First-tier Tribunal (Tax)

 

[2010] UKFTT 410 (TC)

 

 

 

 

 

TC00680

Appeal number LON/2006/1586

 

 

 

INPUT TAX – MTIC – Disallowed purchases from authorised distributor – Mobilx Ltd v HMRC [2010] STC 1436 considered – No evidence of circularity of goods or money – Appeal allowed on facts

 

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

 

EMBLAZE MOBILITY SOLUTIONS LTD Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT) Respondents

 

 

 

TRIBUNAL:  JUDGE THEODORE WALLACE

 T A MARSH

 

Sitting in public in London on 18, 20-22 and 27-29 January, 1-3 and 5 February and 7 July 2010

 

Michael Patchett-Joyce, instructed by The Khan Partnership, for the Appellant

 

Mark Cunningham QC and Andrew Westwood, instructed by Howes Percival LLP, for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

1. This is an appeal against the denial of £8,790,869 input tax claimed by Global Telecoms Distribution plc (“Global”) on 33 purchases of mobile phones in period 03/06 on the grounds that Global knew or should have known that its transactions were connected with the fraudulent evasion of VAT.  The refusal was based on the decision of the Court of Justice in Kittel v Belgium (Case C-430/04) [2008] STC 1537. The allegation of knowing participation involves an allegation of dishonesty against Global and more particularly, against its only witness, John Drinkwater, the former managing director.

 

2. The decision denying the input tax and an assessment for the tax which thereby became payable were dated 29 November 2006.  Global appealed on 20 December 2006. On 30 May 2007 Global was placed into administrative receivership.  On 17 January 2008 the receivers assigned to Emblaze Mobility Solutions Ltd, which is a 51 per cent shareholder in Global and also an unsecured creditor, its rights of appeal in these proceedings subject to charges in favour of two banks; the assignment provided for the proceeds of the claim to be paid to cover the assignee’s costs, then a sum to the receivers on behalf of Global with the balance being split between the receivers on behalf of Global and the Assignee.  On 29 February 2008 the Tribunal directed under rule 13 of the VAT Tribunal Rules 1986 that Emblaze Mobility Solutions Ltd be substituted as Appellant ; Emblaze Ltd, the parent company, is listed on the London Stock Exchange.  For convenience we treat Global as the Appellant and refer to it as Global throughout, although it traded under the name of European Telecom.

 

3. This type of appeal is commonly referred to as an MTIC appeal, MTIC being short for Missing Trader Intra Community.  Mr Patchett-Joyce accepted in closing that it had been proved as a fact that the five companies at the top of the Global’s supply chains were fraudulent defaulters.  However he challenged the connection with Global’s transactions.

 

4. This particular appeal has a number of unusual features. Global was an established trader in mobile phones with over 100 employees selling in the UK market as well as selling overseas.  The disallowed input tax was on 33 purchases totalling £50,233,535 plus VAT from Unique Distribution Ltd (“Unique”) which was also an established trader in mobile phones which we find was an authorised dealer for Nokia.  All the telephones had IMEI (International Mobile Equipment Identification) numbers.  Input tax for a number of periods going back to 11/04 was allowed although Customs traced purchases back through chains to defaulting traders.  Global did not use the offshore bank, FCIB.

 

5. The phones were sold to five French traders.  In each case the phones were at the warehouse of AFI Logistics (UK) Ltd (“AFI”) when bought by Global and following sale to the French traders were consigned to AFI Logistique Sarl at Roissy, near Paris.  The purchasers paid Global by electronic transfers at Global’s bank, HSBC.

 

The evidence

 

6. Customs called six witnesses of fact and one expert witness, all of whom confirmed witness statements and were cross-examined: Clive Bright, higher officer, who was assurance officer for Global from July 2004 and who made the decisions under appeal; Terence Mendes, higher officer, assurance officer for Fx Drona Ltd (“Fx Drona”) from February 2009; Susan Elizabeth Hirons, who was responsible for Zoom Products Ltd (“Zoom”) from February 2006; James Stephen Smallbone, an officer in the MTIC team at Stratford, who gave evidence in relation to Red Rose Consultancy Ltd (“Red Rose”); Sheila Edmead, an MTIC officer since February 2008, who gave evidence in relation to Stella Communications Ltd (“Stella”); Roderick Guy Stone, of HMRC’s Serious Civil Investigations Directorate, who gave overview evidence of Customs’ practice and policy which was not specific to this appeal, and John Fletcher CA, a principal adviser in KPMG LLP, who gave expert evidence.  Two statements by James David Lamb were read since he was unable to attend.

 

7. Mr Drinkwater was the only witness for the Appellant.

 

8. There were 31 ring binders of documents extending to over 10,600 pages.

 

Undisputed evidence

 

9. We set out first in paragraphs 10 to 70 the evidence which was agreed or was not subject to any substantial challenge.

 

10. Global was incorporated on 5 March 2002 and registered for VAT with effect from 26 April 2002 following the take over as a going concern of the business of European Telecom plc on a management buyout.  The application for registration gave the business activity as “mobile phone and accessories distribution”, estimated supplies in the next 12 months as £85 million with estimated EC sales of £10 million and EC purchases of £25 million.  It was signed by James John Mann, director.

 

11. All of Global’s returns were repayment returns.  Apart from the initial period to 30 June 2002, Global rendered monthly returns.

 

12. The returns for the first three months of 2006 showed:

 

01/06 02/06 03/06

 

Box 5 Repayment claimed   5,308,604   6,040,982   8,445,650

Box 6 Outputs 30,423,938 38,450,494 30,360,271

Box 7 EC Supplies 25,691,192 33,384,247 27,536,291

 

Repayment claims for the three months therefore totalled £19,795,236; EC supplies in 03/06 were substantially understated with a considerable amount being included in the April return.  No EC sales lists were exhibited.  Output tax declared in the year to 03/06 varied from £677,665 to £1,545,789 in 03/06 representing UK sales of £64.4 million.

 

13. Global’s turnover rose consistently month on month from April 2005. Repayment claims for the nine months immediately before 31 December 2005 totalled £24,845,898 compared with £6,538,105 for the year to 31 March 2005.

 

14. Management accounts for the 9 months to 31 December 2005 showed sales to Europe totalling £133,009,458 and UK sales of £45,926,922.  UK sales were broken down to £10,333,634 direct sales, £17,948,248 Personal Communications Network (“PCN”) sales and £17,645,040 commission.  Sales to Europe were therefore 74 per cent for the 9 months. The balance sheet included stock comprising mobiles and accessories of £2,041,170, £4,077,588 cash, debtors of £8,875,444 including £3,927,830 (equal to the December repayment claim) and creditors totalling £12,078,580 of which £2,202,132 was bank loans and overdrafts.

 

15. In July 2002 a letter from Mr Stone at Redhill VAT office after referring to problems with businesses in the trade sector advised Global that the VAT status of new customers and suppliers should be verified with that office by fax, telephone or e-mail.  The letter required Global to forward on a monthly basis a purchase and sales listing with identifying VAT registration numbers against the suppliers and customers.

 

16. Subsequently letters were issued on a number of occasions advising Global of the cancellation of the VAT registrations of various companies both in Europe and in the UK.

 

17. As a result of discussions in August 2003 with Samantha Lee, Global’s assurance officer before July 2004, Global kept the IMEI numbers of phones sold and checked those against a data base kept by Global.  These were shown on Global’s invoices for overseas sales which therefore ran into many pages of computer print-outs.  Complete lists were provided by Global to Customs.

 

18. Mr Bright visited Global monthly by appointment from July 2004 to verify the previous month’s returns including the repayment claims.  Before such visits Global provided a schedule of its non-UK supplies, referred to as MESA (Monthly Export Sales Analysis) with copies of the input tax, output tax and trial balance reports. From these Mr Bright selected a sample of entries to check.  The checks included purchase invoices, evidence of removal from UK and evidence of payment.

 

19. In April 2005, with repayment claims increasing, Mr Bright decided to carry out an extended verification of deals from 11/04, tracing each deal back from Global via its supplier and the preceding suppliers using information from traders in the supply chain provided by other Customs officers.

 

20. On 20 October 2005 Mr Bright wrote to Global stating that, as a result of enquiries to date in respect of the 11/04 to 02/05 claims, “We now know that 13 of the transactions selected for verification commenced with defaulting traders and resulted in a loss of revenue exceeding £696,000.”  The letter then listed 13 invoices with the names of Global’s customers.  The letter contained the following paragraphs:

 

“As explained in Notice 726, where you have genuinely done everything you can to check the integrity of the supply chain, can demonstrate you have done so, have taken heed of any indications that VAT may go unpaid and have no other reason to suspect VAT would go unpaid, the joint and several liability measure will not be applied to you.

 

However, if you knew, or had reasonable grounds to suspect that VAT would go unpaid then the measure can be applied to you.  From your records you will be able to ascertain who supplied you with the goods detailed above, and you may wish to consider what appropriate action is needed to ensure that the VAT does not go unpaid in respect of any future transactions.

 

For the avoidance of doubt I should finally tell you that this letter is without prejudice to any enquiries Customs may be making, or have made, into other transactions with which you have already been involved and which are in a chain of transactions where VAT has gone unpaid.”

 

21. A further letter dated 21 October listed 8 transactions in 05/05 traced by Customs to defaulters and contained the same wording.

 

22. Mr Bright and another officer visited Global on 21 October and handed the letters to Mr Mann who was a director of the Appellant.  Mr Bright took copies of Global’s checks on a number of its suppliers: Cybacomms UK Ltd (“Cybacomms”), Inter Communication Ltd (“Inter”), TM Mobile Ltd (“Team”), New Way Associates Ltd (“New Way”), LTL Communications Ltd (“LTL”), Goldex International (UK) Ltd (“Goldex”) and London Communications Ltd (“London Comm”).  These were the suppliers to Global of the phones shown on the invoices listed in the letters.

 

23. On 14 November Mr Mann wrote to the seven companies stating that it appeared from conversations with Customs they had made supplies to Global where there was a missing trader at the beginning of the chain and asked for “a formal undertaking that you are taking all necessary precautions” to limit exposure to missing traders.

 

24. On 21 November, following examination of the checks uplifted, Mr Bright wrote to Global highlighting various features of the results of some of its checks, for example low net worth, lack of financial information, high credit risk, and changes of business activity.  He enclosed short questionnaires in respect of the checks carried out by Global before dealing, asking for them to be returned in 14 days.

 

25. On 29 and 30 November Mr Bright and Alan Baker visited Global primarily to check the 10/05 repayment claim spending over 9 hours.  They were told by Mr Mann that LTL and Inter would need to resubmit applications to trade before Global would deal with them further.  The questionnaires had not yet been completed.  Mr Bright took copies of checks by Global on further suppliers.

 

26. On 19 December Mr Bright wrote that the details with the 11/05 return indicated that Global continued to deal with some of the suppliers and that he had not received the completed questionnaires; he asked for a response within 14 days.  He enclosed 3 further questionnaires.

 

27. On 23 January 2006 Mr Bright and another officer visited Global again. Mr Mann produced the questionnaires.  The officers recorded that new customers and suppliers usually contacted Global.  The sales or purchases team passed details (letters of introduction, VAT certificates and certificates of incorporation) to the accounts section who instigated checks via the Customs office at Redhill and Credit Reference Agencies (“CRAs”).  The results were passed to Mr Mann who decided whether deals could be undertaken.  The officers were shown letters sent on 14 November (see paragraph 23 above) including one to Goldex stating that four missing traders had been identified and a short letter from Goldex dated 7 December assuring Global that Goldex “take all of the necessary precautions and carry out a stringent due diligence process with our suppliers and customers in order to limit our exposure to missing traders.”  The officers were told that a visit to Goldex had been arranged by Ian Chitty, sales director of Global, for the day after the visit.

 

28. On 14 February Mr Bright wrote two letters to Global.  The first stated that as a result of the enquiries in respect of the 11/05 claim 23 of the 25 transactions selected for verification were found to have commenced with defaulting traders resulting in a loss of revenue exceeding £4 million.  The letter listed the transactions and continued with identical wording to the two October letters (see paragraph 20 above).  The suppliers in respect of the transactions included Cybercomms, Team and Goldex, and, in respect of part of one supply, Unique.

 

29. The second letter by Mr Bright referred to the October letter and the other February letter.  The letter contained the following:

 

“As you will be able to see from your records of the 25 supplies identified in the enclose letters 11 were made to you by suppliers already identified in either, or in the case of two suppliers, both of my previous warning letters.  … I must now advise you that you will be deemed to have knowledge that the VAT on any ‘wholesale’ deals undertaken after receipt of this letter is likely to go unpaid to … Customs and, consequently, the Commissioners will not be prepared to meet any claim for repayment of input tax in respect of such deals until such time as the underlying supply chain has been fully and satisfactorily verified by our officers.”

 

The suppliers were not named in the letters.

 

30. On 8 March Mr Bright and Mr Smallbone visited to check the repayment claim for 01/06.  Mr Mann was not present.  They made a further visit on 23 March lasting over 5 hours.  There is no visit report but Mr Bright’s notes of just 3 pages referred to regular checks being completed. Mr Bright’s note covers a discussion at the end and includes the following (“JM” is Mr Mann and “CAB” Mr Bright.):

 

“I sat at JM’s desk to discuss letters 14/2/06

JM – have taken legal advice - can not say what said in letter.  Have stopped dealing with previous suppliers for all ‘wholesale’ inc UK CAB – deals checked only for exports but not for UK – will verify some UK

JM – UK to 02 etc – use some affected supplies for these deals.  Now only using Unique Distribution.

…

CAB – Unique Distribution – what deals?

JM – Director John Farnham ex-Director of

European Telecom plc.  Unique been going years

CAB – How long ago JF director ET plc

JM – approx 5 years ago

CAB – Didn’t UD go down?

JM – Yes approx 2 years ago – We annoyed because not offered contracts

CAB – So UD completely new company – Cert of Inc in your checks shows Change of Name from Land Investments Ltd April 2005 + VAT cert issued March 2005.  No CRA presumably as would only show a new company.”

 

Mr Mann produced some due diligence material as to Unique at that meeting including that referred to in Mr Bright’s note.  This included a letter dated 29 June 2005 from Unique stating that it had authorised distributor status.  Unique’s VAT number was verified by Global with Redhill in June 2005.  Global’s supplier activity report for Unique showed the first supply by Unique as being on 20 June 2005; the largest single invoice before 21 February 2006 was for £67,680 in September 2005 and total invoices up to 17 February 2006 were £493,256. 

 

31. On completion of his verification of period 11/05 Mr Bright had reviewed Global’s return basis and concluded that it should be changed from monthly returns to quarterly under regulation 25 of the VAT General Regulations 1995.  At the end of the visit on 23 March he gave a letter to Mr Mann notifying Global of the intended change giving 14 days to make representations.  On 15 March 2006 a VAT repayment of £5,308,604 had been credited to Global’s bank and on 3 April a further repayment of £6,040,982 was credited; those were the full claims for periods 01/06 and 02/06 (see paragraph 12 above).

 

32. On 31 March The VAT Consultancy replied on behalf of Global requesting Customs to allow monthly returns.  The letter stated that Customs had reviewed a significant number of the monthly returns and had always paid the repayment claims.  The letter stated that Global dealt with Vodaphone selling to its subsidiaries in Portugal and France, had recently opened a branch in Paris to supply French Telecom and SPR and was finalising negotiations to supply 1 million products to Polski Telefona.

 

33. The decision by Customs to change to quarterly accounting was confirmed on 19 April 2006.  Global applied for judicial review of the decision.

 

34. Global submitted its return for March 2006 online on 13 April 2006.  Box 1 VAT on outputs was £1,545,789; Box 3 which included VAT on EC acquisitions was £1,629,514 and Box 4 (inputs including those on EC acquisitions) was £10,075,164 with a net repayment claim in Box 5 of £8,445,650.  The figures for Boxes 5 to 7 are shown at paragraph 12 above.  The supporting report and trial balance which ran to 252 pages were provided to Mr Bright electronically.

 

35. On 19 April |Mr Bright visited Global to inspect the documentation supporting the 03/06 return.  He had written on 18 April asking for the documentation for each export deal to be available as usual including all copy sales and purchase invoices, orders, export documentation, payment details etc.  He specifically asked for copies of each sales invoice and bank statements. On 20 April having examined and collated the information Mr Bright decided to verify the supply chains for the 33 transactions.

 

36. On 17 May Mr Mann telephoned Mr Bright asking about the 03/06 repayment; he said that Unique would not supply stock until paid for outstanding amounts.  Mr Bright advised that he was still verifying the deals noting “possibly one deal back to defaulter.”  There was a lengthy conversation. On the next day The VAT Consultancy wrote expressing concern at the delay with the March repayment return and stating that all recent transactions had been with official distributors. On 19 May Mr Bright had another telephone conversation with Mr Mann, who said that he had spoken to Unique about the source of the phones but that they would say nothing.

 

37. On 26 May Mr Bright wrote to Global and The VAT Consultancy.  His letter to The VAT Consultancy referred to Mr Mann having said that Unique was an “official distributor”.  Mr Bright wrote that losses had been identified in 19 of the 33 chains and that the repayments would not be released until all purchases had been fully verified.

 

38. On 29 June Hassan Khan & Co sent a pre-action letter in relation to further judicial review proceedings regarding the withholding the repayment claim. Mr Bright replied on 7 July stating that he had concluded that there were tax losses in 32 of the supply chains and one was still being verified.

 

39. On a visit to Global on 14 September Mr Bright obtained the records for supplies made by Global in April of goods purchased from Unique in March including reprints of sales invoices and export evidence.

 

40. On 19 October, Customs having meanwhile been served with an application for Judicial Review in relation to the 03/06 return, Mr Bright wrote that AFI had not provided Customs with information requested and asked for Global’s supplier activity report for AFI for February 2006 to June 2006 with AFI’s invoices.

 

41. On 29 November Mr Bright notified the decision to deny £8,790,868.75 input tax for 03/06 and to assess £345,218.31 being the net VAT consequently payable.

 

42. In a letter dated 26 January 2007 Mr Bright wrote that Mr Mann had correctly stated that copies of some of the AFI invoices were taken at previous visits but said that these were needed for all appropriate movements; this related to 03/06.

 

The 33 transactions and deal chains

 

43. We now turn to the actual transactions, about which there was no real issue except for Deal 3 (where the UK acquirer was Zoom), Deals 14 and 15 (where the UK acquirer was Roble) and Deal 26 (where the UK acquirer was Fx Drona), see paragraphs 189 and 190 below.  Mr Westwood provided a most useful schedule with colour coding.

 

44. All deals involved Nokia N90, 9300i or 9500 phones with quantities varying from 2000 to 6500 phones.  In each deal Global bought from Unique which in turn bought from Future Communications (UK) Ltd (“Future”), on which the combined mark-up of Unique and Future was always £3.50 per phone.  Future bought 20 consignments from Crotek Systems Ltd (“Crotek”) and 13 consignments from Goldex, the mark-up by Crotek and Goldex always being 50p per phone each.  Crotek bought 12 consignments from MT Phoenix Ltd (“MT Phoenix”) and 8 consignments from Exhibit Enterprise Ltd (Exhibit”).  Goldex bought 6 consignments from Exhibit, 4 from Crestview Enterprises Ltd (“Crestview”) and 3 from MT Phoenix.  The mark-up obtained by MT Phoenix, Exhibit and Crestview was always 25 pence.  MT Phoenix bought 9 consignments from The Wireless Warehouse Ltd (“Wireless”) and 3 consignments from each of Deepend Trading Ltd (“Deepend”) and Universal Traders Ltd (“Universal”) always at a mark-up of 25 pence.  Exhibit bought 4 consignments from Wireless, 8 from Universal and 2 from IM Technologies Ltd (“IM Tech”) always at 25p mark-up and Crestview bought 2 consignments from Wireless, 1 from Deepend and 1 from Universal, again always at a mark-up of 25p.

 

45. Between Global and the defaulters there were therefore a total of 11 traders for all 33 consignments and in each deal chain the five intermediate traders or buffers between Unique and the UK made a combined mark-up of £4.50.

 

46. At the top of the chains there were five defaulters; Red Rose in 3 deals; Zoom in 3 deals; Roble in 16 deals; Stella in one deal and Fx Drona in 10 deals.  Red Rose and Zoom each sold to Wireless each time; Roble sold 8 consignments to Wireless, 2 to Deepend and 6 to Universal; Stella sold to Universal; Fx Drona sold 5 consignments to Universal, 2 to IM Tech, 2 to Deepend and 1 to Wireless.

 

47. From the deal sheets and documentation it is apparent that, in all deals apart from Deals 29 and 30, all five transactions from the defaulters down to Unique had invoices bearing the same date: 1 March for Deals 1 and 2 through to 31 March for Deals 32 and 33.  The exceptions, Deals 29 and 30, had invoices on the one day down to Future and were invoiced by Future to Unique on 30 March.  The invoices by Unique to Global were on the same days as the invoices from Future for Deals 29, 30, 32 and 33 but were otherwise later than the Future invoices.  There were two invoices (RC 29 and 31) from Roble to Wireless for 5000 Nokia 9500 on 14 March 2006 @ £394.50, the only difference being that RC31 contained the words “with memory sticks”; there were also two invoices from Roble to Wireless on 14 March for 3300 Nokia 9300i for £369.50.

 

48. With the exception of Deal 18, Global’s customers paid Global before the date of Global’s invoice to the customer.  Global’s proforma invoices in most cases bore the same dates as the chains up to Unique or there was other evidence of sale before payment by Global’s customers.  In Deals 29 and 30 there was an order from DGB Sarl in France (“DGB”) before the invoice by Future to Unique and on the same day as the transactions up to Future. 

 

Deal 18

 

49. Deal 18 was taken by Mr Cunningham as an example and accepted by Mr Patchett-Joyce as being representative.  This involved 3200 Nokia 9300i bought from Unique and sold to DGB.  Invoice No.60265 from Unique dated 20 March 2006 was for 3200 Nokia 9300i, central European specification, 2 pin chargers with UK manuals; the unit price was £374 giving £1,196,800 plus £209,440 VAT; the invoice was for payment at Barclays Bank on 20 March, the same day.

 

50. Global’s invoice to DGB was in computerised form listing the IMEI numbers.  Page 34 carried the invoice number 322721 and the sum of £1,244,800 payable by telegraphic transfer in sterling for 3200 Nokia 9300i; the sum equals £389 per unit and of course did not carry VAT; it was for European specification and was dated 4 April.

 

51. DGB’s Commande (or purchase order) to Global carried the fax time of 15.53 (GMT) on 16 March for 3200 Nokia 9300i with no further details.

 

52. The proforma invoice to DGB dated 16 March also covered Deal 16; it included “3200 Nokia 9300i Euro Spec, Sim Free”, it was signed on behalf of Global and DGB on 16 March.  It carried a fax time going from Global of 17.38 and to Global of 17.06 (GMT).  It gave the destination as AFI Logistique, Paris.  It provided for full payment in advance on 16 March giving Global’s bank, HSBC.  The goods were to be sent on hold to AFI Paris to be released on satisfactory inspection and receipt of cleared funds.  It was subject to stock availability and to Global’s terms and conditions.

 

53. An instruction by Keith Bunclark, Logistics Manager at Global to AFI Logistics UK to provide 100% IMEI numbers for “3200 x Nokia 9300i Ex Unique” carried a fax time of 17.18 on 16 March.

 

54. A further fax from Keith Bunclark to AFI with a time of 17.38 instructed AFI to arrange movement by truck to AFI Logistique for delivery 0800 hrs on 17 March; the goods were to be “on hold” pending release instructions.

 

55. The CMR (consignment note for overseas road transport) completed by AFI on 16 March was for delivery of 3200 Nokia 9300i to Paris, was signed on behalf of the carrier with vehicle number and was stamped as received by AFI Logistique “contents unchecked”.  It was stamped “AFI Logistics On Hold”.  On 18 March AFI certified that the goods were shipped on 16 March.

 

56. A bank statement from HSBC showed Global as being credited with £1,244,793.06 from DGB on 21 March and as paying £1,245,000 to Unique on the same day.  On the same day Global instructed AFI to release 3200 Nokia 9300i to DGB. 

 

57. The purchase order from Global to Unique on 16 March carried a fax time of 18.40 but was on a different fax machine to the documents referred to so far.  It covered Deals 16 to 18, the price for Deal 18 being £374 per unit.  It contained 13 lines of specifications including, “Euro Spec, 2 pin Euro charger … New original Euro manuals … Full Euro Warranty.”  It stated that payment was to be after satisfactory inspection and 100 per cent IMEI checks.

 

58. A fax by Unique on 16 March to AFI timed at 18.17 instructed AFI to allocate 3200 Nokia 9300i on hold to Global and another fax also at 18.17 instructed AFI to release the goods to Global.

 

59. We now turn to the documents regarding the transactions in the goods in Deal 18 prior to those involving Global as a party.  Customs did not allege that Global had specific knowledge of these transactions.  We take these in reverse order going back from Unique, Global’s supplier.

 

60. In a fax timed at 18.14 on 16 March, Unique ordered 3200 Nokia 9300i, Central Euro Spec, 2 pin chargers, UK Manuals from Future  at £372 per unit.  In a fax timed at 18.15 Future instructed AFI to allocate the goods to Unique.  Future invoiced Unique and also on 16 March Future instructed AFI to release the stock to Unique stating that the stock was from Crotek.

 

61. There were two invoices from Crotek to Future for 2000 and 1200 Sim Free Nokia 9300i at £370.50 per unit, preceded by purchase orders and an instruction to AFI to allow Future to inspect 3200 Nokia 9300i to be delivered to Crotek being allocated by Exhibit.

 

62. There was an invoice on 16 March from Exhibit to Crotek for 3200 Nokia 9300i at £370 per unit and an allocation to Crotek with a fax time of 16.30.

 

63. There was a purchase order from Exhibit to Universal for 3200 Nokia 9300i with a fax time of 17.25 which was returned by Universal at 17.42.  There was an instruction by Universal allocating the stock to Exhibit with a fax time of 17.24 and an invoice from Universal to Exhibit at £369.75 and a time of 17.42.

 

64. There was a purchase order from Universal to Roble and an invoice from Roble to Universal, again on 16 March for 3200 Nokia 9300i at £369.50 and a total price of £1,182,400 plus £206,920 VAT.  An instruction from Roble to AFI to release 3200 x Nokia 9300i was timed at 2.36pm.

 

65. There was a notification to AFI by Hardware Traders Ltd (Deutchland) (“Hardware”) dated 16 March timed at 2.55 am that 3200 Nokia 9300i would be arriving shortly and an instruction with the same date to release 3200 Nokia 9300i to Roble.

 

The defaulting traders

 

66. Red Rose failed to account for the VAT on its outputs forming part of Deals 1, 2 and 4.

 

67. Although Zoom rendered a return for the shortened period 1 February 2006 to 13 March 2006 showing a repayment claim, no output tax was paid on the assessment when input tax was disallowed.  We return to this later in the Decision.

 

68. Roble failed to account for the VAT on its outputs forming part of Deals 7 to 22, including Deal 18.

 

69. Stella failed to account for the VAT on its outputs forming part of Deal 23.

 

70. Fx Drona failed to render a return for the period 2 February 2006 to 31 March 2006 during which Deals 24 to 33 took place.

 

Mr Bright’s evidence

 

71. Mr Bright confirmed his statements of 31 May 2007, 30 October 2008 and paragraphs 1 to 15 of his statement dated 3 December 2009.  Following an objection by the Appellant, the Tribunal refused to allow the remainder of the 2009 statement to be admitted, a direction having been given on 4 June 2009 that no further statements be served without prior leave.

 

72. He stated that he had been a Customs officer since 1996, joining the MTIC team at Chelmsford in December 1992 and being promoted to Higher Officer in July 2004.  He visited Global monthly from July 2004 taking copies of some of Global’s records such as sales and purchase invoices, bank statements and evidence of removal of goods from the UK.  From period 11/05 Global provided a Weekly Sales List (“WSL”) for deals over £50,000.

 

73. He undertook an extended verification of 46 deals in the periods 11/04 to 02/05 of which 13 were traced back to missing VAT at the start of the chain; the majority of the remaining 33 deals were not traced back to the start of the chain through lack of information.  Eight deals in period 05/05 were traced back to missing VAT, the other four could not be traced back.  He notified Global of his findings in the letters dated 20 and 21 October 2005 which he delivered at a visit (see paragraphs 20 and 21 above).

 

74. Mr Bright stated that between November 2005 and February 2006 he undertook an extended verification of 25 deals in period 11/05, concluding that 23 started with missing VAT.  He notified his findings in a letter dated 14 February 2006, see paragraph 28 above.  On the same day he wrote the letter referred to at paragraph 29 above.  In his second statement Mr Bright said that in the periods 11/05 to 02/06 Global made purchases totalling £34,533,800 from Goldex in 27 deals.

 

75. He stated that a print-out of a supplier activity report provided by Global at a visit in 23 March 2006 showed invoices from Unique totalling £17,927,376 between 21 and 28 February 2006.  He also saw due diligence paperwork apparently faxed by Unique to Global on 21 February 2006.  Mr Mann told him that there had been no Credit Reference Agency check as Unique was a new company.

 

76. Mr Bright referred in his statement to his visit on 19 April and to telephone conversations on 17 and 19 May 2006 (see paragraphs 35 and 36 above).

 

77. He stated that on 20 April he decided to verify the supply chains for the 33 deals in 03/06.  By 21 June from information received from other officers, examination of electronic folder files and departmental accounting systems, he had identified that 32 of the chains appeared to lead back to Red Rose, Zoom, Roble, Stella or Fx Drona none of which had accounted for output tax on the deals.  He continued to receive copy records from officers controlling traders in the chains.

 

78. Mr Bright stated that during a visit on 14 September 2006 Keith Bunclark, Global’s Logistics Manager, confirmed that Global had not requested or undertaken any inspection of the goods to confirm the type or condition of the goods.

 

79. He stated that on 13 October 2006 he received copies of the relevant records for Unique from officer Barry Roberts.  On or around 28 September he received via officer Isaacs copies of records from AFI in respect of the deals.

 

80. He produced a document carrying the words “List of all invoices ex-CD” which included invoices numbered 6-03-1333-30 and 31 and 13331115A.  These were the numbers on Zoom’s invoices to Wireless Warehouse in Deals 5, 6 and 2 respectively.

 

81. On 29 November 2006 Mr Bright notified Global of the decision disallowing input tax and raising the assessment under appeal.

 

82. Cross-examined, Mr Bright said that he became assurance officer for Global in July 2004; his predecessors had paid regular visits from October 2002.  He agreed that Global was a substantial concern with its own premises and up to 100 employees.  The systems which he saw were sophisticated.  He had seen evidence of Global supplying Dixons and Carphone Warehouse.

 

83. He said that from his assuming responsibility to the end of 2005 Global was cooperative in agreeing to visits and providing documentation; Global had provided a substantial volume of due diligence.  On his monthly visits he monitored the turnover which grew steadily and consistently month on month from April 2005 to March 2006.

 

84. He said that on receiving the monthly VAT returns he contacted Global and was sent a monthly export sales analysis (MESA), an input tax analysis and a trial balance; he would ask for details of particular sales and purchases to be ready for the visit.  He normally sat at a table in the corner of Mr Mann’s office.  The weekly sales lists were accurate apart from administrative errors.

 

85. Mr Bright said that Global provided IMEI numbers on invoices from before the time when he took over.  It was not a statutory requirement.  The invoices might extend to 70 pages.  The numbers were not sequential so that in order to use them Customs would have had to put them into number order.  He agreed that Customs had asked for the numbers in electronic form from October 2003 but in early 2004 this was no longer required.  He said that each mobile handset had its own box with a barcode; these barcodes would also appear on the outer carton containing a number of boxes; the outer cartons could be scanned without confirming what was inside.

 

86. Asked about the letters in October 2005, Mr Bright accepted that none of Global’s direct suppliers were defaulters.  He agreed that Global could not go back to find out the identity of its supplier’s suppliers.  He agreed that the letters did not give any information which would allow Global to identify the party occasioning the tax loss.  He agreed that there was no evidence that Global knew that Unique were also supplying DGB and France Affaires direct.

 

87. Mr Bright agreed that Global made a substantial change after the February 2006 letters in limiting its supplies for exports to supplies from Unique.  He said that he had no evidence that Unique was an authorised Nokia distributor but that because of lack of evidence was not challenging Mr Drinkwater’s statement that it was.  He said that he would not know how many authorised distributors there were.

 

88. He said that Global’s documentation on the purchase side was usually very good.  Sometimes the sales side was not as good because of understandable delays in receiving documentation making it necessary to revisit the sales side next time.

 

89. Mr Bright said that he did not visit any of the buffers or defaulters.  He relied on material received from other officers.  He obtained through other officers documentation from the freight forwarders, AFI.  He did not know whether the AFI documentation was complete; he did not know if AFI kept a control document for each consignment and had not asked; he did not know whether he was given all the AFI documentation.  He had been able to trace some deals back to Hardware, a German company.  The Hardware material included a notification by Hardware to AFI in Deal 11 that the phones would arrive shortly with no mention of any customer, and a release note on the same day for the same quantity of the same model for the credit of Roble. 

 

90. He agreed that there was no evidence of Roble carrying out any due diligence checks in relation to phone card deals with Umbria Equitazione (“Umbria”).  He also agreed that there was evidence of third party payment instructions to Umbria by Roble.  He agreed that there was no VAT number on Roble’s invoices to Wireless in Deal 4 and to Deepend in Deal 10.  He said that, although some of Roble’s invoices had VAT numbers, a lot did not.  He said that he had made no specific inquiries as to due diligence by Wireless on Red Rose or Zoom.  He had no recollection of approaching any of the officers with questions as to due diligence up the chain; it was not normal practice.

 

91. Mr Bright said that he could not be certain that every document uplifted from the defaulters was in evidence, he had asked for the documents relevant to the deals, the officers may have uplifted other documents.  He had been selective and the officers forwarding the material may have been selective.

 

92. He agreed that not all Fx Drona invoices had VAT numbers, for example in Deals 24 and 26.

 

93. He said that a week before the hearing he had become aware that there was a further Roble invoice RC 29 for 2000 Sony Ericsson phones whereas the invoice RC 29 and invoice RC 31 in Deal 14 were for 5000 Nokia 9500 phones (see paragraph 47 above).  He realised that RC 29 and RC 30 from Wireless’s records were for different goods than RC 31 and 32 from Roble’s records.  He said that he could not say how Wireless obtained an invoice from Roble with different details, he could only speculate.  He said that RC 30 from Wireless’s records was for 2200 Nokia N90 whereas RC 30 in Roble’s records was for 3300 Nokia 9300i.  He had no explanation for the difference.  He did not accept Mr Patchett-Joyce’s suggestion that the records of Wireless were unreliable without further enquiries.  He had realised the mismatch because of Mr Patchett-Joyce’s skeleton argument.  He did not know whether there were other invoices which did not match.  He accepted that Wireless was the buffer in 15 deals.  It did not necessarily mean that the other 15 deals were wrong and that Wireless was not being supplied by Roble. Apart from obtaining the Wireless paperwork he had no other contact with the officer for Wireless, Mr Reynolds.

 

94. Mr Bright said that no assessments had been raised on Global for periods before 03/06.

 

95. He said that the assurance officer for Unique was Mr Roberts from whom he had obtained documents in tracing the deal chains.  He did not know whether Mr Roberts would have known if Unique was an authorised distributor; he had not asked him.  Mr Bright agreed that he had been told on 23 March 2006 that Global was using only Unique.

 

96. He said that in a telephone conversation on 25 April 2008 Mr Mann had told him that he had been “canned” and that he had been told during the receivership to empty the building; documents had been thrown into a skip.  Mr Bright had noted “building gutted”.

 

The evidence as to the defaulters

 

97. Mr Smallbone, the officer for Red Rose, said that he visited Red Rose on 17 February 2006.  He stated that the director produced two folders of paperwork containing invoices for 11 deals for mobile phones starting in late January; the folders included instructions from Red Rose’s supplier to pay a third company in another state and similar payment instructions by Red Rose to its customers.  At a further visit on 1 March 2006 he was told that Red Rose had started to purchase bulk supplies of mobiles direct from EC traders, selling them in the UK on the same day; the copy records showed that third party payments were being requested.  On 2 March Mr Smallbone delivered a regulation 25 Notice requiring a return by 3 March covering supplies up to 2 March.  On the following day he was told by the director that the return had not been completed and that she could not pay the VAT at that time.  He stated that on 13 July 2006 he was given a deal transaction log for Wireless showing purchases from Red Rose; the exhibit showed purchases corresponding to those for Deals 1, 2 and 4.  He raised an assessment which included those deals.  No payment has been made.

 

98. He told Mr Patchett-Joyce that there was no evidence that Global knew of Red Rose.

 

99. Miss Hirons said that she had been responsible for Zoom since February 2006.  She stated that Zoom made nil returns for periods 10/05 and 01/06.  On a visit on 13 March she was told that Zoom had begun trading in mobile phones and CPUs on 24 January 2006; a director produced a laptop computer and identified 218 transactions in February and the first 7 days of March with an estimated gross value of £250 million; Zoom had no UK bank account and used First Curacao International Bank (“FCIB”) for all payment transfers.  On 14 March a regulation 25 notice was served shortening the VAT return period to 13 March 2006 to be rendered on 15 March.  The director handed over a CD purporting to be a copy record of all transactions.  Miss Hirons stated that she returned on the next day but no representative was present.  The CD records were analysed and found to contain 262 sales with a gross value of £427,911,116, made up of £200,056,810 UK sales with VAT of £35,009,942 and £192,844,364 sales to Umbria which had been zero-rated.

 

100. She produced a VAT return by Zoom for the period 1 February to 13 March 2006 received by Customs on 3 April 2006.  This showed [1] output VAT £38,883,452; [2] EC acquisition VAT £38,519,375; [3] VAT due £77,402,827; [4] input VAT £80,762,968; [5] VAT repayment claim £3,360,141; [6] Total outputs £461,981,100; [8] EC supplies £239,789,944.

 

101. On 7 June Miss Hirons advised Zoom that as no books or records had been produced the return would be amended.  Another letter of that day notified an assessment of £74,596,848 as no evidence of input tax or export removal had been provided.  This comprised the output tax declared at Box [1]  plus 7/47ths of the Box [8] EC supplies with no input tax credit.  No payment was made by Zoom in respect of the assessment.

 

102. She told Mr Patchett-Joyce that she had no evidence relating to Zoom’s supplies back through chains to Global, she presumed that other evidence covered this.

 

103. She said that she could point to no evidence of due diligence inquiries by Zoom as to Wireless or the reverse.  She did not make any inquiries of other officers.

 

104. Statements by Mr Lamb, senior officer, controlling officer for Roble from 17 March 2006, were read in his absence through indisposition on the basis that they were evidence which was not admitted fact.  The statements were dated 17 November 2008 and 23 July 2009.

 

105. Roble was registered for VAT with effect from 1 October 2005 on the transfer as a going concern of the business of Abdinsar Roble.  Roble’s application for registration showed the principal place of business as 516 Hornsey Road, N19 and the business activities as “Telecommunication & general trading.”  Estimated supplies in the next 12 months were given as £89,000; EC Trade was left blank; the application was signed by Umm Kulthum Said.

 

106. Mr Lamb stated that on 20 March 2006 two officers visited 516 Hornsey Road and found an internet café operating from the site.  They were told that Roble was not operating from there and that all mail was collected.  They left a letter advising that the VAT registration was cancelled.  Ms Said telephoned Mr Lamb on 22 March asking for reconsideration stating that the wrong address had been visited and that Roble had generated millions of pounds of sales and hundreds of invoices.  On 24 March Ms Said attended Mr Lamb’s office and presented nine deal packs covering 9 to 21 March 2006, a supplier file, a file for Lodgeway Consultants Ltd (“Lodgeway”) and a client’s file, for which Mr Lamb gave a receipt; she had no bank statements with her.  Ms Said told him that she had agreed that all payments on sales invoices go direct to a third party company and for an element of commission be paid to her direct.  The Lodgeway file contained invoices to Umbria in Italy for goods described as “Card 4 anywhere £50.00”.  An invoice dated 13 March 2006 for 486,333 cards at £30.04 was for £14,609,443, and carried an address in Cranbrook Road, Ilford.  There was a letter from Roble instructing Umbria to pay the invoiced amount to Lodgeway at a bank in Bermuda.

 

107. Ms Said had told Mr Lamb that she had no previous history in this type of trading and that the customer and supplier had instigated contact with her before the deals.  Mr Lamb stated that the purchase invoices from Lodgeway totalled £103,309,500, on which VAT was £18,079,162.50.  The sales invoices to Umbria totalled £103,447,246 involving over 3.4 million phone cards.

 

108. Mr Lamb stated that the premises on Lodgeway’s invoice, 12 Jamaica Road, Thornton Heath, were visited on 27 March and 22 November 2006.  It was a terraced house in a residential street.  On the first visit there was no one present.  On the second visit a Mr Whiteley told the officers that he had lived at that address since the late 1960s and had never heard of Lodgeway.

 

109. Customs requested mutual assistance from the Italian tax authorities under Directive 77/799/EEC in relation to Umbria arising from alleged supplies of phone cards by Celtic Exports & Imports Ltd and four other companies, albeit not Roble.  The reply, dated 5 December 2006, stated that Umbria carried out the activity of wholesale and retail trade in riding items and had never purchased international prepaid phone cards from any person whether in Italy or abroad.

 

110. Mr Lamb stated that evidence obtained from the manufacturer of Card 4 Anywhere £50 phone cards indicated that fewer than 10,000 were produced, the last being in 2002.

 

111. He stated that there was no record of any VAT return being received from Roble for period 03/06.

 

112. Notices of assessment totalling £24,808,139 were issued between 10 May 2006 and 25 July 2007.  Mr Lamb’s statement did not explain how this was calculated.  However his second statement listed the invoices by Roble forming part of the chains in Deals 7 to 10 and 12 to 22 as being covered by the assessments.

 

113. He stated that, based on the records, Hardware had been the supplier in all but one of the deals involving Roble and that the deals involved Nokia phones.

 

114. Sheila Edmead, who has been working in MTIC since February 2008 before which she was working on direct taxes, confirmed a statement regarding Stella.

 

115. She told the Tribunal that she had no knowledge of the facts apart from what she found from the documents on the electronic folder.

 

116. She stated that Dean Jones visited Stella’s premises on 29 March 2006 but was unable to establish that it was trading.  A regulation 25 notice was sent on 3 April advancing the date for the return to 31 March to 4 April.  The return was not submitted.

 

117. Miss Edmead told the Tribunal that Stella never made a return for 03/06.  Customs were never able to collect any records from Stella.  She produced a series of assessments and amendments and a schedule which showed that the VAT on two deals in the schedule totalling £293,475 involving sales of 5200 Nokia N90 on 22 March 2006 formed part of the assessments totalling £10,277,281 which were unpaid, the original assessment covering those deals being in July 2006.  Stella is in liquidation following a winding-up petition gazetted on 31 January 2008.

 

118. She told Mr Patchett-Joyce that she could point to no evidence of Stella undertaking any due diligence on Universal (its customer in Deal 23) or of any due diligence by Universal on Stella; she did not make any inquiries or cause any inquiries to be made.

 

119. Terence Mendes, Higher Officer, who had responsibility for Fx Drona from 1 February 2008, confirmed a statement dated 30 October 2008.

 

120. He said that Fx Drona was registered for VAT on 2 February 2006 giving its intended supplies as “Graphic Animations and Multi-media Development Services.”  Estimated turnover in the next 12 months was given as £85,000 and EC sales as nil.  A new director was appointed on 8 March 2006.

 

121. He stated that on a visit by other officers on 30 March to Point of Logistics Ltd, a freight forwarder, Fx Drona was identified as an acquirer of mobile phones.  On 31 March following a visit earlier in the day to Fx Drona a regulation 25 notice was served requiring a return within 24 hours.  No return was rendered.  Assessments were made on Fx Drona which included the supplies made by it in Deals 24 to 33, Deal 26 being for 2500 Nokia 9300i mobile phones.  No evidence of the supplies was ever produced by Fx Drona.  No appeal was lodged and no tax paid on the assessments.

 

122. He told Mr Patchett-Joyce that he could not tell whether in the full records of Fx Drona, it might have undertaken 2 or 3 deals on the same day involving the same quantity of the same goods.

 

123. He said that he could point to no due diligence by Fx Drona on its customers in the chains or any due diligence by them on Fx Drona.  He had not spoken to the relevant officers about any due diligence.

 

Mr Stone’s evidence

 

124. Mr Stone confirmed a statement dated 3 November 2008 which was an overview statement used in most proceedings, giving the history of Customs policies and some of the commercial practices relevant to this and similar cases.  Although Mr Stone was the author of a number of letters to Global produced in evidence by Mr Bright, including that referred to at paragraph 15 above, Mr Stone’s statement made no reference to those letters or to the facts of this appeal.  The Tribunal refused an application by Mr Cunningham to substitute a new statement dated 3 November 2009 to which Mr Patchett-Joyce objected updating the earlier statement.

 

125. Paragraphs 60 to 132 of his statement covered Customs’ measures against MTIC fraud, including detailed verification of repayment claims, directions under regulation 25 of the VAT Regulations 1995 shortening VAT accounting periods and varying the date by which returns must be made, validation by Customs’ office at Redhill of the VAT registration numbers of the potential suppliers and customers of traders, notifying relevant traders of the cancellation of the VAT registration of missing traders, joint and several liability under section 77A of the VAT Act 1994 as amended in 1997, and the Nemesis data base established on 1 February 2006 enabling Customs to check the unique IMEI number of phones to check whether the phones have been previously scanned or reported stolen or lost.

 

126. He stated that the estimated loss of VAT revenue caused by MTIC fraud in 2004-05 was £1.12 to £1.90 billion and in 2005-06 £2 to £3 billion.  He stated that Customs’ statistical website showed the number of mobile phones exported in March 2006 as 13,158,914 with a value of £4,178,734,726 compared with 4,323,690 phones in December 2005 before the ECJ decision in Optigen and Bond House.

 

127. Cross-examined, he said that a Memorandum of Understanding agreed with the industry in 2000 was moribund by 2002.

 

128. He said that section 77A providing for joint and several liability had been subject to legal challenge which was not resolved until the decision of the Court of Justice in Federation of Technological Industries v Customs and Excise Commissioners (Case C-384/04) [2006] STC 1843 in May 2006.

 

129. He agreed that Customs could refuse input tax where a trader did not have invoices which conformed with the regulations, including a valid VAT number.

 

Mr Fletcher’s Evidence

 

130. John Charles Fletcher CA, a principal adviser in KPMG LLP, confirmed an expert report dated 31 October 2008 which took the form of a witness statement.  There was no formal letter of instructions and it was not clear exactly what material was before him.  He was first instructed in the summer of 2008 by another partner or orally by Howes Percival.  He stated that he had over 15 years experience in the telecoms industry; at KPMG his work had involved providing strategic and regulatory advice to a range of clients including Ofcom, BT plc, Royal Mail Group, T-Mobile, Siemens and MTN South Africa; he had been employed for 5 years by Orange plc.

 

131. He stated that the mobile telecom industry had enjoyed rapid growth over the last 15 years.  Manufacturers such as Nokia distributed new products to network operators, such as Vodaphone, to large retailers and to authorised distributors (“AD”) who aggregated the demand from independent retailers: this was normally called the white market.  Nokia required orders from any one customer to regularly exceed 50,000 handsets per quarter and often gave discounts over 10%.  Apart from discounts Nokia set identical prices for wholesale customers in all markets.  Nokia had 42% of the Western European market (by volume) according to a report in 2007.

 

132. Mr Fletcher stated that he was aware of four main grey market opportunities: handset–unlocking, arbitrage, volume shortages and dumping.  Handset–unlocking arose from non-uniform handset subsidies by network operators; arbitrage arose from price differentials across countries particularly through currency fluctuations; volume shortages arose when network operators and large retailers underestimated demand and dumping arose when distributors overestimated demand resulting in surplus stock.

 

133. In section 4 he considered Global’s trading, stating that it was purchasing from Unique “which is a known AD” and was participating in the grey market.  He assumed that Global was seeking to take advantage of arbitrage opportunities; Global did not speculatively hold stock to exploit dumping; while volume shortages might have occurred in Nokia 9300i handsets which were released onto the market in December 2005, Global’s market share based on the 33 deals made this implausible.

 

134. Mr Fletcher considered the trading behaviours of Global in relation to rational and profitable arbitrage trading in detail and concluded that the presence of negative indicators was overwhelming and that it was “extremely unlikely” that the 33 traders were “part of the profitable arbitrage market or any other rational and profitable white or grey mobile phone handset trading market”.  He stated that non-holding of stock, consistent patterns of trade, release dates and supplier selection were indicative of participating in the arbitrage market; however there were no wholesale price differences for Nokia, Global’s market’s shares of over 100% of the addressable retail market for the whole of Europe and the UAE, a wholly insufficient level of detail on Global’s customer’s purchase orders and inconsistencies between supplier invoices and Global’s purchase orders were not consistent with participation in the profitable arbitrage market.

 

135. Mr Fletcher calculated Global’s market share. He took the numbers of each of the models sold by Global in March and April 2006 based on a transaction analysis by Customs, totalling 140,500 handsets.  He took the sales for Nokia 9300i, 9500 and N90 handsets estimated by GfK Research for those months for Europe and UAE based on grossing up Electronic Point of Sale feeds from 70% of retailers in each country, which totalled 72,333.  He assumed that 36% of manufactured handsets were sold through distributors as opposed to network operators and large retail multiple stores, such as Carphone Warehouse; the basis of this figure is not clear from his Note (106).  He applied this 36% to the estimated sales by GfK, giving an estimated total distributor share of the market of 26,040 handsets.  He calculated Global’s market share at 540% for all three models for the two months, varying from 250% of N90 handsets in March to 991% of Nokia 9500 in April 2006.  He also concluded that Global’s sales for the two months exceeded the total retail European market of 72,333 handsets.

 

136. He checked this conclusion against an alternative calculation based on a Gartner Dataquest Forecast figure of 32 million sales of all makes and models in 2006.  Of this 32 million he stated “36% of which were distributed and 8% were exported.”  The 36% was the same assumed distributor share as in the paragraph above; the 8% was based on an e-mail from GfK (note 114).  In Note (115) he applied the 8% to the 36% giving “a market opportunity for exporting” of c0.9 million handsets or 77,000 per month.

 

137. Cross-examined, Mr Fletcher said that on or around 31 October 2008 he signed off a number of similar reports for Customs, this was among the first.  He had provided the Report in draft form to Customs and had meetings with Customs but had not changed his conclusions.

 

138. He said that his main experience was in industry strategy rather than the retail market; he had advised manufacturers and had advised on the wholesale and distribution market: distribution was key.

 

139. He agreed that the grey market was not illegal and said that on occasion manufacturers turned a blind eye to grey market trading by authorised distributors.  He said that Nokia employees had told him that Nokia set identical prices in all wholesale markets; he understood that any discounts would not fundamentally undermine Nokia’s overall policy so as to prejudice authorised distributors; he had been told in terms that Nokia had standardised wholesale price lists.  He said that Nokia was a client of KPMG.

 

140. Mr Fletcher said that in 2006-07 Vodaphone one of three network operators in Italy added 8.52 million customers gross; those were new to Vodaphone in the period but may have included customers who rejoined after leaving.  He had no figure for customer additions net of those who left.

 

141. Mr Fletcher said that he had no direct knowledge of how any authorised distributor carried on its business and had no clients in the wholesale mobile sector.

 

142. He told Mr Patchett-Joyce that the total market size (referred to at paragraph 135 above) was the retail market not the wholesale market, however the two were intrinsically linked because phones on the wholesale market were logically destined for retailing to end users.  He said that when a wholesaler sold to a wholesaler the number of handsets traded was not doubled, although there would be two transactions.  He did not agree that the wholesale market could be substantially bigger than the retail market.  He said that all wholesale trades end up in the retail market, therefore the markets are essentially the same size. He agreed that the figure of 72,333 for handsets (see paragraph 135 above) was not exhaustive being based on 22 out of 27 countries in Europe and did not include sales to Africa, China and India.

 

143. He said that he had derived information in his Report from a Mintel report in 2007 costing £6,000; he said that there may have been an earlier report but he could not confirm that.  He agreed that a data table sourced to Gartner had a copyright date in 2007 and that information derived from Wireless Intelligence was published in 2008.  He agreed that material from Credit Suisse dated in January 2008 regarding Nokia made no reference to standard wholesale pricing policy.

 

144. Mr Fletcher agreed that the Point of Sale information used by GfK (see paragraph 135) was essentially sampling and working on estimates.

 

145. He said that he had not been asked to comment on fraud in his instructions.  He was not attempting to identify or characterise any transactions as being fraudulent through the use of his Report.

 

146. There was no re-examination.

 

Mr Drinkwater’s evidence

 

147. Mr Drinkwater confirmed his two witness statements, the first of which was 83 pages long being made on 14 May 2008.  He said that after graduating as an engineer at Imperial College he served for 4 years with the Royal Engineers.  He then worked for Proctor and Gamble for 6 years before joining One 2 One, a mobile phone network provider for 6 years; he worked for a small software company in Spain for 18 months before becoming European Sales and marketing director of European Telecom plc, an AIM-quoted mobile distributor.  In 2002 European Telecom went into administrative receivership and he participated in a management buyout of the distribution part, through Global, of which he became managing director.  After Global ceased trading, he remained in post and took no salary for six months. On being made redundant in 2008 he worked as a consultant providing digital marketing consultancy.  He had been given 3 weeks unpaid leave by his employer, The Woodland Trust, a charity, to attend the appeal.

 

148. In his statement he said that Global was one of only three distributors in the UK with licences for distribution of the consumer services of all five mobile network operators: Vodaphone, O2, Orange, T-Mobile and 3.

 

149. He stated that in June 2006 Global had 98 staff excluding directors; those included 4 purchasing staff, 6 export, 6 UK Sales, 37 PCN, 10 finance and 3 logistics.

 

150. He stated that Global negotiated price, delivery terms and other conditions by telephone and then issued a proforma invoice with terms and conditions.  Under clause 7 receipt of the stamped proforma invoice constituted acceptance and under clause 26 goods remained Global’s property until full payment.  He stated that goods were shipped “on hold” pending payment.

 

151. He stated that among reasons for the grey wholesale market was surplus stock which an authorised distributor has been unable to sell old stock when a new product was released, price differences in different markets and stock levels.

 

152. §68 to 72 of his statement read as follows:

Conducting a Deal (Global practice)

 

“68. In respect of each deal, Global generally aimed to implement a high level of due diligence in order to avoid trading with parties who did not account for their tax obligations and commercially to ensure the goods it purchased were as described and that its customers paid for sales to them on the terms agreed and did not default on payment.  The precise steps carried out by Global could vary slightly depending on the circumstances of the transaction.  Generally steps carried out by Global were as follows:

 

·       A price provided by the supplier is compared to the available ‘market rate’.  That rate is established by speaking with customers and suppliers on any given day and understanding who needs what and what they are prepared to pay for it.  From talking to these people on a regular basis it is possible to get a general picture of the market on any given day and try to match offers of goods to those requesting the goods and finalise a deal with the goods being sold (with a profit) to one of any number of customers.  There is not in my view any website or publication that reliably identifies the market rate of a mobile telephone.  This is simply because there are a number of different factors that influence the prices at any given time.  However, there do exist websites on which companies advertise mobile telephones and this can give an indication, e.g. www.itxmarket.com.

·       To establish the price at which goods can be sold, Global’s sales teams gathered information about stock availability and pricing for each model of mobile phone to spot trends and patterns, and estimate the price which specific customers would be willing to pay. Sources included price trends and current stock availability via the purchasing team (who regularly polled suppliers for stock availability and price information), recent sales results and future marketing plans of mobile telephone network providers and major retailers (often via contacts within each organisation) and future stock availability plans from major distributors/manufacturers.  The actual price was then a matter of negotiation in each case, based on the skill of the sales executive (as it is in other commodities markets).

·       VAT numbers of all parties were checked online on the appropriate EU website (where possible).

·       Purchase orders and invoices were exchanged around this time.

·       Goods were delivered to a secure third party specialist warehouse or were brought into Global’s warehouse in certain circumstances.  Third party warehouses are usually chosen based on the location of the stock made available by the supplier.  If stock was to be delivered into a warehouse, it was selected based on cost, the services provided by that warehouse and our satisfaction with quality of services provided by the warehouse previously.

·       Where the goods were taken to a third party warehouse Global instructed the warehouse to inspect the goods and confirm they were physically present and in good condition (an open box inspection).  In the region of 10%-20% of the phones were then opened individually to ensure they contained the correct telephones and manuals, as per the order.  A member of staff from Global attended the warehouse to witness the inspection.  If a member of the Logistics Team could not attend, then occasionally the member of the Sales Team who conducted the deal attended the warehouse.  Global’s inspection requirements included an IMEI check and an arrangement that a select number of the phones were powered up to check that they work.

·       After confirmation from the warehouse that the goods were acceptable, Global paid its supplier for the deal, who then released the stock to Global.

·       Global then instructed a freight forwarder to ship the goods to the customer.  Global rarely used the purchaser’s freight forwarder, as we preferred not to allow the customer to influence the parties handling the stock.  We did sometimes allow the purchasers to collect the goods from us directly, but that was unusual.  We selected the freight forwarder on the basis of geography, who was available and sometimes depending where the goods were at the time, if they have not been brought into the warehouse.

·       Once the goods arrived at their destination, the freight forwarder had his paperwork signed by the purchaser, in order to confirm safe receipt.  Sometimes, a purchaser would have sold the goods on and would request that Global arranged for the goods to be transported to another country than that in which the purchaser resided or on route to such a country.  Global’s Logistics Department, online, would also track the goods.  Most reputable freight forwarders use satellite navigation based tracking of vehicles and secured vehicles, due to the high value of the goods being transported.  Having spoken to members of staff, who worked in logistics, neither they nor I can recall any problems with goods not arriving as promised.

 

69. As I state above, prior to completing a purchase, Global’s employees ensured the stock was inspected and checked.  If the Operations or Logistics Teams were overstretched, a member of the Sales Team would travel to supervise the checks in person. As part of the purchase terms we requested a document was attached to each cardboard ‘outer’ box (a box containing 10-20 boxed phones, depending on the model) listing the IMEI numbers of the phones inside.  Each pallet would contain a number of cardboard ‘outer’ boxes, which would be inspected as follows:

(i) All cardboard ‘outer’ boxes opened, all IMEI number listed on the document attached to the cardboard ‘outer’ box scanned and checked against Global’s computer database and business planning system.

(ii) 1-2 boxes contained within the cardboard ‘outer’ box checked – IMEI on box as against the number on the document attached to the cardboard outer box, as well as the condition of the phone and accessories, including manual.

(iii) 2-4 phones per pallet powered up to check for language, start-up logos, SIM locking etc.

 

70. In early to mid 2006, there were a number of occasions when neither a member of the Operations or Sales Teams were available to travel to review the stock.  In these cases, Global arranged for an inspection company (e.g. A1 Inspections Limited) to carry out the stock check in accordance with the process set out at paragraph 69(i) above, on Global’s behalf.  The inspection company was instructed to focus on ensuring that an IMEI check was carried out and that the phones existed and in the quantities purchased.  The information regarding IMEI’s was passed to Global to check against its database of phones before the stock was accepted.  In all cases, stock was bought subject to any subsequent quality issues, and sold on to customers on the same terms.  In all cases, having spoken to Global’s Operations Manager, John Paddington and a number of former members of the Sales Team, I am not aware that any stock was returned from Global’s customers.  Given that Global had regular relationships with many of its suppliers and customers and freight forwarders, we had no reason to doubt that the IMEI numbers were other than correct or that the goods were of suitable quality, as our freight forwarders and suppliers would lose business if the information they advised us proved incorrect.

 

71. Global always ensured that it could source stock before entering into any sale agreement.  Therefore the sale by Global was matched with a purchase by Global.  Global’s export trades were always back-to-back in order to reduce the risks of market volatility.  Global also always looked to achieve a minimum profit margin of about 3% to 4% on export deals.  If it was decided at any time that there was an insufficient margin on a deal, Global would not take the business.  However, this did not prevent Global entering into a deal with a margin lower than 4% where it was considered Global had the resources to conduct a deal and market conditions limited profit margins.  It was entirely dependant on the market at the time, the popularity of any stock and Global’s capital position.

 

72. I have discussed what Mr Bright claims at paragraph 163 of his statement with Keith Bunclark.  Mr Bunclark does not recall making any statement that Global had not requested or undertaken any inspection of goods and would not have done so, as it is not correct.  Mr Bunclark confirmed that inspections were carried out, as explained above.  I suspect Mr Bright misunderstood that Mr Bunclark was referring to the specific checks being carried out by a third party inspection company (and not internally by Global).  I have also spoken with John Paddington who has advised me that the usual checks were carried out on stock purchased from Unique Distribution Limited, Global’s supplier in March 2006.”

 

153. Later Mr Drinkwater covered due diligence procedures, including those on customers in March 2006.  He stated that Global ran checks of IMEI numbers against its own database to determine if there were any phones which it had traded previously.  As the quantity of stock traded increased a statistical sampling of 10% was adopted with a check against the numbers on the list attached to the outside of the boxes.

 

154. He stated that following the letters from Customs of 14 February 2006 the majority of Global’s supplies were sourced from Unique, a long established and well regarded corporation, which was an official Nokia distributor.  The directors felt that by dealing with an official distributor Global was addressing Customs’ concerns not to deal with “wholesalers”.  The new Unique company in 2005 with many of the same individuals retained the Nokia distribution licence.

 

155. In a supplementary statement made at the Tribunal’s behest on 31 January 2010, he stated that many of the staff having been made redundant in 2007 were unwilling to assist in the case having moved on, however he had been able to discuss the case with some.  Mr Mann told him that the receivers had the office cleared of all records, however a large number of documents had been with Global’s solicitors so were not lost.

 

156. He stated that there was no financial or logical reason to question AFI’s choice as Global’s freight forwarder.  They were well regarded and located close to Heathrow in secure premises.  AFI always supplied IMEI lists.

 

157. Cross-examined, Mr Drinkwater said that he and Global operated with very high standards of professionalism and business ethics.  Global was IS0 9001 accredited, the European version of a British standard.  Global was not in business for a short profit.  Risk was inherent in all commercial transactions.  It was a rather aggressive part of the market.  To be totally averse to risk would have meant very little business, but Global kept a very close eye on risk.

 

158. He said that Global was part of a thriving legitimate market.  He was aware of fraudsters in the market, but Global and before it European Telecom had been in the market for 10 years.  Awareness of fraud did not cause them to wonder what they were doing in the market.  Global had a strategic plan to grow as part of the purchase of a significant shareholding by Emblaze.  We observe at this point that this occurred on a re-organisation in December 2005 and that following the re-organisation Mr Drinkwater and Mr Mann each held 2.45% of the issued shares.

 

159. Mr Drinkwater accepted that in 03/06 sales to EC countries were about 90 per cent of Global’s business, being 140,000 odd.  He said that Global did no research into the size of the grey market for Nokia mobiles.  He said that he did not accept Mr Fletcher’s figures for the share of the market saying that there was a distinction between the wholesale and the retail market.  There could be a number of sales in the wholesale chain to meet the retail market.  He did not know the size of the wholesale market and neither did Mr Fletcher.

 

160. Mr Drinkwater said that he was aware of the main grey market opportunities identified by Mr Fletcher: handset-unlocking, arbitrage, volume shortages and dumping.  When Global sold to customers it did not and could not know which opportunities its customers were meeting.  He denied Mr Cunningham’s suggestion that the only rational explanation for the business was fraud.

 

161. He said that Global’s export business was conducted on a commercial basis at arm’s length; there was a reasonable margin on each deal.  Procedures were in place to ensure that before a deal was concluded, Global knew what margin would be achieved; if it was not sufficient, Global would not do the deal.  The margin of 3 to 4 per cent was very low considering the overheads and cost of sales; in UK business Global typically achieved 10 per cent. Asked about the lack of volatility in prices, he said that it was not unusual for prices of particular models to be static over a 31 day period.  He said that Global managed its business with an overdraft of £500,000 from HSBC and an invoice discounting facility of £6 million.  Global did deals at lower margins on the European business because the return on investment was high and goods were only released on payment to its bank. Global was buying from Unique which it believed to be a bona fide and reputable company.

 

162. Mr Drinkwater was then asked about Deal 18.  He said that he did not actually have any part in putting Deal 18 together but had knowledge of the deals as managing director, reviewing every deal on a weekly basis.  His style was to walk the floor every day when he was there; there was an open-plan office.  He knew the processes followed in organising and concluding deals.

 

163. He said that Global negotiated a deal by telephone over a period of hours; dealers often negotiated a price on availability of stock and then tried to find the stock; Global had no reason to believe Unique an authorised distributor would let it down.  The specification on the purchase order would have been agreed before the order and noted by the team; typing it was a quick process.  It was important that Global was purchasing under its own terms and conditions.  Asked about the language of manuals and the euro warranty, Mr Drinkwater said that if Unique did not deliver in accordance with the order Unique would be responsible for the costs.

 

164. He said that Global’s board policy was not to commit to purchasing stock until a similar commitment from customers.  Once the sales team was satisfied that the customer wanted stock, a proforma invoice was sent for signature.  Global believed it had stock to sell because Unique told Global that it had stock; the purchase team believed that.

 

165. Asked about the instruction to AFI in Deal 18 (see paragraph 53 above) to provide IMEI numbers with a fax time of 17.18 hrs which was before the time of stock allocation by Future to Unique at 18.15 (see paragraph 60), he said that Unique had told Global that it had stock to sell; he did not know to what degree any lies were told.  He agreed that it looked as if Global instructed AFI to ship the goods at 17.38 before putting the purchase order through to Unique at 18.40 and also that the release instruction by Unique at 18.17 was before the purchase order.  He said that Global would not have seen the release instruction.  He said that it struck him that as soon as the proforma invoice was received the Global team was very fast.

 

166. Mr Drinkwater denied Mr Cunningham’s suggestion that the whole sequence of supposed transactions was pure window-dressing, that he knew exactly what was going on and that he knew that it was all artificial and contrived.

 

167. Mr Drinkwater said that the procedure described at §68 of his first statement (see paragraph 152 above) was the typical method before changing to Unique as supplier; §69 had fuller details.  Global did not open 10-20% of the boxes but 10% of the outer boxes and within each box 20 to 20% of the phones.  He agreed that 10% of 10% is 1% and that he did make an error in §69.  He said that he had never seen the inspection done.  Once the goods were obtained from Unique, Global did not carry out this detailed inspection because Unique was an authorised distributor and highly reputable.  Keith Bunclark, the logistics manager, discussed with AFI how they would carry out the inspection.  Mr Drinkwater denied inventing this evidence.  He said that there was no mention of Unique in §70 because he mentioned elsewhere that they were the only people Global bought stock from.  He denied just making this up.  He included §68 in his statement to show that there was a clear change after the letter of 14 February.

 

168. He said that the IMEI checks and the checks that the phones were not visibly damaged and that the quantities existed continued to be made.  Because Global was purchasing from Unique, the inspection by AFI was not in the same detail.  He said that the reference in the last sentence of §70 to “many of its suppliers” rather than to Unique was a matter of semantics.  He said that Mr Bright was wrong in stating that Mr Bunclark confirmed that Global had not requested any inspection.  Mr Bunclark told him that he could not recall the conversation but that there must have been some confusion; he would call AFI on the telephone to confirm that the stock was the specified model and undamaged.  Mr Drinkwater said that “the usual checks” in the last paragraph of his statement referred to the checks in March 2006 rather than to the checks generally.  He denied Mr Cunningham’s suggestion that his evidence as to a change following the move to Unique was a load of lies.  He accepted that there were no written inspection reports from AFI and said that he had not seen any invoice from AFI.  We note that Global’s bank statements show a payment of £70,323.76 to AFI debited on 16 March 2006.

 

169. Mr Drinkwater agreed that the purchase order in Deal 18 to Unique specified “New Original Euro manuals” (see paragraph 57 above) whereas Unique supplied UK manuals; he agreed that there had been no inspection of manuals and that by the time of the invoice the phones had been shipped.  He said that he had no reason to dispute that there was a mismatch between Global’s purchase orders to Unique and its invoices to customers in each of the 33 transactions.  He said that he was confident that there would have been conversations between his purchase team and Unique.  He did not suggest that the manuals had been swapped but said that the customers could have decided to accept the stock and change the manuals which would involve opening each box; he estimated the cost at 50 pence to £1 per phone.  He denied the suggestion that the manuals were irrelevant because it was a fraudulent trade.  He said that it was not unusual to have conversations with customers and suppliers about the language of manuals.

 

170. Mr Drinkwater said that he was aware of Notice 726 before Mr Bright became the relevant officer.  Global did what it reasonably could to verify its supply chain and took supplies from a supplier if high repute.  Global verified that the phones had not previously been supplied to it by checking the IMEI numbers.  It was impractical to identify every trader in the chain.  Global was necessarily making a judgment on the chain based on its knowledge of its supplier.  He agreed with Mr Cunningham that Global could have decided to leave the market sector but rejoined that Barclays could decide not to issue credit cards because of fraud in the sector.

 

171. He was next asked about the October 2005 letters.  He said that Mr Mann immediately brought them to his attention; they were very serious news; Mr Mann telephoned all the suppliers and wrote to them.  He agreed that the first letter to Team was on 14 November, meanwhile Global continued to trade with Team.  He said that they did not believe that Team were part of any fraud but were a victim.  Team’s letter of 29 November gave the comfort needed.  He agreed that Global continued to purchase phones from New Way in November; again, Mr Mann had a conversation with New Way.

 

172. Mr Drinkwater accepted that Goldex was one of the suppliers in relation to the  October letters.  Global wrote to Goldex, received a reply on 7 December 2005 and continued to trade a significant amount of stock.  He agreed that Global did £36 million worth of business with Goldex after the October letters.  He said that Goldex was a PLC, a business of repute with which Global had a regular trading relationship.  He was then asked about §146 of his first statement when he said of the deals with the suppliers in the October letters, “the deals were usually small, one-off amounts of stock.”  He accepted that this was not a correct characterisation of the Goldex transactions but told Mr Cunningham that he was not attempting to mislead: it was a mistake.  He agreed that the Goldex deals were usually large.

 

173. He said that the letters of 14 February 2006 (paragraphs 28 and 29 above) told Global that its judgments and decisions following the October letters did not succeed in removing fraud from its supply chains.  He had noticed that Unique was among the suppliers; Unique supplied 120 handsets making up a sale to Swiftcom together with phones from Carphone Warehouse and New Way; it did not trouble him that Unique, a large distributor, was on the supply side.

 

174. Mr Drinkwater said that following the February letter in relation to export sales Global abandoned all previous suppliers and solely used Unique.  Global wanted to deal with an authorised dealer being as close to the manufacturer as possible and as being a large organisation of repute with the standing of authorised distributor.  Potentially the goods would have come direct from the manufacturer, however that was not the reason why Global moved all its business to Unique.  It made no difference commercially whether the stock came direct from Nokia.  Global went to Unique in order to link itself into the legitimate part of the grey market. Global did not ask Nokia whether Unique was an authorised distributor but had been told so by the managing director of Nokia in 2004.  It was public knowledge that the second Unique company was an authorised distributor.  Global did not check with Nokia.  Global did not inquire from Unique whether it had bought immediately from Nokia; it would not expect Unique to say.  The demise of Unique and the establishment of the second Unique was front page news across the industry.

 

Submissions for Customs on the facts

 

175. Mr Cunningham said that the appeal involved a striking example of a contrived, artificial and schematic way of trading.  There were always six antecedent parties in the chain before Global with deals in one day and total mark-ups of £8.  There must have been a ringmaster.  The ringmaster needed to make sure that the scheme worked, with Global buying from Unique time after time.  It was inconceivable that the orchestrator would let an ignorant interloper in to make three times the profit made by the entirety of the rest of the chain; no evidence had been produced as to Global’s costs.

 

176. He relied on the similarities between the chains and the pattern of transactions of which Global’s transactions formed part as indicative of overall contrivance.  It was unlikely that the fact that all the purchases by Global could be traced back to tax losses was a result of innocent coincidence, see Red 12 Trading Ltd v Revenue and Customs Commissioners [2010] STC 589 at [110].

 

177. He submitted that Global must have known of the fraudulent evasion of tax; this involved dishonesty.  Alternatively Global should have known which involved negligence.

 

178. Mr Cunningham said that Global had a thorough general awareness of the prevalence of MTIC fraud and of its scale.  This had not been denied.

 

179. He said that in March 2006 Global had particular knowledge of fraud through the letters in October 2005 and February 2006 regarding its transactions traced back to defaulters.  In spite of Global’s full review of its suppliers, three of the suppliers recurred in the February letter.  The second February letter carried a very grave warning.

 

180. He said that Global’s European business in March 2006 involved 140,500 handsets and a turnover of £50 million, equal to £600 million a year.  Global had done no research and had no idea of which opportunity in the grey market it or its customers were tapping into.

 

181. He said that there had been no specific attack on Mr Fletcher’s statement.  There was no obvious basis for rejecting Mr Fletcher’s conclusion that the trades in question were unlikely to be part of any rational and profitable white or grey handset market.  Mr Fletcher had said that it was unusual that Unique did not purchase directly from Nokia, that Global’s trade in the deals was not indicative of rational profit-maximising behaviour, that Global was extremely unlikely to be undertaking rational arbitrage trading, because the mark-up exceeded currency fluctuations and the chains were too long, and that it was unusual that Unique as an authorised distributor participated otherwise than as the original supplier to the grey market.

 

182. Mr Fletcher had said that the market share data (see paragraph 135 above) was not consistent with profitable grey market arbitrage trading and called for another explanation and had concluded that there was no other rational explanation.  Mr Cunningham said that Global had not put forward an alternative explanation.

 

183. Mr Cunningham submitted that the story told in Deal 18 (see paragraphs 49 to 65 above) strained at the limits of credibility if the business was bona fide.  The fax header on Global’s purchase order to Unique was 18.40 hrs, however Global’s proforma invoice to DGB was at 17.38 hrs.  The allocation notice from Exhibit to Universal was at 17.24 hrs. Global requested AFI to provide IMEI numbers at 17.18 hrs and to ship on hold at 17.36 hrs.  Unique instructed AFI to release the goods to Global at 18.17 hrs which was before Global’s purchase order at 18.40 hrs.  The timings did not make sense.  He said that this business was all about fabricating documents.

 

184. He said that beyond the IMEI documents there was no evidence at all of inspections.  In every deal there was a mismatch between the manuals ordered and those invoiced.

 

185. He said that there was no persuasive evidence that Unique, which was a phoenix company with one year’s life, was an authorised distributor.  No authorised distribution agreement had been produced.  The whole point of Global’s relationship with Unique was said to be as close as possible to the manufacturer; however Global had not asked whether the supplies to Unique were from Nokia.  Not only were the supplies not authorised but every single supply was tainted.  Global’s judgment in relation to Unique was catastrophically wrong.

 

186. Mr Cunningham said that the Tribunal should not rely on Mr Drinkwater’s evidence.  His evidence as to inspections was inconsistent and his evidence as to an abbreviated inspection regime for Unique was not what he had recited Mr Paddington as saying.  The description in his statement of the trade with Goldex, Team and New Way as small was the opposite of the truth: Global did £36 million of trade with Goldex.  Global had gone through a charade after the October letters of asking for formal undertakings.  The continued trading with these companies was disreputable, dishonest and showed an absolute determination to carry on in fraudulent trading.

 

187. He said that if Global and Mr Drinkwater did not have actual knowledge they were hopelessly incompetent.  He said that Mr Drinkwater was not stupid: it is more likely that he knew exactly what he was doing. 

 

188. In answer to a question as to Mr Drinkwater’s motive being only a 2.45% shareholder in Global, he said that the motive was money.

 

Submissions for Appellant on the facts

 

189. Mr Patchett-Joyce accepted that Customs had proved as a fact that Red Rose, Zoom, Fx Drona, Stella and Roble were fraudulent defaulters.  He also accepted that Customs had proved assessments of alleged tax losses in relation to those defaulters except in relation to Deal 3 involving Zoom and Deals 14 and 15 in relation to Roble; he said that the losses in those three deals arose from the disallowance of input tax on wholly separate transactions and were not attributable to Global’s deal chains.

 

190. He submitted however that there was insufficient cogent evidence to link the tax losses to Global; he relied in particular on Deals 14 and 15 and Deal 26 where he said Customs could not show the validity of the tracing exercise.  If Customs could not do this in relation to those three deals, the Tribunal should not infer a link in the other deals.  The tracing was only a paper exercise.

 

191. Mr Patchett-Joyce said that at the time when it entered into the transactions Global did not know that another party was perpetrating fraud and had no means of knowing.

 

192. He said that Global was a well-established business with its turnover increasing steadily month by month from April 2005 to March 2006.  Global was ISO 9001 accredited.  Mr Bright was given monthly and weekly sales lists and everything he asked for.  The repayment claims up to 02/06 had all been paid by Customs after visits.  There was no suggestion that the transactions were not at market value.

 

193. He said that Mr Drinkwater had attended the Tribunal for 3 weeks on unpaid leave from the charity for which he now worked.  He had no reason to expose himself to cross-examination if not truthful. 

 

194. Mr Patchett-Joyce said that the warning letters did not suggest that Global’s suppliers were defaulters; Goldex was a substantial public company.  After the letters of 14 February 2006 Global had dispensed with all earlier suppliers and sourced all goods from Unique, one of the select four companies appointed by Nokia to be an authorised distributor.  It was never pleaded by Customs that Unique defaulted or was a fraudster.  Mr Fletcher had proceeded in his Report on the basis that Unique was an authorised distributor.

 

195. He said that the goods had in fact been inspected to obtain IMEI numbers.  The documents for Deal 18 were consistent with the deals being done by telephone.  Global did not know or need to know what market opportunity its customers were addressing.  He said that Customs had approached the matter with preconceptions based on hindsight.

 

196. Mr Patchett-Joyce criticised Mr Fletcher’s evidence saying that his experience was in the retail sector rather than wholesale.  One retail sale per telephone did not mean only one wholesale transaction.  Much of his evidence was based on second-hand material with hindsight and information which Global could not know.  He said that the methodology of his evidence as to market share (see paragraph 135 above) was flawed.  Note (63) referred to at paragraph 140 above showed that the market was very large.

 

197. He said that there was no evidence that Global knew or had the means of knowing of any party to the transactions beyond Unique.  No inference of knowledge or means of knowledge could properly be drawn on the factual material.

 

Submissions for Customs on the law

 

198. Submissions on the law were adjourned until after the judgment of the Court of Appeal in Mobilx Ltd (in administration) v Revenue and Customs Commissioners [2010] STC 1436 which was given on 12 May 2010.

 

199. Mr Cunningham said that Mobilx established that the principle laid down in Kittel at [61] has effect without the need for any further UK legislation, see Moses LJ at [47]. He said that arguments based on legal certainty, fiscal neutrality, free movement of goods, proportionality and human rights law were all rejected at [61] to [66] of Mobilx.  It was clear that there was no need for privity of contract between the Appellant and the fraudulent defaulters.

 

200. He accepted that the burden of proof was on Customs on all facts relevant to the fraudulent evasion of VAT, the Appellant’s knowledge and the Appellant’s means of knowledge.  The standard of proof was the civil standard, see per Lord Hoffman at [13] in In re B [2009] 1 AC 11.

 

201. He submitted that actual knowledge is an objective fact, particularly if based on the conclusion that the trader must have known of the relevant facts.  Nelsonian blindness is a form of actual knowledge.  In Mobilx Moses LJ referred at [61] to choosing “to ignore obvious inferences from the facts and circumstances.”  The phrase “know or should have known” in Kittel must have the same meaning as “knowing or having any means of knowing” in Optigen Ltd v Customs and Excise Commissioners (Case C-354/03) [2006] STC 419.

 

202. Mr Cunningham said that Mobilx decided that Customs must establish that the Appellant know or should have known that by his purchase he was (emphasised) taking part in a transaction connected with fraud rather than that it was more likely than not that it was so connected.  The words at [59] “the circumstances which surround their transaction” referred to the totality of surrounding circumstances including the Appellant’s other transactions.  The Court of Appeal had approved [109] to [111] in Red 12 Trading Ltd v Revenue and Customs Commissioners [2010] STC 589.

 

Appellant’s Submissions on the law

 

203. Mr Patchett-Joyce said that it was wrong to suggest that somehow the decision in Mobilx dispensed with the need to have regard to legal certainty, fiscal neutrality, proportionality, equal treatment and free movement of goods, all of which have constitutional status from the Treaty or from decisions of the Court of  Justice; to marginalise those was a fundamental error.

 

204. He said that legal certainty required that when entering into a transaction a trader should be able to know how it would be treated for fiscal purposes.  Mobilx had referred to two concepts that were mutually exclusive: loss of the right to deduct and a transaction being outwith the right.  The change by Customs at a late stage to rely on the transactions being outwith the scope of the right to deduct had not been pleaded and infringed the principle of legal certainty.  The right of deduction was integral to VAT and in principle could not be limited, see Magoora Sp Zoo v Dyrekter Izby Skarbowej w Krakowie  (Case C-414/07).

 

205. He said that it is wrong in law to have regard to a scheme as a whole; each transaction must be considered on its own, objectively, individually and per se, to determine whether VAT becomes chargeable, see the Advocate General in Optigen at paragraphs 28 to 30.  A transaction by transaction approach is expressly required under EC law.  The decisions in Mobilx and Kittel must be read in the light of Optigen.  In Kittel the counterparty was fraudulent.

 

206. Mr Patchett-Joyce said that actual knowledge required knowledge before the transaction.  Mobilx referred to “if found out” at [61] which involved concealment; Global had been open with Customs.

 

207. The issue of whether Global should have known or had means of knowledge depended on the only reasonable explanation test in Mobilx.  To satisfy this test Customs must exclude all other reasonable explanations.  If as Customs submitted this was decided by looking at all the deals, this was close to the argument advanced but rejected in Optigen.  Each transaction must be determined on the basis of its objective character, on the objective facts or factors known or capable of being known by Global when entering into the transaction.  The character of the transactions could not be altered by earlier or later events.

 

208. He submitted formally that the Kittel test has not been transposed into domestic law although accepting that the Tribunal is bound by the decision of the Court of Appeal in Mobilx.

 

Conclusions

 

209. While Mr Patchett-Joyce is correct in asserting that the principles of legal certainty, fiscal neutrality, proportionality and free movement of goods are fundamental to the common system of VAT, it cannot be argued that those principles which were developed by the Court of Justice and were specifically addressed in Kittel were infringed in that decision.  Any argument based on those principles can only be directed to the interpretation of the decision in Kittel which was concerned to prevent EC law being “relied on for abusive or fraudulent ends”, see at [54] .

 

210. In our judgment there is no dichotomy between loss of the right to deduct because a trader knows or should have known that his purchase is connected with the fraudulent evasion of VAT and such purchase being outwith the right of deduction.  Since the relevant time for knowledge is when the trader enters into the transaction the loss of right is ab initio; we see no difference in substance between such right being lost before it is gained and the transaction being outwith the right.  In our judgment there was no material change in Customs’ position so as to infringe the need for legal certainty.

 

211. We accept that the right of deduction is integral to VAT, however Kittel clearly specifies at [61] that,

 

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

 

The Court of Justice set a high test for denial of the right in that it required it to be established by objective factors that the trader knew or should have known of the connection with fraudulent evasion.

 

212. The fact that each transaction must be considered individually does not mean that its context is not to be considered.  The other transactions into which Global entered are clearly part of the context.  They do not alter the individual transaction but they are undoubtedly relevant to ascertaining whether Global had the requisite knowledge or means of knowledge.  The relevant factors are however limited to those of which Global had knowledge or the means of knowledge.

 

213. In view of Mobilx at [47] the submission by Mr Patchett-Joyce that the principle in Kittel could not be relied on by Customs because it has not been enacted in UK law cannot succeed before this Tribunal.

 

214. We turn now to the facts.

 

215. We have already recorded at paragraph 189 above that Mr Patchett-Joyce accepted that Customs had proved that Red Rose, Zoom, Fx Drona, Stella and Roble were fraudulent defaulters and accepted the assessments of tax losses relevant to the deals in issue except in relation to Deals 3, 4 and 15.

 

216. Deal 3 related to 4000 Nokia 90 which Customs traced back to an invoice  from Zoom to Wireless on 2 March 2006 for £1,294,000 plus £226,450 VAT.  A CD was handed to Customs on 14 March 2006.  216 transactions were accessed including two sales to Wireless on 6 March which are Deals 5 and 6.  The details for Deal 3 could not be accessed.  The CD showed UK sales totalling £200,056,810 plus £35,009,942 VAT, which did not include those not accessed, and EC sales to Umbria Eqitazione of £192,844,364.  On 3 April 2006 Zoom rendered a VAT return for the period to 13 March, the period having been shortened under regulation 25, the figures are shown at paragraph 100 above.  The return reclaimed £3,360,141.  No evidence was produced by Zoom to Customs to support the input tax or the sales to Umbria.  The mutual assistance reply from the Italian tax authorities referred to at paragraph 109 stated that Umbria was a trader in riding items and had never purchased pre-paid phone cards.  Evidence from Miss Hirons made it clear that Zoom had given false information to Customs before March 2006.

 

217. Mr Patchett-Joyce did not suggest that Zoom was an honest trader; indeed in part his cross-examination was directed to Customs’ inaction in relation to Zoom before the transaction in question.

 

218. We are satisfied that when entering into the transaction in Deal 3 and indeed Deals 5 and 6 with Wireless, Zoom intended to evade any net liability to pay VAT by falsely claiming to have made substantial sales to Umbria and other EC customers thus generating a repayment claim.  We find on the balance of probabilities that the sales to Wireless formed part of the output tax declared on Zoom’s return although Deal 3 could not be accessed, however we do not consider that that fact can be isolated from the fact that the return as a whole was fraudulent.  It matters not whether the goods purportedly sold to Italy were non-existent together with the attributable input tax or whether the purported EC sales in fact went to the UK.  In our judgment the sales to Wireless were fraudulent transactions and were connected factually with sales by Unique on the same days to Global.

 

219. We can deal with Deals 14 and 15 involving sales by Roble to Wireless more briefly.  There were two invoices dated 14 March 2006 for 5000 Nokia 9500 (Deal 14).  One numbered “RC 29” in Wireless’ records, the other numbered “RC 31” in Roble’s records; apart from the invoice numbers the only difference is that “RC 31” carries the words “with memory 128mb.”  Both were for the same unit price.  The overwhelming probability is that one or the other relates to the goods later purchased by Global; it matters not which since either way Roble failed to account for the VAT.

 

220. Similarly there were invoices for 3300 Nokia 9300i at the same price on the same day from Roble to Wireless, one numbered “RC 30” and the other “RC 32”. Again we find as a fact that one or the other relates to Global’s Deal 15.

 

221. Deal 26 concerned a supply of 2500 Nokia 9300i on 24 March 2006.  In a third witness statement dated 3 December 2009 Mr Bright stated that there might be an alternative chain leading back to A S Genstar rather than Fx Drona.  Mr Patchett-Joyce opposed the application by Mr Cunningham to put in Mr Bright’s third statement and the Tribunal excluded paragraphs 16 onwards which addressed Deal 26.  The evidence as to a possible alternative chain having been excluded, the Appellant cannot rely on that material to cast doubt on the chain leading to Fx Drona covered by Mr Bright’s earlier statement.  Mr Bright was not cross-examined as to Deal 26.

 

222. We are satisfied that the fraudulent defaults and the factual chains leading to Global have been established.

 

223. This brings us to the issue as to whether Customs have established that Global knew or should have known that its purchases were connected with the fraudulent evasion.  The actual knowledge allegation involves a clear allegation of dishonesty.  As is normal with such an allegation it is not admitted and Customs must therefore show that it should be inferred from the facts.

 

224. The most specific matter relied on by Mr Cunningham as evidence of actual knowledge was the documentation in Deal 18 and in particular the timings on fax headers.  He said that the timings did not make sense (see paragraph 182 above).  The relevant documents in respect of Global’s knowledge are of course the documents to and from Global.  Assuming that the fax machines were all showing correct times, Global instructed AFI to ship on hold to DGB at 1736 hrs before Unique instructed AFI to release the goods to Global, Global’s order to Unique being later still.  Mr Drinkwater did not handle the deals personally.  We note that the order from DGB showed a time of 1553hrs (GMT) and that 16 March was before British Summer Time.  In his evidence Mr Drinkwater said that Global negotiated deals by telephone over a period of hours.  We do not consider it to be inherently improbable that the paperwork followed oral agreements or instructions by telephone and was not always produced immediately.  The one document which did need to be sent promptly was the proforma invoice to DGB containing terms and conditions which was timed at 1706hrs, before the instructions by Global to AFI.  Timings on different fax machines are not necessarily consistent.  We do not consider the timings of themselves to be evidence of fabrication.

 

225. We accept the submission of Mr Patchett-Joyce that there was no need for Global to know the reasons of its customers for their purchases and what market opportunity they were addressing.  From a commercial viewpoint all that Global needed to know was that a customer was willing to pay a price which gave Global a profit.  While the type of analysis of market opportunities which Mr Fletcher envisages might be a useful marketing tool in some types of business, it does not seem to us that such analysis was to be expected in grey market transactions in mobile phones.  It is to be remembered that Global had a considerable business in mobiles in the domestic market which has not been questioned which was also on the grey market.

 

226. We regard Mr Fletcher’s evidence as to the size of the total retail European market (paragraphs 135 and 136 above) with reservation, particularly in the light of Vodaphone’s 8.52 million new customers in 2006-07 in Italy.  In any event there was no evidence that Mr Drinkwater or Global were aware that their sales were out of line with those of the market as a whole.

 

227. There is no dispute over the fact that Global was well aware of the substantial amount of fraud in the mobile phone sector and that it had received a series of warnings from Customs that its overseas sales had been traced back to defaulters.  There was no reason for Global to disbelieve what it was told.  On its own evidence Global ceased using all the suppliers of goods to which the letters of 14 February 2006 and earlier related and changed to using Unique.

 

228. There was an issue between the parties as to whether Unique, which was a different company from the Unique which was previously an authorised Nokia distributor, was also an authorised distributor.  The business of Unique Distributions Ltd, which went into administration had been transferred to the present Unique the name of which was changed from Land Investment Ltd on 7 April 2005.  On 27 May 2005 Unique was registered for VAT with effect from 30 March.  The evidence was that it operated from the same premises keeping some staff albeit with new management.  A press cutting from Mobile News dated 10 June 2005 stated “Unique has secured official status from Nokia” although it did not specifically state that it was an authorised distributor.  Mr Fletcher proceeded on the footing that Unique was an authorised distributor; Nokia was a client of KPMG and he had contact with Nokia in preparing his report.  The burden of proof on this issue lies with Customs.  It should have been relatively simple for Customs to adduce evidence that Unique was not an authorised distributor if this was in fact the case.  Customs did not do so.  We find on the balance of probabilities that Unique was an authorised distributor.  In any event we find that Mr Drinkwater believed that Unique was an authorised distributor.

 

229. We find Mr Drinkwater’s evidence that Global changed to sourcing mobiles from Unique in order to address the concerns of Customs as to its previous suppliers to be credible.  Mr Mann told Mr Bright on 23 March 2006 of the change to sourcing from Unique.  In telephone conversations in May 2006 Mr Bright was told that Unique was an authorised distributor.  It is true that Unique was not asked whether the goods were sourced directly from Nokia, however we do not find that surprising.  Mr Drinkwater said that Global relied on the status of Unique as an authorised distributor.

 

230. We next turn to Mr Cunningham’s submission that the entire deals were contrived and that it was inconceivable that an orchestrator would allow an ignorant interloper to make three times the profit made by the entirety of the rest of the chain.  That submission of course leaves out the fraudulent defaulters which charged output tax but did not account for it.  Taking Deal 18, Roble defaulted on £206,920 VAT, the margins of the buffers totalled £12,800 and Global’s margin was £48,000 assuming recovery of VAT of £209,440.  Global paid Unique £1,245,000 on 21 March, basically the money it received from DGB, leaving £161,240 outstanding to Unique.  Global had to meet its expenses including AFI’s charges.  The question is not so much why the orchestrator would allow Global, which had to meet its costs and finance the VAT pending recovery, to make a much higher profit than the buffers as why should Unique effectively finance the VAT.  This aspect however was never addressed and there was no evidence of what inquiries if any were made by Customs of Unique.  It is to be noted that Unique and Future which was an associated company made £11,200 of the £14,400 made by the buffers.

 

231. This is not a case where there was any evidence of circularity of the goods or of money; such evidence if it had existed might well have led to a clear inference that Global was a knowing party.  Circularity is often shown by the parties in the chain using FCIB for payments; Global did not do so.  In the absence of such circularity it is not evident to us that it mattered to the orchestrator to which company the goods were sold by Global.  The objective of the orchestrator was to distance any repayment claim from the defaulters, while ensuring that the money passed up the chain to the defaulters.

 

232. We do not consider that the fact that the chains were contrived necessarily leads to the conclusion that Global was a knowing participant. 

 

233. Perhaps the main basis of Mr Cunningham’s case on actual knowledge was his attack on Mr Drinkwater as a witness.  Indeed this was inevitable since if we accept Mr Drinkwater’s credibility that must include his evidence that he had no knowledge of fraud in the chains.

 

234. Mr Cunningham said that Mr Drinkwater’s denial of the suggestion that the only rational explanation for the business was fraud (see paragraph 160 above) was unrealistic at best.  However it was not clear at the time to the Tribunal whether the question was directed to the rest of the chain or to the chain entirely including the transactions of Global.

 

235. The criticism of Mr Drinkwater’s evidence as to inspections when compared with his written statement (see paragraph 152) was valid.  So also was the criticism of  his reference to the deals with Goldex as “small” (see paragraph 172).

 

236. Mr Drinkwater was cross-examined robustly for a day and a half.  Since it was the primary case for Customs that he was dishonest, this was put to him on a number of occasions.  However Mr Drinkwater did not come across to the Tribunal as a dishonest witness.  In particular he took considerable care with his answers.

 

237. However in weighing his evidence it is necessary to consider its content as well as his impression on the Tribunal.  We have in the preceding paragraphs considered a series of matters including Deal 18, lack of research into the market, the size of the transactions, Global’s reaction to the warning letters and the submissions that the orchestrator would not have let Global in as an ignorant interloper.  While we do not find any of these matters convincing on their own, it is necessary to consider them as a whole, when assessing Mr Drinkwater’s knowledge.  We also bear in mind that in spite of the seriousness of the matters raised in the warning letters Customs met all the repayment claims for periods 03/06, including that for 01/06 which was credited to Global’s bank on 15 March 2006.  Another fact which distinguishes this case was that Global did not use the offshore bank, FCIB, which is frequently used by traders engaged in MTIC transactions.

 

238. Before reaching a conclusion as to Mr Drinkwater’s evidence that he had no knowledge of the connection with fraud, we consider the alternative contention that he and through him Global should have known of the connection with fraud.

 

239. In Mobilx Moses LJ said this at [59]

 

“If a trader should have known that the only reasonable explanation for the   transaction in which he was involved was that it was connected with fraud and if it turns out that it was connected with fraudulent evasion of VAT then he should have known of that fact.”

 

It is clear from the previous sentence that the circumstances which surround the trader’s transactions are relevant to whether he should have known.  It is clear from [61] that the trader must deploy the available means of knowledge.  At [80] Moses LJ used the phrase “the only realistic possibility” in relation to continuing trade.

 

240.  As a matter of language the “only reasonable explanation test” for “should have known” is as high as a test for actual knowledge based on an inference that the trader must have known.  There is however the difference that “should have known” encompasses matters which the trader could have known if he had used the available means of knowledge.

 

241.  In the present case, apart from the fact that the mobiles sold by Unique did not come directly from Nokia, Mr Cunningham did not fasten on many particular matters which Global should have known.  Indeed the pattern of the antecedent chains which are relevant to the contrivance argument on knowledge are not relevant on the should have known issue because Global had no means of knowing them.  It was not argued that the only reasonable explanation for the fact that Unique could supply what Global’s customers wanted was that the deals were connected with fraud.  Since Mr Drinkwater believed that Unique was an authorised dealer we do not consider that he should have concluded that the only realistic possibility was that its sales were connected with fraud. 

 

242.  Customs has not satisfied the Tribunal that the only reasonable explanation for Global’s purchases from Unique were that they were connected with fraud.  Nor viewing the evidence as a whole has Customs satisfied us that Mr Drinkwater or Global knew that the transactions were connected with fraud. 

 

243.  The appeal is allowed with costs.

 

244. This document contains full findings of fact and 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.

 

 

 

THEODORE WALLACE

 

RELEASE DATE: 25 August 2010