the Italian tax authorities as to the purchase by an Italian company of international phone cards; there was however no mention of Midwest among the four UK companies which were the subject of the enquiry (1816). Asked about a statement by the liquidator of Midwest which showed no evidence of a claim by Customs, he said that he was not involved in enforcement.
87. He said that the assessment on Midwest was on the denial of the UK input tax which had thus exposed the output tax on the UK mobile phone sales in the Appellant's supply chain; he said that Midwest had attempted to offset its output tax liability with fake invoices for purchases which did not exist (page 137). That output tax had not been paid. He could not specifically say that the assessment had been notified to the liquidator. He accepted that the liquidator's statement at 11 August 2006 showed moneys as due from Customs. He said that the disallowed Bestleg invoices were not exhibited. He agreed that the vision system print-out showed the entry "not suspect" against "reliability" : he said that that particular column was not regularly updated. The insolvency claim had been written off on 30 October 2007. He said that it was unlikely that the Appellant could have discovered the attempted contra trade. He accepted that there was no evidence held by Customs that suggested that the Appellant directly had any knowledge or means of knowledge of the attempted contra trade.
88. Mr Munroe-Birt said that he knew that the officers for the defaulters had made witness statements, but in view of the timescale for the original Tribunal date he decided to cover those matters himself. Effectively he decided what evidence was produced by Customs, however this was determined by the time available. He did not have the witness statements available to him at the time. He said that it was not normal to take statements covering the buffer traders, although there would always be statements for defaulting traders; it was not possible to get release notes in the time available; he did not consider that these added anything. The assessment on C&B was not in the bundle because it was not on the electronic folder. He had no evidence that the assessment was notified. There was no evidence as to C&B's supplier because C&B were missing. A deregistration letter was sent to C&B but was not in the bundle.
89. He said that he did not suggest that the Appellant knew of C&B or either of the other defaulters only that they were aware of the chain. He accepted that it was never put to the Appellant that it was a knowing participant in a fraudulent supply chain nor had an explanation been requested. He had no involvement in the extent of the evidence as to the Appellant's knowledge and its trading activities. He never spoke to Mr Rintoul about his witness statement. He had never had any responsibility for Miss Whitcombe, her workload, training or preparation. He did approve her decision to refuse the input tax.

The evidence of Mr Tuli

90. Mr Tuli said in his witness statement that in accordance with Customs' letter of 2 August 2005 (para 32 above), whenever contacted by a potential trading partner, he always validated the details with Redhill. If time permitted he tried to check with Redhill once a month (§19 of composite). On the day of a transaction he tried to check with Redhill and validated the trading partner on the Europa website.
91. He stated that he verified Raptor seven times before April 2006, Inter five times, Dualite on 28 March and Mobile Heaven on 17 February and 28 March. He tried to verify Mitek on 14 February and on 16 and 24 March receiving validation on 28 March and resubmitted Mitek's details on 12 April receiving validation on 28 April 2006.
92. He stated that the Appellant employed Veracis and The Security People to carry out due diligence. Sometimes because they were busy there was a delay. The Veracis report on Mitek pre-dated the April transactions.
93. Mr Tuli stated (§50) that the Appellant had details of approximately 12 potential overseas purchasers. On each trading day he would contact those to see their requirements. He would then contact the dozen or so potential suppliers listed on the Appellant's purchase ledger to see whether they could supply the stock. In April 2006 having established the demand, he then tried to source it; Mitek was the first port of call because they had a lot of stock but he still contacted other suppliers to see if they were cheaper; in April 2006 the other suppliers were not cheaper. He exhibited the documents listed at paragraph 57 above. He stated that in April 2006 the Appellant spent approximately £40,000 on inspection and freight charges and insurance. He listed the other disputed transactions.
94. He stated (§68) that the Appellant did not have sufficient capital to hold stock; it was only able to buy stock using the funds generated on sale of that stock; that still left a shortfall arising from the VAT on the purchases; in April 2006 this shortfall was over £1 million which was funded by a loan from the State Bank of India secured on the property where his parents live.
95. He stated that because of the difficulties with HMRC the Appellant had all but ceased trading. He had obtained employment as finance director of Richleys Ltd which had a turnover in excess of £10 million and employed 164 people.
96. He stated that the Appellant had no written agreements with suppliers or customers. On Mr Hodge's advice the Appellant's invoices contained retention of title clauses and were in sterling. Key terms such as price, place of delivery, insurance and freight were agreed orally. The Appellant did not enter into export transactions if the margin was below 3% because of the need to cover freight inspection and insurance charges.
97. He confirmed his witness statement where he stated that at the October 2005 visit Mr Hodge had said that the Appellant was doing everything all right.
98. Mr Tuli was then cross-examined. Mr Margolin sought to cross-examine Mr Tuli on a document relating to Richleys Ltd indicating that it went into administration on 12 March 2008, a fact which Mr Tuli accepted. The document was not in Customs' List of Documents or in the bundle. Mr Young objected. Mr Young looked at the document which was of 27 pages. Mr Margolin said that the document came into the possession of Customs on the Friday afternoon (this being Tuesday afternoon). He said that he had not shown it to Mr Young on Monday because he understood that cross-examination as to credit was "at large". He suggested that the hearing be adjourned for Mr Young to take instructions. This was at 4.30pm, the Tribunal having arranged to sit until 5pm. The chairman observed that the appeal had already overrun badly. Mr Margolin said that he had not appreciated that he needed to ask the Tribunal for leave to put the document in.
99. The Tribunal refused to allow the document to be introduced or to allow further cross-examination based on it. We have been asked to give our reasons. The document had not been included in the List of Documents. There was a specific direction on 6 May 2008 that no further documents should be produced without leave. There had been no application for leave. Mr Young was fully entitled to object, having been ambushed. The document was not produced in response to new evidence or material which had arisen : Mr Tuli's statement as to Richleys was dated 24 May 2007. The introduction of the document without leave had already taken up over half an hour; the Tribunal had already agreed to sit until 5.00pm because it was not sitting on the following morning. An adjournment would have involved the loss of a further half hour on an appeal which had already overrun. No satisfactory explanation was given for the introduction of the document without leave or prior warning.
100. Mr Tuli, told Mr Margolin that when he wrote the letter of 18 May 2005 (paragraph 30 above) the Appellant was intending to trade in mobile phones; those were encompassed in electronics, as in the letter of 12 July. Computer components and telephones were specifically mentioned in the circular letter of 3 August because those were being targeted at that stage. He said that the Appellant never traded in televisions. He agreed that the letter of 12 July 2005 to Customs was not strictly accurate because the Appellant had not traded in certain items including electronics. He said that the reference in the circular letter to a "strong relationship" with clients and suppliers was a "sales pitch". The Appellant started to trade in CPUs and mobile phones around the beginning of September 2005.
101. Asked whether he regarded it as a logical progression to change from wholesale clothing to an entirely different sector, he said that he was referring to continuing wholesaling. His research was on the internet only. Asked why he should be more successful in mobiles than clothing, he said that if he could source a product which a customer required from another wholesaler he could succeed. In the clothing sector they were not buying for a particular customer. He said that he did not know whether the mobile phone sector was crowded. He did not know why other traders on the website would not deal directly with each other. He denied the suggestion that he had no intention of getting involved in television and other markets and only intended to get involved in mobile telephones and CPUs.
102. He accepted that the circular of 3 August 2005 was misleading in that the Appellant had not been dealing in the product areas that long. Thinking about it now, he did not regard it as acceptable.
103. Mr Tuli accepted receiving Customs' letter of 2 August 2005 about MTIC fraud. He had heard about MTIC fraud before, mainly in the press. He agreed that the letter gave him cause for concern. He did not agree that he was a risk taker. He said that there are risks in every business. Within business the taking of risks might be necessary to make a profit. He took a risk in deciding to get involved in this sector.
104. He said that he had read Notice 726. He knew that in paragraph 2.4 verifying the integrity of the supply claim was not necessarily limited to the immediate supplier but referred to the entire supply chain. He recognised joint and several liability as a draconian measure. He knew that he could not afford to turn a blind eye to fraud. He knew the importance of carrying out reasonable checks to avoid joint and several liability, including verifying the integrity of the entire supply chain and he knew that he could not verify the entire supply chain. He said, "We thought we were doing everything to check our suppliers and customers." Asked why he even started trading in the sector, he said that he believed they could cover that risk by checking the integrity of the suppliers and anyone involved in the transactions whose identity they knew.
105. Mr Tuli said that he believed that he received the Veracis report on Mitek around 7 to 10 April 2006. He said that he knew that it was before trading with Mitek but that it was not necessarily important to obtain a report before trading because the Appellant carried out other checks. The first request to Redhill as to Mitek was in February. He said that trading started before credit checks because the Appellant was not giving suppliers any credit. The Appellant had already carried out checks to ensure Mitek was legitimate. Mr Tuli then said that he was not sure that he had received the Veracis report in early April. He said that he did not know why an invoice from Veracis dated 25 July 2006 was not sent earlier; the invoice showed that a payment had been made on account. He did not know why the Security People had not invoiced the Appellant for its report on Mitek until 13 July 2006; he said that both reports were received quite a bit before the June visit. He accepted that a number of the due diligence reports post-dated the start of trading with the companies concerned.
106. He said that the fact that Veracis reported that Mr Hyre of Mitek had shown little awareness of Notice 726 when seen did give him pause for thought; he said that another Mitek employee, Richard Dolman, who came to see the Appellant was aware of Notice 726. The fact that the Veracis report stated that on 31 March 2006 Mr Deol resigned and Mr Hyre was appointed gave him some pause for thought. He denied turning a blind eye to concerns about Mitek in the Veracis report.
107. Asked why all the deals in April were with Mitek, a new supplier, Mr Tuli said that Mitek were very proactive in securing stock and offered stock to the Appellant on a daily basis. He said that he knew that Mitek was in voluntary arrangement but that he was not concerned.
108. Mr Tuli said that he was not sure whether he received a Veracis report on France Affaires before trading with them. He could not recall whether he noticed any reference to third party payments, but would not have accepted or made any. He said that France Affaires confirmed that they were no longer making any third party payments.
109. Asked about the disallowance of input tax on CPUs bought from Inter and Raptor (paragraphs 40 and 42-43 above), he maintained that he was not convinced that HMRC were correct. He had been given no proof but had decided not to carry on trading in CPUs, although he did carry on trading with Inter and Raptor.
110. Mr Tuli agreed that the profit excluding VAT on the eight April deals was a little short of £265,000 before overheads and interest. He agreed that the Appellant's profit in the year to 31 March 2006 was £489,153 compared with £4,094 in the previous year. Almost all of the profit was in mobiles and CPUs in the last six months. He said that he did not feel that he had hit the jackpot; but said that he was extremely pleased.
111. He said that it was too expensive to keep IMEI numbers. He accepted that TLS's charge for IMEI checks would have been very modest relative to the profit. He said that Mr Hodge had said at the October meeting that the Appellant was doing everything OK. He said that the Appellant carried out inspection reports on all phones traded in.
112. Mr Tuli agreed that on occasions the Appellant shipped goods overseas before being paid and that this involved a degree of commercial risk. The transport company was introduced by AFI. He had not carried out any commercial checks on AFI before using them. He had never met any representatives of customers and never visited any supplier's premises. Veracis or The Security People had carried out checks.
113. Mr Tuli said that he presumed that 100% of stock was inspected and checked. The terms of the agreement with A1 Inspections provided for 100% inspection. He did not know what that would involve and had not given written instructions to A1 Inspections as to what to do. He did not remember whether he had requested a 100% open box inspection. He said that he believed 100% box inspection would involve a percentage of the stock being opened and checked with the balance being checked by the carton. The colour of the phones would be written on the boxes. He said that he did not know how A1 Inspections would have known what was in the boxes without opening them. He thought they would have carried out a random open box inspection.
114. He said that he had not asked why he was selling to a French customer phones which had no French manuals or software. He did not know where France Affaires planned to sell the goods. He said that two-pin chargers could be used in the UK with an adaptor. He did not know whether phones with English and Dutch manuals would be sold to an end user in France. He did notice that the manuals were in English.
115. Mr Tuli said that he always tried to verify the status of new customers or suppliers with Redhill. Verification with Redhill was important. He generally faxed Redhill on the day of a transaction. There might be a delay in the response but Redhill would be alerted. He attempted to verify Mitek on 12 April 2006 but did not receive a response until 28 April. The validity of Mitek's VAT number was established on the VIES website. He did not normally print out Europa verifications.
116. He told Mr Margolin that he learned of FCIB in the Netherlands Antilles through talking to other traders on the IPT website; he found out that FCIB was the bank they all used for ease of transferring money between accounts. He said that the maximum daily online facility offered by HSBC was £100,000. He denied being told to use FCIB.
117. Mr Tuli agreed that although it was a new type of business, with new customers and suppliers there were no written terms and no agreements as to passing of title except in the invoices and no agreement as to returns. He assumed that customers would inspect goods on receipt. There was no discussion as to returns. He agreed that the goods were supplied overseas before the Appellant was paid. No key terms were agreed except the price. In most cases the manufacturer's warranty was on the inspection report but he did not know the scope and had not seen the physical warranties. Customers received the report and would inspect the goods before paying. He denied the suggestion that the Appellant did not really care what AI Inspections did.
118. Mr Tuli was taken in some detail through the deal documentation for Deal 2. He said that there had been several telephone conversations with France Affaires before the price was stated in a template letter. The purchase order by France Affaires came after. He sent a proforma invoice to France Affaires together with the customer declaration to be returned. Asked about the fax headers from France Affaires (1073) showing the purchase order being sent at 1442 hours and the customer declaration being returned at 1454 hours, he said that the Appellant could have sent the proforma invoice, the covering fax and the declaration form within a short time because all were templates taking seconds to fill in. He said that the method of operating was customer driven, however the price was not agreed with the customer until the goods were sourced.
119. Asked about Deal 1, where the customer declaration form was shown as sent by the Appellant at 1225 hours, he said that he assumed that he asked the freight forwarders to ask AI Inspections to do an inspection almost immediately, not necessarily waiting for the declaration to be returned. The report bore a time of 3.46pm. He assumed an inspection would take 2 to 3 hours depending on the quantity of phones.
120. Mr Tuli told Mr Margolin that, although there were only five days in April 2006 on which there were deals, he spoke to suppliers and customers on other days; there were no days on which he was in reality inactive. Mitek were constantly offering stock, although he did not know whether they actually had it until it was provided.
121. He said that he did not remember which suppliers he contacted in April 2006. He could not think of any reason why he would not have approached Raptor or Inter. Asked why the goods were sourced from Mitek rather than Raptor or Inter, he said that he could not say whether he contacted those companies in the particular deals.
122. He agreed that the goods in Deal 8 were despatched on 27 April 2006 before the report from AI Inspections was received (1490 and 1481), but said that he would have spoken to AI Inspections on 26 April before receiving the written report, possibly the fax was not working; he would not have been given all the information on the telephone. He denied a suggestion that he was not remotely interested in the content of the report. He denied the suggestion that he was well aware that the trading was related to MTIC fraud.
123. Re-examined, Mr Tuli said that he had determined that there was no material risk in the trades in issue. The Appellant had never been served with a joint and several liability notice. It had never been suggested that the Appellant bought below market price from Mitek. As to IMEI numbers, Mr Hodge had not said that he should keep the numbers. No one had suggested that the Appellant was involved in a carousel. It would have been costly to collate the IMEI numbers, he did not actually investigate the possibility of getting a database.
124. He said that a Dunn & Bradstreet report was not relevant because the Appellant was not giving credit to customers or taking credit from suppliers. The risk that a customer would not pay for goods despatched was not great; the goods were shipped on hold by the freight forwarder to a freight forwarder.
125. He said that the inspection reports had been submitted monthly to Customs to support the claims: there had been no complaints by customers.

Submissions on the facts and the evidence

126. Mr Margolin said that while cogent evidence was required in view of the gravity of the allegations, nonetheless the civil standard of proof applied, see Home Secretary v Rehman [2003] 1 AC 153 at [55]. In considering the documentary evidence and matters such as the timings shown on fax headers he invited the Tribunal to adopt a pragmatic approach as in Dragon Futures Ltd v Revenue and Customs Commissioners (2005) Decision No.19186 at [96] to [112]. Customs' case was that there were fraudulent transactions; although inevitably there were difficulties in obtaining evidence. He referred to Calltel Telecom Ltd v Revenue and Customs Commissioners (2007) Decision No.20266 at [20]-[22] and Honeyfone Ltd v Revenue and Customs Commissioners (2008) Decision No.20667 at [83]-[91]. In Brayfal Ltd v Revenue and Customs Commissioners (2008) Decision No.20781 the Tribunal said at [86] that it was unnecessary for Customs to prove that a tax loss was included in an assessment. In Livewire Telecom Ltd v Revenue and Customs Commissioners [2008] V&DR 131 the Tribunal at [40] referred to the possibility of exhibiting the notebooks and other records of an officer who is unavailable.
127. He said that under Rule 28(1) of the VAT Tribunals Rules 1986 the Tribunal had a very broad discretion to allow evidence to be given in any manner. He accepted that there were serious allegations not only against the Appellant but against other traders who were not parties. Clearly this would make the Tribunal more cautious in its approach to the evidence, including hearsay evidence. It was always a question of discretion and weight. He submitted that it would be wrong to reject altogether hearsay material including the officers' notes even where such material tended towards the witness statement end of the spectrum.
128. Mr Margolin said that the Tribunal should look at the overall picture. The circumstances in which the Appellant moved into a new market sector, its enormous and rapid success and features suggesting orchestration produced a picture from which in the absence of substantial explanation an inference of dishonesty could be drawn, see Pumfrey J in Softwarecure Ltd v Pathan [2005] EWHC 1845 (HC) at [52].
129. He said that Mr Tuli had given no coherent explanation as to why the Appellant had moved into CPUs and mobile telephones; neither had been mentioned when he notified a change of trade classification. It was not a logical progression. Mr Tuli had conducted little research, merely researching the internet to find websites to communicate with other traders. He admitted to having no specific knowledge of the products he was dealing in. He was breaking into a crowded sector as a middle man.
130. Mr Margolin said that the round robin letter of 3 August 2005, see paragraph 33 above, was frankly misleading and Mr Tuli had described it as a sales pitch.
131. He said that it must have been apparent to Mr Tuli that there was widespread fraud in the mobile phone market involving enormous losses to the exchequer. A responsible businessman would have gone to considerable lengths as to due diligence to satisfy himself that the transactions were not connected with fraud. His efforts fell far short of this. It was unclear when the Veracis report on Mitek was requested and when it was received; although dated 8 March 2006, it contained information as at 31 March and the invoice was dated 25 July. Mr Margolin accepted that Mr Tuli had the reports before the visit in June 2006 but suggested that they were obtained because of Customs' enquiry. The explanation for obtaining two reports on Mitek was most surprising. Mr Tuli had paid no attention to the change in personnel at Mitek or to the fact that it was in voluntary arrangement. He said that the declarations from suppliers and customers were of doubtful value; it was unlikely that a fraudster would be scrupulous about completing them accurately.
132. Mr Margolin said that, apart from the Europa checks, there had been no checks on the freight forwarders, warehouse companies or inspection agents. Mr Tuli did not know what was involved in the inspections by AI Inspections for which he was paying: he said that he had asked for 100% physical examination but said that he thought that it was about a 15% check; there could have been a random check on open boxes. Mr Margolin said that there was a range of matters in the inspection reports to which Mr Tuli had given no thought at all, including the report that the software in deal 4 had crashed (1220) and the language of the software.
133. Mr Margolin said that the Appellant's use of FCIB was consistent with orchestration of its trading. Mr Tuli said that he learned of FCIB "through talking to some of the other traders"; he had said that most of the Appellant's trading partners also had FCIB accounts. The HSBC limit of £100,000 per day for online accounts was not mentioned in Mr Tuli's witness statements.
134. He said that the Appellant had no written agreements although dealing with new suppliers and new customers. Mr Tuli was unaware of Mitek's terms and conditions. Mr Tuli referred in evidence to manufacturers' warranties but did not know their scope; some warranties were limited but he did not know what this meant. Mr Margolin asked what was the purpose of inspection reports if there was no further discussion when a report showed goods to be defective.
135. In support of the allegation that the deals were all contrived, Mr Margolin said that Mitek was always the first port of call in 04/06 although the Appellant had never dealt with it before; there were no cancelled deals; all were back to back; the Appellant added little value to justify a considerable mark-up; there was a question as to the suitability of the phones to the market in question; Mr Tuli had carried out limited research before trading; he had shown a lack of concern as to the content of the inspection reports and of the report by Veracis on Mitek. He said that the timing on fax headers were not consistent with Mr Tuli's evidence as to the order of events and his evidence that A1 Inspections would take 2 to 3 hours to inspect and report. The Appellant had despatched the goods in deal 8 before receiving the inspection report. The FCIB statements indicated that the payments started from the end of the chains passing back down the chains to the defaulting acquirer.
136. Mr Young said that the appeal involved serious allegations of fraud and conspiracy involving a large number of persons. A number of officers had made witness statements but had not been called. It was not a case where evidence was unavailable. Mr Munroe-Birt said that he did not put them in because of time constraints. The Tribunal was being asked by Customs to fill in the gaps, however it must decide on the evidence before it.
137. He said that Mr Munroe-Birt had adduced evidence to which he could not speak, including that in Bundle 5. He submitted that the deal packs in the Respondents' List of Documents referred to the material produced by the Appellant. He had repeatedly objected to improper documentation on which it was impossible to cross-examine. Much of Mr Munroe-Birt's evidence was multiple hearsay.
138. Mr Young accepted that the Tribunal could consider documents such as bank statements and invoices. In Brayful Ltd v Revenue and Customs Commissioners (2005) Decision No.20781 the control officer for the missing trader had been called to establish the tax loss. In Dragon Futures Ltd v Revenue and Customs Commissioners (2005) Decision No.19186 there was full evidence as to the provenance of the documents produced by Customs. Here the freight forwarding evidence and release notes in the chain had not been produced by Customs. At this point Mr Margolin said he was not aware that any allegation was made that the freight forwarders had been acting irregularly (17 Dec, page 67).
139. He said that the Appellant does not have the evidential burden as to fraud. On a balanced view Customs had not established that there were defaulters in the chains. There was no cogent evidence that C&B and Bullfinch had imported mobile phones from the EU or anywhere else. Midwest might have been contra-trading however the control officer for Midwest had not been called although Mr Munroe-Birt had seen a witness statement by him. The Tribunal was asked to infer tax losses in the Appellant's chains for which there was no evidence. The assessment on Midwest was for disallowed input tax on its export transactions, not for undeclared output tax.
140. Mr Young said that the Appellant's profit margins in intra-Community trade were higher, there being a greater risk of non-payment and of extended verification. There was no evidence of third party payments in the chains. There was no substance in the criticism that the Appellant had been misleading as to its trade classification. Customs knew by 2 August 2005 that it was involved in mobile telephones. Although Mr Tuli's market research was criticised, no plausible alternative was advanced.
141. He said that the Appellant did adequate due diligence for its purposes. It was wrong to complain that the Appellant could not verify the entire chains. The Appellant had behaved responsibly in ceasing to trade in CPUs. Mr Hodge had not told Mr Tuli to keep IMEI numbers; a data base would have been of limited value to the Appellant. He said that the goods were shipped by the Appellant on hold. As to the inspection reports, Customs had not challenged AI Inspections at any stage; he suggested that AI inspections may have inspected the same goods for other traders so that they could copy a report. He said that the absence of written agreements was not unusual in a fast-moving field with much business on the telephone. Although the Appellant had no returns policy, defective goods were covered by the manufacturers' guarantees.

Conclusions on the facts

142. Whether considering the allegation that the Appellant was a knowing participant in fraudulent chains or the allegation that the Appellant should have known that by the purchases from Mitel it was participating in transactions connected with the fraudulent evasion of VAT, the appeal involves allegations of fraud for which cogent evidence is required. On either basis Customs must establish that the Appellant's purchases were connected with the fraudulent evasion of VAT.
143. The Tribunal must answer four questions:

(1) Was there a VAT loss?

(2) If so, did this loss result from a fraudulent evasion?

(3) If there was a fraudulent evasion, were the Appellant's transactions the subject of this appeal connected with that evasion?

(4) If such a connection was established, should the Appellant have known that its purchases were connected with a fraudulent evasion of VAT?

These questions are based on those approved by Sir Andrew Morritt, C in Blue Sphere Global Ltd v Revenue and Customs Commissioners [2009] EWHC 1150 (Ch) at [29]. To question (4) we add, "Did the Appellant know or" before "should the Appellant have known". That case was solely concerned with contra-trading however the questions are equally applicable in the present case.

144. At [52] Sir Andrew Morritt said this,

"First, the burden is on HMRC to prove that BSG ought to have known that by its purchases it was participating in transactions connected with the fraudulent evasion of VAT. It is not for BSG to prove that it ought not. Second, it is not sufficient to demonstrate that BSG was involved in transactions which 'might' turn out to have undesirable associations."

145. In his closing submission in writing Mr Margolin cited the following passage from the speech of Lord Hoffman in Secretary of State for the Home Department v Rehman [2003] 1 AC 153 at [55] when he said,

"The civil standard of proof always means more likely than not … cogent evidence is generally required to satisfy a civil tribunal that a person has been fraudulent or behaved in some other reprehensible manner. But the question is always whether the tribunal thinks it more probably than not."

In further submissions Mr Margolin cited In re B (Children) (Care Proceedings: Standard of proof) (CAFCASS intervening) [2008] 3 WLR 1 where Lord Hoffman said at [13] that "there is only one civil burden of proof and that is proof that the fact in issue more probably occurred than not" and where Lady Hale said at [72] that there is no logical or necessary connection between seriousness and probability.

146. We do not read In re B (Children) as detracting from Lord Hoffman's observation in Rehman as to the requirement of cogent evidence of fraud. We note that at [69] Lady Hale said,

"There are some proceedings, though civil in form, whose nature is such that it is appropriate to apply the criminal standard of proof."

She then said that care proceedings were not of that nature. While on the current state of the authorities, including Mobilx Ltd (in administration) v Revenue and Customs Commissioners [2009] STC 1107 the standard of proof is the balance of probabilities and not the criminal standard, Lord Hoffman's observations in Rehman as to the need for cogent evidence where fraud is in issue remains the law. In Livewire Telecom v Revenue and Customs Commissioners [2008] V&DR 21 the Tribunal held at [31] that cogent evidence was needed of fraud by Sygent and Unibrand who were not parties to the appeal; that holding was not challenged on appeal to the High Court.

147. When considering the evidence we bear in mind the judgment of Floyd J in Moblix in February when he said this at [63]:

"It is a fundamental aspect of civil litigation that parties do not learn for the first time in a judgment or decision of serious adverse allegations against them. They must be given a proper opportunity of dealing with them before they can form a building block of any substance in the case against them."

In that case the Court held that the Tribunal was not entitled to make findings as to certain matters which were not part of Customs' pleaded case and which had not been put in cross-examination.

148. We do not read the judgment as saying that every allegation must be pleaded in detail in the Statement of Case. The crucial matter is that the Appellant should have had a proper opportunity to deal with any material allegation. Cases such as this involve a mass of detail. It is unrealistic to expect every detailed allegation to be in the Statement of Case. In this appeal the case for Customs was filled out in a skeleton argument dated 3 December 2007 and a supplementary skeleton dated 10 July 2008; furthermore Mr Tuli was cross-examined at length, see paragraphs 98 to 122. We have taken account of the allegations and matters raised in the Statement of Case, the written and oral submissions and in cross-examination. We have not taken account of matters not raised during the hearing on which the Appellant did not therefore have an opportunity to address us : for example we have disregarded the fact that the insurance was provided by companies in Dubai and UAE which it is apparent from the notepaper were associated with the warehouse companies in the UK and we have not taken account of the size of the Bestleg invoices to Midwest.
149. The fraudulent evasions were identified by Customs as the failure by C&B, Bullfinch and Midwest to account for output tax on the supplies forming part of the chains leading via Mitek the Appellant.
150. Although each purchase by the Appellant requires separate consideration, we accept the submission by both counsel that the Tribunal must view the evidence as a whole.
151. There was no real dispute as to the eight chains leading back from the Appellant to the three alleged defaulters, see paragraphs 57 to 75 above. We note that in each chain there were four companies between the alleged defaulter and the Appellant. There were invoices for every transaction in each chain from the alleged defaulter to the Appellant apart from Deal 2 in which there was a purchase order (1029) from The Wireless Warehouse to Bullfinch but no invoice. The invoices were consistent with each other and the majority of transactions had FCIB documentation for transfers matching the invoices. In each chain all the invoices were on the same day. We are satisfied that in each chain the goods supplied by Mitek to the Appellant were supplied to Mitek through the eight chains from C&B. Bullfinch and Midwest.
152. We now turn to the evidence that C&B, Bullfinch and Midwest were defaulting traders and were fraudulent. The evidence here is much less satisfactory since no witness was called who could give direct evidence as to the defaulting companies although statements had been taken from the officers handling those companies. For the reasons given at paragraph 19 to 20 we have disregarded the notes of the officers who were not called apart from those of Miss Whitcombe in relation to the visit as to which Mr Rintoul gave evidence. We can see no satisfactory reason as to why those officers were not called as witnesses so denying the Appellant the chance of cross-examining them.
153. The material, apart from such notes, which relates to C&B is covered at paragraph 77 above. On 16 March 2006 C&B which was registered in 2003 giving the activity as car valeting wrote to Customs stating,

"We now buy and sell chemicals, car components, alloy wheels etc we would like our classification to change to 'general trading'".

On 11 April an officer from Redhill VAT office advised C&B by letter of MTIC fraud in sectors including computer equipment, mobile phones and ancillary items and asked C&B to verify the VAT status of new or potential customers; a copy of Notice 726 was enclosed. The print-out from the electronic folder for V2 (1862-7) listing purchase invoices for April 2006 showed 194 invoices from C&B for mobile phones totalling £23,256,833, the earliest of which was on 6 April. These invoices included supplies by C&B exactly matching those in Deals 1, 3 and 6, in each case showing onward supplies by V2 to SWEG again matching those in the chains. A computer print-out for C&B showed a nil return for period 01/06 and no return as received thereafter; the three previous returns showed total outputs of only £57,488 (1869-70). A calculation dated 6 July 2006 (1861) for the final assessment of £59,047,844 showed a V2 component of £23,256,833; the assessment was dated 7 July 2006 (1873) and was written-off on insolvency on 12 January 2007 (1875). We note that sales to V2 alone in April 2006 were forty times total outputs for the year to 01/06.

154. The material produced by Mr Munroe-Birt relating to Bullfinch is shown at paragraph 78 above. On 11 May 2006 Bullfinch was directed to render its return for the period 04/06 by 12 May 2006. An assessment on 3 July 2006 for that period for £10,649,648 included £436,000 attributable to the supply of 2000 Nokia 3250 phones to The Wireless Warehouse on 13 April 2006 which was part of the Deal 2 chain. No output tax was declared for 04/06. The balance of tax outstanding at 16 November 2007 was £51,508,591. Bullfinch was only registered for VAT in 2005.
155. The material relating to Midwest is summarised at paragraph 79 above. The manual return dated 3 May 2006 for the period 1 January to 2 May 2005 showed output tax of £58,170,883 and VAT on EC acquisition (Box 2) as £58,111,195 making VAT due totalling £116,282,078. Input claimed was £116,273,968 leaving net tax due of £8,109.83. An assessment was made on Midwest in the sum of £57,583,433 on 10 August 2006 disallowing input tax on nine invoices from Bestleg Ltd all dated 14 April 2006 for phone cards; these were of course not part of the Appellant's chains. The chains leading to the Appellant were all after 14 April 2006. A schedule marked "Schedule of Midwest Communications invoices uplifted 28/04/06" showed total purchases excluding VAT of £642,553,417. This schedule included the Bestleg invoices. It also included invoices for EC acquisitions from four companies including Hardware Traders Deutchland matching purchases in the Appellant's chains. The total of the Bestleg purchases excluding VAT was £329,048,190 so that the EC acquisitions constituted the balance of £313,505,227. Acquisitions VAT on the latter figure would have been £54,863,413. The discrepancy between this figure and the larger amount returned in Box 2 was not explained; nor was the input tax figure. It was not suggested by Customs that Midwest did not include the sales in Deals 4, 5, 7 and 8 in the output tax declared.
156. In his witness statement Mr Munroe-Birt stated that the assessment included the transactions in the Appellant's supply chain. This was not in fact correct since the assessment was based on disallowed input tax. The contention that Midwest had attempted to offset the declared output tax by contra-trading was not pleaded in the Statement of Case however it was clearly raised during the hearing.
157. We now summarise the material other than notes by persons not called as witnesses to make good the allegation that C&B, Bullfinch and Midwest fraudulently failed to pay the output tax on mobile telephones in the supply chain to the Appellant. C&B made supplies in April 2006 including supplies to V2, which formed part of the Appellant's chains of supply and in respect of which no VAT return was made. Bullfinch made a supply to The Wireless Warehouse which formed part of the chain for Deal 2 for which no output tax was declared. Midwest made supplies in four deals in the Appellant's chains which were declared on Midwest's VAT return but on which the total output tax was largely offset by input tax part of which was disallowed for a reason not directly connected to the Appellant's chain. In the case of each company sales in April 2006 were dramatically higher than those estimated on registration or provides outputs. Both C&B and Bullfinch had been warned by Customs of fraud in the sector.
158. We next consider the material relating to the onwards supply chains leading to the Appellant in relation to allegations of fraud against C&B, Bullfinch and Midwest. Paragraph 18 of the Statement of Case included the following:

"The MTIC fraud transaction chains themselves lacked commercial reality. That was so to an extent that the Appellant cannot have failed to be aware that it was not taking part only in normal commercial transaction chains. The workability of the fraud was dependent on each and every party in the chain acting exactly as the ringmaster(s) of the fraudulent scheme intended."

Although he produced schedules showing the chains, Mr Margolin made no oral submissions as to the chains themselves apart from the immediate transactions by the Appellant. Since Mr Tuli denied any knowledge of the transactions prior to the Appellant's acquisitions from Mitek, he could not be usefully cross-examined on the prior chains.

159. In each chain Mitek was the direct supplier to the Appellant and there were three other traders between Mitek and the alleged fraudulent defaulters. In each chain all of the supplies in the chain were effected in just one day; three pairs of deals, Deals 2 and 3, 4 and 5 and 7 and 8 were on the same days. There was no evidence of any warehouse movements of the goods between acquisitions by the alleged fraudulent defaulters and supplies by the Appellant. Such evidence as there was indicated that there were no such movements. Apart from a supply by Raptor in Deal 1 at a mark-up of £1.40 per unit, the mark-ups varied from 10 pence per unit to one pound exclusive of VAT. Each trader in each chain had an account at FCIB and each payment was by intra-account transfer at FCIB.
160. Before we come to the Appellant we observe that in each case Mitek was able to source the goods which the Appellant wanted which were situated in one of two warehouses and had passed through three traders following sale earlier on the same day by C&B, Bullfinch or Midwest. We note that each prior supply was of the same quantity : there was no breaking of bulk or the reverse.
161. If each supplier up the chains had to source the goods in order to satisfy the orders in turn, this must have taken time in each case. Furthermore, in such event it was a complete coincidence that the exact quantity was available having been obtained by that supplier's supplier in the same quantity. One possible explanation would be that, before each supplier up the chain agreed to sell on, that supplier located a supplier from whom the desired quantity could be obtained. A further problem is that each intermediate supplier needed to pay its supplier. There was no indication from the FCIB statements exhibited that FCIB was extending credit. In the absence of such credit the payments must have come from the Appellant and passed successively up the chain, whereas the goods passed in the opposite direction down the chain. If the sales were "on hold", successive sales were agreed at a time when the vendor had no title to pass.
162. Another possibility is that the initiative for the transactions along the chain started at the other end with the mobiles being offered by C&B, Bullfinch and Midwest or by their suppliers. This would involve each supplier in turn having found a customer for the exact consignment offered on the same day. However this possibility conflicts with Mr Tuli's evidence that his deals started with requests by his customers, after which he sourced the goods to meet their requirements.
163. Mitek was in voluntary arrangement on 14 March 2006. Between 14 and 26 April 2006 Mitek sold Mobile telephones to the Appellant for £7,065,980 being paid by the Appellant and paying its suppliers by internet transfers at FCIB. On each occasion the goods were at the warehouses of TLS or AFI.
164. In the last three paragraphs we have been considering the position on the chain as far as Mitek which was satisfying the Appellant's orders, concentrating on the documents, there being little or no evidence as to the intermediate traders. We now include the Appellant's part in the chains.
165. The Appellant's case was that the deals were customer-driven and that the Appellant sourced the goods to meet the needs of France Affaires and the other customers. In each deal the goods were shipped to the same freight forwarder (AFI Logistique) at Roissy in France. The invoices stated that title only passed on payment. Each deal involved the steps recorded at paragraph 57 above and communications mainly by telephone to arrange for those steps. Mr Tuli told Miss Whitcombe and Mr Rintoul on 27 June 2006 (see paragraph 54 above) that he got the goods within 2 or 3 hours to a day. Mr Tuli's evidence was that on each deal he contacted a number of suppliers but that Mitek was able to provide the goods at the best price. The deals were arranged by Mr Tuli himself. We observe that Mr Tuli had to handle all the paperwork and, when there were two deals on the same day, to ensure that they did not get mixed up. It would have been necessary for him to ensure that the mobiles which he could obtain from Mitek met the requirements of the customer as to the type of charger and software languages. Mr Tuli said that he also arranged via the warehousekeepers for the goods to be inspected.
166. We found Mr Tuli to be an unconvincing witness. While we accept that it is possible to trade legitimately in the grey market, we find it noteworthy that the Appellant entered into a wholly new sphere of trading with research limited to the internet. If the deals were pre-arranged this would not matter since research would be irrelevant; if they were not, it could give rise to real difficulties. The Appellant was dealing in very substantial sums of money. If the transactions were genuine arm's length transactions, the possibility of default in payment or of the goods being defective could hardly be ignored. Even after the interview on 27 October 2005 it does not appear that Mr Tuli inquired as to how AI Inspections carried out inspections. As to Mitek, he had clearly intended to trade with Mitek for some time before April 2006, since his first enquiry to Redhill was in February. The eight deals in April 2006 involved an extraordinarily large amount given that Mitek was in a voluntary arrangement. If Mr Tuli had been genuinely trying to get the best price, it is difficult to see why on three occasions when Dualite appeared earlier in the chain he did not source the goods from Dualite at £1.50 a unit less than he paid Mitek. If the deals were genuinely negotiated at arm's length, it is extraordinary that all four of the Appellant's overseas customers used the same warehouse at Roissy, although two were Danish, and that four (and may be a fifth – Deal 8) of the consignments bought by the Appellant to meet his customers' needs were at a warehouse (AFI) which the Appellant was using over six months before it traded with Mitek. Many of our comments as to Mr Tuli's conduct of business fall into place if the transactions were pre-arranged so that the only risk was that Customs would deny input tax.
167. When we look at the entirety of the evidence we are satisfied that there is cogent evidence that C&B and Bullfinch acted fraudulently in supplying goods to the chains leading to the Appellant and in failing to account for the output tax on their supplies and that the Appellant was a knowing participant in the fraudulent transactions which included the Appellant's claim to recover input tax. It is not necessary for the Appellant to have known the identity of the defaulters. Nor is it necessary to have evidence as to how the profits from the fraudulent transactions were to be divided.
168. We now return to Midwest which did render a return which included the output tax in the Appellant's chains. Although it was not pleaded in the Statement of Case that Midwest was contra-trading, the appeal was in fact conducted on this basis. A trader which enters into a transaction to cancel out its own output tax liability, as opposed to that of its counterparty, is not normally labelled a "contra-trader". However this is academic. In our judgment if Midwest made the supplies to the Appellant's chains intending to cancel out the output tax payable by making a fraudulent input tax claim albeit in relation to other supplies, such fraud was sufficiently connected to the Appellant's chain to entitle Customs to refuse the Appellant's input tax if the Appellant knew that its purchases were connected with the fraudulent evasion. We see no logical distinction between a defaulter which fraudulently makes no return and a defaulter which makes a return which fraudulently claims input tax offsetting its declared output tax liability. There is no need for the Appellant to know the details of the evasion or the identity of the defaulter.
169. We ask ourselves whether the totality of the evidence is sufficiently cogent to satisfy us that Midwest, when supplying the goods which passed to the Appellant, intended fraudulently to default on the output tax. As already pointed out Customs adduced no acceptable evidence as to the disallowed input tax. Mr Margolin in effect invited us to rely on the hearsay evidence, see paragraph 127. For the reasons already given we do not consider it appropriate to place any reliance on that evidence given the seriousness of the allegation. He did not address us as to a fall back position, except in so far as this is inherent in looking at the overall picture.
170. In effect we have to decide whether we are satisfied that Midwest never intended to account to Customs for the output tax on the sales of the goods supplied by others to the Appellant. In considering this we look at all eight chains. Apart from the fact that Midwest declared the output tax on its UK sales in April 2006 on its VAT return submitted five days after Customs had uplifted the invoices on 28 April, we can discern no material difference between the Midwest chains and the other chains.
171. The pleaded case for Customs (see paragraph 158 above) was that every party in the eight chains acted exactly as the ringmaster intended. The observations in paragraph 159 to 163 are relevant to all eight chains. If there had only been one chain from Midwest, the similarity to the other chains might be regarded as a coincidence. However there were four chains from Midwest all of which were similar.
172. The logic of the case for Customs is that Mitek and the Appellant were acting as the ringmaster intended; we cannot see how the ringmaster could achieve this without telling them what to do. The logic of the case must also be that the warehousekeepers which released the goods successively down the chain and arranged transportation to Roissy were also participants. A problem here is that Mr Margolin said that he was not aware of any allegation against the warehousekeepers that they had been acting irregularly (see paragraph 138 above). In a case of this type we would have expected that Customs would have visited the warehousekeepers at an early stage and to have examined the paperwork; however this did not happen.
173. The fact that Customs appear not to have visited AFI and TLS and made no allegations against them does not however preclude the Tribunal from concluding that the deals and the chains of which they formed part were contrived. We are satisfied that the failure of C&B and Bullfinch to account for output tax was fraudulent and that the chains leading to Mitek, the Appellant and to the overseas customers were designed to make it difficult to Customs to counteract the fraud. We can think of no logical explanation for the similarities of the chains from Midwest other than that Midwest was seeking to mask its other transactions purporting to offset its liability to account for output tax. In spite of the failure by Customs to adduce any proper evidence directly relating to the disallowed input tax, we have concluded that the evidence of the chains leading from Midwest is sufficiently cogent to justify the conclusion that there was a fraudulent loss of tax.
174. In respect of all the deals we find as a fact that the Appellant must have known that its purchases were connected with the fraudulent evasion of VAT. A fortiori we are satisfied that the Appellant should have known.

Submissions on the law

175. In the light of the above conclusions as to the facts we now consider the submissions of the parties on the law apart from evidence and the standard of proof. Both counsel put in written submissions after the hearing at the invitation of the Tribunal so as to avoid a further hearing. Mr Young's closing argument was received on 7 May 2009 and addressed the decisions of Lewison J in Revenue and Customs Commissioners v Livewire Telecom Ltd and Revenue and Customs Commissioners v Olympia Technology Ltd [2009] STC 643 ("Livewire") and of Sir Andrew Park in Mobile Export/Shelford IT Ltd v Revenue and Customs Commissioners ("Mobile Export") [2009] EWHC 797 (Ch) on 19 March 2009. Subsequently the Appellant's solicitors drew the Tribunal's attention to the decision of Floyd J on 21 May 2009 in Calltell Telecom Ltd v Revenue and Customs Commissioners [2009] EWHC 1081 (HL) and to that of the Chancellor on 22 May 2009 in Blue Sphere Global Ltd v Revenue and Customs Commissioners [2009] EWHC 1150 (Ch) at [9] to [11].
176. Mr Young contended that on a proper application of the decision of the Court of Justice in Kittel v Belgium, Belgium v Recolta Recycling SPRL (Cases C-439/04 and C-440/04) [2008] STC 1536 there was insufficient proximity between the Appellant and the alleged defaulters. The issue was whether the Appellant had actual knowledge of a fraudulent activity on the part of its immediate supplier, Mitek, connected with its immediate supply that caused a loss to Customs or whether the Appellant should have known of such fraud by Mitek. Where the loss occurs further down the chain, joint and several liability could arise, however it had not been applied in this case.
177. He referred to Mobile Export where Sir Andrew Park said at [22] that materials produced by the French VAT authorities appeared to proceed on the basis that Kittel only applies if the trader claiming repayment purchased the goods directly from the defaulter. Mr Young said that if the Tribunal considered that the law is not acte claire it should make a reference to the Court of Justice. He said that on Customs' interpretation of Kittel there is a conflict with Article 90 of the Treaty which prevents Member States from applying taxation in a way that results in distortion of competition. The denial of the input tax incurred by the Appellant which had sold to an EU trader treated the Appellant unequally when compared with its supplier and other taxable persons in the supply chain.
178. Mr Young submitted that there had been no real challenge as to the purchases by the Appellant of the mobile phones, their sale to EU traders or to the CMRs evidencing their removal. The Appellant had the right to deduct input tax under the VAT Act 1994, section 25(3); Customs could not point to any authority conferred upon them by Parliament enabling them to avoid the statutory deduction provision. The Bill of Rights provides that the levying of money for the Crown without grant of Parliament is illegal. While an individual citizen can avail himself of the direct effect of a community instrument the State cannot do so. He referred to EC Commission v France [1988] ECR 4797 at [17]-[18]. He said that the courts cannot amend UK legislation to conform with EC law, see Vodafone 2 v HMRC [2008] EWHC 1569 (Ch) at [28].
179. Mr Margolin said that the argument that the Kittel test only enabled input tax to be denied if the Appellant knew or ought to have known of fraudulent evasion by the immediate supplier had been considered and rejected in Dragon Futures v HMRC [2006] V&DR 348, Calltell Telecom Ltd v HMRC (2007) Decision No. 20266 and Megtian Ltd v HMRC (2008) Decision No.20894. In R (Just Fabulous (UK) Ltd) v HMRC [2007] EWHC 521 (Admin) Burton J had cited Dragon Futures with evident approval at [43].
180. As to the submission for the Appellant that Customs had no statutory authority to refuse the deduction of input tax, Mr Margolin said that the Tribunal has no general supervisory jurisdiction of the decisions of Customs beyond that conferred by statute.
181. He submitted that Member States have the right to refuse to pay input tax to taxable persons who are involved in fraud or abuse, whether or not there are any domestic provisions to that effect, see Halifax plc v Customs and Excise Commissioners [2006] STC 919 per Advocate General Maduro at paragraph 76 and the Court at [83]-[96]. He referred to Lord Neuberger at [43]-[45] in WHA Ltd v Revenue and Customs Commissioners [2007] STC 1695, CA.
182. He submitted that the principles of legal certainty and legitimate expectations are trumped by the objective of preventing avoidance and abuse, see Just Fabulous at [45] and Gemeente Leusden v Staatssecretaris van Financien (Case C-487/01) [2004] STC 776 at [77].

Conclusions on Legal Submissions

183. Whatever the position may be where the taxpayer claiming input tax is not shown to be a knowing participant in the fraudulent evasion of VAT, we do not consider that the principle in Kittel is confined to cases where the fraud is by the person selling to the taxpayer. It is true that at [52] and [60] the Court referred to "fraud committed by the seller", however in both the cases which were the subject of the reference fraud had been committed by the seller. The case did not therefore concern fraud further up the chain. It would be extraordinary if a trader who was knowingly involved in a fraudulent chain could reclaim input tax on selling abroad provided that the immediate supplier was not the defaulting trader. We see no need to make a reference to the Court of Justice.
184. The submission of Mr Young that the Appellant is entitled to deduct under the domestic VAT legislation, since the UK has not legislated to give effect to the principles in Kittel is less simple. It is a basic principle of Community law that a Member State cannot rely on the direct effect of a directive which it has not implemented. The Treaties and regulations on the other hand do have effect without legislation by Member States.
185. It was not suggested by Mr Margolin that the UK has legislated to exclude the entitlement to input tax in cases such as this.
186. We accept however that the principles in Kittel do not depend on domestic legislation. At [61] the Court said this,

"By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with the fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct."

The words "it is for the national court" are important. The Court did not say that deduction could be refused if the national legislation so provided.

187. We note the observations of Advocate General Maduro in Halifax where he said that the general principle preventing abuse cannot depend on the adoption by each Member State of national anti-avoidance provisions.
188. In Blue Sphere Global the Chancellor, Sir Andrew Morritt said this at [10] and [11],

"10. The relevant provisions of domestic law in relation to the right of a registered person to deduct input tax from output tax and to be paid or reimbursed the difference are section 24, 25 and 26 of the VAT Act and regulation 29 of the VAT Regulations 1995. Notwithstanding the terms of Articles 22(8) and 28c(A) of the Sixth Directive there is no provision in the VAT Act qualifying the registered person's right to repayment at the end of an accounting period of any excess of input over output tax.

11. The right to refuse such repayment on which HMRC relies arises from a series of decisions of the ECJ to which effect has been given in a number of decisions of the VAT and Duties Tribunal and puisne judges in England. It has not been suggested that they were wrong to have done so. Consequently it is my duty to follow where they have led notwithstanding my concern as to whether this is an appropriate manner in which effectively to impose a tax."

189. If the submission of Mr Young at paragraph 178 above is correct, a series of decisions of the High Court have been wrongly decided albeit the argument that there was no domestic legislation allowing Customs to avoid the statutory right to deduct input tax was not raised in any of those cases.
190. The principle in Kittel was an application of the general principle that "preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive" see at [54].
191. The argument that the Kittel principle is not reflected in the UK legislation is similar to the fifth contention relied on by the Appellant in WHA Ltd v Revenue and Customs Commissioners [2007] STC 1695 at [43]. Lord Neuberger at [44] accepted the submission for Customs that the UK legislation was enacted to give effect to the Directives and agreed with the submission that,

"The fact that it imperfectly transposes the Sixth Directive should not justify the non-application of the abuse principle … . It appears to me that it would be illogical and unsatisfactory if the abuse principle could not apply to a scheme, merely because one of its steps relied for its efficacy on domestic VAT legislation."

If the principle developed by the Court of Justice in Halifax applies notwithstanding that it has not been enacted by Parliament, so also logically must the principle in Kittel. In effect it is necessary to write into the right to deduct input tax a qualification based on Kittel. This is similar to the approach adopted by the Court of Appeal in Vodafone 2 v Revenue and Customs Commissioners [2009] EWCA Civ 446; [2009] STI 1795.

192. Our conclusion is that the appeal is dismissed.

THEODORE WALLACE

TRIBUNAL JUDGE

RELEASED:14 July 2009