[2011] UKFTT 145 (TC)

TC01019

Appeal number:  MAN/2007/0471

 

VAT - MTIC fraud – input tax – whether purchases by the Appellant were connected with fraudulent evasion of VAT – yes – whether the Appellant knew or should have known of the connection – held that the Appellant did know – appeal dismissed

 

FIRST-TIER TRIBUNAL

TAX

 

EURO QUEST TRADING LIMITED

Appellant

 

-and-

 

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS (VAT)

Respondents

 

 

TRIBUNAL:

KEVIN POOLE  (TRIBUNAL JUDGE) ALBAN HOLDEN

 

 

Sitting in public in Manchester on 3 September, 6-8 September and 10 September 2010, with subsequent written submissions

 

Kevin Andrews of VAT Consultants Limited for the Appellant

Jonathan Cannan of Counsel, instructed by Howes Percival, for the Respondents

 

 

© CROWN COPYRIGHT 2011

DECISION

Introduction

1.           This appeal is of a type usually referred to as “MTIC” (missing trader intra-community fraud).

2.           The appellant company, Euro Quest Trading Limited (“EQT”), a dealer in mobile phones, appeals against decisions of the Respondents (“HMRC”) contained in two letters dated 26 March 2007 from HMRC to EQT.  One of those letters notified EQT of HMRC’s decision to deny the right of input tax deduction in respect of VAT incurred by EQT during its VAT accounting period ended 28 February 2006 on two purchases of mobile phones sold on by EQT by way of export to a buyer in Switzerland.  The amount of input tax involved was £625,625.  The second letter set out the fact that EQT’s VAT repayment claim for the relevant VAT accounting period was £570,531.46 and accordingly, in addition to denying that repayment claim in full, EQT was assessed to VAT of £55,093.54.

3.           HMRC claim to be entitled to take this action because the two sales by EQT are, in their view, part of an orchestrated VAT fraud.  They say that in relation to each sale an earlier supplier of the phones in question in the chain of transactions leading to EQT always intended that the VAT due on its supply of those phones within the UK would not be paid, and that VAT has indeed gone unpaid.  They say that by tracing the chains of transactions (and the associated flows of money) involving these phones within and out of the UK, the overall fraud becomes clear; that there is a connection between the fraudulently unpaid VAT and EQT’s transactions; and that EQT (through its directors Siraj Bapu and/or Moshin Dalal) knew or should have known of the fraud.

4.           EQT claims that the transactions were perfectly normal commercial agency or brokerage transactions, in which it acquired and sold title to the goods themselves only in order to conceal the identities of its two counterparties from each other.  It claims to have had no knowledge of the fraud, and that it did everything appropriate to ensure the transactions were not connected with any fraud.  It therefore claims HMRC have no right to refuse its VAT repayment claim.

5.           There are no allegations of what is often called “contra-trading”: both the transactions of EQT the subject of the appeal are alleged to trace directly back (through chains of UK sales and purchases) to UK defaulters.

Legal background

6.           The leading authority in this area of law is the decision of the ECJ in the joined cases of Axel Kittel v Belgium and Belgium v Recolta Recycling C-439/04 and C-440/04 [2006] ECR 1 – 6161.  The ECJ ruled (at [59] and [61]) that the right to deduct input tax may be refused if:

“it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT”

7.           In the Court of Appeal judgment in the joined cases of Mobilx v HMRC; HMRC v Blue Sphere Global Limited; and Calltell Telecom Limited v HMRC [2010] EWCA 517 at [49] it was made clear that this refusal of the right to deduct does not depend on any specific UK legislation:

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

8.           The substance of the Axel Kittel test is generally broken down into its constituent parts in order to apply it, and we find it helpful to do so.  For  the denial of a right to deduction of input VAT to be justified, each of the following elements must be present (having regard to “objective factors”):

(1)  A fraudulent evasion of VAT must be shown to have taken place (“the fraud element”),

(2)  A connection between that fraudulent evasion and the trader’s purchase must be established (“the connection element”), and

(3)  It must be shown that the trader knew or should have known that by its purchase it was participating in a transaction which was connected with fraudulent evasion of VAT (“the knowledge element”).

The correct formulation of the knowledge element has attracted much discussion and argument in earlier cases, but in the leading case of Mobilx/Blue Sphere/Calltell at [56] the Court of Appeal has effectively approved the above formulation of it.

9.           For HMRC to establish the knowledge element without proving actual knowledge of the fraud on EQT’s part, it is not sufficient for them to show that EQT should have appreciated there was a risk, or even a likelihood, that its purchases were connected with VAT fraud; they must establish that it should have known that the only reasonable explanation for those purchases was that they were connected with VAT fraud:

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

10.        HMRC accepted that the burden of proof in relation to all three elements falls on them, and it is clear that the relevant standard of proof is the normal civil standard – the balance of probabilities.

11.        This decision sets out first a background summary of EQT’s history and trading, before turning to the above three elements.  The “fraud” and “connection” elements fall naturally to be considered together and then the “knowledge” element will be considered separately.

Background summary

History of EQT

12.        EQT was incorporated on 25 March 2002 under the name “Retro Jeans Limited”.  It was acquired by Mr Siraj Moosa Bapu (“Mr Bapu”) at or shortly after incorporation.  Apart from the nominee companies of the formation agents, he was the first director and his wife Salma Meetha was the first company secretary.

13.        Mr Bapu explained the reasons behind EQT’s incorporation as follows.  He had worked as an account manager for a clothing company called Milords International Limited (“Milords”) based in Leicester (a company apparently owned by a relative of Mr Bapu) for approximately two years, up to the end of 2000.  He was selling socks, nightclothes and underwear for them to UK customers.  He had then been approached by a company called Ambidex Fashions, a children’s clothing manufacturer in London, to work for them in developing a line of business importing children’s denim wear.  He had set up this import operation for them, buying product from Turkey, Pakistan, India and Hong Kong.  He travelled extensively in the course of his work, including visits to Dubai, where he had a friend in the real estate business, one Imtiaz Suleman, who had moved to Dubai in 2001.

14.        After a while, he said, the travelling was becoming too much for him and he decided to set up his own clothing import business.  He must have been considering this possibility as early as March 2002, when he formed EQT.  It seems however that he took few active steps to start his own business until August 2003, when he applied for VAT registration for EQT, its intended business being described as “to import textiles for onward distribution in the UK and overseas.”  His estimate of its first year’s turnover in the VAT registration application form was £100,000, including £60,000 each of intra-EU purchases and sales.

15.        Much of his initial time and effort was spent in trying to build contacts with the buyers of large UK retailers and eventually he was successful in obtaining a trial order for some 6,000 pairs of jeans for Sainsburys, which he arranged to be manufactured in Pakistan.  This was followed up with a further order for 9,000 pairs.  Because of financial constraints, Mr Bapu had formed an alliance with Milords, his old employer, for them to actually take on the order and deal with all the payment, import and distribution and for EQT to receive a commission.  Although the initial order went well, there was a problem on the second order which resulted in EQT losing all or most of its profit from the deal.  This took place in 2004.  Sainsburys gave him a second chance with a further order in 2005, but that transaction also suffered from problems.

16.        The overall result was that EQT made only very small taxable supplies in its clothing trade – at a meeting between HMRC and Mr Bapu on 3 May 2005, it was noted that EQT had made “three recent NIL returns” for VAT purposes.  This was to change radically when EQT started to trade in mobile phones.

Commencement of EQT’s trading in mobile phones

17.        Mr Bapu gave evidence that it was as a result of being “disheartened” with the outcome of the Sainsburys deal in 2004 that he decided to investigate the possibility of mobile phone trading.  He explained that on one of his visits to Dubai, his friend Imtiaz Suleman had taken him to a market area at Deira where there was a large concentration of mobile phone dealers, both wholesale and retail.  He had spoken to some of the wholesalers, who told him there were a lot of phones being imported from the UK.  He was asked if he might consider sourcing supplies from the UK for the Dubai market.  He understood the prices achievable there were higher because of the large subsidies that were paid on new handsets in the UK by airtime suppliers.  No such subsidies were paid in Dubai, which was a hub for the whole Middle East/Africa mobile phone market, so there were opportunities to make a profit on exporting phones from the UK to Dubai.

18.        Mr Bapu carried out further research into the market through various websites and magazines (he mentioned the IPT (International Phone Traders) and Alibaba websites and Mobile News magazine).

19.        On 20 August 2004 a certificate of incorporation on change of name was issued by Companies House, recording the change of name of EQT from Retro Jeans Limited to Euro Quest Trading Limited.  Mr Bapu said this was because the “Retro Jeans” name was not appropriate for the intended new business.  He also wrote a letter dated 20 August 2004 to HMRC notifying them of a change of trading activities “from retail clothing to retail and wholesale general merchandise”, and this was sent to HMRC by EQT’s accountants dated 23 August 2004.  We find that by this time, Mr Bapu had formed a clear intention to commence trading in mobile phones through EQT.  We also find that he knew enough about the poor reputation of that trade to refrain from mentioning it explicitly to HMRC.

20.        EQT came very close to carrying out an export trade in phones in late August or early September 2004.  Mr Bapu’s researches into the market had thrown up a trader in Glasgow (apparently called AR Communications) and his friend in Dubai had found a prospective buyer there called “Apex Mart”.  The value of the proposed deal was in the order of £1 million.  He was aware that a large part of the VAT payable to his supplier would have to be financed until it could be successfully reclaimed from HMRC.  He had obtained confirmation in principle from the owner of Milords (his sister’s husband) that they would finance the VAT if necessary.  He had exchanged company details with AR Trading.

21.        Probably as a result of AR Trading contacting HMRC to validate EQT’s VAT status as a preliminary step in this potential trade, two things happened.  First, HMRC wrote a letter to EQT dated 23 August 2004.  Second, an officer of HMRC (Mr Colin Wardle) visited EQT on 25 August 2004. 

22.        The letter from HMRC dated 23 August 2004 was a standard form letter notifying mobile phone and similar traders of new arrangements for central validation of counterparties’ VAT status through HMRC’s Redhill office. 

23.        Mr Wardle’s note of the visit of 25 August 2004 records Mr Bapu as saying he was “just looking into possibilities of becoming involved in mobile phone trading, exchanging details, building contacts, etc – but that no deals had taken place, and nothing was in process of being set up at present.”  We find that Mr Bapu was less than candid in saying this, as the events of the next week or two demonstrated.  Mr Bapu told Mr Wardle that “the denim wear business had not taken off as he had hoped, and that the sales to date had been commission only as an agent – introducing parties to each other – but only in clothing trade.”  There was clearly mention at that meeting of Mr Bapu’s plans to import clothing for wholesale to larger UK retailers.  Mr Wardle warned Mr Bapu about the risks of his proposed trade in mobile phones, and left him various documents about it.  From the content of this meeting and the earlier letter from HMRC, as well as Mr Bapu’s own researches, we find that he was by this stage already well aware of the prevalence of VAT fraud within the mobile phone trading market.

24.        Very shortly after this meeting, Mr Bapu contacted HMRC at Redhill to “clear” with them his proposed deal with AR Communications and Apex Mart.  This contact  took place in the week commencing 30 August 2004 (i.e. less than 10 days after his meeting with Mr Wardle). 

25.        After Mr Bapu had given the details of his proposed deal, he was telephoned back by Mr Mendes, an officer of HMRC at Redhill, within a day.  Mr Mendes told him he had carried out a “line check” on the proposed transaction and had found a hijacked VAT registration further back in the chain – i.e. a proposed sale using a trader’s VAT registration number without the trader’s knowledge.  In the light of this, Mr Mendes warned that if Mr Bapu went ahead with the transaction, there would be a VAT loss in the transaction chain.  Although HMRC could not actually tell Mr Bapu not to proceed with the deal, this was a clear indication that it would be highly risky to do so, and Mr Bapu wisely elected not to proceed with it.  He accepted in cross examination that he then knew he had to be careful if he wished to deal in this market, which he accepted was “rife with fraud”.

26.        This experience seems to have put Mr Bapu off mobile phone trading for some time.  He was at that time working part time for a business called “Mobitech” in Kendal, to gain experience in mobile phone servicing with a view to setting up a servicing operation himself in Lancaster.  However, he did also open an account for EQT in February 2005 with First Curaçao International Bank NV of the Netherlands Antilles (“FCIB”).  He said he had heard about this bank during his researches into the mobile phone trade, but also claimed to have opened it for use in the clothing business.

27.        In late April 2005, Mr Bapu contacted HMRC to inform them that EQT was moving its office from 6 Damside, Lancaster, to 7 Cable Street, Lancaster.  He also provided them with a copy of the change of name certificate issued on EQT’s change of name the previous August and requested them to issue a new VAT registration certificate in the updated name.  At almost the same time, his wife resigned as company secretary of EQT (on 26 April 2005) and was replaced by one Muhammad Ali (on 28 April 2005).

28.        This contact prompted HMRC to make a further visit, which took place on 3 May 2005.  Officer Richard Saxon of HMRC attended 7 Cable Street with a colleague, without giving prior notice.  They found Mr Ali at the premises.  He explained he was in the UK on a four-year work permit from Pakistan.  Mr Bapu then arrived and explained EQT had moved from the 6 Damside shop to provide more room for samples and racks for EQT’s clothing business at his wife’s shop.  Mr Saxon’s note of the meeting includes the note: “Confirmed one bank account only held by the company – Lloyds TSB” (and then the details).  Mr Bapu maintains he was only asked about UK accounts, and did not therefore mention the account with FCIB which he had opened on behalf of EQT in February 2005.  We find that he deliberately omitted to mention this account because he felt it would create an adverse impression.

29.        At the 3 May 2005 meeting, Mr Bapu also told Mr Saxon that he intended EQT to diversify into wholesale trading of mobile phones and accessories, and Mr Ali was:

 “currently responsible for setting the activity up and for drawing up contact lists using phone/trade directories and internet.... He [i.e. Mr Bapu] said this aspect has only recently started, since changing the company name and address, and is still very much in the development stage.  There are no deals or potential deals at the moment, they are merely in a research period.”

Mr Saxon’s assessment of Mr Bapu’s motive was that he appeared “keen to generate profit in this area to support a struggling agency activity.”

30.        At the end of the meeting, Mr Saxon indicated that in the light of the information provided and the three recent nil VAT returns, he proposed to deregister EQT for VAT.  At the meeting, Mr Bapu did not object, but the following day he emailed Mr Saxon to say that he wanted the VAT registration maintained so that no problems were caused with his counterparties in the proposed mobile phone trade when they sought to validate his VAT details in a Redhill check.

31.        Despite indicating on 3 May that there were no deals or potential deals, EQT entered into its first trade on 11 May 2005, just eight days after that meeting.

Summary of EQT’s trading in mobile phones

32.        A summary of all the mobile phone trading carried out by EQT from its first deal on 11 May 2005 up to its last deal on 26 April 2006 is set out in the Appendix.  The figures in this summary are slightly different from those reflected in the submissions received from the parties, but are based on a careful review of the evidence put before the Tribunal (it seems likely that the small discrepancies arise from one or two clear errors in the lists put before us and different treatments of apparent partial credit notes and cancellations).  In any event, the discrepancies are not sufficiently material to affect our overall conclusions.  From this summary, a number of observations naturally emerge.

33.        First, it is striking how few customers EQT sold to.  In a total of 177 UK domestic sales, it sold to just six customers.  155 of those sales (over 88% by value) were made to just three customers, two of whom (Globcom Limited and Uni-Brand (Europe) Limited) (“Globcom” and “Unibrand”) were known to Mr Bapu to be closely associated as they were run by a common director – he regarded them as effectively the same business.  Mr Bapu confirmed he was aware that the directors of his three main customers (Globcom, Unibrand and North West Trading Limited (“North West”)) all lived in the Preston area, less than 20 miles down the motorway from Lancaster, even though their supposed bases of operations were in the London area.  He considered this was simply a coincidence, although he was aware that the mobile phone trade was geographically very widespread, with specific concentrations in areas such as certain parts of London and Manchester.

34.        Second, the vast majority of EQT’s trading involved buying from UK suppliers and selling to UK customers, indeed EQT had carried out some 43 sales to UK customers to a total value of nearly £42 million before its first overseas sale in late August 2005.  No explanation was sought or offered as to why this should be, given Mr Bapu’s initial evidence that it was the significant profit potential of export deals to the Middle East that had attracted him to the business in the first place, and his evidence that his brother in law (the owner of Milords) had offered to advance the necessary money to finance the VAT payable on EQT’s first (abortive) export deal in August 2004.   It can readily be seen that the gross profit generated by the trading up to and including the first export sale in August 2005 was approximately £191,000, providing an amount sufficient to cover the £152,000 of VAT which EQT had to finance in relation to that export sale.  Mr Bapu is clearly an intelligent man and we infer that this was no accident.  We find that Mr Bapu took an informed decision to carry out a significant volume of domestic UK sales in order to provide the finance for his intended more lucrative overseas sales; he had sufficient familiarity with the way the mobile phone trading market worked to know that this was a viable approach, even though it required him to execute 43 deals to a combined value of approximately £42 million to generate the necessary funds to finance EQT’s first export sale.

35.        Third, the consistent level of profit achieved on UK domestic sales is striking.  In 161 of the 177 sales, EQT achieved a gross margin of 50p per phone.  In another 11 cases, it achieved £1 per phone.  In the remaining five cases, it achieved between £1.50 and £4 per phone and these last five sales all took place from 21 to 23 February 2006, shortly after the export transactions the subject of this appeal.  These last five sales will be considered in greater detail later in this decision.

36.        Fourth, it is clear that some traders were not only customers of EQT but also, at times, its suppliers.  Mr Bapu said this did not surprise him.

Personnel and roles

37.        At the 3 May 2005 meeting, Mr Bapu told Officer Saxon of HMRC that EQT’s company secretary Mr Muhammad Ali was responsible for setting up the mobile phone trading activity (see [29]).  Mr Ali was resident in the UK under a temporary four year work permit and was (it subsequently emerged) a Tandoori chef.  No explanation was sought or offered as to why Mr Bapu felt he needed the assistance of Mr Ali in setting up the trade, or what Mr Ali’s previous relevant experience was.

38.        A further meeting took place on 12 July 2005, prompted by the appearance of EQT in a deal chain being verified with HMRC by another trader.  That meeting (which had been pre-arranged) was attended by Officer Saxon of HMRC, Mr Bapu, Mr Ali, Mr Mills (of EQT’s accountants) and  Mr Arif Waghat (who was described at that meeting as a recent new “employee”, “tasked with dealing with new suppliers and customers, and for now making site visits as part of due diligence.”).

39.        The day before that meeting, on 11 July 2005, a Mr Moshin Dalal had been appointed as a director of EQT.

40.        At the hearing, Mr Bapu gave evidence about the respective roles and responsibilities of the various individuals in the business.  We accepted this evidence.

41.        He said that Mr Ali’s role in the business, once things were up and running, was mainly an administrative one – he took offers of stock, wrote them down, rang around potential customers, discussed with Mr Bapu whether they should deal or not.  To that extent, he took some part in the dealings and even signed some documents but he was not involved in any negotiating of transactions.

42.        He said that Mr Waghat was a “people person”, with no background in business (although in the notes of the meeting of 12 July 2005, Officer Saxon recorded that Mr Waghat had “recently transferred his health food retail business to his brother”).  He had been a councillor on the local council in Blackburn.  He was recruited, following Officer Saxon’s visit in May 2005, in order to carry out the due diligence on customers and suppliers of the business.  He took no part in the trading itself.

43.        He said that Mr Dalal was his first cousin, and had a background in retailing.  (In his earlier written statement, he had said Mr Dalal was previously involved in telecommunications retailing, but he corrected his statement at the hearing, removing the reference to telecommunications.)  He had recruited him mainly to set up the retail side of the business – selling mobile phones and airtime contracts to the general public through a retail shop.  However he also helped out on the trading side – talking to customers and suppliers and negotiating some deals.  Mr Bapu said that they were “partners” in both sides of the business, by which he meant they were equal owners as well as co-directors.  He said the fact that he (Mr Bapu) held the only issued share in EQT was irrelevant – sorting out the shareholding was just an administrative matter that they had never got around to.

44.        Both Mr Bapu and Mr Dalal had the necessary codes to access EQT’s online bank account with FCIB, but neither Mr Ali nor Mr Waghat had those codes.

45.        In his witness statement dated 20 May 2009, Mr Bapu confirmed that he was aware of all day to day decisions taken within EQT, whether by himself or Mr Dalal.  At the hearing, he again confirmed that every single deal from day one was based on his commercial decision.  We find therefore that Mr Bapu knew the key terms of every transaction entered into by EQT, whether it was actually executed by Mr Dalal or himself (or a combination of the two of them).

46.        Neither Mr Dalal nor Mr Ali gave any written or oral evidence to the Tribunal.  In the light of the details that came out about EQT’s dealings in February 2006 around the time of the transactions the subject of this appeal, we found this surprising.

Methods and pattern of trading

47.        EQT only ever bought and sold phones “back to back” – i.e. it only reached an unconditional agreement to buy stock where it had already obtained a customer committed to purchase that stock from it.  This was nearly always achieved on a “single purchase, single sale” basis – i.e. it was uncommon for purchases to be split or consolidated before making onward sales.

48.        Mr Bapu explained this by saying he regarded EQT’s dealing as essentially a broking operation – it was acting as intermediary between sellers and buyers and making a commission on the sale.  He said the only reason it acted as principal in relation to the invoicing was to maintain confidentiality – if it simply invoiced its commission, it would have to disclose the identity of the purchaser to the supplier for the supplier’s VAT invoicing and thus would risk being cut out of future deals.

49.        Mr Bapu said that for his first (abortive) deal in August 2004, he had made enquiries via several websites and magazines and found the potential seller company in Scotland; his friend in Dubai had found the potential buyer for him.  He then contacted the Scottish supplier and obtained a stock offer from him.  It was only when he faxed this stock offer to HMRC’s Redhill office and received the warning from them that he decided to abort the deal.  In other words, he was saying he had initiated the proposed deal himself.  He also took the decision never to deal with that potential supplier in the future.  We accept his account of the circumstances surrounding this first abortive deal.

50.        At the meeting with Officer Saxon on 12 July 2005 (shortly after EQT had started to trade in mobile phones) Mr Bapu explained how he went about generating deals.  His explanation is set out in Officer Saxon’s note of the meeting, which was not challenged by EQT and which we accept as accurate.  EQT had subscribed to the IPT website for £4,500 p.a. and was also a free member of a Dubai based website GSM Exchange.com; it also used another website called Ali Baba on a free basis.  He phoned around suppliers who were advertising stock for sale to obtain prices; he would then agree in principle to buy a batch of phones from a particular supplier and would then offer it on to potential purchasers at a profit of 50p per phone.  The trades were at that stage therefore initiated by EQT, first lining up a supplier and then a customer.

51.        At the hearing, Mr Bapu said that to start with, generally EQT initiated deals by putting out a “we are looking to buy” statement on the IPT website, then potential suppliers would approach him to offer specific batches of stock.  Mr Bapu would then post details of those batches of stock onto the IPT website and a prospective buyer would get in touch with him.  As time went by, he said, prospective suppliers with stock to sell also started to approach EQT unprompted with stock offers; he would arrange for the stock in question to be offered up for sale, quite often by posting it on the IPT website.

52.        Whilst Mr Bapu said he thought that in the very first deal, he may have actually approached Globcom with an offer of stock, it is all the more striking how restricted EQT’s customer list was, given Mr Bapu’s evidence that quite often the stock was offered at large on the IPT website to any customer who might see EQT’s advertisement.

53.        Mr Bapu said that as the business developed, it became more “customer led” – i.e. in response to general advertisements (not specific stock offers) placed by EQT on IPT or Ali Baba or because of its general presence in the market, customers would approach him with purchase requirements and he would attempt to source the necessary phones to satisfy their requirements.  Again, it is striking how few customers EQT actually dealt with and we comment on this in our findings at paragraphs [153] to [155] below.

54.        All negotiations were carried out by telephone and any notes of conversations were not preserved – Mr Bapu said that once a notebook had been used up and none of its contents remained relevant to any uncompleted deals, it was thrown away.

55.        All sales, including overseas sales, were priced in £ sterling. Mr Bapu said that he was not prepared to agree any UK domestic sale on which his margin would be less than 50p per phone, and because of how tight the market was, that was all he was able to achieve most of the time.  He said he knew better margins were available on overseas sales (because of the subsidies paid on handsets by UK airtime suppliers which were not replicated overseas) and he tried to generate more such sales.  He accepted that overseas customers could have contacted other UK suppliers in what was a very competitive market, and attempted to drive down prices.  He had no special relationship with the overseas customers he dealt with, and he asserted that his success in selling to them was just a result of his superior proactivity when compared to other UK suppliers.

56.        Payment was generally received and made using EQT’s FCIB account.  Payment was generally received from customers before payment was made to suppliers. In its first two export sales in August and November 2005, Mr Bapu said EQT had received payment before the goods had even been shipped. 

57.        So far as domestic UK deals were concerned, the phones in question were always held at one particular freight forwarder (Interken).  Mr Bapu did not consider this was a suspicious coincidence, as he considered Interken to be a reputable freight forwarder, well respected in the mobile phone trade.  He gave evidence (which we accept) that he occasionally called another freight forwarder to enquire about prices and terms, but only in order to check the prices being charged by Interken.  Given that there were other freight forwarders in the market, and given that Mr Bapu did not arrange deals through the freight forwarder, we find it a remarkable coincidence that every single trade of EQT involved phones that were held at Interken, and we comment further on this in our findings at paragraph [155] below.

58.        Mr Bapu would verify that the stock actually existed by telephoning the freight forwarder, and (in the case of domestic UK deals) he would deal in the stock by means of “supplier allocation notes” – instructions from a supplier to Interken, instructing it henceforth to hold the particular stock on behalf of the named customer.  He did not obtain any insurance on the goods, assuming that Interken were responsible for that.  It was implicit in the way the UK domestic deals were arranged that EQT would only be at risk for a few moments at most on the underlying goods.

59.        There were only three occasions when EQT actually sold goods overseas.  These were in August 2005 (to Oman Trading LLC (“Oman Trading”) in Dubai), November 2005 (to the same customer – two invoices but one consignment) and February 2006 (to High Level Trading GmbH in Switzerland (“High Level”) – two invoices but one consignment).  In the first two sales, EQT received the purchase price before shipping.  In the third (the subject of this appeal), the goods were shipped “on hold” – i.e. the shipping agent was instructed to ensure that even though the goods were physically moved, they continued to be held to EQT’s order until they were formally released (which Mr Bapu did once payment had been received).

60.        EQT did not obtain IMEI numbers for the phones which it sold in the UK.  Mr Bapu saw no need to incur the expense or waste the time involved in obtaining them.  Any faulty phones would be covered under the manufacturer’s warranty and the end user would deal direct with the manufacturer or his approved repairer.  If any of the phones he sold were found to have been stolen, he would be able to trace who had supplied them to him by reference to the batch in which they had been sold, without needing IMEI numbers.  For domestic UK sales, no transport was involved, so there was no issue about proving which phones had been damaged by a carrier.

61.        On its export sales to Oman Trading in August and November 2005, EQT had obtained a 10% scan of IMEI numbers of the phones being sold.  On the February 2006 export sale the subject of this appeal, no IMEI numbers had been obtained.  Mr Bapu said this was because of problems at the inspection company.  They were extremely busy, had problems with their scanning equipment and were short staffed on their inspection team.  The shipment needed to be sent urgently and he said he had just taken a commercial decision to instruct Interken to ship it without any scanning being done.

Due diligence

General points

62.        It is common ground that no amount of due diligence by an innocent trader on his direct customers and suppliers will necessarily uncover a scheme by others in a chain of transactions to defraud the VAT authorities.  This is because, by definition, due diligence only provides information about the parties who are actually selling to or buying from that trader; in a deal chain of any length, there is ample scope for the fraudsters to be active without any fear of being discovered by even the most comprehensive due diligence carried out on a distant part of the chain.

63.        What then is the purpose of considering the actual due diligence steps taken by this particular trader? 

64.        HMRC say that if, on close analysis, the due diligence actually undertaken was slipshod, careless or devoid of any substance, it amounts to little more than window dressing.  In such a situation, they argue, it can of itself provide evidence to support the inference that the trader either knew or should have known that he was involving himself in fraudulent chains of transactions.  They say that is the situation in this case, pointing to what they say are deficiencies in the due diligence actually carried out by EQT.

65.        EQT says that evidence of careful due diligence should be taken at face value, i.e. it should be regarded as evidence that EQT was taking all reasonable steps within its power to sniff out fraud so that it could avoid tainted transactions.  It points to a phrase in a letter dated 3 October 2005, when Officer Downer referred to “your extensive due diligence checks on your suppliers and customers”.  It says that it took comfort from this that HMRC were satisfied with the due diligence it was carrying out and it is bemused as to why HMRC are now referring to its due diligence as being inadequate - merely “window dressing”.

66.        At the hearing, HMRC chose to concentrate on one or two particular points on due diligence, rather than attempting to uncover a full picture of EQT’s approach to due diligence throughout its history of trading.  EQT itself did not seek to argue that the full history of its due diligence efforts should be minutely examined, and indeed the evidence of that history in the bundles provided was difficult to follow without detailed oral explanation (which was not given) and may well have been incomplete; EQT’s main submission in relation to due diligence revolved around the comfort it took from the phrase in HMRC’s letter dated 3 October 2005 to the effect that they regarded its due diligence checks on its suppliers and customers as “extensive”.

67.        EQT also alleged that a significant volume of due diligence documents in its possession had been seized by HMRC and then not fully disclosed in the context of this appeal.  We are satisfied that this was not the case, extensive efforts having been made to check shortly before the hearing that all hard copy documents seized by HMRC had been included in the scanned documents which were provided to EQT on disk.

68.        The picture which emerged on considering the documents put before us in evidence was of a somewhat patchy, sometimes belated and certainly incomplete due diligence exercise.  It may well be the case that EQT obtained basic details (corporate existence, verified VAT number and possibly authorisation of relevant individuals) before dealing with customers or suppliers, but it is equally clear that on occasions any substantial effort on due diligence followed rather than preceded the commencement of actual dealings with the relevant customer or supplier. 

Due diligence – early stages of trading

69.        It seems that very little was done in relation to due diligence beyond the bare minimum until around July 2005 (following a meeting with HMRC on 12 July 2005 in which the subject came up).

70.        In the 12 July 2005 meeting, it was highlighted that EQT had not carried out any credit agency checks, company house checks, personal visits, personal identity checks or obtained any trade references before dealing with the four traders who were its customers and suppliers up to that time.  This clearly prompted EQT into significant further action on due diligence generally.

71.        Up to 12 July 2005, EQT had only dealt with two customers (Globcom and Vision Procurement Limited) and two suppliers (Onricano Limited and Wandcall Limited).

Due diligence following 12 July 2005 meeting – existing customers and suppliers

72.        On 13 July 2005, EQT obtained a Companies House report on Globcom, which highlighted the fact that it had only been incorporated on 23 November 2004, so no significant material was available in this report (beyond verifying that its director was Mohamed Iqbal).  On 28 July 2005, EQT obtained a CreditSafe report on Globcom, which showed it as “newly established” and therefore without a credit rating.  On 5 August 2005, EQT faxed a “Trading Application Form” to Globcom, and received the form back, partly filled out, by fax a few minutes later.  The form made no reference to Mohamed Iqbal, who was known to Mr Bapu to be a director of Globcom; Mr Bapu was content with this as he considered it simply showed the two individuals named on it had delegated authority from Mr Iqbal.  EQT followed up one of the referees given by Globcom (OUY Communications Limited – a name Mr Bapu recognised from IPT) and Mr Bapu thought Mr Ali may have followed up the other reference (Shelford Trading Limited) verbally.  Mr Bapu said he had also visited the Globcom premises at some serviced offices in Brentford.

73.        There was no evidence before us as to the steps that had been taken to improve the information that had been obtained about Vision Procurement Limited, Wandcall Limited and Onricano Limited following the meeting on 12 July 2005, but it is striking that EQT ceased dealing with all three of them straight away – and never dealt with any of them again, with the exception of one sale to Vision Procurement Limited on 23 December 2005.

Due diligence following 12 July 2005 meeting – new suppliers

74.        Between the meeting on 12 July 2005 and the end of 2005, EQT carried out 74 transactions.  In those transactions, it bought from Blue Star Trading Limited on 33 deals, Sigma Nationwide Limited (which appears again later in this decision as a VAT defaulter) on 16 deals, Callender Group Limited on 12 deals and GSM Global Limited on 9 deals.  For all of these suppliers there were some due diligence documents in the evidence before us.  Generally there were copy VAT certificates, copy certificates of incorporation, basic company search details, sometimes a part of a CreditSafe report verifying the director(s), some personal identification (e.g. copy passport, utility bill) a “trading application form” and some evidence of the taking up of at least one reference.  These were generally obtained before any trades were done with the relevant supplier.

Due diligence following 12 July 2005 meeting – new UK customers

75.        So far as due diligence on new UK customers is concerned, again the picture is patchy.  The position in relation to Globcom has been outlined above.  The other main customer was North West and although dealings with that customer started in November 2005, it was not until February 2006 (when North West was about to become a significant supplier to EQT as well as its biggest customer) that EQT appears to have commissioned an external firm to carry out a due diligence exercise on North West.  The due diligence report it received is dated 6 May 2006, but refers to a visit to North West on 10 February 2006 which seems to have been the basis for the report.

76.        The position in relation to Unibrand was covered at the hearing.  This company was associated with Globcom and first bought from EQT on 17 January 2006.  Mr Bapu said that Mr Iqbal (director of Globcom) had approached him in October 2005, saying that he had another company through which he wished to purchase, without any reason being given.  EQT went through the due diligence process and gathered a reasonable selection of documents to verify the identity of Unibrand and Mr Iqbal as its director.  At some time after 27 January 2006, he also obtained a CreditSafe report, which showed Unibrand had a respectable trading history and a credit rating of 79 (very good), with a suggested limit of £35,000.  At the hearing however, when challenged about how he could form a reliable judgment as to the trustworthiness of Unibrand/Mr Iqbal based on this documentation, Mr Bapu revealed that there was also a personal connection which gave him some comfort: Mr Iqbal said his father had known Mr Bapu’s father when they had worked together in the 1960’s and 1970’s.  Mr Bapu checked with his own father, to be told that he did vaguely remember a Mr Iqbal and knew he had a son.  Whilst this evidence was unremarkable in itself, we did find it surprising that Mr Bapu had not mentioned it at all before, either in his written statement or when he had been cross examined at some length about his business relationship with Mr Iqbal wearing his “Globcom” hat.

Due diligence on overseas customers

77.        In relation to the overseas customers of EQT (Oman Trading of Dubai and High Level based in Switzerland), the due diligence carried out by EQT was extremely sketchy. 

78.        In relation to Oman Trading (to whom EQT sold phones in August and November 2005) there was no evidence of any significant attempt at all to identify the customer or the individuals behind it in the documents before us, and the matter was not raised orally at the hearing in any great detail.  Mr Bapu’s comment was that he had met with Oman Trading while he was in Dubai with his friend Imtiaz Suleman and simply had relied on that meeting to satisfy him that Oman Trading were trustworthy purchasers.

79.        In relation to High Level (to whom EQT sold phones in February 2006 in the transaction the subject of the present appeal), there was more evidence, but the picture was anything but clear.  Mr Bapu said he thought EQT had been approached by High Level, who said they were based in Switzerland and were looking for mobile phones.  He had not heard of them before they approached EQT.  He said Mr Dalal had mostly dealt with them.  He had said in his written statement that they had satisfied themselves of High Level’s trustworthiness by discussions with other traders and freight forwarders.  At the hearing, he said he could not remember which traders had been contacted, and the only freight forwarder they would have spoken to would have been Interken (which would have been dealt with by Mr Dalal). 

80.        The documents before us contained one of EQT’s “Trading Application Forms” signed by a Mr Jellab on behalf of High Level and dated 14 February 2006 (the day before the sale to High Level).  It declined to give any trade references, crossing through the relevant section and adding the note “Private”.  The documents also include two documents in German.  Mr Bapu confirmed he could not understand them, but took them to be the Swiss equivalent of company registration confirmation and bank detail confirmation.  In fact one of them is some kind of official document from the German Federal Finance Department, quite possibly detailing High Level’s German VAT number.  It is not clear whether these latter documents were sent to EQT before or after its deal with High Level on 15 February 2006, but bearing in mind Mr Bapu did not understand them and took no steps to find out what they meant, the date on which they were received seems academic.

81.        In his written statement, Mr Bapu had said that both he and Mr Dalal had visited High Level before trading with them; he had said they had received “a completed application form, set of company documents and proof of identity of the director” at that meeting.  However at the hearing, his evidence was that he believed High Level had come over to the UK and Mr Dalal had met them there – “he just mentioned it to me”.  There was no note of the meeting.  He also suggested that Mr Ali had visited High Level in Switzerland some four or five weeks after the sale to them – the documents included an EQT “Site Visit Questionnaire” quoting “Date of Visit” as 22 March 2006.  However Mr Ali was not available to give evidence on the point and the handwriting on the questionnaire gives rise to the strong suspicion that the form was completed by High Level and returned to EQT as late as May 2006. In any event, all this activity took place well after EQT had completed its only deal with High Level.  Whatever the truth of the matter, we find that Mr Bapu simply did not know the real facts and had effectively left the whole matter to Mr Dalal to sort out, in association with Mr Ali.

Due diligence - summary

82.        In summary, therefore, we found there was a patchy and inconclusive picture of the due diligence carried out by EQT.  Some of what EQT did in relation to its suppliers after the pivotal meeting in July 2005 with HMRC was a significant improvement on what had gone before, but the steps EQT took to ensure that its customers (especially its overseas customers) were trustworthy were extremely limited, and of no practical value.

Details of the export sales under appeal

83.        We find that Mr Bapu had only the broadest grasp of what was being done by way of due diligence on High Level and negotiations with it.  He left the detail to Mr Dalal, who unfortunately did not give evidence in the appeal.

84.        We find that High Level approached EQT and asked it to source two consignments of phones for it.  EQT carried out only the sketchiest due diligence on High Level and found that it was able to source the phones High Level wanted through Unibrand, the company of its longstanding UK customer Mr Iqbal.  For the first time, EQT used Mr Iqbal’s company as a supplier rather than a customer and, through Mr Dalal, was able to arrange for the phones to be supplied on extended credit (payment seven days after shipment) and on “ship on hold” terms (which were required by High Level).  The goods were to be consigned to High Level’s freight forwarder Delacher in Switzerland and Mr Bapu told us he believed Mr Dalal checked with Interken to find out if they were reputable and trustworthy.

85.        Once the basic terms had been agreed and the “Trading Application Form” had been dealt with (see [80] above), various documents were exchanged on 15 February 2006.  The precise order in which this happened is not clear, but Unibrand issued a stock offer of the phones (5,000 Nokia 9300i’s @ £545 each and 5,000 Motorola V3i’s @ £170 each) to EQT, who issued two purchase orders back to Unibrand for them; Unibrand issued two invoices to EQT for the relevant amounts (which were countersigned by Mr Ali on behalf of EQT); Unibrand issued two “supplier declarations” in standard form to assure EQT that it was not aware of any whiff of fraud in relation to the transaction; EQT issued a stock offer to High Level (at a price which gave it a margin of £12 per Nokia phone and £5 per Motorola phone); High Level countersigned and returned the stock offer and also issued its own purchase orders; EQT issued two invoices for the phones addressed to High Level; Aberdale Logistics Limited issued an inspection report for each batch of phones; Interken’s Dubai company issued two invoices to EQT for the road freight insurance costs; and EQT issued instructions to Interken to ship the phones “on hold” to High Level’s freight forwarders in Switzerland.

86.        The stock offer from EQT to High Level simply referred to the make and model of the two batches of phones, and stated they were “central Europe specification”.  This detail had not been included in the stock offer or invoice from Unibrand to EQT, nor was it included in High Level’s purchase order or EQT’s invoices to High Level.  The inspection reports from Aberdale Logistics Limited did not refer specifically to “central European specification”, but they did refer to the two batches of phones as having a selection of languages which included the main European languages.  The inspection report for the Motorola V3i’s referred to the phones as having 3-pin chargers whereas the Nokia 9300i’s had 2-pin chargers (Mr Bapu said he believed Motorola V3i’s had both 2-pin and 3-pin chargers in the box). 

87.        The documents include a copy of a letter (presumably sent by fax) from EQT (signed by Mr Ali) to “Mr Mustapha” at High Level (presumably Mustapha Jellab, one of its directors) as follows:

“Please find attached with this full inspection report and specification of Motorola V3i’s and Nokia 9300i’s together with the packing list.”

From this we infer that this was the first time the full specification was known to High Level, and EQT was aware of that fact.  Mr Bapu gave evidence that with a phone such as the Motorola V3i, the colour of the phone could have a significant impact on its value.  There was no mention of the colour of the phones in any of the documents until it was recorded in the Aberdale inspection report.  Mr Bapu thought the specification (including the colour) would have been clarified over the telephone, but there was nothing to support that assertion and neither Mr Dalal nor Mr Ali (one of whom would no doubt have dealt with any such clarification) gave evidence.

88.        On 20 February 2006, EQT received payment for the phones from High Level into its FCIB account by direct transfer and gave instructions to Interken to release the phones to High Level.

Events immediately following the export sale to High Level

89.        EQT had however miscalculated its financing for the deal, and found that it had insufficient money to pay the full amount due to Unibrand for the phones on the due date.  It had a shortfall of a little over £150,000.  The due date for payment of the full amount was 22 February and EQT simply did not have the funds to do so.  Mr Bapu said he had a good relationship with Mr Iqbal and rang him up personally to obtain a little more time to pay.  In fact, it is very apparent from the FCIB bank statements of EQT and from the list of deals it carried out that in fact it generated the necessary funds to pay the balance of its debt to Unibrand by further trading over the next few days.  What is interesting is precisely how this was done.

90.        There were two deals in the pipeline which had been invoiced on 17 February but where the profits (totalling £10,000 plus VAT) did not reach EQT’s FCIB account until 21 February.  These were sales to North West at a gross margin of 50p per phone.  This only provided less than £12,000 of the required £154,000.  At that rate, EQT would have had to carry out a great many more domestic UK transactions before it would have been in a position to pay Unibrand the balance of its debt.

91.        Instead, EQT agreed two domestic UK sales to Unibrand of batches of 10,000 phones (sourced from Phone City (Leytonstone) Limited) at a wholly unprecedented margin of £4 per phone – generating an instant profit of £80,000 plus VAT.  As soon as Unibrand had paid EQT for this sale and EQT had settled up with its supplier, EQT paid the sum of £104,875 to Unibrand on 23 February as further part payment of its debt to Unibrand.  This reduced the outstanding debt to £50,000.

92.        EQT paid off this remaining balance through the proceeds of some further trading.  First, it entered into its first ever deal with a new supplier Mana Enterprises Limited, selling 20,000 phones to North West at its “usual” 50p margin, generating a profit of £10,000 plus VAT.  Then it negotiated two further sales to Globcom (Mr Iqbal’s other company) at margins of £2.50 per phone (on a deal of 5,000 phones, generating a profit of £12,500 plus VAT) and £2 per phone (on a deal of 10,000 phones, generating a profit of £20,000 plus VAT).  EQT had thus generated the required cash (£42,500 plus VAT, equating to £49,937.50) and by 28 February was in a position to pay over the outstanding £50,000 balance to Unibrand.  To add icing to the cake, EQT was able to negotiate another “special” deal to sell 10,000 phones to North West on 23 February at a margin of £1.50 per phone, generating a further profit of £15,000 plus VAT.

93.        Mr Bapu insisted that he had no specific memory of this wholly exceptional run of deals (which he thought might have been arranged by Mr Dalal), though he had to accept that it was the profits from these deals which funded the shortfall on the amount that was owed to Unibrand.  We find his assertion wholly incredible, as we do the suggestion made by Mr Andrews in his submission that “negotiations were stepped up in order to achieve the higher margins that were required”.  Whether Mr Bapu himself actually knew or not, we find that EQT (either through Mr Bapu or through Mr Dalal his co-director and “partner”) must have known at the very least that the ability to arrange these deals at the drop of a hat in order to trade its way out of an urgent cash flow crisis implied a high degree of non-commerciality in its trading relations with Mr Iqbal’s companies.

Was there a fraudulent evasion of VAT?

Preliminary matters

94.        The purchases of EQT which are the subject of the current appeal were traced by HMRC through two different chains of sales and purchases back to Global Dotcom Solutions Limited (“GDSL”) and Sigma Nationwide Limited (“Sigma”).  We received witness statements and heard evidence from HMRC Officers Barry Patterson (in relation to GDSL) and John Foy (in relation to Sigma).  There was also written and oral evidence from Officer Michael Downer of HMRC (the officer responsible for dealing with EQT’s VAT affairs).  Included in his written evidence were copies of the documents describing and demonstrating the chain of sales between GDSL and Sigma (on the one hand) and EQT (on the other).  These documents had been largely uplifted from the traders involved in the chains of sales.  We find the chains to have been established (EQT did not seriously contest this).

95.        There was also written evidence in the form of extracts from FCIB records for various traders which, HMRC maintained, demonstrated overall circular flows of funds which could only be consistent with fraud.

Global Dotcom Solutions Limited (“GDSM”)

96.        We were satisfied from the evidence of Officer Patterson that GDSM had on 13 February 2006 supplied the 5,000 Nokia 9300i phones which were ultimately sold on to EQT and then High Level.  At that time, the business of GDSM was being run by an individual using the name “Syed Shah”.  All attempts to trace this individual (or anyone else who admits to having a connection with GDSM at the relevant time) have failed and no VAT return has been submitted or VAT payment made on behalf of GDSM for the period during which the relevant supply took place.  A notice of assessment was issued to GDSM on 21 December 2007 (following an earlier letter dated 7 December 2007 detailing how the assessment was made up and showing VAT on the relevant sale of Nokia 9300i phones referred to above as being included in it).  All relevant correspondence to GDSM was returned undelivered.

97.        We find that an individual using the name “Sayed Shah” used GDSM in a deliberate scheme to defraud HMRC of VAT (including the VAT due on its sale of the 5,000 Nokia 9300i phones which were later sold by EQT to High Level) and the VAT due on GDSM’s supply of those phones has gone unpaid.

Sigma Nationwide Limited (“Sigma”)

98.        We were satisfied from the evidence of Officer Foy that Sigma had on 13 February 2006 supplied 5,000 Motorola V3i phones which were ultimately sold on to EQT and then High Level.  At that time, so far as HMRC were aware from their previous contacts with it, the business of Sigma was being run by an individual using the name “Asif Choudery”.  The evidence of the supply by Sigma was not obtained from that company but from purchase records uplifted by HMRC from Red Rose Consultancy Limited, the company to which Sigma sold the phones.  No VAT return has been submitted or VAT payment made on behalf of Sigma for the period during which the relevant supply took place.  All attempts to contact Sigma or Asif Choudery after a telephone conversation with him on or about 12 October 2005 have failed, except that arrangements were made for HMRC to collect paperwork in relation to “recent deals” from Sigma’s accountants on 17 October 2005.

99.        After an assessment was raised on 24 January 2006 in respect of the VAT due for the period ended 30 September 2005, a further visit was made to Sigma’s principal place of business on 17 February 2006 to obtain details of any further trading.  Nobody from Sigma was to be found and Officer Foy left a letter at the premises warning that Sigma would be deregistered for VAT purposes if no response was received to the letter by the following Monday, 20 February.  No contact was received in reply to this letter and accordingly on 21 February 2006 Sigma was notified by letter that it had been deregistered for VAT purposes with effect from 20 February 2006.

100.    On 22 February 2006, Officer Foy received details of 8 supplies made by Sigma between 31 January and 15 February 2005 to Red Rose Consultancy Limited, including a supply of 5,000 Motorola V3i phones on 13 February 2006.  No VAT return or payment was received from Sigma covering this supply and HMRC raised an assessment for the unpaid VAT, which itself remains unpaid.

101.    We find that Sigma was deliberately used by the individual calling himself Asif Choudery to defraud HMRC of VAT (including the VAT due on the sale of the 5,000 Motorola V3i phones to Red Rose Consultancy Limited, which were later sold by EQT to High Level) and that the VAT due on Sigma’s supply of those phones has gone unpaid.

102.    EQT has argued that by failing to deregister Sigma for VAT as soon as they discovered (in late October 2005) indications that it was involved in VAT fraud, in that it had been making third party payments (i.e. payments to entities other than those from which it had bought the relevant phones), HMRC have themselves caused or contributed to the problem and should therefore accept the responsibility themselves for Sigma’s default in February 2006 rather than effectively laying it at the door of EQT.  We consider that if such an argument were to be capable of succeeding (which we doubt), it would require a great deal more fault on the part of HMRC to be demonstrated than is disclosed by the evidence put before us.

Circularity of fund flows

103.    Officer Downer gave some evidence, using copies of FCIB statement entries for various traders, which he said demonstrated clear circular money flows and suggested that EQT must have been instructed who to buy and sell phones from.

104.    The money flows are in part clearly very suspicious and add generally to the impression of an overall fraud.  We should emphasise however that we were not satisfied that there was anything that could be inferred from them to implicate EQT in any such fraud.

Findings on questions 1 and 2 – fraudulent evasion of VAT and “connection”

105.    We find (see [94] above) that in relation to the purchases of mobile phones made by EQT which are the subject of the current appeal, chains of sales and purchases have been established which lead directly back to Sigma (in relation to the 5,000 Motorola V3i phones) and to GDSM (in relation to the 5,000 Nokia 9300i phones).

106.    We also find (see [97] and [101] above) that the supplies of the relevant phones by Sigma and GDSM were part of a deliberate fraud in which it was always intended that the output VAT charged on those supplies would be fraudulently retained rather than being accounted for to HMRC.  We further find that the VAT due on those supplies has indeed gone unpaid.

107.    It follows that we therefore find that EQT’s purchase of the relevant phones was “connected” with the fraudulent evasion of VAT for the purposes of the test in Kittel.

Question 3 - In relation to its purchases of mobile phones for onward sale to High Level, did EQT know or should it have known that by those purchases it was participating in transactions which were connected with fraudulent evasion of VAT?

Preliminary points

108.    This was the question to which the parties addressed the majority of their arguments.

109.    HMRC accepted that the burden of proof lies on them to show that EQT knew or should have known that its purchases were connected with VAT fraud.

110.    HMRC were quite clear in the way their case was put: they alleged that EQT (through Mr Bapu and/or, as the evidence unfolded, Mr Dalal) was a knowing participant in the fraud, but if that could not be proved, they alleged that it should have known of the connection with the fraud.

111.    Accordingly, we have asked ourselves whether it was more probable than not, on the basis of the evidence put forward, that EQT (through Mr Bapu and/or Mr Dalal) either knew or should have known that each of the two relevant purchases of mobile phones was definitely connected with fraudulent evasion of VAT.

112.    We emphasise that for the purposes of this question, it is the state of mind of both Mr Bapu and Mr Dalal that is relevant.  They were both directors and “equal partners” in the business from July 2005 up to (and including) February 2006 when the export sale relevant to this appeal took place.  Mr Bapu told us that every deal carried out by EQT was based on his commercial decision, but this is not sufficient for us to ignore Mr Dalal’s state of mind for these purposes.  Mr Dalal did not give any evidence (a matter that is considered in more detail below) and therefore we were left to draw inferences as to Mr Dalal’s state of knowledge from the surrounding circumstances.

113.    We were anxious to ensure that, in assessing Mr Bapu’s and/or Mr Dalal’s state of knowledge at any time, we were only bearing in mind information actually known to him at that time.  So, for example, the information about the deal chains and money flows around them which was painstakingly compiled by HMRC after the event has no part to play in that assessment.

114.    We are concerned here with EQT’s state of knowledge at a particular time, namely the moment when it acquired the phones which were to be sold on to High Level.  This of course requires us also to consider the history leading up to that point, but it is also clear from the guidance of Christophe Clarke J in Red 12 Trading Limited v HMRC [2009] EWHC 2563 (Ch) (which was approved by the Court of Appeal in Mobilx and others at [83]) that it is appropriate for us to consider the wider context, including evidence of later events:

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

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

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

115.    We have therefore taken into account the whole history of EQT’s dealings.  The circumstances of (and leading up to) the two acquisitions in question are of course the most important, but we have also had some regard to later events, in particular those occurring during the few days following the acquisitions in question, which we consider cast some significant further light on the issue of the state of EQT’s knowledge at the time of the relevant acquisitions.

Matters relevant to a finding of actual or constructive knowledge by EQT

General knowledge of widespread fraud in the business sector

116.    It was accepted on behalf of EQT that it was well aware through Mr Bapu that the mobile phone trading industry was “rife with fraud”.  On that basis, we would expect EQT to be extremely sensitive to any indicators of possible VAT fraud in relation to its own deals.

Due diligence carried out on customers and suppliers

117.    As summarised above, the due diligence carried out by EQT on its suppliers was initially very sketchy, and that carried out on its customers was even less informative. 

118.    Given that there was apparently an employee (Mr Waghat) whose main role was supposedly to carry out due diligence, it was disappointing that EQT did not think fit to put forward that employee as a witness.  As Mr Bapu had apparently delegated much of the due diligence work to Mr Waghat, Mr Bapu’s evidence of what had been done was necessarily vague and general in some important respects and we therefore relied mainly on the documentary evidence of due diligence which was put before us.

119.    Following the meeting with HMRC on 12 July 2005, EQT started to extend its due diligence on suppliers somewhat, but by the time of the transactions currently under appeal, we find that its approach remained focused more on going through a process which it hoped would satisfy HMRC than on obtaining genuinely independent verification of the trustworthiness of its suppliers.

120.    We are not persuaded by EQT’s argument that it was properly relying on an assurance effectively given in HMRC’s letter dated 3 October 2005 to the effect that its due diligence procedures were regarded as satisfactory.  Officer Downer’s note of the meeting of 30 September 2005 made it clear that his examination of the records (including due diligence files) at that meeting had been “cursory” and in the letter of 3 October 2005, he was not purporting to provide a formal view on the adequacy or otherwise of EQT’s due diligence procedures, he was asking rhetorically whether EQT had carried out similar checks on any investors who had advanced money to EQT (of whom, of course, there were in fact none).

121.    EQT was clearly even less concerned about establishing the trustworthiness of its customers.  There was no attempt to obtain truly independent references for Globcom from non-mobile phone traders.  The evidence about the family connection with Mr Iqbal came out only at the very end of Mr Bapu’s evidence about due diligence, when we would have expected it to have been mentioned to HMRC at a much earlier stage, or at the very least much earlier in the hearing.  We were left with the impression that Mr Bapu had not mentioned it earlier because he was uncertain whether it would be taken as evidence of a more sinister underlying relationship with Mr Iqbal and he only mentioned it at all when he realised his evidence on due diligence was not sounding very convincing.

122.    As to his other main UK customers North West, he had already sold well over £30 million of phones to them before there is any evidence that he commissioned any significant due diligence effort on them.  The due diligence report on North West that was put before us was dated May 2006, though it seemed to have been largely prepared on the basis of research carried out in February 2006.

123.    So far as his overseas customers are concerned, there was no evidence of any efforts to ensure they were trustworthy before dealing with them.

124.    We consider therefore that EQT’s efforts in relation to due diligence were, at best, unconvincing.  To a degree we consider this is explained by the fact that, as HMRC conceded, no amount of due diligence on customers and suppliers can be expected to unearth a fraud which is at some distance down the chain.  We do not therefore consider our findings on due diligence to be determinative of the matter but insofar as they carry weight in the overall assessment of whether EQT knew or should have known of the connection with VAT fraud, that weight counts against EQT because we find that at the time the due diligence was carried out, either:

(1)  EQT was well aware of the underlying fraud and did not want to risk obtaining clear evidence of it from due diligence; or

(2)  EQT regarded the whole process of due diligence as being “window dressing” for HMRC’s benefit, with no practical value to EQT beyond the provision of support for its VAT repayment claim.

Payment terms

125.    In general, the evidence was that EQT was always paid by its customers before it paid its suppliers, and transfer of title to the underlying goods was immediately effected by means of release notes addressed to Interken upon receipt of payment. 

126.    This apparently simple structure conceals a tension: until a release note is issued to transfer control of the goods, a purchaser is at risk on the money it has paid over for those goods; it is trusting that the seller will issue the release note.  If on the other hand the purchaser refuses to release the money until it has received the release note, then the seller is at risk on the goods it has released without receiving payment.  This problem is multiplied many times over where chains of transactions are involved.  The money has to move from one end of the chain to the other while the release notes move in the opposite direction and each buyer and seller must be well aware that he is not just relying on his direct counterparties, but on all the other parties in the chain.

127.    EQT’s answer to this conundrum is that the operation of the market depends on trust, built up over time.  The problem with this answer is that it does not explain why, on a first or second deal, either the supplier or the customer should be prepared to risk hundreds of thousands of pounds (or phones to a similar value) on the word of a trader about whom it knows very little and with whom it has never (or only once) dealt before. 

128.    It seems to us that even if EQT carried out all its deals with counterparties on a basis which eliminated its own risk, it should have been curious as to why its counterparties were prepared to take such massive risks on EQT.  In other words, we find that EQT should have been suspicious about the true commercial nature of the market it was getting into as a result of the inherent structure of that market.

129.    We were also told that on its two export sales to Oman Trading in August and November 2005 (not the subject of this appeal), EQT had been paid some time before it shipped the goods.  Whilst this might have been a welcome development for EQT, it should have asked itself why a trader in Dubai who knew next to nothing about EQT and had never dealt with it before felt comfortable in extending to it unsecured credit of £933,000 (on its first purchase) and £1,232,000 (on its second purchase).  This should again have made EQT suspicious about the true commercial nature of the market in which it was dealing.

130.    Finally, there could hardly be a clearer indication that EQT understood precisely how uncommercial the market was than its extraordinary series of transactions with Globcom and Unibrand to address the cash-flow problem caused by its export deal to High Level in February 2006 (see [89] to [93] above).  It might be accepted that a longstanding customer might allow some extra time to pay.  However, we find that the creation of clearly quite exceptional “counter trades” had, as its obvious purpose, the generation of the profit needed to pay the balance due on the earlier deal between effectively the same parties.  This leads us to draw the quite clear inference that EQT was very well aware it was operating in a largely artificial market.  We also find that EQT knew that both Globcom and Unibrand were also aware that the market was largely artificial.

Lack of evidence from Mr Dalal and Mr Ali

131.    It became apparent at various points during the cross examination of Mr Bapu and, most pointedly, during questions about the crucial facts surrounding the actual dealings with High Level and the subsequent unusual dealings with Globcom and Unibrand, that he had no direct personal knowledge about some of the key events.  In particular, he said that Mr Dalal or Mr Ali had dealt with those matters.  This sat uneasily with his assertion that all EQT’s deals were based on his commercial decision, and the passage in his written statement that “I was aware of all day to day decisions taken within Euroquest, whether by myself or Moshin”.

132.    Mr Cannan, on behalf of HMRC, invites us to draw negative inferences from EQT’s failure to call Mr Dalal to give evidence.  He cites the comments of Brooke LJ in Wisniewski v Central Manchester Health Authority [1998] Lloyds Rep Med 223:

“From this line of authority I derive the following principles in the context of the present case:

(1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.

(2) If a court is willing to draw such inferences they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness.

(3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue.

(4) If the reason for the witness’s absence or silence satisfies the court then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.”

133.    The reason given by Mr Bapu for Mr Dalal’s non-attendance was that “he was not called as a witness so I am assuming he was not required”.  In his submissions on behalf of EQT, Mr Andrews pointed out that:

 “at no time did the respondents request the attendance of any other person nor did they seek a witness statement or even an interview....

Dalal is neither silent nor unexpectedly absent.  He simply had not been asked about any matters at any time by the respondents.  Neither was he asked to be in present [sic] by the respondents.  His attendance was offered in Court by Bapu, but this was declined by silence from the respondents.  In light of this, we submit that the Tribunal should not draw any adverse inferences from the absence of Dalal in this or any other way.”

134.    We accept Mr Cannan’s submission.  It is clear that Mr Dalal would have had “material evidence to give on an issue” in this appeal – namely the issue of the extent of his (and therefore EQT’s) knowledge as to the artificiality of the dealings with High Level, Globcom and Unibrand in February 2006.  We find that the extent of this knowledge is a material consideration in the overall decision about whether EQT actually knew (or should have known) that its purchase of phones to sell to High Level was connected to VAT fraud.  It is this issue of knowledge that is the central issue in this appeal.

135.    Mr Andrews’ submission in our view misses the point.  It is not for HMRC to decide how EQT’s case should best be put, or which witnesses it should call.  It was only as the cross-examination of Mr Bapu developed that this gap in his direct knowledge became apparent to HMRC and the Tribunal, and if EQT had chosen not to call Mr Dalal to fill that gap, we are entitled to draw appropriate inferences.

136.    The absence of any evidence from Mr Dalal in our view greatly strengthens the other evidence (which is in part circumstantial, but also arises very strongly from the uncontested documentary evidence of the sequence of transactions in February 2006) that EQT knew or should have known of the connection with VAT fraud; it also weakens the evidence given by Mr Bapu on behalf of EQT in which he sought to persuade us that EQT had no such knowledge. 

137.    We are quite clear that there is a “case to answer” on this point, arising from the other evidence adduced by HMRC.  We are equally clear that we do not consider the explanation given for Mr Dalal’s absence to be satisfactory and accordingly it does little or nothing to reduce the detrimental effect of Mr Dalal’s absence.

138.    Whilst our view of this point is not on its own determinative of the appeal, it significantly increases the weight we give to the other evidence of EQT’s knowledge which arises from the dealings with Globcom and Unibrand around the time of the sale to High Level.

Prevalence of defaulters in EQT’s deal chains

139.    Officer Downer’s written evidence included a spreadsheet showing the work that had been done by HMRC to trace back the deal chains for all EQT’s deals.  As he said in his statement:

“... many of the transaction chains in which Euro Quest have been involved in [sic] have been traced back to traders who have failed to meet their VAT liabilities.  On no occasion was I able to trace the transactions back to either a manufacturer or recognised distributor.”

140.    Whilst we accept that this spreadsheet gives clear evidence that VAT fraud was generally prevalent in the market, this information was clearly not known to EQT at the time.  HMRC invite us to infer from the prevalence of fraud in EQT’s deal chains that EQT must have been a knowing participant in the fraud.  In the absence of any evidence that EQT knew this information at the time, we decline to draw this inference as we see no logical basis for it.

Features of the trading carried out – ease and consistency of profit

141.    Mr Bapu admitted that he had no previous experience of or contacts in the mobile phone trading market.  He had learned about it from talking to people and researching on the internet.  He invested no significant capital and had no special expertise.  He put no capital at risk – always receiving payment from his customers before he paid his suppliers.  He needed minimal resources to operate his business – just an office, a desk, a chair, a phone and an internet connection.  Yet from the outset he was able to generate consistent and risk-free profits.

142.    A summary of the margins achieved on UK domestic sales by EQT is set out at [35] above.  If we consider only the sales up to the time of the sale to High Level in February 2006, EQT had achieved a margin of 50p per phone on 118 of its 123 UK domestic sales and a margin of £1 per phone on the other five UK domestic sales.

143.    EQT sought to persuade us that this was the result of tough negotiation in a highly competitive market.  Mr Bapu said that 50p per phone was the minimum profit on which EQT was prepared to deal and the market was so competitive that it was only in rare and isolated circumstances that it was able to achieve a higher £1 per phone margin.  No evidence was given as to why he was unable to achieve any margins in the range between 50p and £1.

144.    We hold that the achievement of consistent margins against this background within such a narrow range, with no great knowledge or experience of the market, risk or effort, should have made Mr Bapu suspicious that his transactions were being fraudulently manipulated, even if he was not actually aware that they were fraudulent.  The opportunities which were falling into his lap were just too good to be true – and they were not.

Features of the trading carried out – specifications of phones and inspections

145.    Mr Cannan submitted that the lack of clarity, certainty and precision surrounding the specification of the phones involved in the sale to High Level (as summarised at [86] and [87] above) was clear evidence of uncommerciality – in particular, no genuine buyer or seller of phones worth over £3.5 million would have shown such a cavalier approach in failing to specify and document such important matters as the colour of the phone (which Mr Bapu said could affect its value).  We found Mr Bapu’s evidence that all such details would have been dealt with verbally to be unconvincing – and he was speculating as he did not claim to have dealt with those matters himself. 

146.    We find that there was no clarification of those details with High Level and that EQT’s suspicions should have been aroused by the apparent lack of concern of its buyer as to such details.

147.    It was also apparent that Mr Bapu had a less than complete understanding of what the relevant inspection reports were saying, and he even claimed to believe that one of them was wrong (in referring to the Motorola V3i phones as having a 3-pin charger rather than both 2- and 3-pin chargers).  The overwhelming impression we gleaned from his evidence on the inspection reports was that they were just another piece of the documentation that was needed to unlock payment from his customer and satisfy HMRC on EQT’s repayment claim, without the small print having any particular significance.

Features of the trading carried out – brokerage

148.    Mr Andrews submitted that HMRC were simply misunderstanding how EQT’s business worked.  He said once it was understood that EQT’s was essentially a brokerage business, many of the features which HMRC regarded as evidence of its uncommerciality could be seen in their proper light as simply normal commercial features of a brokerage business.

149.    We agree that certain features of EQT’s business did indeed mirror features normally found in brokerage businesses.  So, for example, it should not be seen as surprising that EQT never dealt at a loss: bearing in mind that no deal would be proceeded with unless it was going to yield a profit, this should not be seen as a feature pointing to uncommerciality.

150.    But this ignores the fact, as HMRC submitted, that EQT chose to operate as principal rather than as agent in putting its deals together.  It bought and sold, it did not introduce buyer to seller and simply charge a commission.  EQT argued this was only in order to maintain commercial confidentiality – otherwise its customers and suppliers would be tempted simply to deal direct in future and cut EQT out of the trade.  We do not find this argument wholly convincing, bearing in mind the very close trading relationship which clearly built up between EQT and its major customers.  However, we also find the argument about whether this was a brokerage business or not somewhat sterile.  The key point is that it could quite legitimately be regarded as having some of the features of a brokerage trade without that necessarily making it intrinsically suspicious.  To that extent, we accept EQT’s argument, though it can only bear so much weight – as considered in the following two paragraphs.

Features of the trading carried out – no stock held

151.    Mr Cannan sought to persuade us that EQT’s failure to hold stock at any time – always dealing “back to back” – should be regarded as evidence that EQT must have realised it was dealing in a largely artificial and manipulated market.  Mr Andrews, on the contrary, asserted that this was simply an inevitable consequence of EQT’s “brokerage” method of business. 

152.    Whilst we feel there is some strength in Mr Andrews’ submission when looking at individual deals, we feel the sheer volume of back to back deals which EQT was able to put together without any great risk or effort should have made it suspicious that it was dealing in an artificially manipulated market.  Was it really credible from a standing start, with no particular experience, expertise or finance, that in a bona fide market EQT would generate over £140 million of genuine profitable sales in its first ten months of trading?  We think that at the very least, EQT should have been suspicious at how easily it had achieved this extraordinary success.

Features of the trading carried out – narrow spread of customers and single freight forwarder

153.    Mr Bapu was clear that there were certain concentrations of mobile phone traders in some particular geographical areas, particularly parts of London and Manchester.  He was also clear that the business of EQT was widely advertised through the internet, especially on the IPT website which had, he said, around 80 to 100 active members at the time.  Yet 88% of his UK domestic sales were to just three customers, the directors of which all lived in the Preston area, less than 20 miles from Mr Bapu’s base in Lancaster. 

154.    We find that however the relationships with these customers started, Mr Bapu found them convenient and straightforward and bearing in mind his evidence that the business became more “customer led” as it developed, we infer that he fell into something of a routine of simply receiving orders from his few preferred customers, which he then sourced through contacts with previous suppliers and searches or advertisements on the IPT website. 

155.    This is entirely consistent with the pattern of trading disclosed in the list of deals carried out by EQT, and leads us to conclude that EQT should have been highly suspicious that it was simply being “fed” deals by its usual customers as part of an artificially rigged “market”.  This suspicion should have been heightened by the fact that EQT was always able to source the relevant stock from suppliers who used a single freight forwarding company – every single deal carried out by EQT involved purchasing stock which was held at Interken.  Mr Bapu regarded this as just simple coincidence.  We do not.

Features of the trading carried out – why only three export deals?

156.    Mr Bapu had given evidence that it was the possibility of profitable export deals to Dubai which had first brought him into the business.  Yet in the whole course of trading EQT only carried out three export trades. Mr Cannan submitted this was curious. 

157.    We consider however that the limited number of export deals is easily explained by reference to the fact that EQT could only generate funds to finance the VAT on export deals by carrying out a large number of domestic UK deals.  It simply did not generate sufficient funds to do any more.  But the observation still remains that Mr Bapu clearly had a high level of understanding of the ability to generate funds for export deals by carrying out numerous domestic UK deals, and he gave no satisfactory explanation of how he gained that understanding.

IMEI numbers

158.    Mr Bapu admitted that he never arranged for IMEI numbers to be captured for any of the phones bought and sold by EQT within the UK.  He saw little point in the (admittedly minimal) expense and (more significantly) delay that would be caused as a result.  There was no binding requirement for IMEI scans at the time, and he would not have been able to use the plain lists of IMEI numbers which he would have obtained from the scans for any useful purpose.

159.    He did arrange for a 10% scan of IMEI numbers on the first two export sales of EQT (in August and November 2005).  He said EQT tried to arrange the same for the export sale in February 2006, but there were difficulties at his appointed inspection company which meant the scan could not be taken in the time available before the goods had to be shipped to Switzerland. 

160.    It was put to him that he purposely refrained from arranging an IMEI scan on the February 2006 deal because he was aware that HMRC’s database “Nemesis” (which was designed to identify carousel transactions through a IMEI records of previously exported phones) had gone live on 1 February 2006 and might throw up problems with his deal.  He stuck to his version of events and denied he knew anything about the Nemesis database at the time.  We accept his evidence on this point.

161.    We therefore find that his failure to take IMEI numbers on any domestic UK sales or on the February 2006 export transaction should not be regarded as evidence that he knew or should have known that EQT’s transactions were connected with fraud.

If there was an overall fraud, could it have operated without EQT’s knowledge?

162.    Mr Cannan submitted that if there was an overall fraudulent scheme, it could not have operated without EQT being aware of it.  We did not find his reasons underpinning this submission clear, but in any event we are not satisfied that it is necessarily true.  Whilst we have indicated a number of areas in which we consider EQT should have been suspicious, we do not agree there is anything in the evidence which means that structurally the scheme quite simply could not have operated successfully without EQT knowing of it.

Summary of our views on the “knowledge” issue

163.    In the circumstances of this case (as in most MTIC cases), it is to be expected that no single piece of evidence will be determinative of the question of whether EQT knew or should have known that its purchases were connected with fraudulent evasion of VAT.  An overall picture must be built up, based on all the evidence, and then a conclusion must be reached based on that picture.

164.    It is also often the case (as here) that there is no direct evidence that the trader knew his trading was connected with fraud; rather the evidence is of circumstances giving rise to an inference of knowledge, or circumstances which should, to a greater or lesser extent, have made a trader suspicious about the existence of an underlying fraud.  Once (as here) it has been shown that there was in fact such a fraud, the question is whether HMRC have shown (the burden admittedly lying on them) that the evidence is sufficiently compelling to require the Tribunal to conclude on a balance of probabilities that either:

(1)  the trader did know its transactions were connected to VAT fraud; or

(2)  the trader should have known they were so connected.

165.    In the absence of the highly suspicious dealings with Globcom and Unibrand immediately following the sale to High Level, we would have reached the conclusion that EQT should have known that its purchases were connected with the fraudulent evasion of VAT.  However in the light of the vague and unconvincing evidence given by Mr Bapu in relation to those dealings, and the absence of any evidence from Mr Dalal in relation to them, we have reached the conclusion that EQT (through Mr Bapu and/or Mr Dalal) did know of that connection.

Conclusion

166.    We find (see [105] to [107] above) that EQT’s purchase of 5,000 Nokia 9300i mobile phones and 5,000 Motorola V3i phones on 15 February 2006 was connected with fraudulent evasion of VAT by earlier suppliers of those phones in the chain of supplies leading to EQT.

167.    We find (see [165] above) that EQT (through its directors Mr Bapu and/or Mr Dalal) knew of that connection.

168.    Accordingly we find that the decision of HMRC to deny EQT’s input tax totalling £625,625 on its purchases of the phones in question was correct and should be upheld.  It follows that:

(1)  HMRC are entitled to withhold the repayment of £570,531.46 claimed by EQT in its VAT return for the period ended 28 February 2006; and

(2)  HMRC’s notice of assessment addressed to EQT for £55,093.54 in respect of unpaid VAT for the same period should be upheld.

169.    The appeal is therefore dismissed.

170.    So far as costs are concerned, we note that both parties applied for an award of costs in the event of being successful.  We therefore direct (but with liberty to either party to apply):

(1)  pursuant to paragraph 7(3)(a) and (b) of schedule 3 to The Transfer of Tribunal Functions and Revenue and Customs Appeal Order 2009, that the provisions relating to costs contained in rule 29 of the Value Added Tax Tribunals Rules 1986 should apply to these proceedings in place of rule 10 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009; and

(2)  that EQT shall pay HMRC’s costs of and incidental to and consequent upon the appeal, to be assessed by a district judge of the High Court of Justice in England and Wales by way of detailed assessment if not agreed.

171.    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.

 

 

 

KEVIN POOLE

TRIBUNAL JUDGE

RELEASE DATE: 25 February 2011

 

 

 

APPENDIX

Summary of EQT’s trading in mobile phones

 

Month	No of deals	Suppliers	No of deals	Value (ex VAT)	No. of phones		Customers	No of deals	Value (ex VAT)	No. of phones	Profit per phone (ex VAT)	Profit (ex VAT)	Monthly profits (ex VAT)	Phones traded in month	Notes
May-05	11	Wandcall	8	£5,991,000	34,000		Globcom	5	£4,114,500	22,000	£0.50	£11,000
		Onricano	3	£2,163,500	10,000		Vision Procurement	6	£4,062,000	22,000	£0.50	£11,000
													£22,000	44,000
Jun-05	18	Wandcall	9	£7,297,000	42,500		Globcom	14	£12,352,470	71,460	£0.50	£35,730
		Onricano Limited	9	£11,517,740	62,960		Vision Procurement	4	£6,515,000	34,000	£0.50	£17,000
													£52,730	105,460
Jul-05	2	Bluestar Trading	2	£1,602,000	6,000		Globcom	2	£1,608,000	6,000	£1.00	£6,000
													£6,000	6,000
Aug-05	14	Bluestar Trading	4	£3,038,750	10,500		Globcom	1	£508,000	2,000	£1.00	£2,000
		GSM Global	4	£3,659,250	25,500		Globcom	11	£12,643,000	78,000	£0.50	£39,000
		Sigma Nationwide	6	£8,745,000	60,000		Greystone UK Trading	1	£1,470,000	10,000	£1.00	£10,000
							Oman Trading (Dubai)	1	£933,000	6,000	£10.00	£60,000			Export sale.  The sales invoice matches one of the purchase invoices from GSM Global.  Input VAT reclaim of £152,775
													£111,000	96,000
Sep-05	10	Sigma Nationwide	7	£5,795,000	35,000		Globcom	10	£7,832,500	48,000	£0.50	£24,000			One purchase from GSM Global split between two equal sale invoices to Globcom - treated as one sale
		GSM Global	3	£2,013,500	13,000									48,000
													£24,000
Oct-05	17	Bluestar Trading	6	£5,816,250	37,500		Globcom	16	£13,207,330	82,840	£0.50	£41,420
		Nirvana Trading	1	£119,500	500		Globcom	1	£1,131,000	3,000	£1.00	£3,000
		GSM Global	2	£1,413,000	9,000
		Sigma Nationwide	3	£1,299,160	8,840
		Callender Group	5	£5,646,000	30,000									85,840
													£44,420
Nov-05	19	Callender Group	4	£3,765,000	27,000		Globcom	4	£4,446,000	32,000	£0.50	£16,000
		Bluestar Trading	13	£10,330,000	75,000		North West Trading	13	£9,700,000	70,000	£0.50	£35,000
		Globcom	2	£1,752,000	12,000		Oman Trading (Dubai)	2	£1,848,000	12,000	£8.00	£96,000			Export sales.  Three sale invoices to Oman Trading match the two purchase invoices from Globcom (and treated as 2 trades).  Input VAT reclaim of £306,600
													£147,000	114,000
Dec-05	12	Bluestar Trading	8	£8,630,000	60,000		North West Trading	7	£10,000,325	70,750	£0.50	£35,375
		Evolution Alliance	1	£1,644,000	12,000		Vision Procurement	1	£2,475,000	18,000	£0.50	£9,000
		Callender Group	3	£5,116,950	36,750		Globcom	4	£2,970,000	20,000	£0.50	£10,000
													£54,375	108,750
Jan-06	27	Bluestar Trading	8	6278000	44,000		Globcom	3	£4,889,000	34,000	£0.50	£17,000			Some unclear evidence of possible cancelled purchase from Callender and associated sale to Globcom in addition to these deals
		K&S Communications	4	£3,115,200	21,530		North West Trading	20	£12,861,250	88,500	£0.50	£44,250
		Callender Group	4	£2,829,000	19,000		Uni-Brand (Europe)	3	£2,282,500	15,000	£0.50	£7,500
		Ultimate Wholesale	7	£4,566,000	31,500		Greystone UK Trading	1	£1,198,465	8,530	£0.50	£4,265
		Nirvana Trading	4	£4,370,000	30,000
													£73,015	146,030
Feb-06	15	Ultimate Wholesale	1	£720,000	5,000		Globcom	1	£722,500	5,000	£0.50	£2,500
		Uni-Brand (Europe)	2	£3,575,000	10,000		Globcom	1	£847,500	5,000	£2.50	£12,500
		Phone City Leytonstone UK	10	£15,065,000	110,000		Globcom	1	£1,530,000	10,000	£2.00	£20,000
		Mana Enterprises	2	£5,540,000	30,000		High Level Trading (Switzerland)	1	£875,000	5,000	£5.00	£25,000			Export sales subject to the current appeal.  The two sales invoices match the purchase invoices from Uni-Brand (Europe).  Input VAT reclaim of £625,625.
							High Level Trading (Switzerland)	1	£2,785,000	5,000	£12.00	£60,000
							North West Trading	5	£9,720,000	70,000	£0.50	£35,000
							North West Trading	1	£1,395,000	10,000	£1.50	£15,000
							Uni-Brand (Europe)	2	£2,850,000	20,000	£4.00	£80,000
							Uni-Brand (Europe)	1	£1,942,500	15,000	£0.50	£7,500
							21st Century Traders	1	£2,495,000	10,000	£0.50	£5,000
													£262,500	155,000
Mar-06	25	UKGTC	12	£17,425,410	123,930		North West Trading	14	£18,638,375	129,930	£0.50	£64,965			Figures reflect one partial credit note from UKGTC, for which a partial credit note was given to North West Trading
		North West Trading	8	£2,217,500	10,000		North West Trading	1	£951,000	3,000	£1.00	£3,000
		Fern Associates	2	£2,698,000	13,000		Globcom	2	£2,131,500	13,000	£0.50	£6,500
		Electron Global	1	£850,000	5,000		21st Century Traders	5	£1,600,000	5,000	£1.00	£5,000
		Pearl Technology	2	£673,000	4,000		21st Century Traders	3	£625,000	5,000	£0.50	£2,500
													£81,965	155,930
Apr-06	12	UKGTC	6	£4,494,735	28,810		North West Trading	12	£11,589,140	86,810	£0.50	£43,405
		Sheba Satellite	6	£7,051,000	58,000
													£43,405	86,810
								182
No of Purchase deals:	182	Total value of purchases:		£178,822,445			Total value of sales:		£179,744,855	TOTAL PROFIT (ex VAT)			£922,410
							Value of overseas sales:		£6,441,000			Total Phones Dealt:		1,151,820	Net of credits/cancelled deals
							Value of UK sales:		£173,303,855