First-tier Tribunal (Tax)

[2011] UKFTT 321 (TC)

TC01181

 

 

 

Appeal number MAN/2007/0749

 

VAT – MTIC fraud – input tax – whether the purchases by the Appellant in the identified deals were “connected with fraudulent evasion of VAT” as per Axel Kittel at para. [61] – held they were – whether the Appellant was a taxable person who knew or should have known that by its purchase it was participating in a transaction “connected with fraudulent evasion of VAT” – held it was a taxable person who both knew and should have known this – appeal dismissed  

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

GREYSTONE INTERNATIONAL LIMITED Appellant

 

- and -

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Value Added Tax) Respondents

 

 

 

TRIBUNAL: JOHN WALTERS QC

MRS RAYNA DEAN FCA

 

 

 

Sitting in public in Manchester on 8-12, 15-19, 22-23 and 25-26 November 2010

 

 

Timothy Brown, Counsel, instructed by BDO, for the Appellant

 

Christopher Foulkes, Counsel, instructed by Howes Percival, for the Respondents

 

 

© CROWN COPYRIGHT 2011

DECISION

 

 

 

Introductory

1.     Greystone International Limited (the Appellant) appeals against the Respondent’s (HMRC’s) decision, communicated to the Appellant in a letter dated 14 June 2007,  to deny credit for input tax as follows:

2.     The Appellant was registered for VAT with effect from 1 March 2003 and commenced trading in the 09/04 VAT period. In its application for VAT registration (form VAT 1) the Appellant had stated that its main business activity would be buying and selling (export) handsets (i.e. mobile phones), buying in the UK and selling in Europe, declaring an estimated value of taxable supplies to be made in the next 12 months at £38 million.  However when trading actually commenced, the goods traded were not mobile phones but Computer Processing Units (“CPUs”).

3.     In both the 12/04 and 03/05 VAT periods, the Appellant’s transactions included CPUs with invalid product identification numbers.  In consequence, the VAT repayments made in those periods were reduced.  The Appellant did not resist the reductions.

4.     The total amount of input tax credit in issue in the appeal (see: above) is £833,270.16 and relates to 9 purchase transactions (or ‘deals’) which gave rise to 11 sales transactions.  We refer to the purchase transactions (as deals 1 to 9) further below. Deal 1 and deal 7 gave rise to two sales transactions each. Otherwise the deals gave rise to one sale transaction each. These transactions were the totality of purchase and sale transactions carried out by the Appellant in the three VAT periods.

5.     HMRC allege that the 9 deals were connected with the fraudulent evasion of VAT and the Appellant knew or should have known this fact (relying on the joined cases of Axel Kittel and Recolta Recycling SPRL v Belgian State (C–439/04 and C–440/04)). They contend that all 9 deals and the 11 sales transactions are affected by a scheme or schemes to defraud the public revenue by way of Missing Trader Intra-Community (“MTIC”) Fraud.  MTIC fraud was described shortly by Christopher Clarke J in Red 12 Trading Limited v Commissioners for HMRC [2009] EWHC 2563 (Ch) at [2] and [3].  Introducing his description, Christopher Clarke J said (at [2]) that ‘anyone reading this judgment is likely to be familiar with [the expression ‘MTIC fraud’]’.  In our view that is equally true in relation to this Decision and so we will not provide a description of our own.

6.     There is agreement between the parties that the issues for the Tribunal’s decision are (in respect of each disputed transaction – or deal):

(1)  Whether the transaction was connected with the fraudulent evasion of VAT; and

(2)  If so, did the Appellant know of this fact or alternatively should it have known that the only reasonable explanation for the circumstances in which the transaction took place was that it had been or would be connected to fraud (Mobilx Ltd and others v CRC [2010] EWCA Civ 5127).  

7.     In relation to the first issue, the Appellant makes a submission that there was no fraudulent evasion of VAT because (to quote from Mr. Brown’s written Final Submissions) ‘the invoices raised by “defaulters” and possibly a number of the buffer companies were false and there was no taxable supply between these companies at the start of the UK chain’. Mr. Brown submits that where no consideration is received by a supplier (or alleged supplier) there can be no taxable supply.  As there was no taxable supply there was no VAT (as opposed to an amount purporting to be VAT which is recoverable as a debt due to the Crown) and there was therefore no fraudulent evasion of VAT.

8.     The Appellant also submits, as an alternative submission in relation to the first issue, (to quote from Mr. Brown’s Skeleton Argument) that ‘for those transactions which are connected to VAT losses, the Appellant has not accepted that the tax losses were fraudulent.  The Appellant does not rely on any evidence of its own on this issue and the Tribunal has to decide the issue on the Respondents’ evidence’.

9.     We heard oral evidence from the following witnesses:

Higher Officers of HMRC: David Winstan Schofield, Philip Graham Bennett, Gregory Mark D’Rozario, Michael James Downer;

Officers of HMRC: Katie Alexandra Finn, Julian David Cook, Roderick Guy Stone (officer of HMRC attached to HMRC’s National Teams and Serious Civil Investigation Directorate);

Directors of the Appellant: David William Maxwell Morrison, Michael Arthur Osborne, William John Thompson, Adam Thompson

Employee of the Appellant: Jonathan Michael Osborne

10.  All of these witnesses had produced Witness Statements, some more than one, which were also in evidence.  Witness Statements from the following additional witnesses, who did not give oral evidence, were also included in our papers:

Edward Francis Mullarkey, John Flynn, Susan Okolo, Lisa Margaret Wride, Daniel Peter Outram, Vivien Barbar Parsons, Brian Raymond Selwood, Huw Liam James Gingell, Theresa Margaret Launder.

11.  Extensive documentary evidence was also before us.

12.  From the evidence we find that the 9 deals all trace back, in the following circumstances, to a loss which is a loss of VAT (a VAT loss), subject to the Appellant’s point about no consideration (which is dealt with below at paragraphs 48 and following).

The deals

13.   Deal 1.  Deal 1 was a purchase on 3 February 2006 by the Appellant of 15,750 Intel Pentium CPUs at a unit price of £90 from Multisystems International Limited of Richmond, Surrey (“Multisystems”) – for a total consideration of £1,417,500 plus £248,082.50 VAT.  These goods were onsold by the Appellant by two sales, one of 6,300 units to Venture Tech International of Clearwater, Florida, USA (“Venture Tech”) and one of 9,450 units to Best Buy Computers (S) PTE Ltd of Singapore (“Best Buy”).  The sales were also invoiced on 3 February 2006 and the unit price charged to Venture Tech was $167.  The unit price charged to Best Buy was £95.50. No VAT was, of course, charged on either sale.

14.  HMRC’s evidence (which we accept) was that the chains of Multisystems’ supply of these CPUs could be traced back to supplies of 6,300 units and 8,190 units respectively by Myco Telecom Ltd. (“Myco”) to Euro Imports & Exports Limited (“EI&E”) and a supply of 3,150 units by Puwar (UK) Ltd. (“Puwar”) to PM Transport & Communications Ltd (“PMT&C”).  All transactions in these chains took place on 3 February 2006.

15.  We received evidence (which we accept) that Myco and Puwar were both defaulters in that Myco failed to pay assessments to VAT totalling some £38 million, including output tax on the supplies in the deal chains for deal 1, and Puwar had a debt for unpaid VAT of just under £76 million on 12 March 2009.  Although the output tax on the supplies by Puwar in the deal chain for deal 1 was not included in the assessed VAT, HMRC submit (and we accept) that it is clear that Puwar has failed to account for VAT on any of its transactions in the relevant period, giving rise to a VAT loss as a result.  Puwar was deregistered for VAT and did not appeal against its deregistration or any of the assessments made on it.

16.  Deal 2. Deal 2 was a purchase on 14 February 2006 by the Appellant of 4,410 Intel Pentium CPUs at a unit price of £88.25 from Multisystems – for a total consideration of £389,182.50 plus £68,106.94 VAT.  These goods were onsold by the Appellant to Best Buy.  The sale was also invoiced on 14 February 2006 and the unit price charged to Best Buy was £93.50. No VAT was, of course, charged on the sale.

17.  HMRC’s evidence (which we accept) was that the chains of Multisystems’ supply of these CPUs could be traced back to a supply of 5,670 units by Puwar to PMT&C.  All transactions in the chain took place on 14 February 2006.

18.  The evidence that Puwar was a defaulter is relevant in relation to deal 2 as well as deal 1.  As with deal 1, the output tax on the supply by Puwar in the deal chain for deal 2 was not included in the VAT assessments made on Puwar.  In connection with deal 2 also, HMRC submit (and we accept) that it is clear that Puwar has failed to account for VAT on any of its transactions in the relevant period giving rise to a VAT loss as a result. 

19.  Deal 3.  Deal 3 was a purchase on 16 February 2006 by the Appellant of 4,725 Intel Pentium CPUs at a unit price of £88 from Multisystems – for a total consideration of £415,800 plus £72,765 VAT.  These goods were (as in deal 2) onsold by the Appellant to Best Buy.  The sale was also invoiced on 16 February 2006 and the unit price charged to Best Buy was £93.25. No VAT was, of course, charged on the sale.

20.  HMRC’s evidence (which we accept) was that the chains of Multisystems’ supply of these CPUs could be traced back to a supply of 4,725 units by Com4U Limited (“Com4U”) to Storm90 Limited (“Storm90”).  Although the supply by Com4U was, according to the documentation, invoiced on 17 February 2006, we find that all transactions in the chain took place on 16 February 2006.

21.  The evidence that Com4U was a defaulter (which, again, we accept) included evidence that it had claimed input tax credit in respect of transactions in phone cards which did not actually take place.  Its VAT return was amended to reflect an amount due of £4,461,507.85 and further assessments for well over £4 million were also raised in respect of undeclared transactions.  The assessments were neither paid nor appealed and Com4U was deregistered for VAT and subsequently placed onto liquidation.  There was evidence (which we accept) that Storm90 was also a defaulter. As at 6 February 2008 the total amount outstanding in respect of VAT assessments was over £44 million.  These assessments remain unpaid and unappealed.

22.  Deal 4. Deal 4 was a purchase on 21 February 2006 by the Appellant of 4,725 Intel Pentium CPUs at a unit price of £87.25 from Multisystems – for a total consideration of £412,256.25 plus £72,144.84 VAT.  These goods were onsold by the Appellant to Venture Tech.  The sale was also invoiced on 21 February 2006 and the unit price charged to Venture Tech was $159. No VAT was, of course, charged on the sale.

23.  HMRC’s evidence (which we accept) was that the chains of Multisystems’ supply of these CPUs could be traced back to a supply of 4,725 units by Storm90 to Optimal Group Ltd. (“Optimal”), or alternatively to that supply and another supply of 6,300 units by Storm90 to Optimal..  All transactions in the chain took place on 21 February 2006.

24.  The evidence that Storm90 was a defaulter is mentioned above in relation to deal 3. 

25.  Deal 5. Deal 5 was a purchase on 28 February 2006 by the Appellant of 6,300 Intel Pentium CPUs at a unit price of £87.25 from Multisystems – for a total consideration of £549,575.00 plus £96,193.13 VAT.  These goods were onsold by the Appellant to Best Buy.  The sale was also invoiced on 28 February 2006 and the unit price charged to Best Buy was £92.50. No VAT was, of course, charged on the sale.

26.  HMRC’s evidence (which we accept) was that the chains of Multisystems’ supply of these CPUs could be traced back to a supply of 6,300 units by The Callender Group Ltd. (“Callender”) to MG Components Ltd. (“MGC”).  All transactions in the chain took place on 28 February 2006.

27.  The evidence (which we accept) that Callender was a defaulter was that at 23 March 2007 the outstanding balance in relation to assessments made on Callender was well over £81 million (this figure included VAT on the supply by Callender in the deal chain behind deal 5). The assessments are unpaid and John Callender, a director of Callender has been disqualified by the High Court from acting as a company director for a period of 15 years.

28.  Deal 6. Deal 6 was a purchase on 23 March 2006 by the Appellant of 7,875 Intel Pentium CPUs at a unit price of £84.50 from Multisystems – for a total consideration of £665,437.50 plus £116,451.56 VAT.  These goods were onsold by the Appellant by two sales, one of 4,095 units to Berkshire International Trading FZE of Dubai (“Berkshire”) and one of 3,780 units to High Level Trading GmbH of Zurich (“HLT”).  The sales were also invoiced on 23 March 2006 and the unit price charged to Berkshire was £89.50.  The unit price charged to HTL was also £89.50. No VAT was, of course, charged on either sale.

29.  HMRC’s evidence (which we accept) was that the chains of Multisystems’ supply of these CPUs could be traced back to supplies of 3,780 units, 4,095 units and 9,450 units respectively by Alpha Sim Communications Ltd. (“Alpha Sim”), all to MGC.  All transactions in the chain took place on 22 or 23 March 2006.

30.  We received (and accept) evidence that Alpha Sim was a defaulter in that it has failed to pay assessments to VAT totalling some £13.7milliion. Alpha Sim was deregistered for VAT and did not appeal against its deregistration or any of the assessments made on it.

31.  Deal 7. Deal 7 was a purchase on 24 March 2006 by the Appellant of 3,000 Intel Pentium CPUs at a unit price of £110.75 from Multisystems – for a total consideration of £332,250.00 plus £58,143.75 VAT.  These goods were onsold by the Appellant to HLT.  The sale was invoiced on 24 March 2006 and the unit price charged to HTL was £118.00. No VAT was, of course, charged on the sale.

32.  HMRC’s evidence (which we accept) was that the chains of Multisystems’ supply of these CPUs could be traced back to supplies of 3,000 units and 1,500 units respectively by Alpha Sim, both to MGC, and a supply of 1,300 units by S&S Garments Ltd. (“S&S”), also to MGC.  All transactions in the chain took place on 22. 23 or 24 March 2006.

33.  We find that Alpha Sim was a defaulter (see paragraph 30 above).  We also received evidence (which we accept) that the VAT registration of S&S had been ‘hijacked’ by persons unknown (persons purporting to be S&S).  An assessment has been made against a dummy registration created for ‘the Taxable Person purporting to be’ S&S which has been neither paid nor appealed.

34.  Deal 8. Deal 8 was a purchase on 31 March 2006 by the Appellant of 3,780 Intel Pentium CPUs at a unit price of £83.50 from Multisystems – for a total consideration of £315,630.00 plus £55,235.25 VAT.  These goods were onsold by the Appellant to Giga Asia PTE Ltd. (“Giga Asia”) of Singapore.  The sale was also invoiced on 31 March 2006 and the unit price charged to Giga Asia was £88.50. No VAT was, of course, charged on the sale.

35.  HMRC’s evidence (which we accept) was that the chains of Multisystems’ supply of these CPUs could be traced back to a supply of 5,040 units by Walk & Talk Yorkshire Ltd. (“Walk & Talk”) to MGC.  The supply by Walk & Talk to MGC took place on 30 March 2006.

36.  HMRC’s evidence (which we accept) was that after investigation they had accepted that Walk & Talk’s VAT registration had been ‘hijacked’ by persons unknown.  An assessment raised against ‘the Taxable Person purporting to be’ Walk & Talk has been neither paid nor appealed.

37.  Deal 9. Deal 9 was a purchase on 7 April 2006 by the Appellant of 3,150 Intel Pentium CPUs at a unit price of £83.75 from LTL Communications (“LTL”) – for a total consideration of £263,812.50 plus £46,167.19 VAT.  These goods were onsold by the Appellant to Venture Tech.  The sale was also invoiced on 7 April 2006 and the unit price charged to Venture Tech was $153. No VAT was, of course, charged on the sale.

38.  HMRC’s evidence (which we accept) was that the chains of LTL’s supply of these CPUs could be traced back to a supply of 3,150 units by Attic Attack UK Ltd (“Attic Attack”) to MGC.  The supply by Attic Attack to MGC took place on 7 April 2006.

39.  HMRC’s evidence (which we accept) was that a VAT assessment in the amount of £3,122,257 has been raised against Attic Attack, which includes VAT on the transaction contained within the deal chain for deal 9.  Although Attic Attack lodged an appeal against that assessment, Attic Attack’s representative applied for further time to comply with directions, as it had not received further instructions.  In the circumstances, HMRC submit (and we accept) that it is clear that Attic Attack entered into the relevant transaction with the intention that the resulting VAT liability would not be paid and that the loss of VAT was connected with fraud.

Connection with the fraudulent evasion of VAT

40.   We deal first with the first issue for our decision as identified above: whether (in respect of each disputed transaction – or deal) the transaction was connected with the fraudulent evasion of VAT.

41.  Before addressing the Appellant’s submission on the absence of consideration for the transactions purportedly entered into by the alleged defaulters – namely, Myco, Puwar, Com4U, Storm90, Callender, Alpha Sim, S&S, Walk & Talk and Attic Attack – we deal with Mr. Brown’s alternative submission that, in effect, it is for HMRC to satisfy the Tribunal that any VAT losses (stricto sensu) are fraudulent.  It is clear – and agreed on both sides – that the burden of proof on this issue is on HMRC.  The Appellant does not rely on any evidence of its own, it simply does not concede the point and puts HMRC to proof of the fraudulent nature of any VAT losses.

42.  We are satisfied that HMRC has indeed proved – by the evidence of the deal chains summarised above – to the requisite standard (the balance of probabilities) that all the Appellant’s purchases in the deals under consideration were connected to losses suffered by HMRC.

43.  We are also satisfied that HMRC has proved by that evidence, again to the requisite standard, that the losses suffered by HMRC were fraudulent.  As Mr. Foulkes submitted, the Tribunal, as well as the public at large, is well aware that the trade in CPUs (and mobile telephones) was rife with MTIC fraud in the early part of the year 2006.  Officer Stone had a meeting with Mr. Max Morrison (at Mr. Morrison’s instigation) in early 2003 when Officer Stone told Mr. Morrison that in his experience all (Officer Stone’s recollection is that he said ‘over 95 per cent’) of the transactions verified by HMRC were tainted by MTIC fraud. This remark was made in relation to mobile phones, which was the trade being discussed at the meeting, but we are satisfied that MTIC fraud was equally pervasive in the trade in CPUs.  Officer Stone said in evidence that in 2003 MTIC activity in computer chips (CPUs) was as prevalent or more prevalent than MTIC activity in mobile phones.  He stated that the Bond House Systems Ltd.  case (and also, we note, the joined cases of Optigen Ltd. and Fulcrum Electronics Ltd) which were being litigated in 2003, were concerned with trade in CPUs. Whereas the statistics of tax loss and the volume of trade which we were given by Officer Stone – and which peaked in the first part of 2006 – referred to mobile phones, we accept Officer Stone’s evidence that the picture was the same for the trade in CPUs.  In all the circumstances, we find that it is more probable than not that the losses suffered by HMRC which were connected to the Appellant’s purchase transactions were fraudulent.

44.  Mr. Brown submitted that we could not reach such a conclusion because HMRC have not shown that any evasion of VAT was done dishonestly. He submitted that it was not sufficient for HMRC to allege that there must have been a fraudulent evasion of VAT by someone unidentified in a VAT chain.  He referred the Tribunal to the decision in Phonepoint Communications Ltd. v HMRC [201] UKFTT 452 (TC), acknowledging that in that decision the argument was rejected.

45.  The Appellant in Phonepoint was unsuccessful, the Tribunal finding that it knew that it was engaged in a series of transactions connected with fraud and that, even on the assumption that Mr. Norris, the Appellant’s principal shareholder and director, was no more than a pawn in the fraud and ignorant of its true purpose, he should have known of the fraud and its purpose of cheating HMRC of VAT to which it was entitled (ibid. [93]).

46.  The Tribunal in Phonepoint held that it was sufficient that one or other of the parties in a chain would inevitably be the entity which evaded VAT (ibid. [60]).  In reaching this conclusion the Tribunal relied on the decision of Christopher Clarke J in Red 12 Trading Ltd., who held (ibid. [84]) that it would be wrong in principle (and an unmerited boon to fraudsters) to require HMRC to prove that the defaulter was the original importer.  Clarke J’s decision on this point was upheld by Moses LJ who refused permission to appeal to the Court of Appeal in Red 12 Trading Ltd. Moses LJ set out the law on this point as follows:

“Of course it must be proved that there has, in respect of each transaction, been a default, and that that default is dishonest, but that can be, in my judgment a fraud committed by anyone down the line and in respect of the person claiming the input tax the question is whether that person had knowledge of it.  In my judgment the judge was right in so concluding and it does not seem to me to be arguable to the contrary.”

47.   In the light of this authority it would be very difficult for us to accept Mr. Brown’s submission, even if we were persuaded by it.  However we are not persuaded by it and we respectfully agree with the approach of the Tribunal in Phonepoint and the courts in Red 12 Trading Ltd. We find no support for any different approach in R v Dealy [1995] STC 217, which was also cited by Mr. Brown. There seems to us to be no logic in the submission that HMRC must be required to identify a defaulting entity in the chain and prove that that entity defaulted dishonestly.  All that is required is that HMRC should prove that each of the Appellant’s transactions (deals) was connected with a fraudulent evasion of VAT. That is achieved by their demonstrating on the balance of probabilities (1) a connection (in terms of a chain of transactions) between a defaulter (whoever that might be) and the Appellant’s deal, and (2) that such defaulter (whoever that might be) has defaulted fraudulently.  We find both propositions proved in the sense that it is more likely than not that both were correct in relation to each of the Appellant’s deals.  However all of this is subject to our decision on the Appellant’s ‘no consideration’ submission to which we now turn.

Was no consideration received by the alleged defaulters?

48.  Mr. Brown’s submission is that the invoices raised by the alleged defaulters – namely, Myco, Puwar, Com4U, Storm90, Callender, Alpha Sim, S&S, Walk & Talk and Attic Attack – and possibly a number of buffer companies in the various chains – were false and that there was no taxable supply between these companies at the start of the chain, because no consideration was received by them for any supplies they might have made.  The burden of proof on this issue is on the Appellant.

49.  The basis of this submission is the evidence that there were ‘third party payments’ in all the deal chains. ‘Third party payments’ are payments of consideration made by a customer to a party who is not that customer’s supplier.  They are usually (if not always) made on the instructions of the customer’s supplier and we have seen examples of ‘third party payment’ instructions in the papers in this appeal. 

50.  HMRC’s witnesses (Officers Schofield and Downer generally, Officer Finn in relation to Puwar, Officer Cook in relation to Com4U, Officer Gingell in relation to Storm90, Officer Outram in relation to Callender and Officer Launder in relation to Attic Attack) gave evidence of their conclusion that the funds were diverted from the alleged defaulters.  This was reinforced by the evidence of payments made between FCIB accounts which was given by Officer D’Rozario. We accept that it is more probable than not that the alleged defaulters (except possibly Myco, where there is evidence that it received ‘commission’ payments in respect of its supplies) received no consideration for the supplies which they respectively made in the deal chains.

51.  We observe that we saw no evidence that the invoices raised by the alleged defaulters were false, in the sense that there was no real underlying transaction reflected in them. 

52.  The question then arises as to whether the fact that the alleged defaulters received no consideration has the consequence that they did not fraudulently evade VAT, because there was never any liability to VAT on supplies made by them.

53.  Mr. Brown’s case was that a supply of goods subject to VAT requires that it be a supply of goods for consideration within the territory of a member state by a taxable person acting as such, citing article 2(1) of the VAT Directive 2006/112/EEC.  He contended that ‘if there is no consideration received by a supplier, there is no taxable supply’, and consequently no ‘VAT due’ which can be assessed under section 73 VAT Act 1994.

54.   A supply ‘for consideration’ in this context does not require a money price to be received by the supplier.  The concept of consideration includes ‘everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply’ (article 73 of the VAT Directive 2006/112/EEC).

55.  Where the right to receive the price of goods supplied is assigned to a third party by the supplier of the goods, consideration (viz: the right) has been obtained by the supplier in return for the supply, and, by a transaction separate from the supply, has been assigned by the supplier to a third party.  In these circumstances there is a supply of goods for consideration by the supplier, and it remains only to value the consideration received.  The value will normally be equal to the money price, but whatever value is put on the consideration will not take away from the fact that the supply has been for consideration and therefore was a taxable supply attracting a VAT liability on the supplier.  In the case of each of the deal chains with which this appeal is concerned we accept that each of the alleged defaulters – Myco, Puwar, Com4U, Storm90, Callender, Alpha Sim, S&S, Walk & Talk and Attic Attack – has indeed defaulted in that it has not discharged its obligation to account for its VAT liability on the supplies respectively made by each of them at the commencement of the deal chains which culminated in the Appellant’s purchases which are in issue in the appeal.

56.  We therefore find (to the extent that the issue is one of fact) and hold (to the extent that it is one of law) that all of the Appellant’s purchases in issue in the appeal were connected with the fraudulent evasion of VAT.

‘Knew or should have known’ - evidence

57.  We recount the evidence relevant to the issue of whether the Appellant knew that its transactions were connected with the fraudulent evasion of VAT or alternatively should have known that the only reasonable explanation for the circumstances in which the respective transactions took place was that they had been or would be connected to fraud. We accept this evidence except to the extent otherwise indicated in this Decision.

58.  The first director and originally the major shareholder in the Appellant was Max Morrison.  He is a Fellow of the Royal Institution of Chartered Surveyors (FRICS) who sold his family business to an institution in 1986.  Thereafter he started a new business called Greystone Investments (his family home at the time being called ‘Greystones’) to look after the funds he had acquired.  Greystone Investments was registered with FIMBRA.  He also set up other companies at that time.

59.  One of his business ventures at this time was to make what he described as significant loans to an offshore company which had developed new technology in the USA to clean up waste coal spoil sites.  The businesses did not do well.  He commented that ‘people disappeared and much of my spare investment cash that I had built up was lost’.

60.  Eventually, in 2000, he was able to establish and fund Greystone Telecom Limited (“GTL”), which provides telecom services, including the provision of 0845 local rate numbers to businesses.  It was through GTL that Mr. Morrison met John Thompson, who, through his company Unishippers Limited, was a customer of GTL.

61.  GTL moved into the business of selling mobile contracts and handsets to the consumer market in the UK – a retail business.

62.   Mr. Morrison  became interested in the prospect of exporting mobile telephones abroad following a chance meeting with someone who was involved in that business in 2002.  This led to a meeting with John Thompson in the late summer of 2002.

63.  (William) John Thompson had in 1999, with some partners, bought a franchise in the freight industry from Unishippers Inc., based in Utah, USA. He operated the franchise from June 1999 and employed his son, Adam Thompson (who had that year finished studying for a BA Hons. degree in business studies at Huddersfield University) as ‘our sales person’.  Around March 2001 Adam left that employment and went to work full time in the telecoms industry, as a director of Rapid Marketing Services (“Rapid”).

64.  Adam Thompson had for some time been trying to set up a small business in Rapid, together with Stewart Butler.  However they had difficulties getting stock of mobile phones and eventually (in 2000) it took the involvement of another person, Oliver Morley, to get the business off the ground.  Mr. Morley required to have indirect ownership of Rapid but Adam Thompson continued as a director of Rapid, involved in the management of the office administration and transportation of exported mobile phones.  Stewart Butler left Rapid at this point.

65.   In 2001 or 2002 Rapid commenced trading in mobile phones, buying in the UK and selling to Spain. Rapid encountered difficulties in relation to VAT because of HMRC’s allegations that goods destined for Europe had been diverted. Rapid used the VAT consultancy services of Barnard Atkins Vat Services Ltd. (“Barnard Atkins”).  On 18 September 2002, HMRC issued assessments to VAT on Rapid amounting to £5.9m. in respect of the 05/02 and 06/02 VAT periods.  Rapid ceased trading and Adam Thompson found further work with Sound Solutions (GB) Ltd. (“Sound Solutions”).  Sound Solutions was also trading in mobile phones and Adam Thompson had responsibility for ensuring that all the paperwork was correct.  In the second year of his employment at Sound Solutions, Adam Thompson met Steven Bell, who had previously been working at Carphone Warehouse.  He came to Sound Solutions to help them break into the second hand mobile phone market.

66.  At around this time (2002-2003) Adam Thompson discussed with his father, John Thompson, the opportunities that existed in the telecoms market and between them they began to put together a proposal to find business partners with the necessary funding which would enable them to set up another business in this market.

67.  A meeting was arranged in the late summer of 2002 between Max Morrison and John Thompson in which John Thompson provided background information on Adam Thompson and what he had been doing.  Mr. Morrison was impressed by the possibility of working with John Thompson (with experience in logistics, transport and exporting) and Adam Thompson (with experience in sourcing and selling mobile phones) and so gave instructions for the incorporation of the company which became Greystone International Ltd. (the Appellant).  We find, however, that Mr. Morrison carried out no due diligence or research on either of the Thompsons to confirm their credibility or that they were suitable people with whom to enter into a business partnership arrangement.

68.  This was in late 2002. Mr. Morrison was appointed director of the Appellant and he completed the VAT registration form on behalf of the Appellant.  This was signed on 17 December 2002.  The form declared that the Appellant intended to deal in handsets, buying in the UK and selling in Europe, and estimated the value of taxable supplies to be made in the next 12 months at £38million.  Barnard Atkins was to be retained to prepare and submit VAT returns on behalf of the Appellant.

69.  Mr. Morrison initially had 90 of the 100 shares in the Appellant, the balance of 10 shares being allotted to GTL.

70.  Michael Osborne was approached by Max Morrison at an early stage after Mr. Morrison had decided to work with John Thompson and Adam Thompson and had set up the Appellant company.  Mr. Osborne made an investment into the business of £100,000 in tranches.  He did so because he trusted Mr. Morrison (he described him as ‘a very honest man’) and he was convinced that he (Mr. Morrison) knew (from his experience with GTL) that there was a genuine grey market in mobile phones. His motivation to invest in the Appellant was to achieve a return of (eventually) 10% a quarter and also partly because he wanted to secure a job for his son, Jonathan Osborne, who was not employed at the time.  He became a director to further his son’s interests, and also to be closer to information as to how the business was going. He took very little part in the running of the Appellant and relied for his information on how the business was progressing on information received from the other directors and his son, Jonathan Osborne.

71.  Mr. Osborne also introduced others, personal friends whom he described as ‘eminent businessmen’, who made investments in the business.

72.  Mr. Morrison found out that Adam Thompson had worked at Rapid.  He told John Thompson that the family involved in Rapid had been responsible for his involvement in the USA coal business and that he would not want a don of his to work for that family. Adam Thompson told Max Morrison that there was fraud in the mobile phone business and that one had to be very careful of it. Mr. Morrison sought out a meeting early in 2003 with Officer Roderick Stone, (at that time the officer with functional responsibility for ‘delivering the MTIC strategy’ in Southern England).  At that meeting Officer Stone told him that 95% (Officer Stone’s recollection) or 100% (Mr. Morrison’s recollection) of the wholesale mobile phone export trade from the UK was tainted with MTIC fraud (the term ‘carousel fraud’ may have been used).  Mr. Morrison was certain in his evidence that Officer Stone had told him that all the wholesale mobile phone export trade from the UK was tainted with fraud and we accept his evidence on this point – he was, in our view, more likely than Mr. Stone to have an accurate recollection of the detail of what was said.

73.  We have a note, dated 20 February 2003, by Officer Judy Hales who visited Mr. Morrison, as a ‘pre-registration’ visit in relation to the Appellant.  He told her that the Appellant’s main business activity would be the wholesale of mobile phone handsets within the UK and the EU and that the Appellant was being advised by Frazer Holmes (a former HMRC officer) of Barnard Atkins, who were ‘well aware of the problems in the industry and [were] more than willing to comply with [HMRC’s] requirements’.  These included the provision to HMRC of the names of suppliers and customers.  A ‘Redhill letter’ was issued (requiring requests for verification by HMRC of the VAT status of new customers and suppliers to be faxed to the dedicated office at Redhill). (Another ‘Redhill letter’ was issued to the Appellant on 14 May 2004, when HMRC had been informed that trading was imminent.)

74.  On 1 March 2003, the Appellant was registered for VAT.

75.  On 29 April 2003, John Thompson attended a meeting of the Federation of IT Equipment Distributors at which an Officer Tony Walker, of Customs and Excise Law Enforcement Policy Department, spoke on anti-fraud measures.  John Thompson had been engaged in market research (he said in evidence for about a month) on the mobile handset market in Europe and the rest of the world.  He took notes of Officer Walker’s address, on joint and several liability, additional evidence requirements for validating input tax and extended provision for security.  John Thompson’s note under the heading ‘Conclusion’ stated:

“Tony’s concluding remarks again indicated that these measures are aimed at serial abusers and that legitimate businesses have nothing to worry about.  However, he stressed that legitimate businesses should not unwittingly get caught up in fraud.”

76.  John Thompson also took notes on addresses given by Dr. M. J. Cheetham, a director of Bond House Systems Ltd., at the time involved in litigation with HMRC, and Mr. Hassan Khan, Solicitor.  The aim of the meeting appeared to be to boost support for the Federation of IT Equipment Distributors and Mr. Frazer Holmes of Barnard Atkins appeared to be organizing this.

77.  On 27 June 2003, a letter was sent to the Appellant under Officer Stone’s name requesting details of forthcoming deals as problems were still being experienced within the Appellant’s trade class.

78.  On 24 July 2003, Officer D’Rozario conducted a telephone interview with Max Morrison.  He ascertained that the Appellant had not been engaged in any trades to date.  Mr. Morrison informed Officer D’Rozario that he still had a genuine intention to trade in mobile phones.  He was awaiting the results of the post-budget consultation before deciding whether or not to enter into bulk dealings.  He explained that the Appellant had access to private investment funds and that ‘several thousands of pounds’ had been spent on professional fees in an attempt to ensure that the Appellant would adopt procedures so as not to become involved in carousel fraud and the implications of joint and several liability.

79.  Mr. Morrison said that his intention at first was to ‘trade say 4 times over say 4 days in the first month to test the market and gauge how long C&E take to repay the company’.  Mr. Morrison also expressed an interest in signing up to the Memorandum of Understanding between H.M. Customs and Excise and the Mobile Phone Industry.  Officer D’Rozario passed this information on internally within HMRC, but nothing came of it and Mr. Morrison did not become a signatory to the Memorandum.

80.  On 14 November 2003, Mr. Morrison emailed Officer D’Rozario to tell him that the Appellant was ‘very close to commencement’ of trading. He continued:

“Our first trades will either occur in the last week of November or the first week in December and in the case of those sales abroad, our VAT specialists will set up the daily procedures with HMCE in accordance with best practice, so that you are fully informed in each case on each transaction.

As we have not traded before there is one question I wonder whether you could help me with.  It is to do with monthly VAT repayment to us.

I presume you will want to see us each month and go through each and every transaction to confirm the amount.

My question is that if we provide a daily schedule of every trade throughout the month to you, and then submit the return ... How long would it be normally before you had reviewed it and if OK passed it for payment; and how long would it take between being passed for payment and receipt of funds?”

81.  Officer D’Rozario sent an email in reply on 18 November 2003.  He could not provide a definite time limit for repayment of VAT.  He asked for information on each transaction to be forwarded in a specific format to the Redhill office with a copy to himself.  He also asked to be contacted before the Appellant’s first deal had occurred in order that he could visit to obtain full details of the Appellant’s funding and suppliers and customers and ‘to allow me the opportunity to fully inform you about our concerns and how you can assist us in this matter’.

82.  Mr. Morrison replied by email on 19 November 2003.  He agreed to Officer D’Rozario’s requests and went on:

“I would like Greystone International to be a shining star in the way in which it co-operates with HMC&E to demonstrate that the requirements set out are reasonable and workable within the industry.  We have no history in trading when things were not as clear, so we are confident that in future if we work within the guidelines required by HMC&E the chances of a VAT non repayment to us are very unlikely.

We, for example, will be checking every box, not just samples in every batch.  Our specialists who have Professional Indemnity Insurance will be visiting our suppliers and purchasers and documenting details, validating addresses, etc. etc.  If they get it wrong, they know we will sue them.

You will be notified every day about every trade, both purchase and sale; and you will be welcome to visit us at any time to check our records.”

83.   On 17 December 2003 John Thompson and Adam Thompson were appointed directors of the Appellant.  At around this time each of them took a one-third shareholding in the Appellant, the remaining one-third shareholding being held by Max Morrison and GTL.

84.  On 6 January 2004 Officer D’Rozario visited the Appellant’s place of business and met with Max Morrison, John Thompson and Adam Thompson.  Officer D’Rozario was told that the Appellant’s main business activity would be the ‘bulk supply of new SIM-free mobile phones’.  It would be an export business, buying in the UK to sell to other member States within the EU and third countries (Dubai, Israel and the USA).  He was also told that the commencement of trading was dependent on funding, which in turn was dependent on Customs & Excise allowing a change of ‘tax stagger’ from quarterly to monthly. The Appellant’s proposed principal customers and suppliers were named.  None of the Appellant’s customers and suppliers featuring in deals 1 to 9 was mentioned, though it is to be borne in mind that originally the Appellant proposed to deal in mobile phones, and deals 1 to 9 were in CPUs.

85.  Officer D’Rozario’s note mentioned that:

“the company requires (from the outset) to be on a monthly tax stagger.  Mr. Morrison thought that they were and when he was informed that he was not, he stated that this would cause serious damage to their cash-flow/financial forecasts and would potentially mean that the business does not start.  He and his tax consultant implored that they be put on monthly returns as soon as possible.

I informed Mr. Morrison that although it is not Department policy to refuse such requests outright, we have a duty of care for the management of VAT and as such it may be that they will have to remain on quarterly returns until their first completed return has been fully verified and if found to have no missing/high jacked [sic] VRNs, then their request would be reviewed.

I did inform Mr. Morrison (during interview) I would make a recommendation that they go onto monthly returns, however, after obtaining a full list of their potential customers (who appear to be new ‘players’ based in Israel, Dubai, Luxembourg & Portugal) and more importantly having established that Sound Solutions Ltd., a company in which Adam Thompson (Sales Director with Greystone) is an employee, is under active investigation, I have now made a recommendation to Barry Johnson (Regional Co-ordinator) that this trader remains on quarterly returns until their first trading return has been verified.”

86.  Details of the Appellant’s proposed arrangements for the insurance and inspection of goods were given to Officer D’Rozario.  Mr. Morrison told Officer D’Rozario that the Appellant would not pay any party other than its immediate supplier, nor instruct any customer to pay any party other than the Appellant (i.e. it would not be involved in third party payments).

87.  An exchange of emails between Max Morrison and Officer D’Rozario on 15 January 2004 confirmed the information given at the meeting on 6 January 2004 and included another request for the Appellant to be put on to monthly returns, Mr. Morrison stating that a large part of the expected funding for the Appellant (including £200,000 to be loaned by Mr. Mike Osborne) was dependent on Customs & Excise agreeing to put the Appellant on to monthly returns.

88.  On 26 January 2004, Officer Downer wrote to the Appellant, for the attention of Mr. Morrison refusing the Appellant’s application to move to monthly returns.  His decision was explained as follows:

“As you will know, Customs and Excise has detected widespread abuse of the VAT system by missing traders not accounting for amounts charged as VAT, notwithstanding the payment of tax credits to those traders who later despatch goods from the UK to other Member States or elsewhere.  This abuse is predominantly in transactions involving mobile phones and computer chips.  Losses in terms of abuse are currently estimated at between £1.65 and £2.64 billion per annum.

From the information provided, I understand that Greystone International Ltd. is a new company formed to make purchases of mobile phones within the UK with the intention to make onward sales to the EU and third countries.  Your request has been carefully considered taking into account the structure of its funding, the business history of its directors (including their declared business associations and that of its financial backers) and the proposed list of suppliers and customers.

Although Greystone International Ltd. would appear to be a new company with no previous trading history (and as a consequence no record of poor compliance), given the overall nature of the trade proposed I have a fear that a movement to monthly returns as requested would have the consequence that the Commissioners would be at risk of a higher volume of transactions by those persons intending to abuse the VAT system than would otherwise be the case.  This is because a move to monthly accounting would provide additional liquidity within a chain of sales and purchases to support additional transactions that would not have else occurred [sic].

A move to monthly returns therefore exposes the Commissioners to an increased risk of loss of revenue.  In all the circumstances I therefore refuse the application made.

I make no allegations of dishonesty or knowing involvement in VAT abuse against you and should any of my assumptions about the nature of the business of Greystone International Ltd. be incorrect then I will of course be happy to reconsider the question.”

89.  The letter continued with advice about the possibility of asking for a review of Officer Downer’s decision, or challenging it by way of judicial review.

90.  The next day, 27 January 2004, Mr. Morrison emailed Officer D’Rozario on the following terms:

“Vince

Thank you for your email with the enclosure from your senior manager.

You will probably have gathered that I have a strong wish to deal in this market place, and I have been very open with you, as to my views on why we can make the small profits available.

Also, having requested monthly VAT returns over a year ago and having been told this would be no problem, at a time before I appointed John and Adam Thompson as directors; and because you informed our meeting that with the evidence available you thought you could recommend approval – I believe something has been unearthed of which I have not been cognizant and which perhaps you may not wish to tell me.

This is purely conjecture and my own sensitivity in dealing with people over a long period.

I have known Mike Osborne ... for over 20 years ...

I have therefore informed both John and Adam Thompson that I wish them to resign as directors and I will take back the shares that they purchased at the same par value.

They have agreed and interestingly without too much fuss, which is another indication to me that my gut reaction is correct.

On this basis, could I ask that I might be able to have a meeting with your senior manager to discuss the matters, in general terms and without commitment?”

91.   Officer D’Rozario replied substantively on 3 February 2004 stating that the matter had been further considered but a move to monthly returns could not be accepted at that time for the reasons given in the letter of 26 January 2004.  He went on:

“This decision would stand irrespective of your action to restructure the company in terms of its directorships and is based solely upon the fact that the business sector in which you intend to trade poses a high risk of loss to the Department.

However, the Commissioners will agree to review this position following receipt of your first two quarterly trading VAT returns.  These returns will be subject to full verification, and if the supply chain is found to be satisfactory, then consideration will be given to moving the company onto monthly returns.”

92.  These exchanges were the subject of significant cross-examination at the hearing of the appeal. At one stage Officer D’Rozario said that the Commissioners decided not to allow the Appellant to go on to monthly returns because Adam Thompson was one of the directors and background research on him and of his previous companies had made him (Officer D’Rozario) change his mind.  In re-examination he qualified that and said that the principal basis on which the Commissioners decided not to allow the Appellant to go on to monthly returns was that the Appellant was going to trade in a market of mobile phones, which the Commissioners knew was ‘prevalent with MTIC fraud’ and that if he had misled Mr. Morrison to believe that research on Adam Thompson had nothing to do with the decision, that was unintentional.

93.  Mr. Morrison complained that Officer D’Rozario had misled him, because if he (Mr. Morrison) had known that the Commissioners were concerned about Adam Thompson, or Adam and John Thompson, he would have obtained his, or their, resignation. But Mr. Morrison agreed that without the Thompsons the Appellant could not have embarked on trading at all, and he also said that ‘we were in it for the long term’ which meant that he would have caused the Appellant to trade for a period hoping eventually to be put on to monthly returns – which eventually happened.

94.  Mr. Morrison described his email of 27 January 2004 to Officer D’Rozario as a ‘test’ of Officer D’Rozario, to see whether the involvement of the Thompsons was the reason why the Commissioners were refusing to allow the Appellant to go on to monthly returns.  Mr. Morrison said, in answer to a question from the Tribunal, that the words in his email of 27 January 2004:

“They [the Thompsons] have agreed, and, interestingly, without too much fuss, which is another indication to me that my gut reaction is correct”

were an ‘embellishment’ in that the Thompsons’ agreement to resign had been reluctant.

95.  Mr. Morrison did ask the Thompsons to resign, as a ‘test’ for Officer D’Rozario.  They did agree to do so.  Mr. Morrison was therefore able to say they had resigned in his email to Officer D’Rozario of 27 January 2004.  When Officer D’Rozario’s response of 3 February 2004 indicated that the Thompsons’ resignations would not change the decision not to allow the Appellant to go on to monthly returns, Mr. Morrison rescinded the Appellant’s acceptance of their resignations.

96.  We consider that it was unrealistic of Mr. Morrison to expect that HMRC would change their mind and allow the Appellant to go on to monthly returns because he had told Officer D’Rozario that he had obtained the Thompsons’ resignations as directors.  We also consider that his approach was disingenuous because if the Appellant was to trade, whether on quarterly or on monthly returns, in reality the Thompsons were going to be closely involved in the trading activity.

97.  Officer D’Rozario communicated again with Mr. Morrison on 11 May 2004, asking what the Appellant’s position with regard to trading was.

98.  Mr. Morrison’s response (on the same day) was that the Appellant was preparing to commence trading on 1 June 2004, but that it would ‘be restricted initially’ to trading in the UK only.  This was the response to HMRC’s refusal to allow the Appellant to go on to monthly returns.

99.  On 22 June 2004, Mr. Morrison emailed Officer D’Rozario as follows:

“Vince,

I have given Adam the go ahead now that you have confirmed you are sending us the pittance! In the UK only.

However, I have decided that once we have been established, I want to buy in the UK and sell outside the EU because HMC&E have killed the inter EU trading, which means that the players establish new markets.

We can now get funds from purchasers in US who will provide us money up front, which enables us to place and pay for orders in the UK and/or suppliers in UK who will wait a few days for payment if we ship abroad because of the HMC&E devastating their previous turnovers.

In other words you have created conditions for an entirely new market to open up with business people being less demanding about payment if they trust us, because the risk of VAT fraud disappears.

What I want to ask you, is if we buy in the UK and only sell in the UK or abroad but never in the EU, can we get monthly from you on the basis that if ever the goods came back VAT would be payable on import.

Thus your risk of carousel fraud does not exist.

Can you set up a meeting with your senior manager if you think this is a problem, as I don’t see one at all.

Thanks”

100.                   Officer D’Rozario replied on 5 July 2004.  He said that Mr. Morrison’s views had been considered carefully by his senior management, but that they were not ‘at this time’ prepared to allow the Appellant to move to monthly returns (although the position would be reviewed following the submission of two quarterly VAT returns).  He added that the reasoning for this decision was as follows:

“The Commissioners of HM Customs & Excise will consider it necessary to verify the whole UK supplier deal-chain irrespective of the fact that a business within a deal-chain of transactions has removed the goods from the UK to a place outside the EU.  In the potential scenario that you provide, the Department has experience that where goods leave the UK for a third country (i.e. outside the EU), the goods can and often do return to the UK, not directly but via another Member State and thus entering the UK VAT free (zero-rated).  When the deal chains are subsequently verified, these can and sometimes do identify missing, hijacked or defaulting traders.”

101.                   Mr. Morrison’s oral evidence was that by this time (5 July 2004) Adam Thompson had advised him that the Appellant should trade in CPUs (and not mobile phones) and also that he could find buyers for CPUs outside the EU.

102.                   Officer Schofield’s evidence was that Adam Thompson had in February 2004 begun working as a full time trader, with particular responsibility for procuring goods, for Mobilx Ltd. (“Mobilx”). 

103.                   The administrators of Mobilx appealed against HMRC’s refusal to pay to Mobilx sums of input tax for which Mobilx claimed credit in its VAT returns for the months of April, May and June 2006.  Mobilx was, at the time, a dealer in mobile phones and CPUs buying within the UK and selling to traders in other Member States of the EU and elsewhere, principally in the USA – see: paragraph 1 of the Decision of the VAT Tribunal (Chairman: Colin Bishopp) in Mobilx Limited (in administration) v HMRC 2008 WL 2148266.

104.                   Adam Thompson, as a shareholder and former employee of Mobilx gave evidence in Mobilx’s appeal.  Mobilx had been incorporated on 16 September 2003.  Its directors were Stuart and Steven Bell. Steven Bell had worked part-time as a consultant for Sound Solutions when Adam Thompson was employed by Sound Solutions.  As stated above, Adam Thompson joined Mobilx (from Sound Solutions) in February 2004.  He had approached Steven Bell in December 2003 asking him if he could come to work with Mobilx to help get the business off the ground. When he joined Mobilx he was given a 25% shareholding interest.  One of the contacts Adam Thompson had had at Sound Solutions was Llion Rowlands, who operated through Syskal Distributions Ltd. (“Syskal”) in Manchester.  Syskal had moved over from trading in mobile phones to trading in CPUs and Adam Thompson suggested to Steven Bell that Mobilx should follow this trend, which it did.

105.                   Mobilx had, in early 2004, been pressing HMRC to agree to its going on to monthly returns, but without success.  On 28 April 2004, indeed, HMRC (an Officer Martin) had written to Mobilx advising that one of its transactions (matched purchases and sales) in December 2003 – there had been four such transactions – had been traced back to a defaulter.  It is not clear whether the transaction concerned was in mobile phones or CPUs, because both were dealt in by Mobilx during December 2003.

106.                   The Appellant commenced trading in September 2004 and on 1 October 2004 Mr. Morrison emailed Officer D’Rozario stating that he had that day signed the Appellant’s first VAT reclaim in the amount of £98,618.62.  He said:

“.. to date the trading has been very modest, comprising two purchases and two sales (one sale to Hong Kong and the other to Dubai).  We may do some UK to UK trades too, but out concentration will be buying in the UK and shipping abroad outside the EU.”

107.                   On 14 September 2004, Officers Martin and Johnson had visited Mobilx and seen Stuart Bell and others (though not Adam Thompson) and had informed them that defaulting traders had been identified in the deal chains of 17 of the 24 transactions involving CPUs undertaken by Mobilx in May and June 2004.

108.                   On 12 October 2004, Officer Douglas Armstrong spoke to Stuart Bell and informed him that, in relation to the deals transacted by Mobilx in July and August 2004, 4 out of 8 deal-chains for July and 7 deal-chains for August had all been traced back to defaulters.

109.                    On 17 January 2005, Officer Johnson wrote to PricewaterhouseCoopers LLP, representing Mobilx, to inform them that at that stage defaulters had been identified in the deal chains of 18 of the 24 transactions in May and June 2004 and in 6 of the 8 deals chains for July and 8 of the 17 deal-chains for August.  Significantly, defaulters had been identified in all deal-chains which had been verified.

110.                   On 1 February 2005 Senior Officer Martin Roberts and Officer Steve Owens visited the Appellant. The visit lasted 2½ hours.  Its purpose was to ‘update company structure’, review trading activities and practices and to review the content of the Appellant’s 12/04 quarterly VAT return.

111.                   The Officers met David Williams, the Finance Director of GTL, who had compiled the 12/04 VAT return for the Appellant, Max Morrison and Jon Osborne, the son of Mike Osborne, who was employed by the Appellant (its only employee).  John Thompson later joined the meeting.  Adam Thompson had been due to attend but did not, apparently due to medical commitments.  He was, however, available on the telephone and at stages throughout the meeting calls were put through to him on ‘speakerphone’.  Mr. Morrison said in evidence that he did not remember the meeting.  We conclude, however, that he was present.

112.                   Mr. Morrison’s role in the Appellant’s business was not day-to-day management.  That was left to John and Adam Thompson, with Jon Osborne as an office manager who was going to be trained up by Adam Thompson.  As Mr. Morrison said in evidence, Adam was running it, John was helping him.

113.                   Officer Roberts told the meeting that he understood that there had been a defaulting trader in the deal-chains of both of the transactions that the Appellant had been involved in during the 09/04 VAT period.  He said he could not disclose the identity of the defaulters or their position(s) in the supply chains but he said that he was not aware of any action being considered to issue the Appellant with a security warning letter.

114.                   This therefore was information that the first trades which the Appellant had undertaken, despite their precautions to avoid being involved in MTIC fraud, had been connected with fraud. John Thompson in evidence accepted that this had been said but added that he could not remember it being said.

115.                   This information prompted contact with Adam Thompson, who later called back to state that he had been assured that neither Vita Moderna (apparently the Appellant’s suppliers in the 09/04 deals) nor their immediate suppliers had defaulted.

116.                   On 14 February 2005, Officer Roberts wrote to the Appellant voicing concern that further enquiries had revealed that certain items of stock purchased in the 12/04 period did not hold valid product identification numbers. On 14 March 2005 he wrote again saying that the stock with invalid product identification numbers had not been distributed by Intel.  The Commissioners were accordingly considering whether there was an entitlement to input tax credit in respect of these purchases.

117.                   On 4 April 2005 John Thompson, Adam Thompson and Michael Osborne were allotted 100 shares each in the Appellant. This left the Appellant being owned effectively in equal shares by Messrs. Morrison, Osborne, Thompson and Thompson.

118.                   In May 2005 the Appellant was permitted by HMRC to go on to monthly returns.  Officer Downer in evidence was unable to recall why this permission was given or the circumstances surrounding the giving of this permission.  We simply note the fact and state that we do not know why the Appellant was permitted to go on to monthly returns at this time, when previously HMRC had been so reluctant to permit the move.

119.                   The Appellant’s 12/04 VAT return was adjusted by HMRC to show a reduction in the input tax repayment to £78,406.34 by reason of invalid product identification numbers (see Officer Martin’s letter dated 3 May 2005). The reduction totalled £20,764.80.

120.                   On 20 May 2005, Officer Owens wrote to the Appellant advising it that in relation to the quarterly period 03/05 another reduction in the Appellant’s repayment relative to invalid product identification numbers would be made.  In this case the reduction was £20,522.25 and the balancing repayment which was authorised ‘without prejudice to any further action which might be taken by’ HMRC was £194,406.30.

121.                   Some of the tax representing this reduction was in fact paid over to the Appellant later, following HMRC’s enquiries suggesting that some of the product identification numbers in question were genuine after all, as relating to genuine Intel product.

122.                   Officers Owen and Tinker made an assurance visit to the Appellant on 21 July 2005 and saw Messrs. Morrison, John Thompson, Jonathan Osborne and David Williams. They were concerned to verify the deal paperwork for the period 06/05, in which 12 deals had been conducted, including 6 purchases from Multisystems.

123.                   HMRC produced at the hearing a schedule drawn up from material produced at Mr. Morrison’s request by his assistant, Irene Holmes, which showed occasions when stock previously purchased by the Appellant (identified by box number) was later offered again to the Appellant by a potential supplier, in connection with a proposed deal to an identified customer. 

124.                   The first transaction by the Appellant in such stock (as listed on the schedule) was on 2 August 2005, when the Appellant bought two identified boxes of CPUs (KN09L180 and KN09NM49) from a supplier called ‘Leisure’ and sold to a customer called ‘Desert Wing’ in the UAE.  Those boxes were re-offered to the Appellant on 29 September 2005 by a supplier called ‘21^st Trading’ for a sale to a customer called ‘Syskal UK’.

125.                   The second such transaction was on 9 August when a box (BH07ZM60) was bought by the Appellant from Multisystems and supplied to a customer called ‘Chief Components Canada’.  The same box was offered to the Appellant on 21 October 2005, again by Multisystems, in connection with a proposed sale by the Appellant to Venture Tech.

126.                   There were 21 further such transactions listed as occurring between 12 August 2005 and 23 November 2005.

127.                   In September 2005 KPMG produced a report for the Appellant containing general guidance to assist the Appellant in combating what was referred to as the high risk of VAT fraud found in the CPU sector. It recommended that checks listed in the report be carried out but noted that ‘the level of documentary evidence required by Customs may change’. The bulk of the report concerned due diligence on suppliers, due diligence on customers and recommended transaction procedures.

128.                   In the month of November 2005, according to the evidence of Officer Downer, an individual named Darren Bagnall (who is, or was at the material time, chief executive officer of Venture Tech, one of the Appellant’s customers in the disputed deals) was found in possession of approximately £99,000 in cash at the SAS Radisson Hotel at Manchester Airport.  The cash was later found to be contaminated with cannabis.  The cash was seized and Darren Bagnall was later convicted of money laundering contrary to section 328 of the Proceeds of Crime Act 2002 at Manchester Crown Court. Also found in the hotel bedroom used by Darren Bagnall was documentation comprising notebook pages which, on analysis (and this was not disputed by any of the Appellant’s witnesses), showed details of high value transactions involving the wholesale trade of CPUs.

129.                   Officer Downer’s analysis of the notebook pages was difficult and time-consuming, mainly due to the fact that many of the transaction lines were undated.  However he was able to trace 38 of the deals recorded to actual sales by reference to trader business records.  He found that the notebook pages detailed sales made by UK based traders who exported CPUs to customers based in the USA and Singapore.  The transaction lines often gave details of other UK traders involved in the supply chain prior to the eventual export sale made by the UK broker, as well as other traders involved after the involvement of the initial USA or Singapore based customer.  The unit costs paid by each of the traders was also noted in the notebook pages. Nicknames or abbreviations of various entities in the supply chains in which the Appellant was involved feature in the notebook entries.   These revealed the involvement of companies in the supply-chains for the Appellant’s deals in issue in the appeal, and also the Appellant itself under the nicknames or abbreviations ‘Grey’ and ‘Ant’.  Transactions in which the Appellant was apparently involved were identified and traced to the Appellant’s transaction documentation. For example the sale by the Appellant on 4 October 2005 of 3,150 CPUs to Venture Tech at $167 each was traced to the notebooks.  Those CPUs had been purchased by the Appellant from Multisystems at £90.25 each on the same day. These notebooks show transactions involved in MTIC fraud.

130.                    On 20 December 2005 two individuals from KPMG visited LTL by appointment on behalf of the Appellant and a due diligence report on LTL was produced by KPMG for the Appellant, dated 5 January 2006. The conclusion was that LTL were aware of the risk of the presence of counterfeit goods within the market and had contracted A1 Inspections Ltd. to carry out independent open box inspections.  LTL also monitored box numbers and IMEI numbers (for mobile phones).  KPMG advised that LTL could ‘demonstrate their compliance with [the Appellant’s] supplier declaration in the deal examined’.  LTL had accounted for the requisite amount of VAT on the specific transaction with the Appellant which KPMG examined.  LTL had not entered into any third party payment arrangements in connection with that transaction.  LTL could evidence that they had bought and sold at the market price, that they had employed A1 Inspections to carry out inspections of all their stock, and that they held validation of VAT numbers with Redhill.

131.                   Following a visit to the Appellant on 13 December 2005, HMRC wrote on 16 January 2006 informing the Appellant that they had authorised repayment of £529,589 VAT to the Appellant in relation to the monthly period 11/05, again ‘without prejudice to any further action which might be taken by’ HMRC.  There remained £10,267.02 repayment requested which was still under investigation because of suspicion of invalid lot numbers.

132.                   The schedule referred to above, which showed occasions when stock previously purchased by the Appellant (identified by box number) was later offered again to the Appellant by a potential supplier, in connection with a proposed deal to an identified customer, showed 9 such transactions between 26 January 2006 and 28 February 2006 and a further 12 transactions all on 23 March 2006 which featured boxes of CPUs purchased by the Appellant from Multisystems and sold on the same day to ‘High Level Trading of Switzerland’ which were again offered to the Appellant by Multisystems eight days later on 31 March 2006 for intended sales by the Appellant to Giga Asia.

133.                   On the instructions of the Appellant, representatives of Chiltern plc visited Multisystems on 31 January 2006 to conduct VAT due diligence checks.  Their conclusion, after speaking to Richard Dawson, the director of Multisystems, was that ‘based on what we were told and from what we could see, we formed the opinion that [Multisystems were] well aware of the importance of due diligence and appear to have a robust system in place’.  The report from Chilterns plc was dated 9 February 2006.

134.                   It was against this factual background and history that the deals in issue in this appeal were transacted.  As stated above, deal 1 took place on 3 February 2006, deal 2 on 14 February 2006, deal 3 on 16 February 2006, deal 4 on 21 February 2006, and deal 5 on 28 February 2006.

135.                   On 3 March 2006 Officer Owens visited the Appellant and spoke to Judith Morrison and Jonathan Osborne to verify the deal paperwork for the 01/06 period.

136.                   Deal 6 took place on 23 March 2006, deal 7 on 24 March 2006, deal 8 on 31 March 2006 and deal 9 on 7 April 2006.

137.                   On 3 May 2006 Officers Bennett and Tarr visited the Appellant to verify the transactions for the periods 02/06 and 03/06.  They met Max Morrison, John Thompson, Jonathan Osborne and John O’Donell of Chiltern’s VAT Consultancy.

138.                   Officer Bennett asked whether the relevant public notices had been issued to the Appellant.  His note of the meeting states that ‘it would appear that they had’ but Mr. Morrison said he would like to read them anyway.  Notices 726 (Joint and Several Liability) Notice 700/52 and the Statement of Practice on Invalid Input Tax were issued.

139.                   Mr. Morrison asked repeatedly what Officer Bennett’s concerns were and he explained that 12 invalid numbers had been identified by Intel in relation to the Appellant’s February 2006 trading.  In addition HMRC’s investigations had indicated that 4 out of the 5 purchases by the Appellant in 02/06 traced back to defaulters and that an early trader in the 5^th chain looked suspicious.  He said that the current debts attributed to those defaulters amounted to approximately £64million.  He also said that cursory examination of the 03/06 period showed that one of the 3 purchases traced back to a defaulter with a debt of £1.5 million.

140.                   Mr. Morrison told Officer Bennett that the Appellant had done all it could to check out the people it dealt with, mentioning the due diligence checks by KPMG and Chilterns.

141.                   On 9 May 2006 Max Morrison and Michael Osborne attended at the Cheadle VAT Office and spoke to Officer Bennett (with Officer Tarr present).  This meeting was at Messrs. Morrison and Osborne’s request.  It was emphasised by Max Morrison that neither John Thompson nor Adam Thompson was aware (at the time) of the meeting or of the issues being considered. Both Mr. Osborne and Mr. Morrison were at pains to convey that they in no way intended to get involved in trading which was connected to fraud.

142.                   Officer Bennett outlined the position of the Appellant as seen at that time by HMRC.  It was a company which had:

·       Elected to enter a market where it knew fraud was endemic;

·       Awaited the outcome of the consultation period, which concerned specific goods, mobile phones and CPUs;

·       Decided not to trade in mobile phones as it considered them risky, but elected instead to trade in CPUs, which were equally risky;

·       Had made three claims concerning trade in invalid CPU numbers (input tax involved being approximately £90,000); and

·       Had all its five February 2006 deals traced back to defaulting traders.

143.                   Mr. Osborne was puzzled by the number of boxes of CPUs being re-offered to the Appellant, as the Appellant sent goods to America, where Mr. Osborne was sure they would be sold on to actual users of the product.  Officer Bennett showed him the results of checks he had been making on the Appellant’s claim for March 2006.  There were two boxes of CPUs traded by the Appellant on 23 March 2006 to Dubai, which had also appeared as having been traded by the Appellant on 30 March 2006 to Singapore.  Both Max Morrison and Michael Osborne reacted to this information with astonishment.

144.                   On 18 May 2006 Max Morrison and Michael Osborne again attended at their request at the Cheadle VAT office and met Officer Bennett (with Officer John Lyon also being present).  Messrs. Morrison and Osborne advised that they had discussed the situation with their fellow investors and that a decision had been made to withdraw entirely from trading in CPUs.  They were concerned that the VAT reclaimed would be recovered.  Officer Bennett told them that there was a possibility at that stage that the bulk of the claims would be met, although he was likely to send a letter advising them that continuing to deal in chains which generated a tax loss would put any future claims in jeopardy.  They said no such situation would arise in the future as they were now persuaded that the trade involved fraud.

145.                   On 19 May 2006, a board meeting of the directors of the Appellant was held at short notice, following the meeting between Messrs. Morrison and Osborne and HMRC the previous day.  Besides Messrs. Morrison and Osborne, John and Adam Thompson were present at the board meeting, and all four signed the minute of the meeting.  At the meeting the Appellant company resolved to cease trading, return all outstanding loans to private lenders as soon as it is in a position to do so and to search for international trading activities in spheres of business not associated with MTIC fraud and to inform HMRC of the position. 

146.                   On 22 May 2006 the Appellant, by Michael Osborne and Max Morrison wrote to Officer Bennett in the following terms:

“Dear Mr. Bennett,

With reference to our recent meeting with yourself and associates I write to inform you that after due consideration of all the circumstances placed before us we have made a decision to cease trading in our present format i.e. silicon chips, mobile telephones traded in such a way as to give the VAT office cause for concern.

As we believe you are aware this company has never traded knowingly in any fraudulent situation and our intention was always to trade completely honestly but we have taken on board your views and will cease forthwith.

This leaves us in an unfair situation in that when we return the monies to the investors we are left with no funds to fight a legal battle over monies that have been withheld by yourselves.

We have taken legal advice with regard to this and previous monies withheld and we have been told that we have a far more than even chance of winning the case.  As a last resort we are informed that there are companies that will buy our legal position and take the case.

While we do not accept that the questioned chips are counterfeit (earlier withheld chips were actually tested and found to be working correctly) we do not want to take either of the legal avenues open to us as we want to stop with a clean break.

We are of the opinion that we do sell in a genuine market and we cannot understand how chips we sell to the U.S. could end up in a chain back here.  However we have accepted your overall view and will stop trading, but do feel that it would be fair and in the spirit of negotiation for you to come to some arrangement with us over our withheld monies to enable us to sever all loose ends and go on to other projects.

We hope you recognise the fairness of this request.

Yours sincerely,

147.                   In a series of letters sent on 22 June 2006, 27 June 2006, 21 July 2006 and 4 August 2006 by Officer Bennett and on 3 January 2007 by Officer Schofield, HMRC informed the Appellant that all purchases carried out by the Appellant in the February, March and April 2006 VAT periods, which had all been subject to extended verification, had been traced to tax losses from defaulting traders. 

148.                   Following a meeting with HMRC on 11 January 2007 and correspondence, finally, on 14 June 2007 HMRC, by Officer Schofield, issued a decision letter to the Appellant denying its claims for repayment of input tax for the VAT periods 02/06, 03/06 and 04/06, which has given rise to the current appeal.

149.                   The decision letter listed 8 matters taken into account by HMRC in reviewing the activities of the Appellant which had led to the decision.  They were:

1.     All of the deals in question were traced back to tax losses;

2.     At the time of entering into the transactions, the Appellant was well aware of MTIC fraud, its implications and patterns;

3.     The Appellant’s due diligence procedures on both suppliers and customers were inadequate to assess the fraud risk posed by high value deals of the nature carried out.  In particular, no proper trade references were taken up and only ‘closed box’ inspections of stock were made.  No attention was paid to the poor credit ratings of Multisystems and LTL, the suppliers dealt with.

4.     Mr. Adam Thompson’s involvement in arranging the transactions was the most significant of all the Appellant’s personnel.  He had a history with companies with a history of involvement in MTIC fraud.

5.     The deals were all back-to-back, taking place on the same day and involving a chain of 7-10 trades all deciding to buy and sell exactly the same quantity and specification of goods.  The Appellant never carried unsold stock.  These were indications of contrived trading.

6.     Payment was always made before the goods were released and all of the supply chain companies and overseas customers had accounts with the FCIB, which was a further indication of the contrived nature of the transactions.

7.     ‘The consistency of the deal patterns and the subsequent missing traders involved in the deal chains involving the Appellant’s overseas customers is so symmetrical and striking that it reinforces the assertion that the deals were contrived.’

8.     The evidence of circularity in March 2006 where the same goods were sold abroad twice by the Appellant to Berkshire in Dubai and then, within a short period to Giga Asia in Singapore.  ‘There is also evidence that the same goods were exported during the same month by both the Appellant and Mobilx, a company in which Mr. Adam Thompson has a significant presence, both as dealmaker and as a shareholder.’

Actual knowledge

150.                   We turn now to the question of which (if any) individual’s knowledge can be attributed to the Appellant, for the purposes of determining whether the Appellant knew that its transactions were connected with fraudulent evasion of VAT.

151.                   Mr. Foulkes, for HMRC, submits that the knowledge of each of the directors is relevant when considering the knowledge of the Appellant and that ‘the clearest (but not the only) candidate is Adam Thompson’.  We did not understand Mr. Brown, for the Appellant, to quarrel with the proposition that any director’s actual knowledge can be attributed to the Appellant for these purposes.

152.                   HMRC sought to extend the area of enquiry to include Jonathan Osborne’s knowledge who, although not a company officer, was given responsibilities in respect of the conduct of the relevant trading activities.

153.                   Mr. Foulkes’s submission was that to the extent that Jonathan Osborne’s work was overseen by a director (Adam Thompson, in fact) then that director would have the requisite knowledge, but to the extent that he was not overseen, it follows that he was given his own discretion: to that limited extent his knowledge is therefore similarly to be imputed to the Appellant.  He cited Meridian Global Funds Management Asia v Securities Commission [1995] AC 500 (a Privy Council decision) in support.

154.                   We find that in practice Jonathan Osborne was working, in relation to the transactions undertaken by the Appellant, under the guidance and direction of Adam Thompson.  He spoke to him every day, although he was not working in the same location.  In relation to due diligence, he worked under the direction of John Thompson.  For example, he told him about boxes which were offered to the Appellant for the second time and which, in accordance with due diligence guidance received by the Appellant from KPMG, were rejected by Jonathan Osborne on behalf of the Appellant.  In answer to a question put to him by Mr. Foulkes:

“... as time developed, and by the time we get to 2006, did you feel that you had some responsibility in the sense of decision-making?  Or did you feel that at the end of the day it was for the directors for you to go to if you had any decisions of any substance to make ... in regards to any of the work that you did?”

Jonathan Osborne replied:  “I’d generally talk to the directors”.  That meant Adam Thompson, John Thompson, his father, Mike Osborne, and possibly Max Morrison as well.  We conclude that Jonathan Osborne was not given his own discretion to any significant extent and that we should not attribute any knowledge of his to the Appellant.  We record that his evidence was that at the time he did not think that the Appellant was involved in any supply chain with a missing trader.

155.                   We conclude from the evidence that all the directors of the Appellant were very aware of the prevalence of MTIC fraud in 2006 within both the mobile telephone and CPU trade sectors.  This was not denied by any of them.  Adam Thompson, in particular, had firsthand experience of working in the mobile phone (through Rapid and Sound Solutions) and CPU (through Mobilx) wholesale sectors and of the prevalence of MTIC fraud in them. 

156.                   We accept that Max Morrison had a genuine intention at any rate up to mid 2004 (when Adam Thompson advised him that the Appellant should trade in CPUs, not mobile phones) to trade in the legitimate wholesale mobile phone grey market of which he had had some experience through GTL.  Similarly we accept that Mike Osborne, who relied on Max Morrison’s advice and experience had such a genuine intention, at any rate up to that time.  This explains, for example, Max Morrison’s statement, in the email of 19 November 2003, that he wanted the Appellant ‘to be a shining star in the way in which it cooperates with HMC&E to demonstrate that the requirements set out are reasonable and workable within the industry’.

157.                   After the Appellant started trading (in CPUs) in September 2004, we consider that Max Morrison and Mike Osborne’s primary concern was to trade as profitably as possible, but legitimately.  Max Morrison’s energies were devoted to obtaining a monthly VAT stagger in order to maximise the Appellant’s trading opportunities.  This was eventually achieved in May 2005. Although Max Morrison knew in general terms that there was a high risk of the Appellant unwittingly becoming involved in supply chains affected by MTIC fraud, he was content to rely on what he understood was Adam Thompson’s expertise and the professional advice (principally from KPMG) which was obtained by the Appellant.  We note, however, the KPMG’s report on due diligence (although commissioned in February 2005) was only produced in September 2005, whereas as early as 1 February 2005 Mr. Morrison had been told at a meeting by Officers of HMRC that it was suspected that there had been a defaulting trader in the deal-chains of both of the transactions that the Appellant had been involved in during the 09/04 VAT period.  The Officer (Roberts) told the meeting that he was not aware of any action being considered to issue the Appellant with a security warning letter and we conclude that Mr. Morrison derived what turned out to be unjustified reassurance from this.  Later in February 2005 the Appellant was informed that certain items of stock purchased in the 12/04 period had not held valid product identification numbers.  Mr. Morrison agreed in cross-examination that this was relevant not just for seeing whether the goods were legitimate CPUs but also for seeing whether the Appellant was being offered the same goods twice.  But at the time he was content to proceed on the basis that this problem was probably due to confusion at the freight forwarder.

158.                   We conclude that Max Morrison was at this stage – and until May 2006 – careless about the effectiveness of such measures as were in place to prevent the Appellant’s involvement in supply chains affected by MTIC fraud, and that Mike Osborne’s attitude was materially influenced by Max Morrison’s.  However, neither of them knew at the time of any of the purchase transactions with which this appeal is concerned that they were connected with the fraudulent evasion of VAT.

159.                   We are not so confident of the state of John Thompson’s knowledge.  His role included carrying out research into the wholesale mobile phone market (which was not in the event traded in) and due diligence visits, for example to Venture Tech.  We are satisfied from the evidence that this research and the due diligence undertaken by the Appellant was not as thoroughgoing as was required by the need to avoid involvement in supply chains affected by MTIC fraud. In addition, he accepted in evidence that he had raised payment instructions (for purchases) at the behest of Adam Thompson, without making any checks, such as asking to see an invoice.  He was also careless in compiling what he described as his ‘discussion document about funding’ which was material in the forming the strategy adopted by the directors for raising funds. He drafted a terms and conditions document, which was carelessly assembled, and he did not take legal advice in relation to it. Nevertheless, John Thompson denied knowledge of involvement in MTIC fraud and on the balance of probabilities we find that HMRC has not proved that he knew at the time of any of the purchase transactions with which this appeal is concerned that they were connected with the fraudulent evasion of VAT.

160.                   We have, however, reached the conclusion that on the balance of probabilities Mr. Adam Thompson did know at the time of the purchase transactions in issue that they were connected with the fraudulent evasion of VAT.

161.                   He denied any such knowledge, but we have found his evidence to be unsatisfactory. The Appellant’s purchases in the three VAT periods under consideration were all connected with fraudulent evasion of VAT.  Mr. Adam Thompson’s involvement was a prerequisite for the Appellant’s trade.  He had begun working as a full time trader for Mobilx in February 2004 and (as Mobilx had been informed by HMRC from September 2004 onwards) defaulting traders had been identified in most of the deal chains (which involved CPUs) in May, June, July and August of 2004. Before that, he had worked at Rapid, which in 2002 had ceased trading because of HMRC’s assessments to VAT, issued because of their concerns about the validity of the commercial documentation provided.  He had also worked for Sound Solutions (as had Steven Bell who later set up Mobilx), which also had a history of participation in transactions connected with MTIC fraud (although in that case the products traded were mobile phones) and of warnings from HMRC that this was the case.

162.                   Furthermore we accept HMRC’s submission that the Appellant’s transactions took place as part of contrived deal chains and that this indicates knowledge of the connection of the transactions with fraudulent evasion of VAT on the part of Mr. Adam Thompson, who was responsible for organising the transactions. 

163.                   The evidence for this is provided both by Officer D’Rozario’s analysis of the FCIB evidence and also by Officer Downer’s evidence relating to the notebooks found in the possession of Darren Bagnall on his arrest in November 2005 and other notebooks found in 2007 during the search of two properties in the Manchester area. 

164.                   We do not regard Officer D’Rozario’s analysis of the FCIB evidence as determinative of the question of whether the Appellant’s transactions took place as part of contrived deal chains.  Mr. Foulkes submitted that the money flow, where it was possible to trace it, followed a similar circular path whichever payment Officer D’Rozario took as his starting point, and that this demonstrated contrivance in that, wherever the transaction chain starts and finishes for a given consignment, it flows in a circle.  The fact remains, however, that Officer D’Rozario’s analyses of the FCIB money flows relative to the same deal are not consistent and cannot all have been correct. Officer D’Rozario’s analyses of the FCIB money flows relative to deal 5 are taken as an example.  The first analysis followed two receipts of payments by Multisystems from the Appellant.  The second analysis followed third party payment instructions from MCG to Optimal (MGC’s customer in the deal chain).  The third analysis followed the intra-account transactions sheets relative to Tracker Trading Limited (“Tracker”) (Optimal’s customer in the deal chain).  These three analyses each demonstrated different money flows.  Although all of them suggested that funds went round in a circle, the respective circles followed different paths.  The analyses involved Officer D’Rozario making assumptions as to what payments related to particular transactions, particularly in relation to part payments.  There was also some criticism of the accuracy of the analyses by reference to the “EB reference numbers” given for certain payments.  These EB reference numbers on the face of it indicate a chronological sequence in which payments were made, but some of the analyses required later payments to be received before earlier payments were made which was, on the face of it, improbable.  Officer D’Rozario suggested that an answer to this problem was that traders could ‘pre-order’ EB reference numbers, and so they did not in fact in themselves indicate a chronological sequence.  Officer D’Rozario had been told of this possibility by another Officer (Birchfield), but he did not give evidence and no indication was given of where he had obtained this explanation from.

165.                   The Appellant did not have an FCIB account (nor did Venture Tech) and therefore receipt of funds by the Appellant in a circular movement via different FCIB accounts could not be demonstrated.

166.                   We conclude that Officer D’Rozario’s analyses were suggestive (but not more) of contrived trading in which the Appellant took part.  They are a factor of which we have taken account in reaching our conclusion that the Appellant did indeed take part in a contrived pattern of trading.

167.                   More persuasive, in our view, is the evidence provided by Officer Downer in relation to the notebooks (see: paragraph 163 above).

168.                   We accept HMRC’s submission that the fact that orchestration involving the Appellant’s deals for periods before the periods in issue in the appeal is demonstrated in the notebooks found in the possession of Darren Bagnall in November 2005 is indicative of the Appellant’s knowing participation in contrived trading generally.

169.                   An example from these notebooks was a chain of supply showing supplies by “Rich” (identified as Multisystems, which was headed up by Richard Dawson) to “Grey” (the Appellant), and by “Grey” to “Vent” (identified as Venture Tech).  This was convincing evidence of the Appellant’s participation in a contrived chain.  We reject the suggestion that the notes are merely a record of legitimate trading.  We regard that as highly improbable.  In particular, we reject the suggestion (as being highly improbable) that the Appellant was an innocent who was manipulated by Dawson (Multisystems) and Bagnall (Venture Tech) on the basis that they were long term business associates.  It appears that Mr. Adam Thompson was also acquainted with both Dawson and Bagnall. Indeed, Mr. Adam Thompson gave detailed evidence about conversations he had with Darren Bagnall  about Bagnall’s business in UN supplies.  It seems to the Tribunal that it is inconceivable that the two of them would not have discussed the business they were doing with each other at all – as Mr. Adam Thompson claimed.

170.                   Many of the deal chains noted in the notebooks record price drops at some juncture – that is, an entity, such as “Chatch”, purchasing goods at a price (94.25) and onselling them at a lower price (86.50).  We accept HMRC’s submission that this is indicative of circular trading to enable goods to re-enter the UK and be recirculated so that the eventual broker (who must recover ‘input tax’ from HMRC) is able to show reasonable sales and purchase prices.

171.                    Important evidence is also provided by an extract from one of the other notebooks found in 2007 during the search of two properties in the Manchester area.  That extract is a page faxed from the Palm Court Hotel in Lahore on 3 April 2006 at 5.41 pm (presumably local time in Pakistan). 

172.                   The page records deals dated 23 March 2006 which we find correspond with deal 6 undertaken on that date, one of the deals with which this appeal is concerned. The deal chains relate to sales of 4095 units and 3780 units respectively. 

173.                   They show, in the case of the sale of 4095 units, sales from “HL” (identified as High Level Trading (HLT)) to “IQ”, from “IQ” to “PZP”, from “PZP” to “SNS” (likely to be S&S, the defaulter in deal 7) at a price drop from 94 to 82.70, from “SNS” to “MG” (likely to be MGC), from “MG” to “OPT” (likely to be Optimal), from “OPT” to “FN” (likely to be Fern Associates), from “FN” to “MSYS” (Multisystems), from “MSYS” to “GREY” (the Appellant) and from “GREY” to “BERK” (likely to be Berkshire).  The unit price recorded on the page for the sale from “MSYS” to “GREY” was 84.50, and from “GREY” to “BERK” was 89.50.  These unit prices match the sterling prices recorded for deal 6 (see: paragraph 28 above).  

174.                   In the case of the sale of 3780 units, the deal chain recorded on the page begins and ends with “HL” (HLT) – which we find is convincing evidence of circularity.  “HL” sells to “IQ”, “IQ” to “PZP”, “PZP” to “SNS”, again at a price drop, this time from 91.75 to 82.70, from “SNS” to “MG”, from “MG” to “OPT”, from “OPT” to FN”, from “FN” to MSYS”, from “MSYS” to “GREY” (the Appellant) and from “GREY” to “HL”.  Again, the unit prices recorded on the page for the sale from “MYSY” to “GREY” and on the sale from “GREY” to “HL”, 84.50 and 89.50 respectively, match the sterling process recorded (at paragraph 28 above) for deal 6.

175.                   Mr. Foulkes drew our attention to the annotation on one of the pages of the notebooks found in Bagnall’s possession as follows: “Foot Note. Adam overpaid $1.50 on 10 box’s [sic]”.  He suggested that this indicated a familiarity between the compiler of the notebook and Mr. Adam Thompson and we agree that it does.  This is consistent with knowledge on Mr. Adam Thompson’s part of the contrived trade evidenced by the notebooks in which the Appellant featured.  We accept that this points in all probability to Mr. Adam Thompson’s knowledge of the Appellant’s connection with fraudulent evasion of VAT.

176.                   We also accept that many other factors show that it was more likely than not that the deal chains in which the Appellant featured were contrived.  We will mention only a few.

177.                   First, the fact that each deal chain contains a large number of traders – in a genuine legitimate market, such deal chains could not be supported. 

178.                   Second, the involvement of Adam Thompson in working for Mobilx at the same time as sourcing and arranging all the Appellant’s deals – this, together with Mr. Adam Thompson’s acceptance in evidence that he concealed his involvement with the Appellant from Mobilx (though not the other way round), we regard as not being commercial practice and as being consistent with Mr. Adam Thompson’s knowledge of the contrived nature of the Appellant’s trading.

179.                   Third, we were unimpressed generally by Mr. Adam Thompson’s evidence.  We give only a few examples. 

180.                   He said that he concealed information from his father, John Thompson – he did not tell them he knew the individuals behind Venture Tech (Bagnall) and Nicom (Compton) before John Thompson visited those traders for ostensibly ‘due diligence’ purposes.  We found Mr. Adam Thompson’s explanation that he wanted his father to ‘form his own opinion’ as unconvincing.

181.                   He referred in his witness statement to recording every piece of stock he was offered on a stock sheet.  In questions from the Tribunal he admitted that he had kept no stock sheet for the Appellant, though he had kept one for Mobilx.  His witness statement was therefore inaccurate.

182.                   He gave reasons for working for Mobilx and the Appellant at the same time which we found incredible – that he was planning to sell out of Mobilx, which had been much more profitable for him than the Appellant, and concentrate all his activities on the Appellant. 

183.                   His evidence about his input into the document that John Thompson principally put together to encourage investment in the Appellant was unconvincing.  He seemed both to say that he had no input into that document – which seems incredible, since he was at that time the only person involved with the Appellant who had experience of trading in CPUs – and that he did have some informal conversations about the market with his father, which helped his father put the document together.  It seemed to the Tribunal that he was trying to avoid responsibility for the document.

184.                   His answers about his responsibility for the Appellant’s paperwork were inconsistent.  He asserted he was good at the paperwork needed to record deals because ‘that’s what I done at Sound Solutions’, and indeed he was solely responsible for that paperwork at the Appellant, Jonathan Osborne working under his direction, but he accepted that he was not good at taking notes.  His evidence about the KPMG report being for the benefit of the other directors indicates to the Tribunal that Mr. Adam Thompson did not want to avail himself of the professional advice which the Appellant had commissioned in order to avoid involvement in fraudulent trades. Jonathan Osborne reported the instances of the Appellant being offered the same stock more than once to Mr. Adam Thompson, but Mr. Thompson carried out no further investigation into this important indicator of fraud.

185.                   Mr. Adam Thompson visited LTL (the Appellant’s supplier in deal 9) on 8 March 2005.  He completed a visit report (which was signed but not dated).  In it he stated that (although apparently Jeff Lewis, the manager of LTL, was previously personally unknown to Mr. Adam Thompson) he found out that LTL traded with Multisystems and Vita Moderna (both of which were known to Mr. Adam Thompson) and Mr. Lewis said he could get references for LTL from both of them, as well as from the freight forwarders..  Mr. Adam Thompson noted that Mr. Lewis ‘seemed a decent person to trust and trade with’.  He noted that his ‘due diligence levels were good’ and that he had the ability to offer the Appellant stock ‘on a day’s credit on certain deals as long as we could place a small deposit’. It did not seem to have occurred to Mr. Adam Thompson that if LTL traded with Multisystems there was no reason for the Appellant to do so, since it also traded with Multisystems.  Further it was not clear why LTL would offer credit to the Appellant and, in any event, one day’s credit was not going to be enough for the Appellant’s purposes.  In evidence, Mr. Adam Thompson said that he ‘hoped to stretch it out a little bit’.  We consider that this interview ought to have put Mr. Adam Thompson on enquiry as to the bona fides of the trading practices of Multisystems and Vita Moderna and LTL, but apparently it did not. 

186.                   We conclude that Mr. Adam Thompson knew that the Appellant was  engaging in a contrived trade connected to the fraudulent evasion of VAT and that his knowledge is to be attributed to the Appellant.  The result is that we dismiss this appeal on the basis that HMRC have persuaded us that the Kittel principle applies in the Appellant’s case, depriving it of the right to claim credit for the tax that would otherwise have been creditable input tax.

Means of knowledge

187.                   In the light of this conclusion it is strictly unnecessary for us to continue to consider HMRC’s alternative submission that the only reasonable explanation for the circumstances in which the transactions took place was that they had been or would be connected to fraud (cf. Mobilx Ltd and others v CRC [2010] EWCA Civ 5127).  However, for completeness, and because the point was fully argued, we state briefly our conclusion on this issue, which is that such was indeed the only reasonable explanation for the circumstances in which the transactions took place, and our reasoning.

188.                   At his meeting with Officer Stone in 2003, Mr. Max Morrison was personally alerted to the dangers of fraud in carousel trading.  Thereafter he took no steps to put in place any formal paperwork or systems of checks and balances on transactions undertaken, which might have effectively guarded against fraud.  In spite of the level of the Appellant’s trade in CPUs, Mr. Morrison had never seen a CPU.

189.                   The directors of the Appellant conducted themselves with little regard to their duties under company law.  The Appellant had none of the commercially sensible controls which would have been appropriate for a company with the level of turnover being achieved in a business sector which was not exposed to high levels of fraud, never mind such controls as would have been appropriate for a company with high turnover trading in a sector shot through with fraud.

190.                   The directors of the Appellant chose not to consider why the Appellant was able to gain access to the amount of business actually achieved, with so little difficulty and with no history of trading in like goods.  Nor did they consider why the Appellant was able to offer such a high level of return to its investors when the Appellant was adding no value to the products traded.

191.                   The months from February to April 2006 were clearly a period of frenzied intra-community trade in CPUs. These months fell in the window of time between the handing down of the ECJ’s judgment in Optigen Ltd., Fulcrum Electronics Ltd. and Bond House Systems Ltd. (which was adverse to HMRC) on 12 January 2006 and the later judgment of the ECJ in Federation of Technological Industries (which was favourable to HMRC) on 11 May 2006.

192.                   HMRC has shown that all 9 deals carried out by the Appellant in the months of February, March and April 2006 have a direct connection with fraudulent evasion of VAT.

193.                   On the basis of this objective evidence we have concluded that it was inherently more likely than not that a “broker deal” (viz: a purchase by a UK trader from a UK supplier and an onwards sale to a customer outside the UK) transacted in CPUs in the months of February, March and April 2006 was connected with fraudulent evasion of VAT.  In our judgment, to examine the evidence and conduct the balancing exercise required by the application of the civil standard of proof on any other basis would involve an unreal approach to the assessment of the situation as it was at the relevant time.

194.                   The practical consequence of our conclusion is that in deciding whether the Appellant has “taken every precaution which could reasonably be required of [it]” (see paragraph [51] of Kittel), we must regard precautions which could reasonably be required of the Appellant as precautions apt to prevent the Appellant participating in “broker deals” connected with fraud, in circumstances where, in fact, “broker deals” were more likely than not to be connected with fraudulent evasion of VAT.

195.                   A precaution is “reasonable” to the extent that it is apt to avoid the (actual) risk which is being guarded against.  Before commenting on precautions which the Appellant did take, we make the further point that reasonable precautions in the context of [51] of Kittel are precautions reasonably required of a trader to ensure that its transactions are not connected with fraud.  It would be a mistake to conclude that such precautions must be reasonably required by HMRC.

196.                   Although obviously HMRC has a major role in the prevention of fraudulent evasion of VAT, HMRC does not have the entire responsibility for this.  As the ECJ held at [54] of Kittel, “preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive.  Community law cannot be relied on for abusive or fraudulent ends.”

197.                   It follows, in the Tribunal’s view, that a person in the position of the Appellant, who assumes the functions of a taxable person and, as such, claims a right to deduct input tax, thereby assumes a responsibility itself to take reasonable precautions to avoid abuse of the VAT system by ensuring that its transactions are not connected with fraud.

198.                   It is therefore no answer to an allegation that the Appellant did not take reasonable precautions to say that HMRC had not required it to take any more precautions than it had in fact taken.

199.                   Nor can the Appellant rely on HMRC’s apparent or even expressed satisfaction with the due diligence undertaken and information supplied earlier than February 2006, which led to the repayments of input tax being made and the Appellant being permitted (in May 2005) to go on to monthly returns. Reasonable precautions satisfying the requirements of [51] of Kittel must be reasonable having regard to the objectively assessed risk of connection with fraudulent evasion of VAT, not to the express requirements of HMRC or what the Appellant alleges HMRC might reasonably have required.

200.                   The Appellant was made aware by HMRC at the meeting on 1 February 2005 of there having been a defaulting trader in the deal-chains of both of the transactions that the Appellant had been involved in during the 09/04 VAT period. In February and March 2005 the Appellant was informed by Officer Roberts of HMRC’s concern regarding items of stock purchased in the 12/04 period which had invalid product identification. (This led later to an adjustment of £20,764.80 to the input tax repayment for the period 12/04 relative to the invalid product identification numbers.)

201.                   In May 2005 the Appellant was informed by Officer Owens that another reduction in the Appellant’s payment, this time relative to the 03/05 period, would be made on account of further invalid product identification numbers which had been identified. Although some of the reduction was later adjusted in the Appellant’s favour, there remained an abatement in the repayment claimed.

202.                   We agree with HMRC that there are aspects of the Appellant’s business model and of the Appellant’s trading history which ought to have put the directors (as reasonable businessmen) on notice that the Appellant was involved in transactions connected with fraudulent evasion of VAT. 

203.                   The Appellant was able to trade in a market in which it had limited experience.  It had no knowledge or experience of CPUs, the product being traded.  Despite this, it was able to achieve a turnover of over £14.5 million in 2005.

204.                   The terms and conditions (drafted by Mr. John Thompson) which were incorporated in the Appellant’s Purchase Agreement were wholly incompatible with normal commercial trading, and in any event were often not observed.

205.                   An example is the requirement in clause 1.1 that the Appellant make ‘immediate’ payment to purchase stock outright from a supplier.  Payment was never ‘immediate’, because suppliers were always prepared to give credit to the Appellant, which itself is remarkable given the Appellant’s lack of history and low credit rating.  The consequence was that suppliers’ goods were shipped abroad by the Appellant without payment having been made.  The terms and conditions also required (clause 2.4) that the purchase amount (i.e. the whole price) would be paid in a single payment to the supplier.  This also was often not observed.

206.                   Most extraordinary and uncommercial of all was the condition at clause 3 under the heading ‘Forfeiting of the Purchase Amount’.  This read as follows:

‘If the transaction is not completed within 36 hours of the receipt of the of the full purchase amount by the Supplier, and is due to any action of the Supplier bound by the signature of the undersigned, then the purchase amount will be returned to Greystone Int Ltd.  If Greystone Int Ltd cannot fulfil the order due to End Customer [the Appellant’s customer] default then the full purchase amount must be returned to Greystone Int Ltd by the Supplier.’

207.                   Thus the supplier was being asked to, and apparently agreed to, carry the risk of the Appellant not being paid by its customer (over whom, presumably, the supplier had no control and whose identity, presumably, was unknown to it – although it should be noted that there was evidence that some of the Appellant’s customers were known to some of their suppliers, thus begging the question why they did not trade directly instead of through the Appellant).

208.                   The Appellant’s customers were apparently willing to pay for the goods before receiving control of them – again an uncommercial situation which led to the Appellant being able to trade in a way that was far more advantageous than was available to either its customers or its suppliers.

209.                   With regard to due diligence on customers and suppliers, both Mr. Max Morrison and Mr. Adam Thompson stated in evidence that with the benefit of hindsight more could have been done.  We agree.  But we also consider that the due diligence actually conducted by the Appellant was inadequate and could have been objectively shown to be so at the time.

210.                   Mr. Adam Thompson accepted that the due diligence was better as regards checking the Appellant’s suppliers than it was as regards checking the Appellant’s customers. This is a serious admission because of course MTIC fraud (particularly of the ‘carousel’ variety where stock goes round in circles and is resupplied in successive chains) depends on contrivance involving a broker’s customers as well as its suppliers. 

211.                   The Appellant placed reliance on its having commissioned a report from KPMG containing guidance in combating the high risk of VAT fraud found in the CPU sector.  The guidance was firm on the need to conduct the recommended measures before any trading took place, but the Appellant did not follow this advice to the letter or indeed in any consistent way. The report was obtained only in September 2005 one year after the Appellant commenced trading. Even then Mr. Adam Thompson, the director primarily responsible for the Appellant’s trading, did not follow its recommendations in full.  He suggested in evidence that the report was anyway of more significance for the actions of the other directors.  Although the report had been commissioned in February 2005, Mr. Adam Thompson did not push for it to be issued sooner. 

212.                   The due diligence reports of KPMG (on LTL) and Chilterns (on Multisystems) appear to the Tribunal to have been quite superficial and, although on their face reassuring, we consider that they were not such as should have satisfied a reasonable businessman engaging in what was well known to be a very high risk sector of trade.

213.                   We conclude that the Appellant’s eye was always on protecting its non-commercial trade and its own interests generally (in particular from adverse action by HMRC) and not on any wider concerns to avoid abuse of the VAT system. As we have already indicated, we consider that the precautions which could reasonably be required of traders (in accordance with paragraph [51] of Kittel) go wider than that and extend to precautions reasonably required to protect the integrity of the VAT system.  When a trader in the position of the Appellant engaged in wholesale dispatches of CPUs (acquired from buffers) outside the UK in February, March and April 2006, we consider that it could only have been said to have taken all the precautions that could reasonably have been required of it if it had conducted its trade on a scrupulously commercial basis.  In fact, the Appellant was engaging in a non-commercial trade, which leads to the conclusion that it did not take all the precautions that could reasonably have been required of it in the Kittel sense.  We consider, on the balance of probabilities, that if the Appellant had conducted its trade on a scrupulously commercial basis it would have soon found (due to the orchestrated nature of the transactions which it in fact entered into) that participation in those transactions was not available to it – a conclusion which it eventually reached in May 2006 when HMRC presented to Messrs. Morrison and Osborne overwhelming evidence of fraudulent trading cycles.  We consider that our conclusion is consistent with the decision of the ECJ in Optigen/Fulcrum/Bond House: the Appellant conducted an economic activity giving rise prima facie to the right to deduct input VAT, but it knew and had the means of knowing of the connection of its economic activity with VAT fraud.

Decision

214.                   We dismiss the appeal.

Costs

215.                   The parties having agreed that the ‘old’ rules should apply in relation to costs in this appeal, we direct that rule 29 of the Value Added Tax Tribunals Rules 1986 shall apply in place of rule 10 of the Tribunal procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the 2009 Rules”) pursuant to paragraph 7(3) of Schedule 3 to the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009.

216.                   We further direct that the Appellant must pay to HMRC their reasonable costs of and incidental to and consequent upon the appeal, to be assessed by a Costs Judge pursuant to rule 29(1)(b) of the 1986 Rules in default of agreement.

Right to apply for permission to appeal

217.                   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 2009 Rules.  The application must be received by the 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.

 

JOHN WALTERS QC

 

JUDGE OF THE FIRST-TIER TRIBUNAL

RELEASE DATE: 13 May 2011