First-tier Tribunal (Tax)

[2010] UKFTT 439

TC00704

 

Reference No: MAN/2008/0489

 

Value Added Tax  -  MTIC appeal involving four transactions in relation to which input tax was disputed, undertaken by a company with a substantial bona fide business in related spheres  -  whether the Appellant knew that its transactions were connected to MTIC fraud -- whether the terms of the transactions were inconsistent with anything but MTIC fraud  -whether the due diligence was adequate and what would have been ascertained if reasonable further enquiries had been made  -  Appeal Dismissed

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

 

A ONE DISTRIVUTION (UK) LIMITED Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

TRIBUNAL: HOWARD M NOWLAN (Tribunal Judge) NICHOLAS DEE

 

 

Sitting in public at 45 Bedford Square, London WC1 on 4-7, and 10-12 May and 21 July 2010

 

Simon Taylor, counsel, on behalf of the Appellant

 

Jonathan Hall, counsel, on behalf of the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

Introduction

 

1. This was an appeal in a case in which the Respondents had made assessments on the Appellant for just in excess of £300,000 because they contended that four deals undertaken in the Appellant’s 3-month VAT period ending 08/06, had been tainted by MTIC fraud. It was not in dispute that the Appellant had traded honestly for many years and that its basic business was one of importing computer casings and other computer components, holding them in its substantial warehouse, and then supplying them to numerous customers in the UK.

 

2. The Appellant had two directors (Tom and Samantha Naughton, neither of whom gave evidence before us), two senior employees described as the Finance Director and the Operations Director (Craig Bentham and Michael Beaver, both of whom did give evidence), a sales executive, Michael Imms, who also gave evidence and Vijay Kerai, the purchasing manager who was periodically referred to but who gave no evidence. In total we understand that it had 20 employees, that its total turnover in the period relevant to the appeal was about £13 million, of which approximately £2 million was attributable to what were described as “back-to-back” deals.

 

3. We were told that the Appellant had considered whether to commence a small line of business in undertaking back-to-back trades in electronic components for about 9 months after Michael Imms joined the company in 2004. “Back-to-back” deals all involved matched purchases and export sales on, or virtually on, the same day with the goods never coming into the Appellant’s custody but being held throughout by a freight forwarder. Tom Naughton was initially opposed to the idea because he apparently considered that the claimed returns were “too good to be true”. We were told that he had been approached by friends or business contacts with a view to his joining some form of trading circle, and he had definitely rejected that proposal. It appears however that Michael Imms had continued to research the profits that he thought could be made in this form of trading, and the individuals mentioned in paragraph 2, with the possible exception of Vijay Kerai, collectively considered embarking on such trades. Craig Bentham was assigned the tasks of seeing whether credit, product liability and other commercial risks could be minimised and of considering what due diligence measures could be adopted to avoid encountering MTIC fraud. In about mid-2005, the Appellant decided to embark on such trades “in a small way”. The Appellant resolved that it would only ever trade with a supplier or customer that had been in business for at least 2 years and whose trade was in the electronics area. The Appellant would also send questionnaires or due diligence packs to potential suppliers and customers, requiring certain information about their trading, and representations that they had had no contact with MTIC trading, and no VAT problems. Initially at least, the level of exports would be restricted by a monthly limit.  This was likely to result in small transactions not occasioning requests for VAT repayments, since in its main trade, virtually all of its products were imported and sold in the domestic market, such that most of its gross sales attracted a liability to pay VAT.

 

4. A number of back-to-back deals were done in the period between July 2005 and the end of May 2006.  An MTIC Officer of HMRC, Margaret Pearson, visited the company to raise a number of questions in relation to the company’s back-to-back trades and its due diligence procedures for the VAT period 02/06, and she cleared the claim for repayment of the VAT in relation to the export deals done in that period. She appeared to have said that the company’s due diligence procedures were reasonably satisfactory, albeit that she recommended that VAT numbers of trading partners should be verified through HMRC’s Redhill VAT office (“Redhill”), rather than with the national contact centre. Following this visit, Craig Bentham made a few improvements to the due diligence forms, and the Appellant started making Redhill checks of the continuing validity of both suppliers’ and customers’ VAT numbers prior to undertaking transactions.

 

5. The Appellant did four back-to-back deals in its VAT period 08/06. The first was a purchase of 2520 AMD64 CPUs from Plazadome Ltd (“Plazadome”) and the sale of those CPUs to the Dutch company, Zaanstrait BV (“Zaanstrait”) effected in a slightly muddled way between 19 and 25 July 2006. Deals 2,3 and 4 were all purchases from Culmain Limited (“Culmain”), and sales to the Austrian company, ASAP Trading GmbH (“ASAP”).  Deal 2, effected on 1 August, involved 4000 4bit iPods, Deal 3 (on 3 August) 4000 semi-conductors and Deal 4 (on 8 August) 3760 semi-conductors.

 

6. These transactions resulted in actual requests for repayment of VAT and for that or other reasons were chosen for “extended verification” by HMRC.

 

7. After a very long period, HMRC disallowed all the relevant input tax in a letter sent to the Appellant on 25 February 2008.

 

8. The bulk of the Appellant’s appeal to this Tribunal was heard prior to the release of the Court of Appeal decision in the joined cases of Mobilx Ltd. v. HMRC, HMRC v. Blue Sphere Global Ltd. and ALLTEL Telecom Ltd v. HMRC [2010] EWCA Civ 517 (“the Court of Appeal decision”). The release of the Court of Appeal decision swept away several arguments that had been advanced by the Appellant in the initial hearing, and resulted in the case essentially hinging around whether HMRC had been able to prove, on the balance of probabilities, that the Appellant knew, or ought to have known, that there could be no other reasonable explanation for the four transactions in question than that they were connected with a fraudulent evasion of VAT. We will deal with the other arguments, and the tracing of the transactions in the first Deal to a contra-trader and to the same defaulter in each of Deals 2,3 and 4, in due course.

 

9. The Respondents’ contention in this case was that the Appellant had actual knowledge that its transactions were connected to fraudulent evasion of VAT, and that if that were not so, it ought to have known that there could be no other reasonable explanation for the transactions than that they had been connected to fraudulent evasion of VAT.

 

10. The Appellant’s contention was that the Appellant fully appreciated that there were MTIC risks when embarking on its marginal excursion into back-to-back trading, but that it considered that it had done sufficient due diligence to establish that its transactions should not be connected to MTIC fraud, such that it should be entitled to the disputed input tax.  In passing, it contended that when the HMRC officer had considered the terms of earlier back-to-back transactions that had been done in the period 02/06, and also the due diligence enquiries and responses that had been received in relation to those transactions, that it had been led to believe that its precautions were broadly acceptable.  When it then entered into the four transactions undertaken in the period 08/06 in a similar manner, save that it effected a few improvements in its due diligence procedures, it seemed extraordinary that input tax should be denied in those later transactions.

 

11. We consider that there are three broad areas for us to consider in this case. 

 

12. The first is whether we consider the due diligence to have been satisfactory, whether we consider that the Appellant should have followed up failures on the part of trading counter-parties to answer some questions or forward some documents, and whether the Appellant should have sought to verify some of the answers given.  In short the dilemma here, and the dispute between the parties, was whether the Appellant was swapping “due diligence” questionnaires just as a smoke-screen to seek to block a possible HMRC challenge of its transactions, and to claim that it had done all that it could reasonably do (as the Respondents contended); or whether its exercise was a genuine one, really to scrutinise matters and seek to uncover dubious trading partners (as the Appellant contended). In this context we accept that it may not be enough for us to conclude that the due diligence was inadequate, in that we should also consider what else, or whether anything else, could and would have been discovered if the Appellant had pursued due diligence more vigorously.

 

13. The second area for consideration relates to the way in which trading was done, with a view to ascertaining whether the terms of trade sustained the Appellant’s contention that the trading was all done commercially, and with a view to minimising commercial risks, or whether some of the aspects of the trading were so extraordinary that they could only be explained by the feature that some at least of the trading counter-parties had to be dubious, at best, or knowingly connected with fraud, at worst.

 

14. The third area for consideration revolves around the fact that much of the contact between Michael Imms, the individual trader employed by the Appellant, and both counter-parties in the second, third and fourth deals was undertaken by way of MSN messages. This has enabled us to read 120 pages of text-type messages, giving the precise wording of these computer messages that the parties to the conversations wrote. Whilst in some respects these messages are supportive of the Appellant’s case in that they show that some deals fell through, and that there was some real negotiation, they also reveal some materially less supportive exchanges. Naturally there was other contact between the parties by phone, mobile phone and conventional e-mail, so that we do not have the totality of the contemporary evidence of the exchanges.  What we do have, however, is very significant.

 

15. Before giving, and shortly explaining, our decision, we should make the preliminary point that we consider that the knowledge and means of knowledge of each of the Directors and employees of the Appellant who are mentioned in this decision can and must all be attributed to the Appellant.  The trader who was doing the deals was clearly acting in the course of his authority, and was reporting to one of the employees given the title, though we believe not formally a director, of Finance Director. Equally plainly all the Directors and senior employees, with the possible exception of the Managing Director, were jointly involved in the transactions and in regular contact with each other.  There is certainly no case for saying that anyone had gone off on a “frolic of their own”, were that anyway to be a material consideration.

 

16. Our decisions on the points canvassed in paragraphs 12 to 14 above are that:

 

·       There is considerable evidence that the Appellant treated the due diligence exercise in the manner suggested by the Respondents.

·       The failure of the Appellant to chase up occasions where counter-parties failed to respond, and the failure to seek to verify any information was not only unacceptable but was consistent with the attitude being that the exchange of due diligence information was done as the smoke-screen to fool and to block HMRC, rather than as a genuine exercise.

·       It was unacceptable for the Appellant to indicate in its questionnaires that it would take up trade references and then not to do so as a matter of policy, and it was unacceptable to say that the Appellant had a policy of never visiting trade partners, as Notice 726 recommended, because “they might be good actors, and they might lie”. If this were so, it seemed all the more obvious that when due diligence forms were completed, or rather part-completed, in a very sloppy manner, then if no effort was made to check a single piece of information, and it leapt off the page that some of the answers called for further enquiry, all the answers might indeed be a pack of lies.

·       In the event many of the answers have been shown to be lies.

·       Had the Appellant pursued some of its enquiries more diligently, it would have ascertained facts sufficient to put it on notice that it had been given dishonest answers to some of its questions, and it would have ended up with the gravest suspicion that if it entered into the transactions, those transactions would be connected to fraud.

·       There are, as the Respondents suggested, many fairly extraordinary features to the terms of the four deals.

·       In particular, we are unclear whether the Appellant had acquired title to goods when it purportedly sold them to its customer, at a time when the suppliers themselves had not been paid.  At least in one case, the suppliers’ Terms and Conditions (the only ones that we, or the parties, could read) made it clear that title did not pass to the Appellant until the supplier had been paid in full.

·       The suppliers were paid as soon as the customer indicated to the Appellant that it had seen and accepted the freight forwarders’ report in relation to the goods, regardless of the fact that the goods would not have been seen by the customer at that point.  If this indicated that the Appellant considered that from that point onwards it had no risk of complaint or action by the customer, should the goods not have met the invoice description, the customer appeared to take an astonishing risk.  This was all the more obvious when the customer in three of the deals indicated that it thought that the freight forwarders were all fools who could not even count.  If the customer might still complain, and one of the Appellant’ witnesses suggested that the customer might complain, and that in this event, the price received would be refunded, and the supplier be sued in turn, the Appellant appeared to have a very material unprotected risk. This and other features of the trading were extraordinary.

·       Even allowing for banter, there are a number of most damaging excerpts in the MSN messages. 

·       The artificial terms of trade and the damaging references in the MSN messages led us to the conclusion that the Appellant had actual knowledge of the connection to fraud.  Were that wrong, the totality of the evidence certainly led us to conclude that the Appellant ought to have known that there could be no other explanation for its transactions than that they were connected to VAT fraud.

 

17. Our decision is that this Appeal is dismissed.

 

The points that became irrelevant in the light of the Court of Appeal’s decision

 

18. We can simplify this decision by largely ignoring several points to which considerable attention was given during the hearing because the later decision of the Court of Appeal resulted in these points becoming irrelevant. We feel that we should mention them shortly, but in no detail.

 

19. One point was dropped, not particularly because it was proved to be unfounded by the Court of Appeal decision, but because it was acknowledged to be wrong. This was the one-time contention that our jurisdiction was confined to examining just the evidence on which Officer Holden, HMRC’s case officer, had reached his decision that the Appellant’s input claims on the four transactions should be rejected, rather than by exercising the wider jurisdiction of considering all the evidence and deciding on the basis of that whether the decision should be upheld. We feel that we should note that Officer Holden had made his decision on the basis that the Appellant had undertaken no other due diligence checks than Redhill checks, and that this was quite wrong because not only had the Appellant exchanged due diligence packs with its trading counter-parties, but Margaret Pearson had already seen and considered both the deal documentation and the due diligence that the Appellant was undertaking when  reviewing the 02/06 return. This point of course eventually became irrelevant when it was accepted that we had a full jurisdiction to decide whether HMRC’s case was indeed proven on all the evidence that we saw.

 

20. The next point that dropped away related to the fact that the CPUs, in issue in Deal 1, had been imported from J & P Import and Export BV by Capitazone Limited (“Capitazone”), which HMRC contended was a contra-trader. Capitazone’s import of the CPUs (and their sale, and ultimate sale to the Appellant) was balanced, in the hands of Capitazone, against a matching export of goods all purchased from Etphones.Com Ltd, a known defaulter, which goods were sold to one foreign customer, Proxi Partners. In the period Capitazone’s imports generated an output liability of approximately £2.7 million and its exports to Proxi Partners an input tax claim of virtually the same amount such that its net liability to VAT, which it paid, was £98.11. With the source of the exports being a known defaulter, and the matching so exact, there was no doubt that Capitazone’s transactions were designed to conceal the fraud in the “dirty chain” (i.e. the purchase from Etphones.Com Ltd). The only issue was whether it was appropriate to conclude that the Appellant’s transaction chain in relation to the CPUs was connected to fraud, when the original fraud was in the dirty chain, or alternatively a fraud on the part of the contra-trader itself. The decision by the Court of Appeal indicated that, once we concluded that the alleged contra-trader’s matched transactions were designed to conceal fraud, and once  we concluded that there was a fraudulent loss of tax in the dirty chain, there was no objection to tracing these fraudulent tax losses to the Appellant’s transaction. Since the Appellant advanced no serious argument in relation to the fraud on the part of Etphones.Com Ltd or Capitazone, once the point of principle dropped away, this point was effectively abandoned and there is no need for us to consider it further.

 

21. The next abandoned argument was the proposition that HMRC would have failed to show that the Appellant’s transaction was connected to a loss of tax if HMRC might have recovered the lost tax from some other party, or should perhaps have pursued such rights of recovery. In the case of Deals 2,3 and 4, a director of the insolvent defaulter had a house, such that he might have had assets that could have been taken to satisfy, or part-satisfy the VAT loss, such that it was contended by the Appellant that it could not be said that the Appellant’s transaction was connected to, or at least wholly connected to, a VAT loss.  This point is clearly no longer tenable after the decision of the Court of Appeal that once a fraudulent loss of tax has been shown on the part of one entity, if the Appellant’s claim for input tax is traced to that loss, the objective entitlement to deduct input tax is forfeited.

 

22. The final abandoned argument related to Deal 3, where HMRC had initially generated their summary of the VAT default, and the tracing of that default to the Appellant on the assumption that E-Management Solution Europe Ltd (“EMS”) was the defaulter. That was based on the fact that EMS had clearly supplied the goods to the parties in the chain in which the Appellant acquired the relevant semi-conductors, and EMS, to quote a succinct summary given by HMRC’s counsel, had “had a turnover that jumped from £8,000 to £10.5 million; [its] director, Mr. Bhutta, repeatedly denied making exports; then said that he had; he made third party payments; he didn’t fill in his VAT return correctly; failed to comply with requests for information; and then, having been deregistered, continued to trade charging VAT and ended up owing over £1.8 million in unpaid VAT”.

 

23. Whilst there appeared to be sufficient evidence that EMS was the defaulter, and that it had been the importer of the semi-conductors bought and sold by the Appellant in Deal 3, it was later discovered (from a freight forwarder’s report) that the relevant semi-conductors might actually have been in the UK when they were supplied to EMS by Papoose SRO (“Papoose”), a Slovakian company, such that it might have been Papoose that ought to have accounted for VAT.  There was even some question as to whether the yet earlier transferor of the semi-conductors had been Tamlex Trading Ltd (“Tamlex”), a Cypriot company, with the possibility that it might have been Tamlex that was properly liable for the VAT if the goods had been in the UK if and when Tamlex might have transferred them to Papoose.

 

24. Whilst this situation was all extremely confusing, it appeared that Mr. Bhutta of EMS had never denied that EMS was liable for the VAT in relation to the Deal 3 goods, and that EMS had failed to pay it. Invoices from Papoose (admittedly in relation to transfers of goods slightly earlier and later than the transfer of the Deal 3 semi-conductors to EMS) indicated that Papoose had declared Nil VAT on its invoices to EMS. It also appeared that Tamlex might not have been a transferor at all, but simply a recipient of third party payments that Papoose made. Whatever the truth, it was certainly the case that no VAT had been accounted for by any of Tamlex, Papoose or EMS in relation to the Deal 3 goods; if therefore Papoose was the party initially liable for the VAT, it had not paid it, and Mr Bhutta never even denied that EMS was the defaulter in relation to the relevant goods. On the reasoning that it seemed reasonable to suppose that no VAT invoice had been provided by Papoose to EMS, and that EMS had not even sought to establish any secondary basis for claiming a deduction for input tax, it appeared that one or other, or both, of Papoose and EMS had failed to pay VAT, both seemingly fraudulently.

 

25. In the light of the Court of Appeal decision that it is not necessary to identify precisely who was liable for the fraudulent loss of tax, provided that it is clear that there was such a loss, this confusion appears not to be significant.  The main cross-examination of the officer, Officer Gerard Maresaux, who was responsible for the case against EMS and Mr. Bhutta, was dedicated to the point mentioned in paragraph 21 above, rather than to any argument that the slight doubt as to which company had fraudulently failed to pay VAT undermined the proposition that there had been a tax loss and that the Appellant’s Deal 3 transaction was connected to that loss.

 

The evidence

 

26. Evidence was given on behalf of the Appellant by Michael Beaver, the Operations Director of the Appellant, by Craig Bentham, the Finance Director of the Appellant, and by Michael Imms, the sales executive who dealt with the negotiation of the four transactions which are the subject of the Appeal.

 

27. Evidence was given on behalf of the Respondents principally by John Holden, who became the main case officer in relation to this Appeal. He replaced Margaret Pearson, who also gave evidence, and who had undertaken the verification of the Appellant’s 02/06 VAT return in which some back-to-back deals had been undertaken. We will summarise the evidence given by these two officers in due course.

 

28. Evidence was also given on behalf of the Respondents by Paul Cole, the officer who had dealt with Capitazone, and by Ian Henderson, the officer who had dealt with the defaulter, Etphones.Com Limited, that sold goods to Capitazone. Evidence in relation to EMS, the defaulter, or at least the company assumed to be the defaulter (see paragraphs 22 to 25 above), in relation to all of the goods eventually sold to Culmain which featured in Deals 2,3 and 4, was given by the officer Gerard Maresaux. As a result of a late admission of further evidence, evidence about money movements through the accounts of  First Curacao International Bank NV (“FCIB”) was given by the officer, Susan Roberts.

 

29. We will summarise very shortly below the deal chains in the four deals. Since, however, it was not seriously disputed by the Appellant, once the points that dropped away following the Court of Appeal decision had indeed been abandoned, that there had been a fraudulent tax loss and that that was connected with the transactions undertaken by the Appellant, we consider that there is no need to refer to any of the evidence given by the officers referred to in paragraph 28 above.

 

30. During the hearing all of the witnesses were straightforward. This is not to say, however, that we have accepted propositions advanced by the Appellant’s witnesses in what we might term the “grey area” of fact. This observation extends to questions such as whether the Appellant’s witnesses considered that their due diligence had been satisfactory, and more relevantly whether the due diligence material had been assembled genuinely to check the credentials of trading partners, rather than to secure a hoped-for defence against an HMRC attack on the basis that they had “done all that they could do”. We should also say that we considered it possible that Craig Bentham, the Finance Director, “had had to follow the flow”, and proceed with the transactions against his better judgment. In isolation the forms and due diligence material that he had produced were perfectly acceptable. The overall policy decision that all the members of the key team agreed upon (not to chase for missing information, not to make visits and not to take out references) was the respect in which the Appellant fell well below the required standard, and we are far from convinced that Craig Bentham would have been the man advocating those policies. Whilst Michael Imms was not seriously faulted in cross-examination, having now considered the content of the MSN messages, we have to conclude that some of his evidence was less than candid.

 

The facts in more detail

The background trading by the Appellant

31. The Appellant’s business commenced in 1991 as a partnership between Tom Naughton and an individual who subsequently left the business. It then operated a retail shop selling computers and computer parts.  In 2003, the business was conducted by Tom Naughton and Samantha Naughton in partnership, and the business was incorporated, and transferred to the Appellant. By this time, the retail side of the business had declined and had been far outstripped by a wholesaling business. The wholesale side of the business almost invariably involved importing product, much of it from China, holding it in the company’s warehouse, illustrating the stock on the company’s website, and supplying stock to the company’s many trade customers. At some point the retail business was closed, the company moved into larger warehouse premises to increase capacity to hold stock, and to provide office space, and the company became one of the largest component suppliers in the UK.  It was never in dispute that this core business was run with complete integrity, that the company was acknowledged to have a very good reputation with its extensive customer base, and that the vast majority of its turnover was derived from this core business.

 

32. When the company had commenced some of the back-to-back trading that we will refer to in the following paragraphs, we were told that it always remained Tom Naughton’s intention that the back-to-back trading would never be more than a minor side line, and that it should not interfere with, or distract staff from attending to the core business. We were told that in 2006, approximately £11 million of the total turnover of £13 million still derived from the core business.

The slow move into “back-to-back” trading

33. The Appellant had occasionally bought and sold product on a matched basis, and had then sometimes arranged for that product to be delivered directly to its customer.  This would always have been for some commercial reason, probably one influencing the customer, and since we were given the names of two “household-name” customers who had dealt on this basis, there was not the slightest suggestion that trading of this nature had anything to do with VAT avoidance.

 

34. Michael Imms joined the Appellant as sales manager in June 2004. He had previously been trading in products similar to those dealt in in the Appellant’s core business in a company called Inex Trading Limited (“Inex”), and it was in the course of that trading that he had first met and dealt with Tom Naughton. According to Officer Holden’s evidence, Inex had submitted VAT repayment returns for the VAT periods 03/06, 07/06 and 08/06 that are currently the subject of extended verification by HMRC  MTIC teams. We accept naturally that these periods themselves were some considerable time after Michael Imms had left Inex and joined the Appellant. 

 

35. At some time between June and late 2004, Michael Imms started to try to interest Tom Naughton in branching out into back-to-back trading. In this context, such trading meant invariably entering into matched deals in which the Appellant would only buy stock to meet a matching and immediate sale order. The stock would invariably not come into the Appellant’s warehouse, but would be held by a freight forwarder that would have been selected either by the supplier to the Appellant or, as is certainly now known, by one of the earlier companies in the several step supply chain prior to the actual supplier to the Appellant.

 

36. Although the different witnesses put a slightly different slant on this point, it appears that Tom Naughton was initially rather opposed to the notion of entering into this type of business. He had certainly rejected the idea of joining some sort of trading club dealing in back-to-back deals because he considered that the returns were too good to be true. We were told, however, that Michael Imms continued to advance the point to Tom Naughton that good profits could be made in this line of business. In his Witness Statement, Michael Beaver made the point that “Michael had had experience of this trading model at his last place of employment, and had a wealth of contacts with whom he felt he could trade safely and effectively”. 

 

37. At some time around the end of 2004, the four or five senior directors/employees of the Appellant researched the possibilities of embarking on some back-to-back trading, and Craig Bentham, as the head of finance, was certainly asked to research some of the risks. Craig Bentham considered the commercial risks, concerning credit risk when dealing with trading partners of whom the Appellant would know very little, and the risks of its own customer claiming that goods sold were defective, with the consequent need to pursue some remedy against the Appellant’s supplier. He also considered the VAT and MTIC risks, and in this context read and seemingly understood all the information in HMRC’s various publications on the subject, including Notice 726.

 

38. This team eventually considered that it was worth embarking on back-to-back trading in a modest way. In Mr. Beaver’s words, Tom Naughton agreed to “a strictly limited and small scale excursion”. Thus in May 2005 (approximately a year after Michael Imms had joined the company), the Appellant did the first of a number of back-to-back deals that were done prior to its (three-month) VAT period 08/06. Initially at least the Appellant sought to keep its back-to-back trading at a modest level and Mr. Beaver confirmed that a monthly limit was set to the level of permitted back-to-back trading. In his Second Witness Statement, Officer Holden referred to various remarks that each of Samantha Naughton, Craig Bentham and Michael Beaver had made at the meeting that Officer Holden had had with them on 14 January 2008 in relation to their early attitude to their modest back-to-back trading activity. Samantha Naughton had said that they had “always played a straight game”, and mentioned that there were deals that they had rejected. Michael Beaver’s remark had been that “they had had a dabble with these deals because profits could be made”. Craig Bentham was asserted to have said that they had taken a risk on these deals because of the potential profits involved.

 

39. Although the trading for the periods 02/06 and 05/06 was not challenged, the then responsible MTIC officer, Margaret Pearson, did have a meeting with Samantha Naughton, Craig Bentham and Michael Imms in relation to the 02/06 return and at that meeting Margaret Pearson reviewed the Appellant’s deal file and due diligence procedures and said that in most respects the Appellant appeared to be undertaking the trades in a satisfactory manner. As mentioned above, she made the specific recommendation that prior to doing any back-to-back transactions, the Appellant should check the VAT registrations of the supplier and customer with Redhill rather than with the national contact centre, but beyond that she made no particular recommendations. There was some dispute between the evidence of the Appellant’s witnesses and Margaret Pearson as to whether, in reviewing passages of the deal file and the due diligence information, she had periodically used the expression “Big tick for that!” or not. Whether she used this expression or not, the Appellant’s witnesses almost certainly summarised matters fairly when they said that at the end of the meeting, whilst Margaret Pearson had clearly given the Appellant no guarantees, she had given the impression that if they continued to operate in a similar way, and additionally obtained Redhill confirmations, they ought not to encounter delays, or worse problems, in having their VAT returns accepted and, where appropriate, having repayments sanctioned.

 

40. After this meeting Craig Bentham made a few improvements to the Appellant’s due diligence check list, and the Appellant sought Redhill confirmations of the continuing validity of VAT registrations of their suppliers and customers before each deal.

The brief detail of the four back-to-back trades undertaken in the period 08/06

41. Deal 1 was conducted in a slightly confused way that we will describe more fully below between 19 and 25 July 2006. It involved the purchase by the Appellant from Plazadome of 2520 AMD64 bit CPUs at a VAT exclusive unit price (to the Appellant) of  £159, and the sale of those CPUs to the Dutch company Zaanstrait. Giving the unit mark-up made by each of the buffer companies in brackets after the name of each, the CPUs had been acquired by the following chain of companies from the original importer Capitazone. Capitazone sold to Castleview (which made 20p per unit), Castleview sold to Masterpiece (which made15p per unit); Masterpiece sold to Plazadome (which made £5.00 per unit); Plazadome sold to the Appellant and the Appellant made £8 per unit on selling to Zaanstrait.

 

42. Deals 2,3 and 4, undertaken on 1 August, 3 August and 8 August, were undertaken by essentially the same parties.

 

43. Deal 2 involved the ultimate purchase of 4000 4 gb iPods at a unit price of  £109.85 by the Appellant from Culmain, and the sale of those iPods to the Austrian company ASAP, the Appellant making a mark-up of £4 per unit. Culmain had assembled the iPods from at least two different purchases, the various companies in the chain from the import of the products by EMS from Papoose of Slovakia being Connect Communications, Futuristic Electronics and Maximize Services. Culmain’s unit mark-up was £2. We will refer in paragraphs 46 –50 below to any points concerning the features in this chain that Culmain assembled its 4000 iPods from different purchases, rather than that the 4000 iPods all passed in exactly that number from EMS, via the chain, to Culmain.

 

44. Deal 3 was simpler. 4000 semi-conductors passed from Papoose to EMS, the defaulter, to Connect Communications (which made 20p per unit); to Maximize Services (which made 20p per unit); to Culmain (which made £2.90); to the Appellant (which made £2.57) and so to ASAP, as in Deal 2.  To give an indication of the percentage level of the mark-ups, the Appellant’s VAT exclusive purchase price per unit from Culmain was £93.40.

 

45. Deal 4 involved precisely the same parties as Deal 3, and involved at all stages 3760 semi-conductors, the Appellant’s unit purchase price from Culmain being £132.50.  Connect’s and Maximize’s respective margins were identical to those in Deal 3, whereas Culmain’s and the Appellant’s mark-ups were £5 and £4.25 respectively.

 

46. Whilst we will leave all material findings of fact until a later point in this decision we should at this point comment on the Respondents’ counsel’s contentions to the effect that one of the indicators of MTIC fraud that should have drawn the Appellant’s attention to the fraudulent nature of the transactions, was the feature that, at all stages in the chains, there were matched deals, with the same quantity of product being acquired and sold.

 

47. This observation seems to us to be basically irrelevant to any issue that we have to consider, and also not correct anyway. We accept that the Appellant always bought and sold identical amounts of stock, but we do not find that significant as a pointer to the transaction being connected to MTIC fraud.  This is because the Appellant was never intending to hold any stock of goods in these products so that it had to arrange the trades (whether in fact tainted or untainted by MTIC fraud) so that its purchases and sales matched.

 

48. We also find it completely irrelevant in Deals 3 and 4 that it was 4000 and 3760 semi-conductors that passed at each stage of the chain, and indeed that the parties were identical. We do accept that these factors assist in demonstrating to us, with a full knowledge of the facts, and most particularly an awareness that EMS was a defaulter, that the transactions were connected to a fraudulent loss of tax.  Whilst we are in due course going to criticise the Appellant’s due diligence and the genuineness of that due diligence, we certainly do not suggest that the Appellant could ever have ascertained that the goods had passed up the chains in the way that they did.

 

49. Finally, on this minor topic, in Deals 1 and 2, it was not the case that identical numbers were involved at each stage in the chains. In deal 1, double the number of CPUs had passed up the chain to Masterpiece, and it was only Plazadome and the Appellant that dealt in the reduced number of 2520 CPUs. And in Deal 2, while EMS imported 2 consignments of iPods, totalling 4193, and those two consignments  were passed on in identical numbers to Connect Communications, the consignments then followed a different path before arriving in Culmain in the number of 4000.  We  accept that HMRC’s contention is right when they suggest that the Appellant’s and Culmain’s 4000 iPods are rightly traced from EMS’s import of 4193 iPods and that is what matters. We consider it irrelevant that the tracing is faintly more complicated in Deal 2 than in Deal 1, and certainly more complicated than in Deals 3 and 4.  And we also consider it irrelevant to explain any further the intricacies of the intermediate movement of the iPods.  As we have said, we are satisfied that the 4000 iPods were among the 4193 imported, and the Appellant’s counsel did not seriously dispute this.

The Appellant’s general approach to due diligence

50. When cross-examined, all three of the Appellant’s witnesses accepted that they knew about MTIC fraud, and they were conscious of the need to take certain due diligence steps to guard against it. There was some slightly pointless debate as to whether the Appellant accepted that there was “a heightened risk of becoming involved with fraud”, or merely that the risk of fraud was “slightly higher”. Craig Bentham certainly acknowledged that he knew of one of the highly material features of the VAT risks in the following exchange with the Respondents’ counsel:

 

Counsel: What sort of risk was involved?

Craig Bentham: There would be the risk of a trader further up the chain defaulting and you being liable for the VAT.

Counsel:  That was particularly relevant, wasn’t it, in this sort of wholesaling of CPUs or iPods?

Craig Bentham:  Yes absolutely.

 

51. In the light of these risks, Craig Bentham mentioned that a decision was taken that they would never trade with a company that had been in operation for less than two years, and they would always refuse to trade with companies whose main activity was in different sectors.  In other words they would not buy iPods or CPUs from a company dealing principally in toys or clothing.  The fair point was made that they understood that MTIC activity meant that HMRC officers were making particularly stringent checks of companies seeking registration when trading in the electronics field, so that if they confined their dealings to such companies, they would have some level of protection.

 

52. Craig Bentham and Samantha Naughton had been the ones principally involved in preparing the Appellant’s Deal Check List, its various information requests that would be sent to trading partners, and the terms to be inserted into purchase orders, and invoices etc.

The Deal Check List

53. The Deal Check List was an internal document enabling Craig Bentham, who was required to clear all deals (possibly in conjunction with Samantha Naughton and Michael Beaver), to ensure that all the required steps had been taken before he sanctioned Michael Imms to proceed with a deal that might have been negotiated.

 

54. Without quoting the Deal Check List in full, it required the following steps to have been taken:

 

• Redhill checks to have been made, and returned in relation to both the Supplier and Customer;
• The Appellant’s Purchase Order to identify the stock to be purchased, including identifying box numbers, and to contain the following text:

 

“This Purchase Order is subject to the provision of an acceptable inspection report.  We reserve the right to cancel or withdraw our offer of purchase should this condition not be met. The offer to purchase goods is strictly conditional upon acceptable verification of all relevant details via Redhill VAT office.”

 

·       The supplier’s Invoice to detail the same box numbers, and to contain the text saying “Subject to special terms”;

·       A Closed Box Inspection Report to have been received from the supplier and also one from the customer, signed and dated;

·       Appropriate insurance to have been effected whilst the goods were owned by the Appellant;

·       The Appellant’s invoice to its customer to identify box numbers and to contain the following text:

 

“The CMR documentation for this invoice MUST be returned to A One Distribution within 2 working days of release of stock. No further trade can be done until this deal is complete.

 

All goods invoiced are subject to a closed box inspection only. We can’t accept responsibility arising from contents being at variance with supplied report. You are strongly advised to request a detailed report in writing before purchase.

 

Our offer to supply goods is strictly conditional upon acceptable verification of all relevant VAT details via Redhill VAT office.”

 

·       Confirmation to have been received from Lloyds that the customer had TT’d the purchase price for the goods to the Appellant’s account;  and finally

·       E-mail confirmation that the freight forwarders had received a stock release from the supplier, and a stock release from the Appellant to release goods to the customer.

 

We should at this point just comment on the Appellant’s standard Terms of Trading which were probably sent to customers with the Appellant’s Trading Application Forms, in that one of the provisions of those Terms was implicitly changed by the insertion put on invoices in accordance with the sixth bullet point above. The standard terms did give a warranty that goods sold were warranted to comply with their description on the Appellant’s order confirmation form. The middle paragraph in the “inserted” term referred to in the sixth bullet point appeared to modify that standard warranty.

 

55. One of the debates between Craig Bentham and the Respondents’ counsel related to the fact that none of the orders or invoices in this case contained any box numbers, leading to counsel’s suggestion that it would have been impossible to determine, should a customer have had some complaint with the product, whether the customer had in fact been sent the stock that had been owned by the Appellant and whether, in turn, that was the stock that had been transferred by the supplier.  Craig Bentham said that the requirement for box numbers was only applicable when there were box numbers, as there certainly were with Intel CPUs. It was suggested that there were no box numbers with AMD CPUs and iPods, and it was suggested that the freight forwarder had cages for each customer so that goods were moved from cage to cage when transferred from one customer to another. There was no evidence as to whether there were or were not identifying numbers or codes of some sort on any of the packaging in any of the four Deals.

 

The Due Diligence Packs

 

56. We could describe the due diligence packs that the Appellant required its suppliers and customers to complete without reference to the answers given, but it seems more informative to describe each document in turn, then giving salient details of the way it was filled in by Plazadome and Culmain, the two suppliers, and Zaanststrait  and ASAP. Whilst our conclusion is that much of the information was incomplete and much of it not terribly helpful, we must obviously state rather laboriously what information was given, since so much in this case hinges around what the Appellant can be said to have known and had the means of knowledge to ascertain, and in this context these documents are of considerable significance.

 

The Appellant’s due diligence in relation to the two suppliers and two customers in its four back-to-back deals undertaken in VAT period 08/06

 

Company details

 

57. The first form requested simple details about the counter-party, including its name, trading and registered address, phone and fax numbers, details of its website, then the name, phone numbers and e-mail addresses of its Managing Director, purchasing contact, and accounts contact. It also asked whether the business was conducted by a limited company, partnership, sole trader or “other”. It then asked for the number of employees, the company registration number, date of incorporation, VAT number and annual turnover.

 

58. In Plazadome’s case, the points worth mentioning are that the registered address (and, one assumed, the trading address) was 49 Greenwich High Road; there was a landline number for the company and one for its fax; there was no website; Mr. Mukhtar was given as the managing director and sales contact, with a mobile phone number; there was no-one given as the accounts contact, and the  company had been formed in April 2000. Finally and significantly, the company had 2 employees and its turnover was put at £151 m.

 

59. In Culmain’s case, the address was in Manchester, and it seems that the Appellant knew of three other companies that traded from small offices in the same small office complex.  A website was mentioned, followed by the words “(not ready yet)”. The Managing Director was Samir Iftikhar, the purchasing contact Sajjao, and the accounts contact Adnan Malik. All three gave the same landline phone number as the company. One had a yahoo e-mail address, and another the e-mail address hugo.boss01@hotmail.com. The company had been formed in August 2003, had 4 employees, and declared a turnover of £10 million.

 

60. There was no reference to this further matter of course, but at this point we might quote the uncontested paragraph of Officer Holden’s First Witness Statement, in which he dealt with HMRC’s information about Culmain. Paragraph 40 said:

 

“The supplier, Culmain Ltd, is a known MTIC trader. Its 03/06, 06/06, 12/06, 03/07 and 06/07 repayments were all selected for extended verification. In period 03/06 input tax has been denied totalling £172,483.36. In 03/06 all company’s export deals have been traced back to tax loss Export deals back-to-back, same day, same quantities sold. The company had no staff yet managed an extraordinary increase in turnover: £8,800,000 in 2003-04, £109,700,000 in 2004-05, £114,800,000 in 2005-06; £17,661 in 2006-07.” (our emphasis)

 

We will not comment more generally on this issue at this point, other than to indicate that the turnover declared on the Appellant’s form was obviously a lie, and that the actual turnover had been about 15 times greater, in other words at the giddy height where it was perhaps thought difficult to reconcile it with honest trading, such that the more modest figure of £10 million might ring fewer “warning bells”.

 

61. Zaanstrait’s equivalent form was difficult to read. A. Bugden was given as the Managing Director, and no name was given for the purchasing or accounts personnel.  The company was said to have been incorporated in 2000, had 2 employees and no annual turnover was given. Although the writing was poor, the date of incorporation was clearly given as 2000, albeit that HMRC’s evidence, obtained under exchange of information powers, was that the company had been formed in January 2006 and that it had started operations in February 2006. It was also said, in HMRC’s evidence, that Andy Bugden was not a director.

 

62. ASAP’s form was even more difficult to read. It did give names against each of the three boxes for the Managing Director, purchasing and accounts contacts. It was formed in February 2003, said to have 4 employees, and no turnover figure was given.

 

Details of Directors

 

63. The next form called for personal address details of the Directors, along with a copy of either their passport or driving licence, and the time that each had lived at his or her current address.

 

64. In the case of Plazadome, this information and a copy of his passport was given, but only for Mr. Mukhtar. In the case of Culmain the information was given for two of the people mentioned on the form referred to in paragraph 59, both being said to have lived at their present properties for “10 years+”.  Zaanstrait’s form revealed as the only director the name Hannibal Barca Holding BV, with Zaanstrait’s address as its address, and gave no other details. ASAP’s form gave the relevant details for one director, namely Eugene Tuninga.

 

References and Bank Details

 

65. The next form asked for the names and “contact names” and contact details of two referees, and for the company’s bank details. This form was accompanied by a form signed by Tom Naughton indicating that the recipient should sign the consent form authorising referees to give references to the Appellant, and indicating that “we will write or telephone your quoted references on our Trade Application form.”

 

66. Plazadome’s Trade Referees were given as Masterpiece Technology and the freight forwarder, Forward Logistics, and its bank as Nordea Bank.  Craig Bentham admitted that he thought that no-one at the Appellant had heard of Masterpiece Technology, and in any event neither referee was contacted. Plazadome also sent through three sheets giving clear typed details of bank accounts with Nordea Bank, Bank of Scotland and FCIB.

 

67. Culmain’s response was simpler in that the Trade Referees were given as Forward Logistics and Tech Freight, two freight forwarders, and its bank was given as FCIB.

 

68. Zaanstrait’s form was completed in a somewhat unhelpful manner in that its two trade referees were given as two freight forwarders, the only further details being that the first, MITT, was located at Rotterdam airport, and the second, L & A Freight,  at Schiphol, and that its bank was ABN Amro. No detailed addresses were given, and no phone numbers or contact details were given.

 

69. ASAP’s form was slightly fuller in that whilst it again gave the names of two freight forwarders as its referees (MITT at Rotterdam airport, and Forward Logistics at Feltham) it did at least give contact names and phone numbers. Its bank was given as Bank Austria, though it also said “Watch on our added company details!!”

 

70. We referred in paragraph 65 to the form that accompanied the request for bank details and trade references. We should add in relation to this form that there was some text in the bottom half of the form that emphasised, in three slightly different ways, that the Appellant “did not condone, support or knowingly transact any business whatsoever with any companies etc …. having connections with Money Laundering, Missing Traders, VAT Fraud, Terrorism or any other criminality or illegal activities”. Significantly the form ended, in bold type, with the following declaration:

 

PLEASE NOTE:  A One Distribution (UK) Limited will only make payments for goods or services directly in the Bank Account as recorded on your VAT Certificate.

 

71. Plazadome’s VAT Certificate declared its bank account to be the Bank of Scotland account, being one of the three accounts referred to in paragraph 66 above. The Appellant’s payment was in fact paid into Plazadome’s Nordea bank account.

 

72. Culmain’s VAT Certificate gave the detail of a bank sort code and account number that we cannot identify with certainty, though we can say with certainty that those details do not tally with the details of the FCIB account to which the moneys paid to Culmain were credited.

 

73. We might also note that Plazadome’s VAT Certificate referred to its trade classification as “Wholesale Household Electrical”, which may not be that far removed from CPUs, whilst Culmain’s trade classification was the more general one of “Wholesaling of a variety of goods”. 

 

Solicitors’ and Accountants’ details and confirmation of attached documents

 

74. The next form asked for details of the trading partner’s solicitors and accountants and asked for confirmation that various listed documents had been provided, along with the answers to the due diligence enquiry.

 

75. Plazadome gave details of both solicitors and accountants; Culmain only of its accountants; Zaanstrait gave both but no address or contact details for the lawyers, and ASAP indicated that one firm performed both roles.

 

76. As regards the confirmation of which documents had been attached with the completed due diligence forms, all four trading partners confirmed that they attached their VAT Certificates, the company’s Certificate of Incorporation (or Dutch and Austrian equivalent), and some sort of driving licence or passport details for at least one Director. With the exception of Zaanstrait which suggested that it had attached a copy of its most recent accounts (though there was both a tick and a cross in the relevant column and no accounts were shown to us so it may be that this was an error), it was otherwise the case that none of the trading partners supplied copies of their three most recent VAT returns or their most recent audited accounts . In response to information requests about the terms of their rental agreement, if their building was rented, and requested sight of recent utility bills, most provided something. Culmain revealed that because they operated from “Workstations” in a Business Centre, they paid an inclusive amount that covered services. The document dealing with this indicated that Culmain had 2 “workstations” in Rooms F19 and 20, and one car parking space.

 

77. We should add that the Dutch and Austrian equivalent of Certificates of Incorporation and VAT Certificates were naturally written in Dutch and German.  Craig Bentham indicated that he had managed to translate them sufficiently, with the aid of Babelfish and other internet translation services to understand them. Mr. Dee observed that had he himself, done this, he would normally have written the key English words on the document to help him assemble a basic understanding of what the document said, but there were certainly no such handwritten additions to the version that we understood that Craig Bentham had received.

 

 

 

Main due diligence questions

 

78. It is relatively easy to summarise the details of the next form since with one single obvious exception, each recipient put the same ticks in the “Yes” and “No” boxes, all in a manner that would seem somewhat predictable in that if the answers had varied it would have been reasonable to assume that the relevant company would have abandoned the hope of trading with the Appellant and thrown all the forms away.

 

79. The relevant questions and answers were as follows:

·       Has the Company or any of its Directors, shareholders, partners, employees or associates ever knowingly dealt with, or been linked to, any individuals, companies or organisations involved in, or linked to, VAT Fraud? No.

·       Has the Company etc….. ever knowingly dealt with, or been linked to, any individuals, companies or organisations involved in, or linked to, Missing Trader Fraud?  No.

·       Has the Company etc …… ever knowingly dealt with, or been linked to, any individuals, companies of organisations involved in, or linked to, Terrorism?  No.

·       Has the Company etc ……. ever knowingly dealt with, or been linked to, any individuals, companies or organisations involved in or linked to Money Laundering activities? No.

·       Are you aware of HMRC’s policy on Joint Several Liability (notice 726)?  Yes for three recipients and No for ASAP.  [ Zaanstrait was run by Andy Bugden an Irishman who had previously worked with Vijay Kerai, the Appellant’s purchasing manager, when they had both worked at a company called Europa based in Manchester, so it is perhaps not that surprising that Andy Bugden said that he was aware of notice 726 and the law concerning joint and several liability.]

·       Do you have any outstanding issues/appeals/problems with HMRC? (If yes, please provide details on a separate sheet)  No.

·       Do you, your Company, its Directors or employees carry out reasonable checks on companies or individuals to ensure that they are legal and valid? Yes.

·       Does the Company have any reason whatsoever to believe that any companies or individuals it deals with have any involvement in any illegal activities?  (If Yes, please provide details on a separate sheet)  No.

·       Have any of the company’s directors proprietors, partners or principal officers got a criminal record?  (If yes, please provide details)  No.

·       Does the company have a Due Diligence policy? If so, please provide evidence of checks carried out and copy of your Due Diligence form.  Yes.

 

Credit references

 

80. Two credit references had been obtained by the Appellant for each of Plazadome and Culmain, and seemingly none for Zaanstrait and ASAP. This may seem curious as the Appellant would need to be paid by the latter two companies, and would be the payer as regards the first two. We believe that no particular evidence was given as regards this, but we certainly accept that the Appellant’s greater credit concern would relate to the two companies for which it obtained credit references. This is because the Appellant was expecting to receive payment from Zaanstrait and ASAP before it paid its own suppliers, and indeed before it would release goods to Zaanstrait and ASAP. In actual fact, errors were made in Deal 1 and the goods were shipped to Zaanstrait some days before either payment was made, but we accept that that was through an error on the part of either the Appellant or Forward Logistics. On the basis thus that the two customers should have paid before the Appellant released the goods to them, there was in reality no credit risk on the customers. The commercial risk that there was was that one of the customers might have raised some immediate complaint on receiving the goods and demanded its money back. In this situation, and Craig Bentham acknowledged this, the Appellant might have had to refund the price that it had received, and raise a similar complaint against its supplier, and he said in evidence that, at worst, the Appellant might have to sue the supplier. In that context it was indeed right that the real credit risk attached to the two suppliers and not the customers, so that it is understandable (should this be the case) that only supplier credit references were taken out.

 

81. The two credit references for the two suppliers were given by Dun & Bradstreet and by Creditsafe.  We were told that the explanation for two reports was that the former had been a pre-condition (along with a Dun & Bradstreet credit report for more than £10,000) to a credit insurance policy for amounts of up to £10,000, whereas the Creditsafe report was a free report and was said to give the Appellant’s traders useful information.

 

82. Although a small County Court judgment was recorded against Plazadome, Dun & Bradstreet nevertheless gave it a reasonable credit report, with a maximum credit figure of £110,000, though Creditsafe’s figure was roughly half that, at £60,000. Both gave net worth or shareholders’ funds as £2,583,271.

 

83. The  Creditsafe report for Culmain was rather more favourable than the Dun & Bradstreet report. The former gave Culmain a credit limit of £120,000, and the latter a credit limit of £5,000. Both put the shareholders’ funds of Culmain at £92,485.

 

84. None of the credit reports gave turnover figures, possibly because both companies ranked as Small companies, such that they could file abridged accounts at the Companies’ Registry.

 

Terms and Conditions

 

85. Craig Bentham made it clear in his evidence that one of the Appellant’s precautions in relation to back-to-back deals would always be that the customer should pay the Appellant first, before the Appellant paid its supplier.  It appears that this was always done.  It also appears that in Deals 1 and 2 (the position being unclear for Deals 3 and 4), the suppliers had released goods to the Appellant before receiving payment, and in Deal 1 the goods were actually despatched to the Netherlands four days before Zaanstrait had paid the Appellant, and four days before the Appellant had paid Plazadome.

 

86. In MTIC transactions there are often arrangements whereunder, although suppliers will have released goods prior to receiving payment, they will only have released them on a “ship to hold” basis, meaning that the purchasers will not be able to remove the goods from the transferee freight forwarder’s custody until a final release has been given. That will of course follow payment.

 

87. The arrangements in this case appear to have been slightly muddled.  On the basis that the various suppliers, including Plazadome and Culmain in Deals 1 and 2, had actually given full releases to the Appellant before they had been paid (this point being confirmed by the MSN messages to which we will refer in due course in the case of Culmain), it is worth looking to the Terms and Conditions of Sale provided by both Plazadome and Culmain to see what the technical position was understood to be.

 

88. The Plazadome Terms and Conditions of Sale contain the following rather curious provisions:

 

4.2       Full title and property to the Products shall only pass to the Customer when all prices, taxes and charges due in respect of the Products and any Products previously supplied to the Customer have been paid.

4.3       Until such time as the property in the Products passes to the Customer, the Customer shall hold the Products on a fiduciary basis as PL’s bailee and shall keep the products properly stored, protected and insured and identified as PL’s property. Until that time the Customer shall be entitled to re-sell or use the Products in the ordinary course of its business, and any such sale shall be a sale of PL’s property on the Customer’s own behalf and the Customer shall deal as principal when making such a sale.”

 

89. It may be unnecessary to rationalise quite what the last sentence of Clause 4.3 actually means, or whether it is effective. It seems to contemplate that the goods will have remained Plazadome’s goods, but that the customer can re-sell them. If it does re-sell them, it will be a sale of Plazadome’s property to the third party purchaser. Quite what is then meant by the notion that sale would be made on behalf of “the Customer” and that the Customer would be dealing as principal when the goods were said to be Plazadome’s goods when on-sold, as principal, by the Customer, is all very confusing. We naturally understand that the aim of the wording is to preclude an “agency” analysis.

 

90. It seems to us that the draftsman of the Plazadome terms was endeavouring to deal with the possibility that arose here, but without having been addressed on the subject, we are inclined to say that these terms appear not to make sense, and that it is not even clear from whom Zaanstrait actually acquired the goods when all parties had released them to Zaanstrait on 21 July, four days before Zaanstrait had paid the Appellant and four days before the Appellant had paid Plazadome. In this context, we might add that the Appellant’s own Terms of Trading provided that title to goods would not pass to an intending purchaser until the goods had been paid for in full. In the meantime, the Appellant’s Terms of Trading provided, somewhat like the Plazadome terms, that the intending purchaser could use or re-sell the goods in the course of its business. There was not however the equivalent reference to the reference in the last sentence of Plazadome’s clause 4.3, commencing with the words “and any such sale ….”.  Quite what the position was therefore in Deal 1, when the goods had been delivered to Zaanstrait, at a time when neither the Appellant nor Plazadome had been paid, is a bit of a mystery, since in these circumstances, it appears that the Appellant was delivering goods to which it had no title, and in circumstances where its own trading terms provided that the purchaser would have no title, albeit that it could re-sell the goods. These points were less acute in Deals 2,3 and 4 in that, at least so far as the Appellant’s own terms were concerned, ASAP had always pre-paid for goods, such that under the Appellant’s terms, there was no bar to title passing on delivery. The only doubt in relation to the goods concerned in Deals 2,3 and 4 is that they had always been released to the Appellant before Culmain had been paid. Had we been able to read the illegible Culmain Trade Terms, this feature might have cast doubt on whether the Appellant was actually selling goods that it even owned. We could however not explore that point further since the Culmain terms were completely illegible.

 

91. It was certainly also the case that the iPods had again been released prior to Culmain receiving payment. This was established by comparing the time at which TechFreight e-mailed the Appellant and informed Michael Imms that Culmain had released the iPods to the Appellant, and the timing of the MSN messages that indicate when the Appellant paid Culmain. As we have just indicated, we were given two sheets of paper containing Culmain’s Terms and Conditions, but these were completely illegible. We imagine that they had initially been faxed to the Appellant by Culmain and that that first faxed version was presumably illegible, such that no-one was able to indicate to us quite what the legal position was, when goods were released prior to Culmain receiving payment.

 

The detailed steps in relation to the four deals

 

92. We were given details of the various transfers to Plazadome and Culmain by earlier companies in the chains, but will ignore this. We will simply record the details of the orders, invoices, inspection reports etc relevant to each of the four deals between the Appellant and its two suppliers and two customers. We should indicate that we were given 120 pages of MSN messages as an annexe to Michael Imms’ Witness Statement.  These MSN messages record a written conversation between Michael Imms and various parties, rather as if text messages had all been written out, but transmitted by computer and not by mobile phone. We will be referring to these messages in more detail later, but they do assist at one or two points in re-assembling the precise order of steps in Deal 2 in particular. It appears that it was only Culmain and ASAP with whom Michael Imms could correspond via MSN messages, so that there are no such messages in relation to Deal 1.

 

The detailed steps relevant to the implementation of Deal 1

 

93. Since there were no MSN messages, and no timings on Orders and Invoices, albeit that many of those would have been faxed, we can only summarise the terms and dates on the documents themselves.

 

94. We were not informed how the Appellant had initially contacted Plazadome. Michael Imms, however, said that many of his initial trading contacts resulted from searches on the ICB website, and then multiple e-mail communication with likely sounding traders found on that website. According to Michael Beaver’s letter of 21 August 2007 to HMRC, it was Mr. Mukhpar of Plazadome that contacted the Appellant, which is consistent with Mr. Mukhpar responding to one of Michael Imms’ e-mail invitations.

 

95. As regards the first contact with Zaanstrait, we have already recorded that Vijay Keraj had worked with Andy Bugden, an Irishman, when both worked in Manchester for a firm named Europa, and Andy Bugden had obviously then moved to the Dutch firm Zaanstrait. It was also recorded that Vijay Kerai had met both Andy Bugden and Wolfgang of ASAP at the CeBIT equipment fair in Hanover at some time between 10 and 15 March 2006. Michael Imms’ evidence and Officer Holden’s evidence  both recorded that an earlier deal had been done  by the Appellant with Zaanstrait back in the 02/06 period, such that by the 08/06 period Zaanstrait was clearly known to the Appellant, and an existing customer.

 

96. Whilst the Appellant may not have known this, it was Officer Holden’s evidence that prior to their trading with the Appellant, Plazadome and Zaanstrait were clearly known to each other because there had been direct trading relationships between the two companies.

 

97. The Appellant’s Purchase Order for the 2520 CPUs in Deal 1, described as AMD 64 BIT 3800X20EM  ADA3800DAA5BV, at a unit price of £159 each, was dated 21 July 2006 and indicated that the goods were required on 22 July.  It contained the text set out in the second bullet point to paragraph 54 above. 21 July 2006 was a Friday.

 

98. Plazadome issued two invoices, both on 21 July both for goods corresponding to the Appellant’s order, and the total satisfying the order number of 2520. One invoice stated that the goods carried a 3 months’ warranty, and “remained the property of Plazadome until paid in full”. The other omitted both these points and said nothing. Neither invoice referred to box numbers.

 

99. At around 4.00 p.m. on the Friday, Michael Imms e-mailed Forward Logistics to ask whether the goods had been released to the Appellant and was told that they had been “fully released to you”.

 

100. Zaanstrait’s purchase order was dated 21 July, and indicated that delivery was to be “Ex Wks Forward Logistics”. The Appellant’s invoice (which included the text set out in the sixth bullet point in paragraph 54 above) was in identical form to the Purchase Order, save that it was dated 25 July, i.e. the following Tuesday, and it did not repeat the “Ex Works” text. On 24 and 25 July, the Appellant received Redhill confirmations of the VAT numbers of Plazadome and Zaanstrait respectively, and both payments were made on 25 July.

 

101. It transpired, however, that whilst the goods were doubtless not meant to be shipped until the Appellant had received payment, they were in fact released and presumably taken by Zaanstrait’s transport company on the Friday, 21 July.

 

102. The only Inspection Report in relation to the CPUs in Deal 1 was a report that actually related to 5040 CPUs (i.e. the quantity that had moved from Capitazone to Castleview, and from Castleview to Masterpiece, but not the quantity acquired by either Plazadome or the Appellant. We accepted that the 2520 CPUs that passed to Plazadome, the Appellant and Zaanstrait was part of that consignment dealt with by the Inspection Report.  The Report itself was dated 19 July and certainly faxed to someone on 19 July, because unusually this document did contain a timed fax header. The report indicated that the goods were in 28 manufacturers’ boxes, and whilst we are not to know whether the relevant box was amongst the boxes passed on to Plazadome and the Appellant, one box was said to be open, with 2 inner boxes remaining sealed, and 1 inner box said also to be open but still intact. The report also indicated that the boxes had been X-rayed.

 

103. There was considerable debate about whether the Appellant had insured the goods whilst in its possession. It had initially been said by the Appellant that whilst it had insured the goods in Deals 2,3 and 4, it had mistakenly failed to insure the goods in Deal 1. It subsequently transpired that this was wrong, and that the Appellant had actually insured the goods for each of the 5 days from 21 July to 25 July. At the Respondents’ request the Appellant then went to some trouble during the hearing to establish, which it did, that it had paid for each day’s insurance cover for storage. The end result was, therefore, somewhat odd in that it ought to have needed the insurance because the goods ought not to have been released until 25 July. As it was, the goods were very likely not owned by it at all when they were assumed to be held by the Appellant on 21 July, but once they had been released to Zaanstrait mistakenly on 21 July, the Appellant had no further real need to have insured them anyway, since they might have become Zaanstrait’s property, pursuant to the wording of Clause  4.3 of Plazadome’s Terms and Conditions.

 

104. There was also considerable debate as to whether the Appellant had “done the deal” prior to receiving Redhill confirmations. Clearly if the goods had not been released, as we presumed was the actual intention, until 25 July, then the Redhill confirmations would have been received in due time. We attach no importance to this point.

 

 

 

 

The detailed steps relevant to the implementation of Deal 2

 

105. There was slight confusion as to the circumstances in which the Appellant had first had some dealings with Culmain.  In his letter to HMRC, dated 21 August 2007, Michael Beaver had initially said that the Appellant had been contacted by Samir Iftikhar of Culmain. He subsequently corrected this when he had read through Michael Imms’ MSN messages, and clarified that the Appellant had in fact sent a speculative e-mail to Culmain to which they had responded. It was however perfectly obvious from the MSN messages that, until ASAP itself recommended to the Appellant that it seek to do some business with Culmain, the earlier contact was no more significant than that Michael Imms had heard of Culmain. The MSN messages seemed to suggest that Culmain itself had forgotten about the Appellant’s contact altogether because there was considerable text about Culmain wanting to check-out with ASAP whether the Appellant was indeed a suitable company with which to deal, and Culmain appeared to want to do this before proceeding with any sort of transaction with the Appellant.

 

106. The Appellant’s initial contact with ASAP stemmed from the fact that the main trader in ASAP, Wolfgang Seher (“Wolfgang”) had previously worked for a company, probably a French company, called JCH Trading, with which the Appellant had traded. In was not clear whether the Appellant had then actually dealt with Wolfgang, but at least they both shared the common experience of having had some considerable trouble with JCH Trading. In addition to this contact, Vijay Kerai had met Wolfgang at the CeBIT Hanover trade fair in March 2006, albeit that the MSN messages between Michael Imms start 3 days before the fair started, and commence by discussing whether the two (Michael Imms and Wolfgang) will meet or not at that fair. In the event, they did not.

 

107. It is worth mentioning that HMRC’s evidence was that both Plazadome and Culmain had done prior deals with ASAP.  The prior deals with Culmain were quite obvious because there are numerous references to this in the MSN messages.

 

108. The technical steps in Deal 2 are fairly simple. The Appellant’s order, dated 1 August, was for 4000 4 GB Nano iPods, “black/white”, at a VAT exclusive unit price of £109.85.

 

109. Culmain’s invoice on the same date was in similar form, though saying “Black & White Mix”. It indicated that the stock was held at Tech Freight, and gave FCIB as the bank to which payment should be made.

 

110. Culmain sent a release fax to Tech Freight and, from the MSN messages, we know that Michael Imms was informed of the release at 1.33 p.m. on 1 August. Having already been paid by ASAP early in the morning on 1 August, the Appellant paid Culmain at about 2.15 p.m. The ASAP purchase order had in fact been dated, and presumably sent, on 31 July, indicating that insurance and transport would be dealt with by ASAP. The Austrian company’s invoice revealed incidentally that ASAP did not stand for “as soon as possible”, but the rather odd name for an Austrian company, namely “Anticipated Sourcing Attractive Promotions”, albeit that “ASAP” was in much larger lettering. The Appellant invoiced ASAP in the familiar form, again describing the products as “Black/White”, albeit that in the MSN messages it was perfectly clear that Wolfgang did not care whether the iPods were black or white.

 

111. Redhill confirmations were obtained on 1 August in respect of both Culmain and ASAP. The final point to mention is that the Appellant itself had commissioned an Inspection Report from Tech Freight. Tech Freight’s form contained three printed choices, we assumed, as to the sort of Inspection required. One was a “100% physical inspection”; the second was “A 100% box count”, and the third was “A 20% physical inspection (random selection)”. There was a typed “X” against the first. It seemed reasonable to assume that this meant that that was the sort of inspection that had been requested and done, and since there was no other commentary, it again seems fair to assume that there can have been nothing wrong with the goods. The Respondents were understandably critical of the report and it was mentioned in Officer Holden’s Witness Statement that Tech Freight was deregistered in January 2007 because it had become a missing trader.

 

The abbreviated steps relevant to the implementation of Deal 3

 

112. Deal 3 was in substantially similar form to Deal 2.  The two purchase orders (from ASAP and the Appellant) were both dated 2 August, and all other documents were dated 3 August, as were the Redhill confirmations. The product description on all four relevant documents was fairly detailed. ASAP’s payment was received at 9.35 a.m., with Michael Imms saying to Wolfgang “Morning M8 (mate), money had landed already I have just asked for the report from the supplier”, at 9.35 a.m. It is not entirely clear what report the supplier was providing, and certainly the equally uninformative Inspection Report provided by Tech Freight appears to have been requested from Tech Freight by the Appellant itself. The time on the Release confirmation from Tech Freight, and the MSN messages confirm that Culmain’s release had been received by Tech Freight at roughly mid-day and Michael Imms confirmed to Culmain that immediately after being notified of this he had made the payment to Culmain.

 

The abbreviated steps relevant to the implementation of Deal 4

 

113. Apart from the fact that all documents were dated 8 August, and neither of the Purchase Orders had an earlier date than 8 August, all of the details in Deal 4 were identical. Again the product description appears to have been relatively detailed, and the Tech Freight report equally uninformative.

 

The internal procedures for vetting deals on the part of the Appellant

 

114. A reasonably consistent picture was given of the way in which the back-to-back deals were supervised, both by the evidence given by Craig Bentham and Michael Beaver and by reading the 120 pages of MSN messages.

 

115. Tom Naughton clearly had ultimate control over whether the company should or should not embark on a controlled experiment in back-to-back trading, but there was no reference to him joining the team of Samantha Naughton, Craig Bentham and Michael Beaver is framing the due diligence procedures. It is clear, however, that those three, probably with Michael Imms on the side-lines, did frame the policies to be followed, and the terms of the due diligence packs, and all three also had some role in being required to vet, and sanction or preclude Michael Imms from proceeding with proposed deals. Craig Bentham appears to have had the main role in this regard in that the others would have looked to the Finance Director to ensure that the credit risk and liability risks were properly addressed, and it was he who acknowledged that he understood the MTIC risks, that the frauds might be several steps behind the immediate trading partners and it was Craig Bentham who had read the HMRC publications on MTIC fraud. There are consistently a number of references in the MSN messages to Michael Imms needing to clear some point, such as whether to pay a prior deposit to Culmain or not, with “the FD”.  There are several references to “the FD being out”, or “in a meeting”, whereupon Michael Imms cannot proceed with the speed that Culmain or Wolfgang would like.  There are other references to Michael Imms summarising some of the internal requirements to Wolfgang, and grumbling about Craig becoming nervous and imposing further restrictions on the method of trading.

 

116. In short, there is evidence that the Appellant did operate some controls over the trading. It is for us to consider whether some of the controls were more geared to credit concerns than concerns about VAT risks, and it is certainly for us to decide whether we conclude that much of the attention was given to seeing that bits of meaningless due diligence were collected without any apparent attention to whether it was pointless and also without any attention to whether more considered checks could  and should have been undertaken. In other words we will have to decide whether the exercise appeared to become a “box ticking exercise”, rather than a genuine exercise. For present purposes, we simply record that there was reality to the fact that Craig Bentham in particular and, to a lesser degree, Samantha Naughton and Michael Beaver did supervise the trading in some way.

 

The proposal to open an FCIB bank account

 

117. The Appellant’s receipts and payments were made through its Lloyd’s Bank account, though we were told that the Appellant had been considering opening an account with FCIB.  We were also told that no such account was ever opened, and we were told that the reasons for that were that the Appellant would have been required to maintain at least £20,000 on the account, it would encounter double banking charges, and it was possibly dubious of leaving the balance of £20,000 with a foreign bank of which it knew little.

 

118. There is however some significance in the very fact that the Appellant was considering opening an FCIB account. Furthermore the tone of the remarks by Michael Imms in several of the MSN messages suggest that it was irritating delays in opening the FCIB account that resulted in the account not being opened, rather than a considered judgment on the part of the Appellant.

 

119. In quoting the MSN messages, we think it best to quote them verbatim in their text form, but will insert “translations” in brackets where we think it appropriate. We will not trouble to insert the timings of messages (all of which are recorded) unless there is an obvious need to do so. The first relevant MSN exchange is an exchange between AD at Culmain and Michael Imms at around 2.20 p.m. on 1 August, at the time when the Appellant was about to pay Culmain for the Deal 2 goods:

 

Michael Imms: hi m8 do you know if the release has been done yet???

AD: released mate

Michael Imms: OK I will call them then send money straight away

AD: k (OK)

AD: are you going to be paying from an fc account?

Michael Imms: no m8 it is a lloyd’s bank
we will pay you now will fax over confirmation in a few mins

AD: k (OK)

Michael Imms: we will have our fcib account in about 10 days it has been really slow with them

AD: im (I’m) gonna send u my fc details so u can confirm the details b4 (before) sending the money

Michael: m8 we have sent money already

 

There was a fairly similar exchange between Michael Imms and Wolfgang of ASAP

in the build up to Deal 2 on 26 July, as follows:

 

Wolfgang: if I would buy from you I would need to send you funds early in the morning so that you can pay with that your supplier?  am I right?

Michael Imms: m8 we are setting up fcib which will be open in about 6-7 days which will make life a lot easier

Wolfgang: much trouble with fcib – I think people are switching to parexgroup.com in the moment

Wolfgang: we use bank Austria only in the moment

Wolfgang: michael – I don’t have any problem to pay you upfront

Michael Imms: yes heard rumours about the problems but fcib assured us no problems

Wolfgang: not a second of doubts

Michael Imms: m8 the problem we have is when we pay our supplier it takes hours

 

Another extract, on 1 August was as follows:

 

Michael Imms: lol (laugh out loud) m8 I will hopefully have fcib soon it has been crazy trying to open a account with them

Wolfgang: I know takes long since when are u trying too?

Michael Imms: we have been trying for 3 months

 

General summary of the content of the MSN messages

 

120. Since the MSN messages are casual text-type messages, invariably between two traders, it is natural that there will have been a certain amount of banter between the parties. We accept that this is entirely natural.

 

121. The MSN messages prove a number of general points that clearly support the Appellant’s case. They demonstrate that:

 

·       Deals are not “put on a plate” for Michael Imms, with him for instance being directed by some mastermind behind the scenes to contact Culmain and ASAP and slot the Appellant into some pre-arranged deal;

·       There is evidence of Michael Imms seeking to buy stock from Culmain which Culmain does not have, or seeking to enter into some deal with Wolfgang which is of no use to Wolfgang. It is certainly not the case that every deal that he touches “comes off”.

·       There is evidence of negotiation. There is naturally nothing that points to what we might describe as worthwhile trading where the Appellant might have taken a stock of goods at a reduced price for understandable reasons, whereupon it then set about trying to sell the stock to numerous customers.  That is not what this trading pattern was about or was meant to be about.  The only sort of negotiation is that once there appears to be a possible deal as middleman between Culmain and ASAP, there is sometimes some effort on the part of Michael Imms to get its two counter-parties to give a bit on price, to make the Appellant’s deal more worthwhile. In this context, the virtually risk-free profits made by Plazadome and Culmain (with no VAT recovery to finance or to worry about) actually suggest that Plazadome and Culmain made relatively large slices of the total profit so that it is not entirely surprising that there was scope for them to reduce their prices marginally.

·       There is also evidence that in some earlier deal, the foreign customer, JCH Trading, that we referred to in paragraph 106 above, had complained that there was something wrong with some of the goods supplied by the Appellant, and Michael Imms was trying, and seemingly succeeding, in enlisting Wolfgang’s support in his various arguments with JCH Trading. Both had a grievance against JCH Trading.  The Appellant was having the dispute about some defect in the supplies, and Wolfgang was pressing to get paid past salary which he claimed that he was owed.  The outcome of these disputes is not significant. It may be that Wolfgang received 60% of the claimed salary, and it sounds as if Wolfgang managed to help the Appellant to sort out the dispute about the contentious supplies. Certainly, Michael Imms was regularly saying: “Thanks M8”. The significant point is that things had actually gone wrong with one of these deals so that it could not be asserted against the Appellant that it was utterly immaterial whether CPUs or appropriate size bricks were delivered in these cases to the customer. This earlier dispute seemed also to suggest that there was no mastermind absolutely controlling say Culmain and ASAP, making it plain that whatever the Appellant had passed to JCH Trading, JCH Trading had to “take it and like it”. We will have to observe in due course, however, that Wolfgang did not appear to be terribly fussy as to whether goods received did or did not tally with the invoice description of them.

·       The final point that emerges from the MSN messages is that it does appear that whilst Wolfgang was certainly going to have to sell on the iPods to another party (whereupon we were not to know whether they were sold by that party to end users, or routed through the UK again in a repeat operation), Wolfgang did appear genuinely to be sourcing the semi-conductors for an end user. It seemed that Wolfgang had a contract to supply semi-conductors to a manufacturer of traffic lights, and that that is why ASAP was sourcing semi-conductors. This has no bearing on whether there was an MTIC fraud of course because the semi-conductors had been manufactured outside the UK, and if they had been routed through the UK just to achieve the cost saving inherent in the VAT fraud, that was as much a fraud as if there was no indication that the semi-conductors were to pass from ASAP to an end user. But, for what it is worth, Wolfgang periodically made remarks along the lines of “hating these back-to-back deals”, where his own buyer “might cancel or back out” (as in the case of the iPod deal), whereupon he might be landed with stock. He seemed infinitely to prefer sourcing semi-conductors for the manufacturer of traffic lights.

Specific remarks and discussions recorded in the MSN messages

 

122. The points summarised in paragraph 121 have been generally supportive of some genuine reality to the Appellant’s deals. This is not necessarily fundamental to the outcome of this Appeal, but there is nothing recorded in paragraph 121 that is particularly damaging to the Appellant’s case. There are, however, some other references that are damaging, and we now turn to these. It is difficult to deal with them in a coherent way, topic by topic, because of course some passages flit from one point to another, but we will endeavour to marshal the significant passages by reference to topics.

 

The first introductory comments between Michael Imms and Culmain

 

123. The point at which Michael Imms first contacts Culmain records that Michael Imms knows that Culmain are in the same building as several other traders that the Appellant knows, and the first and second passages that we quote record both that it was ASAP that introduced Culmain to the Appellant, and that Culmain wish to check out the Appellant with ASAP before dealing with them. Whilst in one context we accept that checking out one trader with another is the sort of thing that HMRC recommended and a feature that supports honesty, it can obviously have the very opposite connotation. The two extracts of text are as follows.

 

 

First, on 27 July:

 

AD, Culmain: who did u get our details from?

Michael Imms: Vijay who works here

AD, Culmain: but we don’t know him….need to know how u got our details

Michael Imms: m8 we know the people like supreme worldwide grandbyte etc syskal who I believe are in the same building as you

Michael Imms: m8 the boys from asap trading recommended you

AD, Culmain: what do u trade in?

Michael Imms: to be honest a bit of cpus 1k at a time but need to get into ipods

 

The second related exchange is on 31 July:

 

AD, Culmain: iv sent u the traders application form

AD, Culmain: Sorry for the delay … its just that we wanted to speak to wolfgang before proceeding

AD, Culmain: Sorry …. I meant

Michael Imms: yes that’s no problem I understand

 

These two exchanges had been preceded by the following conversation between Michael Imms and Wolfgang at ASAP on 26 July that we quote for the various reasons that they illustrate a certain attitude to due diligence, they indicate that ASAP was introducing the Appellant to Culmain, and they illustrate that Wolfgang  was entirely conversant with Culmain’s own VAT situation:

 

Wolfgang: I am looking for special semiconductor where I have since week open orders on hand

Michael Imms: Where can I buy them from that is the problem

Wolfgang: The margin is not as good as with intels but I have stead stress free business

Michael Imms: ok it good be a option m8

Wolfgang: I bought from culmain but he is running out of vat to speak open with you

Wolfgang: cul is on 3 months

Michael Imms: m8 culmain wont speak to me at all I have tried to contact him but to no avail

Wolfgang: I think that is past – history or something like that – this is german provebty (proverb, by the way)

 

and then, ignoring a few irrelevant remarks:

 

Wolfgang: is then ASAP Trading set up with you already? I mean would be ready to go dilli wise?

 

and then, after further remarks:

 

Michael Imms: m8 looks like I have found your forms is there any you want us to fill in or have we filled them in already???

Wolfgang: no we just “sort of red hill” u in Austria and thats it + a D&B report

Michael Imms: ok m8 np (no problem)

Michael Imms will culmain sell me these products you need?

Wolfgang: if they have I think so – calculate if the deal is worth doing for you – if you are happy then I am as well

Michael Imms: ok m8 will look into it now

Wolfgang: would you like to add aky_1@hotmail.com?

Wolfgang: that is I think the best sales guy in culmains company

Michael Imms: ok m8 tell him to accept me

Wolfgang: done?

Michael Imms: yes ok m8 cheers

Wolfgang: thanks as well from my side

Michael Imms: no probs

 

Dialogue relevant to “not caring about product description” etc

 

124. The following somewhat extraordinary exchange occurred on 31 March 2006

many months before the four contentious deals:

 

Wolfgang: buddy what are u charging normally for exportation  - u see there is no problem for e.g. when we order lets say 10 boxes and would pay already early bird (presumably “in advance”) for them -  and then while the IR (Inspection Report) it show up that 2 boxes are from the condition bad liked mixed lots or chips missing  … it doesn’t bother us much because we can then find some for the next day

Michael Imms: m8 there will never be a problem with boxes but I never do tray by tray inspections I just take the standard open box inspections

Wolfgang: and even when there is a problem with such boxes – I can handle it – I swapped shortly ago for wayne a box which he sold to a dutch company

Michael Imms: aaahh ok cool so when can we do our first deal m8

 

125. The next extract occurred on 1 August, in the course of the implementation of the iPod deal, Deal 2:

 

Michael Imms: hi m8 ok I am still waiting for some paperwork from supplier should be 30 mins also are these black or are they white you are buying so I can send over proforma

Wolfgang: any color

Wolfgang: I don’t care about spec or color

Wolfgang: if u need any help – let me know

Wolfgang: I told techfreight that he should be happy to have you on board

Wolfgang: cause nice big distribution

Wolfgang: hehe

Michael Imms: lol (laugh out loud) m8 your money hs hit already that was very quick I will chase up paperwork now from them.

 

and then after a gap, with irrelevant text:

 

Wolfgang: article is called black/white

Wolfgang: makes so much easier because warehouses are too stupid to count proper

Michael Imms: ok no problem I will amend it now

Wolfgang: and then we all have to amend so much paperwork because they have done it wrong  -- it is just out of experience

Michael Imms: ok I will fax over proforma now to you and po (purchase order) to supplier

Wolfgang: 5 out of 10 times they count wrong

Michael Imms: super

 

The attitude to due diligence

 

126. The first exchange is one between Michael Imms and Wolfgang on 31 July, obviously during the implementation of the iPod deal:

 

Michael Imms: m8 the only thing I am waiting on is our due diligence forms from culmain

Wolfgang: that is important

Michael Imms: yes m8

Wolfgang: does somebody take care about it?

Michael  Imms: I think they said they were sorting it today I have sent the forms to them a few days ago

 

The following exchange is between Aky of Culmain and Michael Imms, and is dated 12 December 2006. Although it seems to indicate that the Appellant would have real difficulty in venturing into the type of deal suggested, and although again it post-dates the four transactions in this case, it does appear to indicate Culmain’s attitude to trading and due diligence:

 

Michael Imms: Any news on any stock m8???

Aky hi – not yet

Michael Imms: I could really do with a deal this week

Aky: Would you deal in knitware?

Michael Imms: knitwear????

Aky: Well got a friend with manufacturers he’ always selling to eastern Europe….I could have a word so can use him when we’re stuck

Michael Imms: What does he sell

Aky: jumpers  … blouses … and stuff

Michael Imms: mmmmmmm interesting

Aky: he been running over 15 yrs or so

Aky: but if you start doing loads of diligence you might scare him off
based in manc as well
he gets his returns in 7 days

Michael Imms: we will struggle

 

Suggestions of other products in which the Appellant might trade

 

127. In mid-September 2006 there was the following slightly strange conversation between Michael Imms and Wolfgang, with the dual significance that Wolfgang is suggesting that the Appellant might trade in all sorts of product, and additionally both parties to the conversation appear to be concentrating almost exclusively on the VAT implications of trading in different products:

 

Wolfgang: maybe to open a division in your company which can do any kind of product exporting

Michael Imms: hmmmmm

Wolfgang: General exports  -  as a sub-division

Michael Imms: poss yes m8

Wolfgang: we do same here – extend classifications  - there is so much to do soft drinks, bio diesel

Michael Imms: so semi conductors wouldn’t fall under the zero rated VAT then would it???

Wolfgang: I don’t think so  -  but they have to announce the intra stat numbers to it  -  starting with 85  -  they cannot block a whole range of numbers -  they have to specify them -  in Austria it is on services in construction work  -  which is zero

Michael Imms: ok I will have a look into it

Wolfgang: sunglasses, parfum, digi cams, plasma

Michael Imms: Yes there is still lots to do

Wolfgang: don’t worry -  I feel married to you anyway

Michael Imms: lol (laugh out loud)

 

Explanations of the Appellant’s internal constraints concerning the customer’s acceptance of Inspection Reports and the subsequent payment to suppliers

 

128. Several different extracts have a bearing on the explanations that Michael Imms gives to Wolfgang about the Appellant’s requirements relating to the  customer’s acceptance of Inspection Reports, and the subsequent payment to be made to suppliers:

 

Michael Imms: m8 I can export as much as I want here at aone (i.e. A One) but I am tied to the following conditions my customer pays me on box numbers or ir (inspection report) I then pay my supplier which takes about 90 mins as he has foreign bank we then get release about 30 mins after that, and my customers have to pay in sterling

 

This summary was given on 22 March 2006 and was obviously overtaken by events in that in all four deals with which we are now concerned the goods were released to the Appellant prior to the supplier being paid. The above text did however appear to reflect the position that the customer paid first, and certainly the following extracts seem to suggest that once the freight forwarder had confirmed that the goods tallied with the description in the invoice, and once the customer had confirmed that it accepted this, then Michael Imms appeared to consider that the Appellant had no further product risk, and it immediately paid the supplier. The following are the relevant extracts:

 

Michael Imms: ok would we get release before we pay or not otherwise I only have a floor limit of 130k as there is lots of red tape here but if we get release first we can then do as much as poss (31 July)

 

Then on 1 August:

 

Wolfgang: regarding your company politics in broking deals….when and around what stage are u then paying your suppliers normally?

Michael Imms: once I have the inspection report signed by you which is your acceptance that the stock is ok and once techfreight has emailed to say we have full release we can then pay straight away

Wolfgang: sounds secure

Michael Imms: I know it is long winded m8 but that is the only way I can do it

 

Later in the day:

 

Michael Imms: m8 I have just faxed over invoice and inspection report to you can you sign and send back please

 

and on 3 August:

 

Wolfgang: it looks like IR (inspection report) is finished

Michael Imms: ok I am calling now as the stock has been released to me

Wolfgang (the context of this is that Wolfgang had probably been assisting the Appellant in seeing that Culmain did not require a deposit) may I ask – with or without deposits?

Michael Imms: without – cheers for that

Wolfgang: may I sign the IR for you?

Wolfgang: there is a big clock on the wall here  -  and we are today like 2 or three hours faster than last time

 

Only trading with counter-parties that have been in business for two years

 

129. The following extract seems to contemplate that Culmain is suggesting a fictitious way of circumventing the Appellant’s requirement that it should only trade with parties that have been in business for two years, though it does also bear on the next topic that we will consider:

 

11 Nov 2006:

 

Michael Imms: any offers at mo

Aky, Culmain: how much export do you have available – may have an offer

Michael Imms: 20K of VAT

Aky, Culmain: k. is that this month or roll-over to next also/

Michael Imms: this month  this week next week maybe more

Aky, Culmain: k….  but you have enuf time to do checks on companies?

Michael Imms: yes m8 as long as I have had done deals with them before otherwise it will take me a few days

Aky, Culmain: k …. Does it have to be done this week then . … I think you may need a few days for chks

Michael Imms: Is it buying from you? -  as you have checked out with us

Aky, Culmain: not us

Michael Imms: ok the only requirements we have is that the customer or supplier has to be trading for at least 2 years

Aky, Culmain: k  … well I will see if I can buy from them and sell to you

Michael Imms: ok

Aky, Culmain:  is the vat roll-over or fresh for next month?

Michael Imms: m8 what number are you on I will call and explain

 

Limiting export sales to match the Appellant’s output transactions, and balancing

 

130. The following extracts are all between Michael Imms and Culmain, and we give the relevant date of each:

 

7 August 2006:

Michael Imms: hi I am looking for about 4k of the semiconductors the expensive ones -  can you help?

Aky, Culmain: morning mate … sorry I’m all sold out for today as you never got back to me on Friday …. Will let you know if any for tomorrow

Michael Imms: ok m8 that would be great I am away next week for 2 weeks so I need to do at least one more deal this week

Aky, Culmain: k. will let you know later whats on offer

Michael Imms: ok m8 as I have 80k of VAT to use up this week

Aky, Culmain: k

Aky, Culmain: will know tomorrows availability in couple hrs

Michael Imms: ok m8 great stuff

Aky, Culmain: how much exports you normally do on a monthly basis

Michael Imms: it depends m8 its only about 15% of our business I work off 250k VAT to play with but it can change as we import a lot as well so that helps we are looking at going onto monthly VAT

Aky, Culmain: k…

Michael Imms: are you up for a visit sometime this week???

Aky, Culmain: maybe … even next week

Michael Imms: I am on hols next week for 2 weeks

 

18 October 2006:

 

Aky, Culmain: ru still exporting?

Aky, Culmain: I am as I have no worries about my trades

Michael Imms: I will be but in smaller amounts so I don’t have to tell customs. My fd wont do big deals as he panics and as we import a hell of a lot we have VAT to play with

Aky, Culmain: How you mean don’t have to tell customs? K  that is good when u have it to play with what type of products do you import?

Michael Imms: have a look at www.aone.co.uk 

 

28 February 2007:

 

Aky, Culmain: are you still purchasing cpu?

Michael Imms: no m8 waiting for reclaim like everyone else in the uk

Aky, Culmain: I thought you didn’t have reclaim as importing also

Michael Imms: We are on stop until we get paid out the md has decided

 

131. The following extracts are between Michael Imms and Wolfgang, and have a bearing, in particular, on suggestions about the Appellant making counter-balancing imports, so effectively becoming a contra-trader, were the suggestion to be adopted.

 

 

3 August 2006

 

Wolfgang: nano I received offers from far east on amd tray

Wolfgang: if the prices are ok after I cleared them and send them to you – you might have a chance to import them

Michael Imms: and balance

Wolfgang: these things we need to discuss as well in future

Michael Imms: yes m8 defo (definitely)

Wolfgang: when I can help u in this I will keep margin close to zero

Wolfgang: no joke

 

18 September 2006

 

Michael Imms: lol (laugh out loud) cool let me know if you are looking for any stock

Wolfgang: all right – will do  -  everything ok on your side

Wolfgang: I hear that the future for exporters is the balancing

Michael Imms: yes m8 not good at all

Wolfgang: import compensate with export

Michael Imms: yes it will be interesting in January if the reverse charge goes through

Wolfgang: very but I don’t think so -  no need in the moment

 

Remarks about HMRC investigation

 

132. The following single extract is worth quoting, since it appears to suggest that Michael Imms, who on his evidence had never met Wolfgang, was suggesting to Wolfgang that the two should both confirm that they had met at CeBIT, presumably the Hanover trade fair, where indeed Vijay Kerai did meet Wolfgang.

 

15 September 2007

 

Michael Imms: hi how are you

Wolfgang: hi buddy

Wolfgang: fine and you

Michael Imms: we have had letter off customs asking for more info for customers and suppliers your company name came up I said we met at cebit but I need a good copy of a cmr from a deal back in august is this possible to get from you or mitt????

Shredding a document

 

133. The final remark that we will mention in relation to these MSN messages is a remark made by Wolfgang, when forwarding Culmain details to the Appellant, where he asked Michael Imms to “shredder the first sheet after printing”, to which Michael Imms replied “ok np” (no problem). We do not of course know what was on that sheet, though implicitly it may have been something that Culmain had inserted solely for Wolfgang’s eyes, since it seemed that the context of the remark, as we have said, was that Wolfgang was forwarding Culmain’s particulars to the Appellant.

 

The law

 

134. Whilst we understand that one of the unsuccessful parties in the recent litigation before the Court of Appeal has sought leave of the Supreme Court to appeal to that court, for present purposes we must obviously apply the test laid out in Lord Justice Moses’ decision in the Court of Appeal. That is very simple, and is to the following effect:

 

·       The Respondents have the burden of proof, to the civil standard of the balance of probabilities,

·       It is for the Respondents to show, in relation to the third of the Kittel tests, that the Appellant either knew or ought to have known that its four transactions were connected to VAT (or indeed other) fraud.

·       We are required, before we can reach that conclusion, to decide that the Appellant knew or should have known, on making reasonable enquiries, that its transactions were connected to fraud, and not that it was merely more likely than not that they were so connected.

·       We can consider that the relevant test has been satisfied by the Respondents if we consider that the Appellant knew or ought to have known that there could be no other reasonable explanation for its transactions than that they were connected to fraud.

·       Finally in considering the case we should not dwell excessively on the due diligence, and whether or not that was necessarily satisfactory, and on the issue of what would have been discovered had further due diligence been undertaken, but we should consider all the circumstances, in the round.

 

The contentions on behalf of the Appellant

 

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

 

·       Apart from the failure to make personal visits and the failure to take up trade references, the Appellant had adapted its commercial practices in order to take account of Notice 726.

·       The Appellant’s terms and conditions (release, payment and title) differed significantly from the terms adopted by many MTIC traders.

·       The financial position of the two suppliers, as exhibited by the independent credit reports, was perfectly credible, and large numbers of staff and fixed assets were not required to generate large turnover. Large turnover was also perfectly consistent with a legitimate grey market trade in electronic components.

·       Whilst the Appellant accepted that all of the goods dealt in must have been imported, because it was conceded that none had been manufactured in the UK, this fact was not inconsistent with the goods being traded in the grey market.

·       The MSN messages gave evidence of negotiation and haggling, and also showed that other deals fell through.

·       The very nature of exporting goods within the VAT system occasioned risks.

·       It was wrong to say that the deals were undertaken in a short space of time, since the MSN messages demonstrated that some had taken some time to put together.

·       There was no evidence to say that it was abnormal for goods to be released to the Appellant before they had been paid for.

·       The Appellant only released funds paid to it by its customer once there was a satisfactory inspection report. The report was sent to the customer (ASAP) before any payment was made by the Appellant. The Appellant received funds in advance from ASAP because, on the evidence, international banking meant that if the funds were not sent pro tem in the morning the deal would be interrupted. The customer would have been reimbursed if problems arose and the Appellant’s T&Cs permitted them to reject the deal if the inspection report proved unsatisfactory.

·       There was no evidence that any of the products did have unique box or identification numbers, so that their absence on invoices etc was not material.

·       IPods were highly sought after in August 2006, so that there was nothing suspicious in parties being indifferent to whether they were black or white.

·       There was no significance to the fact that Culmain was in the same building as several other similar traders.

·       Culmain’s checks of the Appellant with ASAP were natural, and what HMRC recommended.

·       Finally, the Appellant’s due diligence, particularly when that for the suppliers was accompanied by two credit reports, gave “a good impression of the company with which A One proposed to deal”.

 

The contentions on behalf of the Respondents

 

136. We should confirm first that the Respondents told each of the Appellant’s witnesses that the Respondents case was advanced on the dual basis that the Appellant did have the relevant knowledge, as well as on the basis that it should have had the relevant knowledge.

 

137. It was contended on behalf of the Respondents that the following factors gave the Appellant “means of knowledge” that its transactions were connected to VAT fraud:

 

·        Directors of the Appellant were familiar with the requirements of Notice 726

·       It was acknowledged that several of the directors and employees, not just those who gave evidence, were fully aware of MTIC fraud in the industry.

·       Vijay Kerai had worked with Andy Bugden and had met Wolfgang of ASAP.

·       The Appellant could and should have made supplementary enquiries after receiving the due diligence responses from its trading counter-parties.

·       Since it was acknowledged that all the electronic items dealt in had been imported at some time into the UK, the Appellant should have scrutinised why, assuming honest transactions, profits were available to be made on re-exporting the goods, particularly as there would be handling charges involved in the goods coming to and being exported from the UK.

·       It was odd that the Appellant was handed an apparently “risk-free” way of making money.

·       It was odd that the Appellant could source the goods required by its customer in a short space of time.

 

138. The Respondents contended that the following were the unusual circumstances in which the four transactions took place:

 

·       The goods were released to the Appellant before they were paid for.

·       Customers were content to pay before they had seen inspection reports.

·       None of the deal documents had box or other identification numbers on them.

·       It was odd that ASAP was prepared to pay before considering the colour or specification of the  iPods in Deal 2.

·       It was odd that Culmain were located in the same premises as several other traders with which the Appellant had done prior business.

·       It was odd that Culmain wanted to check-out the Appellant with ASAP before dealing with it, or indeed before speaking to Michael Imms.

·       It was odd that due diligence was completed shoddily by traders who might have been expected to try to impress the Appellant.

·       ASAP was, at some points, endeavouring to persuade the Appellant to import goods, and to balance imports and exports.

·       It was disturbing that the Appellant was asked to shredder some “front sheet”.

·       Finally, it was odd that ASAP was indifferent to its own judgment that inspections by freight forwarders were often wrong, and had to be followed by the traders having to make subsequent adjustments to documents.

 

Our findings of facts and our Decision

 

139. This decision revolves almost entirely around our findings of fact. Although we will need in due course to give, and to justify, our conclusions in relation to the two issues of whether the Appellant actually knew that its transactions were connected to fraud, and whether, if actual knowledge has not been proved, it ought to have so known, so many of the findings of fact are relevant to both issues that we will initially give these findings without regard to the two distinct issues.

The burden of proof

140. The Court of Appeal decision that has indicated that in the second part of the decision that we must make (namely whether the Appellant should have known of the connection to VAT fraud) that the test is that the Appellant must have known that the transactions were connected to fraud, not that they were merely likely to be connected to fraud, appears to place a very high burden on HMRC. In some respects, indeed it does, but it is wrong to confuse this high threshold with the separate issue of the burden of proof. As regards the burden of proof, the law clearly remains that the Respondents must prove their case, to the balance of probabilities. This seems to us to be an important point to keep in mind, particularly in addressing the first question of whether indeed the Appellant had actual knowledge that its transactions were connected to VAT fraud.

Whose knowledge is relevant?

141. We next repeat the point that we made in paragraph 15, namely that we have no hesitation in attributing knowledge of all the individuals referred to in paragraph 2 above to the Appellant itself, and it is the Appellant’s knowledge that is in issue.

The overall circumstances surrounding the Appellant’s excursion into back-to-back trading  -  what the Appellant knew about MTIC risks  -  why there might or might not be major profits to be made from exporting product that had been imported  -  whether there was any cogent explanation for substantial volumes of honest back-to-back grey market trading

What the Appellant knew about MTIC risks

142. The circumstances surrounding the  Appellant’s excursion into back-to-back trading are unambiguously that the Appellant knew very well all about the existence of MTIC fraud; it knew that the concern was that the fraud might be concealed several steps and several transactions behind the transactions undertaken by the Appellant, and the parties with whom it dealt; and it knew that MTIC fraud was especially prevalent in the electronics industry. That indeed is why the Appellant said that some protection was secured by dealing solely with traders whose trade designation was of that category, since the Appellant claimed that HMRC was especially careful in vetting traders with that trade category. It happened in this case, of course, that one of its suppliers’ trade categories was the somewhat different one of “household electronic goods”, whilst the other was “general wholesaling in various goods”.

143. We attach some importance to the fact that Craig Bentham candidly accepted that he appreciated that a very possible attribute of MTIC fraud was that the fraud might well be perpetrated several steps away from the Appellant’s trading partners.

144. We were not sympathetic to at least two debates between counsel for the Respondents and the Appellant’s witness as to whether the risks in the Appellant’s core trading and the risks in back-to-back trading were slightly different or materially different. In its core business the Appellant generally imported goods and it sold to customers very largely in the domestic market. It was thus in the Appellant’s control to see that the VAT was accounted for, as undoubtedly it was, and the main customer risk was of whether to give customers trade credit or not. The detail of this was not particularly relevant but we gathered, not surprisingly, that the granting of trade credit to customers was dependent on the customer’s record. In back-to-back trading, the commercial risks were dependent on whether the Appellant managed to ensure that the trade terms insulated it from credit and warranty risks and the related issue of whether the approach to those issues by all parties looked commercially credible.  Alongside that there is the great dimension of the VAT fraud risk which was utterly absent in the Appellant’s core business.  We consider that, and that the Appellant knew that, the risks were dramatically different.

The employment of Michael Imms

145. We consider it significant that Michael Imms had worked at Imex Trading prior to moving to the Appellant, and we note that on the Respondents’ evidence, Imex Trading’s returns from 03/06 onwards were the subject of extended verification on the basis that it was at least possible that they involved MTIC activity.  We accept that it is not demonstrated that the relevant trading has been proven to be connected with MTIC activity and we accept that Michael Imms ceased anyway to be employed by Imex Trading well before March 2006.  It is however noteworthy that the way  in which Michael Beaver expressed matters, when referring to the proposed excursion into back-to-back trading, was that “Michael had had experience of this trading model at his last place of employment, and had a wealth of contacts with whom he felt he could trade safely and effectively”.  It is not suggested thus that Michael Imms had been involved simply in selling warehoused goods to known UK customers who would generally be end-users, in the manner that most of the Appellant’s own traders operated.  Michael Imms was said to have “had experience of this trading model”, which is plainly back-to-back trading of the type involved in the presently contentious four deals.  Moreover, Michael Imms’ numerous contacts were in that field, which suggests to us that Michael Imms had trading contacts who may have been involved in honest grey market trading, and he may have had contacts involved with MTIC fraud.

146. In fairness we feel that we should record that it was said that Michael Imms was an excellent salesman, and it was said that Tom Naughton did not want his role in relation to back-to-back trading to divert him materially from his more important role in the Appellant’s acknowledged bona fide trading. The only point that we make in paragraph 145 is that it is clear that when Michael Imms joined the Appellant, he had been fully involved in back-to-back trading at his last place of employment, and that he had many contacts in that field.

147. It was said that Michael Imms was keen to change employers because he had been lodging away from home when working for Imex Trading, and he would have an easier commute when working for the Appellant. Equally we do not doubt that a marketing job at the Appellant was attractive to Michael Imms.

148. The other point that we note however is that it would have struck anyone with a past involvement in back-to-back trading culminating in export sales that the Appellant was an exceptionally attractive company from which to undertake a certain amount of back-to-back trading on the side lines. After all the Appellant provided the three vital features that it was first highly respectable, secondly it had a large volume of plainly legitimate business in precisely the electronics and computer equipment field into which much of the back-to-back trading fitted so neatly, and thirdly the Appellant was a very large importer. Accordingly it was, so to speak, an automatic and honest contra trader.

149. We cannot believe that any of the points just addressed escaped the notice of all the parties.  Beyond being obvious, there have been references in evidence to which we have referred to initial trading being kept within strict financial limits, and the MSN messages make several references, particularly when matters became rather more worrying, to the notion of “not having to tell Customs”.

The simple maths in relation to honest and dishonest import and export transactions

150. We accept that our job in deciding this case is to decide it on the evidence and not speculation, but we nevertheless consider that the following points are relevant. They were, in any event, touched on by counsel for the Respondents.

151. We start with the simple maths of honest and dishonest importation and export. It was accepted in this case that all the goods exported had certainly been imported, because none of them were produced in the United Kingdom.

152. Ignoring trader’s profits, and also ignoring all freight, storage, insurance and other incidental costs, if goods costing the importer £100 are sold to a domestic customer, the supplier must pay £17.50 in VAT, so that the goods are sold to the purchaser for £117.50.  If that purchaser then exports them, the VAT of £17.50 will be refunded, and assuming that the same goods are trading at the initial starting price of £100 ex VAT, the goods will be sold for £100 and the exporter will recover the £17.50 from HMRC.

153. In the fraudulent transaction, the goods will still be sold for £117.50, notwithstanding that the importer will walk off with the £17.50. If the goods are then sold for £105 or £108 (giving the exporter a fairly typical MTIC margin and thus a profit if it successfully recovers the VAT) the exporter has made £5 or £8. Doubtless the defaulter keeps some of the £17.50 that is in the suitcase, or that may have been diverted in the first place by third party payments, but the balance may be applied, one assumes, in various ways. Presumably some may be returned to the foreign buyer who has paid £5 or £8 more than the goods might be worth to leave the exporter with its profit. Some of the £17.50 may also go to the foreign buyer, should it have found that 2 out of the 10 boxes have got some defective products in them, and some balance may, or doubtless does, go to the mastermind.

154. What is staggeringly obvious from these two simple examples is that the feature of bringing goods into the UK and of then exporting them entirely honestly is something that generates no potential profits. Indeed by the margins, freight, insurance and storage costs, it costs money and potentially means that if the importer sells at the price of £100, and recovers the VAT of £17.50, it makes a loss because various costs have been incurred in the meantime.  It is only if there is VAT fraud, and the exporter recovers the VAT, that there is any inherent profit in exporting goods that have been imported.

 

Some observations about supposed grey trading

155. We turn now to the honest grey market about which we were given no specific evidence in the case of trading in CPUS, iPods and semi-conductors.  The general evidence in relation to the honest grey market in mobile phones is that there is such a market, but that it is modest. There is some explanation for the grey market in the case of mobile phones in that a particular model of phone may not have sold well or may be about to be replaced, so that there is a reason why a block of phones may be sold cheaply into the grey market. It then seems that the basic aim of the first grey market trader would be to get the phones to end users (possibly end users in less developed countries if they might fetch more there), and one might expect the initial block to be fragmented into smaller lots in the endeavour to get the phones to end users in a wide area.  The parties involved in this type of exercise are in some sense “adding value”, in that they are achieving a worthwhile commercial end result between them.

156. We can place very little reliance on these and the following points, because there was no clear evidence about the existence of any honest grey market in iPods, CPUs or semi-conductors. Unless, however, there was some fraudulent origin to the 4000 iPods, it seems difficult for the Appellant to have it both ways with the iPods. We are inclined to accept the Appellant’s argument that there was nothing odd in Wolfgang being ready to take black or white iPods, and not caring about specification because we accept that in August 2006 the demand for 4gb iPods was indeed such that traders would have been happy to acquire them, regardless of colour, and we are unaware that there were differences in specification. If this is right, however, there cannot be some surmise that maybe these iPods had gone out of favour and that they were being dumped honestly in the honest grey market.

157. It was tentatively suggested that there might be profits to be made in the grey market by exploiting price and currency differences and trading arbitrage between different countries. It was widely known some years ago in particular, that car manufacturers were selling their cars at quite widely differing prices in different countries, and that for instance it might be cheaper to buy particular cars abroad and then import them into the UK, rather than buy the same cars from authorised dealers in the UK.  This sort of trading pattern is perfectly genuine, and it was drawn to our attention.  It cannot however explain why there might be profits to be made by bringing products into the UK, and exporting them out again, because that very practice illustrates that the UK, and pricing in the UK, become neutral in this situation. If the products start in Slovenia, say A, and they come to the UK and are exported to Austria, C in the example, the pricing difference that may occasion honest profits is the one between jurisdictions A and C.  If the genuine profit is to be made because the trade prices for the relevant goods are considerably higher in jurisdiction C than in jurisdiction A, the feature of whirling them through the UK is either costly and pointless, or seemingly explained by VAT fraud.

158. We appreciate that our decision should be based on evidence and findings of fact but we do also note that much of the assumption behind the Appellant’s trading model, and the case that the Appellant has advanced, is that there was a virtual daily supply of product to be acquired in the honest grey market, all of which might be exported at a significant profit, and without risk, effort or any remote contribution of value into the trading cycle. The proposition is that by simply accessing a web-site, and despatching e-mails to unknown entities, it was quite easy to generate risk-free, matched, and profitable domestic purchases and export sales.  Whilst there was no evidence to dispute this expectation, in reality it appears to be sufficiently improbable for it to be incumbent on the Appellant to have conducted its due diligence very genuinely in order to avoid being tainted with MTIC fraud that was known and appreciated to be a major risk in these product areas.  We are not saying that the Appellant has the burden of proof in illustrating the extent of the grey market, and it would have been for the Respondents to demonstrate the low level of grey market trading, had they wished to do so.  We are simply saying that the obvious risks of MTIC fraud, and the equally obvious absence of any clear rationale for large volumes of honest grey market trading should, quite apart from recommendations from HMRC, have led the Appellant to pursue its due diligence very genuinely.  We will now address the issue of whether the Appellant did indeed approach the due diligence exercise genuinely.

The general approach to due diligence

159. The passages quoted in paragraph 123 and 126 above show, along indeed with many others, the formalistic and often amused and contemptuous attitude taken by the parties to due diligence.  The attitude that Michael Imms illustrates is basically one of having to meet the requirements laid down by Craig Bentham. One gets the impression that provided Wolfgang delivered the last poor copy of a driving licence, or something equally trivial, all would be well even if Wolfgang started to discuss contra trading in the next breath, or indeed openly admitted (not that we suggest that he did) that he had been involved with VAT fraud for a period of years.  The driving licence was what counted. In relation to the issue of whether the parties to the MSN messages did come close to discussing matters that indicated that they were knowing parties to VAT fraud, the passage that we quoted in paragraph 127 above came fairly close to that, albeit that we accept that this conversation occurred in September 2006.

160. We are very firmly of the view that all five participants to the four deals in this case, along with many MTIC operators, regarded the due diligence procedures as a bit of a joke and a free “get-out-of-jail” card.  It was not as if the Appellant was a uniquely careful operator, setting up well-considered due diligence procedures. All parties swapped their “due dilli” packs, and the questions asked and information sought was generally the same.  On first encounter, the approach appeared to be, “Let’s swap our due dilli packs, and then we can get down to some trading”. Wolfgang may have been especially contemptuous, in asking whether the Appellant treated due diligence as really being of importance, but in the passage quoted in paragraph 126 above, it is still impossible to escape the impression that what Michael Imms was waiting for, before dealing with Culmain, was to “get the due diligence forms”. We imagine that they may have been read, and there was evidence that Craig Bentham did read them, but when there was a policy of not requesting missing information, nor verifying anything (save for the credit reports that we will address below), and not visiting the potential trading counter-party, we do actually wonder whether there was much point in reading the semi-completed, scruffily-completed forms anyway.  In the context of whether they were read, we certainly note that Michael Imms appeared not to record the names, phone numbers and other contact details of people at Culmain, and on several occasions asked Wolfgang who he should contact and how he should make contact with people at Culmain.  So if the forms were asserted to give the traders a good feel for the people they were trading with, it appeared that their effect was less than might have been hoped.

The basic standard of the responses received to the Appellant’s due diligence forms

161. It is impossible to provide photocopies of the completed due diligence forms. The Respondents’ counsel suggested that it might have been expected that traders hoping to do business with a sizeable and reputable company such as the Appellant might have taken a bit of care, in order to impress, in responding to the due diligence questions.  We accept, with the Respondents’ counsel, that they did not appear to wish to impress. Had the completed forms been Passport applications, they would have unquestionably been thrown out by the Passport Office. They were generally appallingly written, several contained various deletions and numerous questions were ignored.

162. One company, Zaanstrait, indicated in a confusing way that it attached some accounts to its response, though we did not see any such accounts.  No other company even purported to supply its most recent accounts.  Neither foreign company gave their turnover figures. Culmain gave a round and very wrong figure of £10m, notwithstanding that its turnover was at the levels indicated in paragraph 60 above, approximately 15 times higher.  Plazadome gave its turnover at the impressive level for a company with 2 declared employees, of £151 m.

163. Where phone numbers were given, there was generally only one landline. It was clear in the case of Culmain that Culmain had two rooms and one car parking space in an office complex where the Appellant was aware that three of the other occupants were involved in back-to-back trading.

164. Whilst perhaps this lapse was not too serious if in fact the Appellant had no intention of taking up references, the only referees given were freight forwarders (one of which was later de-registered as a missing trader), there being one exception where the referee was not a freight forwarder but nevertheless a company that no-one in the Appellant had heard of.  More often than not contact names and contact phone numbers for contacts in referees were ignored, as also were the addresses in some cases.

165. All those that replied were asked to indicate that they had no problems with their VAT authorities, and they were all asked to supply the three most recent returns. All naturally said that they had no problems of any sort in relation to VAT, albeit that since Culmain’s 03/06 repayment claims had plainly not been paid, Culmain might have become somewhat troubled about its VAT affairs. No company provided any VAT returns.

166. The Respondents’ evidence in relation to when Zaanstrait commenced trading  (February 2006) was in conflict with the 2000 date given by Zaanstrait.  This conflict was not reconciled, and no-one took the trouble to translate the Dutch forms that had been received from Zaanstrait.  Having ourselves used Babelfish to translate the forms, it actually appears that the company was indeed formed in 2000, and that its “first registration in the trade” was in 2000, though it may be the case that in 2006, when the company’s corporate documents were last amended, that it was acquired by Hannibal Barca Holding BV.  This was unclear, and on-one sought to clarify it. In using Babelfish, we might comment that we did indeed write the English words against all relevant Dutch words on the form.

167. The overall standard of the responses to the due diligence forms can only, however, be described as appalling.

 The Appellant’s policy in relation to checking information given in due diligence forms, and to following up requests for information and documents that had not been given.

168. Craig Bentham gave us the fairly extraordinary evidence that it was the company’s policy:

·       never to follow the strong suggestions in the HMRC leaflets of going to meet potential trading partners at their officers;

·       never to take up trade references; and

·       never to make further requests for information or documents that had been ignored in the initial responses.

The justifications for the above policy decisions were as follows.  There was no point in going to meet potential trading partners, as they might be good actors, and they might lie and fool the Appellant.  It was also not company policy to visit the offices of customers in the Appellant’s core business.  Equally there was no purpose in taking up trade references because referees would generally refuse to give references, and again references were never taken up in relation to new customers in the core part of the Appellant’s business.  As regards missing information, the hope was simply to get as much as one could (on one effort only), because if one asked for too much information it would irritate and one might get even less.

169. We repeat the observation that we made in the introduction, namely that if the Appellant’s view was that it was pointless to meet the trading partners because they might be good actors and they might lie, what on earth was the good of having disgracefully completed, or part-completed due diligence forms faxed to it, without verifying any of the information given?  If the parties might be lying, why did the Appellant conclude, as the Appellant’s witnesses periodically put it that “we concluded that [the counter-party] was an appropriate party with which to trade”, when on their own approach and judgment, the information given might have been a pack of lies. Indeed in some cases it certainly was.

170.  We consider that the contention that it was acceptable not to take out references and not to visit trading partners, because this merely followed the approach adopted by the Appellant in its core business was ridiculous.  As we indicated in paragraph 144 above the risks encountered in the Appellant’s core business and those in its back-to-back trading were different in nature and extent.  The main risk in the core business was presumably the issue of whether to grant customers credit, and this was doubtless influenced entirely by the payment record or general standing of different customers.  In the case of the back-to-back trading, the Appellant was dealing with people of whom it knew next to nothing, in circumstances were potential suppliers operating perhaps from a shop in the Greenwich High Road (nobody knew whether it was a shop or not) had revealed that 2 people had generated a turnover of £143 million, but had still failed to provide accounts or requested recent VAT returns. In the case of Culmain, Michael Imms knew so little that he was having to ask Wolfgang who to speak to at Culmain, and how to contact them.  One of the things ostensibly known about Culmain was that it had a turnover of £10 million, whereas in fact its turnover had been approximately 15 times greater than that.  Another was that it operated from 2 rooms, and had one car parking space in a business centre where three other back-to-back traders known to the Appellant also had rooms.

171. We agree with the Respondents’ counsel’s observation that the information that the Appellant in fact obtained was either absolutely useless or it was disturbing, and it called for further enquiries to be made.

172. The respect in which it was useless was that it was no remote protection against fraud to ascertain that a company had indeed been incorporated  or that it was registered for VAT purposes, or for instance that one director had a driving licence or that a utility bill had been paid. 

173. Our overall conclusion in relation to the whole due diligence exercise, based both on the unacceptable policy decisions that we have referred to, and on a reading of all the MSN messages was that all parties regarded their mutual “due dilli” as no more than a trivial hurdle to be overcome. As we have already said more attention was given to complying with the letter, than the spirit, of the due diligence requirements.  It was more important to get the last gas bill than to worry about whether the counter-party was a fraudster. We actually accept that Michael Imms was saying that the requirements had indeed to be met, as a matter of internal policy, but again we have no doubt that what was meant there was that as a matter of internal policy, Michael Imms had to persuade Craig Bentham that the forms had been completed to some, pretty poor, standard.  We do not consider that the Appellant was any more concerned with the genuineness of the due diligence exercise than its counter-parties.

What could and would have been discovered by seeking to verify the information given by trading counter-parties?

174. In the case of Culmain, one can only imagine that if the Appellant had visited Culmain’s two rooms and asked to see its accounts, the Appellant would either have been met with a plainly unacceptable refusal, or would have seen that the turnover was 15 times higher than the declared £10 million. When additionally the Appellant knew before it even managed to make contact with Culmain that Culmain had “run out of VAT”, one can only conclude that further questions should have been asked, or alternatively that it was unnecessary to ask further questions because there appeared to be a very serious risk that Culmain’s honesty, and its transactions, were both flawed. Culmain, along with all three other trading partners, failed to provide copies of its three most recent VAT returns.  Since Culmain had plainly not received payments from HMRC in respect of its 03/06 return, its returns would obviously have been of some considerable interest, not least because they might well have cast doubt on the answer given by Culmain that it had had no VAT problems with HMRC.

175. Had a visit been made to Culmain, the Appellant might well have considered it prudent to consider precisely why Culmain and three other back-to-back traders were operating from rooms in the same premises. There could have been honest explanations for this fact, but it would certainly have been worth exploring whether the explanation of this feature was honest or not.

176. In the case of Plazadome, where we now know that Plazadome had previously made sales directly to both Zaanstrait and ASAP, and where it now appears likely that the Appellant was being interposed as the exporting middleman in a transaction essentially arranged between Plazadome and Zaanstrait, it would again have been highly relevant to consider the explanation for Plazadome’s colossal turnover figure, and vital to have asked to see, as had been requested in the questionnaire, its accounts and 3 most recent VAT returns.

177. We note that Vijay Kerai had worked at Europa in Manchester with Andy Bugden, and that Andy Bugden had moved to Zaanstrait to start working in Holland, albeit it seems in the same sort of back-to-back trading with a slightly different slant. We note that it was Vijay Kerai who had met Wolfgang in March 2006. The Appellant chose not to seek evidence from Vijay Kerai, but since he was the only person in the Appellant’s organisation who had met two of the key individuals in the trading partners, it was curious that he was not asked to vouch for the total credibility of Andy Bugden and Wolfgang.  We also note that whilst the Appellant thought it futile for visits to be made to back-to-back trading partners, Vijay Kerai did make such a visit. It might be that that visit was partly related to the Appellant’s core business, but it is also noteworthy that Michael Imms was asking Aky of Culmain on 7 August, “Are you up for a visit sometime this week?”  That remark was made 1 minute and 27 seconds after the preceding remark about having £250k of VAT to soak up in the core business, and having £80k of VAT to use up this week”. We are thus asked to believe that due diligence visits were pointless, but that there was every reason to seek to explain to Culmain (which was known to have bumped up against the limit of any of its taxable outputs, such that it could no longer afford to finance export deals) that the Appellant would like to visit it, and that the Appellant had in its core business “this VAT to soak up”.  At another point in the MSN messages, Michael Imms was seeking to arrange a meeting with Wolfgang.

 

The negotiations to open an FCIB account

178. We are very critical of the very feature that the Appellant was considering opening an FCIB account, and also critical of the honesty of the evidence given as to why this account was in the event not opened.

179. The respect in which we say that an unrealistic gloss was put on evidence is that we were led to believe that fairly relaxed thought was given to the Appellant opening an FCIB account, but the idea was dropped because it was thought too costly with double banking charges, and the feature of having to maintain £20,000 on the account. There had clearly been at least one meeting with some form of representative of FCIB but nobody appeared to recollect who that was or what had been said at the meeting.

180. None of that account about eventually deciding, for the reasons mentioned in paragraph 117 above, not to open an FCIB account seems at all consistent with the irritated comments from Michael Imms, recorded in paragraph 119 above, as to how it had been so difficult to open an account with FCIB, and as to how it was hoped that the account would be opened in a few days. We also ask the question of why it was convenient to open such an account. We can quite follow that it might be highly convenient if all parties to transactions had accounts with the same bank, and we can see that it is possible that all MTIC traders might have sufficient common interest for all or many of them to have accounts with one bank.  We find it difficult to see, however, why genuine traders in the grey market would consider clubbing together and agreeing all to place their banking with one bank, and indeed a slightly odd off-shore bank.

181. The far more serious point, however, relates to the text that we quoted at paragraph 70 above, where the Appellant indicated that “[it would] only make payments for goods or services directly in the Bank Account as recorded on your VAT Certificate”. Beyond the fact that without any demur, the Appellant in fact paid moneys to different bank accounts than those on the VAT Certificates in all four transactions, there was the extraordinary fact that the Appellant was seeking to open an FCIB account itself, through which implicitly to conduct its back-to-back trading, and grumbling repeatedly about the delays and difficulty in doing this. It was therefore absolutely hypocritical for the Appellant to be pretending that it would only make payments into the accounts indicated in paragraph 70 above, only to ignore that proposition completely when making payments, and to be proposing itself to breach its own rule.  Such an account can rather obviously never have been the account recorded on the Appellant’s own VAT certificate, if only because the Appellant never in the event had such an account.  We are also clear that it was through difficulties and delays, mainly on the part of FCIB, that the Appellant failed to open such an account, and not just because for a couple of reasons the Appellant eventually thought it slightly too costly.

 

 

Other examples of the Appellant seeking to breach its own rules

182. Whilst it was asserted that one of the key precautions taken by the Appellant to avoid becoming involved with MTIC fraud was that it was only prepared to do business with companies that had been in business for two years, the Appellant, in the shape of Michael Imms, was seemingly ready to allow Culmain to front a transaction with a party that had not been in business for two years so that effectively the two year rule could be undermined. Michael Imms’ response to this was simply “ok”.

183. The other related precaution was that the Appellant would only trade with companies whose business was in the electronics field.  In this context, Plazadome may just have satisfied that test, but Culmain certainly did not.  We are prepared to accept that Michael Imms might have considered that it would be difficult to commence trading in jumpers and blouses, as was suggested by the MSN messages quoted at paragraph 126 above, or in soft drinks, bio diesel sunglasses etc, as discussed in the messages quoted at paragraph 127, but Michael Imms clearly knew that both of his counter-parties, Culmain and ASAP had no remote objection to this sort of trading. The response in the latter exchanges is simply “Yes there is still lots to do”.

The feature that the Appellant was being inserted into transactions essentially between Culmain and ASAP because the former had “run out of VAT to play with”, and the feature that the Appellant did have “VAT to play with”, and often arranged its transactions to exploit this feature

184. The extracts quoted at paragraph 123 above make it perfectly clear that the Appellant is being inserted into transactions between Culmain and ASAP because Culmain has run out of VAT (possibly this meant that it had hit the limit of its taxable supplies such that further exports would require repayment claims to be made, or possibly it was just worried about not receiving VAT repayments following problems with its 03/06 return), and because the Appellant did have “VAT to play with”. There is considerable evidence that certainly in the early transactions the Appellant was seeking to limit back-to-back transactions so that it would merely reduce its output liability, rather than have to make repayment claims. By the period that falls after the four deals in this case, Michael Imms was talking quite openly, in the passages quoted in paragraphs 129 and 130 above, about not worrying the nervous FD, and about keeping below the HMRC “radar screen” by limiting its export deals to the level of its substantial standard rated supplies.

185. We find both of these features highly suspicious.  If Culmain’s transactions were honest, it seems difficult to suppose that it would encounter serious delays or difficulties in making VAT repayment claims.  The Appellant knew that Culmain passed over £42,260 of profit to the Appellant in Deals 2,3 and 4, because that was the profit that the Appellant stood to make if it recovered the VAT.  To forego that level of profit merely because of a reluctance to make repayment claims should have seemed very odd to the Appellant, and to indicate that Culmain’s concerns were geared not to a short-term cash flow deficit but to a rather more serious concern. Since in any event, it was perfectly obvious that the Appellant itself attached very considerable significance to the ability to export product without having to make repayment claims, these two factors are strongly suggestive that the Appellant actually knew that the relevant transactions would be likely to be challenged if undertaken by Culmain, but might avoid challenge if they could be hidden.

The artificial trade terms

186. The Appellant’s counsel contended that the Appellant’s terms and conditions (release, payment and title) differed significantly from the terms adopted by many MTIC traders.  We agree with this, though we disagree with the assumed conclusion to be drawn from this observation.

187. We entirely follow that the Appellant’s understandable concern was to receive payment from the customer before it, the Appellant, paid the supplier, and secondly to defer paying the supplier until the point at which it considered that its warranty risk had broadly ceased.  Whilst this was the fairly obvious objective, the doubts that these requirements occasioned were as follows.

188. It is clear that in all four deals, the goods were released to the Appellant before the supplier, or implicitly perhaps the whole chain of suppliers, had been paid.  In the case of Deal 1, we do have the Plazadome terms, and we have already said that we do not understand clause 4.3 that we quoted in paragraph 88 above. Indeed, when the goods were delivered outright by the Appellant (whether deliberately or in error) to Zaanstrait’s transport agent, if Zaanstrait acquired the goods at that point, we are not entirely clear who it acquired the goods from.

189. We cannot explore the same point in relation to Deals 2,3 and 4, but it would be usual for the supplier in deals such as these to have given trade credit to the Appellant, whilst transferring title prior to receiving payment.

190. Much the more troublesome point in relation to the trade terms was the feature that the Appellant assumed that its risk of warranty liability to the purchaser expired as soon as the Appellant’s freight forwarder had put one “X” on the Inspection Report, at which point the customer was called upon to say that he accepted this report.  The Appellant then seemed to consider that it was safe to pay the supplier, which it did immediately.

191.  Paragraph 124 contains the most extraordinary exchange, albeit that it presumably led Michael Imms to conclude not only that warranty risk was eliminated once ASAP had been informed that an Inspection Report had been received, but that it would not greatly matter even if the goods did not tally with their description. Wolfgang appears to say, in the extract quoted at paragraph 124 above,  that if he orders 10 boxes and has pre-paid for 10 boxes, and he only gets 8, there being defects or items missing from the last 2, none of that matters.  It certainly seems that the Appellant does not get sued for failing to deliver the correct items in the last two boxes.  We would have been very keen to ask Wolfgang what on earth the explanation was for this attitude. Michael Imms’ response was the somewhat predictable one of -  “aaaahh ok cool so when can we do our first deal m8”. Indeed quite an appropriate response, if you can find such accommodating customers!

192. There are four things that we find unacceptable about the assumption that warranty risk is eliminated in this way.  Three are that we find each of the possible three rationalisations to be unacceptable and to indicate a total lack of commercial reality. The fourth objection that we have is that we have absolutely no idea which of the three may in fact have been the position, which is troublesome in itself.

193. The three possible positions are that:

·       rather as Craig Bentham said, and as implicitly happened with the problem with JCH Trading, the customer might complain if the goods were not in accordance with their description in the invoice, and if the Appellant then refunded the customer’s purchase price, as Craig Bentham suggested that it would do,  it would then sue the supplier for having, in turn, delivered faulty goods;

·       the Appellant might rely on “the middle term inserted into the sales invoice”, to say that the customer had been strongly recommended to make its own inspection, and that the Appellant could not be liable for any failure of the goods to tally with the description and condition of them, as illustrated by the freight forwarder’s Inspection Report; or

·       deviance from condition (or indeed existence!!!) might not matter because Wolfgang at least had seemingly said that he would not greatly care if goods were missing.

194. The first of those possibilities would, it seems, have surprised Michael Imms who appeared to think that there would be no such risk. Were there to be a need to sue the supplier, we note that credit reports had been taken out in support of the credit standing of the two suppliers.  The reports were relatively poor, and since Dun & Bradstreet gave Culmain a credit limit of £10,000, and both reports put Culmain’s net equity at £92,485, the Appellant would have had a serious exposure had Culmain failed to deliver the correct goods in any of deals 2,3 and 4. The position would have been dramatically worse if there were a problem with all three.

195. The second and third possible rationalisations in paragraph 192 are somewhat similar in that in the second, the proposition would be that whether the customer was happy or not with the failure in the quality or nature of the goods, it was the customer’s problem, whereas in the third situation, the customer would have indicated that it did not greatly care. Both of these explanations are however quite extraordinary.  In both the customer was relying on a freight forwarder’s Inspection Report, and Wolfgaang had already indicated a total lack of faith in freight forwarder’s reports. We have already referred in paragraph 125 to the seemingly fair observation that freight forwarders were stupid, that they could not count, and that paperwork often had to be re-written (not a terribly encouraging feature in itself) when freight forwarders, on 5 out of 10 occasions, had got something wrong. It thus seems incomprehensible if ASAP was actually prepared, were the transactions entirely commercial and honest, to have waived all its remedies (having already pre-paid) by simply acknowledging that it had seen or received a freight forwarder’s report given (or possibly given) to the Appellant. The third rationalisation is markedly worse, because we can think of no conceivable honest explanation to why, in honest and commercial transactions, a customer would indicate that it was indifferent to whether the goods delivered were defective or missing.

196. It is certainly not for us to rationalise this situation.  Our reaction is that the legal position as between the parties, both as regards the release of goods by the supplier before the supplier had been paid, and more particular the issue of whether the Appellant had any potential warranty liability for defective or absent goods once the customer had been notified that a freight forwarder’s inspection report had been received, is far from clear. The point that is critical for present purposes is that we consider that these terms, and particularly the extraordinary terms in relation to absence of any form of liability for failing to deliver the correct goods demonstrates that the trade terms were inconsistent with any form of commercial trading relationship.  The disclosure by Wolfgang that he was not too concerned with failure to deliver the promised goods (“it doesn’t bother us much because we can then find some for the next day”) cannot reflect the approach of a buyer in an ordinary commercial transaction.

197. We note finally in relation to the disclosure of this extraordinary attitude by Wolfgang, which certainly ought to have struck Michael Imms as being indicative of fraud, that his only reaction, and this sort of phrase occurs at a number of points in the MSN messages, was to say“OK cool so when can we do our first deal m8?”

Dishonest conduct

198. We note that in one admittedly fairly minor respect Michael Imms was ready to fabricate evidence. The exchange that we recorded in paragraph 132 indicated that Michael Imms was making it clear to Wolfgang that he had told HMRC that the two had met at CeBIT, when they had not, and when indeed the two appear never to have met. We accept that this fabrication was a detail if Vijay Kerai had indeed met Wolfgang, as we accept that he had done, but it was still not true. 

Overall conclusion in relation to whether the Appellant had actual knowledge that its transactions were connected to VAT fraud

199. Our conclusion on the first issue of whether the Appellant was a knowing participant in MTIC trading is that, on the balance of probabilities, the Respondents have shown that the Appellant did know that its transactions were in fact connected to MTIC fraud. A smoke-screen of due diligence was erected around the transactions in the hope that a combination of matching and purported due diligence would enable this trading to be undertaken, in Michael Beaver’s words “safely and effectively”. In our view this expectation failed.

200. We justify out conclusion that the Appellant had actual knowledge of the connection to VAT fraud on:

·       the content of those MSN messages that demonstrated that Michael Imms knew of Wolfgang’s extraordinary attitude to the trading terms just addressed which had to indicate a totally uncommercial and fraudulent approach to the transactions;

·       the feature that Michael Imms openly discussed with both Culmain and Wolfgang the Appellant’s high level of output supplies and therefore its ability to balance and “hide” export transactions, and its suitability to be interposed in transactions between Culmain and ASAP;

·       the clear endeavour on the part of the Appellant to open an FCIB account, only thwarted we consider by difficulties encountered in trying to do that, when such an account was difficult to reconcile with honest grey market trading, as well as being in conflict with the Appellant’s stated refusal to make any payments into accounts other than those illustrated on the VAT Certificates for the payment of VAT;

·       the feature that Michael Imms had been involved with back-to-back trading at his previous employer;

·       the feature that when it was not worth visiting trading partners to vet their credibility, it was still worth meeting them to discuss machinery to progress, and to conceal, VAT recovery transactions, and to discuss all aspects of “balancing”; and

·       the feature that when it was not worth visiting trading partners to vet information, Vijay Keraj had in fact met Wolfgang, and having worked with Andy Bugden, doubtless knew him well, but gave no evidence.

201. We accept that those of the above justifications that are based on the content of the MSN messages apply only to the three transactions with Culmain and ASAP, but we consider that the overall approach of the Appellant justifies us in concluding that the Appellant in fact treated Deal 1 in an identical manner. This conclusion is more doubtful we accept, but we have no doubt in concluding that the transaction with Plazadome and Zaanstrait in any event failed the “ought to have known” element of the Kittel test. Insofar as our conclusion in relation to “actual knowledge” is based on a judgment that Michael Imms heard enough in the form of the MSN messages to justify the conclusion that he must have actually known of the connection to fraud, we acknowledge that this aspect is in a sense simply an extension of the “ought to have known” notion.  We say that the inference to draw is that he must have known, rather than that he simply “ought to have known”.  Since however even the latter is sufficient to justify the dismissal of this appeal, we accept that more attention should be given to the second test, to which we now turn.

 

Overall conclusions on the “ought to have known” element of the Kittel test

202. Our conclusion is that the Respondents have surmounted the burden of proof by quite a margin in establishing that the Appellant ought to have known that its transactions could not be reasonably explained other than by connection to VAT fraud. 

203. We consider that the Appellant’s due diligence exercise was undertaken, just as that by the other parties to the four transactions, as a low hurdle to be jumped, in order to contend to HMRC that it had done all that it reasonably could. We consider that it had not done anything approaching what it could have done, and we agree with the Respondents that the exercise was not done in a genuine manner. It was to provide a smoke screen in the face of an HMRC attack.

204. The fictitious nature of the due diligence was illustrated not just by the refusal to visit the premises of trade partners, the refusal to vet information or to press for documents that had been requested but not provided but by the feature that the Appellant was prepared to breach its own rules by considering it acceptable for Culmain to front a transaction to avoid the “two-year” rule, by dealing with Culmain whose VAT trade classification had nothing in particular to do with electronic goods, and by completely ignoring its rule about the bank accounts to which payments should be made.

205. We consider that by asking to see accounts, by asking to see VAT returns, and by visiting all four (or at least the two domestic) parties, that the Appellant would have discovered that some of the responses to its questionnaires had been lies, and that further information (gleaned in particular from the accounts and VAT returns)  would have left it in no doubt that the intended transactions were connected to VAT fraud.  We note that the Appellant was ready enough to visit Culmain and ASAP when that suited its own ends, but it chose not to do so at the point when it should have been making genuine efforts to check the honesty of trading partners.

206. We consider the doubts in the trading terms, and the general ease and artificiality of the transactions to be enough to put anyone on notice as to the non-commercial nature of the transactions.  Michael Imms’ reaction to the remarks by Wolfgang that indicated that he, Wolfgang, was indifferent to whether goods supplied were defective, and that he was seemingly prepared to waive all remedies on simply hearing that a freight forwarder’s report, in which he had no confidence anyway, had been issued to someone, was quite extraordinary.

207. The readiness to make payments to accounts that the Appellant said it would never make payments to, and the hypocritical endeavour at the same time to open its own FCIB account for its own back-to-back trading, are highly damaging.

208. Finally, since there are enough references in the MSN messages to lead us to the conclusion that the Appellant actually knew that its transactions were connected to VAT fraud, it is self-evident that all the same references must have made it clear that the Appellant should have known this, particularly when it took all the points that we have considered in this part of our decision into account as well.

209. We dismiss this Appeal.

Costs

210. This appeal commenced when the VAT and Duties Tribunal was in operation, and in the event that the Respondents wish to rely on the old costs rules, we decide that those rules apply and that the Respondents should be awarded their reasonable costs.

Right of Appeal

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

 

 

HOWARD M. NOWLAN

TRIBUNAL JUDGE

Released: 16 September 2010