First-tier Tribunal (Tax)

[2011] UKFTT 265 (TC)

 

 

 

 

 

 

TC01127

 

 

Appeal number:  LON/2008/1227

 

Value Added Tax – Input tax – Disallowance of input tax on basis MTIC fraud – Appellant knew or ought to have known trade connected with fraud – Whether legitimate expectation input tax would be repaid on basis due diligence said by HMRC to be adequate – No – Appeal dismissed

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

 

SCEPTRE SERVICES Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT) Respondents

 

 

 

TRIBUNAL:  MISS J C GORT (Judge)

 MRS SHAHWAR SADEQUE

 

 

Sitting in public in London on 24 May-3 June 2010, 3 November-15 November and 13 December 2010

 

The Appellant was represented in the earlier part of the hearing by Mr Eamon McNicholas of counsel instructed by Burges Salmon LLP and in the later part by Mr Nigel Popplewell, solicitor of Burges Salmon

 

Mr John Black QC and Daniel Margolin of counsel, instructed by Howes Percival LLP, for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

1. The Appellant (“Sceptre”) appeals against

 

(a) A decision of the Commissioners contained in a letter dated 14 May 2008 denying entitlement to the right to deduct input tax in the sum of £333,211.16 claimed in the Value Added Tax accounting period 07/06 and £504,897.77 in the period 08/06.

 

(b) A decision contained in a letter dated 5 June 2008 that the net amount of £44,458.80 had been assessed as due for the above period; and

 

(c) A decision contained in a letter dated 26 September 2008 informing Sceptre of an error in the decision letter of 14 May 2008 amending the amount of VAT due for the period 07/06 to £345,251.15 and for the period 08/06 to £447,804.

 

By a Direction dated 5 August 2008 the appeals were consolidated, and the total amount of VAT now in issue is £793,055.15.

 

2. The Commissioners’ grounds for denying repayment of input tax are that the input tax was incurred in transactions connected with the fraudulent evasion of input tax and Sceptre either knew or should have known of that fact. 

 

3. The decisions relate to a total of 17 transactions involving the sale by Sceptre of consignments of iPods, computer components and hard disk drives to customers in Europe.  Nine of the transactions were in VAT period 07/06 (July 2006) and the remaining eight transactions were in VAT period 08/06 (August 2006).  “Deal Sheets”, setting out in schematic form each of Sceptre’s 17 deals, and the antecedent trading “chains”, appear in Annex 1.  The Commissioners’ case is that each of the 17 transactions formed part of an overall scheme to defraud the Revenue in that each of them can be traced back, via contrived and pre-arranged chains, to one out of a group of five defaulting traders (being traders who fraudulently failed to account to the Commissioners for VAT due).

 

4. By Notices of Appeal dated 6 June 2008 and 17 June 2008 Sceptre appeals against the decisions on grounds which may be summarised as follows:-

 

(i) Sceptre took every precaution that could reasonably be required of it to ensure that its transactions were not connected with fraud.

(ii) Sceptre did not know and should not have known that by purchasing the items in question it was participating in a transaction or transactions connected with fraud.

(iii) Sceptre:

 

(a) had no actual or constructive knowledge of any fraudulent evasion of VAT;

(b) had no actual or constructive knowledge of any connection between any fraudulent evasion of VAT and the purchase of the goods;

(c) did not participate in any fraud;

(d) did not aid the perpetrators of any fraud nor become their accomplice; and

(e) performed all reasonable and proportionate checks to ensure its transactions were not connected with fraud.

 

Whilst Sceptre disputes the Commissioners’ entitlement to disallow the sums claimed there is no specific issue as to quantification.

 

The Background

 

5. Sceptre was incorporated in 1979 with the name “Alnery No.2 Ltd”.  It later became Sceptre Services Ltd.  Mr Anthony Rayer (“Mr Rayer”) is the sole shareholder and director of Rayer Group Ltd which is the holding company that owns Sceptre and Sceptre’s subsidiary company, Rayer’s Holdings Ltd.  Rayer Holdings Ltd had been a family company run by Mr Rayer’s father which Mr Rayer entered in 1984.  At that time the business comprised a property investment and holding division, a wholesaling textile division and a retailing division.  Mr Rayer handled the paperwork and quite early on he introduced a computer-based system. In 1987 a Mr Colin Evans (“Mr Evans”), an accountant, was brought into the business and since 2004 has been Sceptre’s company secretary.  He was in court almost every day of the hearing but did not give evidence.  About 1986 to 1987 Rayer Holdings (not Sceptre at that time) began retailing computers, hardware and software.  At the end of the 1990s Mr Rayer’s father retired and the retail and wholesale textiles business was wound up.  In 2003 Mr Rayer acquired Sceptre Services outright from Rayer’s Holdings Ltd and various organisational changes were made in the group culminating in Rayer owning Rayer Group Ltd, which owns both Sceptre and Rayer’s Holdings Ltd.  Sceptre had been registered for VAT with effect from 23 September 2003. 

 

6. According to its VAT registration form (“VAT 1”) dated 17 September 2003 its main business activities were described as being selling computer hardware/software and it intended importing/exporting goods.  The VAT 1 shows Sceptre’s estimated turnover in the following twelve month period to be £100,000, it did not expect the purchases to regularly exceed the VAT on its taxable supplies and it did not expect to be either buying from or selling goods to other EU Member States.  Sceptre operates from a property at 4 Bessemer Road in Cardiff which is owned by Rayer’s Holdings Ltd.  Regular checks were carried out on Sceptre’s VAT returns by officers of the Commissioners.

 

7. Sceptre’s submitted VAT returns for the VAT periods 07/06 and 08/06 on or about 1 August 2006 and 1 September 2006 respectively.  The returns were selected for extended verification due to the large repayments requested by Sceptre and the Commissioners conducted detailed enquiries into the build-up of figures on the returns and traced the transactions back through the supply chains.  Sceptre was informed on 21 September 2006 of the fact that its VAT returns were undergoing verification for period 07/06 and on 25 October 2006 for period 08/06.  Sceptre was updated on the position of the verifications on various occasions.  Following completion of the verifications the Commissioners issued the decisions to the Appellant denying entitlement to the right to deduct input tax. 

 

The legislation

 

8. Articles 167 and 168 of Council Directive 2008/112/EC of 28 November 2006 on the common system of VAT provide:

 

167 – A right of deduction shall arise at the time the deductible tax becomes due.

 

168 – Insofar as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:

 

the VAT due or paid in that member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person.

 

9. The Value Added Tax Act 1994 provides:

 

s.1(1) Value added tax shall be charged …

 

(a) on the supply of goods or services in the United Kingdom (including anything treated as such a supply);

(b) on the acquisition in the United Kingdom from other Member States of any goods.

 

s.24-(1)  Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say-

 

(a) VAT on the supply to him of any goods or services;

(b) VAT on the acquisition by him from another member State of any goods; and

(c) VAT paid or payable by him on the importation of any goods from a place outside the member States,

 

being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him …

s.73(1) Where a person has failed to make any returns required under the Act … or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him.

 

Sch 11 Para 5(1)  VAT due from any person shall be recoverable as a debt due

to the Crown;

 

(2) Where an invoice shows a supply of goods or services as taking place with VAT on it, there shall be recoverable from the person who issued the invoice an amount equal to that which is shown on the invoice as VAT or, if VAT is not separately shown, to so much of the total amount shown as payable as is to be taken as representing VAT on the supply.

 

(3) Sub-paragraph (2) above applies whether or not –

 

(a) the invoice is a VAT invoice issued in pursuance of paragraph 2(1) above; or

(b) the supply shown on the invoice actually takes or has taken place …; or

(c) the person issuing the invoice is a taxable person; and any sum recoverable under the sub-paragraph shall, if it is in any case VAT be recoverable as such and shall otherwise be recoverable as a debt due to the Crown.

 

(6) Regulations may provide –

 

(a) for VAT on the supply of goods or services to a taxable person, VAT on the acquisition of goods by a table person from other member States land VAT paid or payable by a taxable person on the importation of goods from places outside the member States to be treated as his input tax only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases.

 

25-(1)  A taxable person shall –

 

(a) in respect of supplies made by him, and

(b) in respect of the acquisition by him from other member States of any goods

 

account for and pay VAT by reference to such periods (in this Act referred to as “prescribed accounting periods” at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.

 

(2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.

 

26-(1)  The amount of input tax for w3hich a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

 

Regulation 29 of the Value Added Tax Regulations 1995 provides:

 

29-(1)  Subject to paragraph (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.

 

(2) At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of –

 

(a) a supply from another taxable person, hold the document which is required to be provided under regulation 13) …

 

provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold, instead of the document or invoice (as the case may require) specified in sub-paragraph (a) … above, such other documentary evidence of the charge to VAT as the Commissioners may direct.

 

Thus, if a taxable person has incurred input tax that is properly allowable, he is entitled to set it against his output tax liability and, if the input tax credit due to him exceeds the output tax liability, receive a repayment.

 

The European Court of Justice (“the ECJ”), in its judgment dated 6 July 2006 in the joined cases Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (“Kittel”), has confirmed that, in the context of MTIC fraud, traders who “knew or should have known”, that the transactions in which they were engaging were connected with such frauds will not be entitled to reclaim any input tax incurred.  In particular, in the Kittel judgment, the ECJ stated:

 

“56. … a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.

 

57. That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.

 

58. In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.

 

59. Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’.”

 

The Court of Appeal applied the principle in Kittel set out in paragraph 59 above in the case of Mobilx Ltd, rejecting the trader’s challenge to it.

 

Missing Trader Intra Community(“MTIC”) Fraud

 

10. When the VAT system is correctly operated, it is axiomatic that

 

·       An amount of VAT charged by one VAT registered trader to another VAT registered trader should be accounted for as output tax, and then

·       The amount of VAT previously charged as output tax, may subsequently be reclaimed by the purchaser as input tax (so as to ensure that the tax is neutral regardless of how many transactions are involved); and

·       When a business’s input tax claim exceeds its output tax it will be entitled to make a claim for a repayment of VAT.

 

A transaction chain in an MTIC fraud involves a “missing” or “defaulting” trader, who imports goods from another EU Member State; a number of intermediary or “buffer” traders, and a “broker” trader, who exports the goods.  These are known as “tax loss chains” or “defaulter chains”.  In an effort to disguise or hide any tax loss, “contra trading” chains are often contrived to run in conjunction with tax loss chains as part of an overall scheme to defraud the revenue.

 

11. The Scheme operates as follows:-

 

(i) Trader A, based in an EU Member State (e.g. France), sells taxable goods to Trader B, in another EU Member State (e.g. the UK).  In effect, Trader B acquires those goods free of VAT.

 

(ii) Trader B, who is the defaulting trader in the UK (i.e. a trader who incurs liability to VAT but who goes missing without discharging that liability) or the trader using a hijacked VAT number (i.e. a trader using a VAT number belonging to someone else), sells the goods to a UK “buffer” (UK Buffer 1)

 

(iii) Trader B charges VAT on the supply to UK Buffer 1.  Trader B is liable to account to HMRC for the output VAT it has charged to its customer (UK Buffer 1), but goes missing before discharging that liability to the tax authorities.

 

(iv) The goods can then be sold through a number of UK Buffer companies.

 

(v) The last UK Buffer company (UK Buffer 3) sells the goods to the UK Broker 1 (Trader C).  As is normally the case with all buffer traders, UK Buffer 3 pays HMRC the output VAT charged after having deducted the input VAT paid.

 

(vi) UK Broker 1/Trader C exports the goods to another Member State or outside the EU Exports are zero-rated for VAT purposes, but UK Broker 1/Trader C is entitled to claim a refund of the input VAT paid on the purchase of the goods from HMRC.  Should HMRC makes this repayment, the loss of VAT by Trader B is crystallised and goes on to fuel the next round of MTIC transactions.

 

The Issues

 

12. The principal issues before the Tribunal are:

 

(i) Have HMRC suffered a tax loss?

(ii) Did that loss arise from the fraudulent evasion of VAT?  If so

(iii) Were the transactions entered into by Sceptre in the relevant period connected to that fraud?

(iv) Did Sceptre know, or should Sceptre have known, that they were so connected? 

 

With regard to these matters the burden of proof lies upon the Commissioners.

 

The Evidence

 

13. There were 19 agreed bundles of evidence.  In addition we heard oral evidence on behalf of the Commissioners from the following officers:  Christopher Williams (“Officer Williams”), David Phillips, Rod Stone, Andrew Williams, Michael Quartey, Adam Smith, Sarah Barker, Angela Seymour, Gerard Marescaux, Ian Webster, John Cordwell and Ghazalah Shah. Dr Kevin Findlay, an independent consultant, also gave evidence on behalf of the Commissioners.  The witness statements of the following officers of the Commissioners were read:  Gail Taylor, Claire Downton, Emma Bishop, Helen Harris, Nicola King, Susan Okolo, Harry Patterson, Susan Payiatis, David Reynolds, Frances Varney and Richard Wilkinson.  In addition the statement of Allan Coughlin of Cardiff University was read to the Tribunal.  Mr Anthony J Rayer was the only witness who gave evidence on behalf of the Appellant.

 

14. The principle matters relied on by the Commissioners as evidence of fraud

 

(i) The Commissioners identified five defaulting traders, whose names appear at the start of the deal chains shown at Annex 1.  It can be seen that SNC Info Solutions UK Ltd (“SNC”) only appears in Deal 1, UR Traders Ltd (“UR”) appears in Deals 2 and 5, Technologz.net Ltd (“Technologz”) appears only in Deal 3, Kaymore Export Ltd (“Kaymore”) appears only in Deal 7, but E-Management Solutions Europe Ltd (“EMS”) appears in Deals 4 and all the other deals, that is Deals 6-17.

 

(ii) Sceptre purchased goods from only three suppliers: Coracle Ventures Ltd (“Coracle”) in Deals 1, 3-4 and 8-18, Grandbyte Computers Ltd (“Grandbyyte”) in Deals 2, 5 and 7 and Culmain Ltd in Deal 6 only.

 

(iii) Sceptre sold to only three customers: Solid Storage Solution Ltd (“Solid”) in Deals 1 and 5-7, Square Trading International Ltd (“Square”) in Deal 2, and ASAP Trading GmbH (“ASAP”) in Deals 3-4 and 8-17. 

 

(iv) It can be seen from Annex 1 that the deal chains up to Sceptre for Deal 2 and Deals 10-17, all of which took place in August 2006, are identical.  They are also identical to Deals 8-9, the last two deals in July.  Connect Communications (“Connect”) appears not only in all those deals, as purchaser from EMS, the (alleged) defaulter in all those deals, but also in Deals 1, 3, 4 and 6.  In Deals 4 and 6 it is also the purchaser from EMS, but in Deals 1 and 3 it purchased from Wireless Amusements Ltd (“Wireless”) who itself purchased from the (alleged) defaulter in each case.  Maximise Services Ltd (“Maximise”) not only appears in all the Deals 8-17 as the purchaser from Connect, but is in a similar position in Deals 1, 3 and 6.  In Deal 4 a company called Emmen Communications Ltd makes its only appearance between Connect and Maximise, in all its trades Maximise sells to Culmain.  In Deals 1, 3-4, and 8-17 Coracle is Sceptre’s supplier, and in each of those deals Coracle has been supplied by Culmain.  However in Deal 6 Culmain supplied Sceptre direct.  Deals 2, 5 and 7 are the only deal chains in which Culmain does not appear, Sceptre’s supplier being Grandbyte, and Deal 6 is the only deal chain in addition to those three in which Coracle does not appear.

 

(v) The products in which Sceptre was trading were Apple iPods (Deals 1, 3, 4 and 6), Intel Pentium 4s (Deals 2 and 5), Maxtor Hard Disk (Deal 7), Astra Semi Conductors (“ASIs”) (Deals 8-10, 12, 14 and 17) and Astra ADCs (“ADCs”) (Deals 11, 13, 15 and 16).  There was a weight of credible evidence, which we will refer to below, that it was not possible to identify the company Astra in connection with semi-conductors and it was questioned by Dr Findlay on behalf of the Commissioners whether the Astra ADCs actually existed.

 

(vi) The Commissioners rely on the pattern of mark-ups as shown in Annex 2.  The Commissioners point to Sceptre apparently taking the greater share of the profit in all the deals.

 

(vii) Further aspects relied on by the Commissioners are the nature of the checks that Sceptre made on its suppliers and its customers, and also the close link it had with both Coracle and a Mr Ian Charles (“Mr Charles”) trading as BCG Europe.  We will set out the evidence in relation to these two aspects later on when we turn to Mr Rayer’s own evidence, and we will also come to the other points relied on by the Commissioners, namely that there are no written contracts with any of the suppliers or customers of Sceptre, the deals were completed back to back with the longest period involved in any one transaction being only one day and the fact that the goods are not insured by Sceptre.  The Commissioners also point to the fact that Sceptre never had physical possession of the goods, and the goods cannot be traced to an end user or back to a manufacturer.  None of the goods were ever returned as damaged or faulty, and there was little or no due diligence on the freight forwarders concerned. 

 

Sceptre’s position on the evidence of fraud

 

15. By its Statements of Agreed Facts Sceptre accepted that there has been fraud by the defaulters identified by the Commissioners in all of the 17 Deals other than Deal 7.  It accepted that a tax loss has been established in all the deals other than Deals 2, 3, 5, 9 and 11.  It agreed that there is a connection between the defaulters and Sceptre in all the deals other than Deals 2, 7, 9 and 11.  In its List of Issues, dated 12 March 2010, Sceptre had accepted that there was a paper trail in Deals 2 linking the entities.  In his final submissions Mr Popplewell, in relation to Deals 2, 3 and 5 submitted that there were both invoice chains (relied on by the Commissioners) which were paper chains only and release note chains which were to be preferred as properly representing the situation.  We will therefore set out the evidence in relation to Deals 2, 3, 5, 7, 9 and 11 in detail, being the deals which are not accepted as to one or other aspect by Sceptre.  In relation to the remaining 11 deals, we have seen evidence that satisfies us that the Commissioners have established the necessary tax loss and a connection between the defaulter and Sceptre in respect of all 11.

 

 

 

 

16. The deals challenged by Sceptre as being fraudulent

 

Deal 2

 

(a) Deal 2 concerns the sale of 1,000 Intel Pentium 4s on 3 July 2006. The Commissioners’ evidence shows a paper trail which started with an invoice to Principle Trades Ltd (“Principle”), buffer 5 in the chain, who had on 3 July 2006, purchased 1,000 Intel P4s described as “P4 4 3.0 800 MHZ 2MB S775 SLQ7 630s (Retail Boxed)” from UR.  UR is a missing trader having failed to account for the VAT on its sale to Principle, and neither having paid nor appealed the assessment raised in respect of that assessment.  On the same date Principle invoiced Carpaa Ltd for 1,000 Intel P4s, Carpaa Ltd invoiced Ultimate Wholesale Ltd (“Ultimate”), Ultimate invoiced RS23 Ltd, RS23 Ltd invoiced “Grandbyte” and Grandbyte invoiced Sceptre for 1,000 “P4 3.0 800 MHZ 2MB S775 SL8Q7 630s (Retail Boxed)”.  RS23’s invoice to Grandbyte described the goods as “Intel P4 3 OG/1 MB/800 630 (Retail CPU Box)”.  Sceptre’s purchase order to Grandbyte was for 1,000 “Intel 630 retail – Pentium 4, 3.0 GHz, 800 MHZ, 2MB cache, 775 pin PLGA.”  Grandbyte’s invoice to Sceptre therefore gives a different description of the goods from that given to it by RS23.  According to its invoice, Sceptre sold to Square Trading 1,000 “Intel P4 3.0 800 775 pin 2MB – SL7 Z9.  Retail Box 630” on 3 July 2006.

 

(b) Sceptre relied on the discrepancies in relation to the description of the items sold as per Grandbyte’s invoices to Sceptre (principally SL8 Q7s) and its own invoice to Square (SL7 Z9s) to suggest a lack of continuity in the chain.  Mr Rayer had said in evidence that when he bought the product he was only interested in the description ‘Intel Pentium 4, Retail Box 630’.  This was in the context of the discrepancy between the description of what he was apparently buying (SL8 Q7s) and what he was selling (SL7 Z9s).  However, this discrepancy was put to him, and in answer to the question whether this mattered to his purchaser he replied: “No, because the negotiations that took place which have occurred over a period of time, we have told them they are getting retail box 630s and the retail box product is a – can be a combination of step codes.”  We do not accept that there is a breach in the chain of evidence here, given that the invoice number on Grandbyte’s purchase order corresponds with the reference on RS23’s sales invoice and with the invoice number reference given on its invoice to Sceptre.  Mr Rayer was clearly unconcerned about the discrepancy on his own documents and we are satisfied on the balance of probabilities that the goods sold by Sceptre are the goods the subject of the above invoices and purchase orders, from RS23 to Grandbyte.  Additional evidence in relation to Deal 2 includes an inspection report from the freight forwarder, Forward Logistics (“Forward”) dated 3 July 2007 in Sceptre’s possession which shows that Forward examined 1,505 BX 80547 PG 300F SL8 Q7s.  There were three torn labels and the notes on the report state: “Two boxes with no Intel label.  One box with split lot number.  One box with wrong suffix.  One box sealed with security tape”.  Mr Rayer accepted that this document related to Sceptre’s sale to Square.  He was unconcerned about the matters evidenced by the inspection report.

 

(c) Also in relation to Deal 2, following a Reference Request Form from Officer Williams, Forward produced documents including shipping instructions from Square dared 2 July 2006 describing the goods as “SL8 Q7s”.  They also produced the same inspection sheet dated 3 July 2006 as Sceptre referred to above.  Sceptre’s Release Notice to Forward bears the same consignment number as the inspection sheet.  There is a Release Note from RS23 for the release to Grandbyte dated 4 July 2006 (i.e. the day after this deal) which bears the same reference number as a release note from a French company, Imanse EURL (“Imanse”) asking Forward to release two consignments of 1,000 goods to Grandbyte which is dated 8 July 2006, but refers to “2,000 units of CPU Pentium 4 630 retail” and “3,100 units of CPU Pentium 4 640 retail”.  A CMR (the waybill standardised by the Convention on the Contract for the International Carriage of Goods by Road) dated 3 July 2006 shows that goods with the same reference number moved from Asia Power-Solutions GmbH in Switzerland to Imanse on 3 July 2006.  Sceptre relies on these documents for showing that the goods entered the supply chain at RS23, and therefore there was no supply to or by the alleged defaulter, UR, and no tax loss.  In addition, Mr Popplewell submitted that there was no evidence of a tax loss to the Commissioners in relation to this deal because there was no evidence that UR, the alleged defaulter, ever traded in the goods the subject of this deal or acquired them from the European Union or at all. We draw no such conclusions.  Documents produced supporting the deal chain in Annex 1 are not undermined by the above documents, there being a purchase order from RS23 to Ultimate, a sales invoice from Ultimate to RS23 and a UK Supplier Declaration Contract from RS23 showing Ultimate as the supplier.  In his witness statement Officer Williams (an experienced MTIC officer) described the issuing of a Release Note by Imanse to Forward as ‘not an uncommon tactic … used by MTIC traders in the hope that HMRC will not be able to trace the chain and the movement of goods’.  He was not cross-examined or challenged on this and we accept his evidence as to the tactics of fraudsters. 

 

Deal 3

 

(a) This deal concerned Apple iPods sold on 7 July 2006. The deal chain in relation to Deal 3 is mainly supported by purchase orders and sales invoices dated 7 July 2006 relating to 2,285 Apple iPods which are to be made up of 1,896 black and 389 white all the way down to Coracle, Sceptre’s supplier.  In respect of the first sale in the chain, by Technologz to Wireless, there is only an invoice from Technologz to Wireless.  The next document is a sales invoice from Wireless to Connect. Sceptre’s own purchase order to Coracle simply says “white/black”.  Coracle’s invoice and release note to Sceptre show “1,896 black and 389 white”, as does Sceptre’s invoice to ASAP.  However ASAP’s purchase order shows “1,789 black, 386 white”, which equals 2,175 pieces.  Sceptre released 2,175 pieces “white/black” but on 11 July issued a credit note in respect of 110 pieces which were said to be ‘not available’.  There are various inspection reports from Forward all dated 7 July 2006.  They give details of damaged boxes and removed labels.  There is an additional inspection sheet from Forward dated 10 July 2007 in relation to 110 black pieces.  Various release notes were produced by Forward to Officer Williams dated 7 July 2006, Sceptre’s release note to ASAP is untimed, as is Coracle’s to Sceptre.  Culmain’s to Coracle is timed at 15.54, Maximise’s to Culmain is timed at 16.06 and Connect’s to Maximise is also timed at 16.06.  It can be seen that Culmain released the goods to Coracle twelve minutes before the goods were released to them. There is a release note apparently relating to the same goods from a company called Switch Tower (“Switch”) in Poland to Connect on 7 July, but no release note from either Wireless or Technologz, who are the two parties above Connect in the chain.  There is no other evidence of a purchase by Connect from Switch.  Enquiries of the Polish authorities revealed that Switch had not traded from its business address for 7 months prior to this date, i.e. since 19 December 2005.  Sceptre alleges that there is no supply to or by Technologz, the alleged defaulter, and no evidence of a tax loss. 

 

(b) Other release notes show 2,175 units of the some consignment apparently being released to Switch by a Maltese company, Bruins Consortium Ltd (“Bruins”) on 7 July and, curiously, the same goods being released to Bruins by Facet Trading (“Facet”) in Holland on the same date.  A release note from Facet dated 11 July 2006 requests the release of 999 units of the same consignment to Imanse (in France). Three CMRs were also provided by Forward, all are dated 7 July 2006 and timed at 1300 hours.  The first two are both for the movement of goods from L&A Freight BV in Holland to Forward using a Spanish transporter.  The first consignment consists of 1,000 units from Facet to Imanse in France.  The second is for 730 units from Facet to be consigned to Bruins in Malta.  The third CMR is for movement of 1,555 pieces of electronic goods between Mitt Rotterdam BV (“Mitt”) (Holland) and Forward using the same Spanish transporter.  Mitt is the transport company referred to on Sceptre’s release note for the goods it sold to ASAP. 

 

(c) A document from Wireless dated 10 July 2006 gives instructions for payments to be made in the following amounts: £2,072.70 to Wireless itself, £10,606.05 to a company called OPM Trading Ltd in Dubai and £318,771.50 to Bruins.  There is no evidence as to whom this instruction is issued. Enquiries from Maltese authorities about Bruins revealed that it had been deregistered on 1 August 2007 because it was not established in Malta, no operations being conducted from the premises and no VAT returns were submitted.  The only director was a British citizen called Harold Bandoh who had a London address.  It traded in CPU’s, mobile phones, iPods, computer parts etc.  Documents provided showed the company’s suppliers as, inter alia, Facet, Ecodia (Portugal), ASAP and Sumo (Germany).  Its clients included Facet and Switch.  Information from the Austrian authorities showed that ASAP (Sceptre’s client) sold the goods on in part to Sumo in Germany and in part to Ecodia in Portugal.

 

(d) Officer Williams gave the same evidence as in relation to the earlier deal, Deal 2,  as to there being the use of a device which was commonly used in MTIC cases.  Again he was not challenged as to this.  The evidence of connections between Bruins and ASAP, Switch, Facet and Ecodia is evidence of contrivance in relation to this deal, which supports the conclusion that the whole deal is tainted with fraud.  In his closing submissions Mr Popplewell submitted that Technologz was not carrying on a business and therefore any loss to the Commissioners was not a value added tax loss.  In his witness statement John Cordwell, the officer investigating Technologz, gave it as his opinion that Technologz was not trading, and he had denied the company the right to claim input tax.  Mr Cordwell had issued an assessment in the sum of £305,342.44 on 11 July 2006 against Technologz, based on information from Wireless showing gross sales to it in June 2006 of £2,050,156.44.  Evidence of further sales to Wireless in July 2006 showed gross sales of £3,110,006.18.  The total sum owing by the company to the Commissioners by September 2006 was £1,337,011.90, of which £42,146.83 relates to Technologz’ purported sale to Wireless.  Technologz did not pay or appeal the assessment.  The Company was deregistered for VAT and wound up on 23 May 2007.

 

(e) It was Mr Cordwell’s opinion that Technologz was a blocker trader whose purpose was to make it difficult for HMRC to trace the goods.  We accept that this is the case, given the clear evidence of contrivance set out above, the only purpose of which can be to evade payment of tax.  Both the invoice from Technologz to Wireless and the invoice from Wireless to Connect show a VAT element, as do all the invoices down the line.  We conclude that these documents represent an attempt to defraud the Commissioners, and the fact that Technologz has not paid over to the Commissioners the VAT represented on its invoice causes a debt to the Crown to crystallise, and therefore a tax loss to the Commissioners.

 

Deal 5

 

(a) With regard to Deal 5, which concerns the sale of Intel Pentium 4s on 12/13 July 2006, Sceptre submits that there is no supply to or by the alleged defaulter, UR, and no evidence of a tax loss.  It is Sceptre’s case that the goods entered the chain lower down at Bluestar trading which is buffer 3 in the chain shown at Annex 1.  For this, as in respect of Deal 3, Sceptre relies on the release notes. 

 

(b) The Commissioners’ case in relation to Deal 5 is evidenced by invoices and purchase orders.  The first purchase order is from Principle to UR, dated 13 July 2006, which mirrors an invoice from UR to Principle of the same date.  VAT of £59,454.55 is shown on that invoice.  The Commissioners, as in Deal 2, raised an assessment against UR in respect of the VAT which had not been paid, and that assessment was neither paid nor appealed.  All mail to UR was marked ‘return to sender’.  Deal 5 concerns 2,005 Intel P4s bought on 12 July by Sceptre, from Grandbyte who bought from Tradex. The documents relating to those transactions, and also to Sceptre’s onward sale to Solid, are dated 12 July 2006, but all the documents relating to earlier companies in the deal chain show that they bought and sold the goods on 13 July.  Sceptre instructed its bank to make payment to Grandbyte at 15.30 on 12 July.  That payment was released at 10.45am on 13 July. 

 

(c) Sceptre’s release note to Solid is dated 12 July, the transport company used is L&A.  Grandbyte, however, did not release the goods to Sceptre until 16.40 on 13 July.  Tradex released them to Grandbyte on 13 July, and Bluestar also released the goods to Tradex on 13 July.  A release note from Imanse timed at 12.12 on 13 July released the goods to Bluestar, the goods having been released to it by a company called OHM Traders in Germany at 13.07 on 13 July, that is 55 minutes after Imanse had released the goods to Bluestar.  It appears that Sceptre released the goods on the day before the goods were released to it.  An inspection sheet from Forward dated 13 July shows 222 boxes, with damaged outer and 80 with damaged inner.  A CMR from Mitt in Holland shows goods moving to Forward received by Forward at 10.25 on 13 July.  A second CMR shows goods moving from Sceptre, ℅ Forward, to L&A Freight in Holland also on 13 July.  Officer Williams queried why the goods would travel from Holland to the United Kingdom and back to Holland on the same day.  No explanation for this was ever given. 

 

(d) Mr Rayer’s evidence about the timing of this deal was that it was concluded on 13 July.  Sceptre’s invoice dated 12 July was its ‘commercial’ invoice which goes to its customer, and for its own purposes there was an internal invoice which was dated 13 July 2006.  He maintained that Sceptre could not have issued the release note on 12 July because it contained information which was not available to Sceptre until receipt of an e-mail from L&A Freight dated 13 July and timed at 14.01.  He claimed to have received an inspection report from Grandbyte before he released payment to them.  This was not the report relied on by the Commissioners, which was timed at 14.26, but another similar one which does not show the time of the fax.  It is a curious fact that the timed fax only differs from the untimed one in that in the former the goods described are SL7Z9s, whereas in the latter they are described as SL7Z8s.  The consignment number is identical, as are the detailed notes describing the damage, and the number of damaged boxes is identical, this cannot be a coincidence.  As with Deal 2, Mr Rayer’s evidence regarding whether the goods were SL7Z9s or SL7Z8s was that he “did not have any worries about the goods because we bought Intel retail 630 processors and that is what was supplied to us …” Later he said: “We were happy to receive either variant of it”.  However, as his release order refers to SL7Z9s, that itself is evidence that the inspection report relied was the one timed at 14.26, and not the untimed one Mr Rayer claimed to have relied on.  Given that Grandbyte’s release note to Sceptre describes the goods as ‘SL7Z9s’ and the CMR describes the goods sent by Sceptre as ‘SL7Z9s’, and all Sceptre’s other documents are silent on this point of description, we find that Sceptre did not receive the untimed fax as claimed.  It was Mr Rayer’s evidence that Sceptre never received day to day paperwork from Forward.  He had not complained to Grandbyte about the paperwork in either Deal 5 or Deal 2. 

 

(e) Documents provided to the Commissioners from the Dutch authorities included CMRs, invoices (including Sceptre’s) and transport details.  The goods Sceptre sold to Solid were split by Solid into two consignments; one consignment of 1,000 units was sold to a company called Bijlage International Technology Trading SRL (“ITT”) in Italy and the other 1,000 units were sold to Platinum in the United Kingdom.  Platinum then sold their 1,000 units on to Ordin Informat SL in Spain.  The CMRs do not show the goods re-entering the UK and it would appear that the goods sold to Platinum went directly to Spain from Holland. 

 

(f) The absence of release notes to the parties above Bluestar we do not regard as fatal to the Commissioners’ case.  As before, the subsequent dealings with the goods and the conflicting times and dates show the artificiality of the dealings in these goods and constitute evidence of fraud.

Deal 7

 

(a). This deal concerns 3,200 Maxtor Hard Disks sold on 19 July 2006.  In respect of Deal 7 Sceptre submits that there is no paperwork linking Simply Connect Ltd (“Simply”) (the first buffer) with Imang Ltd (“Imang”) (the alleged second buffer).  Sceptre disputes that Kaymore is a defaulter and that there is evidence of fraud.  The Commissioners accept that the paper trail in relation to the deal is incomplete inasmuch as they have not been able to obtain a purchase order, sales invoice or release note in respect of the sale by Simply to Imang.  They rely on Simply’s purchase order to Kaymore and Kaymore’s sales invoice, as well as Ultimate’s purchase order from Imang and Imang’s sales invoice.  They also rely on the evidence of Sarah Jane Barker, who was a specialist MTIC officer dealing with matters concerning Kaymore.  Kaymore is a missing trader who owes large sums of VAT and there is credible evidence of a considerable amount of trade conducted by Kaymore, including an invoice, a purchase order and a release note in respect of the Maxtors which are the subject of Deal 7.  The officer gave evidence of 35 transaction chains traced back to Kaymore confirming the release details of the goods, in all of them the chain went via Ultimate, Imang and Simply.  In all of them there was one further buffer between Ultimate and the broker, usually Bluestar or RS23.  Where the broker officer obtained paperwork from the freight forwarder it indicated that Imang released the goods direct to Ultimate, or to the next UK buffer in the chain.  A visit by the officer to Simply showed that it had traded only from 14 July to 11 August 2006.  Simply’s only customer was Imang.  Money due to Imang was routed to Kaymore.  Imang received commission, its only customer, Ultimate, paid Imang’s only supplier, Simply, but the bulk of the money was routed to Kaymore.  We therefore find on the balance of probabilities that Kaymore was a defaulter in this deal. There is credible evidence that Ultimate made third party payments.  It is also relevant that in respect of this deal Mr Rayer said:

 

“… the period of transaction took several days.  I know this because the goods were not available in the UK and were being imported from outside the UK into the UK before we could sell the product.  I was told the goods were in transit.  They were not in the UK at the moment.”

 

Deal 9

 

(a) Deal 9 relates to the sale of 2,000 Astra Semiconductors.  Sceptre contests that there has been a tax loss in Deal 9, or that there is a connection between the defaulter, EMS, and Sceptre in this deal.  The basis for the former point being that there is said to be no evidence for the supply by EMS to Connect, the first buffer.  The assessment raised by the Commissioners in respect of EMS is for £1,958,661.00 in the relevant period.  Mr Popplewell points to this being an output tax liability, and there being there being no evidence of failure to pay acquisition tax. 

 

(b) The director of EMS was a Mr Bhutta, who had had received a large number of visits from the Commissioners from 9 August 2006 onwards and who informed the officers of HMRC during one visit, that he had on occasion made third party payments, but he subsequently denied that.  He failed to produce his records to the Commissioners other than eventually providing some sales and purchase invoices on 12 December 2006.  All his purchases were from Papoose and all his sales were to Connect.  Mr Bhutta claimed to have made exports, but he could not remember to whom and there was no evidence of this.  Assessments were issued against EMS which were never paid.  The total tax loss identified by the Commissioners in respect of EMS was in excess of £1.9m in respect of the period 01/06/06 to 19/09/06.  Officer Marescaux, the officer investigating EMS, gave evidence that EMS through its director Mr Bhutta had contributed to a direct attack on the VAT system by means of fraudulent methods.  Not only had Mr Bhutta used his company to partake in an MTIC fraud whilst the company was registered for VAT, he continued to do so following the deregistration of the company.  The assessments issued were never paid nor appealed.  In relation to Deals 9 and 11 Mr Popplewell submitted that there was no evidence of a supply by EMS to Connect and therefore there was no output VAT due.  Similarly there was no evidence of failure to pay acquisition tax, there was no evidence of tax loss, and the assessments raised were for output tax.  Mr Black submitted that that argument was irrelevant, and a fraud committed by anyone down the line must properly be taken into account.  It was not necessary to identify precisely who was liable for the fraudulent loss of tax, provided that it was clear that there was such a loss.  We were referred to the Tribunal decision in the case of A One Distribution Ltd where, in a case which was similarly dealing with EMS as the defaulter, it was said at paragraph 24:

 

“… whatever the truth it was certainly the case that no VAT had been accounted for by any of Tamlex, Papoose or EMS in relation to Deal 3 goods; if therefore Papoose was the party initially liable for the VAT, it had not paid it, and Mr Bhutta never even denied that EMS was the defaulter in relation to the relevant goods.  On the reasoning that it seems reasonable to suppose that no VAT invoice had been provided by Papoose to EMS, and that EMS had not even sought to establish any secondary basis for claiming a deduction for input tax, it appeared that one or other, or both, of Papoose and EMS had failed to pay VAT, both seemingly fraudulently.”

 

The Commissioners in the present case also relied on the similar fact evidence in relation to all the other deals concerning EMS and its relations with Papoose and Connect to show that there was a tax loss and that tax loss was a fraudulent tax loss down the chain which was connected with Sceptre.

 

(c) The Commissioners have produced evidence from the freight forwarder, Tech Freight, which shows that the goods were released to EMS by Papoose in Slovakia to whom they had been released by a company called Tamlex Trading Ltd (“Tamlex”).  The Release Notes were collected by officers during a visit on 2 August 2006, after which the following chain details were recorded: “23/07/06: 2,000X Semiconductors:  Tamlex – Papoose – EMS – Connect Communications – Maximise Services – Culmain  - Coracle Ventures – Sceptre Services – ASAP Trading GmbH.”  There is an invoice from Connect to Maximise, and a corresponding purchase order from Maximise to Connect.  There are similar invoices and purchase orders all down the chain to ASAP.

 

(d) In the above circumstances, and given that EMS is the defaulter in Deals 4 and 6, and also in Deals 8 and 10-17 where the supply chain is identical to that in Deal 9, we regard it as more probable than not that EMS was a defaulter in Deal 9 and was the supplier to Connect and ultimately to Sceptre in this deal. 

 

Deal 11

 

(a) This deal concerns the sale of 1,800 Astra ADCs on 1 August 2006.  Sceptre challenges the connection between the defaulter EMS and Sceptre, there being no invoices or release notes between it and the first buffer and also contends that there has been no tax loss, there being no evidence of the supply by EMS to Connect so no output VAT would have been due.

 

(b) There is an e-mail release note from Tamlex to Tech Freight relating to the release of the goods by Tamlex to Papoose.  A visit report by officers of the Commissioners on 8 August 2006 provides evidence of the acquisition of the goods by EMS from Papoose, as does a Papoose release notice.  The position is similar in Deals 12 and 13, which are uncontested by Sceptre, where the visit report and a Papoose release notice evidence the acquisition of the goods by EMS from Papoose.

 

(c) The Commissioners rely on there being full documentation of all the links in the chain from Connect onwards, and on the visit report to Tech Freight Ltd on 8 August 2006 which states inter alia:

 

“Entered premises and met with SH.  SH provided copy paperwork for some recent deals.  … Took copies of various documents.  … On returning to the office the paperwork was examined as follows: … 01/08/06: 18,000 x ADC Semiconductors Papoose SRO – EMS  Marketing – Connect Communications Ltd – Maximise [sic] Services Ltd (MSL) – Culmain Ltd – Coracle Ventures Ltd – Sceptre Services Ltd.”

 

They also rely on a release note from Papoose as evidence of the release of the relevant goods to EMS.  That note is dated 1 August 2006 and its goods are described as seven boxes of “IC ASI 124775-BGAs” and three boxes “A/B converter Astra ADC 500A 819s”.  These descriptions correspond with the goods released to Sceptre by Coracle on 1 August 2006, and are evidenced by a Release Notice from Coracle.  The Commissioners also rely on a Release Allocation by EMS dated 1 August 2006 instructing Tech Freight to release identical goods to Connect.

 

(d) The Commissioners also rely on evidence contained in their electronic folder for Connect. This is a monthly trader listing compiled either by information from the trader or from the relevant officer who will have collected it from the company’s invoice.  The supplier’s name is on the list and the goods supplied in the middle.  In this case EMS is shown as having supplied 2,800 Astra Semiconductors on 1 August 2006.  Connect’s customer is shown as Maximise.  The document contains relevant references in respect of all the deals 10 to 17.

 

(e). A schedule produced by Officer Marescaux gave a description of the goods which were the subject of both deals 10 and 11 as “IC Semiconductor AS/124775-BGA”, whereas in fact Deal 11 only concerned products described as “IC Astra ADC 500A819”.  We regard this as simply an error.  Both Deals 10 and 11 took place on 1 August 2006.  Officer Marescaux was not challenged on this point in cross-examination.  He gave evidence which we accept that his investigations into the trading activities of EMS had established a tax liability to the Commissioners of £1,647,412.83.  The goods referred to in the document dated 1 August 2006 were included in that assessment. We accept that the Commissioners have established, on the balance of probabilities, that there was a tax loss arising in relation to deal 11 and its connection with Sceptre.

 

(f) Mr Black, in respect of this deal, and the other deals where the Commissioners’ evidence is challenged, referred the Tribunal to the case of Red 12 where at paragraph 109 Christopher Clarke J said:

 

“Examining individual transactions on their merit does not … require them to be regarded in isolation without regard to their dependent circumstances and context.  Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part … :”

 

Dr Findlay’s evidence

 

17. Dr Findlay is an independent consultant and an adviser to PriceWaterhouseCoopers (“PWC”) and other firms on electronics, semiconductors, IT and software markets and technologies.  He was formerly a director and founder member of PWC’s Global Technology Strategy Group.  He has an impressive CV, and has also worked as a software consultant and engineer. He has various publications to his name.  he has been a guest scientist in semiconductor research with the Siemans Global Technology Centre and has undertaken projects for Infineon semiconductors.  Dr Findlay was called as an expert witness.  He produced a comprehensive report of some 129 pages in the form of a witness statement, and he subsequently produced two further witness statements in reply to argument and documents provided by Mr Rayer.  After giving his evidence Dr Findlay was subsequently called back because Mr Rayer relied on arguments contained in two reports by KPMG which he produced at a later stage as to the size of the grey market in Intel P4s.  Despite extensive cross-examination, Dr Findlay did not change his original opinion or his evidence contained in those three witness statements which we summarise below under headings relating to the different products sold by Sceptre, namely Intel P4s, Maxtor Hard Disk, Astra ADCs and Astra ASI-Astra Semiconductors.  He did not give evidence in respect of the Apple iPods, the subject of Deals 1, 3-4 and 6, these not being in his area of expertise.

 

Intel P4s

 

18. The boxed retail Intel P4s are not used by large assemblers, being supplied directly by Intel or authorised dealers.  Dr Findlay’s evidence was that the volume of the Intel P4s sold by Sceptre was in excess of what he would expect from a company as small as Sceptre.  He gave the estimated total market value of the legitimate grey market of CPUs exported from the UK in 2006 as £1.9 billion, an average of approximately £134,000 per month. Sceptre sold approximately £230,000 worth of one specific Intel CPU in July 2006.  Dr Findlay considered the pricing and profit margins achieved by the buffers in the deal chains up to RS23 not to make commercial sense, the price mark-up of between £0.05 and £0.25 equating to a gross margin of between 0.07% and 0.37%.  There is an open market for Intel CPUs and therefore he found it surprising that none of them apparently knew the current market price – i.e. the price Sceptre was prepared to pay on the day.  Finally he considered that the buying and selling prices were remarkably low, as Sceptre would have known that they were some 25% below Intel’s list price.  He took account of the fact that it was not obvious what value Sceptre added to the deals and it was his opinion that the deal chains were not part of the legitimate grey market.

 

Sceptre’s attack on Dr Findlay re Intel

 

19. Mr Rayer attacked Dr Findlay’s evidence as to the size of the global electronic component market on the basis that Dr Findlay had failed to provide sufficient evidence of the data provided and had mis-used that evidence to provide a ‘suitable argument’, having started  with a result and then worked  backwards to make  the Commissioners’ case look more relevant. Mr Rayer in his third witness statement says: “For simplicity I will normally accept the accuracy of the percentages used in this table.  However Dr Findlay makes some fundamental omissions and errors in this table …”.  Further on, when talking about the proportion and amount of stock purchased on the grey market by authorised distributors, Mr Rayer says: “This is totally irrelevant and is leading any reader to a false conclusion by mis-using the information to provide a solution.”  Dealing specifically with Dr Findlay’s evidence as to whether the volume traded by Sceptre represented a reasonable market share in respect of the Intel P4s, Mr Rayer stated in his witness statement: “Based on Dr Findlay’s data and assumption the figures would appear correct.  However I have contested his ability to provide accurate information in the section on CPUs and he continues to be erroneous in this discussion on volume.  He has concocted a very dubious method to establish the legitimate grey market in the UK.  It appears he has been unable to obtain figures I have found from on-line sources and has ignored a complete sector which accounts for the majority of the sales, the OEM (original equipment manufacturer) market.”  On the same topic Mr Rayer stated: “The recorded figures are designed to confuse the Tribunal into believing that any trade from Sceptre, a small company, was not legitimate as it was a significant proportion of the average monthly turnover.”  We regard this attack as entirely inappropriate, attacking Dr Findlay’s integrity as it does.

 

20. Mr Rayer produced a report from KPMG that gives an estimate of the world’s grey market in hard disk drive storage as $1.83 billion.  Mr Rayer accepted Dr Findlay’s figure of the value of CPUs distributed in the UK as being £1,206,000.  However Dr Findlay is criticised for looking only at the United Kingdom grey market and not the global grey market, and for looking at the global market and then narrowing it down to the UK export market, and for dealing only with the size of the legitimate grey market. 

 

21. Dr Findlay examined the global electronic components distribution market in terms of three distinct groups in the supply chain: the component manufacturers, for example Texas Instruments, Intel, AMD, the assemblers (also called OEMs), for example Hewlett Packard, Dell, and the distributors, for example Parel and Avnet.  He referred in his first witness statement to assemblers, who are referred to in the two KPMG reports as Original Equipment Manufacturers (OEMs), a term also used by Mr Rayer.  Dr Findlay drew a clear distinction between the OEMs and component manufacturers, the component manufacturers having a relation with both the OEMs and the authorised distributors (ADs). The KPMG reports starts with OEMs, where as Dr Findlay deals with the component manufacturers, i.e. higher up the chain.  The KPMG reports look at the grey market for the output of the OEMs rather than the component manufacturers.  Sceptre is dealing with electronic components and therefore Dr Findlay was looking at the area more directly relevant to Sceptre’s services business.  The only electronic components looked at by Dr Findlay in his first witness statement are the CPUs, the Analog to Digital Converters (ADCs) and Hard Drive Disk (HDD) being those components in which Sceptre was dealing. 

 

22. Mr Rayer makes two very specific criticisms of Dr Findlay’s report.  The first major criticism is that Dr Findlay underestimated the size of the grey market in Intel P4s by denying that they entered via the OEMs and had restricted that market to 2.6% of the global market which enters direct from Intel, rather than countenancing the possibility that the P4s entered the UK from other jurisdictions.  This criticism is based on the KPMG report.  Dr Findlay in evidence informed us that the KPMG report concerned a different market and was not relevant, but nonetheless it gave a figure of 7%-8% as the proportion of trading in the grey market in the larger area it was dealing with, which was close to Dr Findlay’s own figure of 6% for the grey market in CPUs, which was a subject of the IT market.  He had limited his own report to the UK market because Sceptre was buying in the UK market and selling abroad, and it was therefore the UK export market which should be considered.  Sceptre’s second major criticism of Dr Findlay’s evidence was that Sceptre had been aware that Intel was flooding the market with P4s at the time, a fact which was known at that time to Mr Rayer, because AMD was about to put dual core processors on the market, as was Intel.  Mr Rayer gave evidence that he did not check Intel prices on the Intel website, his method of pricing was as follows: “The customer comes to us with an indicative price, a price that they have either purchased at or around previously … or where they can sell on to their customer and make a profit themselves so the customer in this instance would come to us with a price and we would have to make certain that

we would purchase and make a profit, as you have quite rightly said, to make it commercially viable for us.”  Mr Rayer claimed that everybody knew that Intel was flooding the market, yet when he was asked whether Dr Findlay had taken that into account, having initially said he did not know whether or not he had, he then said he did not think Dr Findlay had taken that into account. This was not a matter put to Dr Findlay.  Not only would Mr Rayer not look at the Internet for the day’s prices, but in a witness statement he had said: “I would contact my supplier network and ask the question, ‘Do you have any indication of today’s prices on a range of products?’”  Mr Rayer’s method of finding prices, namely either to ask his would be purchaser or his supplier rather than making any independent check, causes us to prefer Dr Findlay’s evidence on the prices available, despite his not having checked on the ‘way back’ archive when he compiled his report on the cost of Intel P4s in 2006.

 

23. We do not accept Mr Rayer’s many criticisms of Dr Findlay’s evidence. Dr Findlay’s second witness statement refuted those arguments set out in Mr Rayer’s witness statement and in his evidence to the Tribunal Dr Findlay himself comprehensively refuted Mr Rayer’s argument based on the two KPMG reports dated 2002 and 2008 which had been produced by Mr Rayer.  We found Dr Findlay to be a thorough and competent witness whose evidence we prefer to that of Mr Rayer, not least because of Dr Findlay’s extensive knowledge of the industry compared with Mr Rayer’s comparatively recent start in trading in the field. 

 

Maxtor Hard Disk-80 GB (“Maxtor”)

 

24. Sceptre only traded in Maxtors in Deal 7.  Dr Findlay accepted that the products could be fully identified from the description on the purchase orders and the invoices, and the buying and selling prices are not criticised, although the selling price by Sceptre was lower than the retail price.  His criticism was that the amount of revenue earned by Sceptre in July showed an excessive market share of the legitimate grey export market of these products from the UK.  He considered this to be indicative of the fact that Sceptre was not dealing in the legitimate grey market.  The figures he gave were that £1.0 million hard drives were exported from the UK in 2006, of which Maxtor had a 9.5% share, which equals £95,000.  There was therefore an available market of approximately £7,900 per month.  Sceptre, in its one deal in July 2006 had apparently achieved a market share of 8.79%. Sceptre had made a mark-up of only 9p.  It was Mr Rayer’s evidence that this was caused by a delay of 24 hours in the purchase of the goods by Grandbyte, Sceptre’s supplier.  The effect of the delay was to change the price of the product agreed with the customer, because of a change in exchange rates.  In his evidence in chief Mr Rayer had said in respect of the delay: “I know this because the goods were not available in the UK and were being imported from outside of the UK into the UK before we could actually sell the product.  I was told that the goods were in transit.  They were not in the UK at the moment.” Because of the low profit, Sceptre only carried out this one trade in Maxtors.  We accept Dr Findlay’s evidence that it is highly improbable that Sceptre was dealing in the legitimate grey market as it claimed.

Astra ADCs

 

25. Astra ADCs were sold by Sceptre in Deals 11, 13, 15 and 16.  ADCs are an example of a semiconductor. ‘Semiconductor’ is a general term referring to electronic components that have a resistivity value between that of a conductor and an insulator. Semiconductors are used in, amongst other things, radios, computers and telephones.  ADCs are a form of semiconductor and are devices which convert analogue electrical signals into a digital format suitable for processing by a Central Processing Unit (“CPUs”) or a Digital Signal Processor.  Dr Findlay in respect of the product described by Sceptre came to the conclusion that: “The Astra ADC is so obscure as to be impossible to price with any certainty”.  He considered the product description wholly inadequate to identify a unique product.  He had made an extensive search of the internet, including searching several industry-standard component inventory databases and general Internet search agents.  He was completely unable to identify the specific product allegedly traded in by Sceptre.  He considered the product specification given wholly inadequate, it partially matched 281 components from several manufacturers but it was impossible to identify the component with any precision.  No technical information could be found for it, which meant that the component was essentially unusable in an assembly operation, and it was impossible to set a price with an acceptable degree of commercial risk.  The global market for ADCs is large, but Sceptre was not trading in standard ADCs, which typically cost £1 each.  The ADCs on the invoices were purchased by Sceptre for £134 each, suggesting they were some of the most sophisticated ADCs in the marketplace.  Dr Findlay concluded that, given the price, the market for such exotic ADCs was a tiny fraction of the overall market, putting into doubt the reasonableness of the volumes traded.  It was also Dr Findlay’s evidence that the situation in 2006 was no different in terms of scale from today.  It was Dr Findlay’s conclusion in his oral evidence that the items as described did not exist.  We accept that conclusion.

 

Astra semiconductor ASI (“Astra ASIs”)

 

26. Astra ASIs were traded by Sceptre in Deals 8-10, 12, 14 and 17.  Dr Findlay, in his first report, concluded that, despite extensive research, he was unable to identify the company ‘Astra Semiconductors’.  The product description he concluded was wholly inadequate to identify a unique product.  He identified 34 products with a partially-matching description which varied in price from $31.10 to $154.65, he therefore concluded that Sceptre could not have known the market rate for the product it was proposing buying and selling.  Having come to the above conclusions, Dr Findlay investigated the possibility that the Astra ASIs were custom-designed for a specific assembler.  He concluded that this was highly unlikely as such a private market is contradicted by the fact that the Astra ASIs were traded through five companies which implied an open market.  He also considered the possibility that they could be a niche product, but this was contradicted by the fact of there being no data sheet supplied from which it may be inferred that the end assembler cannot use the product, and, as before, it was traded through five companies.  Sceptre could not have believed that they were part of the private market (i.e. custom-designed for a specific assembler) because, if that were the case, the product would have been traded direct from the manufacturer to the assembler. 

 

27. Mr Rayer’s evidence was that he had initially been contacted by a Mr Wolfgange Seher of ASAP, a company with which he had previously traded, who asked if Sceptre could provide Astra ASIs.  Sceptre had not traded in the product previously.  In his witness statement Mr Rayer claimed to have asked many questions of Mr Seher and said he would have to undertake research into the product.  He continued: “In due course we checked online and spoke at length to Coracle”.  However, in cross-examination in relation to Coracle and in direct conflict with his witness statement he said: “We discussed it briefly, the nature of the product, with them”.  No relevant documents were  provided by ASAP.  The product was described by Mr Seher simply as ‘ASI’, according to Mr Rayer.  Mr Rayer’s main concern appears to have been the packaging which he referred to frequently in his evidence, stating in terms: “Our initial concern was the packaging”, and later: “… the most important thing to me was how the product was handled, how it was packaged …”.  Mr Rayer claimed to have contacted several of his previous suppliers, including Culmain, about obtaining the product, but he did not purchase any Astra ASIs  from Culmain.  This is surprising, as in all the deals he was supplied by Coracle who, in its turn, was always supplied by Culmain.  Coracle had provided Sceptre with various documents purporting to relate to the Astra ASIs, including two brochures, a technical brief and a set of photographs.  At no time did Mr Rayer make any checks online as to the nature of the product, but he claims to have asked the freight forwarder, Techfreight, about the product and claimed he was informed inter alia that the transaction chains were not large, stock was available and the product came in sealed boxes due to the fact that exposure to moisture would damage it.  When asked what ‘not large’ meant in terms of the chain, Mr Rayer said it would have been under ten. 

 

28. The two brochures provided to Sceptre related to one company called AMI and (apparently) to one called Astra.  They were described by Dr Findlay as follows:

 

“The content of the AMI brochure and the Astra brochure is in most respects identical, save where references to AMI Semiconductor had been substituted with references to Astra Semiconductor.  AMI Semiconductor is now a subsidiary of ON Semiconductor, a NASDAQ-listed semiconductor manufacturer … .

 

“Both documents are generic in nature, describing products and manufacturing facilities, and do not contain any specific information relating to the products which were traded by the Appellant. Importantly it does not contain technical information sufficient to allow an engineer to utilise the products … insofar as the Appellant thought the Astra brochure to be genuine, it is of almost no use in determining either the technical properties of the product or an appropriate price.”

 

 

There is no reason to doubt that the AMI brochure is genuine.  AMI is a Belgium-based company with its corporate headquarters in Idaho, USA.  The brochure contains both a photograph of AMI’s premises in Oudenaarde, Belgium and one of its headquarters in Pocatello, Idaho.  The Astra brochure carries identical photographs, but the former photograph purports to be of its (Astra’s) headquarters in Hong Kong and the latter is simply labelled ‘Shenzhen, China’.  In the Astra brochure references to the Astra Semiconductor are substituted for those to the AMI Semiconductor. Unlike the AMI brochure, the Astra brochure contains no contact details.  It refers to having a ‘sort and test facility’ in Malta.  It was the opinion of Allan Coughlin of the School of Engineering at Cardiff University that the duplication of the pictorial information in relation to the headquarters and the implied manufacturing/research facility cast doubt on the credibility of the Astra Semiconductor brochure.

 

29. With regard to the ‘Astra Technical Brief’ provided Sceptre, Dr Findlay says as follows:

 

“The technical brief is not product specific (most categories of semiconductors such as CPUs, Digital Sound Processors and memory to be affected depending on the specific form of packaging used) and nor is it manufacturer specific.  This means that the document, while helpful to those who anticipate physically handling and storing semiconductors, is of almost no use to those planning to simply trade in semiconductors.  It is of almost no use in determining either the technical properties of the product or an appropriate price.

 

“Despite the Astra Technical Brief bearing an Astra Semiconductor company logo in the header, another company, Intersil, is referred to within the text.  Entering the search phrase (based on the document title) ‘Intersil guidelines surface mount devices’ into internet search engine Google, returns a link to an Intersil document as the top search result.  I discovered that this Intersil document … contains text, tables and diagrams identical to and exactly as they appear in the Astra Technical Brief, except that the Intersil company logo is substituted for an Astra Semiconductor logo and for three other minor variations.”

 

Dr Findlay notes that Intersil are manufacturers of high performance analog integrated circuits, listed on the NASDAQ Stock Exchange.

 

30. Mr Rayer had produced a letter which he himself had written to Mr David Phillips, an officer of the Commissioners.  This letter was written on 7 August 2007 and is a reply to a letter written to him by Mr Phillips on 3 August 2007.  In that letter Mr Rayer said that Sceptre: “believed that the Astra Semiconductors brand of semiconductors were merely rebranded and repackaged versions of another manufacturer’s devices.  Upon further investigation we have discovered that the ASI 124775-BGA is a rebranded version of Texas Instruments’ part number TMS320 C6412-600.”  He provided Mr Phillips with a large number of documents. Mr Coughlin, having seen the documents and the letter, accepted that Texas Instruments did license distribution of its components to local distributors, but stated that “the Texas Instruments part number always appears intact upon the component package itself.  This ensures traceability of the device manufacturers and thus the function of the device can always be determined.  This does not appear to be the case with the goods described on the invoice … and therefore the Astra Semiconductor products described on that document lack credibility.”

 

31. Dr Findlay was also asked to comment on Mr Rayer’s letter and the documents.  Dr Findlay concluded that whilst that letter did refer to an actual data manual which had the potential to be most helpful, it was ultimately irrelevant since it referred to a Texas Instruments data manual.  The implication was that the Astra products were actually Texas Instruments products which he concluded could not be the case, since Texas Instruments, to his knowledge, did not allow their products to be resold under a different name. 

 

32. Mr Rayer relied on the fact that not only were there photographs of the alleged product, but that officers of the Commissioners had visited the freight forwarders and had seen the product.  This however is not the case.  What the officers had seen were packages which purported to be Astra ASIs, but which they were not able to look at because they were told that, if the packages were opened, they would be useless because damp would spoil them.  One of the photographs produced of the packaged product had in large capitals the word ‘Malta’ stamped on it.  Whilst Dr Findlay had not checked whether or not there was a semiconductor plant in Malta, he did not believe that it was the case.

 

Evidence in respect of the uncontested deals

 

33. In respect of Deal 1 the Commissioners provided evidence of trading prior to the sale by the defaulter, SNC, in the form of a release notice relating to the purported release of the goods by a company called T K Components Ltd to another company called Switch and a further release notice relating to the purported release of the goods by Switch to the alleged defaulting trader, SNC. Officer Williams, the officer who conducted the extended verification of Sceptre’s deals, received information from the Dutch authorities regarding the onward supply of goods in Deal 1.  That evidence consisted of copy invoices and details of payment and also details of transport in the form of CMRs.  From this it appears that the goods were sold by Sceptre to Solid in Holland.  Solid then sold the goods on to Platinum Components in the United Kingdom.  This was done on two separate invoices, although evidence from Barclays Business Master shows that Platinum paid Solid, who sold the goods in one amount, two separate payments, as per the invoices.  Platinum sold the goods on to Sumo Computer GmbH in Germany, again on two separate invoices.  The freight forwarder used in this deal was L A Freight.  Officer Williams produced the CMRs showing that goods were shipped from Holland to the UK on 3 July 2006.  From this it appears that there is circularity in the trading of these goods because Officer Williams also holds evidence that the goods had been sold from the UK to Holland, back to the UK and then onwards to Germany.

 

34. In relation to Deal 4, the chain details noted from documents collected on a visit by officers of the Commissioners on 2 August 2006 include details of the acquisition of 755 iPod Nanos by the alleged defaulting trader, EMS from Switch, and of the acquisition of 2,500 iPod Nanos by Papoose from Ecodia and their onward sale to EMS.  As regards the acquisition of the 755 iPod Nanos by EMS from Switch, there is also a Switch release notice.  In addition, there is an EMS purchase order and a Papoose sales invoice relating to purchase by EMS of 755 iPod Nanos and as well as an EMS purchase order in relation to the purchase by EMS of 2,500 iPod Nanos.  There are also third party payment instructions addressed by Papoose to EMS.  With regard to Deal 6 the chain details noted from documents collected on the visit of 2 August 2006 evidence the sale of the goods by Ecodia to Bruins, by Bruins to Papoose and by Papoose to EMS.  There is also an EMS purchase order, a Papoose invoice, third party payment instructions issued to EMS by Papoose and a Papoose release note.

 

35. The documents relating to Deal 8 include chain details noted from documents collected on the visit of 2 August 2006 which appear to evidence the acquisition of the goods by EMS from Papoose.  There is also an EMS purchase order, a Papoose invoice and a Papoose release notice.

36. In Deal 14, where there is an e-mail release notice relating to the release of the goods by Tamlex to Papoose and where the sale of the goods by Papoose to EMS is evidenced by the visit report and a Papoose release notice. 

 

37. In relation to Deal 15 there is an e-mail release notice from Tamlex to Tech Freight relating to the acquisition of the goods by Papoose from Tamlex whilst the acquisition of the goods by EMS from Papoose is evidenced by the visit report and a Papoose release notice.  With regard to Deal 16 the sale of the goods by Papoose to EMS is evidenced by the visit report of the officers of the Commissioners on 17 August 2006 and a Papoose release notice.  In relation to Deal 17 the acquisition of the goods by EMS from Papoose is evidenced by the visit report of officers to Tech Freight on 8 August 2006.  There is a notebook entry, an EMS purchase order and a Papoose release notice.

 

Sceptre’s share of the profits

 

38. On closer analysis it appears that whilst Sceptre did make a healthy profit on Deals 1, 3, 4 and 6, Culmain (who supplied Coracle, Sceptre’s supplier in Deals 1, 3 and 4) also made a profit greater than that made by Coracle and in the case of Deal 4 made a profit of £5.50 whereas Sceptre’s profit on that deal was £3.60.  Similarly in Deal 6 Culmain (who supplied Sceptre directly) made a profit of £5, which was nearly as great as Sceptre’s profit of £5.79. Deal 4 concerned the sale of 2,365 iPods.  Apart from Culmain, all the buffers in the above chains made profits of between 20p and 25p only.  Deal 7 concerned the sale of Maxtor hard disks, and in it Sceptre made a profit of just 9p per unit, whereas its supplier, Grandbyte made a profit of 15p per unit, and Grandbyte’s supplier, RS23, made a profit of 25p per unit.  The suppliers above RS23 made a profit of 5p per unit.  (We note Mr Rayer’s explanation for Sceptre’s low profit set out at paragraph 34).  With regard to Deals 11, 13, 15 and 16, which concern Astra ADCs, Sceptre made a minimum of £3.33 profit and a maximum of £3.89 (Deal 16).  Culmain however, which is the immediate supplier to Coracle, Sceptre’s supplier, made a maximum profit as follows: Deal 11 £5, Deal 13 £5.13, Deal 15 £5, Deal 16 £4.90.  In Deals 8 to 12, 14 and 17, concerning Astra semiconductors, a consistent profit of 50p was made by Coracle who supplied Sceptre.  The buffers make profits varying between 10p and 20p. Sceptre made profits ranging between £1.91 and £2.12, whereas again Culmain made the greatest profit of between £2.75 and £3.50.  The remaining deals, Deals 2 and 5, concern Intel P4s.  In Deal 2 Grandbyte supplied Sceptre making a profit of £3 per unit, Sceptre made a profit of £4.49 on its supply to Square.  In Deal 5 Tradex supplied Grandbyte making a profit of £1, Grandbyte made a profit of £1.50 per unit on its sale to Sceptre, Sceptre made a profit of £2.99 on its sale to Solid.  It is therefore clear that, whilst overall it was making high profits,  Sceptre was not making the highest profit on all of the deals, and that, given that as broker it was having to fund the exporting of the goods, in some cases it was making a surprisingly low profit.

 

Mr Rayer’s evidence as to Sceptre’s trading methods

 

39. Mr Rayer produced three very lengthy witness statements and gave evidence which extended over a period of several days. 

 

40. In 1998 Mr Rayer had met a Dilwyn Williams (“Dr Williams”) an engineer who had obtained a doctorate in fluid dynamics from Cardiff University.  They became friends and subsequently did business together.  Dr Williams is the owner/director of two companies: Coracle Ventures Ltd (“Coracle”) and P L Ventures Ltd (“PL”), both of whom became suppliers to, and customers of, Sceptre in about 2002.  A Mr Richard Griffiths, a fellow director of both Coracle and PL, rented office space from Rayers Holdings Ltd at 4 Bessimer Road Cardiff, Sceptre’s place of business.  In all but three of the seventeen deals the subject of this appeal, Coracle was Sceptre’s supplier.  In a further deal, originally included as Deal 18, which was subsequently not pursued by the Commissioners as Sceptre was acting as a buffer and not a broker in that deal, Sceptre had on 8 August purchased goods from Coracle and sold them on to BCG, Mr Charles’ company.  Mr Rayer’s diary in relation to a transaction by Sceptre on 9 February 2006 showed that the transaction concerned Intel P4 CPUs which were supplied to Sceptre by Culmain and sold on by Sceptre to Coracle.  Mr Rayer’s diary entry refers to the fact that Sceptre was buying the goods from Culmain at a unit price of £88.25 and selling them on to Coracle at a unit price of £89.25.  It makes abundantly clear that Mr Rayer knew at the time that the goods were going to be sold on by Coracle to Solid at a unit price of €135. 

 

41. Mr Rayer explained the times when Sceptre had acted as a buffer, where it would make less profit, and not a broker, by the fact that Sceptre only wished to carry out a certain level of trade each month and therefore it was only at the end of a tax period that it would act as a buffer.  However we note that this was not the case in respect of the deal referred to as Deal 18 above, which took place on 8 August. 

 

42. In 2002 Mr Rayer had met a Mr Ian Charles (“Mr Charles”) in Cardiff where Mr Charles was working as an independent agent for a United States company, Boston Computer Group, an IT brokering company which had been set up in 1989.  Mr Charles had set up a branch office of the Boston Computer Group in Cardiff and had come to Sceptre for assistance in setting up online communications.  Mr Charles was described by Mr Rayer as a broker who facilitated deals between buyers and sellers.  After discussions with Mr Charles, Mr Rayer decided to use the income from the property retail arm of the business trade in computer products.  From 26 May 2005 Mr Charles had registered his own company, called Boston Computer Group, Europe (“BCG”) for United Kingdom VAT.  That company was based downstairs at Bessemer Road, Cardiff in the same building as Sceptre, a building owned by Rayers Holdings Ltd.  BCG became a client of Sceptre and also put Sceptre in touch with Mr Charles’ own established customers, for which he was paid a commission.  He introduced both Solid Storage Solutions (“Solid”) and also a woman called Nikki Wiley who later set up Square Trading (“Square”), both of whom became customers of Sceptre in the deal chains with which we are concerned.

 

43. Mr Rayer claimed that Sceptre only traded with a limited number of suppliers and customers because he liked to deal with people that he knew and trusted and he only dealt with established companies and suppliers, additionally he placed great reliance on the Redhill checks which he made.  He claimed to know none of the parties in the supply chains above Sceptre at the time Sceptre made the deals in question and was unaware of there being any fraud in any of the 17 deal chains.  Mr Rayer described himself as someone who was “technically-minded and up-to-date with product developments”.  Dr Williams and Mr Charles both used Sceptre’s fax machine. Mr Evans, Sceptre’s book-keeper, also acted as Mr Charles’ book-keeper. According to Mr Rayer there was no conflict of interest between BCG, Coracle and Sceptre and, although he seemed uncertain as to the exact meaning of the phrase, he claimed that all dealings between them were at arms length.

 

44. On 3 May 2005 Dr Williams had made a personal loan to Sceptre of £100,000.  In his first witness statement Mr Rayer described this as a loan from Coracle to Sceptre but he later accepted that the documents showed that the loan was in fact made by Dr Williams personally.  The loan itself was repaid in full by Sceptre on 20 May 2005.  Sceptre paid £11,350.06 to Coracle.  Coracle’s own accounts show an amount of £12,666 referred to as a ‘commission’ and described as interest on a loan from Coracle to Sceptre during the period of the loan, but there were no written document in respect of the loan, nor any fixed rate of interest agreed.  Mr Rayer was not able to comment on Dr Williams’ description in a document as to the rate of interest being 12%.  Documents provided by Sceptre to Coracle after the loan are dated 9 May 2005 and an Experian report re Rayers Holdings dated 23 May 2005 was supplied to Coracle on 1 June 2005.  Mr Rayer claimed that, prior to the loan, he had provided Dr Williams with profit and loss accounts, VAT reclaims and bank statements.  He did not accept that the later-supplied documents were simply to make the loan appear genuine.  He was unable adequately to explain the discrepancy in the amount paid by Sceptre and that shown in Coracle’s accounts.

 

45. From 15 July 2005 to 17 June 2006 Mr Rayer was a signatory to Coracle’s bank account, but he was not an officer of the company.  He was described by Dr Williams in a document as a ‘close and trusted partner’.  Dr Williams did not give evidence to the Tribunal.  Mr Rayer had become a signatory when Dr Williams went away on honeymoon and that power had not been cancelled upon his return because Dr Williams and Mr R Griffiths did not always have access to a fax machine, being away at clients’ sites.

 

46. Mr Rayer relied heavily on due diligence procedures which Sceptre carried out, and on his believing that officers of the Commissioners had endorsed those procedures.  This belief arose out of the very regular checks which were carried out by officer Williams on Sceptre prior to the commencement of the extended verification, and partly out of the fact that Mr Rayer had carried out any further specific procedures which had been suggested by officer Williams.  It also arose in part out of specific assurances as to the adequacy of his due diligence which he believed that he had been given by other officers, namely officers Allen and Wride.  There is a visit report following a visit on 15 January 2007 which records “due diligence was discussed, what practices he had.  It was agreed that their level of due diligence was good”.  A similar remark was recorded after a visit on 9 February 2007.  Apart from the checks on his suppliers and customers and Redhill which we set out below, the further matters of due diligence relied on by Sceptre are as follows:

 

(i) face to face meetings conducted with prospective customers;

(ii) that it did not trade with companies which offered products at significantly low market prices;

(iii) it rejected any goods whose box numbers it had traded before;

(iv) it made a conscious decision not to trade with a number of counterparties once it had discovered more about them;

(v) it made enquiries of the freight forwarders;

(vi) not all deals were proceeded with;

(vii) it did not grant credit;

(viii) references were obtained;

(ix) goods were physically inspected;

(x) goods were not released to customers until it was satisfied that payment had actually reached its bank account or instructions to make that payment had been identified to it.

 

47. Sceptre’s Suppliers and Customers

 

1. Coracle

 

We accept that Mr Rayer knew and trusted his principal supplier, Coracle, having a long standing personal relationship with Dr Williams and having, as set out above, been granted a £100,000 loan by Dr Williams in 2005.  However, an Experian “Limited Company Gold Report” dated 30 August 2005 gave Coracle a credit limit of £500, a credit rating of £500 and, inter alia, described it as an ‘above average risk company; should prove good for credit transactions to the limit assigned.  More significant dealings may require a director’s guarantee’.  Its net worth at 31 March 2004 was only £1,182, and it had been dormant for a period.  There was no evidence of any more up to date credit checks despite Mr Rayer’s claim to have made credit checks with regular updates.  Mr Rayer claimed that despite his friendship with Dr Williams, Dr Williams never discussed with Mr Rayer that he was trading with Culmain, and that he had not been given Culmain’s name as a supplier by Dr Williams.

 

2. Grandbyte

 

Mr Rayer had paid a visit to them in January 2005 and produced various documents and credit reports.  A Creditsafe report of 9 February 2005 gave Grandbyte a credit limit of only £750 and both its trading address and registered address were the home address of a Mr Solanki, the company’s director.  Mr Rayer’s claim to check conscientiously those he traded with are cast into doubt by the fact that a further Experian report of 2 June 2005 carried a risk warning; gave a credit limit of £0; a credit rating of zero; a ‘Commercial Delphi Score’ of 8 out of 100; a ‘Commercial Delphi Bond’ rating of maximum risk and failure odds of 3.7 to 1.  Its states “… all credit transactions should be supported by a director’s guarantee.”  There was however a slightly more favourable Experian report dated 9 January 2006 which gave credit limit of £1,100; a credit rating of £800; a Commercial Delphi Score of 50 out of 100; a Commercial Delphi Band of above average risk; failure odds of 18:1 and described it as an above average risk company and suggested a director’s guarantee for more significant dealings.

 

3. Culmain

 

Mr Rayer gave evidence that he became aware of Culmain because “one of our existing suppliers failed to remove the information about their supplier on a transmission to us … we asked questions in the industry about them … we looked into Culmain and approached them for information.”  As said above, he denied being introduced by Dr Williams of Coracle to Culmain, or knowing they were Coracle’s supplier.  However, the document exhibited by Mr Rayer included an undated letter of introduction from Culmain itself, received by Sceptre on 26 August 2005.  Sceptre also had a photocopy of the back page of the director’s passport; bank details; an Experian report dated 26 August 2005 and a Creditsafe report dated 19 April 2006.  In the Experian report Culmain is described as ‘dormant’ by reference to its accounts for the year ended 31 March 2004, despite it describing itself in its letter sent to Sceptre on 26 August 2005 as “a fast-growing and established business”.  Sceptre started trading with Culmain in October 2005 but never visited them, although Mr Rayer claimed that he was due to make a return visit by the end of 2006.  The Creditsafe report gave a credit rating of 73 and a credit limit of £12,000. 

 

 

4. Solid Storage

 

Sceptre first traded with Solid in January 2004.  No visit took place until 29-31 March 2006.  An Experian “international report” dated 15 September 2005 held by Sceptre stated: “Very high risk; a director’s guarantee would be desirable”.  Some largely illegible documents and a document in Dutch faxed to Sceptre on 4 May 2006 together with his contact and bank details were all that were provided.  Mr Rayer claimed to have obtained verbal references from L&A Freight before the first deal, but there is no documentary evidence of this.  The document seen by the Commissioners was illegible.  Mr Rayer claimed this was because it was a copy of a copy, the version he had received was legible. We did not see this document.  The relevant parts of the document are in English.

 

5. Square Trading

 

A few documents including a letter of introduction (undated) and a certificate from the Cypriot Ministry of Commerce, Industry and Tourism confirming the identity of the company’s director and company secretary were produced.  An Experian report of 2 June 2005 gave a credit limit of £0, a Commercial Delphi Score of 7 out of 100, a Commercial Delphi Band rating of “maximum risk” and said all credit transactions should be supported by a director’s guarantee.  Mr Rayer said he saw no real reason to look at their credit worthiness.  The director, Nikki Wiley, had and address in Denmark, the company itself was incorporated in England and Wales with a registered office in Kent and the above certificate gave a Cyprus address, which was also Miss Wiley’s home address.  Mr Rayer never visited Cyprus, but Miss Wiley had been introduced to him by Mr Charles in Wales.  We note that the address which Square gave for the freight forwarder Forward Logistics was incorrect.

 

6. ASAP

 

Sceptre has traded with ASAP since October 2005. Four of the documents produced are illegible, some are in German and untranslated.  ASAP’s bank details are provided, but no evidence of credit checks was given.  Mr Rayer went to visit the company in April 2006 but was ill after an initial meeting with the two directors and was unable to visit the company premises.  Sceptre had supplied these documents and the VAT certificates to Redhill and Mr Rayer himself appeared to think that the fact that Redhill verified the VAT registration on several occasions from October 2005 onwards implied something other than that there was a company with that name with a VAT registration of that number.  He said: “We rely and derived comfort from these verifications.”  Redhill in fact never do any more than verify a VAT registration number and a company name and address, a fact which Mr Rayer ought to have known.

 

 

7. BCG

 

No documents of any substance were provided beyond Redhill checks, but this is not surprising given that Mr Charles had worked on a commission basis with Sceptre prior to setting up this business. 

 

48. There is no evidence of due diligence checks by Mr Rayer on the freight forwarders, although he did visit Forward Logistics regularly.  He did not visit Tech Freight and was therefore in no position to assess its level of security.

 

49. Mr Rayer’s attitude to credit reports was that they were of limited value being based on historic information.  Sceptre had only started obtaining them since they were first suggested by Officer Williams at a meeting in February 2005.  Sceptre had a contract with Creditsafe which included an updating facility.  Mr Rayer gave evidence that he had always queried the validity of Experian reports.  The evidence strongly suggests that he only obtained credit reports to satisfy the Commissioners, not to enable Sceptre to decide with which companies it would trade.

 

50. With regard to Redhill checks, where available Sceptre’s Fax logs show that Sceptre frequently made the request after payment had been made and/or received, and, where made in advance, Sceptre did not always wait for a reply before proceeding with the transactions in question, for example Deals 9, 10 and 11. These deals were with the same parties as Deal 8 where Sceptre had had Redhill confirmation previously. 

 

51. The inspection reports were said by Mr Rayer to be obtained from the freight forwarders to check the authenticity of the goods and the quantity.  There is no evidence that Tech Freight was paid for inspection, and only one invoice from Forward Logistics containing a charge for the inspection.  Mr Rayer’s evidence was that Sceptre  had paid a deposit to freight forwarders, but there was no documentary evidence of this.

 

52. The purpose of Sceptre obtaining the inspection reports or the use to which it puts them was not entirely clear.  Mr Rayer claimed that they were to check the authenticity of the goods and the quality and quantity of the goods.  The nature of the inspections varied, from a 100% count and 10% inspection, to a 100% inspection.  The time limit available, varying from 1-10 seconds to check on each item, was extremely short. According to Mr Rayer that was the length of time which Sceptre had title to the goods, and, according to his second witness statement: “The results of the inspections are forwarded to all potential buyers of the stock”, and also the inspections took place before the goods were released to Sceptre.  It appears probable to us that there was only one inspection done whenever the goods arrived at freight forwarders and copies of that report were passed to the various people in the chain, the evidence for this conclusion is that, in respect of one deal, two identical reports were obtained by the Commissioners relating to the same goods, but one was addressed to Culmain and the other to Sceptre.  We also note that on several of the consignments there is reference in the report to damaged goods, a factor of which Sceptre appears to have taken no notice.  Mr Rayer made no enquiry relating to an inspection report on Deal 2 which stated: “One box sealed with security tape”.  Mr Rayer’s evidence was that there was ‘verbal communication’ and he had daily discussions with the freight forwarders who would only forward on to his clients undamaged goods and therefore he was not concerned, and if there were damage, nonetheless Sceptre would honour the deal.  Sceptre apparently made no attempt to contact the customer in respect of the inspection reports showing the goods were damaged.  The explanation for this was that the Commissioners “had not suggested that it would be a suitable addition to our paperwork”.  The purchase order from ASAP in respect of deal 12 shows ‘1 year warranty’.  When asked by Mr Black if Astra ASI or Astra ADC had issued any warranty, Mr Rayer said: “If there was any problem with any of the product that we sold to ASAP, we would have refunded any monies due to them.”  Not only did Mr Rayer not answer this specific question about the warranty at any stage, but also he was apparently prepared to refund some £791,000 to ASAP should the goods which he sold to ASAP prove faulty, without any certainty that Sceptre itself would be able to look to its supplier or the manufacturer.  We find this evidence completely implausible.

 

53. Sceptre had received Notice 726. That Notice from the Commissioners advises businesses within the trade sector to have a good understanding of market conditions and be generally aware of the market price day-to-day.  Sceptre did not undertake any independent research into prices, being reliant on either its suppliers and/or its customers.  No enquiry as to what the Intel list price was for the P4 processors, and no enquiries were made on the internet.  This was particularly surprising in relation to the Astra Semiconductors, products with which Mr Rayer was entirely unfamiliar.  He was totally reliant on information he had from either the customers or his suppliers.  It was his opinion that “… nothing beats quality information from your supplier or customer”. 

 

54. Sceptre carried on trading after the periods in question, but with a considerably reduced turnover.  Between 09/06 and 05/08 its net outputs were £1,146-£14,867 per month and its net inputs were £2,046-£19,618, whereas at the time of the deals in question both averaged in excess of £2,000,000 per month.

 

The Commissioners’ case

 

55. The Commissioners’ case is that each of the seventeen transactions formed part of an overall scheme to defraud the Commissioners, in that each of them can be traced back, via contrived and pre-arranged chains, to one out of a group of five defaulting traders.  Furthermore there were only three customers at the end of the seventeen deal chains.  Its case was put on the basis that Sceptre knew that it was participating in the fraudulent evasion of VAT.  We were referred to the case of Mobilx Ltd in which the Court of Appeal said:

 

“51. Once it is appreciated how closely Kittel follows the approach the Court had taken six months before in Optigen, it is not difficult to understand what is meant when it said that a taxable person ‘knew or should have known’ that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT.  In Optigen the Court ruled that despite the fact that another prior or subsequent transaction was vitiated by VAT fraud in the chain of supply, of which the impugned transaction formed part, the objective criteria, which determined the scope of VAT and of the right to deduct, were met.  But they limited that principle to circumstances where the taxable person had ‘no knowledge and no means of knowledge’ (paragraph 55).  The Court must have intended Kittel to be a development of the principle in Optigen.  Kittel is the obverse of Optigen.  The Court must have intended the phrase ‘knew or should have known’ which it employs in paragraphs 59 and 61 in Kittel to have the same meaning as the phrase ‘knowing or having any means of knowing’ which it used in Optigen (paragraph 55).

 

“52. If a taxpayer 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, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met.  It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind and carelessness, in the light of the principle in Kittel.  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.”

 

We were also referred to paragraph 59 where Moses LJ said:

 

“60. The test in Kittel is simple and should not be over-refined.  It embraces not only those who know of the connection but those who ‘should have known’.  Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion.  The trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact.  He may properly be regarded as a participant for the reasons explained in Kittel.”

 

56. It was contended that Mr Rayer should have known that the deals in question were connected with fraud because, in all the circumstances, it was the only reasonable explanation for those transactions.  In considering whether the only reasonable explanation for a particular transaction was its connection with the fraudulent evasion of VAT, the trader, and therefore the Tribunal, was to have regard to all the surrounding circumstances and not to consider each individual transaction in isolation.  The relevance of the surrounding circumstances was apparent from Mobilx where Moses LJ at paragraph 83 adopted the approach taken by Christopher Clarke J in Red 12 Trading Ltd at paragraph 111 where he said:

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

 

The Tribunal must also have regard to, and make, inferences from the primary facts as was pointed out by Moses LJ in Mobilx at paragraph 61:

 

“If he [i.e. the trader] chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct.”

 

We were also referred to paragraph 84 of Mobilx where the Court of Appeal attached importance to the fact that the trader in that case had chosen to ignore the obvious explanation as to why he was presented with the opportunity to obtain large and predictable rewards over a short space of time.

 

57. It was accepted that the burden of proof lay upon the Commissioners, and that the standard of proof was that the fact in issue more probably occurred than not, as laid down in the case of In re B (Children)(Care Proceedings: Standard of Proof) by Lord Hoffman in the House of Lords.

 

58. We have set out above in relation to those deals, namely 2, 3, 5, 9 and 11 where Sceptre contested that there was a tax loss, the Commissioners’ case with regard to that issue. Similarly we have set out the evidence relied on by the Commissioners as to the fact of there being a fraud by the defaulters in Deal 7, and the connection between the defaulters and Sceptre in Deals 2, 7, 9 and 11, where that fact was disputed by Sceptre. 

 

59. With regard to Deals 2 and 5 in which Sceptre purchased Intel CPUs, and the evidence that Sceptre had purchased significantly below the market price, Mr Black pointed to the failure by Sceptre to take any adequate steps to ascertain the market price before entering into the relevant transactions. 

 

60. With regard to the extent of Sceptre’s knowledge it was submitted by Mr Black that (1) the Tribunal had to determine whether the trader should have known that its transaction was connected with the fraudulent evasion of VAT; and (2) a positive conclusion should be reached if the evidence, looked at objectively, showed that such a connection was “the only reasonable explanation”, the only “reasonable possibility” or the “only realistic possibility”.  In deciding whether the only reasonable explanation for a particular transaction was its connection with the fraudulent evasion of VAT, the Tribunal was to have regard to all the surrounding circumstances and not to consider each individual transaction in isolation.  (See Red 12 Trading Ltd cited above).  In regard to all the surrounding circumstances and to the totality of the deals, the trader, and consequently the Tribunal, must have regard to, and make inferences from, the primary facts.

 

61. Although the Commissioners’ case was put firmly on the basis that Sceptre knew that its transactions were connected with fraud, the Commissioners also relied on the alternative position that Sceptre ought to have known that its transactions were connected with fraud.

 

62. We were referred to the Court of Appeal decision in Mobilx, where it cited, and commended, a number of questions which had been posed by the Tribunal in the case of Blue Sphere Global Ltd including:

 

“(1) Why was BSG, a relatively small company with comparatively little history of dealing in mobile phones, approached with offers to buy and sell very substantial quantities of such phones?

 

(2) How likely in ordinary commercial circumstances would it be for a company in BSG’s position to be requested to supply large quantities of particular types of mobile phones and to be able to find without difficulty a supplier able to provide exactly that type and quantity of phone?

 

(3) Was Infinity already making supplies direct to other EC countries?  If so, he could have asked why Infinity was not making supplies direct, rather than selling to UK traders who in turn would sell to such other countries.

 

(4) Why are various people encouraging BSG to become involved in these transactions?  What benefit might they be deriving by persuading BSG to do so?  Why should they be inviting BSG to join in when they could do so instead and take the profit for themselves?”

 

63. Mr Black referred us to the judgment of Mr Justice Briggs in the appeal to the Chancery Division in the case of Megtian Ltd where at page 8 he said:

 

“37. In my judgment, there are likely to be many cases in which a participant in sophisticated fraud is shown to have actual or blind-eye knowledge that the transaction in which he is participating is connected with that fraud, without knowing, for example, whether his chain is a clean or dirty chain, whether contra-trading is necessarily involved at all, or whether the fraud has at its heart merely a dishonest intention to abscond without paying tax, or that intention plus one or more multifarious means of achieving a cover-up while the absconding takes place.

 

“38. Similarly, I consider that there are likely to be many cases in which facts about the transaction known to the broker are sufficient to enable it to be said that the broker ought to have known that his transaction was connected with a tax fraud, without it having to be, or even being possible for it to be, demonstrated precisely which aspect of a sophisticated multifaceted fraud he would have discovered, had he made reasonable inquiries.  In my judgment, sophisticated frauds in the real world are not invariably susceptible, as a matter of law, to be carved up into self-contained boxes even though, on the facts of particular cases, including Livewire, that may be an appropriate basis for analysis.

 

…

 

“41. It is important to bear in mind although the phrase ‘knew or ought to have known’ slips evenly off the tongue, that when applied for the purpose of identifying the state of mind of a person who has participated in a transaction which is in fact connected with a fraud, it encompasses two very different states of mind.  A person who knows that a transaction in which he participates is connected with fraudulent tax evasion is a participant in that fraud.  That person has a dishonest state of mind.  By contrast, a person who merely ought to have known of the relevant connection is not dishonest, but has a state of mind broadly equivalent to negligence. 

 

“42. The distinction between dishonesty and negligence is of fundamental importance, even in cases such as the present where proof of either of them will suffice for the opposing party’s purpose.”

 

Sceptre’s case

 

64. As set out above, it was accepted that there had been fraud by the defaulters identified by the Commissioners in all of the 17 deals other than Deal 7 and that  a tax loss had been made out in all the 17 deals other than Deals 2, 3, 5, 9 and 11.  It was also agreed that there was a connection between the defaulters and Sceptre in all the deals other than Deals 2, 7, 9 and 11.  We have set out the evidence in relation to those matters and our conclusions above. 

 

65. It was disputed that, as had been alleged by the Commissioners, Sceptre presented an archetypal MTIC case.  In particular Sceptre relied on its lengthy trading history in retailing, wholesaling and property investment, which showed it was not established simply to export electrical components. 

 

66. It was submitted that Sceptre had complied with Notice 726; it had carried out additional due diligence following officer Williams’ suggestion; goods were not shipped on hold; Sceptre used Lloyds Bank not FCIB; Mr Rayer put his own capital into the business; Sceptre’s trading was either spread throughout the month (July) or carried out at the beginning (August). Sceptre was entitled to recover its input VAT unless the Commissioners could show that there was no other reasonable explanation for what were alleged to be due diligence inadequacies and uncommercial methods of trading.

 

67. With regard to tax loss, Mr Popplewell submitted that the Tribunal should not take a broad brush approach and should only find a tax loss if it was made out on first principles.  In order for output VAT to be due to the Commissioners there must be a genuine supply by a trader for consideration in the course or furtherance of a business.  For acquisition tax to be due the trader must make an acquisition in the United Kingdom from another Member State.  With regard to Deals 2, 3, 5, 9 and 11 it was submitted that the Commissioners had not made out that either output tax or acquisition tax was due.  With regard to the invoices produced, it was Sceptre’s case that the invoices in relation to the transaction between the defaulter and the first buffer in Deals 2, 3 and 5 the invoices did not reflect the underlying supplies made by the defaulter.  We were referred to the case of Langhorst where the Advocate General at paragraph 56-57 said:

 

“56. According to the Genius Holding judgment, the information in the invoice does not have as much weight as the reality of the taxable transaction, at least with regard to exercise of the right to deduct.  The same question may arise in the present case with reference to the taxable person’s obligation to pay VAT. 

 

“57. On this point, my view is that the invoice should preserve its function of documentation.  My reason for proposing that the Court should thus limit the scope of its previous case-law is no different from that which inspired the solution adopted in this case: to discourage tax evasion.”

 

68. Mr Popplewell also referred us to the tribunal case of Guro Kaur there was an absence of any evidence of a supply or that an invoice had been issued.  In that case the Commissioners had relied on paragraph 5(2) and 5(3) of Schedule 11 of the VAT Act 1994 (see above) and had raised an assessment on that basis.  The Tribunal, having considered section 73(1) of the Value Added Tax Act 1994  said as follows:

 

“There must therefore be a supply for output tax to be chargeable and even if an invoice is issued in advance of a proposed sale, tax cannot be chargeable if for some reason the supply does not take place. 

 

“Section 73(1) enables the Commissioners to assess an amount of VAT due from a trader but whatever is due from the Appellant it cannot be VAT because of the absence of a supply.  What in our view, paragraph 5 of Schedule 11 allows is for the Commissioners to recover what is due to them as VAT, by way of an assessment but what is otherwise due to them is recoverable as a debt to the Crown.

 

“In our view the Commissioners are entitle to recover from the Appellant the sum of £3,675 being the amount shown as VAT on the invoice but this is recoverable as a debt to the Crown and not by way of an assessment to VAT.”

 

69. It was submitted that in Deals 2, 3 and 5 the defaulters had not acquired goods from other Member States, the goods having been acquired by other members in the relevant chains, so no acquisition tax was due from them.  In Deals 9 and 11 no evidence of acquisition tax by the defaulters was produced.  The Commissioners had led no evidence of a tax loss at any stage other than by the defaulters.  It was submitted that in Deal 3 the defaulter had not carried on any trade or business, and therefore no VAT was due. 

 

70. With regard to means of knowledge, Sceptre relied on Kittel where at paragraph 51 the ECJ said:

 

“In the light of the foregoing it is apparent that traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT.”

 

Sceptre also relied on the passages in Mobilx cited by Mr Black for the correct test.  Mr Popplewell referred in addition to paragraphs 75 and 80 of Mobilx and submitted that in both the cases of BSG and Mobilx the words used were ‘only reasonable’ in relation to a conclusion about a trader’s state of mind.  Any reasonable explanation for any alleged irregularity or ostensible uncommercial trading must result in a repayment of VAT.  If the Tribunal decides there is any reasonable commercial rationale for the circumstances and/or the transactions which the Commissioners alleged are connected with the fraudulent evasion, the trader is entitled to the payment of his VAT. 

 

73. With regard to the suggestion that Sceptre had turned a blind eye to the circumstances, the Commissioners would have to show that Sceptre had means of knowledge at its disposal, and even if taking further due diligence measures would not in fact have alerted Sceptre to the fact of the fraud, then it would not have had the means at its disposal of knowing of the connection with fraud.  The relevant time was that of the transactions in question.  With regard to evidence, the Tribunal should focus on the circumstances of the trader’s transactions and his business as a whole, rather than solely on due diligence.  It was disputed that Sceptre’s method of trading was uncommercial, and it was specifically argued that the absence of written contracts and the presence of back to back trading was consistent with a wide variety of legitimate commercial trades. 

 

71. It was submitted that the Tribunal should look at Sceptre’s trading history, its export of electrical component goods in other periods and its continued trading after August 2006 in computer hardware, not software, in the UK market.  It was also submitted that the Tribunal should test the evidence by considering it on a deal by deal basis.  The Commissioners’ past behaviour to Sceptre was relevant.  Sceptre had been told that its due diligence was exemplary and Sceptre should be deemed by the Tribunal to have taken all reasonable precautions.  The Commissioners, with the benefit of full knowledge of Sceptre’s due diligence and trading method, were explicitly (as stated by officer Williams) and implicitly, satisfied of the adequacy of the due diligence and the commerciality of its trading arrangements prior to July 2006.  There was no duty upon Sceptre to take reasonable precautions, but, following the case Livewire, the taking of all reasonable precautions provided a trader with an impenetrable shield.  Whether or not Sceptre had done so should be judged at the time of the deals.  Even if Sceptre had not taken all reasonable precautions it was still entitled to a repayment unless the Commissioners could show that by taking such precautions it would have concluded that the deals were connected with fraud.  In the light of all the information which was known about Sceptre’s trading and its due diligence, and its relationship with Coracle and Ian Charles, in 2006, it had a legitimate expectation that the Commissioners would not resile from the expressed and/or implied assurances that there was nothing wrong with Sceptre’s position, and thus it had a shield in that the Commissioners accepted that it had taken all reasonable precautions at that time.

 

72. Sceptre also had a legitimate expectation that its input tax would be repaid on the basis of the above.  In this case there had been no change in the law justifying the Commissioners’ change of stance, there had simply been an administrative policy decision taken to adopt a process known as ‘extended verification’, pending which no input VAT would be repaid.  This was not a case where both parties were labouring under a misapprehension as to the interpretation of the law before something happened, following which the Commissioners could justifiably change its stance.  The overriding duty of public interest to collect tax must be exercised “in a way which achieved reasonable fairness as between taxpayers, avoiding where possible unmerited windfalls for particular taxpayers”.  The Commissioners in seeking to deny input VAT to Sceptre was not acting fairly as between taxpayers, since it was penalising Sceptre rather than the buffers which the Commissioners alleged are parties to the fraud.  It is these buffers that appeared to be benefitting from an ‘unmerited windfall’.

 

73. The matters relied on by Sceptre as the basis for legitimate expectation are as follows:

 

(a) Evidence that Sceptre has been transparent in its dealings with the Commissioners.

(b) The Commissioners had made representations which were clear cut, unambiguous and devoid of relevant qualification. The Commissioners knew all about the relationship between Coracle, Sceptre and Ian Charles.

(c) Sceptre is within the class of those to whom the representation was made – the evidence is that Notice 726 was sent to Sceptre and the assurances given by officer Williams were clearly made to Sceptre.

(d) Sceptre relied upon these representations to its detriment.

 

The Commissioners were not able now to resile from the assurances given to Sceptre  in the knowledge of its trading methods and connections and Sceptre cannot now be impugned by any alleged inadequacies of its due diligence or trading methods or by its relationship with Coracle and/or Ian Charles.  The Tribunal should find that Sceptre had carried out all reasonable precautions and has the benefit of a Livewire shield.

 

74. In addition to the criticisms of Dr Findlay set out above. Mr Popplewell pointed to the time taken by Dr Findlay to prepare his report, some 720 hours, and submitted that it was not reasonable to expect a two-man company to devote a similar amount of time to research.

 

75. With regard to the suggestion by the Commissioners that the fact that Sceptre took a higher profit than other people in the chain it was submitted that the concept of profit used by the Commissioners in the context of MTIC fraud, as comprising solely the mark-ups in a chain, was fundamentally misconceived.  The figures cited by the Commissioners of between £1.7 billion and £2.75 billion as being the amount lost to MTIC fraud in 2001 and 2003 did not arise from fraudsters disappearing with margins.  It arose from defaulters disappearing owing 17.5% of the import or first sale value which was funded by the Commissioners pumping money in at the ‘broker’ end, which then goes down the chain and disappears.  In addition, assuming the buffers are all in the fraud, the margins made by the buffers are profit for the fraudsters.  The profit is everything that is taken out of the chain, at each stage, by the fraudulent participators.  In the light of this on a £100 deal, where the mark-up is £1 down the buffer chain, the participating fraudsters make off with £18.50.  That is the fraudster’s profit.  Compared to this, a £2-£3 profit by an honest broker is a small price to pay for its unwitting involvement in the chains.  Mr Popplewell pointed out that fraud used to be known as ‘carousel’ since the goods went round and round to generate turnover.  So the fraudsters’ ‘profit’, to VAT and the buffer margins, is inflated many times as the goods go round.  Against this, a profit margin made by an honest broker in one of those carousels pales into insignificance.  The answer therefore to the rhetorical question posed by the Commissioners as to why those responsible for the fraud would allow Sceptre to keep its apparently high profit margin was that it was not a high profit margin, it was small compared with the VAT and buffer margins which are taken out of the chain by the participating fraudsters.  It was worthwhile those fraudsters having an honest broker participating since it recovered the VAT which, unknowingly, is then passed down the chain to the defaulter.

 

Reasons for the Decision

 

76. We do not accept Mr Popplewell’s submission that each deal has to be looked at in isolation from the others and conclusions drawn on that basis alone.  The correct approach was set out very clearly by Christopher Clarke J in Red 12 and that approach was endorsed by the Court of Appeal in Mobilx.  At paragraphs 109 and 111 the learned Judge said:

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

 

…

 

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

 

We have carefully examined all the deals the subject of this appeal and whilst, in respect of some of those deals, there is evidence of goods being traded by Sceptre possibly entering the UK by a route other than through the alleged defaulter, where that is the case we are satisfied that that of itself is evidence of fraud, and false trails have been laid in an attempt to prevent the Commissioners from establishing the true deal chains.  There is in all the deals except Deal 7 evidence which we accept which connects the traders in the chains put forward by the Commissioners and which links Sceptre to those chains.  We are satisfied that the Commissioners have established a tax loss in respect of all those deal chains and that the tax loss arose out of that fraud. With regard to Deal 7, we have set out the evidence in respect of it above and we find that the only possible inference from the evidence, taken together with the evidence in respect of Sceptre’s other deals and method of trading, is that this deal too was a fraudulent one and Sceptre was part of a fraudulent scheme of which this deal forms a part.

 

77. Evidence which leads us to the conclusion that there have been fraud is not simply the evidence of non-payment of VAT or of the existence of a debt due to the Crown.  There is evidence in respect of many of the deals of involvement by companies who are not apparently directly part of the deal chains but nonetheless have issued documents or release notes purporting to relate to the goods in question.  We refer specifically to:  Switch (Deals 1, 3 and 4), Platinum (Deals 1, 5, 6 and 7); Imanse (Deals 2, 3 and 5); Bruins (which was not only involved in Deals 3 and 6, but also had dealings with Facet, Switch, Econdia, ASAP – Sceptre’s customer in Deals 3, 4 and 8-17 – and Sumo; Papoose (Deals 4, 6, 8, 9, 11-14); Tamlex (Deals 9 and 11-14); ITT (Deals 5, 6 and 7); and Ecodia (Deals 4 and 6).  Platinum is a UK company and in Deals 1, 5, 6 and 7 it was the purchaser either directly from Sceptre’s customer Solid, or it purchased from ITT which itself had purchased from Solid.  Goods therefore re-entered the UK in all those deals.  The evidence in respect of its connection with Deal 7 came from Mr Rayer himself. 

 

78. As with the majority, if not all, of the cases involving MTIC fraud, there is no direct evidence to show that Sceptre (in effect, Mr Rayer) was a party to the fraud in the chain.  However, Mr Rayer specifically put himself forward as an experienced and conscientious businessman who had traded for many years in various goods, had traded with established companies and who only traded with people he trusted, and therefore we test his behaviour in relation too that description.  We did not find Mr Rayer’s evidence to be reliable or credible.  Our reasons for this conclusion are in part set out in the relevant passages above and in addition are as follows:

 

(i) His attitude to Sceptre’s paperwork was not such as would be expected from a reliable or competent businessman.  For example, in Deal 2 he gave a different description to his customer, Square, of the goods being sold from that which was given to him by his supplier, Grandbyte, claiming that the description did not matter to his customer.

 

(ii) Mr Rayer was unconcerned about the damage referred to in the inspection reports in respect of Deals 2, 3 and 5. 

 

(iii) In relation to Deal 5 there is clear evidence that Sceptre released the goods to its customer Solid on 12 July although the goods were not released to Sceptre until 16.40 on 13 July, payment already have been made by Sceptre at 10.45 on 13 July.

 

(iv) In respect of Deal 7 Mr Rayer stated in terms that he knew the goods were coming from abroad and that they were not available in the UK, despite his criticism of Dr Findlay for basing his conclusions on the amount of product entering the UK without allowing for trade in goods already in the UK.

 

(v) Mr Rayer’s lack of interest in the technical specifications of the products in which he traded in this period is highlighted by his failure to realise that the brochure purporting to relate to the Astra ASIs is an obvious fake.  This would have been evident had he given it more than a cursory examination.

 

(vi) The technical specification provided by Coracle related to a product made by Texas Instruments.  Mr Rayer had made no check on this prior to trading and only checked up on it for the purposes of this appeal.

 

(vii) Mr Rayer claimed to have spoken to Culmain as well as Coracle about the Astra ASIs.  He may have done, but if so, why did he not purchase the goods from Culmain, rather than from Coracle, to whom he had to pay more, on every occasion on which he traded in the product (Deals 8-10, 12, 14 and 17)?

 

(viii) He considered a chain of ten traders above him to be ‘not lengthy’ with regard to the Astra ASIs, yet made no attempt to source the goods elsewhere at a cheaper price, and never checked the price of the goods on the internet.

 

(ix) He paid no attention to the details of the loan to him from Dr Williams, Coracle, for example he was unaware of the precise method to be employed for assessing the cost of the loan and he only provided much of the information about Sceptre to Coracle after the loan had been paid off.

 

(x) Mr Rayer ignored bad references concerning his customers.

 

(xi) Mr Rayer apparently misunderstood the role of Redhill, expecting the Commissioners to advise him whether or not his customers or suppliers were sound.

 

79. Apart from Mr Rayer’s own lack of credibility, we find his dealings with Mr Charles and Dr Williams are not the dealings of a genuinely independent trader.  The links between them are such that we find that the trade conducted between them was not conducted at arms length.  Coracle supplied Sceptre in 13 out of the 17 deals.  Coracle’s supplier on each occasion was Culmain, yet in Deal 6 Culmain was Sceptre’s supplier.  This begs the question why Sceptre did not approach Culmain in the remaining ten deals, rather than Coracle?  Mr Charles had acted as a consultant to Sceptre, despite the fact that he had put Sceptre in touch with Solid and Square, who became two of Sceptre’s customers, rather than trading with them himself.  Mr Rayer’s only explanation for this was that Mr Charles’ association with the Boston Computer Group USA allowed him to develop his own ideas and trading potential, as well as working in association with the Boston Computer Group USA.  Mr Charles was limited in his exposure due to the nature of the association and could never fund a significant expansion of his own business, nonetheless, Mr Charles did start trading on his own account in this market sector and there was no explanation from Mr Rayer as to where he had obtained the finance subsequently.

 

80. We find it remarkable that Mr Evans not only worked for Sceptre but also acted as Mr Charles’ book-keeper.  We take account of the uncontested fact that Dr Williams used the fax machine belonging to Sceptre, as did Mr Charles, which meant that there was a strong possibility that Coracle and BCG would have discovered the identities of Sceptre’s customers and suppliers and vice versa.

 

81. There was no explanation consistent with genuine commercial behaviour on the part of traders operating at arms length as to why Sceptre’s customer Coracle would reveal the identity of its own customer and the price which it had achieved to Sceptre as had happened.  Mr Rayer in cross-examination had no proper explanation for this.  Additionally, Mr Rayer in his second witness statement had quite clearly stated that in June 2005 Sceptre introduced Coracle to Square, one of Sceptre’s own clients.

 

82. The due diligence checks undertaken by Sceptre on its suppliers and on its customers were inadequate; all negative indicators were ignored.  Given Mr Rayer’s view of the value of the Experian Reports, we query why Sceptre went to the trouble and expense of undertaking Experian checks?  Sceptre did not have official documents in a foreign language translated, there was little evidence of any independent trade references, there was no record of the verbal customer verification which Mr Rayer claimed to have obtained and there was little, if any, due diligence on the freight forwarders, and, although Mr Rayer had made regular visits to Forward Logistics, he had never visited Tech Freight.  Sceptre had taken a casual approach to inspection reports, and was apparently not concerned when damage was recorded.  There was nothing in writing to explain to Sceptre’s customers that the goods it would be receiving would not be in good condition, despite the damage referred to in the inspection report.  Notwithstanding the fact that Notice 726 advises traders to have a reasonable idea what range of prices are on offer in the market on any given day, Sceptre did not undertake any independent research into prices and was fairly reliant on the prices quoted by its own customer and supplier.  We also bear in mind the lack of insurance of the high value goods in which Sceptre was trading (a factor which is relevant given Mr Rayer’s evidence that he would account to his customers for any damaged goods); the increase in Sceptre’s turnover and profit once it began trading as a broker; and the fact that Sceptre did not add any value to the goods in which it was trading. 

 

83. The large amount of profit made by Culmain is a curious feature of this case, which remained unexplained.  We find that the mark-ups applied at each stage are inconsistent with genuine commercial behaviour in terms of their rigidity and consistency and only very modest mark-ups were generally made by the various buffers.

 

84. The fact that the deal documents contain numerous irregularities tends to show that the transaction chains were all pre-arranged, firstly by the fact that the goods were released down the chain in the ‘wrong’ order with regard to the release notes, which is indicative of contrivance, and secondly as showing that the traders within the transaction chains behaved in ways which were inconsistent with genuine commercial behaviour, particularly as regards risk.  The parties did not seem concerned about such matters as the condition of the goods, nor whether they were insured, because they knew they would receive payment irrespective of whether the goods were in good condition and arrived safely with the customer.

 

85. Having taken account of the very uncommercial nature of Sceptre’s method of trading, given that Mr Rayer had extensive business experience, we conclude that the evidence, looked at objectively, shows that the only reasonable explanation for his trade where it involved in particular the Astra ASIs and the ADCs is that it was connected with fraud, and Mr Rayer should have known of this connection given the obvious inferences to be drawn from the brochures he produced and the technical document.  It would not have been difficult for Mr Rayer to compare the two brochures nor to check the “Astra Technical Brief” on the internet as had Dr Findlay (see para 29 above)..  With regard to the other deals with which we are concerned, taking account of the totality of the evidence, including the evidence in respect of the deals concerning the Astra ASIs, we find that the only reasonable explanation for those trades is that, looking at the evidence objectively, was that they were connected with fraud, and that Mr Rayer was aware of that fact.  However, if we are wrong in coming to that conclusion, then we have no doubt at all that Mr Rayer ought to have known that his deals were connected with fraud and that he was wilfully turning a blind eye to all the facts before him.

 

86. We accept Mr Popplewell’s submission that it must be shown that Sceptre had means of knowledge at his disposal, in this case he undoubtedly had the means to check the brochure purported to have been issued by Astra and the means of finding out whether the company actually existed.  He simply ignored the content of the brochure and concentrated solely on the photograph of the purported goods.  He did not check on the internet the prices of the goods in which he hoped to trade but relied solely on his suppliers and customers for that information, and he took no account of the warnings contained in the Experian reports.  These were precautions he could have taken, and his failure to do so was not just a matter of failure of due diligence, but a failure to act like a reasonable businessman or a genuine trader.  Given that we have found that Sceptre did not take all reasonable precautions, in  particular in its not checking out the documents provided to it in relation to the Astra ASIs, we do not find that the issue of legitimate expectation raised by Mr Popplewell is relevant as  Sceptre did not take all reasonable precautions.  We do not consider that there is any merit in his argument as to there having been no change in the law justifying the Commissioners carrying out the extended verification of Sceptre’s trading.

 

87. In all the circumstances and for the reasons set out above, this appeal is dismissed.  The Commissioners are entitled to their costs.

 

88.  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.

 

 

 

MISS J C GORT

TRIBUNAL JUDGE

RELEASE DATE: 20 April 2011