[2011] UKFTT 94 (TC)

 

TC00971

 

 

 

Reference number: LON/2007/1827

 

Value Added Tax  -  MTIC appeal  -  16 purchases and sales of mobile phones in April 2006  -  HMRC put to proof by the Appellant in demonstrating that the Appellant’s transactions were connected with fraudulent losses of tax  -  whether the Appellant knew or ought to have known that there could be no other reasonable explanation for his transactions than that they were connected to fraudulent tax losses  -  Appeal Dismissed

 

 

FIRST-TIER TRIBUNAL

TAX

 

 

ROOT 89 LIMITED Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

TRIBUNAL: HOWARD M NOWLAN

MICHAEL TEMPLEMAN

 

Sitting in London on 15-26 March and 22 November 2010

 

Andrew Young, counsel, on behalf of the Appellant

 

Anesta Weekes, QC, and George Rowell, counsel, on behalf of the Respondents

 

 

© CROWN COPYRIGHT 2011

 

 

DECISION

 

 

INTRODUCTION

 

1. This was a relatively straightforward MTIC case. It involved only 16 purchases and sales of mobile phones by the Appellant, all in April 2006. The challenge of all 16 deals by HMRC, based on the proposition that all had been traced to fraudulent tax losses, and that the Appellant knew or should have known this, resulted in a denial of the Appellant’s claim for a refund of input tax in the amount of £1,271,248 in its three-month VAT period ending 04/06.

 

2. A factor that rendered the case somewhat more involved than it might otherwise have been was the unfortunate fact that the case was set down for hearing in March 2010 only a few days before it was expected that the Court of Appeal would deliver its judgment in the three jointed MTIC cases, periodically referred to as Mobilx et al. This meant that certain points were addressed in argument that could have been ignored, had the hearing itself followed the release of the Court of Appeal decision. It also involved an unfortunate gap of eight months before the parties provided their closing submissions on the facts and the law.

 

3.  Those features apart, the case was somewhat simpler even than the first paragraph above might suggest.

 

4. The first transaction (“Deal 1”) was the only “one-off” deal. It involved a purchase of 4000 Nokia 8800 mobile phones for a VAT inclusive price of £1,927,000 from a company called Glasgow Data, and the sale of those phones on the same day (4 April 2006) to a Spanish company called C.E.M.S.A. for £1,668,000.

 

5. Aside from Deal 1, all the remaining 15 deals involved purchases from the same company, namely S & S Connections (“S&S”). 11 of the deals involved sales to the same European company, namely World Communications France SARL (“World Communications”). Three of those deals, referred to as Deals 2, 3 and 4 were almost one single deal from the perspective of the Appellant in that three groups of different mobile phones were sold on the one invoice on the same day as the day of purchase, 7 April, to World Communications.

 

6. The four deals out of the 15 where the sales were not made to World Communications were referred to as deals 5, 6, 7 and 8, and in these the purchaser was Power Communication Trading BV (“Power Communication”). The purchases and sales in deals 5 – 8 were all invoiced on 24 April.

 

7. The purchases and sales in deals 9 – 13 were all invoiced on 25 April, and those in deals 14 – 16 on 28 April. All of these sales were to World Communications.

 

8. So far as the facts, material to the claimed loss of tax were concerned, there were only three different cases to be considered. In deal 1, the purchase from Glasgow Data was traced back to an alleged contra-trader called Worldwide UK Import/Export Ltd (“Import/Export”). In Deals 2 - 4, the purchases were traced back to a company, LinkMobiles.com Ltd (“LinkMobiles”), that sought to be a contra-trader but that ended up being a defaulter. All other deals, namely 5 – 16, were traced back to a defaulter called Computec Solutions Ltd (“Computec”).

 

9. During the hearing, the argument between the two parties focused on two separate issues. 

 

10. The first was the issue of whether HMRC had satisfactorily demonstrated that the Appellant’s 16 deals had indeed been shown to be connected with fraudulent tax losses. In this context, the Appellant’s counsel made it clear that he objected to any evidence concerning the tracing of the movement of goods between various buffer companies being given on a hearsay basis, in other words being produced by a witness who had not actually undertaken the work re-assembling the steps in the transaction chains. The Appellant’s counsel also focused particular attention on contentions that in Deals 1 – 4, the loss of tax at the point of the contra-trader had not been properly established, and on the fact that in Deal 4, there had been considerable confusion as to whether the relevant goods had passed through the ownership of one or another of two possible intermediaries, and whether there might thus be a break in the transaction chain.

 

11. While almost less attention was given to the second issue, the second issue was whether, assuming the first to be decided in favour of HMRC, HMRC had then succeeded in establishing either that the Appellant knew, or alternatively that the Appellant ought to have known, that its transactions were connected to fraudulent losses of tax.

 

12. The Court of Appeal’s decision in the joined cases in Mobilx Ltd & others [2010] EWCA CIV 517 has now clarified that on the issue referred to in paragraph 11, the question that we must answer when considering the second element of the paragraph 11 question, namely the “ought to have known” element of the test, is whether the Appellant ought to have known that its transactions were connected to fraudulent tax loss transactions. It is not enough for us to conclude that the Appellant ought to have known that its transactions were more likely than not to have been connected to fraudulent tax loss transactions. Adopting the precise wording suggested by the Court of Appeal, we need to conclude that the Appellant ought to have known that there could be no other reasonable explanation for its transactions than that they were connected to fraudulent tax loss transactions.

 

13. Whilst the summary of the way we must approach the “ought to have known” element of what is generally referred to as the Kittel test is a stiff test and hurdle for HMRC to surmount, and the burden of proof lies with HMRC on all relevant issues, it must be remembered that it is, or is only, the civil standard of proof that applies in this case. In other words, HMRC must establish the various points on which its case depends “on the balance of probabilities”, and not with scientific and absolute certainty. In this case, whilst the Appellant’s counsel chose to put HMRC “to proof” in relation to every aspect of demonstrating and tracing fraudulent tax losses, and rightly asserted that it was for HMRC to prove these matters by evidence, he rather naturally placed less emphasis on two other factors. The first is that we can and must look at the totality of the evidence in reaching our conclusions on any point, and the second is that the burden of proof is not one of absolute proof but simply that on the balance of probabilities HMRC has made out its case. 

 

14. Our decisions on the issues of tracing the Appellant’s transactions back to fraudulent tax losses and on whether the Appellant had actual knowledge that its transactions were so connected are that HMRC has established its case on both points.  The basis for our decision in relation to actual knowledge is that the facts that the Appellant knew and had to know in participating in the relevant transactions indicate, to a degree equal to, or well in excess of, the balance of probability, that the Appellant must have known that it was a participant in fraudulent transactions. This basis for our decision means that, were we to be wrong in relation to the issue of “actual knowledge”, the facts and circumstances that led us to reach the conclusion that we have reached in relation to actual knowledge also mean that, by quite a margin, the Appellant ought to have known that there could be no other reasonable explanation for its transactions than that they were connected to fraudulent evasion of VAT.

 

THE RESPONDENTS’ EVIDENCE

 

15. Evidence was given on behalf of the Respondents by a number of HMRC officers, and by Mr. John Fletcher of KPMG, as an expert witness.

 

16. The main case officer in relation to the appeal was Paul Russell (“Mr. Russell”).

 

17. Evidence in relation to the transactions of the alleged contra-trader in Deal 1, namely Import/Export, was given by Stephen Patterson (“Mr. Patterson”).

 

18. As a contra-trader, Import/Export was the importer of the mobile phones which were passed through two intermediate “buffer” traders before being acquired by the Appellant. It purportedly discharged its liability for VAT on importing the phones and selling them to a UK purchaser by off-setting against its output liability the input tax that it claimed on simultaneously exporting a virtually identical value of computer chips. The computer chips purchased by Import/Export in its relevant VAT period had all been purchased, via buffer intermediaries, from a company named Only Quality Limited (“Only Quality”).

 

19. HMRC contended that Only Quality was a defaulter and evidence in relation to its transactions was given by Robert Ross (“Mr. Ross”).

 

20. Anna Hudson (“Ms. Hudson”) was the officer who gave evidence in relation to LinkMobiles.com Limited (“LinkMobiles”). It had sought to contra the input tax claimed in relation to various purchases from UK suppliers of phonecards that it purported to have sold to European buyers against its output liability on its imports of the mobile phones that then passed through four intermediary buffer companies before being acquired by the Appellant. Since there were various manifest artificialities in relation to the claimed purchase of phonecards, one being that the quantity allegedly purchased exceeded the cards actually produced, Link Mobiles’ claim for input tax was denied, so that LinkMobiles ended up with an unsatisfied liability in respect of its output liability on the imported mobile phones, and as a defaulter.

 

21. In passing, it is difficult to avoid the observation that some architect behind the frauds in this case may have had something of a sense of humour in choosing the names for Import/Export, LinkMobiles and Only Quality!!

 

22. Timothy Reardon (“Mr. Reardon”) was the officer who gave evidence in relation to the company, Computec Solutions Ltd (“Computec”) that was the alleged defaulter in each of the transactions, Deals 5 to 16.

 

23. Ian Henderson (“Mr. Henderson”) gave evidence in relation to all the banking payments made by all parties through First Curacao International Bank (“FCIB”).

 

24. Mr. Fletcher’s evidence related to the mobile phone market, the different distribution channels, the percentage of mobile phone sales that might be made by companies other than the manufacturers, their authorised main distributors and the large chain stores (those “other” sales being referred to as “grey market” sales), and implicitly the percentage of grey market sales of each brand and model of phone that was equivalent to the level of sales of such brands and models sold by the Appellant in April 2006.

 

25. Roderick Stone, a senior officer of HMRC, provided a Witness Statement in which he summarised many of the aspects of MTIC trading. His Witness Statement was uncontested and so he did not give evidence in person.

 

THE APPELLANT’S EVIDENCE

 

26. The Appellant company had been formed in 2003. Initially it seems that Mr. Dia Nasser (“Mr. Nasser”) had had a business partner involved in the business, namely a Mr. Ahmed Ibrahim. We were told however that they fell out in 2004, and certainly by the time the 2005 accounts were produced, Mr. Nasser was the sole shareholder, and also a Director and Secretary of the company. We were told that someone else assisted in the business and that when boxes containing mobile phones had to be inspected at the warehouses of freight forwarders several people assisted in this task. That apart, we were not informed of any significant involvement by any other person in the company’s business. Evidence was given on behalf of the Appellant by Mr. Nasser, and no-one else gave evidence on behalf of the Appellant.

 

The general credibility of the Respondents’ witnesses, and the Appellant counsel’s “hearsay” contention

 

27. We have no doubt in saying that all of the Respondents’ witnesses gave their evidence fairly and honestly. The Appellant’s counsel objected to any HMRC witness giving evidence about schedules that had been prepared by other colleagues, and giving evidence, for instance, about visits, recorded in visit notes, where again the person before us was not the person who had made the visit. On this issue we have no doubt in accepting such evidence. Much of such evidence was supported by documents, and in many cases evidence was being given by a team leader in circumstances where others in the same team had been responsible for parts of the evidence complied. When there were produced to us literally thousands of pages of evidence that HMRC had had to compile in relation to transactions that had on many occasions been effected by one- or two-man bands whose attention to documentation was often feeble, we consider that the Respondents’ production of the evidence was both a credit to them, and as we have said, invariably fair and honest. We also add that when one fraudulent defaulter can very easily have made fraudulent sales of well in excess of £100,000,000 in one VAT period, and made those sales to and through countless buffer traders, with export transactions being made by numerous innocent or knowing exporters or sellers to EU markets (known oddly in this context as “brokers”), the task that would face HMRC if every scrap of assembled evidence had to be presented in person by every person responsible for any and every element of it would be bewildering and disproportionate.

 

The credibility of Mr. Nasser’s evidence

 

28. We were far more hesitant in accepting Mr. Nasser’s evidence at face value, and it certainly follows from our conclusion that Mr. Nasser knew that the Appellant’s transactions were implicated in fraudulent evasion of VAT that we disbelieved some of his evidence.

 

29. We accept that there was no point at which Mr. Nasser’s whole evidence was completely undermined. There were, however, many occasions when Mr. Nasser was vague in relation to the facts. He periodically prefaced remarks by saying that something “must have been the case”, rather than by simply confirming, from recollection, precisely what had happened. There was a dispute as to whether he had concealed from Mr. Russell the existence of some highly significant loans that had been made to the Appellant, or whether through the phrasing of Mr. Russell’s questions he had been able, legitimately but still rather evasively, not to divulge those facts. The explanation that he gave as to why he took out credit references on his suppliers was incredible. The changes in evidence as to whether goods had been insured, when on any basis he had no idea of any of the terms of insurance was troubling. His general recollection of transactions that one might have thought would have remained firmly fixed in his memory seemed oddly vague. Mr. Nasser conceded that he had received a copy of Notice 726 (which indicated how traders should guard against the risks of being implicated in MTIC fraud). He said, in a very dismissive way, that he had read it, “with the ordinary attention” given to “their Notices”, which we took to mean “not much attention”. This sort of approach was rather consistent with the fact that, while he had been present for the whole of the main hearing in March, he conceded that he had not read much of the paperwork, and had even only glanced at some of the most important documents.

 

30. In summary, we concluded that we had to treat Mr. Nasser’s evidence with very considerable caution.

 

THE FACTS IN MORE DETAIL

31. In the following paragraphs we will summarise:-

 

·       certain background facts (paragraphs 32 to 34);

·       then any facts material to this Appeal arising out of the little that we know of the Appellant’s trading prior to the VAT period 04/06 (paragraphs 35 to 49);

·       then the relevant facts known directly to the Appellant as regards its trading in the period 04/06 (paragraphs 49 to 121), simply recording at this stage the bare facts in relation to the supply chains in accordance with the claims advanced by the Respondents, and the way in which payments were in fact made. 

 

We will ignore in these paragraphs, and deal later (in paragraphs 122 to 145) with the evidence that is material to all deals, including:

 

·       the proportion of total grey market sales in the month of April 2006 of particular models of phones matched by the Appellant’s level of trading in those particular models;

·        the information given about release dates from the Appellant’s suppliers, the dates when inspections were undertaken,  goods despatched, and Redhill checks made;

·       the  Appellant’s inspection arrangements;

·       insurance; and

·       the FCIB evidence. 

 

We will also leave until the paragraphs dealing with the contentions of the respective parties, and the relevant passages of our Decision and the reasons for that Decision, the various arguments as to whether the Respondents’ claimed supply chains have been demonstrated to the required standard of proof.

 

Background facts

 

32. Mr. Nasser took a part-time job, whilst studying avionics engineering at university, working in the warehouse of a major mobile phone wholesaler, Allied TC Ltd. He later became warehouse manager, but was made redundant in 2003.

 

33. He then decided, seemingly jointly with Mr. Ibrahim, to set up the Appellant company. Funded largely by a loan of £25,000 from HSBC and a loan of £20,000 from Mr. Nasser’s brother, the Appellant spent about £50,000 in refurbishing premises in the Edgware Road as an internet café, intending also to retail electronics products and mobile telephones.

 

34. As we mentioned in paragraph 26 above, in 2004 Mr. Nasser fell out with Mr. Ibrahim, the Appellant moved from the Edgware Road premises to Unit 36 Argo House, and Mr. Nasser “decided that the company would become involved in the wholesaling of mobile telephones.” He considered that he had contacts in the industry, some of whom “would be prepared to trade with [him]”. As we also said in paragraph 26, whilst we were not given details of the split with Mr. Ibrahim, or whether at other times the share ownership was in different proportions, the 2005 Accounts certainly demonstrated that Mr. Nasser owned all 1000 shares in the company at 30 June 2005.

 

Trading prior to the Appellant’s VAT period 04/06

 

35. We were given no information about the Appellant’s trading prior to April 2006, save for two facts, one of which was mentioned in evidence, and one of which emerges from the Appellant’s NatWest bank statements. The point that was referred to in evidence was that the Appellant had certainly traded in 2005, “without problem”, with S&S, the company from which it bought the mobile phones in 15 out of the 16 deals in April 2006. The fact that the NatWest bank statements revealed was that on 28 March 2006, the Appellant received £844,507.57 from HMRC, this amount obviously representing a refund of VAT input tax.

 

Financing the trade

 

36. Whilst it was generally asserted that the Appellant financed its further back-to-back trading with profits made in earlier transactions, and its VAT refunds, we should also mention that it emerged that the Appellant had received other loans. There was some dispute as to whether Mr. Nasser had concealed this loan funding when in an early meeting with Mr. Russell he had answered two questions by saying that the company had no bank loans, and also no “other investors”. Whether it was legitimate or not to treat the loans as not representing the interests of “other investors” in the Appellant, by August 2006 it had been conceded by the Appellant that on both 15 January 2006, and later immediately after the end of the presently material VAT period, i.e. on 1 May 2006, Mr. Al-Bayati of Villa 1, Street 32b, Garhoud, Dubai, UAE, had advanced £50,000. Furthermore two seemingly related companies, both based in Blackburn (to the identity of which we shall have to revert below) had also advanced loans. The first was from Mobile Solutions (England) Limited, this loan being dated 25 January 2006 for £150,000, and the second from S&F Distribution Limited, dated 25 April 2006 for £200,000.

 

37. The terms of these loans are of some significance, and we will quote them in full. It will incidentally be noted that those from Mr. Al-Bayati treated Mr. Nasser personally as the borrower, but since the funds advanced were to be paid into what was referred to as his business account, namely Root 89 Limited’s account, we will ignore this minor point.

 

38. The terms of both loans from Mr. Al-Bayati were identical apart from the imposition of a different “total charge”, i.e. something that in UK tax terminology we would generally refer to as “interest”. We insert in square brackets the figures for the January and May loans. Beyond this variation, the terms were that:

 

“We have agreed to Loan to Mr. D Nasser the sum of £50,000 to be paid in full to his NatWest Bank, Business account number 84082526, sort code 60-04-02 (Root 89 Ltd), on the following conditions:

 

1.     The total sum of Loan must be paid back in full within six months of the money being deposited into the account.

2.     A total charge of [January loan £17,200/May loan £10,000] will be applied to the total sum of the loan (total to be repaid [January £67,000/May £60,000].

3.     The borrower may return the loan earlier if he wishes to do so up on the agreement of the Lender.

4.     The Borrower will be penalised for any late payment after the six months period, £2000 for every one month delay.”

 

39. The other two loans, dated 25 January 2006 and 25 April 2006 (both thus advanced in the last few days of two different VAT periods of the Appellant) were in identical terms, save for the facts that, firstly, the lending companies (both based in Blackburn and the signatory in each being a Mohammed Patel) were different, secondly the first advance was for £150,000 and the second £200,000, and thirdly in the first advance, the moneys moved between the lender’s and borrower’s NatWest accounts, whereas in the second they moved between FCIB accounts.   Beyond these changes, and ignoring the last two clauses, which dealt with the relevant bank accounts, the terms (down to identical spelling errors, most of which we have corrected) were as follows:

 

“WHEREAS the Lender has agreed to advance to Borrower the sum of [£150,000/£200,000] as a loan for Six Months on the following conditions:

 

1.     The Borrower will agree to return the sum of the loan upon a 1 month’s notice before the period if the loan is needed by the Lender.

2.     The Borrower will incur a penalty of Five thousand pounds per month for each month’s delay after the first six months period.

3.     The borrower has six months period to return the money where by no additional charge would be advanced to the sum of repayment if the sum is paid in full.

4.     The date of the six months period begins ate the date the money is advanced to Root 89 Ltd account.”

 

40. Whilst clause 3 might be taken to indicate that the loans were interest free for the first six months, with thereafter very severe penalty interest being imposed for late repayment, this was in fact not so. The lender appears to have invoiced the borrower with a commission charge when making the advance, albeit that this appears only to have been intended to be paid, along with repayment of the loan. Thus in the case of the first loan, the NatWest bank statements indicate that on 29 March, two payments were made to Mobile Solutions, one of roughly £150,000, and one of roughly £67,000. These payments were made one day after the Appellant received its 01/06 VAT repayment from HMRC. As regards the second loan, on 27 April the lender invoiced the Appellant for £58,000, as a “Commission Charge”, presumably in respect of the second loan. We were told that even at the date of the hearing this second loan, and also the second of the loans from Mr. Al-Bayati, had not been repaid, and we were certainly unable to find any debit for the commission charge in either of the Appellant’s NatWest or FCIB bank statements that we were shown.

The Appellant’s endeavour to go over to one-month VAT periods

41. There is one other matter that pre-dated the critical April 2006, and the Appellant’s 04/06 three-month VAT period, to which we should refer.

 

42. On 24 March 2005 Mr. Nasser wrote to the Appellant’s VAT officer and said:

 

“We would like to ask you if you could kindly change our VAT return from quarterly to monthly as we might start exporting in the near future it would be more beneficial for us.”

This request was refused on 14 April 2005 on the basis that the Appellant did not satisfy the criteria that justified changing over to monthly reporting, those criteria being that a trader was “entitled to regular repayments, or [was a trader who] could forecast a repayment position covering several months based, for example, on capital expenditure”.

 

43. On 12 May, the Appellant asked HMRC to change the Appellant’s business designation on its VAT Certificate to “Telecommunications”, and asked for a copy of the changed Certificate. This change was in due course made.

 

44. On 30 August 2005, Mr. Nasser made a second attempt to secure monthly VAT returns in the following terms:

 

“We would like you to change our VAT Return from the current status which is quarterly, to a Monthly return.

The reason for us asking you to do so is we are having a regular repayment return and most of the company capital is getting tied up in VAT, as we are a regular exporter of goods from the UK.

This will help our business run more efficiently and smoothly once it’s done.

I would like to thank you in advance for your cooperation and understanding.”

 

45. We are not clear whether the Appellant notified HMRC that it was using FCIB as its, or one of its bankers, but in September 2005 two standard forms were produced by the Appellant, giving notification of changed bank details. One simply specified the FCIB account, and one specified a NatWest account and the FCIB account, the former seemingly replacing HSBC which had provided banking services to the Appellant since only April 2005, but withdrew such facilities in August or September.

 

46. On 11 October 2005, HMRC again declined to change the Appellant’s VAT reporting requirement to monthly, this letter being of considerable significance. The letter first refused the request, then referred generally to the “widespread abuse” of the VAT system in MTIC fraud, and then indicated that HMRC were seeking to verify the whole supply chain of trader’s acquisitions in order to protect against fraudulent evasion. It then continued as follows:

 

“Following the extended verification exercise conducted in relation to your trading activity within the VAT period, to date the Commissioners have identified that in 50%* of your transactions for the 07/05 period, goods that originated from UK traders who have raised invoices charging an amount shown as VAT, have defaulted in their responsibility to discharge the amounts to Customs and Excise. The VAT which remains unpaid by these persons at present amounts to approximately £26M.

·       I was unable to trace back all of your deals for the period, however of the 50% of deals checked all [emphasis in the original] of them emanated from a defaulting or missing trader”

 

The sales to Digi Trading GmbH in Switzerland

47. We might also mention that HMRC drew the Appellant’s attention in a letter of 17 March 2006 to the fact that they had discovered that a particular Swiss company that had purchased goods from the Appellant was thought to be involved with MTIC fraud. The letter explained how goods that had been exported from the UK were moved from place to place, passing through the ownership of different European traders, always “in the same van, in the same quantities at the same weight”, before being consigned back to the UK, with the initial export having been traced to defaulters. This letter contained a slightly ambiguous paragraph, which we will quote before recording the way in which the Respondents’ counsel highlighted the fact that Mr. Nasser had given different answers to the question of what he took one of the remarks in the following paragraph to mean.

 

“It is our view that the Swiss transaction chains you have been involved in with Digi Trading GMBH form an integral part of an overall scheme to defraud the Revenue. This view is strongly supported by the facts outlined above and the actual example shown. You should now reflect carefully on the contents of this letter and as a result you may wish to review your trading pattern in regard to exports of mobile phones to Switzerland. Although each claim will be examined on its merits if you continue with this trade any further repayment claims are likely to be vigorously and robustly verified prior to any decision to make or deny repayment.”

48. The Appellant did not sell any goods to Digi Trading after receipt of this letter. The ambiguity in the paragraph that we have just quoted related to whether Mr. Nasser took the reference to his “continu[ing] with this trade” in the last sentence to refer to the whole trade of back-to-back trading with any counter-parties or whether it merely referred to continued trading with Digi Trading. The Respondents’ counsel was unquestionably right to note, as we did without needing to refer to the transcript, that Mr. Nasser first said that he took this statement to relate to all back-to-back trading, and then he said that he took it to refer to trading just with Digi Trading. Whilst at this point we are not seeking to give findings of fact, we might just mention in passing two observations on this claimed discrepancy. First, since the penultimate sentence of the paragraph had referred specifically to “exports of mobile phones to Switzerland”, it does seem fair to construe the final sentence as referring fairly narrowly to further transactions with Digi Trading. On the other hand, in the light of the extraordinary disclosure that in the period 07/05, HMRC had traced all of the Appellant’s transactions, out of the 50% that they had traced by the time they wrote their letter of 11 October 2005, to tax losses, any protestation by the Appellant that it considered that HMRC were relaxed about sales of mobile phones to customers in any country other than Switzerland would be quite ridiculous.

The Appellant’s shared office space

49. It seems that, at least from January 2006 onwards, the Appellant was sharing its single office at Alto House with another mobile phone back-to-back trader, Esperanza UK Limited. The Respondents made the point that it was odd for competitors to be sharing the same office space. Mr. Nasser said that they never traded with each other, he had no idea who Esperanza’s trading counter-parties were, and he also said that the director running Esperanza was very rarely on the premises, and that after a period he ceased to allocate to Esperanza a share of the rental cost of the office. Without there being any detailed evidence to confirm this, HMRC indicated that Esperanza ended up defaulting on some VAT liabilities.

The 16 deals in the period 04/06

Deal 1

 

50. Deal 1 was not only the only deal with Glasgow Data and CEMSA in this particular VAT period, but there had also been no earlier transaction with Glasgow Data either. In his Witness Statement, Mr. Nasser was slightly vague in indicating how and when he had first made contact with Glasgow Data. He said that he may have seen one of their adverts on the International Phone Traders (“IPT”) website, or he may have been given their name by one of his contacts, when phoning round to source Nokia 8800 phones. He may also have had contact with them prior to April 2006, “discussing business”, but for various reasons had not entered into any earlier transaction with them.

 

51. Deal 1 involved the purchase of 4000 Nokia 8800 mobile phones from Glasgow Data Limited. HMRC produced for us very clear schedules of the supply chains for each of the transactions, giving details (according to their claims) of the various suppliers and the purchaser, the date of the transaction, the invoice numbers, the unit prices at the various steps, the numbers and models of mobile phones traded, and the net and gross figures of the prices paid.  This information was assembled from the invoices supplied by traders, and the lists of deals provided by the traders of the deals that they had entered into in VAT periods where invoices were missing. According to HMRC’s contentions, the supply chain and the more material details for the transactions in Deal 1 were as follow, the purchaser in each transaction being the company named below each supplier, and then of course the supplier in the next transaction:

 

Supplier	Jurisdiction	Invoice date	Unit price (ex VAT)	Unit mark-up
Muggles Consulting Co	Cyprus	4 April 2006	£408.60
Import Export	UK	4 April 2006	£408.80	0.20p
Tempest Solutions Ltd	UK	4 April 2006	£409.00	0.20p
Glasgow Data	UK	4 April 2006	£410.00	£1.00
Root 89 Ltd	UK	4 April 2006	£417.00	£7.00
CEMSA	Spain

 

52. The unit prices given in the table above are all exclusive of VAT. It follows that whilst Glasgow Data’s VAT-exclusive total invoice price to the Appellant was £1,640,000, its gross VAT-inclusive price was £1,927,000 so that pending the hoped for recovery of VAT by the Appellant, the Appellant made an initial loss on the deal. Its total sales price to CEMSA, based on the assumption that no VAT should be charged, and that in due course the input VAT would be recovered, was £1,668,000.

 

53. We were shown a certain amount of due diligence material in relation to Glasgow Data. In fairness, it was completed in a reasonable fashion, it did give the names and contact details of two referees, and it answered most of the questions posed. Naturally it provided copies of the company’s Certificate of Incorporation and its VAT Registration Certificate.

 

54. There were three elements of the due diligence exercise that should perhaps have occasioned some concern. Firstly the copy of the passport photo of the contact director that we were shown merely showed a silhouette, such that we at least could not detect whether he was facing the camera, or looking in the other direction. Secondly there was some dispute between Mr. Russell and Mr. Nasser as to whether Glasgow Data were or were not located merely in “a virtual office” at the time of the transaction. Mr. Nasser was adamant that they had dedicated office space, and that he had visited that space, whereas Mr. Russell believed, from the fact that his own office in Glasgow was round the corner from the 272 Bath Street address of Glasgow Data that the relevant building was indeed a virtual office complex, offering “a business address with mail forwarding facilities”. The answer to this conflict was that since it emerged that Mr. Nasser had only visited Glasgow Data at some time after the transaction, by which time they had moved from the 272 Bath Street address, then at the time of the material transaction, Glasgow Data had indeed operated from a virtual office.

 

55. The most material due diligence information was the independent credit check that the Appellant made in relation to Glasgow Data. This check indicated a credit limit for Glasgow Data of £700, for which the description was “Caution, High Risk Potential”. Mr. Nasser said that he was not interested in the credit rating because his deal with Glasgow Data would not involve the Appellant in extending any credit to Glasgow Data, and he only took out the credit check to check the other information that he had obtained elsewhere. In terms of verifying that rather extraordinary suggestion, we accept that the credit check confirmed the name of the Director, Gian Hayer, and the name of the accountants. It failed to indicate any bankers, or a current trading address; it appeared to indicate that the trade category was “Wholesale of other machinery for use in industry, trade and navigation”; it recorded that the company had full exemption from the Companies Acts requirements in producing its accounts, and the seeming explanation that its credit rating had deteriorated from that in the previous year was that in the period ending March 2005 it had made a £13,000 loss, in contrast to a profit of £63,000 in the previous year.

 

56. Mr. Nasser said that he did less due diligence in relation to his foreign customers, because it was harder to visit them, and as he understood the risks of MTIC fraud, the fraud was on the UK supply side. He also said that he did no checks on the freight forwarders acting for the customers, because it was for the customers to check the reliability of their own freight forwarders. HMRC only received what little due diligence information the Appellant had obtained in relation to its three customers in respect of two of them, CEMSA and Power Communication. It related only to letters of introduction, local VAT certificates and tax certificates and banking details. We were also told that in due course (and obviously after the date of the transactions with which we are concerned) HMRC obtained information from the Spanish, French and Dutch tax authorities to the effect that CEMSA, World Communications and Power Communication respectively had been involved in MTIC or other illegal activities.

 

57. Whilst we are currently dealing with Deal 1, we might at this point say that we can recall no information as to how the Appellant first came into contact with CEMSA. As regards the other two customers, Mr. Nasser said in his Witness Statement that:

 

“As I recall, I was introduced to World Comms via a trading contact and had regular dealings with them for the 12 – 18 month period prior to April 06”

and

 

“I had been in contact with Power Communication for approximately 6 months prior to the 04/06 transactions. From my recollection, they got in touch with the Company, enquiring whether or not we could supply stock”.

 

We note in passing that these statements were, as usual, slightly vague and general, and no name of the “trading contact” is given such that there was certainly no secondary evidence to confirm these statements.

 

The terms of the Invoices material in the Glasgow Data transaction, and the payment details.

 

58. As the table above indicates, all the material invoices for Deal 1 were dated 4 April 2006. The invoices from Import/Export , Tempest Solutions, Glasgow Data and the Appellant all identified the goods simply as “Nokia 8800”, the Appellant’s adding the words “Mobile Phones”. None indicated whether they were equipped with UK or Continental European plugs, though we understood that they were Euro-spec phones.

 

59. The Appellant would not have known the terms of the Import/Export invoice, but it did contain the words “Above goods remain property of Worldwide UK Import Export until paid”. The Tempest invoice contained no such wording. More relevantly, the Glasgow Data invoice contained the words “Please note that all stock remains ours until payment has been made in full”, and the words “All stock is sold as seen. Once stock has been released we hold no responsibility”. The Appellant’s invoice was silent on such points, though, following the Appellant’s sale to CEMSA, the CMR dealing with the movement of the goods to Calais (Calais selected apparently at the request of the Spanish purchaser, CEMSA), did indicate that the goods were transported on the basis of “Ship on Hold”.

 

The dates and amounts of payments

 

60. Until the FCIB bank statements and computer print-outs became available, late in the day, no indication was given as to how and when payments were made. According to Mr. Nasser’s evidence, Glasgow Data waived the term printed on their invoice to the effect that title would not pass until payment had been received in full, and they released the goods to the Appellant, seemingly when they had invoiced the Appellant. This was in no way confirmed by other evidence. The Appellant’s contention nevertheless was that it would only despatch the goods to its purchaser on a “Ship to Hold” basis, its purchaser should pay the full price immediately, and it would not need to pay Glasgow Data until it had been paid. We will have to give considerable attention below to the exact basis on which it was claimed that Glasgow Data were prepared to give credit to the Appellant, and to the similar proposition that S&S must implicitly have given trade credit. We might observe at this point that credit given by the suppliers cannot always have been given “until the Appellant had received payment from its customer”, because the VAT-inclusive prices paid to suppliers always exceeded the VAT-exclusive prices received from customers,  and there were certainly occasions when the Appellant could not itself immediately fund those excess amounts. In the case of Deal 1, for instance, the customer’s payment fell short of the amount owed to Glasgow Data by £259,000, albeit that in Deal 1, as paragraph 63 below will illustrate, the Appellant did have the funds to make full payment in this particular deal.

 

61. The FCIB evidence was of relevance in two respects. First, and great significance was attached to this feature by the Respondents, the evidence often indicated that payments had been made between numerous companies in a circular fashion, and that there had been several third party payments.  We should record at this point a fact that will later be material, namely that a company called Karippa SRO regularly featured in the payment chains, being a regular recipient of third party payments, albeit never an ostensible supplier or customer.  These features of circular payments and third party payments are relevant to the issue of whether the various steps in the transaction chains were all steps in a scheme, and whether there was a fraudulent loss of tax. Since we will reach the conclusion, almost without the assistance of the FCIB evidence, that the Appellant’s transactions were connected to fraudulent losses of tax, we will not at this stage address the particularly complex aspects of the FCIB evidence concerning circularity and third party payments.

 

62. The FCIB evidence was also significant, however, because the print-outs of banking payments by FCIB always indicated from and to which company payments had moved, at least where the payments simply moved between accounts of companies that had FCIB accounts. Accordingly by looking at the FCIB print-outs, and by looking also at the Appellant’s NatWest bank statements, it is relatively easy to ascertain precisely when all material payments to, and by, the Appellant in relation to all 16 deals were made.

 

63. As regards Deal 1, the payments were quite straightforward. CEMSA paid the Appellant the full £1,668,000, by way of two payments  (£1,000,000 and £668,000), both made on 6 April. The Appellant also made two payments to Glasgow Data, the first of £950,000 following the receipt of the £1,000,000, and the second of £718,000 following the second receipt from CEMSA, the Appellant’s two payments aggregating £1,668,000. This left only just in excess of £2,000 in the Appellant’s FCIB account. On 10 April, the Appellant paid the balance of £259,000 to Glasgow Data from its NatWest account, there having been ample on that account since 4 April to have paid that balance at any time.

 

 

 

The facts relevant to the contra-trading by Import Export

 

64. As we have said, the Respondents’ basic information, in relation to the tracing of tax losses in relation to Deal 1, was given by Mr. Russell, Mr. Paterson and Mr. Ross.

 

65. The facts given in support of the proposition that Import/Export was a contra-trader are somewhat staggering.

 

General description of the operations of “contra-traders”

 

66. There are numerous descriptions of the aims and operating methods of contra-traders in the reported cases, but we will give a short summary in order to put Import/Export’s transactions in the context claimed to be appropriate by the Respondents. 

 

67. In combating MTIC fraud, HMRC’s attention was focused initially on defaulting traders and on those making very large input recovery claims. Defaulters would often be identified when a trader that had made VAT returns (likely to be the first buffer company, which would have accounted for VAT on its fine margin) claimed input tax in a transaction from a company that had either made no VAT return whatsoever or which, on making a return, had disappeared. Claimants of significant refunds were obviously identified when large repayment claims were made by companies that were not known to be genuine exporters, and verification would then be undertaken to ascertain whether the goods exported could be traced back to an importation by a defaulting or missing trader.

 

68. The fraudsters obviously concluded that it would make both detection and tracing more problematic for HMRC if the importer of the product (say mobile phones in this example) that would be sold, through buffer companies, to the exporter was able to remain below HMRC’s “radar screen”, by avoiding being a defaulter, albeit that it would still not actually pay HMRC the VAT on the imported phones that it would sell, via the buffer companies, to the eventual exporter and VAT re-claimant. This was achieved by ensuring that the importer of the mobile phones simultaneously exported a nearly identical (but slightly lesser) value of goods (say CPUs), purchased from a separate chain (“the dirty chain”) of UK suppliers, in which the CPUs would initially have been imported by a defaulter that had failed to account for the VAT on its first domestic sales of the imported CPUs. There was no particular need for the products bought in the dirty chain to differ from those imported and sold through the earlier chain (the so-called “clean chain”) to the exporter, but the products in the two chains were commonly different. The VAT return of the company that linked the two chains of transactions then obviously involved one quantity of output transactions (where it had imported mobile phones in this example and was selling to the domestic chain that would end up with the exporter), and a slightly lesser quantity of claims for input deductions, where it ended up as the exporter of the CPUs purchased initially from the defaulting importer. By off-setting the input claims against the output liabilities, it avoided actually claiming VAT back in cash, and on accounting for the VAT on the fractional excess of output liabilities over input claims, it avoided being an apparent defaulter. This then made it less obvious, when the ultimate exporter of the mobile phones claimed input repayments, that the phones derived from a defaulter.

 

The transactions involving Import/Export

 

69. Having given that explanation and example, the facts given to us in relation to Import/Export (the rather apt name of which we have already mentioned) reveal a pattern of trading that corresponds precisely to the description just given.

 

70. Import/Export was incorporated in February 2005 and Abdul and Samir Akhtar were respectively the Director and Company Secretary of the company. It operated from a two-room industrial unit in Barking, where Abdul Akhtar was assisted by a sales manager, Omerferaz Rahman, and Kelly Burring, a part-time bookkeeper.

 

71. In the period from January 2006 to the end of June 2006, being Import/Export’s VAT periods 03/06 and 06/06, whereafter it ceased trading, we were given the monthly figures for imports and exports. As Import/Export’s transactions generally involved imports of mobile phones and exports of CPUs (as in the example given in paragraph 68 above), we will refer to the imports and exports in that manner for clarity. In each month the value of the imports of mobile phones closely matched, month by month, the value of exports of CPUs. The level of trading was at the staggering level that, rounding figures to the nearest million, the sales value to the first buffer company of Import/Export’s importations and sales of mobile phones in January 2006 was £41m, February £103m, March £250m, April £80m, May £103m, and June £50m. Its domestic purchases and exportations of CPUs were in roughly matching amounts, and such that for each of the VAT periods, the imports leading to standard-rated sales slightly exceeded the exports. Aggregating the figures for the entire 6-month period, Import/Export’s sales of imported mobile phones were in the impressive amount of £627,645,055.75 and its exports in the amount of £608,609,806.25!

 

72. We should add that HMRC’s evidence indicated two fairly material further points. The list of European and other foreign buyers of CPUs in many cases involved companies whose Directors had UK addresses. Secondly some of the European buyers of CPUs were simultaneously amongst the suppliers of mobile phones. Muggles Consulting Co of Cyprus, for instance, was not only the original supplier of the very mobile phones that were traced to the Appellant’s purchase in Deal 1, but was also one of the companies that purchased the CPUs that Import/Export was exporting.

 

73. Before turning to HMRC’s evidence in relation to the defaults at the origin of the CPU chains, where CPUs were purchased by Import/Export, we might make two observations.  First, the Respondents’ evidence in relation to Import/Export, including evidence about the making of third party payments made in the supply chains of CPUs, is so staggeringly artificial and indicative of fraud that when we only need to conclude on the balance of probabilities that Import/Export was a fraudulent contra-trader, we have not the slightest hesitation in reaching that conclusion, even before we turn to the evidence about the supply chains of CPUs. The other observation is to note that HMRC concluded that they had sufficient evidence of fraud and actual knowledge, and every other aspect of the Kittel test, to deny Import/Export its input claims for the periods 03/06 and 06/06. This resulted in assessments of £65,780,541.38 and £43,305,395.85 for the two periods, the total assessments being £109,085,937.23, which amount HMRC are seeking, but rather obviously failing, to recover.

 

The role of Only Quality

 

74. We now turn to the evidence in relation to Only Quality.

 

75. We were told that Import/Export’s acquisitions of CPUs were all traced back to one or other of three claimed defaulters. Since, conveniently, Import/Export’s VAT periods ended at the end of March and June 2006, and from the end of March, Import/Export’s purchases of CPUs were all traced from the one alleged defaulter, Only Quality, we can ignore the supply chains to Import/Export derived from the other two alleged defaulters.

 

76. Only Quality was formed in January 2005, and seemed to have been owned or controlled by two other individuals before being transferred on 7 April 2006 to Mr. Warsame Jama Gure. In turn, Mr. Gure resigned on 3 May 2006 and a Mr. Muhayadin became a director and changed the registered office.

 

77. Only Quality was registered for VAT purposes but never made a return. Evidence obtained from a company that had purchased from it indicated that Only Quality asked that purchaser to make third party payments, in other words to pay Only Quality only a trivial amount of the purchase price owed to Only Quality, while paying the balance to third parties, as directed by Only Quality. The trivial payments made to Only Quality itself were wholly insufficient to pay any VAT that might be owed on Only Quality’s transactions. We accept that this pattern of trading is strongly indicative that Only Quality was a defaulter. We also note that evidence was given of a sale made on 2 August 2006 where the goods sold by Only Quality were shown to have been acquired from a Slovenian trader whose Slovenian VAT registration was cancelled because of its involvement in VAT fraud. HMRC have now made unsatisfied assessments on Only Quality for unpaid VAT of £138,908,628.

 

78. The final paragraph of Mr. Ross’ Witness Statement in relation to Only Quality was in the following terms:

 

“Only Quality is a missing trader and none of the directors or company secretaries has been traced. It is clear from the changes in control of the company and from the minimal payments requested by Only Quality from its clients that this business was set up to defraud the VAT”.

 

79. We agree.  It is clear to us that all the operations of Only Quality and Import/Export were fraudulent, and that the Appellant’s purchase in Deal 1 has rightly been traced to fraudulent tax losses.

 

Deals 2,3 and 4

 

80. These three deals involved three different Nokia models of phone, but were essentially one single deal, at least so far as the Appellant was concerned since all three were sold and recorded on one single invoice.  Deal 2 involved 500 Nokia 9500 phones, Deal 3 involved 500 Nokia 9300i phones and Deal 4 involved 1000 Nokia 8800 phones. The parties were identical, save that in Deal 3, there was no direct evidence that Satt Telecom of Italy had supplied to LinkMobiles.com. Ltd (“Link Mobiles”), and there was also considerable debate as to whether one of the intermediate parties had been replaced in deal 4 by a different company, such that arguably the link to the tax loss might have been broken. We will revert to these discrepancies in due course but, for present purposes, the facts in relation to the Deals 2, 3 and 4 chains were claimed by the Respondents to be as follows.

 

Supplier	Jurisdiction	Invoice date	Unit price (ex VAT) in Deals 2,3,4	Unit Mark up Deals 2,3,4
Satt Telecom	Italy	7 April 2006	337.25;-------;413.75
LinkMobiles	UK	7 April	337.50;302.50;414.00	25p;25p;25p
Lets Talk	UK	7 April	337.75;302.75;414.25	25p;25p;25p
Delta Mobile	UK	7 April	338.50;303.50;415.00	75p;75p;75p;
Michigan US	UK	7 April	339.00;304.00;416.00	50p;50p;£1.0
S&S	UK	7 April	340.00;305.00;417.00	£1.0;£1.0;£1.0
Root 89 Ltd	UK	7 April	357.00;319.00;436.00	£17;  £14; £19
World Communications	France

 

81. The facts in relation to the due diligence performed in relation to S&S were not that dissimilar to those in relation to Glasgow Data. Again a Certificate of Incorporation and a VAT Registration Certificate were provided.  The simple questions were answered reasonably clearly, all dated around October 2005 on the occasion of an earlier transaction with S&S, and not re-raised in the 04/06 period.

It was evident from a bill from the accommodation supplier that S&S traded from one room. Its credit report was worse than that for Glasgow Data, in that its suggested maximum credit limit was £0, and there was a reference to a County Court judgment of approximately £20,000 against S&S. Mr. Nasser said that on enquiring about this he was told that it related to some mistake and was of no significance. No reference was made to whether anyone checked the Reference No and Case no for the judgment in the Oxford County Court. The latest accounts filed were those for the period ending August 2003, the very short detail of which (filing exemptions again being available) showed negative net worth.

 

82. We have already mentioned that little due diligence was done in relation to World Communications, and the same applied to Power Communication, the customer in the next group of deals to be considered.

 

83. So far as invoices were concerned, the ones from S&S and the Appellant contained no product description other than the bare model numbers of the phones. The S&S invoice contained the words “Terms and Conditions: All goods remain the property of S&S Connections Ltd until payment is received in full”, and Mr. Nasser again said that its immediate supplier, S&S, waived this term and released the goods without receiving payment. He specifically said furthermore that he considered the notion of the phones being released to the Appellant to be equivalent to the transfer of title to the phones. The Appellant’s CMR again included similar words to those referred to in Deal 1, in other words “Goods on Hold”. Oddly, when we were generally told that all phones were supplied with Continental European plugs, the earlier invoice from Delta Mobile Phones to Michigan US indicated that the phones were “(Euro Specs) UK plug charger”, and the Payment Terms box said “15 days”. Whilst again we will defer all significant findings and observations on the facts until later, we might just observe at this point that if phones had just a UK plug charger or just a Continental European plug charger, both would seem to have been odd. This is because in the first case, it would seem to have been strange to export phones to the Continent with the wrong plug (a UK plug) on the chargers, whilst in the second case, the purpose of importing phones into the UK in the first place with Continental plugs on the chargers would be equally odd.

 

84. As regards payment, World Communications paid the full invoiced price for all three models of phone (£774,000) on 7 April, and subsequently on that day the Appellant paid S&S the full price for the phones in Deals 3 and 4, and £105,000 in respect of the phones in Deal 2, leaving £94,750 outstanding out of the total price for the Deal 2 phones of £199,750. On 24 April, the Appellant’s NatWest account was debited for £94,750, this doubtless being the balance owed to S&S in respect of the Deal 2 phones. This payment resulted in the NatWest account being overdrawn in the amount of £72.

 

The facts relevant to the intended contra-trading by LinkMobiles, and the eventual treatment of LinkMobiles by HMRC

 

85. LinkMobiles was a company formed at the very beginning of January 2006 to take over the business previously conducted by a Mr. Rahman.  Mr. Rahman was seemingly the only material director of the company.

 

86. The turnover of the business, for the periods 08/05 to 02/06 (i.e. both when operated by Mr. Rahman and by LinkMobiles), was £25,277. The turnover for the period from 1 March 2006 to 30 April, when LinksMobiles was de-registered was £160,976,213.  Shortly after the beginning of this period, on 21 March, another HMRC officer visited the declared principal place of business of LinkMobiles and found a locked shop, the adverts on the windows of which suggested that it sold SIM cards. A neighbouring barman said that the owner was no longer bothering to come to Leamington Spa from Birmingham because business had been slow.

 

87. Following this visit, HMRC de-registered LinkMobiles. An assessment for £8,351,630.70 was made, based on information from a freight forwarder, indicating that LinkMobiles was importing mobile phones from Satt Telecom of Italy and selling them to two companies, one being Delta Mobiles, whilst other information suggested that some phones were sold directly to Let’s Talk   Subsequently, on discovering that further transactions had been undertaken, HMRC changed the date of de-registration to 30 April.

 

88. On 10 July LinkMobiles submitted a return expressed to be for the period 05/06, which HMRC modified and allocated to the final period ending 04/06.  This return disclosed output tax of £14,077,157.01 and sent a remittance with the return of £1,166. There was then a curious episode in which Ms.  Hudson and a fellow officer went to Mr. Rahman’s house because she needed, and had not got, back-up material in relation to the return just mentioned. Ms. Hudson was told that all the documentation was not available because it had been in a car owned by someone else which had been seized by the police. It was not until September that the records, that had indeed been recovered from the relevant car, were located, held at a Birmingham HMRC office. 

 

89. Ms. Hudson deduced from these records that three invoices from LinkMobiles evidenced the sale of mobile phones, that had been purchased from Satt Telecom, to Lets Talk, and that it was these phones that had eventually been sold to the Appellant.

 

90. Ms. Hudson wanted further information, and this was long delayed in coming. Eventually there was a meeting on 17 November in which Mr. Rahman said that Satt Telecom was his only supplier in the period March and April 2006, and that these phones had been sold to four customers, Delta Mobiles, Lets Talk, Falpar Ltd and Kwik Talk Ltd. Mr. Rahman then said that he had purchased pre-paid international phonecards from Lodgeway Consultants in the UK and exported them to Umbria Equitazione (“Umbria”) in Italy.

 

91. On further enquiries, the phone card story began to fall apart:

 

·       partially because an elderly couple were found to be living at the address where Lodgeway Consultants were meant to be operating, the couple having lived there since the late 1960’s, such that Lodgeway Consultants was not, and has not been, found;

·       partially because LinkMobiles indicated that it had neither received payment from Umbria, nor paid Lodgeway Consultants, because Mr. Rahman had directed the former to make a third party payment to the latter;

·       partially because the manufacturer of the phone cards indicated that most of the cards that had in fact been produced 4 – 6 years earlier had been returned to it, and cancelled,  because cards with the relevant £50 pre-payment denomination were very slow sellers;

·       partially because it emerged that the quantity of phonecards of the high denomination allegedly purchased exceeded the quantity originally produced;

·        partially because it emerged that the phonecards allegedly sold to Umbria were to be delivered to a truck stop on the A4 in the Netherlands; and

·       finally because the Italian authorities indicated to HMRC that on their review of Umbria’s operation, that company had never traded with LinkMobiles and that in the previous year there had been another incident of a UK supplier claiming to have sold and delivered phonecards to Umbria, where again Umbria had no knowledge of the transaction.

 

92. Not surprisingly perhaps, HMRC disallowed the input tax claimed by LinkMobiles in relation to the alleged phonecard transaction on the ground either that it had not occurred at all, or on the basis that Mr. Rahman knew that it was linked to VAT fraud. A revised assessment for £14,076,077 was made on LinkMobiles which is now in creditors’ voluntary liquidation.

 

Deals 5,6,7 & 8

 

93. The supply chain, according to the Respondents’ evidence in relation to these four deals, all effected by all parties on 24 April 2006, was identical. Deal 5 involved the purchase and sale of 3000 Nokia 8800 phones, Deal 6 involved 2000 Nokia 9500 phones, Deal 7 1000 Nokia n70 phones, and Deal 8 2000 Nokia 9300i phones. The aggregate invoice price due to the Appellant from Power Communications was £2,885,000 and the VAT inclusive price owed by the Appellant to S&S was £3,204,225.  Certain of the details of the steps through the supply chain were as follows according to the Respondents’ evidence.

 

Supplier	Jurisdiction	Invoice date	Unit price (ex VAT) in Deals 5,6,7,8	Unit mark-up Deals 5,6,7,8
Computec	UK	24 April 2006	402.50;339.50;213.50;303.50
Lets Talk	UK	24 April	402.75;339.75;213.75;303.75	25p in all four deals
Delta Mobile	UK	24 April	403;  340; 214;  304	25p in all four deals
First Solutions	UK	24 April	404;  340;  215; 305.25	£1, £1, £1 & £1.25
S&S	UK	24 April	405;  342;  216;  306	£1, £1, £1 & 75p
Root 89 Ltd	UK	24 April	431;  362;  228;  320	£26, £20, £12, £14
Power Communication

 

 

94. Earlier comments have already summarised the due diligence done in relation to S&S, and essentially not done in relation to Power Communication.

 

95. It will be recalled from paragraph 36 above, that Mobile Solutions (England) Limited had lent the Appellant £150,000 on 25 January, and paragraph 39 recorded that this loan had been repaid in the VAT period 04/06 on 29 March, along with interest of £67,000.

 

96. According to the Respondents’ evidence, Mobile Solutions (England) Limited changed its name to First Solutions (England) Limited (“First Solutions”), and is the company referred to in the table above for Deals 5 to 8 as First Solutions. In the FCIB bank documentation, the account number for Mobile Solutions (England) Limited (at the point of the advance of the loan) is indeed the same as that indicated on the First Solutions’ invoice.

 

97. So far as payments in respect of transaction 5 - 8 are concerned, the Appellant received immediate full payment from Power Communication, albeit in two different payments for all four invoices. The Appellant then made immediate full payments to S&S in respect of Deals 6 and 8, both paid also on 24 April. Also on 24 April the Appellant paid £1,364,000 out of the £1,427,625 owing in respect of Deal 5, leaving £63,625 owing. As regards Deal 7, the Appellant paid £136,000 on 28 April, leaving £117,800 owing to S&S.

 

98. It will be recalled that a loan of £200,000 was made on 25 April to the Appellant by S&F Distribution, the funds actually moving from S&F Distribution’s FCIB account on 28 April. Interestingly, S&F Distribution, which the Respondents contended was a related company to Mobile Solutions/First Solutions, had an identical banking reference to Mobile Solutions/First Solutions, though its account had a different account number suffix.

 

99. The very next entry in the FCIB accounts after the receipt of the £200,000 was the payment by the Appellant of the £63,625 balance owing to S&S in respect of Deal 5. On 2 May, the Appellant then paid the balance of £117,800 owing to S&S in respect of Deal 7.

 

100. The rather extraordinary position emerges therefore that the Appellant was only able to pay the total outstanding amounts due to S&S in respect of Deals 5 and 7 (£181,425 being £63,625 plus £117,800) after borrowing £200,000 from a company that the Respondents contended, and that indeed the FCIB account codes seemed to confirm, was related to the very company from which in turn S&S had just bought all the four consignments of phones in Deals 5,6,7 & 8.  The particularly odd feature was that First Solution chose not to sell directly to the Appellant, albeit that the two relevant directors were in close enough contact for S&F Distribution to lend the Appellant £200,000, but instead to sell to S&S, which in turn sold to the Appellant.

 

The Defaulter

 

101. Since Computec Solutions Limited (“Computec”) was the alleged defaulter in relation to the Deals 5 – 8, and also in all remaining deals, we will defer summarising the alleged facts in relation to Computec until we have dealt with the steps and basic details in relation to Deal 9 and Deals 10 to 16. 

 

Deal 9

 

102. Deal 9 involved a purchase and a sale of 3500 Nokia n70 phones.  The supply chain involved sales at unit prices in the range of £214, all on 25 April, with the phones moving from Computec to Lets Talk, which made a unit mark-up of 25p on selling to Delta Mobile, which made a similar mark-up on selling to Michigan US, which made a mark-up of 50p on selling to S&S, which made a mark-up of 75p on selling to the Appellant.  The Appellant sold to World Communications, at a unit mark-up (ignoring VAT in the case of the purchase price) of £15.75.  The gross, VAT inclusive, price owed to S&S was £885,215.62, and the sale price to World Communications was £810,250.00.

 

103. World Communications paid the Appellant the £810,250 just mentioned on 8 May, notwithstanding that it had been invoiced on 25 April, and the Appellant paid S&S the full £885,215.62, in the shape of two payments, both also made on 8 May.

 

104. As we have already said, we will deal with the facts relevant to Computec, the alleged defaulter in relation to Deal 9, after summarising the basic steps in relation to Deals 10 to 16.

 

Deals 10 to 16

 

105. Deals 10 to 16 all involved identical parties. Those parties, from the alleged defaulter to the French buyer were Computec Solutions, Lets Talk, Delta Mobile Phones Ltd, First Solutions, S&S, the Appellant and World Communications. The deals involved the following phones, and quantities:

 

Deal no and date	Model of phone	Number of phones	Approximate unit price
10 25 April	Nokia 9300i	500	£305
11 25 April	Nokia 9500	500	£340
12 25 April	Samsung d600	500	£142
13 25 April	Nokia 9300	500	£245
14 28 April	Nokia 6280	1000	£204
15 28 April	Nokia 8800	820	£403
16 28 April	Nokia 6680	2000	£174

 

106. The actual payments made in respect of Deals 10 to 16 were as follows.

 

107. World Communications paid £1,343,725 in respect of Deals 11 to 16 on 2 May and £166,375 in respect of Deal 10 on 8 May. In its turn the Appellant paid the full amounts owed to S&S in respect of Deals 10, 11, 12, 13 and 14 all on 2 May.

 

108. The payments in respect of Deals 15 and 16 by the Appellant were slightly more involved. In respect of Deal 15, the Appellant paid £376,000 on 2 May but delayed the balance of £13,254 until it had received World Communications’ slightly delayed payment in respect of Deal 9, that payment, and the Appellant’s payment of the balance owed in respect of Deal 15 both being paid on 8 May.

 

109. In his Witness Statement, Mr. Henderson said that HMRC had not been able to trace the payment of the amounts owing by the Appellant to S&S in respect of Deal 16. The Appellant owed S&S £411,250 in respect of Deal 16. We can certainly find two payments moving from the Appellant to S&S in the FCIB statements, because the Account Reference numbers for the recipient indicate that the Appellant paid  S&S £78,000 and £105,000. The resultant total payment of £183,000 meant of course that S&S were still owed £228,000. This figure then tallies with a letter dated 29 June 2006 from S&S to the Appellant in the following terms (quoted precisely):

 

“Re:  Account Overdue

I am writing, with regards to stock which S&S Connections Ltd sold to you Root89 Ltd on the 28/04/06. The details of your purchases are as follows.

 Inv no. Description Quantity Total

3460 Nokia 6680 2000 £411,250

Payment received £183,000

Balance £228,250

 

The above amount still remains outstanding and you have exceeded your 60 days credit limit. We advice you to make payment in full in next 14 days to prevent us from taking any legal action against you.

 

If you have any queries regarding this matter please do not hesitate to call me on any of the numbers above.

 

Kind Regards”

 

110. So far as we are aware the Appellant has not yet paid the £228,250 to S&S and we certainly saw no other correspondence about the non-payment of the balance. We were also told that the Appellant still owed the £50,000 to Mr. Al-Bayati, or rather the full repayment amount including interest, of £60,000, and also the £258,000 owing to S&F Distribution Limited in respect of the 25 April loan, and we were told that the Appellant had no means of paying these amounts. 

 

111. During the hearing we did a quick and rough calculation to calculate the further amounts of default interest that would be due in respect of the two loans just mentioned in the previous paragraph. The cumulative default interest figure was of course very significant indeed. We were told however by Mr. Nasser that default interest ceased to accumulate after some time, such that our calculation was wrong. We can well appreciate that the lenders might have had little prospect of being repaid the full amounts lent, plus original interest, plus any default interest, but we were still told that even as a matter of entitlement, the default interest dropped away after some unidentified period.

 

112. It is again premature to record full findings of fact, but it seems convenient to record at this point several observations about the terms on which:

 

·       suppliers were allegedly content to release goods to the Appellant, notwithstanding every invoice from Glasgow Data and S&S indicating that title to goods would not pass until the suppliers had been paid in full;

·       S&S indicated in the letter just quoted that 60 days’ credit was given to the Appellant to pay S&S’s invoice no 3460 in respect of Deal 16;

·       if we are meant to assume that S&S gave 60 days’ credit in respect of the full purchase price for all deals 2 to16, this seems not only extraordinarily generous and non-commercial (particularly having regard to the credit standing of the Appellant, and the very modest margin made by S&S), but it appears odd that the Appellant then generally recognised that it should pay invoiced amounts immediately, or at least when in funds to do so;

·       if the implicit deal was that credit was only given for the excess of debts to S&S over sales receipts from the “export” buyers (i.e. the element dependent on recovering input VAT from HMRC), this was certainly never stated, and it also seems highly odd that if S&S (and perhaps other suppliers further up the supply chain) were granting credit that was in practice dependent on the recovery of the input tax by the Appellant, those suppliers appeared to get no reward for bearing the very type of risks that the straightforward lenders demanded colossal “commissions” for assuming;

·       the feature that very substantial “add-ons” or commission payments or “total amounts” were owing in respect of all four loans made to the Appellant indicates not just that those loans, from a UK technical point of view, commanded very high rates of interest, but the supplements could also realistically be seen, not so much as interest, but as profit-sharing entitlements for funding VAT recoveries;

·       finally it is extraordinary that the entitlement to very substantial payments of default interest allegedly dropped away (altogether disregarding the skimpy terms of the loans) at some unidentified point; all leading finally to a very strong indication that

·       the loans were almost in reality, though not strictly on their defective terms, limited recourse loans funding VAT recoveries, commanding very substantial profit shares, should the recoveries be made successfully.

 

113. Having canvassed those various oddities at this stage, perhaps it is sufficient to say that:

 

1. in the light of the risks involved in the suppliers extending credit to the Appellant, the basis on which this was done, with absolutely nothing being clarified as to the real terms on which title was to pass, or credit be extended, was unbelievably uncommercial;
2. it is understandable that, having regard to the real circumstances, it would have been very difficult to have drafted terms that would have made commercial sense without those terms looking extraordinarily embarrassing; and
3. finally the bald way in which Glasgow Data and S&S actually sold on the terms of an invoice that contained no terms as regards credit, and a term as regards title passing that we were told had been waived (such that the only written term disappeared) borders on, or surpasses “the unbelievable”.

 

The facts, material to Deals 5 to 16 in relation to the alleged defaulter, Computec

 

114. Mr. Reardon gave evidence in relation to Computec, and this evidence can be summarised relatively shortly.

 

115. Computec was formed in 2004. Various people appear to have been directors and secretary of the company prior to 3 April 2006, and 25 April 2006 when Fawad Qazi and Aboobacker Ummermoideen respectively became the director and secretary of the company.

 

116. Although the company was registered for VAT purposes, under the business heading “software development and consultancy and computer components”, it declared nil returns for the periods 11/04, 02/05, 05/05, 11/05 and 02/06. No return at all was submitted for the final tax period covering 1 March 2006 to 9 May 2006.

 

117. Information from freight forwarders indicated that goods were being released to Computec, always from foreign suppliers in the cases that came to light, and then released by Computec to various UK purchasers. Those purchasers included companies called Anderson Cellular & Data Components Ltd, Stylew Ltd, Global Access International, Trade Eazy, First Associates Ltd, Jos (UK) Ltd, Zeith Sports (UK) Ltd and Lets Talk Ltd.

 

118. An assessment in the amount of £6,769,005 was made on 14 August in relation to Computec’s sales to Lets Talk Ltd.

 

119. This reveals, however, only a very small part of the picture. On HMRC’s figures, Computec issued invoices in respect of sales of mobile phones in the period from 1 March 2006 to 9 May 2006 for a value in excess of £600,000,000, and the cumulative assessments made were in the figure of £105,015,783.23. All of the invoices were said to have been issued shortly after the appointment of the new director in early April.

 

120. We were shown various release notes that had been sent to freight forwarders, some of which evidenced releases by European suppliers to Computec, and others of which, signed by Mr. Qazi, evidenced releases to some of the various customers mentioned above. We were shown release notes issued, on the supply to Computec, by Europe Communication of Estonia, Orange & Green Traders, Import and Export of Barcelona (the company’s name nevertheless being printed in English), and Jakut Impex SL, also of Barcelona.

 

121. We were not shown documents that illustrated that those phones that had been supplied by Computec to Lets Talk Ltd, and traced to the Appellant,  had been supplied by non-UK suppliers, but we can say that:

 

• wherever release notes were provided to demonstrate the identity of suppliers to Computec, the suppliers were non-UK, European companies;
• Computec failed to make any return in respect of its period of trading between March (more particularly April) and May 2006;
• Computec has not appealed against the assessments totally more than £100 million; and
• whilst these points might be said to be inferences drawn from facts, and also contentions advanced by Mr. Reardon and the Respondents in this Appeal, Computec’s pattern of trading was entirely consistent with it being a defaulter in relation to MTIC transactions, and entirely consistent with the proposition that Computec never had any intention of paying the VAT to HMRC for which it invoiced its customers. As we said, this point may be an inference drawn from facts, but since it is so staggeringly obvious, and since we in any event find as facts that these points were as HMRC contended, it seems simplest to confirm them at this point. 

 

Other general facts

 

122. As we indicated in paragraph 31 we will now summarise some general facts that were relevant to all deals.

 

The quantities of phones of various categories traded by the Appellant, contrasted with the suggested level of grey market trading in those phones in the month April 2006

 

123. Mr. Fletcher gave expert evidence, one of the significant features of which was his endeavour to estimate total European trading in the month of April 2006 in each of the models of mobile phone sold by the Appellant, these total figures being calculated by  point of sale technology that was used by the German market research company GfK. We were told that the calculations initially aggregated the sales in 22 European countries and one Middle Eastern country.  Mr. Fletcher then subdivided the total trading figures for each model into the 54% which he considered was appropriately attributed to the sales by network operators and large specialist chain stores, and the remaining 36% attributable to other traders. The final calculation was then to calculate the percentage of that 36% of sales attributable to “other traders” that was equal to the sales of each model of phone made by the Appellant. These final percentage figures were presented on the two-fold basis of first looking at the percentage that the phones sold in each of the 16 deals bore to the total sales made by “other traders” (i.e. the 36%) in April, and the second basis was to aggregate all sales of a particular model of phone, where the Appellant had sold the same type of phone in two or more deals, and calculate what percentage of the “other sales” those aggregated figures represented.

 

124. We consider that the second basis of comparing the Appellant’s sales figures for particular phones with the total sales attributable in April 2006 to “other traders” is much the more appropriate basis. On this basis:

 

• the Appellant’s sales of Nokia 8800 phones was equal to 44.59% of the “other” or “distributors’ share” of phones sold, as recorded by GfK;
• the Appellant’s sales of Nokia 9500 phones was 130.66% of the distributors’ share of the sales of those phones;
• the Appellant’s sales of Nokia 9300i phones was 52.18% of the distributors’ share of the sales of those phones; and
• in the case of the other models sold the percentages were 4.67%, 6.6%, 0.79%, 6.1% and 0.42%.

 

125. These figures are rather extraordinary. The three models of phone where the Appellant’s sales represented either sales equal to approximately half of the total distributor sales, or alternatively a figure exceeding those distributor sales accounted on our calculations for 63.6% of the Appellant’s total sales in the 16 deals by number of units sold, and the even higher figure of 76% if sales are counted by value rather than unit numbers.

 

126. The Appellant’s counsel sought to undermine these figures by going round the world, referring to countries where there were major sales of mobile phones, and asking Mr. Fletcher to confirm that the sales in those countries were not taken into account. Mr. Fletcher of course confirmed that they were not since countries such as China, the USA, Canada and countries in Africa are neither in Europe nor the Middle East, save for a few African countries.  Mr. Fletcher did however say that the European market was almost certainly the most significant market for the models of phones that the Appellant had sold, and that thus featured in the comparison that he made.  Sales of phones in Africa, for instance, would be sales of rather simpler phones, markedly less likely to be some sort of fashion item.

 

127. We accept that the figures were only intended to give an indication of whether the level of sales of particular phones made by the Appellant constituted an improbably high number of sales. It seemed to us that this point was very clearly made, however one might adjust the figures in marginal ways. Indeed, even if one simply halved the percentages given in the first three bullet points above, the fair conclusion remained, in our view, unchanged.

 

The inspection of phones

 

128. The Appellant contended that it was Mr. Nasser, with the assistance sometimes of four other people engaged by him for the purpose, who inspected the mobile phones that had been bought and that were to be consigned to their purchasers. The inspections were naturally all undertaken at the warehouses of the freight forwarders, and certainly on at least some occasions the freight forwarders confirmed that the Appellant’s own staff had inspected the products.

 

129. The inspection procedures were somewhat bewildering. There was at one point some confusion as to whether Mr. Nasser had said that it would take one person one and a half hours to inspect 1000 phones, or whether it would take five people the same time. The answer appeared to be that both calculations were right because each of the five people would have a different role to play, opening the exterior boxes, opening each of the five individual boxes, examining the contents etc. So while five people would be needed, it was still right to say that each man would be engaged for one and a half hours in examining 1000 phones.

 

130. We were told, somewhat to our surprise, that the inspections undertaken were detailed and would involve opening the inner box around each of the phones, rather than just the packing boxes that might contain five or ten phone boxes, with perhaps just one of the inner boxes being inspected.  We were even told that by keying a particular code into the phone, the inspection team would sometimes access the IMEI number of phones, without needing to scan the bar codes.

 

131. Whilst we were satisfied that inspections were undertaken, and whilst there was also no evidence and no suggestion that any of the phone boxes contained relatively light bricks, there was nevertheless something rather bewildering about the whole inspection process. On the basis that the Appellant was essentially a one-man business, it seemed odd that Mr. Nasser would have time in the run-up to April 24 to organize four deals, and to be doing the preparatory work to effect five deals on April 25, whilst simultaneously being in the warehouse of the freight forwarders, inspecting or being part of the inspection team looking at the 8,000 phones bought and sold on 24 April, and then inspecting 5,500 phones on the next day.

 

132. We were shown photographs of the inspection operation in progress, and we have to say that the various photographs were most unimpressive, unless they were simply meant to indicate what large piles of large boxes looked like.  Most of the photographs were simply photographs of very large boxes that we were told would generally hold five or ten inner boxes, though they appeared almost larger than we assumed boxes with ten phones would need to be.  With the exception of two photographs, none showed anything other than unopened boxes, standing in daunting piles. One photograph contained the addition of a picture of someone’s hand; and just one showed a tolerable picture of a man who was not identified.  Two illustrated, for some reason, a CLS Mercedes parked outside the premises of the freight forwarder, First Freight.

 

133. We were told that the Appellant had a scanner, which would record the IMEI numbers on the phone boxes.   The reason why a trader might be expected to scan boxes was slightly unclear since the numbers obtained by the scanner from the relevant bar codes would only be relevant to the trader if that same trader had recorded IMEI numbers on a previous occasion, and the earlier numbers came round again.  We understood that whilst HMRC and the police might periodically scan IMEI numbers and retain all the information obtained, none of this information was available to traders.

 

134. Mr. Nasser said that in relation to Deal 1, they scanned the IMEI numbers of most, but not quite all, of the boxes. HMRC indicated that of the numbers scanned they had been able to ascertain that 21 of the individual boxes had indeed been scanned leaving the UK on a previous exportation, that 7 were scanned on a subsequent exportation, and that 255 others had been recorded as having been lost or stolen in the UK prior to the transactions undertaken by the Appellant. This however was not known to anyone during April 2006, and certainly not to the Appellant.

 

135. Mr. Nasser said that the scanning process was quite time-consuming, and as it seemed to him to be pointless, it was only in the case of the inspections in relation to Deal 1 that any IMEI numbers were scanned. We are unable to criticise Mr. Nasser for reaching this conclusion. 

 

136. The Respondents contended that the evidence given about inspections was not particularly convincing in establishing that the inspection activity was genuine, and it was suggested that the inspection activity, and particularly the photographs (albeit very unconvincing photographs) were taken just to bolster the case that the trading was genuine. We agree with both of those observations.

 

The sequence of events as between supplier release notes, inspections, despatch and Redhill checks 

 

137. Before summarising the general evidence given to us about the sequence of events just indicated, we should mention that the Appellant said that he checked the details of suppliers’ and customers’ VAT registrations with the Europa web-site, albeit that, as recommended by HMRC, he also made Redhill checks.

 

138. There was a point of dispute in relation to the Redhill check allegedly made in relation to Deal 1. On being asked why the Appellant only made its Redhill check for Deal 1 on 10 April when the deal was effected on 4 April, Mr. Nasser said that he had made and lost an earlier Redhill check and that the one made on 10 April was made because of the loss of the earlier one. We were told that HMRC’s Redhill office maintained a record of all enquiries and responses, and that that office had no record of such earlier check having been made. In the light of the fact that the general pattern seemed to be that Redhill checks were made “after the event”, as we will shortly illustrate, we are not satisfied that Mr. Nasser’s evidence about the earlier check was true.

 

139. Mr. Russell provided in his Witness Statement the following helpful schedule of the dates, in relation to each deal, when suppliers released goods to the Appellant (regardless of whether title was passed at that time), when inspections were undertaken, when goods were shipped and when Redhill checks were made.

 

Deal	Release date/time	Inspection	Shipped date/time	Redhill check
1	04/04/06	04/04/06	13/04/06	10/04/06
2-4	07/04/06 17.17	08/04/06	09/04/06 23.10	10/04/06
5-8	24/04/06  17.45	24/04/06	25/04/06	26/04/06
9	25/04/06 15.02	25/04/06	26/04/06 02.59	27/04/06
10/11	26/04/06 12.58	25/04/06	25/04/06 01.03	As above
12	As above	As above	26/04/06 08.14	As above
13	As above	As above	25/04/06 01.03	As above
14	28/04/06 18.25	29/04/06	02/05/06 00.55	02/05/06
15	As above	As above	01/05/06 22.49	As above
16	As above	As above	02/05/06 00.47	As above

 

140. The features, demonstrated by the above table, worth highlighting are that:

 

• Redhill checks appear always to have followed the date when transactions were agreed, not that these dates are shown in this table, and also to have followed the despatch of goods. 
• None of the sales invoices and other terms of trade (of which there seemingly were none) made sales dependent on satisfactory Redhill clearances, so that transactions would still have been binding, even if goods had not been despatched, and Redhill clearances had then been declined.
• 24 and particularly 25 April must have been busy days at the freight forwarders for the Appellant’s checkers to have undertaken their inspections, and it is worth noting that the goods in relation to deals 10, 11 and 13 were checked in at Eurotunnel’s depot, at least 2 hours away from the relevant freight forwarders at a time that seems to indicate either that the goods must have been inspected on the day before the date indicated on the Appellant’s inspection reports, or else they cannot have been inspected at all.
• Finally, and this point reflects badly on both the freight forwarder and the Appellant, the Appellant appears in Deal 13 to have procured the release of goods for shipment, and their arrival at Eurotunnel’s depot before the Appellant’s supplier (or suppliers) had released them to the Appellant.

 

Insurance

 

141. The evidence in relation to whether the Appellant insured the goods was again somewhat curious. At one point it was specifically said that the Appellant had not taken out insurance. Mr. Russell claimed that during an interview, Mr. Nasser had indicated that freight forwarders had taken out insurance, and charged 2.5% of the value of the goods for insurance. Mr. Nasser later asserted that the Appellant had itself taken out insurance for the first shipment warehoused with First Freight, because the Appellant had no previous experience of that freight forwarder, but thereafter, freight forwarders were said to build in insurance at a cost of 0.1% of the value of the goods.

 

142. The considerations that strike us as being relevant in relation to insurance are as follows:

 

• We were never shown the terms of any insurance cover.
• We were certainly not told that the Appellant saw, or considered, any terms of any insurance policy.
• Whilst freight forwarders may have insured their own risks in relation to loss of, or damage to, goods whilst in their possession, and they could have taken out cover on behalf of others, we were certainly not told that the Appellant was ever a named party designed to benefit directly from any insurance policy, and we also have no idea whether there would have been different parties claiming title to goods, since it is far from clear that other unpaid suppliers in the supply chain had passed title to goods.
• We are altogether unclear as to whether goods would have been covered by the policies allegedly taken out by freight forwarders once the goods had been despatched from their warehouses. It seems to us that the risks of loss during the transit phase to the Continent were then far more serious, and particularly because some of the orders placed by the Appellant’s customers demanded the purchase of the goods on CIF (carriage, insurance and freight) terms, we do not know that insurance taken out on terms, as to which everyone was ignorant, would have provided full cover.
• Finally, we would have been interested to ascertain the type of cover that would have covered all material risks borne by the Appellant in relation to goods if the premium was only 0.1% of the value of the goods.

 

143. In summary, we were not impressed with the evidence given in relation to insurance.

 

The FCIB evidence

 

144. We have already referred to the FCIB evidence insofar as it clarified precisely when the Appellant was paid by its customer, when it paid its suppliers, and when very material loans were made to the Appellant to fund payment liabilities to its suppliers.

 

145. We should however mention that the FCIB evidence also demonstrated that:

 

·       there were various instances of third party payments being made (such that suppliers further up the supply chain sometimes merely received their margin, with the bulk of the purchase price having been diverted, often to a company that was not an apparent party in the deal chain);

·       even though some transactions appeared to involve World Communications and others Power Communication, payments between those two indicated clearly that both were jointly involved in the transactions in Deals 2 – 16: 

·       the Appellant generally made about 30 to 36% of the overall profit, assuming VAT to be recovered;  and

·       there is no evidence in any of the deals 2 to 16 that payments, other than minor commissions, went further than the third buffer from the Appellant  (Michigan US in deals 2 to 8), and indeed no further than the second buffer from the Appellant (Mobile Solutions) in deals 9 to 16.

 

THE LAW

 

146. Our objective in this case is to apply the law as recently stated in the Court of Appeal’s decision in Mobilx and others [2010] EWCA CIV 517. It may however be appropriate to state our understanding of that decision, in particular as it relates to several of the points that are material in this case.

 

No need for a UK statutory enactment

 

147. A point, first, with little bearing on this case was the declaration that it was proper for us to apply the Kittel test, based on European case law, without regard to the fact that it had not been specifically introduced into UK law by any statutory provision.

 

Points concerning the connection to fraudulent tax losses

 

148. We next link three points together, being:

 

·       first, that there is no breach of fiscal neutrality for HMRC to deny input claims to a broker claiming repayments of VAT, whilst not seeking to recover tax under the joint and several liability provisions from other traders in the supply chain;

·       secondly, that where input tax is denied to a trader who is shown to have had knowledge or means of knowledge that its transactions were connected to a fraudulent loss of VAT elsewhere in the chain, the denial is total, and the trader is not entitled to claim refunds of the small amounts of VAT that may have been paid (indeed almost certainly will have been paid) by the buffer companies in the chain); and

·       thirdly, that fraudulent losses of tax can be traced through contra-traders, to the demonstrated losses in the dirty chain, without there being any need for HMRC also to demonstrate that the contra-trader had the knowledge or means of knowledge to establish that its own input claims were properly denied on Kittel grounds, such that assessments were then made, and not satisfied, in relation to the contra-trader’s own output transactions so that it became an actual defaulter.

 

149. There was considerable argument on behalf of the Appellant that for losses of tax, traced through a contra-trader, to be shown to be connected to the Appellant’s input claim, the fraudulent losses of tax in the so-called dirty chain had to have been allocated or apportioned to the Appellant’s claim. And as that had not been done in this case, and by the end of the hearing in November it was too late to make that allocation, then the Appeal should be allowed in relation to Deal 1.

 

150. We do entirely accept that it would be quite wrong for HMRC to be able to use fraudulent losses of tax to deny more input claims that were matched by the tax losses. Thus, to take the extraordinarily improbable example of a contra-trader that had bought goods for £50 from a fraudulent defaulter, and goods worth £50 from an importer that could show that it had accounted for the VAT on the whole supply, if the contra-trader exported these goods and reclaimed the VAT and sought to off-set that reclaim against its output liability on sales of different imported product to various different buffers for £101, it would be wrong to use the fraudulent tax loss of £50 to deny input claims to all the brokers at the ends of “the clean chains”. After all the contra-trader’s reclaim in respect of its importation of the “second £50 purchase” would be an entirely valid claim, properly capable of being offset against taxable supplies of £50, and the tax loss in this example would have been only the VAT referable to the fraudulent £50 acquisition.

 

151. The significant fact in our case (and in reality one might suppose that this would either generally or virtually always be the case) is that in the matched transactions of the contra-trader in Deal 1, all £100 of purchases and exportations in the dirty chain emanated from supplies traced back to Only Quality, which we accept was a plain defaulter. When the contra-trader’s supplies in the same period were of £101, with VAT being accounted for on the margin on £1, it seems to us that there is no remote risk of tax losses being used twice, and thus no need for the anyway arbitrary exercise of allocation. We consider it clear we might add, on the implicit authority of the Court of Appeal decision, that the eventual broker traders, whose input tax is in dispute, can no more claim that they should be entitled to a deduction for the tax actually paid by the contra-trader on its very slim margin, any more than the Court of Appeal allowed a claim for the similar small amounts of VAT actually accounted for by the various brokers in the supply chain. We consider the point to be the same in relation to the contra-trader’s margin on which, for fraudulent reasons, the contra-trader would actually pay the tax as that in relation to the various small margins on which the buffer companies will also have paid the tax. Since thus on the example of fraudulent losses of 100 in the dirty chain and supplies by the buffer for 101, and on the facts in Deal 1 in this case, there are tax losses to match all the possible supplies, there is no conceivable prospect of losses in the dirty chain being used to deny a double, or any excess, quantity of input claims.

 

152. We concede that the need for allocations might be more common than the first sentence of the previous paragraph might suggest. It might, as we suggested in that sentence, be singularly improbable for a contra-trader actually to have bought the “second £50 of goods” in our example from a genuine importer that had accounted honestly for all the tax. We do however accept that the same apportionment point would be material if the second purchase of goods could not be traced back to origin at all, such that there was no remote proof whether it derived from a tax loss or from a genuine purchase. In that case, allocation would again be essential, or at least there would have to be some cogent basis for precluding HMRC from denying input claims in relation to purchases of double the amount of the only proven tax loss.

 

153. It is not part of our present concern to deal with how the genuine loss should be apportioned or allocated to different ultimate buyers in the clean chains. There are obviously several possibilities, and we were not addressed on how allocations might, or should, be made. This is because in our case we accept, using the present example, that all the domestic purchases and exportations of CPUs in the dirty chain emanated from Only Quality and that all the supplies from Only Quality involved tax losses, and those losses matched, margin apart, Import/Export’s supplies of mobile phones. 

 

“The knew or ought to have known test” 

 

154. Turning now to the most important point to emerge from the Court of Appeal decision, we accept that unless we conclude (as in fact we do) that this Appellant had actual knowledge that its transactions were connected to VAT fraud, we would otherwise need to decide whether the Appellant “ought to have known” that its transactions were so connected, and then the test is of whether the Appellant ought to have known that its transactions were connected to VAT fraud. It would not be sufficient for us simply to conclude that the Appellant ought to have known that its transactions were more likely than not to have been so connected. The Court of Appeal’s articulation of how we should approach the “were connected” test is that we should ask ourselves whether the Appellant ought to have known that there could be no other reasonable explanation for the transactions than that they were connected to fraud.

 

Due diligence

 

155. It is worth recording that the Court of Appeal encourages this Tribunal not to be distracted entirely by the due diligence exercise undertaken by the Appellant, nor to be too concerned about what would have been learnt from raising additional questions. We should rather concentrate on all the circumstances surrounding the Appellant’s transactions. We will unquestionably follow that direction in this case.

 

The burden and standard of proof

 

156. The Court of Appeal did not specifically deal with the issue of the burden of proof but we accept that both parties were correct when they agreed with the proposition that the burden of proof of all matters in this Appeal lies with the Respondents, and that the standard of proof is the civil standard of the balance of probabilities.

 

Whether the Court of Appeal decision equates a negligent trader, treated as implicated in the fraud, as equivalent to an actual participant in the fraud

 

157. We finally mention in relation to legal points to emerge from the Court of Appeal decision that, were we to decide that the Appellant in this case did not actually know of the connection between its transactions and fraudulent VAT losses, but nevertheless ought to have known of that connection, the resultant denial of input tax is not undermined because the Appellant would merely have been grossly negligent, as opposed to being a knowing participant in the fraud. This particular point, we decide, is not actually relevant in this case because we have already indicated that we consider that, on the balance of probabilities, the Appellant did actually know of the connection, but were we wrong on this point, but right on our secondary decision on the “ought to have known” element of the Kittel test, this point would then be material.

 

THE CONTENTIONS ON BEHALF OF THE RESPONDENTS

 

158. We have decided this case in favour of the Respondents so that it is unnecessary to summarise contentions on behalf of the Respondents, geared to substantiating that the Appellant’s transactions were connected to fraudulent tax losses and that the Appellant knew, and in any event, ought to have known of this fact. Our decision will endorse many of the Respondents’ submissions. Simply for the sake of completeness, we will refer to those of the Respondents’ closing submissions that form no part of our decision and that we have largely ignored, because we should say why this is.

 

159. The points that we have found to be of little or no assistance are as follows:

 

1.  We have not stressed the artificiality of the deal chains, and the way in which each buffer company made fairly nominal, and seemingly pre-arranged, margins. These further confirm the connection to fraudulent tax losses, but, in considering the connection to tax losses,  we are reliant principally on the invoices, trader’s deal lists, and reasonable inference to confirm the tracing and we see little relevance to the buffer companies’ margins. The Appellant may have known that such margins were the norm, but there is no evidence of this, or of the fact that the Appellant knew anything about earlier transactions, and again we prefer to base our decision (essentially on the “knowledge” issues) simply on the terms on which this Appellant traded, and on the fact that we consider it inconceivable that an honest trader could have undertaken bona fide transactions by trading in the way that this Appellant traded.

 

2. The Respondents politely gave credit to the Appellant for effecting no further deals with the Swiss customer to which we referred in paragraphs 47 and 48 above. We think that no credit is due, since further trading with Digi Trading GmbH would have been ludicrous, inviting instant denial of input tax.  The more material comment that we are inclined to make is that it is greatly to the Appellant’s discredit that, through over-optimism, disdain or an expectation in early 2006 that a bit of ostensible due diligence would enable traders to avoid denial of input tax under the line of authority commencing with the ECJ’s decision in Optigen, that the Appellant continued to trade in a similar manner. We consider that the Appellant thought that he could “get away with it”, by asserting ignorance and by pointing to due diligence that in reality proved nothing. 

 

3.  The Respondents provided us with voluminous material in relation to the FCIB banking evidence, and efforts then to show where the deals had been circular, and where third party payments had been made. It would be wrong to say that we have found this to be irrelevant, but we still consider it to have been of only marginal relevance. We summarised in paragraph 145 above the general conclusions that we drew from the FCIB evidence, and will deal below with the bearing that this evidence has on our conclusions. 

 

THE CONTENTIONS ON BEHALF OF THE APPELLANT

 

160. It is also unnecessary to summarise the Appellant’s submissions. Many were geared to seeking to cast doubt on the Respondents’ evidence in tracing of tax losses through the deal chains, and we will deal with each of those, particularly in relation to deals 1, 3, 4 and 6 below. Other contentions were geared to the hearsay evidence point, and the related point of repeatedly asserting that the Appellant insisted on the Respondents being put to proof in relation to every aspect of its case. We will deal with these two points both in the paragraphs below dealing with the hearsay evidence point, and in addressing the issue of what we consider to be proof, on the balance of probabilities, as regards showing a connection between the Appellant’s transactions and fraudulent tax losses.

 

OUR DECISION

 

161. Since the Appellant put the Respondents to proof in relation to every aspect of the Respondents’ case, including of course the matter of identifying tax losses, establishing that they resulted from fraud, and tracing those losses to the Appellant’s transactions, this Decision falls into two distinct parts. First we will deal with the Appellant’s “hearsay evidence” point, and with each of the various arguments that the Appellant advanced in seeking to undermine the Respondents’ case in relation to tracing the Appellant’s transactions to fraudulent tax losses. Secondly we will deal with the aspect of the case that we would normally have expected to deserve the most attention, namely the issue of whether the Appellant knew or ought to have known of any connection that we conclude the Respondents have established.

 

The hearsay evidence point

 

162. We were not asked during the hearing specifically to rule on whether evidence could be produced by a particular witness for the Respondents, where the relevant officer may not have compiled the evidence being advanced but where, on occasions, evidence may simply have been extracted from HMRC’s electronic folder, without the witness before us even knowing who had originally obtained the information and transferred it to the electronic folder. We should add that particular objection was taken to one witness advancing evidence extracted from a visit, and the visit notes compiled by another officer. We also accept the Appellant’s assertion that it was always made clear that we should in due course consider whether to seek to disregard evidence advanced in any of the ways to which objection was taken, or at the very least to pay less, and more cautious, regard to such evidence.

 

163. We also add that one of the grounds advanced by the Appellant’s counsel for objecting to the type of evidence referred to, was that first the allegations made against the Appellant were most serious, one of the two geared to the last element of the Kittel  test plainly accusing the Appellant of being a knowing party to fraud. Secondly the general contentions also involved the implicit suggestion that other parties had been parties to fraud, which were again serious allegations, particularly as such other parties were not in court, and had no way of advancing other evidence to rebut such contentions.

 

164. We have no hesitation in rejecting these submissions on behalf of the Appellant. Our reasons for this decision are as follows:

 

·       We accept that the Respondents’ allegation that the Appellant was a knowing party to fraudulent transactions is a grave accusation, and not one that should be confirmed on the basis of doubtful evidence. We are clear however that the basis on which we do indeed conclude that the Appellant was such a knowing party is entirely based on our consideration of the deals undertaken by the Appellant, and the virtually unarguable facts in relation to those deals. Our findings in relation to deal tracing are also largely based on documents, and where there are no available documents, then on considering the banking payments and the general picture of the overall deals. We are barely influenced by much of the remaining evidence, and find much of the so-called “hearsay evidence” largely secondary in our thought process.

·       We also consider that all evidence given on behalf of the Respondents has been given fairly and honestly at all times. There was one aspect, to which we shall have to refer, namely the deal trace to Deal 4 where theRespondents’ evidence was distinctly confused and where, contrary to the claims by the Respondents’ counsel, we believe that the evidence even remained confused at the end of the hearing. There was however never any occasion where we suspected that any facts had been concealed, or that the Appellant was being presented with a case that had, so to speak, been “stitched up”. In a sense, the sheer confusion in relation to Deal 4 rather confirmed this point.

·       We consider that the claim by the Appellant’s counsel that every officer who had contributed in any way to the assembly of the Respondents’ case, should have been available to give evidence in person and be cross-examined, was grossly disproportionate. Countless officers assemble the evidence in relation to MTIC cases, and as it is we have been shown many thousands of pages of background evidence, and we have had direct evidence from six HMRC officers. To demand more, or reject an honestly prepared case where more is not provided, would put an excessive burden on HMRC, albeit that we accept that the burden of proof rests with HMRC.

·       We acknowledge that it is for the Appellant to advance its case as it chooses, and we will seek to address each of the points in relation to the 16 deals where the Appellant’s counsel has indicated that he considers that the deal trace has not been illustrated in a significant manner. We do however note that the main thrust of the Appellant’s counsel’s case in this appeal has been dedicated to pointing to chinks in the evidence in relation to the deal traces, and in relation thus to the point about “putting the Respondents to strict proof” in relation to every aspect of the claim. We consider that the Appellant had a very weak case in relation to the “actual knowledge” issue, and it may be that those representing the Appellant tacitly noted this, and thus concentrated on addressing chinks of minor detail in relation to the deal tracing exercise. We also believe that the claims in relation to hearsay evidence were also influenced by an endeavour to throw up a cloud of minor doubts, in an effort to obscure the clear picture that emerged to us from the totality of the evidence. Whilst it is wrong for us to be influenced by evidence improperly given, we consider that the reaching of a fair and just result can equally be frustrated by attention being diverted from the big picture to a string of minor chinks, or possible chinks. Our effort, thus, to produce a fair and just result in this case, and to focus our main attention on the overall picture, further confirms us in the belief that we should not be distracted from this aim by arguments and claims that seem to us, on fair consideration, to be designed to distract and confuse, and to divert us from concentrating on the really important points.

 

Consideration of the deal tracing exercise in relation to each of the16 deals

 

165. We now turn to the issue of whether the Respondents have successfully established, on the balance of probabilities, that each of the Appellant’s transactions has been shown to have been connected to fraudulent losses of VAT.

 

Deal 1

 

166. In Deal 1, there was no dispute that the goods purchased had been traced back to an importation by Import/Export from the Cyprus company, Muggles Consulting Company. The main two contentions for doubting the connection between the Appellant’s transaction in Deal 1 with tax losses were firstly the point, addressed by us in paragraphs 149 - 153 above in relation to the absence of any allocation of Import/Export’s input claims derived from Only Quality’s transactions to the sales in the clean chain, and secondly the extraordinary proposition that some significance attached to the point that in April 2006, Mr. Nasser could not have known anything about the operations of contra-traders, because by April 2006 HMRC had chosen not to publicise the existence and features of contra-trading.

 

167. Dealing first with the basis of HMRC’s contentions, we make the following findings of fact:

 

·       when Import/Export made sales of imported mobile phones in the amount of £627,645,055 in the six-month period from January to June 2006, and it exported CPUs in the amount of £608,609,806, and in each VAT period its domestic sales marginally exceeded its input deductions on its export transactions, we find its extraordinarily high level of trading to be consistent only with fraud, and we find the near matching of its transactions to be consistent only with a deliberate policy of acting as a contra-trader;

·       this is supported by its imports of phones often involving transactions with companies (such as Muggles Consulting Company of Cyprus, but there were others of the same nature) that simultaneously purchased the CPUs that it was exporting;

·       the feature that in and after April 2006 all of Import/Export’s CPU purchases were made from a company, Only Quality, that never made a VAT return, but did nevertheless generate invoices in relation to supplies to domestic customers, generating an unsatisfied liability for VAT of £138,908,628, makes it inconceivable that Only Quality was anything but a fraudulent VAT defaulter. It may be that there is only scanty evidence of Only Quality requesting customers to make third party payments, and only evidence from a later period (in early August 2006) that Only Quality’s purchases were purchases on importation, but the level of trading, and the pattern of trading lead us to conclude that Only Quality can have been nothing but a defaulter, further confirming the conclusion that Import/Export was a contra-trader.

 

168. We have dealt already, in summarising our understanding of the law in relation to apportionments of VAT losses in the dirty chain to supplies through the clean chain, and we now repeat the point that because, its small margin apart, all of Import/Export’s sales of mobile phones were matched by its purchases of CPUs, in respect of which the VAT was lost, we have no doubt in dismissing any point about failure to allocate.

 

169. As we have just indicated, the point was made on behalf of the Appellant that by April 2006 HMRC had chosen not to publicise the activities and operating methods of contra-traders, with the result that Mr. Nasser could not be blamed for having failed to spot the risks of dealing with a contra-trader. We are unclear whether this contention was meant to support some argument in relation to lack of connection, or (perhaps more obviously) some claim, in relation to “knowledge or means of knowledge” that the Appellant cannot be blamed for being ignorant of a practice that he knew nothing about. Whatever the basis of the contention, we fail to see any merit in either possible point. Once we have dismissed the allocation point, as we have done, our findings of fact in paragraph 166 above, and the clear decision of the Court of Appeal that fraudulent tax losses can be traced through contra-traders undermine any point concerning “lack of connection”. Whilst we are not at this stage dealing with “knowledge” issues, we can state immediately that all issues in relation to “knowledge and means of knowledge” will depend upon the Appellant’s own transactions, and matters of which the Appellant had and must have had knowledge. These “knowledge” issues will not depend on transactions many steps away from the Appellant’s transactions, as to which we accept that Mr. Nasser would have been ignorant. Since it follows that we accept that Mr. Nasser could not have known of the detail that had occasioned the losses of tax, it obviously follows that the fact that Mr. Nasser may have been ignorant of the operating methods of contra-traders is completely irrelevant.

 

170. We have no hesitation in concluding that the Appellant’s transaction in Deal 1 was connected to fraudulent losses of VAT.

 

Deal 2

 

171. The Appellant raised no particular issues in relation to Deal 2, in that there was a clear chain of invoices, tracing supplies back to LinkMobiles, and there was also evidence of importation by LinkMobiles from Satt Telecom of Italy. LinkMobiles’ attempt to operate as a fraudulent contra-trader plainly failed, and it ended up as a fraudulent defaulter. We accordingly have no hesitation in concluding that the Appellant’s transaction in Deal 2 has been properly traced to a fraudulent tax loss.

 

Deal 3

 

172. We would reach the same conclusion with the same ease in Deal 3, as in Deal 2, save for the fact that we were not shown a Satt Telecom invoice indicating that LinkMobiles purchased, and thus imported, from Satt Telecom. This fact is incidentally indicated in the Satt Telecom line in the table in paragraph 80 above by the dotted line for the middle deal in Deals 2-4, since we have no information for that transaction.

 

173. The absence of an invoice from Satt Telecom does not, however, undermine the contention that LinkMobiles was a defaulter. Our first observation is that in MTIC transactions, whilst it is likely that buffer companies and the broker/exporter will retain the invoices from their suppliers with great care because it is on the basis of those VAT-inclusive invoices that they will base their various claims, the same cannot be said for the defaulter. On many occasions the defaulter will simply disappear, and no paperwork will be available, save for the defaulter’s invoice to the first buffer company that the latter will retain with great care.

 

174. Were it possible to defeat HMRC’s challenges of input recovery claims by simply pointing to the absence of invoices from the importer, fraudsters would immediately seek to ensure that, in addition to the defaulter disappearing, every invoice and piece of evidence in the hands of freight forwarders disappeared, whereupon it would be argued that the importer might have purchased from a domestic supplier on a VAT-inclusive basis, albeit that it would have no way of establishing that. Then it would be said that HMRC could not prove importation either.

 

175. In the case of Deal 2, we have no doubt in saying that LinkMobile was aiming to shelter what it implicitly concedes to be gross output liabilities in respect of the whole of its invoice prices for mobile phones with the input deductions it hoped to establish by its failed attempt to produce export evidence in relation to phonecards. This suggests that it had no input deductions in respect of the mobile phones.

 

176. More relevantly, perhaps is the fact recorded in paragraph 90 above, where Ms. Hudson said, both in her Witness Statement, and in her own typed note of her visit on 17 November 2006 to speak to Mr. Rahman of LinkMobiles, that Mr. Rahman admitted that all of his mobile phone transactions in the March/April 2006 period had involved purchases just from Satt Telecom, and supplies to the four companies mentioned in our paragraph 90 above. So we have Mr. Rahman conceding that he had imported every phone that he acquired in the period and it was only the alleged acquisitions of phonecards that had been made from UK suppliers.

 

177. Turning to the FCIB evidence, we are obviously looking for confirmation from the FCIB information that LinkMobiles paid Satt Telecom for the mobile phones in Deal 3, and we can find no such evidence. This is for two reasons. First, neither Satt Telecom nor LinkMobiles had FCIB accounts. Far more significantly, however, we note that in none of Deals 2 – 4 does Michigan US pay Delta Mobile Phones Ltd the  invoice price for which Michigan US has been invoiced. Instead, when S&S had paid Michigan US the amount for the three deals of £867,159, Michigan US appeared to make a third party payment to Power Communication (not an apparent party in the deal chain at all), whereupon a circle is completed by Power Communication making payment to World Communications, the Appellant’s customer. The critical  payment from Michigan US was for £863,625, and we consider it likely that Michigan US’s retention of £3,525 represented its mark-up on these deals less any trivial amounts paid to earlier players in the invoice chain.

 

178. The conclusion that we draw from the banking information just addressed is that all three deals were fraudulent, and that the money, bar trivial amounts that were doubtless paid to Delta Mobile Phones Ltd, Lets Talk and LinkMobiles, was paid away to a third party. One of the consequences of this, of course, was that the importer that would normally be left with the excess of the VAT-inclusive sales price over the net price paid on importation would not have had the cash either to pay VAT to HMRC on its supplies, or indeed the cash to pack into a suitcase.

 

179. We thus conclude from the fact that Deals 2, 3 and 4 were fundamentally similar, and from the more significant fact that the vast bulk of the invoice prices owed by Michigan US for all three deals were diverted in the shape of one single payment that found its way back, via Power Communication, to the Appellant’s customer, that LinkMobiles was a defaulter in relation to Deal 3, notwithstanding the absence of an actual invoice to LinkMobiles from Satt Telecom.

 

Deal 4

 

180. It was in relation to Deal 4 that the Appellant’s counsel directed most of his criticism in relation to the credibility of the deal trace.

 

181. It is difficult to summarise confusion clearly. The arguments about the confusion focused essentially on three factors, and indeed on a fourth that we will actually add to the picture of confusion for good measure, albeit that this fourth was not addressed in the hearing.

 

182. First, there was the point that whilst the initial list of companies in the deal trace for Deal 4 had been those shown in the chart in paragraph 80 above, Mr. Russsell suggested at one point, in giving his evidence, that this was a mistake, and that the 1000 Nokia 8800 phones that ended up with the Appellant on 7 April had initially been transferred by Satt Telecom to LinkMobiles, and then critically to a company called Kwik Save, rather than to Lets Talk at all, before being transferred to Delta Mobile, Michigan US, S&S and the Appellant. In a very confusing way it was then later said that this correction was also wrong, this being somewhat indicated by the fact that the invoice from LinkMobiles to Kwik Talk was dated 10 April, and not 7 April.

 

183. The next element of confusion was that in the overall vast bundles of documentation, it emerged that there were two invoices, both dated 7 April, in respect of 1000 Nokia 8800 phones, at very slightly different prices, and with different invoice numbers, but both transferring 1000 Nokia 8800 phones from LinkMobiles to Lets Talk. For what it is worth, and this observation will be of no significance without a reader being able to examine the different invoices, we were eventually told that the invoice thought to be the correct one was in fact numbered 201, and the unit price was £414.

 

184. The third area of doubt was that even if the deal trace just indicated in the previous paragraph was correct, there appeared to be no invoice for the transaction under which it was suggested that Michigan US had transferred the 1000 Nokia 8800 phones to S&S. It was suggested that it was therefore possible, with a break in the chain, that S&S might have sourced the phones in Deal 4 from a quite different supplier, in relation to which there would be no evidence of a VAT loss.  In Deals 2 and 3, there were invoices evidencing those steps, but there was no invoice in the case of Deal 4 of the movement from Michigan US to S&S.

 

185 Before mentioning what we suggest to be the fourth additional point of confusion (to which, as we recall, no mention was made during the hearing) we will now indicate why we consider that, notwithstanding this confusion, we still consider that, on the balance of probabilities, the Appellant’s Deal 4 transaction has been sufficiently traced to tax losses.

 

186. Deals 2, 3 and 4 were reasonably clearly a composite deal, and when we reach the point of the Appellant’s transfer to World Communications, one single invoice evidenced the transfers of the three categories of Nokia phones transferred on April 7.  At earlier steps in the chains, there were admittedly invoices for each of the three phones wherever we have invoices, but according to the Respondents’ contentions, and this is certainly so for Deals 2 and 3, the parties from LinkMobiles onwards were clearly the same. We also have the evidence referred to in paragraphs 90 and 176 above to the effect that all phones said by Mr. Rahman to have been acquired by LinkMobiles in March and April 2006 had been acquired from Satt Telecom of Itlay, and sold to one of four buyers. In the light of these points it seems extraordinary that S&S might have acquired the Deal 4 phones, not from one of the parties involved with all the Deal 2 – 4 transactions, but from some honest (and then strangely unidentified) party.

 

187. We cannot, we accept, draw any definite conclusion from the points made in the previous paragraph, but when we need to conclude on the balance of probabilities that the Appellant’s purchase in Deal 4 derived from a transaction that involved fraudulent tax losses, we still conclude that, the oddities in the deal chain notwithstanding, it still very much appears that the Appellant’s transaction was linked to fraud.

 

188. The more significant matter still, however, is that if we refer to Mr. Henderson’s evidence in relation to the FCIB payments, and start tracing the payments in each of deals 2, 3 and 4 backwards from the payments by the Appellant, the point to which we have already referred in paragraph 177 above again seems highly significant. For what we then learn from the reference numbers to the FCIB bank accounts is not only that Satt Telecom and LinkMobiles had no FCIB accounts, but we can also trace the apparent payments by the Appellant to S&S, and equally relevantly by S&S to Michigan US. S&S certainly paid Michigan US the exact amount that Michigan US was asserted to have invoiced S&S for in the Respondents’ summary of the deal chains for Deals 2, 3 and 4. As we noted, however, in paragraph 177 above, Michigan US then made the third party payment to Power Communication, thus dealing in an identical manner with both its receipt from S&S in respect of Deal 4, and its “invoice” liability under Deal 4 to pay Delta Mobiles, as it dealt with the payments in respect of Deals 2 and 3.

 

189. On the basis, thus that in Deal 4, payments have been traced from S&S  to Michigan US as HMRC’s deal chains suggest should have occurred, and payments have then been diverted to a third party, and that the same occurred in Deals 2 and 3, it seems reasonable to conclude that in all three deals, the Appellant’s transactions have been traced, to our satisfaction, to VAT frauds.

 

190. That, thus, is our conclusion in relation to Deal 4.

 

190. We mentioned, in paragraph 185 above, that we would draw attention to one other oddity in the Respondents’ claimed deal chain for Deal 4. This is the feature that when we refer to those Invoices now claimed by the Respondents to be the correct ones for the supplies made by Lets Talk to Delta Mobile, and Delta Mobile to Michigan US in Deal 4, both were accompanied by third party payment instructions. The third party payment instructions have on them the invoice numbers for the deals between Lets Talk and Delta Mobile and Delta Mobile and Michigan US that correspond to the invoice numbers on the invoices that HMRC now claim evidence the two supplies in the Deal 4 deal chain. Instead, however, of those third party payment instructions tying up with the one just referred to in paragraph 188 above (i.e. whereunder HMRC’s FCIB evidence suggested that Michigan US paid virtually the whole of its own payment liabilities in respect of each of Deals 2, 3 and 4 to Power Communication), under these instructions, Lets Talk instructed Delta Mobile to pay the vast majority of the invoiced payment in respect of Deal 4 to Karippa SRO, and similarly Delta Mobile instructed Michigan US also to pay the vast majority of the payment for which Delta Mobile had invoiced Michigan US to Karippa SRO.

 

192. This unfortunately considerably increases the confusion. The two payment instructions that we have just referred to are themselves in conflict, since it is obvious that if Michigan US diverted the bulk of the amount that it owed Delta Mobile to Karippa SRO, Delta Mobile would have no material receipt from Michigan US to divert in any direction. Beyond this, we have conflicting suggestions with the banking evidence suggesting that Michigan US paid away the vast bulk of its payment liabilities in respect of all three deals, Deals 2, 3 and 4, to Power Communication, and then we have a separate instruction to Michigan US, directing Michigan US to pay away the vast bulk of its payment obligation in respect of Deal 4 to Karippa SRO.

 

193. This whole area of confusion is either increased, or possibly diminished, by our recording that we cannot actually trace from the FCIB accounts of either Delta Mobile or Michigan US that either made the payments that each was purportedly instructed to make in the instructions, that cross-referred to the invoices claimed by HMRC to be the relevant ones. Admittedly on the slightly later date of 11 April, Michigan US made a different but broadly similar payment to the one referred to in Delta Mobiles’ payment instruction, to Karippa SRO, but we still note that this payment was made about 25 entries further down Michigan US’s FCIB statement from Michigan US’s receipt from S&S in respect of Deal 4, whereas the composite payment to Power Communication on 7 April, paying the vast bulk of Michigan US’s payment liabilities for all three deals to Delta Mobile to Power Communication is recorded immediately after the receipts from S&S in respect of all three deals.

 

194. The question that seems to us to be critical in relation to Deal 4 is not so much whether we can be certain that HMRC has produced the right deal trace in relation to every step in the transactions involving the 1000 Nokia 8800 phones, but rather the question of whether there is any evidence that there is anywhere a strong indication that those phones acquired by the Appellant from S&S had a fraudulent origin. In considering this question, we refer again to the payment evidence that we recorded in paragraph 187 above. It is clear that the Appellant’s own payment liabilities to S&S in respect of all three deals were made, as we recorded in paragraph 177 above, and more relevantly in paragraph 84 above. It is similarly clear that S&S discharged all of its payment liabilities to Michigan US, always assuming that the payment in a very realistic amount for Deal 4 tallied with the absent invoice from Michigan US to S&S. Our best judgment is then that Michigan US did pay away the aggregate payment liability for all three deals, as Mr. Henderson’s evidence suggested, to Power Communication. Even if this was wrong, then it appears most probable that Michigan US diverted its payment for Deal 4 to Karippa SRO.

 

195. Our overall conclusion in relation to Deal 4 is as follows. We accept that the evidence given does not tie up convincingly, and that the picture that we have is of some confusion. The dominant factor that leads us to say that HMRC has still satisfied the burden of proof in relation to tracing is that in one direction or another, Michigan US’s payment appears to have been diverted, most probably to Power Communication. This is strongly indicative of fraud. We are also very influenced by the fact that every bit of evidence, even if confused, including in particular the banking evidence, suggests that in all three deals, 2,3 and 4, the supplies are traced back to fraudulent VAT losses and to LinkMobiles’ acquisition from Satt Telecom, and we have not the slightest indication that there is somewhere an honest invoice for instance from Nokia’s main distributor. There is great confusion as between invoices and parties, but all the parties appear to be regular parties in all three transactions. Unsatisfactory as this may be, we still say if asked whether, on the balance of probabilities, the Appellant’s Deal 4 transactions has been properly connected with tax losses, that it has been.

 

196. This Deal illustrates the key difference to which the Appellant’s counsel chose not to draw our attention. We accept that it is the Respondents’ responsibility to prove its case to the balance of probabilities, but the Respondents do not fail to do this because of one claimed break in the chain. The totality of the evidence is what counts, and we do not believe for an instant that the Deal 4 Nokia 8800 phones emanated from a supplier which had duly accounted for the VAT in respect of them.

 

Deals 5 to 16, and in particular Deal 6

 

197. Deals 5 to 16 were broadly identical in nature in that all the supplies were traced from the same alleged defaulter, Computec; the Appellant’s supplies were all made to either World Communications, or in four cases, to Power Communication; and with the exception that Michigan US appeared in only Deal 9, in other respects the intermediate buffer companies in all of these deals were the same companies, and in the same order.

 

198. The Appellant’s counsel raised three areas of doubt in relation to the issue of there having been a fraudulent tax loss in these cases, and the issue of the connection of the Appellant’s transactions to that tax loss, as follows:

 

• first it was pointed out, quite correctly, that while there was some little evidence (from release notes provided by freight forwarders) that some of the supplies to Computec had involved importations, there was no such evidence in relation to any of the deal traces that led to the Appellant’s transactions;
• secondly, neither Mr. Russell nor Mr. Reardon had been directly responsible for compiling the information included in the deal Schedule that had been provided to us, and from which we have drawn some of the more relevant information in giving the basic details of the steps in the 16 deal chains that we have summarised above; and
• whilst many of the invoices issued to Lets Talk by Computec were provided to us, there appeared to be no actual invoice at that step in the claimed chain in relation to Deal 6. There were, however, invoices for that particular step in the other deals effected on the same date, in other words Deals 5, 7 and 8.

 

199. Our conclusion is that none of these issues deflects us from reaching the conclusion that the Appellant’s transactions in each of Deals 5 to 16 have been satisfactorily traced, and thus shown to be connected with fraudulent losses of tax.

 

200. We have already dealt in paragraph 121 above with the point made in the first bullet point in paragraph 198 above. We consider that  invoices and other documentation provided to the defaulter will frequently be missing, and we consider that the points made in paragraph 121 amply justify the conclusion that Computec was a defaulter in relation to all of the supplies that it made.

 

201. The points made in the second and third bullet points in paragraph 198 above are related, because doubts about the accuracy of the deal trace information given in HMRC’s helpful schedules were naturally of more significance where we were not  shown the supporting invoices from Computec onwards.

 

202. In relation to the point raised in the middle bullet point, we are of the view that that this is answered by the points that we have already addressed in relation to the Appellant’s hearsay evidence point. Even if all the people who have assembled the information in the deal traces are not present in court to give first-hand evidence and to be cross-examined, we treat the deal schedules as accurate wherever (as in the case of all deals 5 – 16) there is no conflicting information to throw doubt on the schedule, and where we are even given invoice numbers for the invoices asserted to evidence every step in the chains. We have not actually recorded in this Decision the invoice numbers for the Computec invoices (or indeed for the vast majority of the transaction steps) but we mention now that the invoice numbers given in HMRC’s master schedule for Computec’s four suppliers in transactions 5,6,7 and 8 were all prefaced with the date, 240406, and that date number was followed with the suffix numbers –057, -061, -059 and –062. Since thus the invoice number, attributed to Deal 6, 240406 – 061 fits neatly into the schedule, and certainly does not repeat another of the numbers, we have little doubt in concluding that there was somewhere evidence, either in the form of an invoice that we were not shown, or in the list of deals provided to HMRC by Lets Talk, that the Lets Talk acquisition from Computec was reflected in the invoice with the number stated.

 

203. We conclude, in each of Deals 5 – 16, including Deal 6, that the Appellant’s transactions were connected to fraudulent tax losses.

 

Did the Appellant know that its transactions were connected to fraudulent losses of tax?

 

204. Our decision is that the circumstances surrounding the Appellant’s transactions in this case make it inconceivable that the Appellant did not have actual knowledge that its transactions were connected to fraudulent losses of VAT. We will now list the various facts and circumstances that lead us to this conclusion. We will order these points by starting with the more minor points, with the later points being by far the more compelling.

 

Points relevant to it being credible that there would be a highly profitable and honest trade in importing product into the UK and exporting it out again

 

205. We start with a point on which little can be based because most of it is based on common sense, and it is not actually proven that the Appellant, or more particularly Mr. Nasser, appreciated all or any of these points. It does, however, seem improbable that Mr. Nasser can have been oblivious to all of these points, as most are quite simple and glaringly obvious.

 

206. Mr. Nasser did say in evidence that he considered that greater profits could be made by exporting goods than in selling them, at fine margins, to domestic buyers.

 

207. It is commonly the case in MTIC transactions that the buffer companies that bore little risk, and were generally inserted to provide an apparently honest immediate trading partner for the broker, made very minor profits, and that the broker generally made the big margin. There is nevertheless no credible honest reason for supposing that there was a profitable trade to be undertaken in exporting goods that had been imported into the UK. In this case it was accepted that every single phone exported must have been imported into the UK since none were manufactured here, and it was suggested that the exporter could expect to make quite significant profits.

 

208. It is self-evident that special circumstances apart, if A imports goods into the UK for £100, and sells them to B at £120 (using the January 2011 rate of VAT) and accounts for the VAT to HMRC, and B then exports the phones back to a European customer for £100, later recovering the VAT, no-one has made a profit at all. And if one then builds in the costs of transportation, warehousing, insurance, and the small profits made by intermediate buyers plus financing the late recovery of VAT, the re-sale back into Europe in this example, at the price of £100, would involve someone in the chain, perhaps the end seller, making a loss. In other words, even to break even, if these realistic costs are borne in mind, the broker would have to sell at a price above £100, let alone to make a handsome profit. Notwithstanding this, there is no obvious reason why the European buyer of the exported product would be prepared to pay significantly more than £100, when the earlier European seller was content to sell at £100.

 

209. There are of course numerous possible factors that could enable a UK buyer in the above example to make a genuine profit. It might uniquely have knowledge of a particular demand for the product of which the original seller was ignorant; or for any number of reasons changing supply and demand might enhance the value of a product during its period of ownership by the UK companies. With a fashion product like mobile phones, and an ever-changing supply of more attractive phones, it is perhaps more likely that, over time, values will drop rather than rise, and it is also improbable that general market factors would enable a trader that sold phones on the day it bought them to make a profit from such movements, but it is still possible.

 

210. One factor that could certainly not account for a ready profit in importing phones into the UK and exporting them out again, is the feature that different pricing in the UK as against some European country, or exchange differences, might enable the UK seller to make a profit by selling to a particular European jurisdiction. For if the phones are imported into the UK from jurisdiction A, and then exported from the UK to jurisdiction B, it is pricing arbitrage between A and B that is relevant. Bringing the phones into the UK and exporting them out again renders pricing arbitrage as between the UK and other markets neutral, and VAT fraud apart, just wastes money in futile transportation costs.

 

211. A profit can of course be made from exporting phones that have been imported into the UK by a fraudster which fails to account for the VAT of £20, because if the phones are then bought directly or indirectly from the fraudster for £121, and sold to the European buyer for £110, and the exporter recovers the VAT of £20, HMRC has lost £20, and the exporter has made a profit of £9. Whether the fraudster, who has run off with the £20 (or indeed never received either the £20, the £120 or the £121) at the start of the chain reimburses the export buyer for having over-paid £10 for phones likely to be worth no more than £100 is presently irrelevant. The fact that is relevant is that, fairly special circumstances apart, the only factor that can account for an ability of a string of companies to make an overall profit from a rapid sequence of transactions that include the import of mobile phones and shortly thereafter their re-export is VAT fraud.

 

212. We consider every point mentioned in the previous paragraphs to be glaringly obvious. Mr. Nasser may not have appreciated these points but when he had been told on 11 October 2005 that, of the 50% of his transactions that HMRC had been able to research in his deals in his 07/05 VAT period, every single one had been traced to alleged (admittedly not proven) fraudulent tax losses, Mr. Nasser had certainly been put on very clear notice of the likelihood of his transactions involving VAT fraud.

 

213. The only points that we now suggest can be drawn from paragraphs 205 to 212 above are that:

 

·       VAT fraud was an obvious explanation for the ability of those exporting product that had earlier been imported into the UK to make profits;

·       VAT fraud apart, special circumstances might explain the ability to make profits, but when those factors would have to cover and exceed numerous expenses, one might expect the “special circumstances” to be few and far between;

·       the existence of such “special circumstances” is rendered less likely when the Appellant appears not to have been involved in any of the “box-breaking”, arbitrage or heavily discounted sales of “dumped” stock, which Mr. Fletcher’s evidence suggested were the sort of activities that might enable bona fide grey market traders to make profits;

·       it was necessarily common ground that all phones being exported in this Appeal had been imported into the UK; and

·       the various indications that Mr. Nasser had received, most notably the astonishing revelation in HMRC’s letter of 11 October 2005, had put Mr. Nasser on notice of the likelihood that his transactions were connected with VAT fraud.

 

The Plugs

 

214. Some attention was given in submissions to the admission by the Appellant that all the phones had 2-pin European plugs. We do not find this point particularly compelling, and we are not even sure that the admission was factually correct. As we have already observed, some of the earlier invoices in some of the chains described the phones as being “Eurospec, UK plug charger” phones. As we said in paragraph 83, it seems that if the phones had either UK plugs or 2-pin continental plugs, both were mildly damaging because the UK plugs would render the phones unsuitable for export, whilst the claimed 2-pin plugs would make their earlier importation into the UK equally curious. There was never a suggestion that any phone had the more modern adaptable plug and charger which could be used in the UK or on the continent by switching the contacts part of the plug, but it seems to us that that type of plug apart, the type of plug attached to charging units was damaging whether it was a UK or a continental plug.

 

215. On the Appellant’s claim, or admission, that all the phones had 2-pin continental plugs, however, the mildly damaging point that might have made the Appellant curious was the issue of why such phones had been imported into the UK in the first place.

 

The excessive quantities of models of certain phones

 

216. Mr. Nasser struck us as being vague about all the legal details that one would have expected a trader, trading stock of £8.5 million in a month to be conversant with, and we felt that in such matters he was “out of his depth”. It did however seem to us that he was reasonably familiar with the mobile phone market, which was not surprising as he had been operating in the mobile phone field for some considerable time in one way or another. We thus find it likely that he would have known the rough levels of sales of “high-end” phones, and we find it distinctly damaging that he entered into transactions that cumulatively involved the sale of distinctly improbable levels of honest trading in the three Nokia models mentioned in paragraphs 123 – 127 (and particularly paragraph 124) above.

 

The feature that the supplier in 15 of the 16 deals was the same company, and the customer in 12 and 4 of the deals also identical

 

217. This is a very minor point, but it is mildly damaging to the Appellant’s case. The general summary of back-to-back trading, and insofar as the Appellant told us anything about how it located suppliers and customers, the Appellant’s summary as well, is as follows. Once a trader has located either an available supply, or a demand for a particular product, it will search the International Phone Traders (“IPT”) web-site, or its own contacts, to locate suitable customers in the first case and suppliers in the second case, in order to match deals.

 

218. We are un-persuaded by the Respondents’ suggestion that there is anything particularly damaging about the feature that all deals were always matched, and that losses were never made. For it is of the essence of the Appellant’s case that it could not risk or afford to enter into any deal unless it was matching suppliers and customers. It could obviously not afford to take stock on its own books, with a view to later finding customers, and it could not afford to contract to sell stock that it had not located. We accept that such matched trading sounds futile, and fairly improbable in any sort of honest trading, but since that was the only form of bona fide trading that this Appellant could have risked undertaking, we do not find it especially damaging that it never made losses and that all its deals were matched.

 

219. We do find it distinctly curious, however, that this Appellant did not appear to have to search far and wide to secure the required matching deals. S&S always seemed able and ready to supply whatever World Communications or Power Communication wanted, or maybe those companies were willing to take whatever product S&S had to offer.  This feature strikes us as being strongly indicative that this Appellant was not scurrying around to perform the presumably quite difficult task of always matching deals, but instead was being handed everything on a plate by an overall organiser.

 

Due Diligence

 

220. We repeat that we are summarising the factors that have led us to our conclusions in ascending order of importance, and we emphasise that we regard most of the issues in relation to due diligence as of only modest relevance.

 

221.  We have no particular points to raise in relation to the questions that the Appellant put to his two domestic trading partners, Glasgow Data and S&S. The questionnaires were reasonable, and were correctly completed, and we have seen worse.

 

222.  The first point that we do make with some emphasis is that the claim that the Appellant raised, namely that its own suppliers had duly accounted for VAT and that the Appellant had established (this being what it was concerned about) that the suppliers were duly incorporated companies, with VAT registrations, is not of the slightest relevance in supporting the integrity of the Appellant’s transactions. Beyond the startlingly obvious consideration that the fact that a company is able to produce a Certificate of Incorporation and a VAT Certificate is no remote support for the company’s integrity, it is more important to note that those characteristics, coupled with a poor credit rating and no material net worth are the precise attributes required by a buffer company in MTIC trading. The Appellant knew perfectly well, both from the terms of Notice 726 and, more particularly, from HMRC’s critical letter of 11 October 2005, that the assertion made by HMRC was not that its immediate supplier had defaulted, but that its supply chain had been traced to defaulters. Of course the immediate supplier would not have defaulted. That was the whole essence of the “buffer” planning. Equally, of course, the immediate supplier would have no material net worth, a factor that would render it ideal as a fraudulent or innocent buffer company, and render it distinctly improbable as a major honest trader.

 

223. We certainly agree with two points made by the Respondents in relation to the two credit checks on the Appellant’s suppliers.

 

224. Firstly, we did not believe the Appellant’s assertion that he made the credit checks to check “the other information”, in other words that the suppliers had VAT registrations, Certificates of Incorporation, and the claimed director. We believe that that was a made-up explanation for endeavouring to dismiss very poor credit references.

 

225. Secondly, we dismiss Mr. Nasser’s assertion that he was untroubled about a bad credit rating because he was not extending credit to the supplier. We accept that the Appellant was not extending credit to the supplier, and indeed that in an extraordinary manner the suppliers were extending credit to the un-creditworthy Appellant (S&S seemingly still having a significant sum owed to it by the Appellant).  The point that we make at present is that if the Appellant had been seeking to establish that its counter-parties were honest and credible traders, it would have been concerned with their credit standing. We know for instance that in the Glasgow Data deal it emerged that 255 of the mobile phones sold were identified by HMRC, from the IMEI numbers, to have been stolen. That would not have been identified by any inspections undertaken by the Appellant, but had the transactions been honest, and had the theft been detected, the Appellant might have needed to sue Glasgow Data for the return of some of the price paid. There are several other reasons, beyond general credibility, as to why an honest trader would be troubled by a poor credit rating.  The poor credit rating would make the supplier a first-class candidate for being a buffer company in a doubtful supply chain, and an improbable honest trader. The supplier had also got to perform its side of the bargain, namely to deliver phones. The Appellant did not even know that the supplier owned the phones that it contracted to sell, and when the deal was undertaken, it seems highly improbable that the supplier would have owned the phones. Indeed, in some of the transactions, even if we believe the Appellant’s evidence that Glasgow Data and S&S always verbally waived their printed, and never deleted, “title retention” terms, in some of the deals there is no evidence that other suppliers further up the supply chain did likewise. So, for all we know, and for all the Appellant knew, S&S were giving credit and releasing goods (and allegedly passing title) when some supplier up the line had neither been paid nor waived the express term in its own invoice.

 

226. The point that we make in the light of the observations just made is that an honest trader in the position of the Appellant would have every reason to be distinctly troubled about a poor, rather a very very poor, credit rating. We agree with the Respondents. The Appellant knew that these transactions were going to work like clockwork, and so it was unconcerned with the credit ratings. It thus made up feeble explanations for its lack of concern with the poor credit ratings.

 

Further enquiries

 

227. HMRC made the point that the Appellant should have made more searching enquiries of its immediate suppliers, and for instance asked them whether they were in chains of suppliers. Whilst we do not wish to dissuade others from taking every possible precaution, and adhering to the advice in Notice 726, we are not convinced that the right approach in this case would have been for the Appellant to have asked the suggested type of questions, because the answers would have been fairly obvious and not particularly illuminating. We accept the advice of the Court of Appeal, and we aim to base our decision not on the due diligence material, and whether more could and should have been sought from suppliers, but by looking at all the circumstances of the Appellant’s own transactions, and considering their credibility. 

 

The FCIB evidence

 

228. The feature that everything was handed to the Appellant on a plate, which we noted in paragraph 219 above, is very much confirmed by the FCIB evidence. It is perfectly obvious from that evidence that Power Communication and World Communications were either operating in concern or were under common control. Either those companies, or some other mastermind behind them, clearly organised the transactions, and the prospect that the Appellant would buy from some different source, when its customers on all of Deals 2 to 15 were working in concern, so spoiling the plan and disrupting the payment chains was inconceivable. This further erodes the colourless suggestion that the Appellant was trying to match suppliers to customers, or vice versa.

 

The decisive factors

 

229. The points that we have considered above all indicate to some degree that the Appellant’s actual transactions were fictitious and not the transactions of an honest trader. However, the points on which we base our conclusion that the Appellant was a knowing party in the frauds are the points to which we now turn, namely the extraordinary, and skimpy written terms governing the deals; the feature that those few terms appear all to have been modified orally or to have been ignored; the feature that late payments appear to have occasioned no complaints and, most significant of all, the extraordinary basis on which others financed the Appellant’s operation.

 

The lack of evidence in relation to the negotiation of deals

 

230. The Respondents pointed out that Mr. Nasser’s evidence about seeking out suppliers and buyers had been very unconvincing, and that there was virtually no evidence that he had undertaken much research, via the web or in other ways, in relation to the mobile phone market.  We agree. We ended up with no feel whatsoever for the way in which the Appellant claimed to have negotiated deals, since there were just a few colourless assertions about such negotiations. We got the impression, and this was enormously reinforced by the points that we are about to turn to, that in a way that was not revealed to us, deals were put on a plate for the Appellant, 15 of those deals virtually being on one and the same plate.

 

The terms governing the deals

 

231. Since we are unaware of any terms and conditions that governed sales by Glasgow Data, S&S and the Appellant, other than any terms recorded on the orders, invoices and CMRs, it is fairly easy to summarise the terms of the deals.

 

232. So far as their invoices expressly provided, Glasgow Data and S&S both sold on terms that until they were paid, title would be retained by the sellers. S&S were parties to 15 of the deals, all occurring after other deals undertaken in earlier periods with S&S, and the deals on 28 April were invoiced three weeks after the first S&S deal in April 2006. It seems strange to us that the Appellant asserted that both suppliers waived their only single written term, and doubly odd in the case of all the S&S supplies, that if the title retention clause had been waived, neither party seemed troubled about the fact that it was never removed or deleted from invoice after invoice.

 

233. The first question for us is whether we believe the Appellant’s evidence that both suppliers waived their retention of title term. As just indicated, it seems strange that the only written term would be waived, strange that the S&S invoices were thus never corrected, and strange (if we are meant to believe that the deals were honest deals and not deals put together by an “organiser”) that the suppliers would waive the title retention clause without receiving payment, and when dealing with an un-creditworthy counter-party such as the Appellant. The claimed waiver of the clause was not confirmed by any evidence other than the evidence of Mr. Nasser. We conclude that the only basis on which we are inclined to believe the claim about the waiver is that it does make sense if the deals were planned and directed by a “mastermind”, albeit that we consider that the claim would be unbelievable were the deals honest and genuine trading, or thought by the parties to be honest.

 

234. The next curious aspect of the terms of supply by both Glasgow Data and S&S is that neither of them expressly gave credit, nor indeed did they indicate anything about when the invoice price should be paid. We assume that in the absence of any term whatsoever, the implied term would be that payment should be made immediately.

 

235. As it is, we note from the FCIB banking evidence that the suppliers appeared to accept that they be paid in instalments, and no complaint was made if some of the payments were late. Equally we note that if we were meant to assume that the implied term of trade was that normal (say 30-day) credit was extended by the suppliers, then the Appellant appeared not to take the benefit of that, since its general pattern of payment was to pay as soon as it was in funds to do so.

 

236. We quoted the full terms of S&S’s letter of 29 June, which demanded payment of the £228,250 still owed to S&S in respect of Deal 16. We note that this is the only mention of the Appellant’s failure to pay the balance of the amount owed to S&S. We were not shown the Appellant’s reply, or any evidence of the threatened legal action that would ensue if the balance was not paid.

 

237. We are of course perplexed about the reference to a 60-day credit limit. The invoice made no mention of such a credit limit and,ignoring what the Appellant knew about S&S, and just asking the question of whether it would have made the faintest sense for S&S to extend 60 days’ credit to the Appellant in Deal 6 (or maybe in all deals) the answer to this seems clear. S&S’s profit margin on Deal 16 was £1,762.25. Would S&S have extended 60 days’ credit to a company with poor credit standing for £411,250, and simultaneously released the goods to the buyer, and waived the only written term on its invoice?  The answer to that seems to us to be glaringly obvious, and the answer is that S&S would not have traded on these terms unless the deal was pre-arranged by some mastermind, such that all parties would have known that, in one way or another, they would be sheltered from loss if things went wrong.

 

238. We actually find the terms of the letter from S&S that we quoted at paragraph 109 above to be wholly unconvincing. Without evidence from S&S, we can only speculate, and it is not our present concern to decide whether S&S were a knowing party to being a mere buffer company in a fraudulent chain. Notwithstanding that, it still very much looks as if S&S and the Appellant realised that with the Appellant’s failure to recover input tax from HMRC, it was not going to be possible for the Appellant to pay the balance of the invoice price to S&S, and therefore a bit of paperwork had got to be cobbled together to give credibility to the proposition that its initial deal had been genuine. Absent other evidence about further action being taken by S&S, we reach this conclusion with little doubt, and we do not believe that the basic terms of Deal 16, or indeed each of Deals 2 – 16, extended 60 days’ credit to an un-creditworthy company.

 

 

 

The loan financing

 

239. The even more decisive factor in this case is the loan funding.

 

240. Proceeding on the basis that the two Blackburn companies were related, there were two sources of loan funding in this case, with two loans being advanced by Mr. Al-Bayati of Dubai, and two by the Blackburn companies.

 

241. Regardless of whether Mr. Nasser had a faintly legitimate reason for not disclosing these loans to Mr. Russell, it is certainly understandable that he was reluctant to reveal them. Both pairs of loans were on very basic terms, with the effective interest rate being included in a “total sum” in the Dubai loans, and being dealt with outside the terms of the Blackburn loans, as a commission. Both loans then inserted a steep penalty interest rate for late repayment, though we were meant to believe that that penalty interest dropped away, even as an entitlement, after some unspecified period.

 

242. The Appellant’s first borrowing of £150,000 from the Blackburn companies was repaid, along with its “add-on” of a total amount of a further £67,000 (which was either interest or profit share), one day after the Appellant had received its 01/06 VAT repayment from HMRC. When the £200,000 loan was agreed, this loan was conveniently advanced at the point when otherwise the Appellant would have been seriously late in paying S&S the full amounts owed in Deals 5 and 7 (see paragraphs 95 to 97 above), unless of course, S&S had genuinely given 60 days’ credit on all deals (which we do not believe). It is obvious that these lenders were financing the Appellant’s cash flow difficulties in obtaining VAT repayments, and it is equally obvious that the levels of “total amount” or “commission” were either interest at a colossal rate or,more appropriately, profit sharing entitlements, geared to securing VAT recoveries.

 

243. None of the lenders gave evidence. We were unclear where they fitted in. No-one involved with any of the lenders appeared to be a relative of Mr. Nasser, and the individual behind the Blackburn companies had not been a university friend. Mr. Nasser claimed that he had met him “on about 30 occasions”, which may or may not have been true. What does remain is the fact that these lenders were not long-term associates or relatives of Mr. Nasser, and they were lending significant sums of money to a non-creditworthy company, whose ability to repay would be entirely dependent on it recovering input tax from HMRC. The few terms of the loans strongly implied that the lenders were aware that this was the position.

 

244. We reach all those conclusions, even before adding in the final damaging fact that the Blackburn loans appear to have been advanced by affiliated companies of some sort, one of which changed its name and appeared as the supplier to S&S in Deals 5 - 8. Accordingly, as paragraphs 95 to 97 illustrate, the vast bulk of the £200,000 loan was doubtless circled back to First Solutions, under its new name, in that £181,425 out of the £200,000 was paid either immediately or on 2 May to S&S, none other than First Solutions’ customer in deals 5 – 8.

 

245. The facts in relation to loan funding are themselves sufficient to justify our conclusion that the Appellant knew of the VAT fraud in which it was implicated.  It is inconceivable to us that the Appellant could have borrowed from three lenders (two obviously connected) albeit that none of them had a relationship reason to foster the Appellant’s genuine trading, the loans clearly being designed to facilitate export transactions designed to generate VAT recoveries, all on a virtual profit-sharing basis, the loans being repaid or advanced precisely as required, without the Appellant knowing very well what it was involved in.

 

The conclusion

 

246. Our decision is that the terms of the 16 deals, the way the scanty written terms were ostensibly varied or ignored, the way suppliers appeared to wait for instalment payments, the fictitious letter of complaint issued when there appeared to be a major default in Deal 16, and the way in which the Appellant obtained borrowings from companies who provided no witnesses, and one at least of which had mobile phone trading relationships indirectly with the Appellant, rather than any sort of family relationship, put this case beyond any doubt.

 

247. It is always possible that there will be cases where entirely innocent people get swept up in MTIC fraud, and they may innocently end up as the exporter of product where a supply chain leads back to fraudulent tax losses. In this case, we pose for ourselves these three questions:

 

1. Is it remotely credible that the Appellant in this case was trading in a manner consistent with honest grey market trading, and that it was innocently swept up in 16 deals where some mastermind was engineering VAT frauds, with the Appellant remaining innocently oblivious to these facts and able to say that there were no circumstances that ought to have made this reality obvious to it? The answer to that question is undoubtedly that it is not credible.
2. Is it credible that the Appellant in this case was not a knowing party to the fraud, but an innocent trader where, whilst not a knowing participant in the fraud, there were nevertheless sufficient indications of fraud such that the Appellant ought to have realised that there could be no other reasonable explanation for the transactions than that they were connected to fraudulent tax losses. Were we to be overturned on appeal, and on appeal the conclusion was reached that the Appellant was not a knowing party to the frauds, then we certainly say that there were all the indications that ought to have drawn the inevitability of fraudulent connections to the Appellant’s  attention.
3. Was the Appellant a knowing participant in the fraud?  The way in which 15 of the 16 deals involved similar parties, the way in which the skimpy terms were modified behind the scenes, the way in which the payments were made in instalments with no-one knowing whether or what the credit terms were, and no-one complaining about delays in the making of payments,  the way in which loans were advanced and repaid to fund VAT re-claims, the colossal profit shares ceded to those lenders, and the lack of genuine business reality to every aspect of the Appellant’s trading lead us to conclude, on more than the balance of probabilities, that the Appellant knew what it was involved in. 

 

248. Our decisions are that:

 

1. The Respondents have satisfied us, on the balance of probabilities, that every one of the Appellant’s 16 deals was connected to a fraudulent loss of VAT.
2. The Appellant’s transactions, and all the circumstances surrounding those transactions make it inconceivable in our judgment that the Appellant thought that he was entering into bona fide deals.  The Appellant must have known that he was being funded on a profit-sharing basis to obtain fraudulent VAT refunds, and being handed pre-arranged transactions (15 of them indeed “on one plate”) to achieve that end.
3. Were it to be held on appeal that there were not grounds on which we could reasonably reach the conclusion that the Appellant was a knowing party to the frauds, we nevertheless conclude that the same circumstances of the transactions ought to have led to the Appellant knowing that there could be no other reasonable explanations for its transactions than that they were so connected to fraudulent losses of tax.

 

Costs

 

249. The Respondents asked us to apply the costs regime for cases that commenced before the VAT and Duties Tribunal and they asked us, in the event that they prevailed in this appeal, to order the Appellant to pay the Respondents their reasonable costs in this Appeal. We agree to both those requests and grant the Respondents their reasonable costs.

 

Right of Appeal

 

250. This document contains full findings of fact and the reasons for our 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.

 

251. 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.

 

 

 

 

HOWARD M NOWLAN

TRIBUNAL JUDGE

 

RELEASE DATE: 28 January 2011