[2011] UKFTT 148 (TC)

TC01022

 

Value Added Tax  -  MTIC case involving 13 purchases and sales made in a three day period and involving the same supplier and customer  -  high standard of due diligence  -  whether the Appellant knew or ought to have known that its transactions were connected to fraud  -  Appeal dismissed

 

 

FIRST-TIER TRIBUNAL Reference no: LON/2008/2191

 

TAX

 

 

 

 

MAYFAIR EXECUTIVE LIMITED

Appellant

 

 

-and-

 

 

 

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS

Respondents

 

 

 

 

 

Tribunal: HOWARD M. NOWLAN (Tribunal Judge)

ELIZABETH BRIDGE

 

 

 

 

Sitting in public at 45 Bedford Square, London on 5 – 12 and 14 January 2011

 

 

 George Carter-Stephenson QC and Nathaniel Rudolf, counsel, on behalf of the Appellant

Mukul Chawla QC and Jonathan Hall, counsel, on behalf of the Respondents

 

 

 

©CROWN COPYRIGHT 2011

 

DECISION

 

INTRODUCTION

 

1. This was a relatively simple case in which the Appellant appealed against HMRC’s decision to deny its claim for input tax in the amount of £1,998,640 in the period 06/06. That claim derived from 13 transactions effected on the dates 19 to 21 June 2006 all involving purchases of mobile phones from Kingswood Trading Services Ltd (“Kingswood”) and despatch sales (which we will refer to throughout this Decision as “exports” using the general meaning of that term) to the Dutch company 2Trade BVBA (“2Trade”).

 

2. Initially the Appellant had indicated that the Respondents should establish that the transactions were connected to fraudulent losses of VAT. This point was, however, conceded by the Appellant about a year prior to the hearing. Since there was no dispute as to the law to be applied by us in the remaining question of whether the Appellant knew or ought to have known that its transactions were connected to fraudulent losses of VAT, we merely had to decide whether all the circumstances indicated that the Respondents had surmounted the burden of proof in establishing either that the Appellant knew of the relevant connection or that it ought to have so known.

 

3. The case did, nevertheless, pose one element of difficulty for us. This was that the due diligence undertaken by the Appellant in relation to its supplier and its customer was relatively good. The Respondents understandably stressed that the Appellant ignored a poor credit rating in relation to the supplier. In the familiar manner, the Appellant sought to brush this aside by saying that it was unconcerned about a poor credit rating because it was extending no credit to the supplier. Apart from that element of contention, we would otherwise describe the due diligence undertaken by the Appellant as good. Indeed certain HMRC officers had also indicated that they had few adverse comments to make in relation to the due diligence, and where minor comments were made, they were usually addressed by the Appellant.

 

4. In addition to the due diligence being undertaken in a broadly satisfactory manner, we also note certain common attributes of both the supplier and the customer in all 13 deals. Regardless of whether doubts were raised by HMRC in relation to both, we accept the claim by the Appellant’s counsel that both “presented well”, and that both Kingswood and 2 Trade (both of which were visited) were seemingly quite sizeable and efficient operations, neither of them being conducted, for instance, from one room above a retail shop or via a virtual office.

 

5. There were, however, many other features of the transactions that led us to doubt that the Appellant was ignorant of the connection of its transactions to fraudulent VAT losses. The dilemma for us was whether:

 

·       the Appellant was entirely honest and had established that it had done all that it could to establish the integrity of its transactions; or

·       the Appellant knew, or certainly ought to have known, that its transactions were connected to fraudulent tax losses, and believed that seemingly scrupulous attention to due diligence would provide a total defence to any challenge from HMRC.

 

6. Our decision is that the Respondents have surmounted the burden of proof in establishing that the latter is the case. The rest of this decision will be dedicated to summarising the evidence, giving the facts in more detail, and then indicating the factors that have led us to the conclusion that we have reached.

 

THE EVIDENCE

 

7. Evidence was given to us by Officer Attique Ahmed, (“Mr.  Ahmed”) on behalf of the Respondents. Once the Appellant had conceded that its 13 transactions were connected to tax losses, such that everything hinged around the “knowledge” issues, the evidence given by Mr. Ahmed was of relatively minor significance in this case. We are minded to say that we broadly accept the point made by the Appellant’s counsel to the effect that the various grounds given in Mr. Ahmed’s decision letter dated 13 August 2007 for denying the re-claim of the input tax were far from compelling. Since, however, considerable other evidence emerged during the hearing, and we had the benefit of seeing all the details of payments through the FCIB accounts, and it is obviously in order for us to pay regard to all of this information that was not initially available to Mr. Ahmed, it is immaterial to comment further on any doubts that we may have shared with the Appellant’s counsel in relation to the original justifications for the denial of the input tax.

 

8. Evidence was given to us, on behalf of the Appellant, by its two directors, Mr. Badremunir (or “Munir”) Patel (“Mr. Patel”) and Mr. Soyeb Gurjee (“Mr. Gurjee”), and by Ann Renwick (“Miss Renwick”), who had worked as a consultant both for Mr. Gurjee’s previous company, Excel Electronics Limited (“Excel”), and also for the Appellant.

 

9. We were also given a Witness Statement from Ian Tuppen (“Mr. Tuppen”), the director or principal director of Kingswood, the Appellant’s supplier in all 13 transactions. It had been expected that Mr. Tuppen would be available at the hearing to give his evidence in person and to be cross-examined but we were told that since he had had a detached retina back in September 2010 and had more recently suffered from high blood pressure, his doctor had indicated that it would be inappropriate for him to give evidence in person, in order to avoid stress. Both parties agreed that notwithstanding his absence, it was still appropriate for us to read the Witness Statement, as we did, on the basis that counsel, and in particular the Respondents’ counsel, could refer in their submissions to respects in which we should accept the evidence with caution.

 

10. It necessarily follows from the fact that we have already indicated that we consider that the Appellant had actual knowledge, and at the very least, ought to have had knowledge that its transactions were connected to fraudulent VAT losses, that in some respects we consider that both Mr. Patel and Mr. Gurjee did not tell the truth when they denied this knowledge. Much of their evidence was however reasonably straightforward and there was no point at which conflicting evidence indicated clearly that either witness was lying. The justification for saying that in some respects they cannot have told the whole truth is that some of the conclusions that we have reached lead us to say not only that the two directors “ought to have known” of the connection to fraud, but indeed, on the balance of probabilities, that they “must have known” of that connection. In addition, we found the more hesitant evidence given by Mr. Gurjee to be unconvincing on several occasions. We also found it distinctly damaging that in two respects Mr. Gurjee admitted candidly that he had avoided income tax. To his credit he did concede that he had failed to return the two relevant items, albeit that as it was fundamental to the Appellant’s case that the particular funds, whose receipt was in issue, belonged directly or indirectly to Mr. Gurjee, and with HMRC as the other party to the appeal, obviously able to ascertain whether the relevant receipts had or had not been submitted on any tax return by Mr. Gurjee, he had little option but to reveal the receipts and to concede that they had not been “returned” to HMRC.

 

11. We found Miss Renwick’s evidence to be honest, and since it was plain that she had had no involvement whatsoever in relation to the 13 transactions, her evidence was only of minor relevance. One of the most significant features of her evidence was indeed the fact that she was essentially stood down shortly before the Appellant undertook much the most active period of trading ever undertaken by the Appellant, namely the 13 transactions that are the subject of this appeal.

 

12. In the absence of Mr. Tuppen, it would be wrong to indicate whether we accepted that he was ignorant of the connection to fraud of the transactions in which Kingswood was involved. There are, however, certain features of the FCIB evidence, in particular, that raise severe doubts in our minds to which we will refer below. These are of only minor significance to this particular appeal since obviously it is the knowledge and means of knowledge on the part of the Appellant, and not its trading partners, that are relevant to us.

 

THE FACTS IN MORE DETAIL

 

The relevance of the background facts

 

13. This is a case where our decision turns entirely on all the circumstances surrounding the Appellant’s trading, and the issue of what in particular Mr. Patel and Mr. Gurjee knew, must have known and ought to have known. In view of this, it is necessary to look very carefully at the background to the Appellant’s trading, so that we will dedicate a considerable part of this decision to these earlier facts prior to giving consideration to the 13 contentious trades themselves.

 

Background facts in relation to the Appellant and Mr. Patel’s role in the Appellant prior to January 2006

 

14. The Appellant was a company that was used initially in 2004 by Mr. Patel in order to conduct the trade of giving accident management services to accident victims. Mr. Patel’s sister had been injured in a car accident while Mr. Patel was still at London Metropolitan University, and his experience in assisting his sister with her claim is what led Mr. Patel to commence the same role on a professional basis.

 

15. There is no doubt that this activity was undertaken in a genuine manner. It made reasonable, but fairly modest, profits and we were shown countless invoices that had been issued to clients.

 

16. Mr. Patel had been brought up in a family where his father and elder brother had both been involved in business, his father in a clothing manufacturing company, and Mr. Patel was keen to follow in their footsteps. Alongside his trade of giving accident management advice, it seems that Mr. Patel considered a venture in relation to clothing, and the possibility of exporting mobile phones to a friend in South Africa. Neither of these ventures came to much. There were then plans to expand the accident management business by buying in claims. This would involve paying in advance for the claims, before receiving the settlement amounts hoped for, and the Appellant thought that it might well be in a net repayment position for VAT purposes. Mr. Patel accordingly wrote to HMRC on 29 September 2005, asking for the Appellant to be put onto monthly returns for VAT purposes, instead of its pre-existing 3-month periods.

 

17. It was not particularly material for us to consider whether the profile of trading would have regularly involved the Appellant in being in a net repayment position. It would seem logical that the basis of trading could only lead to the Appellant being in a net repayment position if it was making losses, or at the start of the period of buying in third party claims, or as the level of trading increased from one period to another. Whatever the position, HMRC conceded monthly accounting on a trial basis.

 

 18. The proposal of buying in third-party claims was undertaken, though it seems that through some well-known failure of another trader in the business, the Appellant’s business suffered a downturn. The hope of expanding the claims management business by expanding into other areas was not fulfilled. 

 

19. At the end of 2005 and in early 2006 Mr. Patel was actively looking for a new venture, and it was at this point that there were discussions between Mr. Patel and Mr. Gurjee. Mr. Gurjee had for many years been a close friend of Mr. Patel’s elder brother and although he was 11 years older than Mr. Patel, his friendship with the elder brother meant that Mr. Gurjee and Mr. Patel had known each other for many years.

 

The background facts in relation to Mr. Gurjee

 

 20. Mr. Gurjee had several business interests prior to becoming a director of the Appellant in January 2006.

 

21. Alongside other more minor ventures in fashion and clothing, and providing search services for solicitors, his principal interest was as a 50% participant or shareholder in a business that manufactured kitchen and bathroom worktops out of granite and marble. This business employed a considerable number of people and was, and presumably still is, prospering. In the course of this business, some of the stone was imported from Italy, with the obvious consequence that Mr. Gurjee would have been familiar with the VAT implications of importing product from EU countries.

 

22. Mr. Gurjee had also been involved in acting as an agent or sub-agent in procuring investors and buyers for residential properties in Dubai. We were told that he undertook this activity directly as an individual, and we will refer below to the way in which the accumulated commission income, or at least some of that accumulated income, was dealt with both for tax purposes, and as an investment in the Appellant.

 

23. At some time many months before he acquired his interest in the Appellant, Mr. Gurjee embarked on a mobile phone venture. A friend of his, Mr. Ayub Patel (apparently no relation of Mr. Munir Patel, the then owner of the Appellant), was operating Excel, which we referred to in paragraph 8 above. Mr. Ayub Patel was a wealthy businessman with several interests. Excel was operating as a back-to-back trader in mobile phones, and it seems that because Mr. Ayub Patel was not as familiar with computers, word processing and accessing the internet as Mr. Gurjee, Mr. Ayub Patel was keen for Mr. Gurjee to join him in Excel in order to perform these functions. At this time, Mr. Gurjee knew little or nothing about trading in mobile phones and picked up the required information by working with Mr. Ayub Patel who had been undertaking various back-to-back transactions prior to Mr. Gurjee joining him.

 

24. Mr. Gurjee became a 50% shareholder in Excel in due course and also a third director, alongside Mr. Ayub Patel and one of Mr. Ayub Patel’s relatives who was a sleeping partner in the business. At some stage, Miss Renwick was taken on as a consultant because of her expertise in the mobile phone market.

 

The background facts in relation to Miss Renwick

 

25. Miss Renwick commenced her working life with Barclays Bank, but after the birth of her first child she started in business on her own with a small retail outlet selling a few mobile phones to end user customers. In due course, she embarked in a small way on selling mobile phones on a wholesale basis. She was visited in the course of this activity by HMRC officers, but they did not pursue their MTIC enquiries because Miss Renwick indicated that she was going to cease the wholesale activity, which apparently she did. She had, however, acquired considerable knowledge about the trading of mobile phones and it was this experience that made her a valuable addition to the trading activity of Excel.

 

The trading of Excel

 

26. We were not directly concerned with the trading activities at Excel, but we did understand the following features of the business. 

 

27. The finance was provided in some manner, as to which Mr. Gurjee said that he was ignorant, by Mr. Ayub Patel. Most of the day-to-day activity was conducted by Mr. Gurjee who worked for about two or three days a week at Excel, and by Miss Renwick. She was always regarded as a self-employed consultant and not an employee.

 

28. We got the impression that about 50% of the transactions undertaken by Excel were domestic purchases and sales of mobile phones on a back-to-back basis, where the profit margins were very slim. The remaining 50% of the transactions were exports to EU countries of phones purchased from domestic suppliers. The monthly level of claims for the recovery of input tax increased fairly steadily, from £109,326 in September 2004, to £578,428 in June 2005 and to £1,181,284 by December 2005. The claim for January 2006 was in half that amount, and in February the claim was insignificant. By the time Mr. Gurjee claimed to have ceased all involvement with Excel, at the end of January 2006, the cumulative input tax recovery claims had been of approximately £8.8 million.

 

29. We were also given turnover figures for Excel’s trading. In its first year of trading to 30 June 2005, the gross sales were just in excess of £10.5 million, and in the period from 07/05 to the date of Mr. Gurjee’s claimed resignation as a director, the turnover was just short of £42 million.

 

30. We were told that in his period at Excel, Mr. Gurjee became acquainted with Mr. Ian Tuppen, the owner and managing director of Kingswood (one of Excel’s principal suppliers), and it seems that the two men had a good relationship. Mr. Gurjee said that he was impressed with the efficiency of Kingswood’s trading operation. He visited Kingswood more than once. Kingswood had no warehouse, and carried no stock of mobile phones but it was a relatively sizeable operation, with (at least in the later period when Kingswood became a supplier to the Appellant) three or four employees, and a substantial turnover.

 

The departure from Excel

 

31. In the period shortly before November 2005, there was some friction between Mr. Ayub Patel and Mr. Gurjee. Mr. Gurjee alleged that the origin of the friction was because Mr. Ayub Patel suggested that the profits of Excel should be divided in three ways, with one third going to Mr. Ayub Patel’s relative who we mentioned above. Since that relative was performing no function in the business, Mr. Gurjee thought that this was unfair and inappropriate, and he decided that he would leave Excel, and either sell his shares to Mr. Ayub Patel or in some other way extract his share of the profits from Excel.

 

 32. There was then conflicting evidence from Mr. Gurjee and the Respondents as to precisely what happened in relation to the break-up at Excel.

 

33. Mr.Gurjee claimed that he decided that the ill-will that there had been left him bent on ceasing his involvement with Excel, notwithstanding that Mr. Ayub Patel apparently resigned as a director some weeks before Mr. Gurjee himself resigned in November 2005. Following Mr. Gurjee’s resignation, two new directors were appointed, namely Mr. Zubar Patel (no relative, so far as we were aware, of Mr. Patel or more significantly of Mr. Ayab Patel) and Mr. Rafik Hafejee. Neither of the new directors had any experience in the field of back-to-back trading in mobile phones. Whilst we were unclear as to what, if any, connection the two new directors had with Mr. Ayub Patel, it seemed that they must have had some connection because Mr. Gurjee said that in order to facilitate his “exit” deal, which was negotiated between himself and Mr. Ayub Patel, Mr. Gurjee undertook to stay on for at least the month of January 2006 and show the new directors how to effect deal packs in relation to back-to-back mobile phone trading. Whilst we will base little on the following observation, we should perhaps record that while we accept that Mr. Ayub Patel resigned shortly before Mr. Gurjee resigned, there was an indication at a considerably later date that he had perhaps been reappointed because there was a reference, in another HMRC visit note, to the third director, Mr. Ayub Patel, not being present at a meeting with the HMRC officers.

 

34. We need to explain two aspects in relation to Mr. Gurjee’s departure from Excel.

 

35. The first is the whole issue of whether Mr. Gurjee did genuinely cease all connection with Excel after he received a payout of roughly £600,000 which we will mention below. Mr. Gurjee indicated that he did stay on during the month of January. It is clear that this was so because in January, the HMRC National Advice Service received eight phone requests from Mr. Gurjee, who still described himself as a director of Excel. He called to verify VAT registration details of intended trading partners of Excel. Mr. Gurjee accepted that he had made these enquiries during January, all in the course of showing the new directors how to undertake trades. Indeed he even said that he was effectively performing the whole of the trading activity for Excel in January, whilst the new directors were learning what to do. Mr. Gurjee then claimed that after January 2006 he had no further involvement with Excel, and did not even know what trading it was doing.

 

 36. The Respondents suggested that Mr. Gurjee’s account was incorrect. They indicated that in addition to the eight enquiries made with the National Advice Service in January 2006 by Mr. Gurjee, a further enquiry was made on behalf of Excel by Mr. Gurjee in May 2006. Mr. Gurjee denied this and pointed out that HMRC’s records indicated that the enquiry had been made by someone described as “Mr. Soyeb”, which was not how he would have described himself. In fact, virtually every one of HMRC’s records of the eight January enquiries had referred to Mr. Gurjee, using a different, and incorrectly spelt, version of Mr. Gurjee’s name. It seemed highly likely to us that Mr. Gurjee had in fact made the May enquiry, and we specifically note that the caller made it from Excel’s phone number.

 

37. The Respondents also pointed out that at the date of the hearing, and notwithstanding that Excel was by then in liquidation, Mr. Gurjee remained both a director, and 50% shareholder of Excel, according to Companies House records. They also indicated that,when an HMRC officer visited Excel in June 2006 and spoke to the two new directors, they had said that it was expected in due course that Excel would pay a dividend to Mr. Gurjee.

 

38. It is not vital for us to unravel these conflicting facts. It is of course possible that Mr. Gurjee severed all connection with Excel in December 2005, apart from the tutoring function that he was undertaking during January 2006. It is equally possible that the alleged May contact with the National Advice Service and the statement by the new directors that a dividend would be paid to Mr. Gurjee in due course indicated that he had some continuing involvement. It is possible that, beyond his receipt in February 2006 of the £600,000 to which we will refer shortly, he may have had some percentage interest in future profits for a period, and it is possible that this may have come to nothing because Excel’s April and May returns were subjected to extended verification, and HMRC eventually refused to refund the claimed input tax. Excel’s subsequent appeal was struck out for non-compliance with directions, and the input tax was never recovered.

 

39. Whilst there were confusing aspects to the facts in relation to his departure from Excel, with the Respondents claiming that he continued to have some sort of financial interest in the company (supported by the fact that he still appeared to be a 50% shareholder) what is certain is that, following the negotiation between Mr. Ayub Patel, who was assisted by Excel’s accountant, and Mr. Gurjee, Mr. Gurjee did receive £600,000 in February and March 2006, as his “payout” from Excel.

 

40. We endeavoured to understand the precise form of the transaction in which roughly £600,000 was made available to Mr. Gurjee. It was possible that he might have sold his shares to Mr. Ayub Patel, or one or both of the incoming directors, but it seems clear that the money actually came from Excel itself and not from any purchaser of shares. The money was also paid not to Mr. Gurjee personally but to a Dubai company, Sterling Investments Limited (“Sterling”) of which he was the sole shareholder. Mr. Gurjee said that the reason why the money was paid to this company was that, although by this time he had decided to join Mr. Patel and become a 50% shareholder in the Appellant, and conduct back-to-back trading activities in the Appellant (using all of the £600,000 which Sterling would lend to the Appellant), he did not want Mr. Ayub Patel to realise that he was effectively going into business in competition. Accordingly he indicated to Mr. Ayub Patel that Sterling would use its £600,000 in the Dubai property venture that Mr. Gurjee was already conducting.

 

41. Having established that the £600,000 paid to Sterling was paid by Excel, and not by any purchaser of shares, we asked Mr. Gurjee in what form Excel made this payout. On being told that it was paid by cheque, we explained that we meant that we wanted to know whether the payment was paid by way of salary, bonus, dividend, reduction of capital or payment on re-purchase of shares. To this the answer was that the payment was made to Sterling, as “Mr. Gurjee’s share of the pot”. Excel was said to be up-to-date in paying Corporation Tax on its profits, but Mr. Gurjee accepted that he had not returned the diverted receipt of £600,000, paid by Excel to Sterling, for tax purposes. He said that the reason for this was not that it had been diverted to Sterling, which he accepted was a company wholly-owned by him, but because he “had not got it”. The respect in which he “had not got it” was  because Sterling had lent not only the £600,000, but approximately a further £195,000 (£795,000 in total) to the Appellant, and as Sterling was not going to recover any of that loan unless the Appellant won the appeal before us, Mr. Gurjee had “not got” the £600,000.

 

42. Before turning to the facts relevant to the Appellant itself, we should mention that on 5 June 2006, HMRC wrote to Excel informing Excel that its input recovery claim for the period 04/06 was to be the subject of extended verification. In due course, the same applied to the claim for the period 05/06, the claims respectively being for approximately £685,000 and £738,000. As we mentioned in paragraph 38 above, the subsequent appeal was struck out for non-compliance with directions, and therefore the input tax was never recovered.

 

The venture between Mr. Patel and Mr. Gurjee in the Appellant

 

43. In November and December 2005, there were discussions between Mr. Patel and Mr. Gurjee in relation to the possibility of Mr. Gurjee joining Mr. Patel as an equal shareholder in the Appellant, and commencing the business of back-to-back wholesale trading in mobile phones in the company. Mr. Patel had no experience in the field, but said that he had been researching it independently of the negotiations with Mr. Gurjee, which research seemed to indicate that there were big profits to be made, and so Mr. Patel was attracted to the notion of Mr. Gurjee bringing both his expertise and funds to the venture. 

 

44. On 2 November 2005, the Appellant opened a bank account with FCIB.

 

45. On 17 November, Mr. Patel wrote to HMRC and indicated that the Appellant was no longer going to use a name, representative of its accident claims activity, that it had sometimes used and that it would always trade as Mayfair Executive Limited. 

 

46. On 14 December 2005, Mr. Gurjee became a 50% shareholder, subscribing £10,000 for shares, alongside the roughly equivalent retained profits left in the Appellant after its accident claim activities, attributable to Mr. Patel’s shareholding. Mr. Gurjee also became a director, though the change of directorship was not notified to HMRC at that time.

 

47. The Appellant moved office from Preston, Lancashire, down to Ilford in London. This was attractive to Mr. Patel because he had made a number of friends in the area while at university, but the main reason for the change of office was that Miss Renwick had severed her connection with Excel when Mr. Gurjee had resigned as a director, and she was prepared to render equivalent services to the Appellant. Miss Renwick lived in London, and it was principally to accommodate her that the Appellant moved to Ilford.

 

48. On 30 January, the Appellant notified HMRC that it had changed its trade categorisation to that of “telecommunications”, and HMRC responded immediately by writing a letter, dated 2 February, warning of the risks of fraud in this industry sector.

 49. In early February 2006, the Appellant was visited by HMRC officers. Those officers were informed that the two directors of the company were now Mr. Patel and Mr. Gurjee. They were also informed that the company had opened an account with FCIB.

 

50. On returning to his office, the principal officer who had attended the meeting just referred to, re-visited the issue of whether the Appellant’s trial period with one monthly returns for VAT purposes should be continued. He wrote to the Appellant on 30 March, indicating that it would not be. The Appellant’s solicitors at the time, Halliwells LLP, complained about this reversal on behalf of the Appellant, but HMRC rejected the requests that the company be left on monthly returns.

 

 51. The Appellant began trading in mobile phones in February 2006. In February, Mr. Gurjee travelled down from Preston to London to take an active part in the preparation of deal packs, and the other required aspects of the trading, the intention being again (as with the January exercise at Excel) to show Mr. Patel how to effect deals, and prepare the deal packs. The long term plan was that once Mr. Patel became familiar with the requirements of preparing deal packs and undertaking due diligence on suppliers and customers, Mr. Gurjee’s role would become simply a supervisory role, whilst the day-to-day trading would be done by Mr. Patel, with appropriate assistance from Miss Renwick.

 

52. From 13 February to 30 March 2006 (with one further small advance in May) Sterling advanced the eventual total sum of £794,846.88 to the Appellant. The terms of the loans were that the advances were for a one-year period, and the interest rate was 20%.

 

53. We asked how it was that Sterling was able to loan nearly £795,000 to the Appellant, when only £600,000 had been paid to Sterling at Mr. Gurjee’s direction by Excel. We were told that the balance represented the accumulated commission profits that had been standing to the credit of another bank account in Dubai held by Mr. Gurjee. Mr. Gurjee confirmed that he was resident, ordinarily resident and domiciled in the UK, that the commissions had been earned by him personally, and that they had not been included in any tax return to HMRC.

 

54. We were told that only about 15% of the Appellant’s turnover consisted of wholesale sales to UK domestic purchasers of mobile phones. 85% consisted of wholesale export sales, this high percentage resulting from the greater profits that it was understood could be made from export sales.

 

55. We were told that, because of the satisfactory relationship that Mr. Gurjee had had with Mr. Tuppen of Kingswood, some but not all of the Appellant’s trades in the early period of trading (i.e. in the first half of 2006) had involved purchases from Kingswood. The trading for the months of February and March 2006 involved claims for recovery of input tax of roughly £460,000 and £602,000. These claims were queried and paperwork was requested by HMRC officers, but in the event the amounts re-claimed were released without any extended verification.

 

Other relevant matters, prior to dealing with the contested 13 transactions

 

56. We need to summarise a few matters before turning to relevant details of the 13 transactions effected between 19 and 21 June.

 

The standing of Mr. Tuppen

 

57. Mr. Tuppen, the owner and managing director of Kingswood,  appeared to have been an efficient and reasonably successful businessman, but one with a chequered history. He had undertaken a profitable business in somehow buying and selling Microsoft© software, but this had led to some form of claim and extended litigation by Microsoft©, which, through lack of funds, Mr. Tuppen had eventually been unable to defend satisfactorily. There had also, both according to HMRC’s evidence and Mr. Tuppen’s witness statement, been some dispute between HMRC and Mr. Tuppen, but in the absence of Mr. Tuppen, we will not expand on this. He had also been made bankrupt and when he sought registration for VAT purposes, he had revealed it, also mentioning that he hoped to be discharged. In short, our opening remark that Mr. Tuppen had had a chequered history seems fair.

 

58. As we have already indicated, both Kingswood and the Appellant undertook due diligence exercises in relation to each other, and each visited the other. We have already indicated that we consider that whether or not Kingswood was eventually shown to have been involved as a “buffer” or intermediate trader in transactions that were traced back to fraudulent losses of VAT, and it was shown to have had a staggering level of turnover, it “presented quite well”. It did have dedicated office space, three or four employees, and it presented its paperwork efficiently (a factor that very much influenced the Appellant and in particular Mr. Gurjee).

 

Knowledge of MTIC activity

 

59. It was not disputed that the Appellant was perfectly well aware of the risks of being involved in fraudulent MTIC trading. Mr. Gurjee had had visits from HMRC officers whilst at Excel, and from the very first days of trading, or indeed of indicating that it was going to trade in the sector, the Appellant and its two relevant directors had received MTIC warnings. Both had been made aware that, whilst they were expected to undertake due diligence in relation to their immediate suppliers and customers, it remained possible, or indeed rather more likely, that the fraud would be higher up the chain of suppliers. Awareness of this was implicit from the fact that the Appellant’s own standard form purchase orders were unusual, in that they included numerous declarations that suppliers were asked to confirm by counter-signing the orders. These declarations extended to declarations that, in its turn, the supplier had undertaken satisfactory due diligence in relation to its own supplier, as well of course as the more obvious point that the supplier itself would have paid, or would in due course pay, all duly owed output tax for VAT purposes.

 

The problems with Barclays

 

60. On at least two occasions when the Appellant received large payments from HMRC, where input reclaims were paid out, the Appellant noted that the very substantial credit balances on its bank account with Barclays suddenly disappeared. Barclays were obviously blocking the account, whilst undertaking money laundering, and other anti-fraud, checks. The Appellant never expressly conceded that it realised that this was what was happening. Instead both directors simply said that these experiences were “very worrying”.

 

61. On the occasions when moneys disappeared from the Appellant’s Barclays account, they were re-credited after a fairly short period.

 

62. There was a meeting between the Appellant and Barclays’ employees at which the Appellant explained their methods of trading. Although the Appellant concluded that the meeting had gone well, Barclays wrote to the Appellant indicating that the Appellant should locate replacement bankers, explaining that “Barclays had no appetite for the business sector in which the Appellant traded”, and that the account would thus be closed within one month. The Appellant complained about this action but Barclays failed to respond in any way, and shortly after the month deadline the account was closed. The moneys that had been credited to the Barclays account were transferred to the Appellant’s FCIB account.

 

The timing leading up to the 13 trades

 

63. During May 2006, there was little activity at the Appellant, largely because it was awaiting a repayment of a substantial amount of reclaimed input tax from HMRC in respect of prior deals. It was also suggested that activity on the part of other traders was reduced because several were encountering extended verification of their input recovery claims by HMRC. Miss Renwick apparently returned from holiday at some time in May. She explained that because the place was “pretty dead” she was not required, and she left. In fact, Miss Renwick, who said that she had never been involved in any deal involving Kingswood, did no further work for the Appellant after this point.

 

64. On 6 June, HMRC repaid the input tax that had been reclaimed, and it was credited to the Appellant’s Barclays account, which had not yet been closed. In the way summarised above, the money then disappeared from the Barclays account on 12 June, and was not returned until 16 June. On 20 June, the Appellant transferred the entire balance on the Barclays account to its FCIB account and, as we will note below, all receipts and payments relevant to the 13 deals undertaken between 19 and 21 June were dealt with through the FCIB account.

 

The 13 contested trades

 

65. Since the facts in relation to the 13 trades were broadly the same, with one or two irrelevant changes to one of the intermediate buffers, and since the tracing to fraudulent tax losses was conceded, we can give the facts in relation to the trades fairly shortly.

 

66. The Appellant had effected trades prior to the contested 13 in which the supplier was not invariably Kingswood and in which 2Trade was not the buyer, but in each of the contested 13 trades, Kingswood was always the supplier and 2Trade always the customer.

 

67. When HMRC first traced the 13 trades to fraudulent losses, this was done by matching orders and invoices, and no such paperwork existed for the non-UK steps prior to the acquisition by the UK defaulter. Ignoring the full names of the various parties, and simply referring to them by the names used in the hearing, the defaulter was always RS Sales Agency. Documents then traced the path of the mobile phones, to take the example of the first relevant deal, to Highbeam UK, Mobile Heaven, Kingswood, the Appellant, and then to the Dutch company, 2 Trade. Other companies that appeared as a buffer trader on one or more occasions were Quality Import Export, MNR Global, Danum Trading, and Watts Management.

 

68. The 13 deals involved various different phones manufactured by Nokia, with Sony Ericsson phones in just two of the deals. Unit prices varied from the low end of about £150 to £350 at the high end. In total the transactions involved the sale of 45,800 phones in the three-day period from 19 to 21 June; the Appellant’s total VAT reclaim in relation to the transactions was £1,998,639.25, and the Appellant’s profit, had the VAT been refunded, would have been £798,671.50.

 

69. Even before the FCIB evidence became available, HMRC had ascertained that there was one feature to the unit prices higher up the chain that was, at least to us, slightly unusual, albeit that its effect was simply to achieve the conventional end result by a slightly different route. This was that the defaulter, the company that was liable to pay VAT in the UK, having no input tax to set against its output liability because it was the importer, sold the phones at a very minor mark-up as against its VAT exclusive purchase price, notwithstanding that it was providing its purchaser with an invoice indicating that VAT had been paid, or was to be paid, on the relevant sale price. Since the defaulter presumably disappeared with its small mark-up and it plainly failed to pay any VAT, the defaulter made a profit in one sense though, bearing in mind the defaulter’s technical liability to account for the VAT charged in respect of its own sale to the first UK buffer, on that approach the defaulter made a colossal loss. The net effect of this method of operating the trading of the defaulter is that in contrast to the case where the defaulter buys for 100 and sells (at the January 2011 VAT rate) at 120.5, there is no longer a need for the defaulter to put the 20.5 into a suitcase as it disappears, or alternatively no need for an earlier buffer in the chain to be directed to make third-party payments such that, for this different reason, the defaulter never had the cash profit to pack into the suitcase. The basis of trading here automatically left the defaulter with just its minor margin that the mastermind presumably intended the defaulter to retain in return for the role performed.

 

70. During the hearing, full FCIB evidence was available to us, and a random sample of three of the 13 transactions that had been studied by HMRC in great detail was shown and explained to us. Before summarising some of the relevant facts to emerge from this evidence, we should mention that every single trader involved in the deals had an FCIB account, and all payments were made through these accounts. We should also mention two things about the timings of payments. First, the Paris server of FCIB, unlike the Dutch server, did record the precise time when each payment in the chain was made, the period of time that each trader had been on-line in order to effect its payment, and the IP Address that was used by each company, when logged-on to make its payments. Secondly, no-one knew what particular time zone was involved in the various timings given from the FCIB Paris server. Accordingly, when it emerged that a payment was made at 23.00 hours, we had no idea where in the world it might have been 11.00 pm, or indeed even whether the clock was right. From the sequence of payments, however, it became obvious how long each trader in the chain had taken to make its payment, following the prior receipt from its purchaser, and obvious again how many minutes it had taken for the money involved to rotate in a complete circle.

 

71. This detail enabled us to see that:

• All 13 deals were entirely circular, in that the company that made the first payment received its money back, plus a profit of approximately 7%, a little over an hour later, after nine payments had been paid round the circle.
• Implicitly that same company was the first to transfer mobile phones, and again it reacquired them, when they in their turn had passed through the hands of eight other companies.

• Whilst there were no purchase orders and invoices for non-UK steps in the transaction chain, the payment details indicated the existence of 9 companies in the overall circle. So far as UK parties were concerned there were invoices to confirm the movement of the phones between the parties in the reverse order to that of the payments illustrated by the FCIB evidence.
• There were no examples of third-party payments. Each party making a payment was implicitly making that payment in return for a transfer of the phones, with the result that the money went round in a circle and the phones went round the same circle in the reverse direction. Taking the example of deal 9 (one of the three for which detailed information was available), it was clear that the sequence of payments flowed from (1) Worldcall (a Spanish company, operating in Portugal with an English director) to (2) Thierra (a Polish company with a Glaswegian director, periodically operating from the same IP Adress as Worldcall), to (3) Global Mobile (a German company), to (4) 2Trade, to (5) the Appellant, to (6) Kingswood, to (7) Danum, to (8) Highbeam, to (9) RS Sales, and then back to (1) Worldcall.
• In the conventional manner, payments appeared to be made in the reverse direction to the movement of the phones, though since the terms in relation to the giving of any credit, the passing of title, and when phones should be, and were, released to purchasers were skimpy or non-existent, it is difficult to say when title to phones actually passed, or when phones were released to purchasers. We will refer to this feature below.
• In the case of Deal 9, 69 minutes elapsed between the first payment that Worldcall made, and the payment made by RS Sales, at which point the money flowed back to Worldcall.
• In the case of Deal 9, the time that elapsed between the payment by RS Sales to the Appellant and the Appellant’s payment to Kingswood was approximately 5 ½ minutes.
• As we have indicated, we were given detailed payment flows and times for three deals. In the other two deals, rather than the one referred to in the previous bullet point, the total times taken for the payments to be circled were 84 minutes and 88 minutes, and the periods between the Appellant’s receipt and payment were 27 minutes and approximately 9 minutes. 
• The final relevant calculation that could be made as a result of all the details of the payments made through the FCIB accounts was the way in which profits were shared out. Taking the total profit to have been 17.5%, Worldcall and the Appellant seemed to make virtually 7% in each of the deals. The buffer companies made very minor profits, sometimes in the region of 0.15% or 0.2%, and Kingswood tended to make about 0.42%. Significantly, the Appellant’s profit was generally within 0.1% of 7% on every single one of the 13 deals, regardless of the number of phones traded in that deal, the unit price and any other factor that one might think could impact on profitability in genuine trading.

 

Other relevant matters in relation to the 13 deals

 

The terms of trade, and the representations that suppliers were requested to counter-sign on the Appellant’s orders

 

72. The Appellant’s standard form purchase orders identified the brand and model of phone ordered, its unit price, the quantity ordered, and the total VAT-exclusive price, the VAT and the VAT-inclusive price. It also included the words “Sim Free, brand new, never locked virgin stock, C/E spec”. It also contained an extensive Supplier’s Declaration, which the supplier was asked to sign. This declaration declared that:

 

• We are not selling these goods at a lower price than we purchased from our supplier
• These goods are supplied to you at market value as on the above date
• We have not entered into any third party payment(s) with our supplier(s)
• These goods have been subject to examination by us (or our agents) and we are satisfied that specific goods exist according to their description. We confirm that any monies transferred for payment of those goods will be returned forthwith if the goods are not as described
• We have no grounds to suspect that the relevant VAT on these goods has not been or will not be paid by our supplier
• We confirm that the relevant VAT will be declared by us on our sale to you
• We declare we own these goods and have title to these goods at time of sale to Mayfair Executive Ltd
• We confirm we have carried out reasonable due diligence checks on our suppliers of these goods including a review of:

 

(please select and tick those undertaken)

 

An official VAT document namely a certificate of registration for VAT (or EU equivalent)

Companies House Certificate of Incorporation

Company Letterhead and letter of introduction

Verification of VAT registration with HM Customs & Excise Redhill

All relevant commercial documentation in relation to the purchase of these specific goods is held by us

We have conducted further enquiries into the background of our supplier and are satisfied that these checks constitute reasonable enquiries as required by section 77A VAT Act 1994 and in accordance with the consultation document provided by HM Customs & Excise dated April 2003 following the recent changes in the April 2003 Budget.

 

73. The order form then gave lines in which the supplier should sign the declaration, and Kingswood duly completed the order form and ticked each of the boxes where indicated. It also had on it the Appellant’s Company Registration and VAT Registration numbers.

 

74. Kingswood’s invoice was much simpler. It included broadly equivalent details in relation to the phones, prices, and “Sim Free, Euro Spec, and Never Locked”. It required payment by Chaps, and gave bank details for its FCIB account, and the required details for making sterling payments through Rabobank Nederland. It did not specify when payment was to be made, or indicate any credit period. It contained no words indicating anything about transfer of title, or release of goods.

 

75. In its turn, 2Trade’s order gave the same required details of the make and model of phone, and price etc, and then contained some reasonably full requirements, all printed in English. The effect of these was that:

 

• the payment terms were that 100% of the price would be TT’d after satisfactory inspection by 2Trade;
• the goods would be released immediately upon receipt [implicitly by the supplier] of full payment;
• the supplier must be owner of the stock; and
• the stock must arrive in the warehouse before 11.00 am local time on the specified date for delivery.

 

76. The Appellant’s invoice contained only the following brief terms, in addition to the description, and price etc. of the goods. One box contained the words “Payment:  Advance”, followed by the details of the Appellant’s FCIB account. Another box contained the words:

 

“Goods to be despatched by On-Time Logistics Ltd

 

Goods cannot be despatched/released without payment unless agreed otherwise

 

The title of goods remain the property of Mayfair Executive Ltd until full payment has been received”

 

77. We accept that the Appellant would not have seen the equivalent documentation for other steps in the transaction chains, though some at least of the invoices for the sales above Kingswood in the supply chain provided that title was not to pass until full payment had been received.

 

78. It is inappropriate to record findings of fact, and conclusions that we draw from those findings, but it might be clearest at this point just to summarise the following self-evident conclusions in relation to the terms of trade on the part of the Appellant, namely:

 

• no order by the Appellant or invoice from Kingswood indicated that any credit was given, or even specifically touched on the fundamental issue of when Kingswood was to be paid for goods supplied;

·       the terms as between Kingswood and the Appellant were silent in relation to when title would pass and when goods might be released to the Appellant, albeit that the Appellant’s order requested, and in fact received, a declaration that Kingswood had title to the goods and owned them at the time of the sale to Mayfair;

·       2Trade’s order indicated that goods should be released to 2Trade, immediately that 2Trade had paid the Appellant, and the Appellant’s invoice implied that title would pass at that point (or rather, specifically, that title would not pass before that point), whereas Mr. Gurjee accepted, after some confusion in relation to this point, that goods could not be released to 2Trade, until the chain of releases had cascaded down to Kingswood, and then to the Appellant.

 

 

Due Diligence

 

79. The striking feature of this case is that the Appellant’s due diligence was relatively good, or by comparison with the due diligence that we have seen undertaken in relation to trading partners in other cases, very good indeed. Whether we conclude that this was the strength, or rather the fatal weakness, of the Appellant’s case we will deal with in due course, but at this point we should refer to some of the details of the due diligence.

 

80. Mr. Gurjee had already traded satisfactorily with Kingswood and Mr. with Tuppen of Kingswood, whilst working at Excel, and indeed we note that some at least of Excel’s transactions had involved both Kingswood and 2Trade.

 

81. We accept that the Appellant performed a reasonably satisfactory due diligence exercise in relation to Kingswood, and its turn Kingswood into the Appellant. From the former it emerged that Kingswood had two offices, one fairly substantial one in Mr. Tuppen’s house and another in rented and shared premises. Kingswood had at the time four employees, Mr. Tuppen, his daughter Nicola, Mr. Piper, the compliance manager and Nicola’s fiancée, and Mr. Calver, the administration manager. 

 

82. Each of the Appellant and Kingswood had visited the premises of the other. Slightly curiously in relation to the Appellant’s trip to visit Kingswood, which was based near Southampton, we were shown the air tickets booked in the names of Mr. Gurjee and Mr. Usman Patel, to enable Mr. Gurjee to make his visit, from Manchester to Southampton, to Kingswood’s premises. We can make little of the point because we do not know who Mr. Usman Patel was, though we do note from the Appellant’s early accounts, that one Mr. Usman Patel, Mr. Munir Patel’s elder brother, was at that time a director of the Appellant, and it was Mr. Munir Patel’s elder brother who was Mr. Gurjee’s particular friend. Although other “Mr. Patels” were the key early director of Excel, one of the subsequent directors of Excel and the director of Transervices Limited (“Transervices”) to which we will refer shortly, none of those Mr. Patels had the first name Usman, so that it appears that Mr. Gurjee was travelling to Southampton with Mr. Munir Patel’s elder brother, who we thought had no connection with either Excel or (by 2006) the Appellant.

 

83. Whatever the reason why a Mr. Usman Patel was travelling with Mr. Gurjee in April 2006 to visit Kingswood, we still confirm that we accept that on the evidence that we have, they might have been satisfied of the suitability of Kingswood as a trading partner. One adverse point was that the Dun & Bradstreed report gave Kingswood a poor credit rating. Kingswood’s accountants were, however, complimentary about their client; referees gave short but generally good reports of their dealings with Kingswood, the only odd feature being that it was unusual for such forthcoming references to be given. Kingswood showed copies of the Supplier Declarations that it required its suppliers to give, these bearing a striking resemblance to the Supplier Declaration that the Appellant itself asked its suppliers to give, which we quoted in paragraph 72 above. Kingswood even circulated a copy of HMRC’s notice 726 to its suppliers. It also emerged that Kingswood had been trading for some time (3 years with one referee and 5 with another) and that it had a substantial turnover, entirely in mobile phones and all involving UK suppliers and UK customers.

 

84. It was Mr. Patel who undertook the “on-site” due diligence in relation to 2Trade. Whilst 2Trade operated from a private house, it seemed that most of the house had been turned over to office space. By the time of the June 2006 transactions, the Appellant had received a Veracis report that was broadly complimentary and that specifically said that no adverse significance should be attached to the fact that the trade was conducted from a house. Apparently there was a very substantial amount of computer and other office equipment, and both Mr. Patel and Veracis were impressed. Mr. Patel mentioned that his taxi driver had mentioned that he had often driven phone traders to visit 2Trade.

 

85. In all we accept that both Kingswood and 2Trade “presented well”. Neither held stock or operated a retail outlet, and both were plainly back-to-back traders. Using our words carefully, they would have struck anyone undertaking due diligence as reasonably established entities that had been in business for some time, and entities whose responsiveness and documentation was likely to be relatively efficient.

 

86. We ought not to omit from this decision the fact that the Respondents indicated that some newspaper article indicated that the authorities had at some point, obviously after the transactions with which we are concerned, descended on 2Trade, alleging that its transactions had been suspect in some way. We were not told any detail about this, or how matters were eventually resolved.

 

87. Much the same remarks were made about both freight forwarders, acting for the Appellant, and generally for the UK parties in the chain, and those acting for 2Trade. Since these various challenges were all made after the transactions with which we were concerned, we place no material significance on these points. We mention them out of completeness.

 

The similar transaction involving Transervices

 

88. Alongside one of the 13 deals, another deal was done by all the parties to one of the Appellant’s 13 deals save that in place of the Appellant, the exporting broker was the company Transervices to which we have just referred in paragraph 82. Transervices was a company of which a Mr. Hanif Patel was a director, and quite possibly a or the shareholder. Mr. Hanif Patel was another of Mr. Gurjee’s friends, Mr.Gurjee making the remark in the course of giving his evidence that “he and Hanif went back a long way”. 

 

89. The Respondents contended that the fact that Transervices had performed the Appellant’s role in a parallel transaction suggested that Mr. Gurjee had perhaps placed a profitable transaction with his friend, once the Appellant was running out of its cash for financing the VAT gap, and its own trading.

 

90. Mr. Gurjee denied this, and it was demonstrated that yet another company had been inserted as the broker company, there being no suggestion that Mr. Gurjee or Mr. Patel had any knowledge of that other company at all. In relation to contact with Mr. Hanif Patel, Mr. Gurjee said that, while he had in the past had a small and not terribly successful business venture with Mr.  Hanif Patel, he did not know that Mr. Hanif Patel was involved in mobile phone trading. He admitted however that  in casual conversation, he might have mentioned his deals to Mr. Hanif Patel. That could have explained how Mr. Hanif Patel had effected the deal in question with Kingswood, 2Trade and indeed all the same parties.

 

Post-deal due diligence

 

91. Due diligence effected after the June transactions can have no bearing on what the Appellant knew or ought to have known at the time of those transactions but it can have a bearing on how the Appellant was approaching its trading generally. In this regard we should mention that the Appellant received a Veracis report on Kingswood that had probably been commissioned before the June transactions were undertaken. It was certainly received before there was any indication on the part of HMRC that the June transactions were going to be subjected to extended verification.

 

92. This report was again quite favourable. The negative indicators were essentially that Mr. Tuppen had failed on two occasions to be present for interview, Mr. Piper (who dealt with the Veracis enquiries “with extreme cooperation and knowledge) was new to the business, and more significantly Kingswood would not give sight of prior deal records. Beyond that the report was positive, indicating that Mr. Tuppen had had 15 years’ experience in the IT sector, no third party payments were made and the company took due diligence seriously.

 

The Halliwells’ report

 

93. Another aspect of post deal due diligence was that the Appellant received a long report from a firm of solicitors, Halliwells LLP (“Halliwells”), in which an ex- HMRC officer produced a very full report. Much of it was obviously a standard form report, in which Halliwells provided a good survey of the risks of MTIC trading, the relevant case law, and HMRC’s recommendations in relation to due diligence. The report was also designed to review the Appellant’s operating methods and to make suggestions as to how they might be improved.

 

94. We consider that the fact that this report was commissioned at all, and its contents, are of considerable significance in this appeal. At this stage however we will refer to certain passages of the report, and only later will we indicate the significance that we attach to the report.

 

95. One of the points to which the Respondents referred in this report was that Halliwells were not told that the cash flow burden of the Appellant’s trading, in other words the funding of the VAT gap on buying goods for a VAT-inclusive price and inherently selling them for a lower VAT-exclusive price, was financed by a loan of approximately £800,000, made by Sterling. The relevant paragraph of the report read as follows:

 

“As at the date of this report, an account is held with FCIB…. This is a trading account. Halliwells were advised that the company has no outstanding charges/loans and it is funded through retained profits. However, in light of recent actions taken by FCIB, this position should be confirmed.”

 

We might say that we entirely fail to understand the last sentence just quoted. If the company was funded in some other way, including by a substantial loan indirectly injected by one of the shareholders, we would have thought that this could have been ascertained without worrying about “recent actions taken by FCIB”, whatever they might have been in this context. We would also have thought that the company’s accounts would have identified the borrowings (as they did, once published), and that the company’s officers and staff should have made the method of funding plain to those preparing the report.

 

96. Whatever the meaning of the sentence that has confused us, it is certainly the case that the directors cannot have mentioned the £800,000 loan either when commissioning the report, when discussing matters for two days with Halliwells, and when noting the remark in the report that obviously revealed a mistake of fact.

 

97. Having made these various points, we actually attach less significance to Halliwells’ ignorance of the loan point than the Respondents attributed to it.

 

98. The next point that we will make at this stage in relation to this report is that it appeared to summarise the steps in the Appellant’s trading. Several of the aspects of this summary troubled us considerably.

 

99. A significant point is that, after referring to the “Ship on Hold” technique, the report contains the following paragraph:

 

·       “Therefore, if the company’s overseas customer could subsequently cancel the deal after inspection, the company would not make the initial purchase and there would be no transaction. If the goods are “shipped on hold” they can be moved to enable the company’s customer to carry out its inspection without the company being committed to the sale.”

 

We can understand that if the delivered phones were of the wrong type, or failed to meet the specification in all the various invoices, and because by this point the reality (not actually specified in any of Kingswood’s invoices) was that the suppliers would not have been paid, it might have been possible to reverse all the deals as not conforming to specification. However we note first that by this point, the Appellant is certainly meant to have conducted its own inspection, or delegated this function to its own freight forwarders, and we also note that there is nothing whatsoever in the invoices passing between Kingswood and the Appellant that would result in the mere fact of the Appellant’s customer rejecting a supply as entitling the Appellant to reverse its own purchase transaction.

 

100. Another paragraph of the report says that:

 

“Following the transfer of funds, the company posts its actual invoice to the company’s customer and, if necessary, chases the actual invoice from the company’s own supplier. The manner in which deals originate, the timing of the cash flows and the documentation flow is typical for businesses operating within this industry sector”. 

 

101. We find it slightly odd that invoices that we assumed had generally been faxed at an earlier point, and dated at that earlier point, were said only to be generated after receipt of payments. We also refer at this point to the fact that in due course we will address whether the expression “businesses operating within this industry sector” is not something of a euphemism !!

 

The burglary and the loss of all the Appellant’s records

 

102. The final factor that we should mention is that in October 2006, well after the Appellant had been notified that its June 2006 deals were to be subjected to extended verification, there was a break-in at the Appellant’s premises, and the thief stole the Appellant’s computer and hard disc back-up such that the Appellant lost all of its information in relation to deals, e-mail correspondence, and MSM messages. It also appeared that the theft involved the loss of papers as well. We were led to believe, partly in reliance on Miss Renwick’s evidence, that there would have been little purpose in retaining information about deals that had been explored but rejected for some reason, and that paperwork in relation to them might well have been destroyed from time to time, as serving no useful purpose. Belatedly the Halliwells’ report had in fact recommended that such evidence should be retained but we accept that as all activity virtually stopped by the date in August 2006 when HMRC announced that the June deals would be subjected to extended verification, the only information about failed deals might already have been destroyed in the ordinary course. Whatever the position, no paperwork or notebooks or anything remained available to provide further information, in one way or the other, about the past trading, as a result of the burglary. 

 

103. We were told that a thief had been apprehended but that no property had been recovered.

 

OUR DECISION

 

104. It is perfectly obvious from the FCIB evidence, and from the arrangement of the payments in the circular transactions, that these deals were pre-arranged by some mastermind. That does not necessarily indicate that the Appellant knew of this, but as a fact it is indisputable.

 

105. We are conscious that by June 2006, the ECJ decision in Optigen had indicated that HMRC’s earlier attack on MTIC schemes had failed, and that those reclaiming input tax would be entitled to those refunds unless they could be shown to have known that their transactions were connected to fraudulent VAT losses, or the circumstances were such, in the words of the recent Court of Appeal decision, that there could be no other reasonable explanation for the transactions than that they were so connected.

 

106. In view of this, the obvious strategy of any mastermind organising an MTIC fraud in March to June 2006 was to ensure that:

 

·       the immediate trading partners supplying to, and buying from the party that exported, and reclaimed VAT, needed to appear to be as innocent as possible;

·       ideally earlier suppliers would pass the same test, in order to support the immediate supplier’s claims of honesty, and to complicate HMRC’s task of tracing transactions to tax losses;  and

·       whilst intermediate buffers, and particularly the immediate supplier to the claimant, would have to have correct Certificates of Incorporation and VAT registrations (in order to survive due diligence questions and to guarantee Redhill or other appropriate VAT registration confirmations), they also needed to have little net worth in order to render it pointless for HMRC to pursue the buffer companies for lost VAT under the joint and several liability provisions.

 

107. The obvious points just made still leave open the critical question of whether the VAT reclaimant, and in this case thus the Appellant, was an innocent dupe or the type of trader addressed in paragraph 105 above.

 

108. The question for us therefore is whether this Appellant was entirely honest, was pursuing its due diligence in a genuine manner, and was encouraged by the general confirmation by HMRC that it was usually attending to due diligence in the recommended manner, or whether alternatively it was almost laughing at the stupidity of HMRC in concentrating on due diligence that was unlikely to reveal much of relevance, so that the Appellant played up what appeared to be excellent due diligence, in order to generate a smoke-screen, behind which it could continue to trade without risk of challenge.

 

109. Before giving, and then seeking to explain, our answer to that crucial question, we might observe something about the attention once given to due diligence. It would be wrong to say that at any time, HMRC induced back-to-back traders to concentrate just on due diligence. Other indicators as regards the reality of transactions were stressed as well. It is fair to observe however that very considerable stress was placed on the due diligence enquiries that were meant to be made on suppliers and customers. Furthermore, HMRC officers often concentrated on the standard of due diligence paperwork when visiting back-to-back traders, and in this case we have heard of remarks to the effect that officers were reasonably satisfied with the due diligence undertaken by the Appellant.

 

110. Even without the guidance of the Court of Appeal, to the effect that we as a Tribunal should look far more to the overall circumstances, rather than just dwell on the due diligence, it was fairly obvious that much of the due diligence would inevitably fail to reveal the chain to fraud. The reality of the planning behind these transactions that is now very evident, to which we referred in paragraph 106 above, meant that the broker’s immediate trading partners would virtually always be duly incorporated, duly registered, and accounting for VAT on their slim margins. And it was equally obvious that if and when due diligence questions were put to the fraudster, the fraudster would obviously lie. Indeed much of the due diligence exercise appears to have been almost as pointless as the well-known questions in the US immigration forms that ask travellers to the US whether they have been involved in:

 

• “moral turpitude;
• espionage or sabotage
• terrorist activities;
• genocide; or between 1933 and 1945, in any way in persecutions associated with Nazi Germany or its allies”.

 

Our overall conclusion

 

111. Our conclusion is that this is a case where the overall circumstances indicate that the Appellant must have known of the connection of its transaction to fraud, and where the due diligence was regarded as the hoped for smoke-screen that would conceal this reality. We will now indicate all the factors that have led us to this conclusion.

 

The basic nature of the trading

 

112. HMRC made the point in argument that no honest traders could possibly think that a pattern of trading was honest and legitimate if it afforded a company the opportunity to make risk-free profits, potentially generating huge rewards, all in circumstances where the Appellant itself not only added no value at any stage, but even conceded that not once had either of the directors of the Appellant actually seen a single phone traded by it.

 

113. We agree with this observation for a number of reasons.

 

Whether exporting and reclaiming VAT is inherently ”profitable”

 

114. The structure of the VAT regime provided no reason or justification for the Appellant’s repeated assertion and expectation that “greater profits could be made from exporting, than selling in the domestic market”. The phones traded by the Appellant had inevitably been imported into the UK, then to be exported by the Appellant. This was because no mobile phones are in fact manufactured in the UK, and all phones in this case had continental European 2-pin plugs, such that it was odd that they had ever come into the UK in the first place. Assuming honest payment of VAT, however, the exporter is only recovering the VAT that should have been paid on importation, and by intermediate traders, the cost of which should have been added to the transfer prices, and the refund of VAT to the exporter offers no honest opportunity to make a genuine profit.

 

115. Exporting product and reclaiming VAT provides of itself an opportunity to make a profit only if the VAT on importation was not in fact paid.

 

The consistent level of profit

 

116. We also accept the Respondents’ point that it is extraordinary that a 7% profit was made by the Appellant in each and every deal. We accept that where slow selling stock is dumped onto a grey trader at a great discount, where a grey market trader undertakes “box-breaking”, and in other circumstances there can be opportunities for grey market traders to make profits. For those profits invariably to be of 7% in each of 13 deals, particularly when product in identical numbers was bought and sold on one day, with no remote addition of value, is extraordinary.

 

Substantial profits earned in risk-free deals that added no value

 

117. We also accept the Respondents’ point that the trade was risk-free and that the Appellant’s role added no remote value. Accordingly the repeated opportunity to make substantial profits must have struck anyone as curious, and too good to be true.

 

118. The Appellant suggested that the trade was not risk-free. In support of this, it referred to a loss of £10,000 that had been incurred in some earlier deal, when there had been some misunderstanding between the Appellant and its customer as to the agreed sale price. We were not given the details of this earlier transaction, but when the purchaser’s order should have specified the agreed price, and the Appellant’s invoice should certainly have specified the price, there should have been no opportunity for dispute as to the agreed price. Quite why there had been such a dispute, we do not know. The point that we consider sustains the Respondents’ suggestion that the trading was risk-free, was that the very nature of the trading only ever involved purchases when matching and identical sales at a profit had been agreed, and for some slightly curious reason it was plainly understood by all parties that the customer would pay the Appellant first, before the Appellant was even “immediately liable” to pay the supplier. Such trading was risk-free, save as regards confusion in getting the price wrong, and save for the loss that would be suffered if HMRC sustained its case that the refund of input tax was legitimately denied. That latter form of loss necessarily implies complicity in fraud, and this is hardly the risk that one can pay regard to in considering whether the trade was “risk-free”.

 

Education and experience required to effect trading

 

119. We consider it noteworthy that whenever a reference was made to the level of experience or knowledge that was required in order to effect back-to-back trading, it was always obvious that the experience that had to be gained was “how to do deal packs”. Thus when Mr. Gurjee gained his initial experience when trading alongside Mr. Ayub Patel, he was learning how to put together the paperwork of due diligence questionnaires, Redhill and other VAT registration checks, product orders, invoices, CMRs, instructions to freight forwarders to inspect goods, payment instructions and Release Notes. It seems odd to us, albeit that this was inevitably the case with futile back-to-back trading, that people could gain expertise in trading mobile phones without seemingly needing to know anything about the products.

 

120. Just as it was obvious that Mr. Gurjee learnt only about preparing “deal packs” when he initially worked with Mr. Ayub Patel, when in his turn he was showing the new directors of Excel how to effect deals in January 2006 and he was showing Mr. Patel how to do the same at the Appellant in February, we are clear that the experience passed on was all to do with due diligence and deal packs, and Redhill checks, rather than any remotely specialist knowledge about mobile phones.

 

Whether the trading terms made sense

 

121. The point that we make about the trade terms is that the sketchy and incorrect written terms (where, occasionally, there were written terms) made very little sense. Without pre-arrangement between the parties, it is unclear what the position would have been. It is fairly obvious what the terms would have needed to be if they were to reflect the real deal between the nine parties but, as these terms would have been too embarrassing, they were omitted. The actual terms, where there were terms, were, we conclude, terms that honest traders could not have adopted when companies of no material net worth were trading with similar counter-parties in transactions involving several millions of pounds. The reason, thus, why it was acceptable to trade on the actual skimpy terms in fact adopted, is that everyone knew in advance that the payments would whirl round the circle in one direction, and the phones in the other direction, and that the actual trade terms did not matter.

 

122. The real deals between the various parties appeared to operate as follows.

 

123. Once the mastermind had lined up the nine parties, and each had issued an order to its supplier and received an invoice from the supplier, with numbers of phones, type, unit price and total prices specified, the Appellant was probably at liberty to instruct its (i.e. all the UK parties’) freight forwarder to inspect the goods. The Appellant would then be able to instruct its freight forwarder to despatch the goods on a Ship to Hold basis to its European customer’s freight forwarder, even before any payment had been made, and before final releases had been given by the string of UK suppliers above Kingswood in the supply chain. Each party would only be liable to pay its supplier when it had been paid by its customer. The payment flow would commence with Worldcall making the first payment; a few steps later 2Trade would pay the Appellant and the Appellant would pay Kingswood and within a few minutes the money would be back in the hands of Worldcall, with an added profit. Quite which company would then release the phones first in the sequence of transfers of title and releases is not entirely clear but the releases obviously had to be issued in the reverse order to the payments. In other words, the Appellant, having been paid by 2Trade, could not have given an instruction that 2Trade’s freightforwarder could actually release the phones to 2Trade merely because 2Trade had paid the Appellant, because the Appellant needed to have paid Kingswood, Kingswood its supplier and so on before the various releases would trickle or cascade down the line, and enable the Appellant to release the phones sold to 2Trade from the “Ship to Hold” constraint.

 

 

124. The sketchy actual terms were as follow:

 

·       the Appellant’s order from Kingswood requested and received a declaration that “We own these goods and have title to [them] at the time of sale to Mayfair Executive Ltd”;

·       Kingswood’s invoice contained no terms, meaning no terms about when payment should be made, when title would pass and when goods would be released to the Appellant, should this have been at variance with the transfer of title;

·       it is unclear when the “sale to Mayfair” was regarded as taking place, and certainly unclear whether Kingswood would have had title to the goods at any point prior to itself having paid its suppliers since some at least of the earlier suppliers retained title until paid, according to their invoice terms;

·       2Trade’s order provided “Goods released immediately upon receipt of full payment”. “Full payment” must have meant receipt of full payment from 2Trade by the Appellant. Whilst the Appellant’s evidence somewhat varied as to whether it could release the goods to 2Trade as soon as it had received payment, the more considered evidence was that the Appellant first needed releases from Kingswood, and implicitly earlier suppliers in the correct order before goods could be released to 2Trade. Accordingly 2Trade’s term was not complied with.

·       2Trade’s order also insisted that the “supplier must be owner of the stock”. Whilst it was not clear when this had to be established, it is far from clear that this requirement was met.

·       The Appellant’s invoice carried the following two terms:  “Goods cannot be despatched/released without payment unless agreed otherwise” and “The title of goods remain the property of Mayfair Executive Ltd until full payment has been received”. Admittedly the first term might be “otherwise agreed”, but it was still somewhat inappropriate. Goods would invariably be despatched on a Ship to Hold basis prior to payment, and final release from the Ship to Hold requirement was to be given, not just when full payment had been made by 2Trade, but in reality only when all payments up the line had been paid, and the various releases had cascaded in the reverse direction back to the Appellant, such that the Appellant could release the goods to 2Trade.

 

125. Our view is that when the above few terms were not supplemented by any “Terms and Conditions” that anyone ever mentioned, they would have made little or no sense had the parties not in fact known what would actually happen in practice. Had the parties been dealing genuinely and honestly, in the absence of pre-arrangement, these sketchy and largely wrong terms could not have governed deals involving millions of pounds.

 

126. We accept that the basic expectation in this case was that the deal would operate in accordance with “industry practice”. The first of two qualifications that we make to that acceptance is that we believe that the industry practice referred to required pre-arrangement to take precedence over written terms that either failed to record reality or that were simply missing. Secondly, we would paraphrase “industry practice” to mean something rather less complimentary to the participants.

 

Doubts emanating from the FCIB evidence

 

127. Three doubts derive from the way in which the FCIB evidence makes it clear that these 13 transactions were entirely circular, and that payments between as many as 9 companies were made in just over one hour.

 

128. The point about the circularity is that the organiser, and there must plainly have been an organiser, cannot have risked the possibility that the goods and the payments would go “off course”.  In other words, had the Appellant been approached by 2Trade to supply any of the phones initially requested by 2Trade, it would not have been acceptable to the organiser for the Appellant to have sought to source the phones from any supplier other than Kingswood. For otherwise the cash that was meant to circle back to Worldcall would have been paid to that other supplier, and its suppliers, and the clear objective of the “organiser” would not have been fulfilled. The Appellant said generally that on receiving an order for phones it would ring round amongst its suppliers generally and view the IPT website to see where and how to source phones to match the order received. Admittedly the Appellant also said that it regularly purchased from Kingswood which it considered to be reliable, but we were told that, the 13 trades apart, it was not invariably the case that the Appellant’s supplier was Kingswood. In these circumstances, we consider it virtually certain that the mastermind behind Worldcall would have insisted on certainty that the 13 deals would operate in the circular fashion, and this must have involved some pre-arrangement with the Appellant.

 

129. The second observation that we make in relation to the FCIB evidence is that for nine payments to be made in 69 minutes, or in all three specimen cases, fewer than 90 minutes, with several companies being in different countries (albeit two or three of them seemingly operating from the same room and the same IP Address), there again appears to be a strong indication of centralised pre-planning. We know in the case of the Appellant that only Mr. Patel could have been dealing with the payments because Mr. Gurjee was performing merely his supervisory role by June, and Miss Renwick had been stood down prior to the 13 transactions. We do not know, though it is entirely possible, that some of the other companies in the chain would have been “one-man” operations. That feature and the plain fact that only Mr. Patel was available to deal with payments in the case of the Appellant also lends force to the expectation that the way in which nine payments were made in such a short period can only be explained by pre-arrangement.

 

130 The third observation that we make relates to the feature that in all 13 deals the Appellant always purchased the required stock from Kingswood. The Respondents had made the point that it was extraordinary that the Appellant could always buy the exact quantity of stock that the customer wanted. We agree with the Appellant that, as a general observation, there is nothing particularly significant in this, for it could have been that a supplier would have had more phones than were required, so that the reason why only the correct number of phones was acquired was the understandable policy of the Appellant never to hold stock, and never thus to buy more phones than the number for which it had a matching order from a customer.

 

131. The point that might have struck an honest trader as curious, however, was the feature that Kingswood, a company that actually held no stock itself, was always able to access the category of phones that 2Trade wanted. The reality was simple in that because of the circularity, Kingswood would be bound not only to be able to source the type of phones but the exact required number, because “what went round, came round”. Whilst that inevitably satisfied the purchaser’s requirements, it could and should still have struck the Appellant as odd. Furthermore, the Appellant, Kingswood and indeed each buyer in turn could only know that the required stock could be obtained, once every step in the chain had been put in place by the organiser.

 

Timing features and standing Miss Renwick down

 

132. When Miss Renwick returned from holiday in May, she said that activity was dead, and because there was nothing for her to do, she ceased her part-time consultancy for the Appellant.

 

133. The explanations for the fact that there was nothing to do was partly that, pending the Appellant’s receipt of its awaited refund from HMRC it could not finance further export deals, and we were also told (a fact that might have alerted an honest trader to the extent of fraud in the mobile phone/CPU sector) that many traders were facing extended verification for their VAT reclaims, and other problems with HMRC.

 

134. It thus seems strange that when the Appellant received its VAT refund from HMRC on 6 June, when that disappeared from its Barclays account between 12 and 16 June, and was only transferred to the FCIB account on 20 June, the Appellant was able, without the assistance of Miss Renwick, to effect by far its most active period of trading, and indeed to effect all 13 deals in the three days from 19 to 21 June. By the end of the third day, there was less in the FCIB bank account than had been required in any one of the 13 deals to top up the VAT-exclusive payment received from 2Trade to the VAT-inclusive amount that the Appellant had had to pay Kingswood, and so there was no more trading.

 

135. We consider that this timing indicates pre-arrangement, there being every likelihood that it was expected that if and when the Appellant satisfactorily recovered the input tax that it had claimed, it would effect this string of export deals.

 

Banking arrangements

 

136. We attach some considerable significance to several features of the banking arrangements. It was well appreciated that in early 2006 UK banks were severing their links with back-to-back phone, CPU and similar traders; it was significant that moneys disappeared from the Barclays account, and there is some significance to the fact that the Appellant not only had an FCIB account, but indeed that it had opened that account as early as 2 November 2005.

 

137, Any honest trader would have to attach some significance to the fact that UK banks were being pressed by HMRC to sever their relationships with back-to-back traders. It is unrealistic to believe that HMRC could and would single out a legitimate trading sector, and then seek to procure, and equally significantly succeed in procuring, that virtually all UK banks would cease to provide banking facilities to back-to-back, and in particular export, traders without good reason. Something had to be wrong.

 

138. It is unrealistic for the Appellant to say that it was just “worrying” for moneys to disappear from their Barclays account. It was perfectly obvious that Barclays would have been blocking the account whilst money laundering and other fraud enquiries were made, and when this had happened on two occasions, this ought also to have put the Appellant on notice that all might not be well.

 

139. Some appellants in MTIC cases contend that they had to open FCIB accounts because otherwise they could not obtain banking facilities. In the present case, this was obviously not a tenable motivation when the Appellant opened its FCIB account on 2 November 2005, many months before its Barclays account was closed. We do not accept any evidence along the lines that there was some obvious convenience in having an FCIB account in relation either to the trade of giving accident claims advice, or buying in accident claims, or indeed in honest grey market trading in mobile phones. There was every reason to open FCIB accounts for those traders participating in long trading chains, or more particularly circular chains, and we repeat that in this case every one of the parties involved in the 13 deals (not just 9, of course, because there were minor changes in the selection of buffer companies) had FCIB accounts. 

 

 140. We were given no evidence as to the general identity of the great majority of customers of FCIB. The Appellant asserted, without this being established, that many FCIB customers were not mobile phone traders. Since MTIC activity was certainly not confined to trading just in mobile phones, we found this particular suggestion to be of little significance.

 

 141. We do find that the fact that the Appellant opened an FCIB account in early November 2005 is damaging, and as a general rule we consider that the common desire of back-to-back traders to have FCIB accounts was most obviously explained by their convenience in dubious MTIC style trading, rather than with any honest grey market trading.

 

Other preparatory steps

 

142. We were unable to discern whether there was any credibility to the claim that the Appellant wanted to switch over to monthly returns because it was going to embark on buying in claims, and that that business model would lead to regular VAT reclaims. In the event such trading did not occur to any significant degree, and it is equally plain that it would have been attractive for a back-to-back trader regularly exporting phones to Europe to have monthly VAT returns.

 

143. We also note that the Appellant advanced the point in support of its openness that it informed HMRC of its proposed change of trade sector. Some credit is due for this, but it is also noteworthy that it could well have been appreciated that trading partners would have been far more wary of dealing in mobile phones with a company whose primary trade category was that of giving advice in relation to accident claims. The general view at the time, that HMRC monitored phone traders more carefully, and that it was at least curious if an accident advisory trader was buying and selling mobile phones, would very likely have dissuaded some other traders from dealing with the Appellant, had its trade designation not been changed. 

 

Out of one company and into another

 

144. A number of factors related to the way in which Mr. Gurjee had been heavily involved in the back-to-back trading at Excel, and that on exiting from that company (if he did, which HMRC strongly disputed) he embarked on an identical venture with Mr. Patel, renders any claim along the lines that Mr. Gurjee was “an innocent dupe” astonishing unlikely.

 

145. We have little doubt that Mr. Gurjee made the relevant enquiry with the National Advice Service from Excel in May 2006. We also find it difficult to see why, in a meeting with an HMRC officer, the two new directors would have said that Excel would in due course declare a dividend in favour of Mr. Gurjee, had that not been the intention.

 

146. Beyond the indisputable fact that Mr. Gurjee had been fully involved in back-to-back trading at Excel, we place little emphasis on the disputed issue of whether he did or did not sever his connection with Excel after he ceased his “education” role at the end of January 2006. It is perfectly possible that he was to receive some further dividend out of the profits made in the January deals, or maybe the deals for some longer period, but since Excel’s deals were eventually subjected to extended verification and it failed to progress its appeal, it seems likely that it would have lost whatever retained profits it might have had at one point, such that future dividend expectations would have evaporated.

 

147. Without thus reaching any conclusion in relation to Mr. Gurjee’s “exit” from Excel, we do find it highly significant that he left one company, and immediately set up an identical activity in another. Indeed in the new company he would be in a more favourable position. We were told that Mr. Gurjee was unclear in what way Mr. Ayub Patel was financing the VAT gap at Excel, which seems odd since the level of trading was entirely governed by the available finance to fund the VAT gap. It seems reasonable to suppose, however, that Mr. Ayub Patel was taking a prior slice of profits, as an interest return on funds, before Mr. Ayub Patel and Mr. Gurjee shared the remaining profits equally. Whether this was so or not, it was certainly obvious that if Mr. Gurjee could extract his “share of the pot” (£600,000) from Excel and invest it, plus £195,000 derived from his Dubai commission income, into the Appellant at a 20% interest rate, and thereafter earn 50% of the residual profits, with little work after Mr. Patel had been trained in February 2006, the whole proposal was attractive. There was also an attraction inherent in the feature that it was prudent to commence VAT export deals, and the “broker’s activity” in a new company, rather than one, such as Excel, where after many months of trading and VAT re-claims, extended verification was a greater likelihood.

 

148. A disadvantage of extracting funds from Excel, so as to be able to loan £795,000 from Sterling to the Appellant, was the feature that extracting £600,000 from Excel would ordinarily involve some income tax, or capital gains tax implication. Equally investing the undeclared profits of the Dubai commission trading in Sterling and indirectly in the Appellant also involved an avoidance of tax. We find it quite extraordinary that Mr. Gurjee conceded that he had avoided all the tax in extracting “his share of the pot” from Excel, and in accumulating undeclared commission income in Dubai. The explanation that Mr. Gurjee gave for not having declared the money extracted in some undefined manner from Excel for tax purposes was that “he had not got it”, which may have made some practical sense perhaps by the time the Appellant’s reclaims had been subjected to extended verification, but at the point when the funds were received by Sterling, Mr. Gurjee’s wholly-owned company plainly had “got the money”. The feature that the money may have been invested in Sterling, and then in the Appellant, and possibly lost, has obviously not the slightest bearing on whether it should have been declared for tax purposes. Obviously the same applies to the undeclared commission income. 

 

Transervices’ parallel transaction

 

149. We cannot be certain that Mr. Gurjee placed a potentially profitable export transaction with his long-standing friend who was a director of Transervices. It does seem most suspicious however that when the Appellant was close to running out of finance to bridge the VAT gap, Transervices was inserted, between all the same companies as the Appellant in the Appellant’s 13 transactions, and Mr. Gurjee went as far to say that he might have casually mentioned his transactions, and presumably his counter-parties to Mr. Hanif Patel. A casual mention would hardly be enough to enable Mr. Hanif Patel to contact Kingswood and 2Trade, and it thus seems distinctly likely that the reality was that Mr. Gurjee was assisting either his friend Mr. Hanif Patel to effect a profitable deal, or assisting others in the chain to draw Transervices into the net.

 

The absence of Mr. Tuppen and the burglary

 

150. Whilst HMRC cast doubt on the proposition that Mr. Tuppen’s eye operation back in September 2010, and high blood pressure, justified him in refraining from giving evidence in person, and from being cross-examined, there is no doubt that his absence was of significance.

 

151. Both Kingswood and the Appellant appeared to have taken advice from Halliwells. Both companies provided Supplier Declarations, attached to their order forms, in virtually identical form. Mr. Gurjee plainly had a good relationship with Mr. Tuppen and the two had done deals whilst Mr. Gurjee was working at Excel, and while Mr. Gurjee was working at the Appellant, both before and during the June 2006 transactions. The similar documentation suggested that one company was giving recommendations to the other.

 

 152. We have already suggested that the manifest presence of a mastermind and organiser, and the feature that the organiser must have been confident that the phones, and the cash, would indeed go round in the pre-destined circle, and not veer “off-course” must have involved pre-arrangement of many steps. We could not accept, not that it was argued, that each of the 9 companies involved in each chain just happened to access the IPT website and locate its eventual counter-party by chance.  It is of course just possible that the Appellant might not have been party to that pre-arrangement, and that the mastermind might have relied on the feature that if 2Trade ordered particular phones from the Appellant, the Appellant would source the phones from Kingswood. The Appellant had, however, not sourced all of its phones from Kingswood, and indeed a 14^th transaction was dropped from this Appeal, about which we know nothing, save that the parties in that transaction were indeed different. We think it decidedly unlikely that in some way the organiser did not ensure in advance in some way that the Appellant would do precisely as was required, namely buy from Kingswood, supply to 2Trade and be available by phone and internet connection to deal with payments such that in 13 trades the 9 parties could invariably circle cash in about 1 ½ hours. But in the present context, and in considering the role of Kingswood, it seems yet more unlikely that the mastermind and organiser could have relied on chance or circumstances to ensure that when 2Trade sought goods from the Appellant, the Appellant would by chance happen to source the goods from Kingswood and Kingswood by chance would source the goods from the next company in the chain. So evidence about how Kingswood might have been slotted into its role would have been distinctly interesting. 

 

153. It is accordingly very unfortunate that Mr. Tuppen was not available to be cross-examined.

 

154. The same applies to the burglary. We were told that little use was made of MSM messaging, but clearly the loss of the harddisc and the computer and the loss of any papers that had not been destroyed in advance as waste paper have made it harder to be confident that we know precisely what happened in this case. We were only given the slightly colourless description of the way in which the Appellant operated, along the lines of being rung up by a customer with an order, and then accessing the IPT website and ringing round to known contacts to try to source phones to match the order. In the absence of any documentation whatever to give more reality, or to undermine the suggested innocence of the bland way in which the method of operation was described, we can only say that it was distinctly unfortunate that the burglar stole everything that might have assisted us in reaching a fairer, and better informed decision.

 

No claim that the Appellant was duped

 

155. We accept that there will be cases where the exporter or broker may have been entirely innocent of the connection of its transaction to fraud. It is unlikely that such an innocent exporter would have been very actively involved in two different mobile phone traders in succession and involved in numerous transactions. A feature that we would certainly expect to find in a case where a trader had been duped, was some evidence describing how the trader had been approached, the exact proposition put to it, and all information about how it was meant to deal with the various steps in the transaction. We would also expect to hear evidence along the lines that the trader now realised in what respects it had been naïve and over-trusting, and how its general ignorance about MTIC activity had largely explained its earlier naїvety.

 

156. In this case there was, and perhaps understandably was, no remote claim along the lines that this Appellant had been duped into entering into transactions that the Appellant now conceded were connected to fraud.

 

Due Diligence

 

 157. In a slightly perverse manner, we find the point that confirms us in the belief that the Appellant in this case knew of the connection of its transactions to fraud, was the due diligence exercise, in other words the exercise that the Appellant thought would provide it with a defence against attack by HMRC.

 

158. As we indicated in the Introduction to this decision, and in paragraph 108, there are two possibilities as regards the due diligence. Either it was undertaken in a genuine manner, and the Appellant derived genuine confidence from the fact that its counter-parties “presented well”, or the Appellant realised that the due diligence was both largely pointless, and the factor that, bearing in mind the considerable significance placed on due diligence by HMRC, could provide the Appellant with its shield against attack.

 

159. We have no hesitation in reaching the conclusion that in this case the latter is the right rationalisation.

 

160. The repeated warnings that Mr. Gurjee, and to a slightly lesser extent Mr. Patel, had been given about how the fraudster might be many steps away, up the transaction chain, meant that the Appellant was aware that due diligence was in two respects a fairly hopeless way of ascertaining whether transactions were connected to fraud. Firstly, the great likelihood was that the organisers would ensure that the immediate parties, either side of the exporter, would pass all the standard-form tests. They would, in other words, be duly incorporated companies, with valid VAT registrations and inevitably they would pass the Redhill and Europa checks. Secondly, at the point in the chains where those requesting answers in due diligence questionnaires of the fraudster, or those aware that they were participating in fraudulent chains, it was always slightly unlikely that the answers to the questions would reveal this. In other words much of the due diligence seemed as near futile as the US immigration question as to whether travellers were guilty of “moral turpitude”.

 

161. In responding to questions, Mr. Gurjee tended to avoid questions that dwelt on the significance of the fraud being “higher up the chain”, ducking the question by asserting that the Appellant’s immediate supplier had duly paid its VAT and was itself undertaking good due diligence. We were repeatedly told that the immediate trading partners were of seemingly good standing. We believe that Mr. Gurjee knew very well that this was an assertion that was not particularly relevant to the real issue. If he was being asked about the likelihood of making an honest profit of £800,000 in three days, or whether he knew that the transactions were connected to fraud, when the Appellant:

·       entered into risk-free trading, where it added no value whatsoever,

·       produced a bundle of deal packs and managed to be available on the phone and internet in order to receive and make payments,

·        inevitably made a profit of 7%, regardless of the make, model, value and quantity of phones, and

·       never saw a single phone,

the answer to these suggestions of complicit activity in something manifestly too good to be true was not to assert limply that the immediate counter-parties paid their VAT.

 

162. We consider that one of the factors that greatly supports the case that the Appellant regarded the due diligence as a smoke-screen was the Halliwells report.

 

163. The content of that very long report was in many ways excellent. It gave a thorough survey of the relevant case law, and then it set out to advise traders in back-to-back mobile phone trading, how they could trade safely, and avoid being caught up in fraudulent transactions. It is fair to say that the recent instructions from the Court of Appeal, suggesting to Tribunal judges that less attention should be given to due diligence than the overall circumstances, had not been issued back in July 2006. However it was startlingly obvious nevertheless that much due diligence might be futile, and HMRC’s guidance was never confined just to due diligence. It is thus odd that this report, which was very long, paid no regard whatsoever to:

·       whether there was any cogent reason why there were large profits to be made, in honest transactions, from exporting product that had inherently first been imported into the UK;

·       whether there was any element of the trading pattern of back-to-back traders that matched the trading model of honest grey market traders who generally performed some worthwhile function;

·       whether there was anything odd in regularly making identical 7% profit margins, regardless of the different makes, models, values, and numbers of phones in each transaction;

·       whether there was anything odd in millions of pounds of business being undertaken with relatively non-creditworthy counter-parties, all on the basis of scanty written terms that did not properly reflect what was described as “industry practice”; and

·       whether there was any significance in the countless warnings from HMRC that the above features might be just as indicative of proximity to fraud as poor due diligence.

 

 164. We conclude that the great likelihood was that the Halliwells’ report was commissioned both to enable the Appellant actually to improve its due diligence in order to reinforce the shield that was meant to constitute the Appellant’s defence to HMRC attack, and also to be produced as a document for that same reason. We do not suggest that the report was actually produced by Halliwells as a piece of advice designed to enable dishonest trading to continue without risk of challenge, but we certainly consider that there was a manifest gap in the report in that it paid no regard to circumstances, a few of which we have just listed, that were of vital and obvious significance in detecting fraud. And we certainly say that the report was commissioned by the Appellant to satisfy the requirements that we have just identified.

 

FINAL CONCLUSION

 

165. The totality of the evidence in this case leads us to the conclusion that the Appeal must be dismissed. Whilst many of the circumstances that we have identified amply justify us in reaching the conclusion that the Appellant ought to have realised that there could be no other reasonable explanation for its transactions than that they were connected to fraudulent VAT losses, we need now to address the issue of whether we consider that the Appellant had actual knowledge of this.

 

166. Many of the factors that we have identified in supporting our decision indicate only that there were indications that ought to have drawn the Appellant’s attention to the connection of its transactions to fraudulent losses. Others, however, indicate that on the balance of probabilities, the Appellant must have known of the reality of its transactions and of the connection to fraud. The points addressed in paragraphs 128, 129, 134/35, 147 – 149, 152, 155, and 161 – 164 seem to us to fall into this category. Any one in isolation might have been insufficient to justify the conclusion that the Appellant must have had actual knowledge, but the points listed in total do justify that conclusion.

 

COSTS

 

167. The Respondents asked in their opening submissions for costs if they won this Appeal, and they also asked us to apply the costs regime prevailing when the case was initially brought, namely the costs regime of the VAT and Duties Tribunal.

 

168. We have decided that it is appropriate that the old costs regime should be applied, not least because there is no facility to designate a case as Complex or otherwise when it commenced in the VAT and Duties Tribunal. We have also decided that in principle it is appropriate to award the Respondents their costs.

 

169. We were asked by the Respondents, should we reach the conclusions as regards costs that we have reached, to defer giving any specific costs order, on the basis that the Respondents would want to see the basis of our decision before deciding on the costs order that they would request. We accordingly do defer giving any specific order, though assume that if the parties are able to agree on the issue of costs, it may be unnecessary for the Respondents to refer the matter back to this Tribunal. Should that be necessary, the costs issue should be decided by a similarly constituted Tribunal.

 

RIGHT OF APPEAL

 

170. This document contains full findings of fact and the reasons for our decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) Tax Chamber Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

 

HOWARD M. NOWLAN (Tribunal Judge)

 

 

Released:1 March 2011