First-tier Tribunal (Tax)

[2011] UKFTT 328 (TC)

TC01188

 

Appeal number: MAN/07/0528

 

VALUE ADDED TAX- – MTIC-sale of mobile phones and CPUs -  appellant’s repayment claims of £5,146,446.38 and £887,118.75  respectively refused on grounds that the appellant knew or ought to have known that the transactions were part of an MTIC fraud -11 purchases and sales and two contra trades – appellant in ‘clean chain’ knew that the deals were part of a VAT fraud – appellant failed to attend hearing without good reason –appellant acted unreasonably in failing to attend – costs awarded to respondents -   appeal dismissed

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

 

 

ACTIVE INFOTECH LIMITED                   Appellant

 

 

- and -

 

 

                 THE COMMISSIONERS FOR HER MAJESTY’S

                 REVENUE AND CUSTOMS (VAT)                         Respondents

 

 

 

 

TRIBUNAL: DAVID S PORTER (Judge)

                        DEREK ROBERTSON (Member)

                                                                       

                                               

Sitting in public in Manchester on 24, 25, and 26 January and 4 February 2011

 

No one appeared for the Appellant.

Vinesh Mandalia, of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

1.      Balwinder Singh Bains (Mr Singh), Managing Director, of the Appellant Active Infotech Limited (Infotech) appeals on behalf of Infotech against the decisions of the Respondents (HMRC) contained in their letters of 8 May 2007 and 10 March 2008 denying Infotech entitlement to a repayment of input tax of £5,146,446.38 in respect of the periods 02/06, 04/06 and 06/06 and £887,118.75 respectively arising from the export of mobile phones and CPUs and totalling £6,033,565.13. Mr Singh says that he neither knew nor ought to have known that the transactions were connected with fraud. HMRC say that Mr Singh carried out little due diligence and any reasonable businessman would have known or ought to have known that the transactions were connected with fraud or with a fraud in a related chain. As the hearing progressed HMRC submitted that Infotech were parties to the fraud.

2.      Vinesh Mandalia appeared on behalf of HMRC and produced a skeleton argument and a written submission by way of summing up and 28 bundles for the Tribunal, consisting principally of the working papers of HMRC’s witnesses. He called the following witnesses who gave evidence under oath:

Angela Jane Degg, who gave evidence with regard to Infotech’s 13 transactions

Susan Okolo, who gave evidence with regard to the contra- trader Famecraft Ltd, trading as Bristol Cash & Carry. (Famecraft).

Stephen Patterson , who gave evidence as to the contra- Worldwide Import/export Limited.(Worldwide).

Terrence Mendes, who gave evidence as to the banking transactions at First Curacao International Bank (FCIB) in the Netherlands Antilles by Worldwide Import/Export Ltd , others and Infotech

John Andrews, who gave evidence as to the banking transactions at FCIB by Infotech.

 

The following unchallenged witness statements were accepted as evidence- in-chief by the tribunal:

 

Roderick Guy Stone, who gave evidence as to MTIC fraud.

John Fletcher the principal adviser to HMRC from KPMG LLP Chartered Accountants.

Andrew Nicholas Charles, who gave evidence with regard to North Data Ltd, one of the traders in the defaulting chains.

Charlotte-Rebecca Jackson, who gave evidence with regard to Power and Civil (UK) Ltd, one of the traders in the defaulting chain.

Peter Harold Davies, who gave evidence with regard to Anfell Traders Ltd, one of the traders in the defaulting chain.

Peter Alan Cameron-Watson, who gave evidence with regard to Swindon Star Ltd one of the traders in the defaulting chain.

Kyle Angus Martin, who gave evidence with regard to Togane Mobiles Ltd, one of the traders in the defaulting chain.

 

 

 

3.      Mr Singh had been represented by Mr Liban Ahmed (Mr Ahmed) of Controlled Tax Management Limited, 9 Lower Brook Street, Ipswich.IP4 1AG, who dealt with all the preparation work leading up to the hearing. On 12 January 2011 Mr Ahmed emailed HMRC and stated:-

“ Please be advised that we are no longer attending the trial, as the Appellant does not have funds to have representation. We have, however, agreed as a goodwill gesture that we will serve a short skeleton argument and deal with correspondence until the trial commences…..To be clear, the Appellant will be representing himself at the trial.”

On 21 January 2011 Mr Ahmed emailed the Tribunal again and stated:-

“We have been informed by the Appellant that, in his words, he simply cannot face the ordeal of a trial without representation and was struggling to deal with the pressure when he was represented. We have been aware for some time now that, as the trial approached, he was suffering with severe stress, bouts of depression and being generally unwell. Now that he has insufficient funds to have any support, it has simply got too much for him. We have attached a copy of a doctor’s letter that we have received in October 2010 to evidence the issues he had, which are now more severe. He has asked that his witness statement be read and that the trial proceeds in his absence. He remains hopeful that the Tribunal will find no evidence of knowledge on his part. We understand that previous Tribunals have dealt with such evidence as hearsay and we ask the Judge to do so here. …”

Mr Ahmed attached the letter dated 6 December 2010 from the Malling Health signed by Dr Y E Harun which stated:-

“This letter is to certify that this gentleman (Mr Singh) did present to this GP surgery on 10 November 2010. He did discuss his stress, anxiety and insomnia. He is currently using over the counter treatments to help with this. At present we have agreed to keep this under observation. He is not taking any other medication. We continue to follow him up and also with regard to his raised cholesterol in the surgery….”

The letter refers to a visit in November 2010 but is not a satisfactory medical report evidencing a diagnosis of clinical depression or anxiety. On 10 December 2010 Judge Porter gave directions at a pre-trial hearing at which HMRC sought to introduce further evidence in the form of witness statements. Mr Singh was represented at that time and no mention was made either of Mr Singh’s illness, which apparently was diagnosed in November prior to the directions hearing, nor to the fact that he could not afford to instruct a representative in the future. We assume that substantial costs must have been incurred since the notices of appeal dated 15 May 2007 and 19 March 2008 respectively with an anticipation of the costs of the hearing. Furthermore, as we shall indicate later, Infotech had made 4 trades shortly before the transactions, the subject of this appeal, where substantial repayments of VAT had been made to Infotech. No evidence has been given as to the profit made in those transactions but, given that Infotech entered into a further 13 transactions it is reasonable to suppose that they were profitable. We do not therefore accept that Infotech is without funds to continue with this appeal. The case has been listed for two weeks and Infotech has put HMRC to proof with regard to all the transactions including those in two of defaulting trades. It was only at the hearing that Infotech accepted that there had been a loss arising from fraud in the other 12 defaulting chains.  Mr Singh has not attended and we therefore proceeded under Rule 33 of The Tribunal procedure (First-tier)(Tax Chamber) Rules 2009. Mr Singh has been notified of the date of the hearing and he has in dictated, through his representatives, that he will not be attending. We consider it is in the interests of justice to proceed with the hearing.

 

 

4.      We were referred to the following cases:

Axel Kittel and another v Belgium C-439/04, BAILII: [2006] EUECJ C-439/04

R v Just Fabulous (UK) ltd and another v HMRC [2007] EWHC 521 (Admin)

Calltel TelecomLtd and Opto Telelinks (Europe) Ltd v HMRC [2007] V20266

Blue Sphere Global Ltd v HMRC [2009] EWHC 1150 (Ch) ,[2009] STC 2239

Calltel telecom Ltd; and another v HMRC [2009] EWHC 1081 (Ch)

Livewire Telecom Ltd; and another v HMRC [2009] EWHC 15 (Ch)

Mobilx ltd (in administration) v HMRC [2009] EWHC 133 (Ch)

Megtian v HMRC [2010] EWHC 18 (Ch)

Moblix Ltd (in administration); and others v HMRC [2010] EWCA Civ 517

            G Gomms Ltd v HMRC [2010] UKFTT        

            

            Blade Ltd v HMRC [2006] UKFTT   

 

            POWA (jersey) Ltd v HMRC [2009] UKFTT 360 (TC)

 

           Emblaze Mobility Solutions Ltd v HMRC [2010] UKFTT 410 (TC)

 

            Dragon Futures Ltd v HMRC BAILII: [2006] UKVAT V19831

 

            Hawkeye Communications v HMRC [2010] UKFTT 636 (TC)

 

            Magoora v Dyrektor Izby Skarbowel w Krakowie [2008] C-414/07, BAILII: [2008] EUECJ C-414/07

 

Garage Molenheide BVBA, Schepens, Bureau Rik Decan-Business Research  & development NV (BRD) and Sanders BVBA v Belgium [1998] STC 126

 

The Commissioners for Her Majesty’s Revenue and Customs v Brayfal Limited  FTC/53/2010

 

Red 12 Trading Ltd v HMRC [2009] EWHC 2563 (CH)

 

Bulkliner Intermodal Limited v The Commissioners for Her Majesty’s Revenue and Customs TC/00677

 

5.              Most readers of this decision will be familiar with the way in which Missing Trader Fraud operates. Dr John Avery-Jones gave a helpful introduction in Livewire Telecom Ltd; and another v HMRC [2009] EWHC 15 (Ch):

“In order to demonstrate where the loss arises from MTIC fraud we start with a simple example of an import of goods by X, who sells them to Y, who exports them. The tax on acquisition (import) by X is cancelled by input tax of the same amount, and the output tax charged on the sale by X will be cancelled by the input tax repaid to Y on the export, so that the United Kingdom exchequer receives no net tax”.

 If  both X and Y are fraudsters Y will have to finance the output tax charged by X  because X disappears with it, and Y will recover the same when it is repaid to Y by HMRC on Y’s repayment claim.

“The only gain by the fraud is if HMRC pay the input tax to Y, when the exchequer is left with the loss of the amount of the import tax: The non-payment of the output tax by X is merely the recovery of what Y put in. If the exporter is innocent of that fraud he is entitled to repayment of the input tax that he has actually paid even though this represents tax never paid by X and the exchequer is left with the same loss of the amount of input tax”.

 

In his example X is the defaulter and Y the Broker. The chains are often longer as they include intermediaries, known as Buffers, who are introduced to confuse HMRC and to make the transaction harder to trace. The 12 chains the subject of this appeal fall into this latter category

 

6.     The case law, as now developed in Moblix Ltd (in administration); and others v HMRC [2010] EWCA Civ 517, provides that an exporter will not be innocent if he knew or ought to have known that his transaction was connected with the fraudulent avoidance of tax.

 

7.     Carousel fraud was rife from 2003 up to 2007, when the reverse charge was introduced. Any loss to the exchequer only occurs when the input tax is refunded on a repayment claim. HMRC had been repaying substantial sums of money, in many cases well in excess of £10,000,000. The total loss to HMRC during those years amounted to in excess of £20 billion. It appears that many of the frauds have been financed by third parties outside of the various transaction chains.

 

8. We think it would be helpful to set out how the money flows in such schemes and, in that regard we have been much helped by the evidence given by Mr Mendes and Mr Andrews. Mr Stone, who did not appear, but whose witness statement we have read, also confirms that losses to HMRC only occur in all of these transactions when a repayment is made to the Broker. He states at paragraph 6 of his witness statement that there are two forms of MTIC fraud, namely ‘acquisition’ fraud and ‘carousel’ fraud. An MTIC acquisition fraud, as described above by Judge Avery-Jones, is a commodity based fraud in which VAT standard-rated goods or services are purchased zero-rated for VAT purposes from a supplier based in another EU member state and sold in the UK for domestic consumption. The importer, who is officially known as the ‘acquirer’, subsequently fails to account for the VAT due on the standard rated taxable to its UK-based customer(s), which then impacts on HMRC’s VAT receipts. MTIC ‘carousel’ fraud, which is sometimes referred to as ‘MTIC export fraud’, is a financial fraud and is an abuse of the VAT system that results in the fraudulent extraction of revenue from the UK Treasury. The fraud predominantly involved computer chips and mobile phones. The finance for the deals is provided from an outside source and is introduced to the chain when the Broker is paid by his European customer. It then cascades down the chains, each trader withdrawing their agreed profit and paying their appropriate amount of VAT. That VAT is often very small (apart from the Brokers repayment claim) because the intermediate Buffers can set off their input tax against their output tax. The money is then returned to the original funder.

 

9.  The participants in the chain are all seen to make a small profit.  Mr Stone has indicated that this amounts to 3%  of the sale price for the intermediary Buffers and 6% of the sale price for the Brokers, who take the risk of not receiving a repayment. Apart from the defaulter (who ostensibly purchases the goods from Europe) each of the traders thereafter makes appropriate VAT payments to the Revenue. However, they do not necessarily pay each other the correct amounts, either under the apparent contracts, or of VAT.  The participants are required, if the transactions are fraudulent, to make an initial contribution to the scheme. In the example below only half the VAT liability due to their supplier has been paid, so that the participants carry some of the risk and thereby reduce the risk of the fraudsters receiving nothing. When the repayment is obtained by the Broker, he will have sufficient money to take the balance of his profit and to pay his outstanding VAT liability to his supplier. That supplier will then be in a position to pay his outstanding VAT to the defaulter, who will then receive all the VAT he should have paid to HMRC, but which he intends to keep, less the contribution to the profits and VAT down the chain. The vast majority of these transactions were handled by the FCIB in sterling although the participants were, in part, European. The transactions are dealt with in sterling because the UK VAT repayments are made to the Brokers in sterling. It appears from the unique numbering of each transaction in that bank that the cash transfers are affected in a very short time. The shortness of the time suggests that the payments are orchestrated by the fraudsters, as it is unlikely that the several traders in a chain would be available at their computer consoles to make the payments in the time scales suggested. The outsider, who financed the transaction from the beginning, is presumably repaid his original loan plus any agreed interest.

10.   Example

The participants are    “E” the customer in Europe

“D” the broker, who will seek the repayment from HMRC and  who sells the goods to “E”                                   

“C” a buffer who sells the goods to “D” having purchased them from “B” and who pays the net VAT to HMRC

“B” the defaulter, who purchases the goods from Europe and charges VAT on the sale to “C”, but does not account for the VAT to HMRC.

“A” the trader in Europe sells the goods to “B” in the United Kingdom (the defaulter) and receives the money back from “B” which he or the fruadsters introduced into the chain in the first place.

 

Many of these transactions took place through the FCIB, which appears to have been the bank of preference, and has since been closed down by the Dutch Authorities. All the money appears to have taken a significantly time to pass through the account, so that the initial loan, in the example £1,015,050, is only at risk for that length of time so long as all the participants pay their share of the money as soon as they receive it.

·     A (in the EU) sells  the goods to B (the Defaulter) for             £1,000,000        

·      B sells the goods to C (the Buffer) with a profit of 1% for           £1,010,000

                         B charges VAT of £176,750 at 17.5 %

·      C pays the full price for the goods and half the VAT of £88,375 to B and sells the goods  to D (the Broker) with a small profit of ½ % for                                                                                                          £1,015,050

(C charges VAT of £177,633.75 at 17.5% to D

          C pays VAT to HMRC of £883.75 the difference between the    £177,633.75 and £176,750)

·  D pays the full price for the goods but only pays half his VAT liability of £88,816.88 by way of payment of the VAT to C and sells the goods to E (in the EU) with a profit of 6%  (£60,903) for                          £1,075,953                                      

·  E pays D the full price for the goods less D’s profit and no VAT                  £1,015,050                                                     

leaving D to recoup his profit and his VAT liability to C from the repayment.

·  D applies to HMRC for a repayment of VAT of                         £188,291.78 being 17.5 % of £1,075,953 (his selling price and assuming, for the sake of this example, there is no other VAT).

·  D obtains a repayment from HMRC of                             £188,291.78                    D recovers his VAT payment of £88,816.88

                             and the balance of his  profit of     £60,903.00      £149,719.88

                            Leaving a balance                                                   £  38,571.90

D owes a further £88,816.87 by way of VAT to C, who accepts the sum of £38,571.90 which C then pays to B as the balance of the VAT that he presumably has agreed to pay to clear his liability.

As a result the participants receive the following:     

A/B have already received part of the VAT from C                           £88,375.00

and receive the balance above                                                              £ 38,571.90

 making a total of                                                                                             £126,946.90                                                                                                  

C receives his profit of                                                                        £    5,050.00

Less the VAT paid to HMRC of                                                        £       833.75

                            Making a profit of                                                   £    4,216.25

D receives his VAT of £88,816.87and his profit of                           £  60,903.00

 

D will be operating on a monthly VAT cycle and C on a quarterly cycle. If the sale to E can be brought as near to D’s month end as possible, the repayment will be accelerated.

11.     As the fraudsters expected to obtain the repayment from D, D would only need to pay a proportion of the VAT and take some or none of his profit. He can recoup the shortfall or the entirety of his profit from the repayment. That way, the fraudsters ensure that they receive the appropriate amounts from the fraud and D will obtain a refund of the money he had introduced to the chain.  The middleman C only makes a small profit because he effectively does very little and takes very little risk. He merely pays the price for the goods with the money provided by A. The Broker, D, usually takes the largest profit (6% of the selling price) because he takes the risk that the repayment may not be made. All the parties require the monies to be paid as soon as they are received to minimise the risk of a party failing to make a payment and they need to be participants in the scheme to ensure that the money is dealt with according to the planned procedure.

 

12.  HMRC introduced a more robust verification system in 2006 and as a result the fraudsters changed the shape of the scam. Instead of making repayment claims in excess of £10,000,000 they inserted another chain (an apparent ‘clean – chain’), and the Broker appeared in the new chain as well as the dirty chain. In that way the Broker was able to set off the output tax in supplying the clean chain in the United Kingdom against the input tax he had incurred on a transaction from Europe in a similar chain. When HMRC received the application from the Broker in the clean chain, it would not be alerted to the fact that the repayment in that chain was financing the fraud in the dirty chain. As a result, a considerable VAT liability could be washed out of the system without alerting HMRC and the repayment claim in the dirty chain is reduced to a substantially lower figure in the Broker’s return.

 

13.         This case relates to Infotech’s 11 supply chains and the 2 apparent clean chains linked to contra-trading. Infotech has conceded that there are tax losses arising from fraud in 11 of the 13 transactions. In the Appellant’s skeleton argument provided by Mr Ahmed it appears that Infotech contests the fraud and tax loss in the two contra-trades. We therefore have taken evidence from Stephen Patterson in relation to the transactions for Worldwide Import/Export Limited  and from Susan Okolo in relation to Famecraft Ltd t/a Bristol cash and Carry

 

The Legislation.

 

14.   In view of the decision in Moblix Ltd (in administration); and others v HMRC [2010] EWCA Civ 517 we think it would be helpful, before considering the evidence, to indentify the law as we understand it.

The legislation.

The right to deduct is contained in sections 24 -29 of the Value Added Tax Act 1994 (the Act). Section 25 requires such a person to account for and pay any VAT on the supplies of goods and services which he makes and entitles him to a credit of so much of his input tax as is allowable under s 26: see s 25(2). Section 26 gives effect to what is now Article 168 of EC Council Directive 2006/112 (the VAT Directive) and allows the taxable person credit in each accounting period for so much of the input tax for that period as is attributable to supplies made by the taxable person in the course or furtherance of his business: see s 26(2).

These provisions are in mandatory terms. If a trader has incurred input tax, which is properly allowable, he is entitled, as of right, to set it against his output tax liability or to receive a repayment if the input tax credit due to him exceeds that liability. He is required to hold evidence to support his claim (see article 18 of the Sixth Directive and regulation 29(2) of the Value Added Tax Regulations 1995 (SI 1995/2518). As a result the right to deduct or the right to a repayment is absolute, and no element of discretion is conferred on the tax authority, save that the authority may accept less evidence than normally required; it has no right to demand more evidence than that prescribed by article 18. The right is also immediate, that is it may be exercised “when the deductible tax becomes chargeable”. The only limitation is the practical one that, although deductibility is determined on a transaction by transaction basis, the mechanical process of deduction or repayment is effected by reference to prescribed accounting periods.

 

The Case law

15.            The case law has developed from Optigen Ltd and others v HMRC [C-354/03] where it was decided that a repayment must be made to a trader, who is innocent of the fraud, even though the transaction did not amount to an economic activity, through Axel Kittel and another v Belgium [C-439/04] which extended the concept of knowledge to include a trader, who ought to have known that there was a fraud, to Moblix Ltd (in administration); and others v HMRC [2010] EWCA Civ 517, which refers to the various cases and has refined the concept of knowledge and the evidence required to prove it. In the light of that decision, we do not think it is necessary to trace the development of the concept through all of the cases we have been referred to, but rather to refer to Lord Justice Moses’ observations in the Court of Appeal. We have been assisted in that by the observations of Mr Mandalia and Mr Ahmed in their skeleton arguments and Mr Mandalia in his final submissions. Moses LJ stated;

“…The scope of VAT, the transactions to which it applies, and the persons liable to the tax are all defined according to objective criteria of uniform application. The application of those objective criteria are essential to achieve:-     (see kittel para 42, citing BLP Group [1995] ECRI/983 para 24) the objectives of the common system of VAT of ensuring legal certainty and facilitating the measures necessary for the application of VAT by having regard, save in exceptional circumstances, to the objective character of the transaction concerned.” [Paragraph 24]

16. “In Kittel after §55 the Court developed its established principles in relation to fraudulent evasion. It extended the principle, that the objective criteria are not met where tax is evaded, beyond evasion by the taxable person himself to the position of those who knew or should have known that by their purchase they were taking part in a transaction connected with fraudulent evasion of VAT… It extended the category of participants who fall outwith the objective criteria to those who knew or should have known of the connection between their purchase and fraudulent evasion. Kittel did represent a development of the law, because it enlarged the category of participants to those who themselves had no intention of committing fraud, but who, by virtue of the fact that they knew or should have known that the transaction was connected with fraud, were to be treated as participants. Once such traders were treated as participants their transactions did not meet the objective criteria determining the scope of the right to deduct…”[paragraph 41]

17. “.A person who has no intention of undertaking an economic activity, but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person's VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax § 59 and Kittel § 53). A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct”; [paragraph 43]

18.  The European Court of Justice in Optigen Ltd and others v HMRC [C-354/03] has made it clear that a trader can recover his output tax even though the transaction is outside the VAT scheme. Both Kittel and Moblix confirm that where a trader meets the objective criteria for compliance with the VAT regime, it is not open to the Authorities to withhold any tax repayment. If, however, a trader does not comply with the objective criteria, because there is a fraud, that trader cannot recover any tax. Moses LJ at paragraph 30 states:

 

“The Court (The European Court of Justice when considering Optigen) rejected the United Kingdom’s argument that unlawful transactions fell outside the scope of VAT. Fiscal neutrality prohibits the distinction between lawful and unlawful transactions; such a distinction must be restricted to transactions concerning products which by their very nature may not be marketed, such as narcotic drugs and counterfeit currency (see paragraphs 49 and the Advocate General’s Opinion paragraph 40). By its rejection of the United Kingdom argument, the Court made it clear that the reason why the fraud vitiates a transaction is not because it makes the transaction unlawful but rather because where a person commits fraud he will not be able to establish that the objective criteria, which determine the scope of VAT and the right to deduct, have been met.”

And at paragraph 52:

 “If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met.  It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises”;

 

19.   As the Advocate General stated at paragraph 40:

 

“As becomes clear from the commissioners own description of what they consider to constitute carousel fraud, its characteristic is that it makes use of lawful economic channels in order to facilitate the retention of money paid as VAT”

 

At paragraph 59 “The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who "should have known". Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion.  If a trader should have known that the only reasonable explanation (our emphasis) for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel”;

At paragraph 61 “A trader who decides to participate in a transaction connected to fraudulent evasion, despite knowledge of that connection, is making an informed choice; he knows where he stands and knows before he enters into the transaction that if found out, he will not be entitled to deduct input tax. The extension of that principle to a taxable person who has the means of knowledge but chooses not to deploy it, similarly, does not infringe that principle. If he has the means of knowledge available and chooses not to deploy it he knows that, if found out, he will not be entitled to deduct. If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct”;

20. Moses LJ also expressed concern that HMRC have in the past placed too much importance on a traders’ failure to carry out due diligence and not enough on the circumstantial evidence available. At paragraph 75 he stated.

“ 75 The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT…..

21. We have decided that the legal test is that a trader will not be entitled to a repayment if he knew or ought to have known that his transactions were connected with fraud on the basis that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected with such fraudulent evasion. In contra-trading cases HMRC’s ability to establish a connection between the actual tax losses in the contra-trade to the specific repayment claim in the clean chain is extremely difficult. This is not least because of the timing of the payments, where the Broker, in the clean chain, will be on monthly returns, and the transaction to which that repayment relates, will be some two or three months later, dependent on the accounting dates in the dirty chain. In Livewire Telecom Ltd; and another v HMRC [2009] EWHC 15 (Ch) Mr Justice Lewison stated:

Paragraph 102: “In my judgement in a case of alleged contra-trading, where the taxable person claiming repayment of input tax is not himself a dishonest conspirator, there are two potential frauds:

i) The dishonest failure to account for VAT by the defaulter or missing trader in the dirty chain; and

ii) The dishonest cover-up of that fraud by the contra-trader.

Thus it must be established that the taxable person knew or should have known of a connection between his own transaction and at least one of these frauds. I do not consider it is necessary that he knew or should have known of a connection between his own transaction and both of those frauds. If he knows or should have known that the contra-trader is engaging in fraudulent conduct and deals with him, he takes the risk of participating in a fraud, the precise details of which he does not and cannot know.”

22.  In Blue Sphere Global Ltd v HMRC [2009] EWHC 1150 Ch,STC 2239 in paragraph 44 the Chancellor held that:

“44. There is force in the argument of counsel for BSG but I do not accept it. The nature of any particular necessary connection depends on its context, for example electrical, familial, physical or logical. The relevant context in this case is the scheme for charging and recovering VAT in the member states of the EU. The process of off-setting inputs against outputs in a particular period and accounting for the difference to the relevant  revenue authority can connect two or more transactions or chains of transactions in which  there is a common party whether or nor the commodity  sold is the same. If there is a connection in that sense it matters not which transaction or chain came first. Such a connection is entirely consistent with the dicta in Optigen and Kittel because such connection does not alter the nature of the individual transactions. Nor does it offend against any principle of legal certainty, fiscal neutrality, proportionality or freedom of movement because, by itself, it has no effect.

45. Given that the clean and dirty chains can be regarded as connected with one another, by the same token the clean chain is connected with the fraudulent evasion of VAT in the dirty chain because, in a case of contra-trading, the right to reclaim enjoyed by C (Infinity) in the dirty chain, which is the counterpart of the obligation of A to account for input tax paid by B, is transferred to E (BSG) in the clean chain. Such a transfer is apt, for the reasons given by the Tribunal in Olympia  to conceal the fraud committed by A in the dirty chain in its failure to account for the input tax received from B.

46. Not all persons involved in either chain, although connected, should be liable for any tax loss. The control mechanism lies in the need for either direct participation in the fraud or sufficient knowledge of it.”

The Chancellor concluded at paragraph 55.

“55 .In my view it is an inescapable consequence of contra-trading that for HMRC to refuse a reclaim by E it must be in a position to prove that C was party to a conspiracy also involving A. Although the fact that C is a party to both the clean chain with E and the dirty chain A constitutes a sufficient connection it is not enough to show that E ought to have known of the fraudulent evasion of VAT involved in the subsequent dirty chain. At the time he entered into the clean chain there was no such dirty chain of which he could have known, nor was the occurrence of such a dirty chain inevitable in the sense of being pre-planned.”

23.  Mr Mandalia has specifically referred us to  Christopher Clarke J’s comments at paragraph 109 of Red 12 Trading Ltd v HMRC [2009] EWHC 2563 (CH) as authority for the proposition that the Tribunal may considerer compelling similarities between one transaction and another and that it is not precluded from drawing inferences where appropriate, from a pattern of transactions of which the individual transaction in question forms part. We refer to this later in this decision.

   

24.We have concluded that HMRC must establish either that Infotech knew of the fraudulent nature in the 13 transactions or that it or ought to have known that it was party to transactions which caused it to participate in those frauds.

Burden of proof

25. In Mobilx Ltd (In Administration) –v- HMRC [2010] EWCA Civ 517, Moses LJ considered where the burden of proof lies and observed (at paragraphs 81 and 82) that;

“..It is plain that if HMRC wishes to assert that a trader's state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion. No sensible argument was advanced to the contrary.

“But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the BSG appeal, Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focusing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.

Standard of Proof

26.     These are civil proceedings and, as such, the standard of proof is the ordinary civil standard i.e. on the balance of probabilities. The case of Reventhi Shah (Administratrix of the Estate of Naresh Shah Deceased) v Kelly Anne Gale; Kelly Anne Gale v Jason Grant, Mark Young, Paul Hilton, Samantha Easton [2005] EWHC 1087 (QB) (concerning a civil action for unlawful killing) made it quite clear that there is a single civil standard of proof (i.e. on the balance of probabilities) applicable in all civil proceedings regardless of the allegations levied.  Lewison J (as he then was) stated:

“In my judgment, it would be wrong to approach this case on any basis other than the balance of probability with appropriate respect paid to the need for cogent evidence to reflect the serious nature of the allegation and the inherent improbability that this 22 year old young lady of good character should involve herself in such conduct as that alleged. I simply do not accept that it is appropriate, as a matter of law, to require a higher standard of proof simply because of the nature of the allegation. If murder, why not allegations of rape or the most serious fraud.”

The Facts

 

27.   We are in some difficulties with regard to the evidence in this appeal due to Mr Singh’s failure to appear and the lack of cross-examination. As a result, we can only rely on his witness statement as his evidence-in-chief and Mr Ahmed’s skeleton argument to ascertain Mr Singh’s contentions on behalf of Infotech. In his skeleton argument Mr Ahmed appears to have conceded, on behalf of Infotech, that 11 of the 13 transactions’ were fraudulent and gave rise to a loss of tax. Paragraph 9 of his skeleton argument reads:

       “The Appellant has conceded that fraud existed in its supply chains for transactions undertaken within the periods 02/06, 04/06 and 05/06 and that the goods imported by the fraudster were purchased by it”.

 However, at paragraph 8 Mr Ahmed states:

“Regarding the contra trading 06/06 period, the Commissioners must, the Appellant submits, prove a conspiracy to commit fraud between all parties in both chains”.

And at paragraph 10:

“ That a tax loss, let alone a fraudulent tax loss, has not  been proved  in any supply chain relating to the 06/06 period”.

 

28.  In view of the lengths of all the chains, and so that the transactions can be properly understood, we have added in the appendix to this decision the schematics in relation to the chains for deals:

·  1 to 5 (Power and Civil UK Ltd to Medius Trading); 

·  7 and 8 (PZP ENA to CESMA) :

·  10 to 12 (Profitekass UAB to CESMA)

·  6 (contra- trade Muggles Consulting Company  through Worldwide to CEMSA):and

·  13 (contra-trade Sinderby Enterprises through Bristol Cash and Carry to CEMSA.

 

29..   The parties have accepted that there are three issues which need to be satisfied in order to justify HMRC’s refusal to make the repayment of £6,033,565.13 to Infotech:

 

• There must be a fraudulent loss of tax.
• The claim for the input tax of £6,033,565.13 must arise from a transaction ‘connected’ with the fraudulent evasion; and
• It must be established that Infotech, through Mr Singh, knew or should have known that the only reasonable explanation for the circumstances in which the purchases took place was that they were transactions connected with such a fraudulent evasion.

We therefore propose to consider the evidence with regard to the two contra-trades first to establish if there was fraud and a resultant tax loss. We then propose to consider the six transactions prior to this appeal carried out by Infotech in which it received a repayment totalling £2,792,474.05. There is very little evidence from either party as to those transactions but Mr Singh relies in part on the fact that HMRC had known of his trading and allowed, after verification, these repayments. We consider that such repayments are relevant as to whether Mr Singh knew or ought to have known that the subsequent 13 transactions were fraudulent. In Mr Singh’s absence we need to consider those transactions in some detail, as we will also consider the FCIB payments. As a consequence, this decision is somewhat lengthy.

30.                       Mr Singh, in his witness statement, says that between 1994 and 1999 he worked for the Midland Electricity Board in their IT support section. He had always been interested in IT and electronics in general. Between 1999 and 2002 he had been employed by a telecommunications company Logica GMBH (now called CMG) in Germany, as a customer support engineer, working alongside a sales team providing technical advice. Logica sold text messaging services to telephone service providers, including Orange. He was responsible for many other companies within the group, based in countries all over Europe, including Spain and Austria. 

31.                       He was made redundant in 2002.  In the same year he established Active Recruiting Limited and was the sole director.  He claimed to have recognised a niche in the market for an employment agency and he decided to set up his own business in that field. He still supplies labour for the cleaning industry, which forms part of the taxable supplies for the company. In the first year the company turned over £100,000 and by the end of the second year it had achieved £800,000. The business was not compatable with his skills and interests and he would rather have been involved in the electronics industry. Within 2 to 3 years he had saved £400,000.

32.                        By 2005 he had significant savings and he was looking for other business opportunities. Mr Rai, and one of Mr Singh’s friends, the owner of Sapphire Limited, informed him that there was money to be made in mobile phone wholesaling. Mrs Degg, a witness for HMRC, told us that Mr Rai and Sapphire Limited were suspected of being involved in MTIC fraud. Mr Singh found out that there were price differences for the mobile ‘phones in the UK . This, he suggested occurred for a number of reasons; United Kingdom authorised distributors ‘dumping’ stock onto the grey market; over purchasing by distributors and new models being produced. We note that the majority of the purchases and sales, the subject of this appeal, were Nokia Phones, and none of these fall within any of these criteria.

33.                       Mr Singh does not appear to remember how Infotech became involved in the purchase and sale of mobile phones. He thought he must have been directed to the International Phone Traders (‘IPT’) and international Computer brokers (‘ICB’) web sites. Using IPT on the internet to undertake market research he obtained several enquiries and he used his business contacts from his employment with Logica, Interestingly nowhere in his evidence has he produce any details of any of the contacts he made, nor the emails he sent or received. We would have expected him to have such contact details not least because he successfully traded in mobile phones and CPU’s prior to the transactions giving rise to this appeal, and he would need a data base.

34.                       He states that Mr Rai put him in touch with the Amaro Corporation Limited (Amaro), which became his main suppliers. In light of the lack of evidence as to how he started the business and his confirmation that Mr Rai was very helpful, we surmise that he did not need to carry out any research, because the information he needed was supplied by Mr Rai.

35.                       Mr Singh decided to change the name of the company in 2005 to Active Infotech Limited. He invested the £400,000 he had made from the recruitment business into the new venture and his first purchase (not the subject of this appeal) was made in the period 08/05. Within 30 days of changing his trading activities, his accountants informed HMRC of the change and HMRC arranged a visit to Infotech on 1 September 2005. At the visit, Infotech was advised by HMRC of the problems within the mobile phone industry and we are satisfied that Mr Singh was fully aware of the problems arising from mobil phone transactions.

36.                       Mr Singh was unfamiliar with the due diligence measures he should take ,but he met the director of Amaro and used his ‘gut instincts’ regarding whether to trade with them or not. Infotech’s attitude to its due diligence is discussed in detail at paragraphs 56-60. Mr Singh submitted that after HMRC’s visit in September he believed that HMRC would monitor Infotech’s transactions and that HMRC would check to make sure that no tax losses occurred. We accept that Mr Singh must have felt comfortable with the advice he was receiving from the several visits by HMRC but we consider that, in spite of that, he should have been on his guard and heeded the previous warnings about MTIC trading, particularly as the business grew. Only he knew all the circumstances of his deals, not least the volume of his sales, and it is those circumstances, discussed below, which we believe should have lead him to believe there was something amiss.

37.                       Infotech carried out several transactions prior to those, the subject of this appeal, as follows:

 

08/05           £1,426,422      Vat repayment paid £232,498.63

09/05           £1,977,793      Vat repayment paid £323,834.24

                 10/05           £3,134,856      Vat repayment paid £455,150.42

                 11/05           £     73,086       No mobile trading

                 12/05           £1,698,524      Vat repayment made £261,482.06

                 01/06           £3,027,770      Vat repayment made £494,657.36

                 03/06           £6,398,442      Vat repayment made £1,024,551.34

 

                 Totals  £17,663,807  (excluding 11/05)        £2,792,474.05

 

Infotech carried out mobile phone transaction in 08/05 and 10/05, whilst still running its employment agency. We are advised that there was no mobile phone trading for the period 11/05. We suspect that that was because there was a verification of Infotech’s repayment claim for the earlier periods. Infotech must have thought it should not risk any more transactions until the repayment was made. If Infotech was an honest trader why would it have been concerned?  If it was concerned then it was put on notice that it should take care. It was advised to do be so by HMRC on subsequent visits. The repayments were made, after some delay, and Infotech commenced trading in mobile phones again in the period 12/05 to 03/06.  Separate repayments have been made in the periods set out above.

The second column is the turnover for the periods in question and they were provided by Ms Degg. They represent the total turnover for the business including the employment agency. We have been told that the employment agency business represented about £800,000 of that turnover. HMRC have made VAT repayments totalling £2,792,474.05 in spite of the fact that infotech achieved sales of £17,663,807 over a period of 8 months.

38.                       We have not been provided with the details of these trades but we understand that most or all the supplies came from Amaro.  Mr Singh has indicted that the repayments in relation to one or two of the initial VAT returns were repaid late and without a repayment supplement. As a result of this, he believed HMRC would be checking his deals and that they would advise him if Infotech needed to cease trading in mobile phones and CPUs. Mr Singh stated that he made £4 per unit profit from these earlier transactions.  From the details of the subsequent transactions it would appear that Mr Singh made approximately 5.5% profit on most of the deals. That figure is consistent with Mr Stones’s evidence as to the 6% profit usually made by the Brokers in MTIC transactions. Allowing for the fact that one or two of his transactions were at 3% then his average percentage profit might have been 5%. On that basis Mr Singh would appear to have made £856,524 profit on these transactions. (£17,663,807 – £533,333 [8 months agency turnover]* 5%). This figure can be cross-referenced to the volume of goods being sold in the third transaction in Deal 3 ( see the Deal Table below paragraph . There the goods were sold for £83 per unit giving a profit of £5, which approximates to Mr Singh’s suggested figure of £4. On a sale price of £83 per unit the invoice price was £1,042,650, which amounts to approximately 12,600 units. (£1,042,650 divided by £83 = 12562 units). (See the figures below at paragraph 70)  £17,663,807 on the same basis would amount to 213,460 units. (12,600 * £17,663,807 divided by £1,042,650 = 213,459.90 units).  213,460 units at £4 = £853,840.

39.                       The accounts for Infotech for the year ending 31 October 2005 reveal £3,016,555 was owed to the company. This must be money owed to Infotech by Complementos De Exportacion Multifuncionales SA (Cemsa) and the other traders of which we do not have details other than as revealed in the transactions, the subject of this appeal. The accounts also reveal that Infotech owed £2,678,125 to its creditors – we suspect principally Amaro, leaving it effectively in credit by £360,461. Those accounts also reveal cash at bank as £22,031. They make no mention of the Lloyds TSB, Abbey National PLC, nor Yorkshire Bank accounts, which Infotech appears to have. We have been told by Mr Andrews that there was a payment of £1,432,993.12 to Infotech’s FCIB account during the period 19/12/05 to 30/3/06. As Infotech appears to only have had £22,031 in its bank on 31 October 2005, and a net balance after the payment by its debtors of £360,461, we can only conclude that the accounts do not disclose the true position and that Infotech has money elsewhere. Mr Singh must have been aware, when he signed off the accounts in July 2007, of the payment of £1,432,993.12 sometime between December 2005 and March 2006. The ability of Infotech to pay £1,432,993.12 to its FCIB account is consistent with the profit we believe Infotech made out of the first period of trading. The payment must have been for outstanding VAT, which follows the pattern of the subsequent trading, any further money in those accounts would be profit. It is not credible that infotech would continue trading with Amaro and others if it was to make the loss identified in the accounts to 31 October 2005.

 

 

 

The Contra-trades

 

Worldwide

 

40                         Mr Ahmed has put HMRC to proof as to the fraud and loss of tax in the contra-trade with Worldwide. Stephen Patterson gave evidence under oath as to the trading by Worldwide. Worldwide was registered for VAT from 22 February 2005. It estimated its turnover for the first 12 months to be £50,000 and that it would operate as importers and exporters of various consumer electrical goods. The company was put on quarterly returns for the periods ending March, June, September and December.  The principal place of business was a two room industrial unit in Barking where Abdul Qadir Akhtar worked together with Omerferaz Rahman, the sales manager, and Kelly Burring, a part time book keeper. Worldwide  traded in the wholesale of mobile phones and computer processing units (CPUs). Its trading pattern was to import mobile phones, purchased from wholesalers in other European States, for onward sale to United Kingdom wholesalers and to export CPUs, purchased from United Kingdom wholesalers, to European wholesalers. These activities were kept completely separate from each other.

41                         The last sale made by Worldwide was on 30 June 2006. After that date the company did not trade and in view of this the VAT registration was cancelled with effect from 1 June 2007. Mr Patterson carried out an extensive investigation of Worldwide presented to the Tribunal in 19 full lever arch files. He has tracked the returns for Worldwide from 06/05 to 03/07. Dealing with those which affect the transactions the subject of this appeal he commented as follows:

 

• 03/06. Worldwide’s outputs were £806,991,295 (the output tax was £141,145,393.88). The inputs were £806,236,342 (input tax was £141,091,329.58. A payment of the difference of £54,064.30 was made to HMRC.
• 06/06. Worldwide’s outputs were £475,445,162 (output tax was £82,562,885.49). The inputs were £475,002,162 (input tax was £82,514,585.01). A payment of the difference of £48,300.48 was made to HMRC.
• 09/06. Worldwide’s outputs were nil, inputs were £55,944 (input tax was £9556.93) A repayment of £9556.93 was made to Worldwide.

42.    He has verified all of the VAT returns submitted by Worldwide for the period 1 January 2006 to 30 June 2006. In over 97% of the cases the deals were traced to a VAT loss. In total there were 455 dispatch deals (exports) of which 437 have been traced directly to three United Kingdom companies. Woodworks UK Limited  (Woodworks); Steven Ellison Logistics Limited (SEL); and Only Quality Limited (Only Quality) amounting to tax losses as follows;

·         Woodworks: £37,580,110.53, who have been assessed for £83,386,234.

·         SEL: £27,928,823.44, who have been assessed for £71,460,894.

·         Only Quality: £40,432,984.33, who have been assessed for £138,908,586.

43.                       During the period 1 January to 30 June 2006, Worldwide made 464 acquisition deals (imports). Mr Patterson produced a deals summary, which showed the staggering figures of £1,344,487,129.18 as the total purchases and £1,370,053,775.60 of sales.  He had identified at least 66 United Kingdom VAT registered companies during the period 1 January 2006 to 30 June 2006, that had purchased mobile phones either directly or indirectly from Worldwide and made large VAT repayment claims. During the period 03/06 Worldwide’s total acquisition deals were 464 and the total number of dispatch deals were 455. The total value of the acquisitions was £627,670,173.40 and the dispatch deals were £608,943,209.80. The result of this trading pattern was that Worldwide avoided becoming a repayment trader and finished up paying relatively little net tax in relation to the size of its turnover.

44.                       Mr Patterson produced 20 Broker deal chains in which Worldwide were involved covering January 2006 to June 2006. We cannot discuss them all but taking one as a sample, which appears to follow the format of many of the others we have seen, we note:

Worldwide deal 64603 (SP32 bundle volume 10)

a). Worldwide received a purchase order from V5 Solutions (V5) in France for 22,525 Intel P4 3.0 on 6 April 2006 and sold them to V5, on that date, for £90.74 per unit at a total cost of £2,043,918.50  VAT free. Worldwide instructed Imex Logistics Limited (the freight forwarders) to release the goods to V5 on 6 April 2006 and consign them to MSG Freight Belgium BVBA

b). Worldwide obtained these goods from Zeetta Limited on 6 April 2006 at £90.59 per unit at a total cost of £2,040,539.75 plus VAT of £357,094.46.

c)   Zeetta Limited obtained these goods from Bushem Limited on 6 April 2006 at £90.49 per unit, total cost £2,038,287.25 plus VAT of £356,700.27.

d)   Bushem Limited obtained these goods from Only Quality (the defaulting trader) on 6 April 2006 at £90.44 per unit at a total cost of £2,037,161 plus VAT of £356,503.18

45.    Mr Patterson concluded that the transaction chains in the period in question are part of a contra-trading scheme and the tax losses in the scheme have been off set against acquisitions made from European suppliers and their onward sale to United Kingdom traders. The sudden rapid growth of Worldwide’s business, in the space of a few months, to the level declared did not appear credible. Worldwide was always able to supply the exact amount of goods required even though the company did not keep any stock. The goods were never inspected and payment was not required before the goods were sold. Worldwide did not carry out any credit checks on their suppliers or customers. We are satisfied that the contra-trade with Worldwide was fraudulent and resulted in the tax losses set out by Mr Patterson.

 

 

 

Famecraft Limited trading as Bristol Cash and Carry (Famecraft).

 

46.    Mr Ahmed has put HMRC to proof as to the fraud and loss of tax in the contra-trade with Famecraft. Susan Okolo gave evidence under oath with regard to the transactions carried out by Famecraft Limited trading as Bristol Cash and Carry (Famecraft). On its VAT registration form Famecraft indicated that it expected its annual turnover to be £60,000. For the first 3 periods no trading was carried out. The turnover for the periods 05/05 to 02/06 was £4,890,902. Out of that figure the period 02/06 amounted to £4,400,718. The turnover for the periods 05/06 and 08/06 was £394,866,143.

47,    During the period 08/06, the company employed a consistent, but uncommercial, pattern of trading. In each of its transactions, without deviation, where it had sourced goods from Europe, those goods were always sold to a United Kingdom based trader. Similarly, without deviation, where the company sourced goods from a United Kingdom VAT registered trader, those goods were sold to a European customer. For the period 08/06 (covering the 3 months from June 2006 to 31 August 2006), in which Famecraft traded as a contra-trader, an analysis of  the company’s trading reveals that the company entered into 224 deals involving 3 products in June, July and August 2006. In June and July Famecraft undertook 75 deals in which it acquired mobile phones from one European supplier, Sinderby Enterprises based in Cyprus. It supplied those goods to 2 United Kingdom VAT registered traders, Glasgow Data Limited and Trimax Trading International Ltd. The pattern of trading created an output Tax liability of £27,041,787.50.

48.     In the same period, but exclusively between 17 August 2006 and 31 August 2006, it took part in 149 dispatch deals, where it purchased Gillette goods (razor blades) at the standard rate from Flaxley Limited, a United Kingdom VAT registered trader, and sold those goods to Agrupacion Iberia De Ultramar SA in Spain, creating an input tax claim of £27,025,393.22. All Famecraft ‘broker deals’ took place in the last weeks of the period between 17 August and 31 August 2006 with the effect of dramatically reducing the company’s VAT Liability. Its VAT return submitted for the period 08/06 demonstrates that the outputs and inputs were in close alignment given the vast turnover achieved.

49.       During the periods under investigation, the goods were never stored at Famecraft’s principal place of business but were stored at the freight forwarders, 1^st freight for the mobile phones and Croydon Cash and Carry for the razor blades. Famecraft appears to have carried no insurance for the goods in spite of their high value and relied on the freight forwarders as they considered liability lay with them for the risk. Famecraft achieved a very rapid rise in turnover in a very short period. The total turnover for the periods 05/06 and 08/06 was £394,866,143.

50.            In the period 08/06 Famecraft purchased Gillette goods, in this case razor blades, from Flaxley Limited, who acquired then from Barato Wholesalers Ltd, a defaulting trader, and against which an assessment in the sum of £22,967,287 has been issued’ which remains unpaid.

51.   Famecraft acted as a contra-trader knowingly off-setting its input tax claims, involving deal chains that involve a fraudulent defaulter, against its output tax liability in respect of acquisition deals in a ‘clean chain’. Famecraft carried out all its transactions on a back-to-back basis and carried out very little due diligence. Ms Okolo produced several bundles of evidence together with a detail of the due diligence carried out by Famecraft against Sinderby Limited in Cyprus; Sinderby Enterprises Ltd and Agrupacion Iberica De Ultrama SA. These all relied on, amongst other matters, poor quality pictures of offices and individuals; documents which were largely undated and, where they were dated, they were for periods after the deals took place.

52.     Famecraft confirmed the back-to-back arrangements as follows:

“We purchase items which we promise to pay for and we ensure that our sales are on the whole made before we finalise the deal for the purchase.  Those sales are made on the basis that we will receive payment for the sale prior to having to pay for the purchase of those sales. In effect, the trader who is selling to us is bankrolling our deal. This is a high risk strategy but one which has proven very successful for us”

  

Ms Okolo commented that she agreed that this was a high risk policy. Nevertheless Famecraft were prepared to leave themselves open to this risk by undertaking 200 deals for a sum in excess of £3,000,000 in the first month of trading. Despite this risk they were never let down by either their customers or suppliers. In reality she suggested that the deals were contrived and pre-arranged and formed part of an overall scheme to defraud HMRC. As a result everyone involved in the chain knew that they were not actually exposing themselves to any risk.

53.                       Ms Okolo concluded that Famecraft knew that it was involved in a scheme to defraud the Revenue. It engineered its purchases and supplies into two distinct categories. All Famecraft’s imports made in June and July 2006 and sold on to United Kingdom have ended up in Spain.  All the transactions took place on the same day. No stock was returned as faulty or damaged.  Excess stock was never purchased as the demand always equalled the supply. Famecraft  also traded as a normal cash and carry business and yet none of the phones or razor blades were sold in the shop. Instead all the stock ended up in Europe. The repayment claim made by Infotech in respect of deal 13 is linked to a tax loss by virtue of the off-setting exercise conducted by Famecraft. An assessment has been issued against the defaulting trader Barato in the sum of £22,967,287. The assessment has never been paid nor challenged.

54.                       We are satisfied that the contra-trade with Famecraft was fraudulent and resulted in the tax losses set out by Ms Okolo. Having established that the two contra-trade deals 6 and 13 were fraudulent and that they have give rise to tax losses, we shall now consider the 13 transactions entered into by Infotech and the basis on which those deals were constructed. As indicated earlier, we are in some difficulties as we have not had the opportunity of hearing any oral evidence from Mr Singh nor have any of HMRC’s witnesses been cross-examined.

 

 

Infotech’s transactions

 

55.                       Angela Jane Degg of the MTIC Team gave evidence under oath as to the transactions carried out by Infotech. On 8 September 2006 she was asked to investigate Infotech. Originally named Active Recruiting Limited, Infotech registered for VAT on 26 February 2006. Its main business activity, declared on the registration application, was that of an employment agency providing care staff to airport and other companies.  Its taxable supplies were expected to be £90,000 for the first 12 months. The registration was effective from 1 April 2003, but was cancelled with effect from 2 October 2003 as the company failed to indicate whether it was making any taxable supplies. Mr Singh (using the name Baines at the time) asked to register again on 18 October 2003, as Active Recruiting Limited. He said that the bookkeeper had not been running the business properly, which had led to the failures. The business activity was still that of an employment agency operating at that time from 11 Vale Street, West Bromwich, West Midlands.  This was the home address of Nupinder Bains, the company secretary, and sister to Mr Singh .The estimated value of taxable supplies was stated to be £200,000. The company did not expect to make any exempt supplies, nor to purchase or sell goods from or to other European member states. The former company had a debt of £14,343.73 and as a result the new company was put on monthly returns.. On 8 September 2005, Infotech’s agents, City Tax Accountants, wrote to HMRC advising that the company had changed its business to Software Consultancy and Supply and that the company was changing its name to Active Infotech Limited from 7 September 2005.

56.                       Prior to the appeal Infotech had traded with Amaro as set out at paragraph 37 above. In his witness statement Mr Singh stated:

 

          “I didn’t trade with Amaro straight away, but found my first supplier through the I P T website. I can’t remember whether this was to do with Amaro not having the stock I wanted, or not offering the right price”

 

He must have known Amaro at that time to indicate that they could not provide the supplies at the right price. He has produced no evidence of the earlier transactions, nor the names of the parties. We therefore consider, on the balance of probabilities, that Mr Rai introduced Mr Singh to his customers and suppliers the subject of this appeal. We propose considering the actions taken by Infotech with regard to each of the deals before considering the way they were paid for and the FCIB evidence.

57.        On 14 September 2005 HMRC Officers Christopher Quinn and Susan Hirons visited City Tax Accountants and interviewed Mr Singh in the presence of his accountant, Mrs Pangli. At this point, Infotech had already conducted three deals involving the sale of CPUs the first taking place on 15 August 2005. A full discussion took place with regard to due diligence checks. Mr Singh advised that he had visited Amaro, his suppliers, but he had not been provided with copies of their annual accounts. It was suggested that he should extend his checks for future trading. He should inspect certificates of incorporation and check the VAT numbers with Redhill and that he should notify the officers of all future dealings. In her third statement, Ms Degg confirms that a Redhill request was made for Cesma by Infotech. The request was returned as Redhill wanted further information. Such information was not forthcoming. We do not know when Infotech started trading with Amaro as its principle supplier. It would appear that the first deal in August 2005 may have been with another company, as suggested by Mr Singh, but the second deal was probably with Amaro. If so the check list was made after Infotech had been trading with Amaro.

 

58.            Mr Singh says in his witness statement that he decided to employ a third party to carry out the due diligence for him. He employed Richard Yewdall of Tax and Legal Services Limited. Mr Yewdall used to be an officer with HMRC for many years specialising in VAT. He said that Mr Yewdall had reviewed his files and that he knew who Infotech was buying from and selling to. Mr Singh produced evidence of the due diligence Infotech had entered into. This consists of information supplied by Mr Yewdall and an independent report by The Due Diligence Exchange Limited. The report identifies Perwinder Kumer as the managing Director of Amaro. There appears to have been only one member of staff at the premises 20-22 Harbourne Road, Edgbaston, Birmingham. The Company report shows the trading address to be Stewart House, Stewart Street, Graiseley, Wolverhampton WV2 4JW and contains

a.       a blurred passport photograph which could be of anyone.

b.      a good photo of someone purporting to be Mr Kumar

c.       a detail of the annual return and certificate of incorporation

d.      a set of ticked boxes referring to various documents which have been checked, one including bank details. The report by the due Diligence Exchange Limited states, later, that the company was changing its bank account and it could not therefore have checked the bank details. This discrepancy should have put Mr Singh on enquiry given the level of business Infotech was already carrying on with Amaro.

e.       details of the accounts for the company up to 31 May 2005. These were dormant accounts and they revealed no trading and only one ordinary share of £1 issued.  Again this should have put Mr Singh on enquiry as a company of that size would be unlikely to have been able to carryout the substantial contracts by August, some 3 months later.

f.       the report prepared by The Due Diligence Exchange Limited referred to the fact that the company turned over £58,308,042 of business from 31 May 2005 to February 2006. Mr Singh knew the company did not start trading until June 2005 as dormant accounts had been submitted up to 31 May 2005. When Mr Singh enquired how Amaro had achieved that level of turnover he was told by Mr Kumar that he had brought a lot of business with him. It is not clear where from and given the size of the office, purportedly belong to Amaro (see below g), where such quantity of goods was kept. This was not a satisfactory answer and Mr Singh should have been put on further enquiry that the report had to be incorrect and that  a growth to approximately £58,000,000 in nine months was unlikely

g.      photographs, ostensibly, of the offices of the company and the internal views. These photographs appear to be of a residential development which might have been converted to offices but the views do not appear to be the offices where one would expect to find a company turning over £58,000,000.

h.      Two trade reference Jandu Communications Ltd and Hillgrove Trading Limited which do not appear to have been taken up

59.   The VAT registration number was not checked at Redhill. The Due Diligence Exchange Limited advised that they contact Redhill by telephone. They had tried on the Thursday and Friday but advised that in their experience there was a 6 weeks delay in obtaining a response by telephone. They added:

 

“We do not believe a Tribunal would condone HMRC imposing requirements on businesses in your industry, simply because you trade within this particular industry, which effectively interfere with your Community Rights. These rights includes the free movement of goods and the principle of equality”

 

It is odd that the company would refer to the Tribunal as it is HMRC who would, in the first instance, need to be satisfied. It appears as if the Due Diligence Exchange Limited anticipated that HMRC might not only refuse payment, but require Amaro to test their due diligence in the Tribunal.

60.                         Due diligence enquires were also ostensibly carried out on Medius Trading (Medius). The company was registered for VAT on 21 April 2006.Mr Singh said he had met the director, Daniel Hussian, in Austria when he had previously worked in Europe. Mr Singh said he had checked the VAT number with Redhill and Europa. It was suggested at the Tribunal that a Swiss company VAT number could not be checked at either of those sources. It was then conceded by HMRC that as the deals required delivery to Germany, it would have been appropriate to enquire of those sources. No written evidence of theses checks was produced to the Tribunal The only evidence provided by Mr Singh in his bundle is a letter of introduction from Daniel Hassan; 2 documents in German (neither were translated into english); and a passport photograph of a Mr Bruno Gurber, who is the sale director.We do not accept that this information was sufficient to justify dealing with Medius without futher enquiry.

61.                       Due diligence enquires were also ostensibly carried out on Cemsa. Mr Singh said he visited the company in Marbella.The documents were requested on 19 January 2006 and produced to the Tribunal in Mr Singh’s bundle. They consist of:

a.       A request for the companies certificate of incorporation; VAT certificate: trading address and a photograph of the premises. The documents in the folder are in Spanish and it is not clear what they are

b.      A photograph of a building in a busy street with the name Cemsa on a sign. It is unclear how much of the building is occupied  by Cemsa or indeed if any of it is.

Mr Singh said that he had visited their substantial offices in January 2006. He said the company had significant office space with a series of small offices for important figures. This visit was somewhat, since he had started trading with Cemsa in September 2005.

62.   Due diligence enquires were also ostensibly carried out on 2 Trades. They consisted of:

a.   A request for; the companies certificate of incorporation; VAT certificate: trading address and a photograph of the premises. The documents in the folder are in Flemish no translation is provided therefore it is not clear what they relate to.

b,   A photograph of a building and an office which could be anywhere.

 

Again Mr Singh said that he visited their premises and that he had met with a director before the periods in question. There is no evidence of such a meeting. No details were provided of the trip he might have taken to make the visit. In the circumstances we are unable to accept that appropriate due diligence has been taken in relation to 2 Trades. The documentary evidence provided is meaningless.

 

We have decided that as all the due diligences were carried out after Infotech started trading with the companies they are suspect and appear to be window- dressing  and for the most part meaningless without appropriate evidence..

 

63,     Identical terms and conditions of trading were provided, in english, to all three customers. We were told by Mr Singh that these had been prepared by Mr Yewdall, who had the relevant information. Ms Degg has pointed out that Mr Yewdall stated that he started representing Infotech on 31 July 2006, after the deals, which are the subject of this appeal. Ms Pangli, at the meeting on 14 September 2005 had been told by Mr Singh that the terms and conditions were verbal. If Mr Yewdall says that he drew up these terms and conditions doubt must be cast as to the dates that they were signed. In checking the terms and conditions as produced by Mr Singh we note that the one for Cesma is undated but the rest of the folder appears to have been prepared on 19 January 2006 .The one for Medius is dated 10 October 2005 and for 2 Trade BVBA is undated. The rest of the information for them carries the date 20 January 2006. In view of Ms Degg’s comments as to the preparation of the contracts, we suspect that they could not have been dated on the dates suggested and that it is likely that they were prepared at a later date.

 

 

64.   Mr Singh has confirmed that the deals were all back-to-back. This means that Infotech would only pay Amaro when Infotech was paid by its customers. He also confirmed that he would not allow the goods to be released until Infotech had been paid. In that way he considered Infotech carried very little risk. We have seen from the due diligence that Amaro and his customers appeared to have insufficient assets to even remotely cover the costs of the transactions, if anything went wrong with the deals. Mr Singh said that Infotech was content to rely on its freight forwarders to carry any insurance. He considered insurance was too expensive even though he appears to have been making over 5% on the majority of his deals.(see the Deal Table below). Mr Singh pointed out that Infotech’s goods were only at risk during transport through the Euro tunnel and he commented -‘no lorry had been hijacked within the tunnel’.

65.    Infotech’s contracts with its customers allowed 90 days credit; confirmed that they had full legal title to the goods; that they would be inspected by Infotech and that the relevant VAT would be paid on the goods. Ms Degg queried how Infotech could have examined all the goods in each deal as they did not keep a record of the individual IMIE numbers. It appears that Mr Singh never considered going to check his mobile phones at the freight forwarders. We were told that each mobile phone has an IMIE number. Each box has a detail of all the numbers of the phones in the box, as a bar code, on the side of the box which can be scanned electronically and fairly quickly. Mr Singh appeared to believe that every phone in each box was examined, which meant that each box had to be broken into. In her second statement Ms Degg contended that if that was the case the June consignment of 13,500 units would have taken 28.1 days to examine We do not believe any of the goods were examined as they were released to their customers from the freight forwarders, in most case, the day following the invoice date. 

66.  All the deals in April to June 2006 were transported to Cemsa by 1st Freight Limited. Mr Singh told Ms Degg that Infotech had been having difficulties with his original freight forwarders MSG Goods. As Amaro used 1^st Freight Limited he decided it would be sensible to use them as well. As Infotech did not take delivery of any of the goods it would need to confirm that the goods existed. Mr Singh has produced no evidence of any payments to 1^st Freight Limited for their charges in moving any of the goods for him.

67.                        Prior to looking at the evidence of the contractual arrangements, such as they were, for the individual deals, we note that Ms Degg told us she was aware that VAT returns submitted by Infotech  for the periods 08/05, 09/05, 10/05, 12/05 and 01/06 showed large repayments. HMRC officers had requested evidence from Infotech as to the bone fides of these repayments, which was provided. A further letter was sent to Infotech on 12 December 2005 advising that all VAT numbers should be checked. The letter provided a fax number for Redhill for that purpose and indicated that HMRC would expect Infotech to make such checks in the future.

68.                       Subsequently, the repayments were made to Infotech. HMRC confirmed in a letter of 6 October 2005 that a repayment of £2,324,498.63 would be made but that the repayment was made without prejudice  to any post verification activity undertaken by HMRC and any future action which may be consider appropriate.  On 14 September 2006 HMRC indicated in a generic letter, addressed to all traders and sent to Infotech that extended verification was being made with regard to Infotechs later transactions. Ms Degg confirmed that as part of HMRC’s continuing strategy, VAT compliance staff in the MTIC national teams undertook a risk-based programme of verifying repayment claims. An in-depth verification was carried out on the 13 deals, the subject of this appeal, and HMRC decided that Mr Singh,on behalf of Infotech, knew or ought to have known that the transactions were connected with fraud and refused to make the repayment.

69.                       We set out below the financial details of the purchases by Infortech from Amaro and Infotech’s subsequent sales to its customers, Cesma, 2 Trade and Medius in the Deals Table below. We have also attached to this decision as an appendix the schematics of the various transactions. We have indicated in the Deals Table the dates when the goods were released. Mr Singh has stated that as the deals were ‘back to back’, Infotech did not release the goods until it was paid. He also indicated in his statement that the goods were transferred to the freight forwarders to await Infotech’s confirmation that the goods could be released. However, the release notices were invariably sent the next day (see the Deal Table). This is in spite of the fact that some of the goods appear to have been transported by the freight forwarder to the supplier’s freight forwarder with an instruction to hold the same until released. As they were released earlier, this is contradictory and makes no commercial sense..  We therefore take the view that the goods were no longer under Infotech’s control as they had passed to the suppliers when released.

70.                       Payment was not made for the goods for several weeks thereafter. When payment was made, it has been made either as a single payment or as more than one payment and only amounted to the amount due to Infotech on their sales. The payments do not appear to have included all the VAT and in that regard, appear to follow the example set out at paragraph 10 above.

71.                       Deals 1,2,3, and 4 were the sales to Medius; Deal 5  to 2 Trade (as shown on deals 1 and 5  in the appendix); deal 6  was the contra-trade with Worldwide to Cemsa and is numbered 6 in the appendix; Deals 7 and 8 were also sales to Cemsa and are so numbered in the appendix; deals 10 to 12 were sales to Cesma and are numbered 10 in the appendix; and deal 13 was the contra- trade to Cemsa and numbered 13 in the appendix. Ms Degg and Mr Andrews gave evidence as to all of the deals as set out in the Deals Table. We do not propose to go through each deal in detail but to identify Deal 1 as evidence was given by Ms Degg in this respect. We have examined all the other deals and are satisfied that all the deals took place on similar terms. We therefore propose to comment generally on the rest of the deals as set out in the Deals Table. All the deals took place between 2 February 2006 and 28 June 2006 and were as follows:

 

Deals Table

VAT period	02/06
Supplier and Sale to	Invoice Infotech	Price per unit £	Invoice     £	Vat   £	Total     £	Difference     £
Amaro		501	207,915	36,385.13	244,300.13
(1) Medius	5020	531 (5.65%)	220,365	Nil	220,365
Invoice	2/2/06	Released	3/2/06	FCIB below
				Paid 13/3/6
Amaro		501	200,400	35,070	235,470
(2) Medius	5021	531 (5.65%)	212,400	Nil	212,400
Invoice	3/2/06	Released	3/2/06	FCIB a/c	432,756	47,314.13
				Paid 13/3/6	16/02/06
Amaro		83	1,042,650	183,015	1,228,815
(3) Medius	5022	88 (5.68%)	1,108,800	Nil	1,108,800
Invoice	3/2/06	Released	3/2/06	FCIB a/c	1,108,800	12,001.50
				Paid13/3/6
Amaro		98	617,400	108,045	725,445
(4) Medius	5023	104 (5.77%)	655,200	Nil	655,200
Supplier and Sale to	Invoice Infotech	Price per unit £	Invoice     £	Vat   £	Total     £	Difference     £
Invoice	3/2/06	Released	3/2/06	FCIB a/c	655,200	70,255.00
				Paid 13/3/6
Amaro		76.25	960,750	168,131.25	1,128,881.25
(5)  2Trade	5024	80.83 (5.86%)	1,020,600	Nil	1,020,600
Invoice	9/2/06	Released	9/2/06	FCIB a/c	1,020,600	108,281,25
				Paid 9/3/6
Amaro		460.50	4,605,000	805,875	5,410,875
(6) Cemsa	5025	474 (2,85%)	4,740,000	Nil	4,740,000
Invoice	28/2/06	Released	28/2/06	FCIB a/c	4,740,000	670,875
(Paid as to	£4,029,000	and £711,000	making	£4,740,00
Vat period	04/06			Paid 8/3/6
Amaro		412	3,296,000	576,800	3,872,800
(7) Cemsa	5027	436.50(5.94%)	3,492,000	Nil
Invoice	26/4/06	Released	28/2/06	Abbey	3,492,000	380,800
			Paid	18.19.3.6
Amaro		411	2,055,000	359,625	2,414,625
(8) Cemsa	5028	531(5.63%)	2,177,500	Nil
Invoice	28/4/06	Released	28/4/06	Abbey	2,177,500	237,125
			Paid	31.1/5/6
Vat period	05/06
Amaro		410.50	4,105,000	718375	4,823,375
(9) Cemsa	5029	435 (6%)	4,350,000	Nil	4,350,000
Invoice	26/5/06	Released	26/5/06	Abbey	4,350,000	473,327
			Paid	19.20/7/6
Amaro		410.50	4,105000	718,375	4,823,375
(10) Cemsa	5030	435 (6%)	4,350,000	Nil
Invoice	26/5/06	Released	26/5/06	Abbey	4,350,000	473,327
			Paid	19/7/6
Amaro		410.50	4,105,000	718,375	4,823,375
(11)  Cemsa	5031	423 (3%)	4,230,000	Nil	4,230,000
Invoice	26/5/06	Released	26/5/06	Abbey	4,230,000	593,376
				Paid19/7/6
Amaro		410.50	4,105,000	718,375	4,823,375
(12) Cemsa	5032	423 (3%)	4,230,000	Nil	4,230,000
Invoice	26/5/06	Released	26/5/06	Abbey	4,230,000	593,375
Vat period	06/06		Paid	19.24/7/6
Amaro		375	1,314,250	229,993.75	1,544,243.75
(13) Cemsa	5034	387 (3%)	5,224,500	Nil	5,224,500
Invoice	28/6/06	Released	28/6/06	Yorkshire	5,224,500	730,112
	Total sales to	Suppliers	36,001,365	Vat unpaid	by Infotech	4,047,447
			Paid	15/8/6
			Profit on	36,001,365	at 5.55%	1,998,076
			Total to	Settle amount	Due	6,045,522
			Anticipated	VAT	Repayment	6,033,565

 

Note. 1. The margins are consistent at 5.5% approximately.

          2. The goods are released before payment.

          3. Payment is made several weeks after each transaction.

          4. When a payment is made, Infotech only pays the amount it has received and does not, therefore, pay all the VAT. By mid-August Infotech still owed Amaro £4,047,477 with no evidence of any credit being allowed.

  5. When Infotech’s profit of £1,998,076, based on 5.55% of the total turnover is added to the Vat outstanding the total is only £11,957 greater than the anticipated repayment £6,033,565, a difference too small to be a coincidence.

 

72.                       Ms Degg took us through deal 1 but said that HMRC were not sure where this deal started, as they had not been able to trace the transaction to a defaulting trader. She submitted that as the remaining 12 transactions were linked to a defaulting trader it was likely that this deal was also. We accept that this deal must also have started with a defaulting trader. It appears, in any event, that Mr Ahmed has accepted on behalf of Infotech that, apart from the two contra-trades, there has been a tax loss arising as a result of fraud. The parties to deal 1 are set out in the appendix and are the same for the next 4 deals. In her interview with Mr Singh on 9 October 2006, she queried the payments for deals 7 and 8 in April 06. The goods had been released by Infotech prior to payment being received form Cemsa. Mr Singh responded that he was aware that Cesma had cash flow problems and Infortech allowed 60 days credit.(We note from the alleged contracts that the credit period appears to have been 90 days).  Ms Degg expressed surprise that Infortech was prepared to give such credit when the due diligence revealed that that company had very few assets. In spite of that fact Infotech continued to ship and release goods to Cemsa prior to payment and without a request for a part-payment.

73.              Ms Degg commented that all the deals were supplied by Amaro and have been structured in the same way. A profit margin of around 5.5% has been consistent through out and in spite of the transactions being back-to- back Infotech has merely passed on to Amaro the entirety of the monies received form Cesma, Medius and 2 Trade. None of the VAT registrations have been validated from a credible source and in deals 2, 3 and 4 the inspection report received for the goods is dated after the goods had been released. None of the transactions follow normal business patterns. In deals 5,6,8,9,10,11,12 and 13 the logistics documentation showed invoices, inspection report requests, inspection reports and release notes all on the same date. These could not have been achieved in the time allocated.

 

FCIB

74.              Terence Mendes, a Higher Officer for HMRC, gave evidence under oath and he has been involved with investigating MTIC fraud since 2001.  He examined the movement of funds in relation to deal 5025. (Number 6 in the Deal table above). He explained that each customer using the FCIB is allocated a customer number. The first two numbers indicate the currency to be used (in this appeal sterling); the next 3 the type of account; the next 6 are the customer’s reference and the last two, the number of the account within that currency for that customer. Infotech’s number was 04/801/204106/01. The transaction report identifies the amount of monies involved as debits and credits, and the accounts to and from which payments are made. Each transaction carries its own Electronic Banking (EB) number. The number is used both to identify the receipt of a payment and its onward transmission. As a result it is possible to trace all the payments through all the accounts for all the customers. It is also possible to approximate the amount of time between payments by calculating the number of other transactions in the bank between payments. For example Infotech’s EB number for the receipt of £1,177,500 (being part of the payment in deal 8) is EB1016828. The payment out is EB1017062 both payments having been made on 31 May 2006. The payments are 234 bank transactions apart. This means that the receipt and payment will have taken only a short time if there were only 234 transactions in the entire bank in between.  As a result it is possible to approximate the time taken for the payment of each of the deals.

75.              In order to identify the payments and receipts in relation to the supplies, he initially compared the amounts in the trading account of Infotech with the date and value of the invoices identified in the deal spreadsheets provided by Ms Degg. He then checked to see if there was an amount paid into the bank which matched the invoices for each of the transactions. He has traced all the payments though the entire contra-chain from Cemsa to Muggles Consulting Company. He has produced a spreadsheet showing the direction of the payments for the goods and has concluded that the money started and ended with the same traders having passed around the traders in a circular manner. He has produced spread sheets for several of the other accounts and concluded that there are four companies that commence all the transactions, whether they are VAT loss chains or not and the funds are returned to one of the four. The VAT loss chains have the same financier but the funds, including the VAT, are transferred to enable the financiers to continue to create further VAT loss chains. For the scheme to work all participants would have to be aware of the part they play in the scheme or the funds would not return to the financiers and the scheme could not continue.

76.              John Andrews, Higher Officer for HMRC, also gave evidence under oath and had also been provided with details of the deal sheets by Ms Degg. He analysed all thirteen of the transactions. He checked the FCIB account in the same manner as Mr Mendes examined FCIB account for infotech.  He identified account holders’ numbers in the bank and he was able to check the actual payments against the EB bank number of each transaction. He confirmed, from his flow charts, that there was circularity of payment with the same traders appearing in the chains, quite often in the same relative positions, with a regularity that could not be explained by chance. In respect of deal 5025 it could be seen that the funds continue  to move in circles being re-injected  into fresh chains, with the same participants, on the following day

77.              He was concerned that he could not find any evidence of payment whatsoever for the deals numbered 7,8,9,10,11,12 and 13.  Ms Degg has, however, provided in the schedule to her evidence, a date for such payments namely 18,19/3/6, 31 and 1/5/6, 19 and 20/7/5, 19/7/6, 19/7/6, 19 and 24/7/6 and 15/8/6 respectively (see the Deal Table above). She provided no information as to where the dates come from save a reference to Peter Stubbs, who has not given evidence in the case, as Mr Andrews took over his investigation. Mr Andrews does, however, identify four payments from the transactions before this appeal credited by Infotech to its FCIB account from the following banks:

 

19/12/05 from their Lloyds TSB account                   £409,000.00

24 / 1/06   from Abbey national PLC                          £249,993.12

14/02/06  from Yorkshire Bank                                  £200,000.00

30 /3 /06 from Yorkshire Bank                                               £574,000.00

                                                                                    ----------------

Total                                                                           £1,432,993.12

 

In view of the fact that the Deal Table reveals that Infotech owed £4,390,163 to Amaro as outstanding VAT for the transactions the subject of this appeal, we conclude that the payment of £1,432,993 must have been the VAT due to Amaro from the earlier transactions. We therefore conclude that Infotech must have used both the Abbey National and Yorkshire Bank for some of its previous transactions. We suspect that the missing payments were made through those organisations as well.  In preparing the Deal Table we noted that the invoices to the suppliers for the deals numbered 7 to 12 provided an Abbey National Bank account number: 41930209 sort code 09-06-66. Deal 13 referred to a Yorkshire Bank account number: 58751300 sort code 05-09-83. We conclude that Infotech must have used these accounts for those transactions.

78.              We note that the Deal table reveals that if the repayment of £6,033,656 is paid to Infotech, it will be able to pay Infotech’s outstanding VAT of £4,390.163 still due to Amaro and retain its 5.5% margin of £1,998,076. Mr Singh has indicated that he had to pay all his VAT, hence the introduction of the £400,000 in the initial transactions, He has also confirmed that Infotech would not release any of the goods until it had been paid in full and that he extended no credit. It therefore makes no sense at all that in every transaction he has merely passed on the money he has received from his suppliers to Amaro. As a result there is no profit in any of the transactions for Infotech and a substantial liability for outstanding VAT until it receives the repayment. If the repayment is not made it will be indebted to Amaro for £4,390,163. There has been no evidence received from Mr Singh as to whether that amount has been requested by Amaro. As there is no such evidence and the debt has been outstanding since 28.6.2006, we must assume that no such claim has been made, which is extraordinary if the transactions are supposedly on a commercial basis.

.

Submissions

79.              Mr Mandalia submitted that Infotech originally took issue with every aspect of the Respondents case.  Mr Singh did not attend the appeal on behalf of Infotech and there has been, in reality, no attempt by Infotech to challenge any of the evidence relied upon by HMRC. Mr Mandalia has adopted the Tribunal’s test as set out in paragraphs 14 to 25 above. He also accepts that the burden of proof lies with HMRC and that the standard of proof is the civil standard on the balance of probabilities. All the 13 transactions that are the subject of this appeal trace back through the deal chains to tax losses and are, he submits, part of a contrived chain of transactions, the purpose of which was to effect a fraudulent loss to HMRC.  HMRC are not required to prove the identity of the designer(s) of those chains or that all the participants were knowingly involved in a single fraud. Nothing in the case law or the jurisprudence of the ECJ requires HMRC to demonstrate the precise parameters of the fraudulent activity or its particular participants.

80.              HMRC take the view that the object of the fraud is to obtain the repayment of 17.5% VAT from HMRC and that the fraud crystallises when the repayment is made. Mr Mandalia submits that Mr Ahmed is incorrect when he suggests that the fraudsters would allow Infotech to take the ‘lion’s share’ in keeping the VAT repayment as the fraud gives the missing trader a considerable profit due to the large volume of transactions.

81.              HMRC submit that Worldwide and Famecraft have offset significant sums of VAT and made either a relatively small claim for repayment or a relatively small payment to HMRC to mask the fraud. Furthermore, Infotech has made no attempt to show that the defaulting traders had not failed to account for VAT, nor that the failure was anything other than fraudulent. That is so in respect of all 13 deals that are the subject of this appeal, whether the default arise directly in a deal chain or via a contra-trader. Infotech has conceded that there were such losses arising from the remaining 11 deals. 

82.              Evidence from FCIB accounts established that there is circularity of payment in each of the deals in which Infotech were involved. In deal 6 all the payments were made on 8 March 2006. The total invoice value due to Amaro was £5,410,875.00.  Two payments were made by Cesma totaling £4,740,000.00.  For reasons that are neither apparent nor explained Amaro has taken no steps to recover the short fall of £670,875 which is a significant proportion of the VAT due to Amaro. ( See the Deal Sheet at paragraph 67).

83.              Reference to the EB numbers established that the payments received by the traders and the payments made to the relevant traders all occur within relatively close proximity. It is beyond coincidence that each of the traders were able to process the payments and receipts as disclosed. Mr Mandalia submitted that the analysis of the FCIB statements of the traders establishes circularity of payment that is not to be found in a free market and a true commercial environment. Rather, it is evidence of pre-arranged and contrived transaction chains in which Infotech played an integral role. The ability of traders to generate turnover of the magnitude contended, in such short periods of time is implausible in a genuine commercial market.

84.              The Tribunal has not had the opportunity of hearing Infotech’s Director, Mr Singh, give evidence.  In an email sent to the Tribunal at 15:58hrs on 21 January 2011 (that is on the Friday before the hearing was due to commence), Mr Ahmed claimed that Mr Singh “simply could not face the ordeal of a trial without representation and was struggling to deal with the pressure when he was represented.”  In support, Mr Ahmed attached a doctor’s letter that he claimed in his email to have received in October 2010 to evidence the medical issues.  In fact the letter from a GP at “Malling Health” is dated 6 December 2010 and simply stated that Mr Singh presented to that GP surgery on 10 November 2010 to discuss “stress, anxiety and insomnia”, for which Mr Singh appeared to have reported that he used over the counter treatments.  The letter confirms no clinical diagnosis, treatment or indeed prognosis.  Put simply, there is no reason why Mr Singh should not have attended the hearing to give evidence in relation to a repayment of VAT that he seeks to secure in excess of £6 million. 

85.              Mr Ahmed did not seek an adjournment of the hearing, but simply invited the Tribunal to proceed and that Mr Singh’s “witness statement be read”.  The Tribunal is reminded that HMRC have had no opportunity to cross-examine Mr Singh about the evidence upon which he seeks to rely. The Tribunal should therefore read his statement with a degree of caution. The Tribunal must form its own view as to the credibility of Mr Singh, but must do so against the background that he has not attended to give evidence, his evidence has not been tested and there are a number of matters that remain unexplained.  HMRC submit that the evidence clearly establishes that Mr Singh, on behalf of Infotech, knew or should have known that its transactions were connected with fraud.

86.              This is a case, as with most such allegations, where the Tribunal is asked to draw inferences from the known facts. It is necessary to look at all the evidence in the case to determine what support is lent to HMRC’s case.  The evidence is not confined to the deals carried out by Infotech and what it knew about those with whom it directly traded.  Those are important matters, but other factors such as the history, knowledge and background of Infotech and its personnel, and its approach to trading, all provide important circumstantial evidence.  Such evidence can place into context other evidence such as poor due diligence, failure to obtain inspection reports or anomalies in transaction documentation, which might otherwise be dismissed as simple inefficiency or oversight.

87.              The Respondents’ primary submission is that the Appellant knew that its transactions were connected to a fraudulent loss of VAT by other traders.  It is, or course, relevant to that submission that Mr Singh was aware of both the incidence and characteristics of MTIC fraud. Mr Singh states that he relied upon the expertise of Mr Yewdall, of Tax and Legal Services Limited, and that Mr Yewdall was provided with all of the relevant commercial documentation.  Mr Singh asserts that “if Mr Yewdall didn’t know it was likely to be fraud, I’m not entirely sure how I could have known”. Although Mr Singh repeatedly hides behind Mr Yewdall, interestingly, the Appellant did not seek to call Mr Yewdall in support of its case.

88.              It is reasonable to assume that the companies that were selling the goods would want to maximise their profits, and those that were buying the goods would want to maximise their profit by buying at the cheapest price.   It is curious therefore that Amaro, like Infotech, also sold Nokia 8800 mobile phones directly to Cemsa.  In a genuine commercial market both sellers and buyers want to maximise their profit.  Amaro did not seek to take advantage of the lower price that Cemsa could secure by sourcing the goods from Amaro, a company with whom it had an established trading relationship.

89.              Mr Singh does not explain in his statement, and did not attend the hearing to give evidence as to how Infotech’s trading model operates;  There are numerous anomalies that remain unexplained;

a)    Mr Singh simply claims that he was under the impression from the start, that trading United Kingdom to United Kingdom would not involve very goods profits. Infotech did not seek to take advantage of, (and Mr Singh does not explain why) the greater profit that it could make by sourcing goods from abroad, to supply to a customer abroad;

b)    It is noteworthy that Infotech and its counterparties, have gone to some lengths to order and source the mobile phones and or CPU’s in the course of one day.  The deal charts that were provided by Mr Mendes clearly demonstrate that in each of the 13 deals, each of the traders has purchased and sold the goods on the same day.  However, there is then a delay between the goods arriving in Europe and Infotech’s customer making payment to Infotech.  By way of example in Deal 1, the mobile phones are traded in the UK on 2 February 2006.  According to the documentation provided by Infotech, the goods were transported out of the UK by the freight forwarder on 2 February 2006.  The goods were released by Infotech to its customer on 3 February 2006.  However, payment was not made by Medius Trading until 13 March 2006. Infotech transported the goods to its customer on a “Ship to hold basis”.  For example in deals 1 and 2, Infotech issued a ‘Transport’ note to the freight forwarder.  Mr Singh does not explain what a “Ship to hold basis” is, but one must assume that Infotech wished to ensure that the goods were not released to the customer until payment was received.  However, the goods in deals 1 and 2 were released to Medius on 3 February 2006, whereas Infotech did not receive payment until 13 March 2006.  It is simply not credible that Mr Singh would have released goods worth hundreds of thousands of pounds before checking that his customer had made payment.

     d)      At the point that the goods were sold by Infotech, it is unclear from the commercial documentation disclosed by the traders who actually owned the goods and had title to them. There is no evidence that any of the traders in the various chains passed title before receiving payment or were aware that the goods were being sent out of the United Kingdom by Infotech and consented to such an arrangement despite the obvious risks that that would entail.

89.            There has been no attempt by Mr Singh to explain the entries within the FCIB records of the traders and insofar as Infotech was concerned, Mr Singh has made no attempt (not even by way of a statement) to explain why, having received payments from its customer in parts, Infotech made payments to its supplier in an identical fashion rather than by way of a single payment in settlement of the sum due. HMRCHMRC submit that Infotech’s account of its trading model is devoid of any commercial reality and that the general nature of Infotech’s business model would have put any reasonable businessman on notice that he was not involved in a legitimate trade.

90.    There is no explanation as to why a legitimate trader would trade under the trading model of Infotech in the absence of fraud. The Tribunal are entitled to conclude that Infotech would inevitably have suspected that the transactions that are the subject of this appeal were both contrived and connected to fraud. Infotech has provided no other legitimate explanation for the business model it claims resulted in these transactions, and no indication or explanation of why it decided to ignore such clear indications of fraud.

91. If the Tribunal is not convinced of Infotech’s actual knowledge of the connection to fraud then, at the very least, the evidence shows that Infotech ought to have known of the connection to fraud.  Specifically, Infotech should have been alerted at least by the following;

a)       The characteristics of the goods being traded;

i)          Easily transportable high value goods of a type commonly used for the purposes of MTIC fraud and referred to in Notices and correspondence as such;

ii)         Mobile phone bought in large quantities; in quantities that are entirely disproportionate to the size of the retail market for such phone during the months before and after the said transactions;

iii)        Goods bought in large quantities that Infotech intended to sell to a customer outside of the United Kingdom, and thus placing Infotech in a ‘repayment’ position;

b)             The characteristics of the relevant transactions;

i)                   The transactions were back-to-back,

ii)                 All of the transactions involve purchases and sales in the same quantities;

iii)               All of the stock was held by freight forwarders

iv)               All traders accede to releasing goods before payment is made;

v)                 Infotech was not require to make payment to its supplier until it had received payment from its customer, despite the delays in payments being made;

92.                       It is right to say that, in the periods not the subject of this appeal, Infotech had secured repayments from HMRC as set out in paragraph 35 above. All of those repayments were following ‘verification’ and not ‘extended verification’ as has been undertaken in the deals that are the subject of this appeal.  Officer Angela Degg provided the Tribunal with an explanation of the difference between ‘verification’ and ‘extended verification’. Mr Singh claimed in his statement that his personal investment into the company was £400,000.  The Tribunal heard evidence from Officer John Andrews about monies that had been transferred into Infotech’s FCIB account, presumably from monies that Infotech had previously secured by way of repayments from HMRC in earlier periods.

93.                       In light of the difficulties that Infotech had previously encountered in respect of its repayment claims, HMRC and the Tribunal are entitled to expect that thorough ‘due diligence’ would have been conducted in relation to each of Infotech’s trading partners and that Infotech would have taken heed of the information revealed.  HMRC submit that Infotech failed to take every precaution that could reasonably be required of it. HMRC submit that Infotech failed to take reasonable and proportionate action to ensue that its transactions were not connected with fraud.

94.                       HMRC submit that the evidence enables the Tribunal to be satisfied to the requisite standard of proof that;

                 a)     The relevant transactions that are the subject of this appeal, were                 connected with the fraudulent evasion of VAT; and

    b)     Infotech knew or should have known that the deals were connected with the fraudulent evasion of VAT.

 Accordingly, HMRC submit that the Appeal be dismissed.

95.                       Neither Mr Ahmed nor Mr Singh attended the hearing, but Mr Ahmed did produce a skeleton argument and we intend to refer to that argument for the purposes of Mr Ahmed’s submissions. Mr Ahmed’s primary submission is that there is no evidence that Infotech knew or should have known of the fraud. Mr Ahmed also complained that HMRC had deliberately withheld evidence until shortly before the trial. He also submitted that Infotech had limited resources and it was not possible to review all the evidence because of the constraints of time and funds. We do not accept either of these contentions. The additional evidence was introduced as a result of an application for directions, which this Judge heard on 10 December 2010. That evidence, for the most part, related to a second statement for Ms Okolo in relation to Famecraft, and a similar statement for Mr Patterson in relation to Worldwide, with their supporting workings. The request arose because Infotech put HMRC to proof in relation to the two contra-trades. The remaining evidence sort related to the FCIB evidence from Mr Mendes in relation to Worldwide and Mr Andrews in relation to Infotech. All that evidence was relevant to the appeal and we do not accept that Infotech and/or its advisers have had insufficient time to consider the same from 10 December 2010 until the third week in January. In writing this decision, we have been able to consider all the witness statements, and a substantial number of the bundles, over a period of a week and a half.

96.                       Mr Ahmed submits that Infotech could not have known about the circularity of the movement of the funds through the FCIB accounts. He suggests that there is no evidence that HMRC received permission to use such material in civil cases and there are no continuity statements to support the reliability of data or to prove the date could not be corrupted. The officer concerned appears to have no technical knowledge at all and would, even if cross-examined not be able to answer such questions.

97.                       HMRC must prove that a fraud has been committed, that the fraud is connected with Infotech’s transactions and that Infotech knew, or should have known, of these facts. It must do this for each transaction, particularly the contra- trade periods, where the supply chains are completely different to the 3 other periods. Infotech has conceded that fraud existed in its supply chains for the transactions within the periods 02/06, 04/06, and 05/06 and that the goods imported by the fraudsters were purchased by it. Infotech continues to contest that a tax loss, let alone a fraudulent tax loss, has been proved in any supply chain relating to the 06/06 period.

98.                          It is suggested that Infotech ‘should have known’ that its deals were connected with fraud. That proposition is amplified at paragraphs 74 and 75 of the Court of Appeal hearing in Moblix Ltd (in administration); and others v HMRC [2010] EWCA Civ 517 where Moses LJ says:

“The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT. The tribunal might have concluded that Mr Peters should have known that the transactions into which he entered were concerned with fraud, by reference to the unconventional nature of those circumstances (a finding it came close to making at paragraphs 2 to 8). But it was not the only decision within the bounds of reasonable conclusion”

This is a very high threshold. The evidence would need to be cogent and compelling to import such knowledge.

99.                       HMRC contend that the trading practices of Infotech were so far removed from genuine trading that the only reasonable conclusion that can be drawn is that it knew of the fraud perpetrated by the importers at the top of its supply chains, or those alleged to be at the top of Famecraft. Furthermore, that certain aspects of that trading could only have been possible with the assistance of others, overseen by a controlling agent. Mr Ahmed maintained that it was essential to read the first decision in the appeal of Brayfal Limited. The case has not been produced to the Tribunal but has been seen downloaded from the VAT Tribunal’s website from Judge Demack’s decisions. Mr Ahmed submits that the present hearing is dealing with a means of knowledge appeal, the commodity and value of stock can be seen and there is no need to identify the full facts of the case to know this. The allegations are almost identical to the facts in Brayfal and the trading practices are the same. The question was asked as to whether the fact that Brayfal did not record IMEI numbers is an indicator that it had actual knowledge of the fraud and that in itself was enough. Judge Demack found in favour of Brayfal. Mr Ahmed considers that that is the fair and logical conclusion to be drawn. In the second decision in Brayfal, the two members, who appeared to have many years experience in the wholesale business, found nothing sinister in the lack of contractual agreements; a supplier holding the required stock in the right quantities; delivery to a country other than that of the customers; the use of freight forwarders; the use of the FCIB Bank; poor credit rating for a customer etc. the Tribunal took a sensible approach by refusing several minor issues to establish a single major one. Mr Ahmed respectfully urged the tribunal not to be drawn into HMRC’s trap (which conflicts with legal authority) of believing everything which is not text book business practice must in some way arouse suspicion. (Since the hearing the Second-tier Tribunal has heard the appeal by HMRC from the decision in Brayfal. We have received further submissions from the parties in that regard to which we refer in our decision).

100.          As far as the due diligence is concerned HMRC have to show what Infotech could have found out had the checks been taken out at the time of the transactions.  Mr Ahmed submitted that the evidence of what could have been discovered makes it abundantly clear that there was no possibility for Infotech to have identified the fraud. Mr Ahmed submitted that no amount of due diligence on its suppliers would have identified the fraud.  Nor is there any evidence on which to conclude that Infotech was on notice that the freight forwarders were in some way behaving dishonestly, or even in an unusual manner and thereby requiring further investigation. If Infotech had visited the freight forwarders they would have discovered nothing untoward. It is unlikely in any event that the freight forwarders would have divulged any information about other customers.It is therefore submitted that the evidence effectively ends any argument that Infotech “should have known” of the fraud.

101.          With regard to Famecraft, it had been exporting razor blades to Spain for some time and HMRC were aware of this. Officers visited Famecraft regularly and monitored its trading activities. It is suggested by HMRC that Famecraft set up the ‘clean chain’ so that it could contra its VAT liabilities and disguise its activities. Mr Ahmed asked how Famecraft could possibly hide the fraud, when it knew that HMRC would verify every export transaction and continue regular VAT visits. There are only two possible frauds that the Tribunal can properly consider. Hiding the razor blades is one of them. Balancing the books so that Famecraft can continue to export in chains that provide very good profits and that it  knows are contaminated with fraud is not good enough.  In Blue Sphere Global Ltd v HMRC [2009] EWHC 1150 Ch, STC 2239;

 

“55. In my view it is an inescapable consequence of contra-trading that for HMRC to refuse a reclaim by E it must be in a position to show that C was party to a conspiracy also involving A. Although the fact that C is party to both the clean chain with E and the dirty chain with A constitutes a sufficient connection it is not enough to show E ought to have known of the fraudulent evasion of VAT involved in the subsequent dirty chain. At the time he entered into the clean chain there was no dirty chain of which he could have known, nor was the occurrence of such dirty chain inevitable in the sense of being pre-planned”.

 

102.          This leaves the Tribunal with one other issue. Did Infotech have actual knowledge of the fraud in its supply chains- that is that they were connected with the fraudulent evasion of VAT.; that such transactions might be so connected is not enough. Mr Ahmed reminded the Tribunal that neither the allegation of it being a fraudster, nor one of a conspiracy, is the pleaded case. We note that Paragraph 3 of the Amended Statement of Case provides:

 

“The Respondents’ grounds for these decisions are that the input tax incurred by the Appellant in those periods was incurred in transactions connected with the fraudulent evasion of VAT, and that the Appellant either knew or should have known of this fact”

 

and at paragraph 77

 

            “ …..a.) the assessed transactions formed part of transaction chains’ connected with the fraudulent evasion of VAT; and

                 b.) The Appellant either ‘knew or should have known’ of that fact”

We have therefore concluded that HMRC have pleaded that Infotech knew that its transactions were fraudulent.

103.          Mr Ahmed also submits that HMRC have made not attempt to query the VAT transactions of the intermediaries in the chains, although it says that any party whose transactions are connected with fraud, automatically loses its right to deduct input tax. He submits that it is inappropriate for HMRC to ignore the actions of the alleged fraudster and others in the chains and merely lay the blame for their actions on Infotech. Infotech is so far removed from the alleged defaulting traders that it is the company the least likely to know about the fraud. It is extremely important that the tribunal should not exercise hindsight in its assessment of the conduct of Infotech and its director – but rather to consider what actually happened and what evidence was actually available at the time. As Moses LJ said in Moblix:

 

“But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion”.

In Public Notice 726, there are a series of checks that could be carried out, but it is not suggested that anything further should be done and it states that the exporter is not expected to know the full details of its supply chain.

 

104.          HMRC’s position is often that only when an exporter such as Infotech is repaid the VAT is the VAT paid down the chain and later unaccounted for. This was vital to their argument that Infotech must be part of the fraud. It is also submitted by HMRC that Infotech has taken a large share of the VAT and, therefore, must be a knowing participant. It is often suggested that no fraudster would allow an unconnected exporter to take the “lion’s share”. Mr Ahmed disagrees with this analysis as the missing trader is left with a considerable profit, given the massive volume of transactions.

105.          Mr Ahmed submits that it is not proportionate to deny the input tax on a company far removed from the alleged fraud after making no attempt to recover the input tax from the alleged defaulters. No evidence is before the Tribunal as to the financial status of the other companies in the chain. Given the position of the FCIB, it seems likely that other companies’ funds remain frozen in the bank, as they do in the case of Infotech. If that were so, then the recovery would be possible and Infotech’s input tax could not be denied. No evidence has been given by HMRC as to any meaningful attempt to recover the VAT before denying Infotech’s right to deduct.

106.           In all the transactions, the Tribunal is invited to allow the appeal, on the basis that ;

                                      i.                               HMRC’s denial of Infotech’s right to deduct is disproportionate when HMRC could, and should, have denied the right to deduct to the immediate  counterparties to the fraudsters

                                    ii.                               As a matter of fact and law, Infotech’s transactions were not “connected with”  fraud in the sense which Kittel/Recolta are properly to be understood and

                                  iii.                               In any event, Infotech neither knew, nor had the objective means of knowledge, at the time of entering into the relevant transactions of any connection with fraud.

 

HMRC are constructing their case with hindsight and without any direct evidence of any knowledge or participation in fraud.

 

107.          Furthermore, the “missing VAT” was the net amount for which each missing trader failed to account (being, in respect of each deal chain, a lesser sum than the amount of input VAT being reclaimed by Infotech), and Infotech ought to have received credit for the difference between the total amount of repayments claimed and the missing VAT.

108.          Regarding any award of costs, Infotech request that these be dealt with under the new rules given that the majority of the costs have been incurred after April 2009. HMRC did not seek to inform Infotech that it would seek costs until it served the Amended Statement of Case in October 2010. In its first consolidated Statement of Case in August 2008, before the new rules, it only reserved its position and was unaware of the imminent changes. Infotech has stated that it was not aware that costs would be an issue and believed that after April 2009 no adverse costs would arise.  The Tribunal is referred to Judge Berners decision in Hawkeye Communications v HMRC [2010] UKFTT 636 (TC).

 

The decision.

 

109. We have considered the law and the evidence and we dismiss the appeal. We have decided that Mr Singh, on behalf of Infotech, knew that Infotech was participating in fraudulent transactions including the contra-trades, where we have deduced that there were tax losses arising from fraud.. As to a contra-trade Mr Justice Lewison stated in Livewire Telecom Ltd; and another v HMRC [2009] EWHC 15 (Ch) at Paragraph 102:

“In my judgement in a case of alleged contra-trading, where the taxable person claiming repayment of input tax is not himself a dishonest conspirator, there are two potential frauds:

i) The dishonest failure to account for VAT by the defaulter or missing trader in the dirty chain; and

ii) The dishonest cover-up of that fraud by the contra-trader.

110. The participants required Infotech to be prepared to enter into all the transactions in the knowledge that there was very little risk to Infotech as the funds would be provided by Cesma and HMRC when the repayment was made. Infotech falls in to paragraph (ii) of Mr Justice Lewison’s propositions so far as the contra-trading is concerned.  Mr Singh’s failure to attend is not helpful to his case. We cannot accept from the evidence set out in the email that he is suffering from a clinical condition that renders him unable to attend the tribunal hearing. Nor can we accept that he has no funds. As indicated in this decision, we have drawn a conclusion from the facts available to us that he had made at least £856,524 profit from his earlier transactions and recovered his original investment of £400,000. We also believe that such funds are in the three accounts with Abbey National PLC, Lloyds TSB and the Yorkshire Bank, which have not been identified in Infotech’s statutory accounts. The failure to identify these three accounts in its company’s returns is also suspect.

111.          Mr Ahmed submitted that as HMRC had not attempted to query the VAT payments in the intermediate chains, it was not proportionate to deny the input tax to Infotech, which was far removed from the alleged fraud. We cannot agree with him. The joint and several liability enables HMRC to pursue those parties it believes will be most able to account for the VAT. In this case Infotech is seeking a substantial repayment and as it has not been successful in achieving this HMRC are able to retain the tax.

112.                   Ms Degg conceded, when giving her evidence, that HMRC had been aware of Infotech’s trade with Amaro and, through them, others in the chain. She has indicated that the repayments were only made without prejudice to HMRC’s right to carry out an extended verification if it thought that would be necessary, which it ultimately did.  Visiting officers warned Infotech that it must take care. It would appear that as a result of those warnings Infotech purported to carry out further due diligence, to which we refer below. It is unfortunate that we were not given further information about the earlier trades. They represented the introduction of Infotech to Amaro and, as a result of the repayments, Mr Singh must have felt that he was safe to continue trading. We note that Infotech carried out no deals in mobile phones or CPU’s in the period 11/05. Presumably it was waiting to see if it would receive a repayment, when this took place. As a result it continued to trade from the period 12/05. We can, on the balance of probabilities, assume that those earlier trades followed a similar pattern to those the subject of this appeal. Mr Andrews has identified four payments from the accounts of Lloyds TSB, Abbey National PLC and the Yorkshire Bank to Infotech’s FCIB account amounting to £1,432,993.12. We have been told that HMRC repaid £2,792,474 to Infotech representing the total VAT on those previous deals. We are satisfied that the payment of £1,432,993.12 represents the VAT that Infortech owed on those deals after taking out its profit.  As we have shown at paragraph 38, if the turnover representing the employment agency business is deducted from the figure of £17,663,807 (the total sales for the period), Infotech made £856,524 profit from the transactions. It presumably recovered its original investment of £400,000 otherwise there would have been little point in it entering into the transactions. If its profit of £856,254 and the £400,000 are added to the payment to the FCIB account of £1,432,993 the resulting figure is £2,689,517 a figure which is 3% less than the total repayments. We do not believe that that could be a coincidence. The fact that Infotech received the repayments merely reassured it that it could continue to trade in mobile phones and CPUs. HMRC are under no obligation, as suggested by Mr Singh, to notify a trader that it is dealing with defaulters. A trader needs to consider all the circumstances of its transaction and come to a commercial decision as to whether the transaction should be pursued or not.  We have decided that Mr Singh, on behalf of Infotech, decided to continue trading because HMRC were unaware of his involvement in the fraud. How must Mr Singh have known that he was participating in a fraud?

113.            Judge Colin Bishopp suggested in Calltell TelecomLtd & Another –v- Revenue and Customs [207] UKVAT V2066:

            “Much will depend on the facts, but an obvious example might be the offer of an easy purchase and sale generating conspicuously generous profit for no evident reason. A trader receiving an offer would be well advised to ask why it had been made; if he did not he would be likely to fail the test set out in paragraph 51 in the judgement of Kittel.”

 

Infotech had been trading successfully as an employment agency and had achieved a turnover of approximately £800,000. In a period of 11 months, from 08/05 to 06/06, its turnover increased to £53,665,172. This represents an incredible increase in its business, the more so, when the profit, if the repayment was to be made, amounted to £2,854,599. These are figures seldom achieved by successful medium sized companies employing large numbers of staff with substantial assets to support their trading, let alone sole traders. The lack of sufficient financial support appears to be born out by the accounts to 31 October 2006. The Accountants state that the company’s current liabilities exceed its total assets by £3,304,091. These conditions cast significant doubt about the company’s ability to continue in business. The accounts were signed by the board on 12 July 2007some considerable time after the year end of 31 October 2006. They carry a further note at 1.1 advising as to the dispute with HMRC. They do not, however, reveal that even on receipt of the VAT repayment of £6,033,565  there will be a shortfall of £1,306,016 as £4,047,447 was still due to Amaro. (£6,033,565 - £4,047,447 = £1,998,075/ £3,304,091 - £1,998,075 leaves a short fall of £1,306,016). The accounts clearly bear no relationship to the true position. As has been suggested above, Infotech has other bank accounts, which has not been revealed in its accounts. No businessman would enter into transactions of the size of the deals if they produced no profit. We believe that Mr Singh knew when Infotech entered into the deals, the subject of this appeal, that they were fraudulent.

114.            We are satisfied that Infotech started trading in mobile phones and CPU’s as a result of an introduction by Mr Rai not least because there is no other evidence as to the research Mr Singh ostensibly carried out when he first started trading. We are also satisfied, as stated by Ms Degg, that Sapphire Limited is a defaulting trader. Mr Stone has stated that it is essential that all the parties to the transaction are parties to the fraud. We accept that Infotech may have been unaware of the contra-trading in its clean chain. However, as we have found that Infotech knew that all its other dealings with Amaro were such that it was participating in the frauds, it matters not that it did not know of the contra-trade in the ‘clean chain’. All the chains anticipated a substantial payment out of the eventual VAT repayment to clear the outstanding VAT.

115.            Aftera short space of time following the hearing of this appeal, Mr Justice Lewison, sitting as the Judge in the Second-tier Tribunal, handed down his judgment the case of The Commissioners for Her Majesty’s Revenue and Customs v Brayfal Limited FTC/53/2010, referred to earlier by Mr Ahmed. Mr Ahmed and Mr Mandalia have provided us with further submissions in the light of that case and we now deal with those submissions. Mr Justice Lewison dismissed HMRC’s appeal on the basis that HMRC had not proved on the balance of probabilities that Mr Kibbler, on behalf of Brayfal could have known of the contra-trading. He referred to the third test in Axel Kittel and another v Belgium [C-439/04]:

 

“iii) The principle does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion”.

 

The two members in the First-tier Tribunal were of the opinion that Mr Kibbler, on behalf of Brayfal,  had done all that he might reasonably have done as a prudent businessman to ensure that Brayfal’s transactions were not fraudulent.

 

116.            At paragraph 16  Mr Justice Lewison said:

 

            “The members began their detailed reasoning by saying that the clean chain (in which Brayfal found itself) was created before the dirty chain. This was a vitally important point. In order for deduction of input VAT to be withheld, HMRC must prove, having regard to all the factors, that the taxable person, at the time of his transaction, knew or should have known that his transactions were connected with fraud. Where the impugned transactions are transactions in the clean chain this presents problems for HMRC. As the Chancellor pertinently asked in Blue Sphere Global Ltd v HMRC [2009] STC 2239: how can a trader who is not part of a conspiracy know of the fraud before it happens? If there is a regular course of conduct in which the trader knows that his transaction are connected with subsequent transactions that he knows ex post facto are fraudulent, there may come a time at which he can be credited with knowledge of the future. But that is not the case that HMRC advanced in this case. Moreover, in the present case, as the members pointed out, all Brayfal’s transactions were in the clean chain where every trader correctly dealt with its VAT. Thus the members’ findings in paragraphs 138 and 149 were also relevant to, and supportive of, their rejection of the case based on actual knowledge. In a subsequent  passage paragraph 153 they said that HMRC were not aware at the relevant time that there was anything amiss with Future; so that Brayfal was “most unlikely” to be aware. Mr Black drew attention to paragraph 152 in which the members said:

 

            “Question 3 is, in our view, the one the Commissioners have to prove. They have already accepted that Brayfal was not an honest co-conspirator so must show that he had ‘means of knowledge’ at the time of entering into its transactions that they were connected to the fraudulent tax losses”,

 

 

117.            Mr Ahmed, in his further submissions submits that there cannot be a finding of actual knowledge unless the pleaded case is that Infotech is a co-conspirator (Brayfal J/para 16).  There is a lack of evidence to support the allegation of conspiracy. The transactions were not connected with fraud, as they were in clean chains. The most which could be said is that they were almost certainly going to be connected with fraud; but suspicion is not enough, no matter how suspicious one is. (Moblix J/para 55/56).

118.            Mr Mandalia submits that there is no requirement for HMRC to either plead or prove that Infotech was a co-conspirator. In C – Kittel 439/04, the ECJ took the view that where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retrospectively (paragraph 55). Put simply, a co-conspirator is by definition a participant in the fraud. Furthermore, in Mobilx Ltd v HMRC [2010] EWCA Civ 517, Moses LJ held:

 

            “The test in Kittel is simple and should not be over-refined” (paragraph 59); Moses LJ did not find that conspiracy formed part of the Kittel principle.

It is noteworthy that in the recent decision of Brayfal, there is no reference to the judgment of Moses LJ in Mobilx in respect of the timing of transactions. It is the decision of the Court of Appeal that takes precedence. Moses LJ held:

 

            “ The principle of legal certainty provides no warranty for restricting the connection, which must be established, to a fraudulent evasion which immediately proceeds a trader’s purchase. If the circumstances of that purchase are such that a person knows or should have know that his purchase is or will be connected with fraudulent evasion, it cannot matter a jot that the evasion precedes or follows that purchase. That trader’s knowledge brings him within the category of participant. He is a participant whatever the stage at which the evasion occurs…” (paragraph 62)

 

119.            It cannot be right, and according to Moses LJ in Mobilx it is not right, that Community Law would allow a trader that has actual knowledge of a fraudulent scheme to retain his right to deduct merely because he and other participants in the scheme have orchestrated the transactions so that the “clean” chains take place before the “dirty” chains.

 

120.            We cannot agree with Mr Ahmed’s assessment.  It is no part of the Mobilx decision that a conspiracy has to be proved. Moses LJ in Moblix at paragraph 16  said

 

“Complete absence of evidence, or of evidence being to the contrary effect, are two of the grounds on which it may be said that a tribunal was not entitled to reach a conclusion of fact. It is also well settled that a tribunal is not entitled to find serious allegations established against a party who calls relevant witnesses unless those allegations are clearly formulated and put in cross-examination. As Briggs J said in HMRC v Dempster [2008] EWHC 63 (Ch) (unreported)

            “.. it is a cardinal principle of litigation that if serious allegations, in particular allegations of dishonesty, are to be made against a party who is called as a witness they must be both fairly and squarely pleaded, and fairly and squarely put to that witness in cross-examination”.

121.            Infotech can have been in no doubt as to HMRC’s belief that it was party to the fraud. As mentioned earlier, the amended statement of case indicated that HMRC considered that Infotech knew or ought to have known that it was participating in a fraud (paragraph 3). We are satisfied that Infotech was dishonest. Its company accounts are incomplete. Mr Singh could not have forgotten about the other Bank accounts. He said that he had to pay £400,000 to Amaro as evidence of his good faith. No honest trader would expect only to pay to his supplier the amount he received from his European customers. An honest trader would be aware that there would be no VAT payment from the European customer, and an honest trader would have to make arrangements to pay the VAT in addition, as Mr Singh indicated he had. The fact that Infotech had not paid the full amount of all the VAT due on all the transactions, when alleging it had, points to a lack of commerciality. Of the 13 transactions that Infotech entered into only two of them were contra-trades. We concede that Infotech might not know that there was a contra-trade, any more than it could have known of the other 5 or 6 intermediate traders in each of the other transactions. What it did know was that it could make a great deal of money, in a very short period of time, without any risk. It knew it would be paid for all its transactions out of the VAT repayment otherwise it would not have entered into the deals. Amaro and Infotech must also have agreed that the balance of the VAT could be paid out of the repayments. Amaro was relaxed about that as all the repayments had been made in the six previous transactions. The members on Brayfal were satisfied that Brayfal was an honest trader. We have found that Infotech was not.

122.            As Mr Singh has not attended the hearing it has not been possible to put these matters to him by way of cross-examination. However, the amended statement of case has identified that HMRC consider that Infotech, through Mr Singh, knew that it was participating in fraudulent transactions. We refer specifically to paragraphs 3, 15, 38, 46, 52, 62,and 76. Paragraph 76 states:

           

“76. The Respondents contend that, standing back from the individual chains of transactions and looking at the whole picture, as illustrated by the Respondents case as set out above, its true nature can be seen as part of a contrived scheme to defraud the revenue”.

 

R Singh and Infotech must have been aware that HMRC had clearly formulated their allegation that Infotech was dishonest. We therefore find that the appealed decision in Brayfal is of no assistance to Infotech.

 

123.             The evidence as to the due diligence carried out by Infotech is less than satisfactory. We are surprised that HMRC were content to make the earlier repayments on the basis of the evidence that they had seen. In the next period of 5 months the company’s activities increased from £13,000,000 to a further £33,000,000. Mr Singh has suggested that Amaro were a substantial business although they only started trading in June 2005 without any real assets. The substantial growth in Amaro’s business over a very short period of time should have put Infotech on enquiry. Further the due diligence provided by the Due Diligence Exchange Limited is no more than window dressing. No reasonable businessman would have traded with any of the companies on the basis of the information provided, particularly considering the level of trading Infotech had anticipated.

124.            The delivery of the goods to the freight forwarders with release of the same to Infotech’s customers prior to Infotech being paid, does not give Infotech the protection that a ‘back to back’ arrangement was supposed to do. No satisfactory detail has been given of the insurance cover ostensibly arranged by the freight forwarders. In any event, once the goods had been released to Infotech’s customers the freight forwarders would have had no further liability. It is significant that until Infotech was paid some time later the goods were at risk. This is not an acceptable risk for a commercial undertaking. The truth of the matter is that Infotech knew there was no risk as the whole exercise was dishonest.

125.            We do not consider the lack of a contract is critical. By the time of these transactions Infotech had been trading for some time with Amaro and the other tradres. We are, however, concerned that Infotech has sought to suggest that the contracts were prepared by Mr Yewdall. As demonstrated by Ms Degg, Mr Yewdall was instructed to act for Infotech at a later date. We consider the contracts are merely window dressing. The only reason for this must be to create a smoke screen to satisfy HMRC that its transactions were compliant

126.            Mr Singh has indicated that the transactions were ‘back to back’ so that Infotech would be paid before the goods were released. He has stated that he had to invest the £400,000 to cover Infotech’s VAT liability. That is not the case. Infotech’s VAT liability to Amaro by June 2006 was £4,047,447. Infotech only ever transferred to Amaro the money it received from its customers Cemsa, Medius and 2 Trade. As a result it appears not to have needed to provide any finance at all. It is also unusual that Infotech made payments to Amaro of differing amounts. As has been seen in the Deal Table for deal 8 Infotech received two payments from Cemsa, One for £4,029,000 and the other for £711,000 making the total due from Cesma of £4,740,000. There was no provision for Infotech’s profit and there was a shortfall of the VAT of £670,875. We have not been able to ask Mr Singh why this should be. There would be no necessity, in a straightforward transaction, for two payments. There appears to be no merit in the transaction, if there was to be no profit and an outstanding liability for VAT to its supplier. Furthermore the Deal Table reveals that Infotech has still not paid the VAT amounting to £4,047,447 to Amaro. No suppler, in a straightforward commercial transaction, would allow a company of Infotech’s size to run up a debt in excess of £4,000,000 when the accounts for Infotech to 31 October 2005 reveal a net worth of £356,468 and its bank balance to be £20,031.

127.            The schematic of the various transactions set out in the appendix reveals that there were 6 intermediate traders (excluding Infotech) giving rise to the delivery of the goods to Infotech. Mr Andrews identifies that the circularity of the payments through the FCIB was such that all the payments in the chain have been completed in a fairly short period of time. We do not accept Mr Ahmed’s contention that HMRC needed permission to use the evidence as to the circularity of the movement of the cash. Nor do we accept that Mr Andrews “appears to have no technical knowledge at all and would, even if cross-examined not be able to answer any (sic) questions”. We have found all the evidence of the witnesses produced by HMRC to be both thorough and extensive. We understand that FCIB accounts are interrogated digitally through each of the traders’ computers. If the transactions are legitimate this means that each of the traders needed to be interrogating their computers during the entirety of the payments. We can not believe that the 6 other traders and Infotech were all waiting at their computers for the payments to be made. Not least because some of the payments were only part payments. Mr Singh has not been available to explain how and when he knew the payments would be made. Presumably, he did not ‘sit’ at his computer all the time. We can only assume that somebody had been given authority to make all of the payments on behalf of the parties. We do not understand why Mr Singh would have accepted payments of differing amounts and only sufficient to cover the money due to Infotech, if the deals were commercial and not fraudulent.

128.            Mr Andrews was concerned that he could not find any evidence for the payments in the deals from 8 to 13. Although Ms Degg seems to have been able to identify those payments arising from information provided by Peter Stubbs.  That evidence does not appear to have been taken up by Mr Andrews. We note, however, that Infotech made earlier payments to its FCIB account from Lloyds TSB, Abbey National PLC and the Yorkshire Bank. The invoices for the deals 8 to 13 identify the bank accounts as Abbey National PlC and the Yorkshire Bank. We consider that it is reasonable to assume that payments were made through these accounts. It is also reasonable to assume that all the deals, even those prior to the deals, the subject of this appeal, followed the same pattern. The format being that Infotech passed on all the money it received from its customers and relied on the repayment to pay any VAT outstanding and its profit. In fact the model appears to follow the example set out above at paragraph 10. We justify these conclusions on the basis of Christopher Clarke J’s comments at paragraph 109 of Red 12 Trading Ltd v HMRC [2009] EWHC 2563 (CH).  He said:

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

110. To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile phones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A Tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands.

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

We accept that if the payments were made through the Abbey National PLC and the Yorkshire Bank the fraudsters control over the finances, as suggested by the dealings with the FCIB account, would be restricted. However, they appear to have been content in the earlier transactions to use those accounts, as evidenced by the earlier payments to the FCIB account. This perhaps suggests that Infotech was trusted to act in the interest of the parties, not least we suspect, because of the amount of VAT due to Amaro. Infotech was confident that it would be repaid the £6,033,565 as it had received the earlier repayment of £2,792,474.05.

129.            Mr Ahmed also submitted that “HMRC’s position is often that only when an exporter such as Infotech is repaid the VAT is the VAT paid down the chain and later unaccounted for. This was vital to HMRC’s argument that infotech must be part of the fraud. It is also submitted by HMRC that Infotech has taken a large share of the VAT and, therefore, must be a knowing participant. It is often suggested that no fraudster would allow an unconnected exporter to take the “lion’s share”. Mr Ahmed disagrees with this analysis as the missing trader is left with a considerable profit, given the massive volume of transactions”. This completely ignores the fact that Infotech, at the end of these deals, owes Amaro £4,047,447 in VAT, and to date, still owes this amount. The fraudsters will not take ‘a considerable profit’ until Infotech pays the VAT ‘down the chain’

130.            Mr Ahmed has also submitted that the “missing VAT” was the net amount for which each missing trader failed to account (being, in respect of each deal chain, a lesser sum than the amount of input VAT being reclaimed by Infotech), and Infotech ought to have received credit for the difference between the total amount of repayments claimed and the missing VAT. We cannot accept that proposition. HMRC have not been paid the VAT arising from the defaulter and will only have received a small payment from the intermediate buffers.  The intermediaries’ payments have been provided by the fraudsters in the circularity of the payments and not by Infotech. There is no reason why Infotech should receive any credit for that, not least because it is only by Infotech’s dishonest activities that the fraudulent scheme would have come to fruition, and the VAT repayment would have funded the fraud

131.            We are satisfied that Infotech was a party to the fraud. The contents of  the Infotech’s company accounts alone identify duplicity. The failure to make any meaningful enquiries of Amaro and its various customers, when it first started to trade and even when officers from HMRC told Mr Singh that Infotech should make relevant enquiries, indicate a lack of commerciality. The assurance that the VAT was being paid is not born out by the actual payments indentified in the FCIB accounts. The fact that Amaro has not sort since June 2006 to recover its outstanding VAT is extraordinary, particularly given Infotech’s subsequent apparent insolvent position. We are not satisfied that Infotech is without funds notwithstanding their accounts. We believe that it made a substantial profit from its original transactions. If it had not done so, it would not have continued to trade. In the light of Infotech’s ability to raise £1,432,993.12 in 5 months, when continuing its trading with Aamro, and when its accounts show it only had £22,031 of cash on 31 October 2005, indicates that it must have another source of funds. We dismiss the appeal.

Costs.

132.            Mr Ahmed has requested that the costs be dealt with under the new rules, given that the majority of the costs have been incurred after April 2009. HMRC did not seek to inform Infotech that it would seek costs until it served the Amended Statement of Case in October 2010. In its first consolidated Statement of Case in August 2008, before the new rules, it only reserved its position and was unaware of the immanent changes. Infotech has stated that it was not aware that costs would be an issue and believed that after April 2009 no adverse costs would arise.  The Tribunal is referred to Judge Berners decision in Hawkeye Communications v HMRC [2010] UKFTT 636 (TC). Judge Roger Berner commented as follows:

 

“The power of the Tribunal to make a direction (sic) that rule 29 of the Value Added Tax Rules 1986 (the 1986 Rules) shall apply is contained in para 7(3) of the Transfer of Tribunal Functions and Revenue and Customs Appeals order 2009 …  Proceedings commenced prior to 1 April 2009 are consequently “current proceedings” (para 1(2)). In those circumstances para 7(3) gives the Tribunal the power to give directions to ensure that proceeding are dealt with fairly and justly, and in particular may (a) apply any provision in procedural rules which applied to the proceedings before 1 April 2009, or (b) disapply any provisions of  the 2009 Rules.

 

Under rule 29 of the 1986 Rules the Tribunal could direct a party to pay the other party such sum as it might determine on account of the costs of the other party  “ of and incidental to and consequent on the appeal”. This direction enabled the Tribunal to direct costs to be paid both by an appellant to HMRC and HMRC to an appellant. In most cases, as a matter of practice, known as the Sheldon statement, HMRC did not normally seek costs against an unsuccessful appellant…”

133.            In the present appeal HMRC made it clear in their amended statement of case, dated 14 October 2010, at paragraph 78 that they would make an application for costs if the appeal was dismissed. The position as to costs was not raised before this as the case started before the new rules came into force. The new rules contained in section 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the 2009 Rules) provide a different costs regime. Other than in Complex cases, where the parties have agreed that costs should follow the event, the 2009 rules do not provided for a general cost-shifting regime as before. Instead, the power to award costs is confined to waste costs  (which does not apply to this case as Mr Ahmed properly withdrew from the case prior to the hearing) and to a case where the Tribunal considers that a party or their representatives have acted unreasonably in bringing, defending or conducting the proceedings.

 We are not minded to make a direction that the rule 29 of the 1986 rules should apply, as we consider that both parties followed the correct procedures leading up to the hearing, even though we have found that Infotech, through Mr Singh, knew that it was a party to the frauds. We are, however, concerned that Mr Singh was unable to attend the hearing without any reasonable excuse. A position which has been exacerbated both by Infotech’s insistence that HMRC be put to proof of the two contra-trades, which has added substantially to the time taken for the hearing, and the inability to hear his oral evidence and for any of the witnesses to be cross-examined. We therefore find that Infotech, through Mr Singh, have acted unreasonably in conduction the proceedings under  rule 10 (1) (a) by failing to attend the hearing .  We direct that HMRC submit their application for costs of the four day hearing, if they intend to do so, to the Tribunal and to Infotech within 48 days from the release of this decision. Infotech shall reply within 56 days of receipt of those costs with HMRC having the right to reply within 70 days. The tribunal will decide the costs on the basis of written representations. No costs are awarded in relation to any matter prior to the actual hearing

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

 

 

TRIBUNAL JUDGE

RELEASE DATE: 18 May 2011