[2011] UKFTT 75 (TC)

TC00953

 

Appeal number: MAN/2008/0501

 

VAT – MTIC fraud – whether trader entitled to recover input tax – whether transactions formed part of transaction chain which was connected with VAT fraud – yes – whether trader knew or should have known its transactions were connected with VAT fraud – trader knew of connection – appeal dismissed

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

 

 

EUROSTAR TELECOM LIMITED Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

 

 

TRIBUNAL: EDWARD SADLER (TRIBUNAL JUDGE) RICHARD THOMAS

Sitting in public at Field House, Breams Buildings, London EC4 on 25 – 29 October 2010 (final written submissions made on 3 December 2010)

 

Michael Goodwin of counsel, instructed by The Khan Partnership LLP, for the Appellant

 

Jonathan Kinnear of counsel, instructed by Howes Percival LLP, for the Respondents

 

© CROWN COPYRIGHT 2011

DECISION

Introduction

1.     This is an appeal by the company Eurostar Telecom Limited (“the Appellant”) against a decision of The Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) to disallow a claim made by the Appellant for the repayment of input value added tax in the sum of £260,855.35.  The Commissioners notified the Appellant of their decision by their letter to the Appellant dated 18 March 2008 (which incorrectly totals the input claims as £260,925.00).

2.     The claim made by the Appellant relates to its entitlement to deduct input tax for its monthly VAT accounting period 07/06.  The Appellant carried on at that time the business of wholesale trading in mobile telephones.  In the course of July 2006 the Appellant entered into the three transactions which are the concern of this appeal, in each case purchasing mobile telephone handsets from another UK trader (on which input tax was payable) and later the same day trading on those handsets to an EU based trader in a zero-rated transaction for VAT purposes.  The Appellant sought a repayment from the Commissioners of the input tax of £260,855.35 paid on the respective purchases of the handsets. 

3.     The Commissioners have refused to make that repayment.  The Commissioners contend that of each of the Appellant’s purchases and sales in question can be traced directly back through a chain of UK traders to traders who fraudulently have defaulted in payment of VAT in relation to the mobile telephone handsets traded, and that accordingly the Appellant’s transactions were connected with the fraudulent evasion of VAT.  They claim that the fraud is of the type now widely known as MTIC (“Missing Trader Intra-Community”) fraud.  They claim that, in respect of each of the Appellant’s transactions, the deal chain (including the Appellant’s transactions in that deal chain) was contrived and fraudulent, and that the Appellant (as well as every other party in the chain) knew that the transactions which it entered into were connected with the fraud, or alternatively, that the Appellant should have known (because it had the means of so knowing) that those transactions were connected with the fraud.  They claim, on the authority of European and domestic case law, that this results in the Appellant having no entitlement to a credit for the input tax paid by the Appellant in relation to those transactions and hence the Commissioners are not required to repay the input tax claimed.

4.     The Appellant denies that it took part in a contrived and fraudulent set of transactions – it argues that the transactions it entered into were commercial and at arm’s length in the course of an established and commercial business.  The Appellant argues that it is outside its knowledge or means of knowledge as to whether there was a tax loss in each of the deal chains which is the subject of this appeal, and, if there were a tax loss, whether that tax loss resulted from fraud.  The Appellant also argues that the Commissioners’ allegations are made only after, and with the hindsight benefit of, a four-year exercise of forensic examination of the deal chains, and that at the only relevant time, the time at which the Appellant entered into the relevant transactions, the Appellant did not know, nor could it have known, that those transactions were connected with any fraudulent evasion of VAT which may have occurred in the respective deal chains.  The Appellant argues that it took all necessary and reasonable precautions to ensure that, in entering into its transactions, it was not involved in a chain of transactions which involved missing or defaulting traders, carrying out checks beyond the scope of those recommended by the Commissioners.

5.     There is now a sizeable body of case law relating to MTIC fraud transactions and the claims made by traders to recover input VAT in respect of their transactions when they have become involved in chains of deals where there has been such fraud.  Accordingly, both the nature of MTIC fraud and the terminology used in MTIC fraud cases is now widely known.  It is therefore not necessary to describe these matters in detail, but for reference Appendix I is a summary of the way in which MTIC fraud occurs in so-called “simple” chains of transactions such as those in the present case, and the resulting loss to the revenue.  It also explains the terminology commonly used in cases such as this.

Preliminary issue – admission of certain evidence

6.       In the weeks leading up to the hearing of this appeal the Commissioners made three applications to the tribunal for leave to serve further witness statements and adduce further witness evidence.  They were required to make such applications as the tribunal had given directions on 16 March 2010 in the course of case management proceedings that no further witness or expert evidence be admitted without the tribunal’s leave.  In each case the Appellant served notice of its objection to the application. 

7.       For reasons which are not clear these matters were not listed to be dealt with by the tribunal in advance of the hearing of the substantive appeal, which would have been the better course of action, enabling the tribunal to review the evidence in more detail and to give a more considered decision, and giving the parties the opportunity to take account of that decision before the hearing began.  Instead, it was necessary to deal with these matters at the outset of the hearing, and our decision and consequent directions were given orally to the parties the following morning.

8.       For the sake of completeness we set out in Appendix II to this decision a record of our decision and directions in relation to these matters as given to the parties orally at the hearing.

The issues for determination by the tribunal

9.       The parties were agreed that, having regard to the relevant provisions and case law, in determining this appeal the following are the questions of law and fact we have to consider and answer in relation to each of the three July 2006 transactions in respect of which the Appellant is claiming repayment of input tax:

(1)        Was the Appellant’s transaction connected to a VAT loss?

(2)        If so, was that VAT loss attributable to fraud?

(3)        If so:

(a)        did the Appellant know that its transaction was connected to that fraud?

(b)        alternatively, should the Appellant have known that its transaction was connected to that fraud?

If there is an affirmative answer to questions (1) and (2) and to either (3)(a) or (3)(b), then the Appellant has no right to the repayment of input tax in relation to the transaction in question, and its appeal must be dismissed.

10.    Our determination, in relation to each of the transactions in question, is that:

(1)        The Appellant’s transaction was connected to a VAT loss.

(2)        That VAT loss was attributable to fraud.

(3)        The Appellant knew that its transaction was connected to fraudulent VAT loss.

(4)        If we are wrong as to the Appellant’s knowledge of that connection, the Appellant should have known that its transaction was connected to fraudulent VAT loss

Accordingly the Appellant has no right to the repayment of input tax in relation to the three transactions in question, and its appeal is dismissed.

The legal issues

11.  This case is principally concerned with matters of fact, and the legal issues – the domestic statutory and Directive rights of the Appellant to claim repayment of input tax and the domestic and European case law applying those rights – were not in dispute between the parties.  It is, of course, necessary to set out those issues so that the facts can be related to them in order to reach a decision on the Appellant’s appeal.

12.  At the European level the right to deduct input tax (and therefore to claim a repayment of input tax when, in a VAT accounting period, input tax exceeds output tax) is now found in Articles 167 and 168 of the Council Directive of 28 November 2006 on the common system of value added tax (2006/112/EC) (at the time of the Appellant’s relevant transactions corresponding provisions in the Sixth Council Directive applied), which provide (so far as relevant to this case) as follows:

Article 167

A right of deduction shall arise at the time the deductible tax becomes chargeable.

Article 168

In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT he is liable to pay:

the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person….

13.  These provisions are given effect within the UK by the Value Added Tax Act 1994 (“VATA 1994”) and regulations made under VATA 1994.

14.  Section 24(1) VATA 1994 provides the definition of “input tax”, which, for the purposes of the present case means “…VAT on the supply to [a taxable person] of any goods or services…being…goods or services used or to be used for the purpose of any business carried on…by him.”  Section 24(6) provides for regulations relating to input tax. 

15.  Section 25(1) VATA 1994 requires a taxable person to account for and pay VAT by reference to VAT accounting periods (monthly periods in the case of the Appellant), and section 25(2) VATA 1994 then provides:

Subject to the provisions of this section, [the taxable person] is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.

Section 25(3) VATA 1994 then goes on to provide that if at the end of an accounting period the amount of the credit for the input tax exceeds the amount of output tax of the trader for that period, then that amount of such excess will be paid by the Commissioners to the trader.

16.  Section 26(1) VATA 1994 provides:

The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

By virtue of section 26(2) VATA 1994, the input tax must, in order to be creditable, be attributable to taxable supplies (or supplies outside the UK which would be taxable supplies if made in the UK) made by the taxable person in the course or furtherance of his business.

17.  The regulations referred to in sections 24 and 26 VATA 1994 are the Value Added Tax Regulations 1995.  Regulation 29 specifies that a person claiming a deduction for input tax shall make a claim for credit for input tax in his VAT return, on the basis of a VAT invoice in the required form provided to him by the supplier of the goods in question.

18.  Turning back to the Appellant’s appeal, there is no dispute between the parties as to the interpretation of these various provisions or, setting aside the knowledge of fraud/means of knowledge of fraud issue central to this case, as to their application: the Commissioners accept (subject to that central issue) that the Appellant is a taxable person making taxable supplies in the course or furtherance of his business, that the input tax claimed is attributable to such taxable supplies, and that the input tax claim meets the requirements specified by the applicable regulations.

19.  The Commissioners, on the authority of a line of cases before the European Court of Justice and the UK national courts, have challenged the right of a taxable person to claim credit for input tax where that person otherwise satisfies the legislative requirements to claim such credit, but where there is fraud by another person in a related transaction resulting in tax loss and the taxable person knew, or should have known, that his transaction for which he is claiming the input tax credit was connected with the fraud.

20.  As to the European cases, it is sufficient to refer only to the decision in the joined cases of Kittel v Belgium C-439/04 and Belgian State v Recolta Recycling SPRL C-440 [2006] ECR 1-6161, which sets out the principles which are to be applied by a national court in deciding whether input tax can be claimed as a credit where there has been fraud related in some way to the transactions carried out by the claimant.  The following are the key passages of that decision relevant to this appeal:

“51 …it is apparent that traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT (see, to that effect, Case C-384/04 Federation of Technological Industries and Others [2006] ECR I-0000, paragraph 33)…

55 Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively….It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends….

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

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

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

61 …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.”

21.  In the domestic courts the application of the Kittel decision has been the subject of a number of cases, and most significantly this whole area has been reviewed recently by the Court of Appeal in the joined cases of Mobilx Ltd, Blue Sphere Global Ltd, and Calltell Telecom Ltd v HMRC [2010] EWCA Civ 517.

22.  The Mobilx case establishes the following:

(1)        The UK domestic VAT provisions as to the right to deduct input tax (set out above) have the same conceptual basis as the Community legislation from which they are derived.  That basis is not that the right to deduct the input tax is in some way forfeited or vitiated by the fraud or the connection with the fraud, but rather, that where there is such fraud or connection with fraud, the right to deduct does not exist at all.  It follows that if it is objectively established that the taxable supply in question is made to a taxable person who knew or should have know that, by entering into the transaction, he was participating in a transaction connected with fraudulent evasion of VAT (i.e. if the Kittel test is satisfied), then it is consistent with domestic law, as with Community law, that there is no right to deduct the relevant input tax (see [47] to [49]). 

(2)        In cases where the question is not whether the taxable person had actual knowledge that he was participating in a transaction connected with fraud, but whether he should have known that to be the case, then, “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…because the objective criteria for the scope of that right are not met.” (see [52]).  Thus in determining whether the Kittel test is satisfied where the question is whether the taxable person should have known that he was participating in a transaction connected with fraud, the question is not whether the taxable person took reasonable precautions (whether by due diligence on his supplier, or otherwise) designed to ensure that his transaction was not tainted, but whether he has the means at his disposal of knowing that his transaction was tainted (see [75]).

(3)        In applying the “should have known” test, “a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstance in which his purchase took place was that it was a transaction connected with fraudulent evasion.” (see [60]).

(4)        A tribunal, in seeking to discover from the facts whether “the only reasonable explanation for the circumstance in which [the] purchase took place was that it was a transaction connected with fraudulent evasion”, should look not just at the transactions under immediate scrutiny, but at the wider circumstances and context in which the trader was carrying on his business (including all or other transactions which the trader entered into), being ready to draw inferences from such wider circumstances and context in order to reach a conclusion on this point (see [82] to [85]).

(5)        As to the burden and standard of proof, it is for the Commissioners to adduce such evidence as satisfies the tribunal that, on the balance of probabilities, the trader knew that his transaction was connected with the fraud or should have known of that fact (see [81]).  The case which has to be established against the trader is that he knew or should have known that his transaction was connected with the fraud (not that he knew or should have known that there was a risk that his transaction was connected with fraud (see [55] – [56]) and not that he knew or should have known that his transaction was more likely than not to be connected with the fraud (see [77])).  If the case is so established there is no infringement of the principle of legal certainty, since the trader will have made an informed choice: “he knows where he stands and knows before he enters into the transaction that if found out, he will not be entitled to deduct input tax” (see [61]).

The evidence before us

23.  We had in evidence before us, on behalf of the Commissioners, witness statements from five officers of the Commissioners and a witness statement from an expert in the telecommunications industry; and on behalf of the Appellant we had two witness statements from Mr Peter Carnall, the sole director of the Appellant.  Each witness statement was supported by a substantial number of exhibits, and in total there were twenty-five trial bundles, each a lever arch file.

24.  The principal witness for the Commissioners was Mr Neil Brownsword, an officer of the Commissioners working since 2000 in their team dedicated to MTIC fraud cases.  He was the officer allocated to the Appellant’s case in relation to the VAT return submitted by the Appellant in which it sought repayment of VAT for its period July 2006, and it was his decision in his letter of 18 March 2008 to the Appellant which denies the Appellant the repayment of input tax in relation to the three transactions in question in this appeal.  His evidence was based on the enquiries made by him and the team working for him into the business of the Appellant and the trading transactions entered into by the Appellant and also the other transactions comprising the deal chain relating to the Appellant’s transactions.  He also investigated the accounts held with First Curaçao International Bank by certain parties in one of the deal chains.  Mr Brownsword had prepared four witness statements, and he gave extensive oral evidence at the hearing and was cross-examined by Mr Goodwin for the Appellant.  Mr Brownsword’s evidence related to the Appellant’s business; the trading transactions entered into by the Appellant; the VAT fraud perpetrated by one or more parties in chains of transactions which included transactions entered into by the Appellant; the Appellant’s compliance record and correspondence and visits he made to the Appellant in order to make the Appellant aware of MTIC fraud; the nature and extent of the due diligence the Appellant carried out with regard to its suppliers and customers; the movement of funds between parties to one transaction chain connected to one of the Appellant’s relevant transactions; other matters relating to the Appellant’s knowledge or constructive knowledge of fraud in the chains of transactions; and the loan arrangements between the company Associate Investments Limited and the Appellant relating to working capital finance for the Appellant.

25.  We had a witness statement prepared by Miss Sarah Jane Barker, also an officer of the Commissioners working in the area of MTIC fraud.  The Appellant made no objection to Miss Barker’s witness statement, and Miss Barker did not give oral evidence at the hearing.  Miss Barker’s evidence concerned her investigations into and dealings with the company Kaymore Export Limited (a participant in a deal chain which also involved one of the Appellant’s relevant transactions) and its eventual insolvency with unpaid debts for VAT due to the Commissioners.

26.  We had two witness statements prepared by Miss Malgorzata Wanat, also an officer of the Commissioners who in the period May 2006 to December 2007 worked in the area of MTIC fraud.  The Appellant made no objection to Miss Wanat’s witness statement, and Miss Wanat did not give oral evidence at the hearing.  Miss Wanat’s evidence concerned her investigations into and dealings with the company Phone City Limited (a participant in two deal chains which also involved two of the Appellant’s relevant transactions) and its directors, and the eventual insolvency of Phone City Limited with unpaid debts for VAT due to the Commissioners.

27.  We had the benefit of a witness statement prepared by Mr Roderick Guy Stone, an officer of the Commissioners whose principal duties are to provide technical oversight and co-ordination in relation to MTIC compliance and enforcement activities and who had oversight of the activities of the Commissioners’ MTIC technical teams between May 2006 and October 2007.  Mr Stone’s witness statement was not objected to, and he did not give oral evidence at the hearing.  His evidence related to the nature, extent and features of MTIC fraud and the resulting losses to the revenue (see Appendix I); the policies adopted by the Commissioners to combat such fraud (with particular reference to traders in mobile telephones and the “grey market” in such goods); the offshore banking arrangements used by traders; and the internet websites used by traders to seek out or offer trading deals in mobile telephones.  His evidence was about such matters in general, industry-wide, terms, and did not relate specifically to the Appellant or the chain of transactions with which it was related.

28.  We also had the witness statement of Mr Phillip Sarocka, who is an officer of the Commissioners currently working as an operational accountant.  Mr Sarocka had prepared a witness statement and he gave oral evidence at the hearing and was cross-examined by Mr Goodwin for the Appellant.  Mr Sarocka’s evidence related to his investigations of Associate Investments Limited, its shareholder and directors, its business and associated companies, and its loans to the Appellant.

29.  Mr John Fletcher, a director of the firm of KPMG LLP, chartered accountants, also gave evidence for the Commissioners.  Mr Fletcher had prepared a witness statement and he gave oral evidence at the hearing and was cross-examined by Mr Goodwin.  Mr Fletcher has over fifteen years’ experience in the telecoms industry, with operational and advisory experience in the businesses of service providers, mobile network operators, mobile equipment manufacturers, authorised distributors and mobile telephone handset direct-sales operators.  His work has involved the examination of distribution channels for mobile telephone handsets in markets in western and central Europe, the Middle East and Asia.  His evidence related to the development and structure of the mobile telephone handset industry generally, and the nature and scope of the authorised (or “white”) market and also the unauthorised (or “grey”) market for mobile telephone handsets, examining opportunities in the grey market as they appeared in 2006.  His evidence was about such matters in general, industry-wide, terms, and did not relate specifically to the Appellant or the chain of transactions with which the Appellant was related, nor did it relate to fraud within the industry.  Mr Fletcher’s evidence was compiled in 2008 and 2009, and some of the source material he used (for example, certain industry reports) was compiled after 2006, although for the most part such material was by way of comment on the market as it operated in 2006.

30.  The only witness for the Appellant was Mr Peter Carnall.  Mr Carnall is the founder of the Appellant, and through a holding company is its controlling shareholder.  At all material times Mr Carnall was the sole director of the Appellant.  Mr Carnall had prepared two witness statements.  At the hearing he gave extensive oral evidence and was cross-examined by Mr Kinnear for the Commissioners.  Mr Carnall’s evidence concerned his experience in the mobile telephone business before setting up his own business; his establishment of various companies, including the Appellant, engaged in the trading of mobile telephone handsets and related businesses within the UK market; his establishment of the Appellant to trade in mobile telephone handsets in the international “grey market”; the scope and nature of such “grey market” and the Appellant’s business within that market; the scope and nature of the transactions undertaken by the Appellant, including the three transactions the subject of this appeal; the due diligence procedures undertaken by the Appellant with regard to both its suppliers and customers; its relationship with Insignia Telecom (UK) Limited, the supplier to the Appellant in each of the three disputed transactions; the arrangements the Appellant made with its freight forwarders for holding and delivering mobile telephone handsets sold to its customers and the checks made by the Appellant of its stock; the documentation and terms and conditions of the Appellant’s purchases and sales of mobile telephone handsets; the loan and financial arrangements between Associated Investments Limited and the Appellant; and the current financial position of the Appellant.

The findings of fact

31.    From the evidence before us we make the findings of fact as set out in paragraphs 32 to 80 below.

The Appellant and its controlling director

32.    The Appellant was incorporated on 27 May 2004, and it entered into its first significant trading transactions in October 2005. 

33.    Mr Peter Carnall has been the sole director of the Appellant since its incorporation.  He, directly or through a holding company, has been the controlling shareholder of the Appellant since its incorporation, and is the individual primarily responsible for the business and transactions undertaken by the Appellant – Mr Carnall accepts that he is the controlling mind of the Appellant.  The Appellant is one of a group of associated companies under the control of Mr Carnall, and there are six employees whose services are shared between the businesses of those companies (including the Appellant).

34.    Mr Carnall has had extensive experience of the mobile telephone market, having worked in that business since the age of eighteen.  The following is a summary of his career and of the companies he has formed once he entered into business on his own account:

(1)        In 1995 – 1996 he was employed by 20:20 Logistics Limited, part of the Caudwell group of companies with substantial mobile telephone trading and services businesses.  He worked in the department responsible for retaining customers.

(2)        From 1996 to 1999 he undertook various sales and sales management roles.

(3)        In 1999 – 2000 he was employed by Tricell UK Limited, a company trading in the wholesale mobile telephone grey market.  In the course of that employment he developed business contacts with UK suppliers and customers.

(4)        In 2000 – 2003 Mr Carnall was employed by JRS Trading (UK) Limited, also a company trading in the wholesale mobile telephone market, where he was engaged in trading transactions, becoming a director of the company in July 2002, and extending the company’s business and range of suppliers and customers.  In 2002 Mr Carnall recruited Mr Claudio Ramos as an employee of JRS Trading (UK) Limited working as a trade sales and account manager.  Mr Ramos was experienced in the mobile telephone wholesale trading market.  In May 2003 JRS Trading (UK) Limited ceased trading, following the introduction by the Commissioners of the joint and several liability provisions applicable to trading in mobile telephones.

(5)        For brief periods in late 2003 Mr Carnall was employed by a number of different companies active in wholesale trading in mobile telephones.

(6)        In 2003 Mr Carnall formed Eurostar Telecom UK Limited, which began to trade wholesale in mobile telephones in early 2004, principally with UK suppliers and UK customers.  A major supplier was Insignia Telecom (UK) Limited (“Insignia”), a company known to Mr Carnall since 2001.  Eurostar Telecom UK Limited continues to trade.

(7)        In August 2004 Mr Carnall and a colleague formed Eurostar Technologies Limited.  This company does not trade in mobile telephones, but provides services to the mobile telephone market, most significantly re-programming the software in mobile telephones which relates to the operating languages used in a handset.

(8)        In March 2005 Mr Carnall and the same colleague formed Eurostar Shop Limited, which operated a retail shop selling mobile telephones and accessories.  This business did not achieve worthwhile profitability and was sold.

(9)        In June 2005 Mr Carnall formed Eurostar Holdings Limited to act as a group holding company and to provide capital to other group companies.

35.    Mr Carnall formed the Appellant to operate alongside Eurostar Telecom UK Limited, as a wholesale trader in mobile telephones, but trading with overseas customers.  The Appellant was financed with working capital by a loan made to it by Associate Investments Limited, as detailed in paragraphs 59 to 66 below.  Initially the Appellant had a bank account with the Bank of Scotland, but that account was closed by the Bank of Scotland when, as a general move, it closed the bank accounts of companies trading in mobile telephones.  Since then the Appellant has maintained a bank account with the Co-operative Bank.  The Appellant also has a bank account with First Curaçao International Bank (“FCIB”) which was inactive in July 2006.

36.    The Appellant applied for VAT registration on 3 June 2005, describing its business activities as the import and export of mobile telephones internationally, and stating that it expected to receive regular repayments of VAT from HMRC.  In the VAT registration form the Appellant estimated that for the first twelve months of trading following registration it would purchase goods to the value of £10 million from EC suppliers and sell goods to the value of £15 million to EC customers.  The Appellant’s effective date of VAT registration was 15 June 2005.

37.    The Appellant made monthly VAT returns.  In July, August and September 2005 it made nil VAT returns, and thereafter all its returns were repayment VAT returns.  The following table sets out the Appellant’s monthly returns as from October 2005 showing net turnover and VAT repayments as derived from its VAT returns:

VAT period Net turnover (£) VAT repayment (£)

10/05 1,381,000 228,227

11/05 1,662,000 274,507

12/05 1,472,500 244,074

01/06 3,072,000 501,246

02/06 2,336,400 387,681

03/06 4,573,000 748,174

04/06 1,135,000 189,876

05/06 3,176,500 525,772

06/06 0 2,470

07/06 1,600,500 1,681

08/05 0 2,705

09/06 61,500 1,299

(The VAT repayment figures are the amount of VAT actually repaid, not the amount claimed as repayment: hence for the 07/06 period the amount reclaimed by the Appellant in its VAT return for that period was £262,536 of which £1,681 was allowed, and the balance of £260,855 is the disputed repayment the subject of this appeal.)

As from the 10/06 period the Appellant’s VAT returns show nil outputs: the Appellant effectively ceased to trade as from then.

38.    The Appellant is now in administration.

Deal Chain 1

39.    On 12 September 2006 an officer of the Commissioners visited the Appellant to discuss the 07/06 VAT return, and this led to an extended verification process on the part of the Commissioners in relation to the Appellant’s transactions in the 07/06 period.  This process eventually resulted in the Commissioners refusing to repay the Appellant the input tax paid on the three supply transactions entered into by the Appellant in that period (that is, the three transactions entered into in July 2006).

40.  On 21 July 2006 the Appellant entered into the first of those transactions for which it claims repayment of input tax, and to which this appeal relates (“Deal 1”).  The following facts are established from the evidence of the Commissioners in relation to Deal 1 and the chain of transactions which preceded and included Deal 1 (“Deal Chain 1”):

(1)        On 21 July 2006 Phone City Ltd sold 3,000 units of Nokia N91 series mobile telephones to Cirex Corporation Ltd at a price per unit (excluding VAT) of £282.35 (total price: £847,050.00).  Phone City Ltd was at that time registered for VAT, and charged VAT of £148,233.75 on the sale (total amount due to Phone City Ltd: £995,283.75).  Phone City Ltd proved to be a defaulting trader which is presumed to have imported the mobile telephones in question (see paragraph 41 below), so that it received (and failed to account to the Commissioners for) net VAT of £148,233.75;

(2)        Also on 21 July 2006 Cirex Corporation Ltd sold 3,000 units of Nokia N91 series mobile telephones to Data Solutions Northern Ltd at a price per unit (excluding VAT) of £282.55 (total price: £847,650.00, and gross profit margin per unit £0.20).  Cirex Corporation Ltd was registered for VAT, and charged VAT of £148,338.75 on the sale (total amount due to Cirex Corporation Ltd: £995,988.75).  Cirex Corporation Ltd had a net VAT liability of £105.00;

(3)        Also on 21 July 2006 Data Solutions Northern Ltd sold 3,000 units of Nokia N91 series mobile telephones to Topbrandz Ltd at a price per unit (excluding VAT) of £282.75 (total price: £848,250.00, and gross profit margin per unit £0.20).  Data Solutions Northern Ltd was registered for VAT, and charged VAT of £148,443.75 on the sale (total amount due to Data Solutions Northern Ltd: £996,693.75).  Data Solutions Northern Ltd had a net VAT liability of £105.00;

(4)        Also on 21 July 2006 Topbrandz Ltd sold 3,000 units of Nokia N91 series mobile telephones to J D Group plc at a price per unit (excluding VAT) of £283.00 (total price: £849,000.00, and gross profit margin per unit £0.25).  Topbrandz was registered for VAT, and charged VAT of £148,575.00 on the sale (total amount due to Topbrandz Ltd: £997,575.00).  Topbrandz Ltd had a net VAT liability of £131.25;

(5)        Also on 21 July 2006 J D Group plc sold 3,000 units of Nokia N91 series mobile telephones to The Export Company (UK) Ltd at a price per unit (excluding VAT) of £283.25 (total price: £849,750.00 and gross profit margin per unit £0.25).  J D Group plc was registered for VAT, and charged VAT of £148,706.30 on the sale (total amount due to J D Group plc: £998,456.30).  J D Group plc had a net VAT liability of £131.20;

(6)        Also on 21 July 2006 The Export Company (UK) Ltd sold 3,000 units of Nokia N91 series mobile telephones to Top Telecoms Ltd at a price per unit (excluding VAT) of £284.50 (total price: £853,500.00, and gross profit margin per unit £1.25).  (The actual sales invoice is dated 25 July 2006, but the accompanying pro forma invoice, and all other related documentation such as the Supplier Declaration is dated 21 July 2006.)  The Export Company (UK) Ltd was registered for VAT, and charged VAT of £149,362.50 on the sale (total amount due to The Export Company (UK) Ltd: £1,002,862.50).  The Export Company (UK) Ltd had a net VAT liability of £656.20;

(7)        Also on 21 July 2006 Top Telecoms Ltd sold 3,000 units of Nokia N91 series mobile telephones to Insignia at a price per unit (excluding VAT) of £285.00 (total price: £855,000.00 and gross profit margin per unit £0.50).  Top Telecoms Ltd was registered for VAT, and charged VAT of £149,625.00 on the sale (total amount due to Top Telecoms Ltd: £1,004,625.00).  Top Telecoms Ltd had a net VAT liability of £262.50;

(8)        Also on 21 July 2006 Insignia sold 3,000 units of Nokia N91 series mobile telephones to the Appellant at a price per unit (excluding VAT) of £286.00 (total price: £858,000.00, and gross profit margin per unit £1.00).  Insignia was registered for VAT, and charged VAT of £150,150.00 on the sale (total amount due to Insignia: £1,008,150.00).  Insignia had a net VAT liability of £525.00;

(9)        Also on 21 July 2006 the Appellant sold 3,000 units of Nokia N91 series mobile telephones to URTB SARL (“URTB”) at a price per unit of £307.50 (total price: £922,500.00, and gross profit margin per unit £21.50).  URTB is a company incorporated in France and, as at 21 July 2006, was registered for French VAT purposes.  The sale by the Appellant was by way of zero-rated export, so that no VAT was charged by the Appellant on the sale and in consequence the Appellant claims the right to repayment of the VAT of £150,150.00 charged to it by Insignia. 

(10)     There is no available documentation relating to URTB’s subsequent sale of the mobile telephones in question, but subsequent enquiries made by the Commissioners of the French VAT authorities revealed that the great majority of sales made by URTB were made to a Polish company identified as Amex FHU;

(11)     There is no available documentation relating to the purchase by Phone City Ltd of Nokia N91 series mobile telephones, but release notes provided by Interken Freighters (UK) Ltd, the UK freight forwarders used by Data Solutions Northern Ltd and subsequent traders in Deal Chain 1 (including the Appellant), show that 3,000 units of Nokia N91 series mobile telephones were released by Silus BV, a Netherlands company (registered for Netherlands VAT purposes) to Data Solutions Northern Ltd;

(12)     Payment for the goods was made by transfers between the bank accounts of the respective parties.  All of the parties, except for the Appellant and Insignia, held accounts with FCIB (as mentioned, the Appellant held an account with FCIB, but it was at this time dormant, and the Appellant used its account with the Co-operative Bank to receive and make payments on this occasion).  Funds moved as follows:

(a)        URTB paid the Appellant £461,250.00 on 26 July 2006 and £461,248.00 on 27 July 2006;

(b)        The Appellant paid Insignia £500,000.00 on 26 July 2006 and £508,150.00 on 27 July 2006;

(c)        Insignia paid Top Telecoms Ltd £498,250.00 on 26 July 2006 and £506,375.00 on 27 July 2006;

(d)        Top Telecoms Ltd paid The Export Company (UK) Ltd £602,862.50 and £400,000.00 on 27 July 2006;

(e)        The Export Company (UK) Ltd paid J D Group plc £998,456.25 on 25 July 2006;

(f)         J D Group plc paid Topbrandz Ltd £997,575.00 on 25 July 2006;

(g)        Topbrandz Ltd paid Data Solutions Northern Ltd £996,693.75 on 25 July 2006;

(h)        Data Solutions Northern Ltd paid Cirex Corporation Ltd £995,988.75 on 25 July 2006;

(i)         Cirex Corporation Ltd paid Phone City Ltd £995,283.75 on 25 July 2006; and

(j)         Phone City Ltd paid Silus BV £993,345.00 on 25 July 2006.

(13)     The mobile phones were held at the same freight forwarder throughout the buffer trades, and were sold from trader to trader on “ship on hold” terms, which allowed each trader to agree to sell to his customer before taking title to the goods from his supplier.  It is not clear from the documentation when, in the chain of transactions, title passes from a supplier to its customer: whether title passes down the chain as payment for the goods passes up the chain, or whether title passes when the supplier releases the goods (after payment) by direction to the freight forwarder – in either event the customer at the end of the chain makes payment before receiving title (title remaining with the originating supplier until it in turn receives payment up the chain).

(14)     The Appellant’s purchase order placed with Insignia is dated 21 July 2006 for delivery on that date.  In addition to specifying the number and type of the goods (i.e. 3,000 Nokia N91 series mobile telephones), the price and VAT, the terms of the purchase order specify that it is subject to an IMEI check on the goods; that the goods must be supplied free from third party claims; and that Insignia must have full legal title to sell the goods.  The goods are sold “ship on hold”, and payment in full is to be made “upon receipt of a 100% inspection of the goods”.  The purchase order is signed by Mr Carnall, and the sales representative of Insignia is shown as Claudio Ramos (a former colleague of Mr Carnall: see paragraph 34(4) above);

(15)     Insignia’s invoice to the Appellant in relation to the sale of the goods is also dated 21 July 2006.  It states: “Any goods sold by Insignia Telecom (UK) Ltd have been purchased from a UK supplier.  Insignia Telecom (UK) Ltd has carried out all the relevant checks in line with HM Customs & Excise to establish the legitimacy of our supplier and to the best of our knowledge the VAT has been paid on these goods.”  In addition, Insignia completed a “UK Transaction Supplier Declaration” in a format supplied by the Appellant, in which Insignia declared that it was not selling the goods at a loss; that it had made no third party payments with its supplier; that Insignia had no grounds to suspect that the relevant VAT on the goods had not or would not be paid by its supplier, and that the VAT on its sale to the Appellant would be declared; that it had carried out reasonable due diligence checks on its supplier, including verification with HMRC of its VAT registration; that it had obtained a supplier declaration in like terms from its supplier; and that Insignia owned the goods or had full title to the goods at the time of their sale to the Appellant;

(16)     On 27 July 2006 Mr Carnall signed a “Confirmation of Goods Acceptance” confirming to Insignia that the goods had been received and accepted by the Appellant and confirming that full legal title in the goods had been transferred to the Appellant;

(17)     The Appellant’s invoice to URTB in relation to the sale of the 3,000 Nokia N91 series mobile telephones is numbered 0022 and is dated 21 July 2006.  It shows URTB as the “Customer”, with an address in Paris, and a French VAT registration number, and specifies the goods and the price.  Delivery terms are shown as CIF (carriage, insurance and freight), with the goods to be delivered to AFI Logistique SARL at Roissy, France.  In the accompanying pro forma invoice it is stated that the goods will remain on hold until full payment is received, and that they remain the Appellant’s property until that time, but that risk passes to URTB upon delivery.  It is also stated that there is no guarantee as to a valid manufacturers’ European warranty, and that the handset software and manual languages “may be varied”.  The invoice provides details of the Appellant’s sterling bank account with the Co-operative Bank;

(18)     At the Appellant’s request, and expressed to be as part of the Appellant’s procedures and due diligence policy, URTB completed a “Customer Declaration”, declaring that the goods were not being sold on to its customer at a lower price; that the goods were not to be sold on to a customer based in the UK; and that reasonable due diligence checks had been carried out on its customer, as to its incorporation, credit-worthiness, and bank details;

(19)     The Nokia N91 series mobile telephones traded in these transactions were of Central European specification.  The handsets were capable of being used in the UK and elsewhere in Europe (they had an English language facility alongside other European language facilities, but a manual in English only), and the battery charger included in the package with each handset was of a UK three plug design so that it could not be used outside the UK without the appropriate plug adapter;

(20)     Employees of the Appellant carried out a physical inspection of the boxed and palleted consignment of Nokia N91 series mobile telephones at the premises of the freight forwarders holding the goods, Interken Freighters (UK) Ltd, on 21 July 2006, and produced an inspection report with supporting photographs.

(21)     Each of the 3,000 Nokia N91 series mobile telephones traded in these transactions would have had a unique International Mobile Equipment (“IMEI”) number marked on the handset itself and its retail packaging, and used as the identifier of the individual telephone.  The Appellant checked the IMEI numbers of 45 sample mobile telephones in the course of the physical inspection of the goods.  The Commissioners scan IMEI numbers of mobile telephones and maintain a database which allows them to track the movement of individual mobile telephones.  The database reveals that 24 mobile telephones of the sample of 45 checked by the Appellant were in transit at Heathrow Airport on 23 and 24 August 2006;

(22)     At the time the 3,000 Nokia N91 series mobile telephones traded in these transactions were purchased by the Appellant they were held by freight forwarders, Interken Freighters (UK) Ltd, to the order of Insignia.  At some point on or about 24 July 2006 Insignia directed the freight forwarder to allocate the mobile telephones to the Appellant;

(23)     On 24 July 2006 at the direction of the Appellant the Nokia N91 series mobile telephones were shipped at the Appellant’s instruction and cost to AFI Logistique SARL’s warehouse at Roissy in France to be allocated to URTB, but to remain on hold until released on instructions by the Appellant.  On 27 July 2006 the Appellant directed AFI Logistique to release the goods to URTB, and URTB confirmed that day its acceptance of the goods.

41.    The relevant facts in relation to Phone City Ltd are as follows:

(1)        Phone City Ltd was incorporated on 2 August 2004 and registered for VAT purposes on 1 February 2005.  Its application for registration stated that its business was “contract mobile phone distributors”.  On 25 July 2006 the Commissioners deregistered Phone City Ltd because of persistent non-compliance.  On 25 April 2007 Phone City Ltd was wound up owing HMRC the sum of £34,014,672.36;

(2)        Neither the directors nor the company secretary of Phone City Ltd had had any previous business experience – the principal director and one of the shareholders was at the time a medical student (although it is not clear whether this individual was effectively the agent of a “shadow director”, a person who was unable to be appointed director, but who was effectively running the company), and the individual appointed company secretary similarly claimed to be little more than a “front man”;

(3)        Phone City Ltd’s turnover, as appearing in its VAT returns, was very substantial, growing from £3,683 in its first quarterly return (05/05) to £304 million in its 08/06 return.  Most of that turnover comprised the sale of mobile telephones;

(4)        Throughout its trading life there was substantial contact between Phone City Ltd and the Commissioners by way of visits by officers and correspondence.  The Commissioners regularly warned the company about the prevalence of MTIC fraud, expressed concerns about the inadequacy of its due diligence processes and the fact that it was making payments to third parties (rather than to is immediate suppliers – an indication of possible fraud in a chain of transactions), and advised the company that most of its deals had been traced back through a chain of transactions to defaulters.  The company continued to make UK and export sales.  Little, if any, remedial action was taken by Phone City Ltd to deal with these concerns of the Commissioners – it continued to increase its business with a disregard of the connections to fraudulent transactions;

(5)        The directors and the manager of Phone City Ltd consistently failed to keep appointments with officers of the Commissioners, failed to supply information, records and documents requested by the Commissioners by way of support for the VAT returns submitted, and generally evaded all attempts by the Commissioners to investigate its business and the transactions it entered into

(6)        In the light of their concerns about the company and its likely involvement with fraudulent transactions, the Commissioners “blocked” the VAT number of Phone City Ltd on 26 June 2006.  This meant that other companies seeking to trade with Phone City Ltd were thereafter, when carrying out their verification process, put on notice of its suspect status;

(7)        In July 2006 the Commissioners obtained evidence from freight forwarders that Phone City Ltd was acquiring mobile telephones and similar goods from a number of EU countries in eastern Europe, indicating to the Commissioners that Phone City Ltd was continuing to trade notwithstanding the “blocked” VAT number;

(8)        On 25 July 2006 Phone City Ltd paid to Silus BV the sum of £993,345.00 which, save as to some £2,000, corresponds to the VAT-inclusive price Phone City itself received from Cirex Corporation Ltd the same day for the sale of the 3,000 Nokia N91 series mobile telephones.  Silus BV is a Netherlands company, and it is to be expected that it would not charge VAT on the sale of goods to a UK trader such as Phone City Ltd.  As mentioned at paragraph 40(10) above, Silus BV instructed the common freight forwarder to release 3,000 Nokia N91 series mobile telephones to a company two steps down Deal Chain 1, Data Solutions Northern Ltd.  There is no evidence of a sales invoice for the sale of 3,000 Nokia N91 series mobile telephones by Silus BV to Phone City Ltd;

(9)        On 25 July 2006 the Commissioners deregistered Phone City Ltd;

(10)     The Commissioners then carried out an extensive exercise examining the claims and transactions underlying the outstanding VAT returns of Phone City Ltd (principally the 05/06 quarterly return and the final return).  The officers of the company failed to provide records or other information, and at every stage thwarted the investigations of the Commissioners by failing to attend meetings, failing to take agreed follow-up action, and individually evading responsibility by claiming ignorance or that the matter was the responsibility of someone else;

(11)     On 25 April 2007 Phone City Ltd was wound up.  It was insolvent;

(12)     The Commissioners then proceeded to make a series of assessments under section 73(1) VATA 1994, that is, to the best judgment of the Commissioners.  These assessments were calculated on the basis of such information as Phone City Ltd had supplied and further information available to MTIC fraud officers of the Commissioners nation-wide in relation to transactions where Phone City Ltd was a party;

(13)     On 25 July 2007 the Commissioners issued an assessment on Phone City Ltd for VAT due of £1,950,266 in relation to certain transactions entered into in its quarterly return period 05/06.  Further adjustments were made resulting in a liability of £2,757,027.80;

(14)     On 24 August 2006 the Commissioners issued an assessment on Phone City Ltd for VAT due of £224,515.68 in relation to certain transactions entered into in its quarterly return period 02/06;

(15)     The Commissioners also made a series of assessments (totalling £31,033,131) on Phone City Ltd for its final period (1 June 2006 to the date of deregistration, 25 July 2006).  The assessments covered under-declared VAT on sales made by Phone City Ltd and VAT input tax denied due to lack of evidence or on the basis that Phone City Ltd knew or should have known that the transactions in question were connected to fraud;

(16)     Included in those assessments for the final period was the VAT chargeable by Phone City Ltd to Cirex Corporation Ltd on the sale of 3,000 Nokia N91series mobile telephones on 21 July 2006 (a sum of £148,233.75), that is, the transaction at the commencement of Deal Chain 1.  No appeal has been made by Phone City Ltd against such assessments, and the VAT so assessed has not been paid by Phone City Ltd;

(17)     Also included in those assessments for the final period was the VAT chargeable by Phone City Ltd to Gemini Technology Ltd on the sale of 2,000 Nokia N71 series mobile telephones on 21 July 2006 (a sum of £81,550.00), that is, the transaction at the commencement of Deal Chain 2 (see below).  No appeal has been made by Phone City Ltd against such assessments, and the VAT so assessed has not been paid by Phone City Ltd;

(18)     The affairs of Phone City Ltd have been investigated by the Insolvency Service.  The Secretary of State for Business has accepted undertakings from the two former directors of Phone City Ltd that neither will, for a period of twelve years, be a director of a company or in any way be concerned or take part in the promotion, formation or management of a company without the leave of the court.  The stated reason for the undertakings is that the director concerned, “caused or allowed Phone City Ltd to undertake a method of trading which put HMRC at risk of being subject to a Missing Trader Intra Community VAT fraud, which resulted in VAT monies owed to HMRC…which remains unpaid at the date of the liquidation.  If [the former director] did not know, then he abrogated his duty by either being reckless or grossly negligent as to whether Phone City Ltd was involved in such fraud.”  Any act by the former director in contravention of the undertaking given may lead to his criminal prosecution.

42.    The Commissioners had access to the detailed banking records of FCIB.  As mentioned, all the companies in Deal Chain 1 held accounts with FCIB, with the exception of Insignia (which held an account with Handelsbank).  The Appellant held an account with FCIB but it was dormant, the Appellant using an account it held with the Co-operative Bank.  The Commissioners’ investigations revealed that funds were transferred between the companies in Deal Chain 1 as described in paragraph [40(12)] above.  Additionally, those investigations revealed the following:

(1)        Silus BV paid an FCIB account holder identified as Global System Management the sum of £985,575.00 on 25 July 2006;

(2)        Global System Management paid an FCIB account holder identified as Amex the sum of £465,000.00 on 25 July 2006;

(3)        Amex paid URTB the sum of £462,750.00 on 25 July 2006; and

(4)        (as mentioned in paragraph 40(12) above), URTB paid the Appellant the sum of £461,250.00 on 26 July 2006 towards payment for the 3,000 Nokia N91 series mobile telephones which had been traded in Deal Chain 1 (the balance of £461,248.00 was paid by URTB to the Appellant on the following day, 27 July 2006 (URTB having received £462,750.00 into its FCIB account from an unidentified party on 26 July 2006)).

All the FCIB accounts (including those held by overseas companies) were sterling accounts.

In terms of the flow of funds as evidenced by the FCIB accounts (and the bank accounts of the Appellant and Insignia), the starting point, chronologically, is the payment of £998,456.25 by The Export Company (UK) Ltd to J D Group plc on 25 July 2006, with The Export Company (UK) Ltd receiving payment of £1,002,862.50 from Top Telecoms Ltd on 27 July 2006 at the conclusion of the series of payments (see paragraph 40(12) above).

It is also the case that on 25 July URTB paid £461,250.00 into the FCIB account held by Eurostar Telecom (UK) Ltd, an associated company of the Appellant.  It would seem that this payment was made in error as the account of Eurostar Telecom (UK) Ltd shows that sum repaid to URTB’s FCIB account on the same day.

43.    On 19 May 2006 the Appellant sold 3,500 Sony Ericsson mobile telephones to URTB for £1,148,000.00, having purchased those telephones that day from Insignia for £1,078,000.00 (gross profit margin per unit of £20.00).

44.    Insignia sold mobile telephones directly to URTB on two occasions in April 2006.

Deal Chain 2

45.  Also on 21 July 2006 the Appellant entered into the second of those transactions for which it claims repayment of input tax, and to which this appeal relates (“Deal 2”).  The following facts are established from the evidence of the Commissioners in relation to Deal 2 and the chain of transactions which preceded and included Deal 2 (“Deal Chain 2”):

(1)        On 21 July 2006 Phone City Ltd sold 2,000 units of Nokia N71 series mobile telephones to Gemini Technology Ltd at a price per unit (excluding VAT) of £233.00 (total price: £466,000.00).  Phone City Ltd was at that time registered for VAT, and charged VAT of £81,550.00 on the sale (total amount due to Phone City Ltd: £547,550.00).  Phone City Ltd proved to be a defaulting trader (see paragraph 41 above) so that it received (and failed to account to the Commissioners for) net VAT of £81,550.00;

(2)        Also on 21 July 2006 Gemini Technology Ltd sold 2,000 units of Nokia N71 series mobile telephones to Data Solutions Northern Ltd at a price per unit (excluding VAT) of £233.25 (total price: £466,500.00, and gross profit margin per unit £0.25).  Gemini Technology Ltd was registered for VAT, and charged VAT of £81,637.50 on the sale (total amount due to Gemini Technology Ltd: £548,137.50).  Gemini Technology Ltd had a net VAT liability of £87.50;

(3)        Also on 21 July 2006 Data Solutions Northern Ltd sold 2,000 units of Nokia N71 series mobile telephones to Chahal & Sons Ltd at a price per unit (excluding VAT) of £214.50 (total price: £429,000.00, and a loss per unit of £18.75).  Data Solutions Northern Ltd was registered for VAT, and charged VAT of £75,075.00 on the sale (total amount due to Data Solutions Northern Ltd: £504,075.00).  Data Solutions Northern Ltd had a net VAT credit of £656.25;

(4)        Also on 21 July 2006 Chahal & Sons Ltd sold 2,000 units of Nokia N71 series mobile telephones to Total Data Systems Ltd at a price per unit (excluding VAT) of £215.00 (total price: £430,000.00, and gross profit margin per unit £0.50).  Chahal & Sons Ltd was registered for VAT, and charged VAT of £75,250.00 on the sale (total amount due to Chahal & Sons Ltd: £505,250.00).  Chahal & Sons Ltd had a net VAT liability of £175.00;

(5)        Also on 21 July 2006 Total Data Systems Ltd sold 2,000 units of Nokia N71 series mobile telephones to Insignia at a price per unit (excluding VAT) of £216.00 (total price: £432,000.00 and gross profit margin per unit £1.00).  Total Data Systems Ltd was registered for VAT, and charged VAT of £75,600.00 on the sale (total amount due to Total Data Systems Ltd: £507,600.00).  Total Data Systems Ltd had a net VAT liability of £350.00;

(6)        Also on 21 July 2006 Insignia sold 2,000 units of Nokia N71 series mobile telephones to the Appellant at a price per unit (excluding VAT) of £217.00 (total price: £434,000.00, and gross profit margin per unit £1.00).  Insignia was registered for VAT, and charged VAT of £75,950.00 on the sale (total amount due to Insignia: £509,950.00).  Insignia had a net VAT liability of £350.00;

(7)        Also on 21 July 2006 the Appellant sold 2,000 units of Nokia N71 series mobile telephones to Compucell BV (“Compucell”) at a price per unit of £232.00 (total price: £464,000, and gross profit margin per unit £15.00).  Compucell is a company incorporated in the Netherlands and, as at 21 July 2006, was registered for Netherlands VAT purposes.  The sale by the Appellant was by way of zero-rated export, so that no VAT was charged by the Appellant on the sale, and in consequence the Appellant claims the right to be repaid the VAT of £75,950.00 charged to it by Insignia;

(8)        There is no available documentation relating to the purchase by Phone City Ltd of Nokia N71 series mobile telephones;

(9)        Compucell paid the Appellant £464,000.00 on 25 July 2006, and the Appellant paid Insignia £509,950.00 on 26 July 2006.  There are no FCIB or other records available which show funds passing through the chain of transactions;

(10)     The 2,000 Nokia N71 series mobile telephones were held at the freight forwarder company Pauls Freight Services Limited during the buffer trades.  Sales were made on a “ship on hold” basis;

(11)     The documentation between Insignia and the Appellant in relation to the purchase of the 2,000 Nokia N71 series mobile telephones (purchase order, invoice, supplier declaration, etc) is dated 21 July 2006, and, apart from the description of the goods and the price, is in all material respects the same as that in relation to the mobile telephones in Deal 1;

(12)     Likewise, the documentation between the Appellant and Compucell in relation to the sale of the 2,000 Nokia N71 series mobile telephones (purchase order, invoice, all dated 21 July 2006) takes the same form as the Appellant’s sale documentation in Deal 1.  The Appellant’s invoice is numbered 0023, and the customer is shown as Compucell, with an address in the Netherlands, and a Netherlands VAT registration number;

(13)     The Appellant arranged for the goods to be shipped on hold to Interaction Logistics BV in the Netherlands, and for them there to be allocated to Compucell and held pending release on the instructions of the Appellant.  On 25 July 2006 Mr Carnall signed an authorisation releasing the goods to Compucell;

(14)     The goods in Deal 2 were inspected on 21 July 2006 by the Appellant’s staff at the premises of the freight forwarders.  The inspection report shows the mobile telephones to have 2-pin chargers (i.e. for Continental Europe, rather than UK, usage), and with instruction manuals in English and French.  30 IMEI numbers were checked from different pallets.  The Commissioners later checked these IMEI numbers against their tracking database.  The database reveals that all 30 mobile telephones of the sample checked by the Appellant were in transit at Heathrow Airport on 12 June 2006, 1 July 2006 and again on 5 August 2006.

46.    The Appellant had had no prior dealings with Compucell, and it is not clear how the parties came together, nor is there evidence of any negotiation of the sale and purchase: Mr Carnall’s evidence was that it was probable that contact was made through an industry website.  The first communication between the two companies was an undated standard form introduction letter from Compucell to the Appellant faxed by Compucell on the afternoon of 21 July 2006, the day of the transaction (the extent of the due diligence checks carried out by the Appellant on Compucell is referred to in paragraph 80(2) below).  By the time the Appellant received this introduction letter, it already had in place the supplier documentation provided by Insignia.  Staff of the Appellant made a site visit to Compucell in September 2006, some two months after the transaction.  The Appellant had no further dealings with Compucell beyond Deal 2.  The Commissioners have been advised by the Netherlands tax authorities that criminal proceedings have been commenced in the Netherlands against Compucell, and that its director has disappeared and cannot be traced.

47.    There was an association between Insignia and Total Data Systems Ltd, the company in Deal Chain 2 which sold the mobile telephones to Insignia, in that two of the shareholders of Total Data Systems Ltd are directors of Insignia, and a third shareholder is Mr Ramos, the employee of Insignia responsible for the sales to the Appellant (and, as mentioned, the acquaintance and former colleague of Mr Carnall).  For a time the two companies shared the same principal place of business.

Deal Chain 3

48.  On 26 and 27 July 2006 the Appellant entered into the third of those transactions for which it claims repayment of input tax, and to which this appeal relates (“Deal 3”).  The following facts are established from the evidence of the Commissioners in relation to Deal 3 and the chain of transactions which preceded and included Deal 3 (“Deal Chain 3”):

(1)        On 26 July 2006 Kaymore Export Ltd sold 998 units of Nokia N72 series mobile telephones to Simply Connect Ltd at a price per unit (excluding VAT) of £195.80 (total price: £195,408.40).  Kaymore Export Ltd was at that time registered for VAT, and charged VAT of £34,196.47 on the sale (total amount due to Kaymore Export Ltd: £229,604.87).  Kaymore Export Ltd proved to be a defaulting trader (see paragraph 49 below) so that it received (and failed to account to the Commissioners for) net VAT of £34,196.47;

(2)        Also on 26 July 2006 Simply Connect Ltd sold 998 units of Nokia N72 series mobile telephones to Imang Ltd at a price per unit (excluding VAT) of £195.85 (total price: £195,458.30, and gross profit margin per unit £0.05).  Simply Connect Ltd was registered for VAT, and charged VAT of £34,205.20 on the sale (total amount due to Simply Connect Ltd: £229,663.50).  Simply Connect Ltd had a net VAT liability of £8.73;

(3)        Also on 26 July 2006 Imang Ltd sold 998 units of Nokia N72 series mobile telephones to Ultimate Wholesale Ltd at a price per unit (excluding VAT) of £195.90 (total price: £195,508.20, and gross profit margin per unit £0.05).  Imang Ltd was registered for VAT, and charged VAT of £34,213.94 on the sale (total amount due to Imang Ltd: £229,722.13).  Imang Ltd had a net VAT liability of £8.74;

(4)        Also on 26 July 2006 Ultimate Wholesale Ltd sold 998 units of Nokia N72 series mobile telephones to RS 23 Ltd at a price per unit (excluding VAT) of £196.00 (total price: £195,608.00, and gross profit margin per unit £0.10).  Ultimate Wholesale Ltd was registered for VAT, and charged VAT of £34,231.40 on the sale (total amount due to Ultimate Wholesale Ltd: £229,839.40).  Ultimate Wholesale Ltd had a net VAT liability of £17.46;

(5)        Also on 26 July 2006 RS 23 Ltd sold 998 units of Nokia N72 series mobile telephones to Inter Communication (UK) Ltd at a price per unit (excluding VAT) of £196.50 (total price: £196,107.00, and gross profit margin per unit £0.50).  RS 23 Ltd was registered for VAT, and charged VAT of £34,318.73 on the sale (total amount due to RS 23 Ltd: £230,425.73).  RS 23 Ltd had a net VAT liability of £87.33;

(6)        Also on 26 July 2006 Inter Communication (UK) Ltd sold 998 units of Nokia N72 series mobile telephones to Insignia at a price per unit (excluding VAT) of £197.00 (total price: £196,606.00 and gross profit margin per unit £0.50).  Inter Communication (UK) Ltd was registered for VAT, and charged VAT of £34,406.05 on the sale (total amount due to Inter Communication (UK) Ltd: £231,012.05).  Inter Communication (UK) Ltd had a net VAT liability of £87.32;

(7)        On 27 July 2006 Insignia sold 998 units of Nokia N72 series mobile telephones to the Appellant at a price per unit (excluding VAT) of £199.00 (total price: £198,602.00, and gross profit margin per unit £2.00).  Insignia was registered for VAT, and charged VAT of £34,755.35 on the sale (total amount due to Insignia: £233,357.35).  Insignia had a net VAT liability of £349.30;

(8)        On 26 July 2006 Frequency 3G Telecom Ltd sold 2 units of Nokia N72 series mobile telephones to Eurostar Telecom (UK) Ltd at a price per unit (excluding VAT) of £191.00 (total price: £382.00).  Frequency 3G Telecom Ltd was registered for VAT, and charged VAT of £66.85 on the sale (total due to Frequency 3G Telecom Ltd: £448.85);

(9)        On 26 July 2006 Eurostar Telecom (UK) Ltd sold 2 units of Nokia N72 series mobile telephones to the Appellant at a price per unit (excluding VAT) of £199.00 (total price: £398.00).  Eurostar Telecom (UK) Ltd was registered for VAT, and charged VAT of £69.65 on the sale (total due to Eurostar Telecom (UK) Ltd: £467.65);

(10)     On 27 July 2006 the Appellant sold 1,000 units of Nokia N72 series mobile telephones to Bluestar Telecom ApS (“Bluestar”) at a price per unit of £214.00 (total price: £214,000.00, and gross profit margin per unit £15.00).  Bluestar is a company incorporated in Denmark and, as at 27 July 2006, was registered for Danish VAT purposes.  The sale by the Appellant was by way of zero-rated export, so that no VAT was charged by the Appellant on the sale and in consequence the Appellant claims the right to be repaid the VAT of £34,755.35 it was charged by Insignia (it appears from the Commissioners’ decision letter that they do not challenge the right of the Appellant to be repaid its input tax on its purchase of the 2 units of Nokia N72 series mobile telephones);

(11)     On 31 July 2006 Bluestar sold 1,000 units of Nokia N72 series mobile telephones to Silus BV at a price per unit of £217.00.  Silus BV is the Netherlands company which is involved in the payment chain in Deal Chain 1 (see paragraphs 40(11) and (12), 41(8) and 42(1) above);

(12)     There is no available documentation relating to the purchase by Kaymore Export Ltd of Nokia N72 series mobile telephones;

(13)     Bluestar paid the Appellant £214,000.00 on 31 July 2006, and the Appellant paid Insignia £233,357.35 on 1 August 2006.  There are no FCIB or other records available which show funds passing through the chain of transactions;

(14)     The 998 Nokia N72 series mobile telephones were held at the freight forwarder company Pauls Freight Services Limited during the buffer trades.  Sales were made on a “ship on hold” basis;

(15)     The documentation between Insignia and the Appellant in relation to the purchase of the 998 Nokia N72 series mobile telephones (purchase order, invoice, supplier declaration, etc) is dated 27 July 2006, and, apart from the description of the goods and the price, is in all material respects the same as that in relation to the mobile telephones in Deal 1 and Deal 2;

(16)     Likewise, the documentation between the Appellant and Bluestar in relation to the sale of the 1,000 Nokia N72 series mobile telephones (purchase order, invoice, all dated 27 July 2006) takes the same form as the Appellant’s sale documentation in Deal 1 and Deal 2.  The Appellant’s invoice is numbered 0024, and the customer is shown as Bluestar, with an address in Denmark, and a Danish VAT registration number;

(17)     The Appellant arranged for the goods to be shipped on hold to Kuehne & Nagel A/S in Denmark, and for them there to be held pending release on the instructions of the Appellant.  On 31 July 2006 Mr Carnall signed an authorisation releasing the goods to Bluestar;

(18)     The goods in Deal 3 were inspected on 27 July 2006 by the Appellant’s staff at the premises of the freight forwarders.  The inspection report shows the mobile telephones to be of central Europe specification and to have 2-pin chargers (i.e. for Continental Europe, rather than UK, usage), and with instruction manuals in English.  15 IMEI numbers were checked from different pallets.  The Commissioners later checked those IMEI numbers against their tracking database.  The database reveals that all 15 mobile telephones of the sample checked by the Appellant were in transit at Heathrow Airport on 23 June 2006 and again on 27 August 2006.

49.    As with Compucell, the Appellant had had no prior dealings with Bluestar, and again it is not clear how the parties came together nor of any negotiation of the sale and purchase: again, the evidence of Mr Carnall was that it was probable that contact was made through an industry website.  Again, as with Compucell, the first communication between the two companies was an undated standard form introduction letter from Bluestar to the Appellant faxed by Bluestar on 26 July 2006 (the extent of the due diligence checks carried out by the Appellant on Bluestar is referred to in paragraph 80(3) below).  The introduction letter from Bluestar is in identical terms to that sent by Compucell to the Appellant.  Staff of the Appellant made a site visit to Bluestar on 30 August 2006.

50.    The relevant facts in relation to Kaymore Export Ltd and other companies in Deal Chain 3 are as follows:

(1)        Kaymore Export Ltd was incorporated on 9 November 2000, and registered for VAT purposes from 1 February 2001.  In its application for VAT registration it described its main business activity as “the export of engines and spare parts”;

(2)        Kaymore Export Ltd’s VAT returns for each of the four VAT quarters up to 05/06 showed no output supplies, indicating that no trade was carried out during the period from 1 March 2005 to 31 May 2006;

(3)        In August 2006 the Commissioners received information that Kaymore Export Ltd had made substantial purchases of electronic goods from Sweden.  Investigations by the Commissioners resulted in Kaymore Export Ltd providing sales invoices and other sales documents recording some seventy transactions whereby Kaymore Export Ltd sold goods (including mobile telephones) to Simply Connect Ltd during the period 17 to 31 July 2006, those goods having a value in aggregate of £15,196,268.70, with a corresponding VAT liability of £2,659,347.07.  Included in these transactions is the sale of 998 Nokia N72 series mobile telephones, that is, the first transaction in Deal Chain 3.

(4)        The director of Kaymore Export Ltd, a Mr Gary Woodroof, claimed, in interviews with officers of the Commissioners, that he had no knowledge of those transactions with Simply Connect Ltd; that a former employee, a Mr Colin Ally, had persuaded Mr Woodroof to let him (Mr Ally) carry out trading transactions using the company; that because the company’s business of trading in engines and spare parts was declining he had agreed; and that Mr Ally had attended to everything relating to the trading transactions, for which Mr Ally had received a commission payment.  The Commissioners have been unable to contact Mr Ally;

(5)        On 1 September 2006 the Commissioners deregistered Kaymore Export Ltd on the grounds that it had been a knowing participant in trade in relation to which it had no intention of accounting for the VAT charged on the invoices it had issued;

(6)        Also on 1 September 2006 the Commissioners issued to Kaymore Export Ltd an assessment for VAT for its quarter 08/06 in the sum of £2,659,347.00.  Included in this assessment is the amount of VAT chargeable on the sale by Kaymore Export Ltd of the 998 Nokia N72 series mobile telephones it sold to Supply Connect Ltd on 26 July 2006;

(7)        Further investigations by the Commissioners revealed that Kaymore Export Ltd had entered into further sales of goods to Simply Connect Ltd in August 2006, and on 20 November 2006 an additional assessment was made for VAT on those sales in the sum of £1,277,672.00;

(8)        Neither the deregistration of Kaymore Export Ltd nor either of the assessments have been disputed by Kaymore Export Ltd or appealed;

(9)        None of the VAT assessed has been paid by Kaymore Export Ltd;

(10)     On 29 November 2006 Kaymore Export Ltd was placed in compulsory winding-up.  The unpaid VAT has since been written off;

(11)     The Commissioners proceeded to investigate the sequential companies in Deal Chain 3.  Simply Connect Ltd traded only between 14 July 2006 and 11 August 2006, and all its trades were with Kaymore Export Ltd as supplier and Imang Ltd as customer.  The company secretary of Simply Connect Ltd claimed that he was approached by Kaymore Export Ltd and Imang Ltd to enter into the transactions on a matched basis, with Simply Connect Ltd receiving a commission (which was never paid).  Imang Ltd claimed that it traded in mobile telephones for only one month, July 2006, and it had only one supplier (Simply Connect Ltd) and one customer (Ultimate Wholesale Ltd).  Payment arrangements were that Ultimate Wholesale Ltd made payment for the goods direct to Simply Connect Ltd, with Imang Ltd receiving a commission.

The remaining trading transactions entered into by the Appellant

51.    The Appellant commenced trading in October 2005.  Its pattern of trading, as appears from its VAT returns, is set out in paragraph 36 above.  All its trading transactions were sales of mobile telephones.  In the period up to and including July 2006 the total value of its sales in the 23 deals made by the Appellant was £20,409,000 giving an average value for each sale of £887,000.  The total cost of the mobile telephones traded in those 23 sales was £19,449,164.  The gross profit on the 23 sales in aggregate (totalling £1,262,873) represents approximately 6.5 per cent of the cost of the mobile telephones traded by the Appellant (the corresponding figure is 7.37 per cent in relation to the three July 2006 Deals).

52.    All the Appellant’s sales were export sales, made to a variety of overseas customers based in a range of countries in Europe and the Middle East.  All sales were zero-rated for VAT purposes.  As mentioned, the Appellant made one previous sale to URTB, in May 2006, and its associated company, Eurostar Telecom UK Limited, sold mobile telephones to URTB in April 2006.  One deal entered into by the Appellant failed to complete when the Appellant’s customer did not pay the purchase price, and the cost of repatriating the goods was met by the Appellant.

53.    In all but three of the transactions (excluding the aborted transaction) Insignia was the supplier of the goods to the Appellant.  In those three transactions the suppliers were UK companies (one was The Export Company (UK) Ltd, a buffer trader in Deal Chain 1).  All the transactions were back-to-back purchases and sales, and all were profitable for the Appellant (its gross margin per mobile telephone traded ranged from £12 in the case of cheaper units to £30).

54.    Insignia had become a major supplier of mobile telephones to the Appellant in its trading transactions, building on the trading relationship already established between Insignia and Eurostar Telecom UK Limited.  During this period Mr Claudio Ramos was working for Insignia (Mr Ramos was previously a colleague of Mr Carnall when they both worked for JRS Trading (UK) Limited (see paragraph 33(4) above)).  Certain of Insignia’s deals in July 2006 were the subject of extended verification investigations by the Commissioners leading to denial of repayment of input VAT.

55.    The Appellant advertised on e-commerce websites used by mobile telephone traders.  This was the only means by which the Appellant sought out customers or customers sought out the Appellant.

56.    The Appellant had a “marine cargo insurance policy” to provide insurance cover for loss or damage in relation to all mobile telephones traded during the period of cover.  The cover under this policy was for twelve months, effective from 19 May 2006, with instalment payments of the premium.

57.    Since all the Appellant’s sales were zero-rated export supplies it was consistently making repayment claims for the input VAT on its purchases.  The Commissioners examined those repayment claims, making office-based checks by reference to the information supplied by the Appellant (and in one case a check including a visit to the Appellant’s premises) and, until the July 2006 claim, all repayment claims were allowed and paid by the Commissioners.  No extended verification checks were made by the Commissioners until the July 2006 repayment claims were reviewed.

58.    The Appellant traded in a range of mobile telephone products, which reduced the risk of the Appellant participating in so-called “carousel fraud” (where the same goods are imported and exported more than once, with MTIC fraud perpetrated on each occasion).  However, in the course of its 23 deals the Appellant traded three models of mobile telephones on two occasions and one model on four occasions.  In 2006 the Appellant began the development of its own bespoke software system for the purposes of recording IMEI numbers of the mobile telephones it traded.  That software was not operational before the Appellant ceased to trade in October 2006.

59.    The Appellant’s business was highly profitable enabling it out of gross profits of £1,262,873 earned in the period October 2005 to July 2006 from its 23 transactions to pay its lender interest and profit share totalling £510,312; and to pay its shareholder, Eurostar Holdings Limited, a dividend of £237,750.  The Appellant was also able to repay £710,000 of its borrowings of £1million from its lender.

The Appellant’s borrowing arrangements with Associated Investments Limited

60.    The Appellant required working capital to fund its business.  Since its business was the export of goods, and since those goods were always purchased and paid for on a back-to-back basis (so that the Appellant was not required to finance the acquisition and holding of stock), its principal working capital requirement was to fund the VAT it paid to its suppliers pending recovery of its monthly repayment claims.

61.    The Appellant was unable to obtain the finance it required from its bankers.  Mr Carnall approached a Mr Michael Horlock, whom he had known from his time working at JRS Trading (UK) Limited.  Mr Horlock is the sole shareholder and sole director of the company Associated Investments Limited (“AIL”).

62.    Investigations by the Commissioners revealed that AIL was incorporated in July 2005, and was registered for VAT purposes with effect from 1 October 2005.  Mr Horlock described the business activities of AIL to the Commissioners as being that of “business angel – investing into new start ups and existing businesses to provide working capital and expansion finance”.  Mr Horlock and his wife together have controlling shareholdings in a group of associated companies concerned with the sale of computer equipment and related products and mobile telephones and related products.  AIL made loans totalling at least £3 million to other businesses trading in goods subject to suspected MTIC fraud, in terms substantially similar to the terms of the loans to the Appellant.

63.    Over the course of a year Mr Horlock and Mr Carnall negotiated the terms of a loan for the working capital requirements of the Appellant.  There is no documentary evidence as to those negotiations, and no business plan (as to sales forecasts, customer base, costs forecasts, anticipated profits etc) was prepared by the Appellant for AIL.  According to Mr Carnall, Mr Horlock was prepared to rely on Mr Carnall’s experience and market knowledge.  A loan agreement was entered into between AIL and the Appellant on 29 November 2005, pursuant to which AIL agreed to lend the Appellant £500,000 in two equal instalments, and on 3 February 2006 AIL advanced a further £500,000 to the Appellant on the same terms.

64.    Key features of the loan by AIL to the Appellant are:

(1)        The loan is unsecured, and it is not guaranteed by Mr Carnall or any other person.  (Mr Carnall’s evidence is that the question of security was discussed at length with Mr Horlock, but the generous terms as to interest conceded by the Appellant reflected the fact that no security or guarantee was provided.  The minutes of AIL approving the loan record that AIL regarded the Appellant as credit-worthy);

(2)        The loan is repayable on 1 November 2006, with the right for either party to extend it for a further year.  The Appellant has the right to early repayment after 1 May 2006, and the loan is immediately repayable on demand in the event of default by the Appellant;

(3)        Interest is payable quarterly at 6 per cent per annum, subject to increase if the Bank of England base rate increases by more than 1 per cent;

(4)        Additionally, an amount expressed as interest is payable monthly, the amount being equal to one-half of the Appellant’s “gross profit” (the amount of sales less specified expenses) for that month’s trading;

(5)        Payment of the “gross profit” interest is deferred in the event that the Commissioners withhold payment of input VAT due to the Appellant (unless the Appellant “is otherwise in a position to make such payment”).  In such an eventuality the Appellant must instruct AIL’s lawyers in relation to the recovery of the payment withheld;

(6)        In the event that the Commissioners so withhold payment of input VAT, the Appellant cannot, without the consent of AIL, make any single payment or series of payments in excess of £25,000; and

(7)        The Appellant agrees to employ the services of a specified VAT consultancy to ensure compliance with its VAT obligations, and to undertake the necessary due diligence in accordance with the Commissioners’ Notice 726.

65.    In the period January to July 2006 the Appellant paid AIL in total £510,312 by way of interest (fixed-rate interest and profit element) and in August 2006 the Appellant repaid £710,000 of the principal advanced by AIL.

66.    Although the loan agreement imposed some constraints on the way in which the Appellant conducted its business, it did not restrict the Appellant from paying out distributable reserves by way of dividend.  The Appellant has paid dividends to Eurostar Holdings Limited totalling £237,750, representing virtually all of its distributable reserves.

67.    The Appellant remains indebted to AIL for the outstanding principal of £290,000.  There is no evidence of any action taken by AIL to recover the outstanding principal, although it is assumed that it remains a creditor in the administration of the Appellant.

The Appellant’s knowledge of the extent and risk of MTIC fraud

68.    As set out above, Mr Carnall had extensive experience in the mobile telephone industry before he incorporated the Appellant.  In the course of that experience he had dealings with the Commissioners in relation to the existence of and risks associated with MTIC fraud.  Thus in March 2003, in his capacity as a director of JRS Trading (UK) Ltd Mr Carnall attended a meeting with officers of the Commissioners to discuss the problems associated with MTIC fraud, the “hijacking” of that company’s own VAT registration number, the action the Commissioners were taking to verify that company’s VAT return for its January 2003 quarterly period, and the prosecution by the Commissioners of certain traders who had previously traded with that company.

69.    Mr Carnall gave interviews in 2005 to the trade and local press in relation to the policy of UK banks closing accounts of traders in the light of carousel fraud and the fraudulent activity of companies exporting mobile telephones.

70.    In relation to the Eurostar companies associated with the Appellant, Mr Brownsword of the Commissioners advised Mr Carnall at a meeting of the continuing VAT fraud in the wholesale mobile telephone business.

71.    In relation to the Appellant, the Commissioners wrote to the Appellant directly or to its solicitors on four occasions in the period March to June 2006 regarding enquiries undertaken in relation to the Appellant’s repayment claims, and referring to revenue losses arising from MTIC fraud in the mobile telephone trade sector, the need for the verification process, and the probability that there were tax losses in the course of transactions of which the Appellant’s sales formed a part.

72.    The Appellant was aware of the Commissioners’ Notice 726 dealing with joint and several liability in the case of MTIC fraud, and the steps which a trader should take to try to reduce its involvement with transactions related to fraud.

73.    The Appellant formulated a due diligence process which was designed having regard to the risks of dealing with possible fraudulent traders as those risks were identified by Notice 726 and to conform with the requirements and recommendations of Notice 726.  The Appellant was aware of carousel fraud and of the safeguards which should be taken to reduce the risk of trading in goods which had been previously traded.

74.    The Appellant knew from the specification of the mobile telephones or from their chargers that the mobile telephones traded in Deals 1, 2 and 3 had been produced for and originally sold into the EU market, so that in dealing with those mobile telephones the Appellant was exporting goods which it knew had on some prior occasion been imported into the UK.

The Appellant’s due diligence process

75.    The Appellant has devised a due diligence process which it applies in relation to its UK suppliers in the transactions it enters into.  The Appellant refers to this process as the “Tray System”, which comprises a series of progressive checking actions within a file created for each supplier company with which it does business.  This enables those working for the Appellant to follow through the process in sequence and consistently, as follows, with a file passing up the series of Trays if at each stage no negative result ensues:

(1)        First, in Tray 1, the Appellant compiles basic information about the prospective supplier, including its incorporation details and its Companies Registry filed annual returns and directors’ report.  The VAT registration of the company in question is verified with the Commissioners’ Redhill office which provides this service to traders;

(2)        Then, in Tray 2, a credit and financial standing report on the company is obtained from the Appellant’s accountants;

(3)        At the Tray 3 stage Mr Carnall examines the material obtained looking for any inconsistencies or suspicious features in relation to the company, its directors, its place of business, or its telephone number.  If there is nothing untoward, the Appellant provides the prospective supplier with its (that is, the Appellant’s) standard trading documents, which include a supplier declaration as to the due diligence carried out by the supplier on its own supplies;

(4)        If the supplier completes and returns the trading documents, the file reaches Tray 4, where those documents are reviewed to ensure that the details conform with information on the Companies Registry files etc.  Trade references are then taken up and a site visit arranged;

(5)        In Tray 5 the references are reviewed, and in Tray 6 the site visit report is reviewed.

This process results in the Appellant holding a bundle of standardised documentation for the supplier.

76.    The Appellant will then proceed to enter into the transaction documents in standard form with its supplier, being a purchase order (with bank payment details), a purchase invoice, release instructions from the supplier to the freight forwarder holding the goods, and (where required) shipping instructions to the freight forwarder.

77.    The Appellant conducts its own inspections of stock (using its own employees) at the freight forwarder holding the goods, and all goods inspected are photographed.

78.    The Appellant did not have a systematic due diligence process applicable to its customers, apart from checking on the Europa website that their VAT registration remained valid.  The Appellant made a site visit to a customer after its first trade with that customer (after its second trade – the 21 July 2006 trade – in the case of URTB).  The transaction documents entered into with the customer included a sales order, a sales invoice, release and shipping instructions to the freight forwarder and holding agent.  The Appellant had a standard form customer declaration (which in practice was not always completed by the customer), which included a declaration from the customer as to its intended on-sale of the goods.

79.    As to the three deal chains relevant to this appeal, the supplier of the mobile telephones in each case was Insignia (also the supplier in all but three of all the deals entered into by the Appellant).  It was therefore the case that the Appellant already had a due diligence file in existence at the time of the July 2006 deals (largely dating from October 2005), including the standard incorporation, VAT registration, Companies Registry and trade reference material.  In relation to the individual July 2006 transactions, the Appellant obtained confirmation from the Commissioners’ Redhill office that Insignia remained validly registered.  In addition, Insignia provided to the Appellant Supplier Declarations dated respectively 21 July 2006 (for Deals 1 and 2) and 27 July 2006 (for Deal 3) stating in each case the goods traded, the value of the goods, and confirmation by Insignia that it had made no third party supplier payments on its purchase of the goods; that it had examined the goods; that it had conducted its own due diligence checks on its suppliers of the goods; and that its supplier was registered for VAT and it had no reason to suspect that the VAT on the goods would not be paid by its supplier.

80.    As to the Appellant’s customers in the three deal chains, the Appellant’s due diligence process was as follows:

(1)        In the case of URTB the Appellant obtained a standard introduction letter (undated, but seemingly faxed on 7 March 2006) together with an entry (in French) from the Tribunal de Commerce de Paris giving basic filed registry details of URTB, a copy of an identity or business card (illegible) and in May 2006 a standard form trade reference from two UK traders who had previously sold goods to URTB (these being obtained before the Appellant’s May 2006 transaction with URTB).  The Appellant checked the current validity of URTB’s VAT registration on the Europa web-site and with the Commissioners’ call line.  The Appellant required URTB to complete a “Customer Declaration”, declaring that the goods were not being sold on by URTB to its customer at a lower price; that the goods were not to be sold on to a customer based in the UK; and that reasonable due diligence checks had been carried out by URTB on its customer, as to its incorporation, credit-worthiness, and bank details.  On 1 August 2006 an employee of the Appellant carried out a site visit at the office of URTB and completed an extensive site visit report as to the business of URTB and the way it conducted its trade (including VAT compliance).

(2)        In the case of Compucell, the Appellant had no contact prior to receiving a standard introduction letter on 21 July 2006, the day of the transaction.  On that date Compucell faxed to the Appellant a letter, in Dutch, from a firm of accountants dated 9 June 2005 (there is no translation into English, and the letter makes no obvious reference to Compucell; neither Mr Carnall nor any employee of the Appellant reads Dutch), and also sent details of its bank account.  On 21 July 2006 the Appellant made a telephone enquiry to the Commissioners and obtained confirmation that the Netherlands VAT number given by Compucell was valid.  The Appellant did not obtain a “Customer Declaration” from Compucell.  On 11 September 2006 an employee of the Appellant made a site visit to the offices of Compucell and produced a report covering the same ground as the URTB report.  The summary conclusion to the site visit report includes the following statement: “My view is that there are reasons not to undertake trade with this company but this will be subject to further compliance visits.”  Those reasons are not stated.

(3)        Similarly with Bluestar, the Appellant received a standard letter of introduction by fax, the day before the transaction was entered into, together with details of its bankers.  As mentioned, the terms of that letter of introduction are identical to those of the corresponding document sent by Compucell to the Appellant five days earlier.  Bluestar had a website, but the pages visited by the Appellant on 26 July 2006 had no information dated later than 7 June 2005.  Bluestar provided certain documents in Danish, with no English translation, which appear to relate to its corporate registration.  There is no evidence that Mr Carnall or any of the Appellant’s employees spoke Danish.  The Appellant did not obtain a “Customer Declaration” from Bluestar.  On 30 August 2006 an employee of the Appellant made a site visit to the offices of Bluestar and produced a report covering the same ground as the URTB report.  As with Compucell, the summary conclusion to the site visit report includes the following statement: “My view is that there are reasons not to undertake trade with this company but this will be subject to further compliance visits.”  Those reasons are not stated.

The evidence as to the grey market in mobile telephones

81.    As mentioned, on the question of the nature of the grey market in mobile telephones we heard from Mr Fletcher of KPMG LLP whose evidence was part of the Commissioners’ case.  We have referred above (at paragraph 29) to Mr Fletcher’s credentials.  Mr Carnall also gave evidence as to his knowledge and experience of the market in which his companies had traded mobile telephones.  As we refer below, the evidence of Mr Fletcher was challenged by the Appellant, and that of Mr Carnall by the Commissioners.

82.    Mr Fletcher’s evidence is summarised in the following paragraphs (paragraphs 83 to 92).

83.    In the distribution market for mobile telephones, as that market had developed by 2006, there are three principal participants: original equipment manufacturers (“OEMs”) such as Nokia, LG and Samsung; mobile network operators (“MNOs”) such as Vodafone, Orange and O2; and authorised distributors (“ADs”) such as 20:20 Logistics and Avenir Telecom UK.  At the retail end there are large retailers, such as The Carphone Warehouse and the John Lewis Partnership, and also a network of small and independent retailers who sell to the public.

84.    The OEMs manufacture the mobile telephones and sell only to large retailers, MNOs and ADs.  The MNOs sell mobile telephones in connection with their businesses of selling network usage contracts to customers, and will do so through their retail outlets or to large retailers.  The ADs source their goods directly from the OEMs and sell them on to smaller and independent retailers, and are prepared to sell to such customers in volumes of 1,000 units or more per month.  The ADs are major customers of the OEMs, and as such have privileged access in terms of the supply of stock, availability of new models, special pricing deals (including discount for volume purchases), and prior notification of new models (the release of which will depress the value of stocks of current models).  The ADs act in effect as wholesalers, placing large volume orders on the OEMs and on-selling by way of small volume orders placed on them by independent retailers, and they bring value to the market by fulfilling this wholesale function (a service to the OEMs who do not want to deal with the small volume orders of retailers, and a service to the retailers who cannot have access (or access on competitive terms) to the OEMs). 

85.    OEMs set the prices of mobile telephone handsets.  Those prices decline with product age and with the launch into the market of new products.  For some considerable period (including in 2006) Nokia has set identical prices for its wholesale customers in all geographical markets, and although ADs can and do negotiate volume discounts, the effect of a single international market is greatly to limit the opportunity for individual ADs to arbitrage Nokia products between different domestic markets.

86.    Since ADs have the best commercial relations with OEMs enabling them to negotiate the best discounts (where an OEM offers discounts), a trader in the grey market seeking to trade in mobile telephones is likely to find that an AD offers the most favourable price as a supplier.

87.    A grey market in mobile telephones arises from certain failures in the authorised distribution (or “white”) market, namely market failures which are price-related and those which are volume-related. 

88.    A price-related market failure gives scope for a non-authorised dealer to operate in a market based on arbitrage opportunities.  In cases where an OEM has different pricing policies for different geographical markets (which is not the case with Nokia, as mentioned), there is scope for arbitraging between markets by non-authorised dealers (the supply terms between an OEM and an AD will prevent an AD from arbitraging in this way).  In the case of Nokia products, where prices are set in the currencies of the different geographic markets into which it sells, there is some limited scope for arbitraging between markets where price differentials arise from currency exchange rate movements.  In an arbitrage-based grey market profit margins available to traders are small, and in consequence market forces provide limited scope for a chain of traders arbitraging the same goods within that market.  This is particularly the case for trading in Nokia mobile telephones, where arbitraging is currency-based with the risk of volatile exchange rate movements making the profit uncertain.  In rare cases Nokia releases a new model at different times in different territories, and this gives an opportunity for grey market transactions into any territory which at the time is not being supplied by Nokia with the new model.

89.    A volume-related market failure can arise where an OEM has underestimated the demand for a particular model of mobile telephone in a particular market and cannot promptly manufacture sufficient units to satisfy the immediate requirements of its customers (MNOs, ADs, or large retailers) – for example, an MNO may find that it is low in stock of a particular model and at risk of its retail customers taking their business (with the valuable associated network contracts) elsewhere.  If that MNO cannot purchase that model from the OEM it may, in order to satisfy demands made on its own business, look for other means of supply, and a non-authorised dealer holding stock of the goods in question has an opportunity to sell in a grey market to that customer.  This is a limited market in that it is available only for the short period until the OEM meets demand for the model in question from production, and it is available only for traders who happen to hold, or have rapid access to, stock of the required exact specification to meet the immediate demands of the MNOs or large retailers in question.  As with the arbitrage market, the circumstances of this market provide limited possibility for a chain of traders to deal in the mobile telephone models in short supply, and a trader holding stock of such models will be motivated to sell directly to the MNO or large retailer in the market for those models, rather than selling to an intermediary in a chain.

90.    A volume-related market failure can also arise in the converse case where an AD is for some reason left with an excess of stock for its market (such as when it over-estimates demand, or deliberately over-orders to take advantage of volume discounts offered by an OEM).  It will then seek to “dump” this stock by finding a purchaser in a different market (usually in a different territory, given the terms of its supply contract with the OEM) so as to minimise its losses and the amount of its working capital tied up in the stock.  An AD may also wish to reduce its stock at its year end to improve its cash position.  Sales in the grey market arising in this situation are initiated by the distributor/seller, not the customer/purchaser, and the distributor, as a sophisticated trader in the market, will be motivated to search directly for the end customer/purchaser, rather than see its margins further eroded by an intermediate chain of traders.

91.    The grey market in mobile telephones which exists is served by a number of internet exchange websites and bulletin boards designed to allow distributors and traders to advertise stock they have available or which they require and the prices at which they are prepared to trade.  Such internet sites provide a transparent and accessible market which itself works against intermediate traders having a commercial place or justification in that market unless they fulfil a particular role which in some way adds value within the chain of transactions: an intermediate trader in a chain of transactions who adds no such value is taking out profit which is available to the originating distributor or the eventual customer, who, in a transparent market, will be motivated to exclude him from the chain.  Thus in a genuine grey market transaction extended chains of deals are unlikely.

92.    A mobile telephone unit comprises a number of components, including the handset itself, a charger, the software installed in the handset, and the manual.  It is possible to change some of these components to adapt them for a different market (for example, replace a two-pin charger with a three-pin charger; replace a manual in one language with that in another; and make some modifications to the software), and specialist companies provide this service for mobile telephones traded in the grey market.  There is a cost in making such adaptations which will necessarily result in reducing the profit margin made by the trader incurring that cost, so that a trader will be commercially motivated to find units which do not require such adaptation.

93.    Mr Carnall’s evidence is summarised in the following paragraphs (paragraphs 94 to 98).

94.    Mr Carnall agreed with Mr Fletcher’s identification of the types of parties (OEM, AD etc) involved with the market in mobile telephones.  He described the Appellant, and traders like it, as “non-traditional distributors”, who operate independently in trading in mobile telephones, facilitating trade by placing products which are surplus to requirements from reputable suppliers (whether they be ADs or non-traditional distributors).  He described trade between non-traditional distributors as a grey market trade.

95.    The surplus stock in which non-traditional distributors trade is available for one of a number of reasons, such as over-ordering, declining consumer demand for the model in question, order cancellations, a model being superseded by a later model, or and AD wishing to turn stock into cash to improve its balance sheet at its year end.  In such cases a distributor will seek to mitigate its loss and improve its cash flow by selling stock into the grey market.  An AD may also wish to “dump” stock speedily onto the grey market if a particular model is not longer subject to price protection from an OEM (so that its market value is likely to fall).

96.    Market competition between ADs may provide opportunities for non-traditional distributors (who are not seen by ADs as competitors) to facilitate trade between distributors by taking advantage of situations where an AD either has surplus stock (where it has over-ordered) or is short of stock (where it has under-forecast demand).

97.    In situations where an AD can negotiate a volume discount on price with an OEM, there are arbitrage trading opportunities available by trading the mobile telephones into territories other than that in which the AD who has negotiated the discount is operating.  The non-traditional distributor is free from the territorial restrictions which apply to an AD (that is, those imposed by the OEM), and provides a value to the AD, which can share the benefit of the discount obtained with the non-traditional distributor.

98.    Mobile telephone hardware is essentially universal, and supplementary items (chargers, manuals) can be changed and certain software adapted at a relatively minimal cost to enable a mobile telephone handset to be sold into any marketplace.

The submissions of the parties

99.    The Commissioners and the Appellant made opening submissions at the hearing of the appeal in the normal way.  The hearing was listed for five days, and since within that period there proved to be no time for closing submissions it was agreed that the parties should make their closing submissions in writing, the Commissioners making theirs first, followed by the Appellant and with the Commissioners making further brief submissions in reply.

The Commissioners’ submissions

100.Mr Kinnear, for the Commissioners, pointed out that the Appellant had accepted the continuity of the transaction deal chains for each of Deals 1, 2 and 3, so that it is established that the Appellant’s transactions are connected to the transactions undertaken by Phone City Ltd in the case of Deals 1 and 2 and by Kaymore Ltd in the case of Deal 3.  Further, the evidence of the Commissioners as to the fraudulent evasion of VAT by both those companies was not challenged by the Appellant.  Accordingly, Deals 1, 2 and 3 are connected with a loss of VAT where the loss is attributable to fraud.  The only issue, therefore, is whether the Appellant, when it entered into its transactions, knew that those transactions were connected with fraud, or, alternatively, should have known that they were connected with fraud.  It is accepted by the Appellant that Mr Carnall is the mind of the Appellant, and the Commissioners’ primary case is that the evidence establishes, on the balance of probabilities, that Mr Carnall (and therefore the Appellant) knew that the transactions in question were connected with fraud; and their alternative case is that the evidence establishes, on the balance of probabilities, that Mr Carnall (and therefore the Appellant) should have known of that connection.

101.Mr Kinnear invited the tribunal, when it considers the question of the Appellant’s actual or constructive knowledge, to look at all the evidence taken in its entirety, including the circumstantial evidence, and to draw from such evidence those inferences which are reasonable, referring to guidance on this approach given in the case of Megtian Limited v HMRC [2010] EWHC 18 (Ch), the case of Red 12 v HMRC [2009] EWHC 2563 and also in the Mobilx case.  In the Commissioners’ submission this approach, when considering all the evidence, including that which emerged from the cross-examination of Mr Carnall, leads to the conclusion that Mr Carnall knew that the Appellant’s transactions were connected with fraud, or that he ignored the circumstances of those transactions where the only reasonable explanation was that they were connected to VAT fraud, and therefore should have known that they were connected to VAT fraud.

102.As to the Commissioners’ case that the Appellant knew of the connection to VAT fraud:

(1)        Mr Carnall’s evidence in a number of key areas was unsatisfactory, contradictory and incomplete so that it should be rejected as untruthful;

(2)        Mr Carnall was aware that MTIC fraud required a zero-rated export supply by a company in a chain of transactions in the position of the Appellant, with that company claiming a repayment of input tax: the Appellant had no concern to establish a commercial relationship with a foreign customer (as evidenced by the lack of due diligence carried out on potential customers), but was happy to accept any foreign company putting itself forward to enable a deal to be made;

(3)        The Appellant knew from the specification of the mobile telephones it traded that they had been manufactured for a market other than the UK market, so that at the least the Appellant was aware that the mobile telephones in question had been imported into the UK, traded within the UK, and then exported to the EU, in the standard MTIC fraud pattern;

(4)        The loans from AIL totalling £1 million were essential to allow the Appellant to trade (funding negative cashflow pending input tax repayments), but lacked commercial reality and represented a funding arrangement for fraudulent transactions: no business plan was prepared, no security given, the lender allowed a substantial dividend to be paid by the Appellant notwithstanding a significant amount of the loan remained due, and no action was taken to recover the outstanding debt;

(5)        Mr Carnall had little or no understanding of the legal basis of the transactions the Appellant entered into, in particular as to where title to the mobile telephones traded resided at any time, which demonstrated that he was indifferent to, or ignorant of, issues of commercial risk (destruction of goods, sudden change in price or other market conditions, defaulting counter-party) because he knew that the contrived transactions in the deal chains would inevitably be carried through to completion;

(6)        The back-to-back nature of the Appellant’s deals were contrived, and the basis on which they were put in place was never explained.  The Appellant was ensured of a substantial profit and was insulated from any commercial risk, the only risk being that it would not recover a repayment of input tax, as acknowledged by the terms of the AIL loan;

(7)        The Appellant was cavalier in identifying the goods traded, not requiring its supplier to provide it with a full list of IMEI numbers (despite that being a term of the supply), and recording at its inspection only a small fraction of the IMEI numbers: the Appellant’s behaviour was not consistent with a commercial transaction nor with that of a trader genuinely concerned with the risks of carousel trading and the need to avoid dealing more than once in the same goods;

(8)        All the mobile telephones traded in the three deals which were identified by the Appellant were previously or subsequently traded into or out of the UK on at least one other occasion, and were therefore traded in carousel trades.  This could have been the case only if in all the trades of those goods (including the Appellant’s trades) there had been collusion to ensure the goods did not pass to a non-participating party;

(9)        The due diligence carried out on the customers in each of the three deals was very cursory, and included a site visit only after the deals had been done (and after the second – July 2006 – deal and after an associated company’s deal in the case of URTB): it amounted to nothing more than “window-dressing”;

(10)     In relation to Deal 1, Insignia, the Appellant’s supplier, had on at least two previous occasions, traded with URTB, the Appellant’s customer, with Insignia taking a substantial profit: there can be no commercial rationale for Insignia in effect ceding to the Appellant the exporter’s profit on Deal 1 in circumstances where Insignia had a direct and more established relationship with URTB;

(11)     In Deal 1 the FCIB evidence establishes that there was a circularity of funds, beginning with the payment made for the mobile telephones by The Export Company Ltd: there must have been careful pre-arrangement and complicity on the part of all the traders in the chain, including the Appellant, to ensure a structure of deals which resulted in the funds flowing back to the starting point;

(12)     In Deals 2 and 3 the customers seemingly introduced themselves to the Appellant only on the day of the respective transactions, and, in the case of Deal 2, after the supplier, Insignia, had faxed the supply contract documentation: the clear inference is that both the supply and the export contracts were planned and implemented as part of a collusive scheme, rather than as independent commercial transactions; and

(13)     The gross profits in total made by the Appellant from Deals 1, 2 and 3 amounted to approximately 85 per cent of the total gross profits made by the whole chain of traders, which comprised the “large and predictable rewards” which the Appellant was given the opportunity to reap, as mentioned by Moses LJ in the Mobilx case at paragraph 84 of his judgment.  The Appellant’s trading over its 23 deals was highly profitable, permitting the Appellant to pay both a substantial profit-related return to AIL and a large dividend to its shareholder.  The substantial profits of the Appellant are to be contrasted with the very small profits realised by other traders in the chains.

103.Mr Kinnear made the following submissions in relation to the evidence of Mr Carnall as to the grey market in which the Appellant traded:

(1)        Since, as Mr Fletcher explained, ADs obtain the best (i.e. the lowest) price in the market for mobile telephones because of their relationships with the OEMs, any other distributor would seek to source his traded goods as nearly as possible from an AD, and, correspondingly, seek to sell those goods as directly as possible to the end consumer.  In this way profit is maximised.  Any analysis of a true grey market must take account of this imperative, but it formed no part of the grey market in which the Appellant traded, as described by Mr Carnall;

(2)        As explained by Mr Fletcher, ADs are prepared to sell to smaller traders who purchase 1,000 or more mobile telephone units per month, a trading volume easily within the scope of the Appellant’s trade, but there was no evidence that in any of its transactions the Appellant had ever attempted to purchase directly from an AD, nor any explanation from Mr Carnall as to why an AD should not sell directly to a trader such as the Appellant;

(3)        The long deal chains of which the Appellant’s transactions formed part were incompatible with genuine grey market conditions, where there is no market or commercial rationale for interposed traders who add no value, and where there is no Authorised Distributor or retail consumer to originate or finalise the chain; and

(4)        The explanation given by Mr Carnall of the market in which the Appellant traded took little account of the true purpose of any market in mobile telephones, which is to supply a mobile telephone to an end consumer in a competitive retail market: a mobile telephone is not a commodity simply to be traded between traders for the sake of earning profit.  The market described by Mr Carnall was not a genuine grey market as explained by Mr Fletcher, but was a contrived series of trades designed to facilitate fraud.

The Appellant’s submissions

104.Mr Goodwin, for the Appellant, submitted that the Commissioners, if they are to establish that the Appellant has no right to repayment of its input tax in respect of the transactions in Deals 1, 2 and 3, must prove that, at the time it entered into the transactions in question, the Appellant had actual or constructive knowledge of the connection with the fraudulent loss of VAT, and not merely that the Appellant had acted recklessly or with knowledge that there was a risk that its transactions were connected with fraud: only then does the Appellant lose his right to deduct input tax because the objective criteria for the scope of that right are not met: see the Mobilx case at paragraphs 52, 55 and 56.  The Commissioners have failed to prove such knowledge – rather, the preponderance of evidence establishes that the probability is that Mr Carnall did not know of the existence of any fraud within any of the Deal Chains or of any connection with fraud.  The evidence shows that Mr Carnall was an experienced businessman, motivated by profit, who entered into commercial transactions as part of a long-term business plan at a modest and sustainable level in relation to which he took reasonable and proportionate action to reduce his exposure to MTIC fraud.

105.As to the question of whether the Appellant should have known of the connection with fraud, then, applying the Mobilx case, the burden is on the Commissioners to establish that the Appellant should have known that the “only reasonable explanation” for the Appellant’s transactions was that it was connected with the fraudulent evasion of VAT: that is a clear test and a high threshold, akin to almost certainty, which the Commissioners can cross only if any other reasonable explanations for the Appellant’s transactions are eliminated.  On the evidence before the tribunal the Commissioners do not succeed in crossing that threshold: the Appellant traded in the disputed three transactions in accordance with standard commercial practices for back-to-back deals and in a pattern of trading consistent with its twenty other deals, and at worst the Appellant was an innocent dupe in the fraud of others.

106.It is not sufficient for the Commissioners to establish that the Appellant was involved in a chain some parts of which have elements of contrivance in order to perpetrate or obscure fraud: they have to show that the Appellant knowingly participated in a contrived chain, or that the only reasonable explanation for its actions was to participate in that chain.  In the Appellant’s case (far removed from the “normal” trader in MTIC fraud cases who comes to this particular market in an attempt to make substantial profits with, at best, a reckless disregard for any fraud) the evidence shows an honest, careful, and experienced trader who, in the case of three deals out of twenty-three, became unwittingly involved in the fraudulent actions of traders far removed from the Appellant in the deal chains.

107.In evaluating the evidence, the tribunal must take care to look at the situation at the time the Appellant entered into the contested Deal Chains, avoiding using hindsight in a situation where much of the evidence relied on by the Commissioners came to light only following a lengthy extended verification process and a four-year investigation.  It is also material to take account of the fact that the Commissioners have, through their enormous resources and wide access to information, the ability to see a far wider picture than any trader can possibly have access to, especially in relation to supply chains, and the information and knowledge obtained by the Commissioners should not be assumed to be available to a trader.

108.Turning to the evidence before the tribunal, Mr Goodwin made the following points:

(1)        Mr Carnall, directly and through his Eurostar Telecom companies, has considerable experience and standing within the mobile telephone trade sector and had no reason to put this at risk by entering into transactions connected with fraud: his circumstances, and those of the Appellant’s cautious (and, in an MTIC context, relatively modest) business, are far removed from those of the characteristic trader involved with MTIC fraud.  The Appellant, through Mr Carnall, is an experienced trader active in export transactions in the genuine wholesale grey market, and it obtained venture capital finance from AIL for the genuine commercial purpose of funding the timing delay in VAT repayments;

(2)        The Commissioners rely on what may be regarded, in MTIC cases, as the standard factors of contrivance (back-to-back deals, questions of title to the goods, increasing turnover, etc) to prove knowledge or means of knowledge of connection to fraud, but other tribunal cases have not accepted that such factors necessarily prove circumstantially that there is such knowledge or means of knowledge – they may be features of trades conducted by “innocent” traders;

(3)        Mr Carnall worked with the Commissioners in a co-operative and professional manner.  Every deal of the Appellant was monitored by the Commissioners applying standard verification procedures, and until the July 2006 transactions, VAT repayments were made in full as, in those first 20 deals, the Commissioners were apparently satisfied that there was no connection to fraudulent tax loss;

(4)        The Appellant’s due diligence processes were comprehensive, rigorous and reasonable, requiring the Appellant to commit significant resources and time to carrying them out in order to test the integrity of those it was trading with: it was built on Mr Carnall’s extensive experience and went significantly beyond the steps identified as reasonable in Notice 726.  The Appellant did not trade with every supplier it carried out due diligence on;

(5)        The evidence does not establish that the Appellant had knowledge of the required connection to an actual fraudulent tax loss in any of the disputed three Deal Chains;

(6)        As a genuine and experienced trader the Appellant, through Mr Carnall, unavoidably had an awareness of MTIC fraud, but that must be distinguished from actual knowledge or the means of knowledge of fraud in the Appellant’s deal chains.  In the present case, although the Commissioners gave general warnings to the Appellant that it should be aware of MTIC fraud, there were no warnings about specific defaulting traders in any of the Appellant’s supply chains, and therefore nothing by way of warnings which should have caused a genuine trader to withdraw from trading or from trading in particular specified circumstances.  Nor, until after extensive investigation over several years, did the Commissioners indicate any suspicions that any of the Appellant’s trades might be tainted – on the contrary, the systematic repayments of input VAT until August 2006 signalled an acceptance by the Commissioners of the genuineness of the Appellant’s trading activities;

(7)        The Appellant could not be expected to know anything of the supply chains leading up to and including Insignia’s purchase of the mobile telephones – despite the close personal and commercial relationships between Mr Carnall and Mr Ramos of Insignia, Insignia would not have divulged the commercial terms on which it acquired the goods in question or the identity of its supplier – Notice 726 makes it clear that a trader is not expected to look beyond his immediate supplier;

(8)        The approach of the Commissioners to the Appellant’s due diligence processes and deal documentation is inconsistent and takes a stance prejudicial to the Appellant whatever the circumstances: if it is careful and thorough and consistent with the Commissioners’ own guidelines it is said to be meaningless “window dressing”; if it is deficient in any way it is said to be evidence of contrivance;

(9)        The genuine and commercial nature of the three Deals is attested to by the following:

(a)        The Appellant traded the mobile telephones at a genuine market price;

(b)        The mobile telephones traded existed, were insured by the Appellant, were inspected in detail by the Appellant’s employees and were exported and transported all at the Appellant’s cost;

(c)        Although in the case of each of the Deals the purchase and sale documents were entered into on the same day, they were completed several days later to allow inspection and transport of the mobile telephones;

(d)        The Appellant’s profit margin on its 23 deals overall is 6.5 per cent of purchase price (7.37 per cent in the case of the three Deals) which is a reasonable return;

(10)     There is no evidence directly associating the Appellant or AIL with the fraud, and no funds are shown as being transferred from the Appellant to any person directly related to the fraud;

(11)     The FCIB evidence relates to Deal 1 only, and if the Appellant were engaged in fraud the expectation would be that there would be corresponding evidence in relation to the other two Deals.  In any event, there is not an exact correlation between the flow of money and deal documentation, since the Commissioners were unable to produce invoices for deals in the case of three of the companies which received and paid out funds through FCIB accounts (Silus BV, GSM and Amex), and there is no evidence that Phone City Ltd, the defaulting trader, acquired the mobile telephones in question from Silus BV (the company to which Phone City Ltd made a payment according to the FCIB evidence);

(12)     Insignia, the supplier to the Appellant in respect of the three Deals (and for most of the remaining 20 deals) was a trusted supplier about which nothing adverse is known.  The due diligence carried out on Insignia was comprehensive.  By using the same supplier the Appellant was reducing its exposure to MTIC fraud;

(13)     As to the AIL loan, there was no evidence that its terms were other than commercial (even as to the return, having regard to the absence of any security), and no evidence that AIL or Mr Horlock had any connection with VAT fraud;

(14)     The Appellant’s method of trading and terms of trade (back-to-back contracts; shipping and allocating goods on hold; inspection of goods prior to release; release of goods and transfer of title upon receipt of payment) are well-established in many commercial commodity markets; and

(15)     Since chargers, manuals and warranties for any mobile telephone unit can be changed easily and cheaply they are not determinative of the market for which the mobile telephones have been manufactured.  The terms of trade applying to the Appellant’s deals made it clear that warranties were not necessarily applicable to the territories into which the goods were being sold.

109.Mr Goodwin made the following submissions in relation to the evidence of Mr Fletcher as to the nature of the grey market in mobile telephones:

(1)        Mr Fletcher’s experience was essentially as an adviser and strategist, and not, as was the case with Mr Carnall, as an experienced trader;

(2)        Mr Fletcher’s evidence was the result of a substantial forensic investigation that was retrospective in that it was compiled in 2008 and 2009 using, in many instances, material which itself was compiled in 2007 and 2008 (although relating back to 2006) – it was not the result of active experience and participation in the market at the time;

(3)        A number of important assertions in Mr Fletcher’s evidence (in relation to Nokia’s global price-setting policy, and the activities of ADs) are not substantiated beyond reports of Mr Fletcher’s conversations (in the case of Nokia) and his firm’s work for the bank of a single AD; and

(4)        Mr Fletcher’s evidence as to a limited grey market is in stark contrast to what was actually to be seen “on the ground”, namely a legitimate, large and vibrant grey market in which very many people, the Appellant included, traded extensively and successfully until measures by the Commissioners substantially reduced its scope and extent.

110.Finally, although the points were not argued before us in view of the decision of the Court of Appeal in the Mobilx case, Mr Goodwin reserved the Appellant’s right to argue, in a higher court, the European and Human Rights law points put forward by the appellant taxpayers in the Mobilx case should those taxpayers eventually succeed on those points if their case is heard by the Supreme Court.

Conclusions

111.The parties were agreed as to the issues we have to determine in order to decide whether the Appellant has the right to repayment of the input value added tax which it paid on the supplies to it of the mobile telephones it purchased in Deals 1, 2 and 3.  Those issues are set out at paragraph 9 above.  We agree that they are correctly derived from the relevant EU and domestic legislation as applied by the Court of Justice (principally in the Kittel case) and subsequently by the United Kingdom courts. 

112.In this case we have to look at each of the three transactions entered into by the Appellant in late July 2006 which we have identified respectively as Deals 1, 2 and 3 and described in detail above.  For the reasons given below we have determined that, in each such case, the Appellant’s relevant transactions were connected to a VAT loss; that such loss was attributable to fraudulent evasion of VAT; and that the Appellant knew when it entered into the relevant transactions that they were connected to such VAT loss.  If we are wrong in concluding that the Appellant knew that the relevant transactions were connected to such VAT loss, we determine that the Appellant should have known when it entered into the relevant transactions that they were connected to such VAT loss.  In consequence the Appellant has no right to claim repayment of the input tax it paid on its purchase of the mobile telephones in Deals 1, 2 and 3, and the Appellant’s appeal therefore fails.

Were the Appellant’s transactions connected to a VAT loss?

113.In the case of each Deal the transaction we are principally concerned with, when determining whether it was connected to a VAT loss, is the Appellant’s purchase of the mobile telephones (in each case from Insignia).  The Commissioners presented evidence, derived from Mr Brownsword’s investigations, showing the Deal Chains for each Deal (see paragraph 40 above for Deal Chain 1; paragraph 45 for Deal Chain 2 and paragraph 48 for Deal Chain 3). 

114.That evidence showed, in the case of Deal 1, a sequence of sale and purchase contracts each entered into on 21 July 2006 and each for 3,000 units of Nokia N91 series mobile telephones originating with a sale of those mobile telephones by Phone City Ltd and with an eventual purchase of those mobile telephones by the Appellant.  In the case of Deal 2 the sequence of sale and purchase contracts is also entered into on 21 July 2006, but the goods traded are 2,000 units of Nokia N71 series mobile telephones, and again the sequence of contracts originates with a sale of those goods by Phone City Ltd and results in their eventual purchase by the Appellant.  In the case of Deal 3 the sequence of sale and purchase contracts is entered into on 26 and 27 July 2006 for 998 units of Nokia N72 series mobile telephones, originating with a sale by Kaymore Export Ltd and an eventual purchase by the Appellant.

115.The Commissioners’ evidence on these matters was not challenged by the Appellant, and at the hearing Mr Goodwin accepted the continuity of the transaction deal chains for each of Deals 1, 2 and 3.  We note that, for there to be for these purposes a connection between the Appellant’s transactions and the VAT loss it is not required that there should be privity of contract between the Appellant and the entity creating the VAT loss: if a trader’s purchase and sale of the goods in question forms part of a chain of transactions in the course of which a VAT fraud was perpetrated, then the trader’s transaction is connected with that fraud, since the trader aids the perpetrators of the fraud by supplying liquidity into the supply chain: Calltel Telecom Limited v The Commissioners for Her Majesty’s Revenue and Customs [2009] EWHC 1081 (Ch).

116.We accept that evidence, and find that in the case of each of Deals 1 and 2 the Appellant’s purchase of the relevant mobile telephones was connected to the sale of those mobile telephones by Phone City Ltd through the sequence of sale and purchase contracts as described.  Likewise, we find that in the case of Deal 3 the Appellant’s purchase of the relevant mobile telephones was connected to the sale of those mobile telephones by Kaymore Export Ltd through the sequence of sale and purchase contracts as described.

117.The Commissioners also presented evidence as to the loss of VAT by reason of the default of Phone City Ltd and also the default of Kaymore Export Ltd.  That loss included VAT charged by Phone City Ltd on its sale of the relevant mobile telephones in Deal Chains 1 and 2, and the VAT charged by Kaymore Export Ltd on its sale of the relevant mobile telephones in Deal Chain 3.  In each case the VAT charged was not accounted for and was subsequently included in assessments made on the respective companies by the Commissioners.  In each case the VAT so assessed has not been paid, and no appeal has been made against the assessments.

118.We accept the Commissioners’ evidence on these matters, and the detail of our findings of fact is set out in paragraphs 41 and 50 above.  We therefore find that there was a loss of VAT by reason of the sales made by Phone City Ltd and Kaymore Export Ltd respectively, and that accordingly the Appellant’s purchases of the relevant mobile telephones were connected to a VAT loss.

Were the VAT losses attributable to fraud?

119.The second question for us to determine is whether the VAT losses with which the Appellant’s transactions are connected are losses attributable to fraud.

120.There was extensive evidence from the two officers of the Commissioners responsible for investigations into the affairs of, respectively, Phone City Ltd and Kaymore Export Ltd.  None of that evidence was challenged by the Appellant.  Again, we accept the Commissioners’ evidence on these matters, and our consequent findings of fact are set out in paragraphs 41 and 50 above.

121.Phone City Ltd was engaged in very substantial trading in mobile telephones, importing the goods, and making sales to UK and overseas customers.  It was warned by the Commissioners that it was trading in a way which facilitated MTIC fraud, but it continued to trade without regard to such warnings.  When the Commissioners began investigations into its activities, the company’s officers and other staff persistently evaded all the attempts made by officers of the Commissioners to seek to verify the accuracy of the VAT returns it had made, and such information as was provided did not substantiate the returns made.  There are clear indications that the persons appointed as officers were merely “front men”, acting at the behest of others whose identity is not known.  Those officers were not prosecuted for fraud, but, in view of their reckless and grossly negligent disregard for whether the company was involved in fraud, they have been barred from holding future directorships for twelve years.  No attempt was made by the company to pay any part of the assessments to VAT eventually made, nor to dispute those assessments.

122.It is clear beyond doubt that Phone City Ltd was engaged in a course of action which had as its objective and result the evasion of payment of VAT for which it was properly liable, including the VAT chargeable on its sales in the course of Deal Chains 1 and 2.  We therefore conclude that, in relation to Deals 1 and 2, the VAT losses with which the Appellant’s transactions are connected are losses attributable to fraud.

123.In the case of Kaymore Export Ltd, the company, having engaged in no trade until July 2006, and never having previously traded in mobile telephones or similar goods, in the space of two weeks sold mobile telephones to the value of over £22 million for which it was liable to account for VAT of over £3.9 million.  Included in those sales were those it made in the course of Deal Chain 3 on 26 July 2006.  The company failed to account for that VAT in any VAT return, and when the Commissioners assessed it, the assessment went unchallenged and unpaid.  The director of the company disclaimed all knowledge of the transactions and the resulting VAT liability, claiming that they were the work of a former employee who had been re-engaged on a commission basis.  Kaymore Export Ltd provided no information as to how it acquired the mobile telephones it traded, and all its sales were to one customer.  Subsequent investigations showed that Kaymore Export Ltd had colluded with other companies to create apparent deal chains in which companies participated in return for commission payments and where payments were made to third party suppliers: these are actions whose purpose can only have been to deceive the Commissioners in any investigation they might make as to proper VAT compliance and accounting.

124.We conclude that Kaymore Export Ltd entered into its transactions in July 2006, including that of Deal Chain 3, with the intention of not accounting for the VAT for which it was liable in relation to those transactions and that it evaded payment of such VAT.  The resulting loss of VAT to the Commissioners was therefore a fraudulent loss and, in relation to Deal 3, the VAT loss with which the Appellant’s transactions are connected is accordingly a loss attributable to fraud.

The grey market in mobile telephones

125.Before turning to the question of whether the Appellant knew, or should have known, that its transactions were connected to a fraudulent loss of VAT, it is necessary to deal with the evidence of the parties as to the nature of the grey market in mobile telephones.  Our findings on that question have a bearing on the issue of whether the Appellant was engaged in genuine trading.  That evidence is summarised in paragraphs 81 to 98 above.

126.The central point of difference between the evidence of Mr Fletcher and that of Mr Carnall concerns the extent to which there is scope for trade by those who Mr Carnall described as non-traditional distributors – both witnesses accepted that there is the possibility for trading beyond that in the market originated by and recognised by the OEMs, for example where that market fails in terms of manufacturer supply not meeting demand, or, conversely, where there is excess stock in that market.  It was also accepted that there is some scope for a grey market by way of arbitrage of price or currency differentials, although Mr Fletcher’s evidence was that the uniform pricing policy of the manufacturer Nokia (the OEM of the mobile telephones in all three Deal Chains) largely eliminated the scope for a grey market to be created by this means.

127.Mr Fletcher’s central point was that, even if there are market conditions which non-traditional distributors can exploit by trading to accommodate the shortfall or excess or pricing differential which has arisen in the recognised “white” market, the market forces will always work to eliminate from any trading chain any trader who does not, in one form or another, add value to the transaction.  Put differently, in any genuine grey market which may arise, the desire of all parties to maximise profit will ensure that there is the shortest possible chain between the supplier (whether OEM or AD) and the ultimate consumer.

128.We accept the evidence of Mr Fletcher.  Mr Goodwin sought to challenge it on the basis that Mr Fletcher was an observer or adviser and not (unlike Mr Carnall) an active participant in the market he sought to describe.  But Mr Fletcher’s experience, albeit as adviser, across the range of the telecommunications industry, nationally and internationally, is extensive and at the highest professional level.  Moreover, the central point he made, as to market pressure to eliminate intermediate traders whose presence cannot be commercially justified, is entirely credible to the point of being self-evident: in a market-place where pricing, trading and market conditions generally are entirely transparent through the use of websites and other electronic sources of information, any genuine trading will inevitably be subjected to the competitive and rigorous market pressures Mr Fletcher identified.

129.By contrast, the market Mr Carnall described, and certainly that which appeared from Deal Chains 1, 2 and 3, lacks commercial credibility.  Mr Carnall repeatedly referred to the market in mobile telephones as a “commodity” market, but that, as Mr Kinnear rightly remarked, is to disregard the fact that any genuine grey market will function with the sole purpose of matching the source of supply to the consumer customer’s requirements as price-efficiently as possible.  The market in which the Appellant was engaged in, at least as appears from Deal Chains 1, 2 and 3, was a market in which a series of traders took small profits for seemingly no justification other than being in the chain, where the goods traded were imported into and exported from the United Kingdom a number of times, and in which neither a “white” market originating supplier nor a retail or consumer customer played any part.  Our conclusion is that such a market, if it can properly be described at all as a market, is not a market based on genuine commercial imperatives and does not comprise part of the grey market as identified and described by Mr Fletcher.

Did the Appellant know that its transactions in Deals 1, 2 and 3 were connected to the fraudulent loss of VAT?

130.It is clear from the Mobilx case that if we are to determine this question in the affirmative we have to be satisfied, on the balance of probabilities, that the Appellant knew that its transactions were connected to the fraudulent loss of VAT – not merely that it knew that there was a risk of such a connection or that it knew that its transaction was more likely than not to be connected to the fraudulent loss.

131.It is also clear that it is sufficient if it is established that the Appellant knew of the connection to a VAT fraud perpetrated at some point by some party in the chain of transactions, and not that the Appellant knew of the connection to the specific VAT fraud that occurred in the course of the relevant chain of transactions (i.e. the VAT fraud perpetrated by Phone City Ltd and Kaymore Export Ltd).  As is made clear in the Mobilx case, the heart of the decision in the Kittel case is that the trader has no right to recover input tax if he is a participant in the fraudulent evasion of VAT, and he is such a participant if he knew or should have known that his transaction was connected with fraudulent evasion of VAT, whether that evasion occurs before or after the trader enters into his transaction:

“A trader who decides to participate in a transaction connected to fraudulent evasion, despite knowledge of that connection, is making an informed choice; he knows where he stands and knows before he enters into the transaction that if found out, he will not be entitled to deduct input tax.” – Mobilx at [61]

It is knowledge of connection to fraudulent evasion which results in the trader having no right to deduct, so the trader is not protected if he knew that there was fraudulent evasion within the chain even if he did not know in terms how or by whom the fraud was perpetrated.

132.We also note that, in assessing the actual (or constructive) knowledge of the Appellant, we must look to its state of knowledge at the time it entered into the relevant transactions, refraining from using hindsight to attribute knowledge to the Appellant which, on 21 or 27 July 2006 (as the case may be), it did not have or could not have had.

133.In speaking of the state of knowledge of the Appellant we are in this case concerned with the knowledge of Mr Carnall: it is accepted by the Appellant that Mr Carnall is not only the sole director and (through a holding company) the principal shareholder of the Appellant, but is also the mind of the Appellant controlling its decisions and actions.

134.Finally, by way of our general approach to determining this question, we consider that we should take account not only of the evidence as to the primary facts but also of the circumstantial evidence before us and to draw such inferences from the evidence as a whole as appear to us to be reasonable so as to discern the state of knowledge of the Appellant: that, as Mr Kinnear pointed out, is the approach urged upon the tribunal in MTIC cases by the higher courts, as in the cases of Red 12 v HMRC [2009] EWHC 2563 and Megtian Limited v HMRC [2010] EWHC 18 (Ch), as well as in the Mobilx case.  The matter was summarised in these terms by Christopher Clarke J in Red 12 v HMRC at [111] (and approved by the Court of Appeal in the Mobilx case):

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

In the Mobilx case, having cited this paragraph, Moses LJ continues (at [84]):

“Such circumstantial evidence, of a type which compels me to reach a more definite conclusion that that which was reached by the Tribunal in Mobilx, 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.”

135. Turning now to the circumstances of the Appellant’s case, before considering the specific Deals we draw some general conclusions about the Appellant and its business.

136.First, it is clear that the Appellant had extensive knowledge and experience of the business and business context in which it traded, and that knowledge encompassed the extent and nature of VAT fraud which by 2006 had become prevalent in that business.  Mr Carnall emphasised in his evidence his extensive experience in trading in mobile telephones and related activities (and Mr Goodwin contrasted that with the traders more typically involved in businesses connected with MTIC fraud who moved into the business without prior experience attracted by the opportunity for substantial rewards). 

137.Although under cross-examination Mr Carnall seemed surprisingly reticent in admitting to knowledge of how MTIC fraud resulted in loss to the revenue, it is clear that he knew that such fraud existed, that it might be perpetrated in the type of transactions in which the Appellant was engaged, and that in certain circumstances it could jeopardise the Appellant’s entitlement to recover input tax on its purchases.  One would expect such knowledge to be a commonplace for anyone experienced in this business at that time, but such knowledge on the part of the Appellant is in any event apparent from the matters and circumstances set out in paragraphs [68 to 74] above.  In addition, the working capital financing obtained by the Appellant from AIL was substantially based on the risk that the Appellant would be denied the right to recover input tax, so that in agreeing that financing (and ceding to AIL half the gross profit of each month’s trading transactions as the quid pro quo for AIL bearing risk of non-recovery) the Appellant must have known the circumstances in which that eventuality would come about.

138.Mr Goodwin made the point that the Commissioners did not, prior to the July 2006 transactions, specifically warn the Appellant that it was trading in chains of transactions which could be traced back to missing fraudulent traders, and that by repaying the input tax on all transactions prior to Deals 1, 2 and 3 the Commissioners were in some way signalling the bona fides of the transactions of which the Appellant’s export trades were a part.  However, the Appellant’s knowledge of MTIC fraud and of the consequences if its transactions were tainted by such fraud was clearly based on its experience of the sector as a whole, and not on its own trading transactions or the Commissioners’ response to those transactions.

139.We therefore conclude that the Appellant had a well-developed knowledge of the risk that its transactions could be connected with fraudulent evasion of VAT.  As mentioned, knowledge of such risk is not the determining factor – the question is whether the Appellant knew of such connection – but it is part of the circumstantial evidence before us, and it substantially answers a point made by Mr Goodwin that if the Appellant were a party to contrived transactions, it was so because of its naivety which allowed it be duped into participating (a point which in any event was effectively refuted by Mr Carnall, who refused to accept that characterisation of himself in the course of his cross-examination).

140.This leads us to consider next the chains of transactions, Deal Chains 1, 2 and 3.  Our starting point is the evidence of Mr Fletcher, which, as mentioned, has led us to the conclusion that the transactions in those Deal Chains were not transactions in a genuine commercial market.  We consider that they were contrived transactions, noting the following: 

(1)        None of the traders took the commercial risk of holding stock, since all trades were made on a back-to-back basis with a substantial number of sequential contracts entered into on the same day (except for Insignia’s purchase in Deal Chain 3) and for the same number of mobile telephone units, which itself is suggestive of at least a common organising presence. 

(2)        With the exception of one trade at a loss in Deal Chain 2, the profit margins of each of the broker traders were finely tuned, and although very small, in most instances increased as the chain approached the export trader. 

(3)        None of the broker traders did anything which added value to the goods traded or the trading process or otherwise justified its position in the chain (having regard to Mr Fletcher’s evidence that in a transparent and competitive market there is no place for a trader who contributes nothing of value).

(4)        The Appellant, as exporter, did add value in that it arranged and paid for the freight, insurance and other costs of the physical export of the goods to its EU customer.  For doing so it received a profit in gross terms far in excess of any profit received by any other party in the deal chain – taking the three Deal Chains together, the Appellant received 85 per cent of the gross profit arising between the sale by the fraudulent trader and the purchase by the EU customer.  The Appellant’s commercial risks (apart from those related to the physical export of the goods, which were covered by insurance) were no greater than those undertaken by any broker trader in the chain.  Nor, it would seem, were the Appellant’s costs of sourcing EU customers any greater than those of a broker trader sourcing a domestic customer – site visit costs were incurred after the deals were completed, and, as we refer to below, appear to have little relevance or purpose.  No evidence was offered by the Appellant as to the scale of the costs of exports, or of its general overhead costs in running the business, but from the overall profitability of the Appellant as apparent from the amounts paid to AIL and the dividend it paid, they cannot have been a major factor – on any basis Deals 1, 2 and 3 were highly profitable for the Appellant.

(5)        The terms of each sale as to the passing of title to the mobile telephones traded do not bear close commercial scrutiny in the context of a series of contracts where title is contracted to pass to a customer on receipt of full payment by the seller trader, but the seller trader does not have title under its purchase terms until it has paid in full for the goods, which it is not in a position to do until it receives payment from its customer.  The risks of default or other commercial failure seem not to be recognised or provided for in such terms.

(6)        The mobile telephones were traded with a disregard for matching their specification to the market indicating an indifference on the part of the traders as to the consumer destination of the goods.  Mr Carnall explained that certain items – chargers, manuals and software – in each mobile telephone unit could be changed to adapt the unit to the market of the ultimate consumer, and that a service industry (of which another of his companies is part) exists for that purpose.  Even if that can be done at a modest cost it results, as Mr Fletcher made clear, in a shaving of margins and in a genuine market is therefore avoided if at all possible – a customer seeking mobile telephones for a particular market will first look for units manufactured and packaged with a specification appropriate to his market, since they will be cheaper than those which have borne the cost of adaptation.

(7)        In the Deal Chains there is no MNO or AD as the originating supplier and no retailer or other consumer as the destination customer.  Related to this is the evidence of the Commissioners that most of the mobile telephones identified by the Appellant’s inspection in the course of the three Deal Chains were, previously or later, again in transit for import into or export from the UK.  Their trading in the course of Deal Chains 1, 2 or 3 was related to carousel fraud trading rather than to supplying a genuine consumer market.

(8)        In relation to Deal Chain 1 the evidence, principally from the FCIB records, of the circularity of payments for the mobile telephones traded (which we discuss below).

141.The fact, which we find, that each of Deal Chains 1, 2 and 3 is a contrived chain does not establish that the Appellant necessarily knew this to be the case or knew that its transactions were connected to VAT fraud.  It is, however, further circumstantial evidence which we should take into account when looking at the state of the Appellant’s knowledge.  But it is necessary now to turn to the transactions which the Appellant entered into.

142.In each of the three Deals the Appellant purchased the mobile telephones from Insignia.  Furthermore, in seventeen out of the remaining twenty deals entered into by the Appellant in the course of its trading history the supplier was Insignia.  Mr Ramos, who then worked for Insignia, was a former colleague of Mr Carnall, so that there was a close working relationship between the two companies.  The transactions were fully and commercially documented, apart from certain possible inadequacies as to title noted above.

143.As to due diligence, we have described the process put in place by the Appellant with respect to its suppliers (see paragraphs 75 and 76 above).  Whilst this in its terms, and if applied, comprises a careful check on the standing of the supplier, it was in fact a process which was scarcely utilised, given the predominance of Insignia as a supplier to the Appellant – for most of the Appellant’s trading transactions, including Deals 1, 2 and 3, the actual due diligence amounted to the verification of Insignia’s continuing VAT registration and obtaining from Insignia a standard form supplier declaration as to the due diligence it had conducted on its supplier.

144.Mr Carnall pointed out that the fact that the Appellant used Insignia as its predominant supplier in this way was in itself evidence of the care the Appellant took to ensure it was not trading with an otherwise unknown party who might be a VAT fraudster or the tool of a VAT fraudster – in other words, it was an aspect of the Appellant’s due diligence.  That is not the case, of course, if Insignia is in fact a party to a contrived chain of transactions (which we consider it is, following from our finding as to the contrived nature of the chains) for then Insignia is the means by which the Appellant is introduced into the chain.  Further, the Appellant’s dealing with Insignia in this way in itself raises certain questions as to the commerciality of the arrangements between Insignia and the Appellant: if the Appellant is experienced in this market, would it not seek other suppliers who might offer better terms than Insignia (looking no further than those who act as suppliers further up the deal chains)?  Why would Insignia, if fulfilling a valuable role to the Appellant as trusted supplier, not seek to take some of the share of the Appellant’s exporter’s substantial profit margin?  Why would Insignia, itself experienced in export sales, not sell direct to its existing customer (URTB) rather than put the Appellant in the position where it takes the exporter’s profit by selling to URTB?  These are questions to which the Appellant has no answer.

145.More questions, and in our view more telling questions, arise with regard to the sale transactions entered into by the Appellant in the course of Deals 1, 2 and 3.  First we should say that the sale “mechanics” were properly carried out: the Appellant carried out a physical inspection of the goods sold, made proper arrangements for their physical export to the customer’s designated freight forwarder, and entered into adequate commercial documentation (again, subject to certain questions as to title).  The questions which arise concern the relationship with the customers.

146.We discuss first the customers in Deals 2 and 3, where those questions are more acute.  In Deal 2 the customer was Compucell, a Netherlands company, and in Deal 3, Bluestar, a Danish company.  In each case the Appellant had had no prior dealings with the customer.  Mr Carnall could offer no clear evidence as to how the Appellant had found the customer or the customer the Appellant, other than an assumption that the customer must have seen from an industry website that the Appellant had to offer for sale a specified consignment of mobile telephones.  There is no evidence that there was contact between Compucell and the Appellant before the date on which the sale contract was entered into; in the case of Bluestar contact was first made on the day before the contract date.  In each case, Compucell and Bluestar respectively faxed to the Appellant an introduction letter couched in identical terms – this letter was no industry standard format document, but a seemingly “individual” letter referring, amongst other things, to the particular values and practices adopted by the customer in its dealings and seeking to differentiate the customer by its adherence to such values and practices.  There is no evidence as to negotiation or settlement of price or any other terms of the contract.  Given that the Appellant was about to purchase the mobile telephones from Insignia and would therefore be eager to find a purchaser, there is no evidence that it either sought other potential customers on better terms or that other potential customers offered to purchase the goods.

147.The checks made on Compucell and Bluestar (see paragraph 80 above) were virtually non-existent and, leaving to one side questions of their adequacy for VAT purposes, were, in terms of commercial relationships, entirely lacking: each company provided documents in a foreign language which neither Mr Carnall nor any of the Appellant’s employees could understand; those documents were provided immediately before the sale contracts were entered into, so that in any event there could have been no credible consideration or appraisal of their contents on the part of the Appellant; no commercial references were supplied and little or no other evidence as to the financial standing of the customer so as to enable the Appellant to judge whether the customer was able or likely to meet its contractual obligations.  The only check which the Appellant did make was as to the VAT registration of the customers – a matter which, of course, was crucial to the Appellant’s ability to recover its input tax.

148.Such commercial checks as the Appellant did carry out on these two customers were made at a site visit in each case some weeks after the sales contracts were entered into and concluded.  They clearly served no purpose in relation to the July sales.  Mr Carnall said that they were made to determine whether to conduct future business with those customers, and that site visits were only ever made after the first visit.  That does not explain why the Appellant was prepared to enter into the first trade “blind”, and Mr Carnall’s credibility on this point is further undermined by the Appellant’s conduct in this regard as to URTB and also by the fact that when the site visits were made the Appellant had all but ceased to trade.

149.All these factors lead us to the conclusion that the sales to Compucell and Bluestar lacked any underlying commercial reality or rationale.  We conclude that they were contrived in that the Appellant chose to trade with those respective customers on those occasions and on those terms in order to play its part in a chain of transactions which was organised and predetermined.

150.As to Deal 1, the circumstances of the customer are a little different in that the Appellant had on a previous occasion (in May 2006) sold mobile telephones to that customer, URTB, and prior to that sale had obtained some information as to the commercial standing of URTB.  In July 2006 these enquiries were not repeated, but the Appellant did check the current VAT registration of URTB and obtained from it a “Customer Declaration” as to the terms of the on-sale of the goods by URTB.  A site visit was carried out within two weeks of the contract date of 21 July 2006.  Mr Carnall was unable to explain why the site visit was carried out then rather than (in accordance with what he stated to be the Appellant’s policy) after the May 2006 transaction (the Appellant’s associated company, Eurostar Telecom UK Limited had also traded with URTB – in April 2006 – and no site visit followed that transaction).  As with the other site visits, it was carried out at about the time the Appellant had ceased to trade to any significant extent (the Appellant made no sales in August 2006 and sales totalling only £61,500 in September 2006). 

151.The sale to URTB on 21 July 2006 was therefore a sale to a known customer – unlike Compucell and Bluestar, URTB did not appear “out of the blue” on the day before or on the afternoon of the day on which the Appellant contracted with it.  However, as was the case with Compucell and Bluestar, there is no evidence of a negotiation as to price, or of the Appellant seeking other customers for this Deal to see whether more favourable terms might be available in the market.

152.We cannot reach our conclusions on the nature (whether commercial or contrived) of Deal 1 as relates to the Appellant without reference to the evidence as to the movement of funds in Deal Chain 1, summarised at paragraph 42.  This evidence comes from the banking records of FCIB and the records of the accounts which the Appellant and Insignia respectively held with other banks.  When the movement of funds between accounts is matched against the payment obligations arising at each transaction stage in Deal Chain 1, and then when corresponding amounts moved between parties (not in the contract chain identified by the Commissioners) on the same or a subsequent day are traced, it is clear that funds move around a circle, beginning and ending (chronologically at least) with The Export Company (UK) Ltd.  Thus the sum of £1,008,150.00 which the Appellant paid Insignia for 3,000 Nokia N91 series mobile telephones in two instalments on 26 and 27 July 2006 is the source of the funds of £922,500 which the Appellant received in two instalments on 26 and 27 July 2006 for the sale of those mobile telephones to URTB.

153.Mr Goodwin challenged the significance of the evidence as to movement of funds by pointing out that there is no evidence contractually linking Phone City Ltd and each of the other companies in the movement of funds chain with URTB – can it necessarily be said that all the fund movements were directly related to sequential sales of the 3,000 Nokia N91 series mobile telephones which feature in Deal Chain 1?  First it is to be noted that Silus BV (which received the funds from Phone City Ltd) did direct the release of 3,000 Nokia N91 series mobile telephones to a company two steps further down Deal Chain 1, Data Solutions Northern Ltd, and, at the other end of Deal Chain 1, Amex FHU (which made payment to URTB) is a Polish company which the French tax authorities identified as the customer to which URTB made the great majority of its sales, and so there is some evidence of at least a strong possibility of the connection of payments with mobile telephones traded beyond the immediate bounds of Deal Chain 1.  Secondly, the timings, sequence and amounts of the fund movements in themselves comprise convincing evidence that they are, in one way or another, made in settlement of or otherwise in connection with contractual or other obligations most likely relating to the mobile telephones entering and then leaving Deal Chain 1.

154.We regard this evidence as compelling evidence as to the contrived nature of Deal Chain 1 and also as to the Appellant’s part played in that contrivance.  As Mr Kinnear put it, it was essential in order for the funds to end up in the right hands that each company in Deal Chain 1 purchased the mobile telephones from its prescribed seller and sold them to its prescribed buyer; and therefore if the Appellant purchased the mobile telephones from Insignia it had to sell them to URTB.

155.For the reasons set out above, therefore, we conclude that each of Deal Chains 1, 2 and 3 were contrived, with the parties entering into their respective transactions as directed or predetermined and not as a matter of independent commercial reality or purpose. 

156.This is so in the case of the Appellant and the transactions it entered into: it knew that in agreeing to purchase the mobile telephones in question from Insignia a customer in the EU nominated for the purpose would purchase them the same day at a price previously determined.  That would ensure the flow of the goods and funds, and the price so fixed would give the Appellant a handsome profit even after it had borne the costs of exporting the goods and taking other steps, such as inspecting the goods and organising subsequent site visits to the customers, which, in a contrived transaction, had no commercial purpose but which cloaked the transaction with apparent verisimilitude.

157.The question we have to determine is whether the Appellant knew its transactions in Deals 1, 2 and 3 were connected with VAT fraud: in all the circumstances we have outlined, where the Appellant knew of the scope and extent of fraud in its business, and where the Appellant colluded in contrived transactions whose contrivance was designed to ensure both the achievement and the camouflaging of a VAT fraud, the only inference to be drawn is that the Appellant did indeed know that its purchase of the relevant mobile telephones and their sale in the course of each of those Deals was connected with VAT fraud, and we find that to be the case.

158.We need to deal briefly with a number of points made by Mr Goodwin which he submitted challenged the view that the Appellant was knowingly trading in transactions connected to fraud. 

159.First Mr Goodwin said that Mr Carnall, with his experience and reputation in mobile telephone trading and related business, was far removed from those more usually caught up in MTIC fraud cases, who had moved into this business opportunistically and who, unlike Mr Carnall, had no legitimate business reputation to put at risk.  That is as may be.  What is clear is that Mr Carnall set up the Appellant to make export trades when the MTIC fraud “industry” was nearing its peak, and the Appellant then traded very profitably.  The Appellant offered no direct evidence as to its profitability, but we can see from the gross profits made on its transactions (£1.262m), the share of profits it paid to AIL(£0.51m), the repayments of principal it made to AIL (£0.71m), and the dividend it paid (of £0.237m) (see paragraph 59 above) that it earned substantial profits in less than a year’s trading.  The prospect of such profits, which no doubt he knew that others were reaping, may have been sufficient inducement for Mr Carnall to establish the Appellant to trade as it did.

160.Mr Goodwin’s second point was directed at that question of profitability: he said that since the gross profit achieved by the Appellant’s trading transactions was 6.5 per cent of the Appellant’s expenditure on the goods its purchased, that was no more than a reasonable return.  That, it seems to us, is to misunderstand the finances of the Appellant’s business.  If the capital employed by the Appellant in its business amounted to the value of the stock it traded, then a profit at a margin of 6.5 per cent of that capital employed might indeed be reasonable.  That is not, however, the Appellant’s position, since every contract for the purchase of stock was matched by a contract for the sale (at a profit) of that stock.  The only capital employed by the Appellant in its business was that relating to the overheads of the business and to the delay in repayment of input VAT.  We do not have evidence as to those figures, but what is very clear is that the profit earned by the Appellant as a percentage of those amounts is likely to be a very handsome margin indeed, comprising the “large and predictable reward over a short space of time” to which Moses LJ refers in the Mobilx case (at [84]).

Should the Appellant have known that its transactions in Deals 1, 2 and 3 were connected to the fraudulent loss of VAT?

161.Having found that the Appellant knew that its transactions in Deals 1, 2 and 3 were connected to the fraudulent loss of VAT that disposes of the Appellant’s appeal.  However, if for any reason we are held to be wrong in reaching that conclusion we need to consider whether the Appellant should have known of the connection to the VAT fraud.

162.On the question of the constructive knowledge of a trader in a deal chain where there is fraudulent loss of VAT the guidance provided in the Mobilx case is clear.  In applying the Kittel principle that a trader who is a participant in a transaction connected with VAT fraud has no right to recover input tax, Moses LJ said as follows (at [60]):

“…a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

The question for us therefore is whether the evidence shows that, applying an objective test, the only reasonable explanation for the circumstances of the Appellant’s purchases in Deals 1, 2 and 3 was that such purchases were connected with the fraudulent evasion of VAT.

163.It is not necessary to repeat here our findings set out above as to the prevalence of MTIC fraud in the “market” in which the Appellant traded and the Appellant’s knowledge of the risks of such trading; the contrived nature of Deal Chains 1, 2 and 3; the appearance on the scene on the day of contract or the day before (in Deals 2 and 3) of customers previously unknown to the Appellant prepared to pay a price without negotiation rendering a substantial profit to the Appellant; the Appellant’s failure to look beyond Insignia to source the supply of goods in the wider “market” in an attempt to find a lower purchase price; the readiness of Insignia to trade with the Appellant and forego the exporter’s profit even where (in Deal 1) the Appellant was trading with one of Insignia’s own customers; the lack of certainty as to the terms of trade relating to title to the goods; the Appellant’s knowledge that the mobile telephones traded had (as indicated by their specification) been imported into the United Kingdom and were to be exported; and the opportunity presented to the Appellant “to reap a large and predictable reward over a short space of time” in the context of transactions which, because of their back-to-back terms, carried no commercial risk or required no substantial venturing of capital on the part of the Appellant.

164.These matters comprise circumstantial evidence which taken together compels us to conclude that the Appellant, on any objective test, and in relation to each of Deals 1, 2 and 3, “should have known that the only reasonable explanation for the circumstances in which [its] purchase took place was that it was a transaction connected with fraudulent evasion.”  No other explanation, and certainly none based on any true commercial rationale, presents itself.

165.We therefore find that, if the Appellant did not know that its relevant transactions were connected to the fraudulent loss of VAT, it nevertheless should have known this to be the case.

166.Accordingly, the Appellant has no right to repayment of the input VAT of £260,885.35 which is the subject of this appeal.

167.The Appellant’s appeal is dismissed.

Costs

168.The proceedings in this appeal were commenced in the VAT and Duties tribunal.  At the request of both parties this tribunal directed that pursuant to paragraph 7 of the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, Rule 29 of the Value Added Tax Tribunals Rules 1986 (Award and direction as to costs) should apply to this appeal.  We are therefore entitled to make a direction as to costs in exercise of our powers under Rule 29.  The Commissioners have asked for an order that the Appellant pays its costs.

169.We direct that the that the Appellant pay the Commissioners’ costs of this appeal (being the costs of and incidental to and consequent upon the appeal), such costs to be determined in default of agreement by a Taxing Master on the standard basis.  Either party has leave to apply to the tribunal for further directions should that be required to give detailed effect to our costs order.

Right to appeal

170.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.

 

 

 

 

 

 

 

EDWARD SADLER

 

TRIBUNAL JUDGE

RELEASE DATE: 21 January 2011

 

 

Authorities referred to in skeletons and not referred to in the decision:

 

Optigen Ltd v Customs and Excise Commissioners (C354/03, BAILII: [2006] EUECJ C-354/03 ); Bond House Systems Ltd v Customs and Excise Commissioners (C484/030, BAILII: [2006] EUECJ C-484/03); Fulcrum Electronics Ltd v Customs and Excise Commissioners (C355/03) [2006] STC 419

 

In Re B [2009] 1 AC 11

 

S-B Children [2009] UKSC 17

 

Customs and Excise Commissioners v Federation of Technological Industries [2006] STC 1483

 

HMRC v Livewire Telecom Ltd & Olympia Technology Ltd [2009] EWHC 15 (Ch)

 

Blue Sphere Global Ltd v HMRC [2009] EWHC 1150 (Ch)

 

Emblaze Mobility Solutions Ltd v HMRC [2010] UKFTT 410 (TC)

 

Euro Stock Shop Limited v HMRC [2010] UKUT 259 (TCC)

 

Regent Commodities Ltd V HMRC [2010] UKFTT 68 (TC)

 

Quality Import Export Ltd v HMRC [2010] UKFTT 47 (TC)

 

4 Distribution Limited v HMRC [2009] UKFTT 242 (TC)

 

 

 

APPENDIX I

 

The nature of MTIC fraud

 

The evidence of the Commissioners (given by Mr Roderick Stone) is that MTIC fraud has been responsible for enormous losses to the UK Treasury – estimated for the fiscal year 2005-06 to be as much as £4.5 billion.  MTIC fraud is attracted to the trading of goods which are of high value and small bulk, typically hi-tech goods, and frequently mobile telephones, as in the present case.  They can be traded easily and in large quantities at very high values, and physical delivery (as opposed to the goods being held by an intermediary to the order of a trader) is not necessarily taken by each of the traders in the chain.

In the case of a “simple” fraud chain (in contrast to the more complex “contra” fraud chain, with which we are not concerned) Trader A (who will perpetrate the fraud) is a UK trader who purchases the goods from a trader located in another EU Member State.  Trader A is registered (or appears to be registered) for UK VAT purposes.  Trader A is importing the goods into the UK, and pays no VAT at that point.  Trader A sells on the goods to Trader B, and charges VAT on that supply of the goods.  Trader B is also registered for UK VAT purposes, and is known as a “buffer” trader.  Trader A fails to pay to the Commissioners the VAT it has charged to Trader B and the Commissioners are unable to recover that amount from Trader A, who is now the “defaulting trader” or the “missing trader”.  The Commissioners cannot recover because Trader A simply goes missing, or because Trader A has used (“hi-jacked”) another trader’s VAT registration number.

Trader B might or might not know of Trader A’s fraud, but in any event sells at a small profit to Trader C, another “buffer” trader, charging VAT on the supply, and, in the normal way, accounting to the Commissioners for the difference between the input tax it paid to Trader A and the output tax charged to Trader C.  Trader C then trades on the goods, and there may be a chain of “buffer” traders, each UK VAT registered, and each making a small profit and accounting for VAT in the normal way.  In due course the goods are purchased by Trader X (again, UK registered for VAT purposes), who sells them by way of export to an EU purchaser.  Trader X may or may not know of Trader A’s fraud.  In MTIC fraud terminology Trader X is known as the “broker” or the “exporter”.  As he is exporting the goods to an EU trader who is registered for VAT in his own country, Trader X is not required to charge VAT to his customer, and so in his VAT return claims, by way of repayment, the full amount of his input tax paid, that is to say, the VAT which the “buffer” trader charged to Trader X on that trader’s supply of the goods to Trader X.

Thus the loss to the Commissioners is the VAT which Trader A, the “defaulting trader”, fails to pay to them, although the loss is manifested when the Commissioners repay to Trader X, the “broker”, the input tax which he is claiming.  If the Commissioners can legitimately deny Trader X the right to claim repayment of his input tax, they have repaired the loss from Trader A’s fraudulent default, so that, in the result, Trader X bears that loss.  The courts have held that the Commissioners cannot shift their loss in this way onto Trader X unless the circumstances are such that Trader X is connected in some way with the fraudulent default and, additionally, either knew of that fraud or should have known of it.

In the present case, the Appellant is in the position of the “broker” or “exporter” (Trader X), who exported the goods in question and now claims repayment from the Commissioners of the input tax it paid on purchasing the goods from a “buffer” trader.

APPENDIX II

 

Directions as to admissibility of certain evidence made by the Tribunal on 26 October 2010

 

 

The Commissioners applied for leave to admit further evidence and the Appellant objected to that application principally on the grounds that it was too late in the proceedings for the Commissioners to adduce further evidence and that it was prejudicial to the Appellant’s preparation of its case to admit such further evidence.

There are three separate applications to be considered:

(1)        On 27 August 2010 the Commissioners applied for leave to serve the fourth witness statement of Mr Neil Brownsword, their principal witness.  His evidence concerns the movement of funds between bank accounts with the First Curaçao International Bank held by certain of the parties to Deal Chain 1 (“the FCIB evidence”).  Mr Kinnear, for the Commissioners, explained that the evidence in question was part of extensive computerised records available to the Commissioners, being used by the Commissioners for many MTIC fraud cases and criminal proceedings, and that the officers in the present appeal had not, because of priorities and resource constraints, been given access to the records until shortly before the Commissioners made their application;

(2)        On 20 September 2010 the Commissioners applied for leave to adduce further evidence, being a witness statement of Mr David Miller, an officer of the Commissioners.  His evidence concerns the outcome of criminal proceedings relating to MTIC fraud involving a director (a Mr Chahal) of one of the companies involved in Deal Chain 2 (“the Chahal evidence”).  Mr Kinnear explained that although, of course, the Commissioners have known of the criminal proceedings in question for some considerable time, the verdicts had been reached and the sentences passed in those proceedings only shortly before the Commissioners made their application, so that the Commissioners could not have made earlier application;

(3)        On 18 October 2010 the Commissioners applied for leave to serve a further witness statement of Mr Brownsword.  His evidence covers a wide range of matters, the exhibits running to approximately 120 pages.  Mr Kinnear described it as “tidying up evidence”, being matters that cropped up in the late stages of preparation of the case where, for example, documents supported statements made in Mr Brownsword’s previous evidence (“the miscellaneous evidence”).

In this appeal witness evidence has been dealt with by the service of witness statements by both parties over a period from 9 March 2009 to 5 February 2010.  In its directions made on 16 March 2010 the tribunal directed that no further witness or expert evidence should be admitted without the leave of the tribunal.

On 29 September 2010 the Appellant served notice of its objection to the Commissioners’ applications of 27 August 2010 and 20 September 2010, and a further notice of objection was served in respect of the application of 18 October 2010.  Mr Goodwin, for the Appellant, argued strongly that the tribunal should not exercise its powers to consent to the admission of any of these three areas of evidence.  He argued that even if the tribunal considers the evidence in question to be relevant, for reasons of proper case management of a complex case the tribunal should exclude evidence presented late in the day.  He argued, further, that it is unfair to the Appellant to expect it to deal with a substantial body of new evidence in the final weeks before the hearing – and in the days before the hearing in the case of the miscellaneous evidence – when the Appellant is fully engaged in the preparation of the case as it appeared from the evidence presented in due time.  He contrasted the resources available respectively to the Commissioners and the Appellant, and criticised the Commissioners for arguing that, in the case of the FCIB evidence, they had been constrained by resources from obtaining this at an earlier date.  He referred to a number of authorities (and in particular Brayfal Ltd v HMRC [2008] EWHC 3611 (Ch) at paras. 38 to 42) which make it clear that a party is not to be prejudiced by being ambushed by late evidence, or by a less than open-handed and fair approach by the other party to the proceedings.

To the extent permitted by the limited time available to us we reviewed each set of evidence.  We also read the authorities Mr Goodwin cited to us on this issue.  We found the decision of Judge Berner in the case of Xentric Limited v HMRC [2010] UKFTT 249 (TC) to be a helpful summary of the issues and authorities.  It is necessary to take each application in turn.

We considered first the FCIB evidence.  In our judgment the FCIB evidence is relevant to the case.  It should be admitted unless there are good grounds to exclude it.  Although it is quite extensive, it has been available to the Appellant since 27 August 2010.  We understand that Mr Carnall, the Appellant’s principal witness, has had personal problems which have had an adverse impact on his own involvement in the preparation of the Appellant’s case, and we sympathise with his position.  Nevertheless, in the interests of justice, where the default position should always be to admit relevant evidence unless there is material unfairness to the other party in so doing, we consider that the FCIB evidence should be admitted, since in our judgment the Appellant has had adequate time to prepare his case so as to take account of the FCIB evidence and would not therefore be prejudiced by the admission of this evidence at this time.

We therefore direct that the FCIB evidence be admitted.

We considered next the miscellaneous evidence.  Again, we consider it to be relevant to the case.  In this instance it has been available to the Appellant since only 18 October 2010, that is, one week before the hearing.  As indicated, it is extensive, even if it covers ground largely referred to elsewhere.  We agree with Mr Goodwin that some of the evidence seems to extend beyond the “corrections” referred to by Mr Kinnear.  We also agree that matters of mere correction of Mr Brownsword’s previous evidence can be corrected as we go along.  We consider that it is prejudicial to the Appellant for it to have to consider, and prepare a possible rebuttal of, this evidence at such a late stage in the proceedings.  We think the prejudice to the Appellant outweighs any prejudice to the Commissioners in excluding the evidence.

We therefore direct that the miscellaneous evidence be excluded.

Finally we considered the Chahal evidence.  Again we consider it to be relevant to the present appeal.  It has been available to the Appellant since 20 September 2010.  On the face of it, it is a short point, referring to the conviction in criminal proceedings of Mr Chahal.  However, we note that the evidence refers to a second director of the relevant company in the Deal Chain where that second director is yet to stand trial – and, indeed, it is clear from the fact that other defendants in the first trial are to be retried because the jury was unable to reach a verdict, that these are matters of some complexity.

We found this to be a more difficult exercise to weigh up the prejudice to Appellant in admitting the evidence against that to the Commissioners of excluding evidence relevant to their case.  However, our conclusion is that this evidence comes too late in the day, given the possible complexity of the issues and their exact relevance to the case which the Appellant has to answer.

We therefore direct that the Chahal evidence be excluded.

The costs of and incidental to the Commissioners’ three applications should be included in, and follow, the award of costs made in the substantive appeal.