[2010] UKFTT 605 (TC)

 

 

 

 

 

 

TC00846

 

 

 

VAT – input tax – MTIC fraud – did the trader know or should it have known of fraud?

 

 

FIRST TIER TRIBUNAL

TAX

	Appellant

 

 

G COMMS LTD

 

- and -

 

 

Respondents

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS

 

 

 

Tribunal: CHARLES HELLIER (Judge)

HARVEY ADAMS

 

 

Sitting in public in London on 19, 22, 23, 26, 27, 28 October, 2 November 2009, 4 January 2010 and 5 November 2010.

 

 

Orlando Pownall QC and Vivienne Tanchel instructed by Lex Partners for the Appellant

 

Jeremy Benson QC and Paul O’Doherty instructed by the Solicitor for HM Revenue and Customs, for the Respondents

 

 

 

© CROWN COPYRIGHT 2010

DECISION

I. Introduction

1.     G Comms appeals against a decision of the respondents to deny the repayment of £2,290,960 input VAT claimed in respect of the period 04/06 (the period ending on 30 April 2006).

2.     The input tax claimed related to 18 transactions (the 18 Deals) in which G Comms had bought mobile phones and exported them.

3.     Normally input VAT incurred on the purchase of goods which are later sold by a business is creditable. There is no VAT on the export of goods. Thus where trader purchases goods and exports them, a net VAT credit will arise which, in the absence of other VAT liabilities, will be repayable. However, in a number of decisions, one of the more significant of which was Axel Kittel, Recolter Recycling SPRL v Belgian State (C 439/04 and C 440/04) the  ECJ held that no credit was permissible if the trader’s transaction was connected with VAT fraud, and the trader knew or should have known that it was so connected.

4.     The respondents say that in each of the 18 Deals they have traced the phones supplied to G Comms back through a chain of supplies to persons who imported the phones, onsold them, and fraudulently evaded the VAT arising on their sale. They say that in the circumstances G Comms knew or should have known of the connection of these deals to fraud, and as a result G Comms is not entitled to the input tax credit.

5.     G Comms accepts that each of the supplies of phones to it were connected with fraud, but says that it neither knew nor should have known of such a connection.

6.     In the same quarter of 2006 G Comms also entered into 74 other deals in which it bought phones from a UK supplier and sold them to another UK trader. HMRC traced back 50 of these deals to defaulting traders (but had not, at the time of the hearing, traced back the other 24). In each of these deals G Comms claimed input tax credit against its output tax liability on its onward sale. No allegation was made by HMRC that G Comms knew or ought to have known of the connection to fraudulent evasion in relation to these deals, and the input tax claimed was not denied.

II. The Law

7.     We heard the evidence and the parties’ submissions before the Court of Appeal gave judgement in Mobilx Ltd (In Administration) v HMRC  2010 EWCA Civ 517. We agreed to delay our decision until that judgment was given. After it was given the Respondents made written submissions and the Appellant sought leave, which we granted, to make further oral submissions. We heard the parties’ final submissions on 5 November 2010. 

8.     There was little disagreement between the parties as to the applicable law. We apply the following principles:

(1)  an input tax credit is not available where (a) the transaction was connected with VAT fraud and (b) the taxpayer knew or should have known that it was so connected;

(2)  if taxpayer does not know of the connection with fraud, and takes all reasonable precautions, then he has an "impenetrable shield" and is entitled to the input tax credit;

(3)  if a taxpayer does not know the connection to fraud, but does not take all reasonable precautions, then he is not automatically disentitled to input tax credit: it is only if he should have known, had he taken all reasonable precautions, of the connection to fraud that he is not so entitled. If the circumstances and what he would have discovered if he had taken all reasonable precautions would not have alerted him to the connection to fraud he is entitled to the credit;

(4)  "all reasonable precautions" means those precautions which are reasonable and proportionate in the circumstances and includes the proportionate steps which would be taken as a result of taking earlier precautions

(5)  the question whether the taxpayer knew or should have known must be determined at the time of the relevant transactions;

(6)  the knowledge required is not of the specifics of the fraud, but that there was a fraud in the chain of supply to the taxpayer;

(7)  knowledge that a transaction might be connected to fraud is not enough. What is required is knowledge that it was connected to fraud. In Mobilx the Court of Appeal made clear that a person should have known that a transaction was connected to fraud if he had the means of knowing that the only reasonable explanation of the circumstances of the transaction was that it was connected to fraud. ;

;

(8)  where the taxpayer is a company, the question is the knowledge or means of knowledge of the company. In relation in particular to the question of whether the company should have known, that involves consideration of whether a reasonably competent person in the position of the company and equipped with the actual knowledge and expertise of those who act as its agents, should have known of the connection to fraud. In approaching this issue the inexperience or incompetence of those individuals is not to be taken as limiting what such a reasonable man would have done or concluded.

Burden of Proof

9.     It is clear that the burden of proving connection to fraud lies on the commissioners. In Mobilx the Court of Appeal confirmed that the same burden lies in relation to knowledge and means knowledge (“should have known"). We have not found it necessary to rely upon the burden proof in reaching our conclusions.

10.  It is accepted that the standard of proof is the normal civil standard of the balance of probabilities taking into account the probability of fraud in context.

Notice 726

11.  Section 77A VAT Act 1994 provided that in relation to the supply of certain goods, the Commissioners could give notice to the recipient of a supply making the recipient jointly and severally liable with the supplier for unpaid VAT.

12.  In August 2003 HMRC published Notice 726 "Joint and several liability in the supply of specified goods". This notice explained HMRC's views on how joint and several liability applied. Although the notice did not have the force of law it was extensively referred to in evidence before us. In that context we note the following particular provisions:

(1)  “1.4  ... presently this measure only applies where there is a supply of goods or services that are subject to widespread missing trader intra-community (MTIC) VAT fraud. Currently the specified goods defined in legislation are ... telephones ..."

(2)  “2.3 Why has this measure been introduced? ... It is designed to tackle MTIC fraud ... MTIC fraud is a systematic criminal attack on the VAT system ... in its simplest form the fraud, which cost the exchequer between £1.7 and 2.7 5 billion in 2001 – 02, involves a fraudster obtaining a VAT registration number in the UK for the purposes of purchasing goods free from VAT in another EU member state, selling them at a VAT inclusive price in the UK and then going missing without paying the output tax due to Customs and Excise. ... the fraud relies heavily on the ability of fraudulent businesses to undertake trade in goods with other businesses that may be either complicit in the fraud, turn a blind eye, or are not sufficiently circumspect about their trading connections ..."

(3)  “2.4  …you may be held jointly and severally liable ... if we consider that you "knew" or "had reasonable grounds to suspect" that the VAT on the supply of those goods would go unpaid ..."

(4)  "4.6 Can you tell me exactly what checks I should undertake? ... No. The Checks contained in this notice are guidelines for the kind of checks you could make to help avoid dealing with high-risk businesses and individuals.

(5)  "8.1 checks you can undertake to help ensure the integrity of your supply chain ... The following are examples of checks you may wish to undertake to help establish the integrity of your supply chain [there then follow checks in relation to the supplier’s history, commercial arrangements, insurance, recourse for bad goods, the commercial viability of the transaction and checks to ensure the goods will be as specified or described]

(6)  "8.2 checks carried out by existing businesses." The section sets out a non-exhaustive list of checks to be carried out including matters such as obtaining certificates of incorporation, VAT registration confirmations, credit or other references, and other documentation.

III. The Evidence Before Us

13.  We heard oral evidence from Clive Dean, the HMRC officer who had written to G Comms appraising it of  the denial of its input tax deduction, and who had traced back the phones in the 18 Deals along the chain of supply to the defaulting traders; from Russell Hall, an officer from HMRC who gave evidence of information obtained from First Curacao International Bank (FCIB) with whom G Comms had banked; from John Fletcher of KPMG who was called by the respondents to give evidence in relation to the mobile phone market in 2006; from Roderick Stone of HMRC, from Anthony Elliot-Square, a former director of the Federation of Technological Industries, who gave evidence in relation to the mobile phone market in 2006 for the Appellant; from Shiraz Ahmed, a director of G Comms; and from Harkitan Suri, an accountant who assisted Mr Ahmed  and G Comms. Each of these provided one or more witness statements. We also had about 24 bundles of copy documents.

14.  We received no evidence from Dilnawaz Malik, the other director of G Comms  who, Mr Ahmed said, had cooperated with him in the management of G Comms’ activities, or from Mr Mohammed Hussein who was a director of United King Trading FZCO, a company which at an early stage became an 80% shareholder in G Comms. Mr Ahmed told us that Mr Hussein thought it beneath him to come to give evidence to the tribunal.

Mr Ahmed

15.  Mr Ahmed signed a letter (it appears to have been sent to First Curacao International Bank (“FCIB”) in 2005) which provided a reference for a Mr Choudhry, who is the sole director of RVM Ltd (we shall return to the connection with RVM Ltd later). The letter indicated that Mr Choudhry was a previous employee of the business which became that of G Comms on its incorporation in 2004, and that Mr Choudhry had three years' experience in the telecommunications market and was a trustworthy employee.

16.  Mr Ahmed admitted that Mr Choudhry had not been an employee of G Comms and did not have three years experience in the telecommunications market. He had said he had written and signed the letter because Mr Malik was out of the office: Mr Malik had said that a friend of his was looking for a job and wanted a reference and told Mr Ahmed what to write.

17.  We find Mr Ahmed's willingness to sign a letter which he knew contained false statements cast a shadow on his evidence to us.

18.  On another occasion Mr Ahmed was shown a declaration given by G Comms to one of its customers. The declaration was signed by a member of G Comms’ staff and in one respect was untrue. Mr Ahmed did not express concern about the untruth. In effect he told us that the untruth was not material. But his attitude to the truth was in our view disturbing.

19.  We have take into account these considerations in our assessment of Mr Ahmed's evidence.

Mr Suri

20.  Mr Suri held a business and accounting degree, and an accounting qualification. He struck us as an intelligent man. On occasion we thought his replies were evasive.

21.  Mr Suri provided accountancy and related services to G Comms, both directly, and through the medium of his company, Consult Me (UK) Ltd. We were shown a copy of an agreement proclaiming itself "dated 13 July 2004" between G Comms and Consult Me for the provision of accounting and related services to G Comms. A version appears to have been signed on behalf of Consult Me on 4 November 2005. We were shown copies of invoices rendered by Mr Suri personally to G Comms for the period June 2005 to March 2006 ( embracing the period covered by the Consult Me contract), and by Consult Me to G Comms dated April 2006. It was not clear to us why, and on what basis, the distinction was made between the personal provision of services, and that through Consult Me. It suggested to us, at best, a certain laxity of approach.

22.  Mr Suri prepared the accounts of G Comms ready for their presentation to the auditors, and also its VAT returns. He participated in G Comms’ due diligence activity, principally by the preparation of a "second stage" due diligence report on suppliers and customers. We shall explain the nature of that report later.

23.  On several occasions Mr Suri described his role as being limited to recording the actions of the business and its due diligence. Yet he described his job as akin to that of a finance director, and displayed a good understanding of the way the business operated. Although Mr Suri attended meetings between G Comms and its counterparties he said he had ears only for the due diligence side of these meetings. He therefore said that although he recalled that Notice 726 (see later) was discussed, he could not tell us much about other aspects of the discussions at these meetings. In the light of his understanding of the business we found this difficult to believe.

24.  Mr Suri also provided accountancy services for a company called RVM limited. He was company secretary of that company and a signatory for its FCIB bank account. RVM limited was incorporated in July 2004, very shortly after G Comms, and applied to be registered for VAT on 22 July 2004 (G Comms’ application, prepared by Mr Suri, was dated 14 July 2004). RVM limited also traded in mobile phones.

25.  RVM's sole director was Mr Kasif Choudhry (the same Mr Choudhry for whom Mr Ahmed signed the reference referred to above). RVM's shares were owned as to 20% by Mr Choudhry, and 80% by Future Connections FZCO which appears (see  below) to have been the later provider of funds for a £1.25 million loan to G Comms, and a customer of G Comms. We note that G Comms’ shares were owned in similar proportions: 80% by United King Trading, and 20% by Mr Ahmed and Mr Malik.

26.  Mr Suri said that he would not have discussed Mr Choudhry with Mr Ahmed, or Mr Ahmed with Mr Choudhry. There was a confidentiality clause in his agreement (or that of his company) , and he was obliged to maintain confidentiality. Mr Suri also did due diligence for RVM, and acknowledged that some of the customers and suppliers to G Comms were also customers and suppliers of RVM.  In acting for one he said he did not take account of information about the same supplier he had obtained as a result of acting for the other.

27.  Given that Mr Malik knew Mr Choudhry (and that Mr Ahmed at least knew of Mr Choudhry because he had signed the reference), the similar dates of incorporation, the similar businesses, the similar shareholding arrangements, and the shared suppliers and customers of RVM and G Comms, we found it unbelievable that Mr Suri had no discussion with the directors of G Comms about RVM or vice versa. We find it likely that he made known his involvement in RVM to G Comms.

IV Our Findings of Fact

(a) G Comms and its business

28.  G Comms was incorporated in July 2004. Its directors since July 2004 have been Mr Ahmed and Mr Malik. It registered for VAT from 19 July 2004, but its first VAT supplies were made in the quarter ended 30 April 2005.

29.  Mr Ahmed is a qualified plumber. In 2003 and 2004 he began to think about dealing in mobile phones, and after discussions with Mr Malik (who had been trading in car accessories) set up G Comms as a vehicle for this venture.

30.  Before starting to trade Mr Ahmed enquired of others about the mobile phone business, and went in 2004 and 2005 to the trade fair, CeBIT in Hanover. There in 2004 he met, by the cafe, a group of people who were wholesale traders in mobile phones (grey market traders -- we shall explain the term grey market later). He spoke to them about mobile phone trading. He met Mr Hossein, whom he understood traded in mobile phones and other electric goods through United King Trading in the UAE, and who indicated that he was interested in setting up a branch in the UK.

31.  Mr Ahmed realised that if G Comms was to export phones it would need working capital because exports were VAT free and so the monies he would receive from overseas customers would fall short of what he would have to pay (with related VAT) to UK suppliers of phones located in the UK (this was therefore on the assumption that the phones he would sell to non UK customers would be located in the UK). Although Mr Ahmed did not say this to us in relation to this stage of development of G Comms, he did say that greater margins were obtained on export sales than on phone sales within the UK. We think it likely that he wished to engage in export sales and that is why he was concerned about working capital. Mr Ahmed said he approached Mr Hossein for an investment in G Comms. He entered into negotiations with him in March 2005, and Mr Hossein agreed to make a loan to G Comms. A loan of £200,000 was made on 11 July 2005. We discuss its terms later. Mr Hossein's company, United King Trading was the named lender and acquired, at the same time, 80% of the issued share capital of G Comms.

32.  G Comms’ first transaction took place on 8 March 2005.

33.  In its first quarter's trading - the period to 30 April 2005 - G Comms’ turnover was £23 million. In the four quarters ending 31 January 2006 its total turnover was some £73 million. In the single quarter 04/06 its turnover was £90 million.

34.  G Comms’ staff comprised Mr Ahmed and Mr Malik, and, in the period relating to the transactions relevant to this appeal, the company employed a secretary. It used the services of Mr Suri in this period. In 2007 the team was increased in size.

35.  In the period to April 2006 G Comms’ fixed assets consisted of furniture and computer equipment. It had no material stock or work in progress. It traded in such a way that it neither owed money to its suppliers nor was owed money by its customers. It achieved this result by entering into "back-to-back" transactions under which it paid for the goods it bought on the same day (and after) it was paid for them by its customer. Only when it exported would the money it received from its customer be insufficient to pay its supplier. In these circumstances G Comms would fund the difference from its own resources (which included the benefit of the loan from United King Trading and its accumulated profits).

36.  Mr Ahmed said that normally transactions were instigated by requests from G Comms’ customers for particular phones in particular quantities. On receipt of a request he would phone around his suppliers to try to source the phones requested. In most cases when he could source phones of the type required, he would manage to source the quantity required. Occasionally he could find only a smaller quantity. He did not put smaller quantities from separate suppliers together to make up a sale. Nor did he buy more than he could sell. He said that he hardly ever had a request for export which had not resulted in an export transaction.

37.  Once he had found a supplier who could supply the phones to G Comms there would be negotiations about price with its supplier and its customer. Once the price was fixed, purchase orders, and then invoices would be sent out and received. The deal was completed when the price was paid. G Comms would be paid by its customer and then pay its supplier straightaway. The goods would be “released” to the buyer when payment was made.

Allocation, shipping, release and payment

38.  Mr Ahmed told us that G Comms’ mode of  dealing was based upon being "allocated" stock by its suppliers, and in turn allocating it to its customers. In effect, he said, "allocating" stock to someone was giving them a non-binding option over it. By granting an allocation the grantor gave the grantee an expectation that it would  itself be able to allocate, and eventually sell, the stock to someone else.

39.  In discussions with suppliers, he said, he would sometimes be given an indication of whether a supplier expected at a future time to be allocated particular stock, and in turn G Comms would give similar indications to its customers.

40.  If a supplier said stock had been allocated to it, and it in turn allocated the stock to G Comms, then G Comms could allocate the stock to its customer. Then contractual commitments will be entered into: the customer would send G Comms a purchase order, and G Comms would send a purchase order to its supplier. An indication would be given that the stock was held at a particular freight forwarder. Following that invoices would be sent.

41.  Sometimes, Mr Ahmed said, allocation would fail: a supplier might have allocated stock (or its allocation of stock) to more than one customer, in which case the customer who confirmed the purchase of the stock first generally succeeded, and the other chains of allocation fell through. Mr Ahmed said that in about one in four occasions stock would be offered by a supplier but by the time Mr Ahmed got back to the supplier, the stock had already gone. In the 04/06 quarter, however, he said that there were no failures in the allocation of phones for export transactions, but it had happened in about 10 cases in UK to UK transactions into which G Comms had attempted to enter.

42.  It Ahmed explained that the allocated phones would be held that a freight forwarder where they could be inspected (once purchase orders have been issued) by each relevant purchaser. The documents before us indicated that a supplier would tell the freight forwarder to whom the phones had been allocated. Once payment had been received by G Comms (and we understood that the same applied to other traders) G Comms would "release" the stock to its customer. The release would be effected by instructing the freight forwarder to release the goods to the relevant purchaser.

43.   In turn it was clear that the phones would be released to G Comms once G Comms had paid its supplier. As a result we conclude that the release by G Comms to its customer was effectively contingent on the release to G Comms by its supplier (and so on down any particular chain of supply). As a result, even after making payment, neither G Comms nor its customer would gain possession of the phones until the first release in the chain was given. And when that release was given, possession would move directly from the first relevant person in the chain  to the end customer. This of course relates to possession of the goods - the ability to control them - we deal with the question of title later.

44.  Where phones were exported, G Comms would give instructions for them to be shipped "on hold" from the UK freight forwarder holding them to an overseas branch of the freight forwarder. Shipping in this way took place after purchase orders had been sent but before payment. Mr Ahmed explained that he would obtain the permission of his supplier to the shipping of the goods "on hold" out of the UK. (We doubt his evidence on this issue: he also said that he had never been asked for such permission by someone he had supplied in the UK, but many of  the UK – UK deals in the quarter had resulted in exports by his UK customer or a later member of the chain.) Once G Comms received payment, it would provide written instructions to the overseas freight forwarder to release the phones to its customer.

45.  Mr Ahmed explained that the benefit of this system was that if the customer did not pay, then the goods reverted to the possession of G Comms or its supplier  (or, we assume, the initial supplier in the relevant chain) who could deal with the goods directly. He explained that his experience was that, once an invoice had been raised and the stock had been dispatched, payment was always made. There was therefore in practice no risk.

Evaluation

46.  Although the nature of the transactions undertaken by G Comms did not involve the formal granting of credit - that is to say the lending of money, or the supply of goods on terms that payment would be made at some time after title passed - G Comms’ transactions did involve exposure to the creditworthiness of its counterparties in the following ways:

(1)  First, it was exposed to the creditworthiness of its customer. G Comms was paid by its customer before G Comms paid its own supplier. If its customer failed to pay, G Comms would ( assuming it had been contractually bound by the issue of the purchase order) remain liable to pay its supplier. Given the size of the transactions entered into by G Comms, G Comms did not have the resources to fund the payment which would be required to be made to its supplier. (Its transactions were generally in the order of £500,000 or more). G Comms would therefore be in breach of its agreement with its supplier. It was thus exposed to the creditworthiness of its customer.

G Comms’ exposure would be reduced because it would not, without payment, release the goods to its customer, but it would have to find another purchaser or compensate its supplier for the breach of its agreement with that supplier to purchase the goods. Where the goods had been shipped abroad, the cost of moving them back to the UK or back to the supplier would, Mr Ahmed accepted, have had to have been born by G Comms.

G Comms’ exposure was not solely financial. If, because of the failure of its customer to pay, it could not pay its supplier, that would dent its reputation with its supplier and perhaps with others.

(2)  Second, it was exposed to the creditworthiness of its suppliers. When G Comms paid its supplier, the goods were released to G Comms. If the supplier refused to release the goods, or did not have title in the goods (or if, given that G Comms merely knew that its supplier had had the goods allocated to it, the release of the goods to its supplier's supplier failed) G Comms would be liable to repay its customer and would have to seek to recover the monies it had paid supplier. It was therefore exposed to the creditworthiness of its suppliers.

(b) The 18 export deals

47.  In the 18 Deals which are the subject of this appeal:

(1)  Each involved the purchase of mobile phones from a UK counterparty, and  their export to a non-UK customer;

(2)  In each case the phones were “allocated” at a freight forwarder in the UK and despatched by G Comms to a freight forwarder outside the UK;

(3)  G Comms were supplied by one of five suppliers: Datakey products Ltd in 11 cases, Technology Plus Ltd (aka Microtec) in two cases, Hughes Associates in two cases, and Mitek Components Ltd in three cases.

(4)  G Comms sold to one of four customers: EC trading APS in eight cases, J Corps in four cases, D Jensen Trading AB in three cases, and LPDC in three cases.

(5)  the chain of supply in all the deals traced back to a defaulting trader. In 15 of the deals the defaulter was the fourth in the chain behind G Comms; in three of the deals it was the fifth in the chain behind G Comms;

(6)  in each case the UK entities behind G Comms -- between G Comms and the defaulter -- made a profit of between 25p and £1.25 per phone (but  generally 25p to 50p per phone) and G Comms made a profit of between £8.50 and £13 per phone with the majority in the range of £9-£11 per phone. As Mr Ahmed said margins on export deals were better;

(7)  12 of the 18 Deals were invoiced by all those in the chain on the same day in the last three working days of April 2006 with payment being made on 1 or 2 May 2006 ( thus 66% of G Comms’ export supplies in the 04/06 quarter were made within a few days before the quarter end).;

(8)  in each case all the payments were made on the same date. In all cases save one every invoice in the chain of supply for a particular deal bore the same date;

(9)  the mean value of G Comms’ purchases in these transactions was about £855,000 was a variation between £517,000 and £1,413,760; and

(10)   in each case the Appellant accepted that the relevant defaulting trader had fraudulently evaded VAT.

(c) The 76 "buffer" deals

48.   G Comms entered into 76 other deals in the 04/06 quarter. We have adopted the respondents terminology of “buffer deals” for these transactions but do so only for the purpose of identifying them. In 50 cases HMRC traced the chain of supply back to a defaulting trader. The input tax on the supplies to G Comms has not been denied and is not the subject of this appeal. In those deals in which a defaulting trader has been identified:

(1)  in almost all cases there were two suppliers in the chain between the defaulting trader and G Comms.

(2)  The profit made by G Comms and each of the traders before it in the chain were in the order of 25p to 50p per phone.

(3)  G Comms appeared to be either the supplier to the exporter or the supplier to that supplier:

(4)  the deals took place on dates fairly evenly spread over March and April 2006

(5)  in some of these deals G Comms sold to Mitek which then exported the phones. In the 18 Deals Mitek had supplied G Comms on three occasions.

49.  Whilst we can understand that the availability of a trader’s working capital limits the value of the exports it may conduct in a particular quarter, and thus we can see why Mitek might sell to G Comms and G Comms might export on one occasion and on another G Comms might sell to Mitek and Mitek export, it leaves unanswered the question of why on its export transactions Mitek was not able to acquire the phones from the person who supplied G Comms and vice versa.

50.  This issue arose in a number of chains, and raised questions as to the accuracy of Mr Ahmed's account of the way the market worked or the commerciality of G Comms’ operations. He had said that on hearing from a customer that the customer wanted particular phones, he would phone round his suppliers to see if he could find them. If he did they would be allocated to him, but an allocation could fail if the goods were later sold to another buyer.

51.  In deal 346 (one of the 18 Deals, 27 April) G Comms bought from Our Communications who bought from Mitek, who bought from South Wales Electrical Goods ("SWEG"). But SWEG was known to G Comms -- it had conducted several buffer deals with it in March and April.

52.  In deal 347 (of 27 April, another one of the 18 Deals) G Comms bought from Mitek, who bought from Intercommunications, who bought from Bluewire. G Comms had conducted several buffer deals with Bluewire in March and April.

53.  In deal 348 (27 April, one of the 18 Deals) G Comms brought from Mitek, who bought from Raptor who bought from Danum. G Comms had conducted several buffer deals with Danum in March and April.

54.  We can understand that if Mitek and its predecessor had been quicker off the mark than G Comms and had contracted to buy from a supplier known to G Comms, then G Comms would be unlikely to be able to persuade that known supplier to break its contract. But in a world where goods were allocated rather than sold, and where the contract was not completed until close to the day the goods and money moved, we cannot see how G Comms failed to reach a known supplier and get the phones cheaper. Either Mr Ahmed's account of the way he conducted his business was wrong, or once he was offered an allocation he stopped his search, or he was guided to his place in a contrived chain. If he stopped his search once an allocation was offered it suggests that he knew he was not intended to look further because a person whose concern was to make as much profit as possible would not have realised that if he found two possible sources of supply he could have played one off against another.

(d) the phones which were the subject of the 18 Deals

55.  Nokia 8801

56.  In deal 340 G Comms exported 4000 of these phones. In two other deals in the same quarter G Comms bought from and sold to UK counterparties a total of 12,000 of these phones.

57.  We find that Nokia made two similar models, the 8800, and the 8801, and that the 8801 was designed primarily for the American market. The 8801 could use three frequencies: 850, 1800, and 1900 kHz; the 8800 used three frequencies: 900, 1800, 1,900 kHz. The frequencies at which a phone operated determined the networks it could use. In the Americas some networks operated on 850 kHz; in Europe some operated on 800 kHz. The 8800 could be used on all the European networks, but not on all the American ones; and the 8801 on all the US networks but not all the European ones. As a result the 8801 was less attractive to a European end user.

58.  Mr Ahmed said that by updating the software in a phone it was possible to change the radio frequencies at which it operated. Thus the 8801 could be changed to transmit and receive at 900 rather 850 kHz. We did not believe Mr Ahmed. Mr Fletcher told us that this was not possible. Mr Elliott Square said that it would be necessary to change the hardware of a phone to change the operating frequency from 850 to 800 kHz. Mr Ahmed displayed little technical knowledge of operating frequencies of a major network operator. We found that he was either not telling the truth or ignorant of the relevant technical information.

59.  The sales figures produced by Mr Fletcher indicated no retail sales in Europe of 8801s in March and April 2006. That was consistent with their configuration primarily to the American market. Yet G Comms sold 4000 of the 8801s in March, and 12,000 of them in April (4000 of which were sold in one of the 18 Deals).

60.  It seems to us very odd that phones whose principal consumers would have been outside Europe were found in large quantities in the UK and exported, not to the Americas but to Europe. It was not clear that Mr Ahmed was sufficiently knowledgeable of the subject matter of the transactions to appreciate this oddity, but someone who had a grasp of the matter would have done so.

Two pin chargers

61.  In each of the 18 Deals the phones involved had two pin chargers: suitable for use in European countries but not in the UK. Mr Ahmed said that this was perfectly normal in the grey market: 99% of the stock dealt in had two pin chargers.

62.  Mr Ahmed told us that he was aware that his phones had been imported into the UK at some stage. He was aware that he was exporting them. Whilst there was evidence that smaller retailers in the UK might sell two pin phones with accompanying extra three pin chargers there was no evidence that there was a large retail market in the UK in two pin phones. We do not believe there was.

63.  Mr Ahmed told us, and we accept, that he had never been offered and had not dealt in two pin phones located at a freight forwarder in Europe.

64.  Evaluation/comment

65.  It seemed odd to us that, given that there was little need for the physical presence of such phones in the UK, they were brought into the UK and then exported, rather than being traded while they remained closer to a geographical area where they might be sold to an end user. Mr Benson suggested that it was odd that the original exporter to the UK and G Comms’ customer had not found each other and cut out the middleman. We can see that G Comms might have been able to intermediate between the two, but cannot see the commercial reason for the import of the phones physically into the UK.

(e) other aspects of G Comms’ business

66.  Inspection

67.  In each of the 18 Deals G Comms engaged in A1 Inspections to inspect the goods it was acquiring and selling. In UK-UK deals G Comms did not arrange inspection unless requested to do so by its customer. In export deals a copy of the inspection report was also sent to G Comms’ customer before the phones left the UK.

68.  The inspection would be organised once purchase orders and sales orders had been exchanged, and usually after the customer had been invoiced. At this stage it was known at which freight forwarder the phones were held.

69.  A1 Inspections provided a report of their inspection to G Comms. The report indicated the number of boxes of phones counted, the type of phones, their colour and the type of charger. There would be a scan of the IMEI numbers -- generally 10% of the phones (whilst G Comms appeared on occasion to ask for a 100% inspection, it was on most of these occasions satisfied with a 10% inspection). IMEI numbers are unique identifying numbers for mobile phones. Mr Ahmed told us that it would be unusual to open boxes which were sealed with manufacturers’ seals to inspect their contents. We understood that the IMEI numbers were scanned from the information on the boxes. It was not clear whether any boxes were opened by A1 Inspections. The report also indicated the language codes, manual type, and software languages of the phones, and warranty details. This information was obtained from a website by entering in the relevant IMEI numbers.

70.  The IMEI numbers obtained were checked by the Appellant against its collection of previously inspected phones to identify whether it was trading in phones it had previously dealt in - but only to the extent of the 10% sample.

71.  We were shown an inspection report on which, under the heading "software languages", appeared the entry "software crashed". Mr Ahmed said that he did not recall asking A1 what this meant. Initially he said he thought that the entry was a typo. Later in his evidence he said that it meant that A1 Inspections' software crashed in accessing the software languages on the phone against the IMEI numbers website database. Mr Ahmed told us that these inspection reports were produced to his customer but no concern was expressed.

72.   Some reports indicated that the phones had a limited warranty. Mr Ahmed could not recall what that meant.

73.  We concluded that Mr Ahmed did not read the inspection reports carefully and that in fact they were produced principally for the benefit of the customer.

Terms of Trade

74.  G Comms took no legal advice in relation to the terms on which it bought and sold. It had no formal conditions of sale, but its invoices contained the legend "all goods remain the property of G Comms until payment is received in full."

75.  The invoices from G Comms’ suppliers did not seem generally to contain detailed terms and conditions, but several also indicated that the goods remained the property of the supplier until payment was received in full.

76.  We were shown a suppliers' declaration given by G Comms to a customer in which it had affirmed that it had full legal title to the goods being sold.

77.  Mr Ahmed told us that his understanding of the contractual terms on which he dealt with his suppliers was that he was liable to make payment only when the goods were released to him. In practice however we understood that after payment was received notification would be given by the supplier to the freight forwarder to release the goods (and indeed there was at least one deal in which G Comms gave its release the day after the receipt of the payment, although generally the two took place on the same day).

Evaluation

78.  It is unclear whether anyone at G Comms understood when it had title to goods supplied to it, and when it relinquished that title. It seems likely to us that G Comms became contractually bound to buy and sell when respectively it had sent out and received purchase and sale orders. Mr Ahmed did not say anything which suggested to us  that a contract was formed only at the time of release or payment.

79.  The Description of Goods on the Invoices

80.  G Comms’ invoices, sales orders and purchase orders gave descriptions of the phones in generally the following format:

 "800 Nokia 3250. Mobile phone Sim free. Central European spec"

There was no indication of the colour of the phones, whether or not they carried a warranty, or whether or not they had two or three pin chargers (in relation to the last item even Mr Ahmed in cross examination agreed that this was, in retrospect, odd). Mr Ahmed said that his customers received the inspection report which, as has been related, contained greater detail. His customer was happy with what was provided. (And it seems that it was not until G Comms received that report that it knew precisely what it was selling).

81.  This seems very odd to us. The customer would not know precisely what he was getting until he got the inspection report, and was always happy with the result. Why was the customer not concerned whether the phones were pink or black, and whether or not they had full warranties or two or three pin chargers?

 (f)communications with Mr Hussein

82.  Mr Suri told us that Mr Ahmed spoke to Mr Hussein on a regular basis and visited him numerous times. Mr Ahmed told us that he knew Mr Hussein quite well and that Mr Hussein felt very comfortable with him. He said he used to keep him updated on a weekly basis with details of how much G Comms was buying and selling. Mr Ahmed said that Mr Hussein knew the wages being taken from G Comms by Mr Ahmed and Mr Malik. We accept this evidence. It seems to us that through these communications Mr Hussein monitored, and is likely to have participated in the control of, G Comms.

(g) The Loans

83.  G Comms provided copies of loan agreements made with United King Trading FZCO of Dubai. The first, for £200,000, was dated 11 July 2005; the second, for £1,250,000, was dated 1 May 2006.

The first loan

84.  Minutes of G Comms of March 2005 indicate that it was agreed that 80% of G Comms’ shares should be allocated at £1 each to United King Trading. (Mr Ahmed told us that Mr Hussein was the shareholder of United King trading and we understood him to mean that he believed that Mr Hussein held all the share capital of that company. He also said that Mr Hussein was the director of that company) The minutes then record that United King Trading would financially assist G Comms, and that a loan agreement would be drawn up.

85.  The loan agreement of 11 July 2005 appears to be the agreement foreshadowed by those minutes. It requires no interest to be paid and provides that the loan is repayable by mutual agreement or on default. No events of default however are evident in the agreement. No security or guarantee is taken for the loan. The agreement is dated 11 July 2005, and Mr Suri told us that he thought  the loan was made on that date.

86.  There was no written agreement relating to the relations between the shareholders, and the way in which the company should be run after United King Trading's investment in it. Mr Hussein did not ask to become a director or a bank account signatory. Mr Ahmed explained that he had a good relationship with Mr Hussein and used to report to him regularly on what was happening.

87.  No legal advice was taken in relation to the loan. Although G Comms possessed a Dubai incorporation certificate relating to United King Trading, they conducted no further investigations into the company or the source of the funds. No serious consideration of money laundering issues seems to have been given in relation to the source of funds (Mr Suri told us that as the money came from a bank there was no  concern on this issue. We do not believe that a detached professional would have so advised.).

88.  G Comms’ first transaction was on 8 March 2005. Its first VAT quarter in which there was any activity was at ending on 30 April 2005. The next ended on 31 July 2005. The first loan agreement was dated 11 July 2005. Mr Suri indicated that Mr Ahmed had needed additional funds in order to be able to benefit from export profits -- in other words to make export sales. Although, as its VAT returns evidence and Mr Ahmed said, G Comms had been exporting in March 2005, the export transactions G Comms undertook in June and July 2005 were dependent, we believe, upon the loan being made. The agreement to invest was made after at most 21 days of trading and on the basis of a very short trading history. There can at that stage had been no useful financial information available to the lender.

89.  In his evidence to us Mr Ahmed said that "by the time [he] had persuaded [Mr Hussein] to give me the investment, I had already made a decent amount of profit within the mobile phone business. So he felt comfortable". We believe that this was a gross exaggeration or was untrue: the agreement to invest was evidenced in the March minutes; such trades as were done in March, even if done before that meeting could not have given such comfort.

The second loan agreement

90.  The second loan agreement is dated 1 May 2006. Its terms are similar to the first agreement save that interest at 7.25% is to be paid - although dates for its payment are not specified.

91.  The agreement is stated as being signed, like the first agreement, by Mr Ahmed, but the signature for United King trading looks very different. Mr Ahmed told us that Mr Hussein had changed his signature. We thought that unlikely.

92.  Mr Ahmed told us that negotiations for the second loan commenced in March 2006, and it had been agreed that the loan would be made when he had carried out his export transactions. We believe that by this Mr Ahmed meant the export transactions in the period after 30 April 2006 ie after the end of the quarter with which we are concerned. We were shown a business plan for G Comms which incorporated a report on G Comms prepared by Halliwells for one of its clients. We were told it had been sent to Mr Hussein at the time of the second loan.

93.  As with the first loan, no legal advice was obtained, no formal due diligence was undertaken in relation to the lender, and no or limited consideration seems to have been given to money laundering issues either by Mr Ahmed or Mr Suri.

(h)The FCIB evidence

94.  Mr Hall gave evidence in which he told us how he used copies of bank account data obtained from FCIB to trace monies paid by G Comms from its FCIB account into the FCIB account of its supplier, and from that account to the FCIB account of the supplier's supplier, and so on, down the chain of supply in each of the 18 Deals until he reached the defaulting trader in each chain. Each person in the chain banked with FCIB. He was able to match the amounts invoiced by each supplier to the amounts moving between the suppliers’ FCIB accounts. In the same way he was able to find the payment record in the FCIB bank account of G Comms’ customer of its payment into G Comms’ FCIB account.

95.  Having done this Mr Hall traced movements of money out of the defaulter’s bank account. He showed us how in each case the defaulter paid to a non-UK company an amount approximately equal to the VAT inclusive amount that it had received. Payments could then be traced from that non UK company through a chain of two or three other non-UK companies, and from the last of those companies to G Comms’ customer. All the movements of money took place on the same day.

96.  In each case the first non-UK supplier company, either (a), having received an amount close to the VAT inclusive amount paid to the defaulter, paid on to the next non-UK company an amount close to what G Comms received from its customer, and retained an amount (the VAT Profit we shall call it) broadly equivalent to the VAT on which the defaulting trader had defaulted, or (b) paid almost the full receipt to a second non-UK company which retained the VAT Profit and paid to the succeeding non-UK company an amount close to that paid to G Comms by its customer.

97.  We accept Mr Hall's evidence of the money movements, and find that the monies is relating to each deal moved around in a circle of payments which:

(1)  took place on the same day;

(2)  left G Comms, and each of the other traders in the chains with their profit on the transactions (in G Comms case less the VAT input tax it was to reclaim);

(3)  involved payment by the defaulting trader of an amount equal to the total received by it less a few thousand pounds: this residual amount was wholly insufficient to enable it to account for its VAT liability on its onward sale;

(4)  provided  funds to G Comms’ customers which could finance their payment to G Comms;

(5)  left a surplus, the VAT Profit, in a non-UK company equal to the VAT at evaded by the defaulting trader less the aggregate profits taken by each of the other members of the circle. That profit was retained by one of the following companies: Gulf phones, Total Profit, Max Information Technology, or Mobile direct. We call those companies the Profit Retainers; and

(6)  in all but two deals included Marksman International in the circle.

98.  It was clear to us that the payments were part of a fraudulent scheme involving the evasion of VAT by the defaulting trader and the transmission of the VAT Profit to a non-UK company.

99.  The evidence did not show that G Comms knew of the circle of payments, but it raised in our minds questions as to how these virtually contemporaneous payment flows had been set up, and whether they could have been set up without provoking some suspicion or concern in the minds of those directing G Comms’ actions.

100.         Mr Hall also provided evidence of the source of the £1,250,000 paid to G Comms on 1 May 2006. It will be recalled that a second loan agreement between G Comms and United King Trading provided for a loan of this amount to be made by United King Trading on 1 May 2006.

101.         Mr Hall produced evidence of FCIB bank accounts which showed that this amount had been paid on 1 May 2006 from the FCIB bank account of Future Connections (a customer of G Comms in 2005) to G Comms and that Future Connections had received the same amount, on the same day, from Marksman International (a company involved in most of the payments circles), and that on that day all Marksman's receipts had come from Maks Information Technology, one of the VAT Profit Retainers.

102.         The evidence of the bank transfer to G Comms from Future Connections was contradicted by a copy of an FCIB transaction printout produced by G Comms which showed that the source of the loan monies was United King Trading. Mr Ahmed thought that it was not possible for the sender of funds to amend his description of his input to FCIB so that the funds would appear from the transaction print to come from someone else; but we were not persuaded that this was impossible, and preferred the evidence of the bank accounts. We conclude that the immediate source of the funds for the second loan was Future Connections, and that the ultimate source was Maks Information Technology.

103.         We conclude that the source of the funds for the second loan was linked to the schemes for the fraudulent evasion of VAT. The evidence did not directly show however that G Comms knew the source of these funds.

(i)The mobile phone market

104.         Before us a distinction was drawn between the  "white" and the "grey" market in mobile phones. The white market consisted in the sales by Original Equipment Manufacturers (OEM s) such as Nokia to either  their authorised dealers (ADs) or to Mobile Network Operators (MNOs), the sales by ADs to dealers and retailers, and the onward sale by the MNOs and retailers to end users of the phones. The grey market consisted of wholesale dealings in mobile phones outside the white market.

105.         Mr Fletcher described grey market trading as arising from the failure of the authorised white market dealing channels to meet the demands (as to price and volume) of participants in the market. He identified four types of opportunity for grey market traders:

(1)  arbitraging -- the taking advantage of differentials between the prices at which mobile phones were available in different countries;

(2)  "box breaking" which took advantage of the fact that the mobile phones which were sold by MNOs, and initially tied to their networks, were subsidised in some countries. "Box breaking" consists in reconfiguring the handset to work on other networks. The handsets might then be sold at a profit;

(3)  taking advantage of volume shortages in one market (where the ADs and MNOs have underestimated demand) and intermediating a supply from another region with greater available quantities; and

(4)  acquiring and on selling stock which was "dumped" by a dealer who had surplus stock

106.         In relation to each type of grey market activity Mr Fletcher developed indicators which he concluded would indicate whether or not a particular grey market trader was engaged in trading within that category. Mr Elliot Square made a number of criticisms of Mr Fletcher's reasoning. On the whole however his criticisms did not, in our view, substantially dent the propositions he made. We do not set out our reasons for this conclusion since we have not relied on Mr Fletcher’s conclusion in this regard in reaching our conclusions. We accept that Mr Fletcher's indicators provide a good guide as to whether a particular wholesale transaction in mobile phones was likely to fall within one of his classes of grey market activity. We also accept that Mr Fletcher's categories substantially exhaust the nature of genuine grey market trade. But we do not accept that these tests are conclusive in relation to a particular trade. We also note that Mr Fletcher's analysis is based on a good deal of personal expertise and experience of the mobile phone market: experience which Mr Ahmed did not have and which, in our view, would not have been available to a reasonable businessman in G Comms’ position at the relevant time.

107.         Mr Fletcher also argued that the economics of grey market trading, and the availability of information on other potential suppliers and buyers from websites would tend to reduce the length of any chain of supply between an AD (or OEM or MNO) and an eventual retailer. We accept the logic of his argument. Mr Elliot Square argued that the relationship of trust between grey market traders would mitigate against cutting the middleman out of the chains. We accept that not every supply chain will be short; but we believe that it is unlikely in a free market that unconstrained commercial activity would consistently result in chains of supply of the length seen in the deal chains in the 18 + (at least 50 of the 74) transactions undertaken by G Comms in the 04/06 quarter (bearing in mind as well that the complete chain from AD to retail consumer might well be longer than the chain of supply from initial exporter identified by HMRC  to G Comms’ customer).

108.         Mr Fletcher said, and we accept, that it would be unusual to see higher value handsets sold on the grey market in large numbers because they were not designed for the mass market, and not expected therefore to be sold in large numbers. He classified all the phones traded in by G Comms in the 18 Deals as high value for this purpose.

109.         Mr Fletcher exhibited data obtained by Gfk, a leading market research information provider. The data related to sales of mobile phones in 22 European countries and the UAE, in each month of 2006. Gfk state that they capture 92% of consumer sales. Mr Fletcher also told us, and we accept, that on average 36% of handsets are sold by ADs, and that worldwide sales of mobile phones were about three times European sales.

110.         From the evidence in the last paragraph, the respondents prepared a table showing the proportion of the total European sales of each particular model of phone in each of February, March and April 2006 which were represented by G Comms’ sales of that model. The percentages vary between 0.2% and 28,571%. The Respondents also calculated the percentage which G Comms’ sales represented of the sales by authorised distributors in the relevant month (using Mr Fletcher's 36% as being applicable to each model of phone; the 36% was a figure for the market as a whole so this percentage needs to be taken with a pinch of salt.). We set out below some of these results, together with a third result (again to be taken with a good pinch of salt) showing the percentage which G Comms’ sales of a particular model represent of worldwide retail sales of that model in the months of February, March and April 2006. The worldwide percentages are calculated on the basis of Mr Fletcher's evidence that worldwide sales were three times European sales.

Month	Model	Percentage  of European Sales	Percentage of European distributors’ sales	Percentage of worldwide sales
February	N 9500	265%	738%	88%
	N 90	109%	302%	100%
	N 8910i	28,571%	76,923%	[no sensible figure available for American market sales]
	N 9300	4.5%	12.6%	1.5%
March	N 9300i	170%	474%	57%
	Sony W 900i	55%	152%	18%
	N7380	56%	156%	19%
April	N 9500	240%	668%	80%
	N 8800	26%	72%	15%
	N 90	13%	36%	4%

 

111.         We accept that there is a difference between the number of phones manufactured and those sold. These figures relate to those sold not those manufactured. The figures produced by Gfk probably relate only to 92% of the market. The figures in the last two columns are suspect. However even taking into consideration all these factors these figures indicate that a suspiciously high proportion of the phones of these models sold to customers in Europe, and probably in the world, were in a broad sense represented by G Comms’ sales.

112.         Mr Fletcher also estimated that the total value of phones sold to retail consumers by UK authorised distributors in 2006 was £1.2bn. On that basis two months' sales would have been in the order of £200 million. In April and March 2006 G Comms’ export sales were £15 million and its total sales were some £90 million. Seen against the background of authorised distributors sales G Comms’ level of sales is surprisingly high.

113.         Mr Elliot-Square told us that same day, back-to-back trading in the mobile phone grey market was common. We accept that it was common among those to whom he spoke.

(j) The Due diligence undertaken by GComms

114.         In the bundles before us there were copies the documents which were tendered as evidence of the investigations (the due diligence) G Comms had conducted before trading with its counterparties. In our view most commercial enterprises will undertake a measure of due diligence before engaging in any trade which leaves them commercially exposed. Before granting any significant credit to an unknown customer a trader may well seek confirmation of its existence, and some evidence – accounts, or a bank reference, that it is credit worthy. In some circumstances consideration may also be given to avoiding becoming engaged in money laundering. The due diligence conducted will depend on the commercial circumstances. In the context of VAT reclaims for dealing in mobile phones a trader may well also have regard to the words of warning in Notice 726.

115.         It was clear to us from Mr Suri’s evidence that he relied very heavily on Notice 726. He referred to it and to its contents frequently. He gave us the clear impression that he thought that as long as he conducted the tests identified in that notice there was no need to do any more, and that the work he was doing was for the purpose of the tests in that Notice rather than for any broader commercial purpose.  In particular he evinced no inclination to stand back and look at the business in the round.

116.         Mr Ahmed and Mr Suri explained that G Comms conducted its due diligence in two phases. Stage I consisting principally of the documentary checks suggested by paragraph 8.2 of Notice 726: the obtaining of certificates of incorporation, VAT certificates, letters of introduction, credit checks, bank account details, trading application forms and Redhill checks. Mr Suri told us that the first stage due diligence was mandatory before any trading with the counterparty took place.

117.         The Stage II due diligence was a further ongoing evaluation of the counterparty encompassing the obtaining of reports from independent agencies such as Veracis and The Security People and trade references from other suppliers, and from the results of personal contact with the counterparty. These sources of information were collated in a report prepared by Mr Suri on each counterparty. The report, he told us, was a living document continually updated as fresh information was obtained. On the basis of these summary reports Mr Suri told us that Mr Ahmed would decide whether to continue to trade with the counterparty.

118.         The Stage II due diligence reports in the bundles before us were not dated. It was thus difficult to tell from them what, at the relevant times in the quarter 04/06, was G Comms’ knowledge of its counterparties.

119.         Whilst Mr Suri told us that the reports were proffered for consideration by Mr Ahmed as to whether or not to continue to trade with the counterparty, it was clear from Mr Suri's evidence that he relied upon what Mr Ahmed had told him in compiling certain sections of the report.

120.         Overall our impression of the second stage due diligence reports was that they were created, not for the purpose of making an informed decision as to whether or not to trade with a particular company but to record, in the most favourable light, the information received for the purpose of presenting the collations to HMRC.

121.         We also found that whilst the diligence materials provided comfort about the existence of the counterparties, their VAT registration, and their directors, they generally provided very little comfort about the credit worthiness of the counterparty. The written materials also provided no indication of any searching examination of the procedures undertaken by their suppliers to ensure that their suppliers were not connected with fraud. Mr Ahmed told us that at meetings with suppliers they would discuss the kind of due diligence the suppliers were doing on their suppliers. There was no documentary record of the extent of this investigation and we concluded that there was no searching oral examination of how the supplier investigated its suppliers.

122.         Finally we noted that much of the documentation proferred as evidence in the Appellant's due diligence in respect of the 18 Deals was dated after the end of the 04/06 quarter. It was thus not clear that the checks which initially appeared to have been done before trading had not been done after the end of the 04/06 quarter.

123.         We gained these impressions from a number of matters which arose in connection with the reports and from the documentation before us. The following list is not exhaustive but, we hope, indicates the evidence which led to those impressions.

124.         Datakey.

(1)  The Stage II report records Datakey as having been around "for a long time in comparison with other companies in the industry" and that it had been trading in the industry for years. In fact it had not traded before 2005 (only a year in 2006). Mr Suri explained that this could refer to Mr Ahmed's assessment of the directors' experience.

(2)  Although reference is made in the stage II report to a Creditsafe (a credit refernce agency) report which indicated a net worth of £250 K, the only copy of that report before us was extracted on 3 October 2008, and the only accounts which were before us with those for the year to 31 December 2004 and those showed net liabilities of £4K. We were not minded to accept Mr Suri’s evidence that he had the Creditsafe information in early 2006: in response to a question from Mr Pownall about the report of Creditsafe's delivery of the information, he told us that he had "obtained a draft set of accounts, which I was unable to retain, from Datakey". His answer was not consistent with what was written in the report.

(3)  There is a report from The Security People ( a company which provided due diligence reports on counterparties) stated as completed on 11 April 2006 (but one box indicates that VAT details were confirmed on 21 April 2006!). Six of the 11 deals with Datakey took place before that date, five after it. The report provides little additional financial comfort although it provides some comfort on the existence of the company and its directors. The due diligence Datakey conduct on its suppliers is described as "self due diligence". That would not comfort us.

(4)  Until July 2006 Datakey traded in premises a few doors away from the Appellant. Whilst we accept that this may have helped Mr Ahmed and Mr Malik to get to know them, there was no evidence that they used this proximity to address issues such as its ability to trade in large value consignments of phones with its limited creditworthiness.

(5)  Overall there was little tangible comfort and the report gave a rosy coloured perspective of a fairly blank page.

125.         Hughes Associates

(1)  a report Dated 4 April 2006 from Creditsafe shows this company as non-trading and insolvent. The stage II report says "our business is not at risk as our deals have no credit terms". Mr Suri told us that Mr Ahmed had said that there was no risk.

(2)  Hughes Associates' reply to a due diligence verification request from G Comms indicated that it had been trading for 6 years. The reply itself seems to have been completed after July 2006 since it refers to July 2006 as the date of its last VAT inspection. Given that the accounts show no turnover in 2004 and previous years, it could only have been trading for 2 years. The (undated) stage II report says that the directors of Hughes Associates had six years experience. Mr Suri explained that this was information from Mr Ahmed and was also reflected in the "six years" in the reply to the due diligence verification request.

(3)  A comment in the report that a director of Hughes Associates was connected with another company in the industry which had been dissolved, is dismissed as irrelevant because "it has been elucidated that other directorships are not related to this industry".

(4)  No bank references are referred to.

 

126.         Mitek. Comfort is taken in the Stage II report from a report conducted by Veracis (another provider of due diligence material) on a visit to Mitek in March 2006 (the 3 deals with Mitek were invoiced on 27 April 2006). Mr Ahmed also told us that he had visited Mitek. However:

(1)  the Veracis report indicates that the director of Mitek did not know the name of the company's auditors, yet an undated due diligence questionnaire indicates that Price Waterhouse Coopers are the auditors;

(2)  other information is dated after April 2006: a Creditsafe report extracted on 29 September 2006, and Mitek documentation faxed in July 2006;

(3)  the Veracis report indicates that Mitek lacks knowledge of notice 726, the stage II report indicated that Mitek were fully aware of notice 726;

(4)  accounts exhibited to the Veracis report were signed by a Mr Spooner. This person was unknown to either Mr Suri or Mr Ahmed; and.

(5)  the stage II report says that Mitek takes due diligence seriously and only deals with companies which receive Redhill checks and pass their and commercial checks. The only written evidence of this performance was a suppliers' declaration from Mitek indicating that it had carried out checks on the existence, VAT registration, and background of its supplier. There was no indication that Mitek had enquired into its suppliers' examination of their suppliers and so on.

127.         Technology Plus (Microtek)

(1)  The Stage II report stated net worth of the company at £379 K. Mr Suri admitted this was an error. It should have been £200 K. He had prepared each report by taking one for another company and changing it. He had failed to change the figure for net assets.

(2)  Reliance appears to have been placed on a Veracis report which bore the date 23 January 2006. However, as Mr Adams noted, the report included a copy of the company's accounts which had been signed on 24 February 2006. Mr Suri said that the report had been received in the first quarter of 2006. The report also contains an electoral roll search dated 13 March 2006. We do not believe that the report was received in the first quarter of 2006. We doubt whether it was received before the end of April 2006.

(3)  The stage II report indicates a concern that a director of the company has been connected with dissolved companies. It says "we further wait for a response from the company ... to fully satisfy our requirement".. It was not clear when the concern emerged and whether it was resolved before the trade with Microtek in the 04/06 quarter.

(4)  The documentary evidence of Companies House searches, and Credit safe reports are dated August 2006 after the end of the 04/06 quarter. There was no evidence of earlier checks (other than through Veracis).

(5)  Whilst letters from Microtek (dated after 4/06) and the suppliers' declaration included in the Veracis report indicated that Microtek undertook reasonable steps or complied with notice 726, there was no indication of any real testing of what it did.

128.         EC trading

(1)  the due diligence documentation disclosed by the Appellant consisted off (i) a number of Redhill VAT number verifications starting in May 2005, (ii) the “trading application” form from EC trading signed on behalf EC trading dated January 2006 and disclosing its business simply as "trading"; (iii) a bank reference dated September 2004 addressed "to whom it may concern" from Jyske bank indicating EC trading was known to it and that there had been no outstandings since 2003. No update was sought in 2006 from that bank. The bank is not specified by EC trading on its bank details as applied to G Comms. (iv) a number of documents in Danish from Denmark's Companies House which Mr Suri said he had viewed in English on the website, and (v) trade references sought in June 2006;

(2)  no financial information appears to have been obtained

(3)  no third-party reference or agency reports appear to have been sought although Mr Suri said an oral reference was obtained from Mitek.

129.         J Corps Aps

(1)  EC trading and France affairs are given as trade references by the company without giving their addresses. The writer assumes the Appellant knows their addresses. There are no notes of any conversations with the referees or letters from them.

(2)  There was no bank reference or financial information

(3)  Many documents were undated.

130.         La Parisienne Du Commerce (LPDC)

(1)  an undated trade application form from LPDC gives LPDC as referee for itself;

(2)  a second trading application form dated 8 March 2006 contains many on empty boxes, and gives France Affairs and EC Trading as referees (without addresses -- as was the case with J Corps’ form).

(3)  No financial information or any bank reference was obtained.

131.         It was clear that the due diligence carried out on the Appellant's customers was less extensive than that carried out on its suppliers. That indicated to us that what had been done had been done to comply with notice 726 rather than for the commercial purpose of satisfying the company about the credit worthiness or standing at its customers.

132.         In our view the information obtained on customers established little more than that they existed and had VAT numbers. It gave no comfort as their creditworthiness, and no comfort that the customer took any precautions of a serious nature to avoid connection to fraud in its supply chain.

133.         Whilst G Comms’ investigation of its suppliers was more extensive than of its customers, generally it gave little comfort that the suppliers were substantial companies able to meet a claim of the size which could arise in the kind of transactions undertaken by the Appellant, and gave limited comfort that they took serious steps to avoid connection to fraud.

134.         Overall it appeared to us that what had been done, both in relation to suppliers and customers, had been aimed at ticking the boxes in paragraph 8.2, and to a more limited extent paragraph 8.1 of Notice 726.

135.         The fact that many of the documents put before us were undated, and that many of them postdated the 04/06 quarter indicated to us that by April 2006 less due diligence had been done on counterparties that even the stage II reports suggested.

(k) Dealings with HMRC

136.         Mr Dean produced a note made by other officers which indicated that a meeting had been held in August 2004 with the Appellant at which Redhill checks had been discussed. Mr Ahmed could not recall that meeting.

137.         HMRC's officers visited G Comms on at least one occasion in 2005.

138.         HMRC made the following repayments of VAT to G Comms:

Quarter	Amount
04/05	£144K
07/05	£460K
10/05	£660K
0106	£621K

 

139.         G Comms supplied HMRC's officers with documentation such as supply and sales invoices, inspection reports and IMEI numbers, and proofs of export, where relevant, in relation to the deals executed in these quarters. It is possible that the officers dealing with these claims also saw or inspected G Comms’ due diligence materials. There was no suggestion that HMRC's officers indicated that G Comms’ procedures were inadequate in any way, but equally there was no evidence that any express approval had been communicated.

140.         Mr Dean conducted an extended verification exercise into G Comms’ 04/06 period, tracing back the goods G Comms dealt in along the chain of supply to it. As a result of his conclusions from this exercise and his conclusions as to the way in which G Comms conducted its business, he decided that G Comms were not entitled to the input deduction claimed on the 18 Deals. He communicated that decision to G Comms in the letter 14 May 2007 which is the subject of this appeal.

(l)Other Matters

141.         Mr Ahmed said that in 2006 he was aware of MTIC fraud and acquainted with Notice 726. His comments in relation to the discussion of due diligence at meetings with suppliers indicated that he was aware of problems in the industry at the relevant time. Mr Suri was also aware of Notice 726. Both told us that they had undertaken no further research into MTIC fraud and its characteristics.

142.         Mr Suri told us that trade references had been obtained in respect of each of the four customers in the 18 Deals from Mitek even though those customers had not cited Mitek as references, and Mitek was also a supplier to G Comms.

143.         In May 2005 G Comms carried out Redhill VAT checks on each of the four customers to which it sold in the 18 Deals. At that stage it had not received any form of application from these customers. LPDC first made an application on 8 March 2006. Mr Suri did not suggest that there had been any earlier application. The first transactions with LPDC took place in March 2006. We accept Mr Benson's suggestion that it is possible that G Comms were given the number of customers' names by United King Trading in March 2005, and that G Comms checked their VAT numbers at that time.

144.         IV discussion

1. Connection with VAT fraud

145.         The Appellant conceded that the transactions were connected to a tax loss attributable to fraud. We so find. The evidence as to the transaction chains from Mr Dean, the consistent pattern of mark ups in UK - UK transactions within those chains, and the FCIB evidence pointed conclusively to a conclusion that each of these 18 Deal chains were part of an orchestrated scheme to defraud the revenue by the evasion of VAT by the importer. We believe that it is likely that at the very least each member of the chain was nudged into place by the orchestrator of the scheme.

2. Knew

146.         In their closing submissions HMRC contended that United King Trading through Mr Hussein was the controller and directing mind and will of the Appellant, that it knew or ought to have known of the connection to fraud, and that such knowledge or means of knowledge should be attributed to the Appellant.

147.         Mr Pownall says that HMRC did not put its case in this way either in its statement of case or during the earlier part of the hearing. The Appellant in the preparation and presentation of its case was entitled to know where it stood. HMRC reply that the evidence as to United King's control emerged from Mr Ahmed's evidence during the course of the hearing.

148.         We do not consider that it would be just in the circumstances to consider HMRC's contention. Although the evidence as to the degree of involvement of Mr Hussein with G Comms had emerged during Mr Ahmed’s evidence, HMRC knew about United King's shareholding in the Appellant and its role in the FCIB money movements before the hearing. No inkling was given to the Appellant that this argument might ever be one plank of HMRC's case in relation to knowledge or means of knowledge. We decline to consider whether United King’s knowledge (or means of knowledge) may be imputed to the Appellant.

149.         It was clear to us that the actual knowledge of Mr Ahmed should be attributed to the Appellant. Some of Mr Ahmed’s evidence – such as that in relation to Mitek’s position in the chains (see para 54 above) suggested that he knew that the transactions were orchestrated, however in the end we were not persuaded that Mr Ahmed lied when he said he did not know of the connection to fraud, but, for reasons which follow later in this decision, we believe that if he had turned sighted eyes on the business of the company he would have come to that conclusion.

 3. All reasonable precautions?

150.         We do not believe that G Comms took all reasonable precautions to ensure that its transactions were not connected with VAT fraud. In our view it failed in the following respects to take steps which were the circumstances of its business both reasonable and proportionate:

(1)  it appears that it did not thoroughly investigate the nature of MTIC fraud. Given the sudden blooming of its sales and the concerns expressed in Notice 726, it should at least have found out that those frauds involved, generally, a defaulting importer and a chain of supply to an exporter. There is more than an intimation of that in the passages we quoted above from Notice 726,

(2)  it did not give proper consideration to whether its suppliers and their suppliers, and so on, took adequate steps to avoid connection to fraud. There was no evidence that it properly investigated the steps its suppliers took in relation to their suppliers: what questions were asked and what audit was done on what the supplier claimed to have been done. G Comms should have been aware that there was a chain of supply and that the phones it deals in were imported: this should have led to a rigorous examination of the due diligence procedures of its suppliers  (and through them on their suppliers, and so on);

(3)  given the size of its turnover G Comms should have investigated what proportion of UK, European and worldwide sales of given models of phones which passed through its hands;

(4)  it should have asked, and made sure it obtained believable answers to the question of why so many 2 pin phones happened to be in the UK, and why its non-UK customers expected to find them here. It should have done the same in relation to the Nokia 8801s;

(5)  it should have considered the commerciality of its terms of trade: (i) why its customer was willing to pay the phones before they had been released to G Comms, (ii) whether the fact that there were never returns or complaints indicated something suspicious, (iii) how it was that although it and its counterparties were persons of little financial substance, each dealt with its counterparty on terms which left it exposed to the creditworthiness of the counterparty if there were any default, (iv) why its counterparties provided, or were happy to receive, invoices showing little detail, and only knew precisely what they were getting when that received the inspection report, and (v) why its customer was not concerned about an inspection report that indicated that software had crashed;

(6)  it should have been suspicious of United King's involvement: it should have asked why a non-UK company was interested in investing in a company which needed finance principally to export imported 2 pin phones from England. It should have looked this gift horse in the mouth;

(7)  although G Comms collected information to comply with the form of paragraph 8.1 of Notice 726, it did not tackle the spirit of paragraph 8. It would have been reasonable and proportionate in the circumstances for it to do so. For example paragraph 8.1 suggests checks to consider the legitimacy of suppliers, and speaks of asking about the supplier’s history in the trade, the arrangements for financing and the procedures for recourse if goods are not as described. G Comms collected and recorded information about these topics but it did not properly digest the information: it did not ask itself why a recently formed company with little capital could trade in such large values, or why no one appeared to be financing the stock (since no one appeared to hold stock). It did not properly consider how the terms on which it traded with its suppliers and customers would deal with default or misdescription, or whether there was adequate description; and 

(8)  given the concerns which would in a reasonable mind have been evoked by these questions it should have tried to arrange for a third party to trace the chains of supply in order to discover whether there was or had been any VAT fraud at the end of any of them.

151.         We amplify the reasoning behind some of the paragraphs above in the following part of this decision. There is some overlap between what it is reasonable to do and what ought to have been known: if something gives rise to concerns then either (i) that concern together with others or on its own may lead to a conclusion that a person ought to have known, or (ii) it may reasonable to have investigated further in which case it is necessary for us to consider what the result of taking further action would have been.

4. Ought to Have Known

152.         What is clear to us is that if G Comms had turned over the right stones it would have discovered the rotting mess underneath. Mr Ahmed was quite candid: when he was shown the FCIB evidence and the evidence of the chains, he agreed that the deals he had entered into through G Comms were connected with fraud. But at that time, he said, he did not have that evidence. The questions for us are: whether there were aspects of the landscape around G Comms position would have caused a reasonable person to conclude that there was a connection to fraud, or whether, if that conclusion did not immediately arise, what further stones should reasonably have been turned over, and if they were, what would have been found?

153.         There are in our view a number of aspects of G Comms’ business which would have caused a reasonable businessman concern. It may be understandable that these issues did not cause Mr Ahmed concern: he operated in a world where (as Mr Elliot-Square said) some of the practices which cause us concern would have been commonplace to those immersed in his world. If you live in a dysfunctional family domestic violence may be accepted: but that does not mean that its acceptance is the reaction of the reasonable man or woman. We set out in the following paragraphs the aspects of G Comms’ dealings which we believe would have caused such concern.

154.         (1) We find the sums of money involved in the deals G Comms undertook noteworthy. The vast majority of the deals were worth more than £500,000. That is a lot of money. We think it would cause a reasonable person to think hard about the nature of what he was doing. Because the individuals who run a company are protected by the shield of limited liability, that does not mean that the person who is the company is so protected. Such a person would be concerned about the size of his exposure: he (or she) would examine what was being done very carefully.

155.         (2) Linked, but in addition to this, a reasonable businessman would have been surprised by the level of turnover achieved by G Comms in its first year of trading and by the level of its trading in the 04/06 quarter. We think a turnover of £73 million for the very first 12 months of trading is quite something. We think a reasonable person would ask: how did it do that much and how does it compare with other persons in the same sector? and what proportion of the market have we captured?

156.         (3). In our judgement these factors would have led a reasonable businessman to seek to compare this level of trade with the output of the manufacturers and the turnover of the distributors. An assiduous enquirer would have found Dfk and the information which Mr Fletcher produced to us about the level of European sales, sales by authorised distributors in the UK and worldwide sales.  A less tenacious investigator would reasonably  have tried to estimate European sales by looking at say Nokia's accounts, and multiplying their turnover by, say, 5 (to allow for other OEMs) and dividing by, say, 4 (to allow for other worldwide regions). On our finding that UK annual sales to distributors were £1.2 billion, we believe that the results of the comparison by such investigator would be disturbing. And would reasonably merit concern and further inspection.

157.         Thus, whilst we accept that, as Mr Elliot-Square told us, obtaining data from Dfk was expensive (£130,000 per annum), we believe that a reasonable man would have come to the conclusion on less expensively available data either that there was something wrong, or that it might be worth spending the £130,000 to find out whether something was wrong. Either way the concern would not have been dispelled. Similarly Mr Ahmed indicated that Nokia published information on the numbers of the types of phones it had sold. Those numbers would shed light on the level of G Comms' trading.

158.         (4) Now, this hypothetical ordinary reasonable businessman has also been told (or is to be treated as knowing because Mr Ahmed knew) that HMRC have expressed concerns that there is VAT fraud in the mobile phone market. He knows that the financial success of his business is dependent upon getting his VAT back. He is told he may be liable for unpaid VAT (commercially the equivalent not getting his VAT back) under section 77A if he does not take proper care. It is clear to him that HMRC are concerned about this: Notice 726 says that the fraud was “widespread”. G Comms knew about the nature of HMRC's concerns. It knew that VAT fraud was an issue. For a reasonable businessman in G Comms’ position, not getting his VAT back would be a very serious concern. It would destroy his finances. In our view he would ask around, he would look on the Internet, he would talk to HMRC. We think he would have found the links to VAT fraud on IPT’s website, he would have searched the journals and magazines.  Mr Ahmed said he did not. We accept that. But Mr Ahmed is merely a director of G Comms. It was not Mr Ahmed's money that was at stake; it was G Comms’ money. If this trade had been conducted personally and without limited liability by either of us we would not have risked our houses and our own solvency without proper investigation. G Comms, the legal person cannot have been less cautious, whatever Mr Ahmed, as its agent might have done.

159.         Thus, in our estimation, a reasonable person in the position of G Comms would have obtained a good understanding of the mechanism of mobile phone VAT fraud in 2006. He would have understood that it involved a VAT defaulter who sold goods which through a chain of purchases and sales reached an exporter who claimed back the input VAT.

160.         But G Comms also knew (at the beginning of the 04/06 quarter) that HMRC has paid its VAT claims in respect of the previous four quarters. That we think would have abated its concerns but it would not have removed them. A reasonable businessman will not have felt quite so keenly even though it would have remained, in our estimation, a material concern: after all, the export deal input VAT at stake was average four or five times the export profit margin, and on each domestic deal the input VAT at stake was 1000 times the profit margin.

161.         (5) With a need to tread carefully because of the size of the transactions he was entering into, with a worry about the comparative size of his turnover by reference to the size of the market, with the concern about whether he was operating in a market connected with VAT fraud, with an understanding that that fraud might have been by some person before him in the chain of supply and in all likelihood by an importer, and with the knowledge that such fraud was, if not prevalent, at least possible and had serious consequences, a reasonable businessman would, in our view, have stood back and looked carefully and seriously and with good legal advice about how he was trading through those (including Mr Ahmed and Mr Malik) who acted as his agents. And this is what he would have seen:

(1)  he was agreeing to purchase goods he could only afford if his customers paid him;

(2)  he took no deposit from his customers to cover his loss if they defaulted;

(3)  he had no indication that his customers were good for the money other than the fact that they had paid before;

(4)  if the contract of purchase was made when purchase orders were exchanged then, if his customers defaulted he would be stuck with the goods he had agreed to buy from his supplier, and would have to get them back from where ever they had been exported and have to arrange a new deal. If on the other hand the contract was made only when payment passed, then he could find himself obliged to provide goods (because he had received the cash) but without the certainty that he could or would acquire them;

(5)  when his  customer paid he took his customer's money knowing that at the time he took it, he did not own the goods which were being paid for, and his customer did not seem to be concerned whether he did;

(6)  once he had paid his supplier he had little valuable recourse if his supplier did not have title to the goods. His supplier might not have released the goods, or it may have formally released them but not have had title to them. Either way his recourse would be against a supplier with no material equity. Generally a one pound company with small accumulated profits;

(7)  his agents were trading on his behalf with a small coterie of customers and suppliers. And oddly some of the suppliers who supplied him (for his export) were in other deals supplied by him (as it turned out for their export);

(8)  the company's due diligence indicated that at least some of its suppliers were not financially robust companies. It was therefore likely that they operated in the same way as G Comms and would not hold stock for which they had paid, or whose purchase they had financed on credit, but bought and sold stock in back-to-back transactions. Mr Ahmed's evidence that he took his supplier's word that such stock had been "allocated" to G Comms also indicated that G Comms knew that its suppliers operated in this way. Given that G Comms also conducted UK - UK transactions in which the same conclusions in relation to its suppliers' operation would have been likely, it would have been reasonably expected, in a transaction in which G Comms exported that there would have been several UK back-to-back transactions in the chain of supply to it.

In considering whether there was any fraud in the chain of supply to it, it would therefore have been reasonable to consider seriously not only its own supplier but those earlier in the chain: the due diligence conducted did not seriously address this issue. G Comms could not therefore be confident that there was no fraud in the chain;

(9)  his business inspected consignments of phones sold to it generally only if it was going to export them. Why did it not inspect the phones in the other deals? How did it know it was getting what it paid for? Why was it that when it asked for a 100% inspection it got a 10% inspection: was the inspector lazy?;

(10)   all the phones he was dealing in had 2 pin chargers and had been imported into the UK. Why had such phones been imported in such numbers when there was no large market for them here?  One possible answer was to facilitate VAT fraud. It was difficult to see a commercial reason for their import in such numbers when they could have been traded while physically outside the UK without the costs of moving them;

(11)   the details given on G Comms’ invoices were sparse. The customer seemed to rely on the inspection report. How did the customer know that he was getting what he expected? Why was it always content with what turned up? On the occasion the inspection report indicated “software crashed” why had his customer not been concerned? Was it because his customer was a pawn in a scheme in which he knew he had to accept whatever came? Was that indicative of wider rot in the market in which he operated?

(12)   he dealt on three occasion in 04/06 in Nokia 8801s located in the UK when there was no real UK market for such phones. For what commercial reason were they in the UK?

(13)   two of his customers in the period, Jenson and J Corps were run by the same person.

162.         We think that all this would have very seriously rattled the reasonable businessman. After standing back he would look at what he saw and become very nervous.

163.         But then it would get worse. He would consider how he had been funded. He had been lent £200,000 at nil interest by a person outside the UK with an interest in trading in mobile phones. This person (or its human agent) would have been kept updated on the transactions being conducted. When the first loan was provided, neither the company nor the agents had much experience. Had we been G Comms we would have asked our agents: is something funny going on here?

164.         And this person wanted to invest in a business which made its greatest profit from, and needed the finance specifically for, exporting phones which had been imported into the UK (two pin phones). Surely there would have been more profit if the phones did not move through the UK? An exporter from the UK must surely have been less profitable than a two pin phone dealer who dealt in phones located outside the UK. So why want to invest in a UK exporter?

165.         The features listed above in paragraphs 154 onwards (save that in the second part of paragraph 160(8) which related only to lack of comfort rather than concerns or suspicions) consist of information available to G Comms and that which it had the means reasonably to discover. Those features appear to us to have no reasonable explanation other than that G Comms’ transactions were connected to VAT fraud. In particular, given knowledge of the mechanism of VAT fraud, the nature of the phones being traded, the ready acceptance by its customers of the phones provided, the modes of payment and transfer of title, the likelihood that there were several other persons before G Comms in the chain of supply, and the size of G Comms’ share in the market, have as a whole no reasonable explanation other than that G Comms was part of a contrived chain of transactions designed to further such fraud.

166.         It seems to us that if it was the case that Mr Ahmed did not actually know of the connection, the reason for that was that he chose to ignore the warning signs, (although it is possible that he was so wrapped up in this business that he failed to stand back and look at it objectively, we think that this is less likely).

167.         Even if it were not the case that these features led ineluctably to that conclusion, the concerns they would give rise to in the mind of a reasonable businessman would cause him to conduct further investigation.   We believe that, by turning over all stones we could reasonably find, we would have found something which tipped the scales in favour of that conclusion. That is because it is so clear that there was a stone under which that conclusion lay and because the concerns explained in the preceding paragraphs warranted robust and serious investigation. In these circumstances it would not be reasonable to say, for example, “I cannot do any more because my suppliers will not tell me who their suppliers are.”. The following steps would in our view have been proportionate and reasonable.

168.         We would have tried chasing our deals back down the chain In 2007 after HMRC had challenged G Comms’ rights to repayment of input tax Mr Suri, through his company Consult Me prepared a report tracing back G Comms’ purchases on a number of deals by contacting its suppliers and its suppliers supplier, and so on. Mr Ahmed said that in 2006 no one would tell you who their supplier was, but did say that if he had been asked by a reputable third party who had promised not to divulge details of his suppliers to his customer (so that G Comms would not be cut out of the deal) he might have cooperated at that time. Later Mr Ahmed replied to Mr Pownall that he agreed that this form of tracing back could not have been conducted in 2006.

169.         We prefer Mr Ahmed's first and less guarded answer. We think it is possible that some suppliers, if asked by a reputable third party to divulge in confidence to that third party and for the purposes of checking that the chain did not lead back to fraud, would have cooperated. If they did not cooperate it could be an indicator that they were concerned that the chains did lead back to fraud.

170.         We would have quizzed freight forwarders to discover through how many hands the phones passed, and how quickly before coming to us and whether or not they were, or appeared to be, freshly imported. We did not believe Mr Ahmed’s statement that they would have said nothing. If we got nowhere with gentle questioning we would have instructed a private investigator. We would have quizzed our suppliers about “allocation”.

171.         We would have quizzed Mr Hussein about his knowledge of MTIC fraud, his interest in UK exporting activity, and his knowledge of other traders and of our customers, and possibly, depending on his answers and demeanour, on the source of his funds.

172.         Somewhere the smell of the FCIB payment circles, the contrivance of the lengths and the mark ups in the chains, and the VAT fraud would have come out with sufficient strength to give rise to the conclusion that these were deals connected with fraudulent evasion of VAT by an importer of the phones (that such was the only explanation). The fact that each of the 18 Deals traced back through chains of similar length to a defaulter, and that the monies went round in circles must have left traces which would be picked up by a reasonably competent and concerned investigator.

173.         The Appellant made the following submissions in relation to the issue of knowledge and means of knowledge

174.         (i) 2 pin phones

175.         A mobile phone has value throughout the world, There was evidence before us of import into the UK for retail sale. It was cheap to change the charger. The proposition that any sale of phones to Europe or import from Europe is inherently fraudulent is unsustainable.

176.         We do not dispute this. But we find it odd that so many 2 pin phones were in the UK. Almost all the Appellant’s deals were in 2 pin phones. The eventual consumers for all those phones cannot have been principally in the UK. It is suspicious that none was traded whilst physically outside the UK. We do not say that any import or export is inherently fraudulent, but that the presence of so many 2 pin phones in the UK is sufficiently odd to warrant suspicion and further investigation.

177.         (ii) In a perfect market chains would be short, but Utopia is rare.

178.         We agree. But what is surprising is that the chains in which G Comms was involved were all of about the same length. Even if G Comms were unaware of this, it suggests something wrong with the market which may well have surfaced if G Comms had dug more deeply.

179.         (iii) HMRC did not pick up the size of the market share in Nokia phones dealt in by the Appellant when it made the earlier repayments.

180.         HMRC may  have been negligent in failing to consider this. But our concern is not whether HMRC were negligent but whether the Appellant knew or should have known. Further HMRC were not in the same position as the Appellant. They were not in the mobile phone business: one would expect greater consideration and knowledge of the mobile phone market from someone trading in it.

181.         (iv) If the Appellant imported from Europe where phones were more expensive this would have been suspicious. No one suggested that phones were available in Europe at significantly lower prices.

182.         But the phones in the UK had to be imported from somewhere. They were not manufactured here, nor were they mainly for the UK market.  So if profit was being made in the UK (which, given the continuation of the trade, seems likely) phones had been sourced in large numbers from outside the UK at cheaper prices than they were being exported. This was odd.

183.         (v)The fact that no trade resulted in the return of goods or any complaint was not relevant. If, as seemed likely from the FCIB evidence and the evidence of tracing.  there was engineered fraud in the chains, then it is not surprising that no complaints were made. Why should this have alerted G Comms to fraud?  The description of the goods was adequate for the purpose of export.

184.         What to our minds is odd is that the precise details of the phones were provided on the inspection report and that these seemed always to satisfy the customer. Only then did he know exactly what he was getting, and he was always content. And in the domestic deals where there was no inspection report the customer did not have these details and appeared to be content. Even if the value of a pink Nokia XXX with a limited warranty was the same as a silver one with a full warranty, an end user and a retailer would want one rather than the other. And one would have expected that there would have been some interest in the precise specification. We regard this as worthy of some consideration when assessing the circumstances of G Comms’ trade as a whole.

185.         (vi) We should take care approaching this question with the benefit of hindsight: we had the FCIB evidence, G Comms did not (and could not have got it even if it knew the identity of the other persons in the chains), Mr Fletcher’s expertise was not available even to HMRC in 2006..

186.         We agree that hindsight is dangerous. But our assessment at paragraph 165 is on the basis of the facts known to G Comms and those which it had the means of knowing and which reasonably it should have discovered at the time. We have not in reaching our conclusions in paragraph 165 above had regard to the FCIB evidence, and our approach to Mr Fletcher’s evidence has been limited to the broad brush consideration of market share. We have however had regard to the FCIB evidence in reaching our conclusion in paragraph 172 above: that evidence was part of what persuaded us that if G Comms had dug even deeper (as it should have done) it would have found facts which pointed conclusively to connection to VAT fraud.

187.         (vii) The implication of contrivance imparted by the FCIB evidence and the knowledge of the composition of the chains is irrelevant to what G Comms knew or should have known.

188.         We agree that knowledge or means of knowledge does not necessarily follow from the fact that the chains were contrived. But given that all 18 export chains appear to have been and that 50 of the domestic deals were part of similar fraudulent chains, it is at least possible that some inkling that it was (at the least) being nudged into its place may have arisen to it, and likely that asking awkward questions would have created at least a suspicion that such was the case. We have not taken this into account iin our conclusion in paragraph 165, but it forms part of our reasoning fro paragraph 172.

189.         (viii) Miss Tanchel asked us to recall that in early 2006 the Appellant had a business plan for further commercial expansion. In pursuit of that plan it employed additional staff, signed a lease of expensive new premises, and embarked on internet working. Such was indeed the case. She said that this activity was inconsistent with a conclusion that G Comms knew or should have known of a fraudulent connection.

190.         We do not agree for two reasons. First the question as to whether the Appellant should have known is objective: should it have concluded that the only explanation was fraud? In that test what the appellant actually thought is irrelevant. Second, launching a viable respectable commercial activity is not in our view inconsistent with having pursued an activity which you should have know was connected to fraud: a respectable current trade is no guarantee of a blamefree past.

 

191.         We conclude that G Comms should have known that the 18 Deals were connected with VAT fraud.

192.         In all this we emphasise that our conclusion is not about Mr Ahmed’s knowledge nor that Mr Malik, or even that of Mr Hussein (if he controlled, or was in effect the manager of G Comms); it is about G Comms as a person for whom these individuals were simply agents. The question is what G Comms should have known, not  simply what Mr Ahmed knew or should have known.

.V Conclusion

193.         We dismiss the appeal.

 

 

 

194.         The Appellant has the right to apply for permission to appeal against this decision pursuant to Rule 39 of the Tribunal’s rules. The parties are referred to “Guidance to accompany a decision from the First Tier tribunal (Tax Chamber)” which accompanies and, to the relevant extent, forms part of this decision

 

CHARLES HELLIER

TRIBUNAL JUDGE

 

RELEASE DATE: 24 November 2010