[2011] UKFTT 93 (TC)

TC00970

 

Appeal number: MAN/2008/0252

 

VAT – MTIC FRAUD (CONTRA-TRADING) – HMRC denied input tax claim in the sum of ₤1,063,650 in respect of two supplies of mobile phones – Appellant conceded that the supplies were connected with fraudulent VAT losses but denied knowledge –  Did the Appellant know or should have known that its transactions were connected to fraudulent evasion of VAT – Yes – Appeal dismissed

 

FIRST-TIER TRIBUNAL

 

TAX

 

MAXIMUM NETWORKS Appellant

 

 

- and -

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

TRIBUNAL: MICHAEL TILDESLEY OBE (TRIBUNAL JUDGE) RAYNA DEAN FCA

Sitting in public at Alexandra House, 14-22 The Parsonage, Manchester M3 2 JA  on 11 – 15 October 2010

 

Timothy Brown, counsel, instructed by Tax & Legal Services Limited  for the Appellant

 

Lucy Wilson-Barnes instructed by the General Counsel and Solicitor to HM Revenue and Customs, for HMRC

 

 

© CROWN COPYRIGHT 2011

DECISION

The Appeal

1.       The Appellant was appealing against HMRC’s decision dated 20 December 2007 refusing a claim for input tax in the sum of ₤1,063,650 in the VAT quarter ending 30 June 2006.

2.       The disputed input tax claim related to two deals in mobile phones, which were sourced from Glasgow Data Ltd with onward sales to two Spanish companies known as CEMSA and Alimed respectively.  The first deal took place on 26 June 2006 and involved a claim for input tax in the sum of ₤393,750. The second deal occurred on 27 June 2006 with an input tax claim of ₤669,900.

3.       HMRC alleged that the disputed deals were part of an overall scheme to defraud HMRC by Missing Trader Intra-Community (MTIC) VAT fraud, in that each of the deals could be traced back via a contra trader to a defrauding trader which fraudulently failed to account VAT to HMRC. Specifically HMRC contended that the Appellant was a broker within a contra-trading scheme, in which Famecraft (Bristol Cash and Carry) was the contra-trader. Famecraft was involved as a broker within the deal chains which resulted in a fraudulent tax loss (the defaulter deals). Famecraft acted as the acquirer and  Glasgow Data as the buffer in the two deal chains involving  the Appellant (the contra deals).

4.       HMRC has the burden on the balance of probabilities to prove that the disputed deals were part of a MTIC fraud. In this respect HMRC is required  to establish  on the balance of probabilities the following four elements:

(1)        There was a VAT loss.

(2)        The loss was occasioned by fraud.

(3)        The Appellant’s transactions were connected with the fraudulent VAT loss.

(4)        The Appellant knew or should have known of such a connection.

5.       The Appellant accepted the sequence of the supplies in both the defaulter and contra chains and that there was a tax loss in each defaulter deal. Further following the decision of the First-Tier Tribunal in Radarbeam v Commrs. Revenue and Customs ref: MAN/2007/1335 and its finding as to the facts in relation to Famecraft the Appellant conceded that the tax loss was fraudulent and that its transactions giving rise to the disputed input tax claims were connected to the fraudulent tax losses via Famecraft acting as the contra-trader.

6.       The Appellant denied that it conspired with other parties to evade VAT. The Appellant submitted that it did not know or should not have known that its transactions were connected to fraudulent evasion of VAT. HMRC disagreed with the Appellant’s contention arguing on the evidence that it knew or should have known of the connection.

7.       Thus the sole issue in this Appeal was whether the Appellant knew or should have known that the only reasonable explanation for the circumstances in which the transactions in question took place was that they were connected with fraud.

The Evidence

8.       The Tribunal heard evidence for the Appellant from Mark Ready, the Appellant’s director at the time of the disputed deals. The Tribunal heard evidence for HMRC from Anna Louise Hudson, David Farmer and Peter Morehead. Ms Hudson was the Officer who carried out the extended verification and made the decision refusing repayment of VAT. HMRC submitted witness statements from Roderick Guy Stone, Peter Cameron Watson, Susan Okolo, Mark Barry Hughes and John Fletcher which were not challenged by the Appellant. The Tribunal, therefore, admitted the statements in evidence.

9.       The parties agreed a statement of facts regarding the details of the fraudulent contra-trading scheme, which have been incorporated in the decision. The parties agreed 18 bundles of documents which were received in evidence.

The Law

10.    Articles 167 and 168 of Council Directive 2006/112/EC of 28 November 2006 provide:

“167 – A right of deduction shall arise at the time the deductible tax becomes charged.

168. Insofar 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 which 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”.

11.    The Value Added Tax Act 1994 provides:

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

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

VAT on the acquisition by him from another Member State of any goods, and

VAT paid or payable by him on the importation of any goods from a place outside the Member States;

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

(6) Regulations may provide

(a) for VAT on the supply of goods or services to a taxable person, VAT on the acquisition of goods by a taxable person from other Member States and VAT paid or payable by a taxable person on the importation of goods from places outside the Member States to be treated as his input tax only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases…

25-(1) A taxable person shall in respect of supplies made by him, and in respect of the acquisition by him from other Member States of any goods; account for and pay VAT by reference to such periods (in this Act referred to as “prescribed accounting periods”) at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.

(2) Subject to the provisions of this section, he 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.

26-(1) 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 for supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business – taxable supplies; supplies outside the United Kingdom which would be taxable supplies if made within the United Kingdom; (c)  such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection”.

12.    The VAT Regulations 1995 provide as follows:-

“29-(1) Subject to paragraph (2) below, and save as the Commissioners may

otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT becomes chargeable.

(2) At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall if the claim is in respect of – a supply from another taxable person, hold the document which is required to be provided under regulation 13; provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a Claimant shall hold [or such other … evidence as the Commissioners may direct.”

13.    Thus articles 167 and 168 of Council Directive 2006/112/EC which have been enacted in UK legislation by sections 24 to 26 of the VAT Act 1994 entitles a tax payer to repayment of the input tax claimed. The European Court of Justice in the joint cases of Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C-439/04 and C-440/04), however, established that there was an exception to the right of repayment where the transactions are connected to fraud. The Court stated that

“51. … 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 the right to deduct the input VAT.

52. It follows that, where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void, by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller, causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.”

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

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

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

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

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 the fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.”

14.    The Court of Appeal in Mobilx Limited & Others v The Commissioners for Her Majesty’s Revenue & Customs [2010] EWCA Civ 517 has clarified the test in Kittel:.

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

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

15.    The Court of Appeal confirmed that the burden of proof in these proceedings rested with HMRC (para.81). The standard of proof was the ordinary civil standard, proof on the balance of probabilities.

The Mobile Phone Industry

16.    HMRC instructed Mr Fletcher to assess the development and structure of the mobile handset industry generally and the size of the addressable market in the European Union and the United Arab Emirates. Mr Fletcher’s assessment included the nature and scope of the authorised market in mobile handset distribution and the grey market for mobile phone handsets during 2006.

17.    The mobile telecom industry enjoyed rapid growth during the last 15 years. Mobile Network Operators (MNOs) facilitated the growth by subsidising the costs of handsets in order to make them affordable to the mass market. Consumers expressed a clear preference for particular handsets and placed importance when choosing a handset on the features offered.  Within the handset market the Original Equipment Manufacturers (OEMs) would not deal with small retailers. The key players in the distribution market for handsets were the OEMs, MNOs, and Authorised Distributors (ADs). The role of the AD was to bridge the gap between the OEM and the small retailer. The ADs aggregated the demands of the smaller and independent retailers into large orders which were attractive to OEM. This created two distinct trading channels within the authorised handset market: phones directly traded between OEMs and MNOs; and those between OEMs and ADs. The key characteristic of the traders in these deal chains involving mobile phones was that they added value to the phones they sold, earning a profit as a result. The distributors add value by holding stock to meet the demands of small retailers

18.    The mobile phone handset industry was international in nature which provided further opportunities for traders in handsets to take advantage of failures in the international market, in what was commonly referred to as the grey market. The market failures fell into two distinct categories: volume or price failures. The former was caused by the AD holding too much or little stock. Price failures, on the other hand, were a result of differentials in the price of particular handsets in different markets.

19.    Mr Fletcher identified normal behaviours or characteristics for each of the four grey market trading opportunities required to address the opportunities profitably. Where a distributor exhibited such characteristics or behaviours then this would indicate that he was involved in profitable grey market trading. Conversely Mr Fletcher stated that there were a number of negative indicators which ran contrary to rational profit maximising behaviour.  In Mr Fletcher’s view the presence of the negative indicators would indicate that a distributor was extremely unlikely to be exploiting a profitable grey market opportunity.

20.    The negative indicators common across all grey market trading opportunities were unreasonably high volumes of specific handsets compared to the total volume sold through non OEM channels, and inadequate product specification documented on handset purchase orders and invoices. Examples of negative indicators for specific grey trading opportunities included lack of stock, no speculative purchases and no ownership of stock.

21.    Mr Fletcher challenged the view that mobile phone traders operating in the grey market only knew the identity of their immediate supplier and customer. Mr Fletcher pointed out that the low barriers to entry in the grey market were facilitated in part by the free flow of information that existed within the grey market. Traders were able to access a handful of internet exchange websites and bulletin boards which allowed them to identify any number of buyers and sellers in the market place. In Mr Fletcher’s view, this free flow information enabled traders to identify the principal suppliers and customers.

22.    Mr Fletcher stated he would expect in the grey market that any trader when selecting a supplier would aim to be as close as possible to an AD because in the market an AD obtained the best price from an OEM. Likewise a trader would gravitate to the retailer or final customer as quickly as possible since they would pay the highest price. Given this expected pattern of behaviour from the traders, Mr Fletcher did not understand the commercial rationale for long deal chains involving mobile phones. In his view the longer the chain, the smaller the available margins for each individual traders. He saw no benefit to the admission of further traders into the chain which would simply dilute each party’s profit margin. Mr Fletcher concluded that traders in the grey market would be constantly trying to extend the range and diversity of their suppliers and customers. This would allow the traders to spot quickly opportunities for shortening the deal chains and moving closer to either the supply or demand at the end of the chain.

Missing Trader Intra-Community Fraud

23.    Moses LJ in Mobilx Limited & Others v The Commissioners for Her Majesty’s Revenue & Customs [2010] EWCA Civ 517 at para.1 provides a succinct overview of the scale of missing trader intra-community (MTIC) fraud:

“For many years, HMRC have attempted to combat MTIC VAT fraud.  It is notorious that the trades in bulk mobile phone and computer chips are especially susceptible to that type of fraud.  Latest published estimates (Measuring Tax Gaps, December 2009) disclose potential losses in 2005-2006 of up to £5.5 billion and in 2008-2009 of up to £2.5 billion.  Lord Hope described the fraud as a “sophisticated attack on the VAT system”, a “pernicious stratagem” and was of the view that Member States were justified in making use of “every means at their disposal within the scope of the Sixth Directive to eradicate it” (Total Network SL v HMRC [2008] UKHL 19 [2008] STC 644 § 6).”

24.    MTIC fraud exists in two main versions, the so called “classic” variety and the “contra-trading” variety. The judgment of Christopher Clarke J in Red 12 Trading Ltd v The Commissioners for Her Majesty’s Revenue & Customs [2009] EWHC 2563 (Ch) at paras. 2-7 sets out a useful exposition of the two variants of the fraud:

“2. The classic way in which the fraud works is as follows. Trader A imports goods, commonly computer chips and mobile telephones, into the United Kingdom from the European Union (“EU”). Such an importation does not require the importer to pay any VAT on the goods. A then sells the goods to B, charging VAT on the transaction. B pays the VAT to A, for which A is bound to account to HMRC. There are then a series of sales from B to C to D to E (or more). These sales are accounted for in the ordinary way. Thus C will pay B an amount which includes VAT. B will account to HMRC for the VAT it has received from C, but will claim to deduct (as an input tax) the output tax that A has charged to B. The same will happen, mutatis mutandis, as between C and D. The company at the end of the chain – E – will then export the goods to a purchaser in the EU. Exports are zero-rated for tax purposes, so Trader E will receive no VAT. He will have paid input tax but because the goods have been exported he is entitled to claim it back from HMRC. The chains in question may be quite long. The deals giving rise to them may be effected within a single day. Often none of the traders themselves take delivery of the goods which are held by freight forwarders. 

3. The way that the fraud works is that A, the importer, goes missing. It does not account to HMRC for the tax paid to it by B. When HMRC tries to obtain the tax from A it can neither find A nor any of A’s documents. In an alternative version of the fraud (which can take several forms) the fraudster uses the VAT registration details of a genuine and innocent trader, who never sees the tax on the sale to B, with which the fraudster makes off.  The effect of A not accounting for the tax to HMRC means that HMRC does not receive the tax that it should. The effect of the exportation at the end of the chain is that HMRC pays out a sum, which represents the total sum of the VAT payable down the chain, without having received the major part of the overall VAT due, namely the amount due on the first intra-UK transaction  between A and B. This amount is a profit to the fraudsters and a loss to the Revenue....

5. A jargon has developed to describe the participants in the fraud. The importer is known as “the defaulter”.  The intermediate traders between the defaulter and the exporter are known as “buffers” because they serve to hide the link between the importer and the exporter, and are often numbered “buffer 1, buffer 2” etc. The company which export the goods is known as the “broker”. 

6. The manner in which the proceeds of the fraud are shared (if they are) is known only by those who are parties to it. It may be that A takes all the profit or shares it with one or more of those in the chain, typically the broker. Alternatively the others in the chain may only earn a modest profit from a mark up on the intervening transactions. The fact that there are a series of sales in a chain does not necessarily mean that everyone in the chain is party to the fraud. Some of the members of the chain may be innocent traders.

7. There are variants of the plain vanilla version of the fraud. In one version (“carousel fraud”) the goods that have been exported by the broker are subsequently re-imported, either by the original importer, or a different one, and continue down the same or another chain. Another variant is called “contra trading”, the details of which are explained in paragraphs 9 and 10 of the judgment of Burton J in R (on the application of Just Fabulous (UK) Ltd) v HMRC [2008] STC 2123.  Goods are sold in a chain (“the dirty chain”) through one or more buffer companies to (in the end) the broker (“Broker 1”) which exports them, thus generating a claim for repayment. Broker 1 then acquires (actually or purportedly) goods, not necessarily of the same type, but of equivalent value from an EU trader and sells them, usually through one or more buffer companies, to Broker 2 in the UK for a mark up. The effect is that Broker 1 has no claim for repayment of input VAT on the sale to it under the dirty chain, because any such claim is matched by the VAT accountable to HMRC in respect of the sale to UK Broker 2. On the contrary a small sum may be due to HMRC from Broker 1. The suspicions of HMRC are, by this means, hopefully not aroused.  Broker 2 then exports the goods and claims back the total VAT. The overall effect is the same as in the classic version of the fraud; but the exercise has the effect that the party claiming the repayment is not Broker 1 but Broker 2, who is, apparently, part of a chain without a missing trader (“the clean chain”).  Broker 2 is party to the fraud.”

25.    Mr Stone’s evidence added to the explanation of the nature and features of (MTIC) fraud and steps which have been taken by HMRC to combat the fraud. He stated that third party requests, the use of freight forwarders and offshore banking were typical features of MTIC fraud.

26.    Mr Stone identified the following pricing characteristics of a contra transaction chain:

(1)        The goods would be acquired zero-rated from another EU Member State.

(2)        The acquirer would be a broker in transactions commencing with a VAT tax loss.

(3)        The acquirer sold the goods standard rated in the UK and never despatched the goods zero rated to another EU member state.

(4)        The broker never purchased the goods from the cheapest source in the UK or from another EU Member State.

(5)        The broker has customers in other EU Member States but never maximised his profits by sourcing the consignments from a supplier in another EU Member State and delivering them direct to his customers.

(6)        The broker’s overseas customer did not seek to purchase the goods from the cheapest source.

(7)        The invoices were normally shown in pounds sterling.

27.    Mr Stone pointed out that buffers and brokers did not normally offer credit terms and retained ownership of the goods until their customers paid them in full. The broker traders in zero-rated exports, however, were required to finance the VAT  paid  to their suppliers pending receipt of the input tax repayment from HMRC. The selection of traders as brokers would, therefore, be governed by the amount of funding available to them.

28.    Mr Stone reported that between 2005 and 2006 many of the dealers involved in MTIC fraud opened bank accounts off-shore which meant that the money transfers and other financial transactions entered into by these dealers lacked transparency and beyond the reach of the UK’s anti- money laundering laws. The most popular off-shore bank with the dealers was the First Curacao International Bank (FCIB) in the Netherlands Antilles, which ceased business on 11 October 2006 following a criminal investigation by the Dutch authorities.

29.    Mr Stone explained the various steps taken by HMRC to combat MTIC fraud. He referred to Business Brief 15/03 and the establishment of a dedicated team at Redhill which would confirm whether a VAT registration of a specified business was current and valid on enquiry from a trader in the computer, mobile phone and road fuel sectors. The confirmation from Redhill team, however, did not mean that HMRC was sanctioning the enquirer’s business with the holder of the VAT registration.

30.    Mr Stone stated that the April 2003 Budget introduced three new measures to combat MTIC fraud, one of which was Joint and Several Liability (JSL). The implementation of JSL was delayed until 11 May 2006 following a legal challenge to the measure in the European Court of Justice. Notice 726[1] sets out HMRC’s published policy in respect of JSL. Notice 726 warns a trader that he may be held jointly and severally liable for the net tax unpaid on supplies of specified goods that were subject to MTIC VAT frauds, if HMRC considers that the trader knew or had reasonable grounds to suspect that that the VAT on those supplies would go unpaid. Notice 726 gives advice to a trader on the checks he could make to ensure the integrity of the supply chain, and on the checks carried out by existing businesses. Notice 726 emphasises that the list of checks was not exhaustive.

31.    Mr Stone described the creation of the NEMESIS database which went live on 1 February 2006. The database holds details of International Mobile Equipment Identity (IMEI) numbers of mobile phones scanned by HMRC at UK warehouses, and ports used for exports to non-EU countries. Each mobile phone has a unique IMEI number. The NEMESIS database is linked to two other databases kept by the mobile phone industry called the Central Equipment Identity Register, and the Stolen Equipment National Database.

32.    NEMESIS provides reports on the following matters:

(1)        The make and model of a mobile phone set.

(2)        Whether the mobile phone has been reported stolen or lost.

(3)        Whether the mobile phone has been blocked.

(4)        Whether the mobile phone has been previously scanned by HMRC.

33.    Mr Stone reported that during 2005 and the first half of 2006 there was a significant increase in mobile phone exports with no apparent commercial or economic explanation for the increase. According to Mr Stone this increase coincided with the release of the Advocate General’s opinion (February 2005) and the decision of the European Court of Justice (January 2006) in Bond House which rejected HMRC’s argument that carousel trading was not an economic activity. This link with the Bond House decision suggested that a large volume of the trade during this period was connected with fraud. Interestingly, a corresponding large fall in mobile phone exports occurred after the release of the Kittel decision which permitted HMRC to refuse repayment claims where it could be demonstrated that the trader knew or should have known that the mobile phone deals were fraudulent.

The Fraudulent Scheme involving the Disputed Deals

Outline of the Scheme

34.    The disputed deals involving the Appellant were part of a contra-trading fraudulent scheme with Famecraft as the contra-trader. The dirty chain involved 131 purchases of Gillette goods and 18 purchases of rechargeable toothbrushes by Famecraft acting as broker between 17 and 31 August 2006. Barato was the defaulting trader in this chain. In the clean chain, Famecraft undertook 75 deals involving mobile telephones which were acquired from Sinderby located in Cyprus and sold onto two UK traders, Glasgow Data Limited and Trimax. Out of Glasgow Data’s 63 purchases of mobile telephones from Famecraft during the 06/06 period, two deals involved direct onward sales to Alimed. The remaining deals involved onward sales to 13 different UK traders, including the two disputed sales to the Appellant which then sold the phones to Alimed and CEMSA. The diagrams produced by Susan Okolo, at Annexes A and C to the agreed statement of facts reflected the structure of these deals chains. The diagrams are adopted as part of the decision. The diagram below provides an overview of the dirty and clean chains.

Famecraft

35.    Famecraft was incorporated on 2 April 2004 under company number 05091754. It was registered for VAT purposes under registration number 836 1853 15 with effect from 14 June 2004.

36.    Famecraft’s VAT1 application form dated 25 May 2004 stated that the business activity was letting of own property. Famecraft applied to be registered for VAT on the basis that it opted to tax a property at Vivars Way, Selby, North Yorkshire, with the option to tax effective from 14 June 2004. On 22 July 2004, Famecraft’s accountants confirmed that completion of the sale was imminent, but on 25 July 2005 the director of Famecraft confirmed that the property sale at Vivars Way had never completed.

37.    Famecraft did not trade from incorporation until June 2005 when it began trading as a cash and carry business under the trading name Bristol Cash and Carry.

38.    On 3 February 2006 Famecraft notified HMRC that it expected to begin exporting soft drinks and toiletries, and applied for monthly VAT returns.

39.    Famecraft’s VAT1 application form dated 25 May 2004 gave an estimated annual turnover of £60,000. During the first 3 periods for which it was registered for VAT (08/04, 11/04 and 02/05), Famecraft carried out no trading. In VAT periods 05/05 to 02/06, Famecraft’s total turnover was £4,890,902, of which £4,400,718 arose in period 02/06. Famecraft’s sales turnover for VAT periods 05/06 and 08/06 was £394,866,143.

40.    In VAT period 05/06 Famecraft carried out a total of 148 transactions, all involving Gillette razor blades. Six purchases were made from CRM Trading Limited and 142 purchases were made from Flaxley Limited (“Flaxley”). Flaxley  purchased these goods from Barato Wholesalers Limited (“Barato”). Famecraft sold these goods on to eight UK customers and one EU customer, CEMSA of Av Osa Mayor 034 28203 Madrid. Famecraft delivered goods sold to CEMSA to GR Distributions in France. In total in this VAT period Famecraft purchased and sold £71m worth of razor blades. In February 2006, Famecraft purchased £2m worth of razor blades and sold £1.2m to CEMSA.

41.    For VAT period 05/06, Famecraft submitted a VAT return claiming a repayment of £2,849,339. HMRC has denied the deduction of input tax for the sum of £2,990,951.61. Famecraft has not appealed this decision.

42.    In period 08/06, which covers Famecraft’s trading period of the two Appellant’s deals, Famecraft supplied £319m worth of razor blades (in August 2006) and mobile telephones (June and July 2006).

43.    In June and July 2006, Famecraft undertook 75 deals involving mobile telephones. All mobile phones were purchased from just one EU supplier, Sinderby Enterprise Limited in Cyprus. All the mobile phones in these deals were kept at 1^st Freight Limited’s premises. Famecraft sold the mobile phones to only two UK traders, Glasgow Data Limited (“Glasgow Data”) and Trimax Trading International Limited (“Trimax”). 

44.    Out of Glasgow Data’s 63 purchases of mobile telephones from Famecraft in Glasgow Data’s 06/06 period, two deals have involved an onward sale to Alimed of Av Osa Mayor 034 28203 Madrid. The remaining deals involved onward sales to 13 different UK traders, including four sales to Trimax and two sales to the Appellant – the deals that were the subject of this appeal. These UK traders in turn sold the mobile telephones either directly or via another UK trader to two EU customers, CEMSA and Alimed.

45.    All of Trimax’s 12 purchases from Famecraft were sold on to seven UK traders who in turn sold the mobile telephones on to either CEMSA or Alimed.

46.    In August 2006, Famecraft acted as a broker, undertaking 131 purchases of Gillette goods and 18 purchases of rechargeable toothbrushes. All deals were undertaken between 17 and 31 August 2006. All goods were stored at Croydon Cash & Carry Limited t/a Croydon Storage & Logistics. Famecraft sold all these goods on to one EU customer, Agrupacion Iberica De Ultramar SA (“Agrupacion”) of Av Osa Mayor 034 28023 Madrid. All goods sold to Agrupacion were delivered to GR Distributions in France.

47.    All deals undertaken by Famecraft in its VAT period 08/06 were on a back to back basis.

48.    Famecraft opened an account at the International Credit Bank Limited (“ICB”) on 22 June 2006. This account was used to receive payment from its customers and to transfer payments to its suppliers in respect of its mobile telephone deals in June and July 2006.

49.    Famecraft did not take out insurance for any of the goods it traded in period 08/06.

50.    The VAT liability incurred by Famecraft as a result of the 75 mobile telephone deals in June and July 2006 was £27,041,787.50. The input tax attributable to Famecraft’s 149 deals in Gillette goods was £27,025,393.22. By purchasing goods from EU suppliers and selling to UK customers, and purchasing from UK suppliers and supplying to EU customers, Famecraft’s VAT liability for the 08/06 period was £4,145.74. The balance of the transactions was artificial and contrived and Famecraft was trading fraudulently.

51.    The transactions where Famecraft purchased from UK suppliers and sold to EU customers were all traced back to the defaulting trader, Barato.

52.    Famecraft’s due diligence checks were inadequate or in some cases non-existent.

53.    Famecraft’s acted as a contra-trader and its trade was fraudulent.

Barato

54.     Barato was incorporated on 9 February 2005. It was registered for VAT with effect from 17 February 2005 under VAT number 853 9894 62. The VAT1 application form gave the trade classification as wholesale of soft drinks and food stuffs.

55.    Barato stated on its VAT1 application form that its estimated annual turnover would be £700,000.  Barato was placed on quarterly VAT returns. For its first two VAT periods (05/05 and 08/05) Barato rendered nil returns. Barato’s third, fourth and fifth VAT returns (periods 11/05, 02/06 and 05/06) declared sales of £3,032,671, £6,393,362 and £76,606,654 respectively. No VAT return was submitted by Barato for VAT period 08/06.

56.    During VAT period 05/06, Barato acted as a buffer trader, purchasing goods from defaulting trader, Leeming Distribution Limited (“Leeming”). Barato did not make payments directly to Leeming, but made third party payments to a company based outside the UK, Avoset OU.

57.    All goods purchased by Barato from Leeming in VAT period 05/06 were sold on to Flaxley who sold them on to Famecraft. 

58.    In VAT period 08/06, Barato started to acquire razors and toothbrushes from Portuguese company, Levavalour. All good purchased by Barato were sold on to Flaxley.

59.    Barato was assessed for the sum of £22,967,287 in respect of the VAT it should have accounted for on goods purchased from Levavalour and sold on to Flaxley. The relevant VAT assessment V641 was issued on 23 October 2006. Barato has not appealed this assessment.

60.    Barato was compulsorily deregistered for VAT with effect from 25 October 2006 and was wound up on 13 June 2007.

61.    Barato was a defaulting trader that has failed to account to HMRC for VAT.

Glasgow Data

62.    Mr Farmer found that of the 200 deals completed by Glasgow Data during 06/06, 144 eventually reached CEMSA, having been dispatched by one of 33 different United Kingdom brokers. Of the remaining consignments, 41 were sold to Alimed, 12 to two Danish companies, and three consignments could not be traced. The goods in each of the 197 transactions traced were sold to just four European Union customers (Alimed, CEMSA and the two Danish companies).

63.    In the 06/06 period Glasgow Data purchased 63 consignments of mobile phones from Famecraft, the contra-trader, which had acquired its mobile phones from Sinderby Enterprises Limited based in Cyprus. Glasgow Data acting as buffer sold on the 61[2] consignments to 13 UK brokers, one of which was the Appellant. The brokers then despatched the phones to two Spanish companies, Alimed or CEMSA. The UK brokers did not handle the consignments of mobile phones. Instead the consignments were said to be kept at the premises of 1^st Freight Limited and then shipped to the freight warehouse of GR Distribution EURL based in France. This set of  consignments formed the clean chain of the contra-trading scheme involving Famecraft as the contra-trader

64.    Mr Farmer analysed the unit mark ups for the traders at the various stages in the clean chain[3]. He found that Sinderby Enterprises invariably achieved a mark up of ₤1.50, whilst the mark up for Glasgow Data unless acting as a broker was always ₤1 regardless of the model of the phone. The range of mark ups for the United Kingdom brokers was from ₤8.50 to ₤26.25. Mr Farmer conducted a detailed analysis of the mark ups secured by three  brokers which included the Appellant on their dispatches over the period 26 June and 27 June 2006. His analysis showed that

(1)        The three brokers (Lynen Limited, Pierhead Purchasing Limited and the Appellant) achieved the same mark up of ₤26.25 per unit in respect of Nokia 8800 sales to CEMSA.

(2)        Lynen and the Appellant achieved the same mark up of ₤23.03 in their trades of Nokia 9300i.to Alimed.

(3)        Lynen sold the Nokia N91 at the same ₤330.63 unit value as the Appellant charged for Nokia N80, achieving the same mark up of ₤21.63 when making their sales to Alimed.

(4)        The common mark ups and sales values in respect of the deals by the three United Kingdom brokers were achieved irrespective of the quantity of product being traded.

(5)        A direct trading relationship existed between the Appellant and Lynen during the period 04/06.

65.    Mr Farmer pointed out that during period 03/06 Glasgow Data had a direct trading relationship with CEMSA. When brokering their 03/06 sales to CEMSA Glasgow Data achieved a margin of ₤25 per unit for the two different models of mobile phones. Their 06/06 United Kingdom buffer sales covered six different models of mobile phones ranging from ₤189 to ₤410 yet in every instance Glasgow Data achieved a margin of ₤1.  Thus Glasgow Data achieved a net profit of ₤780.750 on its sales of 780.750 units to the UK brokers in the 06/06 period which was significantly less than the potential net profit of ₤19,518,750 if Glasgow Data sold direct to CEMSA.

66.    Mr Farmer concluded that the patterns of trading identified in the clean chain in quarter 06/06 were contrived and performed by a highly organised cell of traders. In his view the deals were part of a scheme to defraud the revenue. The key characteristics of the scheme were that the consignments had to be kept within a given circle of traders and moved between the same two freight forwarders. The only reason for importing the goods into the UK was to create a tax charge and a subsequent repayment claim for a broker trader. Mr Farmer considered that the Appellant played a direct and knowing part in the fraudulent scheme. This was demonstrated by its pattern of trading which followed that of the other supposedly independent companies acting as brokers. They all sourced the goods from the same supplier, used the same freight forwarders, and sold the goods to the same customers. The unit prices charged and the mark ups achieved by the Appellants were remarkably similar to the other two brokers who traded on the 26 and 27 June 2006.

1^st Freight Limited

67.    1^st Freight Limited operated as the freight forwarder in respect of the purported  deals in  the contra-trade fraudulent scheme which included the two disputed deals involving the Appellant.

68.    Mr Morehead presented the evidence on behalf of HMRC in respect of 1^st Freight Limited. Mr Morehead had no personal knowledge of 1^st Freight Limited. The contents of his statement were drawn from other sources, principally from the records kept by Mr Lester who has now retired from HMRC. Despite a strong challenge from Appellant’s counsel which was diluted by the Appellant’s concession of the existence of a fraudulent scheme, the Tribunal was satisfied with the truth of the contents of the statement and the conclusions drawn from the facts uncovered by the HMRC investigation.

69.     Mr Morehead stated that

(1)        1^st Freight Limited was incorporated on 25 January 2006 and registered for VAT on 1 February 2006. 1^st Freight Limited became a missing trader and was compulsory de-registered from VAT with effect from 19 September 2008.

(2)        1^st Freight Limited failed to pursue its Appeal against HMRC’s refusal to meet a repayment claim in the total sum of ₤3,101,922.00.

(3)        The premises of 1^st Freight Limited did not have the capacity to store the quantity of goods purportedly traded through it.

(4)         1^st Freight Limited did not have the ability to scan the goods in the quantities claimed. Mr Morehead believed that the only rational conclusion was that the scanning did not physically occur, and that 1^st Freight Limited somehow obtained the IMEI numbers by other means.

(5)        1^st Freight Limited had 94 known clients, 70 per cent of which supplied CEMSA, a Spanish business. The remaining 30 per cent supplied 14 separate EU customers ranging from Denmark to Italy. According to the CMR’s all the purported goods passing through 1^st Freight Limited were forwarded to GR Distribution based in France regardless of the country in which the customer was located.

(6)        All the road haulers purportedly used by 1^st Freight Limited have denied any knowledge of 1^st Freight Limited or of carrying out any work on its behalf.

(7)        The IMEI scans purportedly carried out by 1^st Freight Limited showed that some phones have passed through 1^st Freight Limited several times for different customers.

70.    Mr Morehead concluded that the number of irregularities and similarities that appeared throughout the checks undertaken by HMRC into the CMR documentation and IMEI records kept by 1^st Freight Limited posed serious doubts on the credibility of the shipments handled by 1^st Freight Limited. Further Mr Morehead did not consider that 1^st Freight Limited operated a genuine business.

71.    Mr Morehead’s statement did not refer specifically to the disputed deals except the inspection report of 6,000 Nokia 8800 phones dated 26 June 2006 provided by 1^st Freight Limited to the Appellant. Apparently at the same time 1^st Freight Limited  carried out this inspection for the Appellant, it conducted an inspection of 5,000 Nokia 8800 phones for Lynden Limited. Mr Morehead estimated that 1^st Freight Limited with a staff of seven would have taken in excess of 13 hours to complete the two inspection reports. Mr Morehead also pointed out that the IMEI numbers in the Appellant’s inspection report were sequentially ordered, which suggested to Mr Morehead that the scan did not take place. 

The Appellant

72.    The Appellant was incorporated in June 2003 and registered for VAT with effect from April 2004. The Appellant had two directors, Mr Stewart Lines and Mr Mark Ready. The latter took the lead in running the company. The Appellant was associated with Maximum corporate group which included Maximum Maintenance, Maximum Networks and Maximum Solutions.

73.    Mr Lines started up the Maximum Group in 2001 with Maximum Solutions dealing in the refurbishment of second hand telephone equipment which was then sold back to the trade. As the company grew, Mr Lines started to install telephone systems to end users, maintain them, and bill the call spend and the line rental for the customers. Mr Lines created Maximum Maintenance and Maximum Networks to handle the new lines of business.

74.    The Appellant was originally set up to provide telecommunications services, namely calls, lines and handsets to business end users. The Appellant was a BT Wholesale partner and a Virgin Media supplier. The Appellant also specialised in the supply of non-geographic numbers and the provision of managed mobile communication solutions.

75.    According to Mr Ready, the Appellant carried on a substantial business in providing telecommunication services to end users before it diversified into the wholesaling of mobile phones. The Appellant had a billing platform where every month it would send out ₤70,000 worth of telephone bills to about 200 different companies, of which 40 per cent of the ₤70,000 was profit. The Appellant sourced its customers for the landline business from a database supplied by its sister company Maximum Maintenance. Mr Ready believed that the Appellant was attractive to mobile phone traders because it was an established company supported by capital. 

76.    The Appellant’s application for VAT registration dated 2 March 2004 stated that it did not expect to receive regular repayments of VAT and that the expected turnover in the following 12 months would be ₤150,000. Further the registration application stated that it did not expect to be either buying from or selling to other EU Member States.

77.    The Appellant submitted ten quarterly VAT returns from the effective date of registration to period 09/06. Four of the ten returns were repayment claims totalling ₤1,736,142.90. In comparison the six payment VAT returns totalled ₤81,610.04. The turnover declared in the VAT returns for the first 12 months to 30 April 2005 was ₤436,940.00. In the second 12 months to 30 April 2006 the declared turnover rose by 1035.5 per cent to ₤4,961,482.00. In the one period from 1 May 2006 to 30 June 2006 the turnover rose again by 35.72 per cent to ₤6,734,106.00. The Appellant’s net tax position changed from payment of ₤33,806.32 in the first 12 months to 31 April 2005 to a repayment of ₤623,386.04 in the second 12 months to 31 April 2006, and a repayment claim of ₤1,054,314.28 in the one period from 1 May 2006 to 30 June 2006.

78.    In July 2005 the Appellant completed a job for a client involving the connection of in excess of 300 telephones. Whilst pricing the job the Appellant became aware of the market in high volume trades of mobile phones and decided to expand its business in that direction. In this respect the Appellant secured additional funding for the deals from its bank, National Westminster, and employed another member of staff, a Mandhir Todd, who had experience in the buying and selling of telephones on the grey market.  The original intention was for the Appellant to transfer the business in the wholesaling of mobile phones to a new company, Telephone Warehouse, which did not get off the ground.

79.    The Appellant secured additional funding for its business from National Westminster in January 2006 by the presentation of a spreadsheet prepared by its accountants. The spreadsheet predicted that the Appellant’s value of sales of mobile phones to Spain would be ₤472,500 per month. Mr Ready could not explain why the spreadsheet specified Spain as the destination for the goods, particularly as its first deals in mobile phones were with companies in France or why the spreadsheet showed the same level of trading for each calendar month. Mr Ready stated that the spreadsheet was produced purely for the Appellant to put a business plan to the bank and gain the overdraft facility. Mr Ready admitted that the Appellant had no formal business plan for its trades in mobile phones.

80.    The Appellant understood the grey market in mobile phones to mean that it was not buying direct from the authorised distributor and that the prices of the phones, if bought in bulk, would be slightly cheaper. The Appellant asserted that it gained its knowledge of the grey market from buying and connecting on a daily basis individual handsets to the different networks. The Appellant stated that it located stock and customers by various means including reference to the trade magazines, checking websites of suppliers and receiving direct approaches from other traders.

81.    The Appellant insisted that it held sound information about the current market value of handsets. The Appellant relied on the market value of handsets as a benchmark for determining whether a proposed deal was too cheap. This was the principal indicator used by the Appellant when evaluating whether a prospective trade was fraudulent.

82.    Mr Ready, however, accepted that none of the documents held by the Appellant, such as, letters of introduction from other traders in mobile phones, and those relating to specific deals contained information about prices. Further the Appellant did not belong to IPT[4], although it accessed the IPT website. The Appellant, however, stated that all negotiations on price took place on the phone of which no records had been kept.

83.    The Appellant received introductory letters from Sinderby Enterprises on 21 June 2006 and Trimex on 27 June 2006. Sinderby Enterprises and Trimex were key players in the deals organised by the contra trader, Famecraft. Mr Ready denied that the Appellant had any direct contact with Sinderby and Trimex in respect of the transactions subject to Appeal.

84.    On 7 February 2006 HMRC Redhill office advised the Appellant by letter of MTIC fraud in the mobile phone trade sector and the requirement to verify the VAT status of customers and suppliers through the Redhill office. The Appellant demonstrated its understanding of the letter by subsequently conducting checks through the Redhill office. On 24 February 2006 HMRC Officers undertook a visit to the Appellant’s office and discussed with Mr Ready the risks of MTIC fraud. Mr Ready confirmed that he had received the 7 February 2006 letter from the Redhill Office and VAT Notice 726, Joint and Several Liability in the Supply of Specified Goods.

85.    The Appellant carried out one mobile phone deal in VAT period 01/06 and four such deals in 04/06. These deals involved the buying and selling of Nokia mobile phones from three United Kingdom suppliers, Pan Euro Ventures Limited, Lynen Limited and Cell Trading UK limited, to two French companies, Eurovision Export Sari and Imanse Import and Export.  The Appellant’s repayment claims for quarters 01/06 and 04/06 were not subject to extended verification and were met by HMRC. During the extended verification of the 06/06 Appellant’s repayment claim, Officer Allen, however, discovered that one of the four transactions undertaken in the 04/06 period had commenced with a defaulting trader. Officer Allen notified the Appellant of this fact in a letter dated 5 October 2006.  Ms Hudson accepted that the deals  in the 04/06 quarter did not occur  at the end of the VAT period, in contrast to the disputed deals which happened  at the end of the 06/06 quarter..

The Disputed Deals

86.    The disputed deals took place in quarter 06/06[5].The Appellant stated that it made contact with its supplier and customers for the two deals on the websites used by traders in mobile phones. The first deal took place on 26 June 2006 and involved the purchase of 6,000 Nokia 8800 phones from Glasgow Data Limited with a unit price of ₤375. The total value of the order was ₤2,643,750 of which ₤393, 750 was VAT. The Appellant then sold the phones back to back at a unit price of ₤401.25 to CEMSA, a Spanish company. The total price of the sale was ₤2,407,500.

87.    The second deal dated 27 June 2006 involved two separate purchases from Glasgow Data.  The first one being a batch of 6,000 Nokia N80 phones with a unit price of ₤309. The value of that order was ₤2,178,450 of which ₤324,450 was VAT. The second was a batch of 6,000 Nokia 9300i phones at a unit price of ₤329 which amounted to ₤2,319,450 in total, of which ₤345,450 was VAT. The total value of the purchases from Glasgow Data Ltd on 27 June 2006 was ₤4,497,900 of which ₤669,900 was VAT. The Appellant sold back to back the two purchases of phones as one consignment to Alimed, a Spanish company, in the sum of ₤4,095,960.

88.    In each of the deals the goods were held by 1^st Freight Limited which was instructed to transport the goods to GR Distribution EURL based in France. The Eurotunnel transport document for the first deal recorded that the goods were transported to France at 21:56 on 26 June 2006. The CMR indicated that the goods were received on 27 June 2006 by GR Distribution. The Eurotunnel transport document for the second deal recorded that the 9300i and N80 mobile phones were transported to France respectively at 19:53 on 27 June 2006, and 19:27 on 28 June 2006.  The respective CMRs indicated that the goods were received on 27 and 28 June 2006 by GR Distribution.

89.     1^st Freight Limited charged the Appellant ₤5,287.50 of which ₤787.50 was VAT. for the transport and a 100 per cent inspection of the phones in the first deal. The transport and inspection charges for the second deal were the same at ₤5,287.50 for each consignment of 6,000 phones. The IMEI scan of the first deal provided by 1^st Freight Limited to the Appellant was checked against the NEMESIS database which showed that the model of phone was the Nokia 3220 not the Nokia 8800 which apparently was the model sold to CEMSA.

90.    On 26 July 2006 HMRC informed the Appellant that the 06/06 repayment claim would be subjected to extended verification because of the prevalence of MTIC fraud in the trade sector.

91.    There was one other deal in the 06/06 quarter which involved a supply of phones from Contact Computing Limited which the Appellant sold onto its associated company, Maximum Solutions (UK) Limited and in the next period issued a credit note to cancel the transaction. Although Ms Hudson considered the circumstances and explanation surrounding the credit note suspicious she decided to release the ₤10,638.94 repayment for 09/06 because:

(1)        Tax had been accounted for correctly for both the buffer deal in period 06/06 and the credit note in period 09/06 by the Appellant and Maximum Solutions Ltd.

(2)        The alleged goods were still at the Appellant’s premises when she visited.

The Appellant’s Due Diligence in Respect of the Disputed Deals

92.    The Appellant’s due diligence undertaken on the supplier, Glasgow Data  consisted of a director’s statement, photocopy of director’s passport and driving licence, copy of certificate of incorporation, copy of VAT registration certificate and Risk Disk prints. The Appellant did not obtain independent evidence to confirm the statements made by Glasgow Data in the trade application form

93.    The Risk Disk print for Glasgow Data produced in evidence was dated 17 August 2006, almost two months after the two disputed transactions took place. The Risk Disk print gave a risk assessment for Glasgow Data of a little higher than average risk – proceed with caution. The print recorded that the credit limit for Glasgow Data was ₤1,900, a nil turnover, and a loss for the latest year available. Mr Ready asserted in his evidence that a risk disk check was carried out on Glasgow Data at the time the deals were struck but no record of it was kept in the file. Mr Ready did not mention this in his witness statements because he did not see the relevance of it despite having had sight of Ms Hudson’s witness statement for some time.

94.    The Spanish Tax Authorities stated that CEMSA had one director, a UK national, named Stephen Russell. The company was incorporated on 14 June 2001 and the date of VAT registration was 8 October 2001. CEMSA’s primary activity was said to be the wholesaling of pharmaceutical products. The Spanish Tax Authorities advised that CEMSA continued to carry out its intra-community commercial activities. Although there was no firm evidence that CEMSA was involved in MTIC fraud, the Spanish authorities believed that CEMSA was engaging in unlawful activities because no goods passed through the business premises and goods were seldom sold in Spain. 

95.    The Appellant’s only information about CEMSA was an introductory letter dated 21 June 2006 and a completed trade application form. CEMSA stated in the trade application form that it had been involved in a supply chain which included a missing trader, and that it had a VAT assessment or outstanding enquiries or appeals with HMRC. The Appellant asserted that it had queried these answers on receipt of the form with Mr Russell of CEMSA who confirmed that the form had been completed in error. The Appellant’s trade application form was a standardised template drawn up by Mr Todd, which was sent as a matter of course to all its suppliers and customers. The Appellant did not adapt the form in respect of suppliers and customers from outside the UK. Ms Hudson accepted that she had mistakenly included in her evidence a Dun & Bradsheet European Comprehensive Report for CEMSA.

96.    The Spanish Tax Authorities advised that Alimed had one director by the name of Sanchez Lerin Garcia Ovies Antonio. He was also a director of another Spanish company to which Famecraft sold the Gillette razor blades in the dirty chain.. Alimed was incorporated on 26 June 1997, registered for VAT on 23 October 2002 and de-registered on 22 June 2007. The Spanish Tax Authorities concluded that Alimed was involved in VAT carousel fraud involving mobile phones.

97.    The Appellant’s due diligence undertaken on the customer, Alimed, consisted of a letter of introduction, bank details, certificate of incorporation and VAT registration certificate which were all faxed to the Appellant on the day the transaction took place. 

98.    The Appellant accepted that it had not met anybody from Glasgow Data, CEMSA or Alimed. The Appellant did not take trade references of its suppliers and customers believing they were of no value because a fellow trader was unlikely to recommend a referee who would give a bad reference. Finally the Appellant obtained no independent evidence confirming the business addresses of Glasgow Data, CEMSA or Alimed and the length of occupation at their respective addresses.

99.    Glasgow Data did not supply its bank details in the due diligence documentation or on its sales invoices provided to the Appellant[6]. The bank accounts for CEMSA and Alimed were not with Spanish banks. CEMSA banked with Close Bank in the Isle of Man and FCIB in the Netherlands Antilles, whilst Alimed held a bank account with FCIB.

100.The Appellant did not undertake due diligence checks on 1^st Freight Limited even though the Appellant entrusted the freight forwarder with the transport of goods to the value of over ₤6.5 million. If the Appellant had carried out checks it would have discovered that the VAT registration number given by 1st Freight Limited on its sales invoice dated 29 June 2006 was that of 1^st Freight (not limited) which had been deregistered for VAT with effect from 5 April 2006.

101.The Appellant faxed details of the companies involved in the disputed deals to HMRC Redhill Office to verify their VAT registration numbers. The results of the check for the second deal were faxed back to the Appellant from HMRC Redhill on 28 June 2006, the day after the deal took place. Mr Ready stated that the Appellant went ahead with the second deal because it obtained clearance from Redhill for the first deal, even though the two deals had different customers.

102.The Appellant supplied no evidence detailing any market research, negotiation of volumes and prices, transport negotiations, delivery or payment arrangements in respect of the first and second deals. Mr Ready did not consider it necessary to have contractual paperwork for these deals because they were one-off transactions. Mr Ready distinguished these deals from the Appellant’s business in landline telephone calls which required written contracts so that its customers were locked into the arrangements for three years.

103.The Appellant made all of its purchases and sales for the transactions in each of the two deals on the same day, and in the same quantities. The Appellant was not left with any excess stock for the two deals in question. The deals were structured so that the Appellant did not have to pay for the purchases until it had been paid by its customers.

104.In Ms Hudson’s experience it was only brokers in MTIC VAT frauds which match up exactly the supply from a supplier with the sale to a customer. Ms Hudson accepted that the mobile phones in the deals had not been recorded before on NEMESIS. Mr Hudson was not prepared to confirm that the phones had never been round a carousel either before or after the disputed deals.

Banking and Payment Arrangements for the Disputed Deals

105.The Appellant used an account with International Credit Bank (ICB) for processing the money involved in the two deals. This account was set up on 12 July 2006. Prior to this date the Appellant was using a National Westminster Bank account. Famecraft, the contra trader, also used the banking facilities offered by ICB for its acquisition of mobile phones in June and July 2006.

106.HMRC had limited information on ICB. The Bank appeared on the Financial Services Authority list of unauthorised internet banks, with the advice that consumers should exercise caution in their dealings with it as they would not get the benefit of the UK compensation and complaints scheme.

107.Mr Ready stated that the Appellant changed its bank account for the wholesale mobile phone deals because it intended to transfer the business to a new company, Telephone Warehouse. Also the Appellant did not want Mr Todd to have access to its National Westminster Bank account. The Appellant opted for ICB on the advice of Mr Todd who stated that it was being used by other traders. Mr Ready accepted that the Appellant did not investigate whether ICB was a bank authorised by the Financial Services Authority. Mr Ready did not think it was unusual to find a bank in San Marino.  Mr Ready stated that ICB was attractive because it facilitated quicker money movements. Mr Ready added that banks such as National Westminster could not move those levels of money around very quickly.

108.The money transfers for the first deal on 26 June 2006 started with a payment of ₤2,407,500 on 14 July 2006 from Alimed, which was not involved in this deal. The Appellant then transferred this payment to its supplier, Glasgow Data. The payment transferred was some ₤236,270 less than the sum of ₤2,643,750 invoiced by Glasgow Data for the consignment of mobile phones sold to the Appellant.

109.The Appellant asserted that the sum of ₤2,407,500 paid by Alimed was a mistake which went unnoticed by the Appellant even though it was only handling two deals at the time. Mr Ready offered no explanation why Alimed would pay the Appellant over ₤2 million for goods which it did not order.  When the error was discovered an agreement was reached with Alimed not to pursue the debt until the Appellant’s receipt of the money due from its customer, CEMSA, for the first deal, which was paid on 1 September 2006. The Appellant then repaid Alimed with the amount of ₤2,407,500 on the same date. The money transfers in the first deal were evidenced by the Appellant’s bank statements. There were, however, no payment details in the deal records provided by the Appellant for the first deal.

110.The money transfers for the second deal on 27 June 2006 took place on the 14 July 2006 with a payment of ₤4,095,800 into the Appellant’s bank account from Alimed, and a payment out of the same sum to Glasgow Data. The payment out of ₤4,095,800 was some ₤402,100 less than ₤4,497,900 invoiced by Glasgow Data for the supply of mobile phones to the Appellant. The money transfers in the second deal were evidenced by the Appellant’s bank statements. There were, however, no payment details in the deal records provided by the Appellant for the second deal.

111.Mr Ready acknowledged that the Appellant did not pay the full sum on the two deals owing to Glasgow Data. The balance outstanding was in excess of ₤600,000. Mr Ready accepted that Glasgow Data had not given credit terms. Thus the Appellant’s failure to pay the full sum invoiced was contrary to the agreed terms of sale which required payment forthwith. Despite full payment not being made, Glasgow Data did not request or demand payment of the outstanding balance from the Appellant.

112. The Appellant’s tax advisers originally stated that the Appellant made efforts to settle the outstanding amount with Glasgow Data but there had been problems with the bank which delayed the settlement. Further the tax advisers told HMRC that the Appellant was now withholding payment to Glasgow Data until it received the VAT repayments Mr Ready denied that the retention of the outstanding sum had anything to do with the recovery of VAT. Mr Ready pointed out that the Appellant had the resources to discharge the debt due to Glasgow Data. The Appellant held  ₤400,000 in its National Westminster account and in addition an overdraft limit of ₤200,000. At the hearing Mr Ready, however, supplied a different reason for not settling the debt. On or around 26 July 2006 he contacted Glasgow Data about payment and was informed that the police had raided the premises of Glasgow Data. In those circumstances Mr Ready considered it prudent not to pay Glasgow Data the  monies due.

Other Evidence relating to the Disputed Deals

113.No member of the supply chain for the first and second deals took physical possession of the mobile phones. Famecraft, Glasgow Data and the Appellant all bought and sold the phones whilst they were held at 1^st Freight Limited. Alimed and CEMSA moved the goods from 1^st Freight Limited to GR Distribution EURL in France. HMRC queried with the Appellant about sending the to the same freight forwarder in France when the Appellant’s customers were based in Spain. According to Mr Ready, Alimed and CEMSA distributed phones predominantly in Northern Europe. The use of a central distribution centre in France enabled Alimed and CEMSA to transport the phones more easily to their customers wherever they might be.

114.The Appellant’s instructions  to 1^st Freight Limited regarding release of goods stated that:

“Please release on hold the following consignment as soon as possible. Please do not release the goods until you receive express written confirmation from the Appellant of receipt of full payment from the customer”.

The goods of the two deals were released to GR Distribution EURL on the 26 June and 27 June 2006 which was more than two weeks before the Appellant received the first payment from Alimed on 14 July 2006. The Appellant supplied no evidence of its express written confirmation which was a pre-requisite for the release of the goods by 1^st Freight Limited on the 26 and 27 June 2006.

115.The two deals were concluded in the last week of the VAT quarter, which enabled the Appellant to include the related claims for repayment of VAT in the return for the June quarter despite not having paid for the supplies. The Appellant only handled four transactions in the June quarter. All the transactions took place at the end of the quarter, which raised questions about how the Appellant’s staff spent their time during long periods of non-business activity.

116.The Appellant did not insure the phones which were the subject of the two disputed deals despite the phones having a value in excess of ₤6.5 million. Mr Ready considered that insurance was unnecessary because of the structure of the deals which meant that the Appellant had no financial risk. Under the terms of the deals the Appellant would only release and pay for the phones after it had received full settlement from its customers.

117. Likewise the Appellant believed that trading with Glasgow Data was risk fee despite having no prior history of trading with Glasgow Data and a risk assessment of proceed with caution for Glasgow Data. The Appellant stated that it would not pay for the goods from Glasgow Data, if they proved to be faulty. Also the Appellant did not own the stock until it had actually paid for it.  Mr Ready explained that

“The way it worked we never actually owned the goods because we would not release goods to customers until we were paid, and we would not pay the supplier until we received the money from the customer”.

118.Mr Ready accepted that the Appellant had released the phones to GR Distribution EURL based in France before receiving payment from either Alimed or CEMSA. Again Mr Ready denied that the risk was substantial believing that the only problem would be of bringing the phones back to the UK at a total cost of ₤5,000.

119.Mr Ready, however, acknowledged that the Appellant had not conducted due diligence on the French forwarders so it had no idea of the forwarder’s bona fides to which 18,000 phones  to a value of ₤6.5 million had been entrusted. Mr Ready felt that this risk stayed with the supplier, Glasgow Data, because it kept ownership of the phones until payment from the Appellant. Mr Ready stated that Glasgow Data was aware of the ultimate destination of the phones to the French warehouse because its approval would be needed for the Appellant to quicken up the transactions with its Spanish customers. Mr Ready could not explain why Glasgow Data would be interested in assisting the Appellant with its onward sales. Finally Mr Ready accepted that on his analysis the Appellant had instructed 1^st Freight Limited to transport outside the UK goods which it did not own.

120.Mr Ready stated that the Appellant became aware of 1^st Freight Limited from Glasgow Data which informed the Appellant of the location of the stock. Mr Ready assumed that Mr Todd instructed 1^st Freight Limited to conduct the IMEI checks for the Appellant. Mr Ready acknowledged that there was no written instruction from the Appellant to 1^st Freight Limited. The IMEI report from 1^st Freight Limited in respect of the first deal was faxed to the Appellant on 27 June 2006 at 10:59 hours which was after the mobile phones had been released to the French freight forwarder.

121.Mr Ready denied that the Appellant had requested IMEI reports simply to supply HMRC with evidence of due diligence. Mr Ready asserted that the Appellant used the IMEI numbers to check whether the mobile phones had been lost or stolen but no records of these checks had been retained by the Appellant. Mr Ready considered that the invoice from 1^st Freight Limited for a 100 per cent check was a mistake. According to Mr Ready, the Appellant requested a 10 per cent inspection of IMEI numbers.

122.The Appellant pointed out that Notice 726 dealt with joint and several liability not repayments of input tax. As far as the Appellant was concerned HMRC had issued no separate guidance on claims for input tax.

123.Mr Ready was insistent that the Appellant had carried out effective due diligence in accordance HMRC’s Notice 726 on Joint and Several Liability. When Mr Ready was, however, taken through the various bullet points on the recommended checks there were significant gaps in the Appellant’s compliance with the Notice.  Mr Ready accepted that the only information the Appellant held on the trading history of Glasgow Data in mobile phones was that it had been established on 5 March 2002, traded from a business address of just six months duration with five employees, had a VAT registration number and an e mail address with a website under construction.  Mr Ready acknowledged that there were no commercial arrangements in place for the financing and insuring of the goods, and no contractual agreement detailing the recourse available to the Appellant if the goods from Glasgow Data were not as they were described. Mr Ready gave a bald answer to the question about undertaking reasonable checks to ensure the commercial viability of the transaction by saying that there was a market for the phones bought because they were the latest models.  Mr Ready acknowledged that the Appellant did not address the question of whether it was commercially viable for the price of goods to increase within the short duration of the supply chain. Mr Ready did not produce any documentary evidence of price negotiation, arguing that all negotiations were done orally. Mr Ready considered the third party payment from Alimed was a mistake. Next Mr Ready conceded that no trade references were taken up of suppliers and customers and no visits made to them before the deals were struck.

124.Mr Ready said that he instructed Mr Todd to negotiate a mark up of between five and ten per cent on the two deals. The fact that Mr Todd achieved a mark up of seven per cent was within the range set for him. The securing of the profit on the two deals, however, depended upon the Appellant receiving a repayment VAT on the purchase of goods from Glasgow Data.

125.Mr Ready accepted that it was rather strange for Glasgow Data to involve the Appellant in these deals particularly as Glasgow Data had previously done business with Alimed and CEMSA and in effect forgoing substantial profits by involving the Appellant.  Ms Hudson pointed out that Glasgow Data advertised on the IPT website, which was the same website used by the Appellant to source customers and meant that Glasgow Data could have easily traded with Alimed and CEMSA without involving the Appellant.

126.Since June 2006 the Appellant has not traded in the wholesaling of mobile telephone handsets but have continued to trade in landline handsets and equipment. In this respect the Appellant has purchased goods from overseas suppliers for shipments to customers in the USA.

Reasons

Legal and Evidential Issues

127.The sole issue in this Appeal was whether the Appellant knew or should have known that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected with fraud.

128.Mr Brown for the Appellant contended that the operative requirement of knew or should have known was a high threshold which HMRC had to prove on the balance of probabilities. In Mr Brown’s view, an accusation of actual knowledge was one of dishonesty. Further the Tribunal should have in mind the words of Lord Hoffman in Re H (Minors) (Sexual Abuse: Standard of Proof) [1986] AC 563, 586D-H, at para. 11 when assessing whether HMRC has met the standard of proof:

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

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

130.Ms Wilson-Barnes for HMRC disputed Mr Brown’s contention that an accusation of actual knowledge was one of dishonesty. Ms Wilson-Barnes referred to the decision of Lewison J in HMRC v Livewire Telecom Limited [2009] EWHC 15(Ch) at para 84-86 which expressly rejected the Respondent’s submission that the test was one of dishonesty. The Court of Appeal in Mobilx emphasised that the question of knowledge in the context of the right to deduct was determined by objective factors and the application of Community law principles, not by domestic law concepts of fraudulent activity. Lord Justice Moses in Mobilx  [2010] EWCA Civ 517 at para.16 stated that

“The ECJ (Kittel) describes the circumstances in which the right to deduct should be refused in its judgment at § 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.”

131. Lord Justice Moses elaborated further at paragraphs 47 to 49:

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

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

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

132. The Tribunal agrees with Ms Wilson Barnes that the issue of knowledge is determined by objective factors, and does not require proof of dishonesty on the part of the trader allegedly participating in a fraudulent activity.

133.The Tribunal considers Mr Brown’s reference to Lord Hoffman’s words on the civil standard of proof potentially confusing, in that it carried the implication of a different or a moving standard of proof in civil cases where an allegation of fraud was involved. The Tribunal considers that Lord Hoffman’s words should be viewed in the context of Mr Brown’s submission that the evidential threshold for knew or should have known was strict and specific, in particular the emphasis on the only reasonable explanation. A finding that the Appellant knew or should have known that it was running a risk that its purchases were connected with fraud would not pass the threshold. Thus the Tribunal has to be satisfied that it was more probable than not the Appellant knew or should have known the only reasonable explanation for the transaction it was involved with was that they were connected with fraud.

134.Lord Justice Moses in Mobilx provided helpful guidance on the evidential requirements for establishing whether a trader had the requisite state of knowledge. He approved the view of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563 where he stated that the Tribunal was entitled to look at the surrounding circumstances of the disputed transactions for the purpose of discerning their true character but not to alter the nature of those transactions. Thus at paragraph 83 Lord Justice Moses stated that

“….I can do no better than repeat the words of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563:-

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

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

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

135.Lord Justice Moses expressed caution about the Tribunal concentrating on due diligence at paragraph 82:

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

136.At paragraph 81 Lord Justice Moses considered the questions asked by the Tribunal in the Appeal of Blue Sphere Global Limited were appropriate when assessing the issue of the trader’s state of knowledge. The questions asked were as follows:

 “(1) Why was BSG, a relatively small company with comparatively little history of dealing in mobile phones, approached with offers to buy and sell very substantial quantities of such phones?

(2) How likely in ordinary commercial circumstances would it be for a company in BSG’s position to be requested to supply large quantities of particular types of mobile phone and to be able to find without difficulty a supplier able to provide exactly that type and quantity of phone?

(3) Was Infinity already making supplies direct to other EC countries?  If so, he could have asked why Infinity was not making supplies direct, rather than selling to UK traders who in turn would sell to such other countries.

(4) Why are various people encouraging BSG to become involved in these transactions?  What benefit might they be deriving by persuading BSG to do so?  Why should they be inviting BSG to join in when they could do so instead and take the profit for themselves?”

137.Finally Lord Justice Moses stated at paragraph 61 on the test of should have known:

“Such an approach does not infringe the principle of legal certainty.  It is difficult to see how an argument to the contrary can be mounted in the light of the decision of the court in Kittel.  The route it adopted was designed to avoid any such infringement. 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.  The extension of that principle to a taxable person who has the means of knowledge but chooses not to deploy it, similarly, does not infringe that principle.  If he has the means of knowledge available and chooses not to deploy it he knows that, if found out, he will not be entitled to deduct.  If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct”.

138.In deciding whether the Appellant had the requisite knowledge, the Tribunal considers the approach adopted by Mummery J in the direct tax case of Hall (Inspector of Taxes) v Lorimer [1992] STC 599 has much to commend itself:

“The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and making an informed, considered, qualitative appreciation of the whole. It is a matter of evaluation of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all the details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another. The process involves painting a picture in each individual case.”

Summary of the Parties’ Submissions

139.Mr Brown submitted that Mr Ready was a truthful witness Mr Ready believed that the checks undertaken by the Appellant at the time of the transactions were adequate and in line with the guidance given by HMRC in Notice 726. Mr Ready was candid about the various checks not done and that insurance was not taken out on the disputed deals. Mr Ready, however, considered that the transactions presented no real risk to the Appellant because it never took title to the goods, and goods were not released to the customer until payment was received.  The Appellant was a bona fide company with an established business track record in telecommunications. HMRC had presented no direct evidence of the Appellant’s involvement in the fraud. The evidence of the witnesses called by HMRC should be treated with caution. This was not a case where there was a circularity of funds or goods.  In Mr Brown’s view the evidence was not sufficiently persuasive to find that the Appellant knew or should have known of the fraud alleged.

140.Ms Wilson Barnes contended that an objective analysis of the transactions revealed that they were too good to be true and appeared out of the blue for which Mr Ready was unable to provide a satisfactory explanation. The transactions had no aura of commerciality. They were not supported by contractual documentation, and the due diligence undertaken was limited. There was clear evidence of contrivance between the Appellant and Glasgow Data, and that the Appellant had direct contact with two other participants in the contra transaction chains. The evidence regarding payments left a lot to be desired, including a third party payment. Mr Ready was not a credible witness, many of his explanations for the various anomalies only surfaced at the hearing despite being aware of HMRC’s case for some considerable time. Ms Wilson Barnes concluded that the Appellant knew that the disputed transactions were connected with fraud.

Findings of Fact

141. The Tribunal adopts an inside outside approach with its analysis of the facts starting with the facts of the immediate transactions involving the Appellant and then moving out to consider the overall factual context. The benefit of this approach is that it deals first with those facts which are known by the Appellant, and not open to the challenge that the Appellant could not know of transactions with which it had no involvement. The Appellant conceded that the disputed transactions were connected to a VAT fraud but denied that it knew or should have known of the connection with the fraud. The burden was upon HMRC to prove on the balance of probabilities that the Appellant knew or should have known of the connection. The evidential burden in relation to the Appellant’s knowledge, however, is likely to be a shifting one with HMRC proving a set of facts demonstrating the requisite state of knowledge which demands an explanation from the Appellant. If the explanation is plausible the evidential burden would then move back to HMRC.

142.The Appellant accepted that it had no previous dealings with the supplier (Glasgow Data) and its Spanish customers (Alimed and CEMSA). The Appellant said that it made contact with the parties through the web sites used by traders in the grey market. The Appellant’s gross margin on the disputed deals was ₤425,000 provided it secured the repayment of VAT on the purchases from Glasgow Data. The Appellant incurred net sales expenses of ₤9,000,[7] for transport and inspection of the goods by 1^st Freight. Mr Ready stated that the disputed transactions carried no risk for the Appellant. The agreed terms and conditions for the sales were that the mobile phones would not be released until the customer handed over the purchase monies. The work done by the Appellant to secure the deals was conducted exclusively over the phone. The Appellant did not inspect or hold the goods. The Appellant had no excess stock left after the deals. Thus the Appellant stood to make in the region of ₤416,000 from two transactions which came out of the blue and carried no commercial risk, and involved minimal resources on its part. On the face of it the deals matched HMRC’s description that they were too good to be true.

143.Mr Ready’s response was that the deals were good business. The Appellant had purchased the mobile phones at market value and secured an acceptable profit margin of seven per cent. Mr Ready, however, at the time of the transactions, was aware of the risks of MTIC fraud and the contents of VAT Notice 726, Joint and Several Liability in the Supply of Specified Goods, having received a visit from HMRC on 24 February 2006. Mr Ready believed that he had complied with Notice 726, which in his view was about securing goods at market value. As was pointed out by Lord Justice Moses in Mobilx (para. 83) Notice 726 required traders to do something more than simply satisfying themselves about the market value of goods. Notice 726 enjoined traders to take heed of any indications of fraud.

144.In this case Mr Ready did not ask the question about why Glasgow Data forfeited profits of around ₤400,000 by selling to the Appellant instead of the Spanish companies. The Appellant had no established business relationships with the parties. The Appellant sourced the deals from the websites which were available to all mobile phone traders in the grey market, including Glasgow Data.  HMRC’s statement of case revealed that Glasgow Data had prior trading relationships with the Spanish companies. Mr Ready acknowledged that in those circumstances it was strange that Glasgow Data sold direct to the Appellant. Mr Ready, however, stated that he would not know of the prior trading relationship at the time of entering into the disputed transactions. Mr Ready, however, misses the point. Regardless of Glasgow Data’s previous dealings with the Spanish companies, it was still strange that Glasgow Data would forgo significant profits by dealing with the Appellant rather than with the Spanish companies, particularly as the particulars of the deal were on a public platform. This question did not occur to Mr Ready.

145. Mr Ready insisted that the Appellant conducted negotiations with the parties over prices but this was not evidenced by any form of records. The Appellant’s negotiations for each deal together with the arrangements for inspection of the goods and the exchange of due diligence documents were concluded in one day. The disputed transactions involved mobile phones to the value of ₤6 million which were not regulated by any form of contract documentation. The value of these deals was significantly beyond the horizons of the Appellant’s trading before it entered into grey trading of mobile phones. In the year to April 2005 the value of the Appellant’s turnover for the whole year was ₤435,000 with the terms of its business set down in contracts arranged by its sister company, Maximum Maintenance. Mr Ready did not consider the value of the transactions and the absence of contract documentation posed any risk to the Appellant. He stated that the contract documentation was unnecessary because its sales were subject to the condition that the goods would not be released until receipt of full payment from the customer. This term did not appear on the Appellant’s invoices to CEMSA and Alimed but only on its instructions to the Freight Forwarder, 1^st Freight. 

146. The credibility of Mr Ready’s assertions about the efficacy of the commercial arrangements for the disputed transactions was cast in doubt by the fact that the goods were shipped to the warehouse in France as directed by CEMSA and Alimed before payment had been received by the Appellant for the goods. Alimed paid for the phones on 14 July 2006, some 16 days after they were shipped to France. Mr Ready’s explanation for this departure from the standard terms and conditions was that Glasgow Data had agreed to the movement of the stock. According to Mr Ready, Glasgow Data still retained the risk if the transaction went awry because it had kept ownership of the goods since no payment had been made by the Appellant. Mr Ready believed that Glasgow Data was content for the movement of goods because it must have been aware of the existence of the warehouse in France. Mr Ready, however, had difficulty in explaining why Glasgow Data would agree to the release of goods without payment. Glasgow Data’s terms of sale on its invoice to the Appellant were clear. The stock was theirs until payment in full, stock was sold as seen, and it held no responsibility once stock had been released. Despite these terms, Mr Ready insisted that Glasgow Data agreed to the release in order to quicken up the transaction to the Spanish companies. Mr Ready’s explanation, however, begs the question why would Glasgow Data, if operating independently, be interested in the Appellant’s onward sale. Glasgow Data’s contract was with the Appellant not with the Spanish companies.

147.Mr Ready did not accept that the Appellant had a legal obligation to pay Glasgow Data for the goods if they went missing in France. Further Mr Ready saw nothing amiss with the Appellant shipping goods which it did not own outside the UK. These circumstances also question the Appellant’s insistence that it was unnecessary to take out insurance on its trading in mobile phones.

148. The circumstances of the transactions revealed other flaws in the commercial arrangements. The results of the Redhill check for the second deal were faxed back to the Appellant on 28 June 2006, the day after the deal took place. Mr Ready stated that the Appellant went ahead with the second deal because it obtained clearance from Redhill for the first deal, even though the two deals had different customers. The Appellant provided no evidence of the express written confirmation given to 1^st Freight Limited for releasing the goods to the French warehouse. The IMEI report from 1^st Freight Limited in respect of the first deal was faxed to the Appellant on 27 June 2006 at 10:59 hours after the mobile phones had been released to the French freight forwarder.

149.The Tribunal was not impressed with Mr Ready’s acquiescence with the unsatisfactory arrangements for the transactions. They raised real doubts about the commercial character of the transactions and whether they were conducted at arms length. Mr Ready’s justification for the purported commerciality of the transactions was undermined by the departures from the alleged agreed terms and conditions for the deals. The commercial arrangements for the transactions lacked authenticity.

150.The Appellant’s due diligence on the various parties involved in the transactions consisted of letters of introduction, bank details[8], copies of certificates of incorporation and copies of VAT registration certificates. The due diligence for Glasgow Data included a director’s statement, photocopy of director’s passport and driving licence, whilst that for CEMSA incorporated a simple trade application form.

151.The Appellant did not meet anybody from Glasgow Data, CEMSA or Alimed. The Appellant did not take trade references of its suppliers and customers believing they were of no value because a fellow trader was unlikely to recommend a referee who would give a bad reference. Finally the Appellant did not obtain evidence to confirm the business addresses of Glasgow Data, CEMSA or Alimed and the length of occupation at their respective addresses.

152. Mr Ready insisted that it had carried out credit checks on the parties to the transaction. There was, however, no contemporaneous documentary evidence that the checks had in fact been done prior to the transactions. The risk data print produced for Glasgow Data dated 17 August 2006 (almost two months after the  disputed transactions) gave a risk assessment of a little higher than average risk – proceed with caution and a credit limit of ₤1,900.  Mr Ready considered this risk assessment for Glasgow Data irrelevant because the Appellant was not selling goods to Glasgow Data, and, therefore, not exposed to the risk of non-payment.

153. Similarly Mr Ready asserted that the Appellant had scrutinised the IMEI scans of the mobile phones carried out by 1^st Freight Limited. Mr Ready, however, only produced documentary evidence of the purported checks at the hearing, which simply consisted of some ink marks against certain numbers. Despite apparently carrying out checks, Mr Ready was unaware that the scan for the first deal showed that the model of phone sold was the Nokia 3220 not the Nokia 8800 recorded on the invoices from and to the parties.

154.CEMSA stated in the trade application form that it had been involved in a supply chain which included a missing trader, and that it had a VAT assessment or outstanding enquiries or appeals with HMRC. The Appellant asserted that it had queried these answers on receipt of the form with Mr Russell of CEMSA who confirmed that the form had been completed in error. There was, however, no documentary evidence corroborating the conversation with Mr Russell.

155.The Appellant undertook no due diligence on the freight forwarder, 1^st Freight Limited, and on GR Distribution EURL based in France to which the Appellant arranged for the mobile phones to be shipped before payment by the Spanish companies. Mr Ready pointed out that HMRC guidance did not require due diligence on freight forwarders.

156.The Tribunal’s finds that the due diligence carried out by the Appellant in respect of the transactions was perfunctory, and had many gaps. The due diligence was generally carried out on the day of the transactions which left no room for reflection. The due diligence on Alimed was scant even by the Appellant’s standards and did not include a completed trade application form. The unsatisfactory level of due diligence on Alimed should have raised questions on the Appellant’s part, particularly as this was supposedly the first trade with Alimed involving goods to the value of ₤4.5 million.

157.The Tribunal rejects the validity of Mr Ready’s reasons for not carrying out certain checks. He was aware of the high risk of fraud in the mobile phone sector which should have encouraged an approach that erred on caution. Further the Tribunal is sceptical of Mr Ready’s claims regarding the conversation with Mr Russell and prior checks on the parties’ creditworthiness and the IMEI scans because of the absence of credible corroborating documentary evidence. If Mr Ready, however, is correct about the checks, he did not stand back and ask questions of the due diligence, which was typified by his response to the credit check on Glasgow Data. Mr Ready considered that the poor credit rating for Glasgow Data did not matter as it was not purchasing goods from the Appellant. Mr Ready again misses the point. One of the principal purposes of the due diligence is to provide assurance that Glasgow Data was not involved in fraudulent activities. In that respect a prudent business person would be asking how a company with a credit limit of ₤1,900.00 and a nil turnover can deal in mobile phones to the value of ₤6 million.

158.Mr Ready’s explanations for the anomalies in the payment arrangements for the mobile phones were equally dubious. The first set of anomalies related to the payment arrangements for the goods destined for CEMSA in the sum of ₤2,407,500 which Alimed paid on 14 July 2006. Prima facie this represented a third party payment from a company that was independent of CEMSA.  Mr Ready stated that the payment was made in error. The Appellant wrongly requested payment from Alimed which apparently met it because the Appellant was a supplier of theirs in respect of the second deal. The Appellant did not spot the error in its bank account despite the fact that at the time it only had two current deals, one with Alimed and the other with CEMSA. The Appellant then transferred the monies from Alimed to Glasgow Data in part payment of the first set of supplies of mobile phones. Finally, according to Mr Ready, when the Appellant realised its error, an agreement was reached with Alimed not to pursue the overpayment until CEMSA settled its debt which did not happen until 1 September 2006. According to Mr Ready, CEMSA said it was an oversight on its part for not contacting the Appellant about payment after it had received goods.

159.The second set of anomalies concerned the Appellant’s payments to Glasgow Data, which comprised direct transfers of the monies received from Alimed on 14 July 2006. The value of the transfers was some ₤600,000 less than the sums invoiced by Glasgow Data for the phones. Mr Ready denied that the withholding of the balance had anything to with the expected VAT repayment. Mr Ready asserted that the Appellant had made efforts to pay the outstanding sums but had been thwarted by problems with the banking account. When those problems had been resolved the Appellant discovered that the police had raided the premises of Glasgow Data, in which case there was no point in remitting the outstanding sums.

160. Next the first tranche of payments connected with the transactions was made some 17 days after the goods had been released to the Spanish companies despite the business term that the goods would not be released until payment in full.

161. Finally the Appellant concluded the two deals in the last week of its VAT quarter, which enabled it to include the VAT repayment claims in respect of the Glasgow Data purchases in the VAT return despite not having paid for the supplies. The Appellant had only one other repayment transaction in the return.

162.The Tribunal’s reaction to Mr Ready’s explanations for the anomalies is one of disbelief. The purported mistake concerning the third party payment by Alimed involved, on Mr Ready’s account, a sequence of four connected errors committed by three supposedly independent bodies. The Appellant made a wrong payment request, Alimed authorised the payment in error, the Appellant did not spot the error on receipt of payment, and CEMSA overlooked its obligation to pay for received goods. The probability of such a mistake going undetected was in the Tribunal’s view extremely remote, particularly where three bodies were involved. In respect of the second set of anomalies, Mr Ready offered no explanation for why Glasgow Data was prepared to accept late part-payment of the sums due, particularly as no credit terms had been advanced.  Further the Appellant gave contradictory statements about the reasons for withholding the outstanding balance.

163.  The Tribunal finds that Mr Ready supplied no plausible commercial explanation for the payment arrangements. They were wholly inconsistent with the purported business terms for the transactions which required payment forthwith and before release of the goods.  The Tribunal is satisfied that the payment arrangements could only have occurred with the express agreement of the parties. The structuring of the arrangements with the immediate transfer of the sums received from Alimed to Glasgow Data and the existence of a third party payment suggested  a high degree of co-ordination between the parties. The Tribunal considers the only rational explanation for the Appellant’s part payment to Glasgow Data was that the Appellant intended to pay the balance when it received the VAT repayment. The unravelling of the payment arrangements coincided with the date of 25 July 2006 which was when HMRC informed the Appellant that its VAT return was subject to extended verification. The Tribunal is satisfied that HMRC’s refusal to repay the VAT pending the extended verification was the reason for the Appellant not paying the outstanding sum to Glasgow Data. Finally the onset of an extended verification was in all probability the prompt to put right the third party payment by Alimed.  

164. The Appellant used an account with International Credit Bank (ICB) for processing the money involved in the two deals. ICB was an off-shore bank in San Marino and appeared on the Financial Services Authority list of unauthorised internet banks. The Appellant set up the ICB account on 12 July 2006. Prior to this date the Appellant was using a National Westminster Bank account.

165.The Appellant’s reasons for switching its bank account were that it facilitated quicker money movements and was the one being used by other traders in the mobile phone sector. Mr Ready stated that ICB operated differently from National Westminster in that the vendor could request payment from the purchaser rather than vice-versa. He accepted that the speeding up of money transfers would only happen if the purchaser had an account with ICB.  Mr Ready did not consider it unusual to find a bank located in San Marino. He accepted that the Appellant did not investigate whether ICB was authorised by the Financial Services Authority.

166. The Tribunal finds the Appellant’s decision to switch bank accounts made no business sense. The evidence suggested that it had a good relationship with National Westminster Bank, which had authorised increases in the Appellant’s overdraft limit. The Appellant’s failure to investigate the bona-fides of ICB was incomprehensible in business terms, particularly in view of the large monetary values involved which were significantly beyond the resources available to the Appellant. Mr Ready’s rationale of quicker money movements made no sense in the context of the disputed transactions, the facts of which showed that there was no urgency over the payment arrangements. There was no sound business reason for the Appellant to use the facilities of an offshore bank for the transactions instead of its usual bank. The fact that the Appellant switched banks purely because it was the one used and recommended by other mobile phone traders suggested that the Appellant was not exercising independent business judgment. 

167.The Tribunal has so far concentrated its analysis on the circumstances specific to the disputed transactions themselves which were within the Appellant’s knowledge, and Mr Ready’s explanations for the events which happened. The analysis has not only revealed shortcomings in the reliability of Mr Ready’s evidence but also exposed the impossibility of his stance in respect of the commerciality and arms length nature of the arrangements which led him unwittingly in an attempt to explain the inexplicable to reveal the contrived form of the transactions.

168. Mr Ready’s evidence was characterised by assertions uncorroborated by documentary evidence[9].  He provided a new explanation for not paying the full amount to Glasgow Data which contradicted previous responses given by the Appellant’s tax advisers. 

169. His stock answer for the business rationale of the transactions was that they followed normal commercial arrangements for grey trading in the mobile phone sector, and that the usual business term of goods kept on hold until payment protected the Appellant’s interests. The weakness in his stock answer was laid bare by what actually happened with the transactions, namely that the goods were released to the Spanish companies with the permission of Glasgow Data before payments had been made.   Mr Ready when faced with this inconsistency was forced to reveal a level of prior understanding between the parties about how the transactions should be executed, and the existence of previous links between Glasgow Data and the French forwarder for the Spanish companies.

170.The Tribunal’s findings on the circumstances specific to the disputed transactions are as follows:

(1)        The transactions were too good to be true.  The Appellant stood to make in the region of ₤416,000 from two transactions which came out of the blue and carried no commercial risk, and involved minimal resources on its part. The question of why Glasgow Data would forgo significant profits by dealing with the Appellant rather than with the Spanish companies did not occur to Mr Ready.

(2)        The Appellant departed from the purported terms and conditions for the deals which raised real doubts about the commercial and arms length character of the transactions. Overall the commercial arrangements lacked a ring of authenticity. Mr Ready acquiesced with the questionable arrangements for the transactions.

(3)        The Appellant’s due diligence in respect of the transactions was perfunctory, and had many gaps. The due diligence was generally carried out on the day of the transactions which left no room for reflection. Mr Ready did not address his mind to the purposes of due diligence resulting in no scrutiny of the information provided.

(4)        The structure of the payment arrangements revealed a high degree of co-ordination and prior agreement between the parties to the transactions. Mr Ready supplied no plausible commercial explanation for the payment arrangements. They were contrary to the apparent agreed terms of business involving late payments between the parties and part payments by the Appellant to Glasgow Data. The existence of a third party payment which was accepted by the Appellant demonstrated not only a connection between the Spanish companies and the transactions themselves but also the Appellant’s compliance with the arrangements. The Tribunal was satisfied that the only rational explanation for the Appellant’s part payment to Glasgow Data was that the Appellant intended to pay the balance when it received the VAT repayment. In this respect the timing of the deals in the last week of the Appellant’s VAT quarter was more than a mere coincidence.

(5)        There was no sound business reason for the Appellant to use the facilities of an offshore bank for the transactions instead of its usual bank. The fact that the Appellant switched banks purely because it was the one used and recommended by other mobile phone traders suggested that the Appellant was not exercising independent business judgment. 

171.The Tribunal moves onto consider the wider circumstances as to whether they cast greater light on the character of the transactions and the Appellant’s state of knowledge.

172.Mr Stone’s evidence identified particular features that were characteristic of MTIC fraud including third party payments the use of offshore banks and freight forwarders which were all present in the Appellant’s deals.  Further Mr Stone identified the following characteristics with the broker role in the fraud.

(1)        The broker never purchased the goods from the cheapest source in the UK or from another EU member state.

(2)        The broker has customers in other EU member states but never maximised his profits by sourcing the consignments from a supplier in another EU member state and delivering them direct to his customers.

(3)        The broker’s overseas customer did not seek to purchase the goods from the cheapest source.

(4)        The invoices were normally shown in pounds sterling.

173. The agreed evidence on the overall fraudulent scheme showed the Appellant occupying the broker’s role in the disputed transactions. The Appellant adduced no evidence that it purchased the mobile phones from the cheapest source. In fact the Appellant supplied no evidence of market research, negotiation of volumes and prices, transport negotiations, delivery arrangements or payment arrangements in respect of the deals. There was no evidence that the Appellant considered sourcing the consignments for the Spanish firms from suppliers in France which would have been near to the French warehouse, despite the fact that the Appellant had established trading relationships with French customers in the previous VAT quarter. The Spanish customers could have dealt direct with Glasgow Data with whom they had a previous trading relationship. The invoices associated with the transactions were in pounds sterling. Thus the Appellant’s role in relation to the disputed transactions conformed to the characteristics commonly assumed by the broker in fraudulent transactions.

174.Mr Fletcher’s evidence dealt with the grey market in mobile phones. The key characteristic of genuine traders in the grey market was that their transactions added value to the supply chain for the mobile phones sold, earning a profit as a result. The evidence showed the Appellant had no understanding of how the grey market operated. Mr Ready described the grey market as one where the prices for mobile phones were slightly cheaper than the authorised market. There was no evidence that the Appellant added value to the supply chain of the phones sold. The Appellant purchased from a UK supplier which could have dealt direct with the Spanish companies. The Appellant adduced no evidence that the phones supplied met a particular market niche. The Appellant shared many of the negative characteristics identified by Mr Fletcher which indicated that it was not a genuine trader in the grey market. The characteristics included inadequate product specification documented on handset purchase orders and invoices, no speculative purchases and no ownership of stock.

175. The agreed evidence on the overall fraudulent scheme showed that the immediate trading partners of the Appellant were key players in the fraud, and that Glasgow Data and CEMSA already had an established relationship before the Appellant entered into the disputed transactions. Mr Brown for the Appellant challenged the strength of HMRC’s evidence on CEMSA’s involvement in MTIC fraud, arguing that it was no more than the suspicions of the Spanish Tax Authorities. The Tribunal was, however, satisfied that the evidence of the fraudulent contra-trading scheme together with the information provided by the Spanish Tax Authorities painted a compelling picture of the active role performed by CEMSA in the fraudulent scheme.  The evidence showed that the Appellant’s involvement with its immediate trading partners was more protracted than that originally portrayed by the Appellant. The involvement was not just confined to the buying and selling of the goods but extended to making payment and delivery arrangements outside the agreed terms of sale. Thus the Appellant’s closeness to key players in the fraud and its protracted involvement with them provided the Appellant with ample opportunity to know about the fraud.

176.Mr Farmer who analysed Glasgow Data’s role in the clean chain in quarter 06/06 concluded that the patterns of trading identified in the clean chain were contrived and performed by a highly organised cell of traders. In his view the deals were part of a scheme to defraud the revenue. The key characteristics of the scheme were that the consignments had to be kept within a given circle of traders and moved between the same two freight forwarders. Mr Farmer considered that the Appellant played a direct and knowing part in the fraudulent scheme. This was demonstrated by its pattern of trading which followed that of the other supposedly independent companies acting as brokers. They all sourced the goods from the same supplier, used the same freight forwarders, and sold the goods to the same customers. The unit prices charged and the mark ups achieved by the Appellant were remarkably similar to the other two brokers who traded on the 26 and 27 June 2006.

177.Mr Brown urged the Tribunal to exercise caution over Mr Farmer’s evidence, in particular Mr Farmer acknowledged that it was quite realistic for the same price and same mark up to be achieved by three different traders doing  business on the same days. Further Mr Brown pointed out that the evidence showed that the Appellant’s deals could be distinguished from other parties in the chain, and other similar chains because it was virtually the only broker to apply a percentage mark up and not a monetary amount. The Tribunal, however, finds that the similarities of the Appellant’s dealings with the other brokers in the clean chain far outweighed their differences.

178. The Appellant received introductory letters from Sinderby Enterprises on 21 June 2006 and Trimex on 27 June 2006. Famecraft, the contra-trader, acquired the mobile phones from Sinderby Enterprises Limited for use in the clean chain. Sinderby Enterprises applied a consistent mark up of ₤1.50 for each phone sold. Trimex performed a similar role to that of Glasgow Data in the fraudulent scheme.  Famecraft also used the same off-shore bank (ICB) as the Appellant for its June and July deals. Mr Brown argued that the contacts by other key players in the fraud were coincidental as was having the same bank account as the contra-trader. Further Mr Brown pointed out that if the Appellant was involved in a fraudulent scheme, it would not have volunteered the information. The Tribunal disagrees. The links were more than mere coincidences. They occurred at the same time as when the Appellant undertook the disputed transactions.  Also it would appear that the Appellant’s switch of its bank account was in all probability prompted by Famecraft’s use of the ICB bank.

179.Thus the Tribunal makes the following findings in respect of the wider circumstances:

(1)        The Appellant’s use of an offshore bank and freight forwarders, and the existence of a third party payment were strong indicators of MTIC fraud.

(2)        The Appellant’s role in relation to the disputed transactions conformed to the characteristics commonly assumed by the broker in fraudulent transactions.

(3)        The Appellant had no understanding of how the grey market operated. The Appellant made no speculative purchases and did not hold stock of mobile phones. The Appellant’s transactions did not meet a particular market niche and did not add value to the supply chain. The Appellant’s documentation for the transactions was characterised by inadequate specification of the handsets supplied. The Appellant’s dealings had many of the features identified by Mr Fletcher which indicated that the Appellant was not a genuine trader in the grey market.

(4)        The Appellant’s immediate trading partners were key players in the fraud. The Appellant’s closeness to key players in the fraud and its protracted involvement with them provided the Appellant with ample opportunity to know about the fraud. 

(5)        The similarities of the Appellant’s pattern of trading with that of the other brokers in the clean chain far outweighed the differences between them. They all sourced the goods from the same supplier, used the same freight forwarders, and sold the goods to the same customers. The unit prices charged and the mark ups achieved by the Appellant were remarkably similar to the other two brokers who traded on the 26 and 27 June 2006.

(6)        The Appellant’s links with the contra-trader and another key player in the fraud were more than mere coincidences.  They contacted the Appellant around the same time as the disputed transactions. The Appellant changed its bank to the one used by the contra-trader.

180. The overall picture formed by the Tribunal’s findings was that the Appellant transactions were connected to a well-orchestrated fraud and that the Appellant at the very least should have known of that connection.  In those circumstances the Tribunal considers next whether there is evidence which admits the possibility of the Appellant being an innocent dupe. The Appellant relied principally upon the testimony of Mr Ready to displace the case presented by HMRC. The Tribunal decided that Mr Ready was not a credible witness for the Appellant. His evidence largely comprised of uncorroborated assertions, whilst the inexplicability of his rationale for the deals exposed the weaknesses in the Appellant’s case.

181. Mr Brown pointed out inconsistencies in the evidence of HMRC’s witnesses. The Tribunal  examined some of these inconsistencies in its consideration of the wider circumstances. Mr Brown criticised aspects of Ms Hudson’s evidence, in particular her mistake of including the Dunn Bradsheet credit report in the CEMSA due diligence papers, her assertions regarding the Appellant’s mark up, the trade application form completed by CEMSA and that all deals were completed on the same day and in identical quantities, and her misunderstanding of the NEMESIS database. The Tribunal did not consider Mr Brown’s criticisms material. They did not go to the heart of the case against the Appellant. Mr Brown contended that Mr Morehead’s evidence should be treated with caution in view of his lack of personal experience with the matters attested to in the witness statement. The Tribunal found Mr Morehead to be a truthful witness but did not place weight on his evidence because of its minimal relevance to the question of the Appellant’s knowledge.

182. Mr Brown argued that the Tribunal should give weight to the fact that the Appellant was a bona-fide company and that it gave up trading in mobile phones after its experience with these transactions. The Tribunal acknowledges that the Appellant was an established business before it entered the mobile trade market. The fact that the Appellant operated its trade in mobile phones differently from its established business undermined the evidential value of the Appellant’s assertions of being a bona-fide business. The mere fact that the Appellant gave up its mobile phone business did not carry any weight.

183.Mr Brown pointed out that the facts of the case did not involve circularity of funds or goods but their mere absence did not weaken the evidence against the Appellant.

184.Finally Mr Brown stated that the Appellant’s case was supported by the facts of the third transaction in the 06/06 quarter. According to Mr Brown there was nothing suspicious with the transaction, upon which HMRC had repaid the VAT. Ms Hudson gave a different perspective saying that the circumstances and explanation surrounding the transaction were suspicious. She decided, however, to release the ₤10,638.94 repayment because tax had been accounted for on the deal and the alleged goods were still at the Appellant’s premises when she visited. The Tribunal decided that the circumstances of the third transaction were so different from the disputed deals that the evidence of it carried no weight.

185.The Tribunal concludes from its findings on the transactions themselves and the wider circumstances that the disputed transactions were an integral part of a contra-trading scheme to defraud the Revenue of VAT. The fraudulent nature of the transactions was demonstrated by the findings that the deal on offer was too good to be true, the transactions had no hallmarks of commercial authenticity, and the arrangements for payment and delivery of the goods made no business sense and contrary to the agreed terms for the deals. The findings on the wider circumstances enhanced the fraudulent nature of the transactions by showing that they had many of the features associated with MTIC fraud.  The Appellant when faced with the obvious fraudulent nature of the transactions did not question them and acquiesced with the arrangements. The question of why Glasgow Data should forgo substantial profits did not occur to Mr Ready. The Appellant’s due diligence was perfunctory with no scrutiny of the information provided. The Tribunal is satisfied on these findings that the Appellant should have known that the only reasonable explanation for the disputed transactions was that they were connected with fraud.

186.The Tribunal’s findings, however, go much further than a determination that the Appellant should have known of the fraudulent connection. The findings revealed that not only did the Appellant adopt an uncritical stance to the fraudulent transactions but it played an active part in their execution. When the findings on the payment and release arrangements were viewed together they demonstrated a high degree of understanding and participation on the part of the Appellant in the furtherance of the fraud. The Appellant allowed the goods to be released to the Spanish companies without payment. The Appellant accepted a third party payment from Alimed. The Appellant withheld part of the purchase monies owed to Glasgow Data. The Appellant did not await the results of some due diligence enquiries before releasing the goods.  The Appellant’s actions were not those of a person engaged in an arms length commercial transaction. Further they could only be carried out with the connivance of Glasgow Data and the Spanish companies, which were key players in the fraud. This picture of the Appellant being an active participant in the fraud was given added colour by the Appellant’s decision to switch to an offshore bank to effect the transactions, the timing of the transactions at the end of the Appellant’s VAT quarter and the Appellant’s connections with the contra-trader.  The findings on the similarities of the Appellant’s pattern of trading with that of the other brokers in the clean chain completed the picture of the Appellant being part of a highly organised cell of traders perpetrating a fraud against the Revenue. The Tribunal is, therefore, satisfied that the Appellant knew that the disputed transactions were connected to the fraudulent evasion of VAT, and that the Appellant was an active participant in the fraud.

Decision

187.  The Tribunal having regard to its findings decides that the Appellant knew that the transactions of 26 and 27 June 2006 were connected to a fraudulent evasion of VAT. The Tribunal, therefore, dismisses the Appeal and upholds HMRC’s decision refusing the Appellant’s claim for input tax in the sum of ₤1,063,650 in the VAT quarter ending 30 June 2006.

188.The Tribunal reserves its position on costs. If a party wishes to apply for costs it must submit an application to the Tribunal within 28 days of release of this decision with a copy to the other p[arty. If an application is submitted either party may apply for a determination if costs cannot be agreed.

189.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.

 

 

 

 

 

 

TRIBUNAL JUDGE

RELEASE DATE: 28 January 2011