First-tier Tribunal (Tax)

[2010] UKFTT 65 (TC)

                                                                                                TC00377

Appeal number: LON/2007/1530

Input tax – MTIC fraud – Whether Appellant knew or should have known that by its purchases it participated in transactions connected with fraudulent evasion of VAT – Finding that Appellant should have known – Kittel ECJ [2009] STC 1537 applied – Applied dismissed

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

                                                 PCCI LIMITED                                Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                             REVENUE AND CUSTOMS (VAT)         Respondents

                                                TRIBUNAL: JUDGE THEODORE WALLACE

                                                                        MRS CATHERINE FARQUHARSON, ACA

                                                                       

Sitting in public in London on 9 to 13 November and 25 November 2009

Leon Kazakos, instructed by Bark and Co, for the Appellant

Christopher Foulkes, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.         This appeal was against the refusal on 24 May 2007 of £152,976 input tax claimed for the quarter ending 31 December 2004 on the purchase of three consignments of mobile phones by the Appellant, which we refer to as “PCCI”.

2.         The decision was on the basis that the three purchases on 30 November and 3 and 9 December 2007 formed part of an overall scheme to defraud the Revenue and that PCCI, “knew or should have known” that this was the case.  The decision cited Kittel v Belgium (Case C-439/04) [2008] STC 1537.

3.         PCCI has been registered for VAT since 1982 and is still trading.  PCCI’s original business was the sale and export of office equipment but this changed to wholesale distribution of electrical equipment.  PCCI had not previously traded in mobile phones.  The phones were sold to Comitel International/AS (“Comitel”), a Danish company.  The largest input tax claim in PCCI’s returns going back to period 05/01 apart from that for 12/04 was £7,236; no other EC sales were shown in those periods.  PCCI had however made exports in each year from 1991 to 2000.

The evidence

4.         There were two oral witnesses who were cross-examined: Kyle Angus Martin, senior officer, a member of the Missing Trader Intra Community Fraud (“MTIC”) team at Finchley since November 2004 and employed by Customs since 1999; and Akbarali Padhani, director of PCCI since 1982.

5.         Statements by Stewart Yule, Customs Officer at Wembley, working as part of an MTIC team since September 2002, and by Roderick Guy Stone, who has been involved since 2001 in Customs’ strategy to combat MTIC fraud, were admitted without challenge.  No submissions were based on Mr Stone’s evidence.

6.         There were separate bundles containing the exhibits by each witness with inevitable duplication.  There was no common bundle and no co-ordinated page numbers.

Facts not in dispute

7.         We now set out facts which were not challenged taken from the documentary evidence.  In early January 2005 PCCI submitted a VAT return for the period 12/04 showing £1,801 output tax and £153,920 input tax giving rise to net VAT repayable of £152,119; EC supplies were £879,528.  Prior to that return the average monthly turnover since May 2001 was £6,678.

8.         For the periods prior to 12/04 which started on 1 October 2004 PCCI made monthly returns but changed to quarterly returns following a request by Mr Padhani in July 2004.  On 1 December 2004 at 1220 hrs Mr Padhani telephoned Customs’ national advice centre and asked to go back to monthly returns; he was told to write to the Variation Unit at Newry.  In the same call he said that he wanted a Danish VAT number checked, giving Comitel’s number; he was told that the Member State was not replying to the request and that he should call back.  Redhill MTIC Unit was advised of the enquiry.  Also on 1 December Mr Padhani faxed the Variation Unit stating that PCCI had a large export order which would cause cashflow restrictions and requesting that the next return be to 30 November.

9.         Mr Padhani had previously telephoned Redhill and on 30 November 2004 received confirmation from Redhill of the VAT number of Lexus Telecom Export Ltd (“Lexus”).  On 3 December Redhill faxed confirmation dated 1 December of the VAT number of AFI Logistics Ltd (“AFI”) and Comitel; on 10 December Redhill gave confirmation of the number of Coretech Systems Ltd (“Coretech”).

10.       A standard letter dated 1 December 2004 by Mr Stone from Redhill to PCCI stated that MTIC fraud involving £1.7 to £2.6 billion a year was the top VAT fraud priority of Customs and that computer equipment and mobile phones were among the commodities involved.  PCCI was asked to verify the VAT status of new customers and suppliers with Redhill: the letter gave the name of Fiona Weldon.  The letter said that if known the information provided should include the name, VAT number, contact number, bank details and directors of the new or potential customer/supplier and the nature, quantity and value of the goods and whether they were buying or selling the goods.  The letter stated that PCCI was required to continue forwarding purchase and sales listings monthly.

11.       On 25 January 2005 Mr Martin visited PCCI by appointment because of the size of the repayment claim in that 12/04 return and saw Mr Padhani.  He took away three sales invoices to Comitel, with shipping confirmations, CMRs (International Consignment Notes) and freight documentation, three invoices from AFI for freight charges, three purchase orders from Comitel and two invoices from Lexus and one from Coretech.

12.       The sales invoice to Comitel for Deal 1 was numbered 7014 and dated 30 November 2004.  It was for 1500 Samsung E800 Sim free phones at £175 each making £262,500.  It stated that title would only pass on full payment and that the invoice was payable within 7 days.  A revised invoice  sent on 1 December omitted the journey details.  A purchase order from Comitel was dated 1 December and stated “delivery : CIF MBS in Frankfurt.”  The purchase invoice was from Lexus, dated 30 November, for 1500 Samsung E800 Sim free at £165 making £247,500 plus £43,312.50 VAT.  Under “product description” there also appeared “9 languages, English manuals, mixed colours Goods to be collected from our warehouse.”  The sales order from Lexus dated 30 November stated, “All goods remain the property of Lexus Telecom until paid for in full.” An invoice from AFI for “export freight charges to France inclusive CIF” was for £1,500 plus £262.50 VAT and showed the date shipped as 30 November; a shipping certificate from AFI confirmed that the goods were shipped on 30 November, the destination being MBS Speditionsgesellschaft MBH, Kelsterbach, Germany.  A vehicle tracking document from P&O Ferries stated that vehicle J 16 GBA had checked in at Dover at 2335 hours on 30 November for the sailing to Calais at 1.00am on 1 December.  A shipment insurance declaration was faxed by AFI to PCCI on 2 December and signed by Mr Padhani on 10 December.  A CMR showed electrical equipment consigned to MBS, the sender as PCCI, the destination as Frankfurt and the goods being received by MBS at 1030 hours on 1 December; the CMR was completed by AFI; it was stamped “ON HOLD AFI Logistics Ltd (UK)”and signed by Tom Grace as carrier with vehicle registration number J 16 GBA.

13.       The sales invoice to Comitel for Deal 2 (No. 7016) was dated 6 December 2004 for 1850 Samsung E700 Sim free phones for delivery AFI Paris, the unit price was £137.50 making £254,375.  The purchase invoice (No. 1117) was from Lexus on 3 December at £129 per unit making £238,650 plus £41,763.75 VAT; the goods were to be released from Hawk.  The CMR was dated 4 December for departure on 5 December for Comitel, stamped “On Hold” for AFI and stamped as received by AFI Logistique in France on 6 December.  The order to Comitel bore the same date as the invoice, namely 6 December.

14.       The sales invoice to Comitel for Deal 3 (No. 7017) was dated 9 December for 1000 Nokia 9500 Sim free German specification delivery AFI Paris, the price was £411 making £411,000.  The purchase invoice this time was from Coretech on 10 December at £388 making £388,000 plus £67,900 VAT.  The CMR was for departure on 10 December for Comitel again on hold and stamped as received by AFI Logistique.  The goods crossed by P&O Ferries late on 10 December.

15.       In respect of Deal 1 involving 1500 Samsung E800s bought by PCCI from Lexus on 30 November at £165, invoices from Coretech to Lexus showed sales of 1700 Samsung E800s at £171 on 22 November (No.1149) and of 1990 Samsung E800 at £168 on 30 November (No.1162).  There were invoices from Golden Yonder Ltd (“Golden Yonder”) to Coretech for 1700 E800s at £167 on 22 November and for 1990 E800s at £164 on 26 November.  A schedule of purchases and sales provided by Golden Yonder to Customs showed the 1700 phones supplied to Coretech as purchased from Ocean 3 Ltd (“Ocean 3”) at £166.85 and the 1990 phones as bought from Ocean 3 at £163.85 but showed no dates.  The sales order from Lexus to PCCI carried a manuscript endorsement “670 – Ex Inv 1162 830 – Ex 1149”.  An invoice dated 26 November from Ask 31 Communications SL (“Ask”), a Spanish company,  to Ocean 3, Ruislip, Middlesex, shows 1700 Samsung E800 supplied at £195.50 totalling £332,350.  On 23 November Coretech had paid the same sum to Ask by Royworld Express.

16.       In respect of Deal 2 involving 1850 Samsung E700 bought by PCCI from Lexus at £129 on 3 December, an invoice (No. 1167) from Coretech to Lexus on 3 December showed 1850 phones at £127 and an invoice from Golden Yonder to Coretech again on 3 December showed 1850 phones at £123.  The schedule mentioned in the last paragraph provided by Golden Yonder showed the 1850 Samsung E 700s sold to Coretech at £123 as purchased from Ocean 3 at £122.85.

17.       In respect of Deal 3 involving 1000 Nokia 9500 bought by PCCI from Coretech on 10 December at £388 (Invoice No.1171), a letter from Coretech to Mr Padhani a copy of which he provided to Customs in May 2005 stated that the stock was purchased from MSG International Ltd (“MSG”).  A schedule prepared by Mr Martin  from documents provided by Coretech’s accountant showed the sale to PCCI but no purchases of Nokia 9500 phones.  A deal log provided by MSG to a Customs officer covering 15 December 2004 to 24 January 2005 showed MSG buying exclusively from Ocean 3.

18.       Ocean 3 was registered for VAT on 1 August 2002, its main business activity being given as computer hardware supplies.  Its VAT returns for periods up to 09/04 showed outputs ranging from nil in 06/03 and 09/04, to £27.15 million in 03/03 and £2.02 million in 12/02, and inputs ranging from nil in 06/03 to £27.04 million and £2 million in 12/02. The largest net tax payable was that for 03/03; there were repayment claims of £307 for 09/04 and £94 for 09/03.  Broadly speaking output tax and input tax were in line.  £3,528 tax was shown as due for 06/04: this was not paid and no supporting paperwork was provided for the 09/04 claim.  A visit due to be made by Mr Yule on 9 December 2004 was cancelled at short notice.  A visit was arranged for 25 January 2005 to see Colin Greenwood, who became a director in September 2004, however on arrival the officers were told that he was not present.

19.       A schedule of input tax claimed by European IT Ltd (“European”) for the period 11/04 showed VAT of £690,512 on 17 invoices from Ocean 3 from 19 October to 4 November.  A letter produced by European to Customs from Ocean 3 requested that in relation to one of the invoices £300,000 be paid “direct to our supplier”, the supplier being Comitel.  The deal log provided by MSG referred to in paragraph 17 above showed VAT of £1,414,610 on 55 invoices from Ocean 3.  A schedule of input tax by Golden Yonder showed VAT of £1,071,573 on 33 invoices from Ocean 3 for November 2004.  Sales to Ocean 3 totalling £19,745,681 were declared by companies in Denmark, Italy and Spain on their EC Sales Lists for the last quarter of 2004 and the first quarter of 2005.

20.       No return was made by Ocean 3 for 12/04 and at 19 May 2005 assessments totalling £3,180,223 were outstanding.  On 24 February 2005 Ocean 3’s accountants notified Customs that they were no longer acting. Ocean 3 was wound up on the petition of Customs on 11 May 2005.

21.       A Bank statement for Ask from 1 November 2004 to 14 January 2005 shows two payments received from European and fifteen payments from Coretech including that for £332,350 mentioned at paragraph 15 above.  It shows 25 payments out to Comitel, these being the only payments out.

22.       Coretech’s bank statements show receipts of £410,000 and £45,900 from PCCI on 10 and 15 December 2004 the latter referring to “VAT not paid” and a payment of £410,000 to Networld Europe by Royworld Express, an international transfer.  The payments by PCCI clearly related to Deal 3.  There was other no payment in December by Coretech which bore any apparent possible relationship to the presumed cost of the goods supplied to PCCI except a payment on 8 December of £436,150 to Comitel; the narrative for this payment included “invs 1169/67”; invoice 1167 is referred to in paragraph 16 in relation to deal 2.  Total payments by Coretech to Comitel between 12 November and 31 December 2004 were £10,973,118.  There were no payments shown to Golden Yonder for the supplies by Golden Yonder to Coretech in deals 1 and 2.

23.       On 8 December 2004 Comitel invoiced Ocean 3 for 1497 Samsung E800 phones at £177 per unit; this was the same model as the 1500 purchased by Comitel a week earlier in Deal 1 (see paragraph 12 above).  On 6 December, Golden Yonder invoiced Coretech for 1497 of the same model at £152 per unit, compared with £164 and £167 for the sales to Coretech in November (see paragraph 15).

24.         On 6 December 2004 Comitel instructed AFI Logistique to do a box count and ship the “Delivery from PCCI” of 1850 Samsung E700 on hold to Hawk Precision Logistics Ltd (“Hawk”) allocated to Ocean 3; this clearly related to Deal 2.  On 9 and 20 December Comitel invoiced Ocean 3 for 1300 Samsung E700 at £132 and 550 also at £132, the same number as purchased by Comitel from PCCI in Deal 2 for £137.50 on 6 December.

25.       On 13 December 2004 Comitel instructed AFI Logistique to ship 1000 Nokia 9500 on hold to Hawk allocated to Fizza Electronics Ltd; the instruction was headed “RE: Delivery from PCCI Ltd.”  These goods had been shipped to France on 10 December, under Deal 3 (paragraph 14 above).

26.       Paragraphs 7 to 25 above are based on documentary evidence to which there was no real challenge.  On the evidence we find that Ocean 3 incurred very substantial VAT liabilities in the period 12/04 for which it made no return and that Ocean 3 requested at least one payment direct to Comitel its supplier.  We are satisfied that Ocean 3 had no intention of accounting for the output tax on Deals 1 and 2.  The clear inference was that Ocean 3 acquired those goods from EC suppliers without paying VAT.  The first consignment almost matched a purchase a week later from Comitel and the second matched the combined purchases from Comitel.  We are satisfied that the transactions in Deals 1 and 2 formed part of an overall scheme or schemes to defraud the Revenue.  Although the evidence in respect of Deal 3 is less clearcut, we are satisfied that it was no accident that Comitel shipped the goods straight back to the UK.  Coretech made a payment of £410,000 to Networld Europe on 13 December which matched a receipt from PCCI on 10 December.  We are satisfied that this was a third party payment by Coretech and that the chain in Deal 3 was fraudulent.  We are satisfied that all three purchases by PCCI were connected with the fraudulent evasion of VAT. 

27.       There was no suggestion by Customs that PCCI did not incur input tax for which it was prima facie entitled to credit.  The issue is therefore whether:

“it is ascertained, having regard to objective factors, that the supply [was] to a taxable person [namely PCCI] [which] knew or should have known that, by [its] purchase, [it] was participating in a transaction connected with the fraudulent evasion of VAT …”

see Kittel at paragraph 61.  If it is so ascertained PCCI loses its entitlement to input tax credit.

Mr Martin’s evidence

28.       Mr Martin confirmed three statements, the first made in May 2008, the other two being made within 4 weeks of the hearing.  For the most part the statements exhibited documents and commented on them.  We have covered the most important documents already.

29.       He produced brief notes taken during the visit on 25 January 2005 which lasted 1½ hours.  He said that the purpose of the visit was to look at the records of PCCI so as to start verification of the repayment claim, starting with the suppliers and customers.  He noted Mr Padhani as saying that the take-off in 12/04 was due to the Comitel order.  He noted, “Suresh Chawda – Previous linked to Lexus Telecom  - Shortage during December.”  He noted the models and was told that Comitel were prepared to take up to 5,000.  His note included a further reference to Chawda and commission.  He noted Mr Padhani as saying that the goods were not released until funds passed.  He noted Devin Chawda’s e-mail at Lexus and an invoice from Devin Chawda Services “Services rendered 1/11/04-1/12/04.”  The visit report contained no additional details of the visit.  Mr Martin gave a receipt for the documents recorded at paragraph 11 above.

30.       On 5 June 2005 Mr Martin and Mr Ghazee interviewed Mr Padhani.  On this occasion a much fuller note was taken by Mr Ghazee and was signed at the end by the Appellant and by both officers.  The notes included the following:

“   –     Suresh Chawda approached PCCI for finance reasons

     …  

     –     Suresh Chawda asked for loan to fund the mobile phone deal

      …

     –     Mr Padhani said he couldn’t lend him the money

     …

–    Rather than lend him money he got involved in the deal

     …

– Mr Padhani spoke to Mr Sheng Tang regarding the deal

– He knew he had to check the customers and suppliers

…

– Suresh told Mr Padhani to contact Devin at Lexus

– Mr Padhani met Devin personally.  He showed him a warehouse with phones in it.  No confirmation that his phones were there.  Warehouse was stocked.

…

Coretech

– No internet checks done

– No credit checks done

– Introduced to Coretech by Devin at Lexus

– Order received from Comitel for Nokia 9500s, rang 20/20 and a few others dealing in phones.  He started researching for a supplier soon as the order was discussed on the phone through Sheng Tang.  He also phoned Lexus but Lexus introduced Coretech instead.

– Devin didn’t buy from Coretech because there was no margin.

– Mr Padhani phoned Coretech and asked for 1000 x Nokia 9500 Devin had informed Simon at Coretech beforehand of Mr Padhani’s request.

…

– Suresh was expecting for 20% commission on the margin deal.

– For Mr Padhani non-mobile phone trader the normal salesman’s commission on the margin is 20-30%.

– Devin Chawda has charged Mr Padhani for the profit he has to make on the deal.  He invoiced Mr Padhani under the heading “Services Renderd!”  An invoice with the figure £5000 was shown to us but Mr Padhani paid £2600 by cheque which cleared on 14/1/05.  The original invoice from Devin Chawda was dated 14/12/04

– Mr Padhani explains that “Services Rendered” involves the possible pricing of goods from Lexus.  This is Devin’s involvement.”

     

31.       Mr Martin said that after the decision of the ECJ in Bond House (Optigen Ltd v Customs and Excise Commissioners [2006] STC 419) he interviewed Mr Padhani again on 15 January 2007 to establish whether he knew or had means of knowledge that the chains had been traced back to fraud.  PCCI’s accountant was present.  Robert Lamb, another officer, took a note.  The interview notes exhibited were not signed either by the officers or by Mr Padhani.  They included the following:

“(AP) [Mr Padhani] – claimed that Suresh was a friend of his brother & have known each other for approx 33 yrs.  Both originate from Uganda. Apparently Suresh approached AP with a business opportunity & reached agreement together to undertake business in the mobile phone field.

Suresh was unable to carry out the trade himself as he had insufficient funds & AP’s not in the lending business it became a joint venture.  Suresh knew of a phone order from a DK company called Comitel.

…

(AP) – Claimed that he knew to contact Redhill to obtain verification by picking this up from a friend - ‘pls don’t quote me’ – then back tracked to say perhaps he rang our advice line or got it from yellow pages – he wanted to know what precautions to take?

…”

32.       Mr Martin stated that Suresh Chawda was company secretary and principal of GSM Worldwide Ltd (“GSM”) which undertook four deals with Lexus in period 12/04 tracing through Coretech to Ocean 3 and one deal with Coretech (KAM 112).  On 22 September 2004 a security warning letter had been issued to GSM informing that company that it was involved in supply chains with a missing trader and enclosing Notice 700/52.

33.       Mr Martin’s oral evidence in chief to explain and supplement his statements took 3 hours from noon on the second day until 3.55pm.

34.       Cross-examined, Mr Martin accepted that there had been earlier visits to PCCI in 1996 and 2002.  In 1996 there was a routine visit regarding intra-Community sales; the report stated that there was no reason to doubt the trader’s credibility.  In 2002 on a general assurance visit PCCI was not considered to be a high risk. 

35.       He said that he had made no direct enquiries as to Lexus and had relied on other officers.  He believed that Lexus was a long-standing wholesale trader in mobile telephones with a designated officer at Wembley LVO because of its high turnover.  He was aware that there was a Lexus group.  He was aware of common directorships.  Lexus purchased from a number of suppliers as well as Coretech and sold to a number of customers.  Later he said that Lexus was still registered for VAT in 2006.  He said that Coretech, Golden Yonder, AFI, MSG and GSM are not now VAT registered.

36.       He accepted that there was no link between PCCI and GSM at corporate level, but maintained that based on what Mr Padhani told him Mr Padhani used Suresh as a consultant.  The Statement of Case had been in error in pleading that Suresh was company secretary of PCCI; he did not believe that he (Mr Martin) had said this.

37.       Mr Martin said that on his visit in January 2005 he had not intended to engage in any long discussion but there was constant conversation with Mr Padhani.  Mr Padhani had shown him an e-mail from Devin Chawda on the computer.

38.       He said that at the second meeting in June 2005 not everything was written down.  Mr Padhani had asked why all the questions were needed; at one stage Mr Padhani said that he was not happy but then agreed to go on.   Mr Martin had a Customs aide-memoire with 214 questions but did not ask all the questions.  He may not have asked about third party payments because he knew that PCCI did not make such payments.

39.       He said that at the meeting in January 2007 Mr Padhani and his accountant asked questions.  At the beginning the meeting was quite normal but at one stage Mr Padhani became quite heated.  Mr Martin said that he could not remember why the notes were not signed, but knew that there was a debate at the time as to whether to give notes to be signed.  He could not remember Mr Lamb refusing to give the notes to Mr Padhani to sign: it was Mr Lamb’s notebook.

40.       In re-examination, Mr Martin said that he did not recall refusing to allow Mr Padhani to sign the notes.  He said that he thought Mr Padhani’s accountant was taking notes.

Mr Padhani’s evidence

41.       Mr Padhani said that he moved to the UK from Uganda in 1970 and, after attending university in London, joined what is now Deloittes qualifying as a CTA and an ACA.  He became a tax manager before leaving in 1981.  He went into business with PCCI, a family company, and in the 1980s and 1990s was selling mainly office equipment and supplies.  Most of the trade was overseas, the first order coming from Italy; 70 per cent of business was with Europe.  90 per cent of business was wholesale nearly all of which involved sourcing products which customers required.  Most customers came through recommendation.  In 1986 or 1987 PCCI became a Canon dealer.  In 1995 sales were £1.7 million of which £1.3 million was exports. 

42.       He said that in 1999 he suffered an epileptic attack and business became very low.  He said that he remains on medication.  In 2004 the business was not making much.

43.       Mr Padhani said that in early October 2004 Suresh Chawda approached him for a loan of £100,000 plus to finance the VAT on an enquiry or order of £1 million until the VAT was reclaimed; he had no security to offer and Mr Padhani refused.  They then went for a kebab.  Mr Padhani told Suresh that no one would lend without security but said that maybe he could take over the order through PCCI and give Suresh part of the profits.  Suresh said that the order was from Comitel, that there would be a margin of 3-5 per cent and that they wanted 5,000 or more phones.  Suresh told him that he used to work at Lexus but had been thrown out a month or so earlier after a disagreement.

44.       Mr Padhani said that he knew of Suresh because Suresh had been at school with his brother in 1974-75.  He had met him in 1993 when Suresh, knowing that he was an accountant, approached him for help in applying for a loan for a property.  He told Suresh that he would not get it.  He had met Suresh’s brother, Naresh, in New York in 1991.  He had been told that Naresh and Kuresh Chawda ran a business called Lexus Telecom.   

45.       Mr Padhani said he looked up Comitel on the internet and spoke to Sheng Tang, a Comitel employee, who told him that Comitel was a multi-national like BT with branches all over Europe.  Sheng told him the number and type of phones he wanted saying that he had a huge shortage and had exhausted most quotas.

46.       Mr Padhani said that he contacted Samsung and Nokia to find out who their local distributors were, but they would not give him a price.  The distributors said that he was not a dealer and did not give a price.  He made a number of phone calls and came across a company called Chahal & Sons Ltd which sent its details on 13 October 2004.

47.       He said that he knew of Lexus because there were thirty to fifty Lexus Telecom shops in North London.  He visited Lexus in Harrow in the last week in November.  It was in an industrial estate and had an office and a warehouse.  He saw boxes of mobile phones.  He faxed Devin Chawda at Lexus on 29 November giving PCCI’s VAT number and asked for Lexus’ details; those he received on 30 November by fax.  He faxed Fiona at Redhill VAT that he intended to trade with Lexus and asked for confirmation of the validity of Lexus’ VAT number; he gave the transaction as the purchase of 1,500 mobile phones “at around £190 each”.  Redhill sent a fax late on 30 November confirming that the registration of Lexus was valid.  He said that he had been in contact with Redhill before that date.  On 3 December Redhill faxed confirmation of the VAT numbers of AFI and Comitel; the confirmation had a datestamp two days earlier.  Mr Padhani said that at that time he was having a problem with his fax.

48.       Mr Padhani said that Comitel introduced him to AFI which specialised in shipping high value goods.  He visited AFI’s warehouse at Hayes.  AFI faxed various documents on 30 November including its VAT certificate.  He asked AFI on 30 November to cover the goods in the first deal for £275,000 telling API that they needed to be in Frankfurt on the next day and received verbal confirmation of cover.  When he did not receive a cover note he sent an e-mail asking whether the 1,500 Samsung E800 were covered while in transit to Frankfurt.  AFI sent a shipment insurance declaration for his signature on 9 December which he returned signed on 10 December.  On 6 December he faxed AFI that the goods could be released.

49.       The Appellant received various documents from Comitel on 1 December by fax.

50.       Mr Padhani said that Lexus told him that they did not have the stock for Deal 3.  It was difficult to say how he heard of Coretech, it could have been Suresh.  He made phone calls to see where he could source the phones and finally Coretech confirmed that they could supply them, however the price was not that favourable.  He enquired again at Lexus, saying that although he had sourced them the price was not right.  Devin Chawda, who he had met when he visited Lexus, said that he knew Coretech and might be able to negotiate a better price.  He said that Devin was a “young boy” who was a nephew of Suresh and his brothers.  Mr Padhani agreed to give him 50 per cent of any saving.

51.       Mr Padhani said that he had three meetings with Mr Martin, the first of which lasted an hour and a half; this was on 25 January 2005.  At the second meeting (6 June 2005) he was a bit annoyed because his money was being held and he was asked the same questions again and again.  Mr Padhani said that to him it was one sale to one customer split into three transactions; he was asking Customs what else he could provide.  Mr Martin had not told him anything and he was unaware of carousel fraud and MTIC.  He said that he was out of accountancy for 20 years and did not keep up to date with accountancy magazines. When he was getting no response from Customs to the repayment claim after a few months he instructed his accountant who made a complaint.  A meeting followed on 15 January 2007 at Mr Martin’s office, the first two meetings having been at PCCI.  This was the first time that he was told that Comitel re-imported the goods.  He said that he did not care.  At the end of the meeting he asked to read the notes but the other officer refused.  Mr Padhani said he would not sign them.  His accountant who was there was quite furious.  Mr Padhani did not see what Mr Lamb was writing because he was at the other end of the table; there were no long pauses.

52.       Mr Padhani was cross-examined for almost two days.  He said that he appreciated the need for proper business practices including record keeping and precautions and the need to tread carefully in a new field; in 2004 he was not experienced in wholesaling or exporting during the last four years because he had not been well.  He said that to him mobile phones were just a commodity with a box number, a model number.

53.       He said that he knew nothing about MTIC fraud or how the VAT was defrauded until Mr Martin’s letter (in December 2006).  He had read in the press about a van full of mobile phones from Heathrow being caught by Customs going to Dover.  He said that everybody does not read everything and he was not a well person.

54.       He told Mr Foulkes that Suresh Chawda was from Uganda also; they were all thrown out by Idi Amin.  He met him for the first time in 1993; Mr Padhani had been treasurer of a Moslem charity which converted a building in Stanmore to a mosque.  Suresh did not go to the same centre because he was a Hindu.  They spoke to each other in Gujerati.  When Suresh approached him for a loan in 2004, Mr Padhani did not ask him what his business activities had been.  Suresh said that he had been thrown out by Lexus and was working from home.  Mr Padhani did not know that Suresh had a company called GSM.

55.       Mr Padhani said that they were not discussing going into business together; he just said to Suresh, “I can take over the order”.  The majority of his business came from people who had left other wholesalers and would come to him saying that they had a sales order.  He said Suresh came back and phoned him next day and agreed to his proposal of 20 per cent.  He told Mr Foulkes that he did not think “My word, this is fabulous”; he did not say things like that.  He agreed that it was a very good business opportunity.  Suresh told him that he would speak to Comitel and tell them to expect a call; he said that Comitel wanted Samsung and Nokia phones.

56.       He said that he telephoned Sheng at Comitel and had a general chat.  On that occasion Sheng just gave the models needed.  He did not specify the language of the manuals until after Mr Padhani had sourced them a few weeks later and gave Comitel a price.  Mr Sheng simply gave the model numbers needed; he did not say that he wanted them to be European specification.  Sheng told him that Comitel was the Danish equivalent of BT; Sheng did not enquire about PCCI.  It was an introduction call, nothing more.

57.       Mr Padhani told Mr Foulkes that he first called Samsung and Nokia; they told him who their authorised distributors were.  Carphone Warehouse said that they only sold unconnected phones; another firm, (20:20) told him to contact the dealer.  Asked whether it occurred to him to go to Suresh to source the phones, he said that it had not occurred to him at any stage : Suresh might put him onto somebody else and have a cut there as well. Then he phoned Lexus having met Naresh Chawda in New York in 1991 and was directed to Devin whom he had not heard of.  Suresh was not involved at this stage.  Mr Padhani said that by then he had been looking for the phones for between two and four weeks. He met Devin and was taken round the warehouse which was quite large.  Devin said that he could supply the phones.  By then Mr Padhani said that he had been looking for maybe two to four weeks: this was probably in the third week in November.

58.       Mr Foulkes then said that Mr Padhani had told the officers in June 2005 that Suresh had told him to contact Devin at Lexus. Mr Padhani replied, “Yes, he probably told me, but I did not contact him straightaway.”  He said that it was very difficult to know what prompted him to phone Lexus.  Suresh might have said, “Phone Devin”.  He might have remembered this in June 2005 but by now had forgotten.  He said that he was having difficulty obtaining the stock and asked Suresh, “Have you been able to source it?” to which Suresh said no.  He denied going into a joint venture with Suresh but agreed that was what he told Customs.  He said, “He got the order or the source of the order and I executed the order.  If you call that joint venture, fine.”  He denied the suggestion that Suresh was centrally involved.  Mr Padhani said that there was no reason not to trust Suresh who was a friend of his brother.  Mr Padhani’s brother had told Suresh to contact him.

59.       Mr Padhani said that when he spoke to Comitel he was surprised by the request for identification documents for PCCI; he had never been asked for these before in twenty years.  Sheng told him that there would be similar requirements in the UK.  The next thing he did after the call to Sheng was to telephone Customs at Redhill where he spoke to someone called Fiona; this was in early October 2004.  He told her that he had an order or enquiry from Denmark for phones.  She told him that there were new regulations and that he should validate the VAT number and send in various documents.  They spoke for 15 or 20 minutes.  He could not remember whether he was told that there were special requirements for mobile phones.  The need for the VAT number seemed obvious because when sending something to Europe VAT had to be charged if the customer was not VAT registered.  He said that he was told to get a list of directors of the companies he was going to trade with, who he was buying from and selling to, what he was selling and who the freight forwarders were.  He denied that it was plain to him that those recommendations were in respect of concerns about MTIC fraud and mobile phones.  He said that Suresh never mentioned the need for VAT numbers or concerns about MTIC fraud to him.

60.       He said that he received documents from Chahal & Sons on 13 October 2004 having telephoned them; he did not read the letter which they sent him referring to MTIC fraud and joint and several liability introduced in the 2003 Budget nor did he read their supplier declaration form.  He did not fill in the documents which Chahal & Sons sent.  He did not deal with them.

61.       He said that Comitel recommended AFI when the order was confirmed over the telephone, maybe on 27 or 28 November.  He had contacted other freight forwarders.  He did not speak to Suresh or Devin about freight forwarders.

62.       Asked about Customs’ note of the 2007 meeting, he said that his replies were normally 20 lines, the answers in the note were very short.  They were a summary of what that person thought he meant.  A lot of parts were missing.  He said that his accountant did not take a note.

63.       Mr Padhani said that he did not have the finance for the whole deal buying and selling outright because one deal was like £250,000 and he did not have the facilities to pay that sum, send the goods to Comitel and wait for the money.  He had to synchronise the deal to pay Lexus when he received payment from Comitel.  He only had to supply the VAT element.

64.       He said that there was no reason why the “friend” referred to in Customs’ notes of January 2007 was not Comitel.  He may have said “friend” but could not recall.  He said that he definitely remembered Comitel telling him to contact his local VAT office, who directed him to Redhill.  He may have spoken to the 0845 number.

65.       Asked about Deal 1, Mr Padhani said that he was not surprised that Comitel a huge company still needed 5,000 phones after 6 weeks: either the price from the manufacturer or main distributor was too high or they were not getting enough stock.  Sheng gave a number of models which he wanted including the Samsung E800.  Suresh had told him that the customer wanted 5,000 plus phones, Sheng might have said during the initial telephone call that the phones were for the European market.  Comitel did not come back after the phones were delivered saying that they had English manuals.  Mr Padhani said that he had very often sold equipment in Europe with English manuals; often equipment had four languages.

66.       He said that it was only possible to tell whether goods were new or damaged by opening the box; if he opened the box and sold it to somebody, that person would just send it back saying that it is used.  He told the freight forwarders to check that the goods were new and the boxes unopened, that the quantities were right and the model number on the box was correct.  The boxes which he had seen at Lexus were shrink wrapped on pallets.

67.       He said that he made out the invoice in Deal 1 to go to Strasbourg: he had drafted it on the computer.  The SO18 postcode was an error.  Asked about the CMR with a German  destination, he said that the main AFI warehouse was in France.   The AFI invoice referring to France was an error.  He denied that it was a contrived deal for the purposes of fraud.

68.       At the start of the fifth day, Mr Padhani said that he had checked overnight and the invoice immediately before No. 7014 (namely No.7013 dated 30 October 2004) which he produced was for courier services from SO18 5TB to Strasbourg; he said that just forgot to delete that reference from the computer programme.  He said that Mr Martin had asked him about it.  He added that invoice No.7014 was dated 30 November but carried Comitel’s order No.780 so that he must have had that number : Comitel’s order dated 1 December was a duplicate or a confirmation of a verbal order.  He told Mr Foulkes that suddenly Sheng was in a hurry: before he was  not.  He said that he had lost the first purchase order. Mr Padhani said that now and then he lost documents or the computer went wrong.

69.       Mr Padhani said that when preparing to do Deal 1 he understood that documents and checks with Redhill were required for mobile phone deals.  He did not think of them as precautions.  He accepted that they had no point if not done in advance.  He agreed that he had given instructions to AFI to collect and ship the goods for Deal 1 before receiving confirmation as to Lexus from Redhill that evening.  He said that it had not occurred to him to wait : originally the goods were to go on 1 December but Comitel phoned to ask for them earlier; he had already asked for verification of Lexus and Comitel.  When he got the Lexus verification he rang Redhill to ask where the Comitel verification was.  He said that he had received the Comitel documents and sent them to Redhill before Comitel sent them for the second time on 1 December.  He agreed that he received AFI’s company documents after giving instructions for Deal 1.  He had asked for them because it was a Redhill requirement.

70.       He said that he asked Lexus for the make and model number without giving further specification.  If customers got goods from England they got three-pin plugs; if a person needed some different specification, he would say that.  It only cost £2 or £3 to replace the manual and the plug.  He said, “Everybody in this market does it.”  Whether the goods originated in the UK or Europe would not make much difference in the grey market.  He said that he was not an expert in the grey market.

71.       Asked about insurance documentation dated after the goods were shipped, he said that he wanted a cover note in case of a problem and that AFI were just doing their paperwork.  He said, “At lot of things are done and confirmed over the phone and then followed by paperwork.”  He instanced car insurance.

72.       Mr Foulkes then asked why the CMR for Deal 2 was for transport to AFI Paris whereas the shipping certificate showed the destination as MBS warehouse in Germany, both for Comitel.  Mr Padhani said that the right goods went to the right place : Comitel wanted it for the French office.  The goods arrived at Paris on 6 December.  Although Comitel’s written purchase order for Deal 2 was dated 6 December, he said that 90 per cent of orders came on the telephone.

73.       Mr Padhani said that he did not know when he had received Mr Stone’s letter dated 1 December (paragraph 10 above).  He agreed that he read the letter and saw that mobile phones were mentioned. He had heard that there was some fraud but did not know what.  He agreed that the letter put into focus why the information was required.  He said that it was making sense before as well when first Comitel and then Redhill told him to collect the information.  He said that fraud happens in every sector of business.  He just read the letter as information coming from the Revenue.  He said that there was no indication in the letter to tell him that he might be involved in fraud.

74.       He said that he did not really know what the fraud was.  With the information which he had there was nothing he could have found out.  There were no indicators of fraud up the chain or that he was being involved in  something set up for fraud.  He had never been conned.  He said that you do business as long as it is legal and profitable.  He agreed that he did another deal after Mr Stone’s letter without further investigations, saying that he was “travelling in a trust zone.”

75.       He said that he could not recall how he found Coretech.  He made many calls before contacting Devin again.  When he told Devin Coretech’s price, Devin said he could get it cheaper.  Mr Padhani did not believe him and put him to the challenge.  Coretech had quoted £398; Devin got a price of £388, a saving of £10,000 for 1,000 phones of which £5,000 was for Devin.  Devin told him that there was not enough margin for Lexus.  Asked about a note at the June 2005 meeting, “Introduced to Coretech by Devin at Lexus”, he said that the note made sense but he had simply forgotten it.  He agreed that after all his research it was Devin and Suresh who pointed him to the suppliers.  He had no reason not to trust Devin; he assumed maybe he was getting commission; everyone worked on commission.

76.       Mr Padhani said that he never inspected any of the goods, he expected AFI to do so.  He had an argument with Ash at AFI when Ash said that they did not take serial numbers, that it was a long job involving opening every pallet and taking each box out and would cost £2 a phone.

77.       He said that credits to PCCI’s bank account at Leicester of £20,000 and £5,000 on 3 December and £25,000 on 6 December related to the difference over the receipts from Comitel on Deals 1 and 2 required to pay the VAT to Lexus.  He did not know whether the receipts were from his brother’s account or from Nuchem Pharmacy, a partnership with his brother.  The VAT on the Coretech purchase was paid late in error.  He agreed that the deals would have been highly profitable if the VAT repayments had been made. 

78.       Mr Padhani said that he had spoken to Suresh two or three times in 2005.  He did not keep in touch with Suresh now because he was now sure that he had been “stitched up” or “conned in to this.”  When he told Suresh that Customs had withheld payment, Suresh told him that they did this with all repayments of this size, especially with mobile phones.  He also spoke to Devin who said that Lexus got their repayments regularly and never had a problem.  Asked whether he had discussed with Devin him giving evidence, he said, “After having seen this, you must be joking.  They are part of the fraud, you can see that.”  He did not see any Lexus branches any more.

79.       Mr Padhani denied that the reality was that he knew that this was an involvement in fraud; he denied that the involvement of Suresh and Devin in his business was greater than he was suggesting and that he was in this with them together with the purpose of obtaining the repayment fraudulently.  He denied that the deals were too good to be honest.

80.       He told the Tribunal that paragraph 30 of his statement where he said that he inspected the goods in Deals 1 and 2 at Lexus was incorrect.

81.       Re-examined, he said that the head office of AFI was in France: this appeared from a document which AFI had sent.

Submissions for Customs

82.       Mr Foulkes submitted that the burden of proof was as stated by Lewison J at [1] in Revenue and Customs Commissioners v Brafal Ltd  (2008) Ch/2008/0082 unreported where he said that, once Customs have established a fraudulent loss and the connection with the taxpayer’s transactions, the taxpayer must show that it did not know and could not have known.  He said that this approach should be preferred to that of the Chancellor in Blue Sphere Global Ltd v Revenue and Customs Commissioners [2009] STC 2239 where he said at [52] that the burden was on Customs to prove that the Appellant ought to have known that by its purchases it was participating in transactions connected with fraud; the issue was not fully argued in Blue Sphere.

83.       He said that it is not necessary for the Appellant to know the identity of the fraudster citing Revenue and Customs Commissioners v Livewire Telecom Ltd [2009] STC 643 at [91].

84.       He submitted that although Suresh Chawda was not an officer or employee of PCCI, his involvement in PCCI’s deals was such that his knowledge should be attributed to PCCI.  He cited the Tribunal decision in Moblix Ltd v Revenue and Customs Commissioners (2008) Decision 20867 at [68]-[70] where the Tribunal relied on Meridian Global Funds Management Asia Ltd v Securitas Commission [1995] AC 500, PC.

85.       Mr Foulkes submitted that the chains were fraudulent contrived chains, a factor which was relevant to PCCI’s knowledge.  There were third party payments for which there was no legitimate explanation.  He said that the output tax for which Ocean 3 was liable did not go to Ocean 3 but by third party payment to Europe.  He said that the profit in the scheme came from the repayment claim rather than from Ocean 3 disappearing without paying the tax.  The actual profit in the scheme came when a repayment claim was made of money that had not been accounted for within the scheme.  He said that for the scheme to work PCCI must have had actual knowledge.

86.       In addition to third party payments there was circularity of the goods: the use of someone who was unaware of the scheme buying from a specific trader and selling to a specific trader went against common sense.  It would have been unnecessary and too risky to involve an innocent party.  The position of PCCI as broker was crucial.  Comitel, PCCI’s customer, was clearly part of the fraud.  One feature of the evidence of circularity is that parties to the chains took a loss at some stage: this was inevitable to avoid unrealistic escalation in the price.  Documents had to be available particularly at the broker end of the chains to support the repayment claim.  In Deal 1 Ocean 3 sold Samsung E800 at a much lower price than it paid for the same model (see paragraph 23).  In Deal 2 Comitel sold the goods back to the UK at a loss.

87.       Mr Foulkes relied on the number of intermediate or buffer companies in the chains and the mark-ups stressing that the mark-up obtained by PCCI was noticeably larger.

88.       He said that there were inconsistencies in Mr Padhani’s evidence and features which lacked in credibility.  Mr Padhani was reluctant to admit any real degree of involvement of Suresh, however in due course he admitted that Suresh directed him to Lexus as supplier.  Mr Padhani had said that he could not trust Suresh to recommend a supplier because he would undercut him; it beggared belief that he did not ask Suresh.  The same applied to Devin : he said that he did not ask him about a freight company but got advice from Comitel.

89.       Mr Foulkes said that Mr Padhani’s evidence was inconsistent as to the need for checks before trading.  Mr Padhani told the officers in 2007 that he learned of the need for checks from a friend but retracted that and said that it was from a helpline.  In cross-examination he said that perhaps the friend was Comitel.

90.       Mr Foulkes said that MTIC fraud was rife in 2004.  Mr Padhani’s utter denial of any knowledge of the existence of MTIC fraud and of his understanding of MTIC fraud once Comitel had told him of different requirements when trading in mobile phones lacked credibility.

91.       He submitted that it was not credible that the involvement of Suresh was limited to introducing the deals.  He said that Suresh was integral to the deals, in providing information, sourcing the goods and providing the customer.  If contrary to Customs’ case, Mr Padhani himself was not aware of the connection with fraud, the knowledge of Suresh was relevant because of the extent of his involvement with the authority of the company through Mr Padhani. 

92.       He said that if Mr Padhani was an innocent dupe it was an extraordinary risk for the Chawdas to set him up: they could have no confidence that he would do what they wanted.

93.       Turning to his alternative submission that the Appellant should have known of the likelihood of connection with fraud in the circumstances, he said that the test was whether having taken all reasonable steps the ordinarily competent trader should have known that there was or was likely to be a missing trader, see Livewire Telecom Ltd [2009] STC 643.

94.       He said that material sent by Chahal & Co on 13 October 2004 gave Mr Padhani considerable information as to the existence and difficulties with MTIC fraud.  Mr Padhani said that he did not read it, however the reasonable and honest and experienced trader would have read it and undertaken enquiries with that company and more generally.  Before Deal 2 Mr Padhani had Mr Stone’s letter of 1 December.  He had not asked why Suresh had been thrown out of his family company. He knew that Comitel did not ask about the precise specification of the goods.  He was able to undertake those deals with minimal experience making profits far exceeding those where he did have experience. Important commercial documentation was not provided before the transactions were undertaken.

95.       He said that Mr Padhani conducted checks with Redhill showing the companies to be registered for VAT and obtained documentation from Comitel, but that documentation was created by Comitel itself.  Checks would have been appropriate in respect of Lexus and Coretech also as well as the freight forwarders.  He would either have got an honest answer putting him on notice that fraud was likely or might have been told that the information could not be given.  The reality was that very few due diligence checks were undertaken and those checks were for window dressing.  Even without any further enquiries the reasonable and honest trader would have concluded that more likely than not the deal was connected with fraud.

Submissions for Appellant

96.       Mr Kazakos relied on the decision in Blue Sphere where the Chancellor held that the burden lies on the Revenue not simply to show that there was fraud but also that the company or its directorship either knew or ought to have known.  That decision had since been followed in Red 12 Trading v Revenue and Customs Commissioners (2008).

97.       He said that in the present case the evidence could not lead the Tribunal to conclude that Suresh Chawda was connected with PCCI in such a matter that his knowledge could be imputed to the company.  He said that in El-Ajou v Dollar Land Holdings plc (No.1) [1994] 2 All ER 685 two companies had a common director; the question arose as to whether the knowledge which the director had as director of one company should be imputed to the other.  Nourse LJ held that it could not be so imputed unless the director owed a duty to one company to communicate the knowledge and a duty to the other to receive it.  He said that in Meridian the knowledge imputed was that of the chief investment officer of a company and in Mobilx it was that of a senior employee.

98.       Mr Kazakos said that the evidence should be assessed on the basis of the position as it presented itself in 2004 to PCCI or to an ordinarily competent director.

99.       He said that the Tribunal was asked by Customs to make a finding of fraud not only against PCCI but against a very large number of other companies.  It would be improper on the evidence for the Tribunal to make a finding of fraud against any of those other companies.  There was no evidence as to the size of Lexus, its operation or its manpower.  Mr Martin’s belief was based on unrecorded conversations with other officers.  The Tribunal was being asked to assess how Lexus would have appeared to PCCI in 2004; there should have been far more material than Customs had presented.  If Lexus was being used as an engine of fraud, why had it not been the subject of warnings or deregistration? Although Customs had suggested that there was something inherently suspicious about Comitel, no evidence had been called about Comitel.

100.     He said that there was no evidence that Mr Padhani knew of Ocean 3 or of anyone involved apart from Suresh and Devin.  He said that if a fraudster wanted someone to take the fall it was best to choose someone one removed.  He said that the reality of business was a matter for the Tribunal: Customs had set the bar too high, involving counsel of perfection.  Mr Padhani was a mature man, experienced in business and widely respected in the community; he was unlikely to jettison all that and involve himself in fraud.  PCCI is still registered and trading, five years later.  Mr Padhani had relied on trust: his trust had been abused.

101.     Mr Kazakos said that no warning had been given by Customs to PCCI until Mr Stone’s letter dated 1 December 2004.  Mr Padhani’s evidence in the appeal as to his initial involvement was the same as the explanation which he had given to Customs in 2005.  It was entirely plausible that Suresh said that he had a deal but wanted a loan.  Mr Kazakos said that it may be that Mr Padhani was taken in.  PCCI was a small company without limitless resources to perform lengthy due diligence.

102.     Mr Kazakos said that it would be very convenient for Lexus and Suresh to use PCCI which had a long standing business and would not be suspected.  Mr Padhani did not need to be a knowing party for those involved in the fraud to make a profit from it.  It was simpler to use a dupe company to carry the risk.  Lexus was paid in full; Suresh was going to receive a cut and would no doubt relieve Mr Padhani of the money as soon as it was received.

Conclusions

103.     We address first the question of the burden of proof.

104.     In Blue Sphere [2009] SIC 2239 the Chancellor gave two reasons for concluding that the “sufficient to protect” test adopted by the Tribunal was too high, saying this at paragraph [52]:

“[52]   In my view, this test is misleading for two reasons.  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.  The relevant knowledge is that BSG ought to have known that by its purchases it was participating in transactions which were connected with the fraudulent evasion of VAT; that such transactions might be so connected is not enough.”

105.     That is the most authoritative statement to date in the domestic courts in which the Chancellor considered two further decisions of the Court of Justice, R (Teleos plc) v Revenue and Customs Commissioners (Case C-409/04) [2008] STC 706 and Netto Supermarket GmbH & Co OHG v Finanzamt Malchin (Case C-271/06) [2008] STC 3280 as well as Livewire Telecom in the High Court.  Furthermore it is a clear application of Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joint Cases C-439/04 and C-440/04) [2008] STC 1537, where the Court of Justice said at [61] and in the answer,

“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 fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to deduct.”

106.     We find it difficult to reconcile the words “where it is ascertained, having regard to objective factors” with a burden of proof on PCCI to show that it did not know and could not have known that the transactions were connected with fraud.  The passage involves the fact of knowledge or constructive knowledge being ascertained by the tribunal. We have no difficulty with the proposition that once Customs have adduced evidence from which it can properly be inferred that PCCI knew or should have known of the connection, there is an evidential burden on PCCI to counter that evidence.  However when weighing the evidence of the two parties, the burden is on Customs to establish that “it is ascertained” that PCCI had the relevant knowledge or had constructive knowledge by which we mean that he should have known.

107.     The other issue of law concerned the basis on which the knowledge of Suresh Chawda might be imputed to the PCCI.  This would arise if we concluded that Mr Padhani did not have the relevant knowledge or constructive knowledge but that he and PCCI were “set up” by Suresh.  Since Suresh was neither an officer or an employee of PCCI, this would involve Customs establishing that Suresh acted as the agent of PCCI in relation to the relevant transactions.  In our judgment mere assistance or advice would not suffice, nor would the entitlement to commission.  Meridian and Mobilx were far removed on the facts from the present case.  We conclude that the knowledge of Suresh cannot be imputed to PCCI.

108.     We have already concluded at paragraphs 26 and 27 that PCCI’s purchases were connected with fraudulent evasion so that the issue is the Appellant’s knowledge or constructive knowledge.

109.     Mr Foulkes contended that for the scheme to work PCCI must have had actual knowledge because the profit came from the repayment and not from the disappearance of Ocean 3 (see paragraph 85).  Mr Kazakos disputed this approach.

110.     We test the matter by reference to Deal 1 in which Ocean 3 sold 1,500 Samsung E800 at an average price of £165.25 to Golden Yonder.  The VAT on this was invoiced to Golden Yonder and we calculate it as £43,377.46.  Ocean 3 disappeared without paying this to Customs.  There was no evidence as to whether Golden Yonder paid Ocean 3.  Coretech’s bank statements show no payments to Golden Yonder for that deal, although substantial payments were made by Coretech to Comitel around that time.  It is quite clear that the VAT which Ocean 3 should have paid to Customs went somewhere and the probabilities are that it formed part of the substantial payments by Coretech to Comitel.  That occurred regardless of any participation knowingly or otherwise by PCCI.  PCCI paid £43,312,50 VAT to Lexus; if the repayment claim succeeds PCCI recovers what it paid but with a mark-up of £10 per phone on the 1,500 phones.  The sale by PCCI to Comitel enabled the phones to be sold back to Ocean 3 in a carousel.  However in our judgment that does not make the participation of PCCI necessary to the fraud by Ocean 3 in the initial chain.  That fraud could have been achieved with Lexus or indeed Coretech selling to any other company regardless of what that company did with it.  All that was necessary was that Lexus was paid by its customer so that it could pay Coretech.  The transactions with the phones sold by PCCI to Comitel following after that sale could just as well have been done with a different consignment.  We consider that the transactions by PCCI while convenient for subsequent transactions were not essential to the fraud by Ocean 3 in not declaring the output tax on its supplies.  The transactions following the sale by Ocean 3 had the effect of distancing Ocean 3 from any repayment claim so making it more difficult to trace back to Ocean 3.  The convenience of PCCI’s participation is no more than a factor in considering whether PCCI was a knowing participant.

111.     Given that we have concluded that on the facts the knowledge of Suresh cannot be imputed to PCCI, there is no direct evidence that PCCI was a knowing participant.  The relevant knowledge is that of Mr Padhani as the controlling mind and the issue is whether Customs have shown on the balance of probabilities that his knowledge should be inferred.  Here, as is usually the case that when fraud is in issue, proof of fraud is by inference.  This depends on those facts which were known to Mr Padhani including those which must have been known to him.

112.     The evidence relevant in deciding whether it should be inferred that Mr Padhani actually knew that PCCI was by its purchases participating in transactions connected with fraudulent evasion of VAT is essentially the same as that relevant to the issue whether he should have known.  The stronger the evidence that he should have known, the greater the inference that he must have known.  However a finding that an appellant should have known that the transactions were connected with fraud does not necessarily lead to a conclusion that he did know.

113.     Knowledge of a fact is as a matter of language an absolute concept.  However in a legal context facts are proved on the balance of probabilities in civil cases, so that both the facts and the knowledge of the facts must be ascertained on the balance of probabilities.  The fact that the transactions might be connected with fraud does not suffice, see Blue Sphere cited at paragraph 104 above.  Since the question whether he should have known does not arise if he did know in fact, as a matter of semantics the question is whether he should have realised that the transactions were probably connected with fraud.

114.     We are unable to accept Mr Padhani’s evidence that he knew nothing about MTIC fraud until Mr Martin’s letter in December 2006.  Mr Padhani was clearly intelligent, having qualified as an accountant and worked in the tax field with a leading firm.  By late 2004 MTIC fraud was sufficiently rife to give rise to the joint and several liability measures enacted in 2003 and had been widely reported in the popular press.  On Mr Padhani’s own evidence he had been told both by Mr Sheng at Comitel and also by Fiona at Redhill in a conversation lasting up to 20 minutes that there were special requirements when dealing in mobile phones.  It is not credible that he did not ask Fiona why such measures were in place if she had not already told him.  The matters referred to in Mr Stone’s letter of 1 December 2004 cannot have been news to him.

115.     Mr Padhani had no prior experience in trading in mobile phones although PCCI had been a Canon dealer .  Business had been very quiet since his epileptic illness in 1999 for which he was still on medication.  Sales in 1995 were £1.7 million of which £1.3 million was exports.  Average monthly sales from May 2001 to September 2004 were only £6,678.  The low level of business meant that he had ample time to consider the transactions in question.  It is noteworthy that the invoice for deal 1 was the first issued by PCCI since the end of October.

116.     The enquiry from Comitel for up to 5,000 mobiles for around £1 million was on a totally different scale to PCCI’s recent business and indeed to PCCI’s business prior to Mr Padhani’s illness.  Apart from the type of model required, the only details given by Comitel were on his evidence the place for delivery and that the phones for Deal 3 be German specification.  He was not told the language of the software or whether 2 pin or 3 pin plugs were required.  He was told that the phones were needed urgently because of a shortage.  Although he said that the plugs and manuals could be changed for £2 or £3 per phone, such a process would take time which is not be easy to reconcile with the urgency of the order.

117.     On Mr Padhani’s own evidence he had no knowledge of where to source the phones apart from telephoning the manufacturers to find out who their distributors were.  We do not find it credible that he spent six weeks making abortive enquiries to meet an urgent order before asking Suresh for help.  Mr Padhani’s evidence was that Suresh was working from home; it is difficult to see how Suresh would have been aware of Comitel’s needs other than through his earlier employment at Lexus.  On any view from Suresh’s end, it would not make sense to leave Mr Padhani unaided for all that time when he, Suresh, was due to get commission and knew that Lexus was a potential supplier.  It makes even less sense given that Suresh was clearly a party to the MTIC scheme.  We are satisfied on the balance of probabilities that Suresh informed Mr Padhani that Lexus was a potential supplier when or soon after introducing him to Comitel. 

118.     We find as a fact that both the customer and the two suppliers were introduced by Suresh.

119.     The explanation given for the approach by Suresh to PCCI was that he needed help to finance the VAT on the goods for Comitel for the period before a repayment claim was met.  We find on the balance of probabilities that Mr Padhani did not realise the problems which the repayment claim would involve and that he was not told that Customs would be likely to make extended enquiries to verify the claim.  There was no suggestion that PCCI had experienced difficulty with its earlier overseas sales.

120.     There was however another aspect to financing the transactions namely the need to cover the cost of the goods between buying and selling.  It would clearly have been quite impossible for PCCI to pay for the phones before being paid.  There was no evidence from Mr Padhani of any discussions with Comitel, Lexus or Coretech as to how this could be done.  According to the terms on the sales order from Lexus, Lexus retained title until payment.  It was however central to the ability of PCCI to engage in the transactions that it would not be obliged to pay Lexus or Coretech until paid by Comitel.  There was no evidence that the shipment of the goods “on hold for AFI” was on behalf of Lexus until it was paid rather than PCCI.  There was no evidence by Mr Padhani that he gave any thought to this aspect apart from concluding that PCCI was not at risk because it was not giving credit to Comitel.

121.     Mr Padhani’s evidence that he did not read the material faxed by Chahal & Sons on 13 October would involve a very casual approach since those documents were sent by Chahal & Sons following an enquiry by him.  He was not busy at the time and Chahal & Sons was one of only two potential suppliers for whom evidence of contact has been produced.  We do not accept this part of his evidence.

122.     Mr Padhani was quite open in asserting that PCCI’s due diligence enquiries were to satisfy Customs rather than for commercial reasons.  Confirmation of the registration of Lexus was obtained from Redhill on the day of Deal 1.  Mr Padhani’s evidence was that he had asked for confirmation of Comitel before 30 November although he did not receive it until later.

123.     We are mindful of the danger of approaching the question of what Mr Padhani should have known applying hindsight.  However we are satisfied on the balance of probabilities that the warning signs were such that he should have realised that the transactions with Lexus, Coretech and Comitel were connected with fraudulent evasion of VAT.  The fact that after 6 weeks of enquiries he ended up with counterparties introduced by Suresh and the absence of any explanation as to why Lexus did not deal directly with Comitel which it must have known should have made him very suspicious.  Having heard his evidence we are not however satisfied that he knew or realised that to be the case.  Apart from the purchase from Coretech in Deal 3, there was no evidence that he had any knowledge of any company higher up the chain than Lexus and PCCI was not involved in any third party payments.  Although the deals were substantial, there were only three all of which arose from one contact.  This was not a case where the trader was involved in a large number of transactions over a period of time.

124.     On the basis of our finding that the Appellant should have known that by its purchases it was participating in transactions connected with the fraudulent evasion of VAT the appeal is dismissed.

THEODORE WALLACE

TRIBUNAL JUDGE

RELEASE DATE: 12 February 2010