[2010] UKFTT 417 (TC)

 

TC00687

Appeal number:  MAN/2006/0756

 

VAT – MTIC fraud – input tax – whether purchases by the Appellant were connected with fraudulent evasion of VAT – yes – whether the Appellant knew or should have known of the connection with fraudulent evasion of VAT – actual knowledge not proved, but held the Appellant should have known of the connection in relation to each purchase – appeal substantially dismissed

 

FIRST-TIER TRIBUNAL

TAX

 

NG INTERNATIONAL LIMITED

Appellant

 

-and-

 

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS (VAT)

Respondents

 

 

TRIBUNAL:

KEVIN POOLE  (TRIBUNAL JUDGE) ALBAN HOLDEN

 

 

Sitting in public in Manchester on 10-12 March, 15-19 March and 20-21 April 2010

Lawrence Power of counsel, instructed by JH Law Solicitors for the Appellant

Jonathan Cannan of counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

Introduction

 

1.     This appeal is of a type usually referred to as “MTIC” (missing trader intra-community fraud).

2.     The appellant company, NG International Limited (“NG”), a dealer in mobile phones, appeals against a decision of the Respondents (“HMRC”) to refuse VAT repayment claims by NG of £766,572.10 in respect of the month ended 31 March 2006 and £689,829.17[1] in respect of the three months ended 30 June 2006.  The total amount of VAT repayment claimed by NG is therefore £1,456,401.27.  This sum largely (but not exclusively) represents the input VAT suffered by NG on its purchases of mobile phones for zero-rated onward sale by it to customers overseas (both within and outside the EU).

3.     HMRC claim to be entitled to refuse payment of the disputed amount because the transactions of NG are, in their view, part of an orchestrated VAT fraud.  They say that an earlier supplier (often, but not always demonstrably, the original UK importer/acquirer) of the mobile phones always intended that the VAT due on the sale of those phones within the UK would not be paid, and that VAT has indeed gone unpaid.  They say that by tracing the chains of transactions involving these phones into, within and out of the UK, the overall fraud becomes clear; that there is a connection between the fraudulently unpaid VAT and NG’s transactions; and that NG (through its director Amarjit Singh Riyait) knew or should have known of the fraud. 

4.     There are no allegations of what is commonly called “contra-trading”: all the transactions of NG the subject of the appeal trace directly back (through chains of UK sales and purchases) to UK defaulters.

5.     The leading authority in this area of law is the decision of the ECJ in the joined cases of Axel Kittel v Belgium and Belgium v Recolta Recycling C-439/04 and C-440/04 [2006] ECR 1 – 6161.  The ECJ ruled (at [59] and [61]) that the right to deduct may be refused if:

“it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT”

6.     In the Court of Appeal judgment in the joined cases of Mobilx v HMRC; HMRC v Blue Sphere Global Limited; and Calltell Telecom Limited v HMRC [2010] EWCA 517 at [49] it was made clear that this refusal of the right to deduct does not depend on any specific UK legislation:

“It is the obligation of domestic courts to interpret the VATA 1994 in the light of the wording and purpose of the Sixth Directive as understood by the ECJ (Marleasing SA 1990 ECR 1-4135 [1992] 1 CMLR 305) (see, for a full discussion of this obligation, the judgment of Arden LJ in Revenue and Customs Commissioners v IDT Card Services Ireland Limited [2006] EWCA Civ 29 [2006] STC 1252, §§ 69-83).  Arden LJ acknowledges, as the ECJ has itself recognised, that the application of the Marleasing principle may result in the imposition of a civil liability where such a liability would not otherwise have been imposed under domestic law (see IDT § 111).  The denial of the right to deduct in this case stems from principles which apply throughout the Community in respect of what is said to be reliance on Community law for fraudulent ends.  It can be no objection to that approach to Community law that in purely domestic circumstances a trader might not be regarded as an accessory to fraud.  In a sense, the dichotomy between domestic and Community law, in the circumstances of these appeals, is false.  In relation to the right to deduct input tax, Community and domestic law are one and the same.”

7.     The substance of the Axel Kittel test is commonly broken down into its constituent parts in order to apply it, and we find it helpful to do so.  For  the denial of a right to deduction of input VAT to be justified, each of the following elements must be present (having regard to “objective factors”):

(1)  A fraudulent evasion of VAT must be shown to have taken place

(2)  A connection between that fraudulent evasion and the trader’s purchase must be established

(3)  It must be shown that the trader knew or should have known that by its purchase it was participating in a transaction which was connected with fraudulent evasion of VAT

The formulation of the last of these three elements has attracted much discussion and argument in earlier cases, but the Court of Appeal in the leading case of Mobilx/Blue Sphere/Calltell at [56] has effectively approved this formulation of it.

8.     This decision sets out first a background summary of the Appellant’s history and trading, before turning to the above three elements.  The first and second elements fall naturally to be considered together, then the third element will be considered separately.

Background summary

History of NG

9.     NG was incorporated on 24 July 2003.  It was formed by Mr Amarjit Singh Riyait (“Mr Riyait”) and Mr Dalbir Singh Sambi (“Mr Sambi”).  They initially formed it with a view to importing and exporting electrical and other goods manufactured in China; a friend of Mr Riyait’s carried on a similar business and had taken Mr Riyait to a trade fair in China.  Mr Riyait had access to a workshop which had been bought jointly with his uncle for use in their building business, but that business had ceased to trade upon the retirement of his uncle in November 2002.  The workshop was therefore empty and Mr Riyait intended to use it to store imported goods before their onward sale.

10.  Mr Riyait and Mr Sambi were already 60:40 partners in another business called DA Travel, a partnership carrying on a travel agency and money exchange business which they had acquired in November 2001.  It was agreed that they would share in the new venture in the same proportions (though board resolutions of NG were only passed on 4 July 2005 to allot the necessary shares).  DA Travel carried on business from premises at 332 Leeds Road, Bradford and there was some spare office accommodation available there for the new venture.  Mr Riyait and Mr Sambi both became directors of NG and Mr Riyait was company secretary.

11.  According to a return made to Companies House and signed by Mr Riyait, up to 31 May 2004 NG’s only transaction was the issue of the two subscriber shares to Mr Sambi and Mr Riyait.  However Mr Riyait gave evidence that during this period he travelled to China and Hong Kong to research products in which to trade and generally worked to get the business of NG up and running.

12.  As part of this activity, Mr Riyait applied for voluntary VAT registration of NG on 10 May 2004.  In the Application for Registration (form VAT1), he described the intended business activities of NG as “Import/Export Electrical goods, Toys, household & general goods, soft drinks” and he gave 1 July 2004 as the expected date of NG’s first taxable supply.  In due course, NG was registered for VAT with effect from 1 July 2004.

13.  For approximately the following year, NG carried out a small scale import and distribution trade in goods such as electric fans.  Its VAT returns over that period showed the following:

	Outputs reported (ex VAT)	Output VAT reported	Inputs reported (ex VAT)	Input VAT reported	Overall VAT reported
August 04 (2 month period)	0	0	£18,252	£16,011.51	- £16,011.51
November 04 (3 month period)	£48,390	£8,468.31	0	0	£8,468.31
February 05 (3 month period)	0	0	0	0	0
May 05 (3 month period	£2,992	£507.84	£29,048	£5,432.03	-£4,924.19
August 05 (3 month period)	£23,228	£4,064.89	£3,980	£696.62	£3,368.27
September 05 (1 month period)	£890	£155.75	£3,980	£99.49	£56.26

14.  NG’s accounts for the year to 31 May 2005 showed a turnover of £51,383 and a loss of £11,633.  Apart from £100 of share capital, the financing was provided by directors’ loans of £134,820.  Mr Riyait gave evidence that this was provided by himself and Mr Sambi in proportion to their shareholdings, and was provided out of DA Travel.

NG enters the wholesale mobile phone trade

15.  It is not clear how and when Mr Riyait decided to enter the mobile phone trading business.  His evidence on this point was unconvincing.  He said that he had a friend and business contact in India called Mr Gurmeet Singh Jolly, who ran his own mobile phone sales company in Delhi.  Mr Jolly had approached Mr Riyait with requests to supply him with mobile phones, but Mr Riyait was unable to source any phones at prices which would afford him a profit after meeting Mr Jolly’s prices. 

16.  Mr Jolly had apparently mentioned a potential supplier called New Way Associates Limited (who in fact became NG’s first supplier) and in researching them, Mr Riyait came across a website called “IPT” (“International Phone Traders”).  He said that his attempts to source phones led him (on the basis of research on the internet, including IPT) to making calls to potential suppliers in Hong Kong, Dubai and Singapore. 

17.  One potential supplier was a company in Hong Kong, whose name he could not remember.  He spoke to an individual called “Wikki” at that company and asked him for any further contacts he could provide.  Wikki gave him some names, including a Mr N S Gambhir at a business called GNJ General Trading LLC (“GNJ”) in Dubai.  Mr Riyait found GNJ on the IPT website as well.  His attempts to source phones from GNJ proved abortive – the sale prices they offered were too high for NG to make a profit out of selling on to Mr Jolly at the purchase prices he was prepared to pay.  But Mr Gambhir asked Mr Riyait whether he could supply phones from the UK to GNJ.  He specified the phones he was looking for and the prices he was prepared to pay and Mr Riyait agreed to do so. 

18.  Whatever the true process by which Mr Riyait entered the mobile phone trading market, he had clearly made his decision to do so, and to supply phones overseas, by early September 2005 at the latest.  On 2 September 2005, he wrote on behalf of NG to HMRC, asking to be placed on monthly VAT returns “because we will be exporting goods from the UK, and will be expecting regular VAT refunds”.  In a letter dated 15 September 2005, HMRC confirmed their approval of this request and therefore NG was required to make monthly returns commencing with the month ending 30 September 2005.

19.  On 21 September 2005, HMRC wrote to NG in what appears to be a standard form letter, informing it of continuing MTIC fraud problems in its trade sector.  This letter was sent as a result of other companies attempting to validate NG’s VAT registration with HMRC when proposing to deal with it in mobile phones.  They gave an estimate of the then current annual VAT loss to the UK of between £1.06 billion and £1.73 billion, and referred specifically to mobile phones as being involved in those frauds.  The main purpose of this letter appears to have been to notify NG of updated arrangements to verify the VAT status of new or potential customers and suppliers with HMRC’s Redhill office.  Contact details and a list of supporting information requested was included in this letter, along with a warning that validation of VAT registration details did not “absolve traders from undertaking their own enquiries in relation to proposed transactions.”  This letter also enclosed a copy of VAT Notice 726 – Joint and Several Liability.

20.  HMRC also arranged a personal visit to NG in view of its apparent intention to deal in mobile phones.  This visit took place on 30 September 2005, when Ms Ann Bushby of HMRC visited NG’s business premises and met Mr Riyait.

21.  At that meeting, Mr Riyait told Ms Bushby of his plans to buy and export mobile phones.  He said he had friends in India who wanted to buy phones and he regarded it as a growing market.  He said he planned to source phones for export to India from the UK and from Hong Kong.  He had taken out a subscription to the IPT website for £325 per month.  He had applied for a bank account with First Curaçao International Bank NV of the Netherlands Antilles, as recommended by people in the trade, to facilitate rapid money transfers.  (This account was actually opened on 3 October 2005.)

22.  Ms Bushby warned Mr Riyait that this particular market was subject to a great deal of fraud, costing the UK Treasury billions of pounds.  She advised him not to get involved in it.  She also requested that he fax her on a weekly basis with details of any trades which he carried out in mobile phones.  There was some discussion of due diligence (i.e. the steps Mr Riyait might take to establish the standing of his customers and suppliers before dealing with them) but Ms Bushby made it clear that whilst Notice 726 contained some suggestions, HMRC were not in a position to lay down definitive rules on what due diligence should be carried out, that remained the responsibility of the directors of NG.

23.  In an exchange of correspondence following the meeting, Ms Bushby again warned of the “severe and widespread problem blighting some sectors of the mobile phone trade” in the form of fraud, and reiterated her request for weekly summaries by fax of any deals in mobile phones which NG carried out.

24.  In spite of the warnings he had received, Mr Riyait decided to press ahead with his plans.

Summary of Trading

25.  NG’s first trade took place on 10 October 2005, and during October it carried out seven purchases and seven sales.  All its sales during October were export sales to GNJ in Dubai, and their total value was just under £870,000.  The phones were bought from three different UK suppliers (New Way Associates Limited, 20:20 Logistics Limited and Excel Electronics Limited).  NG’s VAT return for October 2005 was received by HMRC on 4 November 2005, showing a VAT reclaim of £146,313.12.  Under the guidelines prevailing within HMRC at the time, this claim was passed for payment without further investigation and the amount reclaimed was credited to NG’s bank account on 28 November 2005.

26.  In November 2005, NG carried out ten purchases and ten sales.  All the sales were export or intra-EU removal sales and all except the last (on 30 November, to France Affaires (International) SaRL (“France Affaires”) were exports to GNJ in Dubai.  Invoices to GNJ totalled just over £1.6 million, out of a total of nearly £2.2 million in the month.  The phones were bought from six different UK suppliers (Excel Electronics Limited, New Way Associates Limited, Ocean Connection Limited, 20:20 Logistics Limited, Letting Solutions (UK) Limited and G Comms Limited (“G Comms”)).  NG’s VAT return for November 2005 was received by HMRC on 7 December 2005, showing a VAT reclaim of £346,385.64.  This claim was also accepted without immediate investigation and the amount reclaimed was credited directly to NG’s bank account on 29 December 2005.

27.  In December 2005, NG carried out just one purchase (from the UK trader G Comms) and one sale (an intra-EU removal sale to Zetec SARL).  Its VAT return for December 2005 was received by HMRC on 6 January 2006, showing a VAT reclaim of £43,410.00.  This claim was also accepted without immediate investigation and the amount reclaimed was credited to NG’s bank account on 2 February 2006.

28.  On 5 January 2006 Mrs Bushby made a pre-arranged visit to NG, uplifting its records in relation to deals it had carried out up to that time.

29.  In January 2006, NG carried out six purchases and seven sales.  Its four suppliers (Princeways Limited, Red 12 Trading Limited, G Comms and The Fones Centre Limited (“Fones”)) were all UK traders; the bulk of its sales were intra-EU removal sales to three customers (Facey International GmbH, France Affaires and Future Brokerage SA) but it also sold just over £138,000 plus VAT of phones to Ocean Connections Limited in the UK.  Its VAT return for January 2006 was received by HMRC on 8 February 2006, showing a VAT reclaim of £446,158.95.  This claim was also accepted without immediate investigation and the amount reclaimed was directly credited to NG’s bank account on 9 March 2006.

30.  In February 2006, NG carried out seven purchases (from four UK traders, G Comms, Fones, Red 12 Trading Limited and Inter Communications UK Limited) and seven sales (all export or intra-EU removal sales to six different customers, France Affaires, Facey International GmbH, Future Brokerage Inc SA, Blue Star Telecom APS, GNJ and Compucell BV).  Its VAT return for February 2006 was received by HMRC on 3 March 2006, showing a VAT reclaim of £480,844.86.  This claim was also accepted without immediate investigation and the amount reclaimed was directly credited to NG’s bank account on 30 March 2006.

31.  In the meantime, however, HMRC had selected two deals from the November trading of NG and its only deal in December for closer investigation.  Using the deal information supplied by NG and other traders, they established that all three of those deals led back, through a number of intermediary traders in the UK, to traders who had failed to account for the VAT liability on their trading.  As a result, HMRC wrote two letters to NG dated 16 and 20 February 2006.  Those letters notified NG that each of the three transactions selected for verification led back to defaulting traders, identified the three transactions in question (enabling NG to identify that it had bought the relevant phones from two different companies G Comms and Ocean Connection Limited) and reminded NG of the possible application of the “joint and several” liability provisions set out in VAT Notice 726.  NG’s response, in a letter dated 22 February 2006 from Mr Riyait, was effectively that he was carrying out all the checks required by HMRC and unless he was told of more action he could take, he regarded the tax loss as the responsibility of HMRC rather than NG.

32.  It appears that NG misapplied the information contained in HMRC’s letter of 16 February 2006, regarding it as referring to supplies from Fones and G Comms, when in fact it referred to supplies from Ocean Connection Limited and G Comms.  Although this confusion has since persisted, nothing hangs on it in this appeal.

33.  The letter dated 22 February 2006 from NG effectively set out its position which was maintained right up to the hearing of the appeal.  In contrast the position of HMRC throughout was effectively summarised in a letter dated 3 March 2006, in which Ms Bushby pointed out that it was not HMRC’s responsibility to advise NG as to how to conduct its business to avoid becoming involved in fraudulent deal chains.  She also expressed her opinion that the information she had supplied should “constitute reasonable grounds for you to suspect any future similar dealings would give you grounds to suspect that VAT would go unpaid.”

34.  As a result of the discovery of fraud within NG’s deal chains, HMRC decided to direct that NG should revert to quarterly (as opposed to monthly) VAT returns.  This took effect following the end of the March 2006 monthly accounting period, so that the following VAT return covered the three month period ended 30 June 2006.

35.  In March 2006, NG carried out 11 purchases (all from UK traders, Fones, RS23 Limited (“RS23”) and G Comms) and 11 sales (all intra-EU removal sales to four customers, Navigo.it SpA (“Navigo”), Pabbi Elektronik GmbH (“Pabbi”), France Affaires and Blue Star Telecom APS).  Its VAT return for March 2006 was received by HMRC on 10 April 2006, showing a VAT reclaim of £770,451.02.  In view of the fact that NG was known to have made further purchases on 21 and 23 March from G Comms (which it was aware, from the earlier letters dated 16 and 20 February, was linked in chains of trades to a defaulting trader or traders), HMRC decided to carry out a full investigation into all the trades reflected in this return and the steps NG had taken to avoid being involved in any fraud uncovered.  This process was called “extended verification” and HMRC wrote to NG on 27 April 2006 to inform it of its intentions.  The bulk of this VAT reclaim remains unpaid, being subject to the current appeal.  HMRC subsequently informed NG that they had traced all the trades made by NG in this period back through chains of supply commencing with a defaulting trader.

36.  Over the three month period from 1 April to 30 June 2006, NG made 21 purchases (all from its established UK suppliers RS23, Fones and G Comms) and 21 sales (12 export or intra-EU removal sales to its previous customers Navigo, France Affaires and GNJ, five intra-EU removal sales to a new customer Silus BV, and four sales to UK customers Ocean Connection Limited, Spherehead Limited and New Way Associates Limited).  Its VAT return for this three month period was received by HMRC on 10 July 2006, showing a VAT reclaim of £689,829.17.  By letter dated 31 July 2006, HMRC notified NG that this VAT return would also be subject to extended verification.

37.  By a letter dated 27 September 2006, HMRC notified NG of their decision to refuse its claim for repayment of input tax on all its trades reflected in its VAT return for the one month period ended 31 March 2006 and updated NG on their progress in verifying its VAT return for the three month period ended 30 June 2006.  In due course, after considering the reclaims in detail, HMRC specified that their decision in relation to the March 2006 return was to refuse repayment of £766,572.10 of the total £770,451.02 originally claimed and in relation to the April to June 2006 return was to refuse all of the £689,829.17 originally claimed (though this last refusal was only made fully clear in HMRC’s Statement of Case).

38.  The total value of mobile phone sales made by NG to all customers from the commencement of its trading on 10 October 2005 up to its last 2006 trade on 16 June 2006 (a period of just over nine months) was a little under £19 million.

39.  A summary of NG’s trading over the months from October 2005 to June 2006 is set out in Appendix 1 and details of the specific trades carried out from 1 March to 30 June 2006 (the two VAT periods covered by this appeal) are set out in Appendix 2.

Methods and pattern of trading

40.  All or substantially all of NG’s trading was carried out by Mr Riyait personally.  The normal pattern was for him to receive an enquiry or purchase order by phone or fax from a potential customer who wanted to buy phones from NG.  He would then try to source those phones, mainly through the IPT website by phone or fax to potential suppliers identified in it.  If he was able to obtain the phones he needed, he would send a purchase order to the potential seller and then attempt to reach agreement on both purchase and sale as near as possible contemporaneously.  There is some evidence in the documents however that he may well have issued purchase orders to NG’s supplier on occasion in advance of receiving a purchase order from his customer.  It is also clear that on at least one occasion he approached a potential customer to offer a sale, having already arranged the sourcing of the relevant phones (see [152] below).

41.  With just a few exceptions, all the deals agreed in the period from October 2005 to June 2006 were “back to back” deals, in the sense that each individual purchase of phones from a single supplier linked directly to an individual sale of exactly the same phones to a single customer.  The only exceptions were in January 2006, when one sale (of 1000 Nokia N8800 phones) was sourced by phones from two different suppliers (purchases of 990 and 10 phones) and one purchase (of 2000 Nokia N70 phones) which was split down into three sales (of 1400, 500 and 96 phones, 4 phones going missing).  To put it another way, over the entire period of trading up to the end of June 2006, 60 deals were entirely “back to back”, two purchases were consolidated into one sale and one purchase was split into 3 sales.

42.  During the period from 13 March to 30 June 2006, of the 28 trades carried out by NG which give rise to the disputed VAT reclaim (i.e. excluding domestic UK sales, of which there were four in that period), 26 were fully completed (both purchase and sale) on the same day and the other two were completed with a delay of one day between purchase and sale.  (In one of the 26 cases, NG issued a sales invoice dated one day later than the sales invoice of its supplier, but from the other documentation it is apparent that the supplier’s invoice was mistakenly dated one day early and both purchase and sale in fact took place on the same day.)

43.  As to terms of payment and passing of title, Mr Riyait’s written evidence was that:

“In the mobile phone trade sometimes a supplier would let NG allocate or ship the phones before payment, however the phones remained the property of that supplier until they were fully paid.  NG received payment from its customer and then paid the supplier at which point the supplier would release the phones.

The terms on which phones were bought and sold in the market was that the supplier would remain owner of the phones until NG had them paid in full.  NG would then become owner and remain owner until a purchaser paid the company the sales price.”

44.  This account seems to us to be internally inconsistent.  It appears to break down into the following elements:

(1)  The phones remained the property of NG’s supplier until they had been paid.

(2)  NG would then become the owner until it was paid by its customer.

(3)  When NG’s customer paid NG, the customer would become the owner.

(4)  NG always received payment from its customer before it paid its supplier.  (This statement appears to be supported by the documentary evidence: an analysis of the deal documents and bank statements supplied shows that in every transaction in the period under appeal the payments in and out were made on the same day.  Where the sequence of the payments can be ascertained (the vast majority of cases), the payments in were always received before the payments out were made).

45.  It follows that, at the time the customer paid NG, NG was unable to pass title to the customer, because until the customer’s money had been passed on to NG’s supplier, NG had no title to pass on. 

46.  This issue is considered further below in the section entitled “Features of the trading carried out – credit risk” commencing at [155].

47.  The detail in the purchase orders themselves was generally scant (with the exception of purchase orders from Navigo).  This is considered in more detail below in the section entitled “Features of the trading carried out – specifications of phones supplied” commencing at [148].

48.  In each of the 28 trades the subject of this appeal, the phones bought by NG were all held by freight forwarders at the time NG agreed to buy them.  NG would therefore not take delivery of the phones itself, but would instruct the freight forwarder in question to deliver them direct to NG’s overseas customer.  Usually (but not always) Mr Riyait would instruct the freight forwarder to ship the goods “on hold”.  The documents before us included copies of the evidence of export of all the phones – usually by van or truck through Eurotunnel or by ferry, but by air via Heathrow in the sales to GNJ in Dubai. 

49.  Whilst the documents before us contained numerous copies of instructions to freight forwarders to release goods to NG, there are only isolated copies of any written instructions given by NG to freight forwarders to release goods to its customers.

Was there a fraudulent evasion of VAT?

Preliminary matters

50.  In relation to this question (and the associated question of whether there was a connection between such fraudulent evasion and NG’s purchases), we received written statements and heard oral evidence from a number of officers of HMRC.  All the trades of NG involved in the present appeal were traced by HMRC back to seven UK traders, none of whom had paid the VAT attributable to their UK sales of phones which were ultimately bought by NG.  Those traders, and the officers of HMRC who gave evidence in relation to the default of each of them, were as follows:

Defaulter	Officer
Cosys Services Limited	Clive Bright
Oracle (UK) Limited	Peter Cameron-Watson
Samson Traders Limited	Robert Lamb
Phone IT (UK) Limited	Stuart Yule
Stella Communications UK Limited	Sheila Edmead
Trader purporting to be Okeda Limited	Colin Needs
K.E.P. 2004 Limited	Douglas Armstrong

 

51.  Ms Bushby’s evidence also included copies of documents describing and demonstrating the chain of sales between the above traders and NG.  These documents had largely been uplifted from the traders involved in the chains of sales. 

52.  NG had already indicated it did not dispute these deal chains from original traders to NG.  It took issue however with the identification of the tax losses in each case and disputed that any such tax loss was fraudulent.

53.  Mr Power on behalf of NG in his written closing submissions said that “HMRC need to show a tax loss and we submit that in the disputed returns there is no actual loss.”  Insofar as he was arguing that HMRC’s case must fail because no tax loss had been established, we regard this submission as misconceived: the relevant tax losses arising from fraudulent evasion – in this case as in Kittel – are, if they exist at all, the losses arising from the non-payment of output tax by the defaulting traders identified by HMRC.

54.  Mr Power also submitted that the burden of proof in relation to this issue rested with HMRC, and Mr Cannan on behalf of HMRC accepted this argument, rightly in our view.  We accept Lewison J’s guidance on the point in the High Court case of HMRC v Brayfal Limited (Ch/2008/APP 0082 unreported):

“In cases of this kind, the burden is on HMRC to establish a fraudulent tax loss and that the transactions giving rise to that loss are connected to the taxpayer’s transactions.”

In a situation where all the relevant evidence is in the possession of HMRC, it would make no sense for the burden to be on an appellant to demonstrate that there was no fraudulent tax loss or that if there was, it was not connected to the appellant’s transactions.

55.  Our findings, based on the evidence placed before us in relation to each defaulting trader, are as follows.

Cosys Services Limited (“Cosys”)

56.  We are satisfied, on the evidence of Mr Bright, that Cosys was incorporated and registered for VAT solely for the purpose of defrauding the revenue by acquiring very large quantities of mobile phones from a single supplier based in Denmark and selling them to Phone IT (UK) Limited, over a very short period of time; the VAT arising on the known sales was just under £31 million, and matters were so arranged that Cosys had neither the funds nor any means of obtaining them for the purpose of satisfying its VAT liability.  The VAT liability remains unpaid.

57.  Included in the phones sold by Cosys without accounting for the VAT were those subsequently sold to NG on 13 and 14 March 2006 in deals numbered 1 and 2 in Appendix 2 (and subsequently sold on by NG to Navigo as shown on its invoices numbered 1038 and 1039).

58.  The total amount of unpaid output VAT of Cosys in relation to these two sales was £217,673.75, which we find to have been fraudulently evaded.  The related input VAT of NG on its corresponding purchases amounted to £218,225.00, which was included in its VAT reclaim for the period ended 31 March 2006.

Oracle (UK) Limited (“Oracle”)

59.  We are satisfied, on the evidence of Mr Cameron-Watson, that whilst Oracle was not originally incorporated in order to trade in mobile phones, it entered that business in approximately November 2005.  During the period from then up to its deregistration on 7 April 2006, it incurred an unpaid VAT liability of a little over £24 million in respect of sales of mobile phones which it had acquired from EU traders.  It entered into transactions on the basis that it permitted payments for phones which it sold to be diverted largely to third parties, leaving it without the means to pay its VAT liabilities.  We are satisfied this diversion of payments was fraudulent in intent.  Oracle’s sole or main director, Paramjit Singh Ratoo, undertook not to act as a company director for a period of 12 years commencing on 9 October 2008 in consequence of this and other defaults.

60.  Included in the phones sold by Oracle without accounting for the VAT were those subsequently sold to NG on 5 April 2006 in deal numbered 14 in Appendix 2 (and subsequently sold on by NG to France Affaires as shown on its invoice numbered 1051).

61.  The total amount of unpaid output VAT of Oracle in relation to this sale was £86,450.00, which we find to have been fraudulently evaded.  The related input VAT of NG on its corresponding purchase amounted to £86,800.00, which was included in its VAT reclaim for the period ended 30 June 2006.

Samson Traders Limited (“Samson”)

62.  Samson was incorporated on 11 January 2005 and almost immediately applied to be registered for VAT, with “general traders” as its intended activity.  It is not clear when its trading activities commenced, but they only came to light through examination of the purchase records of another business suspected of involvement in MTIC fraud and not through VAT returns made by Samson itself.  That other business held approximately 700 sales invoices from Samson issued over a period of no more than a few weeks in March and April 2006.  Those invoices reflected an output VAT liability of Samson of a little under £37 million, and arrangements were in place to ensure that Samson would not have the funds to settle this liability.  HMRC were only able to speak to the main director on his mobile telephone by chance and he did not attend an agreed meeting with them to discuss Samson’s trading.

63.  Included in the phones sold by Samson without accounting for the VAT were those subsequently sold to NG on 20, 23 and 24 March 2006 in deals numbered 6, 9 and 11 in Appendix 2 (and subsequently sold on by NG to Navigo, Blue Star Telecom APS and Pabbi as shown on its invoices numbered 1043, 1046 and 1048).

64.  The total amount of unpaid output VAT of Samson in relation to these sales was £144,126.96 (being £144,701.38 on its total invoices, less £574.42 in respect of eight phones included in them which were not subsequently sold on to NG), which we find to have been fraudulently evaded.  The related input VAT of NG on its corresponding purchase amounted to £144,534.60, which was included in its VAT reclaim for the period ended 31 March 2006.

Phone IT (UK) Limited (“Phone IT”)

65.  Phone IT was incorporated on 30 September 2004.  It applied for VAT registration on 25 October 2004, giving its intended business activity as “Mobile Phone Retail and Repair Service”.  It estimated taxable supplies of £75,000 in its first year.  Up to 31 October 2005 it reported a total of £30,665.00 of sales.  In January 2006 it started to trade in mobile phones and records seized by HMRC indicated 1,040 deals between 18 January and 13 March 2006, in which it generated taxable supplies of over £300 million and output VAT totalling some £54,055.841.87.  It had traded with only two suppliers – from 18 January until 20 February 2006 with Global Dotcom Solutions Limited and from 21 February until 13 March 2006 with Cosys.  All the purchases and sales recorded in these documents were domestic UK purchases and sales.

66.  Of its input VAT, some £23,203,770.74 was attributable to purchases from Global Dotcom Solutions Limited however HMRC had cancelled the VAT registration of that company from 28 March 2003 as its VAT registration had been used without its permission, facilitating a fraudulent evasion of VAT by the trader who had “hijacked” its VAT registration in this way.  The purchase invoices held by Phone IT in respect of those purchases were therefore invalid, and eventually VAT assessments totalling over £25 million were raised against Phone IT, largely as a result of this invalidity.  The proceeds of Phone IT’s sales were diverted wholly or mainly to third parties, as a result of which it had clearly neither the ability nor the intention of settling its VAT liabilities.

67.  Included in the phones sold by Phone IT without accounting for the VAT were those subsequently sold to NG on 15 March 2006 in deals numbered 3, 4 and 5 in Appendix 2 (and subsequently sold on by NG to Pabbi and Navigo as shown on its invoices numbered 1040, 1041 and 1042).

68.  The total amount of unpaid output VAT of Phone IT in relation to these sales was £172,493.13, which we find to have been fraudulently evaded.  The related input VAT of NG on its corresponding purchases amounted to £175,087.50, which was included in its VAT reclaim for the period ended 31 March 2006.

Stella Communications UK Limited (“Stella”)

69.  Stella was incorporated on 7 March 2005 and shortly thereafter it applied to be registered for VAT, quoting an intended business activity of “Mobile Phone Shop” and estimated turnover of £100,000 in its first year.  Stella informed HMRC at a post-registration visit on 20 October 2005 that it intended to get involved in the wholesale mobile phone market.  It was sent a letter requesting the provision of deal information on a regular basis, but no such information was provided.  On 28 March 2006, as a result of information obtained from a visit to another trader, it became apparent to HMRC that Stella was trading in mobile phones.  Visits the following day and on 3 April 2006 to the principal place of business were unsuccessful in making any contact with the business – the premises were locked up.  Stella was therefore deregistered with effect from 31 March 2006.

70.  No records of any kind were recovered from Stella.  The only picture of its trading is that pieced together from information provided by other traders and freight forwarders in the wholesale mobile phone business.  From this information, it is apparent that Stella carried out at least 117 trades during the period 15 to 30 March 2006, giving rise to output VAT liability of over £10 million, none of which has been paid.  The director cannot be contacted and is believed to have gone abroad.  He was disqualified from being a company director on 7 August 2008, for a period of 11 years commencing on 28 August 2008.

71.  Included in the phones sold by Stella on 21 and 23 March 2006 without accounting for the VAT were those subsequently sold to NG on the same dates in deals numbered 7, 8 and 10 in Appendix 2 (and subsequently sold on by NG to France Affaires as shown on its invoices numbered 1044, 1045 and 1047).

72.  The total amount of unpaid output VAT of Stella in relation to these sales was £228,025, which we find to have been fraudulently evaded.  The related input VAT of NG on its corresponding purchases amounted to £228,725, which was included in its VAT reclaim for the period ended 31 March 2006.

Trader purporting to be Okeda Limited (“Okeda”)

73.  By enquiries through another wholesale trader in mobile phones (Time Corporates Limited), HMRC established in February 2007 that a trader purporting to be Okeda Limited had supplied large quantities of mobile phones to it, using forged documents to establish its VAT number.  Checks with HMRC’s database and Companies House established that the VAT number quoted on Okeda’s invoices belonged to another company which had been dissolved on 5 April 2005 (more than a year before the dates on the relevant invoices).  That dissolved company shared a director with Okeda Limited.  By other means, HMRC discovered that Okeda had also sold a large volume of mobile phones to another company called UK Communications Limited in May 2006.

74.  HMRC were unable to contact Okeda or its director and no business records could be obtained from it.  No VAT returns had been made by it (it had never been registered for VAT).  From the business records of its known customers, HMRC established that it had made taxable supplies giving rise to undeclared output VAT of at least £28.3 million.  That VAT remains unpaid.

75.  Included in the mobile phones sold by Okeda to UK Communications Limited between 19 May and 2 June 2006 without accounting for VAT were those subsequently sold to NG between the same dates in deals numbered 20 to 28 inclusive in Appendix 2 (and subsequently sold on to Navigo, GNJ and Silus BV (“Silus”) as shown on NG’s invoices numbered 1060 to 1068 inclusive).

76.  The total amount of unpaid output VAT of Okeda in relation to these sales was £278,691.12, which we find to have been fraudulently evaded.  The related input VAT of NG on its corresponding purchases amounted to £278,043.50, which was included in its VAT reclaim for the period ended 30 June 2006.  The amount reclaimed by NG is less than the unpaid output VAT of Okeda because a supplier in the chain between them appears to have sold the phones at a loss.

K.E.P. 2004 Limited (“KEP”)

77.  KEP was incorporated on 10 March 2004 and applied for VAT registration in late September 2005, stating its intended activities as “Supplying Labour to the Construction Industry”.  After supplying further evidence of its intention to trade, it was registered for VAT on 23 March 2006, with effect from 1 October 2005.  Its construction industry trade ceased in January 2006 and in April 2006 it notified HMRC of a change in its trade classification to “Other Business Activities”.

78.  In a very short period of trading in April and May 2006 (up to the date of its deregistration for VAT on 9 May 2006) KEP acquired mobile phones and other goods from a German supplier and supplied them on to a UK customer Time Corporates Limited, generating output VAT liabilities of approximately £110 million, which remain unpaid.  The trades were arranged in such a way that KEP never received the funds necessary to pay this liability.  Its director signed 50 blank release instructions and gave them to his trading partners, and was not suspicious when he was contacted out of the blue by first an overseas supplier wishing to sell goods into the UK and very shortly afterwards by a UK customer wishing to acquire exactly the same goods.

79.  Included in the mobile phones sold by KEP from 4 April to 4 May 2006 without accounting for output VAT were those subsequently sold on the same dates to NG in deals numbered 12, 13 and 15 to 19 inclusive in Appendix 2 (and subsequently sold on to Navigo as shown on NG’s invoices numbered 1049, 1050, 1052, 1053, 1055, 1056 and 1057).

80.  The total amount of unpaid output VAT of KEP in relation to these sales was £319,315.79, which we find to have been fraudulently evaded.  The related input VAT of NG on its corresponding purchases amounted to £320,172.30, which was included in its VAT reclaim for the period ended 30 June 2006. 

Findings on Questions 1 and 2 – fraudulent evasion of VAT and “connection”

81.  With reference to the first issue referred to at [7] above, therefore, we find that there was a fraudulent evasion of VAT in respect of each of the defaulters identified above.  Mr Riyait accepted as much in cross examination.

82.  We observe that not every defaulter has been proven to be the original importer/acquirer of the phones into/within the UK.  In the paradigm case of MTIC fraud, it is the original importer/acquirer that defaults without paying the output VAT on its first sale within the UK; however, as stated by Christopher Clarke J in Red 12 Trading Limited v HMRC [2009] EWHC 2563 (Ch) at [84], this need not be the case:

“In many cases of MTIC fraud the defaulter, i.e. the company which fails to account for VAT and beyond which HMRC will not have been able to trace the chain, will be the actual importer.  But it need not be so.  Y may be the actual importer who sells (or transfers possession of) the goods to A who sells to B.  Both the actual importer and A may “go missing” and make no payment to HMRC at all...  The goods may bypass the defaulter and be allocated by the freight forwarder directly to one of the buffer companies... although input and output tax is accounted for by a buffer company earlier in the chain.  The buffer company serves its function of preventing HMRC tracing back to the original importer.  Third party payments may be made by purchasers in the middle of the chain cutting out those above.  What is needed for an MTIC fraud to work is an importation without payment of VAT, a trader who disappears without accounting to HMRC for the output tax it has received, and an export which generates an entitlement to claim back input tax.  The original importer will make the most profit from failing to pay over output VAT.  For that reason the defaulter is usually the original importer; but any company in the chain which defaults at any stage in the chain will make a profit from not accounting for the VAT, assuming that it has sold on at a profit.  In order to justify denial of the right to deduct input tax there must be knowing participation in a transaction connected with fraudulent evasion of the tax.  If that is established, the right is lost.  It would be inconsistent with that principle, and an unmerited boon to fraudsters, to require the authorities to prove that the defaulter was the original importer.”

83.  We are therefore satisfied that the lack of evidence as to the original importer/acquirer in relation to a number of the deal chains does not affect HMRC’s right to deny NG’s recovery of input tax, if the other conditions are satisfied.

84.  With reference to the second issue referred to at [7] above (the existence of a connection between the defaulters’ fraudulent evasion and NG’s purchases), NG has specifically stated (rightly, in our view) that it does not dispute the “deal chains” identified by HMRC in relation to each batch of mobile phones sold by it – i.e. it accepts the sequence of sales and purchases identified by HMRC in the evidence before us which traces the phones back to the various defaulters identified above. 

85.  If this concession had not been made, we would have made a finding that the deal chains were duly established by the evidence produced.  Having established the deal chains, we have no difficulty in finding they give rise to a “connection” between the fraudulent evasion of VAT by the defaulters and NG’s purchase of the phones.  This was not seriously contested by NG, indeed Mr Riyait accepted the existence of such a connection in cross examination.  In any event, we find that in a case such as the present, where a chain of clearly identified sales and purchases link directly back from NG to each defaulter, the deal chains themselves give rise to a clear “connection” of the requisite nature without the need for anything more.

86.  We therefore find that there was a fraudulent evasion of VAT connected with each of NG’s purchases of phones in the period from 1 March to 30 June 2006.

In relation to each of its purchases, did NG know or should it have known that by its purchase it was participating in a transaction which was connected with fraudulent evasion of VAT?

Preliminary points

87.  This was the question to which the parties addressed the majority of their arguments.

88.  For the purposes of this question, it is the state of mind of Mr Riyait that is relevant.  He gave evidence that he ran NG’s business and neither Mr Sambi nor any other person was involved in it to any significant extent.

89.  Whilst the question must necessarily be asked separately in relation to each relevant purchase made by NG, it would be highly unrealistic to seek to “stop the clock” at the precise time of each purchase and attempt to establish a distinct snapshot of Mr Riyait’s state of mind at that moment.  The purchases in question were carried out over a period of a little over two and a half months, and over that time Mr Riyait’s state of knowledge obviously developed as new events occurred (for example, when he was notified that some of NG’s purchases had been traced back to defaulting traders) and, to that extent, there might be identifiable changes in his state of mind from one transaction to the next; but we also bear in mind the guidance of Christopher Clarke J in Red 12 which was approved by the Court of Appeal in Mobilx and others at [83]:

“109 Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context.  Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme.  The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and “similar fact” evidence.  That is not to alter its character by reference to earlier or later transactions but to discern it.

110 To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial.  A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware.  If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax.  The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader.  A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence.  Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands.

111 Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.”

90.  We have therefore taken account of changes in Mr Riyait’s knowledge as a result of the occurrence of significant events over the two and a half months in question, but having regard to the overall context of NG’s course of dealing throughout that period.  We have also taken account of the fact that NG’s trading in the period under appeal was a continuation, without significant change, of its activities since it commenced trading in October 2005.  There was therefore already a well-established pattern by March 2006.

91.  HMRC were quite clear in the way their case was put: they alleged that NG (through Mr Riyait) was a knowing participant in the fraud, but if that could not be proved, they alleged that it should have known of the connection with the fraud.

92.  HMRC accepted that the burden of proof lies on them to show that NG knew or should have known that its purchases were connected with fraud.  There had been some doubt about this, but it was effectively confirmed as correct by Moses LJ in the Court of Appeal in Mobilx/Blue Sphere/Calltell at [81]:

“It is plain that if HMRC wishes to assert that a trader’s state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion.  No sensible argument was advanced to the contrary.”

93.  Much effort was spent in both parties’ written skeleton arguments on the question of the standard of proof, and whether some adjustment or qualification was required to the normal civil standard (balance of probabilities) in view of the allegations made by HMRC.  We have followed the guidance given by Lord Hoffman in In re B (Children) (Care Proceedings: Standard of Proof) (CAFCASS intervening) [2008] UKHL 35 at [13]-[15]:

“13 ... I think that the time has come to say, once and for all, that there is only one civil standard of proof and that is proof that the fact in issue more probably occurred than not.”

...

“15 Common sense, not law, requires that in deciding this question, regard should be had, to whatever extent appropriate, to inherent probabilities.  If a child alleges sexual abuse by a parent, it is common sense to start with the assumption that most parents do not abuse their children.  But this assumption may be swiftly dispelled by other compelling evidence of the relationship between parent and child or parent and other children.  It would be absurd to suggest that the tribunal must in all cases assume that serious conduct is unlikely to have occurred.  In many cases, the other evidence will show that it was all too likely.  If, for example, it is clear that a child was assaulted by one or other of two people, it would make no sense to start one’s reasoning by saying that assaulting children is a serious matter and therefore neither of them is likely to have done so.  The fact is that one of them did and the question for the tribunal is simply whether it is more probable that one rather than the other was the perpetrator.”

94.  Accordingly, we have asked ourselves whether it was more probable than not, on the basis of the evidence put forward, that NG (through Mr Riyait) either knew or should have known that each of its relevant purchases of mobile phones was connected with fraudulent evasion of VAT.

95.  We were anxious to ensure that, in assessing Mr Riyait’s state of knowledge at any time, we were only bearing in mind information actually known to him at that time.  So, for example, the information about the deal chains which was painstakingly compiled by HMRC after the event has no part to play in that assessment; nor does the information about the overall mobile phone market in 2006 provided in the evidence of Mr Fletcher of KPMG.

96.  In his written closing submissions, Mr Power pointed out that Ms Bushby had accepted during cross-examination that there was nothing NG could have done to detect the fraud at the time of its dealings, whatever precautions Mr Riyait took.  Therefore, he submitted, there was no basis on which Mr Riyait (and through him, NG) could be fixed with constructive knowledge of the fraud.  He cited Lewison J in HMRC v Livewire [2009] EWHC 15 (Ch) at [88]:

“In my judgment... if a taxable person has not taken every precaution that could reasonably be expected of him, he will still not forfeit his right to deduct input tax in a case where he would not have discovered the connection with fraud even if he had taken those precautions.”

97.  Based on this statement and Ms Bushby’s acceptance in cross-examination of Mr Power’s proposition that “there isn’t anything, any check that one can undertake in my position as a new broker to the market place that can give me 100% due diligence to identify a defaulting trader”, Mr Power submitted that NG had no case to answer on the allegation of constructive knowledge.  He submits that HMRC’s case must therefore fail unless we find Mr Riyait had actual knowledge of the fraud.

98.  We do not agree with this submission.  As Moses LJ made clear in Mobilx/Blue Sphere/Calltell at [59]:

“The test in Kittel is simple and should not be over-refined.  It embraces not only those who know of the connection but those who “should have known”.  Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion.  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 the transaction was connected with fraudulent evasion of VAT then he should have known of that fact.  He may properly be regarded as a participant for the reasons explained in Kittel.”

99.  It is clear from this passage that the scope of constructive knowledge is not limited to what the taxpayer could have found out about the particular fraud by making further enquiries; it is wider than that and encompasses the inferences that the taxpayer should have drawn from all the information at his disposal at the relevant time.  If the taxpayer concludes (or should conclude) that his trading is bound to be connected to VAT fraud, then “every precaution that could reasonably be expected of him” (in Lewison J’s words) would include refraining from trading altogether.  As Floyd J said in the High Court in Mobilx v HMRC [2009] EWHC 133 (Ch) at [7]:

“Suspicious indications obtained by a trader from carrying out due diligence checks on its supplier are one, but not the only basis from which it may properly be inferred that a trader knew or should have known of its implication in VAT fraud.....Paragraph 51 [of Kittel] needs to be understood in the sense that “all reasonable precautions” may, in some cases, involve ceasing to trade...”

100.         There is no direct evidence of Mr Riyait or NG being a knowing participant in the fraud in relation to any of the 28 purchases giving rise to the VAT repayment claims made by NG in its VAT periods 03/06 and 06/06.  HMRC invited us to draw an inference of his (and therefore NG’s) knowing participation from the overall evidential picture.  To put it another way, they submitted that the undisputed evidence, together with the view of the disputed evidence which they invited us to take and the inferences which they invited us to draw, together made it more likely than not that Mr Riyait (and therefore NG) was a knowing participant in the fraud.

101.         We now turn to a number of the areas of evidence which HMRC invited us to consider for this purpose, which are at the heart of this appeal.  In doing so, we also consider the counter arguments of NG where relevant.

Matters relevant to a finding of actual or constructive knowledge by NG/Mr Riyait

General knowledge of widespread fraud in the business sector

102.         After other companies dealing in the wholesale mobile phone sector had contacted HMRC to validate NG’s VAT registration as a precursor to possible dealings with it, HMRC sent a letter dated 21 September 2005 to NG, which included the following paragraph:

“HM Revenue and Customs are still experiencing certain problems with businesses in your trade sector offering commodities regularly involved in Missing Trader Intra-Community (MTIC) VAT fraud.  MTIC fraud may involve all types of VAT standard rated goods and services including computer equipment, mobile phones and ancillary items.  The current estimate of the VAT loss from this type of fraud in the UK alone is between £1.06 and £1.73 billion per annum.” 

103.         A copy of VAT Notice 726 was also sent to NG with that letter.  The purpose of Notice 726 was to inform traders of the specific “joint and several liability” measures which had been introduced in the 2003 budget in response to MTIC fraud.  It predated the Axel Kittel case and therefore its content is not directly relevant to the legal basis of the present appeal, but it did give some general warnings.  It referred to “widespread Missing Trader Intra-Community (MTIC) VAT fraud” in relation to, amongst other things, telephones.  It described MTIC fraud as “a systematic criminal attack on the VAT system”.  It said the fraud “relies heavily on the ability of fraudulent businesses to undertake trade in goods with other businesses that may be either complicit in the fraud, turn a blind eye, or are not sufficiently circumspect about their trading connections.”  In a section entitled “How can I avoid being caught up in MTIC fraud?”, it included the following:

“It is in your interests to carefully check who you are dealing with.  In order to help you avoid being unwittingly caught up in a supply chain where VAT goes unpaid, this notice contains examples of reasonable steps you can take to establish the integrity of your customers, suppliers and supplies.”

104.         Further content of Notice 726 is relevant to other issues in this appeal, and is considered below.

105.         HMRC had also arranged a meeting with NG, which took place on 30 September 2005. At that meeting, Ms Bushby made it clear to Mr Riyait that HMRC’s view was that the sector was rife with fraud and that anyone dealing in it needed to be extremely careful about whom they dealt with, in order to avoid being unwittingly caught up in the fraud.  She told him that in the mobile phone wholesale trade, her experience showed that most deals traced back to a defaulting source.  Indeed her warnings were so colourful that Mr Riyait wrote a letter of complaint following this meeting, referring to a suggestion that “flashy cars” funded from the profits of MTIC trading would be confiscated; he took this to be a reference to his own Audi motor vehicle.  His letter acknowledged that Ms Bushby had told him of a “big fraud of £2.7 billion or some sort of figure like this which equates to 1/3^rd of NHS budget” and included the following passage:

“I have been offended by your advise that I should not carry on this trade.  If people are involved in defrauding your department then it is your duty to solve the problem as you are paid by the Government out of public taxes.

I want to trade in this business and would like your advise, support and guidance in this matter.”

106.         We are therefore satisfied that Mr Riyait was aware from the outset of his trading that the market into which he was entering was subject to large scale and widespread fraud.  This was not seriously contested at the hearing, though the general tenor of Mr Riyait’s evidence was (as stated in his letter of 3 October 2005) that he regarded the problem as HMRC’s responsibility to deal with and not his own.

107.         This knowledge of the existence of fraud would have been reinforced when he received a letter dated 16 February 2006 from HMRC, in which he was informed that they had selected two transactions from his November 2005 VAT claim (which had already been paid) and had established that both transactions led back to defaulting traders, costing £146,000 in lost VAT.  Then by a letter dated 20 February 2006 he was informed that they had checked the only transaction reflected in his December 2005 VAT claim (which had also been paid) and had established that it led back to a defaulting trader, costing £430,000 in lost VAT.  Then by a letter dated 9 May 2006 he was informed that they had checked “the only deal undertaken” in his March 2006 return (this was incorrect – NG had carried out 11 deals in March) and found that it led back to a defaulting trader, costing £72,000 in lost VAT. 

108.         The content of these letters bore out Ms Bushby’s warning given in the meeting on 30 September 2005, and must have dispelled any previous impression that NG was in some way immune to the general infection of fraud in the wholesale mobile phone market.  These letters, and Mr Riyait’s reaction to them, are considered in more detail below in the section entitled “Action taken after defaults were identified by HMRC” commencing at [131].

Due diligence carried out on customers and suppliers

109.         There was a significant volume of material before us showing the due diligence work which had been carried out by Mr Riyait on NG’s customers and suppliers.  The parties disagreed fundamentally on what it showed. 

110.         NG said it showed that Mr Riyait was taking his responsibilities seriously and carrying out all reasonable checks into the standing of the customers and suppliers he dealt with.  To the extent it was inadequate, he put the blame squarely back on HMRC; he had asked a number of times what more he should be doing and they never gave a satisfactory answer.   

111.         HMRC said the due diligence material supplied was nothing more than “window dressing”.  They did not dispute that some due diligence had been carried out, but they said it was wholly inadequate and was only carried out to a standard intended to verify the existence and VAT number of NG’s counterparties, and to create an impression of apparent compliance with the letter of VAT Notice 726.

112.         Notice 726 makes it clear that it does not lay down a definitive list of checks a trader should carry out, as “a definitive checklist would merely enable fraudsters to ensure that they can satisfy such a list.”  However, it does contain some suggested checks:

“8.  Dealing with other businesses – How to ensure the integrity of your supply chain

8.1 Checks you can undertake to help ensure the integrity of your supply chain.

The following are examples of checks you make [sic] wish to undertake to help establish the integrity of your supply chain.

1) Undertaking reasonable commercial checks to consider the legitimacy of customers or suppliers.  For example:

- What is the supplier’s history in the trade?

- Are normal commercial arrangements in place for the financing of the goods?

- Are the goods adequately insured?

- What recourse is there if the goods are not as described?

2) Undertaking reasonable checks to ensure the commercial viability of the transaction.  For example:

- Is there a market for this type of goods – such as superseded or outdated mobile phone models?

- Is it commercially viable for the price of the goods to increase within the short duration of the supply chain?

- Have normal commercial practices been adopted in negotiating prices?

- Is there a commercial reason for any third party payments?

3) Undertaking reasonable checks to ensure the goods will be as described by your supplier.  For example:

- Do the goods exist?

- Have they been previously supplied to you?

- Are they in good condition and not damaged?

We recommend that sufficient checks be carried out in each of the above categories to ensure that you are not caught in a fraudulent supply chain.

8.2 Checks carried out by existing businesses

The following are examples of specific checks carried out by existing businesses.  These may also help you to decide what checks you should carry out, but this list is not exhaustive and you should decide what checks you need to carry out before dealing with a supplier or customer:

-  obtain copies of Certificates of Incorporation and VAT registration certificates;

- verify VAT registration details with Customs and Excise;

- obtain letters of introduction on headed paper;

- obtain some form of trade reference, either written or verbal;

- obtain credit checks or other background checks from an independent third party;

- insist on personal contact with a senior officer of the prospective supplier, making an initial visit to their premises whenever possible;

- obtain the prospective supplier’s bank details, to check whether:

(a) payments would be made to a third party; and

(b) that in the case of import, the supplier and their bank shared the same country of residence.

- check details provided against other sources, eg website, letterheads, BT landline records.”

113.         Mr Riyait agreed that it was important to be satisfied about the honesty and good standing of his customers as well as that of his suppliers.  He therefore took steps, described as “due diligence” to satisfy himself as to both.  A summary of the steps he took, in relation to each of the suppliers and customers he dealt with in the 28 trades under appeal, is contained in Appendix 3.  The chronology of the steps he took (insofar as it was established before us), alongside the trading undertaken and other relevant events, is dealt with in relation to each supplier and customer.

114.         We find that Mr Riyait’s emphasis throughout was on satisfying HMRC rather than exercising his own independent judgment.  On one occasion when it was put to him that he was expected to exercise his own judgment, his response was “Well that is why I keep asking them [i.e. HMRC] every letter what else checks I can do, how can I make myself believe this guy or not”.  On another occasion when he was asked “You enter into these deals on the strength of those three pieces of paper and a conversation on the phone?”, his answer was “That’s why I keep asking if I need to find more, let me know please.”  On numerous other occasions when pressed on the inadequacy of his information about his counterparties, he complained that HMRC had not given him any advice about what he could do to satisfy himself. 

115.         He first dealt with all three relevant suppliers before he had established any more about them than that they existed as legal entities, they claimed to have VAT registrations (which, at that stage, he had not independently verified as belonging to them in relation to two out of the three) and they had phones to sell. 

116.         If anything, the information he held about his customers was even less.  He established that they existed as companies and had a VAT number before selling to them, though in several cases he had no independent verification of the information supplied to him before he dealt.  He showed a marked lack of curiosity, even about the slight information that was supplied to him, and his attitude could be summed up in his statement before us: “I have sent the same documents [as were received from his overseas customers] to Redhill and [if] they verify them I’ll be quite happy with that.”

117.          He regarded the Creditsafe business information reports which he obtained as largely irrelevant because he arranged his trading so that he was not taking any credit risk on either his customers or his suppliers.  He did not consider them a particularly useful tool for any other purpose, and did not follow up any of the other information which they disclosed, such as lack of financial information or overseas directors or owners with whom he had no contact.

118.         When asked why he had not taken up any of the trade references that had been identified by some of his counterparties, he said “I didn’t think that was the practice in the mobile trade”; and when asked about the possibility of taking a banker’s reference, he said “if I am shipping goods outside the UK, I don’t pay them until I get paid for the goods.  So I don’t need to see if the bank or if they can afford those goods or not”.

119.         We find that the “due diligence” carried out by Mr Riyait on behalf of NG was lacking any practical substance.  He was intent on going through the motions of complying with some of the specific advice set out in VAT Notice 726, but without using any independent judgment or taking any practical steps which might have really satisfied him as to the substance and honesty of his counterparties.  He said that nothing in the documents provided to him gave him any reason to believe that his counterparties were disreputable or doing something wrong, but he was careful to look no further than those documents.

The relationship with GNJ General Trading LLC

120.         As mentioned at [17], the first contact between Mr Riyait and Mr Gambhir of GNJ was through Mr Riyait’s internet searches for sources of mobile phones and a personal referral by someone he had never met but had also found through the same searches.  There was nothing about this contact or the context in which it took place that could have given Mr Riyait any reassurance that GNJ was a trustworthy, reliable legitimate business with which it was safe to trade.

121.         The extremely limited steps which Mr Riyait took by way of “due diligence” on GNJ are highlighted in Appendix 3.

122.         In its very first deal with GNJ (indeed its very first deal in mobile phone trading), NG paid for the phones from its supplier (£52,640 plus a bank charge) on 11 October 2005 and only received payment for them on 17 October 2005.  Even if the goods were (as Mr Riyait maintains was generally the case) shipped to GNJ “on hold” – i.e. they were to be held by the freight forwarder on behalf of NG until NG gave an instruction for their release to GNJ following payment for them – this meant that a sum equal to approximately one third of DA Travel’s net profit for the year to 30 November 2005 (and bearing in mind NG had only made losses up to 31 July 2005) was tied up in stock which it had shipped to Dubai and for which it had no guarantee of payment.

123.         In the very early days of his trading with GNJ (in early November 2005), a number of mobile phones which NG had sold and exported to GNJ in Dubai went missing at some point before they arrived at GNJ’s customer in Amsterdam.  The details of the claim are not material, but in the course of correspondence in relation to it, Mr Riyait received an email from the consultant acting for the freight forwarding company in relation to NG’s claim against it, containing the following paragraphs:

“Firstly, the consignment was effectively accepted in Dubai by the consignee, GN General Trading, and no complaint about shortage was made.  GN chose not to inspect the goods before instructing Hawk Freight Services to re-export them to Amsterdam.

If a loss was observed on inspection at Amsterdam, I do not consider that Hawk Precision Logistics can be held responsible for it under any circumstances.”

124.         Mr Riyait did not take this up with GNJ at all.  It did not seem odd to him that GNJ were buying these goods from a British company, exporting them from there to Dubai and then selling them back into the EU.  He said that if the goods had come back into the UK, then he would have thought it odd, but even in a business in which he acknowledged carousel fraud was rife, he regarded it as “up to GNJ where he sells his stock.”

125.         We find that Mr Riyait should have been put on enquiry by this information and taken it up with Mr Gambhir to seek an explanation.  Without a convincing explanation (which clearly he did not have), he should have been highly suspicious about future dealings with GNJ.

126.         Instead, he arranged to meet with Mr Gambhir at a trade fair in Germany in March 2006 (followed by a second meeting in April), and together they set up a company in Germany called Microtech.  Its intended business was trading in mobile phones.  It was a 50:50 venture between the two of them, but Mr Riyait says that despite investing 25,000 Euros in the venture, he never took an active part in the business and he claimed to be unaware whether it had ever conducted any trades.

127.         He had made no mention of this business in his witness statements before the hearing.  Its existence only came out when he was asked, in cross examination about his business interests, if he had any other interests apart from those he had already disclosed.  We find that Mr Riyait had deliberately failed to mention this business (and the chain of events leading up to his involvement in it) in his witness statements because he felt it was damaging to his case and he hoped it would not come up in the present appeal. 

128.         His evidence on the establishment and running of Microtech and on his departure from it in (supposedly) December 2009, was evasive and unconvincing.  When its existence first came up, Mr Riyait referred to it as a current business interest: “I have got another company in Germany... I don’t run the business there, my partner runs the business there.”  It was only later in his evidence that he said he had resigned from it in December 2009: “It was too much for me, I wasn’t doing much to participate, to start off my partner was looking after it.  He wasn’t happy with that because I’m not giving more time to it.” 

129.         Overall, we are satisfied from the evidence that Mr Riyait should, at the very least, have harboured strong suspicions about GNJ and Mr Gambhir and, unless those suspicions were allayed, should have refrained from dealing with them.  Instead, we find that he wilfully closed his eyes to the obvious warning signals and this set the pattern for his dealings with his other customers. 

130.         There is some evidence from which it might be inferred that Mr Riyait’s involvement with Mr Gambhir was as a knowing co-conspirator in fraud, but we find the evidence overall is not sufficiently strong to support such an inference.

Action taken after defaults were identified by HMRC

131.         As mentioned at [107], HMRC wrote to NG a number of times to warn it of their findings that its purchases of phones led back to defaulting traders.

132.         There were letters on 16 February 2006, 20 February 2006 and 9 May 2006, as well as subsequent letters which are not relevant for these purposes as they were received after 30 June 2006 and therefore cannot have been influential in any decision of Mr Riyait to carry on trading in spite of the warnings received.

133.         The letter dated 16 February 2006 informed NG that HMRC had verified two of the transactions carried out by NG in November 2005, and warned that both transactions had been traced back to defaulters.  From the information in the letter, it would have been straightforward for Mr Riyait to establish that its suppliers in the relevant deals were Ocean Connection Limited and G Comms.

134.         The confusion between Ocean Connection Limited and Fones has already been highlighted above, and we therefore concentrate on the situation in relation to G Comms.

135.         Mr Riyait’s reaction to this letter was to telephone and visit HMRC to discuss the matter.  Ms Bushby’s evidence (which we accept) is that during that conversation and meeting, she told him she had now demonstrated to him that the market was fraudulent, that given time she believed she could trace all NG’s deals back to fraudulent defaulters and that she hoped he would now cease to trade in this market.

136.         As those conversations were happening, a further letter was being sent (dated 20 February 2006) in which HMRC told NG that it had verified the only deal reflected in NG’s December return and found that it led back to a defaulting trader.  Again, NG’s supplier in the relevant deal was G Comms.

137.         On 9 May 2006, HMRC sent a further letter, referring to the verification of NG’s March 2006 VAT return.  It said “we now know the only deal undertaken that month commenced with a defaulting trader...” and went on to give details of the deal involved, from which it would have been very straightforward to establish that NG’s supplier was again G Comms.  It is unfortunate that this letter referred to “the only deal undertaken that month”, as clearly NG had carried out 11 trades in March 2006 (as Mr Riyait well knew); so nothing flows from this error, which presumably arose from copying and pasting text from the earlier 20 February 2006 letter.

138.         In any event, Mr Riyait had been clearly notified by the letters of 16 and 20 February 2006 that the supply of phones through G Comms had been tainted on the only two occasions it had been tested.

139.         In oral evidence at the hearing, Mr Riyait said that this was why (as the deal sheets showed) he had initially ceased to trade with G Comms after receipt of these warnings.

140.         However, he then restarted his deals with G Comms on 21 March 2006 and on 21 and 23 March and 5 April 2006 he purchased phones from G Comms four times, at a cost of just over £1.8 million plus VAT.

141.         His evidence was that he had initially taken heed of the warning and decided not to trade with G Comms, but subsequently changed his mind.  There was some ambivalence about the reasons behind this change of mind. 

142.         The first time the matter came up in writing was in a letter dated 12 July 2006 from NG’s solicitors, Hassan Khan & Co, to HMRC.  In that letter, after referring to the Creditsafe searches mentioned below, they said:

“Further, on 20 March 2006 a director of NG International contacted its supplier in order to inform the supplier about the notification and to request that care should be taken with regard to the origin of its suppliers and on 23 May 2006 a director of NG International even paid a personal visit to the offices of the supplier.  NG International was reassured by their supplier that it was not dealing with default traders.

...

Your argument that VAT would go unpaid in future similar dealings carries no weight.  To date NG International has entered into 11 transactions with that supplier.  You have identified 4 out of 11 transactions commenced with a missing trader.  Considering the extensive due diligence did not identify any problem and that the majority of the transactions were free of difficulties, NG International had sufficient reason to believe that its supplier was not the culprit and that the problem lay further up the chain of transactions.

143.         In a subsequent letter from them dated 14 August 2006, they said:

“You state that VAT would go unpaid on future purchases from the same supplier.  As explained in our previous correspondence, the majority of the transactions from the same supplier were free of difficulties and therefore our client had sufficient reason to believe that the problem lay further up the chain of transactions and that our client and the supplier were doing everything that was reasonably possible to ensure the integrity of the supply chains.”

144.         In Mr Riyait’s witness statement of 21 July 2008, he said he had taken out Creditsafe searches on the relevant companies on 28 February 2006, which:

“did not disclose anything to suggest that any company with which NG had traded was involved with fraud.  Although credit ratings were not provided.... the report suggested that this was because these companies were newly formed.  I had bought from these suppliers on other occasions and had not been informed that any of these other transactions were connected with fraud.  I therefore concluded that the problems with the supply chains identified must have occurred elsewhere in the chain and that it was therefore safe to continue to deal with these suppliers.”

145.         In the same witness statement, he went on to say:

“I was not aware of any other checks I could have undertaken in order to guarantee transactions were [sic] not be connected with fraud and NG would have lost significant amounts of business had it ceased trading with G Comms.... I considered that ceasing to trade with these suppliers would have been a disproportionate response given the extensive checks undertaken and the potential damage the loss of trade could have done to our business.  I therefore concluded that it was safe for NG to continue to trade with these companies.”

146.         At the hearing, a further reason was put forward for the first time.  It was suggested that the payment by HMRC of the January 2006 VAT repayment claim (which was authorised at HMRC on 3 March and was received by NG on 9 March 2006) and the February 2006 VAT repayment claim (which was authorised at HMRC on 21 March and was received by NG on 30 March 2006) had provided Mr Riyait with reassurance that it was appropriate to continue trading with G Comms notwithstanding the 16 and 20 February warning letters (bearing in mind that both January and February 2006 claims included supplies purchased from G Comms).  Mr Power for NG pointed to the precise correlation between the authorisation of the February 2006 VAT reclaim on 21 March 2006 and NG’s recommencement of dealings with G Comms on the same date, but we are satisfied that Mr Riyait did not even know on 21 March 2006 that NG’s February VAT reclaim had been authorised internally at HMRC. 

147.         We are satisfied that the real reason for NG’s recommencement of trading with G Comms was as set out in Mr Riyait’s witness statement: he did so because he did not want to miss the opportunity of more easy profits and his minimal further due diligence (in the form of the Creditsafe report) did not provide any actual evidence of fraud at G Comms which would have prevented him from doing so.  Similarly, whilst we accept that there may have been some contact with G Comms shortly before the recommencement of dealings, it cannot see how Mr Riyait could have derived any substantial comfort from the general reassurances he would have been given.  In spite of all the warning signals, he was determined not to forego the easy profits that were on offer.

Features of the trading carried out – specifications of phones supplied

148.         There were 28 overseas sales by NG in the period covered by the appeal.  For one of those deals there was no copy of NG’s purchase order in the evidence.  There was only one deal in which NG’s purchase order to its supplier gave exactly the same specification as that given by the customer – and in that transaction the specification was simply “Sony Ericsson W900i”.  Of the remaining 26 deals for which purchase orders (both incoming and outgoing) were produced in evidence, there were only 4 cases where a phone supplied in accordance with the specification given by NG would be certain to satisfy the specification laid down by its customer.

149.         The evidence showed that on many occasions, the purchase orders which Mr Riyait issued to NG’s suppliers contained either no significant detail as to the specification of phones required, or detail which was inconsistent with the specification required by his customers.  Furthermore, the inspection reports which he produced (relating to less than 20 of the 28 deals) showed some clear inconsistencies between the customer’s specifications and the phones actually delivered.

150.         This was most graphically illustrated in the course of dealing with Navigo of Italy.  NG carried out 14 trades altogether with Navigo.  There are inspection reports for 12 of them.  Three of those reports are not sufficiently detailed to tell whether the phones conform to Navigo’s specification or not.  Of the other nine, three give details which conform wholly to the specification and six disclose conflicts with the specification.  When pressed on why Navigo did not reject the non-compliant consignments, Mr Riyait’s response was that he faxed the inspection reports to Navigo and when they accepted them without complaint, that was sufficient for his purposes.  Even if this is true (and no documentary evidence was produced to us to show that it was, even in the fairly extensive documentation from Navigo’s files which was obtained by HMRC from the Italian authorities under the mutual assistance procedures), it should have raised the question in Mr Riyait’s mind as to why Navigo was apparently so unconcerned about compliance with the (quite detailed) specifications which it laid down.  He gave no evidence to suggest that he had raised this with Navigo at any point.

151.         There were some instances of this mismatch between specifications in NG’s sales to other customers, but by and large the specifications laid down by those other customers were much less specific, so a clear mismatch arose less often.

152.         In addition, whilst Mr Riyait’s evidence was that the business was generally customer led, there appeared in the evidence from the Italian tax authorities a copy of a fax from Mr Riyait to Navigo, timed shortly before their very first purchase order was faxed to NG on 13 March 2006, in the following terms:

To Marcello Tormenti

Navigo.it

C. Battisti, 55

Martinsicuro

Can I offer you 2.5k of Nokia 6680 Black, C/E spec @ £181.50.  If you are interested to the stock please send me purchase order.

Regards

Amarjit”

153.         This was followed by a purchase order from Navigo which contained much more detail:

“made in Finland, packed in original boxes  Original brand new phones, sim-free, euro specification Italian lang, in the software, 10 pieces per box, Black colour  Italian language on the dictionary (1 tap/T9) 2 pin-plug charger  Stock with Custom stamp will be automatically rejected”

154.         It is clear, therefore, that Mr Riyait took the initiative in generating this, Navigo’s first order to NG, whatever previous general conversations had taken place between them about possible sales.  And it is equally clear that Navigo “beefed up” the specification that Mr Riyait had offered to them, apparently without any discussion.  This seems to have prompted no reaction from Mr Riyait.  No inspection report for this deal was before us, but Mr Riyait said that either there would have been one or Navigo would have obtained their own report and expressed themselves satisfied, which obviated the need for any report for NG.  In a first transaction, to a value of £453,700, between parties with supposedly no previous knowledge of each other, this sequence of events should have made Mr Riyait suspicious.

Features of the trading carried out – credit risk

155.         Mr Riyait confirmed he never took up a banker’s reference on a customer or a supplier. 

156.         His evidence was that (subject to his payment of deposits in some early transactions, and the payment to his supplier mentioned at [122]) he always paid his supplier after he had been paid by his customer, therefore he did not have to worry about credit risk or finance the whole purchase price of the phones (just the VAT element of his purchase price).

157.         The picture which emerges from an analysis of the documentary evidence put before us is inconsistent, but gives rise to a number of questions.

158.         First, in all the 32 trades (including four domestic UK sales) in the period March to June 2006 (the period covered by the present appeal), NG received payment from its customers and made payment to its suppliers on the same day.  In 30 of those 32 trades, the payments were made through NG’s account with FCIB and the statements show the payments were received from NG’s customers before the corresponding payments were made to its suppliers.  In the other two trades, the payments were received from customers into NG’s Barclays account and the corresponding payments were made to NG’s suppliers from its FCIB account: whilst the receipts and payments took place on the same day, it is obviously not clear from the statements that the customers’ payments were received before the suppliers’ payments were made, but we infer that this was the case from the general evidence on payment given by Mr Riyait.  This meant that NG did not have to finance the payment of its suppliers (except in relation to the VAT element on its overseas sales), but it also meant that its customers were paying NG before NG itself had acquired title to the goods it was purporting to sell to them (Mr Riyait’s evidence being that title passed in all cases only upon payment). 

159.         NG’s customers were therefore paying hundreds of thousands of pounds to NG and trusting that it would then pay its suppliers, thus completing the transfer of title to its customers. 

160.         Navigo, for example, only started to deal with NG in March 2006.  Mr Riyait should have asked himself why Navigo was prepared to take this financial risk on NG, a company with no financial substance, run by an individual they had never met and operating in a market Mr Riyait had been warned was “rife with fraud”.

161.         Mr Riyait’s evidence was that where goods were shipped before they were paid for, the seller would only do so if it was made clear in the shipping documents to all concerned that the goods remained under the seller’s control until they were formally released by it – the so-called “ship on hold” arrangement; so even if the goods actually arrived at the buyer’s warehouse (or, more typically, its freight company’s warehouse), the buyer still should not have access to those goods.  Whilst this arrangement might sound a little “flimsy” to an outsider, Mr Riyait was quite satisfied that it was reliable.  If it was reliable it meant that the buyer, in parting with the money before a “release” instruction had been given, was simply relying on trust that the money would be used to secure the “release” instruction; and if it was not reliable, it meant that the seller was parting with a large quantity of valuable goods and trusting that the buyer would pay for them without breaking the “hold” arrangement.  Either way, it required substantial trust between the parties.

162.         On occasion, the documentary evidence showed that goods were paid for before they were shipped.  For example, in NG’s first trade with Pabbi, the goods were invoiced on 15 March 2006, payment was received from Pabbi (and passed on to NG’s supplier Fones) on 17 March 2006 and the goods were only shipped on 19 March 2006 (arriving at Frankfurt the following day).  Again, Mr Riyait should have asked himself why a new customer, about whom he had almost no knowledge, should be prepared to pay NG £440,000 without any security, trusting that the phones would be delivered to it.

163.         Other evidence arose as to the erratic way in which payment arrangements operated in practice.  For example, on NG’s first sale to Silus in May 2006, the goods were invoiced to NG on 23 May 2006, NG in turn invoiced Silus on 24 May 2006, the goods were dispatched on hold on 25 May 2006, and arrived at their destination in Holland on 26 May 2006.  There was then a delay of five days before Silus paid NG on 31 May 2006 (and NG paid its supplier RS23 on the same day).  Yet RS23 also issued two release notes for this consignment, one dated 23 May and one dated 24 May 2006.  So it appears that RS23 was perfectly content to release £180,000 (plus VAT) of goods (twice) as soon as they were invoiced to NG; but Silus of course was parting with payment believing that the goods, though in Holland, were still on “hold” in favour of NG.

164.         There were no proper terms of trade between NG and any of its customers.  Mr Riyait’s evidence was that payment terms were generally as specified by the seller (usually on its invoice).  On NG’s purchase orders and invoices, no payment terms were specified, though there was a “Payment terms” section on its purchase orders, which was blank on all the purchase orders shown to us.  The practice among its customers and suppliers was variable.  Navigo, for example, specified on its purchase orders that payment would be made after inspection; suppliers to NG put things like “TT” or “Immediate” as the payment terms on their invoices – but these were not followed.

165.         This whole structure of credit risk and payments is hedged around with so many practical and legal difficulties that any reasonable businessman proposing to adopt it would be bound to take a great deal of care in limiting his exposure to risk under it, but Mr Riyait was content to go along with it, as long as he perceived his own risk to be small, without questioning why the other parties to it seemed so relaxed about the risks they were obviously taking on NG (a company of little substance or history, about which they apparently knew very little).  Again, we hold that the nature of these arrangements should have made him suspicious.

Features of the trading carried out – ease and consistency of profit

166.         Mr Riyait gave evidence that his trading was generally customer led, i.e. customers contacted him with their requirements and asked if he could supply the phones.  He said he then went to suppliers found through the IPT website and sourced the stock.

167.         Mr Riyait said he negotiated the prices for his purchases and sales, but there was no evidence of any significant negotiation produced to us.  The evidence as to the prices paid by the various traders back along the deal chains to the defaulters made it clear that there was no serious negotiation involved at all, and we find that generally Mr Riyait was simply offered a selling price by his customers and he was then able to find suppliers through IPT who were prepared to offer the goods to him at prices which enabled him to make a consistent and almost risk-free profit.  (The one exception to this general position, NG’s first sale to Navigo, was not brought to our attention at the hearing; it only came to light on a subsequent analysis of the documents.)  In the 28 trades the subject of the appeal, he made a profit of between 6.72% and 7.26% on 26 of the trades.  The other two trades were his last trades with GNJ and yielded profits of precisely 5% each. 

168.         Mr Riyait was obviously aware of the consistent profits he was making, as he gave evidence that his dealings with GNJ reduced because the margins on the deals they offered, at this level, were simply not as attractive as those he could obtain from other buyers.

169.         On its 18 trades with GNJ (apart from one small early trade, onselling phones it had bought from 20:20 Logistics, in which it made a loss), NG made a gross profit of between 4.0% and 5.08% on 14 occasions and a gross profit of 6.02% to 6.29% on three occasions.  When it started to sell to other buyers, at the end of November 2005, it immediately started to achieve consistently higher margins.  For the 39 non-UK sales to buyers other than GNJ from then on, it made a margin of between 6.72% and 7.26% in 37 deals, an 8.81% margin in one deal and a 5.75% margin in one deal.

170.         We hold that the achievement of consistent margins within such a narrow range, with no great knowledge or experience of the market, risk or effort, should have made Mr Riyait suspicious that his transactions were being fraudulently manipulated, even if he was not actually aware that they were fraudulent.  The opportunities which were falling into his lap were just too good to be true – and they were not.

171.         Mr Power submitted that the occasional losses incurred by NG should be given weight in considering this issue.  We note that NG suffered losses on only three sales.  The first was a sale of 108 Nokia N90 phones to GNJ on 19 October 2005; NG had acquired these phones from 20:20 Logistics Limited (one of only two small trades with this established and reputable dealer) and sold them at an overall loss of £3,240, equating to 6.74%.  The other two were sales of 96 and 500 Nokia N70 phones to Ocean Connection Limited (a UK trader) on 30 January 2006 for £232 plus VAT per phone (a loss of £21 per phone, £12,516 in total, a percentage loss of 8.3%).  We note however that these two sales were the disposal of a “rump” of a purchase of 2,000 phones (apart from four phones which seem to have gone missing); on the overseas sale of the other 1400 phones, NG made a profit of £17 per phone (£23,800 in total, a percentage profit of 6.72%).  Viewed as a whole, this set of transactions resulted in an overall profit of £11,284, a percentage profit of 2.23%.  These isolated trades do not make any difference to our overall view expressed in the previous paragraph.

172.         In addition, Mr Power submitted that a more rounded picture of variable profitability (and therefore normal commercial trading) is derived when NG’s domestic UK sales are considered, in which (apart from the losses referred to in the previous paragraph) NG made profits of between 0.53% and 1.46% in four transactions.  We consider that, if anything, the sharp difference in profitability between domestic sales and overseas sales should have put Mr Riyait on enquiry as to the reasons for the difference, and there was no evidence that he had considered this point at all.  We certainly do not consider that the inclusion of the domestic sales in the review of profitability does anything to colour the overall trading as normal and commercial.

Features of the trading carried out - contacts with customers and suppliers

173.         On the evidence of Mr Riyait, he only met three of his customers or suppliers: Mr Gambhir of GNJ (see [126] above), Spherehead Limited and G Comms.

174.         No evidence about the content of the meeting with Spherehead was given, and that was a company NG only dealt with twice, in May 2006.  They were one of only three UK traders to whom NG sold phones.

175.         Mr Riyait maintained on a number of occasions that he had met with G Comms on 23 May 2006 to obtain reassurance about their supply chain following the revalation from HMRC that phones bought from G Comms had originated from a defaulting trader.

176.         The evidence of such a meeting was sketchy at best.  But even if we were to accept that it took place, it begs the far wider question of why Mr Riyait did not make personal face to face contact with any of his other suppliers and customers.  In any normal business context, one would expect a businessman who was contemplating high volumes of business with a customer or supplier to want to meet the people involved and see their business premises to form a judgment about them.  Mr Riyait did neither.

Features of the trading carried out – no stock held

177.         It is notable that throughout its entire mobile phone trading history, NG never once bought and held stock.  It always bought and sold “back to back” and was never left with unsold stock.  The fact that he was consistently able to do this should, in our view, have made Mr Riyait suspicious that he was dealing in a largely artificial and manipulated market, especially bearing in mind the warnings he had received that the market was “rife with fraud”.

Inspections – they were erratic, simply done as a paper exercise

178.         HMRC invited us to find that the erratic picture of inspections shown by the evidence demonstrated that inspections were simply window dressing – Mr Riyait “was not concerned with what was being inspected or the results of the inspections.”  We do not consider the evidence in this area sufficiently clear to give rise to any adverse inference of the type argued for by HMRC, but neither does it support NG’s case that it was running a proper commercial business.

Insurance – inconsistent arrangements implying artificiality

179.         HMRC invited us to find that the inconsistent evidence about insurance arrangements for the phones showed that the trade of NG was uncommercial, and therefore provided further evidence that Mr Riyait was well aware that NG was taking part in a wholly artificial charade.  Whilst it is clear that Mr Riyait had a somewhat confused approach to insurance, we do not consider the evidence in this area sufficiently clear to give rise to any adverse inference of the type argued for by HMRC, but neither does it support NG’s case that it was running a proper commercial business.

IMEI Numbers

180.         NG’s collection of IMEI numbers on the stock it traded in was patchy.  HMRC acknowledged that NG had clearly done more than it was legally required to in terms of collection of IMEI numbers, but submitted that a bona fide trader would have been careful to keep a full record of IMEI numbers to identify phones it had sold for warranty claims, etc.  The evidential picture of what IMEI data had been collected and when, and what had been done with it, was insufficiently clear for us to draw either favourable or adverse inferences and therefore we have given no weight to this aspect of the evidence in reaching our decision.

Forfeiture proceedings

181.         There was evidence before us of an ongoing appeal by Mr Riyait against the seizure by the police of certain amounts of cash in his possession.  We have disregarded this evidence as it does not assist us either in assessing Mr Riyait’s credibility as a witness or in establishing any facts relevant to this appeal.

Character witnesses

182.         We did not find the written character references in respect of Mr Riyait to be helpful.  They had no bearing on any of the factual matters in dispute, and we formed our own assessment of Mr Riyait’s credibility as a witness.

Failure to trade with Indian customer Mr Jolly

183.         Mr Riyait said that the reason why he had never traded with Mr Jolly in India was because he was never able to supply phones to him at the prices Mr Jolly wanted.  In his search to source phones for Mr Jolly at the right price, he came across Mr Gambhir in Dubai.  The prices which Mr Gambhir offered were roughly the same as the prices Mr Jolly said he was prepared to pay, so after paying for the shipping, NG would have made a loss.  Mr Riyait only produced one list of phones required by Mr Jolly (received in August 2006), but said that similar sheets had been faxed to him regularly at least since August 2005.  He had faxed the details on to Mr Gambhir but without being able to generate any trades.

184.         It was pointed out to Mr Riyait that he was able to make a profit on the phones he sold to Mr Gambhir, of around five per cent; surely this would have meant that he could have sold the same phones to Mr Jolly at the same prices, giving himself the same level of profit?  His reply was that Mr Jolly’s purchase prices were so low that he could not have made a profit; he did not claim the prices related to different phones.  His evidence on this point was therefore inconsistent.

Conclusion

185.         We find that there was a fraudulent evasion of VAT connected with each purchase of mobile phones made by NG reflected in its VAT returns for the one month period ended 31 March 2006 and the three month period ended 30 June 2006 (See [86]).

186.         We further find that NG (through Mr Riyait) should have known that its purchases were connected to the fraudulent evasion of VAT. In reaching this conclusion:

(1)  We have built up an overall picture taking account of the various elements set out above;

(2)  We find there is no clear direct evidence that Mr Riyait was a knowing participant in the fraud;

(3)  there are some strong indicators in some of the evidence from which it might be inferred that Mr Riyait was indeed a knowing participant in the fraud, but overall we do not consider the case of actual knowledge to have been made out, based on the evidence presented; however

(4)  even in the absence of actual knowledge, we find that the features of the transactions themselves and the surrounding circumstances (as summarised above) were such that NG (through Mr Riyait) should have known that its purchases were connected to the fraudulent evasion of VAT.

187.         Accordingly we find that the decision of HMRC to deny NG’s input tax on all its purchases of mobile phones for overseas sale reflected in its VAT returns for the periods ended 31 March 2006 and 30 June 2006 was correct and should be upheld. 

188.         It follows that HMRC’s refusal in full of the VAT reclaim of £766,572.10 contained in NG’s VAT return for the month ended 31 March 2006 is correct and should be upheld.

189.         In relation to HMRC’s refusal to pay the sum of £689,829.17, being the full amount of the VAT reclaim contained in NG’s VAT return for the three months ended 30 June 2006, the position is not quite so straightforward.  The amount of input VAT attributable to NG’s purchases of mobile phones for sale overseas during that period is only £685,015.80 and that is therefore the amount which should be disallowed.  No basis has been raised for refusal to repay the remaining £4,813.37, to which NG is therefore entitled (to the extent it has not already been paid).

190.         So far as costs are concerned we direct (but with liberty to either party to apply):

(1)  pursuant to paragraph 7(3)(a) and (b) of schedule 3 to The Transfer of Tribunal Functions and Revenue and Customs Appeal Order 2009, that the provisions relating to costs contained in rule 29 of the Value Added Tax Tribunals Rules 1986 should apply to these proceedings in place of rule 10 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009; and

(2)  that the parties are (as they have requested) to consider whether an order for costs can be agreed between them, in default of which further written submissions are to be addressed to the Tribunal on behalf of both parties.

191.         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.

 

 

KEVIN POOLE

TRIBUNAL JUDGE

RELEASE DATE: 3 September 2010

 

 

 

 

Appendix 1

 

Summary of Trading October 2005 to June 2006
				Sales & other outputs, exc VAT		Purchases & other inputs, exc VAT		Taxable UK domestic sales of mobile phones shown on dealsheets			Net VAT reclaim
Month ending	Number of purchase trades	Number of sale trades		Shown in VAT return	Sales of phones shown in deal sheets (UK & Overseas)	Shown in VAT return	Shown in deal sheets on purchase of phones	VAT exclusive price on sale	VAT charged on sale	VAT incurred on purchase	Shown in VAT return	Resulting from deal sheets	Total VAT incurred on purchases of all phones in deal sheets
		Overseas	UK
31-Oct-05	7	7	0	£868,610.00	£868,610.00	£836,523.00	£835,814.00	£0.00	£0.00	£0.00	£146,313.12	£146,267.45	£146,267.45
30-Nov-05	10	10	0	£2,130,938.00	£2,184,150.00	£1,997,742.00	£2,062,900.00	£0.00	£0.00	£0.00	£346,385.64	£361,007.50	£361,007.50
31-Dec-05	1	1	0	£265,000.00	£265,000.00	£261,349.00	£247,500.00	£0.00	£0.00	£0.00	£43,410.00	£43,312.50	£43,312.50
31-Jan-06	6	5	2	£2,867,717.00	£2,862,272.00	£2,705,163.00	£2,700,000.00	£138,272.00	£24,197.60	£26,387.90	£446,158.95	£445,435.00	£472,500.00
28-Feb-06	7	7	0	£2,923,804.00	£2,923,804.00	£2,751,619.00	£2,736,820.00	£0.00	£0.00	£0.00	£480,844.86	£478,943.50	£478,943.50
31-Mar-06	11	11	0	£4,686,880.00	£4,686,880.00	£4,403,536.00	£4,380,412.00	£0.00	£0.00	£0.00	£770,451.02	£766,572.10	£766,572.10
30-Apr-06	6	5	1		£1,875,790.00		£1,758,800.00	£141,290.00	£24,725.75	£24,377.50		£283,412.50	£307,790.00
31-May-06	13	11	2		£2,710,099.00		£2,571,340.00	£554,440.00	£97,027.00	£96,506.20		£353,478.30	£449,984.50
30-Jun-06	2	1	1		£568,000.00		£545,000.00	£274,000.00	£47,950.00	£47,250.00		£48,125.00	£95,375.00
Total Apr-Jun				£5,153,889.00	£5,153,889.00	£4,925,222.00	£4,875,140.00	£969,730.00	£169,702.75	£168,133.70	£689,829.17	£685,015.80	£853,149.50
Total Oct - Jun	63	58	6	£18,896,838.00	£18,944,605.00	£17,881,154.00	£17,838,586.00	£1,108,002.00	£193,900.35	£194,521.60	£2,923,392.76	£2,926,553.85	£3,121,752.55
Note1: Shaded area is the period covered by the repayment claims under appeal
Note 2: "Net VAT reclaim - Resulting from deal sheets" is all input VAT  incurred on purchase of phones sold overseas

Appendix 2

 

Particulars of deals carried out March to June 2006
No.	Inv #	Date 06	Supplier	Phone	Units	£/unit	Price ex VAT	VAT	Total Price	Purchaser	Units	£/unit	Price ex VAT	VAT	Total Price
1	1038	13-Mar	Fones Centre	Nokia 6680	2500	170	£425,000	£74,375.00	£499,375.00	Navigo	2500	181.50	£453,750.00	£0.00	£453,750.00
2	1039	14-Mar	Fones Centre	Nokia 8800	2000	411	£822,000	£143,850.00	£965,850.00	Navigo	2000	440	£880,000.00	£0.00	£880,000.00
3	1040	15-Mar	Fones Centre	Nokia 8800	1000	411	£411,000	£71,925.00	£482,925.00	Pabbi	1000	440	£440,000.00	£0.00	£440,000.00
4	1041	15-Mar	RS23	Nokia 6230i	1500	126	£189,000	£33,075.00	£222,075.00	Navigo	1500	134.50	£201,750.00	£0.00	£201,750.00
5	1042	15-Mar	RS23	Samsung D500	3000	133.50	£400,500	£70,087.50	£470,587.50	Navigo	3000	143	£429,000.00	£0.00	£429,000.00
6	1043	20-Mar	RS23	Nokia 9300i	850	312	£265,200	£46,410.00	£311,610.00	Navigo	850	334	£283,900.00	£0.00	£283,900.00
7	1044	21-Mar	G Comms	Nokia 8800	1000	415	£415,000	£72,625.00	£487,625.00	France Aff	1000	444	£444,000.00	£0.00	£444,000.00
8	1045	21-Mar	G Comms	Nokia 9300i	1000	312	£312,000	£54,600.00	£366,600.00	France Aff	1000	334	£334,000.00	£0.00	£334,000.00
9	1046	23-Mar	Fones Centre	Nokia 8800	992	411	£407,712	£71,349.60	£479,061.60	Blue Star	992	440	£436,480.00	£0.00	£436,480.00
10	1047	23-Mar	G Comms	Sony E W900i	2000	290	£580,000	£101,500.00	£681,500.00	France Aff	2000	310	£620,000.00	£0.00	£620,000.00
11	1048	24-Mar	RS23	Nokia 6111	1000	153	£153,000	£26,775.00	£179,775.00	Pabbi	1000	164	£164,000.00	£0.00	£164,000.00
12	1049	04-Apr	RS23	Nokia 7370	1000	166	£166,000	£29,050.00	£195,050.00	Navigo	1000	177.50	£177,500.00	£0.00	£177,500.00
13	1050	04-Apr	RS23	Nokia 6111	1000	151.50	£151,500	£26,512.50	£178,012.50	Navigo	1000	162	£162,000.00	£0.00	£162,000.00
14	1051	05-Apr	G Comms	Nokia 7380	2000	248	£496,000	£86,800.00	£582,800.00	France Aff	2000	266	£532,000.00	£0.00	£532,000.00
15	1052	05-Apr	Fones Centre	Nokia 8800	1000	411	£411,000	£71,925.00	£482,925.00	Navigo	1000	440	£440,000.00	£0.00	£440,000.00
16	1053	17-Apr	RS23	Nokia 8800	1000	395	£395,000	£69,125.00	£464,125.00	Navigo	1000	423	£423,000.00	£0.00	£423,000.00
-	1054	19-Apr	RS23	Nokia 6111	995	140	£139,300	£24,377.50	£163,677.50	Ocean Conn	995	142	£141,290.00	£24,725.75	£166,015.75
17	1055	02-May	RS23	Nokia 8800	992	368	£365,056	£63,884.80	£428,940.80	Navigo	992	394	£390,848.00	£0.00	£390,848.00
18	1056	02-May	Fones Centre	Nokia 6680	1000	143	£143,000	£25,025.00	£168,025.00	Navigo	1000	153	£153,000.00	£0.00	£153,000.00
19	1057	04-May	Fones Centre	Nokia N70	1000	198	£198,000	£34,650.00	£232,650.00	Navigo	1000	212	£212,000.00	£0.00	£212,000.00
-	1058	10-May	RS23	Nokia N70	1000	178	£178,000	£31,150.00	£209,150.00	Spherehead	1000	179	£179,000.00	£31,325.00	£210,325.00
-	1059	16-May	Fones Centre	Nokia 8800	988	378	£373,464	£65,356.20	£438,820.20	Spherehead	988	380	£375,440.00	£65,702.00	£441,142.00
20	1060	19-May	RS23	Nokia N70	1000	180	£180,000	£31,500.00	£211,500.00	Navigo	1000	193	£193,000.00	£0.00	£193,000.00
21	1061	19-May	RS23	Nokia 6111	1000	140	£140,000	£24,500.00	£164,500.00	Navigo	1000	150	£150,000.00	£0.00	£150,000.00
22	1062	22-May	RS23	Nokia N70	1000	180	£180,000	£31,500.00	£211,500.00	GNJ	1000	189	£189,000.00	£0.00	£189,000.00
23	1063	24-May	RS23	Nokia 3250	1000	180	£180,000	£31,500.00	£211,500.00	Silus	1000	193	£193,000.00	£0.00	£193,000.00
24	1064	24-May	RS23	Nokia N70	999	180	£179,820	£31,468.50	£211,288.50	GNJ	999	189	£188,811.00	£0.00	£188,811.00
25	1065	26-May	RS23	Nokia N70	1000	179	£179,000	£31,325.00	£210,325.00	Silus	1000	192	£192,000.00	£0.00	£192,000.00
26	1066	26-May	RS23	Nokia N6111	1000	133	£133,000	£23,275.00	£156,275.00	Silus	1000	142	£142,000.00	£0.00	£142,000.00
27	1067	30-May	Fones Centre	Samsung D820	1000	142	£142,000	£24,850.00	£166,850.00	Silus	1000	152	£152,000.00	£0.00	£152,000.00
28	1068	02-Jun	Fones Centre	Nokia N71	1000	275	£275,000	£48,125.00	£323,125.00	Silus	1000	294	£294,000.00	£0.00	£294,000.00
-	1069	16-Jun	Fones Centre	Nokia 6680	2000	135	£270,000	£47,250.00	£317,250.00	New Way	2000	137	£274,000.00	£47,950.00	£321,950.00
Note: Unnumbered deals are domestic UK deals, not giving rise to VAT reclaim

 

Appendix 3

Chronology of due diligence carried out, information received and trading

G Comms Limited (“G Comms”)

1.     On or before 30 November 2005, Mr Riyait found G Comms on the IPT website when he was looking to source some stock.  He contacted them by telephone.  He spoke to a Mr Ahmed.  They faxed some documents to him by way of due diligence – a letter of introduction to G Comms, signed on its own notepaper by a Mr Malik and a Mr Ahmed; a one page summary of G Comms’ contact, registration, bank and trading activity details, provided by G Comms; a copy of G Comms’ VAT registration certificate and a copy of G Comms’ certificate of incorporation from Companies House. 

2.     On 30 November 2005 Mr Riyait sent a fax to HMRC at Redhill seeking to verify the details he had been provided with.

3.     On 30 November 2005, NG purchased phones from G Comms (value £514,000 plus VAT), before receiving a reply from HMRC.

4.     On 6 December 2005, NG received by fax from HMRC a letter confirming that G Comms’ VAT registration was valid.

5.     On 9 December 2005 NG purchased phones from G Comms (value £247,500 plus VAT).

6.     On 10 December 2005, NG obtained a printout from Companies House of G Comms’ basic registration details.  This confirmed its company registration number and that an annual return had been filed, made up to 13 July 2005.  It showed that no accounts had been filed, the first accounts being due for filing by 13 May 2006. 

7.     On 5 January 2006 NG obtained a further copy of this same printout.

8.     On 25 January 2006 NG purchased phones from G Comms (value £480,000 plus VAT).

9.     On 31 January 2006 NG purchased phones from G Comms (value £950,000 plus VAT).

10.  On 1 February 2006 NG purchased phones from G Comms (value £475,000 plus VAT).

11.  On 7 February 2006 NG purchased phones from G Comms (value £282,000 plus VAT).

12.  On 14 February 2006 NG purchased phones from G Comms (value £460,000 plus VAT).

13.  On 16 February 2006, HMRC wrote to NG, informing it that its 30 November 2005 purchase of phones from G Comms traced back to a defaulter (it did not identify G Comms by name, but the information given enabled NG easily to confirm it).

14.  On 20 February 2006, Mr Riyait visited HMRC to drop off further records in relation to his repayment claim for January 2006 and to discuss the import of HMRC’s letter of 16 February 2006.

15.  On 20 February 2006, HMRC wrote to NG, informing it that its 9 December 2005 purchase of phones from G Comms traced back to a defaulter (it did not identify G Comms by name, but the information given enabled NG easily to confirm it).

16.  On 28 February 2006 NG obtained a “Business Information” report on G Comms from Creditsafe.com.  It confirmed that Dilnawaz Malik and Shiraz Ahmed were the directors and Shiraz Ahmed was the company secretary.  It confirmed G Comms’ rating as “newly established” (i.e. less than 18 months old) and recommended “no credit limit”.

17.  On 9 March 2006 NG received payment of its VAT reclaim for the month of January 2006.  This included VAT reclaimed in respect of the two deals with G Comms on 25 and 31 January 2006.

18.  On 20 March 2006, Mr Riyait says he contacted G Comms to warn of problems in its supply chain, arising from HMRC’s letters of 16 and 21 February.  He says he wrote them a letter, but no copy of that letter has been provided.  We do not accept such a letter was ever written.

19.  On 21 March 2006, NG purchased phones from G Comms (value £727,000 plus VAT).

20.  On 21 March 2006, internal clearance was given in HMRC to pay NG’s February VAT repayment claim.

21.  On 22 March 2006, NG obtained a printout from the “Europa” website of the EU, confirming that G Comms’ VAT number was “a valid VAT number”.

22.  On 23 March 2006, NG purchased phones from G Comms (value £580,000 plus VAT).

23.  On 24 March 2006, NG obtained a further printout from the “Europa” website of the EU, again confirming that G Comms’ VAT number was “a valid VAT number”.

24.  On 30 March 2006 NG received payment of its VAT repayment claim for the month of February 2006.  This included VAT reclaimed in respect of the purchases from G Comms on 1, 7 and 14 February.

25.  On 5 April 2006, NG purchased phones from G Comms (value £496,000 plus VAT).

26.  On 9 May 2006 HMRC wrote to NG, informing it that its 21 March 2006 purchase from G Comms traced back to a defaulting trader (it did not identify G Comms by name, but the information given enabled NG easily to confirm it).

27.  On 15 May 2006 NG wrote back to HMRC, informing them that it now subscribed to Creditsafe to obtain more information on its trading partners and their directors and secretaries.

28.  On 23 May 2006, Mr Riyait says he visited G Comms’ premises. No evidence of such a meeting has been provided and in any event it was more than 6 weeks after his last trade with them.

29.  On or about 25 May 2006 Mr Malik of G Comms completed a “Trading Application Form” produced by NG, in which two trade references were named (NG never took those references up) and to which two third party letters were attached (to demonstrate the trading address of G Comms and the home address of Mr Malik).

30.  On 30 May 2006 Mr Riyait replied to HMRC by letter, listing the checks it undertook on suppliers before it had received HMRC’s warning letters, which it maintained complied fully with Notice 726.

31.  On 1 June 2006 Mr Riyait obtained a further Creditsafe report on G Comms.  As accounts for G Comms’ first year of trading had now been filed, they were now rated at “very good creditworthiness” (updated to that on 28 May 2006 when G Comms’ first accounts were filed), with a suggested credit limit of £35,000.  This was nearly two months after NG’s last deal with G Comms.

32.  On 6 June 2006 HMRC wrote to NG, informing it that its 23 March 2006 purchase from G Comms traced back to a defaulting trader (it did not identify G Comms by name, but the information given enabled NG easily to confirm it).

33.  On 28 July 2006 Mr Riyait wrote four standard form letters to G Comms, notifying them of the four letters received by NG from HMRC (dated 16 February, 20 February, 9 May and 6 June 2006) warning of defaulters in deal chains leading back through G Comms.  This letter was written nearly four months after NG’s last deal with G Comms.

The Fones Centre Limited (“Fones”)

34.  Mr Riyait said that the first contact with Fones was when they rang him up seeking to acquire stock from him.  He was unable to supply them what they wanted, but asked them if they might be able to source stock for him, and they confirmed they could.

35.  On 23 January 2006 NG obtained verification from HMRC (Redhill) of Fones’ VAT number.  It is not clear what material on Fones Mr Riyait had obtained in advance, but his evidence was that he would have obtained a copy of the company’s certificate of incorporation and checked its VAT number was valid (presumably through the Europa website).  We find that the information he obtained was the barest evidence that the company existed and then he verified its VAT number with Redhill.  We are satisfied that he obtained no other information on it.

36.  On 25 January 2006 NG first purchased phones from Fones (value £506,000 plus VAT).  Mr Riyait’s memory was that the person he dealt with was called “Ehmed”.

37.  On 26 January 2006 NG purchased phones from Fones (value £289,000 plus VAT).

38.  On 7 or 17 February 2006 NG purchased phones from Fones (value £359,820 plus VAT).

39.  On 28 February 2006 NG purchased phones from Fones (value £435,000 plus VAT) and it also obtained a Creditsafe report.  That report described Fones as “newly established” (i.e. less than 18 months old) and gave no credit rating beyond that description.  Its advice was “caution – credit at your discretion.”

40.  On 13, 14 and 15 March 2006 NG purchased phones from Fones (three deals, total value £1,658,000 plus VAT).

41.  On 23 March 2006 NG purchased phones from Fones (value £407,712 plus VAT).

42.  On 5 April 2006 NG purchased phones from Fones (value £411,000 plus VAT).

43.  In April or May, Mr Riyait instructed Megsons, a firm of solicitors, to carry out due diligence on Fones.

44.  On 2 and 4 May 2006 NG purchased phones from Fones (two deals, combined value £341,000 plus VAT).

45.  On 16 May 2006 NG purchased phones from Fones (value £373,464 plus VAT).

46.  On 30 May 2006 NG purchased phones from Fones (value £142,000 plus VAT).

47.  On 2 June 2006 NG purchased phones from Fones (value £275,000 plus VAT).

48.  On 6 June 2006 Megsons issued a due diligence bundle on Fones to NG.  In that report, in answer to the question “How do you comply [with VAT Notice 726]?”, the answer is left blank.  The report confirms that no accounts had been filed by Fones.  Two trade references had been supplied, but only company names and addresses, no contact details.  These references do not appear to have been taken up.  Neither of the company employees named in the form is called “Ehmed”.  The format of the report is a questionnaire with attachments, and there was no evidence (either in the report itself or elsewhere) that Megsons had themselves verified any of the information supplied.  The copy phone bill attached related to a “Mr S Ahmed T/A Stations Communications” at Fones’ address, and the photographs supplied appeared to show a mobile phone shop with that name as well as “The Fone Centre” as its title.  A list of present and former officers of Fones attached to the report showed an individual called “Ahmed Jalil” as its former secretary (resigned 8 January 2005) and Mr Riyait identified him as the person he had spoken to.

49.  On 16 June 2006 NG purchased phones from Fones (value £270,000 plus VAT).

50.  On 21 June 2006 HMRC wrote to NG, informing it that its 13, 14, 15 and 23 March 2006 purchases from Fones traced back to a defaulting trader (it did not identify Fones by name, but the information given enabled NG easily to confirm it).

51.  On 28 July 2006 Mr Riyait wrote to Fones notifying them that they had received a letter dated 21 June 2006 from HMRC telling him that four of the purchases from Fones had been traced back to a defaulting trader, and asking them to confirm the procedures they had in place to verify their own supplier.

52.  On 1 August 2006 Fones wrote back to confirm they had carried out checks with their supplier and indeed were still dealing with him.

RS23 Limited (“RS23”)

53.  On 15 March 2006 Mr Riyait sent a fax to HMRC at Redhill seeking to validate RS23’s VAT registration.  He provided them with various documents he had obtained, including a copy of RS23’s VAT Registration Certificate, its Certificate of Registration, its bank details, a BT bill, an introduction letter and a trading application form.  No evidence was given of how or when the first contact occurred with RS23 or when these documents were obtained.  On the same day, NG carried out a “Europa” check on RS23’s VAT number (which confirmed it was a valid VAT number, but such checks do not give the identity of the registered trader).

54.  On 15 March 2006 NG first bought phones from RS23 (two purchases, value £589,500 plus VAT).  By the time Aberdale faxed inspection reports to NG, the phones had already been placed on transport and sent for export via Eurotunnel.

55.  On 20 March 2006 NG purchased phones from RS23 (value £153,000 plus VAT).

56.  On 21 March 2006 NG carried out a company webcheck on RS23 which confirmed it existed under the expected company registration number, confirmed its registered office address and confirmed it had not yet filed any accounts.

57.  On 28 March 2006 HMRC confirmed the validity of RS23’s VAT number by fax to NG.

58.  On 4 April 2006 NG purchased phones from RS23 (in two deals, combined value £317,500 plus VAT).

59.  On 17 April 2006 NG purchased phones from RS23 (value £395,000 plus VAT).

60.  On 19 April 2006 NG purchased phones from RS23 (value £139,300 plus VAT).

61.  On 2 May 2006 NG purchased phones from RS23 (value £365,056 plus VAT).

62.  On 10 May 2006 NG purchased phones from RS23 (value £178,000 plus VAT).

63.  On 19 May 2006 NG purchased phones from RS23 (in two deals, combined value £320,000 plus VAT).

64.  On 22, 23 and 26 May 2006 NG purchased phones from RS23 (in five deals, combined value £851,820).

65.  On 1 June 2006 Mr Riyait obtained a Creditsafe report on RS23, which showed no credit rating as it was newly established.

66.  On 6 June 2006 Megsons issued a due diligence bundle on RS23, in similar form to that relating to Fones.  The questionnaire was completed to a roughly similar standard (e.g. in response to the question “How do you comply [with VAT Notice 726]?” the answer was “Follow the rules & regulations”).  Two trade references were given, Fones and Hawks Precisions (the freight forwarding company well known to NG).  Neither appears to have been taken up.

67.  On 21 June 2006 HMRC wrote to NG, informing it that its 15, 20 and 24 March 2006 purchases from RS23 traced back to a defaulting trader (it did not identify RS23 by name, but the information given enabled NG easily to confirm it).

68.  On 28 July 2006 Mr Riyait wrote to RS23 notifying them that they had received a letter dated 21 June 2006 from HMRC telling him that four of the purchases from SR23 had been traced back to a defaulting trader, and asking them to confirm the procedures they had in place to verify their own supplier.

69.  On 8 August 2006 RS23 wrote to NG in terms that were generally reassuring but almost entirely non-specific.

GNJ Trading LLC of Dubai (“GNJ”)

70.  The circumstances leading up to Mr Riyait’s first contact with this trader are set out at [15] to [17] of this decision.

71.  On 3 October 2005, following the initial contact, GNJ faxed to NG a letter introducing itself; some bank details giving details of GNJ’s bank accounts with FCIB and Standard Chartered Bank; and a one-page document headed “United Arab Emirates Government of Dubai Department of Economic Development  Commercial Licence.”  Apart from the name “G.N.J. General Trading (L.L.C.), the words “Expiry Date” and “Issue Date”, and some dates and numbers in Arabic numerals, the rest of the document was in Arabic script.  Mr Riyait confirmed he could not read or understand it.  He thought it meant that GNJ must “satisfy all terms and conditions of the UAE”, though he had no idea what they were.  He assumed it was the equivalent of a Companies House registration in the UK.

72.  Between 10 and 31 October 2005, NG carried out seven export trades, with GNJ acting as its customer in all seven.  The total value of these sales was £868,610.

73.  Between 1 and 30 November 2005, NG carried out 10 trades, all of them export.  One of them (with GNJ) was cancelled by agreement.  Eight out of the remaining nine sales were to GNJ.  The total value of the sales to GNJ in November 2005 was £1,563,750.

74.  On 19 December 2005, in the context of some correspondence about some phones from a consignment to GNJ that had gone missing, Mr Riyait was informed that GNJ “chose not to inspect the goods before instructing Hawk Freight Services to re-export them to Amsterdam.”

75.  On 14 February 2006, NG sold £278,000 of phones to GNJ for export (in one out of its total of seven export trades that month).

76.  In March 2006 Mr Riyait met Mr Gambhir of GNJ by arrangement at the CEBIT exhibition in Hannover, Germany, as mentioned in [126] of this decision.

77.  In April 2006 Mr Riyait again met Mr Gambhir of GNJ, to discuss their establishment of Microtech in Germany.

78.  On 22 and 23 May 2006, NG sold £377,811 of phones to GNJ for export in two (out of its total of 11) overseas sales that month.

Navigo.it SpA of Italy (“Navigo”)

79.  On 10 March 2006 (fax timed at 14.09), Navigo sent a standard form “Presentation Letter + Company Details and Certificates” to NG.  Attached to it were a page of details about Navigo’s bank account (FCIB), company and freight forwarder in English and 20 pages of documentation in Italian.  Mr Riyait confirmed he does not understand Italian and had no idea what the documents actually said.  On the same date he carried out a “Europa” VAT check and established that the VAT number quoted by Navigo was a valid VAT number (but this check did not establish that it was Navigo’s VAT number).

80.  On 13 March 2006, NG first sold phones to Navigo (value £453,750).  This sale originated as a result of an offer of the phones faxed by Mr Riyait to Navigo.

81.  On 14, 15 and 20 March 2006 (in four deals), NG sold phones to Navigo to a value of a further £1,794, 650.

82.  On 27 March 2006 NG received confirmation from HMRC that Navigo’s VAT number was valid.

83.  From 4 April to 19 May 2006 (in nine deals), NG sold phones to Navigo to a value of a further £2,301,348.

84.  In a total of 14 sales from 13 March to 19 May 2006, Navigo therefore bought phones from NG to a value of £4,549,748.

85.  On 1 June 2006 NG obtained a Creditsafe report on Navigo, which included the name of the individual he had dealt mainly with (confirmed as a director) and gave a “Confidence. Low Risk” credit rating.  It also contained information about Navigo’s activities and “statutory news” in relation to it.  Both were in Italian.  All the “detailed financials” information items were blank.  “No public adverse information filed” against Navigo or its first-named director.

Pabbi Elektronik GmbH of Germany (“Pabbi”)

86.  Mr Riyait says that Pabbi found his details on IPT and contacted him a number of times to try to buy stock from him.  He misremembered the name of the person there he dealt with.

87.  On 10 March 2006 Pabbi sent a standard form introduction letter to NG.  It seems to have been accompanied by two pages of information in German, which Mr Riyait did not understand.

88.  On 10 March 2006 NG may have sent a fax to HMRC requesting verification of Pabbi’s VAT number and attaching the documents sent to it by Pabbi.  At or about the same time, he may have carried out a “Europa” check (which would have confirmed that the VAT number given to him by Pabbi was a valid VAT number, but without confirming which trader it belonged to).  No record of this check having taken place was available.

89.  On 15 and 25 March 2006 NG sold phones to Pabbi (combined value £608,000).

90.  On 27 March 2006 HMRC wrote to NG, requesting provision of Pabbi’s VAT certificate, letter of introduction, certificate of incorporation and invoice or purchase order.  It appears from HMRC’s records that they verified Pabbi’s VAT number to NG on the same day.

91.  On 14 April 2006 NG faxed some of this material to HMRC (incorrectly dating its fax 14 February 2006)

92.  On 18 April 2006 HMRC responded, requesting a copy of Pabbi’s VAT certificate, and they also (according to their records) verified Pabbi’s VAT number on this date.

93.  On 20 April 2006 Pabbi supplied the missing information to NG

94.  On 24 April 2006 NG replied to HMRC with the missing information.

Blue Star Telecom ApS of Denmark (“Blue Star”)

95.  Mr Riyait said that Blue Star had contacted him some time before his first deal with them.  His contact there was “Monty” (he did not know his full name).

96.  On 14 February 2006 Blue Star faxed to NG a standard form letter of introduction, a sheet with its banking details, a trading account application, an extract from the Danish Commerce and Companies Agency showing its basic corporate details (including the fact that the only named director had a Mumbai address in India) and confirmation of its VAT number.

97.  On 14 February 2006 NG contacted HMRC with a request to verify Blue Star’s VAT number.

98.  On 14 February 2006 NG sold phones to Blue Star (value £492,000).

99.  On 20 February 2006 HMRC records indicate that HMRC contacted NG and verified Blue Star’s VAT number (no copy of any written confirmation on this date was in the papers before us).

100.         On 23 March 2006 NG contacted HMRC again to verify Blue Star’s VAT  number.  It also carried out a “Europa” check which confirmed the validity of Blue Star’s VAT number.

101.         On 23 March 2006 NG sold phones to Blue Star (value £436,480)

102.         On 28 March 2006 HMRC faxed NG and verified Blue Star’s VAT number.

Silus BV of The Netherlands (“Silus”)

103.         Mr Riyait could not remember the name of the person he dealt with at Silus.

104.         On 23 May 2006 NG sold phones to Silus (value £193,000).

105.         On 24 May 2006 NG contacted HMRC to verify Silus’s VAT registration.  This fax was marked “EXPRESS VAT VALIDITY CHECK”.  On the same day NG verified on the “Europa” website that the VAT number given by Silus was a valid VAT number.

106.         On 26 and 30 May and 2 June 2006 NG sold phones to Silus in four deals (value £780,000).

107.         On 2 June 2006 NG obtained a Creditsafe report on Silus, which gave “Caution, High Risk Potential” as its credit rating, and noted that its 100% shareholder was in Slough, Berks.

108.         On 24 August 2006 HMRC verified Silus’s VAT number to NG.

France Affaires (International) SaRL (“FA”)

109.         On 30 November 2005 FA faxed to NG (timed at 16.15) a standard form introduction letter with attached extracts from the official commerce and business registry and some tax documents.  The attachments were in French and Mr Riyait did not understand them.  Mr Riyait said he dealt with “Bibi” at FA, but the letter was signed by “Fariza”

110.         On 30 November 2005 NG sold phones to FA (value £550,000).

111.         On 25 January 2006 NG sold phones to FA (value £513,000).

112.         On 31 January 2006 NG sold phones to FA (value £1,016,000).

113.         On 1 February 2006 NG sold phones to FA (value £508,000).

114.         On 21 and 23 March 2006 NG sold phones to FA in three deals (value £1,398,000).

115.         On 5 April 2006 NG sold phones to FA (value £532,000).

116.         Mr Riyait says he carried out a Creditsafe check on FA, but no copy of any such check was put before us.

117.         There was no evidence before us of any “Redhill” check with HMRC or other attempt to verify FA’s VAT registration.