First-tier Tribunal (Tax)

[2010] UKFTT 452 (TC)

TC00717

Appeal number MAN/2008/0408

 

MTIC fraud -  whether Appellant “knew or ought to have known” of fraud in deal chains - Kittel test as reviewed in Mobilx Ltd (In Administration) –v- HMRC[2010]EWCA Civ 517 - apparently conflicting evidence as to the deal chains - identification of HMRC’s loss - extent and relevance of due diligence by Appellant - commercial reality of transactions – appeal dismissed.

 

FIRST-TIER TRIBUNAL

 

TAX

 

PHONEPOINT COMMUNICATIONS LIMITED Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

 

TRIBUNAL: JUDGE RICHARD BARLOW

SUSAN STOTT

CHRISTOPHER HACKING

Sitting in public in Manchester on 16 - 19 and 22 - 25 March 2010 and 30 June 2010

 

 

TIMOTHY BROWN of counsel instructed by McGrigors LLP solicitors, for the Appellant

 

VINESH MANDALIA of counsel instructed by Howes Percival LLP solicitors acting for the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

Introduction

 

1.       This is an appeal by Phonepoint Communications Limited (“Phonepoint”) against a decision made by the Respondents dated 27 February 2008 disallowing the Appellant’s claims to repayment of input value added tax made on its VAT returns for 06/06 and 07/06 totalling £738,378.12.

2.       The claims were disallowed because it is said by the Respondents that the transactions concerned formed part of fraudulent chains of transactions the purpose of which was to improperly retain VAT which should have been accounted for to HMRC and that the Appellant either knew or should have known of this. The Appellant says that the particular transactions it undertook were not so tainted and that it did not know, nor should it have known, that transactions it undertook were connected to a chain of transactions the purpose of which was to defraud HMRC of VAT so as to disentitle it to its claim to repayment of input tax on goods which it subsequently supplied as zero rated sales to EU customers. Fraud of the kind alleged by the Respondents in the chain of which the Appellant’s transactions formed part is known as “Missing trader intra-Community fraud” or “MTIC fraud”

3.       The Appellant has adopted what is best described as a neutral stance in relation to the issue of fraud in the chain of transactions leading up to and following its purchase and sale: it has neither admitted nor denied that the transaction chains in which it participated were fraudulent. The Appellant puts the Respondents to proof of their losses of VAT and the connection between the Appellant and any “missing” trader. The Appellant says that if there was fraud then it did not know nor should it have known of that fact

4.       At the hearing before us the Appellant was represented by Mr Timothy Brown and HMRC Mr Vinesh Mandalia. We are most grateful to both counsel for the care taken by them in their respective presentations of their clients’ cases and in particular for their assistance with reviews of the law following the publication over the past few years of a number of authoritative judgments on MTIC fraud culminating with the recent judgment in Mobilx Ltd (In Administration) –v- HMRC [2010] EWCA Civ 517

MTIC fraud

5.        MTIC fraud is a commodity based fraud in which standard rated goods or services are purchased zero rated for VAT purposes from a supplier based in another EU state and sold in the UK for domestic consumption. The importer, officially known as the “acquirer”, subsequently fails to account for the VAT due on its standard rated taxable supply to its UK based customer(s). HMRC thereby suffers a loss. That loss in recent years has been considerable. In the year with which this decision is concerned (2006) estimated losses resulting from MTIC fraud amounted to between £2.5bn to £4.5bn. It is perfectly possible that a loss to HMRC can arise for reasons other than fraud. For example, the business of the acquirer or a subsequent purchaser in the chain may simply fail without any suggestion of fraud. It is however a defining characteristic of MTIC fraud that there is at some stage in the transaction chain a clear intention by one or more of those undertaking the transactions to fail to account for VAT so as to give rise to a loss to HMRC and if the final trader in the chain receives a refund or credit of input tax while making a zero rated supply then HMRC is the source of the fraudulent profit.

6.       Tribunals and courts have had to consider a number of variants of MTIC fraud over the past years.

7.       In the simplest type of fraud the acquirer purchases the goods from an EU source so that no VAT is payable, invoicing its UK customer including VAT at the standard rate. Instead of passing the VAT on to HMRC the acquirer usually disappears (if indeed it ever really existed) retaining the VAT charged to its customer and, usually, having made no return to HMRC. Frequently it is subsequently established that the defaulting acquirer had no real substance from the outset, possibly operating from an accommodation address with fictitious officers. Another, all too common an occurrence has been the use by the defaulting acquirer of a corporate identity “hi-jacked” or “cloned” from a genuine trader. The defaulting acquirer will, prior to its departure from the scene, have sold on the goods in question to a “buffer” trader at a fixed mark-up on the price (generally such as to allow a nominal profit) and this trader will in turn sell onto another such buffer. The buffer traders will generally (but not always) complete their VAT returns and remit tax due to HMRC making an appropriate claim for deduction of input tax paid. There may be several buffer traders in the chain before a sale to a purchaser (usually referred to as “the broker”) who then sells to an EU customer so that the output VAT is again zero rated. This final trader, the broker, will apply to HMRC for a repayment of the input VAT it has paid to its immediate buffer trader at which point HMRC, if it is aware of the fraudulent activity of the acquirer (or indeed any subsequent buffer trader), will refuse the claim.

The law

8.       This appeal is primarily concerned with matters of fact.

9.       The right to deduct input tax and correspondingly to claim a repayment of input tax when in any VAT accounting period, input tax exceeds output tax, is to be found in Articles 167 and 168 of the Council Directive of 28 November 2006 on the common system of value added tax (2006/112/EC) and finds expression in domestic legislation in the UK in the Value Added Tax Act 1994 (“VATA 1994”) and the Value Added Tax Regulations 1995 published under the authority of that act. It is within this legislative framework that the system of charging output tax in respect of taxable supplies by a taxable person and allowing a deduction of input tax is operated by HMRC.

10.     In its approach to this appeal the tribunal has benefitted from the ruling recently given by the Court of Appeal in Mobilx Ltd (In Administration) –v- HMRC [2010] EWCA Civ 517 particularly as that concerns the test to be applied in determining the position of an Appellant of whom it is said that he knew or should have known that the chain of transactions of which his purchase and sale of goods forms part involved fraud.

11.    Again it is the case in this appeal that with respect to the proper approach to the law on this subject there is very little difference between the parties. Mr Brown did not seek to argue that the Kittel (infra) test as confirmed in Mobilx represented other than the correct jurisprudential approach to the issue of knowledge (actual or imputed) on the part of a trader involved in an MTIC fraud. At this point it is useful to summarise the law to be applied by the tribunal on this aspect of this appeal.

12.    The starting point in the tribunal’s consideration of the law in this appeal is the right of HMRC to refuse entitlement to deduct input tax.

13.    The test is set out at paragraph 61 in the judgment in Joined Cases C-439/04 Kittel v Belgian State and C-440/04 Belgian State v Recolta Recycling SPRL thus:

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

14. The test in Kittel was expressly approved in Mobilx. It confirmed that the category of participants (in a chain of transactions) who fall outside the objective criteria by which entitlement to deduct is determined extended beyond those who have sought to evade the tax to those who:

“themselves had no intention of committing fraud but who, by virtue of the fact that they knew or should have known that the transaction was connected with fraud, were to be treated as participants” [paragraph 41]

….and thus did not meet the objective criteria entitling them to deduction of their input tax.

15. A trader who had no means of knowing of a fraud somewhere in the chain of supply cannot be held responsible in this way but one who had available to him

“the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT ….. loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met”[paragraph 52].

16. The court in Mobilx made clear that

“The Kittel test is not one which is to be over-refined. It embraces not only those who knew of the connection but those who “should have known”. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel” [paragraph 61].

17. In considering this appeal we are mindful of the Court’s observation in Mobilx in which it was emphasised that tribunals dealing with appeals in these cases should not unduly focus on the due diligence exercised by traders to the exclusion of a consideration of the broader circumstances in which the transactions took place if the only reasonable explanation for those circumstances was that the transactions were connected to fraud. To do so would be to detract from the essential question posed by the Kittel test.

The burden and standard of proof

18. The burden of proving entitlement to refuse the deduction of input tax and consequently the right to assess the taxpayer in respect of VAT without deducting such input tax is that of HMRC: it has to show that it was entitled to take this course and if necessary to prove such entitlement. Equally it is clear that having refused to allow the deduction where it says that the Appellant’s transactions were connected with the fraudulent evasion of VAT because the Appellant knew or should have known of the fraud is again a burden which lies with the Respondents.

19. The task of proving that the Appellant knew or should have known of the fraud which tainted its transaction chain(s) will usually involve questions of constructive knowledge. In this respect Calltel Telecom Limited v The Commissioners for Her Majesty’s Revenue and Customs [2007] UK VAT 20266 at paragraph [71] is instructive :

“….we think that it is incumbent on the Commissioners to raise a case, not necessarily amounting to proof but sufficient to demand an answer, that there were facts or circumstances which support, or at least are consistent with, the conclusion that the Appellant knew, or should have known of fraud in the chain……but if the Commissioners are able to mount a case which demands some explanation, the burden shifts to the appellant to show that he took the precautions which could reasonably have been required of him and that, despite his having done so, he did not know, and could not have known, of the fraudulent purpose of others”.

There is thus in such cases, and in this appeal, a shifting evidential burden which recognises the difficult position of an appellant effectively required to prove a negative fact (i.e. that it did not know nor should it have known of the fraud alleged).

20. The standard of proof required to be satisfied is the normal standard in civil cases namely that a fact or matter in issue is established as being more probably the case than not.

 

 

The Appellant

21. The Appellant, Phonepoint Communications Limited, was incorporated on 26 April 2001 as Wordlogo Limited under company registration number 4206806. This company was purchased “off the shelf” from company registration agents. The change of name to Phonepoint Communications Limited was effected in June 2001 and the company was registered for VAT under registration number 789 1090 93 with effect from 19 November 2001. The company’s principal shareholder and director has at all times material to this appeal been Simon Norris.

22. Mr Norris in his witness statement of 21 November 2008 says that he was, prior to the setting up of Phonepoint a director with others in another company which dealt in mobile phones, Cell Direct Limited. That company was engaged in the retail sale of mobile phones from Vodaphone, BT Cellnet (now O2) Orange and T-Mobile. An attempted sale of the company with a view to an AIM listing did not materialize and Mr Norris decided to commence a business of his own acquiring for this purpose Wordlogo/Phonepoint Communications as described above.

23. Between 2001 and September 2004 the Appellant was engaged in the retail sale of mobile phones, accessories, insurance for mobile phones and as agents for airtime providers to the public. This business was conducted mainly by telephone contact with potential customers identified from purchased customer lists and from other sources. Delivery of goods was from a contracted out warehousing facility direct to the customer. This “direct fulfilment” system was, says Mr Norris, an innovation within the retail mobile phone business. The business prospered and annual turnover rose steadily from just under £1M in its first year to around £1.4M by June 2004.

24. Phonepoint commenced its activities in the wholesale sector of the mobile phone business in October 2004. In 2005 its turnover was £4.8M increasing in 2006 to £12.2M, the majority of which was contracted during the first half of the year. Following HMRC’s refusal to allow VAT inputs against its output tax leading to this appeal the Appellant ceased to carry on its wholesale business of mobile phone and ancillary equipment.

25. Mr Norris says that his company’s move into the wholesale business was a “considered” move. In his statement he says that before going into this business he also undertook a considerable amount of research making enquiries as to what was involved with his bankers (HSBC) and with HMRC provided £50,000 of his own money and secured an increase in his company’s overdraft facility with HSBC from £35,000 to £85,000 so as to ensure the availability of adequate working capital for this new business. Mr Norris was, he says, aware of and understood the need for due diligence procedures in relation to those with whom he was to deal. His evidence to the tribunal was that he exercised care in undertaking such due diligence throughout the period of wholesale trading. He was, he said, knowledgeable in the field of mobile telephone trading and was aware of the fact that VAT fraud was being perpetrated so that it was particularly important that he dealt carefully with the matter of due diligence. At no time, Mr Norris said, was the Appellant aware of fraudulent VAT evasion by any of the parties with whom he dealt nor could he have been aware of such fraud in relation to antecedent transactions of which he had no knowledge nor the means of acquiring such. The parties with which he did business had been the subject of due diligence investigations and there was nothing, says Mr Norris, which could have alerted him to the fact that his company was participating in a chain which involved the fraudulent evasion of VAT.

26. The Appellant says that quite apart from the fact that it did not and could not know of any evasion of VAT in its transaction chains HMRC have not in this appeal established that the several alleged fraudulent chains of transactions backwards from the Appellant to the acquirer include a party against which it can clearly establish default leading to a loss of VAT. That is a matter which is central to the Respondents’ case and which they are required to prove as a necessary condition of their entitlement to refuse the Appellant’s claim to repayment of its input tax.

The Respondents’ Case

27. The Respondents say that the Appellant (by Mr Norris) either knew that the fraudulent evasion of VAT had occurred within the chain of transactions in which Phonepoint participated or alternatively that by reason of all the circumstances surrounding those transactions he should have known that his company’s dealings were connected with fraud. The Respondents contend that their tax losses in the transaction chains have arisen as a result of fraud. They argue that each of the transactions the subject of this appeal are connected to one of three companies that have failed to account for VAT due in respect of those connected transactions. The Respondents acknowledge that there would appear to be inconsistencies between the documents relating to the invoice trail and the release note and payment trails in the transaction chains so that doubt can be cast on what would otherwise represent clear evidence of default by the acquirers within the transaction chains. In this case however the Respondents say that the documentation of the transactions taken as a whole represents a fraudulent contrivance such that provided it is clear that HMRC has not received the VAT which ought to have been returned to it by the first party to deal in the goods following acquisition in the UK (whichever of the chain members that might be) HMRC’s case is still made out.

The Respondents’ evidence

28. There were before the tribunal witness statements from Simon Norris on behalf of the Appellant and by Nigel Ward, Peter Dean, Michael Quartey, Sarah Jane Barker, Roderick Stone, John Fletcher and Lesley Camm on behalf of the Respondents. Each of those witnesses attended the hearing and gave evidence to the tribunal. In accordance with the tribunal’s directions these statements, each of which contained a statement as to the truth of their contents, was taken as the evidence in chief of the witness. Some small changes to the texts of some of those statements were made by the witnesses prior to their giving their testimony to the tribunal. Those amendments were noted. Additionally there were before the tribunal some 16 A4 ring binders containing the numerous documents for each deal chain. These comprised order forms, invoices, inspection reports, release notes and bank records as well as papers recording the due diligence exercised by the Appellant in its dealings in these transactions. Also included were copies of the various letters and notices sent by the Respondents to the Appellant including the Appellant’s VAT returns for the months of June and July 2006. A number of further schedules and flow charts created by officers of the Respondents were included with the papers by way of making clear the details of individual deal chains and in particular demonstrating variances between the flows of the deals as evidenced by the invoices and movements of the goods and payments of the price. A “core bundle” agreed between the parties had been provided to the tribunal members and was of considerable assistance in providing ready access to the documents most frequently referred to.

Concerning the acquirers

29. Peter Howard Dean, an officer of HMRC, confirmed the contents of his statement. Rukford Limited (“Rukford”) (otherwise elsewhere spelt “Ruckford Limited”) was incorporated on 19 September 2003 under Company number 04904491 describing the nature of its business as “General construction and civil Engineering). The sole director was Christopher Forden. Vanessa Denny was the Company Secretary. Rukford registered for VAT with effect from 27 October 2003 but there is no evidence that it ever traded as intended in the field of construction. Mr Forden moved in July 2005 from his residential address at which the company was located but was tracked down to another address in London. This address too had been vacated by January 2008 and further attempts to locate Mr Forden have been unsuccessful. It is thought that Mr Forden, a citizen of the Irish Republic may have returned to live there. Mr Dean said that he had learned from a colleague officer, Claire Tilson, that Rukford had been compulsorily deregistered for VAT having made use of a “hijacked” VAT registration number for the purpose of securing repayment of input VAT on the acquisition of mobile phones from an EU supplier. It appeared that the invoice issued by Rukford did not comply with the requirements of a valid VAT invoice as provided in Regulation 29 of the VAT Regulations 1995. Specifically the name and VAT number appearing on the invoice were incorrect leading to the issue of an “Invalid invoice measure” the effect of which would have been to deny the claim made by Rukford. Mr Dean was unable to explain why that measure had been withdrawn enabling the claim to be paid. Rukford was one of the three “missing” traders in the chains with which this appeal is concerned.

30. Michael Quartey, also an officer of HMRC gave evidence concerning another of the three missing traders, UR Traders Limited. (“UR Traders”) UR Traders Limited was incorporated on 27 May 2005 and registered for VAT from 30 July 2005. The company had both a registered address and a separate principal place of business. Both were in London. The company’s stated business on its VAT registration form was shown as “Retail electrical items, crockery, computer parts”. Its estimated taxable turnover was given as £200,000. This company too was deregistered for VAT following enquiries from which it was concluded that the company had ceased to trade. Again it seems that the company had not undertaken any meaningful business (it apparently sold some sample mouse, rat and insect repellents, some DVD cases and undertook the editing of a wedding movie all for £147.79) beyond the transactions in which it was involved in the deal chains in this appeal. Assessments were raised against UR Traders but went unpaid. As with Rukford further enquiries could not establish the whereabouts of the company or its director Mr Ahmad Janjuva or Company Secretary, Khalid Nawazy. Correspondence addressed to the company was returned marked “gone away”. It had simply gone missing. Further enquiries revealed that the telephone landline number on the company’s notepaper was in fact that of NPower Yorkshire Limited. The mobile number was that of someone other than the officers of UR Traders. Mr Quartey’s stated conclusion was that this company had been established purely for the purpose of MTIC fraud.

31. Sarah Jane Barker a Higher Officer of HMRC dealt in her evidence with the third of the missing traders, Kaymore Export Ltd (Kaymore). This company, incorporated on 9 November 2000 under Company number 04104776, had, according to its original VAT registration application been engaged in the business of exporting “engines and spare parts” trading this way until 2006 when it ventured into the business of wholesale telephone trading. Between the quarters ending May 2005 and May 2006 this company did not declare any sales at all. In this case the director of the company a Mr Gary Woodroof claimed that the telephone deals were conducted by “someone working for him” in the name of his company. Following further enquiries it seems that a “Mr Ally” was identified as the person who had introduced Mr Woodroof to the telephone business. The two had come to an agreement whereby Mr Woodroof would allow Mr Ally to “get on with it” (meaning the business of buying and selling telephones, i-Pods and other electrical goods using the company for this purpose) in return for which Mr Woodroof would receive a commission of 10p in respect of each sale. As soon as HMRC started to focus closely on the company and its role in the deal chains in this appeal in August 2006 Mr Ally, not surprisingly perhaps, disappeared from the scene not to be seen or heard of since.

32. Nigel Ward a Higher Officer of HMRC and a member of HMRC’s MTIC fraud team gave evidence confirming the content of his written statement. That evidence will not be rehearsed here in detail. It included an analysis of each of the 20 deals drawing attention to the discrepancies between the flow of invoices and the contradicting evidence as to the release notes relating to the goods. Mr Ward included in his evidence a table showing the losses to HMRC. In concluding that these losses were the result of an orchestrated fraud Mr Ward made the following points:

·       That the discrepancies between the records of the two freight forwarders used for these transactions and the orders and invoices of the traders in the chains and on which the VAT liability has been calculated, indicates a “level of overall control beyond what could be expected of one company whereby one of the two document streams has been manipulated”. This says Mr Ward has the effect of hiding the defaulter from the freight forwarders’ records.

·       In the two months trading reviewed each of the 20 deal chains have businesses called Bluestar and Ultimate at the same point in all of them before the Appellant’s final supplier whether that was L&L or New Order

·       There is clear evidence from the freight forwarders records which, if correct, shows that in at least deals 1, 13 and 14 the goods were owned by one of the companies, OHM Traders, before they were delivered into the UK and once again by OHM Traders following delivery from the UK by the broker. This also happened although with different companies, on deal 4. In this case the Danish company Sunico, the apparent owner of the goods at the start of the chain also features as the ultimate owner in the same chain.

·       That two Dutch customers, Tele Trading and All Trading Worldwide were in the common ownership of Lenka Holdings BV whose sole shareholder is one C R Lynch a circumstance which by itself raises questions as to precisely what was going on.

·       That a close examination of the movement of the goods as evidenced by release notes and other documents obtained from the freight forwarders and from some of the companies concerned show movements of the goods which are at variance with any commercial logic and not in accordance with the invoice or payments trails.

·       That the margins made by the buffer companies are of a uniform consistency throughout the transactions and that the Appellant’s margin on all of the deals in which it was involved was 6% of the purchase price save for a single instance in which the margin was in fact 6.4%. This remarkable consistency evidences,  the Respondents contend, a level of control over the deals as a whole which can only be explained in the context of a contrived fraud the principal purpose of which was to benefit from the VAT made away with by a missing trader. This conclusion is further reinforced, so the Respondents say, by the commonality of the supply chains,

33. Mr Ward’s further evidence deals with the subject of the Appellant’s due diligence with respect to the companies with which he had dealings as well as with the essential character of the deals concerned which were generally carried out all within the space of one day. The fact that the deals were conducted on a “back-to-back” basis is seen as an indicator of MTIC fraud.  Other such indicators included the fact that the goods needed to enable a deal to take place always seemed to be ready at the right time and in the right quantities and customers for the goods appeared again at just the right time. All of the traders used the same offshore bank to assist in the transfer of funds and all of the traders conveniently used the same website for advertising purposes.  That raises the question why the later participants did not simply deal with the earlier ones in the chain and why the intervening traders features at all.

34. The evidence of Lesley Ann Camm, a Higher Officer, of the Respondents concerned the enquiries made by her of the payments chains through the First Curacao International Bank (FCIB). Having identified the Appellant’s account with FCIB Ms Camm then matched the Appellant’s numbered invoices to each of the 20 deal chains. She also identified the accounts of other “members” of the deal chains being Alfa Tradezone, All Trading Worldwide, Bluestar Trading, DRA Corporation, Imanse, L & L Trading, New Order Trading, OHM Traders, Tele Trading Worldwide and Ultimate Wholesale.

35. The traders for whom no account could be identified included Kaymore, Simply Connect, Imang, Resolutions UK, Ruckford (otherwise Rukford) UR Traders Principle Traders and Carpaa.

36. Employing computer based systems Ms Camm was able, in concert with another officer of HMRC, Kevin Wright to access detailed information relating to the financial aspects of the transactions with which this appeal is concerned reproducing this in transaction reports which were included as part of  the Respondents’ evidence. It was also possible to produce information concerning the individuals responsible for setting up the accounts and this information appears as part of Ms Camm’s statement of evidence.

37. It was on the basis of this work that the flow charts detailing the movements of monies representing the purchase price paid for the goods were prepared. Ms Camm’s statement includes a narrative for each of the deals. She concludes that there was in every one of the 20 chains a circularity of payment. For the June 2006 deals numbers 2 and 3 and for the July 2006 deals numbers 3 to 8 and 15 to 17 the funds travelled from and to the Danish company Sunico through the same 7 accounts at FCIB with the sole exception of the July deal 3 in which L & L Trading was not present. For the June deal 1 and the July deals 1, 2, 13 and 14 the funds travelled from and back to the Dutch company All Trading Worldwide through the same 7 accounts and in the July deals 9 to 12 the funds travelled from and to the Dutch company Tele Trading Worldwide again through the same 7 accounts.

38. Other information gathered by Ms Camm included connections between some of the participants in these transactions. Tele Trading Worldwide and All Trading Worldwide are based at the same address, have the same director and made their applications to open accounts at FCIB on the same date. Also within a span of only 2 months of that same date applications were made by Bluestar Trading, OHM Traders, and New Order Trading. The Appellant, Phonepoint Communications Limited was provided with trade references by L & L Trading (something which Mr Norris says was unsurprising in light of his previous association with one of the directors of that company). L & L’s trade references to the Bank were provided by New Order Trading and K M Telecom. The EU companies Alfa Tradezone and DRA Corporation are said both to have UK directors, the director of Imanse having worked shortly before these transactions in the UK.

39. Ms Camm concludes from her analysis of the transactions that they represent an attempt to extract the VAT which should have been paid to HMRC by the acquirer of the goods by fraudulent “carousel” trading. (MTIC fraud).

40. Finally, evidence was given by John Fletcher a principal adviser at the accounting firm KPMG LLP of the market conditions in the telecoms market prevailing at the time of the transactions under review. This was a very detailed analysis of the market for mobile phones but was generalised evidence rather than evidence directly concerned with the alleged fraudulent transactions. Mr Fletcher as one who had had some 15 years experience in finance and development within the telecoms industry and in particular the mobile phone business spoke of the way in which the market operated including the so-called “grey market” in which telephones were traded otherwise than through the recognised distribution channels connecting the manufacturer with his end user. It was Mr Fletcher’s evidence that middlemen could occupy a proper role in the distribution chain (be it in the official or “grey” markets) but only if they can demonstrate that they add value to the transactions concerned. He concludes that “Where such middlemen add no value, they can expect to be disintermediated quickly from the chain”.

41.  The Respondents had prepared flow charts based on the enquiries as to which evidence was given by the witnesses referred to above. These materials include charts showing the invoice chains, the release note chains, details of the freight forwarder used (many of the records recovered by the Respondents have been obtained from the freight forwarders) and the payment chains.

42. Also included in the Respondents’ evidence were tables setting out the details of each transaction within each deal chain and, separately, a schedule disclosing the profit made by each of the participants in the deal chains.

43.  Evidence was adduced as to the results of enquiries concerning the buffer companies. As was demonstrated in the deal flow charts some of the companies in the deal chains play an important part in every chain. For example different combinations of the companies Alfa Tradezone, Imanse, OHM Traders, All Trading Worldwide, DRA Corporation, Sunico and Tele Trading Worldwide play, in various combinations, a significant role in providing a circular movement of monies in all of the deals.

The Appellant’s evidence

44.  The Appellant’s evidence was set out in two witness statements given by Mr Norris as the principal of the Appellant company. The first of these extends to some 125 numbered paragraphs. It is supplemented by a second shorter statement of 34 paragraphs which deals with a curious matter relating to what the appellant claims was an unsolicited payment made into its account at FCIB in the sum of £499,978.14 made by a company called Harith General Trading LLC. Briefly the Appellant says that there had been discussions with Harith concerning possible finance to be provided by Harith to Phonepoint but these did not result in any final agreement. In the event says Mr Norris the payment by Harith of these monies was simply a mistake.

45.  As indicated above it is not our intention to rehearse Mr Norris’s evidence in detail. It will suffice for the present purpose to say that Mr Norris does not take issue with the matters discovered by the Respondents in their several very thorough investigations into these transactions. What he does say is that he entered into the wholesale business with a background in retail mobile telephone sales over a number of years. His business in the wholesale trade was an honest one to which, by his efforts in ensuring customer satisfaction, he was able to add value. He accepts that he was generally aware of MTIC fraud in the industry and that he would need to be careful. He undertook due diligence enquiries having taken advice about such matters from his bank, his accountants and from HMRC which had drawn his attention to the problems of fraud and the steps that would be needed to try and avoid becoming involved in a chain in which fraud was present. This later became of particular importance with the implementation by HMRC of a “joint and several” liability measure enabling it to reclaim unpaid VAT from any company in the deal chain.

46. Mr Norris dealt in detail both in his written evidence and at the hearing with the deal chains in which the Appellant was concerned restricting his observations to only those parts of the chain about which he knew;  generally his supplier and customer. In doing so Mr Norris appeared to us to be a witness who was, throughout his testimony to the tribunal, in command of the facts concerning his company’s involvement in the deal chains concerned. When pressed by Mr Mandalia on aspects of certain transactions which might be considered strange including, for example, the fact that telephones destined for Europe were supplied with 3-pin plugs which are not used there or the fact that goods appeared to have been released from his company’s control before payment of the price had been effected, he sought to explain his approach to these problems in a way which did not obviously suggest dishonesty.

47. Mr Norris dealt with each of the Respondents’ suggestions that there were facts and matters which ought to have put him on notice of the existence of fraud in the chain. He did this, the tribunal felt, with a degree of assurance with the exception only of the uncomfortable and apparently inexplicable fact that each of the deals involving Phonepoint was concluded so as to provide the company with a sales margin of exactly 6%. (except for one deal producing 6.4%). This was a matter on which Mr Brown was invited to address the tribunal when it reconvened on June 30 2010 to hear final submissions. It is fair to say that the tribunal has no better idea now than it had at the outset of the hearing how 20 separate (although in a few cases, related) deals apparently negotiated toughly by Mr Norris (such was his evidence) could all produce exactly the same margin of profit. This was a curiosity which Mr Mandalia contended was a clear signal of knowing participation in MTIC fraud.

48. No further witness evidence was adduced on the Appellant’s behalf.

The tribunal’s approach to this appeal

49. The tribunal adopts the approach to this appeal and its analysis of the evidence by reference to the questions accepted as correct by the Chancellor in Blue Sphere Global Ltd v HMRC [2009] EWHC 1150 (Ch) [at paragraph 29] as follows:

(a)   Was there a VAT loss?

(b)  If so, did that loss result from fraudulent evasion?

(c)  If there was fraudulent evasion, were the Phonepoint transactions the subject of this appeal connected with that evasion?

(d) If such a connection is established, did Phonepoint know or should it have known that its purchases were connected with fraudulent evasion of VAT?

50. These questions need to be considered in the context of a consideration of the transactions the subject of the several deal chains involving the Appellant. This is not a case in which there is a single deal chain leading inevitably back to the defaulting acquirer. The evidence discloses some 20 separate deal chains (although a number involved common parties and were completed at the same time) in which the evidence of the invoicing is, as indicated above, in apparent conflict with evidence which relates to the issue of goods release notes and payment of the price for the goods. It is, the Appellant argues, by reason of these apparent discrepancies that the Respondents are said to be unable to show that they have suffered a loss of VAT in any of the deal chains of which Phonepoint formed a part. It is important to deal first with this matter as a failure to prove that HMRC suffered a loss which can be traced back from the Appellant’s activities to a missing trader which absconded with the VAT charged to its customer would be fatal to the Respondents’ case.

The fraudulent nature of the transactions and the losses to HMRC of tax

51. We have no difficulty in coming to the conclusion, and we find, that each of the 20 deal chains was implemented with a view to defrauding HMRC of VAT properly payable on the first sale by the acquirer of the goods brought into the UK. The transactions concerned were, on the evidence of the Respondents’ which was not challenged, patently fraudulent involving not just a circularity of payments but a circularity which involved in at least one case the goods themselves ending up in the ownership of the party which first disposed of them. This may have occurred in a number of the cases in which there are no copy release notes but the tribunal cannot be certain of that. What is clear is that in every case the money trail leads from and to one of only three companies, Sunico, All Trading and Tele Trading. This is by itself strong evidence of a fraudulent carousel. No credible or indeed any evidence was presented which would begin to explain why the money circulated in this way.

52. There was no evidence that any of the participants in the chains had a genuine commercial interest in satisfying a market demand for the products traded whereby a profit would be achieved by each of the participants playing a part in adding value to the transaction. The Appellant was pressed by Mr Mandalia on this point. Mr Norris said that his company did add value by “delivering stock that he required in the proper manner”. We find however that the goods themselves were simply changing hands with no end users in sight or contemplation and that the Appellant’s claim to add value was without merit.

53. It was apparent from the deal charts prepared by the Respondents that the mark-ups by the buffers and by the Appellant were uniform to an extent only explicable by management of the transaction chain. The buffer companies (UK Communications, Resolution, Principle Trades, Carpaa, Simply Connect, Imang and Ultimate Wholesale collected 5p or 10p each for each telephone or device traded. Bluestar collected either 20p or 25p for each trade with the exception of one trade at 75p. The companies closer to the Appellant as broker received rather more for their trouble. L & L Trading which sold to the Appellant received 125p for each trade whilst New Order which also dealt direct with the Appellant received 100p. The Appellant itself received sums which on a per trade basis varied from as little as £5.05 to as much as £18.05 but these sums produced for the Appellant a consistent sales margin (to the nearest 0.1%) of 6% except in one case only 6.4%.

54. The management of the logistics of these trades was equally clearly orchestrated. All deals were undertaken within the span of one day. The same bank was used by all participants in the chain and, which is remarkable, all of the payments including those made in 2 tranches filtered on up the line and back again to the original source of the funds in precisely the same way. In the face of such evidence and with not a single external purchaser with a true requirement for the goods in sight the inevitable conclusion to which we are drawn is that the only financial incentive justifying the transactions was the VAT fraudulently extracted by the missing traders.

55.  What Mr Brown, on behalf of the Appellant did put in issue is whether the Respondents are able to trace their losses back to a defaulting or “missing” trader. In this he points to the apparently conflicting evidence of the transaction chains relied upon by Mr Ward in Appendix C attached to his decision letter and the second statement of Sarah Jane Barker. Mr Brown submitted that:

“given the Respondents’ inability to identify the correct chain of supply, it cannot be said to have identified the loss in the chain”.

56. More generally it is the Appellant’s position that the whilst acknowledging that the invoices appear to support the Respondents’ contention that the acquirers were Rukford, UR Traders and Kaymore the Appellant is able to point also to the release note and payment chains neither of which disclose any involvement by these companies.

57. In response to this Mr Mandalia argues that there is clear evidence before the tribunal that in each deal the goods were acquired by a UK company from an EU supplier. He accepted that in some cases it was not possible to identify from the documents recording the movements of the goods the original acquirer of the goods from Europe because some of the freight forwarders deliberately omit the details of the missing trader or acquirer. What can be said with certainty is that in each of the 20 chains there has been a tax loss attributable to a defaulter. This says Mr Mandalia is sufficient to establish the loss on which reliance is placed.

58. In support of this position Mr Mandalia took the tribunal to the decision of Clarke J. In Red 12 Trading Ltd v HMRC [2009] EWHC 2563 (Ch):

“The goods may bypass the defaulter and be allocated by the freight forwarder directly to one of the buffer companies……….although input and output tax are accounted for by a buffer company earlier in the chain. The buffer company serves its function of preventing HMRC tracing back to the original importer. Third party payments may be made by purchasers in the middle of the chain cutting out those above. What is needed for an MTIC fraud to work is the importation without payment of VAT, a trader who disappears without accounting to HMRC for the output tax it has received, and an export which generates an entitlement to claim back input tax. The original importer will make the most profit from failing to pay over output VAT. For that reason the defaulter is usually the original importer; but any company in the chain which defaults at any stage in the chain will make a profit from not accounting for the VAT, assuming that it has sold on at a profit. In order to justify denial of the right to deduct input tax there must be knowing participation in a transaction connected with fraudulent evasion of the tax. If that is established, the right is lost. It would be inconsistent with that principle and an unmerited boon to fraudsters, to require the authorities to prove that the defaulter was the original importer”

59.  The above position was further supported in very clear terms by Moses LJ who in refusing permission to appeal to the Court of Appeal in Red 12 Trading states:

“In my judgment that is unarguable. The essence of the fraud consists of depriving the Customs, and therefore the tax payer, of the tax for which the supplier has to account, whilst at the same time obliging the Customs to pay the input tax to one who has, by virtue of his knowledge of what is going on, participated in that fraud. Whether the fraudster was the importer or someone further down the line seems to me completely irrelevant and unarguable. There is no basis in my judgment, in any of the authorities for contending that the importer has to be the defaulter. Of course it must be proved that there has, in respect of each transaction, been a default, and that that default is dishonest, but that can be, in my judgment a fraud committed by anyone down the line and in respect of the person claiming the input tax the question is whether that person had knowledge of it. In my judgment the judge was right in so concluding and it does not seem to me to be arguable to the contrary.”

60. We find that it is more probable than not that the missing traders in these chains were in fact Rukford, UR Traders and Kaymore Export for each of which there is evidence of participation in this fraudulent scheme in the form of invoices connecting each with the transaction chains. The fact that some other candidate for the position of defaulter might be promoted by the Appellant on the evidence of the release notes or the payment arrangements does not detract from our finding. Even if we are wrong about the identity of the acquirers it is clear that there has been a loss to HMRC in these chains in which case, if not the acquirers, one or other of the parties in the chain would inevitably be the defaulting party. In that situation we rely upon the above approach in Red 12 Trading as representing a correct statement of the law. In either case the Respondents are entitled to refuse the Appellant’s claim to repayment of input tax if it can be shown that the Appellant knew or should have known that its transactions were connected to fraud.

The question whether Mr Norris on behalf of the Appellant “knew or should have known” of the fraud

61. We have not felt it necessary to consider at any greater length than we have done questions concerning the essentially fraudulent nature of the transactions nor the fact of the Appellant’s involvement as broker in those transactions. The evidence as to these matters is we believe clear and, with the exception of the issue of the tracing of the VAT loss by HMRC, largely uncontested. This does however leave the critical question to be resolved whether the Appellant knew or should have known of the fraudulent nature of the transactions. It is one thing to have evidence as to a fraudulent scheme mapped out after extensive enquiries and analysis: it is quite another to say that the Appellant, which in practice means Mr Norris, should have been alert to the presence of that fraud. If, as Mr Norris has contended, he dealt in good faith with the parties with which his company contracted wholly unaware of the nature of the arrangements both upstream and downstream of the Phonepoint involvement  then on what evidence and on what basis can it be said that he knew or should have known of the fraud?

62. At this point it is appropriate to remind ourselves of the extract from Kittel at [11] above whereby the tribunal is required to be satisfied that Mr Norris had:

“the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT …..”.

in which circumstance the Appellant:

“loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met” [paragraph 52].

63. The burden of proof, as has already been noted, is on the Respondents to show that Mr Norris knew or should have known that the Appellant’s dealings were connected with fraud. In this matter questions of fault, whether criminal or tortious in nature are irrelevant. What is required as a necessary part of the process of determining whether the Appellant knew or should have known of the fraud being perpetrated is a realistic assessment by the tribunal of the totality of the circumstances surrounding the Appellant’s trading on the basis of which some proper conclusions can be drawn as to the state of Mr Norris’s knowledge. Whilst the Respondents bear the burden described above, the evidential burden in relation to the enquiry as to the Appellant’s knowledge is, as has been described above, necessarily a shifting one. If in response to a particular suggestion which indicates knowledge on the part of the Appellant, the Appellant is able to provide a reasonable explanation then the burden moves back to the Respondents on that issue. This shifting of the burden is common to any contentious proceeding involving a state of knowledge or intention.

64. In asserting that Mr Norris knew or ought to have known of the fraud by traders in the chains of which the Appellant formed part the Respondents have made no assertion of direct participation by Mr Norris as a principal in the fraud although there were occasions during the hearing when Mr Mandalia’s questioning did seem to suggest such a close involvement. That is perhaps not entirely surprising given the nature of MTIC fraud but the tribunal draws a clear distinction between facts and matters in evidence which might lead to a finding of direct involvement in the fraudulent scheme, facts and matters which suggest that he actually knew but did not participate in the scheme and those facts and matters which suggest that whilst Mr Norris was not aware of what was going on elsewhere that nonetheless meant that he should have known of the existence of the fraud with which his company was connected. In this last mentioned circumstance it is necessary to establish that Mr Norris had available to him the means of knowing that fraud was involved. Looked at objectively were there facts or matters which ought to have alerted Mr Norris to the fact that his company was involved in a chain of transactions in which fraud was involved?

65. The Respondents’ answer to the question just posed is an unequivocal “Yes”. It is the Respondents’ primary case that Mr Norris knew that his company’s transactions were connected to a fraudulent loss of VAT by other traders. Mr Norris had, by his own admission, extensive industry knowledge and was aware of MTIC fraud. If he did not know of his company’s connection with the fraudulent loss of VAT then, say the Respondents, he should have known, given all of the surrounding facts.  The tribunal was asked to consider a number of matters in evidence which support these contentions.

Due diligence

66. It is as a matter of prudence that a trader undertaking commercial activities with unknown partners should make reasonable and proportionate enquiries to satisfy himself that the transactions into which he or his company are to enter will be carried out normally and that he does not allow himself or his company to be used for any improper or fraudulent purpose. This in any business is a common sense requirement. In the business of mobile telephone sales, sales of i-Pods and of computer components within the wholesale sector it is essential in light of the known prevalence of fraud.

67. Mr Norris, in his evidence, says that he took all of the steps which it was reasonable to take to satisfy himself that he was not getting involved in transactions which might be connected with fraud. In his written evidence he details the matters covered by his due diligence enquiries and in both this statement and in his testimony to the tribunal Mr Norris was at pains to emphasis that he did not regard due diligence as the “tick box” exercise which the Respondents say was his approach to this.

68. A failure to make proper enquiries as part of the due diligence process would strongly indicate a degree of recklessness which may open the way to an allegation of participation in fraud. We find that whilst Mr Norris did carry out what might be considered as a reasonable due diligence exercise not only at the start of trading but also on an ongoing basis that exercise was undertaken not because the Appellant had any real concern about his company’s trading but rather because it was necessary to keep up a pretence of legitimacy and this rendered desirable demonstrable adherence to HMRC’s compliance procedures.

69. If, for example, Mr Norris had taken any proper notice of the information he obtained from the Equifax reports which the Appellant procured as a prudent businessman Mr Norris must have realised that the companies with which he was doing business were simply not capitalised to conduct such business. L & L Trading did not have the financial standing to be offering credit to Phonepoint of up to £371,000. It had current assets of just £5,130 and a profit for the year ended 31.05.2005 of £2,520 from a turnover of £1.19M. These figures alone should have alerted Mr Norris to a potential problem. The Appellant’s other supplier New Order was little better. It extended to the Appellant credit of £500,000 over a five day period despite the fact that the advised Equifax limit of credit to be extended to it was only £25,000. For the year ended 31.12.2004 this company’s balance sheet disclosed current assets of £415,000, a figure less than the amount of credit extended to the Appellant.  Mr Norris seemed not to have given any serious thought to these figures and what they might mean for the legitimacy of the business he was to conduct with them. Mr Norris went through the motions of due diligence but paid little or no attention to what he found.

70. The Appellant had received a letter dated 13 July 2005 from HMRC alerting it  to the fact that its purchase of 1000 Nokia mobile phones had been traced back through New Order to a defaulting company as a result of which VAT had gone unpaid. It was reminded at that time of the need to ensure that its due diligence checks were maintained and more generally to reconsider its position. Mr Norris spoke with his contact at New Order who reassured him that he knew nothing of default up the chain. Beyond stating that if this were to happen again the Appellant would not trade with New Order no further steps were taken by Mr Norris at that time. Although the Appellant first traded with New Order in May 2005 its due diligence checks on such matters as Europa VAT validation and concerning Companies House information on New Order were not obtained until November of that year. This does suggest to the tribunal a less than assiduous approach to the important matter of due diligence.

71. Whilst obtaining credit from companies which did not appear to have the capacity to offer such credit might, just, be considered acceptable, the granting of credit to similarly financially challenged companies could only be regarded as wholly imprudent yet the Appellant’s due diligence on its customers was also woefully lacking in substance. It was not until some 4½ months after its first sale to All Trading that the Appellant received an Equifax report which disclosed that the company had only been incorporated in June 2003, had not filed any accounts and had a moderate risk credit score. These facts did not dissuade Mr Norris from embarking on substantial trades with this company. A similar situation existed with Tele Trading which had filed no accounts and had a limited risk credit score. Only Sunico appears to have had any substance but once again the Equifax report seems to have arrived some time after the commencement of trading.

72. Mr Norris said in evidence that he regarded due diligence as an ongoing process and this explained the fact that some reports in this process were dated after the dates of relevant transactions. We approach the question of whether Mr Norris knew or should have known of his company’s connection with fraud as one which necessarily engages all of the circumstances surrounding the transactions of which the matter of due diligence is one only. We are not persuaded however that the Appellant was genuinely concerned to understand the results of its due diligence enquiries. Those enquiries may well have “ticked all the boxes” indicated by HMRC at the time the Appellant entered the wholesale mobile telephone business but they did little else.

73. The tribunal bears in mind in relation to the matter of due diligence that it is frequently only clear after the event that a particular action, enquiry or precaution might have helped to avoid a problem:

“Traders who take every precaution which could reasonably be required of them to ensure their transactions are not connected with fraud, be it fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without risk of losing their right to deduct the input of VAT (Case C-384/04 Federation of Technological Industries and Others [2006] ECR 1/4191 as applied in Kittel)”.

Equally it has been said that there may well come a time when it is clear to a trader that the only responsible course of action to prevent involvement in a fraudulent chain is to cease conducting the business concerned. In this case the Appellant had been alerted at an early stage to the fact that a trade traced back through New Order had resulted in a loss of VAT by reason of a missing trader. It is necessary to consider the other indications available to Mr Norris that the business his company was transacting ran the real risk of involvement in a fraudulent chain so that he might have considered the wisdom of withdrawing from the business as the only sure means of ensuring that the Appellant did not expose itself to the risk of becoming involved in fraudulent transactions

Other indications of fraudulent activity in the deal chains

74. The Respondents advanced a number of reasons for their contention that the Appellant knew or should have known of the connection with fraud in the deal chains in which the Appellant was involved. They refer to the visits made by officers of HMRC on 25 November 2004 at the time Mr Norris was about to commence trade in the wholesale sector of the market and on 3^rd May 2005 when they sought confirmation that he had received the “Joint and Several Liability” Notice 726 and Notice number 700/52 concerning extended security measures as well as HMRC’s statement of practice regarding invalid invoices..

75. The Respondents also refer to the letter to the Appellant referred to above dated 13 July 2005 concerning its purchase of 1,000 Nokia 6670 telephones from New Order which had been traced back to a missing trader with a consequent loss of VAT. On the basis of these contacts and of the advice received by the Appellant from its accountants and bank when it first considered trading in the wholesale business of mobile telephones, i-Pods and CPU’s this tribunal finds that the Appellant, by Mr Norris, was well aware of the hazard posed by MTIC fraud. This finding is not directed to the issue of knowledge of actual fraud in any of the deal chains with which this appeal is concerned but addresses only the question whether the Appellant was generally aware of the hazard. That he knew or ought to have known of such fraud as affecting his company’s trading is another matter.

76. Other grounds for asserting that the Appellant should have known of fraud within its chains were directed to the essential nature of the transactions. The value of the transactions was substantial yet they appeared to lack any real formality. There were no signed contracts so that, for example, it was not possible to say precisely when title to the goods passed or to resolve any disputes which might subsequently arise. Important matters such as delivery and payment were left to informal agreement. Proper insurance arrangements had not in many cases been in place. The specifications of the goods were perfunctory often amounting to little more than a statement as to the model number, make and type of telephone. Mr Norris was questioned at some length concerning this apparently nonchalant approach to the business he conducted on his company’s behalf. His responses indicated little understanding of the importance which the passing of title to the goods would have if an insurance claim were to be made or if at any stage default occurred so that it became necessary to identify who actually owned the goods. He was equally dismissive of the other objections referred to above.

77. The deals were all conducted on a “back-to-back” basis whereby the goods ought to have been released by the seller only on receipt of payment. The evidence established however that payment was generally received after the goods had been released

78. All the paperwork for the deals was raised on the same day. The suggestion was that customers and suppliers for the precise quantities of the goods were found in a short time. The “back-to-back” nature of the transactions, concluded as they were on the same day, left no unsold stock and did not appear to represent a business engaged in a genuine commercial venture. The Respondents contend that the fact that the Appellant’s customers’ requirements could be instantly matched on the day they were required suggests that the deals were artificially contrived. We are not entirely convinced that these objections to the transactions are, by themselves, clearly indicative of fraud. The conduct of simultaneous trades on a single occasion are not unknown and of themselves do not necessarily indicate dishonesty but the frequency and facility with which they happened is a relevant fact and it is suggestive of contrivance.

79. The Appellant did not pay its suppliers until it had received payment from its own customer. This meant, say the Respondents, that the Appellant was effectively being granted a substantial unsecured loan. It is also said that there was no evidence of adequate insurance of the goods before July 2006 which would expose the Appellant to risk. These facts were satisfactorily established in evidence although in relation to the matter of insurance we heard from Mr Norris that he had, towards the last days of his trading in this business, agreed a premium with insurers for marine cover with an agreed credit period of one month for payment. His view was that the goods were adequately covered during this credit period although he admitted that he would have been unable to pay the premium when it fell due. In these circumstances we think it unlikely that his insurers would have agreed that cover was effective.

80.  The use by the Appellant of the First Curacao International Bank (FCIB) was of itself said to be suspicious given the fact that money could easily be transferred to other accounts outside the jurisdiction such as in Dubai. We are not wholly satisfied that this is a fair objection. It is one made in hindsight following charges brought against a principal of this bank and the discovery of its activities in money laundering. How much of this it is reasonable to assume the Appellant was aware of at the time he opened his account is not clear. We can see the practical advantage of the parties to a trading chain (whether honest or otherwise) using such a facility as the FCIB offered. 

81. A further suggestion in the Statement of Case bearing on the issue of the Appellant’s knowledge, actual or constructive, relates to the unique IMEI numbers borne by each telephone device as a means of identification. There was, it is said, evidence that a significant proportion of the goods had been scanned “on at least one previous occasion” (presumably by HMRC) thus demonstrating the likelihood that they were part of a carousel scheme aimed at defrauding HMRC. Mr Norris unlike some other traders had in place a system for checking (by scanning) the IMEI numbers. There is no evidence that suggests he should have realised the goods had been scanned by HMRC on more than one occasion.

82.  The mobile phones traded had non conforming plugs in that the vast majority of models acquired for onward trade in the UK market featured 2 pin plugs/leads as used in Europe whilst on at least one occasion phones sold by the Appellant and destined for Europe were equipped with 3 pin (UK) plugs. The Appellant did not appear to be able to offer any explanation for this beyond the suggestion that the appropriate leads/plugs could be supplied at or near the point of sale to an end user. We found this explanation unconvincing. So too was the apparent mismatch of the languages of the instruction sheets contained in each box with the markets of likely destination although we were told by Mr Norris that these instruction sheets were generally printed in a number of languages as is common with white goods sold in the UK and Europe. We accept that this might well be so.

83. The arrangements for inspection of the goods while at the freight forwarder’s premises were said to have been inadequate. The operation of inspection was undertaken on the basis of a 10% check. This would involve the identification of the goods concerned, opening at random some 10% of the boxes, checking the contents for any apparent damage and ensuring that in each box the plugs and leads as well as the instruction leaflet were all present. Given that there were, as the Appellant knew, a number of parties dealing with each other on a back to back basis on the same day it is difficult to conclude that these checks could have been separately undertaken for each party. More likely there was one inspection effectively covering all of the parties if indeed there was time for even one thorough inspection. As with a number of other aspects of these deals the Appellant was unable to assist the tribunal to any great extent as he had at no time ever seen the goods himself nor had he visited the freight forwarders premises.

The tribunals conclusions concerning the allegation that the Appellant “knew or should have known” of the fraud

84. There is very little in dispute between the parties to this appeal concerning the facts presented on behalf of the Respondents. The evidence concerning factual matters was largely uncontested. What is at issue is the proper implication to be drawn from those facts. The Respondents say that the necessary implication is that the Appellant has been knowingly involved in transactions connected with fraud. The Appellant takes the position that it has at all times dealt honestly and in a businesslike way with its immediate trading partners and cannot be held responsible for, or have imputed to it knowledge of, improper or fraudulent activity in those parts of the chains of transactions in which it participated but which were hidden from its view and about which, as a result, it knew nothing nor could it have known anything.

85.  The tribunal’s findings do not wholly support the position taken by the Respondents concerning this aspect of the appeal. It does accept and finds that the steps taken by HMRC to alert traders generally and the Appellant in particular as to the prevalence of MTIC fraud including the visits to the Appellant and the issue of the Public Notices referred to above were sufficient to put the Appellant on its guard as to the risk of becoming involved in a fraudulent chain. The Appellant cannot and does not say that it was unaware of this risk. What Mr Norris did say was that he had been unaware of the extent of MTIC fraud before entering the wholesale business.

86.  We have already found, on the basis of the facts elicited from the very thorough enquiries made by the Respondents, that the scheme of which the Appellant’s purchases and sales formed part were designed for one purpose only, namely to defraud HMRC of VAT properly payable in respect of the goods traded in the UK. There were not, in relation to any of these transactions, any genuine external purchasers at or close to the end user. These were not deals driven by the fast moving and dynamic market in mobile phones of which Mr Norris spoke. There were no customers eagerly awaiting delivery of their mobile phones from shops, the internet or any of the many retail outlets which a genuine wholesale trader might service.

87.  From Mr Norris’s point of view this was a business which must have, or ought to have, seemed too good to be true. He was not required to pay his seller for the goods until his company had been paid by its EU Buyer. His involvement with the goods themselves was limited. What he did have to do was to handle the paperwork to present the transactions as genuine and to take such other steps as might be necessary to convince suspicious revenue officials that he was not involved in MTIC fraud. For that reason he issued declaration forms to his company’s suppliers whereby they stated that they had no knowledge of any unpaid VAT in the supply chain. For the same reason he took care to have in place a system whereby the IMEI numbers of phones were checked. So too did Mr Norris seek to persuade HMRC that he took all reasonable precautions in effecting due diligence enquiries to present the aspect of a genuine trader who would wish to ensure the safety of his company’s business dealings. All of these activities, we find, were a smokescreen designed to present to the World a picture of a successful wholesale trader going about his lawful business.

88. We come to the above conclusions because we do not believe Mr Norris to be a stupid man. On the contrary Mr Norris struck us as an intelligent and articulate man who made the best attempt he could during the tribunal hearing of presenting his business as legitimate when, on any realistic assessment, it was clearly nothing of the sort.

89. A stupid man might think that it was reasonable to expect a customer to pay for the goods before they were delivered (or more accurately in these cases, released to their control). Such a man might also consider it usual that its supplier would extend it credit, even though that same supplier was apparently itself not creditworthy, or at least not to the extent of the many hundreds of thousands of pounds involved. There were many other aspects of this trading pattern that might seem reasonable to a stupid man but Mr Norris is not stupid and we believe that he knew very well what he was doing.

90. Asking this tribunal to accept that the toughly negotiated deals said to have been hammered out by Mr Norris whether with his sellers or his purchasers would without fail result in a uniform margin on turnover of 6% irrespective of the quantities of the contract, the identities of the goods concerned (whether telephones, i-Pods or CPUs) or their specifications is stretching credibility too far. It is, quite simply, incredible.

91. Mr Mandalia has in his closing written submissions to the tribunal made much of the improbable nature of the business model which he says should have alerted Mr Norris to the fact that he was participating in a fraudulent scheme. We accept the points made by Mr Mandalia but in doing so we restrict that view of the scheme to only that part of it which Mr Norris himself could reasonably be expected to have known about. In fact, on the evidence, Mr Norris knew that in the chain of trading which led down to the companies which sold to Phonepoint there was at least one and possibly more parties upstream of both L & L Trading and New Order. In the case of New Order he knew that the chain extended upwards through a number of companies as he had learned from HMRC of a problem with unpaid VAT up the chain. He also knew that his purchaser was not an end user. He had made some enquiries and knew that Sunico, All Trading Worldwide Teletrading Worldwide were traders who in turn would trade on the goods he supplied from the UK. He knew therefore that his company was involved in a significant chain in which all of the inconsistencies with normal business practice referred to in this decision and urged by Mr Mandalia were present.

92. The scale of the Appellant’s business and the rapidity of its growth would have suggested to any reasonable man that there was something unusual in this business which demanded an explanation. To achieve a turnover some £12.2M in around 6 months in a legitimate business in which all of the deals had to be sourced and negotiated would, we believe, be beyond the capacity of the Appellant. We come to this conclusion because although the Appellant had some 40 staff in 2 separate locations the only person who was actually involved in the wholesale business appears to have been Mr Norris. This in itself is something of a curiosity. Had the business been as described by Mr Norris and as no doubt he wished the tribunal to believe, then most of his staff would in one way or another have been engaged in the many different tasks involved in bringing such deals together. We heard from no one but Mr Norris who seemed to be the only party involved in all of the deals concluded by the Appellant.

Conclusion

93. It is the conclusion and finding of this tribunal that the Appellant knew that it was engaged in a series of transactions connected with fraud. The evidence of all of the surrounding facts and circumstances of the trades conducted by Mr Norris on behalf of the Appellant overwhelmingly supports this conclusion. It is because we believe Mr Norris to be an intelligent man that we have come to this conclusion. Even if we were to make the assumption that Mr Norris was no more than a pawn in this fraud, ignorant of its true purpose, we would have to conclude that he should have known of the fraud and its purpose in cheating HMRC of VAT to which it was entitled. In either case the result is the same. The objective criteria for repayment of the Appellant’s VAT inputs have not been met. This appeal fails and is dismissed.  Any application for a direction awarding costs is to be submitted in writing to the Tribunal within 42 days of the release of this decision.  Such application, if any, needs only to be made in principle at that stage and does not need to set out precisely the amount claimed.

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

 

RICHARD BARLOW

TRIBUNAL JUDGE

RELEASE DATE: 28 September 2010