First-tier Tribunal (Tax)

[2010] UKFTT 386 (TC)

 

 

 

 

 

                                                                                   

TC00668

 

            Reference no:  LON/2008/1591

 

 

 

Value Added Tax  -  MTIC case involving one purchase and sale of products not regularly associated with MTIC fraud by a company whose only director claimed that he was oblivious to MTIC frauds  -  whether such ignorance was established -  how to apply the “ought to have known” element of the Kittel test in these circumstances  -  Appeal allowed

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

 

                                           MASSTECH LIMITED                          Appellant

 

 

                                                                      - and -

 

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

 

 

 

                                                TRIBUNAL:  HOWARD M NOWLAN (Judge)

                                                                         SANDI C O’NEILL

                                                                       

 

Sitting in public in London on 5, 6, 7 and 9 July 2010

 

Ian Bridge, counsel, on behalf of the Appellant

 

Paul O’Doherty, counsel, on behalf of the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

Introduction

 

1.     This MTIC case involved the denial of the Appellant’s input tax claim in respect of one purchase of a quantity of 10,000 disposable alcohol test strips that the Appellant bought from a company called Merchants’ Guild Limited (“Merchants’ Guild”) on 19 July 2006 and sold on the same day to a company operating in France, called Sarl MS Enterprise Limited (“MSE”).  In contrast to most MTIC cases that have come before this Tribunal, the VAT at stake in this case was the relatively small sum of £83,895.  

 

2.     The case was also unusual in other respects.    These were that:

 

• the nature of the Appellant’s long-standing trade was essentially a scientific trade of selling, installing and servicing sophisticated laboratory equipment and supplying medical products;
• it appeared from the evidence that the transaction on 19 July 2006 was the only transaction effected by the Appellant that was in any way connected with MTIC fraud;
• the Appellant, and more particularly its only director, shareholder and employee, Mr. Ulhaque (or “Al”) Ahtamad (“Mr. Ahtamad”) claimed to be totally ignorant of the existence of MTIC or carousel fraud until Mr. Ahtamad was told about this fraud by HMRC in October 2006;
• the pricing of the July 2006 transaction was materially less favourable to the Appellant, MassTech Limited (which we will refer to either as “ML” or “the Appellant”) than the pricing and  “risk/reward” ratio generally adopted by “knowing”  MTIC “brokers” (i.e. the traders that export product in an MTIC fraud and rely for their profit on recovering the input VAT).   In this case, the potential profit was only to be £12,300 (a 2.2% margin on ML’s VAT inclusive purchase price), whereas the loss risked if the VAT refund was refused was £71,595; and that
• unlike the approach often adopted in progressing MTIC appeals, the Appellant’s counsel conceded that HMRC’s evidence established that the Appellant’s transaction had been shown to be connected, via a contra trader, to a fraudulent failure to pay VAT.     Accordingly, the Appellant’s case revolved solely around the issue of whether the Appellant knew or ought to have known that its transaction was connected with that fraud, in the sense that there could be no other reasonable explanation for the transaction than that it was connected with that fraudulent evasion.

 

3.     The case commenced in a somewhat unsatisfactory way, and since we consider that this feature has had a major bearing on the outcome of the case, and on the great difficulty that we have both experienced in reaching our conclusion, we feel that we must explain this matter.

 

4.     Prior to the commencement of the hearing, we were informed that the case would commence with an Application by the Respondents that the Appellant should not be at liberty to produce a Second Witness Statement from Mr. Ahtamad that had only been provided to the Respondents three weeks prior to the commencement of the hearing.    Mr. Ahtamad’s first Witness Statement had claimed that the Appellant was entitled to a repayment of input tax on legal grounds without making much reference to any of the facts.    The second Witness Statement, almost certainly written in the light of the Court of Appeal decision in Mobilex Ltd v. HMRC, HMRC v. Blue Sphere Global Ltd and Calltel Telecom Ltd v. HMRC [2010] EWCA Civ 517 (“Lord Justice Moses’ decision) provided an extensive summary of alleged facts, many previously unknown to the Respondents.   In addition to applying that we should refuse the admission of this Witness Statement, the Respondents requested that if the Witness Statement was to be admitted, they, the Respondents, should be entitled to produce two further relatively short Witness Statements.

 

5.     When the hearing commenced, not only were we not asked to consider this Application at all, but it was completely forgotten, and the parties tacitly assumed that all three further Witness Statements would be admitted.  The reason why the Application was forgotten was almost certainly that the first morning of the hearing was dedicated to, and almost “side-tracked” into, a debate between the parties designed to establish whether the principal HMRC case Officer had made subsequent changes to two important meeting notes.   We will describe those issues in due course.   For present purposes it is simply necessary to mention that the significance of those contested changes to meeting notes declined as the hearing continued.  We both now consider that the more significant point is that the Respondents very likely had insufficient time to consider the material further evidence provided in the Second Witness Statement, and any further evidence that they themselves might have wished to produce to address some of the newly revealed evidence.  In retrospect we consider it most unsatisfactory that the parties altogether forgot the Application that had been mentioned prior to the hearing, and tacitly accepted that all the evidence was admissible, and also unsatisfactory that the Respondents had appeared to spend much of the available time worrying about the changes to meeting notes, rather than trying to produce further relevant evidence.   We both feel that the outcome of this case has necessarily been influenced by absence of evidence that the Respondents might have sought to produce, given more time, or given more attention to the points that in retrospect we consider would have been more helpful to us.

 

6.     Our decisions are that:

 

·       the Respondents have failed, on the balance of probabilities, to establish that the Appellant (which in this context means its only material director and employee, Mr. Ahtamad) was aware of the existence of MTIC trading at the time it undertook its July 2006 transaction;

·       notwithstanding that it is well established that there are objective aspects to the “ought to have known” element of the Kittel test, we are not required, when considering the checks that the Appellant ought to have undertaken before entering into the July 2006 transactions, to ignore the fact that we must proceed, in the light of the previous conclusion, on the basis that the Appellant, through its only director, was unaware of MTIC fraud; and that

·       not only was the Appellant unaware that its transaction was connected to VAT fraud but HMRC has failed to show, on the balance of probabilities, that the Appellant had means of knowledge, or that it ought to have known, that there could be no other reasonable explanation for its transaction than that it was connected with fraudulent evasion of VAT. 

 

7.     We reached our decision with considerable hesitation, and after much discussion between us.  The alternative case that had been advanced by HMRC was that earlier involvement by Mr. Ahtamad in the affairs of a different company, MassTech Corporation Limited (“MCL”) must have resulted in Mr. Ahtamad having had prior knowledge of MTIC activity; that the claim by Mr. Ahtamad to have sought to market alcohol test kits amongst his long-standing customers was false, and that for those and other reasons we should conclude that the Appellant failed the third of the Kittel tests. 

 

8.     The two reasons why we have reached the conclusions summarised in paragraph 6 above, and thus allowed the Appeal, are that some of the evidence advanced to support the Respondents’ case has been weak, and secondly there are some factors that seem to us to have been inconsistent with, and “at odds” with, the chain of events contended for by the Respondents.

 

The evidence

 

9.     Mr. Ahtamad was the only witness for the Appellant.    He was a university-educated scientist, and a man of 51 at the time of the hearing.   He appeared to be of only modest means and mentioned on a number of occasions that he and his wife had modest living requirements.   

 

10.     As we have indicated, Mr Ahtamad had provided two Witness Statements.   The first had been produced in June 2009, was of only 2 pages, and essentially just argued that on legal grounds, the input VAT should be refunded.   The second provided a full description of the Appellant’s history, Mr. Ahtamad’s association with the other company that we have referred to, MCL, and it summarised all the build up to, and the details of, the July 2006 transaction.

 

11.     We find it difficult to say unequivocally whether or not Mr. Ahtamad was an honest witness.  He appeared to be a man of integrity, and to be proud of the company that he had built up and of his family’s achievements.   At the same time, some of the evidence that he gave “beggared belief”.  Some elements of evidence also shifted marginally during the course of the hearing.   We certainly conclude that he was not dishonest to the extent of being on the “inside track” with the MTIC fraudsters.  At worst, he got swept up in involvement in such transactions, to a greater or lesser degree depending on the right judgment as to his involvement in the affairs of MCL.    At best, if he was entirely honest, his lack of scrutiny into the activities in MCL, and the lack of attention to what he was buying and selling in the one July 2006 transaction, left us both bemused. 

 

12.     The managing director of  MCL was a Mr. Hussein.  We will explain the connections in due course.  No evidence was given by Mr. Hussein. This was attributed to the fact that “he had disappeared”.  It was said in Officer Hunjan’s Witness Statement that whilst at one point MCL was appealing to this Tribunal against the denial of its input recovery claims, it had subsequently abandoned its claims and that its administrator had decided not to pursue its case.   We were yet later told by counsel that these statements in the Witness Statement might also be wrong, and that the appeal might be pursued.   Whatever the position, Mr. Hussein provided no evidence and we remained unclear as to whether or not he had “re-appeared”.

 

13.      Considerable evidence had been prepared on behalf of HMRC with a view to establishing the tax loss, and that the Appellant’s transactions had been connected with that loss of tax.   The loss had been traced to a “defaulter” via a “contra trader”, and a few “buffer” companies, which made small margins.  We will ignore all this evidence, and even the names of the intermediate companies and that of the contra trader and the defaulter in the “dirty chain”.   None of it is now of any relevance in view of the acceptance by counsel for the Appellant, mentioned in the fifth bullet point in paragraph 2 above, that the only point in dispute was whether “the Appellant knew or ought to have known that there was no other reasonable explanation for the transaction undertaken by the Appellant on 19 July 2006 than that it was connected with the fraudulent evasion of VAT”.

 

14.     The main HMRC evidence was given by the case Officer, or “broker-Officer”, Mr. Hunjan, and by one colleague, Mrs. Donovan, who accompanied Officer Hunjan to a meeting held with Mr. Ahtamad on 15 November 2006.   We will summarise the relevant aspects of this evidence in due course.

 

15.     We have already mentioned that there was considerable argument on the first morning of the hearing as to whether Officer Hunjan had made improper amendments to two written meeting notes.  This debate even led to the Appellant’s counsel sending one note off to a writing expert whose opinion was that certain words had been inserted into the written record in a different pen, and almost certainly at a later date.   We feel that we should say immediately that we thought it unlikely that Officer Hunjan had been doctoring the notes in order to strengthen the case against the Appellant.  The explanation was more likely that the Officer was trying to improve the notes, in the sense of rectifying respects in which the notes were somewhat deficient, for example, by having failed to note that Mr. Ahtamad was present at one significant meeting, albeit that even in doctored form the note still failed to indicate for how long Mr. Ahtamad was at the meeting.  There is no doubt that the lack of contemporary evidence on the part of the Officer as regards the two matters that were debated at length has contributed to our conclusion that HMRC has not established its case.  But Officer Hunjan struck us as an honest man of basically good integrity, albeit possibly one who in April 2005 and November 2006, when fairly new to MTIC enquiry work, was not expert at conducting, and properly recording, MTIC interviews.

 

The facts in more detail

 

16.     We will summarise the more detailed facts in chronological order, albeit that this will involve jumping around from one subject to another, and that it will leave the detail of the presently material transaction until the end of the factual summary.

Early history of the Appellant’s trade

17.   Mr. Ahtamad is a specialist in microscopy, forensics and materials analysis.     He traded from 1984 to 1992 under the trade name, MassTech, and in 1992 the trade was incorporated into the Appellant.    He was the only director and sole shareholder of ML at the time of the July 2006 transaction.   The company appeared to have had no other employees, save for his wife who was the Company Secretary, though it did engage the services of part-time employees, agents or consultants in Middle Eastern countries where it did business for particular projects.  The company’s registered office was at Mr. Ahtamad’s house in High Wycombe, namely 175 Rutland Avenue.       From time to time the company traded from small offices either in Amersham or Chalfont St. Peter, but nothing hinges on this.  The address on the offers, invoices etc. involved in the 19 July 2006 transaction that is the subject of this appeal was the Rutland Avenue address.

 

18.     It was irrelevant for us to understand the detail of the Appellant’s trade in the years prior to 2005.  It basically sold laboratory and medical equipment, and on occasions serviced and installed that equipment.   It also trained people how to use complex equipment such as electron microscopes, a product that it sold as exclusive distributor for a manufacturer, Leo Electron Microscopy Limited (“Leo”), in a number of Middle Eastern countries.     

 

19.     As Mr. Ahtamad described the pattern of trading, it was always sporadic.    In other words, for long periods the company might do and achieve little.   It might then spend months working on a particular deal, and then a substantial transaction would be undertaken, so that a year’s turnover might be generated by just one deal.   It seems that many of the potential customers for the equipment and medical supplies that the Appellant sold were very reputable bodies such as the Metropolitan Police, the RAF, the USAF, and universities, police forces and hospitals in the company’s numerous export markets.   We surmised that one of the Appellant’s attributes that would have appealed to its suppliers was the combination that it offered of basic scientific knowledge allied to practical experience of selling to state agencies in the Middle East.

 

The November 2004 formation of MCL

20.     In November 2004, and thus at a time when the Leo distribution agreement was still in force, Mr. Ahtamad became involved with a new company, MCL, being formed by a Mr. Hussein, the son of one of his own father’s wartime colleagues.    Mr. Hussein was younger than Mr. Ahtamad, and not a close friend but a member of “the family and social circle”.    Mr. Hussein had worked for EDS, and apparently the plan was that the company being formed by Mr. Hussein would provide software to schools, government bodies such as defence organisations and hospitals.       

 

21.     The formation of the new company, named Masstech Corporation Limited, involved Mr. Hussein in subscribing 70 of the 100 shares for nominal consideration, and Mr. Ahtamad subscribing the other 30 on similar terms.  For some reason, the company’s registered office was initially located at Mr. Ahtamad’s home address, albeit that at an early date the company traded from offices at Stockley Park near Uxbridge, and never from Mr. Ahtamad’s house.    The most significant aspect of this deal was that ML, the Appellant, offered a loan facility of £150,000 to the new company.   At all times, Mr. Ahtamad emphasised that MCL was “Mr. Hussein’s company”, and that he had no role whatsoever in the conduct of MCL’s business.    Essentially, ML just provided the loan, and his shareholding and his office as a director were designed to enable him to “protect that investment”.

 

22.     The terms of this loan remained obscure during much of the hearing, and the Respondents had not requested a copy of it, though it was clear that by December 2005 Mr. Ahtamad realised that the loan was in default.  We were also told during the hearing that the loan was interest free.   This led us to suppose that the economic deal was that the new company offered 30% of the shares to Mr. Ahtamad, effectively in return for ML’s loan.

 

23.     Immediately after the end of the hearing, the Court clerk came down to the court with copies of the loan agreement that had been faxed to the Court by the Appellant’s solicitor and so both counsel and we ourselves took copies of the loan documentation.   It may be of relatively little significance to the present dispute, but the following points are worth noting in relation to the documentation that we were given:

 

·       The documentation was reasonably detailed, running to 9 pages, with many familiar clauses.   It was followed by a Drawdown Notice, and then a paper listing repayments, and dates when repayments were made;

·       The loan Agreement was signed on 11 November 2004, ostensibly for a facility of £150,000;

·       The loan was not in reality interest free in that a fee of £25,000 was payable for the facility.    It was not clear whether this was due on drawdown (in which even the drawdown of a net £125,000 on 15 November 2004 might have represented a drawdown of £150,000 netted off against the fee).    The alternative construction is that the fee was certainly due on the Repayment Date, and due in the full amount, regardless of whether any of the loan had been pre-paid.   The stated repayment date was one year after drawdown, i.e. 15 November 2005.

·       There was a very curious typing error in the typed and signed Drawdown Notice.  Notwithstanding that the Notice was dated 15 November 2004, referring to a drawing of £125,000, the typed Drawdown Date was given as “20/07/2006”, albeit that that date was crossed out in ink and replaced by the more understandable date of 16 November 2004.    Quite why anyone might have typed the date “20/07/2006” (one day after ML’s presently contested transaction that took place 20 months later) in a document apparently typed in November 2004, we are at a loss to understand.

·       The final page refers to repayments of £10,000 on 6 December 2004, £10,000 and £5000 on 26 and 31 May 2005, and £80,000 on 9 January 2006, totalling £105,000.   This left a deficit, still outstanding, of £45,000, being the principal deficit of £20,000 and the fee of £25,000.

·       The Appellant’s counsel understandably assumed that the £45,000 deficit was made up of £20,000 plus default interest (for which the agreement in fact made provision at 4% a month), but it transpires that the £45,000 deficit was based on the £20,000 plus the £25,000 fee, and default interest seems to have been ignored.

 

24.     As we have said, Mr. Ahtamad repeatedly said that he took no part in the trading of MCL.   Mr. Ahtamad said that he only went to Stockley Park twice, once to help Mr. Hussein install the office equipment, and once to join the VAT meeting in April 2005 to which Mr. Hussein invited him, and to which we will have to refer again in due course.   He became a Director, not so as to participate in the trading activity of the company, but “to protect his investment”.   In this context we note that none of the terms of the Loan Agreement gave the lender any particular rights to receive information about the trading or profitability of MCL.  

 

The various elements of contact between Mr. Ahtamad and MCL  and Mr. Hussein

 

25.    The first occasion when HMRC contended that Mr. Ahtamad must have been aware of the activities of MCL was when a letter was sent by HMRC to MCL at Mr. Ahtamad’s home address, apparently observing as early as January 2005 that the new company’s trade would be in an MTIC-sensitive area (presumably the provision of CPUs), the letter doubtless warning of the precautions that should be taken to avoid falling into MTIC traps.

 

26.     Mr. Ahtamad said that he generally saw Mr. Hussein once a week or once a fortnight in a non-business, family context, and that he always handed him company mail on these occasions.   Since the letter from HMRC was addressed to Mr. Hussein’s company he would not have opened it, and would have handed it to Mr. Hussein when they next met.

 

The April 2005 meeting

 

27.    A meeting was arranged on 6 April 2005 for Officer Hunjan to discuss various VAT questions relating to MCL’s VAT periods ending 02/05 and 03/05 with Mr. Hussein.   This meeting took place at Stockley Park.   Officer Hunjan had been intended to accompany a more senior colleague to this meeting, since at this time he had only been dealing with MTIC enquiry work for about 4 months, but the colleague was ill or unavailable and so Officer Hunjan went to this meeting unaccompanied.

28.     Whilst there was a dispute about how long Mr. Ahtamad was present at the meeting, it was plain that the meeting had been arranged to enable Officer Hunjan  to meet Mr. Hussein, and he had not even expected to meet Mr. Ahtamad who he had doubtless not met before.   Mr. Ahtamad said that he had been invited to attend by Mr. Hussein, and he claimed that he arrived at the meeting about a quarter or half an hour late (which seems to have been virtually undisputed).   Whilst he also claimed to have been present for only about a quarter of an hour, so leaving early as well, this does not tally with Officer’s Hunjan’s recollection in that he said that he did remember shaking hands with both men when he left the meeting, which had lasted about two hours.    Notwithstanding this, when asked by the Appellant’s counsel for how long Mr. Ahtamad had been at the meeting, Officer Hunjan replied “I’m not sure, I can’t  - I don’t know”.   Reference was also made to the fact that discussions about transactions were conducted with Mr. Hussein, and when the Appellant’s counsel asked Officer Hunjan whether Mr. Ahtamad had been privy to conversations about MTIC trading during the course of the meeting, the reply was “I wouldn’t have noticed, but obviously he was present in the room.”   

 

29.     One fairly irrelevant fact, save that it is a fact about which both Officer Hunjan and Mr. Ahtamad agreed, was that Mr. Ahtamad apparently talked about experiences with his own Maidenhead VAT office, not that this was of any particular relevance to the subject of the meeting.

 

30.     The first debate about late changes being made to Officer Hunjan’s meeting notes related to his hand-written note of this meeting.       Certain words in this meeting note were confirmed by the handwriting expert to have been written in a different pen from the bulk of the ¾ page note, and almost certainly at a different time.   The words in question that were added were the name of “Mr. Ahtamad”, together with “MassTech Ltd”, along with a clarification that Mr. Hussein (whose name alone was in the original ink) represented MCL, a clarification that Officer Hunjan was described as “(Officer HMRC)”, and the officer’s signature at the bottom of the note. 

 

31.      The typed version of this meeting note mentioned Mr. Ahtamad once, after a sentence that said that “A large amount of the time was spent on talking about the business, how a proper business should be operated commercially”.   The sentence referring to Mr. Ahtamad simply remarked that “he mentioned about his experience with Maidenhead VAT office”.  Other short references made it clear, without clarifying whether or not Mr. Ahtamad was a party to these discussions or not, that reference was certainly made to due diligence, Redhill checks and other precautions relevant to avoiding MTIC transactions.

 

32.     It is convenient at this point to make the observation that we are unable to tell whether the additions to the written note were utterly innocuous, made for instance immediately after the meeting and when Officer Hunjan returned to his office.     On this supposition, it was possible that the changes were made, as Officer Hunjan said in evidence, because he had put his own name and that of Mr. Hussein on the note before arriving for the meeting, and had to add that of Mr. Ahtamad later because he had not expected to meet him.  Alternatively, and because the ink in which the headings, and the names of himself and Mr. Hussein were written was the same as the ink in which the short record of the discussions was made, presumably at the meeting, it could be that the name of Mr. Ahtamad was added some considerable time later, and possibly to add to the case that he might have known about the MTIC warnings.     We should also add that somewhat oddly the typed version of the April meeting was not put onto the electronic folder maintained by HMRC until January 2006.

 

33.     The more material findings of fact in relation to this meeting, being the issue of whether Mr. Ahtamad was present for only quarter of an hour, or for roughly the remaining one and a half hours of the meeting, and whether he participated in the discussion about MTIC trading, and MTIC precautions, we will defer until dealing with all our findings of fact. 

 

34.     Finally, in relation to this meeting, we record that Mr. Ahtamad said that after the meeting he had asked Mr. Hussein how the meeting had gone, and that the answer that he received was that it had gone well, and that it was a fairly routine meeting.

 

The loss of the Leo contract, the effect on the trading of ML, Mr. Ahtamad’s other ventures, and the VAT change to monthly from quarterly returns

 

35.     At some time in roughly the middle of 2005, ML lost its distribution contract with Leo, as a result of that company being taken over by Zeiss.   Whilst we were told that ML had sold product of other manufacturers, the Leo contract appears to have been ML’s most significant source of business at that time because its loss resulted in ML doing virtually no business for the next twelve months. 

 

36.      Mr Ahtamad may have been trying to plug the gap resulting from the loss of the Leo contract by forming another company to trade in some way in relation to precious stones, and by taking on the part-time office of sub-postmaster of a post office in South Wales.   There is no need to expand on these facts because the first venture eventually came to nothing, and the office of sub-postmaster involved only one day a week of work (usually at his home and not in South Wales), and generated little, if any, profit.

 

 37.     From April 2005 to April 2006, the Appellant was consistently in a VAT reclaim position because its office expenses occasioned losses since it had no gross receipts.     It was claimed that it was thus to accelerate VAT repayments of this nature that it applied on 16 June 2006 to make monthly returns, and this request was granted on 23 June 2006.

 

The asserted facts leading up to the 19 July 2006 transaction

 

38.   According to Mr. Ahtamad’s evidence, while searching for new medical and forensic products that ML might be able to sell, Mr. Ahtamad perceived in early 2006 that there might be an opportunity to market disposable alcohol test strips to the customer base that he had amassed in his earlier activities, and particularly in selling equipment for Leo and various other similar manufacturers.   Alcohol test strips are a simple, cost-effective and quick method of ascertaining whether a person has consumed alcohol.   In contrast to taking blood samples, the method of operation of the alcohol test strips is easier since it is merely necessary for saliva to be placed on a receptacle, and for the test strip to be placed in the saliva, whereupon there will be a colour change if alcohol is detected.

 

39.   Mr. Ahtamad claimed that the quality and characteristics of test strips manufactured by different manufacturers, such as Craig Medical, AlcoSal, and Bio Rad, was “generally uniform”.   Mr. Ahtamad was keen to source such strips because he believed that, with the ban on alcohol in some Middle Eastern countries, where he had many contacts, there was a major demand for such test strips fom police forces and hospitals in that region.

 

40.     Mr. Ahtamad claimed that in early 2006 he sporadically researched the various possible suppliers of such strips, and he also contacted his Middle Eastern customers, particularly through his agents, to test the local markets.     He said that he certainly contacted Craig Medical and Bio Rad, and when he then gathered that they only made sales through their authorised distributors he contacted Craig UK.

 

41.     On being questioned by counsel for the Respondents, Mr. Ahtamad was unable to produce any documentation that confirmed the contacts that he had allegedly made with manufacturers, authorised distributors, his past customers and his local agents in the Middle East.      He said that most contacts had been by phone, and  that he could not remember the names of people whom he had contacted in the manufacturers, and in Craig UK.   He said that his system did not retain e-mails from 2006 until 2010, nor (when we posed this question to him) had he thought it necessary or appropriate to retain early 2006 e-mails at the point in October 2006 when it became apparent that his July 2006 transaction was being queried by HMRC.

 

42.     There was considerable dispute between Mr. Ahtamad and the Respondents’ counsel on the subject of whether Mr. Ahtamad had in fact undertaken the research into sourcing alcohol test strips, and into marketing such strips in the Middle East, as Mr. Ahtamad had asserted.   The obvious point was made that it was odd for there to be no documentation of numerous contacts allegedly made by Mr. Ahtamad, when researching possible suppliers and customers.  Mr. Ahtamad sought to explain the lack of documentary evidence by saying that, as a “one man band”, he had to operate in a less structured way than HMRC might assume, secondly that documents might have been lost in various office moves and thirdly that marketing documents might well have been taken away by Officer Hunjan and not returned to him.  We were certainly shown a 2007 letter in which Mr. Ahtamad had complained about the failure to return documents.   We, however, find it unlikely that Mr. Ahtamad had indeed provided marketing material that was not returned to him.  When he sent material by post to HMRC on 30 October 2006, following HMRC’s request on 12 October for specific information, including market research information, the material was carefully listed in an Appendix, and certainly none of the material so listed fell into the category of marketing material. Officer Hunhan sent another letter on 8 November chasing the market research material, but he said that he did not pursue it further.    Officer Hunjan said in evidence that he saw no e-mails or other evidence of contact between Mr. Ahtamad and ML’s overseas customers and agents at the meeting held on 15 November.   He did admittedly take away some documents at the end of that meeting, and Mr. Ahtamad could not have indexed that material, but Officer Hunhan said that these documents were only copies of company accounts, and the paperwork in relation to the deal with Merchants’ Guild and MSC that there was no need to return.  

 

43.     Mr. Ahtamad undertook, at the adjournment of one day’s proceedings, to make a search for any contemporary documentation that would confirm the claims about the contacts made with manufacturers, authorised distributors and potential customers, but we were warned in advance by his counsel that, by virtue of material having been lost in one of several office moves, there was a chance that he would be unable to locate any relevant material.    In the event, he located nothing. 

 

44.     Again we will defer recording our findings of fact in relation to the whole issue of whether we accept that Mr. Ahtamad spent some considerable time, in early 2006, in researching the potential of selling disposable alcohol test strips to his various Middle East customers. 

 

The contact made with Merchants’ Guild

 

45.     Mr. Ahtamad claimed in his Witness Statement that in the course of his research into locating suppliers for alcohol test strips, and in about May 2006, he located Merchants’ Guild, whilst searching Google on the internet.  The search apparently revealed that they traded in alcohol test strips.   He said that he contacted a director of Merchants’ Guild, namely Mr. Brillus, by telephone, and that Mr. Brillus said that he wanted to come and visit Mr. Ahtamad at his business premises.    This he did, visiting Mr. Ahtamad at his Amersham office, where the two allegedly discussed quantities that Merchants’ Guild could supply and likely prices.   Mr. Ahtamad said that at this point he was not ready to place any orders because he had got further work to do in preparing the ground for his marketing in the Middle East.

 

46.      Somewhat later in 2006, Mr. Ahtamad received an unsolicited call from a Mr. Patel (an Englishman) representing MSE in France, who was apparently seeking to source alcohol test strips for the substantial market that he alleged that MSE had for such test strips.  Mr. Ahtamad said that he was not at all surprised to receive this enquiry since ML’s own website indicated that it was a provider of medical testing equipment.  Mr. Patel explained that MSE wanted to source between 15,000 and 17,000 test strips “for its buoyant customer base”.  Mr. Ahtamad then contacted the suppliers of which he was aware, and the authorised distributors, and although he was able to source the required quantities, Mr. Patel apparently said that the suggested price was not competitive.

 

47.     At some time, presumably between the above initial contacts and 19 July, Mr. Patel of MSE indicated that he would like to meet Mr. Ahtamad and that, since he was travelling through Heathrow Airport, they could meet in the Terminal 3 lounge.    This apparently they did.

 

48.     At some time, presumably very shortly before19 July, Mr. Brillus contacted Mr. Ahmatad and said that Merchants’ Guild could now supply some alcohol test strips at a price (£46 to £47 each) that might enable the Appellant to sell to its customer at a competitive price, but that they could only source 10,000 test strips.   Mr. Ahtamad said that he was not surprised to receive an offer of stock at a price about £2-£3 lower than the price being charged by authorised distributors.   This might be because the stock might have been “short order stock” or because the intending seller was selling for pressing commercial reasons.   Mr. Ahtamad telephoned Mr. Patel and indicated the price at which he could supply 10,000 alcohol test strips, and Mr. Patel said that MSE would purchase this amount at the price indicated by Mr. Ahtamad.

 

49.     Once the deal had been agreed in principle, five things occurred, all of which we must now mention.

 

50.    First, Merchants’ Guild supplied, without any request from the Appellant, various documents to the Appellant, including a Non-Disclosure Agreement that the Appellant was required to sign.  This required the Appellant not to provide to any third party any details of Merchants’ Guild’s confidential information, such as supplier details, albeit that the Appellant did not know the identity of the supplier to Merchants’ Guild.   The other documents supplied by Merchants’ Guild included a Credit Application form, details of bank accounts that Merchants’ Guild had with NatWest and First Curacao International Bank (“FCIB”), a short letter giving information about Merchants’ Guild, a copy of its Certificate of Incorporation, and VAT registration Certificate, a copy of a local authority Business Rates demand sent to Merchants’ Guild and a copy of Mr. Brillus’s driving licence.    At some time, and possibly along with the above papers or with its invoice, Merchants’ Guild may have furnished to the Appellant a one-page information sheet, dated December 2004, giving some details about AlcoSal’s  “101 & 125 Alcohol Test Strips”.  We will refer to the significance of this sheet of paper later, but we should now mention that it indicated that the Test Strips to which it was referring had to be stored at temperatures of between 5 and 30 degrees centigrade and secondly that the Test Strips should not be used beyond their expiry date.   The “1” and the “25” in the above code numbers appeared to refer to the fact that the strips could be supplied either singly or in packs of 25.

 

51.    The second thing that occurred is that at some time MSE had sent ML an unsolicited pack of papers introducing MSE to its potential suppliers and customers.   One undated letter to “Dear Potential Customer” said that MSE were “traders in products ranging from cosmetics to pharmaceutical items, such as HIV Testing Kits and Alcohol Test Strips”.  Much of the remaining paperwork, including one document dealing with French TVA, was in French.

 

52.     The third thing that must have occurred when or after the deal was struck in principle was that there must have been some discussion between Merchants’ Guild and the Appellant, and the Appellant and MSE about the critical payment terms.   We say this because Merchants’ Guild had sent ML a credit application form, implicitly contemplating (as in fact occurred) that Merchants’ Guild would release the strips to ML prior to receiving payment.  And since ML’s invoice to MSE was going to require “advance payment before delivery”, and that also occurred, this must presumably have been made clear as well. 

 

53.    Merchants’ Guild’s credit application form requested details of the Appellant, its contact details, bank account details, and the identity of two Trade References.   This form was filled in by Mr. Ahtamad and returned to the Merchants’ Guild, giving details of the Appellant’s NatWest bank account, but failing to insert anything in the two boxes where details of Trade References were requested.  Merchants’ Guild appeared not to be troubled that the Trade References were not volunteered, and in cross-examination Mr. Ahtamad said that the reason he may not have given these details was that he could not have obtained consent in time from any contemplated trade contacts to put their names forward as referees.

 

54.     The fourth thing that must have happened before 19 July is that, at some time in July, Mr. Ahtamad had made some changes to his standard Terms and Conditions of Sale.  We were shown these Terms and Conditions and whilst neither counsel appeared to have been able to consider them in any detail, it was clear that they had been amended in July 2006, because there were references at the bottom to there being two Issues of the Terms and Conditions, the first being dated February 1996, and the second July 2006.

 

55.   Whilst this did not specifically emerge in evidence, it seemed that the July changes made no change to the earlier provision dealing with payment terms for export sales.   They had seemingly always required 100% payment, accompanied by Letter of Credit, on despatch, and in the event (as just indicated), ML’s invoice to MSE actually modified this term and required pre-payment.

 

56.     One of the confusing points about these Terms and Conditions was that, while the invoices made no reference to whether the Terms and Conditions applied to the deal and were forwarded to either Merchants’ Guild or MSE, Mr. Ahtamad seemed to recall that they had been sent to both, notwithstanding that they related only to sales. The Appellant’s counsel, on being able to glance at the added Terms (namely those from Clause 15 onwards), remarked that Clause 15 at least appeared to deal with purchases.    We will quote this short Clause because it appears to us to be of some troublesome significance to which we will refer later.    Clause 15 read:

 

“15.   We will only buy and sell goods after rigorous commercial checks and thorough scrutiny of our suppliers and the origin of the goods”.

 

This clause appeared to us to have nothing to do with the terms of purchase, and indeed to be of little contractual significance because it merely referred to steps that it was represented that the Appellant would have undertaken prior to selling goods.  It also appeared that such steps had barely been taken.   All the remaining terms dealt exclusively with the terms of sale, and paid no regard to purchases.

 

57.     Two sales terms sought to restrict the seller’s liability.  Clause 18 said that:

 

“18.    The goods are represented to be as described in the irrevocable purchase order or pro-forma invoice.”

 

and clause 23 said that:

 

“23.    The goods are warranted or guaranteed by the manufacturer and not by the MassTech Ltd and any claim for defects should be addressed to the proper manufacturer’s representative.   The Company shall not be held liable for any consequential damage, either direct or indirect, or for the loss of profits in case of any failure of operation of any of the goods sold.”

 

58.     Having regard to the hopelessly brief description of the goods that appeared on all orders and invoices, any purchaser might have concluded that if Clause 18 was contractually effective, it would give a purchaser few remedies, save in the situation where the goods sold were simply not “alcohol test strips” at all.  And whether Clause 23 was effective to assign whatever manufacturer’s warranties there might have been or not, it was certainly clear that it sought to eliminate potential liability of ML for defects in the goods.

 

59.     We recorded above that at one point Mr. Ahtamad had said that the Terms and Conditions had been sent to both the supplier and the customer, but he also said that it was more usual for the supplier itself, rather than ML, the purchaser, to have provided the terms dealing with the supply to ML. He followed this up by saying that he believed that he would have received something from Merchants’ Guild, but when asked by the Respondents’ counsel whether he had retained any such document, his response was “I cannot answer that, actually”.  We considered Mr. Ahtamad’s evidence to be confusing in relation to what had been furnished, in either direction, between Merchants’ Guild and ML, but we think it reasonable to suppose that whether or not these Terms and Conditions were sent (for no good reason) to the supplier, they probably were faxed to MSE.  

 

60.     The fifth and final thing to occur was that Mr. Ahtamad said that since a friend of his had, many years ago, had difficulties when he had discovered that a Spanish counter-party had had its VAT registration withdrawn shortly before effecting a transaction, he decided to verify Merchants’ Guild’s and MSE’s respective VAT and TVA numbers.   The relevant requests were made to an internet site, not to HMRC’s Redhill office, and the responses were received on 17and 19 July.

 

The material  documents for the 19 July 2006 transaction

 

61.     All the following transaction documents were dated 19 July 2006 and they were all said to have been sent by fax.    No document, however, had any fax header giving the time and date of transmission.    As we understand it, this indicates that both the sending and receiving fax machines would not have been set to record such information.

 

62.     Merchants’ Guild Stock Offer offered 10,000 Disposable Alcohol Test Strips (Pack of 25).   It did not indicate any manufacturer name or Product Code.  Whether or not a telephone discussion tied this Stock Offer up with the 2004 piece of paper describing two types of alcohol test strip manufacturer by AlcoSal we do not know, but we repeat the point that that piece of paper indicated that the described Test Strips were in packs of 1 or 25. 

 

63.     ML’s order gave the same description of the goods, the unit and total prices but contained no other information.  

 

64.      Merchants’ Guild’s invoice was again in similar form.    It did not indicate when payment should be made but did indicate the FCIB account to which monies should be credited.      Mr. Ahtamad said that he had not heard of this bank and had no idea that it was under scrutiny by HMRC.    In his business he dealt with payments to and from numerous banks, some of which he had not previously heard of.

 

65.     ML’s offer to MSE contained the same description of the goods.   It indicated that “Stock inspection is available should you wish to clarify/confirm any details”, and it indicated that the quoted price was “C&F”.

 

66.     MSE’s Order was in identical form, though indicating that the required delivery address was that of a freight forwarder in the Netherlands.

 

67.    ML’s invoice was in similar form.    It indicated that no Letter of Credit was appropriate since it indicated that advance payment was required before delivery.

 

68.     Mr. Ahtamad apparently checked on the internet that the £491,700 invoiced had duly been paid into his NatWest account on 19 July, and he received a confirmation from NatWest, dated 20 July, indicating the same, and that as from 9.00 a.m. on 20 July the payer would not be able to reverse the payment.    The NatWest confirmation indicated that MSE’s payment had come from MSE’s FCIB account.

 

69     Mr. Ahtamed faxed Scanwell Logistics, the freight forwarder being used by Merchants’ Guild (or quite possibly by the chain of suppliers above Merchants’ Guild as well as by Merchants’ Guild itself), intimating that Merchants’ Guild had allocated 10,000 disposable Alcohol Test Strips in 25 pack containers to ML, and that in ML’s turn, they should now be allocated to MSE.    This fax said that “In addition and very importantly the above mentioned stock needs to be inspected.    Please therefore inspect this stock and advise the quantity, state of the packing and any obvious markings or damages.”  

 

70.     Possibly in the interval between the despatch of the above fax, and the follow-up fax mentioned in paragraph 71, Mr. Ahtamad telephoned Scanwell Logistics and ascertained that the goods had been inspected and that the packaging was in good condition.      During the hearing, he said that he did not know to whom he had spoken.

 

71.      A follow-up fax to Scanwell Logistics indicated the address of the Netherlands freight forwarder to whom the goods were to be despatched.    Whether this was sent before or after Mr. Ahtamad received the following confirmatory fax from Scanwell Logistics we do not know.  The fax from Scanwell Logistics confirmed that the packaging was in good condition, though it did make the observation that each packet contained 100 Test Strips, and not 25.    During the hearing this disparity was never explained.   

 

72.     A freight ticket appears to indicate that the goods were booked in or despatched from Dover docks at 10.25 p.m. on 19 July. 

 

73.     On 25 July 2006, Mr. Ahtamad sent a fax to MSE, headed “Acceptance of Goods/Stock”.    This fax asked MSE to confirm that they had received and inspected the consignment of 10,000 alcohol test strips and that it was in accordance with the description in the purchase order and invoice.   This fax was date stamped 26 July and signed on behalf of MSE and seemingly returned, as requested, to ML.

 

74.     On 26 July, ML paid Merchants’ Guild the purchase consideration of £563,295 for the goods that ML had ordered, and for which implicitly credit had been given.

 

The exchange of correspondence dated 12 and 30 October 2006, the enquiries made by HMRC into Scanwell Logistics, and the meeting on 15 November 2006 between Mr. Ahtamad, Officer Hunjan and Officer Donovan

 

75.     The reason why HMRC chose to look closely into the possible MTIC attributes of the 19 July transaction was that it prompted a major repayment claim after ML had been virtually dormant for a year, merely reclaiming VAT in relation to its few continuing office expenses.   It is superfluous to summarise the exchanges of correspondence during which HMRC asked for and received documentation and explained to Mr. Ahtamad how MTIC and contra trading all operated.    Some of the points advanced by the Officers in this period will be referred to when summarising the Respondents’ counsel’s submissions.    All that we need to do at this point is to highlight the three points mentioned in the above heading.

 

76.    We first quote two short passages from Officer Hunjan’s letter to Mr. Ahtamad of 12 October 2006 and Mr. Ahtamad’s reply in his letter of 30 October.   Most of these letters were dedicated to requesting, and then being sent documents, but the two paragraphs that we now quote featured in a contention advanced by counsel for the Respondents.

 

77.     The question posed by Officer Hunjan was “How was this deal financed?   Provide any loan agreements or contracts”.     Mr. Ahtamad’s reply was: “Regarding point no 4:  I would like to confirm that all our trading in period 07/06 was financed using company operating funds and did not involve third party finances”.     We will comment in due course on the submission based on this exchange, and our conclusion in relation to the submission.

 

78.     HMRC made various enquiries into the standing and operation of Scanwell Logistics, and made much in argument of the fact that the Appellant had not visited its premises or paid much attention to the inspection report that Scanwell Logistics produced.    For present purposes it is sufficient to say that HMRC’s own enquiries established that Scanwell Logistics ceased trading, at least as a freight forwarder, on 30 September 2006 and that most of the product that they had dealt with in the past had been fruit and vegetables.      Mr. Ahtamad’s response to contentions that he should have visited their premises to “check them out”, and that he should have checked the goods himself, was that Scanwell Logistics were of course the freight forwarder in whose warehouse the goods had been held when owned by Merchants’ Guild (and doubtless it now transpires by various companies in the chain above Merchants’ Guild) so that they were in no way a forwarder appointed by him.   He also said that in many years of trading he had never had any trouble with a freight forwarder, nor had he visited any freight forwarder’s premises to check them out.

 

79.      The significance of the 15 November meeting was that it has thrown up two items of dispute between the parties as to what was said (or at least meant) at that meeting, and regrettably a further occasion where Officer Hunjan made a subsequent change to the content of his hand-written meeting note.

 

80.     The first area of dispute related to the feature that a version of Officer Hunjan’s hand-written meeting note of the relevant meeting, which had been disclosed to the Appellant in the course of the exchange of documents, made no reference to how long ML had known of Merchants’ Guild, and whether any previous deal had been done.    Very shortly before the hearing HMRC disclosed a further version of this note to which there had been added the words: “The Merchants’ Guild known – 3 years back -  similar deal  -  Mr. Al”.  

 

81.     Officer Hunjan said that he deeply regretted making this change to the earlier version of the note, and thought that he had probably made it in 2009.

 

82.     Mr. Ahtamad’s evidence was that he had not known of Merchants’ Guild until roughly May 2006, and moreover that he located them by making a Google search.    This led to the second element of disputed evidence because Officer Hunjan recorded even in the first version of his hand-written note that Mr. Ahtamad had located Merchants’ Guild by accessing the IPT (International Phone Traders) website.   Mr. Ahtamad said in his evidence that he had never heard of this website for accessing details of availability of mobile phones for sale in the grey market, and demand for such phones, until it was mentioned to him very much later by one or other of the HMRC Officers.

 

83.     Three other documents are of relevance to these elements of disputed evidence, in other words this dispute as to whether Mr. Ahtamad had known of Merchants’ Guild for 3 years prior to the July 2006 transaction, and as to whether he had done a previous deal with them in relation to alcohol test strips (or any other product), and secondly as to whether he had located Merchants’ Guild through the IPT website.

 

84.     The first further document is the typed version of Officer Hunjan’s meeting note.  We are satisfied from evidence produced to us in relation to HMRC’s electronic file that this document was recorded into the electronic file on 23 November 2006 and that it was then in the form in which it was shown to us.   This document contained the sentence: “MTIC Activity:  3 years ago trader had entered into a similar deal involving alcohol test kits supplied by the same supplier (the Merchants’ Guild)”.   This typed document made a further reference to the fact that: “Merchants’ Guild, trader has known them for the last 3 years”, and there was the further relevant sentence “Contact is generally made via IPT and other known MTIC websites”.  

 

85.     The other two relevant documents were the hand-written “aide memoire” note that was made by Officer Donovan at the meeting on 15 November 2006, and the typed version of that note.   Neither version appeared to make reference to the use of the IPT website.  As regards the question of whether there had been any earlier dealing with Merchants’ Guild, the only reference to this appears to be in the hand-written version, and not in the typed version.   The relevant words in the hand-written version were “Ray Brillus” in response to the question: “What was the name of the contact?” and in relation to the question: “How did contact come about?”, the answer recorded was “General trading co  -  3 years ago”.  In giving evidence Officer Donovan said that she could not now say whether that reference meant that there had been an earlier deal with Merchants’ Guild three years ago, or whether it indicated, as it was claimed by the Appellant’s counsel, that Merchants’ Guild had actually been formed about 3 years ago.  She thought it more likely that her note indicated the former, but she could not now say for sure.  We repeat the point that the critical answer to the second question about when the earlier contact came about appeared not to be reproduced in the typed version of the same aide memoire note.

 

86.     HMRC did not produce any other evidence to show that ML had entered into a transaction with Merchants’ Guild in 2003, or indeed prior to 19 July 2006.

 

The relevant law, and whether in particular we should ignore the feature that Mr. Ahtamad, and so the Appellant (since the Appellant could derive its knowledge from no other quarter), was arguably unaware of MTIC trading, when considering the Appellant’s “means of knowledge”, and the issue of whether it ought to have known that there could be no other reasonable explanation for the 19 July transaction than that it was connected to VAT fraud.

 

87.     Since the outcome of this case depends so critically on our findings of fact, we consider that it is more appropriate to deal first with any doubtful points on the law, and with the contentions of the respective parties, prior to giving our findings of fact.

 

88.    The basic approach that we should take in approaching the third of the Kittel questions has been much simplified by Lord Justice Moses’ decision.  This third test is the two-limb test as to whether the Appellant knew or ought to have known that its transaction was connected to MTIC fraud.   The points that we consider clear are that:

 

·       in applying the limb of the test where actual knowledge is in issue, we should treat “Nelsonian blindness” as the equivalent of actual knowledge;

·       in applying the “ought to have known” element of the test, we should treat the notion of what the Appellant ought to have known as being equivalent to the notion of what it had the means to know;

·       it is not sufficient that the Appellant should have known that its transaction was more likely than not to have been connected to fraudulent evasion; it must be shown that the Appellant should have known that its transaction was connected to fraudulent evasion;

·       in considering whether the Appellant ought to have known that its transaction was connected to VAT fraud, we should consider that that test was satisfied if the Appellant knew, or in the circumstances and pursuing reasonable enquiries, had the means to know, that there could be no other reasonable explanation for the transaction than that it was connected with the fraudulent evasion of VAT;

·       whilst we should pay little regard to the failure to make further enquiries where it could not be demonstrated that further enquiries would have revealed something material, we ought also not to over-concentrate merely on the making of due diligence enquiries. We should look at all of the circumstances, and the totality of the facts might well justify an inference that there could be no other explanation for a transaction than that it was connected to VAT fraud.     And a disregard for making further enquiries, coupled with other factors, when taking the whole picture into account, might again justify the same conclusion.

 

89.     Whilst Lord Justice Moses’ decision has greatly simplified matters, it has not specifically dealt with the legal issue of whether in applying the “ought to have known” element of the test “objectively”(and Kittel has made it clear that in some sense the test is an objective one) we should apply the standards of an ordinarily competent appellant, or whether, if we conclude that Mr.Ahtamad, and the Appellant, were ignorant of MTIC fraud in July 2006, we should take that ignorance into account in judging what they ought to have known.

 

90.     It seems to us that the only authority directly relevant to this issue is the decision of Mr. Justice Lewison in the case of HMRC v. Olympia Technology Limited [2009] EWHC 15 (Ch) 95. 

 

 91.    In the Olympia case, the Tribunal had given consideration to whether, in applying the “ought to have known” element of the Kittel test, it should postulate a director of reasonable competence, or whether it should apply the test to the circumstances of the innocent and naïve director who was actually the managing director of the company.  The facts were unfortunately confused by the fact that it was the state of knowledge of the company itself that was properly in issue, and there was a senior employee in the company, as well as the director, whose greater knowledge might equally be attributed to the company.  We are thus not entirely clear whether Mr. Justice Lewison’s decision was based on the fact that because of the awareness of certain things by the other employee it was appropriate to conclude that the company ought to have been aware of the connection to the fraud, or whether the decision was based on the notional awareness of some ordinarily competent director? The following passage makes this dilemma clear:

 

125.    Quite apart from the difficulty of imagining a naïve and gullible company, the Tribunal expressly adopted a legal test that required fewer precautions (or a lower level of understanding) than would have been required of a director of ordinary competence. The Tribunal does not positively find that it would have decided that an ordinarily competent director would have made further enquiries, but in my judgment the fact that the Tribunal considered that it “might well” have done so indicates that the application of the correct legal test might alter the outcome.    In applying the correct legal test, the Tribunal must consider not only the knowledge that should be attributed to the company via its directors, but also the knowledge that should be attributed to the company via its senior employees.  In this context, knowledge includes both knowledge of the facts and the ability to evaluate those facts and to draw appropriate conclusions from them”.

 

92.     It seems to us in the present case, that if we reach the conclusion that Mr. Ahtamad and thus ML were unaware of MTIC fraud in July 2006, this is a material fact to which we must pay regard.   The grounds for saying this are as follows:

 

·       Even if we should interpret Mr. Justice Lewison’s decision as requiring us to pay regard to the standards expected of an average appellant or director, and not those of the actual gullible, naïve or stupid actual Appellant or director, that contrast is not relevant in this case.  There was nothing stupid about Mr. Ahtamad.  He simply shared with the vast majority of the population, including the present Tribunal Judge until about 2008, ignorance of a particular type of fraud.  That appears to us, however, not only to be perfectly understandable, but to be one of the facts or circumstances by reference to which we should apply the “ought to have known test”.   It is not something that makes Mr. Ahtamad so naïve or gullible that we should apply the relevant test to the knowledge that might be available to some different notional person.

·       It also appears to us that whilst the Kittel test plainly requires an Appellant to tread carefully, and to pursue due diligence that he might be expected to pursue, this approach comes close to treating a negligent person as a “participant in the fraud”.  That bridge has plainly been crossed to some degree.    It would however involve a very major extension of this notion if we were required to consider what Mr. Ahtamad knew, and what due diligence he ought to progress by asking us to assume that he would be steeped in knowledge of MTIC fraud, and that he might have the knowledge and expectations of some notional person who did have all that information.   To think of treating Mr. Ahtamad and ML as “participants” on this notional and fictitious basis appears to be a major further step that we should not contemplate taking.

·       Finally we rely on the obvious fact that where appellants in MTIC cases do have all the knowledge and expectations to which we have referred, HMRC understandably goes out of its way to emphasise these facts.   The absence of these facts, and the feature that the absence of this knowledge and these expectations can be entirely realistic, must justify us in our conclusion that we must pay regard to this reality.

 

93.     Our conclusion on this legal point, therefore, aside from the thought that it was perhaps so obvious that it should not have needed any consideration, is that if we conclude that Mr. Ahtamad and therefore the Appellant were ignorant of MTIC fraud, then we should apply the third element of the Kittel test with that conclusion in mind.    

 

94.      We certainly do not say that that feature altogether removes any need on the part of the Appellant to conduct itself properly when allegedly entering into an honest transaction.   Clearly factors that might be curious and suspicious even to the director and Appellant unaware of MTIC fraud need to be pursued.   The point is simply that we would not apply the test from the starting point that the parties should be expecting, and vigorously guarding against, MTIC fraud.  If they are ignorant of it, that cannot be their starting point.

 

The contentions on behalf of the Appellant

 

95.     It was contended on behalf of the Appellant that:

 

·       the burden of proof, to the extent of proving matters on the balance of probabilities, was upon the Respondents;

·       this case was markedly different from many in that it involved “goods .. not traditionally used in MTIC fraud, traded as a one off transaction in a clean chain by a company with a long unblemished trading history”;

·       the Respondents had failed to show that the Appellant had obtained any awareness of MTIC trading either through Mr. Ahtamad’s involvement with MCL or through some alleged earlier transaction between ML and Merchants’ Guild;

·       if Officer Hunjan believed that Mr. Ahtamad had referred to some much earlier transaction between ML and Merchants’ Guild, it was astonishing that he had failed to pursue further questions in relation to that asserted transaction and noteworthy that no other evidence had been produced to substantiate that the transaction had indeed occurred; and that

·       claims that the 19 July transaction itself had had features that should have attracted concern and prompted further enquiries had not been made out.

 

The contentions on behalf of the Respondents

 

96.     It was contended on behalf of the Respondents that:

 

·       the facts surrounding the connection between Mr. Ahtamad and MCL, and Mr. Ahtamad’s attendance at the April 2005 meeting in relation to MCL meant that the claim that Mr. Ahtamad, and so the Appellant were ignorant of MTIC fraud in July 2006 “lacked any credibility”;

·       the alcohol test strips dealt in shared the common characteristics of goods regularly dealt in in MTIC transactions;

·       on a single day, ML both bought and sold an identical quantity of alcohol test strips;

·       no end-users were identified in the supply chain, i.e. beyond MSE;

·       reference by Mr. Ahtamad at the November 2006 meeting to an earlier transaction with Merchants’ Guild and to having located MSE on the IPT web-site revealed an awareness of matters relevant to MTIC activity;

·       no documentary evidence supported Mr. Ahtamad’s claim about having researched his Middle East market in order to market alcohol test strips, or in having spent 6-7 weeks in putting together the actual transaction undertaken on 19 July;

·       the size of the transaction, in terms of the prices paid and received, were equivalent to 70% of the Appellant’s recent turnover, making the transaction most important to ML, and thus making some casual features of its implementation suspicious;

·       it was extraordinary that there was no evidence of a business plan having been produced in relation to the proposed marketing of alcohol test strips to the Middle Eastern customers as the lower product margin would have meant that ML would have to quadruple its turnover to achieve the same level of operating profit as in earlier years;

·       it was highly suspicious that MSE would pre-pay ML, a company about which it knew very little, and equally suspicious that Merchants’ Guild would extend credit to ML in the way it did;

·       ML’s failure to take possession of or even inspect the goods, and to scrutinise the choice, and standards, of the freight forwarders were serious omissions;

·       the product dealt in was never identified by brand-name, serial numbers or other code, and the casual inspection report revealed that the product was packed in 100 unit boxes, whereas Merchants’ Guild’s invoice had referred to boxes of 25;

·       failure to insure the stock, and to rely, without enquiry, on the expectation that the stock was insured whilst on the premises of the freight forwarder by the freight forwarder was highly suspicious;

·       it was odd that at one point Mr. Ahtamad claimed not to have noticed that the goods were being transported to a freight forwarder in the Netherlands for the French buyer, whilst on a different occasion he said that he considered this not to be particularly unusual;

·       the Appellant’s due diligence in relation to Merchants’ Guild and MSE was virtually non-existent; and that

·       the answer given by Mr. Ahtamad to the question that we quoted in paragraph 77 above was an evasive answer designed to obscure the truth.

 

 

Our findings of fact

 

The conflict of evidence

 

97.     This is a case where there has been a major conflict of evidence.  On the one hand, Mr. Ahtamad’s evidence is that, without having heard of Merchants’ Guild before about May 2006, and being oblivious even to the existence of MTIC fraud, ML sought to expand its existing trade of making medical supplies into the area of supplying alcohol test strips.  In this context it seems credible that its existing trade gave it a number of customer contacts amongst police forces, hospitals etc in the Middle East that made the proposed extension of trade quite promising.  In addition, with the loss of the Leo distributorship ML would obviously have been keen to develop some new line of business.

 

98.     It is then credible that having located Merchants’ Guild, Mr. Ahtamad may have fallen inadvertently into an MTIC trap.   Whether or not he should have known this, it is plainly possible that Merchants’ Guild, with their FCIB bank account, may have been involved with MTIC fraud, and then possible that they, or “the coordinator” of the MTIC dirty or contra chain, would have induced MSE to approach ML as an intending customer.   Mr. Ahtamad may then have ended up participating in an MTIC fraud, but on this hypothesis, he may have participated “as an innocent dupe”.   Assuming, on this hypothesis, that he was oblivious to MTIC fraud, he gave attention to the risks that would have seemed to him to be the paramount ones (the credit risk and the need to avoid warranty liability for product about which he knew little), but he can possibly be forgiven for failure to attend to a category of risks that he said he knew nothing about.   It is also possible that he might have chosen to take a bit of a risk with a new deal, in the light of the fact that the loss of his Leo distribution rights had left him with very little (or no) business.

 

99.     The alternative hypothesis is basically different in every respect.   Mr. Ahtamad may have been involved in an earlier MTIC transaction with Merchants’ Guild.  He may have funded MCL to promote MTIC transactions in that company, but with the intention of not being actively, or seen to be actively, involved.   He would then either have been a guilty and knowing party to the July 2006 transaction, or at best one who, knowing all about MTIC transactions, and the recommended due diligence, failed to perform any of the due diligence that HMRC were recommending.    Possibly he chose to back the opposite horse of feigning MTIC ignorance, rather than swapping preposterous and unconvincing due diligence packs with a view to hoping that he could conceal his past involvement in MTIC transactions, and claim that he was an innocent dupe.

 

Three observations

 

100.     We start with three observations.

 

101.   Mr. Ahtamad, a man aged 51, proud of his company, and his family’s achievements, was a man of some integrity.   He may at worst have participated in MTIC transactions, in the knowledge that they were likely to have been connected to fraud.  However he was not “a chancer”.  HMRC has not alleged and we do not believe that he was one of the active conspirators, on the “inside track”.   Some of the brokers, claiming their VAT refunds fall into this category.   He certainly did not.

 

102.    In observing the obvious point that the burden of proof rests upon the Respondents, we emphasise that this is because the Appellant is classed as a participant in a fraud if the Appeal is dismissed.  This is not a conclusion to be reached lightly.

 

103.   The third observation that we make is barely relevant, but it is worth mentioning.  In many MTIC cases, it is perfectly obvious that the appellant has undertaken numerous similar past transactions that have escaped “extended verification”, so that the appellant may have made considerable dubious profits before HMRC deny an input VAT repayment claim on a transaction.  We are not making any point as ridiculous as to suggest that everyone should have a few unchallenged claims.   It is however noteworthy that this Appellant, and Mr. Ahtamad, appear to have modest resources.   ML had shareholders’ funds of £19,779 at 5 February 2005 and it made an operating profit of £52,244 in that financial year.   Furthermore the loss that the Appellant would suffer, were the Appeal to be dismissed is almost exactly six times the modest profit that it will have made if the Appeal is allowed.  This is broadly irrelevant (save in so far as these terms might have a relevance to which we refer in paragraph 113 below), but this reality does mean that we should be very cautious of subjecting the Appellant to this substantial loss that Mr. Ahtamad and the Appellant may be able to ill afford without taking great care that HMRC has proved its case.

 

Was Mr. Ahtamad, and thus the Appellant, aware of the existence of MTIC fraud by virtue of the connection between them and MCL?

 

104.     This question depends on the relationship between Mr. Ahtamad and MCL, the findings concerning certain letters, and the length of Mr. Ahtamad’s attendance at the 6 April 2005 MCL meeting.    We will deal separately with whether other factors might justify the conclusion that Mr. Ahtamad and the Appellant derived such awareness in other ways. 

 

105.     We find the whole relationship between Mr. Ahtamad and Mr. Hussein and Mr. Hussein’s company, MCL, to be extraordinary. By any test an outlay of £150,000 or £125,000 was a very major investment for ML. Mr. Ahtamad’s drawings (aggregating salary and dividends) were generally about £45,000 a year, so that the loan represented both three years’ average gross earnings, and more than twice the operating profit in both 2004 and 2005.

 

106.     We have considered the terms of the loan, its high interest rate, and its early repayment date, and we cannot say that any of these features point to the loan being genuinely intended to fund either the initial capital requirement and working capital needs of a genuine business, or the delayed VAT repayment demands of an MTIC fraudster. It seems improbable that a genuine start-up trader in software could possibly contemplate repaying effectively the whole of its capital within 12 months, though it may have been hoped that with a track record, the company would have been able to secure cheaper and longer term funding after a year.   

 

107.     The terms of the loan conferred no particular rights on the lender to obtain information, as one might have expected in a genuine start-up situation, and indeed also when funding an MTIC broker, unless the lender wanted to remain “hidden behind the scenes”.   Perhaps, between friends or members of Mr. Ahtamad’s social circle, such provision of information could have been assumed.

 

108.     While Mr. Ahtamad claimed that he became a director, not to play any part in the activity of the company, but to protect his investment, there was no evidence that he had attended any Board or shareholder meeting to pursue that objective of protecting his investment, and certainly no evidence that he played any active part in the company’s trading.

 

109.     We find the suggestion that Mr. Ahtamad might have opened the letter posted by HMRC to MCL at his home address in January 2005 (referred to in paragraph 25 above) to be of no significance.  When the company only commenced activity a month or two prior to that date, the natural assumption would be that a letter from HMRC would relate only to something like PAYE or NI detail, or detail concerning VAT registration, and we accept Mr. Ahtamad’s evidence that he simply handed the unopened letter to Mr. Hussein. We have not mentioned that there was some discussion about a much later letter, dealing with MTIC questions, but since that was sent to MCL’s lawyers, and certainly not to Mr. Ahtamad and there was no evidence that he was even aware of this much later letter, we consider that to be irrelevant.

 

110.     The contested evidence concerning Mr. Ahtamad’s presence at the April 2005 meeting is strange.  It is agreed that he arrived at the meeting between 15 and 30 minutes late, but on Officer Hunjan’s claim that he “shook hands with both men at the end of the meeting”, the meeting lasting 2 hours, there is obvious conflict with Mr. Ahtamad’s adamant claim that he left after 15 minutes.   

 

111.    It seems odd that Mr. Ahtamad might have driven 20 miles to attend the meeting at Mr. Hussein’s invitation, only to make a few comments about his Maidenhead VAT office, and then to leave after 15 minutes.  The meeting notes do refer (see paragraph 31 above) to much of the discussion being about how the business was operating, and how a proper business should operate, and Mr. Ahtamad might have thought the meeting to be irrelevant to him.  Equally he might have wished to distance himself from MTIC revelations (an objective requiring some considerable foresight), or Officer Hunjan’s version may be correct, and Mr. Ahtamad might have stayed for the whole meeting.  We simply cannot be sure of that, however, particularly in the light of the answers given by Officer Hunjan that we recorded towards the end of paragraph 28 above.

 

112.   With the absence of clear evidence on the part of Officer Hunjan that Mr. Ahtamad was present at the meeting in order to hear the remarks plainly made about MTIC trading and risks, we both consider that we must conclude that HMRC has not made out its case that Mr. Ahtamad did learn anything material about MTIC risks at this meeting.  We also conclude that, decidedly odd as the whole relationship between Mr. Ahtamad and MCL was, there is no ground for concluding that HMRC has satisfied the burden of proof in order to demonstrate that the whole relationship between Mr. Ahtamad and ML and MCL must equally mean that Mr. Ahtamad was familiar with MTIC trading. 

 

113.   Insofar as that conclusion is naturally a borderline one, and perhaps a surprising one, we should add that the following factors seem to confirm us in our view that our conclusion in paragraph 112 is not as “incredible” as HMRC suggested that such a conclusion would be.  We consider that:

 

·       if Mr. Ahtamad was fully aware of MTIC trading, and aware that MCL had been involved in MTIC transactions, in which it was in dispute with HMRC (as it plainly was by the middle of 2005), it seems a little strange for ML to have knowingly embarked itself on an MTIC transaction 12 months later;

·       in particular ML could ill-afford to lose any part of its loan to MCL, but this was in deficit by December 2005, and no further repayments had been made by 19 July 2006.   Would it have made sense to risk further monetary loss in the very type of transaction that, on this hypothesis, Mr. Ahtamad would have realised would have jeopardised the outstanding £45,000 (ignoring substantial default interest) still owed to ML by MCL?

·       it would surely also be odd for Mr. Ahtamad, assuming him to be conversant with MTIC transactions, to participate in his own company not only in “a second whirl of the dice”, but in a transaction where the 2 .2% profit margin was unusually low, and the level of the loss at risk almost exactly six times as great as the profit that he would make if ML’s track record proved more promising than that of MCL,and the input VAT reclaim had been paid;

·       if Mr. Ahtamad was aware of MTIC transactions and risks, and in particular if he had learnt at the April 2005 meeting about the due diligence that HMRC were suggesting diminished the risks of getting caught up in MTIC transactions, it seems odd that while Mr. Ahtamad received unsolicited introductory information like drivers’ licences and utility bills from both Merchants’ Guild and MSE, he himself took none of the “due diligence” steps strongly recommended by HMRC prior ML entering into the July 2006 transaction.    We will comment below on two qualifications to this point.

 

114.   We note finally, on the subject of whether Mr. Ahtamad derived prior knowledge of MTIC activity from any of his dealings with MCL, that not only do we consider that HMRC has failed to establish, on the balance of probabilities, that Mr. Ahtamad did have such knowledge, but there is also no other evidence that suggests that Mr. Ahtamad participated in whatever transactions MCL in fact undertook, or in any of the perhaps numerous discussions that there may have been between MCL, Mr. Hussein and HMRC between April 2005 and July 2006 (and we understand even to the present day). 

 

ML’s claimed due diligence into selling disposable alcohol test strips to the Middle East market

 

115.  The absence of any documentary evidence, illustrating ML’s claimed “research” into selling alcohol test strips to the Middle East market is very significant.

 

116.    In favour of the proposition that Mr. Ahtamad’s evidence should be accepted are the points that after the loss of the Leo contract, ML needed to develop a new line of business; alcohol test strips were a natural progression for a company selling medical equipment and testing equipment, and sales to the Middle East where alcohol was banned in some countries sounded to be quite a promising line of business.    Furthermore ML and Mr. Ahtamad had contacts with police forces, armed forces and hospitals in that region and a familiarity with selling to such markets

 

117.    It is possible that some of ML’s claimed research related to other possible products.   In paragraph 38 above, we recorded that he considered expanding into the market for other medical and forensic products.  It is also possible that he exaggerated the amount of market research that he had done, and possible that if he ascertained from manufacturers that he could not purchase supplies other than through authorised distributors, there might be little to record.   

 

118.    We are slightly divided in our judgment of whether the claims about the research were valid or not.   We agree that the absence of any documentation is significant.   Whilst we are slightly divided as to whether Mr. Ahtamad had a genuine ambition to sell alcohol test strips to the Middle East market, neither of us considers that this issue undermines the distinct possibility that he was “found” by one or other of Merchants’ Guild and MSE (more likely Merchants’ Guild) and nevertheless became an innocent victim of MTIC fraud, rather than a knowing participant.

 

Had ML undertaken a prior transaction, in about 2003, with Merchants’ Guild, and did ML locate Merchants’ Guild via the IPT web-site?

 

119.     We reject HMRC’s evidence that Mr. Ahtamad had said at the November 2006 meeting that ML had done an earlier transaction with Merchants’ Guild three years before the July 2006 transaction and we reject the suggestion that he located Merchants’ Guild on the IPT web-site.

 

120.     Initially ignoring the reliability of the evidence, we accept that Mr. Ahtamad might have had a motivation to claim earlier dealings with ML’s supplier in that this would have supported the case that ML regarded its supplier as “reliable”.  Mr. Ahtamad would, however, have had a far greater incentive to support his case about ignorance of MTIC activity, such that he would more likely have suppressed information about any earlier deal.    Beyond this however, he had already provided to HMRC Merchants’ Guild’s introductory deal packs. What were these about if Merchants’ Guild was a known supplier?   We also agree with the Appellant’s counsel that if Mr. Ahtamad had indeed, in November 2006, referred to an earlier deal with Merchants’ Guild it was extraordinary for Officer Hunjan not to follow up those remarks.    As it was, Officer Hunjan said that any earlier deal would have been the concern of some other officer, albeit that in this case it has now been asserted to be a material factor in the judgment that we have to make of the July 2006 transaction.    But in November 2006, Officer Hunjan chose not to ask even follow-up questions.  

 

121.    Beyond these points, no other evidence was produced to demonstrate that there had in fact been some earlier deal between Merchants’ Guild and ML.

 

122.     The final reason why we reject the evidence about the supposed earlier deal is that Mrs. Donovan made no mention of it in the written version of her aide memoire note, and in giving evidence was only able to say (see paragraph 85 above) that she thought it more likely that the vague reference in the typed version of the note to something having occurred three years ago in relation to Merchants’ Guild indicated that there had been an earlier deal with Merchants’ Guild, rather than that Merchants’ Guild had perhaps been formed three years before the July 2006 deal.   In his turn, Officer Hunjan has admitted that the reference to the earlier deal was only inserted into the written version of his note at a later date, and probably in 2009.       Recognising that the typed version on the electronic folder did contain such a reference, and that some remark must have been made about something having occurred 3 years ago, we consider that it is far more likely that the claimed remark actually meant that it was Mr. Ahtamad’s understanding that Merchants’ Guild had been formed “about 3 years ago”, not that “ML had done a deal with Merchants’ Guild 3 years ago”.

 

123.     We also reject the evidence that Merchants’ Guild had been located by ML via the IPT web-site.   We note that no reference to this was made in Mrs. Donovan’s aide memoire note, and it was recorded only in Officer Hunjan’s note.  We consider it far more likely that ML located Merchants’ Guild by making a Google search, and consider it perfectly possible that an MTIC officer, steeped in the use of the IPT web-site by mobile phone (rather than alcohol test strip) traders, would have paraphrased the remark that Merchants’ Guild had been located via a Google search and Merchants’ Guild’s web-site to be an admission that it was located on the web-site that the officer would be so familiar with.   We are not oblivious to the possibility that Merchants’ Guild may indeed have appeared in May or July 2006 on the IPT web-site, and may for all we know also have traded in mobile phones.  No evidence was however given as to whether either of these possibilities was in fact the case, notwithstanding that we believe that there are organisations that retain hard-copy versions of internet web-sites from various different dates.    HMRC might also have been able to produce further evidence as to whether Merchants’ Guild had indeed traded in mobile phones, and appeared on the IPT web-site.    It did not do so.

 

124.     We thus reject the evidence both that there had been an earlier deal between ML and Merchants’ Guild and that Merchants’ Guild was located on the IPT web-site.   We accept that ML located Merchants’ Guild in May 2006 by making a Google search.

 

Are there any other factors or features of the transaction that suggest that Mr. Ahtamad must have had knowledge, prior to July 2006, of MTIC activity?

 

125.     Whilst the Respondents’ case made no reference to the first of the points that we will now address, and little reference to the second point, there remain two points that could throw doubt on the Appellant’s claim that it was ignorant of MTIC activity in July 2006.

 

126.   The first point that has troubled us is the insertion into ML’s Terms and Conditions of Clause 15 that we quoted in paragraph 56 above.  This clause appears to us to be pointing to the whole business about verifying the integrity of suppliers and customers, and endeavouring to verify the non-fraudulent origin of supplies, that is so central to guarding against MTIC fraud that we find it a surprising clause for someone, ignorant of MTIC fraud, to light upon for other reasons.  It is also odd in that from a contractual perspective, it was either meaningless, and just a bit of “MTIC window-dressing” or it gave buyers some form of representation that because the supplier would have complied with this requirement the goods purchased would not have a fraudulent origin.

 

127.   We are reluctant to place too much reliance on this clause because the Respondents never referred to it, so that the Appellant had no occasion to address the possible damaging significance of the clause.    Furthermore, the Appellant did at least strengthen its case of MTIC ignorance by seemingly completely disregarding the protestations contained in Clause 15 of its Terms and Conditions as to what it would in fact have done.  In the light of the distinct possibility that Mr. Ahtamad adopted bits of drafting into his Terms and Conditions that he found on the internet (as he said was the basis on which the MCL Loan Agreement was drafted), or that he may have pulled various clauses out of Terms and Conditions of Sale provided by other parties from time to time, we will ignore the troublesome inferences that we might otherwise draw from this clause.   It seems perverse to treat as the saving grace the feature that Mr. Ahtamad paid as little regard to this clause as he did to the protection of ML’s loan investment in MCL to be achieved by his directorship, but that does appear to be a reasonable conclusion.

 

128.     The other point to which again the Respondents seemingly attached little significance was the feature of checking the VAT numbers of Merchants’ Guild and MSE on the Europa website, on account of this alleged problem that some friend had had years ago in Spain.  The explanation about the friend in Spain sounds somewhat unconvincing, and the feature of checking the validity and currency of VAT and TVA registrations appears to be an MTIC – style check, which is a surprising step for someone totally ignorant of MTIC activity to take prior to entering into transactions.  

 

129.    Whilst we note this feature as one that throws some doubt on the claimed ignorance of MTIC trading, we repeat that HMRC made little in cross-examination of this point, and there is no evidence specifically to cast doubt on Mr. Ahtamad’s evidence.  It certainly remains the case that by having ignored all the usual due diligence checks, and by not having made Redhill checks, most of the support for the proposition that Mr. Ahtamad and the Appellant were ignorant of MTIC activity remains cogent.

 

130.     Our conclusion on the facts is that, quite extraordinary as we have found it that ML financed MCL in the way that it did, and extraordinary as we find the way in which Mr. Ahtamad seems not to have scrutinised the activity of MCL particularly when MCL had failed to repay ML’s loan in full on the due date for repayment, it is nevertheless not proven that either Mr. Ahtamad or the Appellant were aware of MTIC activity when ML entered into its July 2006 transaction.   We now turn to our decision itself.  Whilst our conclusion of MTIC ignorance has been quite finely balanced, we must now address the key questions in this Appeal on the basis of this conclusion that we have reached about the issue of prior knowledge.

 

Our decision

 

131.    We will deal with our overall conclusions, and our decision, by addressing whether:

 

·       we have concluded that Mr. Ahtamad was what we describe as an active participant in the VAT fraud, in other words a broker who we considered to be “on the inside track”, and thus either one knowingly manipulated by the overall coordinator of the MTIC transactions, or one who openly conspired with Merchants’ Guild and MSE to facilitate the avoidance of VAT;

·       we have concluded that in a less involved sense Mr. Ahtamad nevertheless knew or turned a Nelsonian blind eye to his actual awareness that the 19 July 2006 transaction was connected with VAT fraud; and thirdly

·       we have concluded that Mr. Ahtamad should nevertheless, albeit ignorant of the existence of MTIC fraud, have known that the only reasonable explanation for its transaction was that it was connected with the fraudulent evasion of VAT.

 

132.     We have no hesitation in rejecting the possibility posed by the first bullet point in paragraph 131 above.  Mr. Ahtamad was a man of some integrity.  The worst that we can conceive is that, having inadvertently become involved in an MTIC transaction, he has somewhat embroidered events to conceal his ignorance and the fact that he may have been naïve.  We cannot believe that he was an active and knowing participant in the fraud.   There was no remote evidence that he received any other form of “kick-back” or payment that would or might have been related to parties in the dirty or contra chains, and no evidence that ML was the beneficiary of limited recourse loans that financed the delay in recovering VAT.  And if, contrary to our judgment, Mr. Ahtamad was at all times an open participant in the fraud, he struck for ML, as a “knowing broker” a fairly disadvantageous deal.   A 2.2% profit margin, and a risk of suffering a loss almost exactly six times greater than the potential profit on the transaction would not only be unusual in our experience of MTIC brokers but surprisingly stupid.

 

133.     We will now address the third bullet point mentioned in paragraph 131 above, it being obvious that if we conclude, as we do, that the Respondents have failed to prove, on the balance of probabilities, that the Appellant should have known that the only reasonable explanation for its relevant transaction was that it was connected to the fraudulent evasion of VAT, then self-evidently they could not have satisfied the test in the middle bullet point.

 

134.     We repeat the point that we made in paragraph 94 above, namely that our conclusion that Mr. Ahtamad and the Appellant were ignorant of MTIC fraud in July 2006 does not remove their need to approach the relevant transaction honestly, and with reasonable diligence.   It simply means that, unlike the trader in mobile phones totally versed in the knowledge of MTIC activity and the advisability of Redhill checks etc, and thus aware that he is treading in a minefield of fraud, this particular Appellant does not start “Love – 40 down”, and required, in order to prove honesty, to scrutinise all features of the deal genuinely and carefully to preserve its fundamental right to the input deduction.

 

135.     On the assumption that Mr. Ahtamad was ignorant of MTIC fraud, he could hardly be expected to know, as the Respondents’ counsel suggested, that “the test strips shared the common characteristics of goods regularly dealt in in MTIC transactions”.      On this assumption there is, we believe no great relevance to the fact that alcohol test strips may rank some way down the list of “MTIC favourites”.   There is, however, relevance in the fact that they were a product that Mr. Ahtamad might understandably have treated as a perfectly natural extension of his genuine trade, and one that he might succeed in marketing to his customer base.

 

136.     We see no significance in the assertion that on a single day ML bought and sold an identical quantity of alcohol test strips.     Mr. Ahtamad’s evidence was that his customer wanted a greater quantity than he could source, and that the deal took a considerable time to put together.     In any event it is quite obvious that ML could not afford to hold, and finance, a stock of test strips, and it was never its intention to effect anything other than a matched deal.     These facts of a matched deal, probably effected on one day, would have arisen both in an honest and in a fraudulent transaction.

 

137.     The Respondents’ contentions in relation to the size of the deal, in terms of the gross purchase price and the sale price, and the resultant importance of the deal to ML, leading to the suggestion that it was extraordinary that little attention was given to some of the checks that might have been expected, has some merit.   It is worth observing, however, that since the Appellant could only enter into the deal if it could eliminate credit risk and warranty risk, the real measure of the deal was the potential profit of £12,300, rather than anything particularly germane to the very substantial amounts received and paid.

 

138.     We are not particularly impressed by the suggestion by HMRC that the absence of a business plan is significant.    ML was a one-man company, and this deal was its first deal in a new field.    Had Mr. Ahtamad concluded that he could repeat the deal, and in particular market the alcohol test strips in the Middle East, a business plan might have become relevant.   He explained that it was when he realised that the price at which he could source alcohol test strips involved ML in purchasing from a tainted source, that he could obviously not repeat, that he abandoned his plans to market to what he claimed to have been his original and main customer base.

 

139.     The Respondents asserted that ML should have detected that the deal was suspicious because Merchants’ Guild was prepared to grant ML credit, and MSE was prepared to pre-pay ML.    

 

140.      In response to this point we note the following points.

 

·       Mr. Ahtamad maintained that he had regularly been given credit by his suppliers, and had often demanded pre-payment or Letters of Credit supporting his customer’s own liability to pay on delivery.    We accept that this is rather less surprising when the dealings are with Leo or some other supplier to whom ML was well known, and who the supplier knew was making supplies to state agencies in foreign countries.    Nevertheless, as Mr. Ahtamad said, it was a trading pattern with which he was familiar, and not something perhaps that seemed all that odd.

·       Mr. Ahtamad did appear to appreciate that he could only afford to do the deal if he negotiated these credit and pre-payment terms.  It is possible that they were delivered to him “on a plate” by the counter-parties, but the change that he made to ML’s Terms and Conditions lends some credence to the proposition that he was seeking to minimise commercial risk.  On that basis, if the counter-parties were prepared to proceed on these terms, he might have taken the view that he was lucky that they did, but that no other approach was commercially safe or viable for him.

·       Mr. Ahtamad did know that he was only a middleman and he believed that he had eliminated credit risk in the transaction.  Whilst his counter-parties may well not have known the terms on which each other participated, Mr. Ahtamad did at least know that each counter-party was aware that he was simply a middleman.  It is therefore perhaps understandable that he may not have thought it suspicious that neither of the counter-parties refused to enter into the transaction on the agreed terms, although we thought it naïve that he did not question this more critically when dealing with new trading parties.

 

In the light of these points, and assuming ignorance of MTIC fraud, we cannot conclude that there was anything in the credit and pre-payment terms that meant that the only reasonable explanation for ML’s deal was that it was connected to fraud.

 

141.     Whilst dealing with credit terms, we disagree with the Respondents’ counsel when he said that the answer given to question 4 in HMRC’s letter of 12 October 2006 was “designed to deceive”.    We referred to this question in paragraph 77 and in the last bullet point of paragraph 96.    We find it difficult to see why it was suggested that Mr. Ahtamad was trying to deceive when he was simultaneously providing documents that illustrated the trade credit given by Merchants’ Guild and the requirement for MSE to pre-pay, provided for in ML’s invoice to MSE.  In the sense that ML had, and required, no other borrowings to finance the transaction, we cannot see that Mr. Ahtamad’s relevant answer was “designed to deceive”.

 

142.     We are not impressed by criticisms levelled against ML geared to its failure to conduct checks of the freight forwarder in whose custody the alcohol test strips were held prior to any involvement by ML, or other casual approaches that might be put down to inexperience when entering into a somewhat new type of transaction.    Doubtless the selection of forwarder, insurance, and transport would have been settled between ML and its major suppliers such as Leo in the past, and it seems possible that ML could have been naïve when entering into its first deal of the nature of the July 2006 transaction.

 

143.      The fact that we do however find quite extraordinary is that the offers, orders and invoices all failed to identify the manufacturer or any product code of the alcohol test strips.  We are not even clear whether any phone call or e-mail in fact tied the identity of the relevant strips to the product description in the one page sheet of paper that described Alcosal 101 and 125 test strips.    

 

144.     Mr. Ahtamad’s evidence was that all alcohol test strips were “much of a muchness”.   We were given no evidence by HMRC as to whether this was right.   We were given no information about expected pricing of deals in such strips in 2006.    We were not even clear, a point that has only occurred to us after the hearing, whether Alcosal was still manufacturing the test strips described in its December 2004 leaflet in 2006.   In the light of the fact that the only information that we were given about these strips was that they were all “much of a muchness”, and there was no evidence to dispute that, or indeed cross-examination to cast serious doubt on it, we find it difficult to say that the invoice description of “disposable alcohol test strips (pack of 25)” was suspiciously vague.  For all we know such strips might be broadly equivalent to “off patent” drugs manufactured by countless derivative pharmaceutical manufacturers.  In that situation, pharmacists will regularly prescribe, say, Lisinopril, without any reference to who it is manufactured by.  There was no evidence to say that alcohol test strips were not of a similar nature.

 

145.     None of the parties appeared to give any attention to the date of manufacture of the alcohol test strips, and to the length of time before the Use-by date that was presumably indicated somewhere on the packaging.     In saying in evidence that he did not perceive this to be a risk to the deal or his company’s reputation at the time, Mr. Ahtamad may have assumed that the product had been manufactured recently and that he could reverse the transaction if MSE complained about the proximity of the Use-by date, but we do accept that this approach by all parties appears to have been extraordinary.

 

146.     We acknowledge that there were respects in which ML can be criticised for the detailed way in which it implemented its July 2006 transaction.   We also acknowledge that it is the totality of all the doubtful points that we should consider together, and that the fact that we have advanced counters to most of the individual points that the Respondents’ counsel relied upon is not necessarily an answer to HMRC’s case.  We nevertheless consider that even when we add all the doubtful points together, it is still credible, when we are testing matters on the basis that Mr. Ahtamad and ML were unaware of MTIC fraud, that the oddities can be put down to inexperience on the part of ML in entering into a deal of this nature, and to some element of honest desperation on the part of Mr. Ahtamad to do a deal when he had generated no income for 12 months.   Mr. Ahtamad said that he was not so desperate, but we are inclined to doubt that and to treat it as a factor that supports ML’s case, rather than necessarily indicating readiness to participate in fraud.

 

147.     The final issues for us however are that the Kittel test, as re-stated by Lord Justice Moses, is a stringent test.  We must be satisfied that there can have been no other reasonable explanation for the transactions in which ML participated than that they were connected to VAT fraud.  We are not satisfied of that.  The burden of proof also falls squarely on HMRC.  When we have been given no evidence of:

 

·       any actual involvement on the part of Mr. Ahtamad in MCL’s asserted MTIC transactions;

·       any indication of any other MTIC transaction in fact conducted by ML, either involving Merchants’ Guild or any other party; and

·       information about the market for alcohol test strips, and in particular any significant quality or specification differences between the products of different manufacturers,

 

and when we consider HMRC’s evidence in relation to the April 2005 MCL meeting, and the November 2006 references to a prior transaction involving Merchants’ Guild, to be highly unsatisfactory, we conclude that HMRC has failed to establish its case.      We admit to being somewhat influenced by the points that we listed in paragraph 113 above.    We also admit that we have both found this case to be bewildering in some respects, and one where we have had to debate matters at length in reaching our conclusion.

 

148.     That conclusion is, however, that this Appeal is allowed.

 

Costs

 

149.      We award the Appellant its reasonable costs.

 

Right of Appeal

 

150.     This document contains full findings of fact and the reasons for the decision.   Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) Tax Chamber) Rules 2009.    The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.   The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

 

 

 

 

 

 

HOWARD M. NOWLAN (Tribunal Judge)

 

Released: 18 August 2010