First-tier Tribunal (Tax)

[2010] UKFTT 620 (TC)

TC00862

 

 

Appeal number LON/07/1050

 

VAT – input tax – right to deduct – MTIC fraud alleged – Mobilx guidelines – contra-traders – standard of proof – particularity of fraud needed – appeal dismissed

 

 

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

 

 

                                             XENTRIC LIMITED                            Appellant

 

 

                                                                      - and -

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                    REVENUE AND CUSTOMS (value added tax) Respondents

 

 

 

                                                TRIBUNAL: Judge Malachy Cornwell-Kelly

                        Mr Michael Templeman

 

           

 

Sitting in public in London on  24, 25, 26, 27, 28 May, 2, 3, 4, 7, 8, 9, 10, 11, 14 June & 1, 2 & 3 September 2010

 

 

Mr Mohammed Khamisa QC and Mr Nigel Goodwin instructed by The Khan Partnership LLP for the taxpayer

 

Mr Christopher Foulkes and Ms Karen Robinson instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Crown

 

© CROWN COPYRIGHT 2010

DECISION

 

Introduction

1 This appeal is against refusals to the appellant of input tax claims for the periods 04/06 (12 transactions) and 05/06 (17 transactions).   On 26 May 2006 HMRC assigned the input tax claim for 04/06 to extended verification and on 15 June 2006 the same thing was done in respect of the claim for 05/06.  

2 To be deprived of what amounted to some £5M in this way was a major blow to the trading viability of the appellant and pressure was put on HMRC to reach a conclusion on the matter, and ultimately an application for judicial review was made on 10 January 2007.  

3 Matters were brought to a head by the issue of refusals of the input tax repayment claims, dated 15 May and 8 November 2007, which were expressed to be made on the ground that the transactions were connected with the fraudulent evasion of value added tax, and the ground that the taxpayer knew or ought to have known that its transactions were so connected.  The taxpayer contends that these refusals were wrong in fact and law and lodged notices of appeal on 12 June and 4 December 2007.  The total tax at issue is £5,031,634.77. 

4 In what follows throughout this decision we are satisfied on the balance of probabilities that the facts are as we have related them, or as we indicate that they have been stated by witnesses, save where we have clearly indicated that we do not accept the evidence.

5 Xentric Limited (‘Xentric’) was incorporated in England on 27 January 2005 and registered for VAT on 1 April 2005, with its current or intended business stated as selling mobile phones and accessories, and information technology products; its estimated turnover in the following twelve months was £1M and it did not expect to be receiving regular repayments of tax.  The company’s principal place of business was at the office of its tax agents in the United Kingdom, Krogh & Partners, at an address in Finsbury Circus in the City of London.

6 All Xentric’s shares were, at the material times, in the beneficial ownership of a Danish company called Olin Holdings ApS, which also had the whole beneficial ownership of another Danish company called EC Trading ApS (‘EC Trading’).  Mr Kenneth Janus Olin, a Danish national, controlled all three companies, and was the managing director of Xentric and the sole director of EC Trading.

7 A further Danish company called seQuire ApS was 50% owned by Olin Holdings ApS, and Mr Olin was its sole director.  Control of Xentric and EC Trading was sold to Titan Holding SA in Switzerland on 25 September 2007 to provide the capital needed to continue trading while Xentric’s input tax claim was resolved.

8 The 29 transactions in question, using Xentric’s invoice numbering, were purchases of what are called ‘CPUs’ – computer processing units or ‘chips’.  A list of the transactions showing the chain of suppliers, invoice dates and unit sale prices as they are now known is at the Appendix to this decision taken from the deal sheets agreed between the parties.   The essence of each of the 29 deals was as follows:-

191 Purchase by Xentric from Worldwide UK Corp Limited (‘Worldwide’) of 7,560 Intel Pentium 4 chips for £662,256 net on 4 April 2006. Unit price £87.60.

192 Purchase by Xentric from Worldwide of 7,875 Intel Pentium 4 chips for £689,850 net on 6 April 2006. Unit price £87.60.

193 Purchase by Xentric from Worldwide of 7,875 Intel Pentium 4 chips for £689,850 net on 6 April 2006. Unit price £87.60.

194 Purchase by Xentric from Worldwide of 6,300 Intel Pentium 4 chips for £551,880 net on 6 April 2006. Unit price £87.60.

195 Purchase by Xentric from Worldwide of 10,710 Intel Pentium 4 chips for £938,196 net on 19 April 2006. Unit price £87.60.

196 Purchase by Xentric from Worldwide of 945 Intel Pentium 4 chips for £80,325 net on 20 April 2006. Unit price £85.00.

197 Purchase by Xentric from Worldwide of 18,900 Intel Pentium 4 chips for £1,738,800 net on 24 April 2006. Unit price £92.00.*

198 Purchase by Xentric from Worldwide of 18,900 Intel Pentium 4 chips for £1,738,800 net on 24 April 2006. Unit price £92.00.*

199 Purchase by Xentric from Worldwide of 15,750 Intel Pentium 4 chips for £1,456,875 net on 24 April 2006. Unit price £92.50.*

200 Purchase by Xentric from Worldwide of 14,998 Intel Pentium 4 chips for £1,349,820 net on 28 April 2006. Unit price £90.00.*

201 Purchase by Xentric from Worldwide of 8,998 Intel Pentium 4 chips for £1,007,776 net on 28 April 2006.  Unit price £112.00.*

202 Purchase by Xentric from Worldwide of 5,998 Intel Pentium 4 chips for £863,712 net on 28 April 2006. Unit price £144.00.*

203 Purchase by Xentric from The Working Group Limited (‘TWG’) of 9,450 Intel Pentium 4 chips for £826,875 net on 30 May 2006. Unit price £87.50.*

204 Purchase by Xentric from TWG of 9,450 Intel Pentium 4 chips for £826,875 net on 30 May 2006. Unit price £87.50.*

205 Purchase by Xentric from TWG of 9,450 Intel Pentium 4 chips for £826,875 net on 30 May 2006. Unit price £87.50.*

206 Purchase by Xentric from TWG of 9,450 Intel Pentium 4 chips for £826,875 net on 30 May 2006.  Unit price £87.50.*

207 Purchase by Xentric from TWG of 11,498 Intel Pentium 4 chips for £1,034,820 net on 30 May 2006. Unit price £90.00.*

208 Purchase by Xentric from TWG of 11,998 Intel Pentium 4 chips for £1,343,776 net on 30 May 2006. Unit price £112.00.*

209 Purchase by Xentric from TWG of 9,450 Intel Pentium 4 chips for £826,875 net on 30 May 2006. Unit price £87.50.*

210 Purchase by Xentric from TWG of 9,450 Intel Pentium 4 chips for £826,875 net on 30 May 2006.  Unit price £87.50.*

211 Purchase by Xentric from TWG of 9,450 Intel Pentium 4 chips for £826,875 net on 30 May 2006. Unit price £87.50.*

212 Purchase by Xentric from TWG of 12,600 Intel Pentium 4 chips for £1,102,500 net on 30 May 2006. Unit price £87.50.*

213 Purchase by Xentric from TWG of 10,998 Intel Pentium 4 chips for £1,506,726 net on 30 May 2006. Unit price £137.*

214 Purchase by Xentric from TWG of 10,395 Intel Pentium 4 chips for £883,575 net on 31 May 2006. Unit price £85.00.*

215 Purchase by Xentric from TWG of 17,955 Intel Pentium 4 chips for £1,517,197.50 net on 31 May 2006. Unit price £84.50.*

216 Purchase by Xentric from TWG of 17,955 Intel Pentium 4 chips for £1,517,197.50 net on 31 May 2006. Unit price £84.50.*

217 (absent from the series)

218 Purchase by Xentric from TWG of 11,998 Intel Pentium 4 chips for £1,319,780 net on 31 May 2006. Unit price £110.*

219 Purchase by Xentric from TWG of 10,498 Intel Pentium 4 chips for £1,427,728 net on 31 May 2006. Unit price £136.*

220 Purchase by Xentric from TWG of 11,498 Intel Pentium 4 chips for £1,270,529 net on 31 May 2006. Unit price £110.50.*

9 The first four transactions were said by Mr Olin to be a single deal, split only for insurance purposes.  The transactions marked * are said by HMRC to be linked to ‘contra-traders’ (the meaning of which is explained below). It will be seen that all the purchases in question were either from Worldwide or TWG and that all were of essentially the same type of goods – Intel Pentium 4 CPUs, although the invoice descriptions of them varied in what we understand to be have been minor technical detail, about which no issue arose.

Context

10 A brief recapitulation of the principal concepts - though well known in cases such as this - is appropriate to make our decision intelligible without the reader having to refer elsewhere.

11 MITC fraud is the name given by HMRC to refer to ‘missing trader intra-Community’ fraud.  In its simplest form, the fraud is said to consist in (i) the acquisition of goods from an EU state, (ii) their onward sale in the UK, accompanied by a default in the payment of the output tax in respect of that sale by the trader who acquired the goods, who then goes missing – but the purchaser who is nonetheless entitled to reclaim input tax on the sale to it, notwithstanding the seller’s default, (iii) usually several more onward sales of the goods in the UK, and (iv) their re-export to another EU state or outside the EU.  The export is zero-rated and the exporter reclaims the input tax on the immediately preceding purchase.  That reclaim is, in principle, legitimate but it obviously assumes a sinister character if it is connected with the default at (ii). 

12 The trader at (ii) is called the defaulter, the traders at (iii) are called the buffers and the trader at (iv) is called the broker.   This type of chain is known as a ‘dirty’ chain.  If the broker, who is the one claiming the repayment of input tax, knew or ought to have known that its purchase actually was (not that there was a risk that it might be) connected to the fraudulent evasion of VAT, it loses its right to reclaim its input tax.  Why this is so is explained in the case law cited later in this decision.

13 A more complicated version of MTIC fraud is said to involve the presence of a contra-trader, which HMRC say was the case for transactions 197 to 220.  Here, the contra-trader appears in two guises in two apparently unconnected chains.  First it appears as the importer at (i) in the example above, but instead of defaulting it pays the tax due correctly, so the chain is a ‘clean’ chain.  The contra’s second appearance, usually in a the same VAT accounting period, is as the broker in a dirty chain of the kind described above, in which there has been a default at stage (ii). 

14 The essence of contra-trading is said to be that the input tax reclaim made when the contra-trader acts as broker in the dirty chain is masked, or made less conspicuous, by the same trader’s correct payment of tax when acting as importer in the clean chain - making it more difficult for HMRC to appreciate that the input tax claim in the dirty chain is suspicious.

15 In the * transactions, it is alleged that Xentric was the broker in the clean chain, but knew or ought to have known that its transactions were connected to a fraud, the essence of the fraud being that the importer in Xentric’s clean chain was or would be the exporter in a dirty chain containing a defaulter.  In essence, it is an allegation that Xentric was involved in a scheme to defraud the revenue just as it could be as the final link in a dirty chain; or, if actual knowledge cannot be proved, then that Xentric should have known, had it made reasonable enquiries and taken reasonable precautions, that there was no other reasonable explanation for its transactions than that they were connected to a fraud on the revenue.

16 The burden of proving this, both in regard to the straight chains and for the contra chains, is agreed to be on HMRC.  The Tribunal must be satisfied to the civil standard of proof, the balance of probabilities, that the case against the taxpayer is made out; otherwise, the taxpayer is entitled to its denied input tax repayments.  It was common ground that, in a company such as Xentric, the mind of the company is that of its sole controlling director, Mr Olin.

The issues

17 A variety of issues emerged in the course of the evidence, which consisted of some 40 lever-arch files of documents, and fourteen days of oral testimony, itself supported by written statements.  Of particular significance were:-

- The nature and operation of the grey market in which Xentric traded.

- The extent of the ‘due diligence’ undertaken by Xentric.

- The commerciality of Xentric’s trading.

- Whether HMRC led Xentric to think that it was keeping clear of trouble.

- Whether Xentric, through Mr Olin, did actually know of the frauds taking place.

18 HMRC’s evidence with regard to fraudulent activity by others in the chains which Xentric was involved in or - allegedly - connected to, was not materially challenged and, for reasons we will explain later, we are satisfied to the requisite standard of proof of the existence of fraud in all the chains in which Xentric participated, including the alleged contra chains.

The grey market  

19 Xentric’s case is that it was a trader in the grey market for CPUs, and it was not denied by HMRC that such a market existed at the material times.  We enquired at the outset whether we would be given evidence about the characteristics of that market and we were told that HMRC had indeed sought leave to adduce expert evidence about it in an application made on 29 April 2010, which was (in this regard) dismissed by Judge Berner following a Directions hearing on 18 May, full reasons being released on 27 May. 

 

20 Counsel for the taxpayer, Mr Khamisa QC, submitted that we should not look at those full reasons, his concern being that the reasons rehearsed something of the evidence which was sought to be adduced and which Judge Berner had decided should not be adduced; if we were to study the reasons therefore we would, it was said, in some measure at least be examining the very evidence which the judge had considered should not be given. 

 

21 In response to Mr Khamisa’s application, Mr Foulkes for HMRC submitted that this is, as he put it, a professional tribunal and well used to the exercise of excluding evidence or considerations which may have emerged as irrelevant or for some reason inadmissible; but he was content that the decision whether to read Judge Berner’s reasons or not should be one for the Tribunal, and he did not particularly press us on it.

 

22 We accordingly took time to consider the matter in the light of the current tribunal rules and in particular the desirability of everything material to the issues before us being considered.  But we also had in mind the need for procedural fairness as between the parties and that such fairness could require that in an appeal, which had taken the best part of four years to reach a hearing, it could be unfair for one party to bring forward new evidence on the eve of the hearing which the other party then had no time to counter. 

 

23 We concluded that the better course was to take no action which would go contrary to Judge Berner’s decision; he, little more than a week before, had examined and balanced the same questions of fairness and justice in the case and no ground had been urged upon us to revisit his determination.  We therefore decided in fairness to the taxpayer not to examine the judge’s reasons for excluding this evidence.

 

24 That conclusion, however, left the tribunal with no evidence as to the workings and characteristics of the grey market other than Mr Olin’s.  Counsel for HMRC suggested that we should look at expert evidence which had been accepted by other tribunals in regard to the grey market, albeit not in relation to CPUs but to mobile phones. 

 

25 Initially, this seemed an attractive proposition, but we expressed concern that reading across factual evidence from other cases, even if it emerged from a situation apparently on all fours (which is not the present case) could be open to question because, in particular, that evidence would not have been subject to challenge by the parties or indeed by the tribunal, would almost certainly relate to different periods of time, and hence could be misleading and unfair to the party against whom it was admitted.

 

26 Counsel was unable to point us to any authority in relation to civil proceedings for what was proposed, and only to section 74 of the Police and Criminal Evidence Act 1984, which allows evidence of a criminal conviction to be admitted to prove that the offence it concerned was actually committed, unless the contrary is proved.  That is a long way from the wholesale reading across of evidence about grey markets accepted by another tribunal in another context, and strongly suggestive that the reading across of evidence in this way requires the greatest caution. 

 

27 Bearing in mind rule 15(2)(b)(iii) - that we may exclude evidence, when to admit it would be unfair -  we decided in the event that it would not be safe or fair to admit evidence accepted by other tribunals in regard the factual issues that they had had before them.  However, so far as the grey market is concerned, although time was taken in cross-examination to draw out its significance for this case, we did not see the description in Mr Olin’s evidence about its basic structure as being essentially in contest in the proceedings.  It appeared credible, and we accept the summary of it which follows as an adequate outline of how the market for CPU

s works.

 

28 The scene is set by the manufacturer who, typically, outsources much design and manufacturing work so that component manufacturers such as Intel, AMD and Samsung produce the parts such as the CPUs in this case that make up a modern computer. The component parts are then put together by the manufacturer, who is known as an ‘original equipment manufacturer’ or OEM; Mr Olin described them as in effect ‘PC assemblers’. They tend to be large multinational companies with offices all over the world, who can dictate the design and features of the components they purchase.

 

29 An OEM is therefore a company like IBM, Dell, Hewlett Packard, Acer, Toshiba, Sony, Fujitsu and Siemens, who put the product together and brand it with their own name, and warrant and license it for sale.  In general, they purchase the components from the component makers in large quantities and for similarly large discounts, either direct or through official distributors authorised by the component makers.  Intel is one of the component makers who sell directly to OEMs, and will do so at a price which is lower than that obtainable from an authorised distributor, though such sales are not supposed to be repeated onwards by the OEM and the components are for use exclusively in PC assembly.  In other words, the OEM is contractually prohibited from further trading in the components it buys from Intel.

 

30 Distributors are of two kinds: the officially authorised distributors who act for the component manufacturers, and sell on, usually in volume, at prices determined by the manufacturers and only into their allocated sales territory; then there are independent distributors who operate outside the official distribution network and without such constraints.  Such a distributor will of course have to pay for its goods at a higher price than that paid by an OEM or an official distributor, but it will compensate for that by being able to obtain and supply goods flexibly and quickly from a variety of sources, including from OEMs who have acquired too much stock for immediate purposes, and maybe in that case at prices below those obtainable from the official distributor. 

 

31 Independent distributors carry considerable risk themselves and are not supported by suppliers, while authorised distributors have the benefit of price protection, stock rotation and marketing assistance from component manufacturers.  The grey market these independent distributors operate in consists in the movement of goods outside the officially authorised distribution networks and it functions in a number of ways.

 

32 By definition, a grey market seller either undercuts the official distributor’s prices for goods in a particular sales territory, or makes them available more quickly than they would be through official channels or across sales territories.  It can therefore be a useful balancing mechanism for the whole sector, enabling surplus stock to be released and urgent requirements to be met. But also, by definition, it is uncontrolled and relatively volatile and apt to experience constant price movements which may not be predictable.

 

33 Thus, an OEM, for example, may purchase a greater quantity of stock than needed from a component manufacturer in order to benefit from volume discounts and lower unit costs, and will then dump what is surplus to its actual needs on the grey market, quite possibly at a price lower than that charged by the official distributor. Other reasons supporting the existence of a grey market include the arbitrage opportunities offered by the frequent currency fluctuations, and local brand preferences which may not be adequately supplied by the official market, or by different pricing in adjacent markets.  Or maybe a distributor sells to the market direct, itself giving volume discounts.

 

34 Component manufacturers tend to turn a blind eye to dumping by OEMs, and indeed to straightforward purchase by an OEM with a view to trade rather than integration in a product, in order themselves to maintain overall sales volumes.  They much prefer, however, that product dumped on the grey market should be sold discreetly and exported, rather than sold locally, in order not to upset their authorised distributors in the same sales territory who may be undercut by grey market sales. 

 

35 Mr Olin went on to describe the specific case of Intel, the world’s largest semi-conductor and component manufacturer.  Intel’s supply chain was described as the most disciplined in the market, going either direct to OEMs or through authorised distributors, who are tightly controlled.  Even so, OEMs to whom Intel sells do sell out to the grey market if they want to clear their stock, and Intel turns a blind eye to it because it needs to maintain its volume sales which can best be achieved through OEMs.  Mr Olin said specifically that Intel had the ability to stop these onward grey market sales by checking every tray found on the grey market and tracing it back to the OEM to which it had been supplied, and then fining that OEM for breach of contract or use other contractual sanctions against it.  But Intel chose not to do so.

 

36 Besides using its authorised distributors, Intel also knows its products flow out through unofficial channels, independent distributors and brokers, one of the largest of which is Smith Associates who supply many smaller OEMs, system integrators, retailers and private businesses, who are unable to source products from Intel direct at favourable prices.  So the smaller PC assemblers may buy from unofficial or official distributors, depending upon the terms they can get. 

 

37 In answer to a question from the tribunal, Mr Olin confirmed that there was in effect nothing approaching a formal commodity exchange for CPUs and that, although there was an online marketing exchange called ITX Market on which many companies advertised, ‘it really didn’t get full grip’; Mr Olin said that he used it for comparison and to get a feel of the market.   Deals were done bilaterally after negotiation.

 

 

Mr Olin’s background before Xentric

 

38 Mr Olin began his career after business school at 19, working for Jyske Bank in Denmark, and in 1999 he started as an IT consultant advising the bank’s clients on IT issues.  Mr Olin left the bank in 2001 and went to work in the purchasing and sales side of IT at two large distribution companies in Demark, BridemaA/S and Bluecom A/S.  These companies were independent distributors, selling as official distributors for some brands and also purchasing and selling on the grey market.

 

39 After a short period in 2002 working for Bridema, Mr Olin moved to Bluecom until 2003, where he had responsibility for the German and UK markets, and it was there that he first became acquainted with the UK market, which he described as “very competitive, with a large range of companies within the IT sector”.  For deals these companies did on the grey market, they would typically not hold stock themselves but would use other warehouses. At Bluecom Mr Olin was both selling IT components conventionally and doing deals on the grey market as a broker.  In so far as the UK market was concerned, he was dealing with PC components such as graphic cards, hard drives and CPUs.

 

40 Although he was aware of MTIC fraud in that job, Mr Olin said that while it was prevalent at the time it was “not really something [Bluecom] put much effort into”; the company’s employees were told to make reasonable checks on the companies they were dealing with to find out if they were legitimate companies, “basically the same kind of checks as I have done afterwards ... we did what was commercially viable”. 

 

41 Mr Olin’s understanding of MTIC fraud was that it consisted essentially of the hijacking of a legitimate company’s name and VAT number by a fraudster who then disappeared.  Mr Olin went two or three times to an annual trade fair in the sector called CeBIT in Hanover, Germany, but MTIC fraud was not much talked about.  At Bluecom, Mr Olin was in the division of a Mr Martin Matthiasen, a sales manager who was very successful at what he did.  Another colleague, whom Mr Olin knew there for about a year and who will figure later, was Mr Kristian Kristiansen.

 

42 A short while after Mr Olin had been working for Bluecom, Mr Matthiasen left that company and started his own business, Solid Trading ApS (‘Solid’).  Mr Olin himself then left Bluecom to join Solid on 1 January 2004, where there were about seven people in all.  Mr Matthiasen was the director and, according to Mr Olin, worked largely by himself behind closed doors, while Mr Olin and his colleagues shared office accommodation.

 

43 The manner of working was much the same as it had been at Bluecom, with each trader working on his deals partly independently.  Mr Olin was buying and selling in the German market, the Netherlands and around Europe, as well as the UK.  On Mr Olin’s own account, his work at Solid was very successful, but it was not to last.  Sometime in 2004, Solid suddenly closed its doors: Mr Matthiasen explained the position to staff as resulting from a default by a supplier who had been pre-paid but had not delivered.  A week later, a liquidator arrived and confirmed the account Mr Matthiasen had given and the company was wound up.

 

44 There was at the time no suggestion that fraud had been involved, but in August 2005 it emerged in the media that a man called Patrick Lee in Hong Kong, the supplier who had defaulted, had been arrested with incriminating evidence and Mr Matthiasen was himself involved.  (Mr Matthiasen is now awaiting trial in Denmark pursuant to an investigation called Operation Yellow Fever.)

 

45 When Solid collapsed in 2004, the blow to Mr Olin was severe.  Mr Olin found himself without a job, having just left Bluecom, and he just bought a house and made, as he said, “a lot of commitments”.  So he explored the possibility of keeping in with Mr Matthiasen, who was moving to Switzerland to establish a company called Liquid Trading (‘Liquid’), believing that though he had made a big mistake he would still be a successful businessman.  But Mr Olin also checked out other options, including returning to Bluecom. 

 

46 Mr Olin says that he assisted in the start-up phase of Liquid, handling some of the paperwork, calling the freight forwarders and so on.  Connected with the Liquid start-up were three people who had been at Bluecom or Solid, Jimmy Coker, Kristian Kristiansen and “a guy called Kenneth”. But Mr Matthiasen no longer had the capital available that he had had previously and the business did not prosper, Mr Matthiasen selling it off in January 2005 to, it seems, a Mr Kelvin Loh Boon Teck.  Meanwhile, Mr Olin had decided not to join it, and never signed an employment contract.  Instead, he decided to branch out on his own and in autumn 2004 he activated EC Trading, which he had set up in Denmark in April 2003 and had had VAT registered there in May 2003. 

 

47 Naturally, at EC Trading Mr Olin began with the contacts that he had built up over the previous years, which in the first quarter of 2005 included Liquid under its new ownership and, later that year, Kristian Kristiansen who had set up Northcom ApS (‘Northcom’) in Denmark.  EC Trading dealt in mobile phones, television sets, memory software and ‘a lot of different items’, brokering deals with various countries inside and outside Europe but not in Denmark.  In so far as MTIC fraud was concerned, Mr Olin said that he took advice from the Danish tax administration who “visited our offices regularly, have copies of all deals, and they were always happy with what they saw”. 

 

Xentric and setting up in the UK

 

48 Mr Olin considered the UK market to be very good, very competitive and very big and having the potential for good profits.  He wished to cut out the middle man and make the extra profit that that would allow.  Mr Olin’s explanation of that was that the exporter in these deals took an extra risk and thus expected to make a bigger profit than he would on local sales; since capital had to be tied up in the business anyway, this was a way of making it earn a bigger profit than if it was used only in buying and selling in a local market. The profits Mr Olin actually made when he did trade in the UK through Xentric were between 2 and 12 per cent.

 

49 Xentric Limited was therefore incorporated on 27 January 2005 and financed by loans from EC Trading i.e. in effect, from Mr Olin’s own resources.  In practical terms, it was run by EC Trading’s staff and of course Mr Olin himself.  Pressed in cross-examination to explain why it was sensible to trade at the same time through EC Trading in Denmark and Xentric in the UK, Mr Olin replied that that was essentially a business decision which he had made at the time, and that it was supported by his accountants who had advised that it was wise to split the risk in his overall business in that way. 

 

50 Xentric’s UK accountants, Krogh & Partners, of Finsbury Circus in the City, prepared an application for Xentric to be registered for VAT on 15 February 2005, which it was with effect from 1 April 2005.  Before that, Mr Olin had a pre-registration meeting with a Mr David Atkin, an officer of HMRC with many years’ experience in the field of MTIC fraud; he was Xentric’s assurance officer for the whole of the relevant period, retiring in June 2007.

 

51 The ‘pre-registration’ meeting was in fact on 6 April 2005 - the registration being slightly back-dated - at the office of Krogh & Partners.  There was no note of the meeting, but the report of it by Mr Atkin dated 7 April 2005 noted that Mr Olin’s company EC Trading was VAT registered in Denmark and that it had traded with several companies involved in carousel fraud; he added: “EC Trading are facilitating (albeit innocently) any fraudsters.”. 

 

52 Nothing, however, was said to Mr Olin to that effect, so that he was not told that he was already in a dangerous situation; the reason according to HMRC’s principal witness Mr David Ball was that the department’s duty of confidentiality towards taxpayers generally prevented that kind of information being disclosed.  However, the notes record that the MTIC carousel implications of the Danish registration, together with the possibility of joint and several liability, were “openly discussed” and that Notice 726 was given to Mr Olin, and clearly MTIC fraud was also addressed.   There is no sign that contra-trading was mentioned, and Mr Ball thought it unlikely that it would have been.

 

53 Mr Atkin wrote that he “told Mr Olin and his accountant that if a UK VAT number was allowed that [he] would personally be closely monitoring trade on a deal by deal basis.”  And Mr Atkin concluded his internal report: “As far as I am concerned, I will be amazed if Xentric, as a broker, do not get involved in a supply chain with a defaulter in the UK”. 

 

Notice 726

 

54 It has been seen that Mr Olin was given this Notice, which was published by the Commissioners of Customs & Excise in August 2003.  It followed the enactment of section 77A of the Value Added Tax Act 1994, which provided with effect from April 2003 that in the case of supplies of certain telephone and computer equipment VAT unpaid in a chain could be recovered jointly and severally from the person primarily liable to pay it and from any person to whom a supply of the goods was made who at the time of the supply “knew or had reasonable grounds to suspect that some or all of the VAT payable in respect of that supply, or on any previous or subsequent supply, of those goods would go unpaid”.

 

55 Subsection (6) of section 77A provided a rebuttable presumption that a person had reasonable grounds for suspecting that VAT would go unpaid if the price at which he bought was (i) less than the lowest price which could reasonably be expected to be payable on the open market, or (ii) was less than the price payable on any previous supply of the goods.  The presumption was without prejudice to any other way of establishing reasonable grounds for suspicion, and the amount payable in the event of the section applying was the net tax unpaid on the goods. 

 

56 Notice 726 explained section 77A and laid down guidelines which were designed to assist traders in avoiding liability under the section.  The section was not, however, invoked in the case under appeal, and no joint and several liability was pursued.  In practice this Notice had come to be used for a rather different purpose, namely as a reference point for traders such as Xentric who were liable to be denied repayments of input tax in situations where VAT had gone unpaid in the chain either before them or after them.  This approach derived from a legal analysis confirmed by the European Court in 2006 which is explained below.

 

57 The Notice emphasised the need for a trader to be circumspect about its trading connections.  Under the heading “How will you establish ‘reasonable grounds to suspect’?” section 2.5 of the Notice said:-

You shall be presumed to have reasonable grounds for suspecting that the VAT on the supply would go unpaid if you have purchased the specified goods for less than:

·                  The lowest market value of the goods; or

·                  The price paid for them by any previous supplier

These tests, which are rebuttable presumptions, are made without prejudice to any other way of establishing reasonable grounds for suspicion.

 

58 Section 3.3 of the Notice continued:-

It is clear, from consultation, that businesses involved in the affected sectors are aware of the problems [of MTIC fraud].  In order for the fraud to be perpetrated the price has to be cut within the supply chain.  This measure is aimed at businesses that either know who is carrying out the frauds, or choose to turn a blind eye.  These businesses, if they do get caught up in the fraud, will have purchased goods that are priced either below the market price or at a lower price than that paid by a previous supplier in the chain. This is to the detriment of legitimate trade.  Businesses that check the integrity of their supplies and the supply chain should not be affected by this measure.

 

59 For the purpose of checking the integrity of their supplies and the supply chain, section 4.4 of the Notice advised traders that they should take “reasonable steps” to establish the integrity of their customers, suppliers and supplies.  In cross-examination, Mr Ball agreed that this referred to a trader’s “immediate customer” and “immediate supplier”; he also agreed that a trader’s enquiries could not be expected to go further than one up or one down the chain, commercial logic suggesting that it would be unrealistic to expect suppliers to disclose their sources for fear of being cut out in future.  Section 4.5 of the Notice in fact made the same point.

 

60 Section 8 of the Notice gave examples of some 18 checks or reference points to which it would be prudent to have regard.  It was emphasised that this was not an exhaustive list of boxes to tick, but suggestions as to the areas of enquiry likely to be relevant.  In summary, they are:-

                 i.      The supplier’s history

                 ii.    The arrangements for financing and insurance

               iii.    Recourse if the goods are not as described

               iv.    The existence of a current market for the goods

                 v.    Are price increases in the chain commercially viable

               vi.    Normal commercial price negotiations

             vii.    Reasons for any third party payments

           viii.    Existence of the goods

                ix.    Previous supplies of the goods to the trader

                  x.    The condition of goods

                xi.    Certificates of incorporation and VAT registration

              xii.    Check on xi with HMRC

            xiii.    Letters of introduction on headed stationery

            xiv.    Trade references, written or oral

              xv.    Credit or background checks

            xvi.    Personal contact with senior officers, and visit to    premises if possible

          xvii.    Bank details

        xviii.    Cross-checks of the above

 

Pre-appeal period trading

 

61 HMRC variously asserted that in 84 deals taking place before the appeal period that they had identified 56 in which there was a defaulter or contra-trader in the chain, and later in the hearing that it was so in 41 out of 69 deals so traced - for the remainder the exercise not having been conclusive.  At all events, Xentric was not told that this was suspected until 8 May 2006 and the information was not confirmed to the company until 12 January 2007.  We must make it clear that we have not taken account of the deals in the pre-appeal periods on which we have not had detailed evidence, and that we have not sought to infer from the allegations made by HMRC in regard to them that it is either more likely, or less likely, that Xentric knew or ought to have known that the appeal transactions were tainted by fraud.

 

‘Due diligence’

 

62 The courts, as will be seen, have warned against an excessive focus on ‘due diligence’ in MTIC cases and urged a more general realistic overview of the steps actually taken by a trader to avoid involvement in fraud in the commercial context in which it operated, thus very much reinforcing HMRC’s own warning that a merely formal compliance with the guidelines in Notice 726 was not what they were inviting.   Moreover, it is apparent that Notice 726 was not designed to address the type of liability which arises in this appeal and in some of its parts was clearly in appropriate e.g. the expectation that fraud would be characterised by price reductions in the chain.

 

63 In addition to that, the expression ‘due diligence’, borrowed as it is from the unconnected sphere of company takeovers and acquisitions is not very helpful.  As the case law makes clear, what is required is perhaps better described as a ‘duty of responsible enquiry’ in all the circumstances of the case.  Bearing this in mind, we now look at the way in which Xentric approached its trade relationships. 

 

64 As a routine, Xentric aimed to establish the following details of all its suppliers or customers:

a.           Trading address, registered address, website, email, date of incorporation and nature of business;

b.           Company registration number and certificate of incorporation;

c.           VAT registration certificate and number;

d.           Directors’ details and passport of one director;

e.           Contact names and details;

f.            Bank details;

g.           Copies of utility bills;

h.           Letters of introduction on headed stationery.

 

65 Commonly, an application to do business with Xentric was also required, stating that the customer or supplier had undertaken reasonable checks on the legitimacy and integrity of its customers and suppliers and reasonable steps to ensure the commercial viability of all deals, that it regularly undertook ‘due diligence’ on its trading partners, and that it was up to date in its tax affairs. Most, but not all, Xentric’s trading partners asked Xentric to complete a similar application to trade with them.

 

66 In reviewing the action taken by Xentric it is useful to consider first the evidence of Xentric’s present case officer, Mr Ball.  He was, as been noted, HMRC’s principal witness, being the officer with primary responsibility for the case.  Mr Ball has been employed by HMRC since August 2003 and he joined the MTIC fraud team on 1 May 2006, gradually taking over from Mr David Atkin as Xentric’s case officer.  Before that, Mr Ball was in the “general department” as he described it, visiting corner shops to trading companies to restaurants to accountants; he had no previous experience of commodity trading within HMRC, but had in the 70s and 80s worked for a bank where he had had some experience of commodity trading.  We saw him as an honest witness, ready to admit mistakes if he had made them and to accept gaps in his knowledge or understanding.

 

Worldwide

 

67 For the first eleven deals noted above, Worldwide was Xentric’s sole supplier; it has not been identified as a defaulter.  Mr Ball agreed, in cross-examination that trading through one dealer only would “probably” minimise the risk of becoming involved in chain tainted by fraud, which was Mr Olin’s explanation of why he stuck with Worldwide throughout these eleven deals. 

 

68 Mr Ball agreed too that Xentric had adhered “almost to the letter” to the Notice 726 guidelines, that each batch of CPUs had been sample electronically tested at Xentric’s expense and checked that they had not been traded before, that it was highly unlikely that Xentric’s request to make monthly VAT returns would have been granted (which it was from September 2005) if it had not been seen as a bona fide business and that all the external features of ‘due diligence’ set out in Notice 726 had been complied with.  Overall, Xentric had taken reasonable steps in relation to its ‘due diligence’ regarding Worldwide.  Mr Olin pointed out that, as far as Worldwide was concerned, these steps had been successful, since there was no allegation that Worldwide was a defaulter.

 

69 All the boxes of CPUs bought from Worldwide were inspected at Xentric’s request by the freight forwarder and sample-tested at the rate of one CPU chip per box of 21 trays, each tray having 15 chips.  Full documentation on every deal was relayed by Xentric to HMRC and, on examining it, Mr Atkin noticed from the inspection reports that many of the boxes or trays had been damaged. 

 

70 We received no evidence as to what this damage amounted to and, although in some samples up to a third (or more) of the trays were reported “damaged”, there was no suggestion that the damage was more than superficial.  When challenged about this by Mr Atkin – because it might indicate that the goods were being carouselled – Mr Olin replied that he was selling CPUs rather than packaging and, as long as the goods themselves were sound, he was content.  Mr Atkin appeared to accept the explanation and no more was said.

 

71 From the start of Xentric’s business in early 2005 until May 2006, all its repayment claims were met and its VAT returns accepted.  On 8 May 2006, however, Xentric received a letter from Mr Atkin saying that verification of its August 2005 return had shown that a sample of three of the purchase transactions reported had in each case commenced with a defaulting trader; the letter urged Xentric “to seriously consider what appropriate action is needed to ensure that the VAT does not go unpaid in respect of any future transactions.”.

 

72 Mr Olin expressed shock and surprise at this news, and replied asking whether Worldwide had bought directly from a defaulter, and when the reverse charge which he had heard talk of, was coming in?  On 17 May, Mr Atkin replied that the European parliament was being requested to authorise a reverse charge, and he said:-

“With regard to Worldwide, you now have the means of knowledge that you are taking a high risk of plugging into a supply chain where VAT goes unpaid by the defaulter.  If after the date I informed you of the defaulters and the deals examined, you purchase from Worldwide and a defaulter is subsequently identified in the supply chain, action may be taken against Xentric to recover the lost VAT.”

73 The same day, 17 May, Mr Olin emailed back that he would stop buying from Worldwide at once, and he did not thereafter deal with them.  Mr Olin asked whether Mr Atkin had any comment about two other companies he had been thinking of dealing with, TWG and Silver Reef UK Limited.  Mr Atkin played a straight bat in response, saying simply that “both companies are known to us”, but leaving Mr Olin perhaps with the impression that there was nothing wrong them; it was said Mr Olin “a green light in my book”. 

74 By now, the input tax claims for 04/06 and 05/06 were on hold and, following the disclosure that some of Worldwide’s chains had led to defaulters, Messrs Atkin and Ball decided to administer a lengthy questionnaire to Mr Olin to risk-assess Xentric’s position.  That was done at a meeting on 15 June 2006 which took at least two hours.  There were 213 questions to cover and Mr Ball agreed that Mr Olin gave answers to each one of them; he also commented of Xentric that “In terms of supplying documentation that has been requested and supplying documentation every month to obtain a repayment, yes, I will them top marks.”.

75 All the answers appeared to us to be satisfactory and to suggest none of the recognised indicia of fraud; there was no criticism of them either recorded at the time or voiced at the hearing before us.  In particular, it was confirmed that Mr Olin had a good knowledge of the market, that he used his own capital to finance the deals, that goods only passed on payment being received, that no third party payments were made, that the goods were always insured, held in warehouse, inspected and tested; Mr Ball agreed that there was no evasiveness in Mr Olin’s replies. 

76 Worldwide had completed Xentric’s trading application form in June 2005.  They gave two trade references: one was a freight forwarder to whom Mr Olin spoke and received a favourable reply; he also sought the input of the freight forwarder, Forward Logistics, and the other reference he ignored.  The credit rating given by Global Asset Management was “high risk” and the latest accounts were overdue; Dun & Bradstreet offered no credit opinion. The company had been trading since 2002, thus for three or four years before Xentric started to deal with them. 

TWG

77 TWG was the supplier to whom Xentric turned when it became apparent that Worldwide’s chain was in some way tainted; Mr Olin recalled that he had first heard of them via a trade association through which they advertised, but TWG was not a connection which Mr Olin had previously had in any other business context before commencing trading through Xentric.  Xentric began purchasing from them in May 2006 for the final 17 deals under appeal. 

78 Xentric had commenced its ‘due diligence’ in regard to TWG in 2005, visiting their premises and doing ongoing due diligence with them in January and May 2006.  TWG were established in 1999 and had been trading in CPUs and managing real estate, though possibly in different branches or through associated companies.  Its accounts were overdue for filing at Companies House.  As in the case of Worldwide, Mr Olin did not pursue the trade references given but relied on information from freight forwarders. 

79 The Dun & Bradstreet report noted “a significant level of risk” and advised taking guarantees if extending credit.  There were also outstanding judgments registered against the company in 2002, 2003 and 2004, but none after that; Mr Olin did not enquire about them, assuming it appears that they had been dealt with by 2005 or 2006. 

80 The evidence showed that there were forms completed by Xentric as part of TWG’s ‘due diligence’ on Xentric which were dated 6 June 2006, thus after Xentric had begun to do deals with them. Mr Olin’s explanation of this timing was that, in view of the length of time that he had been establishing information on TWG, it was probable that they were updating earlier material he had lost.  By contrast, Xentric’s paperwork had been done before its deals with TWG.

Suyama

81 Suyama Pte Limited, based in Singapore, was the purchaser from Xentric in deals 191, 192, 193 & 194.  (These were, Mr Olin said, essentially one deal split up for insurance purposes into several parts.)  Xentric obtained and submitted to HMRC the documents suggested by Notice 726, but Mr Ball’s witness statement commented that “this level of due diligence could not have provided Xentric with adequate assurance that [Suyama] was not involved in MTIC fraud”. 

82 The evidence was that Mr Olin had some acquaintance with the director of Suyama, Mr Caudio Bencivengo, through previous dealings with him in a Dutch company and had met and spoken with him and a colleague of his at the CeBit conference in Hanover in 2005, but he that dealt mainly with Mr Ameer Alsagoff there whom he had not met.  Just after the periods under appeal, Mr Olin also visited Suyama’s office in Singapore in June 2006, at a time when he had expected to continue trading through Xentric.

83 Mr Ball accepted at the hearing that a business relationship between the two companies would eliminate any other risk, though he remained concerned that the financial information on Suyama did not show it in a robust position; he accepted, however, that by not releasing goods to Suyama until it had made payment, Xentric had much reduced its risk, so that a failure to pay would at worst leave only the problem of finding another purchaser for the goods.  In all four cases, the goods were in fact shipped on the same day as payment was made and there was no default.

Formosa & Fine Peace China

84 Formosa SA, based in Switzerland, was the purchaser in one deal only, 195; and Fine Peace (China) Limited was the purchaser in one deal only, 196.  

85 Mr Olin accomplished the formal ‘due diligence’ in respect of Formosa and had dealt with it during his time at Solid; he started trading with Formosa in June 2005 and, though he had not visited its office, he had met and spoken with its main trader Mr Pascal Bordanaro on occasions at CeBit in Hanover.  Again, although the financial information on the company was indifferent (Dun and Bradstreet’s report said that it was “slightly above average level of risk”), Xentric continued to take no risks in trading with it and the shipment of goods and payment were on the same day.  

86 Fine Peace (China) Limited was based in Hong Kong.  The formalities on this company were minimal and somewhat perfunctory; the company had been recommended probably by a freight forwarder and Mr Olin had a good reference for it, but no credit information. It was a low-volume purchaser.  Although Xentric had begun to trade with the company in December 2005, little business was done and the value of the one deal done in the appeal period was just over £80,000. 

 Alpha C

87 Alpha C Aps was established in Denmark and was listed on the website of the trade association ICB; it was known as a popular buyer in the market, and Mr Olin regarded the website listing as a reference for the company and an indication that it was safe to do business with; it confirmed that Alpha C was a company known in the trade.  Alpha C was introduced to Xentric it seems by the IBC website which sought actively to match traders with similar requirements, and it traded with Xentric in April and May 2006: deals 199, 209, 210, 211, 212, 213, 215, 216, 218 & 219. 

88 Mr Olin visited the company before trading, and though much of the usual documentary evidence was obtained there was no financial documentation provided in respect of it.  Mr Olin said that he was reassured further by knowing that the company would have been visited several times by Danish customs.

Northcom

89 Northcom ApS was one of the main purchasers from Xentric, accounting for deals 197, 198, 200, 201, 202, 203, 204, 205, 206, 207, 208 & 220.  This company was run by Mr Kristian Kristiansen with whom Mr Olin had worked at Bluecom and at Liquid, and was initially to do so at Solid; after that, they had renewed contact in the autumn of 2005 and subsequently began to do business in April 2006.  There was, said Mr Olin, an established relationship from the time they had worked together, which as far as he was concerned fully made up for a lack of financial information on the company.  Mr Olin visited Northcom’s offices and collected the necessary paperwork from them. 

Liquid

90 ML Liquid Trading Sarl was established in Switzerland by Mr Olin’s former boss at Bluecom, Mr Martin Matthiasen.  Liquid was the purchaser in one deal only, 214.  Mention has been made above of the relationship between the two men and of Mr Mathiasen’s part in Operation Yellow fever.  By the time Xentric came to trade with Liquid, however, in January 2005 Mr Kelvin Teck had been running the company for some while.  The Dun & Bradstreet report showed the company as a high level financial risk, and the trading application form was dated after the deals with Xentric were done.  Otherwise, the normal checks were recorded.

The adequacy of the ‘due diligence’ checks

91 In the majority of instances, the formalities of ‘due diligence’ checks as advised by Notice 726 were accomplished, although on a number of occasions there is room for criticism that checks were made after the event or not updated sufficiently, or at least that written confirmation arrived after the event.  However, everything done by Xentric in this respect was copied to Mr Atkin each month, and the evidence is that he expressed himself content with it.  

92 Overall, our assessment is that Xentric’s checks with freight forwarders and others and its formal ‘due diligence’, for what it was worth, were just about adequate and for the most part as much as could realistically have been expected of an honest trader acting in good faith and operating in this particular fast moving, volatile and peripheral commercial environment.  There was only so much that could be done: people conducting a carefully orchestrated fraud on the revenue are not normally naive, and to probe significantly more than Xentric did would have been unlikely to have produced other than bland answers which could have indicated little more than commercial prudence on the part of other traders anxious to protect their business. 

93 As Notice 726 made clear, a more fundamental assessment was needed and as counsel for HMRC himself pointed out, the answers from Xentric’s trading partners were as good as the companies which gave them.  The personal contact and familiarity that Mr Olin claimed to have with almost all those he dealt with would we think, for an honest trader, enable a much more realistic assessment of the businesses it was dealing with than the largely formal series of enquiries associated with ‘due diligence’. 

94 The evidence of the reality of Mr Olin’s direct relationships with his trading partners was, however, in our estimation flimsy and unconvincing, and we do not accept that they were of such a kind that he could fairly have relied upon them as discharging his duty of responsible enquiry. In that context, HMRC’s complaint about the formal checks was not so much about the detail of the checks themselves but about what Xentric did with the information emerging from them, in particular that Xentric in practice paid little or no attention to the poor credit ratings of those it did business with. 

95 HMRC argued strongly that a poor credit rating should have been seen as a pointer to fraud, and should have aroused Xentric’s suspicions and led to further enquiry about the bona fides of the business in question.  Xentric’s answer, that it took every precaution to guard against payment defaults by not extending credit, and was not therefore concerned at the poor ratings, does not meet this objection. 

96 Another complaint by HMRC was that Xentric often failed to take up references from third parties given to it in the course of ‘due diligence’ enquiries.  Xentric’s answer, that it was more useful to have the opinion of an independent source such as the freight forwarder, may be fair comment: if the contact being verified was indeed involved in fraud, it would be unlikely to offer a reliable third party as a referee, and a demonstrably independent view would clearly be preferable. 

97 There was however no evidence to support the taking up of references from freight forwarders other than Mr Olin’s assertion.  In every sphere of life, the taking up of references is an important check and since the good standing of traders in a market Mr Olin knew to be riddled with fraud was crucially important, we would expect there to be a written record available as there is with references generally.  We are not therefore persuaded that adequate references were in fact taken up, or that if they were taken up they were satisfactory.

98 We therefore conclude that Xentric’s compliance with Notice 726, and more importantly its overall duty of responsible enquiry in connection with the transactions it undertook, was not adequate for an honest trader doing business in the market in question based on a genuine commercial relationship with its trading partners. 

Reliance on HMRC

99 Considerable reliance was placed on Mr Olin’s relationship with Mr Atkin who, as has been seen, was the officer who registered Xentric for VAT and who monitored the company’s trading.  The burden of the taxpayer’s argument in this regard is effectively that Mr Atkin’s actions, or failures to act or advise, led Xentric to suppose that it was not in danger of being seen as culpably involved in any fraudulent chains that might exist and had done all that could be expected of it, so that in the circumstances Xentric should be seen as having done all it could in the way of ‘due diligence’ and prudent enquiry.

100 In view of the finding we make in that respect, the issue in relation to Mr Olin’s relationship with Mr Atkin does not arise; but if it had arisen we would not have found that anything Mr Atkin did or did not do would have impacted materially on the behaviour to be expected of Xentric in connection with its trading.

Payment patterns, trading terms and commerciality

101 In principle, Xentric traded ‘on the margin’ because it aimed to receive payment from its customer before paying its supplier, and not releasing goods until the customer had paid for them.  In deals 191, 192, 193, 194, 195, 207 & 208 the goods are shown as shipped and paid for the same day; in deals 213, 218, 219 & 220 payment is actually made before the goods are shipped; and in deals 196, 197, 198, 199, 200, 201, 202, 203, 204, 205, 206, 209, 210, 211, 212, 214, 215 & 216 the goods are shown as shipped before payment is received, but ‘on hold’ until payment is made.   

102 At least in 197, 208, 210 and 212 however, it appears that Xentric did make a payment to its supplier before receiving payment from its customers, Mr Olin explaining that this was probably due to his having obtained a very good price and his wanting to make sure of the deal.  (This point is dealt with further in relation to the FCIB evidence.)  There was however no evidence from HMRC as to the prices prevailing at the material times, and there is therefore no ground to question the genuineness of the prices revealed in these transactions - though there is equally no other evidence endorsing them.

103 Much was made by HMRC of the fact that none of the transactions was the subject of formal written terms.   Such terms as were explicit in the deals were contained in the commercial invoices, which Mr Olin claimed made reference to Incoterms, the universal commercial terminology promoted by the International Chamber of Commerce.  Mr Olin’s evidence, on the basis of many years’ experience dealing in IT goods, including at Bluecom, was that the absence of formal terms was the practice in the grey market for these goods, and that “you will hardly ever find formal written contracts between IT trading companies or even between official distributors and their customers.”.

104 Examples of the invoice-based terms used by Xentric were: “Delivery: delivered and insured” and “Payment: T/T in advance” (deals 191 & 192); “Delivery: delivered and insured” and “Payment: Upon Inspection” (deals 200 & 220).  Although Mr Olin claimed that these mentions took in the relevant Incoterms, the latter were not in fact used. 

105 We do not accept the claim Mr Olin makes that his contracts incorporated Incoterms.  But, even if they had done, that is not to say that the kind of detailed sale conditions which contracts for the international sale of goods might be expected to have were incorporated by reference.  Incoterms do no more than define individual items of terminology, so that traders can conveniently make reference to them without having to spell out the definition in detail on each occasion an expression or abbreviation is used.  The two Incoterms that were shown to us – DDU ‘delivered duty unpaid’ and DDP ‘delivered duty paid’ – clearly envisage that there will be a distinct contract of sale, which may need to be modified in certain eventualities, even where those Incoterms are used.

106 Mr Ball expressed scepticism about the absence of full written terms and would only agree, under pressure, that Xentric’s practice was “an odd accepted practice”.  As we have seen, HMRC were not in a position to adduce any evidence on the matter of the general practice in this market.  And in view of our reluctance to read across evidence from other tribunal decisions, we are loathe to take particular account of what has been found in this regard in another tribunal decision containing mixed findings of fact and law, which the taxpayer urged us to rely on. 

107 In our estimation, the strong likelihood is that traders operating at arm’s length, dealing internationally in sales involving hundreds of thousands or millions of pounds, would not generally do so without making explicit provision with regard to matters such as the passing of title, late payment, non-payment, damaged or defective goods, delays in delivery, time of the essence, warranties as to quality or fitness for purpose, liquidated damages, the insolvency of one of the parties, and so forth.  

108 This is especially so where, because of the international context of the business, an uncertain reliance only could be placed on the terms which would be implied by English law if a transaction was clearly intended to be governed by it, but there was no such election of jurisdiction in Xentric’s deals.  We specifically instanced the situation of a sale to a customer of Xentric in circumstances in which its supplier had allowed the shipment of goods on hold by Xentric but Xentric, having received payment from its customer, declined to pay its supplier: in such a case, we asked, does the customer obtain good title?  In a normal commercial transaction, that question could be answered unhesitatingly by references to the contract’s terms.

109 While it is true that questions such as these may be resolved in the event of dispute by reference to terms implied by the particular context, by a course of dealing between the parties, perhaps by legislative assumptions, or even by the usage of the market, that does not show the existence of an accepted general practice of dispensing with written contractual terms.  Since we see that as improbable, we do not, in the absence of independent evidence, accept Mr Olin’s assertion as to the existence of a general practice of the kind he describes.

110 Mr Olin’s evidence as to when he regarded title to the goods as passing was uncertain.  In the first place, Mr Olin said that “title in my opinion is normally transferred on paper, transferred with the payment, but in practice things are not always following the title in the payment sense, but the goods would have been allocated [by the supplier] in order for me to be able to inspect the goods and make sure they are as they should be.” After further questioning Mr Olin added: “title is upon payment, but what happens physically with the goods is different and is administered by the freight forwarders”.

111 Given that it was usually the case that Xentric’s customer paid Xentric before Xentric paid its supplier, the customer would on this understanding have paid for goods to which, at the moment of the customer’s payment, Xentric had had possession and control but did not have title. 

112 In our estimation, such a situation and such an understanding of it is inconsistent with the existence of an arm’s length commercial relationship between the three parties in question: supplier, broker and customer.  In so far as the analysis of the FCIB accounts (see below) suggests that in a few cases the supplier was paid first, at least in part, it is apparent that this was a fortuitous deviation from the norm and does not affect our assessment that the evidence here points to an non-commercial relationship between Xentric and its suppliers.

113 Looking then at the transaction chains (see the summary in the Appendix), it is impossible not to be struck by the appearance of artificiality in the business relationships revealed.  Taking the first six deals, 191 to 196, which HMRC say are ‘straight’ deals not involving a contra-trader, they all (save one) have exactly the same participants in the same order making the same uplifts on the transactions. 

114 When it was put to him that Northcom, run by his old colleague Mr Kristian Kristiansen, was the EU supplier at the start of five of the six chains, Mr Olin expressed no surprise, replying merely “OK”.  When pressed subsequently about Northcom’s and Mr Kristiansen’s involvement in these remarkable trade patterns, and what he now thought about it, Mr Olin replied “Well, I cannot see that [Kristiansen] is doing any extraordinary things.  If he has one customer and one supplier, that’s as far as he can go.”

115 While it appears from Mr Olin’s evidence that deals 191 to 194 were in reality a single deal, split up for insurance purposes, deals 195 and 196 shared the same general characteristics as the first four.  In particular, the sequence and amounts of the price uplifts is such as to suggest artificiality and collusion.  Mr Olin expressed no surprise at this evidence, restricting himself to observing that “I do not want to comment on other traders” and remarking that it was perfectly possible to imagine five traders buying and selling on the same day if the overall profit margin, say 10%, made it worthwhile.

116 Nor did Mr Olin express any surprise or concern that for all the deals from 197 to 220 the same EU based supplier at the start of all the chains was Nordic Srl, and that it was an Italian company of which the Italian authorities had no evidence of any commercial activity, replying again merely “OK”.   And that in 12 out of 23 cases in the same sequence of deals the buyer from Xentric was Mr Kristiansen’s company Northcom.  The same improbable pattern of standardised profit uplifts along the chain repeats itself here also.

117 Artificiality and collusion indeed is apparent in all the deals leading up to those under appeal: in every one, the sequence of transactions on the same day (or, in two cases, on two adjoining days) is shown, giving rise to a sequence of almost identically structured price rises and in batches involving the same or similar groups of traders. 

118 It is also remarkable that all Xentric’s sales were made in pounds sterling, notwithstanding that they were all to buyers in other currency zones.  Mr Olin’s explanation of that, that he used sterling in order to protect himself from the risk of currency fluctuations, sits uneasily with his evidence that currency fluctuations offered arbitrage opportunities in the grey market, and it is surprising that none at all presented themselves in the course of 29 transactions.  It is even more surprising that all the transactions in the FCIB chains constructed by HMRC (see below) were also in sterling, even though they had an international character.

119 Xentric was financed by loans from EC Trading, and profits were reinvested; no dividend was paid.  Turnover increased steadily to £1M a month in February 2006 and rose dramatically from £1.9M by April to £3.15M in May.  Mr Olin said that there was no specific explanation for this, just that as all profits were reinvested it was natural for the figures to “roll bigger” as he put it. 

Freight forwarders

120 Three freight forwarders were used by Xentric in all its deals, Forward Logistics, Secure Freight Management and ASR Logistics. It was common ground that these reputable businesses, at Xentric’s request and at its expense, inspected and tested all the goods the subject of the deals, and checked that they were not on their lists of stolen goods.  Forward Logistics, for example, specifically notified users that they would not accept goods that they had seen before or which bore customs stamps to show that they had been imported previously; Mr Olin said he kept his own records and made corresponding checks.

121 HMRC’s officers had the right to be present at any time in the freight forwarders’ premises and inspect their records, and the evidence is that they visited them regularly.  No evidence was however adduced by HMRC to cast doubt on the authenticity or reliability of the inspections and tests carried out, either by the Freight Forwarders on their own account or those done on behalf of Xentric, or to suggest that the movement of goods was not actually taking place.  None of the boxes had Customs stamps on them indicating that they had gone through before.

122 Mr Olin said that he used Freight Forwarders for references for companies he dealt with because they would inevitably have a good general knowledge of whether a company was in a frequent and genuine way of business; in some cases where deals were not done, references were refused.  We have commented on this above. As Mr Olin discovered by experience, Freight Forwarders would not however disclose confidential information about their customers or their trading transactions.

123 When asked whether he had requested information about how long goods had been in the country, Mr Olin said that he had not because he had understood that it would not be given; he was in fact glad that such information would not be given out to enquirers because it could affect the price a purchaser was willing to pay if he knew that goods had, for example, been a long time in warehouse.

124 Xentric had every consignment of CPUs inspected by the freight forwarder. Each box was opened and the CPUs inspected visually and physically; in addition, a randomly selected CPU from each box, and often each tray, was electronically tested.  Forward Logistics told Mr Olin that his was one of the “very few” companies which required an electronic test as well as a visual and physical inspection. Mr Olin’s evidence was that he had visited the premises of Forward Logistics and witnessed the testing facility there.

125 Mention has been made above of the phenomenon of damaged trays and of Mr Atkins’s apparent acceptance that it was not untoward. As has been said, there was no evidence that the damage was significant. Specifically, Mr Olin said that when he enquired of the freight forwarders why there was such frequent damage reported in the inspections, they replied “it is very common, they are very fragile, but we have to note it anyway”. Mr Olin added that when he was working for Bluecom and was dealing with goods coming straight from the manufacturer he had seen damaged boxes.  The freight forwarder was making a visual, physical and an electronic inspection and Mr Olin said that the matter was “being taken care of by the freight forwarder”.

126 Although they could have done so, HMRC did not adduce any evidence from freight forwarders or their trade association about these matters, and we do not accept that it is proved on the balance of probabilities that the existence of unspecified damage to trays or boxes was a probable or necessary indicator of fraud.

First Curacao International Bank

127 The First Curacao International Bank (FCIB) was established in the Netherlands Antilles.  The trade body concerned with the sector in which Xentric traded, the Federation of Technological Industry (FTI), and others, were from March 2005 onwards actively promoting the use of FCIB by traders by reason its fast and efficient service, with unique software and a 24 hour service with instant transfers, which was in contrast to that offered by the traditional mainstream banks, and was not offered by those Mr Olin used in Denmark or the UK. 

128 Mr Olin said that sometime between June 2005 and June 2006 (he could not recall when) his UK bank, the Bank of Scotland, told him that in response to pressure from HMRC his account was being discontinued; they said that this was not directed at Mr Olin or Xentric but was a general move affecting that trade sector to which all the banks were party and Jyske Bank (Mr Olin’s Danish bank, and the one for which he worked earlier in his career) confirmed that this was the case.

129 Witnesses for HMRC denied that such a policy had been promoted.  We make no finding as to whether HMRC put pressure on banks to close accounts, but we see nothing surprising in bank customers choosing to use an efficient and user-friendly bank, as FCIB evidently was, or in being willing to do business with other traders who had similar accounts.

130 At the time we are concerned with, some 9,000 traders are said to have had accounts at FCIB and, following its closure by the Dutch authorities in October 2006 on suspicion of being involved in money laundering and MTIC fraud, access was allowed to HMRC to the bank’s electronic accounts and statements. 

131 We heard evidence from Mr Downer, an officer of HMRC, who had analysed bank statements for Xentric and other companies from the records of FCIB.  Mr Downer accepted in his statement that he did not have access to inter-account transfer forms which would have enabled payments to be linked to particular invoices.  Mr Downer used the deal sheets prepared by Mr Ball to attempt to trace payments for the goods sold by Xentric.  His findings can be summarised as follows.

132 During the period under appeal, Xentric carried out 29 transactions in CPUs.    At the time of his first statement Mr Downer considered that he was able to demonstrate circularity of monies in eighteen cases.  Of the remaining eleven, he was unable to demonstrate circularity in seven, including the first four transactions, and he had been unable to carry out the analysis on the other four because of time constraints.

133 There were several reservations Mr Downer was obliged to express with regard to his work.  For example, in a typical account was an entry called the ‘post date’, which Mr Downer said that he assumed was the date when the transaction took place.  There was also a mention of the ‘value date’ and again Mr Downer was not sure what that referred to.  Nor was he sure what another mention ‘DD’ related to.  In the final column of the account were the letters ‘S’ and ‘Y’ which Mr Downer did not know the meaning of.  Mr Downer made it clear that the circularities which he considered that his analysis showed were established to the best of his judgment of the matter, but they were not categorical assertions that they related to the transactions under appeal.

134 There was also the phenomenon of ‘bulk payments’ of which Mr Downer said this:-

“On many occasions, when carrying out my analysis, the actual amounts of monies moved agree with the deal sheet.  ... But then, further down the chain, it wasn’t so straightforward, and even though the deal might show that the supplier was charging 1,500,000, they may receive payment of 3 million.  There was no clear explanation for me at this time, on the evidence before us from FCIB, what exactly the invoices that that payment relates to, if indeed it does relate to invoices.  So I’ve had to make the assumption, as I’ve said in my statement, that it may relate to bulk purchases.  They may have entered into five transactions with that trader during that period, and instead of paying them all individual amounts, they paid for them in bulk payments.”

135 Taking deal 195 as an example, Mr Downer traced payments from Xentric’s customer Formosa, but he was unable to say where some of Formosa’s funds had come from: there were payments into its account of £500,000 and £429,993, making £929,993 and a payment out to Xentric of £938,196, and he commented “I can’t jump to too many conclusions on that because it doesn’t say where the banker’s order for [the payment of £429,993 received by Formosa] came from”.  But £500,000 had come from an account held by Northcom which, to Mr Downer, “suggested” that a portion of the goods bought from Xentric had been sold on to Northcom. 

136 Mr Downer then traced the exact payment up to Worldwide, who had sold to Xentric, and thence again exactly to a company called 21^st Trading Limited who had sold to Worldwide.  After that the trail becomes less certain, with larger figures no longer fitting neatly, and Mr Downer commenting that “you cannot really start to trace the transactions.  They don’t really stay nice and neat all the way through”. There is a payment at one point to Northcom and later then there is a recurrence of the payment of £500,000 to Formosa by Northcom similar to that noted at the start.  Mr Downer’s comment about that is “I believe that the transactions have an element of contrivance and the money is moving between the parties on or around the same day. ... I showed that [Xentric] were getting money in from Formosa, who is indeed their customer, and that they in turn appear to be getting money from Northcom ApS in Denmark”. 

137 One feature common to all the cases where circularity was sought to be shown was that one of two Danish companies, Northcom and Alpha C, occur in all of them, but there is no evidence that in any case payment was made by Xentric to a defaulting trader.   Payments made to contra-traders were passed on to other parties who did not appear in the supply chain.  Subsequently either Xentric’s customer, or the company to whom they had sold, appeared to receive circular payments from the supply chain.

138 For 11 of the 17 deals recorded by Xentric on 30 and 31 May, Mr Downer was able to demonstrate that the following features applied:-

a. No payments could be traced in the bank account of the purported supplier to K&M Supplies Ltd, Nordic.

b. Instead K&M made payments to Hexamon Ltd, a UK company which in turn passed the funds to a Spanish company, Emshel Puerto Banus SL.

c. Mr Ball produced information from the Spanish authorities which showed that Emshel did not make any supplies to UK companies in the relevant period.

d. Where Northcom was the customer of Xentric, the payments flowed from Emshel to another Spanish company, 300 Infortec SL which was shown as purchasing the goods from Northcom.  In other words it was clear that Infortec initiated the payments and then received back more than it paid out. This applies to deals 203,204,205,206,207,208 and 220.  The receipt for 220 is slightly less than paid out by Infortec, but in aggregate for the seven deals Infortec paid out £7,286,522 and received in £7,941,219.

e. Where Alpha C was the customer, the funds flowed from Emshel via another Spanish company, CDM Comercio y Distribucion SL to Alpha C.

 

139 Taking deals 215 and 216 as an example Alpha C paid £3,034,395 to Xentric and received £3,110,261. This represents a profit of £75,366. By contrast on the same deals if Xentric recovers the input VAT, the profit is £108,670.

 

140 The analysis produced by Mr Downer for the deals involving purchases from TWG on 30 and 31 May shows a clear pattern of payments designed to allocate profits of the fraud between Xentric, on the one hand, and Infortec and Alpha C on the other.

 

141 One significant feature of the cash flows generally is shown in Xentric’s deal 197.  The amount that the customer, Northcom was due to pay was £1,738,800 but initially Northcom only paid £1,159,200; later the same day after Northcom had received an amount of £1,496,250 from CDM Comercio, a Spanish company at the end of the circle of payments, and Northcom paid the balance of £579,600 to Xentric.  In other words, it seemed that while the payments were moving round the circle Xentric financed roughly one-third of the cost itself.  Indeed Northcom did not have the funds in its FCIB account to pay for the goods it had purchased until it received the payment from CDM. The timing of these payments is derived from the transaction numbers in the FCIB accounts.

142 A similar situation arises in respect of deal 198. The invoice was dated 24 April 2006 and the customer, Northcom, was due to pay £1,738,800. However the bank statement for Northcom shows that the first payment on that day was only £869,400 and that Northcom did not pay the balance of £869,400 until after it had received the payment of £1,197,000 from CDM Comercio. The result was that Xentric temporarily financed £951,615 itself.  Again in deal 199, the customer Alpha C was due to pay £1,456,875, but paid initially £1,356,875 and only paid the balance of £100,000 when it received the apparently circular payment from CDM Comercio.

143 In his first statement Mr Downer said that he was unable to show circularity in respect of seven of the deals.  One of these was deal 214. The purchaser was ML Liquid Trading Sarl and the source of the funds to Liquid Trading could not be traced. In his second statement Mr Downer seeks to demonstrate that the proceeds received by Xentric from deal 214 flowed round a circle to Alpha C and were then used to finance the purchase which was covered by invoice 218.  Mr Downer says:

“The first set of money movements appears to show the transaction chain for Xentric sales invoice 214 dated 31 May 2006.  The second set of money movements appears to show the payments relating to the transaction chain relating to Xentric sales invoice 218 dated 31 May 2006.”

...

“In my view, the analysis I have detailed in this witness statement further supports the conclusions outlined in my earlier statement.  The analysis has shown that that monies used to fund transaction chains often appear to remain within the FCIB banking system in order to fund further transaction chains within the same circle of traders.”

“Most importantly, it appears that third party payments that include an element of UK VAT were over the heads of UK defaulting traders to EU recipients who then appear to pass monies to other EU entities who then appear again to purchase goods from UK brokers.”

“In my view, the analysis contained in this statement further supports my view that Xentric Limited had constructive knowledge that they are involved in a contrived scheme to defraud the revenue.”

 

144 In cross-examination Mr Downer accepted that he could not link any payment definitively to particular invoices.  However where Xentric received an amount corresponding to the amount invoiced to the customer and immediately paid its supplier an amount equal to the purchase price plus VAT, it is reasonable to link that payment to a particular sale. Furthermore in the exercise further down the chain it seems plausible to link payments made immediately on receipt of money coming in to the particular Xentric deals concerned, though this is more tendentious.

 

145 Given the presence of Northcom or Alpha C in all of the deals where circularity is claimed, it is reasonable to infer that the money had to return to its starting point before payment could be made for the next deal. Neither company had sufficient funds in its account at any one time to finance more than a single deal.  Counsel for Xentric did not challenge any of the individual attributions proposed by Mr Downer.

 

146 We have found this evidence particularly difficult to evaluate. In general, the existence of apparently circular payments would  indicate that the transactions  involved are part of a fraudulent scheme, as the only result of the movements of goods and money is a claim to a repayment of VAT by the broker, in this case Xentric.  In this case, moreover, there is the further evidence of the involvement in the circular scheme of Northcom and Alpha C, both run by persons Mr Olin had worked alongside before Xentric was set up and (in the case of Northcom) with whom he worked in later periods.  In addition in at least three of the deals Mr Olin accepted less than full payment initially for the goods and temporarily financed the payment to his supplier himself.  This suggests that he knew that his customer would be able to pay the balance once the circle was completed.

 

147 The evidence produced by Mr Downer is very disturbing and it must give rise to considerable suspicion, both inviting an explanation of what was revealed and indeed further investigation – for example, in seeing the inter-account transfer forms which would have settled many doubts.  No real explanation as such was forthcoming from the taxpayer, but we bear in mind that it is for HMRC to prove their case and that it is not for the taxpayer to explain matters when its case is that it was unaware of the business of the other participants in the chain

148 A key feature of MTIC fraud is that mechanisms exist for money and goods to be returned to the originator, and for the profit arising from the VAT evaded to be shared after the buffers and contra-traders have been paid their mark-ups. Mr Downer’s evidence, notwithstanding his reservations, supplies a coherent pattern for this in relation to those deals where he could show circularity and it adds significantly to the perception that we refer to elsewhere that all the transactions under appeal were part of a collusive and uncommercial arrangement.

 

Mr Olin’s associations and character

149 Various pieces of information or reports, often culled from the internet, were produced relating to Mr Matthiasen being wanted for arrest and trial in the context of a Danish investigation called Operation Yellow Fever, and of an Interpol warrant having been issued for him, and his final arrest.  The quality of this evidence was poor, and we have not taken it into account.

150 Moreover, there is no evidence that Mr Olin has ever been investigated or accused of fraud by the Danish authorities or is in any way involved in Operation Yellow Fever, even for example as a prospective witness, or is implicated in the matters with which Mr Matthiasen is apparently charged.  Nor is there any evidence that Danish authorities, in the course of EU mutual assistance communications with HMRC or otherwise, have made any comment adverse to Mr Olin or Xentric.

151 A considerable amount of evidence, however, was led by HMRC concerning Mr Olin’s familiarity with Messrs Martin Matthiasen and Kristian Kristiansen in particular, the purpose of which seemed to be to establish that Mr Olin’s contacts with them made it more likely than less that he would have been aware of MTIC fraud and the dangers of the dealings which Xentric undertook, and possibly that he would be the more likely actually to be involved in fraud.  We have borne this possibility in mind as part of the general picture.

152 Overall, we were not impressed by Mr Olin as a witness.  Bearing in mind that he stood in jeopardy of losing some £5M, and being assessed as at least knowing that the only realistic explanation of matters was that his transactions were connected to fraud, Mr Olin’s demeanour in the witness box throughout three days of cross-examination appeared disingenuous and contrived. 

153 In particular, Mr Olin did not seem to us to be frank about the situation which HMRC’s evidence had revealed.  For a man who, if he was innocent of all connection with fraudulent trading and had simply been caught in a trap of others’ making, he was remarkably sanguine about the evidence of the trading patterns surrounding his deals and the FCIB analysis showing the probable circularity of the payments involved, insisting that what other companies did was a matter for them which did not concern him.  We did not feel that Mr Olin was a fully open and honest witness, and we return to this issue later.

The underlying frauds - general

154 It is of course axiomatic that for Xentric to lose the right to repayment of input tax there must be shown to be fraudulent conduct with regard to the revenue which Xentric either knew or ought to have known of. The taxpayer has not formally conceded that HMRC’s evidence of the transactions chains reveals a fraud on the revenue, but neither did it in practice dispute that evidence.  Counsel for the taxpayer concentrated on showing that – especially in the contra chains – it could not possibly have known of or found out about the fraud.

155 Nevertheless, it is right to record the purport of the evidence, not least because the tribunal should have a proper reluctance to find other bodies or persons guilty of wrongful behaviour when they have had no chance to explain or defend themselves.  It is indeed a concern inherent in all MTIC cases that the tribunal is heavily reliant on the integrity of the Crown in putting forward evidence which the other party will scarcely ever be in a position to contradict or to challenge. Having reviewed it, however, we find that the existence of fraud at some point in the chains, both in the straight and in the contra chains, is established on the balance of probabilities. 

156 Xentric entered into 6 transactions - deals 191 to 196 - in the period of what are described as ‘straight’ chains because the trail of invoices and purchase orders flows directly to a defaulting trader.  The remaining transactions fall into two categories, those involving the alleged contra-trader, Morganrise Ltd - deals 197 to 202 - and those involving the alleged contra-trader K & M Supplies - deals 203-220; as invoice 217 was not issued, these total 23 deals and collectively they were referred to as the ‘dirty’ chains.

 

The underlying frauds – the straight chains

 

 157 In deal 191, the invoice trail goes back to a UK company called Samson Traders Ltd.  We heard evidence from Mr Lamb, HMRC officer responsible for the affairs of the company. The company failed to submit VAT returns for the periods 02/06 and 04/06, it was deregistered for VAT on 21 April 2006 and subsequently assessments of £36,730,983 and £73,653 were made for unpaid VAT.  This includes the amount relating to the goods invoiced, eventually, to Xentric. The company went into liquidation and the amounts assessed were never paid.

 

158 There is no evidence that the company did anything except issue invoices. Evidence from the freight forwarders was that the goods were imported into the UK by Northcom and released to Qiass Ltd, a company three up the chain from Samson Traders and three below Xentric.

 

159 In deals192-195, the invoice trail goes back to KEP 2004 Ltd, a UK company. We received a witness statement from Mr Martin, HMRC officer responsible for the affairs of the company at the relevant time, but due to the long term sick leave of Mr Martin the evidence was given by Mr Armstrong. The evidence that the company had actually participated in any transactions was contradictory, invoices giving rise to VAT liability of £109,972,679.40 had been issued by someone quoting the VAT registration number of the company, but no evidence of sales or purchases could be traced in its bank account.

 

160 HMRC concluded that the VAT number had been hijacked by someone else. This means that there was fraudulent evasion of VAT, but we are unable to say who was responsible.  The evidence of the freight forwarders was that the goods comprised in each of the deals numbered 192-195 by Xentric were imported into the UK by Northcom and released to Qiass, again a company three up the chain from the apparent defaulter and three below Xentric.

 

161 In deal 196, the invoice trail for this transaction was the same as that for deals 192-195, the only difference was that the goods were imported into the UK by Allcom Aps and released to Qiass. Counsel for the taxpayer concentrated his questioning of both Mr Lamb and Mr Armstrong on when HMRC became aware that the companies concerned were likely to be defaulters.  

 

162 It was established in both cases that this was after the deals leading to Xentric took place. Whereas this might have bearing on what Xentric knew or could have known, it did not affect the facts in the evidence involving the fraudulent issue of invoices by Samson Traders and in the name of KEP 2004.

 

The underlying frauds – the dirty chains

 

163 In deals 197-202, all have been traced back to Morganrise Ltd. In all the deals the goods were apparently purchased by Morganrise from Nordic, a company registered in Italy. There is only one company in the chain between Morganrise and Xentric, namely Worldwide.

 

164 We heard evidence from Mr Ayoola, the officer responsible for the VAT affairs of Morganrise.  In the period of two months to 31 May 2006, 132 deals were entered into by the business of which 34 involved the export of goods from the UK and 59 involved the import of goods into the UK.  

 

165 All the export deals have been traced back to two defaulting traders, N&B Traders Ltd and Premiere Insurance Services Ltd.  A combined tax loss of £15,064,375.12 has been assessed as arising on these deals. In April 2006, when goods were imported that were ultimately exported by Xentric, 75% of the goods imported were mobile phones and 25% were electronic goods including CPUs.  All the goods exported were mobile phones.

 

166 Mr Ayoola, on the basis of his enquiries and the documents submitted in support of his statement, formed the view that all the transactions carried out by Morganrise were part of a contra-trading scheme fraudulently to offset the tax on UK imports against tax repayable on exports from the UK.

 

167 We heard evidence from Mr Laing, an officer of HMRC responsible for the affairs of N&B Traders.  The company was deregistered for VAT on 10 September 2005. Invoices issued to Hexamon in March and April 2006 totalling £42,177,777.82 quoting the VAT number for N&B Traders.  HMRC considered that the VAT number for the company had been hijacked and that the invoices were therefore fraudulent. They were unable to say who had prepared the false invoices.

 

168 We heard evidence from Mr O’Neill, an officer of HMRC responsible for the affairs of Premiere Insurance Services. The conclusion he reached was that the company was fraudulent from the start. It was formed by a company formation agent who claimed that the customer never took delivery of the company. Forms submitted to Companies House quoted a director who apparently does not exist and a fictitious address.

 

169Accounts were submitted allegedly by a firm of accountants who claimed that they had been the victims of identity theft, and neither the address nor the name of the employee who prepared the accounts had any connection to the firm.  As all transaction chains which purported to include Premiere Insurance Services involved loss of VAT, HMRC stated that the purpose of setting up the company was fraudulently to avoid paying VAT.

 

170 In cross examination of both Mr Laing and Mr O’Neill, counsel for the taxpayer concentrated on the time it had taken HMRC to reach conclusions on the mechanism of the defaults by the two companies even with the resources at their disposal; he did not challenge the evidence of the two witnesses that defaults had occurred.

 

171 In deals 203-220, Xentric entered into 17 separate deals, which were recorded on the last two days of May 2006.  (Invoice 217 was not issued.)  The customer in 16 of the deals was either Northcom (seven deals) or Alpha C (nine deals).  In deal 214 the customer was ML Liquid Trading. The supplier to Xentric was TWG who in turn were supplied by K&M Supplies, a company that HMRC now state was a contra-trader.

 

172 We heard evidence from Mr Neal who had taken responsibility for the verification of the repayment claims for K&M Supplies in September 2006. In the period to 28 February 2006, the company had acted as a broker in nine deals, acquiring goods from Morganrise and purporting to export them to a Spanish company, Global Electronic Trading SL. Information received from the Spanish authorities suggested that Global Electronic had never made any purchases from K&M Supplies.

 

173 In the quarter to 31 May 2006, there were 79 deals of which 40 involved acting as a broker and exporting goods, and 39 were acquisition deals involving imports to the UK.  All the import deals were purchases from Nordic, the same supplier as Morganrise and all the exports were to Nordic. There is no evidence that the same goods were imported as were exported. All the export deals were traced back to Premiere Insurance Services, a defaulter discussed above. The 39 acquisition deals included 17 that were sold to TWG and then to Xentric.

 

174 In discussions with HMRC in July 2006 Mr Raza, a director of K&M Supplies, claimed that K&M Supplies had never made third party payments. The evidence of Mr Downer was that K&M made third party payments to Hexamon and that no payments to Nordic could be traced.

 

175 During the examination of the company’s VAT claim Mr Raza had produced a statement for the company’s account with FCIB. We heard evidence from Mr Waxman who had compared this statement with the same period on the records of FCIB. The statement produced by the company included 56 additional transactions on 30 and 31 May 2006. These total around £46m of payments out and £43m of payments in. In addition seven transactions which appear on the FCIB records do not appear on the company’s version. These include payments to Hexamon and receipts from TWG.  In addition, the company’s version did not show the source or destination of payments. Mr Waxman concluded that the statement produced by the company was false.

 

176 On the evidence available to him, Mr Neal took the view that the transactions carried out by K&M Supplies in the period to 31 May 2006 formed part of a contra-trading scheme to defraud the public revenue.

 

177 Counsel for the taxpayer again focussed in cross examination on the time it took HMRC to reach its conclusion that K&M Supplies were a contra-trader, and whether the action taken against K&M Supplies by HMRC meant that there would be double recovery of the VAT lost if repayment was denied to Xentric, but Mr Neal’s evidence of the existence of a fraudulent contra-trading scheme as such was not challenged by the taxpayer.  Mr Waxman’s evidence indicates that the company tried to cover up the fraudulent nature of its transactions, in particular, the making of third party payments.

 

The legal framework

 

178 The various uncertainties and issues which had built up in this area of the law have fortunately been resolved by the recent decisions of the European Court in Axel Kittel v Belgium; Belgium v Recolta Recycling Sprl [2006] ECR 1-6161 and of the Court of Appeal in Mobilx Ltd (in administration) v HMRC & Ors. [2010] EWCA Civ 517, interpreting Kittel.  In view of this very helpful clarification of the position, it suffices to draw the essential features of the law as it affects this appeal from the judgment of the Court of Appeal, delivered by Moses LJ, as follows (the paragraph numbers are those in the official transcript, and the words in italics are our summary headings):-

 

The legal basis of the right to deduct input tax

 

[46] S.1 of the Value Added Tax Act 1994 provides that VAT should be charged, in accordance with the provisions of the 1994 Act, on, amongst other things, the supply of goods in the United Kingdom, and s.1(2) establishes that liability to account for VAT on the supply of goods within the United Kingdom is on the supplier. S.4 provides that VAT should be charged on any taxable supply of goods made by a taxable person in the course or furtherance of a business carried on by him. S.24 defines input tax:-

 

"(1) Subject to the following provisions of this section, 'input tax', in relation to a taxable person, means the following tax, that is to say –

(a) VAT on the supply to him of any goods or services;

(b) VAT on the acquisition by him from another Member State of any goods; and

(c) VAT paid or payable by him on the importation of any goods from a place outside the Member States,

being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him."

S.25(1) sets out the obligation on taxable persons to account for and pay VAT in respect of supplies made by him for each prescribed accounting period and also provides for credit in respect of input tax (see s.25(2)(3)).

 

The fraud may not be in the proximate link in the chain

 

[41] In Kittel after §55 the [European] Court developed its established principles in relation to fraudulent evasion. It extended the principle, that the objective criteria are not met where tax is evaded, beyond evasion by the taxable person himself to the position of those who knew or should have known that by their purchase they were taking part in a transaction connected with fraudulent evasion of VAT:-

 

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

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

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

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

The words I have emphasised "in the same way" and "therefore" link those paragraphs to the earlier paragraphs between 53-55. They demonstrate the basis for the development of the Court's approach. It extended the category of participants who fall outwith the objective criteria to those who knew or should have known of the connection between their purchase and fraudulent evasion. Kittel did represent a development of the law because it enlarged the category of participants to those who themselves had no intention of committing fraud but who, by virtue of the fact that they knew or should have known that the transaction was connected with fraud, were to be treated as participants. Once such traders were treated as participants their transactions did not meet the objective criteria determining the scope of the right to deduct.

 

 [42] By the concluding words of §59 the Court must be taken to mean that even where the transaction in question would otherwise meet the objective criteria which the Court identified, it will not do so in a case where a person is to be regarded, by reason of his state of knowledge, as a participant.

 

Economic activity contrasted with fraudulent activity

[43] A person who has no intention of undertaking an economic activity but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person's VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax § 59 and Kittel § 53). A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct.

 

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

 

The nature of the fault

 

[48] The traders contend that to enlarge the category of participants in the fraud to those who should have known that by their purchase they were taking part in a transaction connected with fraud is to impose a new accessory liability for fraud which does not exist in domestic law; it imposes, so they assert, a negligent standard for fraud by the back door.

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

 

Knowledge of the details of the fraud not required

 

[52] If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.

 

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

 

The need for certainty as to the existence of fraud

[56] It must be remembered that the approach of the court in Kittel was to enlarge the category of participants. A trader who should have known that he was running the risk that by his purchase he might be taking part in a transaction connected with fraudulent evasion of VAT, cannot be regarded as a participant in that fraud. The highest it could be put is that he was running the risk that he might be a participant. That is not the approach of the Court in Kittel, nor is it the language it used. In those circumstances, I am of the view that it must be established that the trader knew or should have known that by his purchase he was taking part in such a transaction, as the Chancellor concluded in his judgment in BSG:-

"The relevant knowledge is that BSG ought to have known by its purchases it was participating in transactions which were connected with a fraudulent evasion of VAT; that such transactions might be so connected is not enough." (§ 52)

 

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

 

The time factor in identifying a connected fraud

 

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

 

The irrelevance of tax loss computations

 

[65] The Kittel principle is not concerned with penalty. It is true that there may well be no correlation between the amount of output tax of which the fraudulent trader has defrauded HMRC and the amount of input tax which another trader has been denied. But the principle is concerned with identifying the objective criteria which must be met before the right to deduct input tax arises. Those criteria are not met, as I have emphasised, where the trader is regarded as a participant in the fraud. No penalty is imposed; his transaction falls outwith the scope of VAT and, accordingly, he is denied the right to deduct input tax by reason of his participation.

 

 The role of ‘due diligence’ in the analysis

[75] The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT.

 

The burden of proof

 

[81] HMRC raised in writing the question as to where the burden of proof lies. It is plain that if HMRC wishes to assert that a trader's state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion. No sensible argument was advanced to the contrary.

 

The relevance of the surrounding circumstances

 

[82] But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the BSG appeal, Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.

[83] The questions posed in BSG (quoted here at § 72) by the Tribunal were important questions which may often need to be asked in relation to the issue of the trader's state of knowledge. I can do no better than repeat the words of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563:-

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

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

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

 

The standard of proof

 

179 It remains only to note that the contention that there must be some specially refined standard of proof in civil cases where the allegation is in essence that the taxpayer knowingly etc. took part in a transaction connected with fraud has been finally disavowed at the highest level.  In In Re B [2009] 1 AC11, Lord Hoffman said at paragraph [13]:

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

 

Conclusions:

180 Both counsel assisted the tribunal considerably by submitting detailed argument in closing as well as in opening, and three further days were occupied by oral argument with regard to them.  We mean no disrespect to those submissions, which can effectively be seen in the transcript of the proceedings, if we confine ourselves at this point to a concise summary of them.

 

181 A large proportion of the time in closing submissions was devoted to argument on the implications of the evidence.  As has been indicated, the documentary evidence filled nearly 40 lever arch files and the oral evidence occupied some fourteen days, and it has been the tribunal’s task to reach conclusions on it. 

 

182 Principal among the submissions for the taxpayer was the assertion that the evidence showed overwhelmingly that Xentric had taken every reasonable precaution in relation to its trading partners, bearing in mind the commercial realities of the situation, and had earned the repeated approval of its case officer at HMRC, Mr Atkin.  In the circumstances, what more could Xentric have done to avoid the acknowledged dangers of fraud in the market in which it traded? 

 

183 That argument concerned the ‘ought to have known’ test laid down in Mobilx, but with regard to the possibility that Xentric had actual knowledge of the frauds counsel submitted that there was simply no evidence on which the tribunal could proceed; the phrase Mr Khamisa used to emphasise this submission was that there was in all the mass of detailed evidence that we had seen, no ‘smoking gun’, no direct incriminating evidence of collusion in wrongdoing or of sharing the proceeds of crime.  There was, he said, plenty of suggestion, innuendo and allegation, but no hard evidence. Any finding of actual knowledge would have to depend on circumstantial evidence alone, and such a finding would be speculative and unsafe.

 

184 With regard to the tests to be applied to the evidence, Mr Khamisa emphasised in particular that each transaction had to be regarded individually, albeit not in isolation; as an allegation of participation in fraud, this was an issue of great seriousness and that it could not be dealt with on the basis of general impressions or by reference to attempts to smear Mr Olin by reference to his association with others, in particular Mr Matthiasen.  There must be specific, precise and case by case proof of culpable knowledge, on one of the two bases accepted in Mobilx, on the part of Xentric and Mr Olin. 

 

185 On the standard of proof required, counsel for the taxpayer submitted that both in the case of imputed knowledge, and in so far as the allegation concerned fraud in general, the case crossed the boundaries between civil and criminal proceedings.  On that account, we should afford the taxpayer procedural protections commensurate with the gravity of the consequences for him of an adverse finding.   In particular, Mr Khamisa relied on the approach of the domestic courts in such matters and cited Life Sentence Review Commissioners v D [2008] UKHL 33 and R(N) v Mental Health Review Tribunal [200] EWCA Civ 1605 to warn us of the need for very careful consideration of the evidence and its quality.

 

186 Considerable stress throughout was also laid on the relationship with HMRC, through Mr Atkin, which Xentric had maintained.  At times, this appeared almost as a legitimate expectations argument, but in its essence it relied upon the perception of Mr Olin as a straightforward young businessman on his first venture in a foreign country, seeking to be guided by the authorities and to win their approval. The case was strengthened by, it was said, Mr Atkins’s promise that he would monitor every deal undertaken himself, and by the fullest reporting to him by Xentric in respect of the documentation pertaining to each deal.

 

187 Submissions for HMRC emphasised the mechanical and formal nature of Xentric’s ‘due diligence’, and its repeated failure to ask probing questions about its partners or draw obvious inferences from the facts discovered, especially the poor credit ratings which virtually all of them had received.    At the same time, HMRC argued that the evidence was consistent with actual knowledge by Xentric of the existence of frauds on the revenue and that it was fully open to the tribunal to infer such knowledge from the surrounding circumstances.

 

188 While acknowledging that we are required to examine each transaction individually, HMRC contended that the authorities establish clearly that the tribunal is entitled to have regard to the overall picture in interpreting the evidence relating to each transaction.  Moreover, it is not necessary for the Crown to show that the taxpayer had actual or deemed knowledge of who was committing the frauds or by what method they were doing so, only that the taxpayer knew or ought to have known that its transactions were connected to frauds on the revenue, without necessarily knowing any more than that.

 

189 At one point, earlier in the proceedings, counsel for the taxpayer had seemed to be advancing the argument that the decision of Court of Appeal in Mobilx was in part at least inconsistent with the jurisprudence of the European Court.  That argument was not pursued in closing, and we are content that there is no such inconsistency to consider. 

 

190 Indeed, the clarification of the practical outworking of the European Court’s case law afforded by Mobilx enables the tribunal to proceed with greater confidence in MTIC cases and materially lessens the scope for attempts at what the Court of Appeal described as ‘over-refinement’ of the test in Kittel – see paragraph [59] of the judgment in Mobilx cited above.  We have accordingly approached the case and the submissions by counsel in the light of the parts of the two judgments we have cited, which we consider deal adequately with the approaches urged upon us, in particular with regard to the need for an individual assessment of each deal, the relevance of the overall picture, the standard of proof required and the significance of ‘due diligence’ enquiries in the total context.

 

191 Reference was made by both counsel to a number of tribunal and High Court decisions which, with one exception, ante-dated the judgment in Mobilx.  In the event, we see no need to examine them here in detail since they are either subsumed in the Court of Appeal’s overview of the law or turn on their particular facts; we have nonetheless given attention to each of the authorities cited in so far as they assist in establishing the approach to evaluation of the type of evidence which characterises these cases.

 

Actual knowledge

 

192 We have already indicated that we accept, on the balance of probabilities, that each of the appeal transactions was objectively connected to transactions which constituted a fraud on the revenue.  Our finding in relation to Xentric on the same basis is that, through its director Mr Olin, it had actual knowledge that each of the transactions under appeal was connected to a fraud on the revenue.  There are four reasons why we have reached that conclusion.

 

193 The first reason is that the pattern of each of the transactions which appeared in the evidence (which are summarised in the Appendix) is clearly inconsistent with a commercial course of trading and obviously contrived.  If Mr Olin had really had - as he was generally at pains to assert – a genuine knowledge of and trust in those he was dealing with, it could not have been the case that he was deceived in his trust on every single occasion unless he was exceptionally naive.

 

194 Mr Olin, on the contrary, struck us as anything but naive, rather as an astute, intelligent and capable person; he was clearly well informed about the sector in which he worked, and his command of English was excellent; there were, in the colloquial expression, ‘no flies on him’.  It is much more likely than not that this alert and intelligent man was well aware of what was taking place, and sought at the time carefully to disguise it; and by the time of the hearing, he was obliged to hold fast to a story about his business dealings which became less and less probable with each new piece of evidence adduced by HMRC.

 

195 The second reason for our conclusion is found in the terms on which Xentric did business.  Principal among our concerns here was the absence of detailed contract terms, and Mr Olin’s unconvincing attempt to claim that this omission was compensated by the incorporation by reference of Incoterms.  During the course of its trading life, from 1 April 2005 to 30 September 2006, it is not in dispute that Xentric’s turnover totalled £69,712,926. 

 

196 It is inconceivable that in fewer than 18 months business of this volume could be transacted without the danger of some problem occurring in the course of it being provided for.  We do not believe that any reasonable businessman would risk what were in effect his personal assets to this extent without providing a backstop for the range of all too real difficulties which could have arisen in any one of the transactions. 

 

197 The most probable explanation of Mr Olin’s insouciance in the matter is that the transactions were contrived and preordained to the extent that there were in reality no real risks to guard against; he did not worry about difficulties arising in the transactions because he was content that there would not be any, and in fact there never were.

 

198 A secondary, but important, concern is the pattern of payments to Xentric’s suppliers and their willingness to allow the goods out of their control before payment.  This again is so strikingly uncommercial and atypical of dealings at arm’s length, that it can only be explained either by the existence of an agency relationship – which was not argued and for which there was no evidence - or by a collusive and non-commercial relationship between Xentric and its suppliers.

 

199 The third reason for our conclusion is that in the witness box Mr Olin did not impress us as an honest witness reacting frankly to what was put to him, but as an actor with a script to follow.  He seemed to us to have constructed a narrative of his business affairs to which he adhered to the point almost of absurdity.  Faced with challenges about the very suspicious circumstances of this or that transaction or relationship, Mr Olin did not express horror, embarrassment or discomfort about the very unattractive situation in which he found himself; instead, his demeanour was throughout impassive and appeared to us to be disingenuous. 

 

200 Mr Olin’s simple insistence that he could not answer for the business decisions of his trading partners, and his refusal to acknowledge the very incriminating character of the transaction patterns surrounding his deals, were not in our judgment the reactions of an honest man caught in a trap which was not of his making. 

 

201 Fourthly, there is the evidence of the circularity of payments culled from the FCIB accounts.  If this was the only evidence against Xentric, we would not rely on it alone to show the probability of actual knowledge: it does not cover all the transactions; where it does cover the transactions in question, the sums subsequently paid are possibly susceptible of an explanation other than that they were circular payments in the sense for which HMRC contend; the evidence of the inter-account transfer forms which would have removed the doubts was not available; and, finally, the officer who prepared the evidence very fairly expressed himself in reserved terms about his claims.

 

202 Nonetheless, this evidence creates a strongly adverse impression and, taken with the other reasons which we have given, we conclude that it is more probable than not, in the many cases to which it relates, that it does show a collusive and conspiratorial course of conduct consistent only with the purpose of the transactions being to defraud the revenue rather than to deal on commercial terms at arm’s length. 

 

The ‘ought to have known’ test

 

203 In view of these findings, the question whether Mr Olin ought to have known that the only reasonable explanation for his trading relationships in each case was that they were connected to a fraud on the revenue does not arise.  We have already concluded (at paragraph 98) that Xentric’s compliance with Notice 726 and its overall duty of responsible enquiry in connection with the transactions it undertook, was not adequate for an honest trader doing business in the market in question.  We have not found Mr Olin to have been an honest trader. 

 

204 Xentric’s appeals must therefore be dismissed.

 

Costs

 

205 At the request of both parties, a direction was made in the course of the hearing pursuant to the Transfer of Functions and Revenue and Customs Appeals Order 2009 applying rule 29 of the Value Added Tax Tribunals Rules 1986 to the case as a transitional case.  The effect of this direction is that costs follow the event unless there is good reason to the contrary; none having been advanced, we therefore direct that the appellant shall pay the costs of the respondents of and incidental to and consequent upon this appeal on the standard basis, to be determined on detailed assessment by a costs judge.

 

Appeal rights

206 This document contains the full findings of fact and reasons for the decision.  Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal no later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

            Malachy Cornwell-Kelly

Tribunal judge

 

Release date: 1 December 2010

 

 

 

APPENDIX

 

Deal Chains in April & May 2006

 

 

Seller                          Invoice date                Unit sale price

191

Samson Traders	3.4.06	£81.00
Routers Group	3.4.06	£81.05
Alpha Wholesale	3.4.06	£81.15
Qiass	4.4.06	£81.25
21st Trading	4.4.06	£81.50
Worldwide	4.4.06	£81.90
Xentric	4.4.06	£87.60
Suyama

 

192

KEP 2004	6.4.06	£81.00
Time Corporates	4.4.06	£81.05
DDML	6.4.06	£81.15
Qiass	6.4.06	£81.25
21st Trading	6.4.06	£81.50
Worldwide	6.4.06	£81.90
Xentric	6.4.06	£87.60
Suyama

 

193

KEP 2004	6.4.06	£81.00
Time Corporates	6.4.06	£81.05
DDML	6.4.06	£81.15
Qiass	6.4.06	£81.25
21st Trading	6.4.06	£81.50
Worldwide	6.4.06	£81.90
Xentric	6.4.06	£87.60
Suyama

 

194

KEP 2004	6.4.06	£81.00
Time Corporates	6.4.06	£81.05
DDML	6.4.06	£81.15
Qiass	6.4.06	£81.25
21st Trading	6.4.06	£81.50
Worldwide	6.4.06	£81.90
Xentric	6.4.06	£87.60
Suyama

 

 

195

KEP 2004	18.4.06	£81.00
Time Corporates	18.4.06	£81.05
DDML	18.4.06	£81.15
Qiass	18.4.06	£81.25
21st Trading	18.4.06	£81.50
Worldwide	19.4.06	£81.90
Xentric	19.4.06	£87.60
Formosa

 

196

KEP 2004	20.4.06	£78.50
Time Corporates	20.4.06	£78.55
DDML	20.4.06	£78.65
Qiass	20.4.06	£78.75
21st Trading	20.4.06	£79.00
Worldwide	20.4.06	£79.40
Xentric	20.4.06	£85.00
Fine Peace (China)

 

197

Nordic	24.4.06	£81.40
Morganrise	24.4.06	£81.60
Worldwide	24.4.06	£82.00
Xentric	24.4.06	£92.00
Northcom	24.4.06	£92.50
CDM Comercio

 

198

Nordic	24.4.06	£81.40
Morganrise	24.4.06	£81.60
Worldwide	24.4.06	£82.00
Xentric	24.4.06	£92.00
Northcom	24.4.06	£92.50
CDM Comercio

 

199

Nordic	24.4.06	£81.40
Morganrise	24.4.06	£81.60
Worldwide	24.4.06	£82.00
Xentric	24.4.06	£92.50
Alpha C	24.4.06	£92.75
300 Infortec

 

200

Nordic	28.4.06	£86.40
Morganrise	28.4.06	£86.60
Worldwide	28.4.06	£87.00
Xentric	28.4.06	£90.00
Northcom	28.4.06	£90.35
300 Infortec

 

201

Nordic	28.4.06	£107.40
Morganrise	28.4.06	£107.60
Worldwide	28.4.06	£108.00
Xentric	28.4.06	£112.00
Northcom	28.4.06	£112.35
300 Infortec

 

202

Nordic	28.4.06	£133.40
Morganrise	28.4.06	£133.60
Worldwide	28.4.06	£134.00
Xentric	28.4.06	£144.00
Northcom	28.4.06	£144.35
300 Infortec

 

203

Nordic	30.5.06	£82.68
K&M	30.5.06	£82.75
TWG	30.5.06	£83.00
Xentric	30.5.06	£87.50
Northcom	30.5.06	£87.75
300 Infortec

 

204

Nordic	30.5.06	£82.68
K&M	30.5.06	£82.75
TWG	30.5.06	£83.00
Xentric	30.5.06	£87.50
Northcom	30.5.06	£87.75
300 Infortec

 

205

Nordic	30.5.06	£82.68
K&M	30.5.06	£82.75
TWG	30.5.06	£83.00
Xentric	30.5.06	£87.50
Northcom	30.5.06	£87.75
300 Infortec

 

206

Nordic	30.5.06	£82.68
K&M	30.5.06	£82.75
TWG	30.5.06	£83.00
Xentric	30.5.06	£87.50
Northcom	30.5.06	£87.75
300 Infortec

 

 

207

Nordic	30.5.06	£84.68
K&M	30.5.06	£84.75
TWG	30.5.06	£85.00
Xentric	30.5.06	£90.00
Northcom	30.5.06	£90.25
300 Infortec

 

208

Nordic	30.5.06	£105.91
K&M	30.5.06	£106.00
TWG	30.5.06	£106.25
Xentric	30.5.06	£112.00
Northcom

 

209

Nordic	30.5.06	£82.68
K&M	30.5.06	£82.75
TWG	30.5.06	£83.00
Xentric	30.5.06	£87.50
Alpha C
CDM Comercio

 

210

Nordic	30.5.06	£82.68
K&M	30.5.06	£82.75
TWG	30.5.06	£83.00
Xentric	30.5.06	£87.50
Alpha C	30.5.06	£87.75
CDM Comercio

 

211

Nordic	30.5.06	£82.68
K&M	30.5.06	£82.75
TWG	30.5.06	£83.00
Xentric	30.5.06	£87.50
Alpha C	30.5.06	£87.75
CDM Comercio

 

212

Nordic	30.5.06	£82.68
K&M	30.5.06	£82.75
TWG	30.5.06	£83.00
Xentric	30.5.06	£87.50
Alpha C	30.5.06	£87.75
CDM Comercio

 

213

Nordic	30.5.06	£131.89
K&M	30.5.06	£132.00
TWG	30.5.06	£132.25
Xentric	30.5.06	£137.00
Alpha C	30.5.06	£137.25
CDM Comercio

 

214

Nordic	31.5.06	£81.18
K&M	31.5.06	£81.25
TWG	31.5.06	£81.50
Xentric	31.5.06	£85.00
ML Liquid Trading

 

215

Nordic	31.5.06	£81.18
K&M	31.5.06	£81.25
TWG	31.5.06	£81.50
Xentric	31.5.06	£84.50
Alpha C	31.5.06	£84.75
CDM Comercio

 

216

Nordic	31.5.06	£81.18
K&M	31.5.06	£81.25
TWG	31.5.06	£81.50
Xentric	31.5.06	£84.50
Alpha C	31.5.06	£84.75
CDM Comercio

 

218

Nordic	31.5.06	£105.91
K&M	31.5.06	£106.00
TWG	31.5.06	£106.25
Xentric	31.5.06	£110.00
Alpha C	31.5.06	£110.25
CDM Comercio

 

219

Nordic	31.5.06	£131.89
K&M	31.5.06	£132.00
TWG	31.5.06	£132.25
Xentric	31.5.06	£136.00
Alpha C	31.5.06	£136.25
CDM Comercio

 

220

Nordic	31.5.06	£105.91
K&M	31.5.06	£106.00
TWG	31.5.06	£106.25
Xentric	31.5.06	£110.50
Northcom