First-tier Tribunal (Tax)

 

[2011] UKFTT 72 (TC)

TC00950

 

Appeal number: LON/2008/0357

 

VAT – alleged MTIC fraud – whether the Appellant knew or ought to have known that its transactions were connected with the fraudulent evasion of VAT- whether HMRC were able to prove that in relation to the relevant transactions there had been a fraudulent evasion of tax

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

My Secrets Limited Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

TRIBUNAL: MRS S.M.G.RADFORD (TRIBUNAL JUDGE) J.G.ROBINSON

Sitting in public at 45 Bedford Square, London WC1 on 19 to 29 April 2010 and 29 October 2010

 

Mr Timothy Brown for the Appellant

 

Mr Mark Bryant–Heron and Mr George Rowell, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

1.       The Appellant appealed the decision of HMRC which was communicated by way of a letter dated 28 January 2008 which denied it the entitlement to deduct input tax in the sum of £819,280.00.

2.       The decision related to two monthly VAT periods - June 2006 (06/06) during which there was four deals which resulted in an input tax claim in amount of £450,187.50 and July 2006 (07/06) during which there were three deals resulting in a claim for £371,616.35 of input tax.

3.       It was claimed for the Appellant that at the material time it was a wholesale trader in mobile phones. It is HMRC’s case that each of the Appellant’s seven deals was connected with fraudulent evasion of VAT and the Appellant either knew or should have known that they were so connected.

4.       The Appellant relied on the evidence of Mr Joseph Kemal, the managing director of the Appellant and Mrs Denise Leach, manager of the Appellant.

5.       The Respondents relied on the evidence of Ms Vivien Parsons, Ms Erica Nketiah, Mr Roderick Stone, Mr Gordon Smith and Mr Terence Mendes of HMRC and their expert witness, Mr John Fletcher of KPMG.

Background and facts

6.       The Appellant was incorporated on 13 December 2002. The director, Mr Joseph Kemal, was appointed on the same date. At the relevant time Mrs Denise Leach was employed as a manager with day to day involvement in trading.

7.       The Appellant was registered for VAT as a textile wholesaler with effect from 1 February 2003, with the VAT registration number 805 2456 47 and at all the material times was responsible for submitting monthly VAT returns. The Appellant’s principal place of business was 575, North End Road, Wembley, Middlesex, HA9 0UU. From mid-2003, the Appellant became involved in the purchase and sale of electronic goods.

8.       In his witness statement Mr Kemal stated that the Appellant was initially formed with a view to wholesaling textile goods which was an area with which he had previously been involved for many years. In evidence he stated that in this business he had had great success before eventually selling his business to Polly Peck.

9.       In evidence he confirmed that as a result of the textile business becoming generally increasingly competitive and profit margins constantly being squeezed he decided to move into another area of business which he believed might be more profitable.

10.    Mr Kemal had been involved with Joe Harris, father of Denise Leach for nearly 35 years. Joe Harris was anxious to provide for her and decided to help to finance the new company with a view to the company eventually belonging to her.

11.    Although the Appellant originally intended to deal in the nightwear business the floor above its premises was rented to an electronic company called Granville and their salesman, known as Vic, persuaded the Appellant that there was good business in exporting international telephone calling cards. After some discussion with Joe Harris it was agreed that the Appellant would take part. Mr Kemal insisted that the goods should come to the Appellant for checking and that HMRC became involved.

12.    HMRC visited the Appellant’s offices and were informed that the company was now trading in the purchase and sale of international calling cards. Mr Kemal was aware that VAT fraud was on the increase and asked for a form to be devised which would be sent to the Appellant’s suppliers for confirmation that VAT would be accounted for on any goods sold to the Appellant.

13.    In evidence Mr Kemal stated that he met Ian Tuppen after the fourth or fifth deal that they did with the international calling cards. Ian Tuppen had confirmed to him that with the Olympic Games in Greece there would be a big demand for cheap telephone calls. By then Vic, the salesman, who had been demanding more commission on the sales, had left Granville. Mr Kemal employed Paula Huller to take the place of Vic and to continue with the calling card business.

14.    During this time on the advice of the Appellant’s accountant the Appellant’s VAT returns were changed to a monthly basis.

15.    After the meeting with Ian Tuppen, whose company Kingswood Trading Services Limited (“Kingswood”) had previously been supplying Granville, it was decided that the Appellant would become involved in the broking of electronic goods and Paula Huller was to experiment by buying and selling a small quantity of computer chips which would be supplied by Kingswood.

16.    In 2005 Paula Huller left the company and Denise Leach took over the trading, buying

17.     goods in the UK and selling primarily to overseas companies. The Appellant continued to trade using the IPT website and diversified into the purchase and sale of computer software.

18.    Ian Tuppen again visited the Appellant and suggested that as the demand for international calling cards had ceased they should consider other exports such as mobile phones. Mr Kemal understood that these would be grey market goods as they would be new models and difficult to obtain.

19.    The Appellant was visited by Kingswood’s solicitors, Halliwells who had asked for a meeting to ensure that everything was in order. Following this visit Denise Leach was asked to visit their customers.

20.    In September 2006 there was a further visit from HMRC who asked detailed questions concerning the Appellant’s suppliers and purchasers.

 

The Tax Loss Chains

21.    The four deals in June 2006 and the three deals in July 2006 were in each case traced directly back through a chain of buffer traders to an alleged defaulting trader. In each of the deals the trader imported the mobile phones into the UK from a company based elsewhere in the EU. Their purchase was therefore zero-rated for VAT. The traders then sold the mobile phones to another UK based trader, charging VAT output tax on the invoice, for which they then allegedly failed to account. The mobile phones were then sold on to a number of other UK based traders until they were purchased by the Appellant, who in turn exported them from the UK in a sale to another EU based trader. The Appellant’s sale was zero rated for VAT and it sought to reclaim the input tax on its purchase.

The Appellant’s VAT period 06/06 (alleged defaulter: RS Sales Agency Limited)

22.    The purchases and onward sales in the VAT period 06/06 took place on the 22, 23 and 28 June 2006. The transactions dealt in Nokia phones on the 22 June (Nokia 7710) and the 28 June (Nokia N80 and N90) and in the LG KG800/Chocolate phone on the 23 June. 9,500 handsets were traded in the deals at a purchase price of £2,572,500.00 and a sale price of £2,624,000.00. All the purchases were from Kingswood and all the sales were to a Belgian company called 2 Trade BVBA (“2 Trade”). The total input tax on these 06/06 deals was £450,187.50.

23.    All of the Appellant’s purchases from Kingswood in June 2006 were traced back to an alleged defaulting trader, RS Sales Agency Limited (“RSSA”). RSSA did not pay its VAT liability.

24.    Kingswood purchased from three different traders on the four deals, Mobile Heaven (22/6 and 28/6, MNR Global Limited (23/6) and Danum Trading (28/6). All these traders apparently purchased their mobile phones from Highbeam UK Limited (“Highbeam”) which purported to purchase the phones from RSSA, the defaulting trader.

25.    On the face of the trading documents a single trader, RSSA supplied all the phones to a single purchaser Highbeam which supplied them to Kingswood who then supplied the Appellant in June 2006.

26.    RSSA is a missing trader. Its position in the transaction chain was importer of the goods. RSSA’s director, Rafik Sodawala, registered for VAT as a sole trader on 19 September 2003 with the trading name RS Sales Agency (“the Sole Trader”). Mr Sodawala signed the application and subsequently applied unsuccessfully, through an accountants’ firm, M Iqbal & Company, to transfer the VAT registration number to RSSA on 20 February 2006. The same letter informed HMRC that RSSA’s future business activity would be wholesale and retail dealing in mobile phones. Thus at the time of the transaction in issue in the appeal, RSSA was not registered for VAT.

27.    On 3 July 2006 HMRC officer Parsons and a colleague made an unannounced visit to the principal place of business of the Sole Trader and RSSA having received information that RSSA was trading with Highbeam. The address, 469A, Cheetham Hill Road, Manchester, M8 9LR was a doorway between two shops with no sign of any business operating from there and with no-one at the address. There had been a previous request to change the principal place of business to another address, which request was subsequently cancelled. The officers also visited this other address at 302, Cheetham Hill Road, Manchester, M8 0PL. This address was a hairdresser’s shop and the occupants had no knowledge of the Sole Trader or RSSA.

28.    There was no subsequent contact from Mr Sodawala. Consequently the Sole Trader’s VAT registration was cancelled from 4 July 2006 and Mr Sodawala was informed of this in writing. This prompted a phone call from Mr Iqbal, the Sole Trader’s accountant, on 6 July 2006, who said that Mr Sodawala was away. It was requested that Mr. Sodawala contact the officer on his return but he did not do so.

29.    The Sole Trader made no VAT returns after October 2005 and no business records were provided. RSSA never filed a VAT return and never provided any business records. From trading documents identified from other traders, the net turnover of RSSA in the six week period from 26 April 2006 to 4 July 2006 was apparently £165,704,862 with an unpaid VAT liability of £28,998,350.90.

30.    The four June deals which were sold on ultimately to the Appellant were identified by invoices from the records of Highbeam.  RSSA purchased the first three deals from a Portuguese Company called Worldcall LDA (“Worldcall”), making payments to Worldcall from its account at First Curacao International Bank “(FCIB”). The fourth June purchase was from another Portuguese company called Snowrix LDA (“Snowrix”). The information provided to FCIB in respect of Snowrix and Worldcall suggested that they were closely connected and controlled by the same individual. 

31.    On 14 April 2008, RSSA was assessed for the unpaid VAT which relates to the chains in issue in this appeal. It has made no attempt to pay or appeal against this assessment. RSSA has now been wound up and Mr Sodawala has been disqualified from acting as a director for 13 years.

The Appellant’s VAT period 07/06 (alleged defaulter: V2 (UK) Limited)

32.    The three July 2006 purchases by the Appellant from Kingswood can be traced back to an alleged defaulting trader, V2 (UK) Limited (“V2”). There were three separate deals all on the same day, 27 July 2006, with different models of Nokia handsets and the chain of traders was the same for each deal resulting in trading purchases by the Appellant of £2,478,192.50 inclusive of VAT in one day.

33.    The three deals which all consisted of purchases from Kingswood and sales to Allimpex Handelgesellschaft (“Allimpex”), a German firm, were 2,400 Nokia N91 handsets, 1,400 Nokia N72 handsets and 2,300 Nokia N80 handsets. The Appellant made a profit of £84,225 on these transactions.

34.    V2 purchased the Nokia phones in each case from a Polish firm called Techbase Consulting (“Techbase”). They were sold on in each case to MNR Global Limited. MNR Global Limited sold on to Kingswood who supplied the phones to the Appellant. The Appellant exported the mobile phones in each case to Allimpex. V2 did not pay HMRC the output tax on these sales.

35.    V2 was incorporated on 17 January 2003 and registered for VAT from 3 March 2003. Nadeem Ahmed was initially the company secretary until 21 December 2004 when he became the sole director. The principal business activity of the company was described on the VAT 1 application for registration as being retail sales of clothing and accessories.

36.    In February 2006 V2 was selected for an assurance visit by an officer from an MTIC monitoring team. Officer Gordon Smith visited the premises on 21 February 2006. Mr Nadeem Ahmed, the director, informed Smith that he wanted to diversify into wholesale trading in mobile phones because the retail clothing business was not good. He stated that his intention was to trade with UK registered suppliers and customers only. Mr. Ahmed was served with notices relating to trade in MTIC related areas which included the trade in mobile phones and was sent Notice 726 which provided information on joint and several liability for unpaid VAT by other parties in the supply chain.

37.    On 7 April 2006, the officer again visited V2’s premises following notification that a Cyprus registered company, Destonia, had released goods to V2. Nadeem Ahmed explained to the officer that V2 in fact purchased these goods from a UK company, CHP Distribution Limited, not Destonia.

38.    Officer Gordon Smith gave evidence that in the period from February 2006, V2 traded on a large scale in mobile phones, always buying from traders who claimed to have imported the mobile phones. V2 traded with a series of defaulting traders. The trading with each defaulter was largely consecutive. V2 traded with CHP Distribution Limited from 23 February 2006 until 5 April 2006, with C&B Trading (UK) Limited from 31 March 2006 until 28 April 2006, with RSSA from 26 April 2006 until 4 July 2006 and with Parfums (UK) Limited from 7 July 2006 until 20 July 2006. These companies were all de-registered following default on VAT liability incurred in the course of MTIC trading. The amount of input tax claimed by V2 and ultimately made the subject of an assessment by HMRC on 2 October 2006 was £45,832,419.00.  The amount of VAT from RSSA claimed as input tax by V2 was £3,737,650.31. The amount of VAT claimed as input tax in purchases from Parfums Limited was £1,182,247.92.

39.    In addition V2 made purchases from Highbeam as part of a chain of transactions in mobile phones, claiming input tax of £3,904,456.59 from that company.

40.    V2’s profit on every deal was 50p per unit, irrespective of the quantity or model of phone being traded. 

41.    On or about 20 July 2006, V2 changed its trading pattern and started to import directly, importing 32 consignments including the three consignments of mobile phones which were ultimately purchased by the Appellant who then exported them.  The purchases were from Techbase in Poland. On 29 August 2006, the officer, Gordon Smith, sought information about V2’s trade with Techbase and was provided with the documents which, it was asserted, comprised the due diligence checks by V2. These documents however appeared to provide no meaningful information about Techbase and a report, referred to in the documents as having been prepared by Express Intelligence UK Limited, was not amongst the documents supplied to the officer. The extent of V2’s trade with Techbase was some £7,513,975.00.

42.    On 21 August 2006, HMRC issued a regulation 25 direction which instructed the company to immediately make an early VAT return. This was not complied with but a return was made for the 08/06 quarter declaring a VAT output tax liability of £985,064.70.  This included the VAT liability for the July 2006 sales of phones to the Appellant which were the subject of this appeal. This sum remains unpaid.

43.    At a meeting between Officer Smith and Nadeem Ahmed on 1 September 2006, Mr Ahmed complained that V2’s FCIB account which had a balance of £1,325,625.61 had been frozen. V2 by this time had also issued credit notes in respect of transactions for which they had not been paid. This resulted in an assessment being raised by HMRC on the basis that in the absence of any indication from other purchasers that they were not pursuing the debt it was simply an attempt to evade a VAT liability which was due.

44.    On cross-examination Mr Smith confirmed that the three deals with which the Appellant was involved were submitted on a single VAT return which showed a VAT liability of £985,064.70. However he could not accept the net liability shown on the return because of the credit notes issued which he believed were intended to artificially reduce the amount of VAT due.

45.    He confirmed that on 21 August 2006 he had received a fax from V2’s accountant which stated “My client has asked me to make you aware that funds sufficient to pay the VAT are currently on deposit so that payment can be made as soon as practicable” and it was arranged that he would meet Mr Ahmed on 29 August 2006. Mr Smith confirmed that at that time there were no outstanding VAT debts.

46.    In cross examination Mr Brown for the Appellant questioned whether in respect of the three transactions with which the Appellant was involved V2 was attempting to fraudulently evade its VAT liability. Mr Smith replied that he had to have regard to the entirety of V2’s trade as demonstrating that they fully knew that they were getting involved in a fraudulent trade from 23 February 2006. He could not believe that Mr Ahmed did not know what he was doing. Although the money was in the account he did not believe it was to be used to pay the VAT liability.

47.    Mr Brown asked him whether he had anything on which to base this belief and Mr Smith said that he could not bring himself to trust that Mr Ahmed would use the money to pay the liability. Mr Smith confirmed that he had made four visits to the premises unannounced without questioning the large increase in V2’s turnover and had found no evidence of a conspiracy between all the parties.

48.    On 28 October 2006, V2 ceased trading and a liquidator was appointed on 16 November 2006.  The company was compulsorily wound up.

49.    In a six month period V2 made sales of mobile phones to the value of £416,038,327.49 including VAT of £61,909,016.86.

50.    The expert witness John Fletcher gave expert evidence as to the nature of the “grey market” in mobile phones. He stated that opportunities for profit through arbitrage for those who dealt in the grey market (as opposed to authorised dealers) in Nokia handsets were extremely limited because Nokia set identical prices in all geographical markets. He stated that the opportunities presented by currency fluctuation between sterling and the euro to trade profitably were too limited to support realistic arbitrage opportunities. 

51.    Mr. Fletcher identified four types of trading which exist in the grey market. He concluded that V2’s trading patterns had a number of negative indicators which ran contrary to rational profit maximising behaviour and indicated that V2 was unlikely to have been exploiting a profitable market opportunity.

52.    He stated that the absence of exports (save for 0.1% of sales of mobile phones) to companies abroad indicated that V2 were not seeking to take advantage of arbitrage opportunities arising from price differentials between countries. Similarly, the trading was inconsistent with box-breaking which is taking advantage of differences in subsidies to purchase prices between countries by reconfiguring the handsets and selling them abroad, responding to volume shortages or purchasing speculatively to take advantage of the dumping of handsets on the market by authorised dealers or manufacturers.

53.    V2’s trade in mobile phones appeared to have achieved a wholly unrealistic level of share of the total market in mobile phones. Mr Fletcher had analysed the total market share of the distributor market for the mobile phones which V2 traded in over the period of five months from March to July 2006 inclusive. The three deals which were sold on ultimately to the Appellant represented on their own 17.9% of the market in Nokia N91 handsets, 27% of the market in Nokia N72 handsets and 4.98% of the market in Nokia N80 handsets. The Nokia 8910i was first sold in November 2002 and had therefore become an old model by the relevant time. The total market for such handsets was therefore only 27 in this period, of which the size of the distributors’ market numbered 10.  V2 apparently sold 15,600. That is a 156,000% share of the market. 97% of V2’s trading achieved a market share in excess of 5% of the market. Seven of the models traded by V2 achieved sales which were greater than the whole market in Europe and the UAE for that phone, which meant that V21’s sales exceeded all sales to retailers. In relation to the Nokia 8801, V2 apparently sold 22,590 handsets during the period March to July 2006. The market data shows that no handsets were sold in Europe during this period, and only 299 were sold to retailers through the whole of 2006. The Nokia 8801 was designed for the American market.

 

Schedule of events concerning the purchase and sale of the mobile phones by the Appellant

54.    Mr Rowell for the Respondents had prepared a chart which referred to the documents relating to the Appellant’s transactions in respect of which he provided information concerning each of the seven deals.

55.    The first deal he referred to was that of 3,000 Nokia 7710 mobile phones. On 22 June 2006 a quotation for the mobile phones was received by the Appellant from Kingswood. A return of supplier’s declaration form dated 22 June 2006 was faxed to Kingswood at 10.36 on 23 June 2006. The Appellant’s purchase order to Kingswood was dated 22 June 2006 and dated on the same day was Kingswood’s invoice to the Appellant for 3,000 Nokia 7710 mobile phones “Sim Free, Euro Spec, Never Locked”.

56.    On 22 June 2006 at 17.41 2 Trade faxed an order for the phones to the Appellant. They were to be shipped CIF to the Netherlands warehouse. It stated that the latest delivery date for the phones was 23 June 2006 and that they must arrive before 11 am local time or the order could be cancelled. It stated that the goods were to be released on receipt of full payment.

57.    An invoice dated 22 June 2006 was prepared by the Appellant. The invoice had a retention of title clause and terms that if the goods were shipped before payment the customer must insure the goods from the moment that the Appellant instructed its freight forwarder to ship them and notified its customer. The invoice appeared to have been faxed to 2 Trade at 10.51 on 23 June 2006 in response to 2 Trade’s purchase order.

58.    The goods were released to the Appellant on 22 June 2006 by Kingswood and at 10.31 on 23 June 2006 the Appellant faxed the freight forwarder Ontime Logistics Limited (“Ontime”) asking that the goods be inspected and shipped to 2 Trade. The inspection report was received on the same day by the Appellant with a note that a 10% IMEI scan was to follow.

59.    Documents provided showed that the goods were shipped on 23 June 2006 from Ontime in Tonbridge to ML & Co in the Netherlands. They were checked in at the Channel Tunnel at 10.36 and arrived at 11.55.

60.    On the instructions of 2 Trade the goods were inspected by ML & Co on 29 June 2006 whereupon 2 Trade paid the Appellant for the goods in full. The payment amounted to £759,000. On the same day the Appellant paid Kingswood £759,019.53. The total due to Kingswood including VAT was £874,200. The balance was paid from the Appellant’s UK bank account at Lloyds bank.

61.    The second deal was an order for 3,000 LG KG 800 mobile phones. On 23 June 2006 the Appellant received a quotation from Kingswood and an order was emailed to Kingswood at 14.38 on the same day. At 16.08 the Appellant faxed Kingswood a completed declaration form. On 23 June 2006 an invoice for the phones was faxed to the Appellant again stating that the phones were “Sim free, Euro Spec, Never Locked”.

62.    A purchase order faxed at 16.35 was received from 2 Trade on 23 June 2006. The terms were the same as those of the first deal. At 16.15 the Appellant faxed an invoice to 2 Trade and on the same day the goods were released to the Appellant by Kingswood. At 15.19 the Appellant emailed Ontime and they sent an inspection report. The goods were shipped by Ontime and checked in at the Channel Tunnel at 12.33 on 23 June 2006 arriving at13.56. The goods were inspected on 29 June 2006 by ML & Co for 2 Trade as before and 2 Trade paid the Appellant in full on the same day an amount of £771,000 via their FCIB account.

63.    The Appellant owed Kingswood £888,300 including VAT and made a part payment of £771.019.53 on 29 June 2006 from their FCIB account and on 30 June 2006 paid Kingswood £232,500 from their Lloyds bank account.

64.    The third deal was for 1,500 Nokia N90 mobile phones and the fourth deal for 2,000 Nokia N80 mobile phones. At 1.46 on 28 June 2006 Kingswood sent the Appellant an email offering them 1,500 Nokia N90 mobile phones and 2,000 Nokia N80 mobile phones. The email stated “If this is of interest please get the paperwork through ASAP.”

65.    On the same day an order was sent to Kingswood for all the phones on offer and Kingswood sent invoices for the phones to the Appellant.

66.    On the 28 June 2006 at 15.21 a fax was sent to the Appellant by 2 Trade requesting inter alia 4,000 Nokia N90 mobile phones and 4,000 Nokia N80 mobile phones and at 16.46 2 Trade faxed the Appellant a purchase order. The Appellant then sent an invoice to 2 Trade and Kingswood sent the Appellant a release note. At 15.49 the Appellant instructed Ontime by fax to inspect the goods and Ontime sent an inspection report. The goods were shipped by Ontime and checked in at the Channel Tunnel at 14.14 arriving at 15.24 on the same day. ML inspected the goods on behalf of 2 Trade on 29 June 2006.

67.    On the same day full payment of the goods in the amount of £390,000 was made by 2 Trade via their FCIB account and the Appellant paid the same amount to Kingswood leaving an amount owed to Kingswood of £59,437.50.

68.    The fourth deal took place on the same day and the events followed in the same pattern as the third deal with the goods apparently being shipped at the same time.

69.    In respect of the first two deals there appeared to be no record of any discussion between 2 Trade and the Appellant concerning stock availability but on the 28 June 2006 2 Trade sent the Appellant a completed trade application form. On 19 July 2006 the Appellant checked 2 Trade’s VAT registration with the Redhill VAT office and received a reply on 24 July 2006.

70.    The three deals in July took place between the Appellant and an EC company called Allimpex. Again all the mobile phones were provided by Kingswood. On 24 July 2006 Allimpex returned the Appellant’s trade application form which had been completed by them. On the same day the Appellant faxed Redhill to check Allimpex’s VAT registration and a faxed reply was received from Redhill on 27 July 2006.

71.    On the 26 July 2006 a note was sent to the Appellant from Kingswood offering them 2,400 Nokia N91 mobile phones, 1,400 Nokia N72 mobile phones and 2,300 Nokia N80 mobile phones. On 27 July 2006 the Appellant returned Kingswood’s supplier declaration form, sent them a purchase order and Kingswood invoiced the Appellant.

72.    On 27 July 2006 the Appellant faxed Allimpex offering them the mobile phones ordered from Kingswood and at 18.30 received a purchase order from them. The Appellant faxed invoices to Allimpex at 17.46 on 27 July 2006. The invoices had the same terms as for the Appellant’s deals with 2 Trade. The invoices were signed by Allimpex and faxed back to the Appellant on 28 July 2006.

73.    The goods were released by Kingswood on 27 July 2006 and the Appellant instructed freight forwarder A1 Freight of Feltham to inspect the goods on their behalf. The Appellant received an inspection report on 28 July 2006 and the goods were checked in at the Channel Tunnel at 18.16 arriving at 19.25 on the same day.

74.    On 31 July 2006 a copy of the invoice in respect of the 2,400 Nokia N92 phones was faxed to the Appellant signed on behalf of Allimpex with a handwritten request to “pls send us stock offer/proforma invoice regarding all deals made on 27/7/06 waiting for quick reply. Thanks”.

75.    No evidence was provided in respect of an inspection in Europe on behalf of Allimpex but on 3 August 2006 full payment in amount of £858,600 was made by Allimpex in respect of the 2,400 Nokia N92 phones via their FCIB bank account. On the same day the Appellant paid Kingswood the same amount leaving a balance owed to Kingswood of £111,480.

76.    On 8 August 2006 Allimpex paid the Appellant £509,600 via its FCIB account in full payment for the 1,400 Nokia N72 phones and the Appellant paid the same amount to Kingswood leaving an outstanding balance owed to Kingswood of £66,150.

77.    On 8 August 2006 Allimpex paid the Appellant £825,125 in full payment for the 2,300 Nokia N80 phones via its FCIB account and the Appellant paid the same amount to Kingswood leaving a balance owed to Kingswood of £107,237.50.

78.    On 8 August the Appellant paid Kingswood from their Lloyds account the balance of £284,867.50 owed to them in respect of the three deals.

79.    Ms Denise Leach gave evidence that she had been employed as the manager of the Appellant between July 2005 and March 2007. She had previously worked for Mr Kemal at some of his previous businesses. In her witness statement she confirmed that the Appellant’s main business had been the wholesaling of mobile phone handsets to customers in other parts of the European Community. She stated that the majority of these were purchased from Kingswood.

80.    She gave evidence that she and Mr Kemal had visited the premises of Kingswood on a number of occasions and discussed procedures with Ian Tuppen. Mrs Leach stated that she was impressed with the measures that Kingswood took with regard to checking their suppliers and customers including the fact that they had a due diligence manual prepared by their solicitors, Halliwells. Halliwells had visited the Appellant and conducted due diligence on behalf of Kingswood and Mrs Leach had provided information to them concerning the Appellant’s due diligence.

81.    The Appellant continued to do business with Kingswood until July 2006 when the Appellant was informed by HMRC that they were undertaking extended verification into the transactions undertaken by the Appellant in June and July 2006. Mrs Leach stated that this had a devastating effect on the Appellant’s cash flow as they were owed in excess of £800,000 in VAT which had been paid to Kingswood.

82.    When Mrs Leach joined the Appellant there was an established pattern of trading. She was required to contact potential customers and then source their requirements. Kingswood was able to fulfil all the Appellant’s needs and they had a good relationship with them. Kingswood was able to source the mobile phones required at short notice at competitive prices.

83.    The Appellant had to pay the full purchase price to Kingswood including VAT and so were reliant on receiving the VAT repayments from HMRC to supplement the funds held in the Appellant and so enable them to trade.

84.    Mrs Leach stated that she would check the customers’ requirements with Kingswood and ask if they could source the particular models requested. Sometimes this was not possible and she would return to the customers to inform them what was available.

85.    Mrs Leach gave evidence that this was always done by telephone prior to any paper work being received or prepared. The Appellant did not actively seek other suppliers as they did not wish to deal with companies not known to them. The Appellant was aware that there were some suppliers that could be involved in VAT fraud and believed that by restricting their supplier to Kingswood this would minimise the risk of fraud.

86.    Kingswood would also contact the Appellant and inform them of handsets which were available and then the Appellant would contact potential customers and offer the handsets to them for purchase.

87.    Mrs Leach gave evidence that at the time she believed that all their customers were bona fide.

88.    She stated that the Appellant would acquire the handsets subject to a detailed inspection and this was conducted by a specialist company such as A1 Inspections Limited who checked the condition of the handsets prior to purchase and onward despatch. The instructions given to the inspection company were that all boxes should be inspected externally and a report made on the condition of packing. Boxes were then to be scanned electronically to record the IMEI numbers of the handsets. On receipt of the numbers Mrs Leach would check a sample of five numbers per batch of handsets by reference to the International Numbering Plans website. On checking the numbers Mrs Leach always found that they corresponded to the exact make and model of handset. The IMEI numbers were made available to HMRC for input to their database to check whether any of them had been involved in fraudulent trading.

89.    Provided that the handsets passed the agent’s inspection confirmation was given to the potential purchaser that the handsets were available. On receipt and inspection of the goods by the customer the Appellant was paid by bank transfer. The terms of trading with their customers were that the Appellant retained title to the goods until full payment had been made by the customer. These terms were shown on the Appellant’s invoice which was faxed to the customer once the Appellant had confirmation that the goods were available from their supplier.

90.    The goods were always stored in a secure warehouse and the Appellant purchased the goods whilst they were in the warehouse after receiving confirmation from the inspection agents that the goods were as described. Once the purchase order was received from the customer the warehouse keeper would be instructed to load them into a secure vehicle for transport either to the customer’s premises or to another warehouse as designated by the customer.

91.    Although the goods were insured whilst in the secure warehouse, Mrs Leach made arrangements through the freight forwarder for the goods to be insured whilst in transit as the Appellant’s contracts stated that title did not pass until full payment had been made by the customer. Mrs Leach stated that although HMRC had queried the validity of the insurance she had received confirmation from Ontime that the insurance paid for was valid. Additionally she had received a copy of the policy from the relevant Dutch insurance company.

92.     Mrs Leach stated that the Appellant had always taken great care in selecting those with whom they traded and at no stage prior to receiving the HMRC letter dated 27 September 2006 were they aware that there were any tax losses in the transaction chain. HMRC had visited them regularly and their records were always freely available to them.

93.    In January 2006 it was decided that Mrs Leach would start personally visiting the customers. A check list was devised by her which was sent by fax to the customers for completion prior to her visit. She tried to visit the customers as soon as possible after agreeing the deals and in the case of Allimpex was back home before the goods had been released. She had never had any reason to believe that Kingswood or any of the customers had been involved in VAT fraud and would have refused to deal with them if she had.

94.    In her examination in chief Mrs Leach confirmed the information in her witness statement and provided further details as to the checks she had made on Kingswood and the Appellant’s potential customers. She confirmed that it was her standard practice to ask Redhill for VAT verification on a regular basis. The Tribunal was provided with a list prepared by HMRC of the traders for whom the Appellant had sought verification and it was seen that Kingswood had been checked out on a regular basis.

95.    Mrs Leach was asked why some of the checks were carried out after the invoice date and she replied that carrying out the checks was a continuous process. Not everything could be done in one go and she was the only one doing things. Many phone calls went back and forward and after doing the initial checks to ensure that the parties were bona fide traders she couldn’t always do the official paperwork straight away.

96.    In cross examination Mrs Leach confirmed that all their mobile phone purchases were from Kingswood. The Appellant had limited funds and were a tiny company compared to others trading in mobile phones. Kingswood was able to satisfy the amount that Mr Kemal and her father were prepared to trade and they had a good relationship with Ian Tuppen and trusted him.

97.    She confirmed that no price negotiations took place with Kingswood. Kingswood would tell her their price and if she could find a buyer offering two to four percent above it they would be satisfied.

98.    She was asked whether she did not think it odd that Kingswood did not export the phones themselves. She said that it was not in her remit to question the way Kingswood traded and for all she knew they might not have been able to finance the export.

99.    Mrs Leach was cross-examined by Counsel for HMRC concerning her knowledge of the grey market. She believed that they were dealing in this market and were selling models that were not yet easily available hence the large demand for them and she agreed that this inevitably pushed up the price. However when questioned further she agreed that in her witness statement she had stated that the Appellant did not purchase directly from the manufacturers because grey market handsets were more competitively priced.

100.   She confirmed that 2 Trade had contacted them shortly before they were ready to do a trade so that when they were advised that stocks were available from Kingswood she could contact them and give them a price. The price she originally quoted was not accepted but on reducing it so that the Appellant made a two per cent profit 2 Trade accepted it. There was no written evidence of the negotiation because it had all been done on the telephone. She didn’t spend time looking for other potential buyers because the price offered by 2 Trade was within her remit. If they had a buyer willing to purchase the goods that they had available at a price within their range then they were happy to accept.

101.   Mrs Leach confirmed that in the case of the July deals again it was the potential buyer, Allimpex, who contacted them. Allimpex offered a better price than 2 Trade so she felt that there was no need to contact anyone else. Mr Bryant – Heron pointed out that the Appellant’s trading did not appear realistic. They had one supplier and in each case a willing buyer contacted them and offered an acceptable price.

102.   Mrs Leach confirmed that Kingswood had effectively given them credit by releasing the goods to them for shipping before they had paid for them. They regarded the goods as theirs by the time they shipped them and accordingly insured them. Mrs Leach did not feel that it was her position to question Ian Tuppen too closely as to his apparent generosity in extending informal free credit.

103.   Mrs Leach confirmed that the goods were often shipped before the actual paper work was received because everything was agreed on the telephone, carried out and then the paper work caught up.

104.   On re-examination Mrs Leach again repeated that for her a deal was not completed until the Appellant had received payment and only then would she release the goods. By then all the enquiries and documents for each deal would have been received with the exception perhaps of the Redhill enquiries. Sometimes when there was a hold up with Redhill she would use the Europa website to confirm VAT numbers.

105.   In his cross-examination Mr Kemal gave evidence concerning the opening of the Appellant’s FCIB bank account. He said that in the beginning they were happy with the English banks but then “a guy came to me; I don’t know his name and asked me if I wanted to open an account in this company”. At first he refused but the man phoned again two weeks later and again offered to open a bank account for him telling him that they would transfer money immediately. After discussing it with Mrs Leach and Mr Harris he decided to open the account with FCIB. Although they kept their bank account with Lloyds the problem with Lloyds was that they couldn’t transfer money immediately. The money had to go via their head office and because of the time this could take Mr Kemal thought that that could mean that they lost the deal.

106.  On further cross- examination he stated that the FCIB representative had told him that they would offer better facilities than Lloyds. They would transfer money, pay customers and do it on the spot.

Other traders in the chains

107.  Mr Mendes gave evidence concerning the FCIB bank accounts. He is a Higher Officer attached to the Validation Team at Redhill and stated that since 3 November 2008 he had taken on the further responsibility of viewing and analysing data from the First Curacao International Bank in order to extract relevant data in connection with HMRC’s civil investigation into MTIC fraud.

108.  All the traders in the chain banked with the FCIB. Officer Terence Mendes analysed the FCIB accounts in order to trace the payment of funds for the goods in which the Appellant dealt. The first three of the June transactions showed that the goods were sold to RSSA by a Portuguese company called Worldcall LDA. This company purchased back the same phones after they were exported by the Appellant to 2 Trade in Belgium and sold on to other traders.

109.  For the fourth transaction, the company in the position of Worldcall LDA, selling the goods to RSSA was called Snowrix LDA. The goods were sold on and exported by the Appellant to 2 Trade BVBA, and ultimately purchased by Worldcall LDA. Mr Mendes stated that there was good evidence from the FCIB records that Worldcall and Snowrix were controlled by the same individual.

110.  Officer Mendes had concluded that the VAT which RSSA should have paid to HMRC was retained by the Portuguese companies, Worldcall and Snowrix.

111.  For the first of the July transactions Officer Mendes stated that there was circularity of transactions starting and finishing with a Polish company called Thierra Investments SP ZOO. For the remaining two July transactions, the circular chain of transactions started and finished with Snowrix LDA. He stated that the same company (or pair of Portuguese companies) as for the June deals therefore completed the circle notwithstanding that the importer/defaulter in July was V2 whereas in June it was RSSA and the Appellant’s foreign customer in July was Allimpex whereas in June it was 2 Trade BVBA.

112.  Mr Mendes stated that at the request of Erica Nketiah of HMRC who was the case officer in the Appellant’s appeal he attended Custom House in order to obtain access to the electronic records relevant to the appeal. Officer Nketiah had provided him with the FCIB account number of the Appellant and a list of the parties involved.

113.  He commenced his analysis with the account of the Appellant tracing the receipt of the money for the transaction identified from the EU customer of the Appellant to its suppliers in the UK.

114.  The traders who were involved in the relevant transactions were the Appellant, Kingswood, MNR Global Ltd, Mobile Heaven (Europe ) Ltd (“Mobile Heaven”) Highbeam, RSSA, Danum Trading Ltd, 2 Trade, Global Mobile Leasing GMBH (“Global Mobile”), Thierra Investments SP Zoo (“Thierra Investments”), Snowrix LDA, Kempton Park LDA, Racheltel SLU (“Racheltel”), Allimpex, V2, Techbase, Tomsberg Corporation SL (“Tomsberg”) Talkount SL (“Talkount”) and Tribal Solutions SARL(“Tribal Solutions”).

115.  Starting with the Appellant’s first sale on 22 June 2006 the Appellant raised a sales invoice under reference 170 which showed the dispatch of 3,000 Nokia 7710’s with a sales value of £759,000 to 2 Trade. Payment for the deal took place on 29 June 2006 and the Appellant received £759,000 from 2 Trade.

116.  2 Trade sold the goods on to a German company Global Mobile and received a payment of £762,300.

117.  Global Mobile sold the goods to a Polish company Thierra Investments and received a payment of £763,800.

118.  Thierra Investments sold the goods to Worldcall LDA which was based in Portugal and received a payment of £764,550.

119.  Tracing back from the supply to the Appellant, the Appellant was supplied with the goods by Kingswood which was paid £759,000 by the Appellant on 29 June 2006. Kingswood’s sales invoice showed £874,200.

120.  Kingswood was supplied with the goods by Mobile Heaven, a UK VAT registered company. Mobile Heaven was paid £867,150.

121.  Mobile Heaven was apparently supplied with the goods by Highbeam, another UK VAT registered company which was paid £863,625.

122.  Highbeam was apparently supplied with the goods by RSSA which was paid £861,862.50.

123.  RSSA was supplied with the goods by Worldcall which was paid £860,000. Mr Mendes stated that the amounts referred to above were all funds received inclusive of VAT and it appeared that the VAT which was passed through the transaction claim was paid to Worldcall by RSSA. Mr Mendes produced a flowchart, spreadsheet and extracts of the accounts to confirm these payments and receipts.

124.  Mr Mendes states that the following two relevant deals by the Appellant, 171 and 172B followed the same circular pattern.

125.  On 28 June 2006 the Appellant raised a sales invoice under reference 172A showing the dispatch of 1,500 Nokia N90’s with a sales value of £390,000 to 2 Trade. Payment for the transaction took place on 29 June 2006.

126.  2 Trade sold the goods on to Global Mobile and received a payment of £391,650.

127.  Global Mobile sold the goods on to Thierra Investments and received a payment of £392,400.

128.  Thierra Investments sold the goods to Worldcall and received a payment of £392,775.

129.  Tracing back from the supply to the Appellant by Kingswood, Kingswood were paid £390,000 by the Appellant from their FCIB account on 29 June 2006. The sales invoice from Kingswood was for an amount of £449,437.50.

130.  Kingswood was apparently supplied with the goods by Danum a UK VAT registered company. Danum was paid £142,387.50. Danum input funds of a further £280,000 on 19 July 2006 to cover the payment to their supplier. Mr Mendes could find no evidence that an additional £300,000 due from Kingswood was paid to Danum.

131.  Danum was apparently supplied with the goods by Highbeam and on 19 July 2006 Highbeam was paid £441,506.25.

132.  Highbeam was supplied by RSSA which was paid £440,625 on 19 July 2006. RSSA was apparently supplied with the goods by Snowrix LDA, a Portuguese company which was paid £439,743.75 on 19 July 2006.

133.  Again the amounts relating to this transaction, reference 172A , were all funds received inclusive of VAT and it appeared that the VAT that was passed through the transaction chain in the UK was paid to the overseas company Snowrix by RSSA. Mr Mendes produced a flowchart, spreadsheet and extracts from the bank accounts confirming the movement of goods and funds.

134.  He stated that he had concluded that Snowrix and Worldcall were controlled by the same individual and that the goods had moved in a circle.

135.  The next transaction by the Appellant started on 27 July 2006 when the Appellant raised a sales invoice under reference 173 showing the dispatch of 2,400 Nokia N91’s with a sales value of £858,600 to the German company Allimpex. Payment for the transaction took place on 3 August 2006.

136.  Allimpex sold the goods on to Racheltel a Spanish company and received £859,200.

137.  Racheltel sold the goods to Kempton Park, a Portuguese company and received a payment of £859,560.

138.  Kempton Park sold the goods to Thierra Investments and received a payment of £860,160.

139.  Tracing back from the supply to the Appellant by Kingswood, Kingswood was paid £858,600 on 3 August 2006 by the Appellant from its FCIB account. The sales invoice from Kingswood was for £970,080.

140.  On 3 August 2006 Kingswood was apparently supplied with the goods in the UK by MNR Global Ltd, a UK VAT registered company which was paid £950,340.

141.  MNR Global Ltd was apparently supplied with the goods in the UK by V2 which was paid £949,635.

142.  V2 was apparently supplied with the goods by a Polish company Techbase which was paid £807,000.

143.  Techbase was apparently supplied with the goods by a Spanish company Tomsberg which was paid £806,640. Tomsberg was apparently supplied with the goods by a French company Tribal Solutions which was paid £806,280. Tribal Solutions was apparently supplied with the goods by Thierra Investments which was paid £805,600.

144.  All the amounts relating to the above transactions were received inclusive of VAT and it appeared to Mr Mendes that the VAT was retained by V2. Mr Mendes produced a flowchart and spreadsheet and extracts from the bank accounts in relation to the transactions which confirmed that the funds had moved in a circle from Thierra Investments and then eventually ending up at Thierra Investments again.

145.  On 27 July 2006 the Appellant raised a sales invoice under reference 174 showing the dispatch of 1,400 Nokia N72’s to a German company Allimpex. Allimpex paid the Appellant £509,600 on 8 August 2006.

146.  Allimpex sold the goods on to Racheltel and received a payment of £509,950. Racheltel sold the goods on to Kempton Park and received a payment of £510,160. Kempton Park sold the goods to Tribal Solutions and received £510,510. Tribal Solutions sold the goods on to Snowrix.

147.  Tracing back from the supply to the Appellant from Kingswood, Kingswood was paid £509,600 by the Appellant on 8 August 2006. The sales invoice from Kingswood showed £575,750.

148.  Kingswood was apparently supplied with the goods in the UK by MNR Global which was paid £562,590. MNR Global was apparently supplied with the goods in the UK by V2 which was paid £562,178.75. V2 was apparently supplied with the goods by Techbase which was paid £477,750.

149.  Techbase was apparently supplied with the goods by Tomsberg which was paid £477,190. Tomsberg was apparently supplied by Talkount which was paid £476,980. Talkount was apparently supplied with the goods by Snowrix.

150.  The funds transferred in the above transactions which were made in the UK were inclusive of VAT and Mr Mendes stated that it appeared that the VAT had been retained by V2.

151.  Mr Mendes produced a flowchart, spreadsheets and extracts from bank accounts in relation to the payments and receipts flowing through the FCIB accounts. He stated that it appeared that the goods in the transaction had moved in a circle starting and ending with Snowrix.

152.  Mr Mendes stated that the other July transaction carried out by the Appellant with reference 175 followed the sane pattern as 174. It related to the supply of 2,300 Nokia N80’s by the Appellant to Allimpex. The Appellant was supplied with the goods by Kingswood. Mr Mendes traced a circularity of funds and it appeared that V2 had retained the VAT.

153.  Mr Mendes confirmed that he had analysed the FCIB bank account of the Appellant and it appeared that only payments received from their EC customers were paid to their supplier Kingswood through this account.

154. Ms Nketiah gave evidence that between May 2006 and March 2008 she worked in the Missing Trader Intra-Community (“MTIC”) fraud team at HMRC’s Wembley office.

155. She stated that the Appellant’s returns for the period 06/06 and 07/06 had been received at the HMRC’s VAT Central unit on 6 July 2006 and 25 August 2006. The return for 06/06 showed a net repayment claim of £450,187.50 and the return for 07/06 showed a net repayment claim of £371,616.35.

156.  These returns were selected for extended verification and the Appellant was notified of this in letters dated 2 August 2006 and 12 September 2006. On 3 August 2006 she took over the extended verification of the 06/06 return and was subsequently allocated the 07/06 return as well.

157. Ms Nketiah confirmed that as a result of the information revealed by the extended verification exercise she had concluded that the Appellant’s deals in the 06/06 and 07/06 periods were connected with MTIC fraud.

158. The completed deal sheets showed that the Appellant’s supply chains for the 06/06 and 07/06 periods led to traders who had imported the goods into the UK, sold them onwards to the next UK member of each supply chain and then defaulted on their output tax liabilities. Ms Nketiah concluded that the Appellant’ s supply chains had been artificially orchestrated for the purpose of committing MTIC fraud rather than arising naturally through genuine commercial bargains struck by businesses operating at arm’s length from each other.

159.  None of the UK members of the supply chains took physical possession of the goods. Instead the goods remained at the freight forwarders’ premises whilst being sold on.

160.  All the known deals throughout each supply chain were conducted either on the same day or occasionally on the next day. Ms Nketiah found it hard to see how all the five or more parties could have had time to contact each other, agree terms, arrange for the release of the goods, make payments and negotiate ancillary contracts such as inspection, insurance and transportation. She would expect that in legitimate business transactions involving such large sums of money the parties would be cautious especially when dealing with new customers. She felt that in legitimate deals the parties would take time to make sure that all the proper safeguards and ancillary contracts were in place before the deal was concluded.

161.  Nearly all the participants in the supply chains had accounts at FCIB. These accounts suited the perpetrators of MTIC fraud because they allowed instant money transfers with no questions asked by the bank and they were beyond the reach of the UK’s anti-money laundering regulations.

162.  The Appellant provided Ms Nketiah with no evidence of having carried out any checks on the freight forwarders they used. She stated that when questioned, Mrs Leach informed her that the Appellant allowed its supplier to determine which freight forwarder should be used and relied on the supplier to make the necessary checks.

163.  On the basis of her investigation Ms Nketiah recommended that the input tax claimed by the Appellant be denied on the grounds that it formed part of an overall scheme to defraud HMRC and the Appellant knew or ought to have known this.

164.  Each handset has a unique International Mobile Equipment Identity (“IMEI”) number and as part of the measures to combat fraud HMRC has compiled a database (“Nemesis”) which records the IMEI numbers which traders scan and submit to HMRC. Ms Nketiah confirmed that the Appellant had provided IMEI numbers for a proportion of the mobile numbers it had traded. The numbers were scanned by the freight forwarder and a list was provided to HMRC for each month’s deals.

165. In respect of the Appellant’s trading a large number of IMEI numbers scanned and supplied by A1 Inspections on behalf of the Appellant appeared to have been previously scanned in previous trading which might indicate that these mobile phones had been exported before.

166. The Appellant had requested a 10 per cent scan of the phones. In her witness statement Ms Nketiah stated that the lists for both months had been run through the Nemesis data base and a number of hits had been recorded. “The vast majority of the hits related to handsets that had been previously scanned by HMRC which indicates that the supply chains in question were consistent with the carousel version of VAT fraud.”

167. On cross-examination she confirmed that 14 out of 2,400 telephones came out as having been previously scanned.

168. Ms Nketiah had also questioned the fact that despite the Appellant’s evidence to the contrary, there appeared to be no insurance in place. The insurance documents produced by the Appellant did not include the Appellant’s details but the possibility remained that there may have been a block insurance policy issued to the freight forwarder. The Appellant produced correspondence confirming that insurance was in place.

169.  Mr Stone, a senior HMRC officer who has charge of the technical overview of MTIC fraud for HMRC gave evidence to explain the nature and features of the fraud and the steps taken by HMRC to combat it.

170.  He confirmed that it was HMRC’s case that certainly in terms of money movement circularity of trading had been identified in this matter. Money started and ended with the same trader. It was also a feature of MTIC fraud that whilst trade was carried out within the UK, goods often remained with the same trader whilst a number of transactions took place and consecutive release notes were issued.

171.  He confirmed that the freight forwarders A1 Freight (UK) Limited who had provided the insurance for the July deals and the company MNR Global had common directors.

172.  He stated that from 2005 they had noticed as a department that a large number of traders were opening accounts with FCIB and that their transactions were being conducted within that bank. Subsequently there were a number of criminal investigations which led to freezing orders of accounts at the bank and then in late 2005 the Dutch opened an investigation into the bank itself. In late August/September 2006 all the accounts were frozen.

173.  He explained the Redhill validation system whereby traders will send in as much information as possible regarding its potential customer or supplier. The officers at Redhill will then match the information against the information held by HMRC and if there is any variation the trader is told that the details can not be validated. He explained that the Europa site was a database of all the VAT registration details across the EU held by the European Commission. It did not however look at all the available information held by HMRC.

174.  Mr Stone confirmed that the Appellant had received notice 726 which advised traders of the risk from MITC fraud; the introduction of the measures to combat MITC fraud; and also advises them to undertake reasonable commercial checks on their counterparties and to look at the integrity of the transaction chain as a whole before deciding whether or not to participate in the transaction.

175.  Referring to Nemesis he explained that it had been developed from 1 February 2006. It was a database, purpose built to allow HMRC officers to upload scanned IMEI numbers and see whether they had been previously examined. The officers would make spot checks at the freight forwarders and whilst there, scan every IMEI number they could in the time allocated to them. The numbers were then downloaded into a computer and uploaded into the Nemesis data base. To protect the integrity of the system only information scanned by HMRC officers was uploaded onto the system.

176.  Mr Stone gave evidence in respect of his second witness statement which concerned the Appellant’s dealings with Kingswood and Ian Tuppen. He stated that in 2003 as a result of an investigation HMRC were able to prove a circularity of the transaction chains trading in international calling cards. The input tax claimed by Ian Tuppen was as a result denied on the basis that it was a non-economic activity because it was fraudulent and therefore did not amount to a taxable supply and fell outside the VAT regime. However as a result of the decision in the Bond House case the input tax was eventually repaid.

177.  Mr Stone went on to discuss the results of a Google search on Ian Tuppen which he produced to the hearing. Amongst other matters there was a report that Ian Tuppen and a second person would be forced to compensate Microsoft for dealing in counterfeit material. On cross-examination he stated that Mr Tuppen in various entities, shapes and forms was involved in the counterfeit products. He stated that Mr Tuppen had had a number of entities which had passed into disuse or been resurrected at various times.

178.  Mr Bryant-Heron summarised and read central parts of the statement of Vivien Parsons, an HMRC officer on VAT assurance duties. Her statement was in respect of RSSA and confirmed that both addresses provided by RSSA had been visited without success. One address was a doorway between two shops and the other was a hairdresser the occupants of which had no knowledge of RSSA.

179.  She wrote to Mr Sodawala at the declared principal place of business and informed him that the VAT registration had been cancelled. Although she had a phone call from his accountant, Mr Sodawala did not ever contact her. Having regard to the net turnover of the company in the six week period from 26 April 2006 to 4 July being £165,704,862 with a VAT liability of £28,998,350.90 she concluded that this sudden and remarkable increase in turnover would not be possible in a genuine market. The history of the Sole Trader and of RSSA, the lack of direct tangible assets or resources and the elusive nature of Mr Sodawala reinforced her view that the company was a fraudulent trader.

180.  To date the total value of unpaid VAT on identified transactions by the company amounted to £28,998,350.90. Ms Parsons’ statement confirmed that the company had defaulted on its VAT liabilities in relation to the supply chains of the Appellant at issue in the appeal.

HMRC’s Submissions on the Law

181.  Mr Rowell on behalf of HMRC made  submissions following the Court of Appeal’s judgment in Mobilx (in Administration) v. HMRC, HMRC v. Blue Sphere Global Limited, Calltel Telecom Ltd and Anr v. HMRC [2010] EWCA Civ 517 (hereinafter “Mobilx”), which was handed down on 12 May 2010. Mr Rowell submitted that the three conjoined appeals were MTIC fraud cases with many factual similarities to the instant case. He submitted that the Court of Appeal’s judgment provides helpful clarification of the approach to be adopted in such cases.

182. He stated that the Mobilx appeal was concerned with the domestic application of the test set out in the leading European Court of Justice Case, Axel Kittel v. Belgium; Belgium v. Recolta Recycling [2006] ECR 1-6161. Kittel was concerned with the application of the Sixth Council Directive (77/388/EEC of 17/5/77) concerning the treatment of VAT in member states and, specifically, the right to deduct VAT payments from VAT liability. The Kittel test stated that “...where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.”

183.  He stated that Moses LJ, giving the judgement of the Court of Appeal in Mobilx, approved the Kittel test and rejected the proposition that it required domestic legislation or further elaboration. Moses LJ stated at paragraph 47 of the judgement

“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 the 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.”

184. The objective criteria, set out in the Sixth directive and in the VAT Act 1994, determine the scope of the right to deduct.

 “... Kittel did represent a development of the law because it enlarged the category of 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.” (paragraph 41 of Mobilx) “By the concluding words of paragraph 59 [of Kittel] 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.” (para 42 of Mobilx.)

185. Mr Rowell submitted that those who evade tax such as a defaulter also clearly do not meet the objective criteria which give rise to the right to deduct. At paragraph 43 of Mobilx  the  parameters of the test for those who do not meet the objective criteria were set out as follows by Moses LJ:

 “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......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.”

186. Mr Rowell confirmed that the Court of Appeal had made clear that the burden of proof lay on the HMRC:

“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.”

187. Mr Rowell submitted that the standard of proof which was not considered by the Court of Appeal in Mobilx was simply the civil standard. The House of Lords’ decision In Re B [2009] 1 AC 11, confirmed that there was no heightened civil standard. Lord Hoffman stated at paragraph 13 of In Re B:

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

188.  Mr Rowell contended that the test for the Tribunal, therefore, was “have HMRC proved that it is more probable than not that the Appellant knew or should have known that it was participating in transactions which were connected with fraudulent evasion of VAT?”

189. He said that HMRC had brought their case on alternative bases: namely, that it is more probable than not that the Appellant either knew or should have known that the challenged transactions were connected with fraud. He submitted that, in considering whether HMRC had proved that the Appellant knew that the challenged transactions were connected with fraud, it was irrelevant to consider the constituent elements of fraud in domestic law. At paragraph 49 of Mobilx Moses LJ stated :

“The denial of the right to deduct in this case stems from the 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.”

190. Mr Rowell stated that it was therefore submitted that it was not relevant or helpful for the Tribunal to have regard to cases regarding the definition of dishonesty in domestic criminal law, such as Ghosh and Dealy, as has been submitted by the Appellant in this case. The trader who knows that his transactions are connected with fraud may, of course, be dishonest, but the Tribunal is not required to make a finding of dishonesty as a matter of fact.

 

 

191. The test set out originally by HMRC remained good law:

(i) Were the transactions in issue connected with the fraudulent evasion of VAT?

 

(ii) If so, did the Appellant know, or should it have known, that the said transactions were connected with such fraud?

 

If these two questions were answered in the affirmative then the Appellant was participating in a transaction connected with fraud and therefore is not entitled to input tax credit.

192. Mr Rowell contended that question (i) required the Tribunal to consider whether there was a fraudulent tax loss, and whether the Appellant’s transactions were connected with that tax loss. The Court of Appeal in paragraph 62 of the Mobilx judgement rejected the submission made by the appellant traders in Mobilx that the expression “connected with” required that there be privity of contract between the appellants and the defaulters.

193. He submitted that the Court of Appeal in Mobilx also gave guidance on the “should have known” test. The test was defined by Moses LJ at paragraph 52 of the judgement not in terms of negligence, but in terms of reference to the objective criteria for the test.

“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.”

194. Mr Rowell submitted that the Mobilx judgement provided further elucidation of the “should have known” test: At paragraph 51 of the judgment it was stated:

“The [ECJ] must have intended the phrase “knew or should have known” which it employs in paras 59 and 61  of Kittel to have the same meaning as the phrase “knowing or having the means of knowing” which it used in Optigen (para 55) (para 51 Mobilx).”

 Further at paragraph 64 of the judgement

 “If it is established that a trader should have known that by his purchase there was no reasonable explanation for the circumstances in which the transaction was undertaken other than that it was connected with fraud then such a trader was directly and knowingly involved in fraudulent evasion of VAT.”

195. Mr Rowell submitted that it was therefore unnecessary, as Moses LJ stated, to further refine the Kittel test in relation to the appellant’s extent of knowledge. The argument before the Court of Appeal as to the extent of knowledge required, that is whether the appellant should have known, either that the transactions were more likely than not to be connected to fraud, or that that the transactions were connected to fraud, was, according to Moses LJ, redundant. He framed the matter in paragraph 59 of the judgement as follows:

“If a trader should have known that the only reasonable explanation for the transaction was that it was connected with fraud and it turns out that the transaction was connected with fraudulent of evasion of VAT then he should have known of that fact.”

196. Mr Rowell said that in assessing the evidence as to whether an appellant “should have known”, in paragraph 82 of the judgement Moses LJ warned against an undue focus on the question of whether a trader had acted with due diligence. Mr Rowell contended that it was important that the Tribunal have regard to the circumstances and context of the challenged transactions.

197.  He said that the Court of Appeal cited with approval the approach of Christopher Clarke J in Red 12 Ltd v. HMRC [2009] EWHC 2563. Mr Rowell submitted that paragraphs 81 to 85 of the Mobilx judgment merited setting out substantially in full as guidance to this Tribunal in approaching the “should have known” issue.

“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 it outwith the scope of the right to deduct it must prove that assertion. No sensible argument was advanced to the contrary.

 

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 Blue Sphere Global 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 participating in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.

 

83. The questions posed in BSG 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 The questions posed in BSG were, (1) Why was BSG, a relatively small company with comparatively little history of dealing in mobile phones, approached with offers to buy and sell very substantial quantities of such phones> (2) How likely in ordinary commercial circumstances would it be for a company in BSG’s position to be requested to supply large quantities of particular types of mobile phone and to be able to find without difficulty a supplier able to provide exactly that type and quantity of phone? (3) Was Infinity already making supplies direct to other EC countries? If so, he could have asked why Infinity was not making supplies direct, rather than selling to UK traders who in turn would sell to such other countries. (4) Why are various people encouraging BSG to become involved in these transactions? What benefit might they be deriving by persuading BSG to do so? Why should they be inviting BSG to join in when they could do so instead and take the profit for themselves? I can do no better than repeat the words of Christopher Clarke J in Red 12 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 phones 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, these suspicions 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 should have done, together with the surrounding circumstances in respect of all of them.”

 

84. Such circumstantial evidence......will often indicate that a trader has chosen to ignore the obvious explanation as to why he was presented with the opportunity to reap a large and predictable reward over a short space of time......

85. In so saying I am doing no more than echoing the warning given in HMRC’s Public Notice 726 in relation to the introduction of joint and several liability. In that Notice traders were warned that the imposition of joint and several liability was aimed at businesses who “know who is carrying out the frauds, or choose to turn a blind eye. (3.3) They were warned to take heed of any indications that VAT may go unpaid (4.9). 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.”

 

HMRC’s Submissions on the Facts

198. Mr Rowell contended that firstly the Appellant’s transactions that are in issue in the appeal were connected with the fraudulent evasion of VAT by the defaulting traders RSSA or V2 and secondly that the Appellant knew or should have known of that connection. 

199. He said that the Appellant accepted in submissions that the evidence demonstrated a tax loss. Whilst there had been no formal concession that RSSA acted fraudulently the proposition had not been contested, and no evidence had been adduced by the Appellant to suggest that RSSA did not act fraudulently. It is submitted that RSSA was a classic “missing trader.” RSSA incurred a VAT output tax liability of £28,998, 350.90 in the period from 26 April 2006 to 4 July 2006. This liability was not paid. Officers who went to RSSA’s principal place of business and to another address which had been supplied to HMRC, found that RSSA did not trade from those addresses. RSSA has made no attempt to pay or to challenge the assessments relating to the said VAT liability.

200. The defaulter in the July transactions was V2. The tax loss is established. It was clear that V2 did not pay the VAT output tax they were liable to pay in the relevant period and that they sold on the mobile phones which were ultimately sold to the Appellanr in the three July deals which are the subject of the appeal. The Appellant contests the proposition that the evidence discloses that V2 acted fraudulently. The question for the Tribunal is whether at the time of the transactions which gave rise to the VAT liability, V2 had a fraudulent intention not to pay the liability.

201. Mr Rowell submitted that the relevant evidence was that HMRC issued a regulation 25 notice for early payment of V2’s VAT liability. V2 did not comply with this notice. V2 declared a VAT liability on its return. A number of deals in the relevant period had, apparently, not in fact taken place, although invoices had been exchanged, with the result that VAT liability had been incurred. V2 sought to avoid their full liability by issuing credit notes against the failed deals with no notification from those they were trading with that they agreed to this course of action. They were not, at that stage, entitled to bad debt relief. The assigned Officer, Gordon Smith, refused to allow V2 to rely on the credit notes.

202. Mr Rowell submitted that when Mr Smith visited V2 on 1/9/06, Nadeem Ahmed, the V2 director, informed Mr Smith that £1,325,625.61 was frozen in V2’s FCIB bank account. It is suggested by the Appellant that this money was intended for payment of V2’s VAT liability and this evidences V2’s intention to pay its VAT but Mr Rowell contended that there was no reliable evidence to support that proposition. The fact that V2 had money in a bank account (particularly an FCIB bank account) is not evidence of an intention to pay VAT. The amount did not, in any event, equal V2’s true VAT liability once the credit notes were properly accounted for. This VAT liability was in excess of £2 million.

203. The submission of the Appellant that V2 “co-operated” with HMRC carried no weight. V2’s career as a buffer trader in MTIC chains depended on co-operation, or at least the appearance of co-operation, with HMRC. Similarly, the fact of submission of a VAT return is not, in the circumstances of this case, evidence of V2’s intention to pay its VAT.

204. He submitted that the context of the non-payment of VAT by V2 in this case was that since February 2006 V2 had traded on a massive scale in mobile phones as a first line buffer in MTIC chains with consecutive defaulting traders. The evidence of John Fletcher was that V2 apparently traded in phones at a wholly unrealistic level of market penetration. This was so even allowing for an absence of data in relation to business to business sales.

205.  The Appellant’s purchases which originated from V2’s imports represented on their own, 17.9% of the market in Nokia N91 handsets, 27% of the market in Nokia N72 handsets and 4.98% of the market in Nokia N80 handsets. It was wholly implausible that a small trader like the Appellant could achieve market share as high as 27% of the market.

206. Given V2’s track record in MTIC, it must have known the role it was assuming once it became the importer of mobile phones which was its position at the time of the transactions resulting in the tax loss. The proper inference to draw was that V2 did not intend to pay its VAT liability.

207. The prevalence of MTIC mobile phone fraud is well-documented. The fraud was described by Lord Hope in Total Network SL v. HMRC [2008] UKHL 19 at paragraph 6:

“this type of fraud is not confined to the United Kingdom. It is common in other countries within the EU. It has been a sophisticated attack on the VAT system. It was estimated to have cost in excess of £1bn in the year 2004/2005 to the United Kingdom by way of lost revenue. The Commissioners refer in their written case to estimates that show that this figure was exceeded substantially in the succeeding financial years. There is no doubt that this is a pernicious stratagem, and that member states are justified in making use of every means at their disposal within the scope of the Sixth Directive to eradicate it.”

208. He reminded the Tribunal that Roderick Stone had given evidence that MTIC fraud was at its height in the first half of 2006. The vast majority of actual and purported exports of mobile telephones at that time were connected with MTIC fraud rather than with any genuine market. Since HMRC had introduced the reverse charge mechanism on 1 June 2007, which effectively prevented mobile phones and computer chips from being used to perpetrate MTIC fraud, only 179 of the some 179,000 traders registered for VAT under the trade classifications for those goods had chosen to register for the charge.

209. Mr Rowell submitted that Roderick Stone had given evidence of the essential characteristics of MTIC fraud. There were long supply chains; artificial and commercially inexplicable mark-ups; back to back trading throughout each chain in a very short space of time; and the use of FCIB accounts by all the members of the chains who made and received payments. All of these characteristics were present in the instant case as were all of the factors described by Christopher Clarke J in Red 12 and cited with approval by the Court of Appeal in the Mobilx judgement.

210. John Fletcher had given evidence on the characteristics of a true grey market, arising from the pursuit of profit through transactions at arm’s length. There were short chains, leading to an end user and there were four classes of grey market trading: arbitrage, box-breaking, forecast failure and dumping. Mr Rowell contended that none of these characteristics applied to the Appellant’s trading in the instant case. Moreover, the Appellant traded high specification phones which Mr Fletcher would not have expected to be traded on the grey market and most of the deals concerned Nokia phones which thanks to Nokia’s Europe-wide uniform pricing policy cannot be subject to profitable arbitrage trading. There was thus no commercial justification for the chains in which the Appellant participated.

211. Mr Rowell said that Mr Mendes had given evidence that the chains were circular with the money always moving through accounts at the FCIB and similar sets of account-holders appearing in each of the chains. This was not possible in an open market. In the June 2006 deals, RSSA’s EC supplier, Worldcall or Snowrix, received the full amount including the VAT, leaving RSSA without the funds to settle its VAT debt and that was how the VAT was taken out of the system.

212. The majority of the chains involved payments through Snowrix and/or Worldcall. Mr Mendes showed through a comparison of the relevant commercial documents held by the FCIB that the same people were behind these two Portuguese companies. The chain for invoice number 172A began at Worldcall and ended at Snowrix. As a result of the common control of those two accounts, HMRC submitted that this chain could be regarded as circular like all the rest.

213. The implication of circularity is that this is directed trade. The goods must go to the right destination or those who control the flow of money to repeatedly buy mobile phones cannot control the process. The probative value of such evidence has been described in the following terms by the Tribunal in Regent Commodities Ltd v HMRC [2010] UKFTT 68 (TC) at para.247:

“In our judgment, it would be difficult to find more compelling evidence of [the Director of Regent’s] knowledge of involvement in pre-arranged and contrived transactions than that of [the Officer that found circularity in Regent’s payments].”

 

214. Mr Rowell contended that this was supported by the evidence of trading in this case from Denise Leach on behalf of the Appellant. Stock availability was supply-driven, there was no negotiation as to price, there was no market research, there was repeated dealing with the same supplier. This is significant evidence, taken together with the evidence of circularity, to prove that the Appellant knew that its transactions were connected with fraud. Failing which, it is the clearest evidence that the Appellant, or specifically Joseph Kemal and Denise Leach, should have known that the transactions were connected with fraud.

215. The Appellant was surrounded in its trading by those who had engaged in fraud. There was a remarkable consistency in the identity of the traders in the chains both in the UK and abroad. Such a pattern suggested a contrived trading chain, rather than genuine traders in a competitive market seeking the best price for their goods. Where there was some change in the UK chains, such as the change in the identity of the second line buffers in the June deals, the parties on either side of these traders in the chain remained constant.

216. Mr Rowell submitted that evidence relating to Ian Tuppen who controlled Kingswood, showed that he was previously engaged in circular trading involving telephone calling cards. Kingswood sold these cards to a foreign company called France Affaires. When the Appellant dealt in telephone cards they sold to France Affaires. This was no coincidence. Mr Tuppen was arrested on suspicion of counterfeiting and was found to be in contempt of court in litigation with Microsoft, receiving a suspended prison sentence. These and other details of Mr Tuppen’s dubious business history are in the public domain by way of reported judgments and press reports. The Appellant could easily have discovered such materials if it had troubled to conduct a brief search on the internet.

217. The directors of 2 Trade in Belgium were arrested by the Belgian authorities for fraud. Allimpex, based in Germany but run by UK nationals, was suspected of fraud by the German authorities. ML & Co BV, the freight forwarders who received the goods, were suspected of fraud by the Dutch authorities. The Appellant did not conduct any proper checks on any of these parties. In respect of the June 2006 deals, the Appellant despatched the goods before receiving the results of such minimal checks as it did conduct.

218. Mr Kemal, a man with great business experience, agreed in effect with Mr Tuppen that Kingswood was to be a monopoly supplier. Mr Kemal knew that the area of business he had chosen to enter was affected by fraud and that joint and several liability potentially applied to the Appellant for fraudulent transactions by others further down the chain of transactions.

219. Mr Kemal gave no good reason for going into this business. Mr Kemal’s evidence as to the circumstances in which he first met Mr Tuppen differed in evidence from the account given in his statement. He also contradicted himself as to whether he first met Mr Tuppen in 2003 or after the fourth or fifth deal of his previous run of trading.  Mr Kemal’s assertion that he did not know that the vetoed trader Ibiplace traded through Kingswood to the Appellant is not credible. Mr Kemal took no measures to look into Kingswood at all, contrary to the guidance he had read in HMRC’s Public Notice 726.  Throughout his evidence he insisted that he trusted Mr Tuppen, but he also admitted that he never made any enquiries to check his bona fides.

220. Mr Kemal equivocated when asked what checks and processes he put in place; but when pressed repeatedly he said that he left the business of conducting commercial checks and arranging trading to Denise Leach. Mrs Leach herself, however, did not regard it as within her remit to ask Mr Tuppen about curious features of Kingswood’s trading pattern. In essence, Mr Kemal claimed to have left Mrs Leach to run the business on a day-to-day basis. She was a person with no sales experience contrary to the impression he gave in his evidence and he gave her no instructions or guidance about due diligence procedures. He failed to do so notwithstanding his evidence that he was concerned about rumours in the business of fraud. In reality, it was Mr Kemal’s decision to use Mr Tuppen’s company, Kingswood, as the supplier in all mobile phone deals; Mrs Leach’s role was merely to carry out that decision.

221. Mr Rowell submitted that Mr Kemal’s reason for taking a FCIB account was not credible. He said that the FCIB permitted quick transactions. Quick transactions occurred in other banks and a number of the payments took place days after the dates of the transactions on the invoices. All the parties to the deals in the supply chains had accounts at FCIB in the Netherlands Antilles. This was not a coincidence. This arrangement permitted the rapid transfer of payments without risk of report of suspicious transactions by the bank to the UK authorities. The Dutch authorities froze all the accounts at FCIB in 2006 because of suspicion of criminal activity and the FCIB has in effect ceased to operate as a bank.

222. Mr Kemal claimed that he planned to trade European specification mobile phones in this country by persuading people to plug them in to shaving sockets. Apart from being a farcical explanation, Mr Rowell contended that it demonstrated that Mr Kemal knew that these phones had been imported and he was exporting them again, a trading pattern which should have put him on alert to MTIC fraud.

223. Denise Leach’s evidence was consistent with what is to be expected in contrived trade and not an open market. There was a single supplier who gave informal and unsecured credit to the Appellant.

224.  Mr Rowell submitted that it was revealing that when Denise Leach wanted to authorise a purchase from Kingswood, she went to Mr Kemal for authority. She was merely responsible for processing paperwork rather than any substantive commercial decisions. No negotiation or searching for an alternative supplier took place. Mrs Leach’s position amounted to completely uncommercial behaviour and she should have known that her trade was connected with fraud. Her evidence was in contrast to the account given in her statement and to the line taken by Mr Kemal in his oral evidence which was that she identified customers and parties to trade with from websites such as International Phone Traders.

225.  Mr Rowell contended that the mark-up on the prices down the chain and the level of mark up achieved by the Appellant without negotiation or market justification, demonstrated the operation of this fraud with each company in the chain. Neither witness for the Appellant gave any good commercial explanation for the way the mark ups took place. The chains showed consistent increase in mark-up of price from the sale from the importer through to the Appellant’s position as exporter. The mark-up for those traders at the importing and first buffer end of the chain was always lower than the mark-up achieved by Kingswood, the supplier to the Appellant. The Appellant in turn achieved the highest mark-up in each case. Such a pattern was not consistent with genuine commercial activity.

226. Mr Rowell submitted that the large schedule of documents produced by HMRC showed anomalies concerning the timing and commercial terms of the transactions. For example with respect to deals numbers 170 to 172B the goods were despatched for shipment through the Channel Tunnel before the Appellant had sent inspection and shipping instructions to Ontime Logistics; the goods were shipped abroad before the Appellant had received a purchase order or supplier declaration from its customer, 2 Trade (deals numbers170-172B) and the goods were shipped abroad before the Appellant had been offered them by its UK supplier (deals number 172A and 172B). 2 Trade’s purchase orders to the Appellant contained a detailed list of specifications concerning language, software, boxes etc. No such details were to be found on the corresponding inspection reports or on the corresponding invoices and purchase orders exchanged by the Appellant and its UK supplier (deals number 170-172B). The home-made risk and title clause on the Appellant’s invoices was inconsistent with the CIF term printed on the purchase orders issued by 2 Trade (deals number 170-172B).  The Appellant paid A1 Freight for providing insurance, which was inconsistent with the risk and title clause on the Appellant’s invoices (deals number 173-175).

227. Mr Rowell said that when the anomalies as to timing were put to Mrs Leach, her standard and unelaborated answer was that the deals had already been agreed by telephone and the documents merely amounted to retrospective confirmation. He submitted that this explanation was wholly unsatisfactory. Not a single one of the faxes and e-mails produced by the Appellant contained any words to indicate a confirmatory purpose, such as “further to our conversation this morning...”. Rather the various stock offers, invoices, purchase orders, shipping instructions and inspection reports appeared to have been concocted to provide the transactions with a veneer of commercial normality and legitimacy.

228. The deals along the transaction chain took place in a very short time frame. There was no time to enter detailed commercial contractual arrangements or negotiation. The purchaser of the goods always appeared to want precisely the same number of goods as the supplier was able to supply with the result that the Appellant was never left holding any stock and never made a loss. This was simply too good to be true and did not bear any relationship to a genuine commercial market.

229.  None of the UK members of the supply chains took physical possession of the goods, which remained at the same freight forwarders whilst transactions took place and release notes were issued.

230. Mr Rowell said that in any case, if the parties were really operating at arm’s length from each other, it was not credible that the Appellant would despatch, or that a freight forwarder would ship, goods worth millions of pounds before any written confirmation of the order or shipping instructions had been received. This was especially true of the Appellant and 2 Trade, where there was no established trading relationship before the June and July 2006 deals. Nor was it credible that detailed lists of specifications of the kind printed on 2 Trade’s purchase orders would only ever be agreed and confirmed orally between the Appellant and its supplier and freight forwarder. So if as Mrs Leach claimed the Appellant and its suppliers and customers and freight forwarders were content to ship goods on the basis of oral agreements alone, that strongly suggested that they were not trading at arm’s length from each other.

231.  According to the Belgian authorities, the goods purchased by 2 Trade never entered Belgium, but were always sent to warehouses in the Netherlands or France. As stated by Ms Nketiah in her witness statement 2 Trade were suspected of involvement in large-scale VAT fraud. The directors of 2 Trade, Hycint de Voldere and Aryan Aelmaes had been arrested on suspicion of money laundering and involvement in defrauding UK VAT authority according to the article produced by HMRC.

232.  Mr Rowell submitted that as early as October 2003 the Appellant was alerted to the nature and risks associated with MTIC fraud. Following visits on 20 September 2003 and 1 October 2003, the Appellant was sent VAT Notice 726 on joint and several liability for unpaid VAT, notifying the trader of the risk of joint and several liability for unpaid VAT arising in the event of non-payment of VAT in respect of fraudulent transactions in the supply chain. The notice contained a list of suggested checks to carry out before entering into mobile phone deals. 

233.  Mr Rowell contended that on 9 October 2003 the Appellant was sent a letter from officer Roderick Stone giving information about MTIC fraud and steps which could be taken to avoid involvement in MTIC fraud. The Appellant had since August 2003 been verifying VAT registration numbers with the Redhill verification office which provided a service to help combat MTIC fraud.

234.  The Appellant was also aware of the necessity of carrying out full due diligence and verification of stock because of previous experience in having input tax denied for the purchase and proposed resale of sub-standard stock in April 2004. Furthermore in the VAT quarter 08/04 to 10/04, the Appellant was denied zero-rating in respect of an export of goods when those goods did not match the description on sales invoices. As confirmed by Ms Nketiah the Appellant initially appealed the decision and subsequently abandoned the appeal. Repayment of a £957,086.27 VAT claim had also been withheld in respect of an export of software to Dubai because of concerns about the nature of the transactions, how the Appellant contacted the customer and supplier and the absence of traceable shipping details.

235.  Mr Rowell said that the documents obtained by the Appellant for its customer 2 Trade consisted of the director’s passport and driving licence, a picture of presumably the director sitting at a desk, an interpretation of the accounts which confirmed that 2 Trade was solvent on 31 December 2004, details of 2 Trade’s bank accounts at the FCIB and at ABN-Amro, and a validation of 2 Trade’s VAT number with Redhill VAT office. There were also some trade references. The majority of the documents were dated 28 June 2006, the same date as the last June trade with 2 Trade, or were dated in July 2006 after the last sale to 2 Trade. The documents obtained in relation to Allimpex included photographs of two people in an office, Allimpex’s bank account details at FCIB and Deutsche Bank AG, and a VAT registration verification check at Redhill. On 4 August 20 06 the Appellant sent Allimpex a fax stating that Mrs Leach of the Appellant intended to visit Allimpex’s office in Berlin. The fax relating to this proposed visit post-dated the July deals.

236. It was submitted by Mr Rowell that the evidence demonstrated that there was no meaningful due diligence exercise carried out by the Appellant in relation to its customers. The fact that much of it post-dated the relevant transactions demonstrated that the exercise was largely for appearance’s sake and was simply a question of going through the motions in order to bolster the credibility of its VAT repayment claim.

237.  When the officer Erica Nketiah carried out a verification visit on 12 September 2006, it was made clear to her that no due diligence checks had been carried out on Kingswood because of the long-standing relationship between the companies.

238.  Mr Kemal, the Appellant’s director, in his statement stated that they had previously sold to a Spanish company called Ibiplace. There is no record of sales to Ibiplace by the Appellant but Ibiplace did appear as a European supplier of goods which went through a trading chain to the Appellant as exporter. On 19 July 2004 the Appellant was notified by HMRC that Ibiplace had been de-registered for VAT. The supplier to the Appellant for these deals was Kingswood. In these circumstances the absence of due diligence is even more stark as Kingswood had been involved in transactions which were connected with a foreign trader who had later been de-registered.

239.  The evidence of Terence Mendes and his analysis of the FCIB payments demonstrated circularity of trading and payment. Such circularity required organisation. It was submitted by Mr Rowell that the Appellant’s participation in the chains was orchestrated by an organiser or organisers. The Appellant’s participation was not therefore a coincidence. Such orchestration must have involved some-one telling the Appellant when and what to buy and sell and to whom to sell. The fact that all but one of the transaction chains came back to the same pair of linked Portuguese companies, Worldcall and Snowrix, even though the defaulting company and the Appellant’s customer changed, supported this inference. Such instructions would have made it obvious to the Appellant that the transactions must have been fraudulent.

240.  Consistent with the above contention Mr Rowell submitted that there appeared to have been an unusual commercial relationship with Kingswood. The Appellant never carried out any inspections of goods relying exclusively on inspections carried out by A1 Inspections, a company connected to the freight forwarder A1 Freight (UK) Limited. A1 Freight (UK) Limited and Ontime Logistics Limited carried out the forwarding of the consignments which were relevant to this appeal. No due diligence was carried out by the Appellant on the freight forwarders notwithstanding the high value of the goods being traded. In answer to questions put by her in an aide memoire on her visit to the Appellant on 12 September 2006, Ms Nketiah was informed that the Appellant allowed its supplier to determine which freight forwarder was used and relied upon the supplier to conduct checks.

241. Goods were shipped by the Appellant to their destination abroad prior to receiving payment. They were stored at the destination warehouse on ship on hold terms and not released by the Appellant until payment was received. On receipt of payment into the Appellant’s FCIB account this sum was immediately paid on to the supplier Kingswood. Mr Rowell submitted that it appeared therefore that the Appellant took no commercial risk, obtaining payment before paying its supplier whilst Kingswood advanced substantial credit to the Appellant on an informal basis.

242. Ms Nketiah analysed the payments made to Kingswood. It appeared that sums equating closely to the VAT liability to the supplier were paid to Kingswood from the Appellant’s Lloyds bank account on 30 June 2006 (£232,500), 3 July 2006 (£166,187.50) and 8 August 2006(£284,867.50). These payments appeared to have been funded by loans to the company made by third parties although there was no formal evidence of any loan agreements.

243. Mr Rowell contended that the effect of the above was that the Appellant enjoyed a complete absence of commercial risk in these transactions. This was not consistent with genuine commercial activity.

244.The Appellant achieved substantial turnover having started life in clothing retail. It was not clear what marketing or selling point the Appellant could offer to “add value” in the market. There was no commercial reason for the supplier Kingswood to give up the chance of the Appellant’s profit by selling the mobile phones to the customer abroad.

245.  It was submitted that the connection between the Appellant’s transactions and fraudulent evasion of VAT was plainly made out by the evidence of Ms Parsons in respect of RSSA and by the evidence of Mr Smith and Mr Fletcher in respect of V2.

246. Mr Rowell submitted that further, there was an overwhelming set of indications to the effect that the Appellant, through Mr Kemal and/or Mrs Leach, knew or should have known of the connection with fraud. In his submission on behalf of HMRC the Tribunal would be perfectly entitled to conclude that the Appellant had knowledge that it was participating in fraud. Such was the inference to be drawn from the factual matters set out in his submissions and from the way in which Mr Kemal, in particular, gave his evidence which was riddled with contradictions and evasions and which contained a discreditable attempt to pass the buck to a subordinate who was not responsible for any substantive commercial decisions.

247. Mr Rowell submitted that if the Tribunal was not with HMRC on the question of actual knowledge, it would have to consider whether the Appellant should have known of the connection with fraud. In so doing, the Tribunal should be guided by the Court of Appeal’s judgment in Mobilx. The central question was whether fraud was the only reasonable explanation in the circumstances for the transactions in which the Appellant participated. The Tribunal must consider the suspicious features of the transactions set out by HMRC for example the participation in circular chains, the lack of economic justification for the deals, the rapid rise in turnover, the making of easy profits for no obvious reason, the extension of unsecured credit by the supplier, the failure to undertake proper commercial checks, the shipment of goods before receipt of purchase orders, shipping instructions and inspection reports. The Tribunal must then ask itself whether these and all of the other features of the transactions, considered as a whole, could be regarded by a reasonable person in the Appellant’s position as compatible with legitimate, arm’s length trading. In HMRC’s submission, the transactions were so far removed from the operation of any genuine business that the answer could only be ‘no’. If so, it must follow that fraud was the only reasonable explanation. HMRC submitted that the Appellant should have concluded that the transactions were more likely to be connected with fraud than to be part of any legitimate market.

Appellant’s Submissions on the Law

248. Mr Brown for the Appellant submitted that a taxable person is entitled to deduct VAT paid in respect of supplies of goods made to him used for the purposes of his business (art. 168 Council Directive 2006/112/EC (formerly art. 17 Sixth VAT Directive)). However, a taxable person who knew or ought to have known that he was taking part in a transaction connected with the fraudulent evasion of VAT could have his entitlement to the right to deduct VAT paid to his supplier refused (Kittel v. Belgium (Case C-439/04)).

 

249. Mr Brown stated that the Court of Appeal in Mobilx Ltd and others v. CRC [2010] EWCA Civ 517 held that in order to deny the right to input tax based on Kittel, HMRC had to prove on the balance of probabilities that the Appellant knew or should have known that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected with fraud.

 

250. The standard of proof was the civil standard as set out in Re B [2009] 1 AC 11. Whilst the Appellant agreed with HMRC’s submission that the House of Lords’ decision In Re B [2009] 1 AC 11 confirmed that there was no heightened civil standard, Mr Brown submitted that the Tribunal must also bear in mind Lord Hoffman’s words that regard should be had to, whatever extent appropriate, inherent probabilities when he approved the words of Lord Nicholls In re H (Minors)(Sexual Abuse: Standard of Proof) [1996] AC 563, 586D-H, at paragraph 11 that:

 

“The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence.”

 

251. Mr Brown Appellant submitted that the correct test for the Tribunal was “have the HMRC proved that it is more probable than not that the Appellant knew or should have known the only reasonable explanation for the transactions it was involved with was that they were connected with fraud.

 

Appellant’s submissions on the Facts

 

252. Mr Brown submitted that the issues were:

 

(i) Whether there was a tax loss by the defaulters,

(ii) Whether the tax losses were connected to VAT fraud that is was the Appellant participating in a transaction connected to VAT fraud, and

(iii) Did the Appellant know or should it have known that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected with fraud (Mobilx Ltd and others v. CRC [2010] EWCA Civ 517)?

 

253. The Appellant accepted that there was a tax loss by RSSA and V2.

254. The Appellant did not concede fraud on the part of RSSA but adduced no evidence. Mr Brown submitted that it was for the Tribunal to reach its decision based on the facts before it.

 

255. Mr Brown submitted that the Appellant believed that HMRC had not proved that V2 fraudulently intended to evade VAT on the Appellant’s three transactions. He submitted that V2’s behaviour was not that of a business which intended to evade VAT. He contended that Mr Smith’s evidence in summary was that he visited V2 four times; three visits were unannounced. On each occasion V2 provided the information asked for. All of V2’s transactions were included in the information provided over the periods; none were omitted. In respect of the Regulation 25 notices the effect was to break down the three month 08/06 period into two parts 1 June to 21 August 2006, issued 21 August 2006 to be submitted by the following day and 22 August to 31 August 2006, issued on 29 August 2006 to be submitted by 1 September 2006.

 

256. The Appellant’s three transactions occurred in the first period of the Regulation 25 notice. The VAT Return for whole period was submitted on time on 1 September 2009, and included the Appellant’s three transactions. V2 stated that it had the money in its FCIB account to pay the liability stated on the VAT return, which was true. Mr Smith disallowed the credit notes but Mr Brown submitted firstly that V2 had not and never was paid for the supplies represented by the credit notes so that amount in the FCIB account did not relate to those transactions, and secondly that the amount in the FCIB account had been accrued as a result of V2 correctly retaining the funds to pay the VAT. Mr Mendes had confirmed in his statement that V2 had retained the VAT in its FCIB account.

 

257.  Mr Brown submitted that the question was would V2 have paid its VAT liability in respect of the three deals if the FCIB account had not been frozen? Mr. Smith did not issue an assessment in respect of the disallowed credit notes until the end of September 2006.

258. V2 knew it was getting attention from HMRC from February 2006 and was visited on four occasions. It nevertheless provided information when asked for it, including bank account details of its customers and suppliers. It never omitted any transactions from the information it gave to HMRC. Even after receiving a £2million assessment, V2 met with Mr Smith and was still providing information on 14 September 2006.

259. Mr Brown drew the Tribunal’s attention to the fact that there was an exchange of letters between V2 and its supplier C&B, where V2 had cancelled the deal. This was not one of the Appellant’s transactions. Mr Brown queried if V2 was participating in an overall scheme to defraud HMRC firstly why would it cancel a deal and secondly why would it be dealt with in correspondence? It would surely have been sorted out by a telephone call or face-to face meeting.

260. V2 objected to the veto letter issued by HMRC because it prevented it from trading. None of the other companies which were vetoed in the chain objected. V2 provided Officer Smith with the due diligence information it carried out on Techbase.

261. The vast majority of V2’s £51million VAT liability arose because HMRC disallowed its input tax claim on the same basis as that of the Appellant, that it was connected to a fraudulent transaction, not that it was an assessment for undeclared output tax. The remainder was because V2 couldn’t meet its output tax liability for the 08/06 period.

262. Mr Brown contended that in deciding whether V2 fraudulently evaded VAT, the Tribunal must apply the tests in R v. Dealy [1995] STC 217. In applying the tests he contended that the Tribunal must ask itself:

(i) Did Mr Ahmed of V2 deliberately not pay the amount of VAT on the VAT return, which included the Appellant’s transactions in order to evade tax? Mr Brown submitted that he did not; he stated that he had £1.3m in his FCIB account, which was true, but the account was frozen, which was true, and

(ii) If there was evasion by V2, was it fraudulent that is dishonest? To find it was dishonest, the Tribunal must come to the conclusion that V2 would have never paid the amount in question on the VAT return and Mr. Ahmed acted dishonestly by the standards of reasonable and honest people and that he knew himself that what he was doing was by those standards dishonest.

 

263. If the Tribunal decided that V2 did not fraudulently evade VAT in respect of the Appellant’s three deals, then it must allow the appeal in respect of the July transactions as they were not connected to the fraudulent evasion of VAT.

 

264. Mr Brown said that in submitting that the Appellant did not know nor should have known that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected with fraud; the Appellant relied on its factual oral submissions made at the Tribunal by Mr Kemal and Mrs Leach.

 

265. He contended that the seven “deals” must be viewed in context, that is that there were effectively three transactions, namely: 23 June 2006 for invoices 170 and 171, 28 June 2006 for invoices 172 A and B and 27 July 2006 for invoices 173-175.

 

266. These transactions were not isolated so far as the Appellant’s supplier Kingswood was concerned. The release note from Kingswood to the freight forwarder released stock to five or six separate companies of which the Appellant was one.

 

267. Mr Brown submitted that in respect of the alleged circularity of funds the Appellant made the following points. Invoices 172A and B were in fact a single invoice which was split by HMRCs for convenience. The two deals were very similar except that Kingswood purchased from Danum for invoice 172A and from Mobile Heaven for invoice 172B. In the final payment however RSSA paid Snowrix and not Worldcall. The Appellant accepted that there were there were connections between the two entities Worldcall and Snowrix but they were separately registered and had separated beneficial owners. In his contention this was sufficient to ensure that the payment for invoice 172A was not circular. If it was under single control RSSA would have paid Worldcall as it did in 172B. In respect of invoices 174 and 175 the payments from Talkout to Snowrix cannot be reconciled in any way to the invoices. This is especially true of invoice 174 where the amounts paid by Talkout are all greater than Tomsberg to Talkout, whereas if it was for the supply of the 1400 Nokia N72’s it would have been less. Also the amounts were whole amounts, multiples of £10,000, whereas the preceding payments are multiples of £10’s.

 

268. Mr Brown contended that the Appellant was the only party in these transactions chains to use a UK bank account. If as Mr Stone said the purpose of FCIB was to avoid anti-money laundering laws and to escape transparency, the Appellant didn’t seek to do so. He said that the Tribunal should also bear in mind that four years on from the Dutch authorities investigations, no-one from the FCIB had been charged with an offence.

 

269. He contended that the Appellant’s retention of title clause meant that it did not transfer title or release goods until it was paid. If the transactions were contrived there would be no need for such a clause. The money could simply flow through the chain quickly without the several days and in the case of the July deals over a week’s delay.

 

270. He claimed that a dispute by the Appellant with Allimpex over freight charges in respect of invoices 173 to 175 which continued until early 2007 would not have arisen if the whole thing was being orchestrated and everyone knew what was going on.

 

271.   With respect to invoice 172 2Trade required more stock than the Appellant could supply, contrary to Miss Nketiah’s assertion that the supplier always sold what the customer required. 2Trade sent the Appellant a stock request for 4000 N80’s and 4000 N90’s amongst other models. This was passed on by the Appellant without divulging 2 Trade’s identity to Kingswood, which replied that it could only supply 2000 N80’s and 1500 N90’s. A deal in respect to these phones went ahead and became invoice 172. This would not have happened if the whole thing had been contrived. Everyone would have known the amounts and types of stock which were going to be traded.

272.  The Appellant sought to achieve a percentage mark up not a standard monetary amount per unit as with others in the chain.

273.   Mr Brown contended that there was nothing to Ms Nketiah’s assertion that there was something suspicious about the Appellant’s customer requiring the goods to be delivered to a freight forwarder in a different member state.

274.  He accepted that a lot of the due diligence was carried out after the date of the Appellant’s invoices but claimed that the important factor was the retention of title until payment had been received for the goods. He said that it was basic contract law that it was only then that the goods were released. By this time the Appellant had sufficient information to make a judgment as to whether it was satisfied that it was a bone fide transaction and to accept the payment and release those goods. The only outstanding checks were the Redhill confirmations but Kingswood had been checked numerous times previously and Mrs Leach validated the VAT numbers on the Europa website. He contended therefore that the necessary due diligence was performed prior to the transactions being completed and the Appellant transferring title to its customer. This was contrary to what Miss Nketiah alleged in her witness statement. She had alleged that the bulk of due diligence was not carried out until after the deals in question if at all.

275.  Mr Brown said that it was also important to look at the wider context. The purpose of due diligence is to know your supplier. This would have been relevant if Kingswood was a new supplier but the Appellant had been buying goods from Kingswood since 2003. Nevertheless the Appellant kept checking that Kingswood’s VAT number was still valid.

276.  Mr Brown contended that it was churlish of HMRC to suggest that the Appellant should have treated Ian Tuppen with caution because exactly the same assertion could be levelled at HMRC when their officers visited the Appellant to check the telephone calling cards. They knew who the Appellant had purchased them from yet they gave Mr Kemal the go ahead as he put it. HMRC can’t say that they didn’t know of Mr. Tuppen, indeed Mr Stone’s witness statement stated that he knew of Ian Tuppen in 2002.

277.  Referring to Mr Fletcher’s evidence and his conclusions Mr Brown contended that Mr Fletcher had no experience of advising wholesalers in 2005 and 2006; he relied on figures which did not include business to business sales. For the basis of his calculations and upon which he based his opinions he was not prepared to even hazard a guess at what the percentage of business to business sales as a total of mobile telephone sales might be; he agreed the IPT website was a genuine website; that there was a genuine grey market in mobile telephones; and he had acknowledged that Carphone Warehouse dumped 67,000 mobiles telephones onto the grey market in 2009 and that the price would be lower than that charged by an authorised distributor. In respect of that dumping, because of Nokia’s consistent pricing policy throughout EU, those goods would obviously be cheaper than the authorised distributor’s prices throughout EU. There was no evidence before the Tribunal that the Appellant knew about RSSA or anyone else in the preceding chain, except for Kingswood, when selling those goods on that day. The same went for the July chains involving V2.

278.  Mr Brown submitted that because the business to business sales were not included in the analysis, Mr Fletcher’s figures and conclusions were not reliable. There was no allegation that the goods were counterfeit or didn’t exist so by the very definition that no authorised distributors were in the chains, these goods were being traded on the grey market.

279.  Mr Brown contended that with regard to the importance of phone specification, the important thing was that the Appellant sold goods to the EU where of course two-pin plugs are the norm. He reminded the Tribunal of Mr. Kemal’s evidence that 2-pin plugs could also be used in the UK.

280.  He contended that less than 1% of the IMEI numbers of the total goods (10% of the 10%) came back as having been previously scanned. Nemesis was not available to the Appellant or any other trader so it couldn’t check if the goods had been previously scanned by HMRC. Those that came back as hits were from different consignments. The maximum was three hits from the same consignment. This proved that consignments were being broken down and split. This was consistent with legitimate trade; if goods had been carouselled around the EU as part of a contrived fraud, there would have been significant hits on a consignment.

281.  Although Ms Nketiah had questioned the credit given by Kingswood to the Appellant, as a result of the Appellant’s retention of title clause there would be no need for credit if the transactions were contrived. The money would simply flow through. Mr Kemal chose to do business without formal contractual agreements. Mrs Leach had given an example of this with the purchase of wood from the Czech Republic in a flooring business with which she had been involved.

282.  Although much has been made by HMRC on the timing of the issue of documents and they contended that the lack of fax headers was suspicious, Mr Brown reminded the Tribunal of Mrs Leach’s evidence that some of the documents were scanned and emailed not faxed and deals were done on the telephone and the documentation was completed afterwards.

283.  Mr Brown submitted that the Tribunal must take into account that the documentation was exchanged prior to the transactions being completed upon payment and release of goods. He also asked the Tribunal to bear in mind, if it considered the timing on faxes important, that the Appellant’s customers were one hour ahead of the UK and therefore the timings might be distorted.

284.  Mr Brown contended that the insurance issue was a non-point for HMRC. Mrs Leach’s evidence was that as far as she was concerned the Appellant insured the goods, which was supported by invoices from the freight forwarders and payments in bank statements. Whether or not the freight forwarders could as a matter of law provide adequate insurance was irrelevant. What was important was whether the Appellant believed it was insuring the goods. Mrs Leach decided that she was going to insure the goods and she read the retention of title clause on the Appellant’s invoice as meaning that she would have to inform the customer if it was liable for the insurance. Finally, the customer requested CIF on its purchase order.

285.  Finally Mr Brown again submitted that on the evidence before the Tribunal V2 did not fraudulently evade VAT and therefore the Appellant’s transactions so far as these deal chains were concerned were not connected with fraud and this part of the appeal must be allowed. If the Tribunal found that V2 did fraudulently evade VAT, and VAT was fraudulently evaded in respect of RSSA deal chains nevertheless the Appellant acted in a bona fide manner. It was not knowingly involved in transactions connected with VAT fraud and given all the circumstances it cannot be said that the Appellant should have known the only reason for its transactions was that they were connected to VAT fraud.

Findings

Was there a tax loss caused by the alleged defaulters?

 

286.  We find that there was a tax loss caused by RSSA and V2.

Were the tax losses connected to VAT fraud that is was the Appellant participating in transactions connected to VAT fraud?

287.  We find that the tax loss in respect of RSSA was connected to VAT fraud.

288.  In respect of V2 we find that HMRC have not proved that V2 fraudulently intended to evade VAT in respect of the Appellant’s three transactions. At the time of Mr Smith’s visit to them they produced their VAT return in respect of these deals and had the money in their FCIB account to meet the VAT due. The issue of the credit notes was a clumsy attempt to delay the payment of VAT due in respect of previous supplies for which they had not yet been paid. V2 had not and never was paid for these supplies so that the amount in their FCIB account did not relate to those transactions. The amount in the FCIB account had been accrued as a result of V2 correctly retaining the funds to pay the VAT due in respect of the Appellant’s three transactions. In his witness statement Mr Mendes confirmed that the VAT in respect of all three of the transactions had been retained by V2.

289.  Mr Smith visited V2 on four occasions of which three visits were unannounced and on each occasion V2 provided the information he had requested.

290.  We find that Mr Ahmed of V2 did not deliberately avoid paying the amount of VAT on the return which included the Appellant’s transactions. He stated that he had some £1.3 million in his bank account which was true but that the account was frozen which was also true. We are unable to come to the conclusion that he would never have paid the VAT had the account not been frozen.

291.  The vast majority of V2’s £51million VAT liability arose because HMRC disallowed its input tax claim on the same basis as that of the Appellant, that it was connected to a fraudulent transaction, not that it was an assessment for undeclared output tax. The remainder was because V2 couldn’t meet its output tax liability for the 08/06 period as a result of its bank account being frozen.

Did the Appellant know or should it have known that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected with fraud?

 

292.  We find that the Appellant did not know that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected with fraud but find that the Appellant ought to have known.

293.  All the known deals throughout each supply chain were conducted either on the same day or occasionally the next day. Ms Nketiah found it hard to see how all the five or more parties could have had time to contact each other, agree terms, arrange for the release of the goods, make payments and negotiate ancillary contracts such as inspection, insurance and transportation. She would expect that in legitimate business transactions involving such large sums of money the parties would be cautious especially when dealing with new customers. She felt that in legitimate deals the parties would take time to make sure that all the proper safeguards and ancillary contracts were in place before the deal was concluded.

294.  We found the evidence of Mr Kemal and Mrs Leach to be honest but naïve. Mr Kemal has had considerable business experience but was operating in an area of which he knew nothing. He believed that he had found a trustworthy business associate in Ian Tuppen having successfully dealt with him in exporting international calling cards. During this period the Appellant had been visited by HMRC and had been reassured that the operation met with their approval. It would not have occurred to him to “google” Ian Tuppen on the internet and the Tribunal did not gain the impression that this was a method with which he was familiar. He relied on Mrs Leach to do all the necessary checks and due diligence. Mrs Leach relied on the judgement of Mr Kemal and her father and was reassured by the visit to their premises by Ian Tuppen’s solicitors Halliwells which seemed a reputable firm.

295.  Although Mrs Leach believed that she had safe guarded their operation by a retention of title clause and by insuring the goods  she did not stop to consider at any time why Kingswood were giving the Appellant such enormous sums of unsecured credit and why Kingswood did not export the phones themselves. She did not think that it “was within her remit” to do so. The Appellant transferred monies received from their customer via their FCIB account directly to Kingswood and then relied on money in their Lloyds bank account to pay the balance owed to Kingswood in respect of the VAT.

296.  As the Court of Appeal stated in Mobilx it is not possible to ignore the circumstances in which the transactions took place if the only reasonable explanation for them is that they have been or will be connected to fraud. At paragraphs 82 and 83:

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 Blue Sphere Global 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 participating in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.

 

83. The questions posed in BSG 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 The questions posed in BSG were, (1) Why was BSG, a relatively small company with comparatively little history of dealing in mobile phones, approached with offers to buy and sell very substantial quantities of such phones> (2) How likely in ordinary commercial circumstances would it be for a company in BSG’s position to be requested to supply large quantities of particular types of mobile phone and to be able to find without difficulty a supplier able to provide exactly that type and quantity of phone? (3) Was Infinity already making supplies direct to other EC countries? If so, he could have asked why Infinity was not making supplies direct, rather than selling to UK traders who in turn would sell to such other countries. (4) Why are various people encouraging BSG to become involved in these transactions? What benefit might they be deriving by persuading BSG to do so? Why should they be inviting BSG to join in when they could do so instead and take the profit for themselves?

 

297.  We found that neither Mrs Leach nor Mr Kemal asked themselves these four vital questions as set out above in paragraph 83 of the Mobilx judgment.

298. We were told that the Appellant relied on loans from Joe Harris, Mrs Leach’s father and a Turkish businessman to subsidise these payments until the Appellant was able to reclaim the VAT. We accept that these loans may well have been undocumented as they were other than at arm’s length.

299. We did not find the evidence concerning the IMEI numbers particularly compelling as on analysis only a very small proportion of the phones had been previously scanned through Nemesis.

300. The goods were at a freight forwarders known to Kingswood. Neither Mrs Leach nor Mr Kemal thought to question why phones of European specification were in the UK and the Tribunal did not find Mr Kemal’s explanation of their potential use in the UK credible.

301. We found that the Appellant ought to have realised that there was no reasonable explanation for the EC customers contacting them unsolicited and requesting precisely the models of mobile phones which Kingswood were able to supply. This was, as submitted by HMRC, simply too good to be true and the Appellant ought to have realised this. The Appellant was never left holding stock and Mr Kemal’s business experience ought to have led him to realise that this just did not bear any relationship to a genuine commercial market.

302. We found that the fact that this did not happen once but four times in a few days in one month and then three times in a short period the following month and always towards the end of the month should have set alarm bells ringing. We found that a reasonable person in the Appellant’s shoes would not have regarded this as genuine arm’s length trading.

303. We found that the fatal flaw was Mr Kemal trusting Ian Tuppen “one hundred per cent”. Although he genuinely believed that he had taken on board the risks of MITC fraud, having established what he believed to be a good working relationship of mutual trust with Ian Tuppen, he did not pause to look more closely at the commercial reality of the transactions.

304. We found that the Appellant never questioned what value it was adding to the deal for the percentage mark up achieved. There was no commercial reason for Kingswood to give up the chance of making that profit itself by exporting the goods abroad.

305. We found that the problem was that nobody at the Appellant took true responsibility. Mr Kemal relied on Mrs Leach as he was not available much of the time and she in turn just did as she was told. She felt that it was not for her to question Mr Tuppen concerning the free credit or the ready availability of the goods at a freight forwarders known to him. She allowed their supplier to choose the freight forwarder and relied on it to make the necessary checks on the freight forwarder.

306. Mr Kemal did not appear to question the unexpected and unsolicited approach to the Appellant by “some guy from FCIB”. Although neither of the Appellant’s witnesses specifically said so, we gained the impression that they believed that both their customers and the FCIB representative had been directed to them as a result of Mr Tuppen’s endeavours.

307. We appreciated the detailed schedule of timings prepared by Mr Rowell and whilst we did not doubt that as Mrs Leach stated in evidence some of the arrangements were made by telephone and then confirmed by fax, nevertheless we find that here again the short period of time between the initial contact from the customer and the speed with which the deals were completed was just too good to be true and for this there was no reasonable explanation.

308. On the basis of the Court of Appeal’s judgement in Mobilx that it was important to focus not on the due diligence but on the circumstances surrounding the transactions we make no detailed findings in respect of the Appellant’s attempts at due diligence. We find that both Mrs Leach and Mr Kemal believed that they were doing what was necessary but as stated above failed to look closer to home at their supplier because of their misguided trust in him.

309. We find that HMRC has proved that it is more probable than not that the Appellant should have known the only reasonable explanation for the transactions it was involved with was that they were connected with fraud.

310. The appeal is dismissed in respect of the VAT claimed for the 06/06 period. As a result of our finding that HMRC failed to prove that V2 fraudulently intended to evade VAT in respect of the Appellant’s three transactions in July the appeal is therefore allowed in respect of those transactions.

311.  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.

 

 

S.M.G.RADFORD

 

TRIBUNAL JUDGE

 

RELEASE DATE: 20 January 2011