First-tier Tribunal (Tax)

[2011] UKFTT 162 (TC)

 

 

 

 

TC01031

 

Appeal number:  LON/2007/0962

 

 

VAT – MTIC Fraud

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

 

MYNT LTD Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT) Respondents

 

 

 

TRIBUNAL:  CHARLES HELLIER (Judge)

 GILL HUNTER

 

 

 

Sitting in public in London on 4-7, 11-14, 17, 18, 21 May, 15, 16 and 18 June, 23 August and 7 October 2010

 

Yasser Malik, director of the Appellant for the Appellant

 

John Black QC and Catherine Addy, instructed by the solicitor to HMRC for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

 

I Introduction

 

1. Mynt appeals against decisions of HMRC to deny its input tax in relation to transactions in mobile phones it entered into in February, March, April and May 2006.  The effect of the decisions was, in relation to April and May, to deny Mynt the repayment of the excess of that input tax over its output tax, and, in relation to February and March, to give rise to assessments to recover the input tax previously credited and repaid to the Appellant in relation to those months.

 

2. HMRC say that, under the principle enunciated by the ECJ in Axel Kittel v Belgium [2008] STC 1537, the input tax on these transactions was not creditable because Mynt knew or should have known that each of those transactions was connected with the fraudulent evasion of VAT. They say that the phones reached Mynt by a series of virtually contemporaneous transactions which started with a trader (the “defaulter”) who should have paid VAT on its sale and fraudulently did not do so.

 

3. The transactions in question were three deals in February 2006 (“February Deals 1 to 3”), nine deals in March 2006 (“March Deals 1 to 3 and 5 to 10”: input tax had not been denied in relation to March Deal 4), eight deals in April (“April Deals 1 to 8”), and 15 deals in May 2006 (“May Deals 1 to 15”).  In each case HMRC contend that after a series of three sales starting with a sale by the defaulter, the phones were acquired by Mynt.  In each case Mynt then exported the phones.

 

4. Mynt accepted that its acquisition could be traced back to the alleged defaulter in all but 19 cases, but put HMRC to proof in all cases that the company they said was the defaulter had in fact fraudulently evaded paying VAT on its sale.  Mynt also denied that it knew or should have known of any connection to fraud.

 

5. We had 27 lever arch files of documentary evidence.  We heard oral evidence from Julie Yeomans, an HMRC officer who was responsible for issuing the assessment and input tax denial letters to Mynt; from Michael Downer, Elaine Emery, Martin Evans, Philip Hawkins, Susan Hirons, Jonathan Laing, Terence Mendes, Timothy Reardon, Roderick Stone and Alan Tully, all of whom were HMRC officers; and from John Fletcher of KPMG.  All of them provided witness statements. We received unchallenged witness statements from the following officers of HMRC: Jennifer Carter, Andrew Monk, Barry Patterson, Susan Roberts, Stephen Robinson and Stewart Yule.  From this evidence we make the findings of fact which appear in the sections which follow.  Where in this decision we say that we were told something by a witness that means we accept that evidence unless it is clear in context that we do not.

 

6. We refer below to ‘the FCIB evidence’.  It was evidence of the movement of funds between account holders at First Curacao International Bank provided by Elaine Emery.

 

7. In a chain of supply which commences with a defaulter which sells to a first customer, which in turn sells to a second customer, and so on until a sale is made to Mynt, we refer to the intermediate suppliers as “buffers”. We use that term as a matter of convenience and without any implication that the buffer is in the chain for nefarious purposes.

 

8. The remainder of this decision is structured as follows:

II The conduct of the appeal

III The relevant law

IV Connection to a defaulter: the disputed chains (see also Appendix I)

V The alleged defaulters (and also Appendix 2) 

VI Knowledge and Means of knowledge – Factual Findings

VII Knowledge and Means of knowledge: conclusions

VIII Conclusions

IX Rights of Appeal

 

 

II The Conduct of the Appeal

 

(a) Mr Malik

 

9. Mr Black and Miss Addy appeared before us for HMRC with the assistance of HMRC’s Solicitor’s office.  Mr Malik appeared for the Appellant.  Mr Malik is and was the sole director of the Appellant and acted for the Appellant in relation to each of the transactions at issue: he was the human face of the Appellant.

 

10. Although Mr Malik told us that he had some help professional and otherwise with the preparation of parts of his case, he appeared before us alone and without legal representation or other help.  Despite the daunting forces ranged against him, Mr Malik was composed and clear in his presentation.  We were impressed by his grasp of the relevant principles, his clear presentation and by his calm and focused cross-examination.  He is clearly an able and intelligent man.

 

11. Mr Malik started the hearing expecting to give evidence on behalf of the Appellant.  He had submitted a witness statement and made factual statements in opening his case and elsewhere on which it could reasonably be expected that he would be cross-examined by Mr Black.

 

12. But Mr Malik also gave evidence at a trial before Flaux J at Leicester Crown Court for one of the defendants in confiscation proceedings: R v Syed Ahmed and Shakeel Ahmad.  HMRC sought leave (which we granted) to adduce the transcript of Mr Malik’s evidence in that case before us (and later put the judgment of Flaux J before us).  During the course of Mr Malik’s evidence (and in his later judgment) Flaux J said that he believed Mr Malik came perilously close to incriminating himself as a fraudster and assister of the defendants’ money laundering.

 

13. Because of links between some of the facts in the Syed Ahmed and Shakeel Ahmad case and the evidence in the appeal it was plain that Mr Black would cross-examine Mr Malik on aspects of his involvement with Mr Ahmed and Mr Ahmad and his evidence in that case.

 

14. Mr Black indicated to us that he would not object if Mr Malik sought an adjournment to consider, with appropriate legal help, whether he should give evidence in this appeal.  Mr Malik was initially hesitant about accepting this suggestion but eventually accepted it.  We adjourned.  He took advice and he returned to indicate that he did not intend to give evidence for the Appellant.

 

15. But we note that we were clear that, until this point, Mr Malik intended to give oral evidence in relation at least to these those things he had put in his witness statement and the facts he had indicated in his position as the company’s advocate.  After that event it was clear that the Tribunal would not have the benefit of Mr Malik’s statements being tested in cross examination. In these circumstances we have not ignored Mr Malik’s statements, but have considered them alongside the other evidence before us, taking into account the fact that they were untested.

 

(b) HMRC’s Statement of Case

 

16. In their statement of case the Respondents say that the relevant input tax was denied because “the input tax incurred by the Appellant was done so in a transaction or transactions connected with the fraudulent evasion of VAT”.  They rely on Kittel and say that the issue is whether “(a) the assessed transactions were connected with fraudulent evasion of VAT, and (b) whether the Appellant taxpayer knew or should have known of that fact.  They explain the connection to fraud at paras 28 to 31 as the tracing of the chains of transactions to defaulting traders.  The Respondents’ skeleton argument adopted a similar approach.

 

17. One piece of evidence suggested that for some of the deals the phones allegedly traded in did not exist.  If they did not exist then no VAT was due on this supply and no input tax credit would be available on their alleged supply to the Appellant.  The Respondents did not at any time before the last day of the hearing suggest that the Appellant’s input VAT could be denied on this ground.

 

18. It seemed to us that it would not be just to uphold the Respondents’ decision on this ground even if we were inclined to accept evidence that the goods did not exist.  The Appellant did not have a chance properly to dispute a case that input tax should be denied on that basis.

 

III The Relevant Law

 

19.  We apply the following principles:

 

(i) Where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that by his purchase he was participating in a transaction connected to fraudulent evasion of VAT, he is not entitled to deduct input tax on the transaction (see Kittel [59]).

 

(ii) This principle forms part of domestic law.  Mr Malik in his closing submissions contended to the contrary, but in Mobilx Ltd v Revenue and Customs Commissioners (and other appeals) 2010 EWCA Civ 517 at [47] Moses LJ makes it clear that no further domestic legislation is required to give it effect.

 

(iii) The words “should have known” have the same meaning as “having the means of knowing”. “If a taxpayer has the means at his disposal of knowing that he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct …” (Mobilx [51]).

 

(iv) A taxpayer has (or should have) the relevant knowledge only if he knows (or should know) that his transaction is (or was) connected to fraud.  Knowledge that it might be connected to fraud or that it was more likely than not that it was connected to fraud is not enough to trigger denial of input tax (Mobilx [56] and [60]).

 

(v) If a trader knew or should have known that “the only reasonable explanation” for the transaction was that it was connected to VAT fraud, then he is to be taken as knowing, or treated as if he should have known, that it was connected to VAT fraud (Mobilx [59], [60], [74], [75], [80]).

 

(vi) On the other hand if a trader takes ‘every precaution which could reasonably be required’ to ensure that his transactions were not connected with fraud, he is entitled to his input tax deduction (Kittel [51]).  He has an “impenetrable shield” (HMRC v Livewire 2009 EWHC 15 (Ch) per Lewison J at [87]).

 

We do not regard Moses LJ in Mobilx as casting any doubt over this proposition which derives directly from Kittel.  What is clear however is that “every precaution which could reasonably be required” will depend on the circumstances and what is reasonable in those circumstances.  Depending on those circumstances, following a list of suggestions provided by HMRC may fall considerably short of, or may substantially exceed what could reasonably be required.  Further, as Moses LJ (at [61]) and Lewison J made clear (at [87]), the taking of such precautions includes acting on the basis of what a trader discovers as a result of taking them; and that in our view includes making further investigations or taking such further precaution as the circumstances may reasonably require.

 

(vi) The knowledge required is not of a particular fraud or fraudster but of a connection to fraud (see the discussion at [54] to [56] in Honeyfone v HMRC).

 

(vii) The fraud need not be in the transaction which immediately precedes the taxpayer’s purchase (Mobilx [62]).

 

(viii) Even though the tax lost through the actions of a fraudster in the chain may be less than the input tax claimed by the taxpayer, the whole of that input tax is denied by the Kittel doctrine, not just the amount evaded (Mobilx [65]).

 

(ix) The burden of proof that there was fraudulent evasion of VAT and that it was connected to the Appellant’s transaction lies on the Respondents.  The burden of proof as to knowledge or means of knowledge also lies on them (Mobilx [81]).  In reaching a conclusion on the issue the Tribunal may properly take into account the circumstances surrounding a transaction including other transactions (Mobilx [82] and [93]).

 

 

 

IV Connection to an alleged defaulter: the disputed chains

 

20. The input tax credit HMRC challenges relates to transactions (‘Deals’) carried out in February, March, April and May 2006.  HMRC allege a chain of transactions which resulted in Mynt’s purchase in each of those Deals.  We call them the Deal Chains.

 

21. Mynt formally disputed the constitution of the Deal Chains alleged by HMRC in February Deal 3, April Deals 3, 4, and 8, and May Deals 5, 6, 7, 7, 14 and 15. In the course of his submissions to us Mr Malik also questioned whether a connection to the alleged defaulter had been shown in the case of March Deal 5.  A further concern emerged during the course of the hearing as to whether 3D Animations Ltd was, as alleged, the relevant defaulting party in May Deals 16 to 23.  We deal with each of these chains in turn in Appendix I.

 

22. In relation to each alleged chain we had before us copies of invoices, orders, deal listings, and release notes offered as evidence to establish the sale of the phones along the chain from the alleged defaulter to a purchaser, from that purchaser to another purchaser and from that purchaser to Mynt: so that, by a chain of three sales and purchases, the goods moved from the alleged defaulter to Mynt. This was the evidence offered of a connection between Mynt’s transaction and the alleged evasion by the defaulter.  There was also evidence of Mynt’s sale and in some cases its customer’s onward sale.  In most cases there was also evidence relating to the alleged defaulter’s acquisition of the phones and often an earlier transfer.  We heard evidence from Julie Yeomans, the officer of HMRC who had collated those materials and whose work was summarised in “Deal sheets” showing the successive sales of the phones.  In some cases the evidence offered of a sale and purchase took the form of entries on a deal listing which Ms Yeomans told us had been computed by an officer responsible for a particular trader from the documentation made available by that trader to him or her, which showed all the purchases and sales of that trader in a particular period.

 

 

Conclusions – Connection

 

23. There were 52 Deal Chains in which a connection to a specified alleged defaulter was alleged by HMRC.  Mynt did not contest the connection to the alleged defaulter in 33 cases.

 

24. In those uncontested cases we sampled some of the evidence and found it supported the chain alleged.  On this basis and on the basis of Mynt’s acceptance of the chains, we find the connection in these chains proved.

 

25. In relation to the 19 contested chains we find that it is proved that in February Deal 3, March Deal 5, April Deals 3, 4 and 8, and May Deals 5, 6, 7, 8 and 14 there was a connection between Mynt’s purchase and the alleged defaulter’s sale. The remaining chains are May Deals 15 to 23.  In the case of those deals we find either that there was a connection to the sale by the alleged defaulter, 3D Animations, or that there was a connection to a fraud by 3D Animations involving the provision of false invoices to Zenith on which Zenith claimed input tax recovery.

 

26. We discuss issues relating to the possible non-existence of the phones in VI(5) below.  The conclusions above are on the basis that the phones existed.

 

V. The Alleged Defaulters

 

27. In this section we consider: whether the alleged defaulter did fail to account for VAT in relation to its sale in the relevant chain, whether its failure was fraudulent, and whether the relevant fraudulent intention was present at the time of Mynt’s purchase.  The last element is important: unless the fraudulent intent had been formed at the time of Mynt’s purchase, Mynt could not have known at that time of the fraud.

 

28. We set out in Appendix II to this decision our assessment of the evidence in relation to each alleged defaulter and our conclusions on these questions.  We found that it had been proved that the alleged defaulter intended fraudulently to evade the VAT on its sale in all cases.

 

 

 

VI. Knowledge and Means of Knowledge – Factual Findings

 

29. In this section we set out our findings of fact and initial inferences therefrom from various aspects of the evidence before us.

 

30. We divide this section into six parts: (1) Mr Malik’s knowledge of the business and of MTIC fraud, (2) the conduct of Mynt’s business, (3) its dealings with HMRC, (4) the FCIB evidence, (5) the evidence from Mr Downer relating to the alleged non-existence of some of the phones, and (6) certain features of the Deal Chains.

 

(1) Mr Malik

 

(a) Esbae Ltd and Esbae International Ltd

 

31. Shortly after he left university Mr Malik worked for Esbae Limited.  Esbae Ltd appears to have been a fairly new company at that time.  Zulfiquar Mahmoud was we believe a director.  Mr Malik was not.  One of the first of its transactions (and its last) was a purchase and sale of CPUs.  Mr Malik was involved in this transaction.

 

32. Esbae Ltd arranged to buy the CPUs from J, an importer, and to sell them to C.  J delivered the CPUs to Esbae’s offices so that they might be inspected.  C came to inspect them and was told that Esbae did not own the CPUs.

 

33. C was willing to buy the CPUs.  C agreed to pay Esbae the price, and agreed that Esbae could then use the money to pay J who would then release the CPUs.  The payments were made.

 

34. But then J told Esbae Ltd that it did not own the CPUs: they were owned by the European Vendor from whom J had imported them.  J then made payment to that vendor, but once it had done so the vendor asserted that that payment discharged an existing debt of J and refused to release the CPUs.

 

35. As a result, as Mr Malik said, “Esbae Limited were now in a position where they have taken money from a customer who [had] paid them, the customer [was] well aware of how the deal was going to be constructed.  Esbae [had] now passed it [the cash] over to their supplier.  The supplier [had] passed it over to Europe and we [knew] the supplier was not in control of the stock.  Esbae [was] not in control of the stock.  So therefore Esbae [was] sitting there with a liability to its customer.”

 

36. C took action against Esbae for the money it had paid.  Esbae Ltd ceased business.

 

37. For this reason Esbae International Ltd (“EIL”) was set up.  Mr Malik was made a director of Esbae International Ltd in 2001.  It was decided that Zulfiquar Mahmoud should not be a director of Esbae International Ltd so that the new company’s business could be distanced from any claim C might have in relation to Esbae Ltd.  Mr Mahmoud held about 75% of EIL.

 

38. Esbae International Ltd (EIL) traded in mobile phones, buying and selling wholesale.  Mr Malik was a director between 2001 and 2004.  Although Mr Malik was formally a director of the company and Mr Mahmoud was not, it appears that, at least in the period up to February 2002, Mr Mahmoud had a greater influence in running the company.

 

39. Mr Malik says in his witness statement that during his time at EIL “he learnt the trade and established numerous contacts in the industry.”  We accept this.  He was also aware of an investigation into EIL’s transactions by Mr Hawkins.

 

40. In late 2001 Mr Hawkins became concerned that EIL was dealing with businesses who would fail to account for their VAT.  He visited EIL and met Mr Mahmoud and Mr Malik.  He explained his concerns that one of their suppliers might be a missing trader.  Mr Mahmoud dealt with Mr Hawkins’ questions and gave somewhat incomplete answers.  From a later inspection of EIL’s records Mr Hawkins concluded that (a) EIL had engaged in transactions of purchase and sale of a significant volume and (b) that, rather than paying its suppliers it had on some occasions made payment of the full purchase price (including the VAT) directly to its supplier’s supplier, a company outside the EC (such payments are generally termed “third party payments”).

 

41. In February 2002 Mr Hawkins visited EIL again.  Only Mr Malik was there: Mr Mahmoud had departed.  Mr Hawkins put his concerns about the third party payments to Mr Malik, and indicated that EIL’s VAT repayment would be withheld pending further consideration.  Mr Malik was not shy in providing information to HMRC at that meeting.  One of Mr Hawkins’ concerns was that the purchases in relation to which third party payments had been made could properly be treated as direct purchases (imports) from the person to whom payment had been made, rather than from a UK supplier, which would mean that the input VAT claimed was not due.

 

42. Eventually repayment was made. HMRC decided that no assessment should be made for acquisition tax (tax on an import).

 

43. On 19 February, 11 March, and 7 October 2002 EIL received letters from HMRC each of which indicated that a company it had traded with or considered trading with had been deregistered.

 

44. After February 2002 Mr Malik appeared to have run the company.  No third party payments were made by it after that time.

 

Our inferences from these facts

 

45. We conclude from the dealings at EIL that from 2002 onwards Mr Malik knew:-

 

(i) that it was not unlikely that a trader in mobile phones could ‘go missing’ and fail to account for VAT;

(ii) that in some cases such missing traders could be importers;

(iii) that third party payment to non-UK suppliers could well indicate fraud by a UK importer particularly when that payment left the importer without funds to pay the VAT;

(iv) that there was likely to be a chain of purchases and sales possibly tracing back to an importer in any wholesale transaction in mobile phones.

(v) that HMRC were active in deregistering companies it traded with or considered trading with.

 

46. From the involvement of Mr Malik with Esbae Ltd we infer that thereafter he appreciated the problems that could arise where a person could not supply title to goods when payment was made, and in particular that the making of payment even when assured that the payment would secure release of the goods would not necessarily transfer title to the goods.  Thus he would have been aware that even where payment for, and direction to release, goods were substantially contemporaneous, the purchaser remained exposed to the ability of the seller to transfer title, and if it did not have that ability, to the creditworthiness of the supplier.  We return to this issue when we discuss the terms on which Mynt traded.

 

(b) Shakeel Ahmad and Syed Ahmed

 

 

47. On 25 March 2004 Shakeel Ahmad was arrested and remanded on bail.  On 28 March 2007 he and Syed Ahmed were convicted of conspiring to cheat the Revenue and sentenced to imprisonment.  The conviction was for their knowing participation as directors and shareholders of a company, MST, in 32 transactions in computer chips when it acted as a ‘buffer’ in a chain which started with a defaulting importer and ended with an exporter.

 

48. At confiscation proceedings before Flaux J in Leicester Crown Court Mr Malik gave evidence for Syed Ahmed.

 

49. We note that (i) Mr Malik told the Court that he had known Shakeel Ahmad since about 2001, and (2) that in June 2006 he asked Shakeel Ahmad to make a loan to Mynt, and (3) Flaux J described transactions in which Mr Malik, his companies, Shakeel and his wife were involved as being “money laundering, of the defaulters’ close friends and associates washing their money for them to conceal the true source of monies which paid for assets.”

 

50. It thus appeared that Mr Malik knew Shakeel Ahmad well, and we therefore find it likely that before 2006 Mr Malik had learned from Shakeel Ahmad the nature of the transactions in which MSL had been involved, and the nature of the allegations made against him.  We therefore find it likely that by the beginning of 2006 Mr Malik knew that there had been and could be chains of transactions in items such as CPUs in which:

 

(i) the items were imported

(ii) the importer sold to a buffer

(iii) the importer defaulted on the VAT

(iv) the buffer sold to another buffer

(v) which buffer sold directly or through other buffers to an exporter,

 

And therefore that Mr Malik knew that obtaining comfort that Mynt’s supplier existed or was trustworthy would not have provided comfort that the transactions undertaken with that supplier could not be traced back to a fraudulent importer.

 

(c) Comments by Flaux J in his judgment

 

51. The Respondents drew our attention to paragraph [372] of Flaux J’s judgment in the Syed Ahmed and Shakeel Ahmad case.  Having described Mynt’s business and the VAT reclaims made in April and May 2006 he said:-

 

“These reclaims have been denied by HMRC because they have traced every transaction back to a defaulting trade ...  Mr Malik accepted in cross-examination that there was MTIC fraud and that he was the person at the end of the chain claiming big money.  Although he did not accept that he was himself an MTIC fraudster, it seemed to me at the time and still does, having re-read my notes of his evidence that he came perilously close to admitting that he was fraudulent and, indeed I warned him and the defendants about him incriminating himself.”

 

52. The transcript of the trial records the relevant exchanges thus:

 

“Q Because all of the deals in those four months traced back to defaulting traders?

  A. Yes.  Apart from one which was – yes

  Q. What’s known as MTIC fraud, Mr Malik

  A. Yes

  Q. And you were the person at the end of the chain reclaiming the big money?

  A. If you – you could put it that way, if you wish.”

 

53. This evidence was given to the Crown court on 26 May 2010.  At that time we had had 10 days of this appeal.  The issues in this appeal would have been clear in Mr Malik’s mind: was there fraud at the beginning of the chain, and did Mynt have knowledge of that fraud?  In that context it seems abundantly clear to us that when Mr Malik asserted to the proposition that the tracing back to defaulting traders was MTIC fraud he was making no admission that he knew that such was the case.  He was merely saying that if you have at the beginning of a chain a defaulting importer then you had what is called Missing Trader Inter Community Fraud – MTIC fraud.  Mynt’s position at the end of the chain, claiming back the big money meant that it was connected with that fraud, but unless Mr Malik knew of that connection he could not be said knowingly to have participated in it, and unless he knew or should have known of it Mynt could not be regarded as a ‘participant’ in the Kittel sense.  Given that the issue of such knowledge was, in this tribunal, a big issue, separate from the issue of connection and initial fraud, we find it inconceivable that Mr Malik was doing any more than assenting to the proposition that some of Mynt’s deals had been traced back to a fraudulent defaulter.  Flaux J saw Mr Malik giving evidence, we did not, but we did see him in action over a period of some two weeks before the day when he gave evidence before Flaux J. In context we do not draw the same conclusions as those drawn by Flaux J from this evidence.

 

(d) Other aspects of Mr Malik’s evidence before Flaux J

 

54. Mr Malik also gave evidence at that trial about a number of loans made to Mynt and to Yas Trading, a Spanish company owned and directed by Mr Malik.  These loans were of £100,000 (December 2004) and £300,000 (January 2005) to Yas Trading, and of £400,000 (April 2006) to Mynt.

 

55. It appeared that in June 2006 it was intended that Mynt would lend the £400,000 to Yas Trading who would lend it back to Mynt, and that Mr Malik considered that these transactions could be put in place without the physical movement of money from Mynt to Yas Trading and back again so long as there was paperwork in place showing the two loans.  He said that there was “no point in me physically transferring money from one to another. Why not just do it direct and have the paperwork then to justify it?  That’s not a sham.”

 

56. Flaux J found that the real purpose of at least half of the money funnelled into Yas Trading by the first two loans was to launder money which had originated from MST’s activities and transmit it to Shakeel’s wife.

 

57. We reach two conclusions from this evidence.  First that Mr Malik (and through him Mynt) was not particularly fastidious about legal niceties, and second that he was not above becoming involved in something dodgy: something which would have caused a reasonable businessman sufficient concern either to ask a lot of questions, or speedily to distance himself from.

 

(2) Mynt’s Business

 

(a) Creditworthiness of Mynt, its suppliers and its customers

 

58. In his witness statement Mr Malik says that Mynt did not rely upon the credit checks it undertook for two reasons: “First, we were not dealing with long-established companies, and most new companies, including ours, were unlikely to have a good credit rating. Second, as we were not extending credit to our customer, a low credit rating was not of particular concern to us.” It was not a concern he intimated because of the back to back nature of the deals.

 

59. From Mr Malik’s first reason we conclude that: (1) Mynt was a company without substantial net assets, and did not have the resources to meet a claim for tens or hundreds of thousands of pounds; (2) its customers were in a similar position. We also conclude from this, and the due diligence reports on its suppliers, Phone City and Regal, that they were companies of little substance without the resources to meet any substantial claim, or the ability to borrow or obtain significant credit. Thus Mynt must have known that they operated in a similar back to back way as Mynt.

 

(b) Back to back sales: the Passing of Title, and the effect of “release”.

 

60. Each of the deals under consideration involved ‘back to back’ purchases and sales by Mynt on the same day.  We understood (from Mr Malik’s cross examination of Mr Hawkins) that once a supplier and a purchaser had been lined up, Purchase Orders would be made and invoices issued.  About the same time Mynt would receive notification that the phones had been allocated to it at a freight forwarder.  It would then be able to arrange inspection of the phones.  When that was completed, payments would be made against the invoices.  First Mynt’s customer would pay Mynt and then Mynt would pay its supplier.  The supplier would then fax the freight forwarder instructing it to release the goods to Mynt, and Mynt would similarly instruct the freight forwarder to release the phones to its customer.

 

61. In his closing submissions, however, Mr Malik described the procedure somewhat differently:

“1. Stock is allocated to Mynt; this allows Mynt to inspect the stock.

2. When the stock has been satisfactorily inspected. Mynt commits to the stock and the stock is released to Mynt– title is passed.

3.Mynt ships the stock to the customer to allow the customer to inspect it – title is not passed.

4. When the customer is happy with the stock he makes payment to Mynt. Mynt then sends a release note to the freight forwarder, in the UK, to release the stock to the customer – title passes.

5. Payment is made to the supplier for the stock.”[Our italics].

 

62. The account of the passage of title in those submissions is inconsistent with what Mr Malik said to Mr Hawkins in cross examining him. For then Mr Malik indicated that Mynt’s supplier would release the stock to Mynt only once Mynt had paid it. 

 

63. The documentary evidence available to us appeared generally to support the account in Mynt’s closing submissions. On sampling such notes as were in the documentation, it appeared that Phone City at least would direct the freight forwarder to release the phones to Mynt on the date Mynt committed rather than that on which it paid, and on that date Mynt would ship them “on hold” to its customer. Then, on a later date, the customer would pay Mynt and Mynt direct the freight forwarder to release the goods to its customer, and would pay its supplier.

 

64. There were however some surprising features in some of the chains we examined. Mynt may not have known of the first two of these, but because of Mr Malik’s experience at Esbae, Mynt would have known that they were possible. They were: (1) For March deal 6, although buffer 2 released the phones to Mynt and Mynt shipped on hold on the invoice date of 28 March, it was not until 31 March, after the date of payment (on 30 March) that FX Drona, the first UK entity in the chain gave instructions to release the phones. Thus it was unlikely that Mynt’s release conferred title or control upon its customer even though its contractual documentation indicated that title would pass on payment; (2) something similar occurred in March deal 2; (3) In February Deal 3, Mynt shipped on hold on 27 February, releasing the phones on 3 March, but Phone City apparently released the phones to Mynt on 22 February, nine days before payment.

 

65. On the basis of the account in the closing submissions, Mynt’s supplier (assuming that it had title) would pass title to the stock to Mynt before it had received payment, and would have to wait for payment until Mynt got that payment from its customer. It would thus give credit to Mynt for that period. On the basis of Mr Malik’s oral account, Mynt’s customer would pay before getting title, and would not get title until Mynt had paid its supplier, the supplier had released to Mynt and Mynt in turn had released to the customer. On that basis the customer provided credit to Mynt until it got title. 

 

66. We saw documents “Terms of the Sale with Mynt Limited” addressed to, and signed by, Mynt’s customers.  They contained the following clauses:

 

“4. At the time of sale Mynt Ltd has full ownership of the products.

 

5. The products will be shipped on hold to the customer’s desired destination.

 

6. Ownership will be passed to the customer once full payment has been received …

 

“Additional Notes

At times the customer will in effect be making a prepayment to Mynt Ltd, as they will pay for the stock before it is delivered to their destination.  The customer accepts this arrangement as part of the terms of the sale …”

 

67. Mynt also had Terms of Sale with its suppliers.  These made no reference to when ownership of the phones passed.  All they said about title was that the products had been bought by the supplier “on the open market with free title”.

 

68. Mynt’s invoices say “Goods will be released when full payment has been received”. (And on the purchase orders it is said that “10% payment of the total due will be made after satisfactory inspection request has been completed to secure stock”.  But Mr Malik told us that this was a hang over from 2005 and had not been deleted from the template.)

 

69. The documents provided by Mynt show that for a number of deals Mynt gave instructions to its freight forwarder to “Ship on Hold” phones it had ordered from a supplier to a European destination.  Although we had no direct evidence on what this meant it seemed clear that this instruction would be given at a time when Mynt had ordered the goods from its supplier, had been informed at which freight forwarder they were held, had inspected them and knew where its purchaser wanted them to be delivered.

 

70. The documents showed that in 22 deals the relevant phones were shipped on hold to the designated location, and that at the time of shipment Mynt had not been paid by its customer, nor had it paid its own supplier.  Thus goods belonging to someone else were shipped to a depository outside the country.

 

Evaluation

 

71. It seems to us that when an instruction is given to a freight forwarder by X to “release” goods to Y, that must be an instruction to give Y such control over the goods as X has, and is intended to convey whatever title X has in the goods to Y. But if X does not own the goods, or has not had them released to it, it can operate only to convey title to Y once X has acquired it.

 

72. Two consequences flow from this. First, that in the circumstances where in an earlier stage of the chain there had not been a release, then Mynt could not confer title on its customer by releasing the goods. Mynt knew this. Second, if Mynt’s supplier had title then in its release of the goods to Mynt it was giving Mynt credit until Mynt paid.

 

73. The mechanism of shipping on hold also calls for some comment. Mynt, by consenting to the custody of the goods passing out of the UK would have to get them back and resell the goods if the deal collapsed. It must have been exposed to its own shipping and repatriation costs, and to any default by the overseas freight forwarder.

 

74. Likewise until the chain completed and the money reached whoever had original title, Mynt, in respect of the price it paid its supplier (in we believe the sure knowledge that its supplier was also buying on the same day), was exposed to its supplier in relation to the full amount of the purchase price.

 

75. Thus in the picture of these deals painted by Mynt: (1) Mynt’s customer took credit risk on Mynt between its payment and the time Mynt passed title (if it had actually been given title by its supplier)  or later when the money passed back down the chain to the person with original title; (2) Mynt took a risk that the customer would not want the goods and it had to find the money to pay its supplier, (3) Mynt took a credit risk on its supplier that it did not in fact have title to convey to Mynt, and (4) Mynt’s supplier took a credit risk on Mynt by releasing control or whatever title it had to the goods before Mynt paid it some days later. And all of them took a risk that someone further down the chain – and they must have known that there was someone further down the chain for the reasons noted earlier – would not pass title or control.

 

76. These were substantial credit exposures held against companies with no real capability to meet the claims 

 

77. Nor did the words in italics in Mynt’s terms of sale save it from this exposure.  Even if the (full) payment made by the customer could be regarded as a “pre payment” clause 4 provided that “ownership will be passed when full payment is received”, and thus the italics could refer only to the risk of delivery not to any delayed passing of title for the goods.

 

78. Mr Malik’s experience with Esbae Ltd (and J and C) revealed exactly this exposure.  Mynt, through Mr Malik, knew of the problems. We see no way in which the mechanism of trading could not have given rise to substantial credit exposures (albeit in practice only for a short period when all happened as planned) for Mynt, its customer, and in all likelihood its supplier.

 

 

(c) Payment after release

 

79. In March Deal 10 and May Deal 5 Mynt gave instructions to release the goods before it had received payment.

 

80. In these deals Mynt took a risk on the credit of Pochard for some £600k and LBS Warenhandel for some £84k.  Here was no evidence that Mynt made any checks on the creditworthiness of those companies, and indeed Mr Malik’s closing submissions suggest that they were regarded as unnecessary.

 

81. We conclude that Mynt was certain that payment would be arranged in each case.

 

 

 

(d) Mynt’s invoices

 

82. Mynt’s invoices to its customers had a field for a description of the phones being sold.  The description would be “Nokia 6681”, “Nokia N70”, “Sony Ericson N900i” etc. There was no mention of whether the phones were sim free, what colour they were, whether they came with European 2 pin plugs or UK three pin plugs.  The purchase orders Mynt gave were similarly terse, as were the invoices it received. The detail on the purchase orders Mynt received was more variable.  Whilst the orders from Coburg Trading specified original packaging, sim free, never locked, and ‘Central European Spec’, those from Pochard and CEMSA contained no such requirements, and those from Warenhandel required only “original packaging and sim free”.

 

83. It is, of course, quite possible that such details were agreed orally between the parties before the orders and invoices were sent.  But these were transactions with prices of £100,000 where small changes in the product were bound to affect the value. Ordinary commercial prudence and practice would be to provide as much certainty as possible in the documents recording such a deal.

 

(e) Inspection

 

84. Mr Malik indicated in his witness statement that Mynt arranged an inspection of the goods before they were delivered.  The inspection was undertaken by the freight forwarder, and included a scan of 10% of the unique identifying IMEI numbers of the phones.

 

85. For most of the Deals there were inspection reports addressed to Mynt in the documents before us.  The most basic of these reports were from Humber Freight.  They would set out the number and type of phone (e.g. 450x Nokia 3250) and certify that they were genuine, had not been tampered with, and were in cartons with original seals.  These reports made no mention of the colour or specification of the phone.  The reports from A1 Inspections Ltd were more detailed; they listed the colour, whether the charger was 2 pin, and the keypad language.  The reports from Marathon described whether they were sim free, had a battery, a manual and a charger, and whether they were Central European Spec.

 

86. All the inspection reports which had more detail than the Humber Freight reports indicated that the phones either had 2 pin chargers, or were ‘Central European Spec’.  We conclude that all these phones were not intended for the UK market.

 

87. We think therefore that it is likely that all or almost all the other phones were not adapted for the UK market but for the European market.

 

88. We find it indicative of a lack of interest on Mynt’s part in the precise nature of the phones that the terse reports by Humber Freight were acceptable to it.  Mr Malik in his witness statement said that the inspection was undertaken to ensure, as far as they reasonably could, that the specification of the phones was as “per our order”.  Coupled with the lack of detail on the inspection reports that indicates that Mynt was not concerned with the precise nature of what it was trading.

 

89. The Humber Freight reports indicated the country of manufacture of the phones.  In every case it was outside the UK.  Mynt would therefore have known, if it did not already, that all the phones it dealt in came originally from outside the UK.

 

 

(f) Due Diligence

 

90. This is the term which was given to investigating the financial state and reliability of persons with whom a trader dealt.  The exhibits to Mr Malik’s witness statement included Mynt’s due diligence files in relation to its suppliers and some of its customers in the Deals to which this appeal relates.

 

91. Mr Malik did not exhibit any due diligence files for the freight forwarders it used to hold (albeit often momentarily) and ship the phones. In their closing submissions HMRC infer that we should conclude there were none.  We felt unable to reach that conclusion because it was insufficiently clear that the existence or otherwise of such due diligence was part of the case Mynt had to meet.

 

92. A number of the documents in the exhibited copies of Mynt’s due diligence materials appear to have been received by Mynt after some or all of the relevant Deals took place. This contributed to the impression we gained from all these materials that they were not obtained for the purpose of, and were fairly useless in, addressing the question as to whether Mynt’s transactions could be connected with fraud, but were obtained merely to show HMRC that some of the checks in its Notice 726 had been conducted. Indeed Mr Malik in his witness statement indicates that Mynt relied on the third party checks primarily to ensure that the persons they dealt with were the directors of the companies concerned.

 

 

Suppliers

 

93. The due diligence files for Mynt’s two suppliers in the period, Phone City and Regal Portfolio contained copies, inter alia, of their certificates of incorporation, of VAT certificates, of the passports or driving licences of their directors, of references, and of Dunn & Bradstreet reports.

 

94. These documents are in our view adequate evidence on which to conclude that these companies existed, were at some time VAT registered, and had the persons Mynt dealt with as their directors.  They provide however no comfort as to the financial standing of the companies:-

 

(i) for Phone City the only indication of financial strength is in the Dunn & Bradstreet report which indicates it is a high risk company with a share capital of £1;

(ii) Regal Portfolio’s accounts show an insolvent company, whose assets exceed its liabilities.

 

95. In addition, whenever Phone City or Regal Portfolio sold phones to Mynt a supplier declaration was completed confirming to Mynt ten points, and that they had carried out ‘reasonable due diligence checks’ on their supplier.  The ten points were directed to the specific checks suggested  in HMRC’s notice 726, and included statements that the supplier had no reason to suspect that the VAT on the goods would go unpaid by its supplier, and that it did not make third party payments.

 

96. This document could reasonably afford Mynt some comfort that its supplier did not intend to evade VAT on its sale, but it provided almost no comfort that there was not VAT fraud earlier in the chain of supply.

 

97. We should also note that the Terms of the Sale with Mynt Limited, referred to at (2)(a) above, contained similar confirmation from Mynt’s suppliers that third party payments were not made, that they were not aware of VAT not being paid, and that “sufficient due diligence as stated in HMRC Notice 726” had been conducted on their suppliers followed by a list of eight checks performed.  Those checks again related principally to the existence of the counterparty, but included a credit check and a check on the supplier’s bank details “to check whether (a) payments would be made to a third party, and (b) that in the case of import, the supplier and the bank shared the same country of residence”.  Given Mynt’s approach to credit checks we doubt that either of its suppliers used these checks other than to confirm the existence and directors of their counterparties, and we can see little relevance to VAT fraud in whether or not a seller from abroad shared the same country of residence as its bank.

 

98. Whilst these terms could provide some comfort to Mynt that its supplier conducted some checks they would not have provided any real comfort that the chain of supply did not start with a VAT fraud. Because of its knowledge of the operation of MTIC fraud, Mynt knew this.

 

 

Customers

 

99. In his witness statement Mr Malik says ‘we did not consider trade references were necessary for foreign based customers as guidance from HMRC refers to the VAT being in the UK.  The due diligence we conducted on customers abroad was therefore less extensive… commercially our risk was mitigated as the stock is always shipped on hold and is only ever released once full payment is received.”

 

100. This in our view indicates that the due diligence Mynt undertook was done to comply with HMRC’s expression of concern (particularly in Notice 726) and not to deal with any concern Mynt had or should have had over the chain of supply.  And it indicates a box ticking approach to dealing with HMRC’s concerns.

 

101. The due diligence documents for Mynt’s customers ESM SARL, CEMSA and LBS Warenhandel contain documents which might give comfort that these companies existed but little else. The documents provided no comfort that these companies were of good financial standing. There were no documents relating to Coburg or Pochard.  We conclude none were obtained.

 

102. Mr Malik’s statement that commercial risk was avoided by releasing the goods only after payment appears to be contradicted in the case of the payments and releases in March Deal 10 and May Deal 5 referred to in (2)(c) above.

 

103. (We also note that it is possible that Mynt took credit risk against these companies in deals which completed in the manner Mr Malik describes:  if the goods were shipped on hold pursuant to a contract made with the customer, and the customer reneged, Mynt would incur shipping and reshipping costs, and the costs of reselling the goods (or of reneging on its own obligations to its supplier).  These costs it would seek from the reneging customer).

 

 

(g) Mynt’s trading partners

 

(i) Suppliers :

 

104. Mynt had only two suppliers in the Deals: Phone City and Regal Portfolio

 

Phone City

 

105. In March 2009 two of Phone City’s directors (they had both been directors of Phone City at the time Mynt purchased from that company) gave undertakings under the Company Directors Disqualification Act that they would not act as directors for a period of 12 years (a period suggesting a serious misdemeanour).  To each undertaking there is appended a schedule of the conduct which made the declarant unfit to be a director. That conduct in each case relates to their allowing or causing Phone City to take insufficient care in its transactions in mobile phones and other equipment to avoid a loss of VAT to HMRC through MTIC fraud in the period concerning the deals in this appeal.

 

106. These documents do not constitute findings by the High Court that Phone City was knowingly involved in MTIC fraud, but it seems to us that the undertakings would not have been given in the form they were unless those giving them were content to admit that insufficient checks had been made to ensure that their companies’ dealings were not connected to fraud.

 

107. The undertakings had not been given at the time Mynt dealt with Phone City but the unfit conduct related to the time of Mynt’s deals.  The undertakings indicate to us that Phone City did not take reasonable care to avoid connection to fraud.  That on its own does not indicate that Mynt knew that such was the case, but it suggests that if it had pressed that supplier on what precautions it took, the answers it would have received (and the nature of any documents which would have been revealed) would have given a reasonable recipient little comfort on that score.

Regal Portfolio

 

108. An order was made by the High Court in April 2010 disqualifying the person who was the director of Regal Portfolio at the time of the Deals under appeal from being a director for the period of 14 years.  The misconduct cited was that Regal Portfolio had made third party payments which had contributed to the failure of its suppliers and the consequent loss of VAT to HMRC, and had undertaken insufficient checks to distance itself from VAT fraud.

 

109. Again this does not mean that Mynt knew of this behaviour.  Indeed the undertaking that it did not make third party payments given by Regal Portfolio in the Terms of Sale with Mynt might suggest that Mynt could have been under the impression that Regal did not make third party payments.  But the cited misconduct suggests to us that if Mynt had pressed its enquiries the answers it received were likely to have been worrying and unsatisfactory.  Given that Mynt made 23 purchases from Regal in May, it had adequate opportunity and reason to pursue any enquiry it might have had.

 

(ii) Customers

 

Coburg

110. Miss Yeomans exhibited a report from the Spanish VAT authorities indicating that they had deregistered Coburg from 8 March 2006 on the basis of fraud risk indices and business simulation suspicions.

 

Pochard

111. Miss Yeomans exhibited a report from the Polish VAT authorities indicating that Pochard was being deregistered as it seemed to be a missing trader.  This information appears to have been received by HMRC at some time after 1 October 2006.

 

LBS Warenhandel

112. A report from the German VAT authorities indicated that this company had been engaged in carousel fraud in 2004 and had been deregistered on 2 October 2006 because the company “could not be located” at its address.

 

CEMSA

113. A report from the Spanish VAT authorities indicated that they suspected that it was carrying out unlawful activity although there was no firm evidence of this.

 

ESM Sarl

114. A report from the Luxemburg VAT authorities in October 2007 indicated that this company was a missing trader.

 

115. None of these reports indicate conclusively that these companies were engaged in transactions connected to VAT fraud.  However they do suggest, when taken together that Mynt’s customers or at least some of them may have been involved in such fraud, and that, if searching questions had been asked of them in early 2006, the answers could have induced concern on that score. But we can draw no stronger or further inference from this evidence. Suspicions, even those held by august bodies, are not proof of turpitude, and there are possible innocent explanations for traders’ disappearances.

 

(3) Mynt’s dealings with HMRC

 

116. In August 2003 HMRC (through its predecessor HM Customs and Excise) published Notice 726. This related to the imposition of joint and several liability under section 77A VATA. That provision enabled HMRC to make a trader liable for the VAT lost as the result of a default by another trader in the chain of supply to the trader. The provisions applied to goods such as mobile phones, and had effect if the trader knew or had reasonable grounds to suspect that the VAT had not been paid. The Notice set out examples of reasonable steps a trader could take to avoid being unwittingly caught in such a trade. This notice was therefore not strictly addressed to the Kittel principle. But it was known, and relied upon, by Mynt in its dealings in 2006.

 

117. Mynt received a copy of HMRC’s notice 726 in February 2005. At about the same time it also received a letter from HMRC indicating that MTIC fraud was a serious problem and was one of the most costly forms of VAT fraud.  It was clear from Mynt’s Terms of Sale with its suppliers that it was aware of the contents of that notice.

 

118. On 13 March 2006 HMRC sent Mynt a “broker warning later” indicating that one of the transactions it had undertaken in the October 2005 period had been traced back to a defaulting trader and that £106,000 of VAT had been lost.  Mynt’s supplier was FMS International.  Mynt did not deal with this supplier after getting this letter.

 

119. Mynt’s VAT return for February 2006 encompassed a repayment claim for £119,506.97.  The claim was paid by HMRC on 7 April 2006.  The return was received by HMRC on 17 March 2006.  [We think it likely that the return was despatched after the receipt of the broker warning letter.]

 

120. Mynt’s VAT return for March 2006 encompassed a claim for £1,168,466.97.  It was paid by HMRC on 10 May 2006, about a month after its submission.

 

121. Mynt’s VAT returns for April and May 2006 also disclosed repayment claims (of £909k and £1,503k).  These were not repaid by HMRC.

 

122. HMRC wrote to Mynt on 16 May 2007 formally denying input tax claims in relation to the April and May periods.

 

 

(4) The FCIB Evidence

 

 

123. Miss Emery gave evidence of her interrogation of the account records of FCIB. FCIB was a bank. It was used by Mynt and by its suppliers and customers. It appears to have been used by almost all others in the chains of supply in the Deals. HMRC had obtained an electronic version of these accounts from the Dutch authorities. From these records Miss Emery was able to examine the movements of funds between the bank accounts of the companies in the Deal chains and between companies (and individuals) which paid, or received money from, them.

124. She investigated 10 deals. The deals were selected by Ms Yeomans before Miss Emery began her work.

125. In arriving at her conclusions Miss Emery sought to match payments into an account with payments from it. Sometimes such a match was clear because the amounts were the same or very similar and the entries were consecutive or nearly so. Sometimes a match was made of two or more receipts against one payment or vice versa. To some extent, because she was looking for a match she was more likely to find one where there may have been no link between receipt and payment. Nevertheless in the majority of cases the matches were plain and in general we agreed with her conclusions.

126. Miss Emery’s investigations revealed the following:

(1)  The monies for February Deals 1 and 2 had gone round in a circle on 27 February 2006. (At various points in the circle companies would take their cut. Mynt, of course paid out more than it received because its purchase bore VAT and its sale did not.) The circle started with E&I trading, and went through three non-UK companies before reaching Coburg. Thence the monies passed to Mynt and went along the Deal Chains for those deals and back to E&I trading. (Miss Emery drew a conclusion in relation to Deal 1 only. She did not have the details for Deal 2; we did. )

(2)  There was a circular flow in February Deal 3. Here the monies start with  Evolution Trading (Dubai)

(3)  In each February Deal the alleged defaulter (and importer) paid almost all its sale proceeds out including the VAT element. It retained a small commission but deprived itself of the resources to pay the VAT due on its acquisition and sale.

(4)  In each of these deals as the money goes round each trader takes its profit. E&I trading retains a surplus equal to the VAT forgone by the defaulting trader less the aggregate of the profits or retentions made by the other member of the circle (we call this net amount the “VAT Profit”).

(5)  For March deals 1 and 2 it appears that Zaagoug International (a Moroccan company) collects funds which are transmitted (via one other company) to Pochard. Pochard then uses that receipt to pay its purchase price in March Deals 1 and 2. The funds in [those] deal chains then flow from Mynt through the two buffers but are not remitted to FX Drona, the defaulter, but to a Mr Kanadas  and thence to E&I Trading: which receives an amount equal to the purchase price plus the VAT which should have been retained by the importer to pay its VAT bill. E&I trading then transmits the funds to Zaagoug which uses them provide the funds for Pochard’s purchase in Deal 3. We conclude that Zaagoug retains the value of the VAT Profit in these two chains.

(6)        For April Deal 1 the funds flow starts with Zaagoug, and, after passing along the Deal Chain ends up with Zaagoug. The alleged defaulter pays all of its receipt (bar £6.2K) to a third party thereby depriving itself of the ability to pay its VAT liability. The VAT Profit is retained by Zaagoug.

(7)        Miss Emery’s researches for April Deal 7 throw up no obvious circular movement of funds, though they show that payment was not made by the first UK buffer to the alleged defaulter.

(8)        Miss Emery’s researches for May Deal 1 appear to us to throw up evidence relevant to May Deals 1, 2, 3, and 4. On 18 May Zaagoug made three payments each of over £600k, totalling £1,955,660 which were indirectly transmitted to Warenhandel. Warenhandel used these monies to pay Mynt for Deals 1, 2, 3 and 4. The payments continue along each Deal Chain. The alleged defaulter is short circuited and after a couple more steps three payments totalling £2,135K end up with Zaagoug. The difference between Zaagoug’s payment and receipt is £181K which is the VAT Profit.

(9)        Miss Emery’s researches for May Deal 5 show funds for this deal coming from Zaagoug . Later the same day they show the May Deal 5 funds returning, together with the VAT Profit to Zaagoug. The alleged defaulter is cut out of the cash movement.

(10)     The accounts for May Deal 7 show that on 5 June Mynt paid Phone City for Deals 21 to 23. Miss Emery links Phone City’s receipt to two particular payments to Zenith which found their way to Zaagoug. We do not accept this link because the payments are clearly matched in the accounts by three payments for the same deals by Phone City to Zenith, and we could see no clear link to the later payments going to Zenith. Nevertheless her researches show that on 5 June Zaagoug paid some £748K which funded Mynt’s customer’s payment in May Deal 7 of £745K, which in turn funded Mynt’s payments, on 9 June, down the Deal Chain (again omitting the alleged defaulter) and then back to Zaagoug. The VAT lost was some £130K. Mynt kept a £41K profit, Zaagoug retained some £70K, the remainder being the retentions of the other members of the Chain.

(11)     Miss Emery’s researches in relation to May deals 9 and 10 show similar pictures. Funds provided by Zaagoug indirectly provide funds to pay Mynt (on these and two other Deals), and Mynt’s payments indirectly find their way back to Zaagoug together with the VAT Profit.

 

127. We note from the transaction numbers that these transactions were completed within a short period of time on the same day (in each case other than May Deal 7 – see (10) above).

128. There was here evidence in relation to almost all the deals selected, and by a side wind a number of others, that: with one exception the monies always went round in a circle, that the alleged defaulters were always deprived of the funds to pay their VAT, that (with one exception) the monies moved within a very short space of time, and the funds representing the VAT Profit were retained by an entity outside the UK.

129. It is clear from this evidence that these were organised fraudulent transactions. Although this evidence relates only to 20 % of the deals it seems to us likely that the same conclusion should apply to all the Deals.

(5) Mr Downer’s evidence

130. Mr Downer produced a report from the Dutch authorities of a criminal investigation into the activities of a Martin Monster of Worldwide Logistics. The report contained extracts from statements made by Mr Monster and other employees of Worldwide Logistics in which they indicated that during 2006 they stamped and signed CMRs to indicate that goods had been received by Worldwide Logistics when in fact no goods had been so received. They said that they had received cash for so doing.

131. We find that it is likely that these people conducted this activity.

132. Mr Downer also produced some of the CMRs provided to him by the Dutch authorities which he said were thought by the Dutch to represent such fictitious deliveries. The CMRs he produced related to the following Deals: March Deals 2, 3, 4(March 4 was not in issue before us), 8 and 9, and April deals 7 and 8.

133. The first five of these CMRs showed the carrier as PT Transport, the last two, Secure Management Services. But the extract from the employee’s statement said, in relation to the practice of getting cash for a signature, “It was always the same carrier though, namely SPF Logistics.”(There was also a reference to drivers from Neo Abaco, but Mr Downer told us that Neo Abaco was a trader, not a carrier.) When asked about this discrepancy, Mr Downer told us that all he could do was to speculate that it was nevertheless the view of the Dutch authorities that the CMRs he had been sent, and exhibited, were ones which they thought related to fictitious consignments from the material provide to them by Worldwide Logistics. The report from the Dutch also says that attached to it were copies of CMRs found in the records of Worldwide, and that “the extracts from the statements taken and the investigation initiated in the Netherlands show that these CMRs relate to fictitious  consignments of goods in the direction UK – Netherlands.” We also note an extract from the statement of another employee who is not specific about the carrier.

134. It appears that in connection with this investigation of Worldwide Logistics, the Dutch authorities seized six consignments of phones which were the subject of Mynt’s dealings. They were the phones of May Deals 27 to 32. Mynt complained about the seizure to the District Court of Haarlem, which, following a hearing on 5 October 2006 ordered the return of the phones to Mynt. It then appeared that, having released them in accordance with that order, the Dutch authorities seized them a second time on the basis that they had new information. Mynt complained to the Court again, and on 24 August 2007 the Court again ordered the release of the phones to Mynt.

135. The record of the first hearing indicates that the Court found: (1) that the documents available to it did not show that Mynt had committed an offence in relation to the phones; (2) that the suggestion that Mynt was involved in a carousel fraud lacked proper substantiation; (3) that it did not appear that Mynt was familiar with the use of phones for such an offence or could reasonably be suspected of such use; and (4) the evidence was insufficient to assume bad faith on Mynt’s behalf.  On those grounds it was found highly improbable that the criminal court would later order forfeiture.

136. From the record of the second hearing it appears that the second seizure had been in on the basis of suspicion that Mynt was knowingly involved in VAT fraud. But the Public Prosecutor then told the Court that Mynt was no longer considered a suspect. As a result the prosecutor did not object to the return of the phones. The Court went on to consider whether, in the context of a seizure against Worldwide Logistics rather than Mynt, FCIB evidence (showing “that Mr Zaagoug receives his own money back”) should result in a conclusion that Mynt did not act in good faith. The Court finds that it should not.

Evaluation

137. The reports of the Haarlem Court did not contain a full description of the evidence before it. That evidence we believe was less comprehensive than that available to us. We note in particular the finding that Mynt was not familiar with the use of phones in fraud – a finding which is quite contrary to the evidence before us. We also note that the Court’s findings in relation to Mynt’s involvement in carousel fraud and in relation to bad faith, were merely that the evidence did not establish that to be the case, rather than that it had been established not to be the case. As a result we do not consider that we should treat the Court’s findings as persuasive in this case.

138. It was clear however that the phones in these deals had existed: the seizure was evidence of that (although how and whether Mynt was paid for them was left unanswered). It was also clear that they had been consigned to Worldwide Logistics. These goods were not however those to which the fictitious CMRs produced by Mr Downer related. Nevertheless this suggested that it was not every consignment of goods to Worldwide which gave rise to a fictitious CMR.

139. We did not hear from the Dutch officials who had provided the suspect CMRs and could not determine the basis of their statements or assess why it seemed at odds with the employee’s statement.

140. In view of the fact that the goods did exist in some deals, and the unresolved uncertainty cast over the CMRs which were produced by the employee’s statement, we were unable to find that the goods in the related deals were not delivered to Holland.

141. Further, even if the phones had not been delivered to Holland, it would not necessarily follow that they were not present in the UK when they were released to Mynt or to other members of the chain. They could simply have been retained in the UK rather than carried abroad.

142. We therefore do not conclude that the phones which were the subject of these deals did not exist. Whether or not they were actually exported is not directly relevant to this appeal: HMRC did not contend in their statement of case that Mynt’s sale was not zero zero-rated, but denied input tax credit on Kittel grounds. We could not determine the appeal on the basis of a different challenge.

143. In discussion before us we considered what the effect would be if the phones in these deals had not existed at any stage in the chain. We tentatively concluded that HMRC would not succeed in the appeal since, in that case, they would not have shown- as they pleaded-  a connection to fraudulent evasion by the defaulter, since the defaulter would have made no supply on which VAT was chargeable under the Sixth Directive, and the fact that a sum equal to the VAT on the “defaulter’s” invoice might have been due as a debt to the Crown under the purely domestic provisions of VATA and might have been evaded, was not clearly the subject of the Kittel doctrine as incorporated into English law. 

 

(6) Features of the Deal Chains

144. We noted the following features of the chains in the  deals under appeal:

1. In every case Mynt had bought either from Phone City or from Regal Portfolio;

2. In every case Mynt’s supplier had made a profit of 30p per phone on its sale;

3. In every case bar one Mynt’s supplier had bought from either The Wireless Warehouse or Zenith;

4. In every case that supplier had made a profit of 25p per phone;

5. In every case Mynt made a profit of at least £8 per phone;

6. In every case where there was evidence of a sale by a non UK entity to the first UK entity in the chain – that is to say in 43 of the [52] deals – that entity was Financial Alpha;

7. In every one of these cases there were only 3 (or possibly 4 in the case of May Deals 7 and 8 and 15 to 23 –see V above) UK entities in the chain between a non-UK supplier and Mynt.

145. What is noteworthy about (2) and (4) above is the constant profit in each deal, and the differential between the profit made by the supplier to Mynt and that made by its supplier.

146. To these features we add the fact noted in relation to April Deal 1 and 12 subsequent deals (see Appendix I at April Deal 3), that from 24 April at the latest Zenith knew from the instructions given to it by Phone City that it was selling to Mynt, and yet in 36 deals after that Zenith sold to someone who sold to Mynt.

147. These features indicate to us that it is beyond doubt that these chains were a game in which each participant prior to Mynt played the role it was required to play. Phone City and Regal knew that they should take 30p profit; their suppliers knew they should take 25p. Zenith knew it was not supposed to sell to Mynt.

148. That conclusion is supported, if support is needed, by the FCIB evidence. The chains of circular, virtually contemporaneous payments on so many occasions point squarely to the organisation of the chains.

149. That game must have been set up by someone. These participants must have been told their place. They may not have received express instructions in relation to every deal, but once they had an intimation of a possible deal they knew what to do. No doubt they also knew that if they stepped out of line it would be arranged that they would not get another deal.

150. Mr Black says that the chains were contrived. In the sense described above we believe that they were. The fact of the contrivance of the steps in the chains prior to Mynt does not necessarily mean that Mynt knew of it, but we find it impossible to believe that some hint of the game did not reach Mynt. Mynt dealt with Phone City or Regal in [53] deals between February and May. Mr Malik must have talked to them. He said he had a good relationship with them.  Either he knew they were part of a game, or he suspected that was the case but deliberately steered the conversation away from anything which might give him more knowledge than he wanted, or he must have gained some hint that this was a game.

151. Mynt sold to a steady succession of customers: to Coburg in February, to Pochard in March, to CEMSA and Warenhandel in April and to Warenhandel and CEMSA in May. 29 of its 32 deals in May were with Warenhandel.  There was a customer of the month (or two of them).

152. This steady progression of customers suggests to us that Mynt was, at the very least, nudged into its place in the chains. But even assuming that Mynt was not told from whom it should buy and to whom it should sell, it must have been surprising to find that if requests came from the customer of the month for phones, it was Phone City or Regal who fulfilled those which could be fulfilled, and that it Phone City or Regal indicated they could sell stock, only the customer of the month wanted it.

153. At the very least, that surprise, coupled with (at the least) some suspicion that Phone City and Regal had their place in a game, must have suggested to Mynt that it too had a place in the game, if it did not already know that such was the case. Mr Malik’s approach to the Yas Trading loans discussed at V(1) above suggest to us that he would not have caused Mynt to distance itself from the deals on the grounds that they could be part of some dodgy game. His intelligence indicated to us that he would have been likely to have picked up the scent of anything which was afoot.

154. In his closing submissions Mr Malik says that once a supply chain has been established where the parties are making enough profit then there is not any need to change it – although one would naturally look for new opportunities. He had a good relationship, he says, with Phone City and Regal. They were reliable and made him a good profit. It made perfect sense to continue to purchase from them.

155. But that a supply chain was established is precisely the conclusion we draw: that it had been established, or arranged, that the participants would work in these chains in this way. What is striking is that every export deal was part of one of these established chains – that Mynt had no other export transactions, and that these entities were the only ones who had the matching need and capacity to sell these phones.

VII Knowledge and Means of Knowledge

(a) Knew

156. It is difficult to look inside the mind of a person to determine what they actually knew. Mr Malik may well have seen signs of connection to fraud and resolutely turned the other way. We did not hear Mr Malik’s evidence and could not assess his approach.

157. Mr Black says that the rather cursory, and sometimes late, due diligence points to knowledge. But it is to our mind more likely that this due diligence was done merely to satisfy HMRC- merely to attempt to give the impression of complying with Notice 726 so that HMRC would repay its input tax.  It played no real part in Mynt’s evaluation of its counterparties. It played no part in any assessment of a connection to fraud, and for the reasons we set out at VI(f),  Mr Malik knew that it could not protect Mynt from such a connection.

158. But whether Mr Malik actually knew, or refused to draw that conclusion from the evidence available to him, keeping his eyes down and his blinkers on, it is clear that, if he had given any real thought to these deals he (and through him Mynt) would have concluded that they were connected to fraud. That is for the reasons which follow. 

(b) Should have Known

(1) The possibility of connectin to fraud

159.  Mynt knew that there was a real possibility that any of Mynt’s deals could have been connected to VAT fraud by an importer. That is because Mr Malik knew:

(a)        that VAT fraud was a serious and costly problem. It was not therefore merely a theoretical possibility. It affected mobile phone transactions (see VI(3): from HMRC correspondence and Notice 726);

(b)        that VAT fraud took place when a trader went missing and failed to account for VAT (see VI(1)(a));

(c)        that such missing traders could be importers (see VI(1)(a)) and, from a general understanding of VAT, or from Mr Malik’s contacts in the phone business or otherwise, that a greater amount of VAT would be lost on the default by an importer of VATable phones. As the fraud was a costly problem it was likely that an importer was involved;

(d)        that it was possible that phones sold by such a missing trader would pass through a chain of buffer dealers before reaching Mynt (our inference from EIL: VI(1)(a));

(e)        that such chains, starting with a missing trader and ending in an exporter, were characteristic of MTIC fraud (a conclusion from (c) and (d) above and also our inference from Mr Malik’s link to Shakeel Ahmad (VI(1)(b));

(f)         that obtaining comfort that Mynt’s suppliers existed (and even that they had checked that their suppliers existed) provided Mynt with no comfort that its purchases were not part of such fraudulent chains (VI(1)(b) and VI(2)(f)); and

(g)        further, after 13 March 2006, so for the entire period of the March April and May deals, Mynt knew that one of its deals had been traced back to a defaulter;

(2) That the deals were part of contrived chains

160. Mynt knew or should have known that the only reasonable explanation of the deals in which it was involved was that they were set up or contrived. That is because:

(a) Mynt knew that its suppliers were not creditworthy (VI(f),(g)) and were themselves acquiring by  back to back transactions similar to its own. It knew that there was a chain of supply (VI(2)(b)).

 (b)Mynt received and gave orders, and accepted inspection reports, which lacked detail (VI)(2)(b) and (c)): it knew or can only have reasonably concluded that what was important to its counterparties (as well as itself) was the fact of a sale, rather than precisely what was sold;

(c)Mynt worked within a practical or contractual framework which created substantial credit exposures (VI(2)(a),(d)) on companies with little creditworthiness (VI(f)(g)) and seemed confused as regards the transfer of title (VI(2)(a) and (b));

(d) Mynt knew that somehow it just happened that the customer of the month’s needs would be provided by one of its two suppliers;

(e) Mynt participated in the orchestrated circular payments of cash. It must have received some hint that these were set up: it knew that it had to pay its supplier as soon as it received payment (even though, if its supplier had already released title to the goods to Mynt, it had no need to move speedily in paying for them in order to pass title to its customer) ; and

(f) it got (although it may have deliberately ignored) some hint of a game from its dealings with its counterparties(VI(6)).

161. Each of these on their own might have innocent explanations. But those explanations are inconsistent with other features of Mynt’s business:

1.     The lack of specificity might be explained by the fact that the customer could inspect the phones before committing to them and could therefore be sure that they were what it wanted – that it just happened  that  pink phones were what it wanted. That would be a possible explanation for one or two transactions, but not for the multitude conducted.

2.     Nor is it possible to explain the lack of specificity as a result of a type of commodity dealing. Dealers in shares are unconcerned by the precise identifying share register numbers of the shares which they may buy or sell, dealers in pork belly futures deal in a standard pork belly. But phones differ in colour and specification, and have real consumers for the different types. Even if this type of trade could be akin to some sort of exchange arbitrage trading, there would be no need for the phones to move. Such a trade is inconsistent with the export of the goods on so many occasions.

3.     The only reasonable explanation was that the deals had been set up and that there was someone at the end of the chain who knew what he was going to get because he knew what was put in at the beginning of the chain. He may have wanted to check it was all there, but he knew the nature of what would be there.

4.     The lack of coherence in the arrangements for the transfer of title and the credit risks taken by Mynt’s suppliers on Mynt, by Mynt on its customer, or by Mynt’s customer on Mynt could be explained by saying that each party accepted that risk as part of its commercial operation. But whilst one can imagine one customer being willing to risk £100,000s on a deal with Mynt, it is not believable that each customer of the month, in turn, accepted the same risks. And given Mynt’s knowledge of what could go wrong when payment was made and title could not be transferred because the supplier did not have it, it is amazing that Mynt took that risk on its suppliers. The only sensible explanation is that all parties knew that in some way the chain was controlled: that payments would flow quickly and that no one would be left holding the baby (or not holding it): once the goods were back at the start, the money could flow round. The risk was not a commercial risk against a counterparty (because the risks taken were not commercial), but a risk that something would go wrong with the game.

5.     The way in which Phone City or Regal just happened to have the phones which the supplier of the month wanted is also only explicable if the deals were in some way set up. Whilst one or two such coincidences might simply be coincidences, their regular occurrence over four months can only be explained as something set up or contrived.

6.     The speedy cash payments could be explained as the result of a desire on the behalf of Mynt to ensure that it had done all it could to give its customer title as soon as it could. But Mynt must have known that its financially lightweight suppliers could only have provided the phones on similar back to back terms as those on which Mynt operated, and they would thus be unlikely to be able to confer title on Mynt until after they themselves had been paid and made payment (if then): paying them quickly did not ensure title, it simply put Mynt at risk because it had parted with the cash.

7.     Any hint of a game only suggests contrivance, but when taken with the lack of specificity and the incoherent approach to credit and transfer of title, can only be reasonably explained as arising because there was in fact a game. 

162. In our view the only reasonable explanation of the lack of specificity, the willingness to risk substantial sums on insubstantial credits, the hints which must have come from suppliers and from the cash arrangements, and the way in which Phone City and Regal just happened to be the suppliers of the phones which the customer of the month wanted, was that the deals were set up chains of transactions in which what mattered was the quick transfer of cash and the making of a supply for VAT purposes.

163. It does not seem to us that any comfort that Mynt may have taken, or which objectively could be taken, from HMRC’s action or inaction detracts from this conclusion. HMRC were not privy to the all information available to Mynt, and Mynt knew that.

(3) That the phones had been imported for the purpose of these transactions

164.  Mynt knew or should have known that the phones Mynt exported had been imported for the purpose of these transactions. That is because:

(a)        Mynt knew that the phones were not manufactured in the UK (VI(2)(e) and Mr Malik’s closing submissions), but, more than that, it knew that the phones were not for the UK market (VI(2)(e) again, or if they were, why were they being exported?) It knew these phones were in the UK in very large quantities and not just on one occasion but in many deals over a number of months;

(b)        the only explanation of so many such phones being in the UK over such a period is that they were brought into the UK for the purpose of these transactions. (If they were UK Spec phones it made no sense otherwise to be exporting them, and if they were non-UK phones it made no sense otherwise for them to be in the UK in such large numbers over such a period.)

Mr Malik says that 2 pin chargers do not mean that the phones cannot be bought and sold in the UK. 3 pin chargers can be bought cheaply and swapped. That may be true, but, it does not provide a reasonable explanation for why so many phones over so many months had been brought into the UK presumably for the purpose of changing their chargers and selling them here, and then given over to wholesale transactions.

165. In the context of Mynt’s knowledge of VAT MTIC fraud and of the possibility that it  might be connected to such fraud, the only reasonable explanation of the fact (which Mynt knew or should have known) that these phones were imported for the purpose of these contrived deals, was that the deals were connected to such fraud.

166. Thus, if Mynt did not actually know this was the case, it should have known: that these deals were connected to VAT fraud by a person in the chain of supply was the only reasonable conclusion Mynt could have reached on the knowledge available to it.

Did Mynt have an  “impenetrable shield”?

167. If Mynt did not know about its connection and had taken all reasonable steps to avoid connection to fraud, then it would be entitled to its input VAT.

168. In our view Mynt did not take all such steps. Not only was it unclear  whether it conducted all its due diligence before it traded, but that due diligence, in the context of what it knew about MTIC fraud, was wholly inadequate to protect it from connection to such fraud.

169. The factors we discuss above in VII(b)“Should Have Known” indicate that the only reasonable conclusion Mynt could have come to was that its transactions were connected to fraud. In that context the only steps Mynt could have taken to avoid such connection were either not to do the deal or to insist, with the chance or even the likelihood of losing the deal, on the independent chasing of its purchase down the chain of supply. Such steps would have been wholly reasonable in these circumstances. It did not conduct them. It cannot rely on any shield.

The Appellant’s Arguments

(a) Dealings with HMRC

170. Mr Malik notes that (i) HMRC permitted Mynt to submit monthly returns to claim input tax back more quickly; (ii) Mynt had always traded in Central European Spec phones and HMRC had never raised a concern about that; (iii) HMRC had repaid earlier claims and initially had been happy to repay the February and April claims; (iv) HMRC never queried that lack of specificity in Mynt’s invoices; (v) the March 2006 broker warning letter indicated that there had been only one problem in 39 deals; he was never told to stop purchasing from Phone City or Regal.

171. In broad terms he says (i) HMRC’s actions resulted in, or contributed to, Mynt believing that all was well, and (ii) if HMRC did not suspect connection to fraud, then how could Mynt?

172. As regards the first point, we can see that Mynt could have taken some comfort from these factors. But the questions before us fall to be determined against the background of all the information available to Mynt and that which it could reasonably be expected to obtain, and that comfort is but one thing to be weighed in the balance together with all the other factors. As regards the second point, the issue for us is not whether HMRC knew or suspected, but whether Mynt knew, or should have known. And the information available to Mynt may have been different from that available to HMRC. It might even be the case that HMRC thought that there was connection to fraud but did not at that time think that that resulted in the right to deduct input tax being lost.(b) Notice 726173. Mr Malik says that “it is obvious when considering the purpose of Public Notice 726, that the Appellant is not expected to conduct due diligence on any company other than its immediate trading partners.”.

174. We agree that para 4.5 of that Notice says “You are not necessarily expected to know your supplier’s supplier to the full range of selling prices throughout your supply chain.” But it goes on to say “However, we would expect you to make a judgement on the integrity of your supply chain.”, and later, in response to the question, “Can you tell me exactly what checks I should undertake?”, the answer is given “No. The checks contained in this notice are guidelines.”.  It seems to us that even if this notice were to be taken as determinative of the actions a trader should take to avoid a Kittel attack (which, since it relates to section 77A, is problematic), what it requires is a careful investigation in the light of all the circumstances, not simply checks to establish the existence of those with whom the trader dealt and their VAT status.

175. (c) Mr Malik says no amount of due diligence on Phone City or Regal would have identified fraud. Mynt must have been able to rely on the declarations given by those companies: if they were inaccurate it could not be laid at Mynt’s door.

176. We agree that the supplier declarations may have provided some comfort. But in view of what Mynt knew about the nature of MTIC fraud they did not provide enough comfort. If Mynt did not already know what was going on it should have questioned its suppliers and asked about what its suppliers’ suppliers did and so on. Given the directors’ disqualification citations and our findings that they must have known that they were part of a game, it seem clear to us that Mynt would have found out, if it did not already know,  that all was not well, and that the mere declaration was not enough to dispel a concern that fraud was involved.

177. (d) Mr Malik cautions against taking a set of individual factors, none of which point conclusively to fraud and each of which might have an innocent explanation as pointing in aggregate to fraud. Five rights, he says, do not make a wrong.

178. We agree to this extent: we have taken no regard of the reports of suspicions of other authorities, because they may have explanations which do not indicate a connection to fraud in Mynt’s transactions. But where each of a number of factors may have an innocent explanation, but those innocent explanations are mutually inconsistent, or otherwise inconsistent with the circumstances of Mynt’s trade, or just plain unlikely, then they can in our view point to connection to fraud.

179. (e) Mr Malik notes that HMRC have taken no action against the buffers or defaulters.

180. This seems to us to be irrelevant. The question for us is not what HMRC thought or did, or even what it ought to have thought or done, but what Mynt knew or should have known, and whether the alleged defaulters were fraudulent.

181. (f) The Appellant says that it is not proportionate to deny input tax to a company far removed from a default after making virtually no attempt to recover the input tax from the defaulter. It is also disproportionate to deny one party its rights when allowing other parties (such as the buffers) to exercise the same right.

182. The doctrine of proportionality as we understand it relates to the issue of whether something done or sought to be done by the state represents the minimum infringement of the rights of a person consistent with the aim of the state (where that aim is justifiable). So stated, the actions or inactions of the state in relation to other persons are irrelevant to whether what the state does in relation to particular person is or is not proportionate.

VIII Conclusions

183. We find that a connection between the alleged defaulter’s sale and Mynt’s purchase exists in all Deals apart from May Deals 15 to 23 . Leaving aside May deals 15 to 23 we find that the alleged defaulters did, at the time of their sales dishonestly intend to evade the VAT on those sales.

184. For May Deals 12 to 23 we find that either there was a connection to a sale by 3D Animations, which intended to and did default in relation to the VAT on its sale, or that there was a connection to a fraud by 3D Animations under which it provided a false invoice to its customer, and its customer thereby obtained a VAT input tax credit to which it was not entitled.

185. We find that Mynt knew or should have known of its connection to fraud in all cases.

186. Therefore we dismiss the appeal.

IX Rights of Appeal

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

 

 

 

CHARLES HELLIER

TRIBUNAL JUDGE

 

RELEASE DATE: 16 February 2011

 

 

 

 

 

 

 

 

 

 

Appendix I

 

The disputed Deal Chains

 

 

February Deal 3

The Deal Sheet for this deal showed sales by Zoom Products Ltd to Wireless Warehouse, then to Phone City and then to Mynt.  Zoom Products was the alleged defaulter.

 

Two concerns were raised in relation to this chain: first that no import or purchase by Zoom had been identified, second that there was some possible discrepancy in the document relating to Zoom’s sale.

 

So far as the first issue is concerned, the Respondents suggest that Zoom normally imported from Financial Alpha or United Traders.  We were told by Miss Hirons, an officer of the Respondents who had visited Zoom that she had been told by a representative of Zoom that this was the case.  Whilst we accept Miss Hirons’ evidence on this point it was not enough to convince us that in this deal the phones were imported from one of these companies.  However, the Respondents allege that Zoom fraudulently defaulted in relation to the VAT on this transaction.  All that they are required to prove, on the assumption that Zoom did so default, is the connection to Mynt.  Evidence of Zoom’s purchase is not relevant to that connection.  Absence of such evidence does not call the evidence in relation to the chain from Zoom onwards into question.

 

The second issue concerns Zoom’s invoice on its sale to Wireless Warehouse.  We saw a copy of Zoom’s invoice for this sale of the phones.  It was numbered 1333141E and was for £285,106.33 plus VAT.  But Miss Hirons, when she visited Zoom had been given a CD listing its transactions.  That invoice and that amount did not appear in the CD listing, but there was listed under the heading “file name”, “INV 1333141. xls” (i.e. the same number without the ‘E’ suffix and with “xls” instead) for £1,425,000.00 with Wireless Warehouse being shown as the “Customer on Invoice”.  Miss Hirons was unable to help us with the apparent discrepancy.

 

We were also shown a copy of The Wireless Warehouse’s FCIB bank statement which showed a payment by it of £334,999.00 on 3 March with the legend  “1625 Nokia 6680 (27 Feb)” which legend matched the invoice from Zoom and whose amount differed from that of that invoice by only £0.84p.

 

On balance we concluded that Zoom had made the sale of the phones to Wireless Warehouse alleged on the Deal Sheet.  The entry on the CD listing we concluded probably referred to a number of different invoices (with suffixes say A to F) including that at issue. Even if that were not the case we were satisfied by Miss Hirons’ evidence that the copy invoice was a Zoom invoice and that it (and also a purchase order from Wireless Warehouse) evidenced a sale on the terms in the Deal Sheet.

 

We therefore concluded that the purchase of phones by Mynt in February Deal 3 was connected with Zoom’s sale of the phones (and accordingly that if Zoom had fraudulently evaded VAT in relation to that sale, Mynt’s transaction was connected with that fraud).

 

March Deal 5

The Deal Sheet alleged sales (1) by FX Drona to Gara Technologies, (2) by Gara Technologies to Phone City, (3) by Phone City to Mynt, and (4) by Mynt to Pochard.  FX Drona was the alleged defaulter.

 

The documentation before us was limited to steps (2), (3), and (4), and, in relation to step (2), consisted only of a purchase order from Phone City to Gara.  There was no documentary evidence indicating the involvement of FX Drona.

 

However, in her evidence to us Ms Yeomans said that she had traced this deal back to FX Drona together with March Deals 1 to 3 and 6-10.  This evidence was unchallenged and our examination of the documentary evidence before us led us to conclude that those other deals did trace back to FX Drona.  That gave us confidence in Ms Yeoman’s statement about Deal 5.

 

Mynt’s challenge to March Deal 5 was made late in the day.  Had it been much earlier and the Deal contested from the start, HMRC would have been given adequate notice to remedy any gap in the documents before us.  If, having had such notice, they did not do so, we might have drawn an adverse conclusion.  In the circumstances we do not.

 

We conclude, in reliance on Ms Yeoman’s evidence, that transactions (1) and (2) did take place and accordingly that Mynt’s purchase is connected to FX Drona’s sale of the phones which were the subject of this deal.

 

April Deals 3 and 4

The Deal Sheets for these deals allege the sale of quantities of three types of phone in each deal : by Goodluck Employment Services to Zenith Sports, by Zenith Sports to Phone City, and by Phone City to Mynt.  HMRC identify Goodluck as a defaulter, and say that, in each case, it purchased from Financial Alpha which purchased from E&I Trading

 

(a) April Deal 3

In the case of April Deal 3 a complete series of invoices and purchase orders showed the sale of the phones down the chain from Goodluck to Mynt, the sales by Zenith to Phone City were also evidenced by release notes from Zenith to Humber Freight requiring Humber Freight to ‘Allocate and Release’ the relevant phones to Phone City.

 

The Deal Sheet for April Deal 3 indicated that Goodluck had purchased from Financial Alpha, and Financial Alpha from E&I Trading.  The only evidence of these transactions was a number of release notes.  These showed the release of the Motorola V3is and Sony W900s which were part of this deal from E&I to Financial Alpha, and from Financial Alpha to Goodluck, but there were no release notes, or any other evidence, for this part of the alleged chain in relation to the third type of phones which were part of the other transactions in other parts of the chain for this deal, the Nokia 6681s.

 

On the basis of this evidence we were satisfied of a connection between Mynt’s purchase of each of the three types of phones and Goodluck’s sale of them (and thus of a connection between that purchase and any fraud on the part of Goodluck in relation to the VAT on the sale).

 

We were also satisfied that Goodluck had acquired the Motorola VSis and Sony W900s from Financial Alpha which in turn had acquired them from E&I Trading, but were not so satisfied in relation to the Nokia 6681s.

 

We noted from the documentation: (a) that E&I’s release note and Financial Alpha’s release note were both addressed to Humber Freight in the UK suggesting that the phones were in the UK under their respective control at the time they were supplied, and (b) that Phone City’s purchase order to Zenith required the phones to be delivered directly to Mynt – thereby indicating to Zenith that Mynt was the purchaser and giving Zenith the information that it might have been able in the future to sell directly to Mynt : eliminating Phone City and potentially increasing its own profit; it did not appear that Zenith took advantage of this information, for, in all of the 23 deals in May, Zenith sold to an intermediary (Phone City or Regal) which onsold to Mynt.  the same instructions were on the April Deal 1 purchase order and on 12 subsequent purchase orders.

 

(b) April Deal 4

 

The complete series of purchase orders and invoices, together with some release notes and evidence of payments convinced us of the sale of the phones in this deal along the chain from Goodluck to Mynt.  We therefore conclude that Mynt’s purchase was connected with Goodluck’s sale.

 

The evidence of transactions in the chain before Goodluck was again limited to release notes.  In the case of the release by E&I to Financial Alpha there were before us copies of release notes in relation to each of the three types of phone which were the subject of this deal.  But whilst there were copies of release notes for two of the three types of phone from Financial Alpha to Goodluck, the copy of the release notes appearing to relate to the Nokia 6680s was partly obscured.  Nonetheless the similarity of the timing, of the other sales in the chain, and the evidence of E&I’s release of these phones to Goodluck and of Goodluck’s sale of the same phones, convinced us that Financial Alpha had released them to Goodluck.  We conclude that it is likely that E&I sold to Financial Alpha and Financial Alpha sold to Goodluck as alleged.

 

Again E&I’s and Financial Alpha’s release notes, being addressed to Humber Freight in the UK indicated that the goods were in the UK when transferred.

 

April Deal 8

 

A series of purchase orders and invoices showed a chain of sales and purchases commencing with Computec Solutions Ltd and ending with Mynt Ltd.  There were, in addition, copies of bank payment instructions and a release note.

 

With our papers there was an invoice from Computec for the 2600 Nokia N70s which were the subject of this Deal but also an invoice of the same date, and with the same parties and the same purchase order reference for only 2000 such phones.  That invoice did not appear to be connected with the phones acquired by Mynt.  Its presence in the documents did not, in our view, cast doubt upon the sale by Computec of 2600 phones.

 

From those documents we concluded that it was likely that Mynt’s purchase in this deal was connected with Computec’s sale of the same phones.

 

There was one issue, however, which cast doubt on the conclusion.  Mr Downer, as we record elsewhere gave evidence of an investigation by the Dutch authorities into the activities of Worldwide Logistics BV, a freight forwarder.  That investigation indicated that CMRs (documents evidencing the export of goods) had been faked by an employee of that company.  Among the allegedly faked CMRs was one relating to Mynt’s sale in this deal chain.  If the conclusion to be drawn from this evidence was that the goods which appear to have been the subject of all the purchases and sales in the chain did not exist, then there was no purchase by Mynt, and there could have been no sale by Computec.  In that case there can have been no connection between Mynt’s acquisition and Computec’s sale. However, we were not convinced ( see VI(5)) that Mr Downer’s evidence showed that it was likely that the phones did not exist, and we do not find that the connection indicated by the chain of paperwork is made less than likely by Mr Downer’s evidence.

 

We find the connection proved. .

 

May Deals 5 and 6

 

In relation to these deals HMRC alleged a chain which started (in the UK) with Sunmac (UK) Ltd, the alleged defaulter, which sold to Zenith (Buffer 1) which sold to Buffer 2, being Phone City (in the case of Deal 5) or Regal Portfolio Ltd (in the case of Deal 6), which in turn sold to Mynt.  (We repeat that we use the term buffer here and below for convenience in the following discussion, and do not intend any implication thereby.)

 

Copies of purchase orders and invoices provided evidence sufficient to conclude that each chain was established from Buffer 1 to Mynt.  The evidence in each chain in relation to a sale by Sunmac to Buffer 1 consisted of invoices from Sunmac to Buffer 1 and release notes from Ramsha Trading Ltd, directing release of the same number of phones of the same type and on the same day as the other invoices, to Financial Alpha, from Financial Alpha to Sunmac and from Sunmac to Buffer 1 (Zenith).

 

The FCIB evidence in relation to Deal 5 shows the purchase price was paid on 18 May by Mynt to Phone City, by Phone City to Zenith, by Zenith to a Mr Ummermoiden, who, Mr Reardon told us, was company secretary of Computec (not Sunmac), and then to E&I Trading and on to Ramsha Trading. 

 

We conclude that it was shown that Sunmac sold those goods to Zenith and therefore that in both cases a connection was proved between Mynt’s purchase and a sale by Sunmac. The diversion of monies via Mr Ummermoiden did not disturb our conclusion that Sumac’s invoice represented the sale of the phones.

 

May Deals 7, 8 and 15 to 23 (Deal 14 follows)

 

In each of these deals, HMRC allege a chain in which a defaulter, 3D Animations, sold through a chain of two Buffers to Mynt.  The First Buffer in every case is Zenith, the second either Phone City or Regal Portfolio.

 

In the case of May Deals 7 and 8 there was an indication that Sunmac rather than 3D Animations was the first UK seller in the chain, and in the case of May Deals 15 to 23 that Maize Investments rather than 3D Animations was the first UK seller.  If this were sufficiently likely then HMRC would not succeed in relation to May Deals 15 to 23 because a connection would not have been shown between Mynt’s purchase and a fraudulent evasion of VAT (since there was no evidence before us that Maize had evaded any VAT).

 

In each of these alleged Deal Chains the documentary evidence before us convinced us that there was a chain of three purchases and sales of the phones from Zenith, the first buffer, to Mynt.  The question in each case was from whom Zenith had acquired the phones: was it the company alleged by HMRC?

 

(a) Deals 7 and 8

 

The copy documents included purchase orders from Zenith to 3D Animations, and invoices from 3D Animations to Zenith for the relevant phones but also contained release notes for the phones in the case of Deal 7 from Sunmac, rather than 3D Animations, to Zenith, and, in the case of Deal 8, to Sunmac (rather than 3D Animations) and from Sunmac to Zenith.

 

Mr Malik (in his closing submissions [290] & [291]) says that the exhibited documentation for these deals contains no purchase orders from 3D Animations and no invoices to 3D Animations.  He says that this throws doubt into whether 3D Animations imported the stock, and suggests that the documents indicate that Sunmac rather than 3D was the importer of the phones.

 

Ms Yeomans told us that the purchase orders from, and invoices to, Zenith had been obtained by the officer responsible for Zenith and that nothing had been obtained from 3D Animations.  She said that the release notes concerning Sunmac had been obtained from Humber Freight, a freight forwarder, on a visit by another HMRC officer.

 

On 17 May 2006, the day after the invoice date of all the transactions in these two chains, officers of HMRC made a visit to Humber Freight.  Whilst there they telephoned HMRC’s Redhill office and were told that Sunmac had been deregistered (or that a decision was then, or had been, made to that effect).  They passed the information on to Humber Freight.  On 18 May 2006 HMRC wrote to Humber Freight confirming Sunmac’s deregistration.

 

The FCIB evidence showed the payment on 9 June 2006 of the purchase price in Deal 7 from Mynt to Phone City, from Phone City to Zenith, and from Zenith to an individual, Gopal Kalidas, and by that individual to Rezaco trading.  Mr Kalidas was company secretary of 3D Animations between 10 April 2006 and 30 May 2006.  From Mr Yule’s evidence we conclude that Mr Kalidas was not an officer of Sunmac in this period.

 

HMRC suggest that Deals 7 and 8 were originally set up with Sunmac as the first UK entity in the chain, but when those organising the trade found that Sunmac was deregistered, they substituted 3D Animations in its place.  By that time Sunmac had already received and made allocation at the freight forwarder but the invoices were routed through 3D Animations.  In their closing submissions HMRC say that such substitution was evidence of contrivance of the chains – a somewhat circular submission.

 

There was before us no evidence that news of Sunmac’s deregistration had spread before 17 May and one possible inference from the report of the visit to Humber Freight on 17 May was that that visit triggered the deregistration.  All other relevant documents were dated the previous day, 16 May, and we are unable to conclude that on that day it was known that Sunmac was or was to be deregistered.

 

On balance it seem to us that the evidence of cash movement through Mr Kalidas (3D Animations’ secretary) and the invoices from 3D Animations suggest that a contract for the delivery of the phones was made by 3D Animations with Zenith, and payment was made under that contract, the release of the phone by Sunmac to Zenith satisfying 3D Animations’ obligation.

 

The consequence of this conclusion is that 3D Animations’ sales were connected with Mynt’s purchase, but it is not that 3D Animations imported the goods.  That is because (a) there remains the possibility that 3D Animations acquired them from Sunmac and effectively directed Sunmac to deliver directly to Zenith, and (b) the goods were already in the UK when released to Sunmac and indeed when they were released to its supplier.

 

(b) Deals 15 to 23

 

In relation to these deals HMRC assert that the phones were acquired by Zenith (Buffer 1) from 3D Animations, and that 3D Animations imported the phones from Financial Alpha which in turn acquired them from Ramsha Trading.

 

Again, in relation to such a deal chain, the documentary evidence before us convinced us of the chain of transactions between Zenith and Mynt (and indeed Mynt made no direct challenge in relation to those transactions).

 

The problem for HMRC was that in each case there were release notes by which Financial Alpha released the phones to Maize Investments Ltd (rather than 3D Animations), and Maize released them to Zenith : suggesting that Maize took the place of 3D Animations (the alleged defaulter) in the chain.

 

On 24 May 2006 one of HMRC’s officers, Sam Jones sent an internal e-mail asking that Maize be deregistered.  It appears that it was then deregistered.  On the same day HMRC wrote to Humber Freight letting them know that Maize had been deregistered, and indicating that transactions involving Maize after 8.00am on 22 May might “fall to be verified”.  That e-mail records that a Roy Ledger had, at some unspecified time, called HMRC saying that he had taken over the company.  A telephone call record of 8 June 2006 records the same man wanting to know why the company had been deregistered.

 

At a visit to Zenith by HMRC on 29 June 2006 a representative of Zenith “claimed not to have done any purchases through Maize”.  Together with that for 10 other companies, Zenith provided due diligence materials in relation to 3D Animations but none in relation to Maize [26/6960].

 

The copies of the release notes seemingly sent by Maize to Humber Freight bore a VAT number which was not that of Maize.

 

HMRC suggest that Deals Chains 15 to 23 were originally intended to commence in the UK with Maize which was to be the defaulter, but when Maize was deregistered it became necessary to insert a new trader in its place and 3D Animations was chosen.  However by then the phones had been released to Maize and by Maize to Zenith.  They say that the fact that the invoices to, and purchase orders from, Zenith, came from Zenith indicates that 3D Animations was Zenith’s supplier.  (They say that this is supported by a Deal Log produced by HMRC’s officers from Zenith’s records, but it was unclear to us that these records extended beyond the purchase order and invoice exhibited to us.)

 

Mr Malik in his closing submissions ([292] to [311]) makes the following points:-

 

(i) in relation to Deals 15 to 23 there are exhibited by HMRC no purchase orders from, or invoices to, 3D Animations.  That throws doubt on whether 3D Animations imported the stock.  The release and allocation to Maize by Financial Alpha suggest Maize imported the stock.

 

We should say that in relation to our present enquiry, namely whether there is a connection between Mynt’s purchase and the alleged default by 3D Animations, we regard the question of whether 3D Animations imported the stock as irrelevant.  It may be relevant to whether 3D Animations defaulted fraudulently or whether there was a VAT loss but it is not relevant to the question of connection.  However we take Mr Malik’s point that the release to Maize calls the chain into question.

 

(ii) May Deals 15 to 23 were all invoiced on 19 May 2006 (which was also the date of the Maize release notes).  At that time Maize had not been deregistered nor Humber Freight (and thus presumably other persons) notified of that fact.  There was no need to replace Maize with 3D Animations at that time.

 

Discussion

 

There was not in the case of these Deals the cash movement evidence which in the case of Deals 7 and 8 helped us to conclude that 3D Animations was the likely seller to Zenith.

 

It seems to us that there are only the following possibilities:-

 

(i) that, as HMRC suggest, 3D Animations was substituted for Maize because of the deregistration of Maize.

 

We reject this interpretation. The evidence of the steps taken towards deregistration is that they were taken several days after the goods were released and invoiced.  We agree with Mr Malik.

 

(ii) that 3D Animations did contract with Zenith for the supply to it of phones and satisfied its obligation by arranging the direct release by Maize of the phones to Zenith.  On this explanation Maize would have made a supply to 3D Animations.  This explanation is not affected by the fact that Zenith said it did not deal with Maize since Zenith need not have known that Maize provided the phones.  Nor is it affected by the incorrect VAT number on the Maize release note: the deliverer (and the supplier of a service to 3D of delivery of the phones) may have assumed the letterhead of Maize without being Maize.

 

(iii) that 3D Animations never acquired the phones or any right to their delivery.  Instead it produced pieces of paper appearing to be invoices for a supply, but which were not.  It was not concerned with the existence of the goods but instead with producing an invoice in relation to which Zenith could claim input tax.  Other persons, under the name Maize, arranged for the goods to come into the fleeting possession of Zenith so that it could release them down the chain.

 

On the evidence before us we cannot say that one of (ii) or (iii) is more likely than the other.

 

If (ii) is the case then Mynt’s purchase is connected to 3D Animations’ sale and thus, if 3D fraudulently evaded VAT on that sale, to that fraud.

 

If (iii) is the case then Mynt’s purchases appear to us to be connected to 3D Animations’ false invoices to Zenith.  It seems to us that in this case 3D Animations is properly described as being fraudulent whether or not Zenith was complicit in that fraud.  In this case the VAT lost was the VAT claimed by Zenith as input tax in relation to these invoices, rather than VAT which 3D did not account for on a supply which it did not make.

 

Thus we conclude that it is shown either that Mynt’s purchase was connected to 3D Animations’ sale, or that Mynt’s purchase was connected to the fraudulent evasion of VAT which took place in relation to the invoices it produced.

 

 

May Deal 14

 

The documentation tendered by HMRC to support this chain contained a couple of documents which, on inspection, referred to a later transaction and omitted the invoices to and by Mynt.  The latter however were contained in the documents provided by Mynt and, once the former were removed from consideration, it became clear to us that the documents supported the chain of sales and purchases alleged by HMRC.

 

We find that there was a connection between Mynt’s purchase of the goods in this Deal and their sale by the alleged defaulter, Smart View Ltd.

 

 

 

 

Appendix II

 

Alleged Defaulters

 

Introduction

 

We deal here with evidence directly connected to defaulters, not with any general argument about implication from the general circumstances of the deals. We use “importer”  colloquially, recognising that the technical term for an import from the EU is an acquisition.

 

1. Ultimate Security Agency (Deals Feb 1&2 2006)

 

From the evidence of Mr Mendes we find:-

 

(i) Ultimate was registered for VAT on 16 July 2004;

(ii) between November 2004 and January 2006 its trade consisted primarily of buying electrical devices from UK vendors and exporting them.  Its VAT returns then indicated repayment claims in this period;

(iii) at a visit by HMRC officers on 20 December 2005 an employee told them that the company would be importing phones in the future.  That employee became a director in January 2006 in place of the previous sole director;

(iv) following visits to freight forwarders HMRC’s officers identified Ultimate as an importer.  Ultimate was visited on 20 February and on 21 February HMRC’s officers had a discussion with Mr Khan.  He was given a regulation 25 notice requiring submission of a VAT return for the period to 20 February on the following day and asked to produce sales and purchase listings.  Mr Khan said that because of exports to a company called Umbria Equitazione of goods purchased in the UK from Parkacre Contractors the net amount on the return would be low.

(v) on the following day, 22 February, a VAT return was forwarded to HMRC showing VAT due of £357.24, a cheque for that amount was collected from Ultimate, and Ultimate were told that Parkacre had been deregistered from 30 January 2006;

(vi) the records of Ultimate in relation to the 22 February VAT return indicate purchases from Parkacre and Maximillan Solutions Ltd of phone cards which were sold to Umbria.  The Directors of Umbria were reported by the Italian revenue authorities to have no knowledge of these purchases. The records of Ultimate (now in the possession of its liquidators) revealed no details of payments nor any export documentation relating to these transactions;

(vii) on 23 February HMRC wrote to Ultimate giving notice of a VAT assessment from £31,942,723. This was assessed on the basis that all Ultimate’s exports had been purchased from Parkacre and sold to Umbria.  The letter indicated that documentation to support the return had not been supplied and since no documentation was tendered to support the exports VAT was assessed on the sale price without input tax credit.  Another letter on the same date cancelled its registration;

(viii) no communication was received from Ultimate in relation to these letters.  The assessments have neither been paid nor disputed.  The company was put into liquidation;

(ix) in the period Ultimate sold to the Wireless Warehouse the goods which were the subject of February Deals 1&2.  From the evidence of Ms Yeomans we accept that these goods were acquired from Financial Alpha and that VAT was due as the result of their purchase and sale.

 

Evaluation

 

The change in Ultimate’s pattern of trade from being an exporter of goods acquired in the UK to trading also in goods it imported and sold to UK counterparties meant that, absent export activity of commensurate value, it would become liable to pay VAT.  The actions of the company in producing a VAT return when so required by the regulation 25 notice and paying the VAT shown on that return do not point to any fraudulent intent.  Neither would a few days’ delay in producing a sales and purchases listing.

 

Mr Malik says that the evidence of export indicated that no VAT was due, and there had been no fraudulent intent.

 

However the company’s failure to respond to the letter advertising the £31m assessment calls its actions into question.  An innocent trader receiving such a letter might take a few days to recover from the shock, but in the end would make a substantial response: providing details and documentation, and making protest.  It seems to us that the lack of documentation of the Umbria sales and the likelihood that the goods were not acquired by Umbria suggests that it is likely that the Umbria transactions were fictitious and created in order to be able to provide a VAT return with only a modest amount of VAT payable.  Even if Ultimate were an honest trader who might have been so frightened by a £31m VAT assessment that he just ran away, the circumstances of the alleged Umbria exports led us to the conclusion that such is unlikely to have been the case.

 

We find that Ultimate sold the phones in February Deals 1 and 2 fraudulently intending not to account for the VAT on them and did not account for that VAT.

 

2. Zoom Products  (February Deal 3 (27/2/06)) 

 

We heard oral evidence from Susan Hirons in relation to Zoom.  We find:-

 

(i) Zoom registered for VAT on 15 September 2005 and started business at Birmingham Airport.

(ii) In September or October 2005 Zoom was acquired by a Mr Khera (or Khela) and notification of a change of address was given on 28 November 2005.

(iii) Nil VAT returns were made for 10/05 and 01/06.

(iv) But release notes obtained from freight forwarders dated 12 and 19 December 2005 indicated that phones have been allocated by an entity with Zoom’s name and address but quoting a VAT number one of whose digits had been translated to the end of the number.  These release notes are in a format different from those acquired in March 2006 by HMRC from a different freight forwarder.

(v) At some time towards the end of 2005 an officer of HMRC was told by Mr Khera that no trading had taken place.  It is not clear that this was said before or after 12 December.

(vi) On 20 February HMRC officers visiting Zoom’s address were told Mr Khera would be back on 27 February (leaving a letter).  A further visit (leaving another letter) was made on 28 February but no one was in.

(vii) On 2 March Mr Khera was contacted by phone and an appointment made to visit and to inspect the records on 13 March.

(viii) Leaving aside the 12 and 19 December documentation from freight forwarders, the earliest indications of Zoom’s phone trading in the documents HMRC collected from other traders was of trades on 27 and 28 February

(ix) On 13 March the visit took place and Mr Khera was met.  But he said he had taken the records to the accountant.  He produced, however, a laptop computer which showed that Zoom had undertaken 218 sales in the period 1 February to 7 March with a value of about £250m.  HMRC were told that no due diligence had been conducted. He also agreed to take the records to HMRC later that day.  He did not do so.  Miss Hirons thought that he did not appear to be concerned that the company would have a large VAT liability.

(x) On 14 March a regulation 25 letter was given to Mr Khera requiring a VAT return to be made up to 13 March by 15 March 2006.  HMRC were however provided with a CD of the company’s transactions.  Interrogation of the CD showed 262 sales with a value of £427m.  It also indicated exports of £198m to Umbria Equitazione, whose officers represented to the Italian authorities that they did not acquire or deal in the goods concerned

(xi) When HMRC visited to collect the return no one was present.

(xii) On about 5 April 2006 Zoom sent HMRC a VAT return in pursuance of the regulation 25 requirement.  It claimed a VAT repayment of £3.4m.

(xiii) On 12 May HMRC wrote to Zoom requesting production of all their records.  No reply was received (we note in particular that no evidence of export to Umbria was provided).

(xiv) An assessment was notified to Zoom on 7 June of £74m.  This was compiled by denying all input tax and treating declared EC supplies as taxable.

(xv) No payment has been received in respect of the assessment.  We find it likely that no further communication has been received by HMRC from the company.

(xvi) Miss Hirons was not aware of any criminal investigation against the managers of Zoom, but a disqualification order was made against Mr Khera on 8 April 2009 citing his management of Zoom.

 

Some of the release notes exhibited for transactions in which Zoom was involved in March 2006 suggest that the phones were present in the UK at the time they were released to Zoom.

 

Mr Malik notes that the December release notes required the freight forwarder to “ship on hold” to Wireless Warehouse. That he said was customary only for exports.

 

Evaluation

 

We accept that Zoom made sales of telephones on and after 27 February on which output VAT arose.

 

We were not convinced that the “ship on hold” indicated that the goods had been exported when sold to Wireless Warehouse, a UK entity. If they had been exports Zoom could have produced export documentation when it was asked for it.

 

We accept that Zoom’s purported sale to Umbria either did not take place or was not an export.  We believe it was manufactured to buy time by submitting a VAT return which did not record a liability.

 

Mr Malik notes that on 20 February Miss Hirons noted that the property had a sale notice outside. He says that if, during the investigation the property was vacated it was less suspicious that assessments were not replied to. But Zoom was present there on 14 March and there was no evidence that they had told HMRC of a change of address. We think it likely that a trader who was not engaged in fraud would have left a forwarding address if it had moved. 

 

We find that Zoom’s failure to respond to the request for its records, its failure to communicate with HMRC after the assessments and its failure to pay any VAT assessed indicates that it dishonestly intended to evade payment of VAT applicable to the transactions it undertook in February.

 

It is not clear to us that Zoom imported the phones which were the subject of Deal 3.  However it seems likely that it made a profit on the deal and that a net VAT liability arose.  We find that it intended at the time of its sales, and did, fraudulently evade that liability.

 

 

 

3. FX Drona  (March Deals 1-3 and 5-10)

 

Stephen Robinson produced a witness statement in relation to FX Drona.  His evidence was not disputed and he gave no oral evidence to us.  From his evidence we find:-

 

(i) he and a colleague visited FX Drona on Friday 31 March 2006 (after the invoice date of each of the March Deals).  They met there Mohane Varatharajan, a man who was evasive and unhelpful.  Eventually the company’s director Mr Kanadas phoned and spoke to HMRC’s officers.

(ii) Mr Kanadas confirmed that FX Drona was involved in the buying and selling of mobile phones and was supplied by Electron in Bath.  Mr Kanadas said his accountant would provide details.

(iii) HMRC’s officers threatened FX Drona with deregistration if it did not provide details of all the deals.  Mr Kanadas then rang off.

(iv) HMRC’s officers seized a computer in the office and left.  There was no evidence as to whether or not the computer was interrogated.

(v) They returned with the computer at 3.00pm.  Mr Kanadas phoned them.  He said he would be back at the premises at 5.00pm.  The officers said they would not wait and left.  (It was Friday).  A regulation 25 letter was left at the premises requiring the VAT return for the period to 31 March 2006 to be submitted by 3 April.

 

From Mr Mendes’ evidence we find:-

 

(i) the company was VAT registered on 2 February 2006, with a declared trade of supplies of Graphic Animations and Multimedia Developments;

(ii) Mr Kanadas became a director on 8 March 2006.  HMRC were not informed of any change in the nature of FX Drona’s trade

(iii) no VAT return was rendered in response to the regulation 25 notice;

(iv) assessments totalling some £33m (including some £16m in July 2006 and some £13m in November 2006) have been made on FX Drona on the basis of documentation received from its customers in relation to mobile phone transactions;

(v) HMRC have received no contact from the company challenging the assessments.  The company was put in liquidation.

 

 

It is admitted that in each of the 9 March Deals in issue there was a supply of the phones by FX Drona.  There was VAT on this supply.

 

The documentation before us in relation to the supply to FX Drona was absent in the case of Deal 5 and in relation to the other 8 Deals was limited to instructions from Financial Alpha Computer International, an Italian company, given to Point of Logistics in the UK, to release the relevant stock to FX Drona.  Those release notes indicated to Point of Logistics that the stock had been allocated to Financial Alpha by E&I Trading.  There was no documentary evidence of the price paid by FX Drona and whether or not it was charged VAT by Financial Alpha.

 

In relation to March Deal 1 the evidence of Miss Emery showed that FX Drona’s customer in the chain had paid the invoiced purchase price to Mr Kanadas who in turn had paid E&I Trading the same amount less some £2,837.

 

Evaluation

 

Neither the cussed and evasive behaviour of Mr Varatharajun nor, in the circumstances the failure promptly to comply with the regulation 25 notice speaks to us of fraudulent conduct.  (Deciding not to comply with a notice because an HMRC officer would not wait until 5.00pm to see you could well be retaliatory or silly, but it doesn’t point to dishonesty.)

 

The acquisition of control of the company by Mr Kanadas followed by its venture into mobile phone dealing rather than graphic design supply does not point to fraud either.  Mr Kanadas and his advisers may well have been ignorant of any requirement to notify HMRC or lazy about compliance.  Many people are lazy or ignorant but are not dishonest.

 

The routingof the sale monies through Mr Kanadas’ bank account (thereby apparently cutting out FX Drona’s supplier Financial Alpha – although there was no evidence as to whether Mr Kanadas later made any payment to Financial Alpha of its profit) is not comfortable but does not in our view point sufficiently strongly to fraudulent evasion of FX Drona’s VAT (whether just on its margin or on the whole of the sale price): short-circuiting a chain of payments makes administrative sense even though it may call into question the commerciality of the transaction chain.

 

The failure of FX Drona to respond to the large VAT assessment levied upon it is more questionable.  If the company was aware that it had a large VAT liability (which would be the case if it had no input VAT to offset against the output VAT in its sales), then failing to pay or respond to the assessments indicates fairly strongly to us that it never intended to pay that VAT.  On the other hand if the company thought its VAT liability was limited to the VAT liability on its margin (because in the normal way it would get input tax credit on its purchase) then it may well have intended to pay that VAT, but when presented with a VAT bill many thousands of times larger may at that stage suddenly realised or found out that it was in the soup, and frozen like a rabbit in a headlight beam and done nothing.  In this latter case there would have been no dishonest intention not to pay the VAT due until after the assessment arrived and perhaps not even one at that stage if the company did not have the funds to pay.

 

However, if the company had thought that it had only a small VAT liability then we would have expected it to complete a VAT return (even if it might deliver it tardily). The failure to provide any return of its sales, coupled with the failure to respond to the assessments indicates to us that it did not in fact believe it had only a small liability, and that at the time of its sales it dishonestly intended to evade, and did evade,  the liability that would arise on them.

 

4. Goodluck Employment Services Ltd (April Deals 1-4)

 

We had before us the unchallenged witness statements from Mr Patterson and Mr Monk.  From that evidence we find:-

 

(i) Until late 2005 Goodluck conducted the business of supplying labour to others.

(ii) In January 2006 it wrote to HMRC indicating a prospective change in its business and asking that its business be classified as General Business.

(iii) Later in the same month it e-mailed HMRC indicating that it had not traded in the period September to 3 November 2005.

(iv) At a visit to Goodluck on 13 March 2006 an HMRC officer was told by its sole director that the company was inactive but considering various options including importing rice.

(v) In late March or April 2006 (Mr Patterson’s witness statement mentions 19 and 20 March but his recorded actions and exhibits suggest this should be April 2006) HMRC concluded from the records of a freight forwarder that Goodluck was trading in mobile phones held at Freight Forwarders in the UK.

(vi) On 24 April HMRC’s officers left a regulation 25 notice at Goodluck’s offices requiring a VAT return for the period to that day to be completed by the following day.

(vii) When Mr Monk visited Goodluck the next day to pick up the return he was told by its sole director, Mr Shahid, that its business involved wholesale traders in mobile phones.  The trade had been conducted by an employee.  The director said that he had been told that there would be no VAT to pay on these deals, and said that the company did not have the funds to pay large amounts of VAT.  Mr Shahid also said he did not know whether any third party payments were made. The required VAT return was not provided.

(viii) Assessments were sent to Goodluck on 9 May 2006 (for £515,000), and between 23 May 2006 and September 2007 13 further assessments or amendments thereto were sent to the company.

(ix) Letters sent to the company and its director in early 2007 were returned marked “gone away”.

(x) HMRC’s record shows outstanding VAT liabilities (from the assessments) of some £18m.

(xi) Goodluck was made the subject of a winding up order on 24 January 2007.  Visits by HMRC’s officers to its premises and to the director’s home in 2007 found no one in.

(xii) From correspondence with the Insolvency Service we find that no legal action was taken against Goodluck by HMRC.

 

From Ms Yeoman’s evidence we find that the company did not contact HMRC at any time after the visit on 25 April 2006, and that no payment has been received in respect of, nor any contest made against any of the assessments.

 

From the FCIB evidence we find that for April Deal 1 Goodluck paid an amount equal to its entire VAT inclusive sales price less £6.2K to Rezaco (which was the supplier to its supplier, Financial Alpha). This was what was known as a third party payment.

 

The documentation supporting the deals sheets for April deals 1 to 4 include copies of declarations made by Goodluck to its customer in respect of these deals. Those declarations contain a statement that Goodluck did not make third party payments. The declarations were signed by Mr Shahid and dated 19 April (deals 1 and 2) and 24 April (deals 3 and 4).

 

Import

 

In a letter dated 28 December 2007 from HMRC to the Insolvency Service it is said that HMRC “have no details in our records of any purchases from EC suppliers”.  The assessments made by HMRC were however made on the basis that the phones were acquired from EC traders and sold to UK customers.  Mr Patterson exhibited a schedule indicating that the information obtained from the freight forwarders in April 2006 showed Financial Alpha Services as Goodluck’s supplier in eight cases and Custom-Elec in one.  He exhibited a release note from Custom-Elec to Hawk Precision asking Hawk to allocate and release phones to Goodluck and indicating that the phones “had been allocated to [Custom-Elec] by E&I Trading”.  It thus appeared that the phones were in the UK when released to Goodluck.  Mr Patterson described this as a sample but did not indicate whether the other notes were in similar form.

 

In each of the Deals the documents show that the phones were in the UK when they were released to Financial Alpha, and by Financial Alpha to Goodluck.

 

Evaluation

 

Mr Malik says that the approach taken by HMRC’s officers in their dealings with Goodluck suggested that they did not consider it to be engaged in fraud. We find that the materials before us point neither to a conclusion that HMRC’s officers thought that Goodluck was involved in fraud nor to a conclusion that they thought it was not.

 

 It is accepted by the Appellant that the phones which were the subject of its sale in April Deals 1 and 2 were those supplied by Goodluck.  We reached the same conclusion in relation to April Deals 3 and 4 (see Appendix 1). There we note that the phones in those deals were in the UK when they were purchased by Goodluck.

 

We find that Goodluck was dealing in mobile phones in April 2006 and that it is likely that a VAT liability arose by reason of its purchases and sales. Its failure to make any communication in relation to the assessments made on it indicates that it did not intend to pay those assessments.

 

Goodluck’s director’s comment to Mr Monk that there would be no VAT to pay on those deals was in the context of having been told by Mr Monk that £500k of VAT would be due on the sale of goods acquired in EU countries.  It is possible that this remark did not therefore mean that the director thought no VAT at all was payable, but merely meant that VAT was payable on the margin.

 

If Goodluck thought it was buying goods in the UK and on selling them (as appears to have been the case in relation to Deals 3 and 4 at least), then its VAT liability would have been likely to have been small.  In those circumstances it would not have been immediately clear that its failure to address HMRC’s assessments or to provide a return (given the timing of Mr Monk’s remark) pointed clearly to an intention to defraud HMRC of that small liability, or pointed to an intention to defraud HMRC of any large amount.

 

However, Mr Shahid’s statement to Mr Monk that he did not know whether Goodluck made third party payments, when contrasted with the almost contemporaneous declarations that it did not, and the fact that it had made such a payment a few days earlier indicated to us that Mr Shahid’s statements were not reliable, and that it was likely that he  was intending to mislead Mr Monk (or possibly that the employee who conducted the deals intended either to mislead Mr Shahid, or through him HMRC).

 

The pattern of the deals in which Goodluck was a party, as well as the pattern of all the other deals  indicated that Goodluck would have made a profit on these deals. As a result, even if it was entitled to an input tax credit (because the phones were supplied from the UK) it would have had a net VAT liability. But if it truly thought it had a right to an input tax credit, why did it not try to persuade HMRC of that fact?

 

In our view the fact that Goodluck did not attempt to claim an input tax credit, and Mr Shahid’s lack of frankness indicates to us that Goodluck, through Mr Shahid or through another acting on its behalf, did not truly believe that a VAT credit was available and was intending, at the times it made its sales,  to avoid any VAT which arose on its sale

 

We find that it was  proved that Goodluck intended fraudulently to evade, and did evade, the VAT on its sales in these Deals at the time of its sale.

 

 

5. Computec Solutions Ltd (April Deals 5 to 8)

 

From the unchallenged witness statement of Mr Reardon in relation to this company, we find:-

 

(i) Computec was VAT registered on 1 November 2004 and made nil VAT return for the six periods up to 28 February 2006;

(ii) a Regulation 25 notice was served on 5 May 2006 requiring a return for the period ending on 5 May 2006;

(iii) 17 VAT assessments were issued to the company in the period July 2006 to April 2008;

(iv) no appeal or other communication has been received by HMRC from the company since 5 May 2006 other than from an insolvency practitioner in connection with its liquidation;

(v) a winding up order was made against the company on 24 January 2007;

(vi) the assessments made related to sales invoices issued by the company and obtained by HMRC’s officers from its customers;

(vii) the assessments total some £105m and relate to invoices to the value of over £600m issued in the period 3 April to 9 May 2006.  Mr Reardon exhibits release notes which indicated that Computec purchased the goods it sold in this period from EU suppliers.  Only in the case of purchase from Custom-Elec did the release notes indicate any earlier allocation while the goods were at the freight forwarder to Computec’s supplier.  There was no other evidence before us relating to whether Computec had imported the goods or brought them from an EU supplier which held them in the UK.

 

Evaluation

 

As Mr Malik notes, the majority of HMRC’s letters and assessments were sent to 26 York Street , London; Computec’s April release notes show its address as 1 Farnham Road, Guildford. This latter address was visited by HMRC on 5 May 2006 when the regulation 25 notice was left there. The officers were then told that Computec had a presence there. The 26 York Street address was Computec’s registered office, but in October 2007, officers visiting that office were told that it was a virtual office facility and that Computec were no longer there. A third address was given to them at that time but no letters were sent to it. Mr Malik says that if the assessments were sent to an address at which the company no longer had a presence, then it is no wonder that there was no reply.

 

We accept, however, that the assessments made by HMRC were made on the basis of invoices it sent to other traders and that it is likely that Computec made the supplies which gave rise to the assessments. 1 Farnham Road was the address on its release notes and the regulation 25 letter was left there.

 

Yet despite (a) making very substantial sales, and (b) having correspondence delivered to both its addresses, it made no VAT returns after February 2006.

 

We find that it is likely that Computec imported all the goods it sold in its brief flowering period.  The release notes did not generally indicate that the goods were already in the UK when sold by the EU suppliers and we prefer the view that it is likely that there was uniformity of practice in this brief highly active period and conclude it is more likely that it imported the goods in which it traded.

 

We find that Computec intended dishonestly to evade, and did evade,  its VAT liability in relation to its sales between 3 April and 9 May 2006.  We therefore find that to the extent Mynt’s transactions in April Deals 5 to 8 were in phones acquired in a chain in which Computec was a precursor of Mynt, that Computec fraudulently evaded VAT in relation to those deals.

 

We so found because (i) Computec was dormant for almost two years and then made some £600m of sales within a month, (ii) having so traded in a way which most have incurred substantial VAT it then failed to make any return to HMRC or to respond to any assessment.

 

6. Regal Emporium (May Deals 1-4)

 

In relation to Regal Emporium we had an unchallenged witness statement from Susan Roberts and heard oral evidence from Ms Yeomans.  We find:-

 

(i) the company was VAT registered on 22 May 2002 declaring its prospective business as selling imported marble handicrafts;

(ii) the company rendered VAT returns embracing the period from registration to 31 January 2006.  These show little activity: no taxable outputs and small inputs.  The last two returns in this period were nil returns;

(iii) the Companies House records indicate an original director resigning on 31 March 2006 and a Mr Asiedu both being appointed and resigning on that day;

(iv) on (2 or) 7 April 2006 a letter from Mr Asiedu, signed as a director of the company, notified a change of address to 412, Greenford Road;

(v) on or shortly after 12 May 2006 it seems that the company was deregistered for VAT since it had been dormant for 6 months;

(vi) on 16 May 2006 HMRC logged a call from one Joyce who asked why the company had been deregistered;

(vii) release notes obtained by HMRC from freight forwarders indicated Regal Emporium (of 412 Greenford Road) as releasing mobile phones in transactions between 15 May and 12 June 2006;

(viii) on 2 June Mr Asiedu wrote notifying a change of address to 198 Windmill Lane (his residential address in the Companies House records);

(ix) between 4 August and 15 August 2006 two assessments were sent to the company (at 198 Windmill Lane) totalling some £1.1m.  The assessments were based on purchases recorded by other traders as being from Regal;

(x) further assessments were made in December 2006, January, and October 2007, and February 2008;

(xi) a letter sent by HMRC to Regal at 198 Windmill Lane in October 2006 was returned marked “gone away”;

(xii) on a visit on 28 May 2008 to 198 Windmill Lane an HMRC officer was told that Regal Emporium had never had a presence at that address.  It is not recorded whether anything was said about Mr Asiedu;

(xiii) Regal was dissolved on 7 May 2008.  No payment has been received in respect of any of the assessments.

 

Following the assessments of 4 and 15 August (which were sent to 198 Windmill Lane) HMRC received two letters from Mr Asiedu at 198 Windmill Lane of 14 and 22 August disputing the assessments and indicating that the VAT assessed exceeded sales for the year.  In response to HMRC’s subsequent request for business records Mr Asiedu wrote again on 29 September saying that since “we bought the company on 31 March 2006” it had not done any business.  He goes on to say that in April 2006 someone came to ask if they were interested in acting in electronic business as agent for another company on a commission.  They had said yes and someone came to change his computer equipment, but on the third day they departed saying that they had discovered the company was not registered for VAT so that it could not act as an agent.

 

Evaluation

 

It is clear to us from the freight forwarder documentation that either someone acting on behalf of Regal, or someone purporting so to act had been engaged in mobile phone transactions between 15 May and 12 June.  This period covers the dates of the transactions in May Deals 1 to 4 and we think it likely that those deals were part of the same arrangements.

 

Mr Asiedu’s letter of 29 September 2006 with its account of the agency and commission is consistent with the 16 May telephone call (from Joyce) about the deregistration.  Mr Asiedu’s three letters also indicate that, despite what HMRC was told at a later visit to 198 Windmill Lane, the letters it sent there were received by Mr Asiedu although subsequently he may have departed. 

 

It seems to us that there is a range of possible situations which would be consistent with these facts: from complicity by Mr Asiedu (and thereby Regal) in trades in mobile phones which Regal invoiced plus VAT for which it did not intend to account, to the assumption, unbeknown to Mr Asiedu of another person of Regal’s name, address and VAT number and the intention of that person not to account for the VAT due.  Between the two lies a tract where Mr Asiedu may have had more or less knowledge or suspicion of what was happening.

 

However in each of these situations it seems clear to us that sales were conducted in Regal’s name which bore a VAT liability for which it was intended to make no account.  We therefore conclude that there was fraudulent evasion of the VAT on the transactions which involved May Deals 1 to 4.

 

The release notes before us did not make it clear that the transactions in Regal’s name involved the import of phones rather than their purchase in the UK.  Thus, for example, one from Orange and Green Traders (15/3670) asks Hawk to allocate phones from DRT to Orange and Green and then to allocate and release them to Regal.  It might be the case therefore that the only VAT evaded was that on the margin (“commission”) earned by the transaction.  However the letters from Mr Asiedu indicate to us that, for someone, more was at stake than the VAT on the margin and that at the least it was intended to evade the VAT on the sale price.

 

 

7. Sunmac (UK) Limited (May Deals 5&6 (undertaken on 15 May 2006))

 

We heard oral evidence in relation to Sunmac from Ms Yeomans and Mr Reardon and had before us an unchallenged witness statement from Mr Yule.  Miss Emery produced evidence relating to the flows of cash in the Deal 5 chain.

 

From that evidence we find:-

 

(i) Sunmac was registered for VAT on 1 January 2003.  Its declared principal place of business was Pentax House and its main business activity IT consultancy;

(ii) Sunmac submitted quarterly returns for the periods up to May 2004 showing aggregate modest sales;

(iii) VAT returns for the period from May 2004 to February 2006were received as a batch in 2006.  They were nil returns.  We did not see copies of these returns as we had requested, but accept their record of receipt on HMRC’s computer..

(iv) in early April 2006 Sunmac’s existing directors resigned and a new director was appointed;

(v) between December 2005 and May 2006 three VAT return forms and nine other letters from HMRC to Sunmac at its Pentax House address were returned marked “gone away”;

(vi) on 17 May 2006 at a visit to a freight forwarder HMRC officers were shown release notes indicating the acquisition and sale of mobile phones by Sunmac.  The allocations to Sunmac were from Financial Alpha of Italy;

(vii) no VAT return has been received from Sunmac in relation to these transactions or in relation to May Deals 5 and 6;

(viii) these release notes indicated that Sunmac’s address was Highlands House SW19, although they showed its registered office at Pentax House;

(ix) Sunmac’s VAT registration was cancelled on 18 May 2006 (after the deals the subject of the chain in Deals 5&6);

(x) on visiting Pentax House in August 2006 HMRC’s officers were told Sunmac had moved out some time ago;

(xi) Sunmac was struck off the register on 10 April 2007;

(xii) assessments in respect of invoices bearing Sunmac’s name and held by other traders were sent to the Pentax House address on 7 August 2006 (for £14k), 11 August 2006 (for 43k);

(xiii) no payment, appeal or other communication has been received from Sunmac.  Given the previous history of the unopened return of assessments addressed to Pentax House, this was unsurprising.

 

The FCIB evidence showed that in Deal 5 Sunmac’s customer (Zenith) had not paid Sunmac but had paid Mr Ummermoiden (the company secretary of Computec) who had then paid E&I Trading. Sunmac received no funds from which to pay its VAT liability.

 

Evaluation

 

In this case the failure of Sunmac to respond to assessments sent by HMRC to Pentax House does not indicate to us that it intended not to pay the VAT represented by the deals reflected in those assessments.  It seems clear that it had relinquished any presence there well before those transactions were conducted.  Had the letter been sent to Highlands House the failure to deal with them may have pointed to dishonest intent.

 

The evidence however shows that someone was licitly or illicitly conducting transactions in Sunmac’s name in May 2006 and that on those sales VAT was due.  We saw invoices from Sunmac for each of deals 5 and 6. It also seems clear that no return of that VAT was made in Sunmac’s name.  However a failure to return VAT is not a clear indicator of an intention to evade paying it: the relevant person may have forgotten to pay, thought that there was no VAT or been unavoidably prevented from paying.

 

On the other hand it is odd that its early business activity appeared to fall into abeyance, and then, just before the phone transactions started, VAT returns were delivered for outstanding periods (an action which might be thought to be intended to preserve its VAT registration), and that the new deals were done from a new address.

 

On balance we conclude that the suspicious factors (including the diversion of Zenith’s payment to Mr Ummermoiden) weigh more heavily in the balance and that whoever undertook those transactions in Sunmac’s name dishonestly intended that the VAT on them should be evaded.

 

 

8. 3D Animations (May Deals 7&8, and 15-32)

 

We recall our conclusion in Appendix 1 in relation to 3D Animations’ place in the chain of supply in these Deals.  

 

We heard oral evidence from Mr Evans in relation to 3D Animations.  We also heard evidence from Miss Emery in relation to the FCIB account transactions in connection with May Deal 7.

 

From that evidence we find:-

 

(i) 3D was incorporated on 5 April 2006 and registered for VAT on 7 April 2006 with a declared intended trade of Design Multimedia and Animation Graphics;

(ii) on 10 April 2006 its company secretary resigned and Mr Kalidas Gopal was appointed secretary.  The previous sole director resigned on 16 May, a replacement having been appointed on 15 May 2006;

(iii) on 1 June 2006 an HMRC officer visited its declared place of business because other officers had reported that a substantial number of mobile phones had been allocated to 3D by EU based companies.  There was no one present.  A letter containing a regulation 25 notice requiring completion of a VAT return to 1 June 2006 by the following day, and a letter warning of deregistration unless contact was made and records presented, were left at the premises;

(iv) no reply to those letters has been received by HMRC;

(v) on the basis of information produced by other officers dealing with other traders whose records indicated purchases from 3D, assessments were issued to 3D for some £130m in respect of its sales (of some £880m)  in the period to 6 June 2006.  No response to, or appeal against, those assessments has been made.  No VAT payment has been received from 3D.

(vi) the assessments were made on the basis that no credit for input VAT was available to 3D in respect of its purchase of the goods;

(vi) 3D Animations went into compulsory liquidation on 30 September 2006.  On 29 November 2006 the liquidator wrote to HMRC indicating that he had been attempting to recover monies from FCIB bank accounts held by the company or companies with which it traded.

 

Mr Evans exhibited release notes for 31 transactions in which instructions were given to a freight forwarder in the UK, Point of Logistics, to release phones to 3D Animations. 19 of those were from Lariant Trading Ltd, the remainder from Europe Communication.  Lariant’s release notes have a Cyprus address and a VAT number. Mr Evans was not able to say definitively whether the VAT number was a Cyprus or UK one but on balance we find that he checked it and found it was not a UK VAT number.  Those notes required Point of Logistics to “release our goods” to 3D.  The Europe Communications notes showed it as having an Estonian address.

 

With the exception of May Deals 24-26, the Deal sheets show 3D Animations as purchasing the goods from Financial Alpha. In each of those cases the documentation also contained a release note from another EU based trader to a UK Freight Forwarder requiring it to release goods to Financial Alpha.  There was then (in the case of Deals 27 to 32) a subsequent release note addressed to the same UK freight forwarder requiring release to 3D Animations but as we note elsewhere in May Deals 7 and 8 and May Deal 15 to 23 the release notes indicate release not to 3D Animations, but to Sunmac and Maize respectively.

 

The FCIB evidence from Miss Emery shows that, in May Deal 7, 3D Animations’ customer made payment to Gopal Kalidas’ FCIB account, (Gopal Kalidas was the company secretary of 3D Animations at that time) and that payment was then made of a similar amount to the account of Rezaco trading (which had released the goods to Financial Alpha).  FCIB’s account documentation for the opening of Mr Kalidas’ account indicates that it was to be a personal account.

 

Evaluation

 

We accept that 3D Animations engaged in an explosion of trade in May and the first part of June 2006.  Given the change of officer holders before this trade commenced we do not see the difference between the declared trade and that undertaken as necessarily suspicious.

 

We accept that VAT was due in relation to 3D Animations’ sales in this period and find that no attempt was made to make any return in respect of or to account for that VAT.  The lack of any response to the regulation 25 notice and the letters delivered on 1 June 2006 supports that finding.

 

Those failures and the failure to make any response to the very large assessments made on it indicate clearly to us that 3D Animations did not intend to pay the VAT for which it was liable and did not intend to pay it at the time it entered into the transactions.

 

It seems to us unlikely that these transactions would have been loss making and we conclude that even if 3D Animations was entitled to input VAT credit in respect of them there was a VAT liability which it intended to and did evade.

 

Thus we conclude that every transaction in May in which 3D Animations sold mobile phones was conducted with the dishonest intention of evading VAT and that such VAT was not paid.

 

It is possible that 3D Animation was owed monies by those with whom it traded which was not paid to it.  The letter from the liquidator indicated that this may be a possibility.  If it did not have the monies then it would have had difficulty paying the VAT.  But its lack of response and failure to communicate with HMRC suggest strongly that this was not the reason it failed to make payment.  Likewise it is possible that a failure of payment meant that it was entitled to VAT bad debt relief cancelling its VAT output liability.  However Miss Emery’s FCIB evidence in relation to Deal 7 indicates that payment was made (albeit to Mr Kalidas) and even if (as the evidence from the liquidation showed)  3D had not received proper payment, an honest trader would have raised that issue with HMRC.

 

The release notes before us caused us to conclude that in any case in which 3D had purchased phones, the phones had been in the UK at the time of purchase. As a result for such purchases input tax credit may have been available on the purchase, and 3D Animations’ liability reduced to that on its margin only. But we remain convinced that it intended to evade that liability.

 

In our conclusion in relation to Deals 15 to 23 in Appendix 2 we say that 3D Animations either purchased and onsold the phones or that it fraudulently invoiced Zenith for them. If the former was the case then we conclude that it intended at the time of its sale to evade the VAT thereon and did so evade it.

 

9. Smart View Ltd (May Deals 9 to 14)

 

We heard oral evidence from Mrs Yeomans and Mr Laing in relation to Smart View.  From that evidence we find:-

 

(i) Smart View was registered for VAT on 10 March 2005 with an intended business declared to be in leather goods;

(ii) it submitted VAT returns for the quarters 07/05, 10/05, 01/06 showing modest sales which we believe to have been of leather goods;

(iii) no VAT return was received for 04/06;

(iv) on 18 May 2005 an HMRC officer visited Smart View’s address, found it shut up and left a regulation 25 letter;

(v) on 19 May 2005 the same officer returned to pick up the VAT return.  He was unsuccessful in this activity but was told that the trader had gone away in December 2005 owing rent and leaving some stock behind;

(vi) in the period 13 June to 21 January 2008 HMRC issued (net of withdrawn assessments) eight assessments to Smart View totalling some £6.2m.  None have been appealed or paid;

(vi) the assessments were based on evidence in the records of other traders of sales to them by Smart View;

(vii) no surcharges penalties or criminal proceedings were levied or instigated against Smart View.

 

We were shown a copy of a letter from HMRC ostensibly in reply to a standard letter from the Insolvency Service.  The letter appeared to have been prepared sloppily and indicated inter alia that a return for 04/06 had been received from Smart View.  We accept Mr Laing’s suggestion that this reply arose as a result of a mis-reading of HMRC’s computer records.  The letter also indicated that no visits had been made to the trader despite the apparent existence of manuscript notes of such visits.  We preferred the evidence of the manuscript notes.

 

A sample of release notes derived from the freight forwarder Humber Freight shows phones being allocated by Financial Alpha to Smart View.  The notes indicate that at the time of allocation the goods were already in the UK.

 

Evaluation

 

We accept that Smart View made sales in May 2006 and that VAT arose on those sales.  It is clear that no attempt was made by Smart View to report those sales or account for any VAT arising.  We accept that those sales gave rise to some £6m of output tax.

 

The change from a modest leather goods business to a substantial mobile phone trading business, the apparent abandonment of its original premises, and the change from a business which rendered VAT returns for its modest activities to one which rendered no VAT returns for its vast activity indicate to us that it is likely that those who controlled Smart View’s activities (or who acted in its name in May 2006) never intended to pay the VAT arising on its sales and were dishonest in that intention.

 

In each of the six transactions in May Deals 9 to 14 in which Smart View participated, the goods were allocated to it by Financial Alpha, and at the time of allocation appeared to be in the UK.

 

Even if input VAT credit was available to Smart View in respect of those purchases it seems to us likely that a net VAT liability would have arisen in each deal and that Smart View (or those acting in its name) dishonestly intended at the time of those sales to evade, and did evade, the VAT arising on them.