Network Euro Ltd (in liquidation) v Revenue & Customs [2011] UKFTT 255 (TC) (19 April 2011)
DECISION
1. Network
Euro Limited (“the Company”) appeals against the refusal of HMRC to repay to it
input tax referable to April - July 2006. In detail, on 30 April 2007 HMRC
denied Network Euro its claim to recover £1,955,450 VAT for period 04/06 and its
claim of £2,351,701.19 for period 05/06. On 11 May 2007, HMRC denied the
Company its claim for £2,989,322.50 for the period 06/06, and on 2 October 2007
denied its claim for £1,580,255.50 for the period 07/06. The total amount
denied and therefore at stake in this appeal is £8,876,709.
2. All
this input tax relates to 62 transactions conducted by the Company during these
four months in which it purchased mobile phones in the UK and despatched them to purchasers outside the United Kingdom. The Company conducted no other
trade during this time.
3. HMRC
allege that all these 62 transactions were connected to fraudulent evasion of
VAT and that the Appellant knew this or in the alternative ought to have known
this and that therefore under Kittel the Company has no right to recover
the input tax relating to these transactions.
Background
4. The
Company was incorporated in August 2004 with Mr Sandeep Virdee as its
Director. Mr Virdee had wanted to establish his own business and so he
conducted research to identify possible business opportunities. He decided to
set up the Company to exploit what he saw as an opportunity to refurbish and
sell second-hand computers. Mr Virdee funded it by juggling loans on some nine
credit cards. The Company sold the computer units by advertising them in Loot
(a free newspaper) and on ebay (an internet bidding site). Mr Virdee planned
to expand the business by selling refurbished electronics into Eastern Europe
and the Middle East.
5. Mr
Gurpreet Taggar joined the Company in 2004 and was appointed Director in early
2005. He paid off Mr Virdee’s credit card debts of about £25,000 in return for
which the unwritten agreement between the two men was that Mr G Taggar would be
entitled to 50% of the Company’s profits. Later shares in the Company were
transferred to Mr G Taggar’s father, Mr S S Gurpreet. In May 2006 Mr G Taggar
resigned as Director and became Company secretary although it was not suggested
that his role within the Company changed at his point.
6. Mr
Virdee registered the Company for VAT on 1 September 2004. Mr G Taggar (not yet
a director) was stated in the application to be a “manager”.
7. We
find that the business started in a small way with a very low turnover. Its
first three returns were quarterly and showed outputs of £2,945, £15,259 and
£23,189.
8. HMRC
officers visited Network Euro on 26 April 2005 and discussed issues including
MTIC fraud. At the meeting, Mr Virdee asked the HMRC officers about the
process for verifying VAT numbers and successfully requested that the Company
be put on monthly VAT returns. Its first monthly return was for June 2005 and
in this month the Company’s outputs leapt to £2,773,000. In July 2005 its
outputs were £5,152,000, and in August its outputs exceeded £9million.
Thereafter its VAT returns each month vary from about £3million to over
£18million in outputs. The approximate net turnover of its last 11 months of
trading (to end July 2006) was £128million. After that date its turnover
dropped to nil and the Company later went into liquidation. The Company’s
transfer to monthly returns coincided with its first despatches outside the United Kingdom and its first substantial repayment claims.
9. No
accounts have ever been filed by the Company, although one set of draft
accounts (for year ending 31 August 2005) were produced to HMRC by Mr Virdee
on 23 August 2006. Its profit after tax in its first year was estimated in its
draft accounts to be £1.127million.
Appendix
10. There were a
very large number of companies mentioned in this appeal. We have referred to
them by an abbreviated name in this Decision Notice. Their full legal title is
set out in an appendix to this decision notice.
Terms and expressions and description of
MTIC
11. This case is one
of many in which HMRC allege that the transactions were connected to MTIC
fraud. Many previous tribunals and higher Courts have given a description of
MTIC fraud which we cannot better. We rely on the descriptions given by Burton
J in R (Just Fabulous (UK) Ltd) v HMRC [2007] EWHC 521 at paragraphs 5-7;
by Lewison J in HMRC v Livewire Telecom Ltd [2009] EWHC 15 (Ch) at
paragraph 1 and by Floyd J in Mobilx Ltd (In Administration) v HMRC
[2009] EWHC 133 at paragraphs 2-3. We repeat Lewison J’s paragraph 1 from Livewire
as it is a short description of a ‘normal’ MTIC defaulter chain and also
of what is known as contra-trading as both are relevant in this appeal:
“1. VAT fraud is a serious problem for
national taxing authorities throughout the European Union. VAT fraud can take a
number of forms. The particular form of fraud with which these appeals is
concerned is known generically as missing trader intra-community fraud or MTIC
fraud. This is a description coined by HMRC, but is generally used by those who
specialise in this area. Even this generic type of fraud can itself take
different forms:
i) In its simplest form it is known as an
acquisition fraud. A trader imports goods from another Member State. No VAT is payable on the import. He then sells on those goods to a domestic buyer and
charges VAT. He dishonestly fails to account for the VAT to HMRC and
disappears. The importer is labelled a "missing trader" or
"defaulter".
ii) The next level of sophistication involves both
an import and an export. A trader once again imports goods from another Member State. No VAT is payable on the import. Typically the goods are high value low
volume goods, such as computer chips or mobile phones. He then sells on those
goods to a domestic buyer and charges VAT. He dishonestly fails to account for
the VAT to HMRC and disappears. The domestic buyer sells on to an exporter at a
price which includes VAT. The exporter exports the goods to another Member State. The export is zero-rated. So the exporter is, in theory, entitled to deduct
the VAT that he paid from what would otherwise be his liability to account to
HMRC for VAT on his turnover. If he has no output tax to offset against his
entitlement to deduct, he is, in theory, entitled to a payment from HMRC. Thus
HMRC directly parts with money. Sometimes the exported goods are re-imported
and the process begins again. In this variant the fraud is known as a carousel
fraud. There may be many intermediaries between the original importer and the
ultimate exporter. These intermediaries are known as "buffers". The
ultimate exporter is labelled a "broker". A chain of transactions in
which one or more of the transactions is dishonest has conveniently been
labelled a "dirty chain". Where HMRC investigate and find a dirty
chain they refuse to repay the amount reclaimed by the ultimate exporter.
iii) In order to disguise the existence of a dirty
chain, fraudsters have become more sophisticated. They have conducted what HMRC
call "contra-trading". The trader who would have been the exporter or
broker at the end of a dirty chain, with a claim to repayment of input tax,
himself imports goods (which may be different kinds of goods) from another Member State. Because this is an import he acquires the goods without having to pay VAT.
This is the contra-trade. He sells on the newly acquired goods, charging VAT
but this output tax is offset against his input tax, resulting in no payment
(or only a small payment) to HMRC. The buyer of the newly acquired goods
exports them and reclaims his own input tax from HMRC. Again there may be
intermediaries or buffers between the contra-trader and the ultimate exporter.
The fraudsters' hope is that if HMRC investigate the chain of transactions
culminating in the export, they will find that all VAT has been properly
accounted for. This chain of transactions has conveniently been called the
"clean chain". Thus the theory is that an investigation of the clean
chain will not find out about the dirty chain, with the result that HMRC will
pay the reclaim of VAT on the export of the goods which have progressed through
the clean chain. I should add that HMRC do not agree with the label "clean
chain" because they say that both chains are part of an overall fraudulent
scheme.”
Law
12. The European
Court of Justice (“ECJ”) ruled in Axel Kittel v Etat Belge (C-439/04)
and Etat Belge v Recolta Recyling SPRL (C-440/04) in July 2006 that
(paragraph 61):
“where it is ascertained, having regard to objective
factors, that the supply is to a taxable person who knew or should have known
that, by his purchase, he was participating in a transaction connected with
fraudulent evasion of VAT, it is for the national court to refuse that taxable
person entitlement to the right to deduct.”
13. The Court of
Appeal considered this in Mobilx Ltd (In Administration) [2010] EWCA Civ 517. At paragraph 47 Moses LJ (giving the leading judgment) said:
“…. the objective criteria which form the basis of
concepts used in the Sixth Directive form the basis of the concepts which limit
the scope of VAT and the right to deduct under ss. 1, 4 and 24 of the 1994 Act.
Applying the principle in Kittel, the objective criteria are not met
where a taxable person knew or should have known that by his purchase he was
participating in a transaction connected with fraudulent evasion of VAT.
14. Moses LJ went on
to say at paragraph 60:
“The true principle to be derived from Kittel
does not extend to circumstances in which a taxable person should have known
that by his purchase it was more likely than not that his transaction was
connected with fraudulent evasion. But a trader may be regarded as a
participant where he should have known that the only reasonable explanation for
the circumstances in which his purchase took place was that it was a
transaction connected with such fraudulent evasion.”
15. The Appellant’s
contention is that, following Mobilx, in order to deny the right to
input tax based on Kittel HMRC has to prove on the balance of
probabilities that the appellant knew or should have known that the only
reasonable explanation for the circumstances in which the transactions took
place was that they were connected to fraud.
16. This summary of
the judgment in Mobilx is an over-simplification, although nothing turns
on this for the purposes of this Decision Notice. Firstly, the reference by
Moses LJ to “only reasonable explanation” was in the context of “means of
knowledge” and not actual knowledge. Nevertheless, if HMRC could show that the
trader knew that the only reasonable explanation for the transaction was
that it was connected to fraud, then we would regard this as sufficient to
fulfil the Kittel test for actual knowledge. Nothing turns on this
point in this case.
17. It is also an
over simplification in that Mr Brown’s formulation suggests HMRC are limited to
showing means of knowledge by showing the trader should have known that “the
only reasonable explanation” was connection to fraud. However, Moses LJ
only used this expression in the context of explaining that although it was not
enough for HMRC to show that the trader ought to have known that his
transaction was probably connected to fraud, it would be enough to show
that the trader ought to have known that his transaction was connected
to fraud because this was the only reasonable explanation for it. There
is nothing in what Moses LJ says which would limit HMRC to showing means
of knowledge (or knowledge) by reference to what was the only reasonable
explanation for the transaction. However, as we have said, nothing turns on
this formulation of Mobilx in this appeal.
Burden of proof
18. HMRC did not
dispute Mr Brown’s formulation of the Mobilx decision as stating that
the burden of proof for the Kittel test is entirely on HMRC. HMRC
accept it is for them to show (if they can) that the transactions on which they
deny the Appellant input tax recovery are connected with fraudulent evasion of
tax and that the Appellant knew or ought to have known this.
19. If HMRC cannot
show this then the Appellant is entitled - with one significant exception which
we address in paragraph 402 - to recover the input tax at stake in this appeal.
20. Mr Brown
referred to In re B [2009]1 AC 11 and In re H [1996] AC 563, 586
D-H where Lord Nicholls said:
“The balance of probability standard means that a
court is satisfied an event occurred if the court considers that, on the
evidence, the occurrence of the event was more likely than not. When assessing
the probabilities the court will have in mind as a factor, to whatever extent
is appropriate in the particular case, that the more serious the allegation the
less likely it is that the event occurred and, hence, the stronger should be
the evidence before the court concludes that the allegation is established on
the balance of probability. Fraud is usually less likely than negligence.”
21. We see this as a
requirement, when assessing whether something is proved on the balance of
probabilities, to consider all relevant matters, including as Lord Nicholls
said, that fraud is usually less likely than negligence. As far as proof on
the balance of probabilities of the Company’s alleged actual knowledge of
connection to fraud (through its controlling officers, Mr Virdee and Mr G
Taggar) we consider this in detail in the main part of this Decision Notice.
22. Mr Brown points
out that there were over 40 companies involved in the chains of transactions
connected with the Appellant’s transactions and not a single one of these
companies has admitted fraud. HMRC’s retort was that based on Mr Stone’s
undisputed evidence, fraud in the wholesale mobile phone industry at this
period was considerably more likely than not. As explained in paragraph 155
below nothing turns on this point in this appeal.
23. It is beyond
dispute of course that in considering questions of knowledge and means of
knowledge (indeed in considerating any question in front of the
Tribunal) the Tribunal must consider all evidence in front of it including
circumstantial evidence. As Moses LJ said in Mobilx at paragraph 81-82
“[81]HMRC raised in writing the question as to where
the burden of proof lies. It is plain that if HMRC wishes to assert that a
trader's state of knowledge was such that his purchase is outwith the scope of
the right to deduct it must prove that assertion. No sensible argument was
advanced to the contrary.
[82] But that is far from saying that the
surrounding circumstances cannot establish sufficient knowledge to treat the
trader as a participant. …”
Means of knowledge
24. What did the ECJ
mean when it said in Kittel at paragraphs 56 & 59 that it is clear
that a taxpayer who “should have known” his purchase was connected with the
fraudulent evasion of VAT “must, for the purposes of the Sixth Directive, be
regarded as a participant in that fraud” and in these circumstances lose his
right to deduct his input tax on that purchase?
25. This was
considered by Moses LJ in the Court of Appeal decision Mobilx. He said
at paragraph 52 that a
“taxpayer [who] has the means at his disposal of
knowing that by his purchase he is participating in a transaction connected
with fraudulent evasion of VAT he loses his right to deduct…”
and also that
“A trader who fails to deploy means of knowledge
available to him does not satisfy the objective criteria which must be met
before his right to deduct arises”.
26. At paragraph 61
Moses LJ said:
“If he [the taxable person] has the means of
knowledge available and chooses not to deploy it he knows that, if found out he
will not be entitled to deduct. If he chooses to ignore obvious inferences
from the facts and circumstances in which he has been trading, he will not be
entitled to deduct.”
27. Although as can
be seen from below it is not necessary to our decision, we find that “means of
knowledge” means that the ECJ does expect a taxpayer to take reasonable
precautions and to make further enquiries where there are negative indicators.
We think the right to recover input tax is matched by an objective duty to take
reasonable precautions, and that where there is a failure to take reasonable
precautions which would have revealed the connection to fraud, input tax is
properly denied.
Summary
28. HMRC must show
in respect of each of the 62 reclaims of input tax made by the Company that the
transaction in which the Company incurred that VAT was (a) connected to (b) a
loss of tax that was (c) fraudulent and (d) that the Company knew or ought to
have known this.
29. The Appellant
does not dispute that its 62 transactions are connected, by a chain of
transactions, with tax loss. We find that each of the 62 transactions was
connected to tax loss.
30. The undisputed
evidence from HMRC was that deals (numbered for ease of reference) 1-15, 21-23
and 28-30 were in a chain that connected back through a number of purchases and
sales to a trader (a “defaulter”) who did not account for VAT on the sale made
at the start of the chain. It was also not disputed that the remaining deals
were connected to tax loss incurred by a defaulter in a contra-trade chain
connected to Network Euro’s transaction.
31. Mr Brown’s
original position was that the Appellant accepted that there was a tax loss in
its chains, but it did not accept that that tax loss was fraudulent. Its
position was that it did not know and could not have known whether VAT would be
fraudulently evaded by a party earlier in the chain of transactions and it is
for HMRC to prove that the tax loss was fraudulent. In other words the Company
accepted the connection to tax loss, but not that that tax loss was fraudulent.
32. At the hearing,
however, Mr Brown conceded that the only issue before this Tribunal was the
Appellant’s knowledge or means of knowledge of an accepted connection to fraud.
The Company no longer took issue with the allegation that the losses were
fraudulent, although of course disputed what inferences could be drawn from
the fact each chain was connected to a fraudulent defaulter and in particular
denied that the Tribunal could infer from this that the Appellant had knowledge
(or means of knowledge) of the fraud.
33. In any event,
this Tribunal had a great deal of evidence before it from witnesses (much from
undisputed witness statements) and the exhibits to their statements from we
which we find that the defaulters in the straight MTIC chains and the
defaulters in the “dirty” contra-trade chains were registered for VAT, made
sales of goods for which they issued VAT invoices, and then failed to declare
or pay the resultant VAT liability. We consider that whereas a failure to pay
tax that is due can occur for many reasons other than an intention to defraud
the revenue, where a person issues VAT invoices and then fails to both pay or
even declare its resultant VAT liability, such failure is more likely than not
to be fraudulent as it is unlikely that there is an innocent explanation for
such conduct.
34. A very brief
summary of the evidence that the tax loss was fraudulent is as follows:
35. The defaulters
were CT Co UK; Worldwide, Swindon Star, Computec, IT Recycling, Stockmart and
3D Animations.
36. C T Co UK (deals 1-8): this company was the defaulter on deals 1-8 inclusive. Its VAT
returns since 2002 have shown no VAT liability yet it entered into sales in
excess of £27million and issued VAT invoices. In these circumstances failing
both to declare and pay the VAT due is we find more likely than not to be
fraudulent.
37. Worldwide
(deal 9): this company only submitted four VAT returns, the first two
showing a small repayment to the company and the last two showing no trading.
After the company was deregistered in May 2006 (after Deal 9) it continued to
use its old VAT number to issue invoices. In total it issued invoices showing
a VAT liability of over £36million. We find issuing invoices but failing to
pay or declare the resultant VAT liability is fraudulent.
38. Swindon Star (deal 10): the director of this company claimed that all
dealings were carried out by a different person forging her signature. It
issued VAT invoices and owes HMRC over £14million in unpaid VAT. Either the
person carrying on the activity was forging the director’s signature or the
director was being untruthful about the extent of her involvement: either way
it is more likely than not that the tax loss was incurred fraudulently.
39. Computec
(deal 11): this company submitted 6 VAT returns which all returned a nil
VAT liability. Nevertheless, it issued VAT invoices and has been assessed for
VAT in excess of £12million on undeclared transactions, including the one at issue
in this appeal. We find issuing invoices but failing to declare the resultant
VAT liability on returns is fraudulent.
40. Stockmart
(deals 14 & 15): Stockmart was an old company that had had a genuine
business in the past. Some 15 of the company’s 20 VAT returns were payment
returns. However, from 2006 its returns showed no trading or were simply not
submitted. Yet it issued a number of VAT invoices (including the ones at the
top of chains 14 & 15 in this appeal) on which it did not account for VAT
and now owes some £60million to HMRC. We find issuing invoices but failing to
declare the resultant VAT liability on returns is fraudulent.
41. IT Recycling
(deals 21-23 & 28): this company was the defaulter on deals 12-13,
21-23 and 28. It was deregistered for not trading and had submitted only one
VAT return showing a small repayment owing to it. Nevertheless, it issued VAT
invoices without accounting for the VAT and has been assessed to £4million
unpaid VAT. Failing both to declare and pay VAT due is fraudulent.
42. 3D Animations
(deals 29 & 30): this company was the defaulter on deals 29 & 30.
It never submitted any VAT returns. Nevertheless, it issued VAT invoices which
led to it being assessed to VAT in excess of £100million for unpaid VAT. We
find issuing invoices but failing to declare the resultant VAT liability on
returns is fraudulent.
43. The
contra-traders were Topnotch, Crestview, Lagan, Smartphone and Jos.
44. Topnotch
(deals 16-20, 24-27): In the quarter ending 06/06 Topnotch commenced
large value EU supplies and acquisitions. It also carried out buffer
transactions. From this contra trading, its VAT liability in this quarter
resulted in a very small repayment claim. The officers of the company were
uncooperative with providing information to HMRC. This changed after the
return for the next quarter (09/06) in which the company asked for a VAT
repayment of very large sum (due to the cancellation of an acquisition for over
£500,000). There were tax losses on all the company’s broker deals. Almost all
goods which Topnotch acquired from the EU were sold back into the EU and all
were sold out of the UK. The company achieved regularity in its mark ups. It
did not take possession of the goods in which it traded. It did not insure
them. It did not inspect them. There were many repeat patterns in its
chains. Topnotch by its officers was well aware of risks of MTIC fraud and had
received veto letters before the deals in issue, yet its due diligence
ineffective and often after the event.
45. We find that Topnotch’s
offsetting of VAT was more likely than not to be fraudulent. The defaulters in
its offsetting chains were Computec; 3D Animations; Prompt Info Ltd; Puwar UK
Ltd; and Worldwide. We have already found that the tax losses associated with
defaults by 3D Animations, Computec and Worldwide were more likely than not to
be fraudulent.
46. Puwar was
registered for VAT in 2002 but declared no taxable supplies after 2002 and made
no returns after 2005 yet after this date it sold mobile phones wholesale in
the UK and issued invoices on which it did not account for VAT. It has not
appealed the resulting VAT assessments. We find making supplies but not making
a return in respect of them is more likely than not to be fraudulent.
47. Prompt Info
Ltd was registered for VAT in 2005. What returns it made showed no tax
liability, yet it made taxable supplies in the UK which has led to an
assessment of over £13million. In these circumstances we find its failure to
pay its VAT liability was more likely than not to be fraudulent.
48. Crestview
(deals 31-32): Crestview had a rapid and phenomenal increase in its
turnover to £51million on entering the wholesale mobile phone market. Its
deals were grouped and back to back: no stock was held. The tax it owed HMRC
was always offset by tax owed to it which is not a normal pattern of trading.
It produced false CMRs to HMRC. Its officers were made aware of the risks of
MTIC trading long before its trades with Network Euro took place. The due
diligence it carried out was inadequate and either carried out after the deals
took place or negative indicators were ignored. It made third party payments
despite being warned by HMRC not to do this. It claimed to have traded in a
commodity in a greater quantity that was actually manufactured. It held no
insurance. Whenever a supplier was deregistered Crestview switched to another
supplier but without otherwise changing its trading pattern. All its deals
have been connected to tax loss. It had no written contractual terms.
Sometimes the deal paperwork was put together after the deal had taken place.
It was partly financed by another mobile phone wholesaler. Ultimately it
switched from mobile phones to other commodities but continued to trade in the
same manner.
49. We find from
this that Crestview’s offsetting of VAT was more likely than not to be
fraudulent.
50. The defaulter in
the offsetting chain was Red Rose which went from a standing start to a
turnover of about £9million in two days of trading. It was VAT registered and
issued VAT invoices but it has not declared its liability on a VAT return nor
paid the VAT due on its transactions. It is insolvent owing over £1million in
VAT. We find that Red Rose’s default was more likely than not to be fraudulent.
51. Lagan (deals
33-38, 43): Lagan traded wholesale in mobile phones for May-July 2006.
Prior to this the business had struggled to pay a quarterly VAT liability of
about £3,000, with an annual turnover of about £114,000. At this date its
turnover jumps for those two-and-a-half months of mobile phone wholesaling to
£38million. The Director of the company admitted to HMRC that he knew of the
risks of MTIC fraud yet nevertheless allowed the back-to back wholesale phone
business to be conducted on behalf of the Company by a “friend” a Mr Dalbir Gul
Singh, and without any real due diligence. It produced no bank statements to
evidence the turnover shown on the invoices. It made at least one third party
payment. It did not fully disclose all the deals it had conducted to HMRC on
request. The contra-deals were evidenced by a paper trail without any other
evidence that the goods had really existed. The company owes over £1.5million
in VAT and has not appealed against the decision to deny its input VAT
recovery. We find that the tax default by Lagan was more likely than not to be
fraudulent.
52. The defaulters
in the defaulting chains supplying Lagan were Red Rose and Digitalk. We have
already found that Red Rose’s default was more likely than not to be
fraudulent. Digitalk was registered for VAT in the UK and made supplies within the UK in excess of £2million without declaring or paying its VAT
liability. It requested some customers to make third party payments. In these
circumstances we find it more likely than not that the tax loss from Digitalk’s
transactions was fraudulent.
53. Smartphone
(39, 44-47, 51-58): A Mr Minhas became a director of this company on 22
June 2006 after purchasing it. It carried out its first mobile phone supplies
a few days later. In that first month of trading it declared net sales of over
£14m (this would have included a small amount of retail trading). In the next
quarter it declared supplies of over £20m in wholesale trading. It used no
capital to make these supplies. It did not pay until it was paid. Its EU
acquisitions were almost entirely offset by EU despatches resulting in minimal
declared VAT liability. It bought from only 2 EU suppliers and from only 2 UK suppliers (both UK suppliers being in the same serviced building). All its UK purchases for its wholesale trade traced back to tax defaults. Its mark up was consistently £1
per unit in 30 out of 36 transactions despite great variation in quantity of
each supply (the mark up in one was £2 per unit and in 5 50p per unit). It was
never left with unsold stock. Although there was no record that Mr Minhas met
with HMRC at time of deals, the company was aware of the risk of MTIC as it did
carry out due diligence and obtained supplier declarations. This due
diligence, however, was sometimes completed after the deal in question and
negative indicators were ignored.
54. We find that
Smartphone’s offsetting of VAT was more likely than not to be fraudulent. The
defaulter in the chains which offset the chains with Network Euro were Red
Rose, Park General Store, Phone City, and Jewel. We have already found that
Red Rose’s default was more likely than not to have been fraudulent. We find Jewel
traded as a jewellers, making VAT returns from 2003 but in May changed its
business activity to wholesaling of electrical items. At this point its
returns showed nil net sales. This was despite issuing VAT invoices in June.
It was assessed for VAT of over £800,000 which it has not paid. We find it is
more likely than not that the default was fraudulent.
55. Phone City commenced wholesale mobile phones sales in July 2005 and went
from a standing start to sales of £72million over a few days. It acted as a
contra trader and HMRC traced all its UK purchases back to a defaulter. The
director was a “shadow” director who did what he was told without knowing what
business was being conducted. We find it was more likely than not that the
default by Phone City was fraudulent.
56. Park General
Store was registered on 12 July 2006 and deregistered on 29 September of
the same year when it was apparent that the business had never carried on its
intended trade as a newsagent. It made one VAT return showing sales of less
than £5,000. Yet in that period it issued VAT invoices well in excess of this
amount and made sales of mobile phones with a VAT liability of nearly
£2million. As it did not declare nor pay its VAT liability its default was
more likely than not fraudulent.
57. Jos (40-42,
48-50, 59-62): This company acted as a buffer in 2005 and continued to do
so in 2006. In June 2006 it was a buffer in 148 transactions of which 99 are
confirmed to trace back to defaulters and remainder were not confirmed either
way. Ten tansactions in this month were broker deals (UK purchase and EU customer) and 12 were acquisition deals (EU supplier and UK customer). All of the broker deals trace back to tax loss with the same defaulter - Cybersol UK
Ltd. The supplier of all the acquisition deals was BRD and the customer for
half of them was Network Euro.
58. The 10 broker
deals all took place on 19 June 2006: the 12 off setting acquisitions all took
place in the last 3 days of June and reduced Jos’ repayment claim to approx
£471,000 (from £2million). Jos never inspected goods nor kept unique reference
numbers for goods traded; it had no written contracts with customers or
suppliers; some of its due diligence was carried out after the deals took
place, the director ceased doing credit checks due to negative results being
received, and in general the due diligence was inadequate for its purpose and
was window dressing. Discrepancies in documents were not queried. The
director was advised on many occasions of risks of MTIC and making third party
payments and in fact the director had involvement in another business (now
defaulting owing £2.6m) which was also given MTIC warnings. The company had 45
veto letters and had been notified in January 2006 that a default was
discovered in one of its chains but it carried on trading in the same manner
and making third party payments. It often bought direct from defaulting traders.
It never made or received any payments on its broker deals in June 2006. It
made a profit of £1 on all the phones in its 12 broker transactions regardless
of specification or quantities traded. Jos has not appealed the decision to
refuse input tax reclaims on the basis it knew or ought to have known purchases
connected to fraud and its director has a criminal record for involvement in
fraud.
59. We find that
Jos’ offsetting of VAT was more likely than not to be fraudulent.
60. Cybersol
was registered for VAT in 2004 and declared VAT from its trade as an internet
café of between £20,000 and £65,000 per quarter. Its last return was to 31 May
2006. It did not declare its transactions which traced to Jos in period 06/06
nor pay the VAT on them and has not appealed the resulting VAT assessment. We
find that its default was more likely than not to be fraudulent.
61. In any event
from the findings made in the following section of this decision notice on
orchestration, we find that the evidence is overwhelming that the transaction
chains involving all Network Euro’s 62 purchases at issue in this appeal were
organised for the purposes of MTIC fraud. For this reason alone, we find it
more likely than not that the tax losses with which the Appellant’s
transactions are connected were fraudulent.
62. The Appellant
did not admit was that its transactions or the chains of transactions in which
they formed part were orchestrated. It was HMRC’s case that the entirety of
all the chains were engineered by the fraudsters with the purpose of
facilitating MTIC fraud.
63. A simple missing trader
fraud relies on a genuine sale of goods into an open market. The fraud is that
the missing trader (or “defaulter”) has charged VAT to its customer and
intentionally fails to account for this VAT to HMRC. The more sophisticated
type of missing trader fraud is where the fraudster does not have a genuine
market into which he can sell goods at the volume and price necessary to
achieve the sorts of illegal profits he wants to make by failing to account for
the VAT due.
64. To commit this kind of
sophisticated, organised missing trader fraud, the fraudster has to establish
an artificial market. In this artificial market, the goods are bought and sold
but there is no real market for the goods. For this type of fraud it is not
even necessary for the goods to actually exist. It is likely but not essential
for this fraud to work for the goods (if they exist) physically to go round in
a circle as it is obviously more efficient and makes more money if the
defaulter re-uses the goods in artificial chains as often as possible.
65. To create the necessary
artificial market, the fraudster must organise a buyer at every step of the
way: there is no genuine market. Third parties will not enter into the chain
if they do not see a profit in it, so the fraudster must organise a sale at a
profit for everyone who is to be a buyer in the chain. Logically it follows
that the defaulter must ensure that the buffers and brokers do realise their
profit: they will act as rationale people and if they make a loss, they will
not participate again. So if the fraudster wants to commit the fraud a second
time with the same people, he must continue to organise every step of the
transaction because there is no genuine market. As organising an artificial
market must take effort, it is likely (but not essential) that the fraudster
would use the same brokers and buffers again and again.
66. It is also not essential for
this sort of fraud to be successful that the buffers and brokers necessarily
understand that they are not operating in a genuine market. Nevertheless, we
consider that, whether the fraud to which the transactions in this appeal are
connected was a simple kind of MTIC or, on the contrary, an organised MTIC is likely
to be relevant to the question of knowledge or means of knowledge of the
Appellant. This is because if the defaulter committed only simple MTIC fraud he
would have been concerned only with his sale to a genuine buyer. Any
subsequent sales of the goods would have been irrelevant to his ability to
commit the fraud. He would not have needed to organise the subsequent sales
and purchases. Whereas if this was an organised MTIC the reverse is true. If
the 62 purchases on which the Company seeks to recover its input tax in this
appeal were part of an organised MTIC fraud, then the fraudster would have
organised Network Euro’s purchases and sales in the same way it would have
organised all the other purchases and sales in the chains. If we find that the
frauds were of the organised MTIC type, then when we assess Network Euro’s
knowledge, or means of knowledge of the fraud, we assess this against our
knowledge that its transactions were transactions in an artificial chain of
transactions organised to facilitate fraud and did not in fact arise through
the operation of an open and genuine market.
67. So we consider whether the
62 transactions were connected to simple or organised MTIC fraud.
68. The Company paid
the inspection companies it used to give it a record of the IMEI numbers of 10%
of the phones in which it traded. Comparing these numbers for its deals in
April and May 2006 to HMRC’s NEMESIS database, the evidence was and we find
that 3 of the phones traded in by Network Euro were traded again: one was
traded before it went through Network Euro’s hands and two were traded in
after they had been through Network Euro’s hands. A further 6 phones traded in
by Network Euro were reported lost or stolen and a further 29 phones traded by
the Company were locked by the manufacturer although it is not clear on what
date.
69. HMRC say that we
should infer from this that there was circularity in the chains and the phones
were not going to end users but being endlessly carouselled. Mr Brown’s point
is that this evidence exists for only a tiny proportion of the phones traded in
by the Company (even if one multiplied by 10 to make up for the fact the
Company only kept records for 10% of its phones). We agree with Mr Brown that
we cannot infer that the goods as a whole were being carouselled from this
evidence as it is such a small proportion of the many thousands of phones
Network Europe sold.
70. Indeed the
reverse is true in that the fact that there is no evidence that the vast
majority of Network Euro’s phones were sold in the UK either before or after
Network Euro dealt in them would suggest they were not part of a carousel.
71. However, we were
given no evidence on how complete HMRC’s NEMESIS database was as a record of
all mobile phones traded in the UK nor do we know how accurate Network Euro’s
records of its own IMEI numbers were, so although we find no evidence the
phones were carouselled, we do not consider this conclusively informs the
Tribunal whether or not the fraud to which Network Euros sales were connected
was organised or not. This is particularly the case as we find from the
evidence given that none of the phones in the chains at issue in this appeal
trace back to a supply from a manufacturer or authorised distributor which one
would expect if they were sold on a genuine market even if simple MTIC fraud
was involved.
72. Finding this
evidence inconclusive either way, we go on to consider other evidence.
73. Mr Jarrold gave
evidence (which we accept) that for Deals 33-35 and Deal 49 the goods the
subject to the deal were not shipped as per the shipping notes. For deals
33-35 he and his team searched the vehicle which was supposed to contain the
goods despatched by Network Euro while it was on board the 23:15 ferry on 19
June 2006. He found that the lorry only contained rolls of bowling green.
74. For deal 49 his
team searched the vehicle which was supposed to contain the goods despatched by
Network Euro while it was on board the ferry on 3 July 2006. His team found
that the lorry only contained powdered industrial resin. Mr Jarrold was on
board this ferry but personally searched a different vehicle. We accept his
evidence in relation to both searches.
75. For deals 33-35,
we find that as Network Euro’s shipping note was faxed at 17:03 asking for the
goods to be shipped that day, it was not possible for the lorry to have gone to
the continent and returned to the UK in time to be on the ferry at 23.15.
Therefore the lorry should have been but was not carrying the mobile phones
that Network Euro had sold to Fone Link. For Deal 49 there was a Statement of
Agreed Facts that there was no evidence that the ship had left the UK earlier
that day and we find that the lorry in question should have been but was not
carrying the mobile phones that Network Euro had sold to Proxi.
76. Mr Virdee for
Network Euro says that the Company always got confirmation that the buyer was
happy with the goods and that in any event they paid for them. However, we are
not addressing at this point whether the Company knew or ought to have known
that the goods were not transported, but whether the deals were orchestrated
for the purposes of fraud.
77. From the fact
that the goods were not transported and delivered to them yet the buyer did not
complain and further actually paid for them, we infer it more likely than not
that the goods did not exist and that the buyers (Fone Link and Proxi) were
well aware of this. We find on the basis of this evidence that these
transactions at least were part of organised MTIC fraud.
78. It puts into
question any other deals in this appeal in which these two companies were
involved (over half of the deals in the appeal). The freight forwarder, Sam
Logistics, must also have known the goods did not exist yet was content to be
involved. It puts in question all the deals in which Sam Logistics was the
freight forwarder (approximately half of the deals in this appeal). However,
this is not relevant to our decision as there is other and overwhelming
evidence as set out below that all of the transactions the subject of this
appeal were part of an organised MTIC fraud and none of them took place on the
open market and we explain this below.
79. Mr Nevin, an
officer of HMRC, gave evidence about First Curacao International Bank (“FCIB”)
account information which he had examined. This comprised the bank’s internal
records of banking transactions undertaken by its account holders. Virtually
all of the traders in the chains at issue in this appeal held accounts with
FCIB making it possible for Mr Nevin to follow the money.
80. Mr Nevin
analysed 21 of the Company’s transactions chosen at random. He did not have
time to analyse more. In tracing the money from one account to another he
looked at the date and amount shown by the invoice trail. However, he found
that although payments up and down the chain normally took place on the same
day, payment was always (and sometimes several weeks) later than the date of
the invoice. He also found that in some cases the amount of the payment was more
or less than the amount shown on the invoice. He also found that in many deals
the parties to the chain of transactions as shown by the invoices did not
entirely match the deal chain.
81. He also looked
at the “EB” number against each payment or receipt. This was a unique number
allocated by FCIB to each transaction so the EB number on a payment from one
FCIB account would be the same on the receipt of that money into another FCIB
account. They were also issued sequentially so Mr Nevin was able to determine
which was the first movement of money (ie where the money originated) by
looking at the EB numbers in a chain of money transfers.
82. Relying on the
invoices, the EB numbers and the fact that the money tended to move from one
account to another fairly quickly once the first money movement took place, Mr
Nevin gave evidence that in 15 of these 21 deals, the money ended up with the
person with whom it originated.
83. For instance,
for Deal 5 Mr Nevin produced evidence which showed that Network Euro raised an invoice
on 7 April 2006 to its customer Belltrask. It was paid on 20 April. On the
same day Belltrask was paid by Sigma Sixty, and Sigma Sixty was paid by SL
Computer. The first money movement was from S L Computer showing that the
money originated with that company: the evidence shows it also terminated with
that company as Network Euro bought the goods which it sold in Deal 5 from Cell
Trading. Network Euro paid Cell Trading the majority of the money on 20 April
and the balance a day later (after receiving a payment of £110,000 from
Amira). Cell Trading paid Trade Smart, Trade Smart paid City Phones Ltd, City
Phones paid a Mr Shaun Venables, Mr Venables paid SL Computer.
84. Mr Brown
submitted the Tribunal treat Mr Nevin’s evidence with caution as he was not an
accountant, did not have accountancy experience, and this was the first time he
had done this sort of exercise. We find, from looking at the bank’s printouts
of the money movements undertaken by its customers (which we’ll refer to as
bank statements) that, on the contrary, Mr Nevin’s evidence was reliable.
85. We note that Mr
Nevin accepted that he had made a mistake in his flow chart for Deal 29. He
omitted Belltrask from the flow charts. Nevertheless, it is clear from his
witness statement and exhibited documents that Bell Trask was in the loop. We
find this was just an error in the flow chart for this deal and that the flow
charts were no more than a convenient method of summarising Mr Nevin’s
conclusions. The error did not affect the underlying evidence that the flow of
funds in Deal 29 was circular nor did it affect the overall credibility of Mr
Nevin’s evidence.
86. Mr Brown also
doubted that on deal 16 the first money movement commenced with SL Computers
because the EB number for that deal was later than the EB number for Sigma
Sixty’s money movement. The explanation for this might be that Sigma Sixty
pre-booked the transaction. In any event we find it does not affect our view
of Mr Nevin’s evidence: Mr Nevin did not claim that first money movement
originated with SL Computers in this chain and it was one of the ones which was
not shown to be circular.
87. Mr Brown
challenged the evidence on the basis that in some cases the payments which Mr
Nevin relied on as relating to the invoiced deals were not single payments but
in batches of two or three payments. He said there would be no reason for split
payments in a contrived fraud. For instance, on Deal 11 Global Access’ invoice
was for £1,758,387.50. West Point paid Global Access three amounts on the same
day: £1,000,000 plus £743,700 and £14,687.50. However, these payments
totalled £1,758,387.50 which was the sum due on the invoice and we find more
likely than not that Mr Nevin was correct to identify them as relating to this
deal.
88. In any event we
note that Mr G Taggar stated that Network Euro did sometimes split its payment
into more than one lot, and Mr Nevin’s evidence shows that this is true. Mr
Taggar’s explanation for this (which the Tribunal does not understand) was that
Network Euro split the money so that it did not get lost in transit.
Nevertheless, whatever the reason for the split was, it is clear that it was a
feature of these chains and we do not agree with Mr Brown that the split
amounts of money suggest Mr Nevin is mistaken in his evidence.
89. We bear in mind
(1) the identity or similarity in the total sums paid to the invoice amount;
(2) that the movements of money all took place on the same day, in most cases
starting an ending with the same company; (3) there being no other payments
between these companies on that day that could relate to the outstanding
invoices; (4) Mr Taggar’s evidence it was usual for Network Euro to split its
payments. We conclude that although we do not know why the payments were
split, nevertheless in all cases of split payments shown in Mr Nevin’s
evidence, the split payments do relate to the invoice chain as he alleges.
90. Mr Brown doubts
that Mr Nevin showed circularity in those deals where he alleged the money flow
included Leriant (deals 14, 15, 24, 25 and 29). This is because Mr Nevin did
not exhibit Leriant’s bank statements. However, (with the exception of deal
29) he did exhibit the bank statements for the other parties which show the
number of the source/destination account. In any event in all but deal 14
there is identity in the amount paid (to the invoice amount) and similarity in
amount for those payments beyond the invoice chain. There is also identity in
the date of payment (eg in deal 25 all payments were made on 14 June 2006). We
find it more likely than not that the flow of funds in deals 15, 24 and 25 was
circular. On deal 14 we find the payment by Leriant was £1.4m whereas further
down the chain the payment was £1.8m. We bear in mind that in other “Leriant”
chains - bar 29 - we have found a circular flow of money and so it is more
likely than not that there was such a flow in deal 14 too.
91. Mr Brown doubted
that circularity was proved in deal 29. Putting aside the issue of the mistake
in the flow chart, Mr Brown also pointed out that Mr Nevin relied on a payment
by Leriant to Sigma on 14 June for nearly £4.5m whereas on this transaction
chain only some £800,000 was due. He further doubts circularity because of the
dates. The deal took place on 31 May and all invoices carried this date. Sigma
Sixty paid Bell Trask on 5 June; Belltrask paid Network Euro on same day;
Network Euro paid Cell Trading on 6 June; but Cell Trading did not pay its
supplier Selectafone Ltd until 14 June. All other payments back up chain -
Selectafone to Mobile Memory to Mr Farook, Leriant to Sigma took place on 14
June.
92. Another defect
is that not only is Leriant’s bank statement not exhibited neither is Mr
Farook’s. So although it is Mr Nevin’s evidence that he saw Lerient’s bank
statements and it was merely a mistake that they were not included in the
exhibits, we cannot know (without the exhibits) whether the conclusions Mr
Nevin has drawn on Deal 29 are accurate. Mobile Memory’s statement shows the
payment out to Mr Farook on 14 June: Sigma’s shows a receipt from Leriant on
the same date. But we consider it is for HMRC to prove their case which
includes exhibiting the evidence on which they relied and we conclude that HMRC
have not proved that Mr Farook paid Leriant in this deal chain. It is proved,
however, that Mobile Memory paid Mr Farook rather than its supplier, 3D
Animations.
93. Mr Brown also
questioned the evidence on Deal 31 because HMRC did not produce the bank
statements for TFAS. We accept Mr Nevin’s evidence that this omission was a
mistake. However, the other parties’ statements were produced and from the
other statements it can be seen that Negresso made payment to TFAS and Yayha
received payment from TFAS. Mr Brown’s criticism is that without the TFAS
statement we cannot be certain that there were no other payments which broke
the chain. However we consider the fact that all the payments in the entire
chain took place on 26 July 2006 and that the payments made by Negresso to
TFAS, and from TFAS to Yayha were in approximately the right sums. We find it
proved on the balance of probabilities that there was a circular flow of money
in this chain.
94. In summary, we
find it proved on the balance of probabilities on the basis of Mr Nevin’s
evidence that there was a circular flow of money in 14 out of the 21 deal
chains analysed. And in those 14 transactions where circularity has been
shown, the money started and ended with either SL Computers, Leriant, or
Yayha.
95. Mr Nevin did not
find evidence of circularity of funds in 7 cases. Yet even in these cases it
seems more likely than not to us that either the flow of funds was circular or
at least that they were as likely to be involved in MTIC fraud as the chains
where circularity was proved. This is because we find that in all 7, most of
the companies involved in the money flows were also involved in the circular
flow of funds in the 14 proved circular flows of funds. For instance in Deal 8,
Stylez Ltd instead of paying its supplier, C T Co UK (the defaulter), pays Mr
Shaun Venables. Mr Shaun Venables was frequently a party in a proved circular
flow of funds. A similar point could be made in respect of his payee in Deal
8, Flash Tech, which was part of a circular flow of funds in other deals (eg 2
& 3).
96. The evidence of
Mr Nevin’s analysis of the money flows showed other relevant matters. In
particular we find it showed:
·
The money paid did not always exactly match the invoiced amount;
·
The money was not always paid to the person who issued the
invoice;
·
The money was often not paid until some time after (sometimes
weeks after) the deal took place on paper but when it was paid was normally
paid all on the same day across the whole chain.
Invoice chain does not match money flow chain
97. We find that the
invoice chain did not normally entirely match the money flow chain at the
defaulter/buffer 1 level or sometimes at buffer 2 level. For instance, in Deal
1 the invoice chain shows that City Phones Ltd (buffer 1) purchased from C T Co
UK Ltd (the defaulter). However City Phones actually paid a Mr S Venables. Mr
Venables then paid S L Computer. In Deal 2 Cell Trading did not pay
Tradesmart, it paid Symbolix SARL, who paid Flash Tech who paid SL Computer.
In both cases the first money movement was from SL Computer: in other words
the money paid to Network Euro originated with SL Computer as well as
terminating with SL Computer.
98. We find that the
companies who paid a third party rather than their supplier were: Cell Trading,
Topnotch, West Point, Global Access, Stylez, City Phones, Mobile Memory,
Crestview, and Lagan.
99. We found that
the companies which made supplies for which they were not paid: were: C T Co
UK Ltd, Tradesmart, Stylex, Computec, Stockmart, Global Access, Senbetel, 3D
Animations and Phonedeal.
100.And we found
that the companies or persons who accepted payment for a supply even though
they had made no supply were: Tradesmart, Trade Eazy, Cell Trading, Jos, BRD
Werburg, Label, and Red Rose.
Amount paid does not always match invoice
101.We also find
that the amounts paid by Network Euro and others in the chain did not always
match the invoiced amounts. For instance, in Deal 3 City Phones invoiced
Tradesmart £895,358. Tradesmart only paid £841,000. Tradesmart invoiced
Topnotch £897,112.50. Topnotch only paid £841,000. In half of the chains Mr
Nevin analysed we find that one or more of the parties in the chain did not pay
the invoiced amount.
102.The companies
which did not always pay and/or receive the invoiced amount include Cell
Trading, Tradesmart, City Phones, Topnotch, West Point, A-Z Mobile, and Senbetel
103.We can see no
reason why this would happen in a commercial world. In a genuine market,
traders pay what they have agreed to pay, no more and no less.
Conclusions on FCIB evidence
104.In summary,
we find it very likely that the 14 chains in which circularity was proved were
likely to involve MTIC fraud because we can see no commercial reasons for
Yayha, Leriant or SL Computers to send money round in a circle, but it makes
every sense in the artificial world of MTIC where the organisers of the fraud
need to put everyone in funds to create the appearance of genuine trading using
companies with no assets. If we had doubts on this, they would be laid to rest
by the fact that the money flows do not match the invoice flows, and from the
fact that the amounts paid do not always match the invoiced amount neither of
which makes any sense in the commercial world.
105.We also find
that for the 7 chains in which circularity was not proved that they also were
more likely than not to be involved in MTIC fraud. We find this because many
of the companies to which payments were made were companies involved in the
circular movement of funds in other chains: Mr Venables, Flash Tech, Sigma
Sixty, Senbetel, Leriant, Belltrask and that all 7 of the chains involved some
of these companies. We also note that the 5 of the 7 chains did not involve
contra trading and all therefore involved a company which did not pay its
supplier (its supplier being the defaulter). We note that the 2 remaining
chains included companies which did not pay/receive the invoiced amount. In
conclusion, taking these factors into account even in these 7 cases where
circularity was not proved, it seems on the FCIB evidence more likely than not
that these chains were also orchestrated transactions as they involved
companies whose behaviour does not appear to be commercial and who have been
shown to be involved in other deals which we have found to be organised for the
purpose of MTIC fraud based on the evidence of circular movement of funds.
106.Moving away
from Mr Nevin’s evidence, HMRC gave evidence of timing discrepancies in some of
the documents. This evidence relied largely on the fax headers on the
documents which showed the time at which the document was faxed. Mr Brown
challenged the evidence on the basis we could not know if the internal fax
machine clocks were accurate. However, we find that this point is not a good
one when more likely than not it is the same fax machine printing both fax
headers. It is also not a good point when the times are significantly
different as we think it is more likely than not a clock would not be more than
a few minutes out.
107.From the
evidence of the faxed headers, we find that in deal 2, Trade Smart offers stock
to Cell Trading at 11:24 but had already faxed allocation and release notes in
favour of Cell Trading to Humber Freight at 11:06. In this case we find it was
more likely than not that it was the same fax machine printing the headers.
108.We find in
deal 3, Trade Smart faxed to the freight forwarder a release of the goods to
Topnotch at 10.12 and then two minutes later faxed a stock offer to Topnotch.
Topnotch sent a purchase order to Trade Smart at 13:56. We find that not only
is it more likely than not that the same fax machine printed the header on the
first two mentioned faxes, but that neither Trade Smart’s nor Topnotch’s fax
machine was likely to be nearly four hours wrong. This means Trade Smart had
released the goods to Topnotch nearly 4 hours before Topnotch had sent its
purchase order.
109.We find in
deal 5, Cell Trading sent a stock offer (dated 6 April) to Network Euro on 7
April at 15:06. The Company sent a purchase order back to Cell Trading some 20
minutes later. But Cell Trading’s invoice to Network Euro was dated 6 April
(and faxed at 18:33 on that date). The release note from Cell Trading to the
freight forwarder in favour of Network Euro was also dated 6 April.
110.We find in
deal 6, Cell Trading faxed its stock offer to Network Euro on 6 April at
17:44. Network Euro returned it to Cell Trading on 7 April at 13:35 and faxed
over a purchase order timed at 15:26 (this was in fact sent with the purchase
order for deal 5). Yet as with Deal 5, Cell Trading’s invoice and release note
were both dated 6 April.
111.Mr Virdee’s
explanation in cross-examination was that Network Euro did its deals on the
phone and the paperwork was only produced after the event and he would infer
this might well be true for other mobile phone wholesalers in the chain.
112.Both sides
therefore seem agreed that at least in some of the deals some of the paperwork
was produced after the event. HMRC’s interpretation is that this is because
the deals were all orchestrated and the paperwork was a smokescreen. Mr
Virdee’s explanation is that the deals were genuine but negotiated entirely on
the phone and the documents only produced later as they were required for the
deal pack.
113.We find
producing paperwork such as purchase orders after the deal was concluded makes
no sense in a commercial world. Either (more likely) the vendor would insist
on a purchase orders before proceeding with the transaction, or if it did not,
would have no need of them after the deal had been concluded. Mr Virdee’s
explanation that they were needed for deal packs is, we find, the likely
explanation why they were produced: the documents had no commercial relevance
but were produced to give the appearance that they had formed part of the
negotiations. This begs the question: if the purchase order was produced
after the event because the vendor did not require a purchase order before
proceeding but wanted one to make it appear that he did, does this indicate the
deals were contrived? We find that it does indicate that the vendor was
relying on something other than a purchase order to give it certainty the deal
would be progressing. By itself we might not find this conclusive that the
deals were organised and not in a genuine market, but is indicative that that
is the case.
114.As mentioned
above of the 62 deals in issue in this appeal, some 21 were straight chains
that connected back to a defaulting trader. The remaining 41 deals were
contra-trades, so the chain of goods did not connect back to a
defaulting trader (although we find the transaction as a whole was connected to
fraudulent tax loss as explained in paragraphs 32 above). Of the 21 straight
chains, apart from 6 chains, these had 3 or more buffer companies between
Network Euro and the UK acquirer. The remaining 6 were where Network Euro
purchased directly from the defaulting trader IT Recycling.
115. In contrast
to the majority of the straight chains, the contra trade chains are very
short. In all but 3 of the contra deals (33, 34, & 35) the chain comprised
UK acquirer - Network Euro - non-UK acquirer. There were no buffers. And in
those 3 excepted chains, there was only one buffer.
116.We find that
there is no logical reason why in an open and free market or even in a simple
MTIC, chains would be short where was no defaulter in the chain of goods but
very long where there was a defaulter. We do find that there is a good reason
for the difference if the chains were organised. That reason is that a long
chain would be harder to organise and involved paying the buffers: the
fraudster would only do this if he thought it necessary to facilitate the
fraud. As explained above in paragraph 65, it was in the interests of the
fraudster to protect the position of its brokers (so it could use them again).
A long chain would be put a “safe” distance between defaulter and broker making
it harder for HMRC to prove connection. However, the “safe” distance in
contra-trades was created by having the default occur in a different chain. So
the fraudsters would probably perceive that there would be no point in having a
long chain of buffers on the “clean” chain (ie the one that did not originate
with the defaulter.)
117.Another
pattern in the 62 deals is that we find Network Euro traded in blocks. Deals
1-15 inclusive were all straight chains connecting back to a defaulter. Deals
16-30 inclusive were a mixture of straight and contra-trades. Deals 31-62
inclusive were all contra-trades.
118.The chains
are very repetitious. Many deals are in pairs. There were identical chains for
Deals 1& 2; a separate (but identical) chain for deals 5&6 and so on
for deals7& 8; 12&13; 14&16; 16&17; 18-20; 21-23; 24-27; 31-32;
33-35; 36-37;40-42; 44-47; 48-50; 51-55; 56-58; 59-62. In the other chains,
the chains were all very similar to other chains with often only one company
being different.
119.There were
other repetitions, examples of which we include in the next few following
paragraphs. Parasail supplied all the contra-trade chains apart from those
supplied by Phonedeal mentioned in the above paragraph. In deals 40-42, 44-62
(ie slightly over one third of all the deals in this appeal) the chain was
Parasail
BRD (acquirer)
Contra-trader
Network Euro
EU Acquirer
120.The
contra-trader was always one of two companies: either Jos or Smart Phone. The
EU Acquirer was always one of 3 companies: Fonelink, Proxi Partners or Bijou.
121.We find that
Jos acted as UK acquirer on 12 deals in June, 6 of them the subject of this
appeal as Network Euro was Jos’ customer. The customer in 4 of them was New
Order Trading Ltd, the customer in one was New Order Exports Ltd, and in the
remaining deal the customer was Talk 2 Us Ltd. New Order Trading supplied
Haroon Younas in the UK who then supplied Proxi Partners in Belgium; New Order Exports supplied Fone Link. Network Euro supplied Fone Link on 3 of the deals,
and Proxi on the other three. So in these 12 chains, there was a single
acquirer, four brokers but only 2 EU acquirers.
122.There was
evidence which we accept of 27 chains in June 2006 in which Lagan or Jos were
buffers. In these the EU supplier is always either BRD or Phonedeal. The EU
acquirer is always either Proxi or Fone Link. Network Euro is the broker in 14
of the chains. The other brokers are New Order Exports, Lagan, or Mr Younas.
123.In the 06/06
period Smart Phone made 6 UK supplies, 1 to St Annes and 5 to Network Euro.
One purchase was from Phone Dealers and the other five from BRD. St Anne’s
sold its batch to Fone Link SL as did Network Euro. All of these 5 sales by BRD
were of goods purchased by them from Parasail in Spain.
124.There were
patterns in the freight forwarder used. In deals 1-8 the Company had four
customers (all in different EU countries) and three suppliers. Yet all the
goods were sent to the same freight forwarder in Holland (Interaction
Logistics) using the same export freight company (Humber Freight). Where Point
of Logistics was used as the export freight company (deals
9,11,20,24,25,26,27,29,30) the goods were always sent to Interaction Logistics
although 4 different EU acquirers were involved.
125.We do not
find it likely that such repetition in chains would arise by accident in a
genuinely open market
126. We find that
Top Notch had a pre-existing relationship with Belltrask to whom it sold goods
on 3 May. Yet late in the same month TopNotch sold to Network Euro who sold to
Belltrask (deals 24-27). Lagan sold goods to Proxi Partners in June 2006,
including a transaction only a few days before Network Euro’s deal 43. In deal
43 Network Euro bought from Lagan and sold to Proxi Partners. Indeed, Lagan
actually gives Network Euro the name of Proxi Partners as its trade reference.
Smart Phone systems had a pre-existing relationship with Proxi Partners too:
there were sales by Smart Phone Systems to Proxi Partners in June 2006. Yet in
July Network Euro buy from Smart Phone and sell to Proxi Partners. In all
cases Network Euro made a substantial profit. There are other instances where
Network buys from one company and sells to another where HMRC have demonstrated
that the two parties had a pre-existing relationship.
127.We consider
this would be unlikely to have happened in a genuine market: why would
Belltrask or Proxi buy from Network Euro when they could buy more cheaply from
a vendor with whom they had a pre-existing relationship?
128.We find that
the Company’s profit in a chain vastly exceeded the profits made by the
buffers. Of the total profit made by all buffers and brokers in a chain, in
most chains Network Euro’s profit would be about 80-90%. It was never lower
than 61%.
129.We find this
makes no sense in a commercial world. Why would by far the majority of the
profit arise on the cross-channel sale? Although the broker would have costs a
buffer would not (principally freight) Network Euro’s profits far outweighed
these costs and this cannot be the explanation.
130.Mr Virdee’s
explanation was that buffers could not make the profits because they did not
have the capital to be a broker: a broker had to be able to “block” the VAT.
We find he meant that, because cross border sales were zero rated, that a broker
had to be in a financial position to pay more to its vendor than it would
receive from its European buyer. It would recoup the position only when HMRC
refunded the VAT it paid to its vendor. Mr Virdee explained (and on the other
evidence we accept this) that Network Euro had the funds to do this because it
borrowed the money.
131.We do not
find that Mr Virdee’s explanation makes sense. Although it is true that a
broker had to be in a financial position which enabled it to “block” or fund
the VAT for a month or so, this cannot explain why EU acquirers would be
prepared to pay so very much more for the stock than the UK brokers. The
profit was well in excess of any normal commercial rate of interest on the
capital that would have been needed to block the VAT. At the sort of price
differential evidenced in this case between what a buffer and broker charged
their customer, we find a commercial market would have come up with another
solution (such as the EU acquirer purchasing the goods in the UK from a buffer
or the buffer borrowing funds to become a broker and undercutting the other
brokers).
132.However, this
price differential does make sense in the world of MTIC where only the broker
is taking a risk: the risk HMRC will not refund the VAT.
Identity in mark-ups
133.There was
unchallenged evidence which we accept that Lagan, Crestview, Jos and
Smartphones all achieved a mark-up of 0.33% on a certain specification of phone
when they sold it to Network Euro. Of Network Euro’s 20 deals in June 2006
with 4 different suppliers, the Company’s four suppliers always made £1 per
phone and always at a mark-up of 0.33% or 0.34%.
134. We find that
these profits made by the Company’s suppliers are inexplicably consistent in a
commercial environment and also a very small proportion of the value of the
goods and do not appear to commercially viable assuming that the businesses had
normal overheads.
135.Forty
companies appeared in the chains at issue in this appeal. HMRC’s undisputed
evidence which we accept was that 33 of these companies had accounts with
FCIB. The directors of 2 of the remaining 7 companies (though not the
companies) had accounts with FCIB. Of the remaining 5 companies, 1 directed
payments to be made to a third party who had an FCIB account and two did not
receive any payments. When FCIB closed down many moved to the same Swedish
bank UMBS.
136.HMRC’s view
was that using FCIB facilitated the fraud and the buffers and brokers were
effectively instructed by the organisers of the fraud to have FCIB accounts.
Mr Virdee put the view that it was known in the trade that FCIB was an
efficient bank and many of the companies in that sector had no choice other
than to use FCIB as their UK bank accounts were closed down without
explanation. He said suppliers would be more ready to deal with them if they
banked with FCIB.
137.We do not
find this evidence by itself persuades us that the 40 companies were acting in
concert: Mr Virdee’s explanation, that FCIB was the bank known in the trade
sector which would take their business when UK banks would not, is, we find, at
least as likely as HMRC’s explanation.
138. We find that
the buffers in these chains, like Network Euro, did not take possession of the
stock. The stock was traded while it sat at a freight forwarder’s premises.
We find that the deals in an entire chain were normally completed on the same
day.
139.We find no
one “added value” to the transaction chains. No one took any risk. No one
split or combined the stock. The only thing which the buffers appeared to do
was raise an invoice. For this they were rewarded with very small profits.
140.On the other
hand, as can be seen from Mr Nevin’s evidence above, the deals were often not
paid on the day they were completed. Sometimes payment could be weeks after
the day of the deal. Mr Brown suggested that this was strong evidence that the
deals were not contrived, because, he said if contrived no one would have
agreed a delay. We think the contrary is true. In a commercial situation
there is no reason why the ultimate seller would be prepared to let go of
control of the goods sometimes for weeks before they were paid, as happened on
many of the deals in this appeal. Further, there is no evidence (apart from
the oral evidence of the Company’s officers which we reject for reasons given
below) that the date of the payment was arranged on the date of the deal. It
was not recorded in the deal documentation so if these were commercial deals
payment would have been expected immediately. Yet payments were normally delayed
by days or weeks. We think, contrary to what Mr Brown says, this is evidence
that the deal chains were contrived as it seems no one in the chain had any
concerns about the date of payment.
141.We find that
in many of these deal chains the goods were shown to originate on the
continent. That was also their destination after Network Euro purchased and
sold them. This begs the question why Network Euro’s customers did not buy
direct from the European company which sold the goods to the defaulter. It
makes no sense in a commercial world for the goods to be acquired and traded
in the UK if there was such a ready market for the goods on the continent that
Network Euro were (on its own evidence) able to sell the goods for a much higher
price there than in the UK, and when (on the evidence of the deal chains) the
goods actually originated from a dealer on the Continent.
142.Mr Brown’s
point is that (he says) there is no evidence that NE knew that the phones
originated in Europe. But that is not the point: the point is that the phones
originated in Continental Europe whether or not Network Euro knew this and this
makes no commercial sense and is therefore, we find, evidence that the chains
were artificial and orchestrated.
Conclusions on orchestration
143.Mr Brown says
that HMRC did not lead any evidence which showed that Appellant’s supplier knew
what stock the Appellant’s customer required and on what date and vice versa.
However, although it is true there is no direct evidence of this, the
circumstantial evidence that Network Euro’s transactions were orchestrated and
that someone - the shadowy figure who organised the frauds - did know what
stock Appellant’s customer required and on what date and what they would pay
and what stock the Company’s supplier would be selling on what date and for how
much, is we find overwhelming.
144.We find as
follows: a commercially driven market would be most unlikely to operate in a
manner that would bring these types of chains into existence, which regularly
involved goods being acquired in the UK from the Continent and then sold and
transported back to the Continent at a very high profit; the buffers were all
dealing back to back without risk or adding value to the transaction or stock
nor taking possession of the stock; the buffers’ profits were very small and
predictable, the broker’s profit was inexplicably much higher although no extra
input in the transaction was involved (apart from increased freight costs); the
trading took place in blocks that would be unlikely to arise by chance and for
which we could find no commercial explanation; the chains showed much
repetition and patterns in their structure which again we find would be
unlikely to arise by chance and for which we could see no commercial explanation;
Network Euro dealt with trading partners who already had a pre-existing
relationship making Network Euro superfluous in the chain; and we also found
in that in some cases the paperwork was being generated after the event
indicating that the vendors did not require purchase orders to be certain the
deal was going ahead. From all this we conclude the chains and the
transactions comprising the chains would be far more likely to have been
orchestrated for the purposes of MTIC fraud than not.
145.When combined
with the FCIB evidence we find HMRC’s case to be overwhelming. From this
evidence we see that the money moved in circular flows for which there can be
no commercial explanation, we find in many cases that the money paid by many of
the participants was not the same as the amounts invoiced, and we find that the
chain of payments does not match the chain of invoices. We find that the only
credible explanation for all this is that all the transactions at issue in this
appeal were part of an orchestrated MTIC fraud where there was no genuine
market for the goods.
146.We find that
every purchase and every sale made by the Company which is at issue in the
appeal (whether or not the Directors of the company knew or ought to have
known) was organised as part of this fraud and did not take place in a genuine
market.
General evidence on MTIC fraud
147.Mr Stone, an
officer of HMRC had no direct involvement with Network Euro’s input tax reclaim
and he gave evidence about MTIC fraud in mobile phones in general.
148.Mr Stone has
been employed by HMRC to apply their MTIC strategy since 2001. Since 2004 he
has been MTIC Deputy National Coordinator and senior policy adviser.
149.He gave
evidence that despatches and exports of mobile phones from the UK significantly
decreased after May 2006 and points out that this decrease coincided with the
implementation of HMRC’s full programme of extended verification on 1 May 2006
and with the ECJ judgment on joint and several liability on 11 May 2006 (HMRC
v Federation of Technological Industries C-384/04). Figures for January
and February 2005 show cross-border trade in mobile phones of about £250m per
month. It steadily increases to over £1billion by November 2005. By March- May
2006 it is over £4b each month. There was a slight fall off to £3b in June
2006 and a dramatic decrease to under £1billion by July 2006. The trade
continued to fall to under £100m/month by November 2006. It was Mr Stone’s
evidence that for the six months from July to December 2006 total trade was
down from £21bn in previous six months to £2.1bn, and about the same for the
period January 2007 to October 2007.
150.It is also Mr
Stone’s evidence that since introduction of the reverse charge on mobile phones
on 1 June 2007 of the 179,000 traders registered for VAT with mobile phone and
computer trade classifications (which in any event is likely to be an
under-representation of the traders in the market as many (such as Network
Euro) did not have this classification) only 179 traders have registered for
the reverse charge.
151.It was not
suggested to us that the increase in sales was due to the increase in
popularity of mobile phones and indeed the dramatic fall off in trade in July
2006 onwards is not consistent with such an explanation.
152.Mr Brown put
the view that the dramatic fall in mobile phone trading in July - December 2006
was the result of HMRC’s extended verification resulting in businesses being
unable to trade as their input tax reclaims were withheld. We were not given
figures of how many of these traders ultimately were repaid and of those which
were not, how many appealed, nor of how successful the appeals were. So we
agree with Mr Brown that this figure alone does not tell us whether the
fall-off was due largely to businesses trading in a genuine market being caught
up in extended verification or businesses trading in artificial markets being
caught up in extended verification.
153.If the mobile
phone frauds were of the simple type, each sale by the defaulter would be into
a genuine market. That market would continue to exist despite the introduction
of the reverse charge. We take into account that one of the effects of the
reverse charge is to ensure that traders have no need to fear extended
verification as there is no VAT to reclaim. So that if in April - July 2006
the fraud either was non-existent or was of the simple variety, it is likely
after the reverse charge came into effect that business would return to its
high level of mid-2006.
154.However, from
the evidence in respect of the vastly decreased number of traders actually
registering for the reverse charge, and the fact that since the introduction of
the reverse charge business has not returned to anything like the early 2006
levels, we conclude that it is considerably more likely than not that the
bubble in wholesaling mobile phones described by Mr Stone in 2005 and early
2006 was due to transactions in mobile phones being orchestrated to facilitate
MTIC fraud and that there was only a very small genuine market for the
wholesale of mobile phones.
155.From this we
find most of the £billion trade in wholesale mobiles April - July 2006 were
orchestrated for the purpose of fraud. Returning to paragraph 20 above and the
citation from In re H, although in general fraud is less likely than
negligence, in the wholesale mobile phone market in late 2005-mid 2006, we find
it more likely a transaction was orchestrated for the purposes of fraud than
not. But that does not tell us if the transactions in this case were
orchestrated for the purposes of fraud. However, nothing turns on this in this
appeal: entirely ignoring Mr Stone’s evidence, it is very clear from the
evidence in paragraphs 62-142 above that the 62 chains at issue in this appeal
were orchestrated for the purposes of fraud.
156.We turn to
the question of whether the Company knew that any or all of its 62 purchases at
issue in this appeal were connected to MTIC fraud. When we consider this we
will look at circumstantial evidence. Clark J at paragraph 110 in Red 12 (cited
with approval by Moses LJ in Mobilx):
“to look only at the purchase in respect of which
input tax was sought to be deducted would be wholly artificial. The sale of
1,000 mobile telephones may be entirely regular or entirely regular so far as
the taxpayer is or ought to be aware. If so, the fact there was fraud
somewhere else in the chain cannot disentitle the taxpayer to return of input
tax. The same transaction may be viewed differently if it is fourth in line of
a chain of transactions, all of which have identical percentage mark-ups, made
by a trader who has practically no capital as part of a huge and unexplained
turnover, with no leftover stock and mirrored by over 40 other similar chains,
in all of which the taxpayer participated and in each of which there has been a
defaulting trader. A Tribunal could legitimately think it unlikely that the
fact that all 46 of the transactions at issue can be traced to tax losses to
HMRC is the result of innocent coincidence. Similarly, three suspicious
involvements may pale into insignificance if the trader has obviously been
innocent in thousands.”
157.The
Appellant’s case was that its business was at all times bona fide. It carried
out transactions with a view to making profit in what its director and company
secretary believed was a genuine market. It says that the level of due
diligence it carried out on both customers and suppliers was sufficient for it
to be assured that it was not participating in fraudulent transaction chains.
It said in addition:
·
The lack of business documents was not incredible;
·
The visit by the HMRC officers was not stage-managed;
·
Its suppliers did not always hold the exact quantity of stock
required by the appellant’s customers: it was just the Appellant only bought
what its customer required;
·
It freely negotiated its selling price with its customers.
158.Mr Brown
maintained that its witnesses were credible.
159.Mr Virdee’s
and Mr Taggar’s evidence is that they had overall responsibility for the day to
day business of the company and we find this to be so. It follows that when
considering the knowledge or means of knowledge of the Appellant company we
consider what Network Euro by its principal officers (Mr Virdee and Mr Taggar)
knew or ought to have known.
Mr Scanlon
160.Mr Scanlon is
an officer with HMRC. He joined HM C&E in 2000 and started to work on MTIC
matters in 2003. His first contact with NE was on 13 July 2006 and soon after
that date he became the officer allocated to deal with its affairs.
161.The veracity
of Mr Scanlon’s evidence was put in some question by the Appellant as it was
its case that he misrepresented a conversation which took place between himself
and Mr Virdee in January 2007. For the reasons set out in the sub-section
immediately below we accept the veracity of Mr Scanlon’s account.
162.Mr Brown also
said Mr Scanlon’s letter of 1 September 2006 to the Company was misleading.
It said that certain specified deals had commenced with a defaulting trader
when in fact the evidence is that they were contra deals. We find that Mr
Scanlon merely meant in this letter that the deals were connected to fraud and
he was not intending to draw a distinction between normal MTIC chains and
contra trades: he was just explaining why HMRC were withholding the VAT. He
was not being intentionally misleading.
163.MrBrown
suggested to Mr Scanlon that he had not written his own statement as at one
place the report is written in the third person. Mr Scanlon’s evidence was
that he had written it entirely by himself and had chosen to refer to himself as
“officer Jeremiah Scanlon”. We accept Mr Scanlon’s evidence on this - we think
it was a lapse into unnecessary formality by him.
164.His evidence
was also challenged in that it contained numerous mathematical errors. We note
other careless errors (eg in his second witness statement he refers to the
Appellant’s last deal being on 26 July when it entered into 4 deals on 31st
July).
165.It was also
the case that his evidence contained opinions as well as facts and in
particular it was clear that it was his opinion that Network Euro knowingly
participated in the fraudulent deal chains at issue in this appeal and that
Network Euro had “stage managed” his visit to them on 31st July.
166.In
conclusion, we find that Mr Scanlon’s maths was not reliable but that he
immediately accepted his errors when they were pointed out to him. We find he
was quick to draw adverse conclusions (eg he gave it as his opinion that the
payroll showing 13 employees could have been fabricated but he had no direct
evidence of this.) We pay no attention to his opinions. We accept him as a
reliable (if occasionally careless) witness of fact.
167.The
conversation Mr Scanlon accompanied by another HMRC officer, Mr Johal,
went to the Company’s business premises which Mr Scanlon had visited in July 2006
and found the Company no longer occupied them. They then went to its
registered office to drop off a copy of the same letter. They did not plan to
speak to anyone but the secretary at the premises called Mr Virdee and he came
over immediately. Mr Virdee and Mr Scanlon are agreed that they then had a
brief informal conversation. Their accounts of that conversation cannot be
reconciled.
168.They did not
even agree on who was present. Mr Scanlon and Mr Johal (both officers of HMRC)
thought that only themselves and Mr Virdee were present. Mr Virdee and Mr
Macdonald (an employee) assert that Mr Macdonald was also there although Mr
Macdonald says he was only in the room and did not hear the conversation. His
absence or presence does not seem particularly relevant as he does not claim to
have heard the conversation, although, in view of our later findings about the
reliability of the witnesses, we find he was not present.
169. Mr Virdee’s
account of the conversation is that Mr Scanlon had said to him that Mr Blair
(prime minister at the time) and the Chancellor’s “right hand woman” had
visited Uxbridge VAT office and told the staff that under no circumstances were
any monies to be released to any traders and they were to delay the appeals
process for as long as possible. He said that Mr Scanlon then went on to say
that, if it was up to him (ie Mr Scanlon) he would repay Network Euro. Mr
Virdee also claims that Mr Johal corroborated that the decisions refusing the
VAT repayments had been made months before. Mr Virdee also said that Mr
Scanlon said that he was speaking off the record and that if it came to court
he would deny the conversation.
170.Mr Scanlon’s
version of the story is that he had told Mr Virdee that Ms Primarolo had
visited Uxbridge VAT office (on this their stories agree). He says that he
said that Ms Primarolo had visited to explain the importance the Government
attached to the work of MTIC officers and that MTIC fraudsters would be
pursued. Mr Blair did not visit. Mr Scanlon denies that he said that the
decision to deny the Company the input tax had been made months before or at
all: at the time (January 2007) he was still undertaking extended verification
checks. He denies he said he was speaking off the record and that it would
have been foolish to do so as Mr Johal was present as well.
171.Mr Johal’s
version of the story is was that it was an “informal conversation” that he does
not really remember. His recollection is that they gave stock answers of the
type they gave to any trader enquiring about their withheld VAT repayment. He
denies that Mr Scanlon said what Mr Virdee alleges he said and he denies that
he corroborated it.
172.Neither
officer produced a note of the conversation. Mr Scanlon was the visiting
officer but, he says, they had not been expecting to meet Mr Virdee and had not
been intending to speak to him formally about his claim and the conversation
was just general and not the sort he would record.
173.We find that
a conversation took place in which Miss Primarolo’s visit to Uxbridge VAT office
was mentioned. We find the entire story as related by Mr Virdee improbable:
it seems highly unlikely that a very senior minister would tell junior HMRC
officers to behave in an unlawful manner (ie to withhold repayments without
good cause) and highly improbable that Mr Scanlon would have said he thought
Network Euro should be repaid. As he wrote the first denial letter less than 3
months later it is not likely in January 2007 he was convinced the company
should be repaid.
174. Apart from
the improbability of Mr Virdee’s account of the conversation, the story was not
backed up by Mr Johal. In conclusion, in so far as the stories differ, we
accept Mr Scanlon and Mr Johal’s version of the conversation.
Mr Virdee
175.Mr Virdee was
the director of the Company and his evidence was that he oversaw all deals
exceeding £5,000 in value. Indeed there was no dispute that Mr Virdee or Mr G
Taggar personally authorised all the 62 deals at issue in this appeal.
176.It was HMRC’s
view that Mr Virdee was an “utterly unreliable” witness and it was put to him
in cross-examination that he was not being truthful.
177.We do not
find his account of his conversation in January 2007 with Mr Scanlon to be
reliable. More significantly, he gave evidence which we do not accept as
truthful in relation to due diligence and inspection of the goods. We explain
below.
178.Inspection
of goods: The Company paid an inspection company to inspect the goods at
the freight forwarder. Late introduced evidence from HMRC (already discussed
above in paragraphs 73-78) indicated that in respect of deals 33-35 & 49,
the goods did not exist. Mr Virdee’s oral evidence at the hearing was that in
addition to paying for an inspection report, he and/or Mr G Taggar would, in
about 60% of the deals, travel to the freight forwarders and physically inspect
the goods.
179.There is no
mention of this in his or Mr G Taggar’s witness statements. Indeed, Mr
Virdee’s witness statement (made in late 2007) contains a paragraph of his day
to day activities. In his description he was entirely office bound. He says
he would discuss pending deals and due diligence issues with staff, and that
throughout the day he would be available to assist staff with any queries. He
makes no mention of travelling to freight forwarders.
180.Yet most the
freight forwarders used were some distance from the Company’s offices: Humber
Freight was in Hull yet Mr Virdee claimed he visited there to carry out
inspections. We find in most cases he would have had to be absent half to a
whole day in order to carry out the claimed physical inspections. It seems
inexplicable to us that if he was to invest this sort of time in carrying out
an extra inspection procedure, he would not have mentioned this prior to the
hearing in 2010.
181.Further, in
his description (and the description given by other members of the staff) of
how a deal was put together, there was no time allowed for Mr Virdee and/or Mr
G Taggar to travel to inspect the goods before giving the go-ahead to the
deal. It was also clear from their evidence that they gave the go-ahead when
physically present in the office - yet if they were satisfied with their
inspection why would they travel back before giving the go-ahead?
182.Further,
there seemed no point to the alleged visits. Mr Virdee agreed that he could
not produce any notes that he had made and that he did not know how to carry
out an inspection. Further, the Company was paying an inspection company to
carry out a formal inspection and deliver an inspection report. We could see
no purpose in an additional inspection.
183.We took into
account the manner in which Mr Virdee gave his evidence, the improbable nature
of it and the fact he had failed to mention it before. We took into account
that nevertheless Mr G Taggar corroborated it but (for reasons given below) we
do not consider his evidence reliable and note that as he sat through the
hearing he had heard Mr Virdee’s evidence. We concluded that Mr Virdee was
untruthful in saying that in some of the deals he and/or Mr G Taggar personally
inspected the goods at the freight forwarders. We find he gave this evidence
because he wished to combat the possible implication from Mr Jarrold’s evidence
(given first in March 2010) that the goods had not existed.
184.Due
diligence: The Company said it put a great deal of emphasis on having
“strict” due diligence procedures. Its stance on this was shown in
contemporaneous letters to HMRC and in its witness statements and evidence at
the Tribunal. For instance, a staff member Mr Rubani wrote to HMRC in March
2006 asking HMRC for a thorough due diligence questionnaire to use. In it he
said “…I have recently taken over the due diligence department…I need to make
my reports ‘watertight’…..” In June 2006 Mr Virdee delivered a long letter to
HMRC in which he said “….At present we have had the opinion of Tax Council
(sic) to say that our due diligence is sufficient and very informative but we
will go to further lengths to improve it. At this present time network euro is
in a transition period where our current due diligence is being updated with
more stringent checks and verifications….If you feel that there is anything
else we can do to intensify our check please do not hesitate to get in touch as
your advice will be much appreciated…”
185.After Mr
Rubani, the company employed a Miss J Virdee (no relation of Mr S Virdee) to
carry out due diligence and this was her full time role. She gave evidence she
would go to the premises of the company being checked and complete a due
diligence questionnaire with them. Further checks would be carried out back at
the office.
186.In his
witness statement, Mr Virdee put a lot of emphasis on the Company’s due
diligence. He said Miss Virdee’s due diligence report “would be forwarded to
the directors for them to make a decision whether or not to trade with the
company in question.” He said that their due diligence was “vital” and that a
deal would only be completed once the due diligence checks had been carried
out.
187.At the
hearing the timing of the due diligence checks was challenged as well as their
thoroughness. It emerged that many due diligence reports were not completed
until after the deal had been entered into.
188.In cross
examination, Mr Virdee said that the most important part of the due diligence
checks were when he or Mr G Taggar met with the director and secretaries of the
company with whom they were considering trading and took a commercial
judgment. He said that the due diligence report created by Miss Virdee was
mainly a cross-reference tool.
189.No records of
these “pre-due diligence” meetings were produced and Mr Virdee said he did not
take notes. Mr Virdee was vague as to where or when they might have taken
place, other than to say that they would definitely have been before the first
deal with that company took place and would have been at that company’s office,
or Network Euro’s offices or over lunch or dinner. He went on to say that they
were constantly meeting with their suppliers and customers as part of an
on-going due diligence. It was put to him that these meetings did not take
place or that if they did the purpose of them was not due diligence. He denied
this.
190.We take into
account the manner in which this evidence was given and that it appeared to us
to be in response to the criticisms HMRC made of the timing of their due
diligence reports. We taken into account the fact that this evidence was not
foreshadowed in any of the correspondence with HMRC or any witness statement
made. We take into account that it is not consistent with the evidence in
their witness statements that they relied on the due diligence reports produced
by Miss Virdee. We take into account that the evidence was corroborated by Mr
G Taggar but note that we did not find his evidence reliable (see below) and
that he had heard Mr Virdee given evidence. In conclusion, we do not believe
that Mr Virdee was being truthful when he said that he met the directors of the
company before deals in order to make a commercial judgment on whether to trade
with the company.
191.We also note
that from the fact that so many due diligence reports post-dated the first
deals with a new supplier or customer that Mr Virdee was misleading HMRC in
2006 when he wrote to say how effective their due diligence was. When he wrote
this he was well aware that Network Euro did not rely on these reports.
192.Other
inconsistencies: Mr McGuiness put it to Mr Virdee that at the meeting with
Officer Patterson on 26 April, Network Euro was already intending to deal
wholesale in mobile phones and this is why Mr Virdee asked to go onto monthly
returns but that (based on the officer’s notebook) Mr Virdee had failed to
mention this to the HMRC officer. Mr Virdee said, on the contrary, that he had
discussed mobile phone wholesaling with Officer Patterson. HMRC did not call
the officer to give evidence and we find that HMRC have not made out their case
on this.
193.It was HMRC’s
case that at the end of July 2006 Mr Virdee informed them that the Company had
no loans but by November of the same year admitted to loans of £900,000. Mr
Scanlon completed an Aide Memoir with Mr Virdee at their meeting on 31 July
2006. The questionnaire asked about bank loans and Mr Virdee’s answer was that
NE had “no bank loans”. It also asked if there were other loans or overdraft
facilities available to the company. Mr Virdee’s reply was “no overdraft
facility”. It asked if NE had private investors. Mr Virdee’s reply was that
they did not.
194.At the
hearing it was agreed that the Company had £900,000 in loans from friends and
family. When questioned about the truthfulness of his answer to the Aide
memoire, Mr Virdee’s point was that he had been strictly truthful, in that the
Company had no bank loans, no overdraft facility and he understood investors to
mean shareholders and not lenders.
195.Mr Brown says
that Mr Virdee was clearly not trying to conceal anything as he had already
informed Mr Scanlon in his letter of 16 June 2006 that the company did have
loans from friends and family. In fact what Mr Virdee had actually said was:
“in regards to any monies borrowed we have borrowed
money from friends and family on a few occasions, this has had no effect or
change in allocated shares and profits in the company. There is no other party
that has any financial or other beneficial interest in Network Euro Limited.”
196.This did not
give HMRC much information. We find that Mr Virdee’s reply in July was
misleading: he was asked if there were other loans and he gave an incomplete
answer. Subsequently he continued to be reluctant to provide the information.
Details of 4 loans were produced at a meeting with Mr Scanlon on 23 August
2006. However in a letter of 21 August 2006 (two days earlier) he had failed
to disclose the requested information. Mr Scanlon required more information in
his letter of 1 September and the letter in reply ignored the request.
Information was requested again in Mr Scanlon’s letter of 3 October 2006.
There was a holding reply on 9 October 2006. Mr Scanlon wrote again on 18
October. No reply was ever received. A chaser was sent by Mr Scanlon on 7
November 2006 and details (comprising the name of the lender and amount) were
provided in Mr Virdee’s reply of 8 November. We find that Mr Virdee was less
than cooperative with HMRC on this and initially gave less then full answers.
197.It was Mr
Scanlon’s evidence that the Company produced no release notes when asked for
the documentation while HMRC were carrying out extended verification. Mr
Virdee claims that they were produced. Release notes were disclosed on the
Appellant’s list of documents for this hearing. It was put to Mr Virdee in
cross examination that he had created the release notes for the purpose of the
hearing (which he denied). We have not found Mr Virdee to be truthful and we
accept Mr Scanlon’s evidence that no release notes were produced in extended
verification so we consider whether Mr Virdee merely made a mistake and forgot
to give them to HMRC or whether they were (as alleged) created after the event
to bolster the Company’s claim. We take into account the evidence that Network
Euro often had more than one version of a document (see below) and that its
problem (to put it at its best) was disorganisation leading to the production
of multiple versions of the same document. We take into account its evidence
that it had deal packs for each deal into the documents for each deal would be
placed. While we find that some release notes might well be overlooked, the
absence of an entire class of documents, when they would have been held
separately in relation to each deal, indicates to us that they did not exist
contemporaneously with the deals and that Mr Virdee knew this and so we find.
198.In
conclusion, we found Mr Virdee to be a most unsatisfactory witness. We
consider that the evidence he gave as explained above was untruthful. Any
other evidence he gave we treated with caution and in many cases we found it to
be unreliable as explained below.
Mr Gurpreet Taggar
199. As
mentioned, Mr Taggar was originally an investor and director. Shares were
issued to his father and in 2006 he became Company Secretary rather than director.
His position within the company structure did not appear to change. With Mr
Virdee he was one of the two persons who could authorise the deals at issue in
this appeal. He told us it was his responsibility to ensure that the Company
had the funds to go ahead with the deals: he did not negotiate the deals
himself. He said he attended with Mr Virdee on the “due diligence” visits made
before deals took place and occasionally attended with Mr Virdee on physical
inspection of the goods.
200.As explained
in respect of Mr Virdee we did not find his and Mr G Taggar’s evidence of the
pre-deal “due diligence” visits with new customers and suppliers, or the
claimed visits to inspect the stock, to be credible and we consider that his
evidence on this was not truthful.
201.When it was
put to him in cross-examination that the deals were not credible because the
documents did not record the detailed specifications of the phone, his evidence
was that the detailed specification was negotiated just not recorded. He went
on to say he faxed through a copy of the inspection report to customers so they
were assured of the phones’ specification. We do not find this credible.
Other evidence was that the inspection report was normally not available until
the day after the deal was negotiated, and there is nothing in the witness
statements about the provision of the inspection report at any stage to the
customer. None of the evidence about the negotiation process included a gap to
cover a wait for the inspection company to carry out the inspection and provide
a report before the deal was finalised. We consider this evidence was
fabricated by him to cover up the absence of a physical record of the
specification of the phones in the deal documentation.
202.In
conclusion, we found Mr G Taggar to be an unsatisfactory witness. We consider
that the evidence he gave as explained above was untruthful. Any other
evidence he gave we treated with caution.
Mr Charanpreet Taggar
203.Mr
Charanpreet Taggar was the brother to Mr G Taggar and son to Mr SS Taggar who
loaned money to company. Mr C Taggar was employed by Network Euro full time
from November 2005 until late 2006 and earned approx £1,300 per month gross.
204.It was his
evidence corroborated by others that his job on the wholesale side was to negotiate
the deals. For reasons given below, we do not accept Network Euro’s initial
claim to HMRC that its deals were freely negotiated or that (as stated in
evidence at the hearing) its purchase price was freely negotiated but
its sale price was always at a mark up of 8% (later 4%) on this. In his
witness statement, Mr C Taggar said he negotiated the prices and found the
buyers to buy the stock at that price. He made no mention of applying a fixed
mark up which in later oral evidence he said he did. It was put to him that
his oral evidence made no sense in what was the purpose of negotiating a
purchase price downwards if standing orders were (as he said) always to add 8%
to the price? He said that this was so buyers knew Network Euro gave them a
good price: we do not accept this. If Network Euro was concerned about giving
its buyers a good price and retaining their custom as Mr C Taggar claimed, they
would not have had (as he said they had) a fixed rule of an 8% mark up on
purchase price. We conclude that his recollection on negotiation was flawed.
205.We also note
that he also said in oral evidence that when he negotiated deals, he found the
customers’ main concerns were specification, price and date of delivery. Yet
we find that the deal paperwork only recorded the price: it did not record the
full specification of the phone. If buyers were truly concerned with this we
find it would have been recorded in their purchase order and Network Euro would
have ensured that its own purchase order reflected their buyers’ requirements.
We conclude that his recollection that buyers were concerned with specification
was not credible and must be flawed. Overall we did not find him to be a
reliable witness.
Mr Lee Macdonald
206.Mr Lee
Macdonald was the Company’s longest serving employee, originally joining in May
2005 as an apprentice under a training contract with Sandra Robinson Group. He
was taken on to work in the retail side of the business, refurbishing
second-hand computers. He moved to the wholesale side of the business in
February 2006 after the retail side had disappeared. He worked on finding
customers and suppliers on the IPT website and designed an improved electronic
version of the daily stock log. He remained employed by another of Mr Virdee’s
companies until at least January 2007.
207.Mr Macdonald
confirms that Mr Virdee would have met the suppliers and customers before due
diligence was carried out. We have rejected Mr Virdee’s and Mr G Taggar’s
evidence on this for the reasons given which calls into question the
reliability of Mr Macdonald’s.
208.We also note
he confirmed in oral evidence Mr Virdee’s claim that he travelled to check the
condition of the stock in many of the deals at issue in this appeal. We have
already dealt with why we reject that evidence and consider the reliability of
Mr Macdonald’s evidence.
209.We note that
Mr Macdonald was present throughout most of the earlier evidence being given
and that on the question of whether or not the staff were instructed to insist
on a margin of 8% he gave inconsistent oral evidence to the Tribunal (at first
he said they did not have to stick to 8% and then he said that they did). We
conclude that for whatever reason his evidence was not entirely reliable and we
put no weight on his confirmation of Mr Virdee’s story of the pre-due diligence
checks or the personal stock check.
Miss Jasdeep Virdee
210.Miss J Virdee
was employed as the Company’s due diligence officer. The panel asked what
factors Ms Virdee took into account when giving the directors her view on whether
to trade with a company on which she had conducted due diligence. Her answer
was “The size of the warehouse….” She elaborated on this to explain the
majority of suppliers and buyers would have warehouses and that “it can’t be
trading from a one room office” and “Where are you supposed to actually store
the stock. That was one thing. Things like [security] cameras as well….”
211.We find,
however, that not only do none of her due diligence reports ask about or deal
with warehousing (or security cameras), that no one else mentioned at any point
in their evidence that their supplier’s and customer’s warehousing was of
interest, and that Mr Virdee would have been uninterested in this matter.
Whether the Company’s transactions were (as we have found them to be) part of
an orchestrated MTIC fraud or whether genuine trading on the open market (as Mr
Virdee tells us he believed it to be), the Company would have had no interest
in their buyers’ or sellers’ warehousing capabilities as the stock was
invariably held at a freight forwarders when purchased and transported to a
freight forwarders on the continent when sold. We find that Ms Virdee
demonstrated in her oral evidence a very flawed recollection of her due
diligence role and we have to treat anything she said with caution.
212.We note that
Mr Virdee, who finished giving his evidence after Ms Virdee, did confirm that
he had sometimes asked her to check the warehousing if the customer said they
had it. We find this quite improbable for the reasons given above and bearing
in mind that he had already misled the Tribunal (as set out above) we find that
this statement was untruthful and an attempt by Mr Virdee to make Ms Virdee’s
evidence appear more reliable.
213.We note that
Ms Virdee confirmed Mr Virdee’s statement that he undertook pre-due diligence
checks. She said “there were times where they [ie Mr Virdee and Mr G Taggar]
did meet the directors beforehand and they had a better relationship with
them….” Firstly, this stops short of being a confirmation that this happened
in every case or indeed that the purpose of any meeting was due diligence.
Secondly, we have to treat what Ms Virdee said with caution as her recollection
was shown to be flawed and she had just heard Mr Virdee give evidence. Thirdly,
it was clear to us (as explained above) that these pre-due diligence meetings
did not take place. So we do not accept this evidence from Ms Virdee.
214.According to
evidence from the officer’s notebook and from Mr Virdee, we find HMRC officers
visited Network Euro on 26 April 2005 and discussed issues including MTIC
fraud. At the meeting NE officers asked HMRC officers about the process for
verifying VAT numbers and asked to be put on monthly returns. Following the
meeting Network Euro was sent Notice 726. This was immediately before Network
Euro started exporting mobile phones to Europe: HMRC’s evidence was that it
was prompted because the visiting officers noted that Network Euro had traded
with a company HMRC suspected to be involved in MTIC fraud.
215.We find that
Notice 726 was issued by HMRC to traders to specifically warn them of the
dangers of MTIC fraud and the risk that they might be caught up in it.
Although it explains the risk of joint and several liability and not Kittel
nevertheless it warns traders in clear terms of the dangers of trading in a
chain in which MTIC fraud has occurred. It contains practical advice on how to
avoid such chains although to a large extent the recommended checks are only
checks on immediate suppliers and buyers:
(paragraph 4.5) “We advise you to carry out steps to
establish the legitimacy of your supplier to avoid being caught up in a supply
chain where VAT would go unpaid. There are a number of checks that you could
probably already undertake in line with good commercial practice, such as
credit checks. We don’t expect you to go beyond what is reasonable. You are
not necessarily expected to know your supplier’s supplier or the full range of
selling prices throughout your supply chain, however, we would expect you to
make a judgement on the integrity of your supplier chain….”
216.It was HMRC’s
case that NE knew the scale of MTIC fraud in early 2006 and knew the steps it
should take to avoid being caught up in it.
217.Network Euro
were visited next by Ms Carter, an HMRC officer, on 18 July 2005. This was
prompted by receipt by HMRC of Network Euro’s large input tax reclaim. Ms
Carter records that she was shown the company’s due diligence and that she then
authorised release of the repayment.
218.There was
some dispute about what happened at Mr Scanlon’s visit to Network Euro on 31
July 2006 and as this was on the day of the last deals the subject of this
appeal, it does not really take any further the question of the Company’s
background knowledge of MTIC fraud.
219.As mentioned
above, Mr Virdee wrote to HMRC about its due diligence procedures on 16 June
2006. In his letter Mr Virdee said:
“As you are aware that the due diligence procedure
is an ongoing process, we at Network Euro are committed to obtaining and implementing
the highest level of vigilance and informative groundwork to insure (sic) we
are safeguarded against any type of fraud. ….We are constantly requesting more
information from these companies to make sure our due diligence is to it best
capabilities…..At present we have had the opinion of Tax Council (sic) to say
that our due diligence is sufficient and very informative but we will go to
further lengths to improve it. At this present time network euro is in a
transition period where our current due diligence is being updated with more
stringent checks and verifications….If you feel that there is anything else we
can do to intensify our check please do not hesitate to get in touch as your
advice will be much appreciated…”
220.In his
evidence at the hearing Mr G Taggar said that although he read Notice 726 he
only took from it that there was fraud in the industry and that he had to be
wary of stock offered below market price. However, he went on to say that
Network Euro did take legal advice as well as consult HMRC, that he knew they
should not be involved in a chain where people knew each other, and that he and
Mr Virdee did spend some time discussing fraud in the industry.
221.Although we
find Mr G Taggar did try to play down in the hearing his awareness of fraud in
the mobile phone industry at the time of the deals in question, it is clear to
us and we find that the Company was well aware of the risks of MTIC fraud at
the time of the deals in question
·
HMRC officers had visited in 2005 and discussed it with them;
·
The Company had been given a copy of Notice 726;
·
The Company had consulted tax counsel over their due diligence -
at least before mid-June 2006;
·
The Company wrote to HMRC to ask for advice in March and June
2006 on how to improve their due diligence (we have referred to this above in
para 184);
·
Mr Virdee described the Company’s due diligence as “vital” and
told HMRC that it had developed a comprehensive due diligence product “to make
the deal as secure as possible”;
·
The Company appointed due diligence officers before the deals in
question (Mr Rubani followed by Miss J Virdee). Miss Virdee’s only role at the
company was due diligence and she held this role throughout the time of the
deals in question;
·
The Company in fact carried out due diligence on most of its
trading partners.
222.It is HMRC’s
case that much of this was “talking the talk” and window-dressing to hide that
the Company was knowingly involved in facilitating MTIC fraud, but either way
we find it is clear that the Company was well aware of the existence of MTIC
fraud in the market in which they traded and the necessity of ensuring (or, as
HMRC allege, at least appearing to ensure) that they were taking steps to avoid
being caught up in fraud.
223.We have
covered this topic in brief in discussing the reliability of the witnesses. It
was not disputed that many (but not all) of the due diligence reports produced
to HMRC were dated after the date of the first deal with the company to whom
the report referred.
224.Crestview:
There was a letter of introduction from them dated 14 June and the Company
carried out £1million worth of trading with them on 15 June. The due diligence
was dated 16 June.
225.CEMSA:
The due diligence on this customer is dated 16 June: the first transaction was
on 27 April (Deal 10).
226.IT
Recycling: The Company was given a letter of introduction dated 15 May
and their first deals (Deals 12 & 13) took place the day after. Deals
21-23 with this company were completed on 23 May, and Deal 28 on 31 May. The
site visit for due diligence took place two weeks after the first deal, on 1
June, and the form was signed on 2 June.
227.TopNotch:
The site visit for due diligence took place on 24 May 2006 which was over a
month after the first deals with it had taken place on 6 April (Deals 3&4).
Deals 16, 17 & 18 took place on 18 May and deal 20 took place on 22 May.
228.A-Z
Mobiles: Network Euro traded with this company on 10, 12 and 16 April 2006
(deals 7,8,9,14 &15. The due diligence site visit was carried out on 15
June 2006 and about half completed and signed on 16 June.
229. The due
diligence report and site visit post-dated the first deals with Bijou by a few
days and the due diligence report and site visit post-dated the first deals
with Fonelink by nearly four weeks. In fact, we find that in the clear
majority of cases, the due diligence post-dated the first deals with the
company the subject of it (in some cases it post dated all the deals
with the company) and sometimes by a matter of weeks.
230. Mr Virdee
admitted that the company did not rely on these reports in order to decide
whether to trade with the company. As we have already reported, he said that
the most important part of the Company’s due diligence was when he or Mr G
Taggar met with the directors and secretary of the new supplier or customer in
advance of the first deal and made a commercial judgement on whether the
Company should trade that new supplier or customer. He said the due diligence
reports were “mainly a cross-reference method” and in answers to questions from
the panel he described them as a “back-up”.
231.Mr Brown made
the point that in many cases the due diligence visits and reports were
completed before the goods were paid for and released. As we find in some
cases payment took place weeks after the transaction, this is indeed the case.
Mr Virdee’s evidence was that if the due diligence was not satisfactory “we
could always recall the stock.” We do not find this a probable explanation of
why they obtained due diligence after the deals took place. Once the deal was
negotiated the Company was committed to the purchase, sale and transportation
of the goods even if the Company did not actually release possession of the
goods until they were paid. We consider that no company in a genuine market
without foreknowledge that the deals were all pre-arranged, which had decided
to carry out due diligence on its supplier and customers in advance, would
regularly take the risk of committing themselves in this manner before that due
diligence was completed. And in any event what is the point of ‘recalling’
stock from a customer if it turns out the supplier looks risky? It makes no
sense. Mr Virdee’s explanation is extremely improbable and (bearing in mind we
find he misled the Tribunal on quite a number of points) we find that this too
was a fabrication, made up to explain why the Company entered into deals before
the due diligence was undertaken.
232.For the
reasons given above where we discuss Mr Virdee’s credibility as a witness, we
not accept that Mr Virdee’s alleged pre-due diligence meetings took place. So
we find in many cases the Company chose to go ahead with a deal without having
undertaken any due diligence on it at all.
233.In any event
we note, even had these alleged pre-due diligence meetings taken place, it seems
they did not amount to much of a check on the likelihood of the company being
involved in fraud. Mr Virdee said the Company would turn down a new contact if
it turned out that they were trading from a residential address, or it seemed
the directors of it did not know how to conduct a deal, or had just set up
business overnight. The Company would also turn them down if the VAT number
was invalid or Companies house registration did not match their letterhead.
234.However, even
this evidence was not consistent. Mr Virdee said it was an important part of
their due diligence to check that the company had a genuine trading address yet
he also said these pre-diligence meetings might take place at the new contact’s
offices, or at Network Euro’s offices or be over lunch. So these meetings (had
they taken place and we find they did not) would not all have confirmed what Mr
Virdee said was vital which was that they had genuine trading premises.
235.On their own
evidence, we find that in many cases they failed to check in advance of the
first deal with a new trading partner the financial standing of that new
trading partner or conduct any other due diligence on them.
236.The due
diligence reports: At least up to the hearing, the Appellant maintained
that Miss Virdee’s due diligence reports were very important to it in its
decision making on whether to enter into the deals.
237.From the
evidence we saw the reports took quite some time to complete as they involved a
site visit, photographs of the building and staff, interviewing the director
and completing a lengthy form. In her witness statement, Miss Virdee implied
the form was completed at the site visit but in oral evidence given by her and
in oral evidence by Mr Virdee (and in his second witness statement) they said
often only the main parts of the form were completed and the form signed at the
meeting. Miss Virdee would then chase the new contact for the information
after the site visit and complete the rest of the form herself.
238.Mr Virdee
stated that this practice of part-completing the due diligence at the meeting
and chasing up the remaining information led to a number of copies of the same
document (in various stages of completion) existing as his staff would
photocopy and file even the part-completed versions. Miss Virdee implied
however that only the completed due diligence form would be copied although
both the copy and original would be retained.
239.We are wary
of Miss Virdee’s evidence as her recollection was shown to be unreliable and in
any event this does not entirely reflect her witness statement. We find it
unwise to accept anything Mr Virdee said as we have found he misled the
Tribunal on a number of matters as mentioned above. We consider whether this
explanation is a likely one or one given to explain how copies of supposedly
the same due diligence report produced to HMRC in extended verification and
then in disclosure for the appeal were different.
240. The two
versions of the A-Z Mobile due diligence report have some 11 differences. Mr
Virdee’s evidence was that he accepted that he made changes to the due
diligence report after he had submitted it to Mr Scanlon in extended
verification in order to update the form with information already held by the
Company but which they had failed to collate onto the report. This was of
course after the Company had ceased trading (its last deal was on 31 July 2006
subject to one qualification mentioned below). This is effectively an
admission that some at least of the due diligence reports were changed after
extended verification. We can see no honest reason for Mr Virdee to do this:
the Company had effectively ceased trading and there was no longer a need to
use the due diligence reports. Mr Virdee says that the Company already held
the information and he did no more than collate it: we do not believe this.
Trading history & financial standing of trading partners
241.Mr Virdee
agreed that Network Euro did not have an interest in the financial standing of
their trading partners: he said it did not matter to the Company because it was
not extending them credit. The Company was more concerned, he said, with the
physical stock. In cross-examination, he said that they never performed credit
checks to find out if a company was credit worthy but in order to
cross-reference the details with those obtained from Companies House.
242.IT
Recycling: This was a company which like Network Euro had started by
selling refurbished second hand computers. It only dealt in wholesale mobile
phones in May and June 2006 and in those 2 months had a turnover of some
£20million. It provided Ms Virdee with an overdue utilities bill and a bank
statement which showed no substantial
trading.
243.Top Notch:
This company was incorporated in 1997 and VAT registered since 2000. Its
credit report dated 13 June 2006 shows a credit limit of £6,000. Before it
even obtained a copy of this report, the Company had conducted deals with it in
April 2006 to value of over £2m and in May to the value of nearly £5million.
244. Crestview
The Company was faxed a letter of introduction on 14 June 2006. The first
deals took place the next day. We find it was a rather ridiculous letter that
should have raised doubts in any reasonable person’s mind about the company as
it included specious statements such as “We are a general UK company that prides itself in trading in all commodities” and fails to give any specific
information whatsoever. The credit report (date is not visible) gives a credit
limit of £500. The accounting information is also very odd: no turnover is
shown but the assets and liabilities are each stated to be over £12million,
with profits of £3,000 and wages of £5,000. The due diligence report update
was completed facetiously with comments like “82%” and “well done” and “B+” and
“Could do better” and “See me after class”.
245.Jos: This
company was given no credit rating in its credit report (dated 11 May 2006) as
the company was only 18 months old. In its replies to Network Euro’s due diligence
report it refused to declare its turnover as “confidential”. The following
month Network Euro completed over £10million worth of business with it.
246.Lagan:
Its business was stated to be as a pizza takeaway on its VAT 1 (application for
VAT registration) and the business proffered a utility bill addressed to
Perfect Pizzas as part of the due diligence. Its credit report carried out on
20 June 2006 gave it a nil credit rating.
247.The report
also showed its turnover to August 2005 was £290K but its answers on the due
diligence report said its turnover for the previous year was £6million and its
expected turnover for the current year was £12m. And indeed the value of the
Network Euro’s first two deals with this company were nearly £4million.
248.A-Z Mobile: Network Euro traded with this company on 10, 12 and 16 April 2006 (deals
7,8,9,14 &15). Their trade class for the purpose of VAT registration was
the retail of mobile phones. This was known to Network Euro as the Certificate
of Registration was one of the documents it obtained for due diligence. The
utility bill which it produced to Network Euro was an overdue phone bill for
approximately £200. Network Euro did not obtain a credit report on this
company until 11 May 2006. This showed that the company’s credit rating was
“0” and it had not filed any accounts since September 2004 (so one set of
accounts was overdue.) Yet Network Euro chose to trade with this company in
values excess of £3m before it obtained the unfavourable credit report.
249.Power Communications:
HMRC’s evidence was that a credit report was obtained by Network Euro for this
company on 15 June 2006 and this date was not challenged by the Appellant
although it is not apparent on the document produced to the Tribunal. It gave
a credit limit of €6,000. The company had not filed accounts In its due
diligence report for Network Euro it showed its turnover for the previous year
to be £65million and its estimated turnover for the then current year to be
£80million.
250.Opal 53:
This company stated in its due diligence replies that it commenced trading in
January 2006. This is also clear from one trade reference which was provided.
On 6 and 8 April Network Euro sold it goods with a net value of £817,000, then
on 12 April sold it goods with a value of £851,000, and then on 10 May sold it
goods with the value of £3.3million. Opal 53’s credit report gave it a credit
limit of €1. HMRC’s evidence was that the credit report was obtained by
Network Euro for this company on 15 June 2006 and as this date was not
challenged by the Appellant we find it to be correct although it is not apparent
on the document produced to the Tribunal. It had one employee.
251. No
directors’ identification was provided apart from a bank statement. The due
diligence report has two dates 20 April (the day of Miss Virdee’s site visit)
and a later date of 30 May. It does seem to be the case that this is one of
the continually updated due diligences referred to by Mr Virdee as two further
trade references were obtained, one on 12 May 2006 and one dated not earlier
than 5 May 2006.
252. Bijou:
Network Euro did not obtain a credit report for this company.
253. Cell
Trading (supplier): Network Euro traded with this company on 6 & 7
April (deals 1,2,5 &6) and on 31 May (deals 29 & 30). The due
diligence site visit was conducted a month later on 9 May. The Company
obtained a credit report on 11 May 2006. This gave Cell Trading a credit limit
of £750 but showed a turnover of between £11million and £25million for each of
the three preceding years. In the due diligence report it estimated its own
turnover would be £80-90million in 2006.
254.CEMSA
(customer): Network traded with this company on 27 April (deal 10). It
conducted a site visit on 12 May. HMRC’s evidence was that the credit report
was obtained by Network Euro for this company on 16 June 2006 and as this date
was not challenged by the Appellant we find it to be correct although it is not
apparent on the document produced to the Tribunal. It was shown as operating in
the pharmaceutical sector and given a credit limit of 0 euros and a high risk
credit score. Its turnover was shown €85 million in 2002, €109 million in
2003, and nearly €10 million in 2004.
255.Fonelink
(customer): Network Euro completed deals 12 & 13 on 16 May 2006 and 21, 22
& 23 on 23 May 2006 with this company. Company information was sent by
Fonelink in Spanish to Network Euro on 26 May and the due diligence site visit
was on 12 June 2006. HMRC’s evidence was that the credit report was obtained
by Network Euro for this company on 15 June 2006 and as this date was not
challenged by the Appellant we find it to be correct although it is not
apparent on the document produced to the Tribunal. It gave a credit limit of
€1,202.
256.Globalfone:
(customer): It faxed its introductory letter to NE on 31 July 2006. Network
Euro completed deals with them on 10 April, 18 May and 22 May. Its credit
report dated 15 June 2006 gave credit limit of €5,000. It had one employee.
In its due diligence report it estimated its turnover would be €100m and said
that its turnover the previous year had been €50m.
257.Proxi
Partners (customer): The first deal by Network Euro with Proxi Partners
was on 28 June (deal 43) and was for £1.9m. The due diligence questionnaire is
dated the following day and shows the company was incorporated January 2006.
It also estimates their turnover for the year to be £12million. It gives trade
references from Crestview and Lagan, who were both suppliers to Network Euro.
In any event the companies say that they have only traded with Proxi for one
month. HMRC’s evidence was that the credit report was obtained by Network Euro
for this company on 28 July 2006 and as this date was not challenged by the
Appellant we find it to be correct although it is not apparent on the document
produced to the Tribunal. The credit rating is a score of nil and is shown as
high risk.
258.Sigma Sixty
(customer): Network Euro was faxed a letter of introduction on 31 July. Its
only deal with this company was deal 30 and this took place on 31 May 2006. In
its due diligence the company stated it had been trading 6 months - its VAT one
shows that this was exactly correct as it was registered on 31 January 2006 so
at the time of the first deal with Network Euro it had been trading 4 months.
It said its expected turnover was £3million for the year and its previous
turnover was half a million. Its deal with Network Euro was for £1m. The due
diligence report was undated. HMRC’s evidence was that the credit report was
obtained by Network Euro for this company on 15 June 2006 and as this date was
not challenged by the Appellant we find it to be correct although it is not
apparent on the document produced to the Tribunal. Its rating was “caution -
high risk potential.”
259.Smart
Phone (supplier): Its VAT registration certificate records its trade sector
as the retail of mobile phones. A credit report was obtained on 29 June 2006
but by then NE had already completed £2.5m worth of trade. Its credit limit
was £4,500.
260.Glasgow Data (supplier): A credit check carried out on 13 June showed a
credit limit of £3,500. It also showed its trade sector as electrical parts
and equipment. Network Euro bought phones to value of nearly £1m from them in
April 2006 (deal 10).
261.IT Global:
Network Euro made sales to this company in October 2006 after the Company had
effectively ceased trading. The goods for deals 56 & 57 had been sold to
Bijou at a profit and shipped on July 26. As explained in paragraphs 266 they
were largely re-sold to IT Global as Bijou failed to pay. The Company has
never produced any due diligence in respect of IT Global. Network Euro says
this is because HMRC did not ask for the due diligence on companies after July
2006. However, we note that HMRC’s first comment on the absence of this due
diligence was in Mr Scanlon’s witness statement dated 12 June 2008 which gave
the Appellant plenty of time to produce it and the fact they have not means we
infer that it does not exist.
Conclusions
262.We find that
credit reports were in most cases obtained by Network Euro after the date it
first started to trade with the subject of the report. And where the reports
were obtained before a deal took place, it is clear that Network Euro (as it
admits) was not concerned about the contents of the report. In most cases, the
customer or supplier was given a very low (or no) credit rating and in all
cases the credit rating was several orders of magnitude below the value of the
trade Network Euro carried out with the company. The credit reports combined
with the due diligence also showed that many of the companies had very
substantial turnovers but were without much substance: they had few assets and
few employees. In summary, we find that Network Euro had no interest in the
financial standing of its trading partners nor how they achieved such high
turnovers with so little financial substance.
263.Mr Virdee
admits that Network Euro had no interest in the financial standing of its
trading partners as, he says, they were not offering them credit. We do not
find this a credible explanation for why they failed to obtain timely reports
or ignored them when they had them. Firstly, Mr Virdee admitted that Network
Euro was never paid at the time it completed the deals and indeed in many cases
was not paid for several days or weeks later. So Network Euro was clearly
granting credit to its customers often in deals worth several million pounds.
It is no answer that Network Euro was itself granted credit by its suppliers
and did not pay until it was paid: it still remained liable to pay. It was not
suggested, and it was certainly not apparent, that it was one of the terms that
if the buyer reneged then Network Euro itself could renege. Indeed in the one
case where the buyer reneged -deals 57 & 58 - Network Euro did not renege
but found a new buyer but ended up out of pocket on the deal. So Network Euro
(if these were genuine transactions) was taking a very real financial risk and
was effectively granting its customers credit.
264.Secondly, we
have found that Network Euro by its officers was very well aware of the risk of
MTIC fraud and aware that HMRC recommended that companies take care with whom
they trade. Even if Network Euro granted no credit, they should have been
concerned to ensure that they were not dealing with companies which were
involved with fraud. Knowledge that a company, proposing to trade in millions
of pounds’ worth of phones was new (or newly in the business) and without
substantial assets would be relevant to this (even if not conclusive). Yet, we
find, Network Euro did not care.
265.Thirdly, why,
if Network Euro had no interest in the financial standing of its trading
partners, did it obtain credit reports at all? Mr Virdee said it was to
cross-reference the information available from Companies House. We do not find
this credible: there was no suggestion that there was any doubt about the
information available from Companies House. We find it was Mr Virdee’s stock
and untrue explanation for carrying out redundant processes (due diligence
reports and credit checks) that they were for cross referencing other
information. We bear in mind that he gave untruthful evidence on other matters
in this Tribunal. We consider that Network Euro carried out credit checks for
no other reason than because they wished to be seen to carrying out the due
diligence and other checks on suppliers and customers recommended by HMRC.
266.This lack of
curiosity about their trading partners was also, we find, demonstrated in relation
to the aborted deal with Bijou. Bijou failed to pay Network Euro on deals 57
& 58 to the value of just over £2million. Mr G Taggar was questioned why
Bijou did not pay and he said that they had financial problems but he had not
enquired any further as this would be “personal”, implying that it was none of
Network Euro’s business to know why a customer was unable to pay for goods
which Network Euro had had delivered to the customer’s freight forwarders on
the continent (albeit not released to them). He said they did not take legal
proceedings as it would not be cost effective and although he had asked for
reimbursement of their costs over the phone, he had been refused and he had not
pursued it any further. Network was able to re-sell the goods to another buyer
in October 2006 at cost price (see below). Network Euro was unable to produce
any documentation which related to the cancellation of the deal.
267.Network
Euro’s lack of curiosity about its partners’ financial standing and its failure
to pursue them when they did not pay indicates to us that they did not have a
normal commercial relationship with them.
268.We find
Network Euro conducted its business in blocks. The first eight deals in this
appeal were we find a block. Cell Trading supplied the goods in deals 1&2,
and 5&6. Topnotch supplied the goods in deals 3&4 and A-Z Mobile
supplied goods in deals 7&8. The buyer for deals 1&2 was Opal 53;
Power Communications for deals 3&4; Belltrask for 5&6 and Globalfone
for 7&8. Deals 1-4 took place on 6 April, deals 5&6 took place on 7
April and deals 7&8 took place on 10 April. All the goods were shipped out
on 12 April on 3 lorries: the evidence from HMRC which we accept was that the
combined load from deals 1-8 was just sufficient to fill 3 lorries. All the
goods were held (on behalf of the 3 suppliers) by the same freight forwarder in
the UK (Humber Freight) and the destination of all of the goods was the same
freight forwarder (for the 4 purchasers) in Holland (Interaction Logistics BV).
269.It was put to
Mr Virdee that this was fortuitous. He denied it. We find that the incidence
of 4 separate purchasers wanting the goods taken to the same warehouse,
combined with the incidence that the 3 suppliers happened to have the goods in
the same warehouse in the UK, combined with the fact that the 4 customers were
all prepared to wait until the transport was available combined with the fact
that the total load happened to just fill the available transport is not a
coincidence but means that it was organised. Indeed, this is entirely
consistent with our finding that all the deals at issue in this appeal were
masterminded.
270.The question
is whether the officers of Network Euro knew this. Mr Virdee said that he
would not have known at the time when the lorries were going out. He agreed
that his customers would have wanted the goods as soon as possible and denied
that in reality none of the Company’s customers minded being kept waiting as it
was all artificially contrived trading (which he denied).
271.We do not
accept that he would not have known when the lorries were leaving if his
customers were pressing him for delivery: one of the negotiated terms in a
commercial deal would have been the date of delivery and in a commercial deal
Mr Virdee would have known when the goods were to be transported.
272.It was also
Mr Virdee’s case that all the 62 deals in which the Company was involved were
negotiated individually. We find, on the contrary, that it was clear that
these 8 deals were all part of a single arrangement and that in particular each
deal would not have been negotiated (or agreed upon) separately to the other 7.
273.The
Appellant’s profit on the 62 deals over the 4-month period amounted to
£3.5million. The proportion of the Company’s share in the profits made by all
the buffers and itself in the deals is also very high (for instance in Deal 1
97% of the profit went to the Company). In the same deal the Company’s profit
as a proportion of the VAT defaulted upon is 46.5%. It remains at this level
from Deal 1 to Deal 50. After that, when the Company reduced its mark-up as
explained in paragraph 280 below, its profit share fell to a consistent 22-23%
of the VAT defaulted upon.
274.HMRC allege
that it must have been knowingly involved in the fraud to have been allowed by
the organisers of the fraud to participate in such a large share of the
profit. We reach our conclusion on this in paragraph 394.
275.It was
Network Euro’s case that it negotiated the deals in a free market. Yet we find
from the evidence the stock offers from the suppliers (of which 56 were
provided out of a total of 62 deals) that in 53 out of 56 Network Euro bought
the stock at the stipulated price.
276.Mr Virdee’s
explanation was that the price was negotiated on the phone in advance and the
stock offer merely recorded what had been agreed. It was put to him that in
such a case the stock offer was redundant so why have one? Mr Virdee denied it
was redundant as it was required for the deal pack.
277.We do not
accept this evidence. The contract paperwork fails to record important matters
such as the full specification of the phone and the due date of payment which
Mr Virdee, Mr C Taggar and Mr Macdonald claim was negotiated. We find it was
their stock answer to a failure in the paperwork to say the matter was
negotiated on the phone and not recorded in the paperwork. We do not find this
credible. A genuine commercial business which had negotiated terms at arms
length with independent suppliers and customers would ensure that those terms
were reduced to writing and enforceable.
278.For reasons
given below with relation to the fixed mark up and Daily Stock Log as well as
the incredible nature of this evidence on the stock offers, we do not accept
that the prices were negotiated as they say they were. Further we also note we
have found that the deals were orchestrated for the purposes of fraud and there
would be no scope for genuine negotiation of prices within this artificial
chain of transactions. For all these reasons we do not accept that the prices
were negotiated at all.
279.The Company’s
original evidence was its prices were freely negotiated. In a letter dated 21
August 2006 to Mr Scanlon Mr Virdee said :
“As I explained to you at our meeting on 31st
July 2006, Network Euro operates by obtaining goods at what it believes is a
good price for a particular product on a particular day. It then sells the
goods on to a customer at the best price it can achieve. Therefore there are
no pricelists and no discounts as such. However, in attempting to sell the
goods there are obviously negotiations as to the price.
280.We find that
Network Euro made a consistent mark-up of approximately 8% (it varied from
7.85% to 8.19%) on all the transactions in this appeal up to Deal 50 (end of
June 2006) and thereafter a consistent mark-up of approximately 4% (it varied
from 3.81% to 4.11%) on all transactions after that date. The prices paid and
charged by Network Euro were subject to variation (For instance it sold N91
phones on 16 June for £322, on 21 June for 317.50 and on 29 June for £319.75.)
We find it is highly unlikely that freely negotiated prices would result by
coincidence in virtually identical mark-ups of sale price over purchase price.
281.Indeed, at
the hearing Network Euro Mr Virdee and Mr G Taggar claimed that it was not
chance but design: a deliberate choice by Network Euro to instruct staff to
add 8% (later 4%) to the purchase price. This evidence first emerged at the
hearing and is not presaged in any witness statement. It contradicts Mr
Virdee’s earlier statement.
282.Mr Virdee’s
explanation at the hearing of why the Company chose to do business like this
was that they had experimented with different (higher) prices and found that 8%
on top of the purchase price was what the market would bear and they missed out
on deals if they charged more. Mr G Taggar said he used 8% as Mr Virdee had
told him that this was the industry norm.
283.We find this
makes no sense in a commercial world. The Company’s customers ought to be
entirely unaware of what the Company was paying its suppliers and therefore
they could not possibly decide to pay 8% above that price. They would not know
what that price was. Nor does it make any sense in a commercial world that
Network Euro would stick to 8% and refuse what was a very large profit for
doing very little if the customer was prepared to pay a slightly lower figure
than that asked for.
284.Mr Virdee’s
explanation for why the mark up dropped overnight to 4% from 8% was that many
traders had their VAT withheld and European customers exploited this. Mr
Taggar said it became a buyer’s market. These explanations make no sense. The
withholding of the VAT leading to a reduction in brokers would lead to a
reduction in supply: it would not create a buyer’s market but a seller’s
market. And even though were the market genuine (which we have found it was
not), a reduction in price would make sense (we have already commented the
cross border price differential makes no commercial sense), we would not expect
the price to drop overnight and then settle at a new norm. We would expect to
see fluctuations: we don’t. We reject this explanation.
285.We note that
it was confirmed by Mr C Taggar that he was told to add 8% to purchase prices.
We have already noted that Mr Macdonald gave inconsistent oral evidence at
first suggesting the sale price by the Company was open to negotiation and then
later agreeing with what was in effect the oral evidence of Mr Virdee and Mr G
Taggar that the sale price was achieved by adding 8% to the purchase price. Mr
G Taggar went so far as to say this was a take it or leave it price for the
buyer.
286.We do not
accept Network Euro’s evidence at the hearing on its mark up as reliable. It
makes no sense and is improbable: it is also inconsistent with Mr Virdee’s
earlier statements to Mr Scanlon as set out above. We also bear in mind that
we found Mr Virdee and Mr G Taggar’s evidence to be untruthful on other points
and Mr Macdonald’s evidence to be unreliable.
287.We do not
find Mr C Taggar’s evidence on this reliable because it was improbable for the
reasons given above. We also note he said that he negotiated prices downwards
which for reasons given below we also don’t accept.
288.In
conclusion, we find Network Euro knew that its sale price would be approximately
8% above the purchase price and that this was not negotiated or even chosen by
Network Euro.
289.At the
hearing it was suggested that although the sale price was not negotiated, but a
take or leave it price for the buyer, the purchase price was negotiated. Mr C
Taggar said he would negotiate purchase prices and Mr Macdonald gave evidence
he would negotiate a price reduction in slightly under half of the cases of up
to about 25p per phone.
290.We do not
accept this evidence. It is improbable. As is apparent from the prices
actually paid, and as Network Euro’s witnesses agreed at the hearing, the mark
up was fixed at 8% (later 4%): a reduction in purchase price would not
increase Network Euro’s profits as it would be passed on to the customer. Further,
we know that the buffers selling to Network Euro often had a very low profit
margin often of about £1 per phone. A small and pointless reduction in price
for Network Euro would in many cases diminish the buffer’s small profits by
25%. Further, we have already found that the transactions were organised.
Buffers received regular if small profits. It is to the highest degree
unlikely that they would have agreed to reduce these small profits when it is
apparent the deals were arranged and the buffers had no need to capture Network
Euro’s goodwill. It is also the case there is no evidence the sale prices were
reduced: the buffers’ profits were fairly consistent.
291.We note that
not only is Mr Macdonald’s evidence improbable but we have found his
recollection of events to be unreliable as explained above. We do not accept
his evidence that the purchase price was negotiated. Similarly, we do not
accept Mr C Taggar’s evidence on this either due to its improbability and the
fact that he heard the evidence given by Mr Virdee before giving his own
evidence which may have influenced his recollections and conclude that he was
not a reliable witness.
292.As we reject
Network Euro’s evidence on how its prices came to be fixed, the question is how
did they arrive at their prices? We find they were not negotiated. We have
already found that these transactions were arranged by the fraudsters for the
purpose of MTIC fraud. So “take it or leave it prices” purchase and sale
prices are what we would expect to see and in fact are what we see here.
293.We find it
considerably more likely than not that Network Euro was instructed at what
price to buy and sell.
294. We note
that Mr Virdee denied that the prices were contrived and he knew from whom to
buy and to whom to sell. For the reasons set out above, we do not accept this
denial.
Daily Stock Log
295.It was the
Appellant’s case that it freely located its buyers and sellers and freely
negotiated the deals.
296.Mr Virdee
says that Network Euro “soon” had a network of customers to whom they would
offer stock on a regular basis. We find this makes little sense: there was no
suggestion that the identities of buyers and sellers were secret. On the
contrary, it was the Appellant’s case that it found the deals by searching
daily the IPT website where sellers would advertise mobile phone stock for sale
and buyers would advertise for what they wanted to acquire. Mr Virdee said
some 300-700 companies might advertise on IPT each day and that Network Euro’s
staff would call up to 25-150 companies a day to try to put a deal together.
297.We find the
daily stock log was an electronic spreadsheet kept by Network Euro and it
showed the date, company name, the first name of contact, the company’s
telephone number and the type of phone (if any) on offer to buy or sell, and
sometimes the quantity and “target price”. Notes were added and these were
often something like “nothing” (ie nothing to sell/buy today) or “call back
later” or the name of the freight forwarders where stock was held.
298.We have noted
that it was the job of junior members of staff (in particular a Miss N Ahmed)
to compile each day’s entries. The evidence from Mr Macdonald and Mr C Taggar
was that it was their job to use the entries from the Daily Stock Log to put
deals together. These deals would then be authorised by Mr Virdee or Mr G
Taggar.
299.We find
however that of the 62 deals in the 4 month period covered by this appeal, not
a single one of those buy-sell deals was presaged in the daily stock log. We
find that 4 of the purchases made by Network Euro were foreshadowed in
the Daily Stock Log but that none of the sales were. For instance in deal 7,
A-Z offered 5,000 9300Is for sale at £314 and this is what Network Euro bought
and paid for. Again for deals 21-23 Network Euro bought the quantity of phones
offered and at the price offered on the Daily Stock Log.
300.We also find
that in some cases Network Euro bought stock from a supplier not recorded on
that day in the Daily Stock Log when a different supplier was offering the same
stock at a lower price. For instance, in deal 55 the daily stock log shows
1,000 9300Is at £213 but Network Euro bought 1,000 9300Is from a different
supplier at £289 each.
301.We also note
that on 30 June, a day on which Network Euro bought 9,100 mobile phones from
Jos that there is an entry for Jos in the Stock Log which says “nothing”. For
all other days (apart from those 4 instances mentioned) the seller does not
appear on that day.
302.When asked in
cross examination what relevance the Daily Stock Log had to the 62 transactions
in this appeal, Mr Virdee agreed it had no relevance. It was HMRC’s case that
the Daily Stock Log was a sham. The Appellant’s reply was that Mr Macdonald
and Mr C Taggar would put a deal together making notes on pieces of paper and
not necessarily recording the negotiations in the daily stock log, which was in
fact compiled by more junior members of staff.
303.We find that
the Daily Stock Log had no relevance to the deals that were undertaken by
Network Euro and Mr Virdee and Mr Taggar, Mr Macdonald and Mr C Taggar were
well aware of this at the time. It was not apparent to us that the junior
staff (excluding Mr Macdonald and Mr C Taggar) would necessarily have known
that the Daily Stock Log was not used to put deals together.
304.The question
for the Tribunal is why would Mr Virdee instruct staff to undertake what he
knew to be the redundant exercise of compiling a Daily Stock Log? We find the
most likely reason for this was that he wished to give the appearance that the
company was operating in a commercial market, but that he knew this was not the
case.
Uncommercial terms of trading - delayed payment
305.Network Euro
was often not paid until a month after the date of its invoice and a long time
after it had shipped the goods to its buyer’s nominated freight forwarder.
Its case was that it shipped the goods on hold and would not release them until
it was paid.
306.As we have
already said it makes no sense that the Company or the Company’s suppliers
would enter into deals which left the Company’s buyer at liberty to chose when
to pay for them. Network Euro’s answer to this was that at the time of the
deal, they would negotiate the due payment date with the buyer and seller. We
note that the due payment date is not recorded in any of the documents yet it
is inconceivable that something as important as a date for payment in contracts
for hundreds of thousands of pounds would be negotiated but not recorded. We
note that we have found Mr Virdee’s and Mr G Taggar’s evidence on other matters
to be untruthful and we do not find their evidence on this to be reliable. We
reject it.
307.We also find
that in practice Network Euro did release goods before they were paid for
them. Mr G Taggar effectively accepts this in his second witness statement.
There were some 20 deals between 16 June and 31 July for which Network Euro has
never been paid. It was not suggested that Network Euro still had possession
of the goods.
308.Even though
Network Euro did not pay its suppliers until it had been paid, it still needed
very substantial capital to conduct these deals as the gross price paid to its
suppliers would exceed the net price paid by its buyers: the difference was
VAT. No VAT was payable by its EU buyers but Network Euro had to pay VAT to
its suppliers and then reclaim it from HMRC. As it was on monthly returns it
could be without refund of the VAT element of its purchase from anything from
one to two months (or of course indefinitely if HMRC refused the refund as it
did in respect of the transactions at issue in this appeal).
309.We find that
Network Euro was funded by loans. No written documentation for any of the
loans was produced, and the consistent evidence from the Appellant was that
these loans were within the community of friends and family to which Mr Virdee
and Mr Taggar belonged and traditionally everything would be done on a
handshake without a written agreement. The parties were not specific whether
the loans were to the Company or to its officers: we find it makes no
difference to this appeal. The loans were for the purpose of the Company’s
trading.
310.We find there
were two kinds of loans. Loans (often from close family members) on very
favourable terms to the Company or those from friends on very unfavourable
terms.
311.Both Mr
Virdee and Mr G Taggar were agreed that a Mr Collar (a family friend) had lent
£74,000 when the Company started trading in mobile phones. Mr Virdee said the
Company needed the money to “block” the VAT. Mr Virdee’s evidence was that Mr
Collar’s initial loan of £74,000 would have been on basis that the Company was
about to make profit, and the loan would be repaid with a % share of the
profit. Mr Collar was repaid and Mr Virdee can no longer remember the details:
he thinks the loan was outstanding for only a month or two and cannot remember
the rate of interest.
312.Mr G Taggar’s
evidence was not consistent. He insists that the arrangement was that Mr
Collar gave the Company £74,000 in return for Mr G Taggar’s father’s car worth
£7,000. As Mr Taggar’s evidence was somewhat confused on this, and bearing in
mind the improbability of Mr Taggar’s story, and also bearing in mind he agreed
Mr Collar was repaid out of Network Euro’s first VAT repayment, we find that
the arrangement was that Mr Collar only loaned the £74,000 and that this was
repaid after about two months. The “interest” was the car with a value of
about £7,000.
313.We find on
the evidence that a company called Amira Group International Limited made 5
payments totalling £412,000 between 10/4/6 and 2/7/6 (even Network Euro accepted
that the figure was £592,000). Network Euro made 4 payments back to Amira
totalling approximately £821,000 not later than 6 August 2006.
314.The evidence
of Mr Virdee and Mr Taggar was that the directors of Amira (in particular Mr
Imran Memon) were friends of theirs and that the Company had borrowed money
from Amira before the loans at issue in this appeal.
315.Mr Virdee’s
and Mr Taggar’s evidence was also that a company called Desert Wing Trading had
loaned £20,000 at this time and been repaid £35,000. Mr Virdee’s evidence was
that this company was also associated with Mr Imran Memon.
316.At the time
of the deals at issue in this appeal the company had outstanding loans of about
£900,000.
317.Westlake
Estates Ltd made a loan of £150,000 on 5 May 2006 at 15% per annum. This has
not been repaid. Originally Mr Virdee said to HMRC that the loan was really
from a Mr Gurdeep Sethi (a friend of Mr Virdee’s) through his company Westlake
Estates. However, we find that Mr Sethi had ceased to be a director of Westlake a year before the loan was made, and further at the hearing Mr Virdee’s evidence
was that he had approached a Mr Kutaria for the loan and that he had arranged
for it to be paid via Mr Sethi and his company. We find that Mr Virdee gave
the Tribunal a confused account of this loan and in particular which friend had
made it.
318. A loan of
£300,000 was made by Galway Bay Ltd on 24 April 2006. This company was owned
by a Mr Kuldeep Singh Gozra who Mr Virdee said was a personal friend of his for
the last 5 years. The loan was at 10% per annum interest.
319.A loan of
£60,000 was made by Mitcom International on 1 June 2006. This lender was
recommended to the Company by a friend working with the firm of accountants
acting for Network Euro (although it was not clear from Mr Virdee’s and Mr
Taggar’s evidence whether this friend made the recommendation during the course
of his employment). There is nothing in writing. The loan carries 15% per
annum and is still outstanding.
320. A loan of
£100,000 was made on 30 March 2006 by a Mr Jassi, who was a long-standing
friend of Mr Virdee’s. Mr Virdee’s evidence was that the loan carried no
interest and that he had promised to repay it within 12 months. It has not been
repaid. There is nothing in writing. Mr G Taggar gave contradictory evidence
that the terms of the loan were 15% after 12 months, but then agreed that Mr
Virdee was right and no interest is due. He stated that they will repay Mr
Jassi after they win this case and then will pay something extra to reflect
interest but said the amount is not agreed.
321.Mr SS Taggar
(Mr G & Mr C Taggars’ father) loaned £195,000 on 22 Nov 2005. He funded
this loan by re-mortgaging his home. The arrangement was that the Company
would pay the monthly instalments on the mortgage until the loan was repaid.
322.We find, and
as Mr Virdee agreed, that commercial bodies would not lend such large sums to
businesses with no assets (for security) and no accounts.
323.We find, as
the Company said, the purpose of loans was to enable them to accept deals: the
Company could not enter into export deals unless they could, as Mr Virdee put
it, block the VAT. As an example of this, we note in deal 5 that Network Euro
owed Cell Trading (its supplier) £1,385,325 but only sold the goods for
£1,273,500 (the difference being the VAT). It paid £1,273,500 to Cell Trading
on 20 April, the day it received the money from Bell Trask (its customer). The
following day Amira paid Network Euro £110,000 and Network Euro then paid this
to Cell Trading being the balance owing.
324.We find that
Mr Virdee and Mr Taggar were vague on the terms of the loans and who had made
them. They claimed the loans were made by close family and friends yet, with
the exception of Mr Jassi and Mr SS Taggar, the loans were made by companies,
and that in the case of Westlake Estates, their evidence was confused as to
which friend was behind the loan made by the company, and in the case of Mitcom
it was not suggested that the loan was in fact made by a friend. We accept
that loans by friends and family might not be reduced to writing, but it makes
no sense in a commercial context that the loan from Mitcom, which was not from
a friend, would be without any written contract.
325.Some of the
loans, and in particular those from Amira and Desert Wing (the companies
associated with Mr Imran Memon) carried uncommercially high rates of interest.
The loans from Amira were repaid with approximately 40-50% on top of the loaned
capital. The loans were outstanding some 2-4 months, equating to an annual
interest rate of about 150-300%. It was the Company’s case that it had to agree
to these terms because an ordinary bank would not lend to them: we find that
the Company only agreed to such terms because they knew that they would shortly
be in position to repay out of the VAT repayment made by HMRC.
326.It was HMRC’s
case that Network Euro must have known about the deals before they took place
in order to get the funds in place: we find however, that the deals often took
place before, and often weeks before, they were paid for. On the evidence it
seems at least as likely to us that the loans were arranged to fund the VAT on
deals which had already been completed but not paid for, as to fund VAT on
deals which had not yet taken place. Although it was Mr Muddar’s evidence that
he would note loans on the deal sheets, this does not tell us whether Network
Euro organised the loans before the day of the deal or merely before the day
the deals were paid.
327. It was we
find clear that the Company depended to some extent on loans to have the
capital to fund the VAT in these 62 transactions (although it appears also to
have used profits generated from earlier transactions to fund some of the
deals). We do not find on the evidence on the loans that HMRC have made out
their case that Network Euro necessarily knew about the deals in advance in
order that they could arrange the finance. They may have arranged loans in the
hope deals would materialise or arranged them afterwards.
328.We have
already stated that we find that the deals at issue in this appeal were part of
an organised chain of deals put in place for the purpose of MTIC fraud. It
would have been important to the person organising the fraud that the company
in the pivotal role of broker, Network Euro, would be in a position to fund the
deals that were being organised. Although we accept that some at least of the
loans were funded by family or friends and often it seems on fairly benign
terms, we also find that some of the loans were on usurious rates of returns.
It seems more likely than not that these were funded, directly or indirectly,
by the fraudsters themselves. The question is whether Network Euro by its
officers knew or should have known this.
329.Mr G Taggar
denied that he thought it suspicious that the Company was given loans at such
high rates of return but we think accepting such terms might indicate that he
did know that the deals were not ordinary commercial deals and we come to a
conclusion on this in paragraph 394 when considering the totality of the
evidence.
330.The Company
had a staff (including cleaners) of 13 people in the middle of 2006. We have
already mentioned Miss Virdee, Mr C Taggar and Mr L Macdonald.
331.Claire Wells
was a young employee taken on as an apprentice via the Sandra Robinson group.
She worked on the retail side of the business (refurbishing second hand
electronics equipment) and only came to work full time on the wholesaling of
mobile phones when the retail side disappeared early in 2006. Early in 2006,
she would help with compiling the daily stock log, which she saw as sourcing
stock, although she agrees she was not involved in pricing stock or putting a
deal together. Later her role was to assist Miss Virdee. It appears she
worked full time obtaining credit check reports, checking VAT numbers with
Redhill and VIES and chasing trade references from due diligence reports.
332.We agree with
HMRC that her time seems to have been wasted with making frequently repeated
triple checking of VAT numbers with 3 different sources (Redhill, VAT helpline
and VIES).
333.Nabila Ahmed
(who did not give evidence) had a job described as general office admin. We
find her job was to help compile the daily stock log. We have already noted
that this was a redundant exercise and Mr Virdee knew this.
334.Mr Assad
Rubani had a history in sales with other employers and joined in October 2005
as a sales manager. We find, as he said, that his job was to source computer
hardware, increase the customer base, find new products, build relationships
with suppliers, and manage sales team, all on the refurbished computer side of
business. This business died out in late 2005/early 2006 and Mr Rubani
temporarily became the Company’s due diligence officer. It was his evidence
that Network Euro had strict due diligence criteria and he would tell Mr Virdee
if any prospective customer or supplier did not meet it. He re-joined the
sales team in April 2006, looking for new business opportunities and having
nothing further to do with the mobile phone side of the business. He left the Company
in August 2006.
335.Mr Hardeep
Muddar was a bookkeeper and considered himself to be self-employed although it
seems it worked at Network Euro’s premises and largely on Network Euro’s
affairs. He kept ledgers, did the VAT returns, EC Sales lists, intrastate
returns, paid bills, and controlled petty cash. He did not have authority to
operate the Company’s FCIB account and according to his evidence (which we
accept) he did not even see the statements on the FCIB trading accounts.
336.HMRC say that
NE employed this large staff to give the impression of a thriving business
whereas the reality was that very little work was done and all of the
significant decisions were taken by Mr Virdee and Mr G Taggar.
337.An analysis
of the wages over 16 months showed the Company paid total salaries of £166,000
of which £113,500 was paid to Mr Virdee and Mr Taggar. The rest of the staff
shared the remaining £52,500 - which meant that most of them were on low
salaries. This is we find explained in part because the Company took on
apprentices from the Sandra Robinson group which meant the Company only had to
pay expenses in return for giving young people work experience.
338.We also find
that while it is true that staff did increase over time, Mr Virdee was clearly
keen to employ as many as possible right from the start and before the Company
moved into wholesaling mobile phones.
339.Nevertheless,
we do agree with HMRC that all the important decisions were made by Mr Virdee
and Mr Taggar (this was not denied in any event) and similarly that only Mr
Virdee and Mr Taggar controlled the money movements and saw the FCIB accounts.
Most of the junior staff either did not work on the wholesale of mobile phones,
or if they did, were employed to carry out redundant exercises such as
repetitively checking VAT numbers or compiling the daily stock log or due
diligence reports neither of which would be relied on in putting together
deals.
340.We have
already concluded that the due diligence had no relevance to the decisions
taken by the officers of the Company whether or not to trade. We have also
concluded that the daily stock log had no relevance to trades entered into by
the company. We find that the Company by its officers was aware that the
company relied on neither the due diligence nor the daily stock log. Were
these superfluous employees a smokescreen? We find that the large staff
employed by the Company might as likely be explained by an apparent desire by
Mr Virdee to have a thriving business with large numbers of employees. But we
also find that the only reason for the Company setting its employees to work on
the redundant due diligence and daily stock log was to give the appearance that
the deals were negotiated and proper due diligence undertaken. It was, as HMRC
allege, window dressing.
341.Officers of
HMRC visited Network Euro on 31 July. The last deal took place on this day.
All employees were present and apparently actively working. HMRC claim Mr
Virdee stage managed this visit to give the impression of a thriving business
with many members of staff whereas the reality was that very little was
happening.
342.We do not
find that HMRC has made out its case on this: although we find the due
diligence and daily stock log were redundant, nevertheless it is far from clear
to us that all members of staff (rather than just Mr Virdee and Mr G
Taggar) would have been aware of this nor that the junior members of staff
would have pretended to be busy when they were not. It was certainly not put
to those of them who gave evidence.
343.Network Euro
agrees that it held no insurance on the goods it purchased neither while they
were in store nor while they were in transit. The Company informed HMRC of
this at a meeting on 23 August 2006 . At this point, Mr Virdee said he was
“shocked” on checking with the freight forwarders to discover the goods were
not insured and that in future the Company would insure.
344.Mr Virdee’s
explanation was that the Company had held insurance until December 2005 but
then gave it up as found it too expensive and too limited in cover. It was
also his case that the Company did not need insurance as Network Euro only
owned the goods fleetingly. Title did not pass until goods were released.
Goods were not released until paid for. As soon as Network was paid, it paid
its supplier. Therefore the goods were released to the Company and almost
immediately released by the Company to its buyer. Further, he said he had
believed (until August 2006) the goods to be insured by the freight forwarders
and transport companies. Mr Brown also made the point that even if the Company
had known that the goods were not insured, that does not mean that it was
knowingly involved in the fraud as surely whether or not it had known of the
fraud he would have insured the goods?
345.HMRC’s case
was that Network Euro knew the goods were uninsured and were unconcerned by
this as its officers were aware that all the deals were part of a MTIC fraud
the objective of which was to steal money and not to supply phones.
346.We do not
accept Mr Virdee’s explanation. It is improbable and we bear in mind that we
find very little of what he said at Tribunal to be reliable. We think that a
business transporting and selling goods worth millions of pounds would be
concerned to ensure that it protected itself from liability if something went
wrong. We don’t think a genuine business would give up its insurance in
reliance on a vague assumption that it would not have liability because it
considered (but had not checked) that despite agreeing to buy them and having
the right to transport them out of the country, it only owned the goods
fleetingly or because it believed (but had not checked) it could rely on a
third party’s insurance policy. Mr Virdee does not even claim to have asked
for a copy of the freight forwarder’s insurance policy at the time he says the
Company was relying on it. The story is ridiculous and we do not accept it.
347.This leaves
the question of the true reason why the Company chose not to insure the goods
the subject of this appeal. It must be that it did not consider itself at risk
and (we agree with HMRC) that this is because Mr Virdee knew that the
transactions were part of an orchestrated MTIC fraud the object of which was to
defraud the exchequer of this country and not genuinely to deal in mobile phones.
348.We find (and
Network Euro did not suggest otherwise) that for all its deals it arranged to
buy and sell the stock on the same day. Indeed it would not enter into a
contract to buy (or sell) unless it had also secured a contract to sell (or
buy) the same stock. It never had any left over stock.
349.The Company
maintains that it was agreed with its supplier that it was not liable to pay
for the stock until its customer had paid it. That this was a term of the
agreement in practice is evidenced by the fact that Network Euro never did pay
a supplier before it was paid by its customer. For Deals 56 & 57 Bijou
failed in large part to pay and the goods were ultimately sold to IT Recycling
on 18 October 2006. Only then did the Company pay its supplier.
350.It was also
the case it would sell goods to a purchaser (eg Proxi) before that customer had
paid for earlier consignments.
351.HMRC’s view
was that this was an exceptionally favourable credit arrangement granted to the
Company by its suppliers (and by the Company to its customers) without a
commercial agreement and was too good to be true.
352.We find
Network Euro acted as if it was free from risk. It was not concerned with the
credit status of its trading partners and it did not agree a due payment date
and was often paid late. Even when it did go wrong (in deal 57 & 58) at
the end of the day it was able to re-sell the goods at cost price. So the
Company was right to consider itself free from risk.
353.But we infer
from this it must have been because it knew it was all pre-arranged and not on
open market.
354.Network Euro
paid A1 Inspections Limited to carry out inspections of the goods. It was Mr
Macdonald’s evidence that an inspection report would normally be received the
day after it was requested. This would be the day after the deal as we find
Network Euro only requested an inspection report after it had received its
purchase order from the customer.
355.We have
already dealt with and rejected Mr Virdee and Mr G Taggar’s evidence that they
carried out personal inspections of the goods on the day of the deal.
356.We therefore
find that Network Euro was prepared to and did enter into deals to buy and sell
mobile phones without checking beforehand that the goods physically met the
description required or that they were in good condition or even that they
existed.
357.We find that
Network Euro was aware that each mobile phone has a fairly complex
specification that differentiates one type of phone from another. This is
apparent from their due diligence questionnaire which lists 12 points of
specification. However, the Company’s purchase orders and invoices, and the
purchase orders and invoices which the Company received, do not contain much
detail on the specification. The information is normally limited to the make
and model of the phone. It sometimes included colour. The language of the
keypad, the manual, and whether the charger is 2 or 3 pin, was not recorded.
358.Nevertheless,
it was the evidence of Mr Macdonald and Mr C Taggar that they did negotiate
the detailed specification of the phones with the Company’s customers and
suppliers and were simply in too much of a rush to record it on the documents.
Mr Virdee also said this. We note that we consider much of Mr Virdee’s
evidence to be untruthful and have found Mr Macdonald’s and Mr C Taggar’s to be
unreliable.
359.Mr G Taggar
elaborated on the evidence given to say that although the specification was not
recorded, nevertheless it was part of the negotiated deal because he would fax
through the first page of the inspection report (which showed the
specification) to the Company’s customer so they would know what they were
buying. It was put to Mr G Taggar that he was not being truthful on this. No
mention of this was made in any witness statement. Further, from other
evidence given (including by Mr G Taggar himself) it was clear that the
inspection report was not available until the following day and indeed not even
commissioned until after the deal had been completed on the phone and the customer’s
purchase order sent to Network Euro. We do not accept that the customer ever
saw the inspection report and certainly they were not sent it on the day of the
deal.
360.We find that
if the detailed specification had been negotiated, it would have been
recorded. Apart from the question of legal enforceability of agreed terms of
the contract, the agreed specification would have needed to be written down so
all parties remembered what had been agreed. The fact that it was not reduced
to writing, means we find that it was not negotiated and was not important to
the parties. We also note that we have already found as a matter of fact that
the deals in this appeal were orchestrated for the purpose of MTIC fraud, which
means in practice Network Euro’s customers would not have been interested in
the specification of the phones. For this reason also we find that the
specification was not negotiated with its customers by Network Euro.
361.We find that
this was a chain of transactions in which the buyers and sellers were
uninterested in the specification of the goods purchased and sold because they
had no commercial interest in the goods as they were simply a vehicle for
fraud.
Retention of IMEI numbers
362.Network Euro
made no complete record of IMEI numbers of each individual phone in which it
traded. It paid its inspection company to make a record of the IMEI numbers of
10% of the phones inspected. Mr Virdee’s explanation is that they were acting
on the advice of their VAT officer Miss Jenny Carter who (they said) had said a
100% check was unnecessary and 10% would be fine. Miss Carter also said that
HMRC would not check the numbers on behalf of the Company.
363.Why did the
Company keep a 10% list? It could not know if it had traded in that phone
before (in order to avoid MTIC fraud) nor (if this were genuine trading) know
if it had sold a particular phone to a customer should there be a complaint
about it. Yet it required its customers to certify that they did carry out a
100% inspection.
364.Mr L
Macdonald’s evidence is that he checked randomly 5 or 10 numbers from the 10%
list against a database on the internet (Numberingplans) which could tell him
if it was a valid IMEI number and to what specification phone it belonged.
This evidence is consistent with his witness statement from late 2007 and we
accept it.
365.As we have
already noted in paragraphs 68, using Network Euro’s 10% lists and HMRC’s
NEMISIS database only a very small proportion of the phones sold by Network
Euro appear to have been carouselled.
366.It is HMRC’s
case that the First Freight Ltd 10% inspection report for deal 10 is false.
This is because, if the last digit of the 15 digit number for each phone is
ignored, the numbers run sequentially. It is HMRC’s case that this sequential
numbering could never have happened on genuine inspection (particularly a 10%
inspection) but rather all that someone has done is taken a sequential list of
numbers with 14 digits and added a random 15th digit to disguise
this. The reason for this, HMRC implies, is that First Freight did not
actually undertake the inspection at all.
367.Although we
take into account Mr Stone’s evidence that the 15th digit of an IMEI
number would always be a random check digit, we think on the balance of
probability the list is false because it would be very unlikely that the boxes
could have been scanned sequentially. However, that tells the Tribunal very
little. It tells us that Network Euro were defrauded in that they paid for an
inspection that was not carried out. But the question is whether Network Euro
knew or ought to have known this. It is most unlikely they knew the report was
false, else they would not have kept it. Should they have known it was false?
If they had looked at it more closely, then they should have realised it was
odd: but that by itself would not have told them the entire transaction was
fraudulent.
368.Date
discrepancies
369.On Deal 17
there is a stock offer by Top Notch to Network Euro dated 17 May. Network Euro
accepts this on 19 May and sends a purchase order the same day. Top Notch
sends an invoice to Network Euro on 18 May. Top Notch also sends allocation
and release notes in favour of Network Euro to the freight company dated 18 May
and faxes confirmation of this to Network Euro on 18 May. Network Euro’s
explanation of this is that it was all done on 18 May but all happened so fast
Network Euro did not manage to produce the purchase order until the following
day.
370.On deal 4
there is a purchase order from Network Euro to Topnotch dated 6 April 2006, but
Top Notch’s stock offer is not faxed until 7 April. Mr Virdee’s explanation is
that Network Euro would have put a deal pack together on the day after the
deal, realise they had lost the stock offer and ask for it to be faxed over
again. This is an incorrect explanation as the stock offer is actually dated 7
April as well as faxed on that date. The supplier declaration is also dated 7
April.
371.Differing
copies
372.Deal 4:
There is a supplier declaration from Top Notch. There are two versions of it,
one produced for extended verification and one which was disclosed for the
purpose of the appeal. Although they clearly relate to the same deal as they
have the same purchase order number the first is signed by a “Mr R S Johal” on
7 April and the second is signed by a “Mr R Johal” in very different
handwriting on 11 May. The PO number is 20234 on both of them.
373.Deal 10 also
has 2 different supplier declarations. The later one has boxes ticked that
were not ticked on the first one.
374.Deal 11 has
two different invoices: they have the same number and details but the date
changes from 27 April to 28 April. Mr Virdee’s explanation is that the deal
was negotiated on 27 April but for shipment on 28 April. An invoice was raised
on 27 April and due to clerical error another invoice was raised on 28 April.
375.Deal 12 has 2
different supplier declarations. There are quite substantial differences and
although they were (purportedly) signed by same person on same day- one is
clearly not an updated version of the other as on one “Director” was written in
small handwriting and on the other one in large handwriting.
376.For Deal 17
Network Euro produced two different purchase orders. They clearly relate to
the same deal but differ in format and carry different dates.
377.Deal 18 and
19. Again Network Euro produced two different purchase orders for these two
deals. The format of, and information on, each varies. Mr Virdee’s explanation
is that this was during a transition period when the Company changed from one
format of purchase order to another (which included the vendors’ VAT number).
There are also two different supplier declarations: they are identical except
one includes an extra line. Mr Virdee’s explanation is that a staff member
must have spotted that a line was missing and asked for it to be completed but
nevertheless filed the incomplete version as well. There are differences
between the invoices on these deals as well.
378.For deal 26,
there are two invoices from Network Euro and the price is not identical. Mr
Virdee says that this was a clerical error or reflects the fact the price was
renegotiated.
379.Deal 29:
Cell Trading’s invoice as produced by Network Euro originally had no signature
or company stamp but version produced in disclosure for this appeal does.
380.Deal 45:
Network produced in extended verification a purchase order which it sent to its
supplier and then produced a different purchase order during disclosure. The
one given to HMRC for extended verification quotes the correct VAT number for
the supplier but the one disclosed for the purposes of the appeal quotes an
incorrect VAT number for the supplier. Mr Virdee’s explanation is that the one
with an incorrect number was a mistake.
381.In two deals
there is a frequently repeated spelling mistake “sliver” for “silver” in both
the Jos and Network Euro paperwork. HMRC say this shows the same person
produced the documents for both companies. Mr Virdee’s explanation is that
the staff just repeated an error they saw in the other company’s paperwork.
382.Due diligence
on A-Z Mobile: The first copy was produced to HMRC as part of the extended
verification. The second copy was produced with a witness statement. The
answers given on the first one are more complete than on the second. The
explanation by Network Euro is that they had more than one copy of the same
document. A-Z must have provided incomplete answers and been asked to fill it
in again.
383.HMRC’s
allegation is where more than one copy of the same document has been produced
to them that at least one copy was not genuine and was produced for the
purposes of the appeal. Further, they say the poor quality of the paperwork
indicates that Network Euro was not really concerned with creating accurate
paperwork as they knew that the deals were all orchestrated and were not genuine.
384.It was the
Appellant’s case that the mistakes in the documents were just due to human
error and that the Appellant’s officers believed that transactions were genuine
even though some careless mistakes were made in the documents. Further and as
mentioned above, when documents were out of timing sequence, the Company’s
explanation was that the deal was done on the phone and the superfluous
documents (such as purchase orders) were just created for deal packs. Mr
Virdee’s evidence was also that Network Euro often had more than one copy of
the same document and that this explains discrepancies between the documents
produced in extended verification and those produced in evidence in this
appeal. This was because staff would ask for new copies of documents (eg when
the original was not complete) and then file both copies. Due diligence was
updated but the old copies were not discarded. Spelling mistakes were often
repeated as the word processing package automatically stored previously used
phrases in a drop down menu to make completing the document another time
quicker. So a mis-spelling could be stored and repeated in the same or even a
different type of document.
385.We do not
think it makes sense for Mr Virdee to produce false versions of documents which
he had already produced in extended verification (as the change is obvious to
HMRC), but balanced against this is his admission in his witness statement that
he did so in respect of A-Z’s due diligence report (see paragraph 240). We
also note that the explanations given by the Company for many of the errors and
duplications are likely to be true: the impression we have is that the staff
were junior and inexperienced. We also note that we find that the release
notes were manufactured by Mr Virdee after extended verification and were not
genuine, for the reasons explained above. We also note that we have not found
Mr Virdee to be an truthful witness.
386. In
conclusion we find that HMRC have not made out its case that all the
discrepancies listed above indicate that the Company was knowingly involved in
fraud. We do find that some documents, represented by the company
contemporaneous with the deal (such as some purchase orders and all release
notes) were in fact produced after the deal was negotiated. We do find that as some of the
documents were altered or created by Mr Virdee after the event this means they
were not required for the deals. This is an indication that Mr Virdee knew the
deals would take place even without the normal commercial documentation being in
place and bolsters our final conclusion on knowledge reached in paragraph 394.
387.Mr Virdee had
little previous business experience. He set up business buying and selling
second-hand computer equipment on eBay. From a standing start in 2004, there
was a sudden exponential increase in turnover for the Company in 2005. In its
first 9 months of trading had a turnover of approximately £41,000. Outputs for
the quarter to May 2005 were approximately £23,000. Then in the next month,
the Company, now on monthly returns and now selling mobile phones wholesale,
has outputs of nearly £3million. Turnover was over £17million to year ended 31
August 2005, and over £100m to end of following financial year (it only traded
11 months of this year).
Business records
388.Network Euro
has virtually no business records. The only accounts produced were for one
year and were only in draft as their Accountants would not finalise the
accounts until their bill was paid. No management reports, profit and loss
accounts, cash flow forecasts, aged debtors reports, aged creditor report or
business plans have ever been produced. Mr Virdee’s response was that such
reports were unnecessary. We accept Mr Muddar’s evidence that Network Euro had
electronic ledgers for which he was responsible and on which the monthly deal
logs sent to HMRC were based even thought the Company is now nevertheless
unable to produce copies of these ledgers.
389.HMRC’s case
is that this lack of business records is because there was no genuine
business. By itself we do not think this necessarily indicates more than that
Mr Virdee and Mr G Taggar were inexperienced in business, which is not
surprising in that their business increased exponentially over such a short
time.
390.Network
Euro’s standard terms and conditions were, we find, intended for and suitable
to its retail business and not suitable for its wholesale business. For
instance, the conditions refer to collecting unpaid balances by credit card:
at term suitable for retail sales (where it would typically sell a unit for
£99) but unenforceable in a contract for hundreds of thousands of pounds.
391. Again the
explanation for this might well be that the business increased exponentially in
a short time and its directors were very inexperienced in dealing with
multi-million pound deals and we find HMRC have not made out its case on this
point.
392.Mr Brown says
that even if we conclude this was orchestrated MTIC it is not necessary for the
broker to have known of the fraud. We agree that it is theoretically possible
for a broker to an innocent dupe of the fraudster but it is a question of fact
whether they were in this case for the Tribunal to decide.
393.Mr Brown says
that we should take into account that HMRC have not taken criminal proceedings
against officers of Network Euro so we should assume HMRC did not think that
they had sufficient evidence of their participation in fraud. We do not know
why HMRC have not done this nor would it make any difference if we did: the
question is what this Tribunal finds as fact and not what HMRC thinks.
394.We find for
all the reasons given in this Decision Notice that Mr Virdee and Mr G Taggar
both
·
Knew that the Company did not negotiate the prices nor the
specifications of the phones in which it dealt. We found they were not
interested in the physical condition or existence of the goods as they did not
inspect them before the deals took place. As we have also found that the deals
at issue in this appeal were orchestrated for the purposes of fraud, the only
possible conclusion that we can reach and which we do reach is that the company
was presented with and accepted pre-arranged deals: it was told with whom to
trade and at what prices. Mr G Taggar denied this but we do not believe him;
·
acted as if the deals were free of risk (eg the Company did not
insure the goods) and did not negotiate due dates for payment and we find that
in practice we find the deals were virtually free of risk. Even when the Company
has not been paid there is no suggestion that its sellers are pursuing it for
payment;
·
had no interest in the status of the Company’s trading partners
even though they were well aware that fraud was a risk in wholesale
transactions in mobile phone and even though the Company was selling and
transporting millions of pounds worth of goods without payment while the
Company itself was on the hook to pay its buyer. This lack of concern shows
that they were confident they would be paid and that must mean they knew the
deals were pre-arranged and also that they had no real interest in ensuring
their deals were not tainted with MTIC fraud;
·
instructed staff to undertake exercises which Mr Virdee and Mr G
Taggar knew were redundant and pointless such as the creation of the daily
stock log and due diligence reports. We find that the Company’s reason for
giving these instructions was to create a false impression that the deals were
negotiated when they knew they were not, and that they cared about the
financial status of the companies with which it traded when they did not. We
see no reason why the Company would have wanted to create a false impression
other than it knew it had something to hide;
·
the Company made a great deal of money from transactions for
which it did virtually nothing other than issue a few documents and “block” the
VAT; the deals were far too good to be true and they knew it (Mr Virdee denied
that this made him suspicious but we do not believe him);
·
the Company accepted loans at exorbitant rates of interest and
traded in a very amateur fashion all the while dealing in millions of pounds;
·
its profit was (up to 24 July 2006) over 40% of the value of the
VAT defaulted upon which means the person who orchestrated the fraud was
allowing the Company to share nearly 50:50 in the proceeds it would make from
the fraud. We do not consider that the fraudsters would be so generous other
than that it was necessary to secure knowing participation in unlawful
activity;
·
that all of its 62 transactions were connected to fraudulent tax
loss which is stretching coincidence.
395.We reach the
inevitable conclusion based on these findings that Mr Virdee and Mr G Taggar
did know at the time of them that all the Company’s transactions were connected
to a tax fraud and that they willingly participated in these transactions for
the illegal profits they would achieve.
396.We find as a
matter of law that because it (by its principal officers) knowingly
participated in fraud, as well as having actual knowledge under the Kittel
test that its transactions were all connected to fraudulent tax loss, the
Company is not entitled to recover the input tax it has claimed and the appeal
is dismissed.
Conclusion on means of knowledge
397.It was Mr
Virdee’s evidence that Officer J Carter of HMRC checked all their paperwork and
told Network Euro that what it was doing was more than sufficient and to keep
up the good work. However, Mr Virdee also said another officer visited and
criticised their due diligence but when asked what was wrong with it, said it
was not for HMRC to tell Network Euro how to do its due diligence. Mr Virdee
complains that Network Euro was constantly hitting a brick wall with no help
from HMRC.
398.We do not
accept that on the basis of this, even if they did not actual knowledge of the
fraud (contrary to our finding that they did), that this very limited
reassurance from HMRC could have reasonably assured them that there was no
problem in the light of everything else that Network Euro did know.
399.From the fact
the deals did not need to be negotiated, from the fact they made very large
profits for very little input or risk, the fact that their trading partners had
poor financial standing and that Mr Virdee and Mr G Taggar were well aware of
the risks of MTIC, they should have concluded that MTIC fraud was the only
explanation for the “business” opportunity they were offered on these 62 deals.
400.For much the
same reasons as above in relation to actual knowledge, had it been necessary to
consider the Company’s “means of knowledge” of connection to fraudulent tax
loss, we find that the Company by its Directors did have means of knowledge
before the transactions were entered into that the transactions were all
connected to fraudulent tax loss.
401.For this
reason too, we dismiss the appeal in its entirety.
402. It was
agreed by both parties that to the extent that the invoices were unpaid by
Network Euro the company has no entitlement to reclaim the VAT on those
invoices in any event. This is because of s26A Value Added Tax Act 1994 which
provides as follows:
“26A(1) Where-
(a)
a person has become entitled to
credit for any input tax, and
(b)
the consideration for the supply
who which that input tax relates, or any part of it, is unpaid at the end of
the period of six months following the relevant date,
he
shall be taken, as from the end of that period, not to have been entitled to
credit for input tax in respect of the VAT that is referable to the unpaid
consideration or part.”
403.The parties,
however, have not agreed which invoices were unpaid.
404.Whereas for
the rest of this case the burden is very much on HMRC to prove their case, on
this aspect it is for the Appellant company to show to the Tribunal that it
paid the invoices on which it is claiming VAT recovery.
405. The parties
agreed to resolve the quantum after the hearing and inform the Tribunal. There
was an inconclusive exchange of letters between them. HMRC allege some
£11,830,769.15 worth of invoices at issue in this appeal were unpaid by Network
Euro. Network Euro has neither confirmed nor denied this. But it is for them
to show that HMRC’s figure is wrong and they have chosen not to do this.
406.This is of
course superfluous to our findings as we have already dismissed the appeal but
we note that even apart from their actual knowledge of the connection to
fraudulent tax loss, the Company is not entitled to recover the VAT on these
unpaid invoices. We therefore find that in any event they are not entitled to
recover the VAT in respect of these unpaid invoices in the figure given by
HMRC.
407.At the close
of the hearing HMRC asked, should they be successful, for costs in the case to
be awarded in their favour against the liquidators of the Appellant in their
personal capacity.
408.On 31 March
2009 I directed that unless HMRC objected within 2 weeks, the new costs regime
would be dis-applied and the old costs rule in Rule 29 apply. HMRC did not
object. So on costs matters this case is governed by Rule 29. The power of
the Tribunal to make a costs order under Rule 29 is:
“(1) A tribunal may direct that a party or applicant
shall pay to the other party to the appeal or application - …..”
409. We find that
the history of this matter is that at a hearing before Mr M Tildesley on 18
December 2008 the Chairman gave a direction:
“the liquidators of the Appellant shall, if so
advised, give written consent to being substituted in these proceedings in
place of the Appellant by 18 February 2009, and in the event that no such
written consent is received by the Tribunal, the appeal shall be dismissed
pursuant to rule 13(2) of the Value Added Tax Tribunals Rules 1986 as amended.
The liquidators are Neil Charles Money and Neil Richard Gibson of CBA, 39 Castle Street, Leicester LE1 5WN.”
410.On 18
February 2009 the two liquidators wrote to the Tribunal saying:
“TAKE NOTICE that Neil Charles Money and Neil
Richard Gibson as Liquidators of the Network Euro Limited (“the Company”)
consent to being substituted as the Appellant in the proceedings in place of
the Company.”
411.However, it
does not appear that the Tribunal ever made a direction under the then Rule
13(2) substituting the liquidators as the Appellant in the case. And even if
HMRC were now to apply for such a direction, in our view, it is too late after
the hearing of the case. Therefore, the liquidators are not the Appellants:
Network Euro remained as the Appellant. As they are not parties to this
appeal, it is therefore not necessary for us even to consider whether it is
appropriate to make an award of costs against the liquidators personally.
412. We order the
Appellant (being Network Euro Ltd) to be pay the Respondents its costs of and
incidental to and consequent upon this appeal to be assessed by a Costs Judge
if not agreed.
413.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.
Barbara Mosedale
TRIBUNAL JUDGE
RELEASE DATE: 19 April 2011
APPENDIX
Names of Companies in this
Decision Notice
|
Abbreviation used in
Decision Notice
|
Full Name of company
|
|
3D Animations
|
3D Animations Limited
|
|
A-Z Mobile
|
A-Z Mobile Accessories Ltd
|
|
Amira
|
Amira Group International
|
|
Belltrask
|
Belltrask SA
|
|
Bijou
|
Bijou Medinacelli SL
|
|
BRD
|
BRD Werbrung-und Handels GmbH
|
|
Cell Trading
|
Cell Trading UK Ltd
|
|
CEMSA
|
CEM SA
|
|
City Phones
|
City Phones Ltd
|
|
Computec
|
Computec Solutions Ltd
|
|
Crestview
|
Crestview Enterprises Ltd
|
|
C T Co UK
|
C T Co UK Ltd
|
|
Cybersol
|
Cybersol UK Ltd
|
|
Digitalk
|
Digitalk Communications Ltd
|
|
Flash Tech
|
Flash Tech
|
|
Fonelink
|
Fone Link SL
|
|
Glasgow Data
|
Glasgow Data Ltd
|
|
Global Access
|
Global Access International Ltd
|
|
Globalfone
|
Globalfone Communications GmbH
|
|
Humber Freight
|
|
|
Interaction Logistics
|
|
|
IT Reclycling
|
IT Recycling Services Ltd
|
|
Jewel
|
Jewel Collection Ltd
|
|
Jos
|
Jos (UK) Ltd
|
|
JSA Logistics
|
|
|
Label
|
Label Clothing Ltd
|
|
Lagan
|
Lagan (UK) Ltd
|
|
Leriant
|
Leriant Trading Ltd
|
|
Luxembourg Logistics
|
|
|
Mobile Memory
|
|
|
Network Euro
|
Network Euro Limited
|
|
New Order Exports
|
New Order Exports Ltd
|
|
New Order Trading
|
New Order Trading Ltd
|
|
Opal 53
|
Opal 53 GmbH
|
|
Parasail
|
Parasail Distribution Spain SL
|
|
Paul’s Freight
|
|
|
Phone City
|
Phone City Limited
|
|
Phone Dealers
|
|
|
Phonedeal
|
Phone Deal World Ltd
|
|
Point of Logistics
|
|
|
Power Communication
|
Power Communication Trading BV
|
|
Proxi Partners
|
|
|
Red Rose
|
Red Rose Consultancy Ltd
|
|
Senbetel
|
Senbetel Telecommunications SL
|
|
Sigma Sixty
|
Sigma (Sixty) BV
|
|
S L Computer
|
S L Computer Electronics Ltd
|
|
St Anne’s
|
St Anne’s Distribution Ltd
|
|
Stylex
|
Stylex Ltd
|
|
Sam Logistics
|
|
|
Smart Phone
|
Smart Phone Systems Ltd
|
|
Stockmart
|
Stockmart Ltd
|
|
Stylez
|
Stylez Ltd
|
|
Swindon Star
|
Swindon Star Ltd
|
|
Symbolix
|
Symbolix SARL
|
|
Topnotch
|
Topnotch Corporation Ltd
|
|
Total Logistics
|
|
|
Trade Eazy
|
Trade Eazy Ltd
|
|
Trade Smart
|
Trade Smart Ltd
|
|
West Point
|
West Point One Ltd
|
|
Worldwide
|
Worldwide Enterprises Ltd
|
|
Yayha
|
Yayha International
|
