[2011] UKFTT 47 (TC)

TC00924

Appeal reference: MAN/2007/0431

 

VALUE ADDED TAX — input tax — trader acting as “broker” in sales of mobile phones — fraudulent defaults by traders in chains or related chains — whether trader knew or ought to have known of connection with fraud — yes — appeal dismissed

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

 

 

EYEDIAL LIMITED Appellant

 

- and -

 

THE COMMISSIONERS FOR

HER MAJESTY’S REVENUE AND CUSTOMS Respondents

 

 

 

Tribunal: Judge Colin Bishopp

Susan Stott FCA

Sitting in public in Manchester on 9, 10, 11, 12, 16, 17, 18 and 19 August 2010 with written submissions closing on 15 October 2010

 

Deborah Field, director, for the Appellant

 

Andrew Macnab, counsel, for the Respondents

 

 

 

 

© CROWN COPYRIGHT 2011

DECISION

Introduction

1.           This is an appeal by Eyedial Limited (“Eyedial”) against the Respondents’ refusal to pay to it input tax amounting to £670,075 which Eyedial incurred in its accounting period 05/06. They have refused to do so because, they say, Eyedial, in the person of its sole director Deborah Field, knew or ought to have known that the transactions into which it entered and which generated its input tax claim were connected with fraud. It is, in short, what is commonly known as a missing trader intra-community, or MTIC, appeal.

2.           Eyedial was represented before us by Miss Field and the Commissioners by Andrew Macnab of counsel. We heard the oral evidence of several witnesses, and had the unchallenged statements of others. The most important of the witnesses who gave oral evidence were Douglas Armstrong, the officer who was Eyedial’s main point of contact with HMRC, Dale Hunton, Eyedial’s accountant, and Miss Field herself. The other witnesses, all Customs officers, added very little to their statements and for the reasons which will become apparent it is unnecessary to say much about their evidence.

3.           It is uncontroversial that Eyedial was incorporated on 18 July 2003 and that its majority shareholder throughout was Miss Field (the other shareholder was her father). Miss Field has at all times been the managing director and controlling mind of Eyedial. The paid-up share capital of the company was £100 and its balance sheet at 31 July 2005, the last before the events with which we were concerned, showed that its net assets and shareholders’ funds were negative to the extent of £6,580. It carried on business from premises in Darlington and was at all material times registered for VAT. In its application for registration Eyedial stated that it would be engaged in the sales of telecommunications services, predominantly sales of phone cards, but HMRC were well aware, before 2006, that Eyedial was buying and selling mobile phones.

4.           The transactions with which we are concerned took place in the period from March to May 2006. As we shall explain, Eyedial’s repeated requests that it be placed on monthly accounting for VAT were consistently refused, and the relevant return therefore covered all those three months, during which Eyedial undertook 19 linked transactions of purchase and sale. Of those, 12 were what is known as “buffer” deals, that is to say transactions in which goods are bought from a UK trader and sold to another UK trader. The remaining seven were what is known as “broker” deals, that is transactions in which goods are bought from a UK supplier and sold to an overseas, usually European Union-based, customer. We are concerned in this appeal only with those seven deals since, despite the fact that defaulters were found in the chains in which Eyedial had acted as a buffer, the Commissioners take no issue with those transactions because of their policy at the time. Eyedial accounted correctly for its net tax liability in respect of those deals, and it is unnecessary for us to say any more about them.

5.           The Commissioners’ case is that in three of the seven relevant deals the goods bought and sold by Eyedial could be traced back to defaulting traders, while in the other four instances Eyedial’s purchases were from what is known as a “contra-trader”, that is a dealer who has bought and sold goods within an apparently unblemished chain of transactions, but who in reality has done so in order to conceal the fact that he is making a claim for repayment of input tax incurred in another, apparently unconnected, chain in which there is a defaulter. These concepts were understood by Miss Field, and will be well-known to most readers of this decision, and we shall not dwell on them further.

6.           Miss Field did not attempt to challenge the Commissioners’ case that there had in fact been a loss of VAT attributable to fraud in the three chains which led back to defaulters, or in the related chains where Eyedial’s purchases were from a contra-trader. Her cross-examination of the HMRC officers who attended to give oral evidence about the transactions was limited to satisfying herself that there remained an outstanding VAT debt, which in all cases the officer concerned confirmed to be so. There was, moreover, no evidence to the contrary and we accept as a fact that there was outstanding tax in each of the three chains which led back to a defaulter, and in the four related chains to which Eyedial was linked via a contra-trader. As the transactions which make up the chains, the defaults and the fraudulent nature of the defaults were all undisputed there is nothing to be gained by our setting out the detail of the chains, though we shall have some observations to make about them later.

7.           We should interpose at this point some comments about an issue which clearly troubled Miss Field deeply, both at the hearing and afterwards. The Commissioners relied, in part, on evidence they had secured from an examination of the computer servers used by First Curaçao International Bank, or FCIB, in order to demonstrate that the chains of transactions were essentially circular: that is, while the goods passed from one trader to another in one direction, the money which the traders paid to each other for the goods proceeded in the opposite direction, with both the goods and the money ending up in the same hands. It became apparent as the officer, Smita Parikh, who had undertaken the analysis gave her evidence that while her analysis established in some of the relevant chains that both goods and money had travelled in circles, it did not do so in others. Mr Macnab asked us to admit further evidence designed to make good the Commissioners’ case on this point, and we declined to admit it. It was in our view much too late to put in new evidence, even if it was evidence designed to correct what had already been advanced and to support the pleaded case, during the course of the hearing and when Miss Field would have no reasonable opportunity of dealing with it. Miss Field also took the view that the Commissioners had attempted to put in the same evidence by a different route in their closing written submissions. It is, we think, sufficient to record that we have taken care to pay heed only to those parts of Miss Parikh’s evidence which were properly before us.

8.           However, although evidence of the kind of Miss Parikh gave might be of importance, even critical, in some cases, in this it really added little to the already overwhelming evidence that there was fraud in every one of the relevant chains, a fact which Miss Field had effectively conceded by the conclusion of the hearing. The Commissioners’ evidence established a now familiar pattern of traders selling huge quantities of goods, collecting the output tax due on those sales from their customers, and then disappearing without accounting to the Commissioners for that output tax. In some cases the evidence showed that the missing trader had not in fact itself received the tax, but had arranged for the price of the goods to be paid to a third party, usually its own, overseas, supplier, an arrangement which made it impossible for the trader to discharge its liability. In others the enormous size of the debt built up by the defaulting trader in a very short period is impossible to reconcile with legitimate trade, and the only reasonable inference is that the trader set out to defraud.

9.           We accept that it is always difficult for a trader in Eyedial’s position to produce evidence which undermines the Commissioners’ analysis but, here, the evidence available to us, even disregarding the additional evidence which was produced in relation to the pattern of payments in some cases, established beyond any reasonable room for doubt that certain of the traders in each chain had entered into the transactions for no other purpose than to commit fraud. No plausible alternative explanation was offered, nor is any apparent.

10.        Miss Field did not challenge the proposition that Eyedial’s transactions were “connected” with those frauds, in the sense that it dealt in the same goods, or entered into transactions which formed part of an overall series of transactions which were designed, by others, to commit or conceal the frauds. We should make it clear, since this too appears to trouble Miss Field, that it is not the Commissioners’ case that she or Eyedial were themselves fraudulent. And it may help to say that we are satisfied they were not; despite the criticisms we shall make hereafter of her conduct, we accept that Miss Field believed she was acting correctly.

11.        That, however, is not the test. The question in this appeal is a simple one: it is not whether Eyedial, effectively Miss Field, was itself fraudulent, but whether it, or she, knew or ought to have known that Eyedial’s transactions were connected with frauds committed by others. We recognise that the defaulting traders did not deal directly with Eyedial, and that there was no evidence that Miss Field knew of their identity. But that too is not the test.

The law

12.        The circumstances in which the Commissioners can properly refuse to allow a trader to deduct input tax he has incurred, a normally absolute right, are spelt out in the only two authorities to which it is necessary to refer. The first is the judgment of the European Court of Justice in Axel Kittel v Belgium, Belgium v Recolta Recycling SPRL (joined cases C-439/04 and C-440/04) [2006] ECR I – 6161, [2008] STC 1537 (“Kittel”) in which it said, at [59], that the right to deduct may be refused “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.” That case is, accordingly, authority for the proposition that there are circumstances in which the otherwise inviolable right of a taxable trader to deduct input tax incurred by him in the purchase of supplies intended for onward sale may be overridden. However, the expression used by the Court is less specific than one might hope about the nature of the objective factors which are to be taken into consideration, and about what precisely is meant by “knew or should have known”. The observation by the Court at [51] that:

“… traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input of VAT …”

leads inexorably to the question whether a trader who takes every precaution which could reasonably be required of him is, without more, protected.

13.        That issue was dealt with by the Court of Appeal in the other authority to which we must refer, Mobilx (in administration) v Revenue and Customs Commissioners and related appeals [2010] STC 1436 (“Mobilx”). Moses LJ gave the only judgment, with which the other two Lords Justices agreed. At [52] he said:

“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.… 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.”

14.        Then, at [59] he said:

“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 the 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.”

15.        At [75] he added that:

“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 the fraudulent evasion of VAT.”

16.        Moses LJ concluded at [85] by saying that:

“A trader who chooses to ignore circumstances which can only reasonably be explained by virtue of the connection between his transactions and fraudulent evasion of VAT, participates in that fraud and, by his own choice, deprives himself of the right to deduct input tax.”

17.        The principles we draw from those observations are, first, that the focus must always be on the “big picture”, meaning all of the circumstances surrounding the transactions in question. The fact that a trader has undertaken due diligence enquiries will almost always be a factor, but not a determinative factor. In particular, a trader cannot protect himself merely by making enquiries; the enquiries, and the answers he receives, merely form part of the “big picture” which he must consider before deciding whether or not to enter into any individual transaction. It is not necessary for the Commissioners to demonstrate that the trader had knowledge of the detail of the antecedent dealings in the goods, the identities of the traders, the nature of the fraud and other matters of that kind; they do not feature in the simple test adumbrated by Moses LJ in the extract from para [59] of his judgment set out above.

18.        We add, before coming to the facts, that the Court of Appeal also made it clear in Mobilx that it is for the Commissioners to demonstrate to the tribunal’s satisfaction that the trader concerned knew or ought to have known of the connection of his transactions with the fraudulent evasion of VAT, and it is not for the trader to show the converse. The standard of proof is the usual civil standard, that is the balance of probabilities.

The facts

19.        The first event of present relevance is Mr Armstrong’s visit to Eyedial on 23 January 2004. At that stage, Eyedial was not registered for VAT but it had made an application for registration. Mr Armstrong’s record of the meeting shows that Miss Field told him that Eyedial had started selling mobile phones by retail and on the strength of that understanding he agreed to register the company, and indeed to backdate the registration to the date of its incorporation. That record was however, the subject of some dispute; Miss Field’s evidence was that the description Mr Armstrong recorded was of her father’s business. While we are quite willing to accept that the dispute arises from a misunderstanding rather than an intention to deceive, it seems to us so unlikely that Mr Armstrong would have recommended registration of Eyedial on the strength of a conversation with Miss Field about her father’s business that we are satisfied that his account of the discussion must be correct.

20.        What is more important is that, if Eyedial was not in fact engaged in the retail sale of mobile phones, it is not readily apparent what its trading activities at that time were. In the course of her discussions with Mr Armstrong, Miss Field made a number of suggestions of trading activities, or intended activities, none of which seem to have come to very much although, as the Commissioners point out, they all have the common characteristic that they would put Eyedial in a repayment position (that is, it would be reclaiming rather than paying VAT on each of its returns). Miss Field used that factor as an argument in her efforts to persuade Mr Armstrong to allow Eyedial to account monthly—thus accelerating its repayments—but, although she made the request on several occasions, Mr Armstrong always refused and Eyedial remained, throughout, on conventional three-month returns.

21.        Because Eyedial was understood to be trading in telecommunications equipment the Commissioners considered that it was possible it might be drawn into MTIC trading and on 15 July 2004 two HMRC officers, Yvette Hay (who gave oral evidence) and Andrew Watson made what the Commissioners describe as a “business education” visit to Eyedial. Their intention was to alert it, should it be necessary, to the dangers of wholesale trading in mobile phones and certain other goods, and to hand to Miss Field the Commissioners’ Notice 726, which deals with their policy in relation to the making of traders in specified goods, including mobile phones, jointly and severally reliable with others, in accordance with s 77A of the Value Added Tax 1994. They discovered that Miss Field was already very well aware of the risks of the trade since (as we could see for ourselves over the course of the hearing) she is astute in informing herself. Shortly afterwards, the Commissioners’ office at Redhill, which has overall responsibility for monitoring the wholesale trade in mobile phones and other items, sent to Eyedial a standard letter warning it of the risks inherent in the trade. In the following months, several further letters with similar content were sent to Eyedial. Miss Field accepted at the hearing that she was, at all times, well aware of the risks of the trade in which Eyedial was engaged and equally well aware of the Commissioners’ policy.

22.        On 24 March 2005 Mr Armstrong and Ms Hay paid a further visit to Eyedial, when Mr Hunton was also present. Mr Armstrong again explained—as is undisputed—the risks of the wholesale trade in mobile phones, and the Commissioners’ policy in relation to imposing joint and several liability on traders. He then went on to discuss the due diligence which Eyedial was undertaking. According to his records, he made a point of saying that the telephones Eyedial bought and sold should be inspected, that records of their IMEI numbers should be kept, and that any request to make a third party payment (that is a payment to someone other than the immediate supplier) could itself be an indication of fraud. Again, Miss Field does not dispute that she was aware of the risks of which Mr Armstrong warned her, and that she understood the need for the taking of precautions. She was adamant that she would not make any third party payments, and there is no reason to suppose that she ever did. Two further meetings took place, in September 2005, at which the same topics were discussed.

23.        Shortly after each of the meetings, Mr Armstrong wrote to Eyedial summarising what had been discussed and pointing out that merely making due diligence enquiries was not enough; it was necessary, he said, to take account of the information received or, if that was the case, that it had not been supplied. Miss Field accepts that she received the letters.

24.        In October 2005 Eyedial applied, successfully, to open an account with FCIB. The Commissioner’s position is that the possession of an account with that bank is, of itself, an indication that a trader is engaged in MTIC trading. Miss Field’s argument is that it was a sensible course to adopt since the bank offered cheap online banking facilities, including a system for the instant transfer of funds, and for that reason virtually every trader in the market had an account with the bank. Although that fact is consistent with the Commissioners’ case, we do not think that one can draw from it alone the conclusion that the Commissioners have reached. While it may be that all knowing participants in this kind of fraudulent trading had accounts with the bank, it does not follow that every one of its account holders must be a knowing, or a “blind eye”, participant in fraudulent trading.

25.        On 18 November 2005 and again on 2 December 2005 Mr Armstrong and another officer visited Miss Field, on the second occasion seeing also her assistant, a Miss Stapley. The conversation included the topics which had previously been discussed, about the risks of the trade and the precautions Eyedial should take, but by this time Eyedial was actively trading in mobile phones and Mr Armstrong’s main purpose at the second of the two visits was to examine the working papers supporting Eyedial’s claim for repayment for the accounting period 11/05. There was, according to Mr Armstrong’s record, a lengthy discussion about due diligence and he followed the meeting by another letter to Miss Field pointing out that due diligence was not a “box ticking” exercise and that the consistency of the answers Eyedial received from its enquiries, with each other and internally, and their plausibility, were all factors to be taken into account.

26.        Mr Armstrong is recorded by his note to have expressed the view during the course of the first discussion that as much as 90% of the wholesale trade in mobile phones was fraudulent; though we think his belief is probably more anecdotal than statistical, we are in no doubt that he was at pains to impress upon Miss Field that there was extensive fraud within the trade and that it would be a very difficult task for her, however good her precautions, to avoid Eyedial’s becoming caught up in it. Both at the meetings and in a subsequent telephone call Miss Field asked that Eyedial be placed on monthly returns and again Mr Armstrong refused, on the grounds that Eyedial was engaged in a risky trade.

27.        In January 2006, there were several telephone conversations between Miss Field and Mr Armstrong, who paid a further visit to Eyedial on 13 January. The same topics were discussed and, according to Mr Armstrong’s record, Miss Field again volunteered at the meeting that she was aware that there were fraudulent chains but that she did not wish to become caught up in them. Mr Armstrong’s response, according to his record—and we consider it to be an accurate one—was to repeat what he had already said, that Eyedial would inevitably be caught up in such chains if it carried on trading in large quantities of mobile phones. Later that month Miss Field asked again for permission to make monthly returns, a request which was refused by a letter of 24 January 2006, in which Mr Armstrong also told Miss Field that of the 12 transactions which featured in Eyedial’s 11/05 return, 11 had been traced, all to defaulting traders.

28.        A few days later Mr Armstrong sent Eyedial a formal warning letter, advising it that it was at risk of being considered by the Commissioners to be jointly and severally liable with others in its chains of transactions. Miss Field’s response was to advise Mr Armstrong that she had immediately ceased trading with her current suppliers, and was looking for others. According to Mr Armstrong’s notes, which again Miss Field did not challenge, she extolled the quality of her due diligence, and asked Mr Armstrong for his own opinion. He declined to give it, but did tell her that she should continue to make the checks she was undertaking. However, a few days later he wrote to her, again pointing out that merely making the enquiries was not enough; true due diligence, he wrote, was the analysis of the information received. A few days later, in a telephone conversation in which Miss Field complained to Mr Armstrong that, when checking with HMRC’s Redhill office, to ensure that Eyedial was a registered trader, an intending purchaser had been told (she understood) that Eyedial was a defaulter; her complaint was not so much that it had apparently been described, wrongly, as a defaulter, but that it had not in fact been involved in any defaulting chains. Mr Armstrong reminded her that, as he had told her in his letter of 24 January 2006, the Commissioners had discovered that it had been involved in several such chains.

29.        The next visit took place on 20 February 2006, shortly before the start of the period with which we are concerned. On this occasion, too, Mr Hunton was present; Mr Armstrong was accompanied by another officer, a Mr Martin. Mr Armstrong’s note was again not challenged. It shows that Miss Field said she knew that there were pre-arranged chains of transactions, but that she was not involved in them and that Mr Armstrong was picking on her by not allowing Eyedial to make monthly returns. Again, Eyedial’s due diligence was discussed, in the manner which we have already related. As had become his habit, Mr Armstrong wrote following the meeting, again pointing out that due diligence consisted in the analysis of the information obtained from the other traders with which Eyedial was proposing to deal. On 5 May 2006 Miss Field wrote to Mr Armstrong. Her letter contains the following passage, on which the Commissioners rely:

“Defaulters: we note your comments concerning the possibility that we may have unknowingly been involved in transactions where there have been defaulters, and you state this may have an impact on the application [for monthly returns]. We understood that following the recent EC ruling, that we can not be held responsible for defaulters within a transaction chain of whom we are unaware. Therefore how can this be taken into consideration in relation to our application for monthly VAT returns?”

30.        This passage, they say, and the misunderstanding of the law which it contains, is revealing of Miss Field’s state of knowledge. It shows, they say, that she knew that she was engaged in fraudulent chains but that she thought she was unaffected because she did not know the identity of the defaulter.

31.        Eyedial’s VAT return for the 05/06 period was submitted in June 2006, and was subjected to an extended verification process. At the end of that process Mr Armstrong made the decision which is the subject of this appeal, communicating it to Eyedial by means of a letter of 14 March 2007, with a supplementary explanation in a letter dated 2 April 2007.

32.        As we have said, the return covered 19 deals altogether. Although all, according to Mr Armstrong, led back, directly or indirectly, to defaulters, the evidence we heard related only to the seven transactions in respect of which Eyedial’s input tax claim was refused. In those seven deals, Eyedial bought one consignment from one supplier, two consignments from a second supplier, and four consignments from a third, and sold two consignments to one customer, one consignment to a second, and four consignments to a third. The four consignments bought from the same supplier were all sold to the same customer, in Denmark, but here was no similar match of supplier to customer in relation to the first three. We interpose for completeness that the Commissioners do not accept that the goods purportedly bought and sold in fact existed, and in relation to two of the deals there was some evidence that they did not, or at least were not the goods purportedly bought and sold. However, the existence or otherwise of the goods was not a positive feature of the Commissioners’ case, either in Mr Armstrong’s decision letters or at the hearing, and we shall proceed upon the assumption that the goods did indeed exist, and were what they purported to be.

33.        Much of the evidence, as we have indicated, related to the tracing of the chains and the identification of the defaulters in those chains or, when the link was through a contra-trader, in the related chains. As Miss Field cross-examined the witnesses only as to the continuing existence of the VAT loss, and did not argue that the VAT losses were attributable to any other cause or that her own transactions were not connected to them (in other words, she did not seek to argue that the goods in which she dealt had not been handled by the other traders identified by the Commissioners in establishing the chains) we do not propose to deal with the evidence relating to the transactions which preceded Eyedial’s own purchases, but to confine ourselves instead to Eyedial’s own transactions, in each case of a purchase matched by a sale of exactly the same quantity of goods.

Eyedial’s relevant transactions

34.        In the first of the seven relevant deals, Eyedial purchased 1,150 Nokia 9500 phones for £323 each and sold them to a French customer for £336 each. The phones, according to an inspection report, had two-pin chargers. They were transported on Miss Field’s instructions from a freight forwarder at Heathrow Airport to an associated freight forwarder located adjacent to Charles de Gaulle Airport in Paris, and the documents, produced to us from Eyedial’s own records, show that the transport was by road and Eurotunnel. The shipment took place before Eyedial had received payment, but the goods were not released to the customer until payment had been received.

35.        In the second deal, Eyedial bought 2,200 Samsung I300 phones at £440 each, and sold them to the same French customer for £443. Again, an inspection report revealed that the phones had two-pin chargers.

36.        The third deal consisted of the purchase of 1,500 Nokia 8800 phones at £505 each, from the same supplier as in the second deal, and their sale to a different French customer. As before, the chargers were of the two-pin variety. The goods in the second and third deals were transferred between the same two freight forwarders, on the same day, and on this occasion by ferry. The goods appear to have been released to the customer only upon receipt by Eyedial of the price.

37.        As we have already said, the remaining four deals consisted of purchases from the same supplier and sales to the same customer. As in the first three deals, all the phones were to a continental European specification. The supplier is said by the Commissioners (and accepted by Eyedial) to have been a contra-trader. It is worth mentioning in relation to these deals that the Commissioners’ enquiries showed that the goods were supplied, at the start of the chain, by a French-registered company using offices in Milan, and that the company was owned by a Finnish national who lived in Spain. The Danish company which purchased the goods from Eyedial was owned and run by a Bulgarian living in London. While there may well be perfectly good explanations for these arrangements, they do appear to be somewhat unusual. There is no evidence before us that Miss Field knew (or could have known) anything of the original supplier, but her due diligence into her purchaser should have revealed these details of its ownership and control. Mr Macnab made much of Miss Field’s failure to enquire further into the background of the company, and of her failure to make comprehensive enquiries into its creditworthiness. We shall return to these points.

38.        In the first of those four deals, the purchaser submitted a purchase order on 19 May 2006 for 3,995 Nokia 6680 phones at £153 each. On 24 May Eyedial submitted a purchase order to its own supplier (the contra-trader) for the same quantity and type of phones at £150. Its documentation included two invoices from the supplier, one dated 22 May and the other 23 May, for respectively 2,000 and 1,995 phones of the same description, in each case at the price of £150 per phone. Although it is odd that the invoices apparently precede the purchase order, we accept there may a simple explanation (even though Miss Field did not offer one), and we do not read a great deal into this oddity. Eyedial apparently instructed a freight forwarder to ship the goods, on 24 May, to a Dutch freight forwarder. There was nothing in the documents to show, and Miss Field was unable to explain how she found out, that the goods were to be shipped to the Netherlands. Nor is there any evidence that she made enquiries about a Danish company’s desire to have goods shipped to a different country. Although the sale was apparently effected on 24 May, the goods were not shipped until 31 May or, probably, 1 June, despite the date of Eyedial’s instruction to its freight forwarder. Payment was made both to and by Eyedial on 7 June and the goods were released to the purchaser on that day.

39.        In the next deal—we say “next” to mean the next in Eyedial’s numerical sequence, since there was some chronological overlap—Eyedial bought 1,000 Nokia 6111 phones at £142 each and sold them at £146 each. The goods were again transported to the Dutch freight forwarder. These goods appear to have been transported by Eurotunnel on 25 or 26 May and to have been released by Eyedial to the purchaser when payment was made, also on 7 June 2006. In the third deal the goods were 2,000 Nokia 6280 phones purchased at £186 and sold at £190.50 per phone. The Commissioners point to a number of oddities in relation to these transactions.

40.        First, the purchasers had submitted a purchase order on 16 May 2006. Within Eyedial’s documents was an unsigned inspection report apparently relating to these goods and dated 20 May 2006, although it has a fax header of 27 May 2000 [sic]. On the same day, Eyedial instructed a freight forwarder (which had undertaken the inspection) to release the goods to its purchaser. Further documents show that the goods travelled from the UK freight forwarder’s premises to a freight forwarder in France, near to the French end of the tunnel, on 21 or 22 May 2006. According to the inspection report, the total consignment weighed about 1,600 kg but the transport documentation (CMRs) included within Eyedial’s working papers showed that the combined weight was only 1,200 kg.

41.        However, according to its own documentation, Eyedial did not purchase the goods until 25 May 2006, the day on which, according to that documentation, it arranged transport of the goods not to the French freight forwarder identified by the purchaser but to the same Dutch freight forwarder as had been used previously. Payment was again made on 7 June 2006, on which day Eyedial authorised the release of the goods to the purchaser, evidently overlooking the fact that it had already done so more than two weeks previously and (apparently) before it had bought the goods. Eyedial in fact underpaid its own supplier by almost £260,000 upon the basis, as Miss Field told us, that its supplier would wait for that sum until Eyedial had received its next VAT repayment from the Commissioners.

42.        There are similar oddities surrounding the last of the deals. The purchaser submitted an order for 1,800 Nokia 8800 phones on 16 May 2006, again indicating a French freight forwarder as the intended destination. Within Eyedial’s working papers was an inspection report dated 20 May 2006. The report did not identify an addressee and was unsigned. It indicated that the goods were placed on seven pallets, each weighing approximately 200 kg. Also on 20 May Eyedial instructed, or purported to instruct, the freight forwarders to release the goods to its purchaser and on the following day, according to the copy CMR evidencing the transport within Eyedial’s possession, it instructed, or purported to instruct, the freight forwarders to release the goods to its purchaser. The copy CMR shows that the goods were sent to the French freight forwarder’s premises on that day. It records the aggregate weight of the consignment as 1,100 kg rather than the 1,400 kg shown by the inspection report, and other documents show that the goods travelled, not on 21, but on 23 or 24 May. However, it was not until 25 May that Eyedial submitted its purchase order to its supplier. Payment was again made on 7 June 2006, when Eyedial, similarly overlooking that it had already done so, released the goods to its purchaser. The Commissioners also point to the fact that the freight forwarders who prepared the inspection report to which we have referred rendered an invoice to Eyedial for storage and handling charges, but made no charge for inspection.

Did Eyedial know, or should it have known?

43.        As we have indicated, the question we must ask is whether, having regard to all the objective factors, Eyedial (or Miss Field) knew, or ought to have known, that the transactions were connected with fraud. Put in simpler terms, we must stand back from the detail as we have related it, and ask whether a trader in Miss Field’s position could conclude with reasonable confidence that the transactions were legitimate; or, instead, she ought to have realised that there was something so untoward about the circumstances such that she should not have entered into the transactions at all. To repeat what was said by Moses LJ in Mobilx at [59], “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 the fraudulent evasion of VAT then he should have known of that fact”. Here, it is not challenged that the transactions were “connected with the fraudulent evasion of VAT”. The question therefore is whether there was, or Miss Field could plausibly have thought there was, any other reasonable explanation for the transactions.

44.        Miss Field’s case was, in essence, that although she knew there was fraud within the trade in which Eyedial was engaged, she believed that there was a volume of legitimate trade and that, if she took proper care, she could confine Eyedial to the legitimate trade and avoid being caught up in fraudulent chains. She sought advice from Mr Armstrong, and followed it; she had not acted dishonestly and she should not now be (as she saw it) penalised by the refusal of her claim for input tax credit.

45.        There was support for that argument from Mr Hunton’s evidence. He told us that at the meetings with Mr Armstrong which he attended, Mr Armstrong was helpful in that he steered Miss Field towards conducting Eyedial’s business in a manner which, provided Miss Field kept to it, she could confidently expect would avoid Eyedial’s being drawn into dubious or worse transactions. While he might advance what Mr Hunton described as “the official line” in his letters, at meetings Mr Armstrong was reassuring, supportive and largely uncritical of the efforts Miss Field was making to ensure that Eyedial undertook only legitimate business. Mr Armstrong, by contrast, told us that he was throughout at pains, not only in his letters but at meetings, to impress upon Miss Field that there was more to due diligence than making enquiries and collecting the answers; she had to look critically at Eyedial’s business and at the transactions it was intending to undertake. He also made the point that it was not for him, as an officer of HMRC, to run a trader’s business.

46.        We have some sympathy with Miss Field, since we are satisfied she did not set out, even indirectly, with the intention of profiting from fraud. We think, rather, that she was simply out of her depth, but that does not excuse her. She clearly placed a great deal of reliance on Mr Armstrong, and it may well be that what he said did have the effect of reassuring her. But if so, we are sure that any such reassurance was inadvertent, and due in large part to Miss Field’s greater receptivity (as we could see for ourselves as the hearing proceeded) to what she wanted to hear than to what she did not. We find it impossible to believe that an HMRC officer of Mr Armstrong’s experience, engaged as he was on what the Commissioners were loudly proclaiming—as Mr Armstrong’s own letters show—to be their highest priority (of preventing MTIC fraud), would wittingly encourage any trader to engage in the wholesaling of mobile phones within the “grey” market at all, let alone set out to convey the impression that the trader would be safe from action by HMRC if he or she undertook certain suggested steps. The difficulty facing Eyedial is that Miss Field was, we have concluded, too willing to believe that Mr Armstrong was “on her side” than to pay attention to what he said to her about the risks of the trade and the warning signs she should heed.

47.        Those warning signs were, however, all too obvious and any prudent company director (and it is by that standard that Miss Field must be judged) would have realised at a very early stage that this was a market in which an honest trader should not be involved and that the individual transactions could not rationally be explained otherwise than by an underlying fraudulent purpose. Moreover, some of the precautions which Miss Field took, even after Mr Armstrong’s meetings with her, were manifestly inadequate.

48.        We begin with the nature of the goods in which Eyedial traded. They were, without exception, mobile phones manufactured to a continental European specification, in that the battery charger supplied with them was in every case of the two-pin variety suitable for use in continental Europe but not in the United Kingdom. There is no evident reason why phones of that specification should be in the United Kingdom at all. No mobile phones are manufactured in this country and the goods in which Eyedial dealt must therefore have been imported. Miss Field asserted that mobile phones were more expensive in continental Europe and that is why she was able to buy relatively cheaply in the UK and sell at a profit in Europe. That assertion, if it is correct, may well explain her ability to export, but it does not explain why the goods entered this country in the first place; if it is correct that mobile phones can be sold at a higher price on the continent, it makes little sense to bring them to the UK in order to sell them for less. The only obvious explanation for the presence of the goods in the UK—and Miss Field offered no other—is that, in order to satisfy the conditions for zero-rating a supply, the goods must cross frontiers between Member States.

49.        Mr Macnab put it to Miss Field that Eyedial added no value in the transaction chains. That is, it bought goods and sold exactly the same goods without adding anything, by adapting them, holding stock, sourcing goods of an unusual specification, buying in bulk and selling in smaller quantities, or in any other similar way. Miss Field evidently had some difficulty in understanding the concept, apparently thinking that “adding value” meant no more than securing a higher price. The point is, however, an entirely valid one, and we were left with no explanation of how it was that Miss Field was able to identify suppliers of phones at one price, and purchasers for exactly the same phones—exactly the same in quantity, model and specification—at a higher price when, as she conceded, she had no previous experience in the trade. In our judgment any person diligently and honestly undertaking a business consisting of purchases and sales would ask himself or herself why it was that profits could be so easily made in such circumstances.

50.        Miss Field made much of her due diligence, and of her having followed what she understood to be Mr Armstrong’s advice. We interpose that we agree with Mr Armstrong that it is not the function of an HMRC officer to advise a trader how to conduct his or her own business, though it is nevertheless fair to say that he did give a good deal of guidance, more than one commonly sees in cases of this kind, to Miss Field. The difficulty she faces is that she followed only some of that advice in that, as Mr Macnab succinctly put it, she collected pieces of paper (and did so by assiduously following the suggestions in Notice 726, even though many of the suggestions were not followed to a conclusion). What she did not do, as is quite clear, was examine the information she obtained in the course of those enquiries, and come to reasonable conclusions as a result of doing so.

51.        We have already mentioned the absence of any apparent curiosity about the French company run by a Bulgarian in London which required its goods to be delivered to a freight forwarder in the Netherlands, and the absence of any meaningful credit enquiries into that company. Miss Field’s response was that, as she did not give release instructions until Eyedial had been paid, she ran no risk. We leave aside for the moment the oddities of the timings of the various steps in the transactions and the fact that—on its own case—Eyedial was able to ship goods for which it had not paid overseas, with the apparent acquiescence of its supplier. In our view it simply defies belief that a circumspect trader would commit himself to the purchase of goods, and then arrange for the transport of those goods to another country, without virtual certainty of payment. Here, Miss Field could have had no such certainty since she knew almost nothing of her customer’s ability to pay. Even had Eyedial undertaken careful and effective due diligence, and even if it had watertight conditions of trade which it was able to impose on its suppliers and customers, it could not entirely eliminate the risk that its customer might change its mind, or for unexpected reasons become unable to pay. Eyedial had no fallback position. It remained, assuming the transactions were otherwise legitimate, committed to buying goods for which it might have no customer; and it had committed itself to transport the goods to another country. If the sale fell through it would find itself liable either to pay for storage charges in that other country or to pay the costs of bringing the goods back to the United Kingdom. It became apparent to us that these risks had simply not occurred to Miss Field.

52.        In the same context the Commissioners point to Eyedial’s apparent ability to undertake transactions of a high value, despite its lack of capital and other resources. In our view this is a telling point. Eyedial was dealing in consignments worth, as will be apparent from the descriptions of them set out above, hundreds of thousands of pounds, and in some cases was undertaking several such deals simultaneously. Its capital, however, was negligible if not negative, albeit it had overdraft facilities with its UK bank. Miss Field’s retort, again, was that Eyedial did not release goods to its customer until it had been paid, and was required to pay its supplier only when it had been paid itself; thus, she said, it had no need of substantial capital resources. That suppliers were willing to wait for payment until their purchaser’s customer had paid, in itself, seems to us an oddity in a legitimate market, in which one must assume that the supplier would have no idea of the identity and, importantly, the creditworthiness of the eventual customer. It is in our view credible that the supplier would wait for payment in that way only when he knew the deals were arranged in such a manner that payment was guaranteed. Miss Parikh’s evidence, in relation to some of the chains, demonstrated that such payment was indeed guaranteed: there was a clear, closed circle of traders. We did not have (or, at least, refused to admit) similar evidence in relation to the other transactions, but it does not require such evidence before one can draw the inference that relaxed arrangements of the kind into which Miss Field entered are quite inconsistent with the contention that these were legitimate deals, at arm’s length, between traders seeking to make a reasonable profit in a genuine market, after eliminating as much of the attendant risk as possible.

53.        These points are amplified by the evidence which we have already described, to the effect that the sequence of events was not as one might expect in a legitimate series of transactions. Goods were frequently sold and dispatched before they had been bought or, at least, before clear contractual documents were in place. We had no evidence of any sort about the various traders’—even Eyedial’s—conditions of sale and of agreement, in case of conflict, about which conditions should prevail, nor of any other protection that they may have secured for themselves in the event that their suppliers failed to provide the goods, or if their purchasers failed to pay. It became clear to us as she gave her evidence that these too were considerations which had simply not occurred to Miss Field; instead, we are satisfied, she saw a relatively easy profit and did not her address her mind to the, in our view obvious, risks. In trade within the United Kingdom it is, just, credible that traders will be content to rely on the ordinary law of the land; in international transactions no sensible trader would do so.

54.        Similar comments may be made about insurance. These were valuable consignments, worth, as we have said, hundreds of thousands of pounds. Miss Field told us she understood that they were insured by the freight forwarders, not only while they were at their premises but while they were in transit. There is no evidence whatever that she verified that belief. In addition, even if the goods were insured for their own value, there was no evidence that Eyedial was insured for any consequential losses that it might sustain. If, for example, goods were destroyed or stolen in transit between the UK and the destination country, an insurer might pay their capital value, enabling Eyedial to discharge its obligation to its supplier. It did not seem to have occurred to Miss Field that, in addition, Eyedial’s customer might have a claim for loss of bargain or loss of profit on its onward sale; nor had she made any provision for the inevitable delay between loss and payment by the insurer.

55.        The inspection reports secured by Eyedial were the subject of some—in our view valid—criticism by Mr Macnab, since they were superficial, in some cases incomplete or ambiguous, and of dubious reliability. We have pointed out a number of discrepancies in dates, and in weights of consignments, already. It is also surprising, though perhaps no more, that in every case, without exception, all the goods were found to be present, in good condition, and to specification. On not one occasion in the deals with which we are concerned was any anomaly found.

56.        However, even assuming that the reports can be taken at face value, they seem to us to be no more than a further part of the “box ticking” due diligence which Miss Field carried out. It is conspicuous that the inspection reports were carried out, not before Eyedial bought, but before it sold. We recognise, of course, that purchase and sale occurred, if not on the same day, in very quick succession, but it is apparent from the documentation with which we were provided, itself, that the inspections were to be carried out before shipment, rather than before acceptance by Eyedial of the consignment from its own supplier. A prudent trader would wish to ensure that it accepted only the goods it had ordered, and would correspondingly take care to arrange the inspection before acceptance. That Miss Field was content to do otherwise is in our view a clear indication that the inspections were considered by her not as an important protection for Eyedial, but as no more than a means of obtaining a piece of paper to add to her due diligence file. There was, incidentally, no evidence that Miss Field carried out any due diligence on the freight forwarders, or satisfied herself by other means that they had the capacity to produce reliable inspection reports.

57.        We had no explanation from Miss Field about why her suppliers were willing to allow her to transport goods which had not been released to her to the premises of freight forwarders in France or the Netherlands. She claimed that the goods were transported “on hold”, that is on the basis that the overseas freight forwarder would hold them to Eyedial’s order until they were released. But there is no evidence whatever that she made any enquiries of any kind into the overseas freight forwarders, and indeed in most cases, if not all, the instruction was given, not to the freight forwarder at the intended destination who was to comply with it, but to the UK freight forwarder which was transporting the goods and was, presumably, expected to pass on the instruction. There was no documentary evidence that Eyedial’s suppliers had agreed to the transport of the goods overseas, nor, as we have said, was there any evidence of contractual conditions which would come into play should anything go wrong. Eyedial’s supplier was, in short, wholly exposed to default by Eyedial or its own customer. That, again, seems to us to be quite inconsistent with the workings of a legitimate market. It evidently did not occur to Miss Field that her suppliers were extraordinarily relaxed about what happened to valuable consignments of goods for which they had not been paid.

58.        The Commissioners put their case on the basis that transactions of this kind are wholly orchestrated and designed for no other purpose than the defrauding of the tax authorities in this or other countries. They may well be right, but it is not necessary for us to decide that issue in this appeal. The simple question for us, as we have indicated, is whether Eyedial, or Miss Field, ought to have known that there was no other reasonable explanation for the transactions in which Eyedial engaged than that they were connected with fraud. In our view there is only one possible answer to that question. It is perfectly obvious to us, and it should have been equally obvious to Miss Field if she had considered the matter properly, that these transactions did not bear the characteristics of a legitimate market and that they can have been driven only by a fraudulent purpose. Mr Armstrong was right to refuse Eyedial’s repayment claim and the appeal must be dismissed.

59.        The Commissioners asked for a direction in their favour in respect of costs should the appeal fail. We have the power to make such a direction, because of the provisions of para 7(3)(a) of Sch 3 to the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, and we think it is appropriate to do so. Eyedial is to pay the Commissioners’ costs of and incidental to the appeal, to be assessed on the standard basis by a costs judge of the High Court if they cannot be agreed. Payment is to be made within 14 days of agreement or assessment.

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

 

 

 

 

 

 

Colin Bishopp

Tribunal Judge

Release Date: 13 January 2011