First-tier Tribunal (Tax)

[2010] UKFTT 431 (TC)

TC00699

Appeal reference: MAN/2007/1335

VAT – input tax – alleged MTIC fraud and contra-trading – fraud established – whether Appellant “knew or should have known” – yes – it knew – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

 

 

RADARBEAM LTD Appellant

 

- and -

 

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE AND CUSTOMS Respondents

 

 

Tribunal: Judith Mitting (Judge)

Robert Barraclough FCA MAE (Member)

Sitting in public in Manchester on 2 – 5 November, 9 – 12 November 2009 and 26-27 July 2010

 

Stephen Climie, counsel for the Appellant

 

Jonathan Kinnear & Amy Mannion, instructed by the Solicitor to Her Majesty’s Revenue and Customs for the Respondents

 

 

 

 

© CROWN COPYRIGHT 2010

DECISION

 

1.           The decision under appeal is that of the Commissioners, notified on 16 October 2007, to deny the Appellant an entitlement to deduct input tax in the sum of £4,963,525.  The decision relates to the following three monthly returns:

1.     April 2006 (04/06) – six deals - £1,549,625

2.     May 2006 (05/06) – three deals - £1,914,500

3.     June 2006 (06/06) – two deals - £1,499,400

2.           It is the Respondents’ case, that each of the deals carried out in the three periods can be traced back to a loss of VAT which is attributable to fraud and that the Appellant either knew or should have known that they were so connected.

3.           At the outset Mr. Climie accepted on behalf of the Appellant:-

1.     The Commissioners had correctly traced the supply chains.

2.     In relation to period 04/06 and 05/06 there was a tax loss in each chain and that tax loss had come about fraudulently.

3.     In respect of period 06/06, Barato Wholesale in the dirty chain had committed a fraud and had no intention of accounting for output tax on its sales of razor blades within the UK.

4.     The stock imported by Barato was later purchased and exported by BCC.

5.     There is sufficient evidence of importation in all supply chains and sufficient evidence of onward sales through a chain of companies to the Appellant.

It was the Appellant’s case that:

1.     It did not know and neither could nor should have known of the frauds in its 04/06 and 05/06 supply chains

2.     Its 06/06 supply chains were not tainted by fraud

3.     There was no logical connection between its clean 06/06 chains and BCC’s dirty chains

4.     There was no evidence of conspiracy between the parties in the 06/06 supply chains

5.     That it did not know and should not have known of the fraud within BCC’s supply chains

6.     That BCC is not a fraudster

4.           We heard oral evidence from Mr. Sukhwinder Todd on behalf of the Appellant and on behalf of the Commissioners from:

Mrs. Phyllis Mee, the officer tasked with carrying out the extended verification into the returns

Peter Cameron-Watson and Susan Okolo, officers concerned with BCC

David Skelly, operational accountant

Roderick Stone of the Serious Civil Investigations Directorate

EVIDENCE

Radarbeam’s early trading history and involvement with the Commissioners

5.           Radarbeam was incorporated on 23 May 2002.  The sole director was and is Mr. Todd, whom it was accepted is the controlling mind of the company.  The company was registered for VAT with effect from 1 August 2002, its main business activity being given as a used car dealer.  The anticipated value of taxable supplies for the next 12 months was £250,000.  By letter dated 2 November 2002, the company’s accountant, PJ Wyatt, advised the Commissioners that Radarbeam intended to trade as a mobile phone and accessories wholesaler and retailer as well as trading as a wholesaler and retailer of used cars.  It should be noted here that in cross-examination Mr. Todd said that in fact Mr. Wyatt had got this wrong.  At that stage, Mr. Todd knew nothing of the mobile phone wholesale business and his intention was to retail only.  Equally he had no intention of retailing used cars, only wholesaling.

6.           On 14 January 2003, Mr. Todd was visited by Officer Samujh as part of the MTIC verification programme.  At this stage he was still selling used cars, had taken no active steps in the area of mobile phones, was generally uncertain as to the direction he would take but was looking for premises from which to retail mobile phones.  He was asked to contact the MTIC team when he finally decided to go into phones.  Mr. Todd was later to say in his evidence that he thought at this stage that the purpose of the visit from the Commissioners was merely to check up on him, ensuring that he was who he said he was.  He did not believe, despite what they told him, that they were in any way warning him of the dangers of fraud.

7.           By letter dated 19 February 2003, Mr. Todd notified the Commissioners that Radarbeam was now operating a retail shop supplying mobile phones and accessories to the public and would also be buying and selling SIM-free phones to meet the needs of pay-as-you-go customers.  This was followed by a letter dated 27 February 2003, notifying a change of bankers to Barclays from HSBC.  A further change was notified on 20 October 2003 to Bank of Scotland.

8.           On 1 October 2003, Mr. Todd was visited again by Officer Samujh.  Mr. Samujh’s visit report notes that Mr. Todd had established his shop and done some significant wholesale trading but was unaware of what verification checks he should be doing and how often.  Mr. Samujh explained the need to make normal business enquiries to satisfy himself of the bona fides of the businesses with whom he was trading; he must make regular checks to verify their VAT registration numbers; he must ensure he always spoke to a proper officer of the company and should visit the premises.  Mr. Samujh also referred him to Notices 700/52 and 726 and to the guidance list of checks.  He was informed of the 2003 budget provisions. Mr. Samujh noted that it was too early to gauge Mr. Todd’s credibility risk and went on to note that Mr. Todd posed “a degree of risk to the Revenue and to himself as I feel that he is not fully aware of the ramifications of the trade sector that he is in”.  Mr. Samujh also noted that Mr. Todd was “prone to being approached by a multiplicity of other traders over the phone in a scattergun approach. … This could, I fear, leave him open to hijacks”.

9.           Mr. Todd was, on 9 December 2003, sent a letter stressing the problems arising from missing trader fraud and advising of the verification services offered by Redhill Office.  A further letter dated 9 February 2004 again gave a similar warning and requested Radarbeam to complete monthly transactions sheets to be faxed to the Commissioners.  Further warning was given by letter dated 22 February 2004 when Radarbeam’s 11/03 repayment claim had been suspended.  Repayment was to be withheld until “HM Customs & Excise is satisfied with the bona fides of the repayment, including verification of transactions”.  It was to be Mr. Todd’s evidence that whenever a repayment which had been suspended was later met – ie in all cases up to the periods now under appeal – his understanding was that the Commissioners had carried out a thorough investigation and had been satisfied.  He took from this that his supplier, Saphire, and the suppliers to Saphire had all been cleared and that Radarbeam was dealing with “a good supplier”.

10.        On 16 March 2004, Radarbeam requested to go onto monthly returns to ease cashflow pressures.  This was allowed.  In a letter of 8 April 2004, Mr. Todd, clearly in response to a query from Officer Samujh, gave a reply detailing a clear third party payment received from a company called Beronvine Ltd in respect of a sale to Radarbeam’s customer Envey Handel.  This issue was later to reveal a conflict with Mr. Todd’s written statement and his evidence in chief that he was aware of no third party payment in any chain in which he had been involved.  In cross-examination, Mr. Todd’s reaction was that he had overlooked it; it was only a small amount of the total payment and he was just glad to get paid.

11.        The Commissioners suspended repayment of Radarbeam’s returns for 09/04 and 10/04 pending verification.  Mr. Todd repeatedly chased repayment and eventually involved his solicitors, Messrs Cobbetts, who entered into protracted correspondence with the Commissioners who explained that repayment would continue to be withheld until they had verified each stage of the deal chains.  A letter from the Commissioners of 5 January 2005 advised Cobbetts that defaulting traders had been identified in Radarbeam’s transaction chains.  This is important in evidential terms because it was Mr. Todd’s case in his written statement, in evidence in chief and in cross-examination that he did not know there had ever been defaulting traders in his chains.  His evidence on this point was that he never saw a copy of this letter and Cobbetts would merely have told him that there was “some sort of problem” with his supplier.  He accepted that he did receive copy correspondence from Cobbetts but not this one.  Mr. Todd was also advised of the presence of defaulting traders in his chains in a telephone conversation between himself and Mrs. Hirons of the Commissioners.  Mrs. Hirons’ statement to Mr. Todd was confirmed by Cobbetts in their letter of 14 January 2005.  This letter also advised the Commissioners that Mr. Todd had made enquiries of both his suppliers in the chains in question and has been told that they had not been approached by the Commissioners and were trading normally.  Further correspondence ensued, in particular a letter of 28 January when the Commissioners advised Cobbetts that Mr. Todd had been informed that there were defaulters in each of the five deal chains involved in the two periods.  Details of each chain were given and in respect of three of them the letter went on to say that third party payments had been identified.  Mr. Todd was later to say, in cross-examination, that if he had ever been told even once by Customs that there was a defaulting trader in any of his chains with Saphire, he would have ceased trading with them.  However, his reasoning then became that “it wasn’t a definite thing that happened”; Customs were still looking into it and finally if anything that serious had happened he would have expected the officers to come and see him.

12.        On 3 March 2005, Cobbetts were informed that payments had been released for both 09/04 and 10/04, this letter concluding:

“I can confirm that there is no evidence to contend that Radarbeam Ltd is involved in any fraudulent trading.  I cannot confirm whether or not Radarbeam Ltd has any knowledge of such trading.  I can confirm, from our frequent discussions, that Mr. Todd is aware that fraudulent trading exists in the area in which he has chosen to conduct his business.”

13.        In May 2005, Mr. Todd was informed of the revised version of the Notices.  Further repayments in 2005 were suspended pending verification, all subsequently being met but throughout the period there was running contact between Mr. Todd and the Commissioners, with Mr. Todd being asked for information and he chasing repayment.  Again as stated before, it was Mr. Todd’s evidence that every time a repayment was made it was to him an implicit confirmation of the bona fides of his suppliers and customers.  Throughout this entire period there are several telephone records of Mr. Todd phoning the Commissioners’ helpline and seeking verification of Saphire’s and occasionally other’s VAT registrations.  Mr. Todd told us it was his practice to phone the helpline because a reply was instantaneous and it gave him precisely the information he needed.  He had on occasion faxed the Redhill site, but there would be an inevitable delay in replying which was not appropriate to last-minute checks.

14.        Without prejudice repayments were made to Radarbeam in respect of its returns for 11/05, 12/05, 01/06 and 02/06, the repayment being made by and large within two or three weeks of submission of the return.  Matters were slightly different for the 03/06 return.  This was submitted, we assume, at the normal time within a couple of days of the end of the month.  Hearing nothing, Mr. Todd contacted the Commissioners and received an email back from a Mr. Davies dated 25 April 2006 stating that the repayment would be verified in due course; that they were very busy; that Mr. Todd’s constant calls delayed their efforts and finally that he would be pleased to know that additional staff were being recruited to deal with “the extended verification of VAT repayment returns”.  Mr. Todd finally received payment on 25 May 2006, and assumed that the deals had been verified and cleared.

An analysis of turnover taken from the VAT returns

15.        Radarbeam’s turnover as revealed in the VAT returns reflects the following:

·       16^th August 2002 (effective date of registration) to 31^st August 2003 = £739,895;

·       1^st September 2003 to 31^st July 2004 = £4,427,228;

·       1^st August 2004 to 31^st July 2005 = £12,919,995;

·       1^st August 2005 to 31^st July 2006 = £58,768,509;

·       1^st August 2006 to 31^st July 2007 = £5,383.

The deal chains

04/06

16.        There were six deals in 04/06, all carried out on 26 April.  In each case the goods supplied were 5,000 Nokia phones sourced from Saphire Ltd and sold to a Belgium company, 2 Trade:

	Date Purchased	Supplier Name	Invoice Reference	Goods	Quantity Price	Net	VAT	Gross
1	26.04.2006	Saphire Ltd	2006154	Nokia 8800	5,000  £381	£1,905,000	£333,375	£2,238,375
2	26.04.2006	Saphire Ltd	2006155	Nokia 9300	5,000  £296	£1,480,000	£259,000	£1,739,000
3	26.04.2006	Saphire Ltd	2006156	Nokia 8910i	5,000  £276	£1,380,000	£241,500	£1,621,500
4	26.04.2006	Saphire Ltd	2006158	Nokia N90	5,000  £261	£1,305,000	£228,375	£1,533,375
5	26.04.2006	Saphire Ltd	2006159	Nokia N90	5,000 £261	£1,305,000	£228,375	£1,533,375
6	26.04.2006	Saphire Ltd	2006157	Nokia 9500	5,000  £296	£1,480,000	£259,000	£1,739,000

 

All six deals were traced back to a defaulting trader, C&B Trading (UK) Ltd.  Chains 1, 3 and 4 were identical with C&B selling to Highbeam (UK) Ltd, who sold to Mobile Heaven (Europe) Ltd, who sold to Sahpire.  In deals 2 and 5, C&B sold to V2 (UK) Ltd who sold to Quality Import Export who sold to MNR Global Ltd, who sold to Saphire.  Deal 6 was similar to these two save that Watts Management Services was substituted for Quality Import Export.  Every deal throughout each chain took place on 26 April.

05/06

17.        There were three deals in this period, again all taking place on the same day, 25 May.  Again the goods were Nokia phones purchased from Saphire and this time sold to a Spanish company, CEMSA:

	Date Purchased	Supplier Name	Invoice Reference	Goods	Quantity Price	Net	VAT	Gross
7	25.05.2006	Saphire  Ltd	2006167	Nokia 8800	10,000  £411	£4,110,000	£719,250	£4,829,250
8	25.05.2006	Saphire Ltd	2006165	Nokia N91	10,000  £356	£3,560.000	£623,000	£4,183,000
9	25.05.2006	Saphire Ltd	2006166	Nokia N80	10,000 £327	£3,270.000	£572,250	£3,842,250

 

All three deals were traced back to a defaulting trader, Toganne Mobiles.  In deals 8 and 9, the chains were identical namely Toganne selling to Let’s Talk Ltd, who sold to Fone Dealers Ltd, who sold to Tracker Trading, who sold to Glasgow Data Ltd, who sold to Saphire Ltd, who sold to Radarbeam.  In deal 7 Kingfisher Traders Ltd was substituted for Tracker Trading, otherwise identical.

06/06

18.        There were two deals in this period, each involving a contra-trading chain.  We refer to the contra-trading chain at length further on.  At this stage we deal with the clean chain in which Radarbeam was involved.  This time the goods were Sony Ericsson phones, again purchased from Saphire and again sold to CEMSA:

 

In each of these two chains, a company called Sinderby Enterprises Ltd sold to Bristol Cash and Carry Ltd (“BCC”), who sold to Glasgow Data Ltd, who sold to Saphire, who sold to Radarbeam.  BCC was the contra-trader.

19.        Throughout all the transaction chains in each period the profit per unit shows minimal variation, regardless of the model of phone and the quantity traded.  The following three tables show the markups in respect of each of three periods:

VAT Period 04/06

 

VAT Period 05/06

Purchase Price per unit	Deal 1 RB Inv 194	Deal 2 RB Inv 196	Deal 3 RB Inv 195
1st Price	£408.35	£343.35	£324.35
-6			£0.10
-5	£0.10	£0.10	£0.10
-4	£0.15	£0.15	£0.15
-3	£0.30	£0.30	£0.30
-2	£1.00	£1.00	£1.00
-1	£1.00	£1.00	£1.00
Broker	£12.00	£10.50	£10.00
Total	£14.55	£13.05	£12.65

 

VAT Period 06/06

Purchase Price per unit	Deal 1 RB Inv 199	Deal 2 RB Inv 198
1st Price	£302.50	£302..50
-3	£1.50	£1.50
-2	£1.00	£1.00
-1	£1.00	£1.00
Broker	£9.00	£9.00
Total	£12.50	£12.50

 

20.        It will be noted that the markups are also uniform across the chains, for example buffers 1 and 2 in every single deal make £1.  Further, in 05/06, buffer 3 uniformly made £0.30 even though not the same company in all chains.

Movement of the goods

21.        None of the eleven chains have been able to be traced back to the manufacturer or to an authorised distributor and none of the companies in the chains took physical possession of the goods.

04/06

22.        From the chronology assembled by the Commissioners, it appears that in each of the six deal chains, the purchaser from C&B instructs the removal of the stock from a holder called Ontime Logistics from Kent to Capital Logistics in Stoke-on-Trent.  This is achieved by the purchasing company sending an instruction to release to Ontime and an instruction to accept to Capital.  Each party in the chain thereafter instructs Capital to allocate the stock to its own purchaser.  Finally Radarbeam sends one single instruction to Capital to ship the entire stock for all six deals, on hold, to a company in Holland called ML & Co. BV.  There is then a CMR in respect of each of the deals (in one case dated 27 April, in all others 26) accompanied by Stenna Line freight documentation dated 27 April.  We look at the documentation concerning this period later on.

05/06

23.        The goods appear to be held throughout by 1^st Freight Ltd with individual parties instructing 1^st Freight to release to their customers.  In all three chains, Radarbeam instructs 1^st Freight to ship the stock on hold to GR Distribution URL in France and there follows Euro Tunnel documentation.

06/06

24.        Again the goods are held by 1^st Freight Ltd and there is an instruction by CEMSA for removal to GR Distribution. 

25.        In periods 04/06 and 05/06, in all nine chains, the deals are conducted straight down the chains on the same day.  Purchase orders and sales invoices to and from each trader, allocation requests to the freight forwarders, customer and supplier declarations and export documentation are, with the very odd exception, invariably dated the same day.  The method of communication appears to be by fax.  Some but not all of the faxes were timed but because they were not all timed and on the face of it they originated from different fax machines, it has not been possible to put a time frame to the movements.  Mrs. Mee however thought it appeared difficult to see how all the parties could have had time to contact each other, agree terms, arrange for the release of the goods and negotiate any ancillary contracts such as inspection all on the same day.  The other factor that stands out, in chains 1 to 9, is that each transaction down the chain is for precisely the same quantity of goods.  The stock moves intact at all stages.  In period 06/06, although the sale to Radarbeam and the sale from Radarbeam both occur on the same day, the chain appears to have originated with the sale from Sinderby to BCC some three days earlier.

26.        Unconnected with the current case, officers from the MTIC team had visited Capital Logistics on 2, 4 and 10 April 2006 and their visit reports were before the tribunal.  On 2 April access to the business village where Capital Logistics is situated could not be made because of an external security gate (it was outside normal office hours).  The 4 April visit was by appointment and the officers met with Mr. Kully, the director.  Mr. Kully said that he had had 30 transactions completed in the last month and that he collected goods and transported them directly to other locations in the UK or abroad.  He did not maintain a goods in / goods out record or stock inventory sheets.  The visit on 10 April was unannounced and officers spoke with an employee called Peter.  An inspection of the warehouse confirmed a quantity of mobile phones awaiting distribution and a collection note revealed them to be 10,000 units of Nokia 1100s.  Officers made a further visit on 18 May where they met with Peter Sangha who said that he was in charge when Kully was not there.  Officers were told that the Nokia 1100s were still held with no change to ownership and no movement.  Mr. Sangha was asked if any goods had been received, moved or dispatched since the last visit and was told that the only thing received had been a consignment of CD-ROM games.

27.        Mrs. Mee had also checked the VAT position of Capital Logistics and found they had completed no returns since 05/05.  She carried out further checks on a company called SKD Transport who were the carrier used for all deals.  She found this company had been deregistered as a missing trader and until then the only returns it had submitted had been nil returns.  Ontime Logistics had also been visited by officers from the Redhill freight team on 25 October 2006.  They were told that there were no files for the April 2006 deals as no records had been retained.  Officers noted that it was not credible that during the summer Ontime had had millions of pounds’ worth of goods in the warehouse and that it called into question the existence of the goods and Ontime’s credibility.  Officers were told that Ontime were not responsible for insurance of the goods in the warehouse, which had to have goods in transit insurance.

Payments through the chains & banking arrangements

04/06

28.        Payments for the 04/06 deals were made throughout the chain between 22 and 26 May, ie approximately four weeks later.  In each case, Radarbeam on 25 May faxed an Acceptance of Stock to 2Trade who would return it signed and on the same day Radarbeam requested Capital Logistics to release the goods to 2Trade.  The only quirk in this pattern is in the deal numbered 5, where although Radarbeam pay Saphire in tranches on 23 and 26 May, it appears that Saphire don’t complete their payment to MNR Global until 7 July so it is not until then that MNR Global request Capital Logistics to release the goods to Saphire, by which time of course some six weeks have elapsed since Radarbeam released them to 2Trade.

05/06

29.        It appears from bank statements produced by Mr. Todd that Radarbeam received payment by instalments from CEMSA for the three deals between 26 July and 2 August and Radarbeam paid Saphire in instalments between 26 July and 14 August.

06/06

30.        Again Radarbeam’s bank statements show CEMSA having paid Radarbeam for deals 10 and 11 in one single payment on 14 August.  Radarbeam is shown as paying Saphire on the same day but leaving £2,418,000 still unpaid.

 

31.        At the commencement of these deals Radarbeam, Sahpire, 2Trade and CEMSA all banked with the FCIB.  Mr. Todd’s explanation for banking with them was speed and ease of access and electronic banking.  Mr. Todd then opened an account with the International Credit Bank (ICB).  Mr. Todd had said initially this account had been opened at the beginning of 2006 at much the same time as the FCIB account.  In fact documentation showed it to have been opened on 23 June 2006.  His explanation for opening the account was that a number of his customers, although he could not remember any specifically, had had accounts there in the past so he thought he would have one as well.

32.        Mr. Kinnear had carried out an analysis of the banking arrangements of the major players in the chains and we reproduce below the schedule which he produced, showing how and when they had all opened accounts with ICB.

Account Number	Trader Name	Who Are They?	Opening Date	Page Ref
1054601000	Glasgow Data	Supplier to Saphire Deals 7-11, Purchase from BCC Deals 10-11		4347
1054601026	Trimex Trading	Purchase from BCC, checked with Redhill by Saphire (1806)		4361
1054601036	Bristol Cash and Carry (BCC)	Contra trader, but from Flaxley and Sinderby, sell to AIDU, Glasgow and Trimax	22nd June 06	4344
1054601062	CEMSA	Radarbeam customer deals 7-11	22nd June 06	2695, 3665
1054601063	Flaxley	Supplier to BCC, in August razor blade deals		4344
1054601072	Kingfisher	Buffer in deal 7		2322
1054601077	Radarbeam	The Appellant	23rd June 06	2694
1054601092	Saphire	Supplier to Radarbeam in all 11 deals		2695
1054601093	Sinderby	Supplier to BCC in June / July mobile phone deals		4361
1054601123	Fonedealers	Buffer in deals 7-9		2325
1054604818	Iberica (AIDU)	Customer of BCC	Opened at latest 18\8	4369

 

33.        Mr. Todd had no explanation as to how so many traders in his chains could have come to open accounts at the same bank within such a short time period.

34.        When payment was made for the April deals, the operating accounts for all three parties (Saphire, Radarbeam and 2Trade) were with FCIB.  By the time payment was made for the May and June deals, all three parties banked with the ICB and copy ICB statements show the transfers each way going through.  Mr. Kinnear’s question to Mr. Todd was how did CEMSA know that payment now had to be made to the ICB and not the FCIB account disclosed on the introductory exchange of information?  Equally, how did Mr. Todd know that payment to Saphire was to go to the ICB and not the FCIB account which he had used previously.  Mr. Todd responded that he would have faxed CEMSA and Saphire would have faxed him but he could not produce the faxes.

35.        Mr. Kinnear also referred Mr. Todd to his FCIB account which showed a credit of £410,000 on 11 August 2006, £400,000 being paid out to Saphire on 14 August.  Asked where the payment in came from, Mr. Todd said from his ICICI account.  This was not however supported by any ICICI statements which we saw.  Mr. Todd said he thought he had another account with ICICI, a fixed deposit account.  In addition he claimed to have a £420,000 balance stuck in the FCIB.

Mr. Todd’s evidence and his documentation

36.        Mr. Todd’s business life began in his family’s car dealership business which sold new and used cars within several dealerships.  He rose from trainee to general manager within three years.  By the age of 25, Mr. Todd wanted to branch out on his own although he wasn’t exactly sure in which direction.  He just knew he felt ready to trade in his own right.  He rejected the idea of opening up a car dealership as he knew it would be morally wrong to set up in competition with his family.  Mr. Todd developed an interest in mobile phones through a friend, Michael Steventon, who was director of a company selling mobile phone contracts to businesses.  As cars were however what Mr. Todd knew about he decided to set up a company that traded in cars and mobile phones.  His eventual aim was to open a mobile phone retail shop but at least initially his income would need to be supplemented by the car business and his original decision was to trade in used cars, hence his VAT registration.  That this trade did take place was documented by invoices for the sale of used cars.  Mr. Todd denied any suggestion that he was circumventing the Commissioners’ pre-registration checks by registering as a car dealer – saying that in 2002 he was totally unaware that fraud was a major issue.  He also pointed to his accountant’s letter of 2 November 2002 applying to amend the registration.

37.        Mr. Todd initially took a lease on a small retail outlet, but coming from a busy car dealership dealing with large transactions he became bored with retail and began to look at wholesaling.  Through a contact in Toronto who was selling mobile phones from Hong Kong, Mr. Todd himself, in mid-2003, began to source phones in Hong Kong, which he sold in Dubai.  The documentation produced reflects a system whereby Mr. Todd would instruct his supplier to ship on hold to Dubai pending inspection by his customer in Dubai to whom the goods would then be released on payment.  Mr. Todd was introduced to a Mr. Rai of Saphire through a family friend.  Mr. Rai sent Mr. Todd an introductory package about Saphire but Mr. Todd took matters no further until a further meeting a few months later.  This was in mid-2004.  Mr. Todd had explained to Mr. Rai that he had customers in Dubai and Europe for whom he was looking for stock.  Mr. Todd told us that he never advertised and although he did not put himself on the IPT website, he accessed the site to target potential customers, to whom he would then send an introductory package setting out stock he could supply and welcoming enquiries about any other stock which he would then seek out for them.  Mr. Todd accepted that his stock list was not in effect a genuine list because he could not necessarily obtain the stock he had listed but its object was to make contact and generate enquiries.  At this stage (2004) Mr. Todd told us he had an awareness of missing trader principles and that VAT numbers could be hijacked but he did not appreciate the extent to which his suppliers could be involved in fraud and he had no idea of the identity of or even that there was a chain behind Saphire.

38.        As far as funding his business was concerned, initially when buying and selling outside the EU, Mr. Todd would ship on hold and be paid by his customer before he paid his supplier so no funding was required.  However when he began to deal within Europe, bridging was needed because Saphire would be seeking the refund of its VAT element which Mr. Todd, on three-monthly returns, could not meet so he remortgaged his house for £180,000 and periodically borrowed from friends sums in the region of between £50,000 and £100,000.  Originally Mr. Todd had given credit rather than ship on hold but gave this up after losing a court case which he had brought to seek payment of £194,000 from a Spanish customer who defaulted in payment.  Mr. Todd’s evidence about this court case was extremely vague.  He only appeared to know that he had lost it, but could give no information as to why or in what circumstances.  Until this time Mr. Todd had been operating under a set of terms and conditions of trading but believing that these offered him no protection he abandoned them and all deals thereafter were without any written terms and conditions.

39.        Mr. Todd was cross examined at length on a credit agreement dated 30 March 2006 and credit account application dated 25 May 2006 which he had signed with Saphire.  When asked why he had signed the agreement, Mr. Todd was unable to clearly remember but added that he did it “to get them off my back”.  He confirmed that in fact no limit had ever been set and he would not have had sufficient assets to give security in any event.

40.        Mr Todd was cross examined at length about his choice of supplier.  The evidence appears to show that he had dealt with various suppliers up until he began to source from Saphire.  After that he used no other, his reasoning being that he trusted them.  He went on to say that certain other companies could not supply the quantity but he did accept he had not shopped around and that he had never approached any of the authorised dealers.

41.        Deals were carried out towards the end of the month because VAT repayments would by then have been received to help fund the next round of transactions.  Radarbeam was not insured in respect of the transactions with which we were concerned.  Mr. Todd saw the only risk against which he could insure to be loss or damage occurring during transportation from freight forwarder to delivery address.  He had in the past been insured but had never had to make a claim and he felt the risk did not justify the expense.  It would cost, we were told, in the region of £30,000 to insure the stock in each of these deals.  Mr Todd accepted in cross examination that he could “now” see that all the deal chains were fraudulent and that their sole purpose was to defraud the Revenue.

The 04/06 deals and Radarbeam’s supporting documentation

42.        We analysed in detail the supporting documentation in respect of the 04/06 deals but the documentation for the remaining deals was very much the same.  Mr. Todd was unsure why what, on the face of it, was in effect a single sale of 30,000 mobile phones supplied by Saphire, through Radarbeam to 2Trade was broken into six deals.  His understanding was that it was easier for the freight forwarders to process and to handle the stock in smaller units.  The first time Mr. Todd had dealt with 2Trade had been in March 2006.

43.        Before the 04/06 deals could be finalised, Mr. Todd told us there would be telephone, fax and email exchanges identifying what 2Trade required and whether Mr. Todd could source it.  Price would be negotiated and agreed and once all this was in place a purchase order would be faxed from 2Trade to Radarbeam.  The purchase order, dated 26 April, states payment terms to be “one hundred percent TT after inspection and satisfactory by 2Trade BVBA.  Goods released immediately upon receipt of full payment”.  The corresponding invoice was also produced and we saw a CMR confirming export and an Inspection Report also dated 26 April generated by the freight forwarder, Capital Logistics.  The Report describes the goods as being in the warehouse; a 100% box check having been carried out; there were no IMEI scans done; 5,000 phones were inspected; there were no customs stamps and no cutout (which would have indicated the phones had been examined before by customs and were merely doing a circuit); carton condition was good; product box condition was good and the stock appeared new.  There were 21 pallets, matching the number of pallets on the CMR.  Capital then invoice Radarbeam for warehousing, inspection and shipping, again dated 26 April.  Radarbeam fax to 2Trade a Customer Declaration to be completed and faxed back.  Mr. Todd told us that he would expect this Declaration to be faxed back to him before the deal could continue, although in this case the Declaration does not make this clear.  The Declaration was dated 26 April in its header but the date of completion appears to have been 27 April.  The Declaration certified that 2Trade were not intentionally selling the goods on to a customer at a lower price; the company they were being sold to was registered for VAT; they had carried out all reasonable due diligence checks and had all relevant company documentation in place and that they would purchase the goods at the agreed price on the proviso that the goods are in the condition stated and pass a 100% inspection and IMEI check.  The form was signed on behalf of 2Trade and returned.  It should be noted here that although 2Trade were certifying an IMEI check, it appears that none had been carried out.  Even though this form was dated 27 April, on 26 April, Radarbeam sent a fax to Capital Logistics requesting them to ship, on hold, the stock from all April deals (1/6) to ML & Co. BV in the Netherlands, a freight forwarder designated by 2Trade.  A further document entitled “Release Instructions” is dated 25 May and is sent by Radarbeam to Capital Logistics and presumably post-dates receipt of payment.  This instructs Capital Logistics to release the phones which they had shipped on hold to 2Trade.

44.        We were then referred to a form headed “Acceptance of Stock”.  This form was a Radarbeam-generated form, signed by Mr. Todd’s employee Mr. Kooner, and was dated 25 May.  It requests 2Trade to confirm acceptance of the stock and to give the details of 2Trade’s bank account out of which payment had been made.  It had been returned, signed by 2Trade giving their FCIB account number.  Significant in this form was that the header, dated 23 May, is addressed to Hyacint at 2Trade, Hyacint being Mr. Todd’s contact there.  The body of the letter however reads “Dear Maria”, who was Mr. Todd’s contact with CEMSA.  Mr. Kinnear put the discrepancy to Mr. Todd in cross-examination.  Mr. Todd first explained it away by saying that the letter was a standard format letter which would be edited deal-by-deal and Mr. Kooner had clearly forgotten to edit it.  However, Mr. Todd had told us in evidence in chief that he had never dealt with CEMSA before the 25 May deals so he should not have had on his system an acceptance of stock letter in any form addressed to Maria as such a form would necessarily only go out on the conclusion of a deal.  When this was pointed out, Mr. Todd said that it might have been a different Maria although he couldn’t recall dealing with any other.  Mr. Todd was then referred to an invoice addressed to CEMSA dated 30 March 2006 reflecting a deal in March to the value of £2.19 million, thus contradicting Mr. Todd’s evidence that he had not traded with CEMSA until May.  Mr. Todd said that he had forgotten about this deal and had thought that it was a 2Trade deal.

45.        We were referred to a Radarbeam-generated document headed “Checklist”.  We were told by Mr. Todd that this was an internal document serving as a reminder of everything that needed to be done in relation to the individual deals.  The reference at the head of the document is Saphire – Radarbeam and Radarbeam – 2Trade and is marked as referring to all six of the April deals.  The first section is headed “Client Profiles” and refers to all the verification checks that should be done on customer and supplier, such as credit checks, trade references, site visits and VAT number verifications.  This section has not been completed.  The next section is headed “Transaction Documents File”.  It lists all the documents one would expect to see in a transaction with a space for a tick alongside those which were in place.  The usual documents were ticked including for example purchase and sales orders, invoices, instructions to the freight forwarders etc.  The significant feature is that also ticked is “Inspection report: are goods genuine?” and “IMEI number duplication check report”.  There is no evidence upon which Radarbeam could have ticked the genuineness of the goods in question and an IMEI numbers check, although ticked, was not carried out.

46.        We were then referred to the corresponding documentation between Radarbeam and Saphire.  We saw the purchase order from Radarbeam to Saphire which merely stated “Nokia 8800 sim free – 5000”.  It contained no specification as to colour, keyboard language, software or type of charger.  Mr. Todd explained that this was unnecessary because he would already have discussed with Mr. Rai who would, from experience, know exactly what Mr. Todd wanted.  The brevity of this purchase order contrasts to that of 2Trade to Radarbeam which sets out their requirements far more precisely.  The invoice from Saphire to Radarbeam requested payment into a Bank of Ireland account although payment was in fact made into an FCIB account, Mr. Todd telling us he would have been told by Mr. Rai that that was how it should be done.  We then saw a Supplier Declaration in very similar format to the Customer Declaration.

47.        In evidence in chief, Mr. Todd said he was not concerned about delay in payment as the stock had been shipped on hold and if he wasn’t paid he would merely bring it back.  Mr. Todd was questioned about the delay in payment in each of the periods involved, which was quite significant by the time of the June deals.  Mr. Todd having initially said that he was not concerned, did concede in cross examination that he was “worried sick”.  His reaction of lack of concern is also somewhat at odds with paragraph 120 of his written statement, which reads “I didn’t want to risk having stock sat in a foreign warehouse that I couldn’t sell quickly and may have to bring back to the UK.  My experience tells me that the price of mobile phones can fluctuate quickly, for example if a new model is released onto the market.”  Mr. Todd accepted that mobile phone prices generally fell and indeed this is evidenced by the prices of Nokia 8800s, which were £438 per unit in the March deal with CEMSA but only £403 in the April deals in 2Trade. 

48.        Delay in payment is also relevant to when the title to the goods passes, something Mr. Todd would be extremely uncertain about.  As between Saphire and Radarbeam, Mr. Todd’s first response was that title passed to Radarbeam when Radarbeam paid for the goods.  When Mr. Kinnear pointed out that if that were the case, then in all eleven deals, Radarbeam had shipped out to the Netherlands and France goods owned by Saphire, Mr. Todd then said that he supposed that once Radarbeam had been invoiced, Radarbeam would own the stock because “they trusted me to pay them”.  Mr. Todd said payment was generally able to be made within a week, something not borne out by the delays in payment in these three months.  The effect of Mr. Todd’s understanding of the arrangement would be that Radarbeam would be the owner of goods worth millions of pounds sitting in European freight forwarders’ warehouses chosen by 2Trade in deals 1 to 6 and CEMSA in deals 7 to 11.  Mr. Todd knew nothing of these warehouses and had carried out no due diligence checks on them.  There was no guarantee of how long the goods would be there for.  The goods were not insured by Mr. Todd and he had made no enquiries to ensure that they were insured in the foreign warehouse.

49.        We did not go in detail through the documentation relating to the May and June deals which was broadly similar, but our attention was drawn by Mr. Kinnear to correspondence with 1^st Freight in 06/06 in which Mr. Todd requested an inspection of the goods.  The inspection request was identical in wording in each of the three months.  There should however have been a difference in the June correspondence because in this month, Mr. Todd was requesting IMEI 10% inspection.  This was not indicated in the inspection request and despite it being a time consuming exercise it was not referred to on the invoice and the amount invoiced was identical.  Mr. Todd thought that he may have made a separate email request and been invoiced separately but as he said he was only guessing.

50.        We have already referred (paragraphs 29 and 30) to the chronology of payments for the 05 and 06 periods.  Against this background, Mr. Todd, owed £11 million by CEMSA for the May deals, entered into the June deals worth a further £8.8 million.  By the beginning of July he therefore had phones to the value of £20 million uninsured in a French warehouse which he had never visited.

Due diligence

51.        As the verification of VAT registration numbers is a crucial part of due diligence, we just set out here the three basic types of check which a trader can make.  The most expansive check, and that favoured by the Commissioners, is a check to the Redhill VAT office.  Redhill will require the name, address and bankers of the entity being searched against as well as their VAT number and they will double-check that all elements match.  Application for a Redhill check has to be in some form of writing and response is not instantaneous.  The Commissioners use Redhill checks as an information gathering exercise because it tells them who is trading with whom as well as highlighting any discrepancies in information provided by the checker against that which they hold.  A second type of check is a Europa check, which is a check on the European Commission website.  This tells the enquirer whether the registration number is valid at the date of enquiry but does not give any indication of the entity to whom the number is registered.  Thirdly, a call can be made to the Commissioners’ helpline.  The caller will give the name of the entity against whom he is searching and the registered VAT number which he has and will be told whether the two match.  Response to the Europa and helpline checks are both instantaneous.

52.        Mr. Todd had been made aware by the Commissioners from day one of the need for due diligence.  Initially he maintained that he did not understand the full extent of what was needed but the impression we get is by the time that these deals were carried out he was well aware of the extent of the fraud within his area of operation and the need for good due diligence.  This is borne out at least in part by the questions raised on both the customer and supplier declarations and his own internal checklist.

 

Due diligence - Saphire

53.        As we have already said, Mr. Todd met Mr. Rai at a family gathering.  He put this at the early part of 2003 but said that he took no action to further any business relationship until later that year.  He held two or three meetings at Saphire’s premises and later at his own, which he put down to Mr. Rai carrying out his own due diligence on Radarbeam.  We were referred to an extensive fax from Saphire dated 3 June 2004.  The fax was accompanied by a letter of introduction, VAT registration certificate, certificate of incorporation, banking details and a completed Radarbeam trade application form and a trade application form in blank for Radarbeam to complete.  Mr. Todd returned the trading application form and supplied his own similar details back to Mr. Rai.  Mr. Todd’s first deal with Saphire was on 30 September 2004 and on 29 September, Mr. Todd applied to the Commissioners for a Redhill check.  This is evidenced by a copy of  Mr. Todd’s fax to the Commissioners.  Mr. Todd told us that as he could not get a reply in time he did not wait for their response but telephoned the Commissioners’ advice line, which confirmed the VAT number was valid.  On 31 May 2005, again evidenced by fax, was a further request to Redhill for verification of the Saphire number.  HMRC requested additional information which was forwarded and verification received on 14 June.

54.        In mid-2005, Mr. Todd instructed a Frazer Holmes, an ex-HMRC VAT officer to provide due diligence advice.  Mr. Todd first met Mr. Holmes at Saphire’s premises because Mr. Holmes also advised Saphire on due diligence and he came highly recommended by Mr. Rai.  Mr. Holmes explained how MTIC fraud worked and advised Mr. Todd on the importance of setting up the proper procedures, including site visits to suppliers.  Mr. Todd therefore instructed Mr. Holmes to carry out an inspection on Saphire on behalf of Radarbeam.  The purpose of this was twofold.  First, Mr. Todd would be able to check how much due diligence Saphire carried out on its own suppliers and secondly it would provide a format to Mr. Todd which he could then adopt when carrying out his own visits to his customers.  Mr. Holmes’ report is dated 5 September 2005.  The “Site Visit Report” lists a number of items such as name of business, address of premises, person seen and their status and description of premises.  It then sets out the due diligence checks carried out by that business.  In Saphire’s case it lists:

1.     VAT consultant employed

2.     Credit and Companies House checks

3.     VAT number verification each deal

4.     Supplier and customer declarations

5.     Site visits

6.     Inspection of stock

7.     IMEI checks

8.     Export evidence and bank records

9.     No third-party payments

10.  Monthly VAT visits

The report highlights that IMEI numbers should be shared with Radarbeam and recommends an improvement in respect of such information.  It lists satisfactory trade references as having been supplied, genuine stock and credible prices and recommends Saphire as someone with whom trade could be carried out.

55.        Finally in relation to Saphire, a further Redhill VAT verification check was carried out on 14 June 2005.  Mr. Todd also us that he checked on the day of each deal with the Commissioners’ advice centre although this was not evidenced.

Due diligence – 2Trade

56.        The first time Mr. Todd dealt with 2Trade had been in March 2006.  2Trade was a major advertiser on the IPT and as such had been targeted by Mr. Todd in the way previously described.  When they eventually responded to Radarbeam, it was by way of an introductory fax dated 8 February which enclosed their introduction pack – including VAT and company registration certificates which, as they were not in English, Mr. Todd had to email back on 22 February asking what they were.  On 23/24 February, Mr. Todd visited 2Trade’s premises in Brussels where he met its director, Hyacint.  Mr. Todd completed a visit report in the format designed by Mr. Holmes.  The report describes 2Trade as having been in business for some six years, three years at its current address, its stock level was put at “40,000” although in evidence, Mr. Todd could not recall precisely what that figure referred to.  The due diligence checks carried out by 2Trade are listed as “local checks, VAT checks and address checks”.  Mr. Todd had ticked that those checks were satisfactory, that the prices quoted for stock by the business were credible and that the business dealt with genuine stock.  Two trade referees are listed, these apparently both being the addresses of freight forwarders.  The question asking whether or not these references have been obtained is left blank and indeed Mr. Todd could not recall whether or not he had ever followed the references up but thought he would have given them a call.  The question as to whether he should deal with the business is left blank.  In cross-examination, Mr. Todd accepted that he could not remember what, if anything, he had been shown which could lead him to the conclusion that the prices were credible and the stock genuine.  Mr. Todd also produced some photographs which he had taken: one of the outside of an unnamed building, one of a nameplate and several of an empty office.

57.        Mr. Todd told us that he verified the VAT registration number with the National Helpline and confirmed the address he was visiting matched the address on the paperwork.  He did not need to carry out any credit checks, he said, because he had no intention of giving credit.  The stock would be shipped out on hold pending an inspection by 2Trade and would only be released to them on payment.

Due diligence - CEMSA

58.        Mr. Todd told us he first became aware of CEMSA in November 2005 and began targeting them with his lists of stock.  They did not respond until March 2006 when they returned a trading application, giving their VAT and corporate registration numbers and banking information.  They also sent a covering letter setting out a vast array of goods in which they themselves traded and offering themselves up as suppliers to Radarbeam, something which Mr. Todd told us he was not interested in.  Mr. Todd carried out a Europa VAT verification which came back positive and then arranged to visit.  In his witness statement, Mr. Todd puts his first deal with CEMSA as being on 25 May 2006, but as we have already pointed out there was in fact the earlier deal in March.  The visit therefore did not pre-date the first of his dealings and his first dealings with CEMSA were carried out without the benefit of the site visit.

59.        Mr. Todd’s site visit report to CEMSA was dated 20 April 2006 but this was, we were told, an error and should have read 28 April.  Mr. Todd did not realise the incorrect date, he told us, until he checked his credit card statements.  After extensive cross-examination about the true date of the visit which Mr. Todd had originally said he coupled with a holiday in Marbella for his wife’s birthday, he volunteered that in fact 20 April might have been the correct date after all and that he had liked what he saw so much that he returned the following week with the rest of the family for his wife’s birthday.

60.        The site visit report, again in the same format designed by Mr. Holmes, described the person seen as Maria, the account manager.  Stock levels were put at 3/4k but again, Mr. Todd could not remember to what this referred.  The due diligence checks carried out by CEMSA were listed as credit checks and site visit.  Again Mr. Todd indicated on the report that the prices quoted for the stock were credible and the stock was genuine.  In reference to references, Mr. Todd had replied that the business could provide satisfactory references and he had obtained them but alongside this wrote “to follow”.  As with 2Trade, he could not remember what if anything he had seen to satisfy himself as to the credible pricing or the genuineness of the stock.  He could not remember whether he had taken up the references.  He provided some photographs of an unknown lady sitting at an office desk and the outside of some premises with CEMSA written on a nameplate.

61.        Later on during the course of the investigation, Mrs. Mee asked for further information regarding due diligence checks and Mr. Todd provided her on 30 August 2007 with three reports which he had obtained from a company called Vetting Services.  The report on Saphire was dated August 2006 and showed current working capital of £1 to £1.5 million which meant that Saphire would not be able to pay its suppliers until paid by Radarbeam.  Its credit rating had been 51 on 13 May but 78 on 26 June.  The report referred to the fact that Saphire had originally carried out 100% IMEI checks, had scaled this down to 10% but were now reverting back to 100%.  The report for 2Trade was dated 4 September 2006, the current credit rating was 7 and credit to the value of 247,000 Euros was recommended.  The report on CEMSA was dated 24 August and showed a credit rating of 3 / high risk.

Mrs. Mee’s investigation

62.        Mrs. Mee was initially tasked with carrying out an extended verification into the April and May returns and later the June return.  We need not go into the course of her investigation in great detail because most of the matters into which she looked have already been covered earlier in this decision.  We will however set out points not previously covered and in particular look at IMEI numbers.  Mrs. Mee made initial contact with Mr. Todd by telephone on 14 June asking to see him and advising him of what she would need to see including supporting documentation to his returns; due diligence information and IMEI numbers.

63.        Her first meeting with him was on 26 June when there was discussion of IMEI numbers and Mr. Todd told Mrs. Mee that he did not obtain them. Mrs. Mee expressed her concern that without this means of identification of stock, problems could arise in the event of defective or returned stock and more importantly how would he know that his stock was not counterfeit.  Mr. Todd’s response was that he relied on his freight forwarders’ inspection reports and any problem he had he would pass back to his suppliers.  Also at this meeting Mrs. Mee asked if Mr. Todd could print out an up-to-date balance from his FCIB account but this could not be done because although he could remember his password he could not remember his user ID.  It was noted by Mr. Kinnear that although there was an extensive discussion about banking arrangements at this meeting which took place only days after Mr. Todd had opened his ICB account, Mr. Todd did not mention this account to Mrs. Mee.  The meeting concluded with Mr. Todd telling Mrs. Mee that he had done no deals in June due to cashflow problems.  Mr. Todd was later to explain in his evidence that although he did in fact carry out the June deals only days later, he felt able to do this because he felt great confidence that repayments would not be long coming now that Mrs. Mee was on the case.

IMEI checks

64.        Mr. Todd carried out no IMEI checks until the June deals, despite being advised to do so by Mrs. Mee and indeed by Mr. Holmes.  His explanation was that he didn’t need them although this statement is somewhat at odds with the fact that they are included in his “checklist” document and as we pointed out in paragraph 45, he had wrongly ticked that they had been done.  Some four days after the June visit, Mr. Todd carried out his June deals and did in fact arrange for a 10% IMEI check.  The check was done by the freight forwarders, First Freight, although Mr. Todd accepted in evidence that he had no idea how they had come by the numbers and he assumed that it was by scanning.  The numbers he obtained were sent back to Mrs. Mee who put them through the Commissioners NEMESIS database.  The working of the database was explained to us by Mr. Stone as was the individual and discrete registration number which each mobile phone would bear.  28,000 phones were dealt with in the June deals and 2,800 numbers were therefore provided to Mrs. Mee.  None of these numbers should have appeared on the NEMESIS database as these were a batch of brand new phones.  However hits were recorded for a handful, including three which predated the June deals.  Most of the remaining numbers which scored hits were dated some time between the end of June and when payment was made when presumably the phones would still have been stored in the freight forwarder’s warehouse pending payment and release.  Although we did not have any documentary evidence of release of the goods from the freight forwarders for the June deals, it was Mr. Todd’s evidence, supported by documentary evidence for the earlier deals, that he would not authorise release until paid.

65.        Mr. Stone was asked about the extended verification programme launched by the Commissioners in April 2006.  He spoke of some 1,600 brokers being subjected to extended verification of which 1,500 were found to have transaction chains connected to the fraud.  Mr. Stone accepted that “there may also be features in those (the 100) cases which are not dissimilar to the features in the 1,500 cases”.  Speaking of the characteristics of fraud, Mr. Stone said that there were legitimate and bona fide traders who used freight forwarders.  Both Mr. Stone and Mrs. Mee accepted that back-to-back trading could also be legitimate.  Mr. Stone was also asked, as this was relevant to later submissions to be made by Mr. Climie, about the barring of repayments to parties in a transaction chain which had been found to be connected with fraud.  Mr. Stone concluded that subject to the issues of multiple recovery and unjust enrichment, “we would be able to deny the input tax of anybody in the transaction chain we believed was party to the fraud”. 

The contra-trader and the contra-trading chain

The trading background of BCC

66.        BCC originally traded as Famecraft Ltd.  The company was incorporated on 2 April 2004 with the sole director and shareholder being a Mr. Paul Singh.  Famecraft registered for VAT with effect from 14 June 2004.  The business activity was described as letting of owned properties with an estimated turnover of £60,000.  The basis of the registration was that Famecraft had opted to tax a property in Selby, North Yorkshire and intended to charge rent.  Having been advised by Famecraft’s lawyers that the completion of the purchase of the property was imminent, the Commissioners allowed the election to waive exemption.  On 23 June 2005, the company advised the Commissioners that it was now trading as Bristol Cash And Carry.  Famecraft had been allocated quarterly VAT periods ending February, May, August and November.  On 3 February 2006, the company applied to go onto monthly returns on the basis that it expected to export to customers in Spain and Tenerife soft drinks and toiletries which would result in monthly refunds.  This application was refused.  The first three returns submitted by BCC for August 2004, November 2004 and February 2005 all declared no trading.  The return for May 2005 was a repayment claim in the sum of £10,424 but again no trading had been declared.  The 05/05 repayment claim was referred for verification and Mr. Singh was visited on 25 July 2005.  Mr Singh advised the officer that the purchase of the property in Selby had not happened, hence the nil trading returns up to 02/05.  During the period 05/05, the company had received directors’ loans in order to purchase racking for the warehouse and it was expected that sales of beer, wine and soft drinks to pubs and clubs would take place in the next VAT period.  Mr. Singh told the officer that there was no actual launch date but would have expected there to be sales on the 08/05 return.

67.        The 08/05 return showed sales of £76,362 and was a net repayment claim of £68,393.  The reclaim was met in full after the company’s accountant confirmed that the reclaim had arisen from the purchase of stock.

68.        The return for 11/05 showed sales of £410,554 and was a net repayment claim of £42,915.  This return was referred for verification and officers visited the premises on 10 January 2006 where they met a Mr. Jeal who introduced himself as the bookkeeper.  One was the same officer who had visited previously, Mrs. Tricia Morgan-Davies and she noted that since the last visit, business was now “up and running and warehouse is bursting with stock”.  Mr. Jeal explained that the level of purchases throughout three consecutive returns was due to mistakes having been made but he was expecting that Christmas sales would generate a payment on the next return.  He was still trading locally but Mr. Jeal told Mrs. Morgan-Davies that there was a possibility of supplying a customer in Tenerife.  The supply was going to be to ex-pats and Mrs. Morgan-Davies explained to him the special rules for this.  Her visit concludes with the words “I am concerned at level of claims and intend to place inhibit on file so any future claims can be monitored”.  She then passed the claim for repayment.

69.        The return for 02/06 was again completed by Mr. Jeal and it showed sales of £4,400,718 and purchases of £4,125,997.  The return revealed sales of £1,261,958 to the EEC.  This return also was a net repayment claim in the sum of £172,898.  Officer Morgan-Davies again contacted the company to verify the claim.  She was told that the claim related to the sales of razor blades to a Spanish commercial customer via France.  She noted that evidence had been received to support the sale and commercial evidence of shipping.  She also obtained a sample of a supplier invoice from a cash and carry in Northampton.  Her note concludes that “no reason to disallow VAT at present so claim must be released”.

70.        Mrs. Morgan-Davies discussed the case with the Bristol MTIC team.  She had been concerned at the change in trading from a cash and carry organisation selling only in the UK to one who was also trading in the wholesale of razor blades to a Spanish customer.  A visit was arranged on 25 April 2006.  Mrs. Morgan-Davies and Officer Jenner met Mr. Jeal who advised that the trade in exports of Gillette razor blades had commenced in February 2006.  All the goods had been sold to one Spanish customer, CEMSA, who had had them delivered to an address in France.  Razor blades had also been supplied to some UK customers.  All blades had been sourced from one UK supplier, Flaxley Ltd.  BCC now banked with FCIB and Mr. Jeal said that BCC only paid Flaxley when they received payment from their customer.  Officers added the following comment after this visit, “found that there was evidence in trader’s records plus discussion with company accountant to indicate that this was a typical MTIC setup.  Bank used was Curacao plus others, large value trade going to other buffers as well as brokering to Spain via France”.

71.        Officers from the Bristol MTIC team visited Mr. Singh on 27 April 2006.  They explained at length the dangers in his form of trading and issued to him Notice 726.  Mr. Singh was advised that some of his razor blades could become involved in a carousel fraud and Mr. Singh was specifically referred to all the due diligence checks which he should be carrying out.  Mr. Singh was asked why they had chosen to bank with the FCIB, to which he replied that Flaxley, or it could have been CEMSA, said that they would pay instantly through FCIB.  The bank operated 24 / 7, there was instant transfer on production of passwords.  A further warning was given to Mr. Singh about third-party payments.  He was asked how he came by his supplies.  He said that he had contacted various suppliers on the net.  One had come back cheaper than Flaxley but could not supply the quantities.  The goods were inspected by freight forwarders.  Mr. Singh was asked how his customers were contacted to which he replied that he would contact some 40 to 50, sending out faxes of stock offers.  He had come across CEMSA some time ago when he was considering becoming a pharmaceutical wholesaler because CEMSA supplied many chemists in Spain and elsewhere and when he had the razor blades he contacted them again as they appeared to have outlets for them.  Mr. Singh had in February 2006 anticipated future sales would be 30% UK standard rated and 70% zero rated exports.

72.        A further visit took place on 4 May 2006 at which Mr. Singh wanted to discuss the compliance folders that he had set up on individual customers.  The checks made for each customer were discussed in some detail.  Jandu Textiles apparently approached BCC, having been told of them by their freight forwarders, First Freight, which was the forwarder used to ship the Gillette razor blades.  Mr. Singh said that the Jandu family were well known in the community.  They dealt in household goods and textiles and had tried to sell to BCC.  Mr. Singh had sent them a stock offer of his Gillette stock and they purchased it.  Denjon had in the past tried to sell smoke-damaged electrical goods to BCC and Mr. Singh approached them to offer them razor blades.  Denjon is a partnership but Mr. Singh told the officers that he had checked out their details at Companies House.  Dubb Fashions were based in Birmingham and were known to Mr. Singh’s family who themselves were in the clothing industry.  He made a stock offer to them.  He had done a Companies House check and found that they had filed returns for several years, although he accepted their turnover had not been shown.  Mr. Singh had offered them stock which they had bought and paid for and the goods were released on payment being cleared.  The officers, at this meeting, advised Mr. Singh at length about the importance of his due diligence checks.  He was warned not to turn a blind eye if something appeared not quite right.  He was issued with a letter dated 3 May summarising the risk factors which had been discussed.  The importance of deal logs and due diligence checks was explained and the risks indicated by third-party payments was pointed out and the various factors that indicated to the Revenue that VAT had not or would not be paid were also listed.  The factors included:

1.     The remote storage of stock – ie at a freight forwarder

2.     No apparent added value in the transaction

3.     Third-party payments being made or requested or passed on

4.     Goods being continually wholesaled and not reaching an end user

5.     Transactions in which the customer pays you before you pay your supplier

73.        The financing of BCC had been discussed during the visits on 27 April and 4 May.  Prior to commencing trading, Mr. Singh had been a director in a mortgage company.  At the meeting on 27 April, Mr. Singh told officers that in order to set up the cash and carry business he had received a loan from his uncle, Sukhwinder Singh in the sum of £300,000 in June 2005.  On the visit of 4 May 2006, Mr. Singh produced a loan agreement dated 10 April 2006 in the sum of £500,000 from Oracle General Trading FZE.  The document was not signed and Mr. Singh explained that the company was his uncle’s business.  The loan agreement scheduled twelve monthly instalments commencing on 15 May 2007 but as no inspection of banking records had been undertaken by the Bristol MTIC team it could not be ascertained if and when any moneys were received or were repaid.

An overview of BCC’s trade in razor blades

74.        BCC made its first supply of razor blades during period 02/06, the first supply being dated 13 February 2006.  The company purchased all blades from one supplier, Flaxley, to a net total value of £2,040,267.  Sales were to Davis & Dan and Amber Services in the UK and to CEMSA in Spain.  During this period BCC traded as a buffer and a broker.

75.        In period 05/06, BCC continued to trade as a buffer and a broker in Gillette razor blades.  During this period BCC had two suppliers, Flaxley and CRM Trading Ltd.  The purchases from Flaxley were to a total value of £71,466, 172 and were sold to a number of UK outlets and to CEMSA in Spain.  Purchases from CRM to a value of £1,686,847 were sold solely to CEMSA in Spain.

76.        Flaxley’s transaction log for the period February to May 2006 reveals that all goods were purchased from one supplier, Barato Wholesalers Ltd who sold to either BCC or to CRM Trading.

77.        Barato’s transaction log for the period February to May 2006 shows that all goods were purchased by them from one supplier, Leeming Distribution Ltd and sold to the one customer, Flaxley.  The purchases from CRM were also traced back through to Flaxley, Barato and Leeming Distribution.  Officers ascertained that all payments for goods purchased from Leeming were made to a third party, Avouset.

78.        It has therefore been established that all the Gillette razor blades which BCC purchased during periods 02/06 and 05/06 originated from Leeming Distribution Ltd, a defaulting trader who had its VAT registration cancelled on 13 July 2006 and had been categorised as a missing trader with a debt on file in excess of £15 million.

79.        BCC’s return for 05/06 declared outputs totalling £75,666,852 as against inputs of £73,656,683, giving a net repayment claim of £2,849,339.  As at the date of the hearing, that repayment had not been made.

The contra-trading period 08/06

80.        The return for 08/06 reveals outputs of £319,199,291 and inputs of £309,748,499.  This resulted in a net repayment claim of £4,145.74.  What BCC did during this period, in effect, was to purchase razor blades from a UK-based trader, which it exported to an EU trader, generating a substantial repayment claim.  The company however then imported mobile phones from an EU-based company, sold them on within the UK thereby generating an output tax debt to the Commissioners.  The two virtually balanced leaving the company very close to a VAT neutral position.

The deal chains

81.        The chain in razor blades begins with Barato importing into the UK from a Portuguese-based company, Levalor Trading.  This transaction would be zero-rated.  Barato sold on to Flaxley, thus incurring an output tax liability to the Commissioners on which Barato defaulted, thus giving rise to the fraudulent tax loss in this chain.  Flaxley sold on to BCC who then made a zero-rated export sale to a Spanish Company, AIDU, thus entitling BCC to reclaim the tax which it had paid to Flaxley.

82.        The goods were stored at Croydon Cash and Carry and shipped, on behalf of AIDU, to GR Distribution in France.  Officers made an unannounced visit to Croydon Cash and Carry on 10 July where they met a Mr. Gala who described himself as the company’s accountant.  The visit had been triggered by the appearance on a mobile phone website for the first time of Croydon Cash and Carry advertising their services as a freight forwarder.  Mr. Gala told officers that the director had decided to enter into the freight forwarding business following the collapse of his cash and carry business.  No goods had yet been handled and the warehouse was still being fitted out.  No insurance cover was yet in place.  In the warehouse area an employee was shrink wrapping empty boxes in an attempt, officers were told, to look busy.  Further visits to the premises were made on 28 July and 21 September.  On both occasions the premises were shut and shuttered and on the second occasion a director of a neighbouring business told the officers he parked his car across the entrance to Croydon Cash and Carry to deter flytippers.  He further said he had been trading there since 14 August and the only activity he noticed was a young man arriving to collect post and then leaving.

83.        Mr. Kinnear described the flow of the goods in both the clean and dirty chains by way of a spreadsheet.  The admissibility of this document was later to be the subject of submission by Mr. Climie.  At this stage we should therefore make four comments with regard to it.  First the spreadsheet was not produced until a few days before of the hearing.  Secondly, none of the raw material upon which it was based was put into evidence.  Thirdly, the author of the sheet was not called to give evidence.  It had, we were told, been prepared by a colleague of Mrs. Mee who sits next to her and she had “been through it” with them.  Fourth, we were told by Mrs. Okolo that in fact the chart was not complete and there were further transactions involving further companies which did not appear on it.  The mobile phone chain begins with a Portuguese company, Scorpion Electronics, selling within the EU to Sinderby Ltd, based in Cyprus.  Sinderby sells to BCC, a zero-rated purchase for BCC, who sell to two UK traders – Glasgow Data Ltd and Trimax Trading International Ltd.  These two transactions give rise to the output tax debt to the Commissioners which is set against the input tax claim in the razor blade chain.  The goods then, in Mr. Kinnear’s phrase, “fan out”, Glasgow Data and Trimax between them selling to some 25 different outlets (including Glasgow Data to Saphire).  A few of these companies sell on within the UK (including Saphire to Radarbeam), the others selling directly to two EU-based companies, CEMSA and a Spanish company the name of which we abbreviate to Alimed.  Those goods which have been sold within the UK are now also sold on to CEMSA and Alimed.  The shape of the chain therefore sees all the goods originating from Scorpion, through Sinderby, to BCC, to Glasgow Data and Trimex; fanning out and then all coming back together again to Alimed and CEMSA.  One other significant feature in this chain is that Saphire, as well as selling to Radarbeam, who sold to CEMSA, also sell direct to CEMSA.

BCC’s due diligence checks

84.        By letter dated 10 October 2006, the Commissioners requested Mr. Singh to provide them with details of his insurance cover; import entry certificates for the goods acquired from Cyprus and copies of the due diligence checks carried out on suppliers and customers.  In reply, by letter dated 6 November, Mr. Singh stated “insurance is dealt with by the freight companies.  We do not take out separate insurance.  Liability for the goods lies with the freight company”.  He went on to say that Sinderby had sorted out all arrangements for transportation and import entry certificates would be with them.

85.        With regard to the due diligence documentation, there was no evidence produced that any checks were ever carried out in respect of Glasgow Data, Trimax, Flaxley, Levavalor, Croydon Cash and Carry or First Freight.  With regard to Sinderby what was produced was:-

1.     A copy of a six-month lease dated 27 June 2006 (it is not known whether BCC in fact saw this document before entering into any deals)

2.     A telephone bill for August 2006 (post-dates the deals)

3.     An internal office photograph which could be anywhere; photos of an external building which could be anywhere and a nameplate displaying “Sinderby Enterprises Ltd”

4.     A certificate of incorporation

5.     A certificate of VAT registration

6.     Sinderby letterheaded paper

7.     A document written in Greek

86.        The documentation regarding AIDU consisted of:

1.     Indistinct copy photographs of offices

2.     A company profile

3.     Copy of an ID card

4.     A Dunn & Bradstreet check dated 29 September 2006 (post-dating the event).  Interestingly the risk assessment in the report states that credit would not be recommended

5.     A document in Spanish

6.     Europa VAT registration number checks

87.        With regard to the verification of VAT numbers, in the letter dated 8 November, Mr. Singh referred to a telephone conversation with Redhill.

IMEI checks

88.        The Commissioners requested details of the IMEI numbers for the mobile phones purchased and sold by BCC.  By email dated 25 September, Mr. Jeal replied that the IMEI numbers were kept at First Freight but by email dated 27 February he supplied a set of the numbers to officers.  The numbers were checked on the NEMESIS database.  The numbers provided in respect of invoices 5188 and 5189, both dated 28 June 2006, did not match the models described in the invoices.  The invoices stated the sales to be of 10,000 Nokia 8800s whereas the numbers provided were in respect of Nokia 3220 models.  It was also noted that computer file of IMEI numbers provided was in zip format and that when the compressed file was unzipped it also contained separate files of IMEI numbers for a raft of other companies.  These included, as well as Radarbeam, Glasgow Data, Jandu, Statebridge, Trimax, Get Mobile, Solutions Centre, Active Infotech, Nutro, Pierhead, Lynen, JK Trading, Saphire, Landcom, Face Off, Maximum Networks, ie the majority of all the traders in the clean supply chain.  One file bore the note “W810i – 2800 rader.xls”.  Mr. Kinnear was to submit this had to refer to the IMEI check requested on Radarbeam’s purchase of 28,000 W810i phones.

The Commissioners’ view of BCC

89.        It was Mrs. Okolo’s view that BCC was involved in a scheme to defraud the Revenue.  She believed that the company had knowingly engineered its purchases and supplies into two distinct chains.  Stock was purchased and sold on the same day, none ever being returned as faulty or damaged.  The stock supplied tallied precisely with the stock purchased.  There was no evidence that BCC held any form of insurance cover for the millions of pounds’ worth of goods with which they were dealing.  The due diligence checks were totally inadequate and were done, Mrs. Okolo believes, with the sole objective of demonstrating compliance to the Commissioners because in reality BCC knew that its customers and suppliers would not let it down and therefore insurance cover was not necessary.

CASE LAW

90.        We refer in this decision to the following principal cases:

·       Kittel v Belgium and Belgium v Recolta Recycling SPRL [2008] STC 1537

·       Molilx Ltd (In Administration) v HMRC [2010] EWCA Civ 517

·       Red 12 Trading Ltd v HMRC [2009] EWHC 2563(Ch)

·       Megtian Ltd v HMRC [2010] EWHC 18(Ch)

THE LAW

91.        We would respectfully adopt from the judgment of Christopher Clarke J. in Red 12 his description of how MTIC fraud works (paragraphs 2 - 10) and the legislative framework (paragraphs 12 – 13).

92.        The right of a registered trader to reclaim his input tax has however been held by the ECJ to be restricted in circumstances where there has been fraud.  The extent of this restriction is set out in the principal case of Kittel at paragraphs 56 – 59 and 61:

“56. In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.

57. That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.

58. In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.

59. Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’.

[…]

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

93.        The principle to emerge from Kittel is thus that if a trader knew or should have known that the transaction in which he was engaging was connected with the fraudulent evasion of VAT he will lose his entitlement to deduct.  How this test should be interpreted has been the subject of a number of tribunal and High Court cases and has now been definitively considered by the Court of Appeal in Mobilx, Moses L J giving the judgment.  At paragraphs 47, 59 and 60, Moses L J states:

“47. Accordingly, the objective criteria which form the basis of concepts used in the Sixth Directive form the basis of the concepts which limit the scope of VAT and the right to deduce under ss. 1, 4 and 24 of the 1994 Act.  Applying the principle in Kittel, the objective criteria are not met where a taxable person knew or should have known that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT.  That principle merely requires consideration of whether the objective criteria relevant to those provisions of the VAT Act 1994 are met.  It does not required the introduction of any further domestic legislation.

[…]

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.

60. The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion.  But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

94.        Our role therefore is to carry out objective consideration of the evidence before us and from that to determine (1) whether the Appellant’s eleven deals were connected to the fraudulent evasion of VAT and if so (2) did the Appellant know or should it have known that it was?

THE APPROACH TO BE TAKEN BY THE TRIBUNAL

95.        Moses L J sets out very clearly the approach which the tribunal should take in its fact-finding role.  He draws on paragraphs 109 – 111 of Christopher Clarke J in Red 12:

“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.”

96.        This approach is emphasised in paragraph 59 of Mobilx, quoted above, in its reference to “the circumstances which surround their transactions”.

97.        This approach was also taken by Briggs J in Megtian:

“In my judgment the primary facts found by the Tribunal relevant to @tomic’s knowledge were, in the aggregate, sufficient to permit the tribunal, if it thought fit, to make a finding of dishonest knowledge on the part of @tomic.  It is in this context important for an appeal court to have regard to the need to appraise the overall effect of primary facts, rather than merely their individual effect viewed separately.  As Lewison J put it in Arif v Revenue and Customs Commissioners [2006] EWHC 1262 (Ch) at paragraph 22:

“There is one other general comment that is appropriate at this stage.  It relates to the evaluation of circumstantial evidence.  Pollock CB famously likened circumstantial evidence to strands in a cord, one of which might be quite insufficient to sustain the weight, but three stranded together might be quite sufficient (R v Exall (1866) 4 F & F 922).  Thus there can be no valid criticism of a tribunal which considers that one piece of evidence, while raising a suspicion, is not enough on its own to find dishonesty; but that several such pieces of evidence, taken cumulatively, lead to that conclusion.”

98.        It is clear therefore that the approach by the tribunal should be what Mr. Kinnear termed a “collective” approach where we look at the evidence as a body or in the round.  This does not mean that we adopt a totally broad brush approach.  We still analyse for example individual features of Mr. Todd’s trading practices but we can view those features “in the aggregate”.  We can draw them together to see if patterns emerge.  We are entitled to consider the circumstantial evidence.

99.        Mr. Climie had initially advocated that we should take a more individual approach and should look at different features in isolation.  It was his submission that a collection of small points that individually are incapable of proving actual knowledge cannot logically be combined to prove such knowledge.  In the light of the Mobilx judgment,  Mr. Climie fully accepted that his approach had been overtaken but he pointed out that one danger of aggregation is that it could lead to a collection of circumstances being assessed with the benefit of hindsight whereas if they were being looked at individually they would be viewed through the eyes of the trader at the time they occurred.  Subject to this word of caution from Mr. Climie, we accept that our approach to the evidence should be a collective approach.

100.    We treat the burden of proof throughout as being upon the Commissioners and the standard of proof as being the balance of probability.

EVIDENTIAL ISSUES RAISED BY THE APPELLANT

101.    Mr. Climie raised three specific issues which taken together, he maintained, resulted in the Appellant being “ambushed” and further that the Respondents were developing their case by way of cross-examination.  Specifically he challenged the pleaded case, the admissibility into evidence of what we will call “the ICB schedule” (paragraph 32 of this decision) and the admissibility of the spreadsheet referred to in paragraph 83.  We take these individually.

102.    As far as the stated case is concerned, Mr. Climie cited paragraphs 27 and 28 of Mr. Bishopp’s decision in Powa (Jersey) Ltd v HMRC (MAN/07/1317).  Specifically Mr. Climie refers to the Commissioners’ contention during evidence and submissions that the Appellant was part of a conspiracy to cheat the Revenue and that a conspiracy existed between the Appellant’s clean chains and the BCC’s dirty chains.  As far as the allegation that the Appellant is part of a conspiracy is concerned, this is not alleged in the statement of case and we are not treating this as an issue before us.  The statement of case alleges that the Appellant knew or should have known of a fraud within its chains.  This is the case the Appellant is to meet and the one with which we deal.  As far as the conspiracy between the clean and dirty chains is concerned, this we take as a matter of terminology.  The link between the clean and dirty chains in contra-trading is clearly set out in the statement of case and it is that link that has to be shown.  To call it a “conspiracy” takes the matter no further and is not an issue which we will be addressing.  Equally the allegation that the goods did not exist was not made in the statement of case and again is not a finding which we will be making.  Other matters raised by Mr. Climie in highlighting the inadequacy of the statement of case seem to us to fall within the distinction made by Mr. Kinnear between evidence and allegation.  Banking arrangements and late payments are both matters of evidence.  We deal with the banking in the next paragraph but as far as the issue of late payment is concerned, we believe the Commissioners are perfectly entitled to raise this.  There is no reason why Mr. Todd should not have been challenged on such a fundamental aspect of his dealings.  All the documentation to which Mr. Kinnear referred Mr. Todd was contained in the documents and there was nothing there which should have taken Mr. Todd by surprise.  The matters upon which we have drawn in reaching our conclusions are all either specifically pleaded in the statement of case; made abundantly clear in the statement of case or are matters of evidence where the evidence is already contained in the documents.

103.    Mr. Climie makes a powerfully-argued case that the tribunal should disregard the ICB schedule.  He points out that it was produced only on the very last day of evidence and without any prior notice.  He maintained that not only was Mr. Todd taken by surprise in cross-examination but that he had been deprived of the right to obtain his own evidence from ICB, both in terms of time this would take and the ability to fund it.  Mr. Climie suggests that “the only possible reason for this course of conduct (the late production of the schedule) was to ensure that the Appellant had neither the time, resources nor the opportunity to formulate a response”.  We must immediately take issue on this statement and this involves looking at how the schedule came into being.  It was with apology that Mr. Kinnear produced it on the final day.  He had drawn it up himself when he saw a link between the banking arrangements of all the various parties, a link which does not previously appear to have been drawn by the Respondents.  This is the reason for its late production, not in order to hijack the Appellant.  The important feature of this document, to us, is that it draws on nothing that was outside the bundles of documents.  All Mr. Kinnear has done is to collate information and evidence which was already there.  He has drawn it together in a certain manner and is inviting the tribunal to draw certain inferences from it.  There is no reason at all why Mr. Todd should not have been questioned on his banking arrangements and why he changed to the ICB.  This could have been asked in any event without any reference to the schedule.

104.    There are in effect two inferences which Mr. Kinnear is inviting the tribunal to draw, although they are connected.  The first inference is the dating of the opening of the accounts.  Mr. Kinnear maintains that given the proximity of the account numbers and the opening dates which are known, the accounts were all opened within a very short space of time.  This appears to us to be a perfectly reasonable conclusion to draw and one which we accept.  He goes on to submit that for all these traders to have moved en masse from FCIB to ICB within such a short timeframe, it has to have involved a degree of collusion.  This question is formed by taking an objective look at the information available and forming a view from it.  It appears to us that Mr. Kinnear’s inference has to be correct.  This en masse move could not have happened by coincidence and must be evidence of a degree of collusion between the named traders.  We refer elsewhere in this decision to Mr. Todd’s evidence on the opening of the ICB account and the matter of the banking arrangements discussed with Mrs. Mee in the interview of 26 June.

105.    Mr. Climie also challenged the admission of the spreadsheet.  We set out in paragraph 83 the circumstances in which this document came into being.  We accept Mr. Climie’s submission, as indeed did Mr. Kinnear, that this is a document upon which we the tribunal should not rely.  The only proven aspect of it is the listing of the two deal chains and those are proven elsewhere.  The “fanning out” is not based upon any evidence which is before the tribunal or indeed which was made available to the Appellant and therefore should be discounted.

OUR FINDINGS IN SUMMARY

106.    In reaching our conclusions we have taken into account all the oral evidence which we heard, the documentary evidence to which we were referred and the opening and closing submissions both written and oral of both counsel.  We will summarise our findings here, the reasons for which are set out fully below.

1.     In deals 1 to 9, we find that the Appellant’s transactions were connected to the fraudulent evasion of VAT

2.     We find that the Appellant had actual knowledge of the fraud in those chains

3.     We find that BCC was a participant in the fraudulent evasion of VAT and that deals 10 and 11, the contra deals, were connected to fraud

4.     The Appellant knew in deals 10 and 11 its transactions were connected to the fraudulent evasion of VAT

5.     As the Appellant had actual knowledge of fraud in all 11 chains, it does not have any entitlement to deduct its input tax

107.    As we have found actual knowledge on the part of the Appellant, it will not be necessary for us to go into a number of matters that were raised in evidence and indeed in submissions as these relate to the “should have known” test.  We confine our reasoning to the conclusions which we have drawn.

OUR REASONING

108.    Before setting out our reasons we look at one issue raised by Mr. Climie and that concerns how we should approach Mr. Todd’s evidence.  Mr. Climie accepted by inference that it was in part unsatisfactory. He gave a number of reasons why this should be so but asked us specifically to take into account the pressure of giving evidence when one’s financial status is in the balance, and the fact that over the passage of time memory fades and recollections change.  Mr. Climie denied that Mr. Todd had deliberately misled the tribunal, saying that at worst his account may have changed to benefit the appeal. We accept that memories fade over the passage of time and there were clear examples of some, in our view, peripheral, matters being put to Mr. Todd over which he did not have a clear recollection.  These are not matters which we have taken into account in our decision.  In other instances however, and these are referred to below, there appears to us to be a vagueness and sometimes a reluctance to answer which was nothing to do with the passage of time.  We should also make the point that while we accept that giving evidence over a long period when so much is at stake is nerve-wracking for anybody, the difficulties with Mr. Todd’s evidence began well before the hearing.  His witness statement contains at least one untruth and his replies to Mrs. Mee in his interview with her were in part either untruthful or deceptive.  Where we have taken note of Mr. Todd’s attitude or approach to his evidence we have commented on it specifically.

109.    Mr. Climie made the point that Mr. Todd’s trading methods did not change between his earlier Dubai / Hong Kong trading and the deals carried out which are the subject of this appeal.  He asked us to find that because those trading methods had not originally been fraudulent they could not now become so.  We do not think this follows.  We accept, as indeed did Mr. Stone, that dozens of traders traded like the Appellant but not fraudulently.  Equally we accept that individual features of Mr. Todd’s trading are not of themselves inevitable indicators of fraud.  Back-to-back trading can perfectly legitimately exist in various commodities.  The use of freight warehouses and shipping on hold is not uncommon.  We approach our role by looking at Mr. Todd’s conduct during the deals.  Whether or not the earlier trading was or was not fraudulent was never ascertained – it was not particularly relevant to the appeal.  But even if it were totally genuine and legitimate trade, we do not see that a finding of fraud in these deal chains is in any way inconsistent with earlier genuine trading.  Equally we are not barred from finding fraud in the deal chains just because Mr. Todd may have traded similarly in an earlier period.  Our concern is what he did during the periods in question.

110.    The deals are, in our view, quite clearly connected to fraud.  Mr. Climie accepted that in 04/06, in deals numbered 1 - 6 C & B Trading (UK) Ltd and in 05/06, in deals numbered 7 – 9 Togane Mobiles were both fraudulent and had no intention of accounting for output tax on their sales of mobile phones.  Mr. Climie further accepted that the stock imported by each was the same stock which was purchased by the Appellant.  Mr. Kinnear submitted that that was sufficient to form the connection.  However Mr. Climie submitted that this was not a “connection to fraud” in the Kittel sense.  His contention was that Kittel was a case of narrow application, only suitable to be applied in cases where the taxable person is a counter-party to the fraudulent transaction and as the Appellant did not purchase from either of the fraudulent traders, it must follow that the Appellant’s deals were not connected with fraud.  Mr. Climie points out that the question posed before the ECJ was quite specific namely that:

“… the referring court asks essentially whether, where the recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was part of a fraud committed by the seller…”

Equally the ruling of the Court read:

“Where a recipient of a supply of goods is a taxable person who did not or could not know that the transaction concerned was connected with a fraud committed by the seller…”

In Mr. Climie’s submission, the judgment of the ECJ was critically dependent upon the premise that the fraud had been committed by the seller of the goods.

111.    It is our view that although that was the originating question, Kittel was never intended to be read so narrowly.  And there is certainly no authority in English law that narrows the application to those in a direct contractual relationship.  The observations throughout Kittel are quite clearly widely drawn.  In the paragraphs that we have cited earlier there is no indication that the principle is to apply only to counter-parties.  It is of note that in Mobilx, all three cases which were under consideration involved companies where there was no privity of contract between the fraudsters and the Appellants.  Although Moses L J does not expressly and in any detail answer the point of privity, the wording of paragraph 62 must address the point:

“62. The principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader’s purchase.  If the circumstances of that purchase are such that a person knows or should know that his purchase is or will be connected with fraudulent evasion, it cannot matter a jot that that evasion precedes or follows that purchase.  That trader’s knowledge brings him within the category of participant.  He is a participant whatever the stage at which the evasion occurs.”

112.    We therefore find that, in law, the Appellant’s deals were connected to fraud.  We have already commented on the obvious connection in fact but this can only be strengthened by an overview of the deal chains, set out in paragraphs 16 and 17 of this decision.  This overview demonstrates that the chains were so obviously contrived.  The goods moved up the chains intact.  Throughout the chains the profit per unit showed minimal variation even when the models and quantities differed.  The mark-up was uniform across the chains even where different buffer companies were substituted.  The transactions added no value to the phones.  None of the buffers took typical possession of the goods and none of the chains could be traced back to a manufacturer or an authorised distributor.

113.    Having been satisfied that in fact and in law the Appellant’s transactions were connected to fraud, we now set out our reasoning why we find that the Appellant had actual knowledge of that fraud.

114.    We look first at Mr. Todd’s knowledge of MTIC fraud both in general terms and more specifically in relation to his own trading.  There is abundant evidence that Mr. Todd had been made aware from the outset of the prevalence of fraud in the mobile phone trade.  He had received visits from officers, received advisory letters and copies of Notice 726.  In mid-2005 Mr. Todd instructed Mr. Holmes to advise him on due diligence and he accepted in evidence that Mr. Holmes had explained to him the nature of MTIC fraud, how it worked and the precautions which he had to take to avoid it.  Both customer and supplier declaration forms showed from their checklist content a very sound knowledge of due diligence procedures.  We find that by the time Mr. Todd carried out the deals with which we are concerned, he had an extremely good knowledge of the widespread existence of MTIC fraud, how it worked, and the steps which had to be taken to minimise his company’s exposure to it.  Mr. Todd had also been made aware of the existence of fraud in his own chains, specifically in respect of 09/04 and 10/04, the returns for both periods being subject to verification.  Letters from the Commissioners to Cobbetts advised of this and they in turn advised Mr. Todd.  Additionally Mrs. Hiroms also informed Mr. Todd in a telephone call.  There is an abundance of totally unequivocal evidence that Mr. Todd was aware by early 2005 of the existence of fraudulent defaulters in each of his supply chains in 09/04 and 10/04.  Despite this, Mr. Todd in his witness statement, evidence in chief and cross examination maintained he had never known of the existence of defaulting traders in these chains.  This evidence was quite simply untrue.

115.    Similarly his evidence, both written and oral, was untrue in relation to third-party payments.  We find as a fact that by early 2005, Mr. Todd was well aware of the existence of defaulting traders and third party payments in his supply chains.

116.    We then look at how Mr. Todd reacted to this information.  Mr. Kinnear’s first question in cross-examination to Mr. Todd was, “how many times would HMRC have had to tell you that there were defaulting traders in your chain for you to stop trading?”.  Mr. Todd replied “once” and he would stop.  In reality Mr. Todd did nothing of the sort.  He certainly did not stop trading and even more importantly he did not appear to take any additional precautions or carry out any other due diligence checks.

117.    There is no doubt that by the time the deals were carried out, Mr. Todd was well aware of not only the need for due diligence but also what needed to be done.  This is borne out by his involvement with Mr. Holmes, his trading documentation in the form of his internal checklist and customer and supplier declarations and his own evidence.  For example when he was visited by Mr. Rai he saw this visit as Mr. Rai carrying out his own due diligence checks on Radarbeam.  We have earlier in this decision (paragraphs 53 – 61) described the due diligence checks carried out by Mr. Todd and the paperwork set in place for him by Mr. Holmes, in particular the site visit report.  We are not concerned here with what proper due diligence would have revealed.  That would have been fundamentally important to the issue of “should have known” but is not so relevant to actual knowledge.  So, for example, we are not concerned with the post-deal vetting checks and make no examination of them.  Our concern here is with the procedures themselves.  What due diligence checks did Mr. Todd carry out before he began to trade with these companies.  Did he do enough, and if not, why not?  Due diligence on Saphire appears to have been carried out by Mr. Holmes.  This does however beg the question how reasonable it was for Mr. Todd to rely on Mr. Holmes who was himself employed by Saphire.  There cannot be a more obvious conflict of interest.  The first time Mr. Todd dealt with 2Trade was in March 2006 and his visit predated that, taking place on 23/24 February.  However the evidence of what took place on that visit is totally unsatisfactory.  The visit report is only partially completed and the information that has been inserted is scanty and in places quite meaningless.  Mr. Todd had no idea what the stock level of “40,000” referred to.  The trade referees are only freight forwarders and Mr. Todd could not recall whether he had even followed them up.  If he had he had made no note and he could not recall the conversations.  He ticked that the prices quoted for stock were credible and that the business dealt in genuine stock but he had no answer as to what evidence that was based on.  The photographs could have been taken anywhere.  He carried out no credit checks and had not even completed the section on whether or not this was a company with which he should deal.

118.    The due diligence checks on CEMSA are similarly flawed.  There is the initial confusion and inconsistency over the date of the visit, which in any event post-dated the first deals with this company.  The explanations proffered by Mr. Todd for the conflicting dates are simply not credible, and the suggestion that perhaps he had in fact paid two visits was just untrue.  He did not really think that was the case.  In the site visit report, stock levels were stated to be 3/4,000 but again Mr. Todd did not know to what this referred.  Without any apparent justification he again stated that he was satisfied with pricing levels and the genuineness of the stock.  No referees were named and apparently no references taken up.  Again the photographs could have been taken anywhere.  Mr. Todd never took up banking references.  Even though he was to supply this company with millions of pounds’ worth of stock, he made no check that they were going to be good for the money.  In relation to both 2Trade and CEMSA, both in the terms of the supporting documentation and Mr. Todd’s oral evidence, what checks there were were meaningless.  They would be of no assistance in a genuine relationship.  They smack of someone going through the motions of an exercise never seriously undertaken, the only explanation for which can be that in reality nothing hung on the result.

119.    Despite being advised repeatedly to do so Mr. Todd consistently refused to record IMEI numbers, his only explanation being that he would rely on the checks carried out by Saphire.  Although in isolation, a failure to carry out an IMEI check is not always indicative of fraud, it is unwise in the extreme.  However the problem with the IMEI numbers does not stop at the failure to have them recorded in the 04/06 and 05/06 deals.  Of even greater concern is the position in relation to the 10% IMEI check which Mr. Todd claimed he carried out in 06/06.  First there is no evidence that it was actually ever carried out.  We have mentioned in the course of the evidence the fact that there does not appear ever to have been an invoice for carrying out the inspection.  This alone would cause a raised eyebrow but, without more, could be passed off, but what cannot, in any view, be satisfactorily explained is the result of the check.  2,800 phones were checked.  A search on the Nemesis database revealed that three hits were scored prior to the June deals.  We accept that three is a minute proportion of 2,800 but there should have been none, and in genuine new stock there could have been none.  Similarly, the remaining hits, which again we accept are very few in number, post-date the completion of the deals but pre-dated the supposed release of the stock to the customer.  If Mr. Todd’s evidence is true that the goods would not be released until paid for, the phones which scored hits should still have been in storage at the freight forwarders.  It follows that the numbers provided by Mr. Todd could not relate to the consignments with which he was dealing.  It could be that the stock never existed or that the numbers were fabricated.  We do not know, but in ruling out “a mistake”, which we do, we can only conclude that the reason the IMEI numbers scored a hit has to be because the trade was fraudulent.

120.    We look next at some of the features of Mr. Todd’s trading practices.  Throughout these deals, Mr. Todd traded without any terms and conditions in place.  His reason for this was quite absurd.  He said that he had abandoned written contracts after losing his Spanish court case.  His evidence in relation to this case alone is utterly unsatisfactory.  He lost £194,000 in the case and yet had no recollection of what it had been about or why he had lost.  Even the passage of time cannot account for such a selective memory as that.  Even more strange is Mr. Todd’s reaction to losing the case.  Instead of tightening up his terms and conditions, without taking any legal advice he just abandoned them.  This is not the reaction of a genuine trader carrying out a legitimate business having just taken such a huge financial hit.

121.    Even more striking is Mr. Todd’s inability to understand when title in the goods passed.  He was shipping abroad millions of pounds of uninsured stock through freight warehouses against whom he had carried out no due diligence checks and yet he had no idea to whom the stock belonged at any given time.  He did not understand what had to happen for title to pass.  Not only is there no contractual documentation in place but what documentation there is is not consistent with conventional and genuine trading. The purchase orders from Radarbeam and Saphire contain no detailed specification.  Mr. Todd’s explanation that this was unnecessary because he had already discussed it with Mr. Rai is totally inadequate.  In the genuine commercial world, detailed specification would always be needed in case of dispute over what had been ordered.  Setting these trading practices in the context of the increasing delays in payment, a picture is emerging of a trade which just cannot be credible or legitimate.  Mr. Todd did not even seem to know whether he was worried or not about these delays (paragraph 47).  Because there were no terms and conditions in place, there were no agreed payment terms and he did not seem to have any idea what Saphire expected of him in terms of payment.  He did not know whether or not they had given him credit or if so what his credit limit was.  He had produced a Credit Agreement between himself and Sahpire dated 28 March 2006 which provided that an agreed credit limit would be agreed between Radarbeam and Saphire and that Radarbeam would provide security to the level of the credit.  Also produced was a credit account application form dated 25 May 2006.  Mr. Todd did not appear to know the effect of either document and was quite unable to say why he had signed them.  Nothing appears to have flowed from either.  Even more striking is the position over the payments due to Radarbeam.  Despite still being owed £11 million for the May deals with CEMSA, Radarbeam supplied a further £8.8 million worth of stock on 30 June.  This latter transaction is even more strange given Mr. Todd’s interview with Mrs. Mee on 26 June when he told her that he had done no June deals because of cashflow problems.  What had changed?  According to Mr. Todd it was that Mrs. Mee was on the case.  This is a flippant response which tells us nothing.

122.    The interview which Mr. Todd had with Mrs. Mee on 26 June throws up further inconsistencies in Mr. Todd’s evidence.  He initially told Mrs. Mee that all suppliers had been paid, only to contradict this a short time later by saying that he still had to pay the balance for his 05/06 purchases.  This again was contradicted when asked if he had any creditors of debtors and he replied “none” even though the payment for the May deals was still outstanding.  It is possible that Mr. Todd was just, rather incompetently, trying to deceive Mrs. Mee or it does add some credence to Mr. Kinnear’s suggestion that the finances were dealt with remotely and Mr. Todd actually did not really know what was going on.  Equally strange is the fact that he sourced his goods throughout from only one supplier, Saphire.  His explanation that the Commissioners had told him to stick to one supplier does not stand up.  They might have advised that he should stick to known and trusted suppliers but they could not fetter a trader’s ability to compete by telling him to stick to just one.  By sticking with Saphire throughout, he appears to be denying himself the possibility of sourcing goods more cheaply and there is certainly no evidence that he ever had to haggle with Mr. Rai over price.  This again is a feature which is not consistent with legitimate trading.

123.    The trading practices adopted by Mr. Todd are not credible in a legitimate commercial venture and neither is his attitude to them. Deals which he carried out were not subject to the normal rules of trading or of commerce.  Mr. Todd was not dealing on ordinary commercial terms with his suppliers or his customers and the only explanation for this is that put forward by the Commissioners, namely that the transactions were fraudulent and pre-ordained and Mr. Todd knew this.  That this explanation is correct is in our view supported by the “checklist”.  This is a perfectly proper document of the type which one would expect to see in the most well-organised businesses.  However Mr. Todd’s checklists are only half completed and even more telling is that those sections which have been completed lie.  Mr. Todd’s explanation that he is bad with paperwork or that Mr. Kooner got it wrong does not work.  The checklist was a smokescreen designed to portray to the Commissioners normal conventional trading legitimately carried out.

124.    The Commissioners rely heavily on the banking evidence as evidence of collusion between all companies in the chains.  They point to the fact that all members of the chains at some stage banked with FCIB, the inference being, they submit, that this was used to keep funds off-shore, outside the UK’s money laundering controls and away from the grasp of the Commissioners.  Banking with FCIB was common in the mobile phone trade.  FCIB advertised widely on websites and offered, according to Mr. Todd, speed and ease of access and electronic banking.  That so many of the traders in the deal chains banked with FCIB is worthy of comment and raises suspicions.  However an even stronger picture emerges when one sees the mass move to the ICB.  We have already commented on the schedule produced by Mr. Kinnear and accepted the inferences which he draws from it.  Now however we put this in the specific context of Mr. Todd’s evidence.  Mr. Todd was asked by Mr. Kinnear first of all why he moved to ICB in June 2006.  Mr. Todd’s response was that in fact he didn’t think he had; he thought that the account had been opened up at the same time as that with FCIB.  When asked who they were, he answered that it was “just an international bank”.  He could not remember where they were based.  It was just one of a number of banks advertising on the website.  He mentioned that other customers had banked with them so he decided to open an account as well, although he could not remember the names of those customers.  The vagueness and inconsistency in Mr. Todd’s evidence is just not credible.  A legitimate trader in a multi-million-pound genuine business would have taken considerably more care than that demonstrated by Mr. Todd in changing his bank.  The fact of the mass move coupled with Mr. Todd’s evidence leads us to find that there is in the move an orchestration and a manipulation that has to be fraudulent.  There can be no other explanation of the mass move, it being totally beyond the bounds of coincidence.

125.    There is one point which we should make with regard to the ICB account.  Mr. Kinnear accused Mr. Todd of deliberately concealing the existence of the account from Mrs. Mee when he saw her on 26 June despite the fact that it had been opened only three days earlier.  This may be right but it is not inevitably so.  Mrs. Mee’s opening letter to Mr. Todd specifically stated that she was seeking verification of the 04/06 and the 05/06 deals and in that context wished to see his banking evidence.  There is no suggestion in the interview notes that he was asked about the existence of any other bank accounts and although it is possible that he deliberately withheld the information we do not so find as it is just as likely that he was, as he said, just answering the questions.

126.    All the factors above mentioned have to be looked at in the overall context of the Appellant’s trade and specifically its meteoric increase in turnover.  As we have set out previously, his turnover increased from £4.8 million to £57.7 million between 2005 and 2006, this being achieved by a few high-value deals.  In our view this increase in turnover cannot be attributed to honest trading.  Such an exponential increase can only be explained by the Appellant being involved in fraudulent trade as Mr. Todd must have known.

127.    In summary, given the Appellant’s admitted knowledge of the prevalence of fraud, its actual (although denied) knowledge of fraud within its own chains; total failure to carry out proper due diligence checks and its meteoric rise in turnover, all point in our view to an operation fraudulently carried out.  Deals in trades 1 – 9 were part of chains which were contrived, manipulated and orchestrated and bore no legitimate commercial substance and the Appellant, through its controlling operator, Mr. Todd, had actual knowledge of this fraud, and so we find.  These trading practices also of course carried forward into deals 10 and 11, which we now go on to consider.

128.    In respect of the contra-trading period and deals 10 and 11, it was Mr. Kinnear’s contention that if the tribunal concluded that in deals 1 – 9, the Appellant knew or should have known that the deals were connected to fraud, then it must inevitably reach the same conclusion in deals 10 and 11.  He contended that the early unsuccessful trading history of BCC in the cash and carry business, its sudden explosive arrival into the export market, the careful management of its trade to achieve the 08/06 balance of input tax against output tax, all its export trade being traced back to a defaulting trader were all indicative of contrivance.  He maintained that the use of Croydon Cash & Carry, “an evidently bogus” warehouse and freight forwarder was further clear evidence and stressed particularly the presence amongst the IMEI numbers of the references to other traders who were supposed to be unrelated.  Mr. Kinnear maintained that the ZIP file was in effect one of the planning documents for the fraud, clearly released by mistake.  He stressed the transfer by BCC of its banking to ICB, slotting it into the schedule to which we have referred earlier.  In Mr. Kinnear’s submission, BCC was trading fraudulently.  The only way the fraud could be completed was to induce a fraudulent repayment from HMRC.  Instead of making the claim themselves, the scheme was designed to distance the repayment and shift it to the Appellant.  In this, submitted Mr. Kinnear, the Appellant had to be complicit.

129.    Mr. Climie’s underlying submission was that the arrangement was in effect pointless because the fraud could not be hidden.  The Commissioners had known about BCC’s export trade since its commencement and were obviously monitoring it.  He points out that BCC had always been open with the Commissioners.  Their 02/06 repayment claim had been met.  Mr. Climie’s contention was that the likeliest reason for the trading pattern was that BCC had had its repayment claim withheld for 05/06 and its application to go onto monthly returns refused.  BCC was thus forced to look at different avenues to fund its exports and this explains the commencement of trading in mobile phones.  Mr. Climie stressed the lengthy relationship which the company had had with CEMSA, a relationship which had existed long before the alleged fraud.  There was in fact no sudden change in BCC’s trading pattern as it continued to buy and export razor blades as it had done for a number of months.  There is no reason why a trade which had continued for months should suddenly come to be regarded as fraudulent.  It was, contended Mr. Climie, no more than sound business management on the part of BCC to balance out its output tax against its input tax.

130.    An overview of BCC’s trading history reveals a pattern which cannot be explained by any other means than that it is fraudulent.  Trading for some six months as an unsuccessful cash and carry in the domestic market only, BCC makes its first ever export of razor blades in February 2006.  It purchased £2 million worth of blades from Flaxley, a company with which it had never previously traded, and sold £1.2 million worth to CEMSA.  By 05/06, the razor blade purchases from Flaxley had risen to £71.4 million worth.  To source and supply from nowhere, in a market in which it had never previously traded, goods to this value is utterly incredible and quite outside any normal trading pattern.  The pattern is even stronger in 08/06.  For the first time ever BCC traded in mobile phones.  Again it managed to source from a company, Sinderby, with whom it had never previously traded and supply goods to the value of millions of pounds.  In June and July BCC’s trade was only in mobile phones; in August it was only in razorblades.  In this period, BCC purported to carry out sales to the value of £319 million and yet by the balancing of EEC acquisitions and supplies, its VAT payment was only £4,145.74.  This balance is artificial and contrived.  Our belief that BCC was trading fraudulently is strengthened by a number of other matters.  First every single one of its export deals was traced back to a defaulting trader.  The mobile phone deal chains are quite clearly contrived (table 3, paragraph 19).  We note in particular the consistency in mark-up and the lack of any added value, which we saw in deals 1 – 9.  As in those deals, the chains have no genuine commercial rationale.  There must also exist grave doubts about the existence and / or legitimacy of Croydon Cash and Carry.  It is our view that there is only one realistic conclusion which can be drawn, namely that BCC’s trade was fraudulent.  There is then the absence of any proper due diligence.  The checks in relation to Sinderby and Aidu are utterly inadequate and meaningless and would have told a legitimate trader absolutely nothing.  No checks at all were done in relation to Flaxley, Glasgow Data or Croydon Cash and Carry.  No genuine trader acting in a legitimate and normal commercial market would ever trade in goods to the value we have here without carrying out proper due diligence.  The reality is that BCC had no need to do this as their market was preordained and orchestrated.

131.    The submission of the IMEI numbers by BCC are clear indicators of fraud.  As Mr. Kinnear pointed out, there can have been no legitimate reason why the spreadsheets in relation to so many other of the companies was contained within the file.  Again as Mr. Kinnear pointed out there was no reason why these particular traders should have been grouped together because they were supposed to be entirely unrelated.  The IMEI numbers in fact provide further evidence of the fraud.  BCC was, on 28 June 2006, purporting to sell Glasgow data 10,000 Nokia 8800 phones whereas the IMEI numbers provided relate to Nokia 3220 models.  The banking evidence is also particularly telling and indeed the clearest possible evidence linking the companies in the clean and dirty chains.  In the mobile phone chains in June and July, Sinderby sold to BCC, who sold to Glasgow Data, who sold to Saphire, who sold to Radarbeam, who sold to CEMSA.  Every single one of those traders moved to ICB.  In the August razor blade chains, Flaxley sold to BCC who sold to Iberica.  Each of these three traders were also included in the mass move.  This mass movement of the key companies in the two chains did not happen by coincidence.  It was manipulated and orchestrated and is clear evidence that the two chains are, as contended by Mr. Kinnear, inextricably linked.

132.    We cannot accept Mr. Climie’s submission that the balancing act is just good financial management by BCC.  The evidence of a contrived and orchestrated fraud is too strong and compelling.  Equally although the Commissioners were certainly monitoring BCC very strongly by the time of the submission of its 08/06 return, it is our view that this fraud had been carefully set up well in advance and certainly as far back as 02/06.  At this time, the Commissioners were monitoring BCC but the full extent of that monitoring would not yet be known.  The 11/05 claim which, although referred for verification, was passed for payment as indeed was the 02/06 return. Nothing we have heard is inconsistent with the view that BCC was attempting to disguise its input tax repayment claim by a matching output tax declaration.

133.    For all these reasons we find that BCC’s trade was fraudulent and was carried out as part of an overall scheme to evade the payment of VAT.  There is no other rational or realistic conclusion that can be drawn.  We also find that the Appellant had knowledge of the fraud, clearly demonstrated by all the factors we have identified and the findings we have made in relation to deals 1 – 9.

134.    The Appellant’s appeal therefore fails in its entirety.  We direct that the Appellant should pay the Commissioners costs of and incidental to and consequent upon the appeal, such costs to be assessed by a costs judge of the High Court in the event of their not being agreed.

 

 

 

LADY MITTING

JUDGE
Release Date: 10 September 2010