First-tier Tribunal (Tax)

[2010] UKFTT 131 (TC)

TC00440

 

Appeal number LON/2006/0839

 

VAT – MTIC fraud – input tax – whether the purchases by the Appellant in the identified deals were “connected with fraudulent evasion of VAT” as per Axel Kittel at para. [61] – held yes – whether the Appellant was a taxable person who knew or should have known that by its purchase it was participating in a transaction “connected with fraudulent evasion of VAT” – held that HMRC had not proved knowledge but that the Appellant should have known of the connection in the case of each deal – Appeal dismissed

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

                                               BLADA LIMITED                              Appellant

 

                                                                      - and -

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Value Added Tax)                                                                Respondents

 

 

 

                                                TRIBUNAL: JOHN WALTERS QC

                                                                        JOHN N BROWN CBE                                                                   

 

 

 

Sitting in public in London on 2-4, 7-11, 14, 15, 18 and 21 September 2009

 

 

Nigel Popplewell, Burges Salmon, for the Appellant

 

Simon Draycott QC and David Bedenham, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

 

 

Introductory

1.     Blada Limited (the Appellant) appeals against the Respondent’s (HMRC’s) decision to deny credit for input tax as follows:

2.     The total amount of input tax credit in issue is thus £2,260,981.84 and relates to 19 purchase transactions (or ‘deals’) which we refer to (as deals 1 to 19) further below.

3.     HMRC allege that the 19 deals were connected with the fraudulent evasion of VAT and the Appellant knew or should have known this fact (relying on the joined cases of Axel Kittel and Recolta Recycling SPRL v Belgian State (C–439/04 and C–440/04)) (“Kittel”). They contend that all 19 deals are affected by a scheme or schemes to defraud the public revenue by way of Missing Trader Intra-Community (“MTIC”) Fraud.  Deals 1 to 10 and 14 to 19 are, so HMRC contend, component parts of single chains of supplies affected by MTIC fraud, whereas deals 11 to 13 are parts of chains of supplies connected to different chains, themselves affected by MTIC fraud.  The activity of the traders featuring in both the chains of supplies in which deals 11 to 13 feature, and also other chains affected by MTIC fraud, are termed ‘contra-traders’.  The facts of this appeal feature two alleged contra-traders, Starmill International Ltd. (“Starmill”) (in deal 11) and A-Z Mobile Accessories Ltd. (“A-Z”) (in deals 12 and 13).

The witnesses

4.     We heard oral evidence from the following witnesses: Laurence Smith, an Officer of HMRC, who was the Appellant’s case officer; Douglas Armstrong; David Booth; Peter Cameron-Watson; Ian Archibald; Malcolm Orr; Anna Hudson; Peter Goulding; Fu Sang Lam; Matthew Bycroft; Martin Evans; Terence Mendes; and Roderick Stone; all Officers of HMRC, Simon Bliss, the sole director of the Appellant; and Clive Gamlin, director of Castlemead Insurance Brokers Limited (“Castlemead”). 

5.     Simon Bliss organised the incorporation of the Appellant in 2002 and has an ownership interest in the Appellant under arrangements involving a British Virgin Islands company which is the direct holding company of the Appellant.  Mr. Bliss, though ordinarily resident in the UK for some years is domiciled in a territory outside the UK and is an Australian citizen.  Since 2007 he has also been a UK citizen. He was born in Australia, and before he came to the UK in 1999 he had served in the Australian regular army for some 12 years.

6.     We also received extensive documentary evidence including witness statements from all the witnesses who gave oral evidence.

The facts

7. We set out the evidence which we found to be relevant as follows.  The evidence so set out represents the facts found by us, except where the contrary appears from discussion later in this Decision.

8.     The Appellant was registered for VAT with effect from 1 January 2003.  When applying for VAT registration, the Appellant, through its director, Mr. Bliss, stated that its business activity was the distribution of computer components, with an expected turnover in the following 12 months of £30 million.  HMRC were later informed that the Appellant was or would be involved in the wholesale of mobile phones. Deals 1 to 4, 7, and 9 to 19 (inclusive) are purchases of mobile phones or similar items.  Deals 5, 6 and 8 are purchases of computer components.

9.      The Appellant was a trader submitting monthly VAT returns.  Nil returns were submitted by the Appellant for the VAT periods 01/03 to 10/03 inclusive. Its return for the VAT period 11/03 shows an amount of VAT payable of £3,343.56.  We were told that related to a receipt of commission.  The returns for the periods 12/03 to 09/04 inclusive show VAT repayable of amounts under £100. The returns for the periods 10/04 to 02/05 show either modest amounts (all under £4,000) of VAT payable or small repayments (of under £60) claimed.  There then follow periods when substantial repayment claims were made and paid (albeit in some or all of the periods paid by HMRC on a “without prejudice” basis) as follows:

10.  A small part of these amounts (totalling almost £2.9 million) relate to business supplies which were not supplies of mobile phones or computer components, but we understand that much the greater part of them did relate to such supplies.

11.  We find that the decision on HMRC’s part to apply “extended verification” to the Appellant’s repayment claim for the VAT period 03/06 was made on or about 28 April 2006, because on that date Mr. Bliss had a telephone conversation with the case officer, Laurence Smith, and also wrote to him, complaining about the withholding of the repayment for that period.  Officer Smith wrote to Mr. Bliss on 8 May 2006 informing him that he had “commenced a verification of the deals conducted in 03/06, and [hoped] to be able to demonstrate to [him] shortly the amount of tax lost, if any, in those deals”.

12.  We understand from the evidence of Officer Roderick Guy Stone as to HMRC’s policy in dealing with MTIC fraud, that “extended verification” is a process undertaken by HMRC to establish whether a transaction chain of which a deal of a repayment trader (such as the Appellant) is a component part is tainted by fraud.

13.  Officer Stone’s evidence was that extended verification was first introduced by HMRC in June 2002, and the first business selected for extended verification was Bond House Systems Ltd (“Bond House”).  

14.  The investigation into Bond House culminated in the reference to the European Court of Justice (ECJ) in the joined cases of Optigen Ltd., Fulcrum Electronics Ltd. and Bond House Systems Ltd. v Customs and Excise Commissioners (Joined cases C–354/03, C–355/03 and C–484/03) [2006] STC 419.

15.  The VAT Tribunals in these cases had held in essence that transactions forming part of a carousel fraud fell outside the scope of VAT, so that the transactions could not give rise to a right to be repaid VAT as input tax.  The ECJ held otherwise, following the Opinion of Advocate-General Poiares Maduro. The oral hearing in the joined cases was held on 8 December 2004, the Advocate-General’s Opinion was issued on 16 February 2005 and the ECJ’s Judgment was handed down on 12 January 2006. The ECJ, following the Advocate-General’s Opinion, held that transactions such as those in issue, which were not themselves vitiated by VAT fraud, constituted supplies of goods or services effected by a taxable person acting as such  and an economic activity for VAT purposes.

16.  In the Budget Statement delivered on 9 April 2003, a new provision (to be enacted as section 77A VATA) was announced, to make businesses in a supply chain of inter alia mobile telephones and CPUs jointly and severally liable for VAT that has not been paid by a missing trader.  That provision was to come into effect on 10 April 2003.

17.  On 18 February 2004, Lightman J in R (on the application of Federation of Technological Industries and others) v Customs and Excise Commissioners [2004] EWHC 254 (Admin); [2004] STC 1008 gave permission to apply for a declaration that inter alia section 77A VATA was not authorised by Community law and ordered a reference on the point to be made to the ECJ.  The application for judicial review was one in which 53 traders in mobile phones and their trade body challenged the compatibility with Community law of inter alia  section 77A VATA.  In his Judgment, Lightman J expressed the view that the construction put on the relevant provision of the Sixth Directive by the claimants ‘has not merely a substantial prospect of success but is indeed likely to succeed’ (ibid. [20]).  H.M. Customs and Excise appealed ([2006] STC 1424).  The members of the Court of Appeal apparently formed the opposite view to Lightman J, but confirmed the reference to the ECJ.  This was on 30 July 2004.

18.  On 11 May 2006, the ECJ handed down its judgment in the reference in Customs and Excise Commissioners and another v Federation of Technological Industries and others (Case C–384/04) [2006] STC 1483. The ECJ held that legislation with the objectives of section 77A was compatible with Community law provided the general principles of Community law including the principles of legal certainty and proportionality were respected.

19.  Officer Stone put in evidence a table showing the monthly figures for the export of mobile telephone units from the UK in 2005 and 2006 compiled from data publicly available through the HMRC website www.uktradeinfo.com. That table shows a steady increase from 1,834,558 units per month in January 2005 to 5,512,820 units in November 2005.  There is then a drop in December 2005 to 4,323,690 units, but the figure for January 2006 is 6,583,046 units.  The figures increase to a maximum of 13,573,290 units in May 2006 and then decline to 10,493,222 units in June 2006, 2,853,100 units in July 2006 and 836,322 units in December 2006.

20.  Officer Stone pointed out, and we accept, that the table shows a steady increase in exports of mobile phones following the issue of Advocate-General’s Opinion in the Optigen/Fulcrum/Bond House litigation on 16 February 2005, and a further increase after the ECJ’s judgment, agreeing with the Advocate-General, was handed down on 12 January 2006.  It also shows a significant decline in exports of mobile phones following the ECJ’s judgment in the Federation of Technological Industries case on 11 May 2006.

21.  After Mr. Bliss arrived in the UK in 1999, through the introduction of his friend and fellow Australian, Mr. Stuart Adam, he obtained a position with a company called Silverpar Ltd. (“Silverpar”) as a commodity broker.  Silverpar was a subsidiary of VLSI International Holdings Limited (“VSLI”), a company of which a Mr. Peter McCaffrey was a director.   

22.  Mr. Bliss developed skills as a brokerage operator, specialising in the brokerage of CPUs, hard drives and computer memory.  He also realised there was a commercial opportunity for a specialist brokerage company in this market, offering its skills to a number of companies operating in the industry.  He formed his first company, Bliss Brothers, to exploit that opportunity.  He has also incorporated other UK companies dealing in wine, meat and seafoods.  He is an entrepreneur.

23.  In 2001, Bliss Brothers started to supply agency services (effectively sourcing sales and customers and dealing with freight forwarders) for Cullatron IT Limited (“Cullatron”), a company owned by Lisa Southall, which was an exporter of CPUs and mobile phones.  Cullatron operated at the same premises at Hampton, Middlesex from which the Appellant subsequently operated.  Bliss Brothers (or Mr. Bliss) also looked after the management accounts for Cullatron. Bliss Brothers was paid a percentage of profits, as a commission, by Cullatron.

24.  This agency arrangement continued until Cullatron ceased trading in November 2002.  Cullatron was a repayment trader.  Mr. Bliss was aware of carousel fraud in the mobile phones and CPUs trading industry at that time.

25.  In mid 2002, Cullatron became the agent of Spartan Distribution Limited (“Spartan”), another wholesaler of mobile phones and CPUs, and on 8 July 2002, Mr. Peter McCaffrey, as director of Spartan, informed HMRC of this, and also that Mr. Bliss and Mr. Adams would be the contacts (i.e. agents) for Cullatron.

26.  Bliss Brothers, or Mr. Bliss, also acted as agent in the same way for VLSI, which also dealt in the wholesaling of mobile phones in 2003.

27.  Bliss Brothers became agents in the same way for Spartan. Spartan traded from September 2004 to February 2005.  Spartan was also a repayment trader operating from the same address in Hampton.

28.  The Appellant company was incorporated in late 2002.  The name “Blada” is an amalgamation of “Bliss” and “Adam”.  The Appellant applied to be registered for VAT on 11 December 2002. Cullatron had ceased to trade by that stage. The expected date of the Appellant’s first taxable supplies, according to the application, was 1 January 2003, and (as stated above) its expected first year turnover was £30,000,000.

29.  The Appellant did not in fact start trading from 1 January 2003. Mr. Bliss said that this was because it was unable to raise the necessary funds (about £500,000) to commence trading.  Mr. Bliss said he had approached VLSI and Spartan for funds.  He spoke to Mr. McCaffrey.  His meeting with Mr. McCaffrey was not minuted.  Mr. Bliss said that he met Mr. McCaffrey in 2002 to discuss funding and that Mr. McCaffrey had given him agreement in principle to lend the funds required.

30.  Mr. Bliss had a meeting with Mr. Gamlin of Castlemead on 14 March 2003 to discuss the insurance requirements of the Appellant.

31.  On 10 June 2003 Mr. McCaffrey told Officer Smith that Spartan was not then trading because of the 2003 Budget measures (the proposed joint and several liability provisions).  Mr. Bliss was aware that Spartan had stopped trading on legal advice.  He was (indirectly) acting as agent for Spartan at that time.

32.  Mr. Bliss understood that Customs & Excise were saying that there was fraud in the industry at that time and while acknowledging that there was a risk that Spartan might get caught up in fraudulent chains, he said that he did not think that it was likely that Spartan would do so.

33.  On 30 July 2003 the Appellant, having abandoned the idea of trading in CPUs and mobile phones on its own behalf at that stage, entered into a Commission Agreement with Spartan, whereby it was appointed to be Spartan’s ‘Marketing Consultant’ to act as its agent ‘to source and subsequently sell, store and ship [CPUs and mobile phones and other products] on behalf of Spartan’.

34.  The Appellant’s function under the Agreement was to sell on behalf of Spartan anywhere in the world except the European Union (EU), obtaining undertakings from its customers that the products sold would not be resold into the EU.  There was an exception to this, in that goods sourced outside the EU could be shipped and sold into the EU under the Agreement. Mr. Bliss believed that these provisions effectively prevented Spartan’s trade from being connected with carousel fraud.  However he said that he thought that the risk of Spartan being connected to carousel fraud was in any event ‘a small percentage’.  He had not been notified of any defaulters in chains in which Spartan had carried out transactions. This change in the way Spartan’s business operated meant that the Appellant had to find new customers for Spartan.  He described it as ‘a change in process’. Spartan began to trade through the Appellant’s agency in October or November 2003.

35.  Officer Smith, with another officer, Matt Copeland, visited Mr. Bliss on 10 February 2004.  He stated to Mr. Smith that Spartan’s repayment claims were still being verified, but that there would be no requirement for verification if Spartan purchased from suppliers who were importers of goods.  However, Mr. Bliss made no efforts in 2004 to source goods from suppliers who were importers.  Very little trade was done under the original Commission Agreement of 30 July 2003.

36.  On 25 February 2004 Mr Bliss, described as managing director, wrote on behalf of Spartan to Officer Smith chasing up repayments of tax which had been claimed for September and October 2003 but not yet paid.  He wrote:

“As you know, we have submitted our Notice of Appeal to the VAT Tribunals and expect to have our claims upheld.  Further, I understand that, following a judgement in the Royal Courts of Justice on the 18^th February 2004, that leave has been given for the Federation of Technological Industries to appeal to the European Court to ascertain whether the Joint and Several Liabilities imposed by HM Customs and Excise has any legal standing.  I am further led to believe that the judge commented, ‘I consider that the construction by Maitre Waelbroek (instructed by claimant) has not merely a substantial prospect of success but indeed is likely to succeed’.

This fact, along with the fact that we believe we make adequate supplier and customer checks, lead me to believe that you should be immediately making these outstanding payments to us and that you had no legal right to withhold these monies in the first instance.”

37.  The Commission Agreement of 30 July 2003 was varied by a document dated 26 July 2004 signed by Mr. Bliss both for Spartan and for the Appellant. The variation authorised the Appellant to sell goods on behalf of Spartan into the EU.  It required the Appellant to obtain undertakings for customers that goods should not be resold into the UK (except when sourced outside the EU).  It also placed a requirement on the Appellant to inform H.M. Customs and Excise of ‘all of the details of the supplier, and the details of the customer for the goods, product type and quantity’ and ‘on receipt of validated information from H.M. Customs and Excise’ the Appellant would be approved to continue with the transactions, but not otherwise.  A commission payment of 70% of the gross margin per unit was agreed.

38.  Mr. Bliss said that the variation implemented a change of mind in that the view was taken that Spartan could trade into the EU ‘in a manner that would reduce’ the risk of getting involved in a fraudulent line of trading. He said that at that time (July 2004) and until 2006 it was his belief ‘that joint and several liability had effectively wiped out’ – or significantly reduced – the fraud in the UK.  When taken to his letter dated 25 February 2004 (quoted from, above) he said that the question mark over the compatibility of the legislation providing for joint and several liability did not contribute to the reason for the variation, which was entirely ‘based on the fact that we thought we could trade successfully’.

39.  In November 2004, Mr. Bliss had difficulty securing a repayment of the claim made by Spartan for September 2004.  Officer Smith had told him that there was one transaction entered into by Spartan which had been traced back to a third party payment, by the company which was second in the UK chain, to a European company.  Officer Smith had stated that it was unlikely that the repayment for this transaction would be made by H.M. Customs and Excise because ‘the situation may turn out to be either MTIC fraud or a company liquidation’.  In the event the repayment claim was paid in full.

40.  On 18 November 2004 Mr. Bliss had a meeting with Mr. Gamlin of Castlemead when he estimated to Mr. Gamlin that the Appellant would have a turnover for the next year estimated at £3,000,000.  This was in anticipation of the fact that VLSI would lend the Appellant funds to enable it to trade.

41.  On 19 May 2005 an Investment Agreement was entered into between the Appellant and VLSI.  It recorded that since 23 February 2005 the Appellant had been paying VLSI 25% of its gross margin in return for ‘Venture Capital loans’.  That arrangement was provided for in a letter dated 8 February 2005 (the “Loan Facility document”) from Mr. McCaffrey on behalf of VLSI to Mr. Bliss on behalf of the Appellant.

42.  The Loan Facility document provided that the loan was originally for £125,000 working capital.  Working capital was needed because the Appellant needed to fund the VAT payable to its supplier (because it anticipated making zero-rated supplies to customers outside the UK). The Appellant was going to trade exclusively with customers outside the UK because, Mr. Bliss said, ‘we had a customer database of overseas people that we relied on ... We had always been involved as an exporter.  That is what we knew.  That was our business, our business model and that is what we wished to continue to do’.

43.  The terms of the loan from VLSI were onerous.  There was a ‘set up fee’ of £25,000.  The interest Rate was 50% of the amount borrowed ‘and [was] a definitive amount and not calculated on an annual basis’. 

44.  Clause 1.6 of the Loan Facility document provided that VLSI ‘shall maintain and be entitled to an ongoing investment with’ the Appellant.  That is expanded in clause 7.1, which provided:

“Subsequent to the repayment of the full loan amount, [VLSI] shall be entitled to maintain an ongoing investment with [the Appellant].  Therefore [VLSI] shall continue to be entitled to a return on investment equal to 25% of the gross margin achieved by [the Appellant], during the normal course of his [sic] business.”

45.   Mr. Bliss explained these terms as follows.  The ‘set-up fee’ was in fact an acknowledgement to repay £25,000 that he (or the Appellant) already owed to VLSI.  The 25% entitlement of VLSI was approximate to a normal participation of the lender in the borrower, which could be expected in venture capital arrangements.

46.  Mr. Bliss said that he did not on 8 February 2005, when on behalf of the Appellant he entered into this arrangement with VLSI, know of the substance of the Advocate-General’s Opinion in the Bond House litigation, which would be issued on 16 February 2005, following the hearing on 8 December 2004.

47.  Mr. Bliss said that the Appellant set out to trade in exactly the same way as ‘we had traded in the previous seven years’, that is, as Cullatron, Spartan and VLSI had traded.  The Appellant commenced trading in March 2005.

48.  Mr. Bliss said that he:

“discussed the prevalence or lack thereof of MTIC fraud with every single person that I met within the trade, and I got the same response.  I discussed it with our professional advisers, Burges Salmon, with our accountants and everyone else; and in my opinion, what I had heard, joint and several liability had effectively reduced that to nil.  I cannot find any evidence of it [MTIC fraud] ... I spoke to the freight forwarders, literally everyone I spoke to, so I couldn’t find any evidence of it.

“I also couldn’t see any cases coming to the fore of – recent cases.  So by that I mean a case coming in early 2005 for goods that had been traded in – late 2004.  What I was seeing coming to the fore were cases being brought to court, to trial for – or arrest for frauds that were committed in 2002 and 2001.  So it was my understanding at the time that joint and several liability, as I have said, had effectively – to say it had wiped it out completely is not true, but it had reduced it to levels that he considered it was safe to put his toe back in the water (to adopt language put to him by Mr. Draycott, with which he agreed ‘absolutely’).

“The lone voice was where I would go and see Customs on a monthly basis or ring them, I would speak to Laurence Smith and he would say something to the contrary, but he would never give any details of whether it is recent – in fact his comment was, well, we are still employed, or we are still here ...”

49.  In March 2005, the Appellant began to trade in significant amounts, as can be seen from the extract of repayment claims given above at paragraph 9.  By May 2006, when the repayment of input tax claimed was £234,574.39, the Appellant’s turnover was in the region of £2m, in that month alone.

50.  On 22 July 2005, Mr. McCaffrey, on behalf of VLSI, wrote to Officer Smith to inform him that VLSI had provided ‘a working capital investment loan’ to the Appellant of £140,000, with the intention of increasing that to a maximum of £200,000.  He stated that the interest on the loan was variable and dependent on the gross margin performance of the Appellant and that it was subject to a maximum of ‘an amount equal to the capital amount loaned’.  Mr. Bliss informed us that the original loan of £125,000, with all attendant charges, had been paid back to VLSI and a new loan of £140,000 obtained from VLSI.

51.  On 27 September 2005, Officer Smith communicated with Mr. Bliss confirming an earlier telephone discussion in which, among other things, Officer Smith mentioned that he had checked through the IMEI database held by HMRC and found matches between some of the phones dealt with by the Appellant in August 2005 with other traders’ deals in the UK ‘spanning December 2004 to August 2005’.  He advised Mr. Bliss that ‘this may result in HMRC action against [the Appellant] using the joint and several liability legislation, depending upon further investigation’.

52.  Mr Bliss told us that his immediate reaction to this was to contact the supplier, Infinity Distribution, and ask them what was happening.  Mr. Bliss checked that neither the Appellant nor Infinity Distribution had handled the phones in question before, but because Infinity Distribution could not give a guarantee that this would not happen again, the Appellant ceased to deal with Infinity Distribution immediately.

53.  Mr. Bliss did not contact the customer who had bought the phones to alert him to the situation.  He told us that his main focus had been on his suppliers with regard to preventing involvement in carousel fraud, and in this he had been following HMRC indications.

54.  He did however contact A1 Inspections, asking them to check the IMEI numbers of phones traded by the Appellant against its (A1 Inspections’) database.  They however said they could not do this ‘for data protection reasons’.

55.  On 30 September 2005 the Appellant acquired Spartan with the intention of utilising its tax losses.  The consideration was £81,000, being a commercial rate for the losses (4p per £1), according to Mr. Bliss.

56.  On 28 November 2005 the Tax Operations Manager at the Redhill VAT Office wrote to the Appellant, warning the Appellant that HMRC were still ‘experiencing certain problems with businesses in your trade sector offering commodities regularly involved in’ MTIC VAT fraud, and advising that ‘the current estimate of the VAT loss from this type of fraud in the UK alone is between £1.06 and £1.73 billion per annum’.  The Appellant was instructed with immediate effect to make requested for verification of VAT status of new customers or suppliers to the Redhill VAT Office.

57.  A standard warning was included in the letter in the following terms:

‘Although the Commissioners may validate VAT registration details, it does not serve to guarantee the status of suppliers and purchasers.  Nor does it absolve traders from undertaking their own enquiries in relation to proposed transactions.  It has always remained a trader’s own commercial decision whether to participate in transactions or not and transactions may still fall to be verified for VAT purposes.’

58.  A copy of Notice 726 (“Joint and several liability in the supply of specified goods”) was enclosed.

59.  Mr. Bliss told us that “this letter to me evidenced that there had been a reduction in fraud” because the figures mentioned in the letter were smaller than figures which had previously been mentioned to him by HMRC.

60.  He also said that he had himself asked other people – including customers and suppliers – about the prevalence of MTIC fraud in the industry at that time and he said he ‘was experiencing two different points of view’.  That is, we understood him to say, that the information he obtained from his contacts was that the incidence of fraud in the industry was much reduced.  He said that he had thought at the time that the Appellant’s methods of trading were sufficient to reduce the risk of being embroiled in MTIC fraud.

61.  On 8 December 2005, the Appellant borrowed £200,000 from Lisa Southall.  It was repaid, with £99,245.86 of interest on 7 July 2006.

62.  On 6 January 2006, Mr. Bliss, for the Appellant applied to open an account with First Curacao International Bank (“FCIB”).  He thought the Appellant needed another bank account and UK banks were proving difficult, because HMRC were applying pressure on them not to offer facilities to traders in the industry.

63.  Mr. Bliss stated that the advantage to the Appellant of FCIB was that they offered an automatic service rather than a manual service.  This meant that transaction times were much faster when conducted by FCIB than by other banks. Transaction costs charged by FCIB were cheaper, also. FCIB were advertised to traders in the industry and they provided a ‘very, very good’ level of service.  He denied the suggestion, put to him by Mr. Draycott, that someone told him to open an account with FCIB. 

64.  He accepted that ‘it was becoming apparent’ that traders in the industry were opening accounts with FCIB.  He suggested that the explanation was, at any rate in part, that HMRC was applying pressure on UK banks not to offer facilities to traders in the industry.  He said he had approached the Cooperative Bank, Alliance and Leicester, and Abbey and had been turned down by all of them.

65.  When asked persistently by Mr. Draycott whether it concerned him from the point of view of possible connection with MTIC fraud that the Appellant, and all customers and suppliers it did business with, either had or were obtaining bank accounts with FCIB, Mr. Bliss said ‘Did it raise some concerns?  Of course you think about these issues, but looking at the reasons for them, it was hardly surprising’.  At a later stage in his evidence, Mr. Bliss said that when the Appellant opened its account with FCIB, the bank went through much more thorough enquiries (due diligence) about the Appellant than any bank he had approached before or since.  He said he was ‘very much heartened by the level of due diligence that they were doing over the opening of an account’.  He also said he was impressed by the way that FCIB required the Appellant to provide all relevant documentation relating to money transfers operated on the account.

66.  On 26 January 2006, Castlemead wrote to Mr. Bliss, on behalf of the Appellant, enclosing a marine cargo insurance policy document for the 2005/2006 insurance period.  The letter invited Mr. Bliss to check through the documents to ensure they met the Appellant’s requirements.  He checked the documents but failed to pick up language in the definition of the subject-matter of the insurance which included ‘mobile phones’ (at the top of the page) but excluded ‘Mobile/Cellular Telephones’ at the bottom of the page.

67.  It was put to Mr. Bliss by Mr Draycott, that ‘it would have stood out a mile that there was something wrong with this insurance policy’ and ‘that if this was genuine trading and [Mr. Bliss was] a genuine businessman doing genuine trading, this would have jumped out a mile as [Mr. Bliss] pored over it and [he] would have done something about it.  [Mr. Draycott’s] suggestion [was] that the reason [Mr. Bliss] didn’t bother to check it [was] it really didn’t matter’.  Mr. Bliss’s response was that they employed professionals (Castlemead) to deal with the detail of the language.  He had checked the shipping amounts to make sure they correlated with what he had asked for.  He checked the policy limits, but did not check the language.

68.  Mr. Gamlin of Castlemead said in evidence that the problem in the language arose from a failure of the insurance company (“AIG”) to amend a standard exclusion.  Mr. Bliss had in 2007 raised the point with Castlemead, and Castlemead had referred the point to AIG, and the underwriter there immediately agreed that it was a clerical error and provided Mr. Gamlin with a “to whom it may concern” letter making clear that the exclusion was an error in the documentation.

69.   Dealing with the Appellant’s method of trading, Mr. Draycott drew attention to the fact that the Appellant never gives credit (which was agreed by Mr. Bliss) but that every supplier dealt with by the Appellant does give credit to the Appellant.  Mr. Bliss’s observation was that ‘We have built up a relationship with those suppliers over a number of years.  It is a business relationship such that they feel comfortable in supplying us with goods on credit.’  Mr. Bliss confirmed that that observation went for every single supplier in the 19 deals in dispute.

70.  Mr. Bliss accepted that the Appellant’s customers pay for goods supplied by the Appellant after inspection of the goods, and after payment is received the goods are released by the Appellant to the customer concerned.  He said that the Appellant’s suppliers release the goods to the Appellant to enable the Appellant to release them to its customers.  However this is done before the Appellant has paid its supplier concerned.  He explained this by the good relationship built up by with each of the Appellant’s suppliers.  Sometimes in the periods in dispute the Appellant underpaid its suppliers (the payment in deal 1 to TAP Global is an example).

71.  Mr. Bliss said that ‘previous to the period’ in question (by which we understood him to mean before 1 March 2006) the Appellant would pay to the supplier 10% of the purchase price of stock on reservation of it, before the Appellant had found a customer for the stock, which would enable it to go through with the purchase.  However Mr. Bliss also said that if the purchase did not go through the 10% deposit would either be credited in relation to other stock reserved from the same supplier, or, if that was not possible, repaid.  He accepted that the Appellant was not at any serious commercial risk by reserving large quantities of stock.

72.  Mr. Bliss was unsure of the precise legal position relating to the passing of title in the goods.  He was confident that the Appellant passed title to its customers once payment had been received.  He thought that up until that point the Appellant’s supplier would have retained title but released the goods.  He accepted that the suppliers must have released title in the goods to the Appellant before receiving payment, in order to enable the Appellant to pass title to its customers on their payment to the Appellant.

73.  Mr. Bliss personally visited the Appellant’s suppliers, but not all its customers.

74.  Mr. Bliss said that the Appellant tried to obtain a mark-up (gross profit) of 6% or thereabouts.  The Appellant operated an accounting computer software package called QuickBooks.

75.  The Appellant’s first contact was with its suppliers, to ascertain what stock was available from them.  Mr. Bliss handled this personally. That stock was then advertised by the Appellant on ‘trading boards’ and Mr. Bliss would telephone customers.

76.  Deal 1:  In deal 1, the Appellant bought 2000 Samsung D600 mobile phones from The Accessory People Global Ltd. (“TAP Global”) at a unit price of £179.00, giving a total net value of £358,000 to which VAT of £62,650 was added (total £420,650).  The invoice date was 21 March 2006.

77.  The Appellant made a payment in full of £420,650 relating to deal 1 from its FCIB account to TAP Global’s FCIB account on 3 April 2006.  That payment was reversed later the same day.  Mr. Bliss’s explanation was that he understood that TAP Global could not allocate the receipt for some reason, so they returned it. Subsequently, on 7 April 2006, the Appellant transferred £360,650 from its FCIB account to the FCIB account of TAP Global in part payment of the sale price.  Mr. Bliss’s explanation for the shortfall of £60,000 was that the Appellant had ‘overtraded’ that month and did not have the money to make full payment.  No interest was paid on the outstanding £60,000.  Mr. Bliss said he thought the outstanding £60,000 was paid about three weeks later.  He produced a copy of a letter dated 26 April 2006 to himself on behalf of the Appellant from TAP Global requesting Mr. Bliss to ensure that the full payment of £60,000 was paid into TAP Global’s Allied Irish Bank account in the UK, by 5 May 2006, and threatening recovery action if that was not done.  The standard terms and conditions of trade of The Accessory People (“TAP”) and its subsidiaries, signed by Mr. Bliss on behalf of the Appellant on 22 February 2006, were exhibited.  Clause 9 of these terms and conditions states that “the Seller [TAP] will exercise its statutory right to interest under the Late payment of Commercial Debts (Interest) Act 1998 as amended if payment is not made according to agreed credit terms”.  Mr. Bliss confirmed that TAP Global did not charge interest on the late payment.

78.  The goods – the same quantity and description – were sold by the Appellant to World Communications France SARL (“World Comm France”) at a unit price of £191.65, giving a net value of £383,000 to which, of course, no VAT was added.  The invoice date was 22 March 2006.  The purchase order from World Comm  France was not specific as to whether the mobile phones required were to have 2-pin or 3-pin chargers.  Mr. Bliss met this point by saying that chargers are easily replaceable and the customer would not have worried which type of charger was supplied.  Mr. Bliss did acknowledge that if chargers were supplied which were not of the type required by an ultimate customer, then there would be a cost in replacing the charger where it was necessary to do so.   This cost would fall on the retailer, or the party from whom the retailer acquired the mobile phones in question.

79.  Clause 25 of TAP’s terms and conditions (referred to above) states that “in spite of delivery having been made the Buyer [the Appellant] shall not obtain good title to the Goods from the Seller [TAP] until the Buyer shall have paid the Price plus VAT in full and also there shall be no other sums whatsoever due from the Buyer to the Seller”.  When it was put to Mr. Bliss by Mr. Draycott, that the Appellant acted inconsistently with this clause in ‘releasing title’ to the goods in deal 1 to World Comm France before full payment had been made to TAP Global, Mr. Bliss stated that he thought he had released title to World Comm France and TAP Global never complained to him about the situation.

80.  The CMR consignment note for the despatch of the goods by the Appellant from Pauls Freight Services (“Pauls Freight”) to AFI Logistics Paris for the order of World Comm France was in evidence.  It showed as carrier two named individuals, Damian Baker and Mark Betts and a vehicle registration number, KT55 GVC. Mr. Draycott put in evidence a delivery note issued by a transport firm Spherical Road Logistics Ltd., with an address in the same building as TAP Global’s address, requiring Pauls Freight to accept a delivery of 2000 Samsung D600 mobile phones to the order of their customer, Power Communication Trading B.V. (“Power Communications”).  This delivery note was dated 23 March 2006 and it made reference to “Driver Named M BUTTS” and “Vehicle Reg. KTU55 GVC”.  Although noting the differences between Mark Betts and M BUTTS, and KTU55 GVC and KT55 GVC, Mr. Draycott suggested that it showed that the 2000 Samsung D600 mobile phones which had been sent by the Appellant from Pauls Freight to France on 22 March 2006 were returned to Pauls Freight in the same vehicle on 23 March 2006. There was documentation before the Tribunal showing that the vehicle registration number KT55 GVC [sic] registered with Eurotunnel at 12.44 hours on 23 March 2006.

81.  The Tribunal also had among its documents a ‘Product Status Proforma’ of the Appellant which appeared to show that the 2000 Samsung D600 mobile phones destined to be sold to World Comm France under deal 1 (and 2000 Nokia N70 destined to be sold to World Communications IMP-EXP SLE of Spain under deal 2) were not released by Pauls Freight to the respective customers until 19:31 hours on 7 April 2006.  Mr. Bliss explained that goods shipped by Pauls Freight to AFI Logistique ought to have been held by AFI Logistique to the Appellant’s order until Paul’s Freight had indicated to AFI Logistique on the Appellant’s behalf that they could be released, and Pauls Freight would only do that when instructed by the Appellant, which, in the case of deal 1, did not happen until 7 April 2006.

82.  The Appellant obtained (apparently on 28 February 2006, the date of the download from the website indicate on the printed page copies with our papers) a “Comprehensive Report” from Dun & Bradstreet on TAP Global.  The “tangible net worth” of TAP Global is stated to be “£1” on the report.  The risk indicator is given as “3”, representing a greater than average risk of business failure.  Mr. Bliss explained that these indications did not concern him because he knew that TAP Global was a new company, part of a £450m. group, launched by its owner who was “worth £40m”.

83.  There was with the Tribunal’s papers a note in Mr. Bliss’s handwriting of a trade reference supplied to him by World Comm France for TAP – “12 months.  1 million pounds.  No problems paying”.  Mr. Bliss confirmed that World Comm France knew TAP. 

84.  Mr. Draycott put it to Mr. Bliss that as World Comm France (the Appellant’s customer) knew TAP (TAP Global was the Appellant’s supplier), World Comm France could simply have bought the stock direct from TAP Global at the price at which TAP Global in fact sold to the Appellant, and thus saved some £25,000 (the Appellant’s mark-up).  Mr. Bliss’s response was that World Comm France could have done this, but did not do so, because the Appellant had already agreed to buy the stock.  He denied that the supply of the goods by TAP Global to the Appellant and by the Appellant to World Comm France was contrived.

85.  HMRC showed that TAP Global had acquired the goods from Delta Mobile Phones Limited (“Delta Mobile”) (by an invoice dated 21 March 2006), who had acquired them from Let’s Talk Ltd (“Let’s Talk”) (by an invoice dated 21 March 2006), who had acquired them from LinkMobiles.com Ltd (“LinkMobiles”) (by an invoice dated 21 March 2006), who had acquired them from Satt Telecom, a company with an Italian VAT registration (by an invoice dated 21 March 2006).

86.  Satt Telecom sold the phones for a unit price of £175.25.  They passed through the chain at unit price mark-ups of £0.25 for each of LinkMobiles and Let’s Talk, £0.75 for Delta Mobile and £2.50 for TAP Global.  The Appellant’s mark-up on its sale to World Comm France was £12.65 per unit.

87.  Mr. Bliss said that he knew none of the companies in the chain before TAP Global, who was the Appellant’s supplier.

88.  HMRC led evidence from Officer Anna Hudson, who was the officer handling the investigation of LinkMobiles. Her evidence was that the VAT return for LinkMobiles for the period 1 March 2006 to 30 April 2006 showed outputs of £160,976,213 and inputs of £160,756,099, the relative input tax being proposed to be offset against the relative output tax, leaving a net liability of £1,166, which was paid.  Eventually Officer Hudson gained access to the deal packs for LinkMobiles and, included in those records, was documentation relating to the order by LinkMobiles from Satt Telecom on 21 March 2006 of 2000 Samsung D600 mobile phones at a unit price of £175.25, and the sale of them at a unit price of £175.50 plus VAT on 21 March 2006 to Let’s Talk.  The payment instructions issued by LinkMobiles (through its director Mr. Z. Rahman) to Let’s Talk on 21 March 2006 were for the total sales price (inclusive of VAT) of £412,425 to be paid as follows.  £411,837.50 was to be paid direct to the account with FCIB of Karippa SRO (Karippa) (described as “Our Supplier” in the payment instructions), and the balance of £587.50 (described as “Our Commission Amount”) was to be credited to an account of LinkMobiles with Barclays Bank in the UK.

89.   Evidence produced by Officer Fu Lam from an analysis of material obtained from FCIB showed that the Appellant’s account with FCIB was credited with the full invoice price for deal 1 of £383,000, received from its customer World Comm France, on 7 April 2006.  The Appellant paid, as we have noted, £360,500 to the FCIB account of TAP Global on 7 April 2006.  TAP Global paid the full invoice price owed by it to Delta Mobile’s FCIB account (£414,775) on 7 April 2006.  Delta Mobile’s FCIB account was debited with £411,837.50 (slightly less than the amount due by it to Let’s Talk which was £413,012.50) and this amount was credited to the FCIB account of Karippa on 10 April 2006.  It is probable (and we so find) that in the same way that LinkMobiles instructed its customer, Let’s Talk, to make the bulk of the payment due to it (LinkMobiles) to Karippa, so Let’s Talk instructed its customer, Delta Mobile, to make the bulk of the payment due to it (Let’s Talk) to Karippa. The balance of £1,175 due by Delta Mobile to Let’s Talk was presumably paid to it (Let’s Talk), enabling it to pay the amount of £587.50 demanded by LinkMobiles to be paid directly to its Barclays Bank account and allowing it to keep the remainder, exactly £587.50, as its own “commission”.  The equal amounts of “commission” correspond to the equal mark-ups of £0.25 each enjoyed by Let’s Talk and LinkMobiles.

90.  Officer Fu Lam’s evidence showed that Karippa was the source of a payment to Power Communications’ FCIB account of £977,550 on 7 April 2006, which in turn enabled Power Communications to pay World Comm France’s FCIB account £391,300 on 7 April 2009, which in turn funded the payment to the Appellant’s FCIB account of £383,000 on 7 April 2006.

91.  Mr. Draycott put it to Mr. Bliss that the trading and payment patterns revealed by the evidence were all contrived and that therefore Mr. Bliss, on behalf of the Appellant, must have known whom it was he had to sell to, and whom it was he had to buy from.  Mr. Bliss denied this, and any knowledge of the trading and payment patterns not directly connected with the Appellant.

92.  The proposed offset of input tax of £14,075,990.35 by Link Mobiles related to 20 transactions in telephone calling cards which LinkMobiles claimed to have conducted.  However HMRC obtained information, which the Tribunal accepts and which was not challenged by Mr. Popplewell on behalf of the Appellant, that £14,074,910 of this amount related to purported supplies which had not taken place.  LinkMobiles was deregistered for VAT purposes with effect from 30 April 2006.  On 22 February 2007, an assessment to VAT of £14,074,910 was raised on LinkMobiles.  That assessment has not been appealed and the tax has not been paid.

93.  Deal 2: In deal 2, the Appellant bought 3000 Nokia N70 mobile phones from Direct Accessories (as sister company of TAP Global) at a unit price of £230.00, giving a total net value of £690,000 to which VAT of £120,750 was added.  The invoice date was 21 March 2006.

94.  These goods (together with 2,000 units of the same phone which had been bought by the Appellant in February 2006 and were already at AFI Logistiques in Paris) were sold by the Appellant to World Communications IMP-EXP SLU, (“World Comm Spain”), a company with a Spanish VAT registration number and a sister company of World Comm France, at a unit price of £250.80, giving a net value of £752,400 to which, of course, no VAT was added.  The invoice date was 22 March 2006.

95.  HMRC showed that Direct Accessories had acquired the goods from Delta Mobile (by an invoice dated 21 March 2006), who had acquired them from Let’s Talk (by an invoice dated 21 March 2006), who had acquired them from LinkMobiles (by an invoice dated 21 March 2006), who had acquired them from Satt Telecom (by an invoice dated 21 March 2006).

96.  Satt Telecom sold the phones for a unit price of £226.25.  They passed through the chain at unit price mark-ups of £0.25 for each of LinkMobiles and Let’s Talk, £0.75 for Delta Mobile and £2.50 for Direct Accessories.  The Appellant’s mark up on its sale to World Comm Spain was £20.60 per unit.

97.  The chain up to Direct Accessories, the Appellant’s immediate supplier, was the same chain as in deal 1.  Mr. Bliss had already said, in relation to deal 1, that he knew none of the companies in the chain before the Appellant’s immediate supplier.

98.  Mr. Bliss accepted that World Comm Spain knew about Direct Accessories.  He denied any knowledge of the chain behind Direct Accessories.

99.  The 2000 units which were bought by the Appellant in February 2006 and also sold on to World Comm Spain, had originally been intended to be sold to Power Communicarions.  Power Communications had agreed to buy 4000 units and had paid very quickly for 2000 of them.  (The Appellant had done a Europa check and a National Advice Service check, but had not completed a Redhill check on Power Communications.  The checks completed had had satisfactory results.)The remaining 2000 units were however not sold by the Appellant to Power Communications because HMRC’s Redhill office did not confirm the validity of the documents sent to them about the VAT registration of Power Communications.  This, Mr. Bliss said, ‘was raising [his] level of anxiety over the deal’.  The Appellant withdrew from the sale of the remaining 2000 units to Power Communications. Mr. Bliss found World Comm Spain as a buyer for 5000 units of the same mobile phone.  He therefore sold the 2000 units already at AFI Logistique in Paris to World Comm Spain, and purchased a further 3000 units (the deal 2 units) from Direct Accessories for onward sale to World Comm Spain, making up their order for 5000 units. The sale was conducted via two invoices, one for 2000 units and one for 3000 units.

100.                   Before the sale of the 2000 units purchased in February 2006 to World Comm Spain, the Appellant had been approached by Kyel Holdings with a view to their purchasing them.  However Dunn & Bradstreet told the Appellant that they were not prepared to answer questions regarding the trades of Kyel Holdings and so the Appellant regarded their due diligence checks on Kyel Holdings as not having been met satisfactorily and the Appellant refused to deal with Kyel Holdings.  The 2000 units therefore remained available to be sold to World Comm.  Mr. Bliss agreed with a point put to him by Mr. Popplewell in re-examination, that once the Appellant had shipped the stock they ‘really were committed to buying it’. This made him feel ‘not very comfortable’ until he found an alternate customer for the stock.

101.                    The 5000 units ordered from the Appellant by World Comm Spain were “Nokia N70 Euro Spec” and invoice 86 from the Appellant to World Comm Spain described the goods as 500 “Nokia N70 Original, Sim Free, Euro Spec, Battery, Mains Charger”.  The 3000 units forming part of the order, which were the subject of deal 2, were inspected by A1 Inspections when they were at Pauls Freight.  There was a 10% physical inspections and a 100% IMEI scan.  The inspection report states that the units inspected had 3 pin chargers and that there were 280 “cutouts”.  Mr. Draycott suggested to Mr. Bliss that the order specifying “Euro Spec” meant that 2-pin, not 3-pin chargers were to be supplied.  Mr. Bliss’s response was that “Euro Spec” did not indicate 2-pin rather than 3-pin chargers and that whether mobile phones came with 2-pin or 3-pin chargers was a matter of indifference to the Appellant’s customers because the chargers were changeable at the retail level.  “Euro Spec” was a quality of the mobile phone itself, not a reference to the chargers. He added that World Comm Spain did not complain about receiving phones with 3-pin chargers.

102.                   The Appellant stored the IMEI numbers reported on the IMEI scan by A1 Inspections.

103.                    The Dun & Bradstreet Comprehensive report on Direct Accessories, which was obtained by the Appellant, was exhibited.  It showed a high risk of business failure.  Mr. Bliss responded that he was confident in dealing with Direct Accessories because it had had a turnover of £118m in 2003, during the time that the Appellant, or other entities for which Mr. Bliss was acting, had dealt with them.  Also he had met the stated 100% owner of Direct Accessories, a Mr. Naja A Khan, on a couple of occasions and had no cause to believe that Direct Accessories would default.

104.                   The evidence regarding the loss of tax due from Linkmobiles which is recorded above in relation to deal 1 is, of course, relevant also in relation to deal 2. The connection between the Appellant’s deal 2 transaction and the loss of tax due from Linkmobiles was shown as follows.

105.                   When Officer Hudson gained access to the deal packs for LinkMobiles, she found, included in those records, documentation relating to the order by LinkMobiles from Satt Telecom on 21 March 2006 of 3000 Nokia N70 GSM mobile phones at a unit price of £226.25, and the sale of them at a unit price of £226.50 plus VAT on an indecipherable date (presumably 21 March 2006) to Let’s Talk.  The payment instructions issued by LinkMobiles (through its director Mr. Z. Rahman) to Let’s Talk on 21 March 2006 were for the total sales price (inclusive of VAT) of £798, 412.50 to be paid as follows.  £797,531.25 was to be paid direct to the account with FCIB of Karippa (described as “Our Supplier” in the payment instructions), and the balance of £881.25 (described as “Our Commission Amount”) was to be credited to an account of LinkMobiles with Barclays Bank in the UK.

106.                    Evidence produced by Officer Fu Lam from an analysis of material obtained from FCIB showed that the Appellant’s account with FCIB was credited with the full invoice price for deal 2 of £752,400, less £5,400, giving a net receipt of £747,000, received from its customer World Comm Spain, on 7 April 2006.  The Appellant paid £810,750, the full invoice price to the FCIB account of Direct Accessories on 7 April 2006.  Direct Accessories paid the full invoice price owed by it to Delta Mobile’s FCIB account (£801,937) on 7 April 2006.  Delta Mobile’s FCIB account was debited with £797,531.25 (slightly less than the amount due by it to Let’s Talk which was £799,293.75) and this amount was credited to the FCIB account of Karippa on 10 April 2006.  It is probable (and we so find) that in the same way that LinkMobiles instructed its customer, Let’s Talk, to make the bulk of the payment due to it (LinkMobiles) to Karippa, so Let’s Talk instructed its customer, Delta Mobile, to make the bulk of the payment due to it (Let’s Talk) to Karippa. The balance of £1,762.60 due by Delta Mobile to Let’s Talk was presumably paid to it (Let’s Talk), enabling it to pay the amount of £881.25 demanded by LinkMobiles to be paid directly to its Barclays Bank account and allowing it to keep the remainder, exactly £881.25, as its own “commission”.  The equal amounts of “commission” correspond to the equal mark-ups of £0.25 each enjoyed by Let’s Talk and LinkMobiles.

107.                   As stated above, in relation to deal 1, Officer Fu Lam’s evidence showed that Karippa was the source of a payment to Power Communications’ FCIB account of £977,550 on 7 April 2006.  Power Communications paid into World Comm Spain’s FCIB account £759,000 on 7 April 2009, which apparently funded the payment to the Appellant’s FCIB account of £747,000 on 7 April 2006.

108.                   Deal 3: In deal 3, the Appellant bought 4000 Nokia 6680 mobile phones from TAP Global at a unit price of £185.00, giving a total net value of £740,000 to which VAT of £129,500 was added.  The invoice date was 21 March 2006.

109.                   These goods were sold by the Appellant to World Comm Spain at a unit price of £190.00, giving a net value of £760,000 to which, of course, no VAT was added.  The invoice date was 22 March 2006.

110.                   HMRC showed that TAP Global had acquired the goods from Delta Mobile (by an invoice dated 21 March 2006), who had acquired them from Let’s Talk (by an invoice dated 21 March 2006), who had acquired them from LinkMobiles (by an invoice dated 21 March 2006), who had acquired them from Satt Telecom (by an invoice dated 21 March 2006).

111.                   Satt Telecom sold the phones for a unit price of £181.25.  They passed through the chain at unit price mark-ups of £0.25 for each of LinkMobiles and Let’s Talk, £0.75 for Delta Mobile and £2.50 for TAP Global.  The Appellant’s mark up on its sale to World Comm Spain was £5.00 per unit.

112.                   The chain up to TAP Global, the Appellant’s immediate supplier, was the same chain as in deals 1 and 2.  Mr. Bliss had already said that he knew none of the companies in the chain before the Appellant’s immediate supplier. Mr. Bliss denied any knowledge of the chain behind TAP Global.

113.                   An extract from the TAP group’s website was also put in evidence.  It stated that among TAP’s customers were Asia Power, World Comm Spain and World Comm France.  These entities were among the Appellant’s customers and various TAP companies were among the Appellant’s suppliers.  When it was put to Mr. Bliss that in deal 2 and deal 3 a TAP company was the Appellant’s supplier and the Appellant’s customers were also customers of TAP companies, he said this situation must have arisen because the Appellant (and not TAP) had the stock which World Comm Spain and World Comm France wanted.

114.                   The evidence regarding the loss of tax due from Linkmobiles which is recorded above in relation to deal 1 is, of course, relevant also in relation to deal 3, as it was to deal 2. The connection between the Appellant’s deal 3 transaction and the loss of tax due from Linkmobiles was shown as follows.

115.                   When Officer Hudson gained access to the deal packs for LinkMobiles, she found, included in those records, documentation relating to the order by LinkMobiles from Satt Telecom on 21 March 2006 of 4000 Nokia 6680 GSM mobile phones at a unit price of £181.25, and the sale of them at a unit price of £181.50 plus VAT on 21 March 2006 to Let’s Talk.  The payment instructions issued by LinkMobiles (through its director Mr. Z. Rahman) to Let’s Talk on 21 March 2006 were for the total sales price (inclusive of VAT) of £853,050 to be paid as follows.  £851,875 was to be paid direct to the account with FCIB of Karippa (described as “Our Supplier” in the payment instructions), and the balance of £1175.00 (described as “Our Commission Amount”) was to be credited to an account of LinkMobiles with Barclays Bank in the UK.

116.                    Evidence produced by Officer Fu Lam from an analysis of material obtained from FCIB showed that the Appellant’s account with FCIB was credited with the full invoice price for deal 3 of £760,000 received from its customer World Comm Spain, on 7 April 2006.  The Appellant paid £869,000, the full invoice price, to the FCIB account of TAP Global on 7 April 2006.  TAP Global paid the full invoice price owed by it to Delta Mobile’s FCIB account (£857,750) on 7 April 2006.  Delta Mobile’s FCIB account was debited with £851,875 (slightly less than the amount due by it to Let’s Talk which was £854,225) and this amount was credited to the FCIB account of Karippa on 7 April 2006.  It is probable (and we so find) that in the same way that LinkMobiles instructed its customer, Let’s Talk, to make the bulk of the payment due to it (LinkMobiles) to Karippa, so Let’s Talk instructed its customer, Delta Mobile, to make the bulk of the payment due to it (Let’s Talk) to Karippa. The balance of £2,350 due by Delta Mobile to Let’s Talk was presumably paid to it (Let’s Talk), enabling it to pay the amount of £1,175 demanded by LinkMobiles to be paid directly to its Barclays Bank account and allowing it to keep the remainder, exactly £1,175, as its own “commission”.  The equal amounts of “commission” correspond to the equal mark-ups of £0.25 each enjoyed by Let’s Talk and LinkMobiles.

117.                   As stated above, in relation to deals 1 and 2, Officer Fu Lam’s evidence showed that Karippa was the source of a payment to Power Communications’ FCIB account of £977,550 on 7 April 2006.  Power Communications paid World Comm Spain’s FCIB account £776,000 on 7 April 2009, which apparently funded the payment to the Appellant’s FCIB account of £760,000 on 7 April 2006.

118.                   Deal 4: In deal 4, the Appellant bought 500 Nokia 9500 mobile phones from Direct Accessories at a unit price of £325.00, giving a total net value of £162,500 to which VAT of £28,437.50 was added.  The invoice date was 21 March 2006.

119.                   These goods were sold by the Appellant to World Comm France at a unit price of £335.00, giving a net value of £167,500 to which, of course, no VAT was added.  The invoice date was 22 March 2006.

120.                   HMRC showed that Direct Accessories had acquired the goods from Delta Mobile (by an invoice dated 21 March 2006), who had acquired them from Let’s Talk (by an invoice dated 21 March 2006), who had acquired them from LinkMobiles (by an invoice dated 21 March 2006), who had acquired them from Satt Telecom (by an invoice dated 21 March 2006).

121.                   Satt Telecom sold the phones for a unit price of £320.75.  They passed through the chain at unit price mark-ups of £0.25 for each of LinkMobiles and Let’s Talk, £0.75 for Delta Mobile and £3.00 for Direct Accessories.  The Appellant’s mark up on its sale to World Comm France was £10.00 per unit.

122.                   The chain up to Direct Accessories, the Appellant’s immediate supplier, was the same chain as in deals 1, 2 and 3.  Mr. Bliss had already said that he knew none of the companies in the chain before the Appellant’s immediate supplier. Mr. Bliss denied any knowledge of the chain behind Direct Accessories.

123.                   The evidence regarding the loss of tax due from Linkmobiles which is recorded above in relation to deal 1 is, of course, relevant also in relation to deal 4, as it was to deals 2 and 3. The connection between the Appellant’s deal 4 transaction and the loss of tax due from Linkmobiles was shown as follows.

124.                   When Officer Hudson gained access to the deal packs for LinkMobiles, she found, included in those records, documentation relating to the order by LinkMobiles from Satt Telecom on 21 March 2006 of 500 Nokia 9500 GSM mobile phones at a unit price of £320.75, and the sale of them at a unit price of £321 plus VAT on 21 March 2006 to Let’s Talk.  The payment instructions issued by LinkMobiles (through its director Mr. Z. Rahman) to Let’s Talk on 21 March 2006 were for the total sales price (inclusive of VAT) of £188,587.50 to be paid as follows.  £188,440.63 was to be paid direct to the account with FCIB of Power Communications (described as “Our Supplier” in the payment instructions), and the balance of £146.87 (described as “Our Commission Amount”) was to be credited to an account of LinkMobiles with Barclays Bank in the UK.

125.                    Evidence produced by Officer Fu Lam from an analysis of material obtained from FCIB showed that the Appellant’s account with FCIB was credited with the full invoice price for deal 4 of £167,500 received from its customer World Comm France, on 7 April 2006.  The Appellant paid £190,937.50, the full invoice price to the FCIB account of Direct Accessories on 3 April 2006, which was repaid to the Appellant by TAP on the same day. There was a payment made to Direct Accessories (or TAP, an associate company of Direct Accessories, on its behalf) of £310,000 by the Appellant on 6 April 2006, which seems to have consolidated the payment for deal 4 with other payments due.  Officer Fu Lam traced a payment of £552,250 from TAP to Delta Mobiles and a payment of £548,725 from Delta Mobiles to Karippa, and concluded that ‘it seems clear that Karippa used the funds to pay Power Communications at the start’ of the chains to fund deal 3 and deal 4.

126.                   Deal 5: In deal 5, the Appellant bought 5000 Intel P4 SL7 Z9 630 retail CPUs from Grandbyte Computers Ltd. (“Grandbyte”) at a unit price of £81.75, giving a total net value of £408,750 to which VAT of £71,531.25 was added.  The invoice date was 30 March 2006.

127.                   These goods were sold by the Appellant to Asia Power Solutions GmbH (“Asia Power”) at a unit price of £87.20, giving a net value of £436,000 to which, of course, no VAT was added.  The invoice date was 30 March 2006.

128.                   HMRC showed that Grandbyte had acquired the goods from The Fone Centre Limited (“Fone Centre”) (by an invoice dated 31 March 2006), who had acquired them from Nirvana Trading Ltd. (“Nirvana”) (by an invoice dated 30 March 2006), who had acquired them from Resolutions UK Ltd. (“Resolutions”) (by an invoice dated 30 March 2006), who had acquired them from Time Corporates Ltd. (“Time”) (by an invoice dated 30 March 2006), who had acquired them from Kep 2004 Ltd. – or a trader purporting to be Kep 2004 Ltd. – (“Kep”) by an invoice dated 30 March 2006, who had acquired them from Panmax GmbH (“Panmax”), a company with a German VAT registration.

129.                   Kep sold the CPUs for a unit price of £80.40.  They passed through the chain at unit price mark-ups of £0.05 for each of Time and Resolutions, £0.25 for each of Nirvana and Fone Centre, and £0.75 for Grandbyte. The Appellant’s mark up on its sale to Asia Power was £5.45 per unit.

130.                   Officer Armstong gave evidence on HMRC’s investigation into the affairs of Kep, based on HMRC’s databases and notebooks and visit reports.  HMRC’s investigations had led them to treat Kep’s VAT registration as having been hijacked for the purposes of facilitating MTIC fraud to be committed.  A VAT registration was created in the name of ‘A Taxable Person Purporting to be KEP 2004 Ltd’ and, by 25 September 2008, the date of Officer Armstrong’s Witness Statement, tax lost of £109,972,228.40 had been assessed. The tax due from Kep in the transaction at the start of the chain in deal 5 has not been recovered by HMRC.  The position of Kep as a hijacked trader and its principal, Mr. Vasey was considered by the Tribunal in the appeal of Euro Stock Shop at paragraphs [80] and [81].  In that case, the Tribunal was persuaded that ‘whether or not Mr. Vasey/Kep were involved and the transactions were conducted with or without his knowledge, what is clear is that there was a fraudulent scheme to ensure that output VAT on sales of imported goods was not paid’.

131.                   The Appellant instructed Forward Logistics to inspect the consignments from Grandbyte which made up deals 5 and 6.  In respect of the inspection of the 5000 units (1000 boxes) which made up deal 5, Forward Logistics noted some damage to the boxes, and knife marks on 78 of them and pen marks on 40 of them.  29 of the boxes had been resealed on arrival, 4 boxes had evidence of stickers or labels removed and 2 boxes had been opened by HMRC and sealed with HMRC stickers.  Mr. Bliss commented that he thought the resealed boxes must have been inspected before, and the knife marks must have been associated with earlier inspections.   He said ‘the worst case scenario is that 2 boxes have been through the UK previously.  2 out of 1,000 boxes.  That is 0.2 per cent’.  He accepted that the stock was ‘not in the best condition’ but asserted that ‘the general condition is fair’.  He said that this report had not caused him anxiety that the Appellant was getting itself involved in MTIC fraud trading.

132.                   The order from Asia Power to the Appellant was for 5000 units “BRAND NEW”.  Asia Power did not reject the stock and Mr. Bliss explained that he thought that was because although the boxes were in some cases damaged, the stock was not. 

133.                   Mr. Bliss said he was not concerned about the Dun & Bradstreet report on Asia Power, which reported a poor credit recommendation and higher than average probability of business failure, because the Appellant was not giving credit to Asia Power. 

134.                   Officer Fu Lam’s evidence was that the payments relating to deal 5 were mixed with those relating to deal 6.  We therefore now turn to deal 6.

135.                   Deal 6: In deal 6, the Appellant bought 2000 Intel P4 SL7 Z9 640 retail CPUs from Grandbyte at a unit price of £107.00, giving a total net value of £214,000 to which VAT of £37,450.00 was added.  The invoice date was 30 March 2006.

136.                   These goods were sold by the Appellant to Asia Power at a unit price of £112.00, giving a net value of £224,000 to which, of course, no VAT was added.  The invoice date was 30 March 2006.

137.                   HMRC showed that Grandbyte had acquired the goods from Fone Centre (by an undated invoice), who had acquired them from Nirvana (by an invoice dated 30 March 2006), who had acquired them from Resolutions (by an invoice dated 30 March 2006), who had acquired them from Time (by an invoice dated 30 March 2006), who had acquired them from Kep (by an invoice dated 30 March 2006), who had acquired them from Panmax.  In other words, deal 6 exhibits exactly the same chain as deal 5.

138.                   Kep sold the CPUs for a unit price of £103.40.  They passed through the chain at unit price mark-ups of £0.05 for each of Time and Resolutions, £0.25 for each of Nirvana and Fone Centre, and £3 for Grandbyte. The Appellant’s mark up on its sale to Asia Power was £5.00 per unit.

139.                   Officer Armstrong’s evidence was that the output VAT due from Kep on deal 6 had gone unpaid.

140.                   Again, as in the case of deal 5, the inspection report from Forward Logistics reported damaged boxes, boxes resealed on arrival (74), unsealed boxes (2), knife marks (50), pen marks (41) extra labels (6) and damaged labels (6). The inspection report related to 2,600 units in 520 boxes.  The Appellant’s order (deal 6) was for 2,000 units (400 boxes).  Mr. Bliss said he asked Forward Logistics verbally ‘to cut out 2,000 of the best ones and then send them on’.  Mr. Bliss confirmed that he had ordered only 2,000 units from Grandbyte.  He had no idea to whom the remaining 600 units inspected belonged. He said that the fact that he got an inspection report for 2,600 units caused him no concern.

141.                   Officer Fu Lam’s evidence was that a payment of £660,000 was paid from Asia Power’s FCIB account on 3 April 2006 representing the sums due for the sales in deal 5 (£436,000) and deal 6 (£224,000), and that the Appellant had paid Grandbyte’s FCIB account on 3 April 2006 the sum of £731,731.25, representing the amounts due for the purchases in deal 5 (£480,281.25) and deal 6 (£251,450). 

142.                   Deal 7:  In deal 7, the Appellant bought 1750 Nokia 9500 mobile phones from Simple Distribution Ltd. (“Simple”) at a unit price of £316.50, giving a total net value of £553,875 to which VAT of £96,928.12 was added.  The invoice date was 31 March 2006.

143.                   These goods were sold by the Appellant to France Affaires International Sarl (“France Affaires”) at a unit price of £330.75, giving a net value of £578,812.50 to which, of course, no VAT was added.  The invoice date was 31 March 2006.

144.                   HMRC showed that Simple had acquired the goods from Katian UK Ltd. (“Katian”) (by an invoice dated 31 March 2006), who had acquired them from Kingswood Trading Services (“Kingswood”) (by an invoice dated 31 March 2006), who had acquired them from Mitek Computer Components (“Mitek”) (by an invoice dated 31 March 2006), who had acquired them from Technology Plus trading as Microtec (“Microtec”) (by an invoice dated 31 March 2006), who had acquired them from IT Players UK Ltd. (“IT”) (by an invoice dated 31 March 2006), who had acquired them from IH Technologies (“IHT”) (by an undated invoice), who had acquired them from FX Drona (“FX”) (by an invoice dated 31 March 2006).

145.                   FX sold the mobile phones for a unit price of £309.50.  They passed through the chain at unit price mark-ups of £0.25 for each of IHT and IT, £0.50 for each of Microtec and Mitek, £2.50 for Kingswood, and £1.50 for each of Katian and Simple. The Appellant’s mark up on its sale to France Affaires was £14.25 per unit.

146.                   Officer Mendes’s evidence was that the output VAT due from FX on deal 7 (£98,784.37)  was incorporated in a VAT assessment totalling £16,987,207.85, which in turn was incorporated in the total VAT debt due by FX of £35,199,516.85 had gone unpaid.  FX had not contacted HMRC to challenge the debt and the company has now been liquidated.

147.                   Officer Fu Lam’s evidence was that a payment of £578,812.50 was made from France Affaires’ FCIB account on 4 April 2006 to the Appellant’s FCIB account, representing the sums due for the sale in deal 7, and that the Appellant had paid Simple’s FCIB account on 4 April 2006 the sum of £632,803.13, being £18,000 short of the sum payable under Simple’s invoice to the Appellant for deal 7.  The balance of £18,000 was paid on 7 April 2006. Officer Fu Lam traced payments down the chain from Simple to IH, and then showed that a third party payment had been made, by-passing FX, the defaulter in the chain.  He showed that for this, as for other deals, he had traced payments which might have shown circular payments to fund France Affaires’ payment to the Appellant.

148.                   Mr. Bliss knew (which was the fact) that the Appellant’s supplier, Simple, was also an exporter of mobile phones.  When asked if he knew why Simple, who would know that if they exported they would get more money than if they sold to a UK trader, decided to trade with the Appellant rather than export the goods, he replied ‘They may not have had enough money to export the goods’.  When asked further, ‘Or is this a contrived trade?’ he answered ‘No, I think it will be a limitation on cash’. 

149.                   Mr. Bliss explained the ability of an exporter to charge a higher price than a UK domestic trader as the need and ability to recoup greater overheads (insurance was mentioned) and to take compensation for greater risks.  His explanation as to why France Affaires would buy from the Appellant at a high price rather than acquire from a local (French) trader at a lower (domestic) price, was that in that case France Affaires would also have to pay French VAT, which would increase their outgoings and reduce their capital.  When it was put to him by the Tribunal that France Affaires would have in any case to pay French VAT on the goods acquired from the Appellant as an acquisition, Mr. Bliss replied: ‘No, because they are buying from a UK supplier’. Mr. Bliss denied that the higher price obtainable by an exporter of these goods was attributable to the risk of being denied VAT by HMRC, because of the known practice of HMRC to challenge the reclaim of VAT in MTIC-related cases by exporters.

150.                   Deal 8:  In deal 8, the Appellant bought 1225 i-mate JASJAR personal digital assistants (PDAs) from Simple at a unit price of £482.15, giving a total net value of £590,633.75 to which VAT of £103,360.91 was added.  The invoice date was 25 April 2006.

151.                   These goods were sold by the Appellant to France Affaires at a unit price of £503.75, giving a net value of £617,093.75 to which, of course, no VAT was added.  The invoice date was 25 April 2006.

152.                   HMRC showed that Simple had acquired the goods from Katian (by an invoice dated 25 April 2006), who had acquired them from Kingswood (by an invoice dated 25 April 2006), who had acquired them from  Inter Comms UK Ltd (“Inter Comms”) (by an invoice dated 25 April 2006), who had acquired them from IT (by an invoice dated 25 April 2006), who had acquired them from The Wireless Warehouse (“Wireless”) (by an invoice dated 25 April 2006), who had acquired them from MidWest Communications Ltd (“Mid West”) (by an invoice dated 25 April 2006), who had acquired them from Hardware Traders Ltd. Deutschland (“Hardware”), an entity with a German VAT registration.

153.                   Hardware sold the PDAs for a unit price of £471.25.  They passed through the chain at unit price mark-ups of £0.25 for each of MidWest, Wireless, and IT, £1 for Inter Comms, £2.25 for Kingswood, £4.75 for Katian and £2. 40 for Simple. The Appellant’s mark up on its sale to France Affaires was £21.60 per unit.

154.                   On 2 May 2006 a payment of £617,000 was made out of the Appellant’s FCIB account to Simple.  This was £76,994.66 less than Simple’s invoice.  Mr. Bliss said that the balance was included in a payment made to Simple out of the Appellant’s FCIB account on 5 July 2006.  That payment was of an amount of £209,998 in total. Mr. Bliss said that Simple were not content with the delay in payment, but no documentary evidence relating to the delay in payment was produced.

155.                   Officer Bycroft’s evidence was that the output VAT due from MidWest on deal 8 had not been paid.  MidWest had produced a VAT return showing output tax of £116,282,077.86, which we take to include the tax due on its supply of the goods in deal 8 to Wireless, offset by purported input tax of £116,273,968.03.  The claim to deduct the purported input tax was investigated and found to be fraudulent, and therefore it was disallowed.  An assessment was raised in the amount of £57,583,433.00.  It has neither been paid nor appealed.

156.                   Officer Fu Lam’s evidence was that a payment of £617,093.75 was made from France Affaires’ FCIB account on 2 May 2006 to the Appellant’s FCIB account, representing the sums due for the sale in deal 8, and that the Appellant had paid Simple’s FCIB account on 2 May 2006 the sum of £617,000, being £76,994.66 short of the sum payable under Simple’s invoice to the Appellant for deal 8.  The balance was paid on 5 July 2006, together with other sums then owed to Simple.  Officer Fu Lam traced payments down the chain from Simple to MidWest, and then showed that a third party payment had been made, by-passing Hardware, the defaulter in the chain.  He showed that for this as for other deals, he had traced payments which might have shown circular payments to fund France Affaires’ payment to the Appellant.

157.                   Deal 9:  In deal 9, the Appellant bought 1100 Nokia 9500 mobile phones from Simple at a unit price of £297.50, giving a total net value of £327,250 to which VAT of £57,268.75 was added.  The invoice date was 28 April 2006.

158.                   These goods were sold by the Appellant to 2 Trade BVBA (“BVBA”), an entity with a Belgian VAT registration, at a unit price of £312.50, giving a net value of £343,750.00 to which, of course, no VAT was added.  The invoice date was 2 May 2006.

159.                   HMRC showed that Simple had acquired the goods from Lone Enterprises Ltd. (“Lone”) (by an invoice dated 28 April 2006), who had acquired them from V2 (UK) Ltd. (“V2”) (by an invoice dated 28 April 2006), who had acquired them from C&B Trading UK Ltd. (“C&B”) (by an invoice dated 28 April 2006).

160.                   C&B sold the mobile phones for a unit price of £292.40.  They passed through the chain at unit price mark-ups of £0.60 for V2, £0.50 for Lone, and £4.00 for Simple. The Appellant’s mark up on its sale to BVBA was £15 per unit.

161.                   Officer Goulding’s evidence was that the output VAT due from C&B on deal 9 (and deal 10 – see: below) had not been paid.  Although C&B’s VAT return for the period 04/06 was never filed, it was clear from the purchase records of traders accessed by HMRC that C&B had incurred a VAT liability in excess of £80m., which has not been paid.

162.                   The goods were inspected on behalf of the Appellant by A1 Inspections, when they were at the premises of Capital Logistics in Stoke on Trent.  The CMR international consignment note provided by the Appellant shows that the carrier, SKD Transport Ltd., took over the goods at Oldbury, some 30 miles south of Stoke on Trent. Mr. Bliss’s explanation is that Capital Logistics had probably transported the goods to Oldbury for their onward transportation abroad (for which a CMR was required). The risks associated with this procedure would have been on Capital Logistics.

163.                   Officer Fu Lam’s evidence was that the Appellant had received a payment of £343,750 from BVBA in payment of the supply in deal 9, but that the payments by the Appellant to Simple for the supplies under deals 9 and 10 were dealt with together. We deal further with this under deal 10.

164.                   Deal 10: In deal 10, the Appellant bought 2800 Nokia 9300i mobile phones from Simple at a unit price of £296.50, giving a total net value of £830,200 to which VAT of £145,285 was added.  The invoice date was 28 April 2006.

165.                   These goods were sold by the Appellant to BVBA at a unit price of £315.25, giving a net value of £882,700.00 to which, of course, no VAT was added.  The invoice date was 2 May 2006.

166.                   HMRC showed that Simple had acquired the goods from Lone (by an invoice dated 28 April 2006), who had acquired them from V2 (by an invoice dated 28 April 2006), who had acquired them from C&B (by an invoice dated 28 April 2006).

167.                   C&B sold the mobile phones for a unit price of £294.90.  They passed through the chain at unit price mark-ups of £0.90 for V2, £0.10 for Lone, and £0.50 for Simple. The Appellant’s mark up on its sale to BVBA was £18.75 per unit.

168.                   Officer Goulding’s evidence was that the output VAT due from C&B on deal 10 had not been paid (see above in relation to deal 9).

169.                   Officer Fu Lam’s evidence was that the Appellant on 22 May 2006 had received a payment of £882,700 from BVBA in payment of the supply in deal 10. The payments by the Appellant to Simple for the supplies under deals 9 and 10 were dealt with together. On 22 May 2006 the Appellant made a payment of £1,227,000 to Simple’s FCIB account.  This was an amount £133,003.75 short of the full amount owed on the invoices for deals 9 and 10.  Mr. Bliss said that the balance was made up later (presumably by the payment on 5 July 2006) and that the debt was settled in full.

170.                   Again, the evidence was that the goods in deal 10 (like those in deal 9) had been moved from Stoke-on-Trent to Oldbury, before onward transportation overseas.  Mr. Bliss said he did not know at the time that this was happening.  It had presumably been arranged by Capital Logistics, and the Appellant had insurance cover which would have protected it against the consequences of any mishap en route.

171.                   Deal 11: In deal 11, the Appellant bought 7000 Nokia N70 mobile phones from Grange Computers Ltd (“Grange”) at a unit price of £220.50, giving a total net value of £1,543,500.00 to which VAT of £270,112.50 was added.  The invoice date was 28 April 2006.

172.                   These goods were sold by the Appellant to CEMSA, an entity with a Spanish VAT registration, at a unit price of £233, giving a net value of £1,631,000.00 to which, of course, no VAT was added.  The invoice date was 4 May 2006.

173.                   HMRC showed that Grange had acquired the goods from Stardex UK Limited (“Stardex”) (by an invoice dated 28 April 2006), who had acquired them from Starmill (by an invoice dated 28 April 2006), who had acquired them from KOM TEAM Sarl (“KOM”), an entity with a French VAT registration (by an invoice dated 28 April 2006).

174.                   KOM sold the mobile phones for a unit price of £214.00.  They passed through the chain at unit price mark-ups of £1for Starmill, £2 for Stardex, and £3.50 for Grange. The Appellant’s mark up on its sale to CEMSA was £12.50 per unit.

175.                   Officer Archibald gave evidence that Starmill was involved in contra trading.  Specifically, in March 2006, Starmill carried out 6 transactions as “acquiring trader” – i.e. a trader acquiring from a supplier in another EU Member State, and selling the goods so acquired on to a domestic (UK) trader – and 4 transactions as a “broker trader” – i.e. a trader acquiring from a domestic (UK) supplier and selling the goods so acquired to a trader in another EU Member State.  In April 2006, Starmill carried out 4 transactions as “acquiring trader” (including the deal 11 transaction) and 6 transactions as a “broker” trader.  Of these 6 transactions, 5 have been traced back to defaulting traders, and one to another contra trader (Morganrise).  In May 2006, Starmill carried out 2 transactions as a “broker trader”, and none as an “acquiring trader”.   

176.                   Officer Archibald stated that HMRC have allocated to the input tax purported to be deducted against the output tax on the supply by Starmill to Stardex in the ‘clean’ chain which ends with the Appellant’s supply to CEMSA, tax losses from Starmill’s transactions as a “broker trader” which trace back to defaulting traders, and not to the contra trader (Morganrise).  On this basis the Appellant’s claim for repayment of input tax in respect of deal 11 is traced back to tax lost due to fraud.

177.                   The Appellant made a payment of £1,632,000 out of its FCIB account to Grange’s FCIB account.  This payment was £181,612.50 less than the invoiced amount for deal 11.  That amount remains outstanding and proceedings for recovery have been issued against the Appellant by Grange and its receivers.

178.                   Officer Fu Lam’s evidence was that the Appellant on 12 May 2006 had received a payment of £1,631,000 from CEMSA in payment for the supply in deal 11. On 12 May 2006 the Appellant made a payment of £1,632,000 to Grange’s FCIB account.  This was £181,612.50 short of the full amount owed on the invoices for deal 11.  Grange likewise paid its supplier, Stardex, on 12 May 2006 an amount (£1,632,000) which was £152,825 less than the invoiced amount for the goods. Stardex however paid its supplier, Starmill, also on 12 May 2006, the full amount of its invoice (£1,768,365).   Officer Fu Lam’s evidence suggested that there were circular payments connected with this deal.

179.                   Deal 12:  In deal 12, the Appellant bought 4000 Nokia N7380 mobile phones from Grange at a unit price of £224.50, giving a total net value of £898,000.00 to which VAT of £157,150.00 was added.  The invoice date was 28 April 2006.

180.                   These goods were sold by the Appellant to CEMSA at a unit price of £237.15, giving a net value of £948,600.00 to which, of course, no VAT was added.  The invoice date was 4 May 2006.

181.                   HMRC showed that Grange had acquired the goods from Stardex (by an invoice dated 28 April 2006), who had acquired them from A-Z (by an invoice dated 28 April 2006), who had acquired them from KOM (by an invoice dated 28 April 2006).

182.                   KOM sold the mobile phones for a unit price of £219.00.  They passed through the chain at unit price mark-ups of £1for A-Z, £2 for Stardex, and £2.50 for Grange. The Appellant’s mark up on its sale to CEMSA was £12.65 per unit.

183.                   Officer Booth gave evidence that A-Z was also involved in contra- trading.  Specifically, of the 115 deals in March, April and May 2006 which A-Z carried out as a “broker trader”, all have been traced back to defaulting traders.

184.                   Officer Booth stated that HMRC have allocated to the input tax purported to be deducted against the output tax on the supply by A-Z to Stardex in the ‘clean’ chain which ends with the Appellant’s supply to CEMSA (and also the supply by A-Z to Stardex in the ‘clean’ chain which ends in the Appellant’s supply to Evolution Sarl (“Evolution”) in deal 13 – see: below), tax losses from A-Z’s transactions as a “broker trader” which trace back to defaulting traders, specifically Eutex Ltd (“Eutex”) and UK Communications Ltd (“UK Comm”).  As will be seen from the following two paragraphs, the tax losses so allocated exceed the amount of input tax sought by A-Z to be offset against the output tax due on its supply to Stardex in the ‘clean’ deal 12 chain leading to the Appellant’s supply to CEMSA.

185.                   On 12 May 2006 Eutex sold 3000 units of Nokia N70 mobile phones to Dialhouse Electrics Limited, who sold them on, on the same day, to Yodem Ltd., who sold them on, on the same day, to Sabretone Electrics Limited (Sabretone) , who sold them on, on the same day to A-Z, who sold them on, on the same day, to Powertec Computer Components LDA, a Portuguese company.  A-Z’s purported input tax on its purchase from Sabretone was £100,275.00.   Eutex was a ‘hijacked’ trader, that is, it used the address details of a genuine trader of that name, but a fictitious VAT registration number.  Assessments totalling over £82m. were made on Eutex, which have not been paid.

186.                   On 30 May 2006 UK Comm sold 3020 units of Epson P400 80GB digital media players to Phone City Limited, who sold them on, on the same day, to Worldwide Wholesalers Ltd., who sold them on, on the same day, to A-Z, who sold them on, on the same day, to R.C.C.I. Hi Tec Ltd., a Cypriot company.  A-Z’s purported input tax on its purchase from Worldwide was £192,902.50.   UK Comm was, according to Officer Cameron-Watson’s evidence, a missing trader against whom an assessment of over £32m had been raised, which has not been paid.  

187.                   Officer Fu Lam’s evidence was that the Appellant on 12 May 2006 had received a payment of £948,600 from CEMSA in payment for the supply in deal 12. On 12 May 2006 the Appellant made a payment of £948,000 to Grange’s FCIB account.  This was £107,150 short of the full amount owed on the invoices for deal 12.  Grange likewise paid its supplier, Stardex, on 12 May 2006 an amount (£948,000) which was £95,400 less than the invoiced amount for the goods. Officer Fu Lam’s evidence suggested that there were circular payments connected with this deal also.

188.                   Deal 13: In deal 13, the Appellant bought 2500 Nokia 9300i mobile phones from Grange at a unit price of £309.50, giving a total net value of £773,750.00 to which VAT of £135,406.25 was added.  The invoice date was 28 April 2006.

189.                   These goods were sold by the Appellant to Evolution at a unit price of £327.00, giving a net value of £817,500.00 to which, of course, no VAT was added.  The invoice date was 4 May 2006.

190.                   HMRC showed that Grange had acquired the goods from Stardex (by an invoice dated 28 April 2006), who had acquired them from A-Z (by an invoice dated 28 April 2006), who had acquired them from KOM (by an invoice dated 28 April 2006).

191.                   KOM sold the mobile phones for a unit price of £302.00.  They passed through the chain at unit price mark-ups of £1for A-Z, £2 for Stardex, and £4.50 for Grange. The Appellant’s mark up on its sale to CEMSA was £17.50 per unit.

192.                   As stated above, Officer Booth gave evidence that A-Z was involved in contra-trading and that HMRC have allocated to the input tax purported to be deducted against the output tax on the supply by A-Z to Stardex in the ‘clean’ chain which ends with the Appellant’s supply to Evolution (and also the supply by A-Z to Stardex in the ‘clean’ chain which ends in the Appellant’s supply to CEMSA in deal 12 – see: above), tax losses from A-Z’s transactions as a “broker trader” which trace back to defaulting traders, specifically Eutex and UK Comm.  As will have been seen from the paragraphs above dealing with Eutex and UK Comm ([185] and [186]), the tax losses so allocated exceed the amount of input tax sought by A-Z to be offset against the output tax due on its supply to Stardex in the ‘clean’ deal 13 chain leading to the Appellant’s supply to Evolution, as well as the ‘clean’ deal 12 chain leading to the Appellant’s supply to CEMSA.  The tax losses so allocated total £293,177.50 and the tax sought to be reclaimed by the Appellant in relation to deals 12 and 13 totals £292,556.25.

193.                   On this basis, the methodology of which (though not the existence of tax losses) is challenged by Mr. Popplewell for the Appellant, the Appellant’s claim for repayment of input tax in respect of deal 12 (and deal 13) is traced back to tax lost due to fraud.

194.                   We were shown a document filled in by Mr. Bliss in which he gave to Evolution the name, address and contact details of Simple as a trade reference for the Appellant.  The point was put to Mr. Bliss that Simple had been a supplier of the Appellant and in giving these details to Evolution (a potential and actual customer), he was enabling Evolution to bypass the Appellant on future deals and buy direct from Simple.  Mr. Bliss countered this by saying it was as an action consistent with commercial trading, pointing out that he had not told Evolution that Simple was also a supplier of mobile phones or CPUs and that in any case ‘someone else’s ability to supply is based on the amount of money they have available to them to supply’. (See also paragraph [148] above.)

195.                   On 14 May 2006 the Appellant entered into a debenture with Lisa Kay Southall, and, pursuant to that, a term loan facility of up to £300,000.  The repayment of the loan made on 8 December 2005, plus interest (see: above paragraph [61]) was made on 7 July 2006 using this facility. Beyond this, the facility enabled the Appellant to trade at a higher level, effectively to fund additional VAT on purchases.

196.                   Officer Fu Lam’s evidence was that the Appellant on 12 May 2006 had received a payment of £817,000 from Evolution in payment for the supply in deal 13. On 12 May 2006 the Appellant made a payment of £817,000 to Grange’s FCIB account.  This was £92,156.25 short of the full amount owed on the invoices for deal 12.  Grange likewise paid its supplier, Stardex, on 12 May 2006 an amount (£817,000) which was £78,937.50 less than the invoiced amount for the goods. Officer Fu Lam’s evidence suggested that there were circular payments connected with this deal also.

197.                   Deal 14: In deal 14, the Appellant bought 2000 Nokia 8800 Black mobile phones from Aston Technology Partners Ltd (“Aston”) at a unit price of £481.00, giving a total net value of £962,000 to which VAT of £168,350 was added.  The invoice date was 30 May 2006.

198.                   These goods were sold by the Appellant to Accedex Trading CV (“Accedex”), an entity with a Netherlands VAT registration, at a unit price of £495.00, giving a net value of £990,000 to which, of course, no VAT was added.  The invoice date was 30 May 2006.

199.                   HMRC showed that Aston had acquired the goods from IT (by an invoice dated 30 May 2006), who had acquired them from IH Technologies (“IH”) (by an invoice dated 30 May 2006), who had acquired them from 3D Animations Ltd (“3D”) (by an invoice dated 30 May 2006).

200.                   3D sold the mobile phones for a unit price of £474.60.  They passed through the chain at unit price mark-ups of £0.15 for IH, £0.25 for IT, and £6.00 for Aston. The Appellant’s mark up on its sale to Accedex was £14 per unit.

201.                   Officer Evans’s evidence was that the output VAT due from 3D on deal 14 (and deals 15 to 19 – see: below) had not been paid.  VAT assessments totalling approximately £129m. have been raised against 3D and have not been paid.

202.                   Officer Fu Lam’s evidence on the payments associated with deals 14 to 19 inclusive was that they were dealt with together.  We refer to this evidence below, after we have given the other facts related to deals 15 to 19.

203.                   Deal 15: In deal 15, the Appellant bought 3200 Nokia N71 mobile phones from Aston at a unit price of £372.00, giving a total net value of £1,190,400.00 to which VAT of £208,320.00 was added.  The invoice date was 26 May 2006.

204.                   These goods were sold by the Appellant to Accedex at a unit price of £399.00, giving a net value of £1,276,800 to which, of course, no VAT was added.  The invoice date was 30 May 2006.

205.                   HMRC showed that Aston had acquired the goods from IT (by an invoice dated 30 May 2006), who had acquired them from Wireless (by an invoice dated 30 May 2006), who had acquired them from 3D (by an invoice dated 30 May 2006).

206.                   3D sold the mobile phones for a unit price of £370.50.  They passed through the chain at unit price mark-ups of £0.25 for each of Wireless and IT, and £1.00 for Aston. The Appellant’s mark up on its sale to Accedex was £27 per unit.

207.                   Officer Evans’s evidence was that the output VAT due from 3D on deal 15 (see: above in relation to deal 14) had not been paid.

208.                   Deal 16:   In deal 16, the Appellant bought 2000 Nokia N80 mobile phones from Aston at a unit price of £320.50, giving a total net value of £641,000.00 to which VAT of £112,175.00 was added.  The invoice date was 30 May 2006.

209.                   These goods were sold by the Appellant to Accedex at a unit price of £345.00, giving a net value of £690,000 to which, of course, no VAT was added.  The invoice date was 30 May 2006.

210.                   HMRC showed that Aston had acquired the goods from IT (by an invoice dated 30 May 2006), who had acquired them from Wireless (by an invoice dated 30 May 2006), who had acquired them from 3D (by an invoice dated 30 May 2006).

211.                   3D sold the mobile phones for a unit price of £322.50.  They passed through the chain at unit price mark-ups of £0.25 for each of Wireless and IT, and, apparently, a unit loss of £0.50 for Aston. The Appellant’s mark up on its sale to Accedex was £24.50 per unit.

212.                   Officer Evans’s evidence was that the output VAT due from 3D on deal 16 (see: above in relation to deal 14) had not been paid.

213.                   Deal 17: In deal 17, the Appellant bought 2400 Nokia 8800 mobile phones from Aston at a unit price of £364.00, giving a total net value of £873,600.00 to which VAT of £152,880.00 was added.  The invoice date was 31 May 2006.

214.                   These goods were sold by the Appellant to Accedex at a unit price of £367.00, giving a net value of £880,800 to which, of course, no VAT was added.  The invoice date was 31 May 2006.

215.                   HMRC showed that Aston had acquired the goods from IT (by an invoice dated 31 May 2006), who had acquired them from IH (by an invoice dated 31 May 2006), who had acquired them from 3D (by an invoice dated 31 May 2006).

216.                   3D sold the mobile phones for a unit price of £358.60.  They passed through the chain at unit price mark-ups of £0.15 for IH, £0.25 for IT, and £5 for Aston. The Appellant’s mark up on its sale to Accedex was £3 per unit.

217.                   Officer Evans’s evidence was that the output VAT due from 3D on deal 17 (see: above in relation to deal 14) had not been paid.

218.                   Deal 18: In deal 18, the Appellant bought 2750 Nokia N91 mobile phones from Aston at a unit price of £335.25, giving a total net value of £921,937.50 to which VAT of £161,339.06 was added.  The invoice date was 31 May 2006.

219.                   These goods were sold by the Appellant to Accedex at a unit price of £366.25, giving a net value of £1,007,187.50 to which, of course, no VAT was added.  The invoice date was 31 May 2006.

220.                   HMRC showed that Aston had acquired the goods from IT (by an invoice dated 31 May 2006), who had acquired them from Wireless (by an invoice dated 31 May 2006), who had acquired them from 3D (by an invoice dated 31 May 2006).

221.                   3D sold the mobile phones for a unit price of £334.50.  They passed through the chain at unit price mark-ups of £0.25 for each of Wireless, IT and Aston. The Appellant’s mark up on its sale to Accedex was £1 per unit.

222.                   Officer Evans’s evidence was that the output VAT due from 3D on deal 18 (see: above in relation to deal 14) had not been paid.

223.                   Deal 19: In deal 19, the Appellant bought 500 Nokia 8800 Black mobile phones from Aston at a unit price of £481.00, giving a total net value of £240,500.00 to which VAT of £42,087.50 was added.  The invoice date was 31 May 2006.

224.                   These goods were sold by the Appellant to Accedex at a unit price of £495.00, giving a net value of £247,500.00 to which, of course, no VAT was added.  The invoice date was 31 May 2006.

225.                   HMRC showed that Aston had acquired the goods from IT (by an invoice dated 30 May 2006), who had acquired them from IH (by an invoice dated 30 May 2006), who had acquired them from 3D (by an invoice dated 30 May 2006).

226.                   3D sold the mobile phones for a unit price of £474.60.  They passed through the chain at unit price mark-ups of £0.15 for IH, £0.25 for IT and £6 for Aston. The Appellant’s mark up on its sale to Accedex was £14 per unit.

227.                   Officer Evans’s evidence was that the output VAT due from 3D on deal 19 (see: above in relation to deal 14) had not been paid.

228.                   On 23 June 2006 Grange organised a loan to the Appellant by an entity called Liban Trust.  £385,000 was credited to the Appellant’s FCIB account by Liban Trust on that date.  Mr. Bliss told the Tribunal that he thought that he personally was going to borrow £750,000 from Grange, but what in fact happened was that Liban Trust lent the Appellant £385,000. This was arranged by Grange because the Appellant owed money to Grange (see [178] above).  Grange, and its principal, Anthony Rose, whom Mr. Bliss had known for some time, expected that these funds would be used to settle the Appellant’s debt with Grange, but in fact the funds were used to pay Aston.  Mr. Bliss explained that he was expecting more funds to be advanced – to take the loan up to £750,000 – and, if that had happened, Grange would have been paid.  Also he said that he had an agreement with Grange pursuant to which Grange understood that the reason they had not been paid in full was because the Appellant had not received its VAT repayment.  There was no similar understanding with Aston, so Mr. Bliss used the available funds to pay off Aston in the absence of a VAT repayment for the three periods in dispute.

229.                   Officer Fu Lam’s evidence in relation to deals 14 to 19 inclusive was that the Appellant on 5 June 2006 had received six payments totalling £5,092,287.50 from Accedex in payment for the supplies.  This was the total consideration due from Accedex for deals 14 to 19 inclusive.  Individual payments matched the consideration due for deals 15, 16, 17 and 19.  The consideration for deal 14 (£990,000) and deal 18 (£1,007,187.50) was satisfied by two payments of £1,000,000 and £997,187.50 respectively. On 5 June 2006 the Appellant made two payments of £638,938.79 and £4,413,725 respectively to Aston’s FCIB account.  This was £581,925.27 short of the full amount owed on the invoices for deals 14 to 19 inclusive. Aston likewise paid its supplier, IT, on 5 and 6 June 2006 two amounts, of £4,248,858.75 and £843,000 respectively which, taken together, was £552,312.50 less than the invoiced amounts for the goods in deals 14 to 19 inclusive. Officer Fu Lam’s evidence suggested that there were circular payments connected with these deals also.  

The Issues

230.                   The parties identified the issues in the appeal as follows:

The First Issue: Has HMRC established a tax loss in each of chains in which each of the deals in issue (deal 1 to deal 19 inclusive) was transacted?

The Second Issue: If so, has HMRC established that the losses arose from fraudulent evasion of VAT?

The Third Issue: If so, were the Appellant’s purchases connected with such fraudulent evasion?

The Fourth Issue: If so, did the Appellant have actual knowledge, or means of knowledge, that its purchases were so connected?  On the question of whether the Appellant had such means of knowledge (which, of course, the Appellant denies), Mr. Popplewell submitted that the issue could be formulated as whether the Appellant had taken reasonable precautions to ensure that its transactions were not connected with fraud.

231.                   We accept Mr. Popplewell’s submission that we must consider these issues in relation to each of the Appellant’s purchases separately.

The First Issue

232.                   Mr. Popplewell however accepted that HMRC has established that there was a tax loss in each of the chains in which each of the deals in issue was transacted.  On the basis of the evidence rehearsed above we so find.  So far as the contra-trading chains are concerned, we accept that HMRC has established the tax losses which they have attributed to each of the chains in which the Appellant’s deals were transacted. 

 

233.                   Mr. Popplewell raised a query over deals 5 and 15 because in those deal chains there are instances of an invoice at a later date than the date of an invoice further down the chain. He asked rhetorically how the Appellant could have bought goods which were sold to its supplier at a later date.  He also suggested that the goods actually sold by the Appellant might have entered the chain after the default of the defaulter.  We find on the balance of probabilities that in the cases where the invoice dating does not follow a chronological pattern, there was a clerical or some other error in the dating of the invoices, or that the invoices were not produced on the same day that the goods were supplied.  We also find on the balance of probabilities that the goods passed down the chains from the defaulter in the way contended for by HMRC, as the invoices indicate. The invoices queried show the same model and quantity of goods as all of the other purchase orders and sales invoices in the respective transaction chains and the pricing shown on them is wholly consistent with the pricing in the transactions in the rest of the chains, that is, the mark-ups are consistent with the integrity of the chains established by HMRC.  This disposes of the first issue.

 

The Second Issue

234.                   Turning to the second issue, the Appellant accepts that HMRC have established that the tax loss in the ‘direct’ chains, those involving deals 1 to 10 inclusive and 14 to 19 inclusive, arose from fraudulent evasion of VAT.  Again, on the basis of the evidence rehearsed above, we so find.

235.                   With regard to deals 11 to 13 inclusive, which involved entities which we described, without intending any prejudice thereby, as ‘contra-traders’, the Appellant accepts that HMRC have established that the tax losses in the ‘dirty’ chains arose from the fraudulent evasion of VAT, being the fraudulent evasion by the ‘defaulters’ in each of those chains.  But Mr. Popplewell submits that HMRC have not established that the contra-traders, Starmill and A-Z, were involved in dishonest conduct designed to conceal or avoid the discovery of the frauds in the ‘dirty’ chains which led to them respectively.

236.                   In our view, this submission was directed to the general question of whether the Appellant’s purchases in deals 11 to 13 inclusive were connected with fraudulent evasion of tax, and so is best dealt with in connection with the third, rather than the second issue.  We find with regard to the second issue that all the relevant tax losses arose from fraudulent evasion of VAT.

 

The Third Issue

237.                   Turning, then, to the third issue, whether the Appellant’s purchases were connected with such tax losses, and thus with fraudulent evasion of VAT, we find with regard to the ‘direct’ chains, those involving deals 1 to 10 inclusive and 14 to 19 inclusive, that they were on the basis that the connection is established by the deal chains themselves.

238.                   With regard to deals 11 to 13 inclusive (those involving contra traders) the connection between the Appellant’s purchases and the tax losses arising from fraudulent evasion of VAT must be made through the contra-traders Starmill and A-Z.

239.                   Relying on passages in Livewire [105] and Blue Sphere Global [55], Mr. Popplewell submitted that unless we find that the Appellant (through Mr. Bliss) itself had a fraudulent intent, or “knowledge” of the connection between its purchases and fraudulent evasion of VAT, HMRC would have to prove that the contra-traders were ‘[parties] to [conspiracies] involving [the defaulters in the dirty chains]’ (Blue Sphere Global) or entities having a ‘fraudulent purpose’ (Livewire).  In other words, unless we find that the Appellant had actual knowledge that its purchases were connected to fraud, it would be necessary, in order to uphold the refusal of the repayment claims with regard to deals 11 to 13 inclusive, to decide that Starmill and A-Z themselves had actual knowledge that their actions were designed to conceal or avoid the discovery of the frauds committed in the respective ‘dirty’ chains with which their own transactions were connected.  Such actual knowledge on the part of the contra-traders would have to be proved in order that they could be taken to co-conspirators or having a fraudulent purpose.

240.                   Mr. Draycott, for HMRC, submitted that a contra-trader’s state of knowledge is irrelevant to the application of the Kittel principle to a taxable person in the position of the Appellant.  To hold otherwise, he submitted, would seriously undermine the rationale of Kittel.

241.                   This question, which arises only in cases of contra-trading, has not yet, we understand, been considered by the ECJ.  When we suggested that this could be a suitable case to make a reference to the ECJ on the point, neither side greeted the suggestion with any enthusiasm.  It would, in any case, be more appropriate for any such reference to be made by a higher court.

242.                   Neither of the cases considered in Kittel itself concerned contra-trading.   In one, (Axel Kittel (C–439/04), the taxable person concerned knowingly participated in a VAT carousel fraud, in the other, (Recolta Recycling SPRL (Case C–440/04), the taxable person concerned, unaware of the fraud in that case, acquired goods directly from the defaulter. 

243.                   The principle of the Kittel judgment, as we discern it, is that the entitlement to the right to deduct tax as input tax is to be refused where the national court ascertains, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT (Kittel  [59]).

244.                   Participation in such a transaction, for these purposes, is also extended to include a case where a taxable person did not know but should have known that, by his purchase, he was taking part in such a transaction (Kittel [56]).

245.                   It follows, in our view, that it is plainly in accordance with the reasoning of the ECJ in Kittel to conclude that a contra-trader who was, having regard to objective factors, taking part in a transaction connected with fraudulent evasion of VAT, and did not know but, again having regard to objective factors, should have known that this was the case, should be regarded as a participant in the fraud.

246.                   Further, we consider that a submission that the subjective motivation or intention of a contra-trader can be relevant to the position of a taxable person to whom HMRC seek to deny entitlement to the repayment of input tax, is inherently unlikely to be correct.  In this respect we recall the passages in the judgment in Kittel which state explicitly that “requiring the tax authorities to carry out inquiries to determine the intention of a taxable person would be contrary to the objectives of the common system of VAT” – which are to ensure legal certainty and facilitate the measures necessary for the application of VAT by having regard, save in exceptional cases, to the objective character of the transaction concerned (ibid.  [42]).  The Court went on, at ibid. [43], to state that “a fortiori ... to take account of the intention of a trader other than the taxable person concerned ...would be contrary to those objectives”.

247.                   We therefore, in agreement with HMRC, and rejecting the Appellant’s submission, hold that HMRC is not obliged to “establish a dishonest cover up by the contra-trader” (as it was put at paragraph 5(m) of the Appellant’s closing written submission).  On the contrary, if we do not find that the Appellant had actual knowledge of the connection of its purchases to fraudulent transactions, it will be sufficient to establish a connection between the Appellant’s purchases and either the dishonest failure to account for VAT by the defaulter or missing trader in the dirty chain, or the actions of the contra-trader in covering up that fraud.  And in the latter case it will be enough to establish a connection with any such actions which were actions which were taken by contra traders who, having regard to objective factors, ought to have known (even if they did not know) that by those actions they were covering up that fraud.

248.                    We mention in this regard that HMRC have adduced persuasive evidence that Starmill and A-Z were dishonestly involved in perpetrating a scheme to defraud HMRC.  This evidence was of the contrived nature of the trading of Starmill and A-Z and evidence that all of the “broker deals” conducted by A-Z (115 deals) and Starmill (11 deals) had been traced back to a trader who had failed to account for VAT.  The evidence is also that all the stock acquired from the EU by A-Z and Starmill is eventually sold back to the EU with the result that all of the chains beginning with A-Z and Starmill result in a claim to HMRC for repayment of input tax.  There was also evidence of the orchestration of the schemes of fraudulent evasion of VAT involving A-Z and Starmill, especially evidence of the commonality of traders between the schemes involving A-Z and those involving Starmill.

249.                   Mr. Popplewell made the point that the tax losses from the defaulter Teknic, on which HMRC rely in connection with the contra-trader Starmill, and the tax losses from the defaulters Eutex and UK Comms on which they rely in connection with the contra trader A-Z, arose in May 2006, but the relevant purchases by the Appellant took place in April 2006.  He asks rhetorically, echoing the Chancellor’s comments in Blue Sphere Global at [54]: ‘How could the Appellant have known of any fraud before it happened?’

250.                   We answer that rhetorical question by saying that if we find: (1) that Starmill and A-Z knew or should have known that they were supplying goods in the ‘clean’ chains which led to the Appellant’s purchases and that thereby they were incurring VAT liabilities against which they intended, as a matter of objective evidence,  to offset VAT on their own purchases of goods; and (2) that the circumstances were that, even if they did not know it, they ought to have known that such offsets would cover up VAT fraud by defaulters in ‘dirty’ chains through which the purchased goods had come down; then it follows that (3) the the supplies by the contra-traders, which, of course, would be anterior in time to the Appellant’s purchases would be frauds directly connected to the Appellant’s purchases.  In other words, in such circumstances, the supplies by Starmill and/or A-Z in the ‘clean’ chains would for the purposes of finding a connection between the Appellant’s purchases and fraudulent evasion of VAT, be regarded as fraudulent.

251.                   We consider below whether we are satisfied on the facts that Starmill and A-Z indeed should have known that by making supplies of goods in the ‘clean’ chains they were taking steps to cover up VAT frauds by defaulters in the ‘dirty’ chains.

252.                   But subject to our findings on this issue, which affect deals 11 to 13 inclusive, we find against the Appellant on this third issue, namely that the Appellant’s purchases in all the deals under consideration were connected with fraudulent evasion of VAT.

 

The Fourth Issue

253.                   We turn therefore to the fourth issue, which we regard as crucial to the appeal.  Did the Appellant have actual knowledge, or means of knowledge, that its purchases were connected to fraudulent evasion of VAT? 

254.                   A preliminary point arises, which is: on whom is the burden of proof in this issue?  There is a conflict of authority on this point.  In HMRC v Brayfal Limited, Lewison J said that the taxpayer must show that it did not and could not have known about the fraud.  This was also the approach of the Tribunal in Calltel Telecom Limited v HMRC [2007] UK VAT 20266 at [71] and Dragon Futures Limted [2006] UK VAT 19831 at [85].  It was also the approach supported in S&I Electronics Ltd. v HMRC at [88].  However, against this approach is that of the Chancellor in Blue Sphere Global Ltd. v HMRC [2009] EWHC 1150 (Ch) at [52], where he said that the burden of proof falls on the Commissioners to prove that an appellant ought to have known that by its purchases it was participating in transactions connected with fraudulent evasion of VAT.

255.                   Mr. Draycott observed of the Chancellor’s remarks that the issue was not fully argued and his approach should be regarded as limited to the facts of the case before him.  He submitted that Lewison J’s approach in Brayfal was to be preferred.

256.                   Mr. Popplewell submitted that the burden was on HMRC to prove what they seek to assert, namely that effectively the Appellant was a participant in VAT fraud.  He prayed in aid the authority of the Chancellor in Blue Sphere Global.

257.                   In paragraph [59] of the judgment in Kittel, the ECJ referred to the Tribunal’s function in this type of case as a function “to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT ...”. 

258.                   This formulation seems to us to suggest that the party urging the Tribunal to disapply the right to deduct ought to have the burden of proving their case.  We proceed, therefore, on the basis that the burden is on HMRC to prove that the Appellant had actual knowledge, or means of knowledge, that its purchases were connected to fraudulent evasion of VAT.

259.                   The standard of proof is the normal civil standard of the balance of probabilities.  In Home Secretary v Rehman [2003] 1 AC 153 at [55], Lord Hoffmann said:

“The civil standard of proof always means more likely than not.  The only higher degree of probability required by the law is the criminal standard.  But, as Lord Nicholls of Birkenhead explained in In re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563, 586, some things are inherently more likely than others.  It would need more cogent evidence to satisfy one that the creature seen walking in Regent’s Park was more likely than not to have been a lioness than to be satisfied to the same standard of probability that it was an Alsatian.  On this basis, 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 probable than not.”

260.                   The months in issue in this appeal, March, April and May 2006 were the months in which, according to the table produced by Officer Stone and referred to at paragraph [19] above, the volume and value of exports of mobile phones were at their peak for the years 2005 and 2006.

261.                   The units exported in each of those months were, according to the table, over 13 million, to a value of over £4 billion.  These figures compare to the average number of units exported per month in 2005 and 2006 of something in the region of 4.8 million, to a value of something in the region of £1.3 billion.

262.                   The months of March, April and May 2006 were clearly a period of frenzied intra-community trade in mobile phones and, we assume, CPUs. As noted above, and as stressed by Officer Stone on behalf of HMRC, these months fell largely in the window of time between the handing down of the ECJ’s judgment in Optigen Ltd., Fulcrum Electronics Ltd. and Bond House Systems Ltd. (which was adverse to HMRC) on 12 January 2006 and the later judgment of the ECJ in Federation of Technological Industries  (which was favourable to HMRC) on 11 May 2006.

263.                   HMRC has shown that all 19 deals carried out by the Appellant in the months of March, April and May 2006 have a connection with fraudulent evasion of VAT – a direct connection in the cases of deals 1 to 10 and 14 to 19, and an indirect connection via Starmill and A-Z in the cases of deals 11 to 13.  Further, HMRC has adduced evidence that all of the “broker deals” (i.e.  supplies to another EU member state) conducted by A-Z (115 deals) and Starmill (11 deals) in April 2006 had been traced back to a trader who had failed to account for VAT.

264.                   Further, the Tax Operations Manager at HMRC’s Redhill VAT Office wrote to the Appellant on 28 November 2005 warning it that HMRC were still encountering MTIC fraud in businesses in the Appellant’s trade sector and advising that the current estimate of VAT loss from this type of fraud in the UK was between £1.06 and £1.73 billion per annum.

265.                   On the basis of this objective evidence we have concluded that it was inherently more likely than not that a “broker deal” transacted in mobile phones or CPUs in the months of March, April and May 2006 was connected with fraudulent evasion of VAT. 

266.                   In our judgment, to examine the evidence and conduct the balancing exercise required by the application of the civil standard of proof on any other basis would involve an unreal approach to the assessment of the situation as it was at the relevant time. With respect to the Tribunal in Olympia Technology Ltd v HMRC (Tribunal reference 20570), we consider that its discussion of the basis on which the evidence should be approached, at [25] – a passage on which Mr. Popplewell relied – is just such an unreal approach.  We note that the High Court allowed HMRC’s appeal in Olympia and remitted the case to the Tribunal.

267.                   The practical consequence of our conclusion is that in deciding whether the Appellant has “taken every precaution which could reasonably be required of [it]” (see paragraph [51] of Kittel), we must regard precautions which could reasonably be required of the Appellant as precautions apt to prevent the Appellant participating in “broker deals” which were, in fact, more likely than not to be connected with fraudulent evasion of VAT.

268.                   A precaution is “reasonable” to the extent that it is apt to avoid the (actual) risk which is being guarded against.  Mr. Popplewell accepted in argument that the fact that “there was a lot of MTIC fraud about ... imposes in a way – again a greater duty of care on [the Appellant] to take reasonable precautions.  That is really raising the bar.”

269.                   Mr. Bliss’s evidence was that from 26 July 2004, when the Commission Agreement between Spartan and the Appellant was varied to permit the Appellant to sell goods on behalf of Spartan into the EU (i.e.  to carry out “broker deals”), until 2006 it was his belief that ‘joint and several liability had effectively wiped out’ – or significantly reduced – the fraud in the UK (see: above, paragraph [38] and paragraph [48] ).

270.                   Mr. Bliss heard what HMRC were saying about the prevalence of MTIC fraud.  He took his own soundings from people in the trade – including people who might be implicated if what HMRC said was true – and he preferred to believe what they told him – that the risk of involvement in MTIC fraud had effectively been reduced to nil.

271.                   This was not, in the Tribunal’s judgment, a reasonable assessment of the situation.  Accordingly, precautions taken by the Appellant against a risk which it perceived as ‘effectively wiped out’ or significantly reduced, are unlikely to have met the requirement of being reasonable precautions in a situation where, as we have concluded, “broker deals” were, in fact, more likely than not to be connected with fraudulent evasion of VAT.

272.                   Before turning to the precautions which the Appellant did take, we make the further point that reasonable precautions in the context of [51] of Kittel are precautions reasonably required of a trader to ensure that its transactions are not connected with fraud.  It would be a mistake to conclude that such precautions must be reasonably required by HMRC.

273.                   Although obviously HMRC has a major role in the prevention of fraudulent evasion of VAT, HMRC does not have the entire responsibility for this.  As the ECJ held at [54] of Kittel, “preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive.  Community law cannot be relied on for abusive or fraudulent ends.”

274.                   It follows, in the Tribunal’s view, that a person in the position of the Appellant, who assumes the functions of a taxable person and, as such, claims a right to deduct input tax, thereby assumes a responsibility itself to take reasonable precautions to avoid abuse of the VAT system by ensuring that its transactions are not connected with fraud. Mr. Bliss was mis-stating the position when he said in his letter dated 30 November 2004 to Officer Birchfield (sent in relation to Spartan) that “a taxable supplier’s only material obligations under the VAT legislation are to account for the VAT at the end of each accounting period and to keep proper records”.

275.                   The Tribunal’s formulation above is consistent with Lewison J’s comments in HMRC v Livewire Telecom Ltd. at [87] as follows:

“The taxable person does not owe a “duty” to take precautions (unless it is a duty to himself).  The taking of all reasonable precautions (and acting on the basis of what he discovers as a result of taking those precautions) provides him with an impenetrable shield against any attack by HMRC.”

276.                   It is therefore no answer to an allegation that the Appellant did not take reasonable precautions to say that HMRC had not required it to take any more precautions than it had in fact taken.

277.                   Nor can the Appellant rely on HMRC’s apparent or even expressed satisfaction with the due diligence undertaken and information supplied earlier than March 2006, which led to the repayments of input tax referred to in paragraph [9] above being made. Reasonable precautions satisfying the requirements of [51] of Kittel  must be reasonable having regard to the objectively assessed risk of connection with fraudulent evasion of VAT, not to the express requirements of HMRC or what the Appellant alleges HMRC might reasonably have required.

278.                   The Appellant was first made aware by HMRC (Officer Smith) of a specific tax loss in a chain resulting in one of its purchases by a letter dated 26 June 2006.  That letter referred to the Appellant’s sale “94” to its customer France Affaires.  This was deal 8.

279.                   So far as actual knowledge of the connection of the Appellant’s purchases with fraudulent evasion of VAT is concerned, HMRC’s case is not based on any specific evidence as to Mr. Bliss’s state of mind – his being the mind behind the Appellant.  It is, instead, based on an accumulation of circumstantial evidence, which established, in HMRC’s submission, that the trading in which the Appellant was involved was orchestrated by a person or persons unknown, as demonstrated by the circulation of goods and the circulations of funds. The evidence as to the circulation of goods persuades us that the Appellant’s trading was indeed orchestrated by a person or persons unknown.  Such evidence was (1) that the goods were bought in large quantities; (2) that they were manufactured outside the UK and unsuitable for use in the UK, yet brought into the UK only to be despatched out to other Member States; (3) that they were purchased and sold in the same quantities without the need ever to source from more than one supplier or to buy stock in excess of the Appellant’s customer’s requirements; and (4) that the goods were not held in stock by the Appellant, but always held at freight forwarders’ premises.  However, Mr. Popplewell successfully threw doubt on the complete coherence of Officer Fu Lam’s evidence on the circularity of funds obtained from his examination of the FCIB accounts of the Appellant and other entities in the chains of supply concerned.

280.                   HMRC’s case on actual knowledge was essentially that the Appellant must have known that it was participating in a fraudulent trade.  Mr. Bliss was a robust witness.  Although we were not persuaded by all his evidence, we have reached the conclusion that HMRC has not established to the requisite standard of proof that he actually knew of the connection between the Appellant’s purchases with fraudulent evasion of VAT before his receipt of Officer Smith’s letter of 26 June 2006.

281.                   We turn therefore to means of knowledge.   Mr. Bliss undertook due diligence based on the checks suggested at paragraph 8 of HMRC’s Notice 726.  The checks there suggested are intended to “help ensure the integrity of your supply chain”.  We are satisfied that the Appellant generally performed these suggested checks. 

282.                   However, we agree with HMRC that there are aspects of the Appellant’s business model which ought to have put Mr. Bliss (as a reasonable businessman) on notice that the Appellant was involved in transactions connected with fraudulent evasion of VAT.  This is consistent with our decision that the Appellant was required to take precautions apt to prevent its participation in “broker deals” which were, in fact, more likely than not to be connected with fraudulent evasion of VAT. 

283.                    One such aspect is signposted by the question appearing at the second bullet-point of sub-paragraph (1) in paragraph 8.1 of Notice 726: “Are normal commercial arrangements in place for the financing of the goods?”

284.                     The terms on which the Appellant, its suppliers and its customers traded were that title in the goods sold could not pass until the party at the head of the chain of supply (i.e. the ultimate supplier) had been paid.  At the same time, the unvarying practice was that no party paid for the supply of the goods to it until it, itself, had been paid by its customer.  The evidence is that the Appellant paid its direct supplier after it had been paid by its customer (except to the extent that the Appellant underpaid its supplier).

285.                   Mr. Bliss stressed that he had a relationship of trust with his suppliers, such that they trusted him to release goods to the Appellant without payment, thereby extending to the Appellant very considerable credit (see paragraph [69] above).  He asserted that the Appellant might have been able to buy more cheaply from other suppliers, but that the credit terms given by the existing suppliers were so beneficial that the Appellant dealt with them at higher prices for that reason.

286.                   On the other hand, Mr. Bliss said that the Appellant never released goods to its customer before it was paid for them – “because it doesn’t matter how much you might trust a customer, experience has taught us that when you release to a customer, if you think that you trust them, and then they take a week to pay you and you don’t sleep for a week because you are £700,000 out of pocket, you therefore learn and you don’t release to your customer without payment”.

287.                   The unbalanced nature of these funding arrangements – which were supported, if at all, by only minimal documentation – is, in the Tribunal’s view a strong indication of non-commercial trading.  As Mr. Draycott pointed out in submissions, there is no commercial logic in the Appellant’s suppliers providing goods worth tens or hundreds of thousands of pounds to another trader (the Appellant) without payment in the knowledge that they would only be paid if each link in a chain of unknown length makes payment.  The existence of a retention of title clause in the sale agreements (such as set out in paragraph [79] above) would be minimal protection, because locating the goods after they have moved through numerous traders’ hands would be likely to be virtually impossible.

288.                   The Tribunal asks rhetorically, why, if the Appellant could not trust its customers, did it expect to be (and was) trusted by its suppliers?  The answer, given by Mr. Bliss, that the commercial relationship built up by him with the suppliers was good enough to achieve this is, in the Tribunal’s judgment, unconvincing.

289.                   Given that there is no evidence that the goods were ever sold to consumers, it is also strange that the Appellant’s business model relied on someone in the chain actually paying for the goods purchased, which payment would initiate the subsequent payments of consideration down the chain (including the payment to the Appellant and the Appellant’s payment to its supplier).  It was not explained why one participant in the chain would initiate payment for its purchases before it had itself been paid, while all the others did not do so.  This factor also suggests to the Tribunal that the Appellant was engaged in non-commercial trading.

290.                   It is also strange that the Appellant experienced as little difficulty as it did when it underpaid, or paid late, its trusted suppliers.  An example is deal 1, where a payment in full (£420,650) to TAP Global’s FCIB account was made on 3 April 2006 and reversed the same day.  On 7 April 2006 the Appellant paid £360,650, which left £60,000 outstanding, which was not paid for about three weeks.  Notwithstanding TAP Global’s contractual entitlement to charge interest on late payment, no such charge was made.  A similar (but short-lived) underpayment occurred in relation to deal 7 (see paragraph [147] above). A more extended underpayment was documented in relation to deal 8 (see: paragraph [154]) but again no particular difficulties seem to have been experienced by the Appellant as a result. There was also a significant underpayment in relation to deal 13 (see: paragraph [196] above), which give rise to the loan arrangement with Liban Trust organised by Grange (see: paragraph [228] above).  We find these instances to be further indications of non-commercial trading.

291.                    In this context we mention also the evidence that some of the Appellant’s suppliers were known to some of their customers – see: paragraphs [83], [84], [113], [148], and [194] above.  Mr. Draycott, for HMRC, asked Mr. Bliss why in such cases the Appellant’s suppliers had not supplied the Appellant’s customers directly.  Mr. Bliss’s response was that he supposed that this was because the Appellant had already effectively reserved the stock concerned.  We were told that before the periods in issue (i.e. before 1 March 2006), the Appellant had put down 10% of the purchase price of stock on reserving it, but that it would suffer no adverse consequences if, having reserved the stock, it did not go on to purchase it (paragraph [71] above).  We find that the reservation by the Appellant of stock had no real commercial significance and that it was unlikely to have been a bar in practice to the purchase by a customer of the Appellant of goods from a supplier of the Appellant.  In these circumstances we conclude that the fact that some of the Appellant’s suppliers were known to some of their customers is a further indication of non-commercial trading on the part of the Appellant.

292.                   Of less significance in reaching our conclusions, but still puzzling and giving rise to doubts about the commerciality of the Appellant’s trading, was the evidence that the Appellant was not concerned whether the mobile phones it purchased and supplied were fitted with 2- or 3-pin plug chargers (see: paragraphs [78] and [101] above), and that on occasion the boxes exhibited “cutouts” (paragraph [101] above), knife marks, pen marks, and so forth (paragraph [140] above).  In the same category was the evidence about the poor Dun & Bradstreet reports on the Appellant’s suppliers (paragraphs [82], and [103] above) and on one of the Appellant’s customers (paragraph [133] above).

293.                   We regarded the evidence of the mistake in the insurance documentation (paragraphs [67] and [68]) and the reshipment of goods at Oldbury (paragraphs[162] and [170]) to be unpersuasive either way,

294.                   We conclude that the Appellant took great care in regard to the due diligence which it undertook, answering all or most of the points raised by Notice 726.  Mr. Bliss described this in detail in his Witness Statement under the headings (1) background due diligence; (2) transactional due diligence; (3) corporate insurance (of goods shipped by the Appellant); and (4) information provided to HMRC.  The Appellant was keen to check with HMRC whether there was any more information or documentation which they required, and if there was, it would be supplied.  Mr. Bliss also asked HMRC on occasion to carry out a ‘line check’, which is a check on the bona fides of the chain of supply of goods which the Appellant (or Spartan) was proposing to deal in.

295.                   The evidence included examples of cases where the Appellant reacted to the receipt of indications that transactions it had intended to enter into might be connected with fraud. Thus, in response to Officer Smith raising with him matches found between some of the phones dealt with by the Appellant in August 2005 with other traders’ deals in the UK, Mr. Bliss contacted the supplier, Infinity Distribution and, because their reaction was deemed unsatisfactory, ceased dealing with them (see: paragraph [52] above).   He also withdrew from the sale of the remaining 2000 units in deal 2 to Power Communications on HMRC’s Redhill; office not confirming the validity of documents sent to them about its VAT registration (see: paragraph [99] above). Again, the Appellant refused to deal with Kyel Holdings following adverse due diligence findings (see: Paragraph [100] above).

296.                   On the other hand, when the matter of the use of FCIB accounts by the Appellant and all its customers and suppliers was raised with Mr. Bliss by Mr. Draycott, Mr. Bliss’s response was to justify his failure to act on that indication of the Appellant’s trade possibly being connected with fraud.  He said: ‘Did it raise some concerns?  Of course you think about these issues, but looking at the reasons for them, it was hardly surprising’ (see: paragraph [65] above).  The alleged reasons were that all traders in the industry were effectively being forced into using FCIB’s services because HMRC was leaning on domestic banks to dissuade them from accepting customers in the industry.

297.                   We conclude that the Appellant was keenly aware at all times of the possibility that its trading might be or become connected with fraudulent evasion of VAT.  It sought to protect itself against any attack by HMRC by carrying out careful paper due diligence and reacting to any obvious indications of possible specific connection between its trading and fraud, where such reaction (as in the cases mentioned at paragraph [295] above) could be carried out without any real or lasting damage to the profitability of its trade.

298.                   But we conclude that the Appellant’s eye was always on protecting its non-commercial trade and its own interests generally (in particular from adverse action by HMRC) and not on any wider concerns to avoid abuse of the VAT system (see: paragraph [274] above).  As we have already indicated, we consider that the precautions which could reasonably be required of traders (in accordance with paragraph [51] of Kittel) go wider than that and extend to precautions reasonably required to protect the integrity of the VAT system.  The fact that the Appellant was engaging in a non-commercial trade (as evidenced by the factors mentioned above at paragraphs [282] to [292]) leads to the conclusion that it did not take all the precautions that could reasonably have been required of it in the Kittel sense.  When a trader in the position of the Appellant engaged in wholesale dispatches of mobile phones and CPUs (acquired from buffers) to other member states in March, April and May 2006, we consider that it could only have been said to have taken all the precautions that could reasonably have been required of it if it had conducted its trade on a scrupulously commercial basis.  We consider, on the balance of probabilities, that if the Appellant had conducted its trade on a scrupulously commercial basis it would have soon found (due to the orchestrated nature of the transactions which it in fact entered into – see paragraph [279] above) that participation in those transactions was not available to it.  That is, if it had taken such reasonable precautions it would have discovered the connection with fraud and so the protection of paragraph [88] of Lewison J’s judgment in Livewire (on which Mr. Popplewell relied) is not available to the Appellant. We consider that our conclusion is consistent with the decision of the ECJ in Optigen/Fulcrum/Bond House: the Appellant conducted an economic activity giving rise prima facie to the right to deduct input VAT, but it had the means of knowing the connection of its economic activity with VAT fraud.

299.                   We have been guided in reaching this conclusion by the following passage in Floyd J’s judgment in Mobilx Ltd (In Administration) v HMRC [2009] EWHC 133 (Ch) at [7]:

“In the light of the difficulties of making enquiries beyond the immediate supplier, there is a danger in reading paragraph 51 of Kittel in a narrow sense and as suggesting that provided proper checks are carried out by the trader on a supplier, then the trader’s claims to repayment of VAT are not capable of challenge.  That is not, in my judgment, a correct view.  Suspicious indications obtained by a trader from carrying out due diligence checks on its supplier are one, but not the only basis from which it may properly be inferred that a trader knew or should have known of its implication in VAT fraud.  The test to be applied is that set out in paragraph 61 of the Judgment[1], and indeed in the Court’s final determination at the end of the judgment.  Paragraph 51 needs to be understood in the sense that “all reasonable precautions” may, in some cases, involve ceasing to trade in specific goods in a particular market, at least in the particular manner in which the trader undertakes that trade.  Such a situation may conceivable arise where, from other indications available to the trader, the trader knew or should have known that it is more likely than not that, despite all due diligence checking, any further goods traded in the same way will be implicated in VAT fraud.”

300.                   We find that Mr. Bliss was very well informed indeed about the developments in the ECJ jurisprudence in this area as they happened.  In his letter of 25 February 2004 he wrote on behalf of Spartan to Officer Smith quoting comments by Lightman J made one week earlier (on 18 February 2004) when judgment was handed down in the Federation of Technological Industries case (see: paragraph [36] above).  The variation of the Commission Agreement between Spartan and the Appellant referred to at paragraph [37] above was carried out on 26 July 2004, when the favourable climate generated by Lightman J’s decision still prevailed.  The Appellant began trading in significant amounts in March 2005 (see: paragraph [49] above) following the publication of the Advocate-General’s Opinion in the Bond House litigation on 16 February 2005.  He entered into the funding arrangement (see: paragraphs [41] et seq. above) with VLSI on 8 February 2005, before the publication of the Advocate-General’s Opinion, but following the hearing in open court on 8 December 2004.  We infer that on 8 February 2005 Mr. Bliss and Mr. McCaffrey were confident that the Advocate-General’s Opinion would be, as it was in fact, adverse to HMRC.

301.                   We have concluded that the Appellant was well aware of the dangers inherent in the trade it chose to carry on and conducted its trade on the basis that it could rely on thorough due diligence of its direct suppliers and a quick avoiding response to any indications that it might actually, as opposed to potentially, be involved with traders connected with VAT fraud. It did not have any concerns about the wider issue of the maintenance of the integrity of the VAT system and was running a dangerous course, particularly with its involvement with FCIB.

302.                   We return to the position of Starmill and A-Z (see: paragraph [251] above). The evidence referred to at paragraph [248] above has persuaded us that on the balance of probabilities both Starmill and A-Z were carrying on non-commercial trades, which were orchestrated by a person or persons unknown.  We therefore decide that neither Starmill nor A-Z took all reasonable precautions to ensure that their transactions were not connected with fraud.  It follows that both Starmill and A-Z should have known (if they did not actually know) that by their supplies in the ‘clean’ chains, which led to the Appellant’s purchases in deals 11 to 13 inclusive, they were participating in transactions connected with the fraudulent evasion of VAT.

Conclusion

303.                   We consider on the basis of the objective factors which we have set out at paragraphs [281] to [302] above that the Appellant should have known that by its purchases it was (as was the fact) participating in transactions connected with the fraudulent evasion of VAT.

304.                   This conclusion applies to all 19 deals in issue and therefore we dismiss the appeal.

Costs

305.                   We apply rule 29 of the VAT Tribunals Rules 1986 in the exercise of our discretion under the transitional rules (and in accordance with the wishes of both parties) and we direct, pursuant to rule 29(1)(b), that the Appellant must pay to HMRC their costs of the appeal on the standard basis to be assessed by a Costs Judge of the Supreme Court in default of agreement.  There will be liberty to apply to a Judge of the First-tier Tribunal sitting alone if the Appellant wishes to make submissions that some discount ought to be made in this costs direction to reflect the fact that we have found that the Appellant did not actually know of the connection of its purchases with fraudulent evasion of VAT.

 

 

 

JOHN WALTERS QC

 

JUDGE OF THE FIRST-TIER TRIBUNAL

RELEASE DATE: 24 March 2010