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Cite as: [2011] UKFTT 393 (TC)

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Edgeskill Ltd v Revenue & Customs [2011] UKFTT 393 (TC) (14 June 2011)
VAT - INPUT TAX
Other

[2011] UKFTT 393 (TC)

TC01248

Appeal number LON/2007/1548

MAN/2008/0459

LON/2008/1075

VAT – INPUT TAX – HMRC denied input tax claims totalling £15,294,335 in respect of 93 transactions of mobile phones – Was there a VAT Loss? – Yes – Was the loss fraudulent? – Yes – Were the Appellant’s transactions connected with the fraud? – Yes - Did the Appellant know or should have known that its transactions were connected to fraudulent evasion of VAT ? – Yes the Appellant knew – Appeal dismissed

FIRST-TIER TRIBUNAL

TAX

EDGESKILL LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: MICHAEL TILDESLEY OBE

CHRISTOPHER JENKINS

Sitting in public at Field House, London WC1 on 8 November 2010 to 3 December 2010

Michael Patchett-Joyce counsel instructed by The Khan Partnership LLP for the Appellant

John McGuinness QC and Howard Watkinson counsel instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

DECISION

The Appeal

1. The Appellant appealed three decisions of HMRC refusing input tax in the total sum of £15,294,335 claimed in VAT accounting periods 03/06 (£5,535,460), 04/06 (£6,460,125) and 06/06 (£3,298,750).

2. The disputed decisions were notified to the Appellant by way of letters dated 17 August 2007, 25 January 2008 and 15 April 2008. HMRC’s grounds for the decisions were that the Appellant’s transactions in which the relevant input tax was incurred were connected with the fraudulent evasion of VAT and that the Appellant through its director and senior employees, knew or should have known of such a connection. In short, the fraudulent evasion alleged is missing trader intra-community (“MTIC”) fraud.

3. The disputed decisions involved 93 transactions in mobile phones. In period 03/06 there were 19 deals comprising 52 transactions, all of which, according to HMRC, were traced back to fraudulent defaulting traders who did not meet their VAT liabilities. The remaining 41 transactions completed in periods 04/06 and 06/06 were allegedly connected to fraudulent defaulters via the same contra-trader.

4. HMRC contended that the Appellant’s transactions were part of an overall MTIC fraud scheme involving a web of companies and various chains of “transactions” where the sole aim was to defraud the Revenue of VAT due to it. The transactions were orchestrated and contrived for such a purpose and had no ordinary commerciality to them. HMRC’s primary contention was that the Appellant knew that its transactions were connected to such a scheme and must have known of that connection to have played such an integral role in the scheme and to have taken such a significant share of the profits. HMRC’s secondary contention was that, in the absence of actual knowledge, the Appellant should have known of the connection of its transactions to an MTIC scheme by the cumulative circumstances presented to it, not least the fact that it was able to make extraordinary profits from doing little more than arranging for consignments of mobile telephones to cross the English channel whilst adding no value to the goods whatsoever.

5. The Appellant in contrast asserted that it was a genuine trader acting as a rational business seeking to make a commercial profit from an economic activity. The Appellant did not and could not have had any wider knowledge of any parties involved in any of the transaction chains beyond knowledge of its suppliers and customers. The Appellant contended that its case was straightforward. The Appellant entered into commercial supply contracts on which it paid input tax to its suppliers, and for which those suppliers have properly accounted to HMRC. Further the Appellant despatched those goods without them having been consumed to customers within and outside the European Union, which sales were zero-rated. Thus the Appellant submitted that it was entitled to reclaim the input tax that it paid on its purchases.

6. The Tribunal is required to determine the following matters in respect of the disputed transactions:

(1) Was there a VAT loss?

(2) If so was it occasioned by fraud?

(3) If so were the Appellant’s transactions connected with such a fraudulent VAT loss?

(4) If so did the Appellant know or should it have known of such a connection?

7. HMRC had the burden of proving on the balance of probabilities all the four above matters in relation to the Appellant’s deals. The Appellant denied knowledge of the supply chains relied on by HMRC to prove that its transactions were part of an overall fraudulent scheme. The Appellant’s knowledge was limited to the parties from whom it bought, and to whom it sold. In those circumstances the Appellant was unable to advance a positive contrary case in respect of the alleged wider scheme. Nevertheless the Appellant was entitled to put HMRC to proof of its case. Also the Appellant argued that HMRC had infringed fundamental principles of Community law by its denial of the Appellant’s claims for VAT.

8. The Appellant pointed out that even if HMRC established the first three matters set out in paragraph 6 above that would not be enough to make out the case against it. HMRC was required to prove on the balance of probabilities that the Appellant knew or should have known that the only reasonable explanation for the circumstances in which the transactions in question took place was that they were connected with fraud. Further the Appellant’s knowledge or means of knowledge must be considered at the time of the transactions in question. The Appellant’s position was that it was an honest trader, and that there was no persuasive evidence that it knew or had the means of knowing at the time it entered into the transactions that they were connected to fraud.

Overview of MTIC Fraud

9. The words of Moses LJ in Mobilx Limited & Others v The Commissioners for Her Majesty’s Revenue & Customs [2010] EWCA Civ 517 at para.1 provide a succinct overview of the scale of MTIC fraud:

“For many years, Her Majesty’s Revenue and Customs (HMRC) have attempted to combat “missing trader intra-Community” VAT fraud. It is notorious that the trades in bulk mobile phone and computer chips are especially susceptible to that type of fraud. Latest published estimates (Measuring Tax Gaps, December 2009) disclose potential losses in 2005-2006 of up to £5.5 billion and in 2008-2009 of up to £2.5 billion. Lord Hope described the fraud as a “sophisticated attack on the VAT system”, a “pernicious stratagem” and was of the view that Member States were justified in making use of “every means at their disposal within the scope of the Sixth Directive to eradicate it” (Total Network SL v HMRC [2008] UKHL 19 [2008] STC 644 § 6).”

10. MTIC fraud exists in two main versions, the so called “classic” variety and the “contra-trading” variety. The judgment of Christopher Clarke J in Red 12 Trading Ltd v The Commissioners for Her Majesty’s Revenue & Customs [2009] EWHC 2563 (Ch) at paras. 2-7 sets out a useful exposition of the two variants of the fraud:

“2. The classic way in which the fraud works is as follows. Trader A imports goods, commonly computer chips and mobile telephones, into the United Kingdom from the European Union (“EU”). Such an importation does not require the importer to pay any VAT on the goods. A then sells the goods to B, charging VAT on the transaction. B pays the VAT to A, for which A is bound to account to HMRC. There are then a series of sales from B to C to D to E (or more). These sales are accounted for in the ordinary way. Thus C will pay B an amount which includes VAT. B will account to HMRC for the VAT it has received from C, but will claim to deduct (as an input tax) the output tax that A has charged to B. The same will happen, mutatis mutandis, as between C and D. The company at the end of the chain – E – will then export the goods to a purchaser in the EU. Exports are zero-rated for tax purposes, so Trader E will receive no VAT. He will have paid input tax but because the goods have been exported he is entitled to claim it back from HMRC. The chains in question may be quite long. The deals giving rise to them may be effected within a single day. Often none of the traders themselves take delivery of the goods which are held by freight forwarders.

3. The way that the fraud works is that A, the importer, goes missing. It does not account to HMRC for the tax paid to it by B. When HMRC tries to obtain the tax from A it can neither find A nor any of A’s documents. In an alternative version of the fraud (which can take several forms) the fraudster uses the VAT registration details of a genuine and innocent trader, who never sees the tax on the sale to B, with which the fraudster makes off. The effect of A not accounting for the tax to HMRC means that HMRC does not receive the tax that it should. The effect of the exportation at the end of the chain is that HMRC pays out a sum, which represents the total sum of the VAT payable down the chain, without having received the major part of the overall VAT due, namely the amount due on the first intra-UK transaction between A and B. This amount is a profit to the fraudsters and a loss to the Revenue....

5. A jargon has developed to describe the participants in the fraud. The importer is known as “the defaulter”. The intermediate traders between the defaulter and the exporter are known as “buffers” because they serve to hide the link between the importer and the exporter, and are often numbered “buffer 1, buffer 2” etc. The company which export the goods is known as the “broker”.

6. The manner in which the proceeds of the fraud are shared (if they are) is known only by those who are parties to it. It may be that A takes all the profit or shares it with one or more of those in the chain, typically the broker. Alternatively the others in the chain may only earn a modest profit from a mark up on the intervening transactions. The fact that there are a series of sales in a chain does not necessarily mean that everyone in the chain is party to the fraud. Some of the members of the chain may be innocent traders.

7. There are variants of the plain vanilla version of the fraud. In one version (“carousel fraud”) the goods that have been exported by the broker are subsequently re-imported, either by the original importer, or a different one, and continue down the same or another chain. Another variant is called “contra trading”, the details of which are explained in paragraphs 9 and 10 of the judgment of Burton J in R (on the application of Just Fabulous (UK) Ltd) v HMRC [2008] STC 2123. Goods are sold in a chain (“the dirty chain”) through one or more buffer companies to (in the end) the broker (“Broker 1”) which exports them, thus generating a claim for repayment. Broker 1 then acquires (actually or purportedly) goods, not necessarily of the same type, but of equivalent value from an EU trader and sells them, usually through one or more buffer companies, to Broker 2 in the UK for a mark up. The effect is that Broker 1 has no claim for repayment of input VAT on the sale to it under the dirty chain, because any such claim is matched by the VAT accountable to HMRC in respect of the sale to UK Broker 2. On the contrary a small sum may be due to HMRC from Broker 1. The suspicions of HMRC are, by this means, hopefully not aroused. Broker 2 then exports the goods and claims back the total VAT. The overall effect is the same as in the classic version of the fraud; but the exercise has the effect that the party claiming the repayment is not Broker 1 but Broker 2, who is, apparently, part of a chain without a missing trader (“the clean chain”). Broker 2 is party to the fraud.”

11. HMRC alleged that the Appellant was involved with the plain vanilla type of fraud in its transactions completed in the 03/06 period where it acted as a broker. According to HMRC, the Appellant in the other two periods acted as a broker and a buffer respectively in a fraudulent contra-trade operation.

Overview of the Law

12. Articles 167 and 168 of Council Directive 2006/112/EC provide:

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

168. Insofar as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay: The VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person”.

13. Sections 24 to 26 of the VAT Act 1994 enact the right to deduct tax paid on goods and services used for the purposes of business into UK legislation. Thus a trader is entitled to the payment of input tax it claims.

14. The European Court of Justice (“the ECJ”) the joint cases of Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C-439/04 and C-440/04) established an exception to the right to deduct when the trader knew its transactions were connected to fraud. The Court stated:

“51. In the light of the foregoing, it is apparent that traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT (see, to that effect, Case C‑384/04 Federation of Technological Industries and Others [2006] ECR I-0000, paragraph 33).

52. It follows that, where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void, by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller, causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.

53. By contrast, the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’ are not met where tax is evaded by the taxable person himself (see Case C‑255/02 Halifax and Others [2006] ECR I‑0000, paragraph 59).

54. As the Court has already observed, preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Joined Cases C-487/01 and C-7/02 Gemeente Leusden and Holin Groep [2004] ECR I-5337, paragraph 76). Community law cannot be relied on for abusive or fraudulent ends (see, inter alia, Case C‑367/96 Kefalas and Others [1998] ECR I-2843, paragraph 20; Case C‑373/97 Diamantis [2000] ECR I-1705, paragraph 33; and Case C‑32/03 Fini H [2005] ECR I-1599, paragraph 32).

55. Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively (see, inter alia, Case 268/83 Rompelman [1985] ECR 655, paragraph 24; Case C‑110/94 INZO [1996] ECR I-857, paragraph 24; and Gabalfrisa, paragraph 46). It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends (see Fini H, paragraph 34).

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

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

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

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

60. It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void – by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller – causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.

61. By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.

15. The Court of Appeal in Mobilx Limited & Others v The Commissioners for Her Majesty’s Revenue & Customs [2010] EWCA Civ 517 clarified the test in Kittel

“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 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.

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

The Hearing

16. The Tribunal heard the Appeal on 8 November to 3 December 2010. The Tribunal permitted the Appellant to submit a detailed closing response in writing by 17 December 2010 with a right of reply by HMRC. The Tribunal on the Appellant’s application gave the parties an opportunity to make written submissions and replies by 21 April 2011on the Upper Tribunal decision in Commissioners of Revenue and Customs v Brayfal Limited (FTC/53/2010).

17. The Tribunal heard evidence from 19 witnesses. Adil Rashid (hereinafter referred to as Mr Rashid), and Stephen Plowman gave evidence for the Appellant. Mr Rashid was the Appellant’s director. Mr Plowman was director of Veracis Limited which was appointed by the Appellant as a Customs Consultant and provided services in connection with the Appellant’s due diligence. HMRC witnesses included Warren Wald, the Officer who made the disputed decision, Lisa Orr who gave evidence on the First Curacao International Bank (hereinafter referred to as FCIB) analysis of the transactions, Fu Sang Lam, the Officer responsible for Uni-Brand, the alleged contra trader, Kirsten Pooke who dealt with the January 2006 Appellant’s trades, and John Fletcher, expert witness on the mobile phone industry. Daniel Outram, Michael Stevens, Vivien Bradley, Karen Bradley, Andrew Monk, Paul Cole, Joanne Gibbons, Patrick Limpkin, Charlotte Rebecca Jackson, and Peter Cameron Watson gave evidence on the purported defaulting trader for which each was responsible. Richard Wilkinson, Stewart Yule and Mr Kenrick gave evidence on TCF Logistiques, a June 2006 meeting with the Appellant, and the Appellant’s business records held by HMRC respectively. The witness statement of Andrew Letherby was admitted in evidence. The Tribunal also admitted in evidence in excess of fifty lever-arch files of documents. A transcript of the hearing was taken.

18. During the course of the hearing the Tribunal dealt with a series of applications including one by Mr Plowman. The outcomes of those applications were recorded in the transcripts. The Tribunal relies on the transcripts in respect of the decisions taken on the applications, and does not intend to repeat them in the body of this decision.

19. HMRC attached five appendices to its skeleton argument which were: the Deal Overview, Deal Map, Profit and Mark Up Analysis, Insurance Schedule and Inspection of Transport which presented the evidence relied upon by HMRC in an accessible form. The Tribunal adopts the five appendices as part of the evidence recorded in this decision. HMRC also supplied the Tribunal with an Appendix 6, a narrative and flow charts of the alleged money movements connected with the disputed deals which were derived from the Officer Orr’s evidence. The Appellant contended that HMRC was seeking to adduce further evidence regarding FCIB. HMRC disagreed arguing that Appendix 6 was simply a comment on evidence already before the Tribunal. The Tribunal agrees with HMRC and incorporated Appendix 6 as part of the evidence recorded in the decision.

The Mobile Phone Industry

20. HMRC instructed Mr Fletcher to assess the development and structure of the mobile handset industry generally and the size of the addressable market in the European Union and the United Arab Emirates. Mr Fletcher’s assessment included the nature and scope of the authorised market in mobile handset distribution and the grey market for mobile phone handsets during 2006.

21. Mr Fletcher had over 15 years experience in the telecoms industry. He had been employed by the parent companies of both Service Providers (SPs) and Mobile Network Operators (MNOs) in addition to his recent work as a consultant. His operational and advisory experience had provided him with a detailed understanding of MNOs and the context they set for the mobile handset distribution segment. Mr Fletcher acknowledged that his experience was predominantly concerned with strategic development in the mobile telephony business sector. Further he had no direct experience of working within the wholesale sector for mobile phones.

22. Mr Fletcher used a range of publicly available information in relation to the mobile phone handset market [1] for his witness statement and was assisted in its preparation by a team of industry specialists, forensic accountants and economists working to his direction and supervision. Mr Fletcher accepted that the sources of the information generally covered the period up to the end of 2006, and that the Mintel report was dated May 2007, which was after the dates of the Appellant’s disputed deals.

23. The mobile telecom industry enjoyed rapid growth over the last 15 years and had a very large global market with many millions of handsets being manufactured and sold. In 2006 the market for mobile phones was growing rapidly with a 90 per cent mobile penetration in all European markets except France and Romania. In the UK alone the number of retail handsets traded in 2006 was 32 million. Mr Fletcher accepted that the growth in emergent markets for mobile phones would generally be stronger than the developed markets in Europe and the USA, particularly in those countries which did not have an established landline telephony system.

24. MNOs facilitated this growth in mobile phones by subsidising the costs of handsets in order to make them affordable to the mass market. Consumers expressed a clear preference for particular handsets and placed importance when choosing a handset on the features offered. Within the handset market the Original Equipment Manufacturers (OEMs) would not deal with small retailers. The key players in the distribution market for handsets were the OEMs, MNOs, and Authorised Distributors (ADs). The role of the AD was to bridge the gap between the OEM and the small retailer. The ADs aggregated the demands of the smaller and independent retailers into large orders which were attractive to OEM. This created two distinct trading channels within the authorised handset market: phones directly traded between OEMs and MNOs; and those between OEMs and ADs. The key characteristic of the traders in these deal chains involving mobile phones was that they added value to the phones they sold, earning a profit as a result. The distributors add value by holding stock to meet the demands of small retailers

25. The mobile phone handset industry was international in nature which provided further opportunities for traders in handsets to take advantage of failures in the international market, in what was commonly referred to as the grey market. Mr Fletcher acknowledged that where the authorised market did not meet the demands of its customers, then those customers would logically turn to the grey market.

26. Mr Fletcher stated that there were two market failures in the distribution market which gave rise to grey market opportunities. The two market failures were price related or volume related. The latter was caused by the AD holding too much or little stock. Price failures, on the other hand, were a result of differentials in the price of particular handsets in different markets.

28. Mr Fletcher identified normal behaviours or characteristics for each of the four grey market trading opportunities required to address the opportunities profitably. Where a distributor exhibited such characteristics or behaviours then this would indicate that he was involved in profitable grey market trading. Conversely Mr Fletcher stated that there were a number of negative indicators which ran contrary to rational profit maximising behaviour. In Mr Fletcher’s view, the presence of the negative indicators would indicate that a distributor was extremely unlikely to be exploiting a profitable grey market opportunity.

29. The normal characteristics for box breaking were:

(1) Access to markets with heavily subsidised handsets such as the UK.

(2) Access to distribution channels into markets with low or no subsidies in order to maximise markets.

(3) Access to a large pool of labour.

(4) Warehouse and storage facilities.

30. The negative indicators for box breaking were:

(1) Traded in handsets that did not originate in the UK.

(2) No significant workforce and no storage or warehouse facilities.

(3) Did not hold stock.

(4) Used generic product descriptions on its purchase orders and sales invoices.

31. The normal characteristics for exploiting an arbitrage opportunity were:

(1) Current knowledge of the OEM price differences in various geographical areas.

(2) Seek to repeat transactions with their customers for as long as the pricing differential was maintained.

(3) No requirement for the distributor to hold stock.

(4) Margins available to arbitrage traders were small, therefore traders must be able to source handsets as close to the OEM as possible.

(5) Arbitrage dealers use their best endeavours to eliminate any links in the chain between supplier and their customer.

32. The negative indicators were:

(1) Trade in Nokia stock Nokia have a homogenous pricing policy across all territories.

(2) Use of generic product descriptions.

(3) Did not source stock from authorised distributors or original equipment manufacturers and traded in long supply chains.

(4) Did not hold stock.

33. The normal characteristics for exploiting volume advantages included:

(1) Speculative purchases of stock.

(2) Good relationships with MNOs.

(3) Ownership or quick access to stock.

34. The negative indicators were:

(1) Use of generic product descriptions when a volume shortage would require a very specific type of handset; and

(2) Did not hold stock.

35. The normal characteristics of dumping were:

(1) Speculative purchase of stock.

(2) Sales were initiated by the distributor of the stock rather than sought by the customer.

(3) A distributor would only dump stock internationally when a more profitable transaction could not be achieved in the UK.

36. The negative indicators were:

(1) Purchase of stock from companies other than authorised distributors or original equipment manufacturers.

(2) Selling stock that could not be traced to a distributor.

(3) Use of generic product descriptions.

37. Mr Fletcher challenged the view that mobile phone traders operating in the grey market only knew the identity of their immediate supplier and customer. Mr Fletcher pointed out that the low barriers to entry in the grey market were facilitated in part by the free flow of information that existed within the grey market. Traders were able to access a handful of internet exchange websites and bulletin boards which allowed them to identify any number of buyers and sellers in the market place, such as the International Phone Traders’ website (hereinafter referred to as IPT). In Mr Fletcher’s view, this free flow information enabled traders to identify the principal suppliers and customers.

38. Mr Fletcher stated he would expect in the grey market that any trader when selecting a supplier would aim to be as close as possible to an AD because in the market an AD obtained the best price from an OEM. Mr Fletcher opined it was straightforward for a trader to determine the identity of authorised distributors. Mr Fletcher accepted that at an elemental level a trader may only be concerned with selling the phones at a price more than what he paid for them. Mr Fletcher nevertheless believed that a trader in the grey market would try to find out who was his supplier’s supplier so as to achieve additional profit margins. Likewise a trader would gravitate to the retailer or final customer as quickly as possible since they would pay the highest price.

39. Given this expected pattern of behaviour from the traders, Mr Fletcher did not understand the commercial rationale for long deal chains involving mobile phones. In his view the longer the chain, the smaller the available margins for each individual traders. He saw no benefit to the admission of additional traders in the chain which would simply dilute each party’s profit margin. Mr Fletcher concluded that traders in the grey market would be constantly trying to extend the range and diversity of their suppliers and customers. This would allow the traders to spot quickly opportunities for shortening the deal chains and moving closer to either the supply or demand at the end of the chain. Mr Fletcher would also expect with a grey market trader that some of his trades would collapse leaving him with a loss.

40. The Appellant argued that Mr Fletcher’s evidence was irrelevant as a matter of law except his admission that there was a grey market in the international wholesale of mobile phones [2]. In addition the Appellant pointed out that Mr Fletcher’s expertise was in strategy and related to MNOs and their supply to the retail market. Finally Mr Fletcher’s evidence relied on material which post-dated the disputed transactions that were the subject of this Appeal.

41. This Tribunal takes a different perspective from the Appellant on the value of Mr Fletcher’s evidence. The Tribunal accepts that Mr Fletcher’s evidence did not explicitly refer to the Appellant’s individual transactions and was not decisive on whether those transactions were connected to fraud. This did not, however, render Mr Fletcher’s evidence irrelevant. The Tribunal was satisfied that Mr Fletcher gave his evidence in the capacity of an expert witness on the mobile phone market. The Appellant questioned whether Mr Fletcher had the necessary expertise to qualify as an expert witness, considering his inexperience in the wholesale mobile phone market. The Tribunal concluded that Mr Fletcher had significant strategic experience in the trading of mobile phones which together with his extensive research and the support of his research team made him a competent expert witness.

42. The Appellant in its cross examination of the HMRC’s Officers made the valid point that the Officers did not have direct business experience. In the Appellant’s view, the Officers’ outlook of normal business practice in the wholesaling of mobile phones was unduly influenced by their contact with fraudulent traders. This line of questioning in effect posited the proposition that Mr Rashid’s evidence was the only evidence upon which the Tribunal could rely to determine the norms of business practice in the wholesaling of mobile phones. The Tribunal must not apply its own knowledge of business practice in deciding the facts. The Tribunal must make its decision on the evidence before it. In this respect HMRC was correct in calling Mr Fletcher to give an expert opinion on trading in mobile phones.

43. The Tribunal considers Mr Fletcher’s evidence relevant in that it dealt with the operation of the grey market in mobile phones which was a factual issue relied upon by the Appellant in its Appeal. In some respects the evidence of Mr Fletcher and Mr Rashid on the grey market in mobile phones was at one, which reinforced the value of Mr Fletcher’s evidence. They both agreed there was a grey market, traders had open access to the market via shared web platforms and traders would gravitate towards ADs [3] In those circumstances the Tribunal considers that the Appellant’s attempt to disparage Mr Fletcher’s analysis of the grey market was a tactical ruse which did not undermine the substance of Mr Fletcher’s evidence. Thus the Tribunal finds Mr Fletcher’s evidence helpful in assessing the credibility of Mr Rashid’s testimony on the way he ran the Appellant’s business.

The Evidence on the Appellant and its Trading in Mobile Phones until March 2006

Introduction

44. Mr Rashid, the Appellant’s director, had a long trading history in sales. In 1987 Mr Rashid with his family set up a hosiery business, AA Hosiery Manufacturers, originally as a partnership but later incorporated as AA Trading (GB) Limited. Mr Rashid applied a business model to his hosiery business of anticipating products that would be in demand, sourcing them reliably, and selling the products on in bulk for a low percentage profit margin.

45. Around 2001 the hosiery trade became more competitive because retailers started to import goods directly themselves. Mr Rashid decided to diversify his business by extending into the wholesale mobile phone commodity market which had many common features to hosiery sourcing and selling. Mr Rashid researched the wholesale mobile phone market for about two years. He spoke with a business colleague who used to sell mobile phone connections and regularly purchased specialist leading sector publications, such as “What Mobile”, “Mobile Choice”, “What Cellphone” and “Total Mobile”.

46. Mr Rashid considered the key feature of the wholesale commodity market was high volume - low profit margin. Mr Rashid always negotiated to push up the profit margin on the commodity but whatever he did the price was always dictated by the market.

47. The Appellant was incorporated on 4 March 2002. Mr. Rashid and his brother. Mr Arif Rashid, were appointed as director and company secretary respectively on 15 March 2002. Mr Arif Rashid resigned as company secretary on 6 June 2002 and Mr Rashid’s wife, Mrs Shagufta Rashid, was appointed to the position. Mr Rashid and his brother Arif remained directors of AA Trading (GB) Ltd. Mr Arif Rashid went on to become the director of Hi-Tec Electronics A/S of Denmark, a company incorporated on 5 March 2004, which traded in mobile phones. Asif Rashid (another brother of Mr Rashid) was the director of the Singaporean company Arrowstar which also traded in mobile phones.

48. On 21 March 2002 Mr Rashid completed a VAT1 form to register the Appellant for VAT. The main business activity was given as “general/importer/exporters” with the handwritten addendum: “socks, small garment”. Mr. Rashid denied responsibility for the handwritten addendum. Instead Mr Rashid suggested that HMRC had inserted socks, small garment taking the information from the AA Hosiery VAT registration. Mr Rashid’s denial was contradicted by the contents of the HMRC visit report of 26 September 2002 where Mr. Rashid confirmed that the Appellant had been originally set up to import socks and underwear from Turkey. Further the Appellant had invoiced Beyler Socks Ltd for socks and other small garments dated 9 and 22 August 2002, and also invoiced AA Hosiery Manufacturers for vests and socks. The Appellant, however, did not disguise its trade in mobile phones. In October 2002 the Appellant disclosed to HMRC that it was involved in the wholesaling of mobile phones.

49. The Appellant undertook its first deals in mobile phones in September 2002. According to Mr Rashid other traders in the industry got to know about the Appellant as it became established in the business. In October 2003 the Appellant started advertising in well known and widely circulated mobile phone magazines. In 2005 the Appellant began using the IPT website, the principal portal used by mobile phone traders.

50. The primary roles of Mr Rashid as the Appellant’s director were to negotiate deals with suppliers and customers, and to oversee due diligence. The Appellant had three employees in June 2005 which increased to six in February 2006. The Appellant used in-house accountants and engaged a manager to assist Mr Rashid.

51. The Appellant operated initially from premises in Rochdale which was owned by Mr Rashid’s family. In April 2004 the Appellant expanded its operations by renting offices in Harrow, Middlesex which were close to the specialist freight forwarders for the industry. The Appellant did not hold consignments of mobile phones in its business premises.

52. From 2002 the Appellant had an account with Bank of Scotland which was closed on 3 January 2006, and with Bank of Baroda from March 2005 to 1 September 2006. In February 2005 the Appellant opened an account with FCIB, which in Mr Rashid’s view was a sensible and commercial step to take. Many traders in the mobile phone market had FCIB accounts because it offered real time online/internet banking 24/7.

The Appellant’s Knowledge of the Industry

53. The Appellant traded in the wholesaling of brand new Sim free mobile phones. According to Mr Rashid, the Appellant’s negotiations and deals with suppliers and customers were struck over the phone. Freight forwarders kept the consignments of mobile phones on hold and awaited the Appellant’s instructions before releasing them to the customers. The Appellant never took physical possession of the mobile phones. The Appellant would await payment from its customer before paying its supplier and releasing the goods. Mr Rashid stated that the Appellant sometimes paid its supplier first, however, he provided no concrete examples of when this happened. The Appellant held no business plan and no cash flow forecasts. Mr Rashid considered the Appellant’s VAT returns equivalent to cash flow forecasts.

54. When asked about the value added by the Appellant to the disputed deals Mr Rashid responded:

“We are not manufacturer. We are not updating any mobile phone but we are satisfying the demand and supply. Like a travel agent, they put two people together and make a profit out of it. They are putting value there because they are providing the service. If you look, insurance broker is same, estate agent the same. Same thing we do”[4].

55. In response to the question that the only value added by the Appellant was buying the goods at one price and selling the goods at a higher price. Mr Rashid said:

“We pay corporation tax. We employ the people. We pay them wages. They pay tax, insurance. This add value as well, and we satisfy the demand, whatever demand is there”.

56. Mr Rashid believed there were markets for all types of mobile phones and that the Appellant sold only the latest and in demand models. Mr Rashid asserted that he adopted normal commercial practices in negotiating prices.

57. Mr Rashid explained the characteristics of the different Nokia models of mobile phones traded by the Appellant in the March deals 2006 [5]. He said that Nokia model 8800 was the top range phone. Nokia models 9300i, N70, and N90 were the communicators which were opened and closed by the users. Nokia models 6230i and 7610 were the famous ones, which had run extremely well for a long time. The 3230 and 6680/1 models were at the cheap end of the range.

58. Mr Rashid checked whether the prices paid by the Appellant for mobile phones were competitive by surfing the IBD (sic)[6] website, which had an open board for traders selling mobile phones. Mr Rashid rang the traders to discover their prices and compare them with the prices of the Appellant’s proposed deal.

59. Mr Rashid stated the four types of the grey market as identified by Mr Fletcher. He disagreed with Mr Fletcher’s analysis because it was focussed on the retail market. Mr Rashid, however, could not explain how the mobile phones subject to the March deals came into the grey market. He suggested that the phones may be from dumping, or from value rebate or from the end of the line.

60. Mr Rashid dismissed suggestions that trading with Dubai based companies was one of the hallmarks of MTIC fraud. The Appellant traded with these firms because the wholesale market was very big in Dubai, not only in mobile phones but in the whole field of electronic goods. Mr Rashid pointed out that Dubai had strong trading links with Africa. The Appellant’s March deals with Midcom International of Dubai, however, involved the transport of the mobile phones to Switzerland. In contrast the mobile phones in later March deals with another Dubai firm, Imaani, were exported to Interken in Dubai.

61. Mr Rashid asserted that the Appellant always sought to maximise its profit margin but was constrained by the market which was very competitive. The Appellant’s first deals were with traders in the UK. In October 2003 the Appellant began to sell mobile phones overseas. Mr Rashid accepted that the intra-UK market deals were less profitable than the export market to Europe and overseas. The intra-UK market was more competitive, which meant that the Appellant could only achieve a mark up on each phone of between 50 pence and ₤1.50. Mr Rashid in cross-examination stated that the Appellant achieved this mark up because they do not allow us to make more than that[7]. On the following day Mr Rashid clarified the meaning of they saying that they mean is the market, who working in the market.[8]

62. Mr Rashid stated that the Appellant would not buy stock from a supplier until it found a buyer. Mr Rashid said that when the Appellant was offered stock it would put a seven per cent mark up on the price and offer the goods to its customers. If one of its customers bought at the price offered it would proceed with the deal.

63. Mr Rashid said that the way to make a big profit was to sell to overseas customers. According to Mr Rashid: every country has different demand and different price. If there was a shortage there, then you have more profit. Mr Rashid pointed out that although the overseas market was more profitable it had more overheads including insurance and transport costs.

64. Mr Rashid was cross examined on April deal 15 [9] where it was pointed out that Falcon trading in Germany was prepared to sell at ₤424 but within a day Neo Abaco in Switzerland purchased the mobile phones from the Appellant at ₤440. Mr Rashid stated that he did not knew who Falcon was and could only comment on the Appellant’s sale to the Swiss company which on that day was able to pay that much because it was the market price.

The Appellant and HMRC

65. The Appellant stated that it traded professionally and worked openly with HMRC. Mr Rashid indicated that HMRC in October 2004 had permitted the Appellant to move from quarterly to monthly returns. Further unlike the majority of traders in the mobile phone sector, the Appellant had only six visits from HMRC in five years and one of those was at the Appellant’s invitation. Mr Rashid asserted that the Appellant had no complexities in its dealings with HMRC prior to its disallowance of repayment claims. Mr Rashid could not recall HMRC Officers specifically telling him about MTIC fraud. Finally Officer Yule at a meeting with Mr Rashid in May 2005 told him that he was going to show Appellant’s due diligence to other traders as a good example. Mr Plowman of Veracis corroborated Mr Rashid’s re-collection of the conversation with Mr Yule, although he acknowledged that he and Mr Rashid had given June not May as the date of the meeting with HMRC in their witness statements.

66. Mr Rashid accepted in cross-examination that the Appellant had been de-registered for VAT for three months towards the end of 2002. Mr Rashid also admitted that the Appellant had received warnings about the third party payments made in its early deals. Mr Rashid was aware about HMRC’s concerns with non-economical activities and knew of the Bondhouse decision. Finally Mr Rashid acknowledged as a result of HMRC correspondence in 2004 that one of the problems in the mobile phone business was the chain of supplies and the potential for one of the traders in that chain to default on its VAT payments.

67. Officer Yule denied that he had complimented the Appellant on the quality of its due diligence. Officer Yule stated that he with Officer Sanger had visited the Appellant to collect a sample of its business records in relation to a deal with Globcom. Officer Yule was surprised that Mr Rashid and Mr Plowman engaged them in a discussion about due diligence upon which he was not in a position to comment.

KSC Agreement

68. Despite his research Mr Rashid found it very difficult to break into the wholesale mobile phone market. He noted that the market required traders to trust each other with large sums of monies. Mr Rashid visited a range of traders but they were not prepared to trust him. Instead he turned to KSC Electrical Industries (KSC) for assistance by providing him with a reference to do business in the mobile trade. KSC was one company within the KSB Group of Companies in Pakistan. Mr Rashid had known the directors of KSC, Mr Khalid Aziz, Mr Tariq Aziz and Mr Shahid Aziz for around 35 years.

69. On 29 August 2002 Mr. Rashid signed a written agreement with KSC which recorded the Appellant as a wholesaler in the mobile phone business with effect from 21 August 2002.

70. The clauses of the agreement stated that

“That [KSC] would assist in undertaking and securing business, if [the Appellant] would nominate [KSC] as its sole selling agents, which includes the advice to sell the mobile phones at the price and to the person specified by [KSC] and [the Appellant] would be bound to follow such advice.

That in return, [the Appellant] shall pay a commission of 0.325% on annual turnover, excluding VAT where applicable (30 June of every year).

That if [the Appellant] would sell mobile phones units without the intervention of [KSC], then [KSC] automatically has the right to withdraw from this agreement, if they do so, then [the Appellant] is eligible to pay the commission, for the whole year.

That the duration of this agreement shall be 2 (two) years from the date of signing of this agreement which can be extended by the mutual consent of both the parties to this agreement”.

71. Mr. Rashid initially denied in cross examination that the agreement entitled KSC to choose the Appellant’s customers. Mr Rashid stated that when he was having difficulty in finding customers KSC gave him an introduction to whom to sell by providing references. Mr Rashid, however, later changed his evidence, confirming that under the terms of the agreement KSC advised him to whom to sell mobile telephones and that he was bound to follow that advice.

72. Mr Rashid accepted that the commission under the agreement was calculated on the Appellant’s turnover, not on its gross profit. Mr Rashid acknowledged that it would be cheaper for the Appellant to sell goods direct to customers, but if that happened KSC would invoke the cancellation clause requiring the Appellant to pay one year commission to KSC.

73. Mr Rashid revealed for the first time in cross examination that the KSC agreement had been extended in September 2004 on the same terms for another two years until August 2006. Mr Rashid argued that when the agreement was extended he insisted on the Appellant being allowed to choose its own customers so as to enable its business to grow. Mr. Rashid’s evidence that the extension was a friendly agreement and that the clause binding the Appellant to the will of KSC had been removed was contradicted by his description of KSC as greedy and commercial multi-million business people, and the terms of the extension.

Funding

74. The Appellant’s business model of delaying payment to suppliers until after receipt of monies from customers minimised the financial risks associated with the business. The Appellant, however, required a cash flow to finance the VAT on supplies exported overseas, which were zero-rated for VAT purposes. The Appellant secured a cash flow in part by adopting the practice of delaying trades until receipt of the VAT repayment for the previous month.

75. The Appellant, however, required extra finance for the cash flow and expand its business. The Appellant secured various sources of funding from KSC.

76. Mr Aziz of KSC in a letter dated 24 April 2005 to Inland Revenue explained the origin of a loan in the amount of ₤560,542 outstanding at 30 June 2003 which appeared in the Appellant’s tax return:

“This amount was originally the commission earned and we have agreed to loan this to the company in order to enable the company to build up its working capital. I understand from Mr Rashid that the company was owed a large sum by the UK VAT office and requires the money to help with their cash flow”.

77. Mr Rashid acknowledged that the ₤560,542 equated to the commission owed to KSC in respect of the deals in September and November 2002. He stated that the commission was converted into a loan sometime in 2004 and was repaid around the end of 2005. Mr Rashid stated that the commission based agreement with KSC was renewed in August 2004 on the basis that he could treat the ₤560,000 owed as a loan.

78. On 23 May 2005 the Appellants’ Officers accepted a written offer to subscribe to 150 ordinary equity shares of the Appellant from Mr Khalid and Mr Choudhary, directors of KSC for a total consideration of ₤1,240,000, which was entered into the Appellant’s share premium account for the year ended 30 June 2006. Mr Rashid explained that the sale of shares constituted an investment in the Appellant to keep it healthy. He also accepted that he needed the money to give a source of cash to pay the VAT on the deals.

79. On 13 March 2006 the Appellant agreed a loan with KSC in the sum of ₤1.5 million. Under the terms of the loan the Appellant was required to pay KSC interest of 10 per cent per annum on the principal amount outstanding from time to time yearly in arrear starting from 15 July 2006. The agreement specified no period of the loan. Mr Rashid explained that it was an open loan. The Appellant would give back the money when KSC wanted it back. Also the Appellant provided no security for the loan in the event of a potential default. According to Mr Rashid there was no need for a security because the KSC directors had known him for 35 years. They trusted Mr Rashid.

80. Mr Rashid agreed that the Appellant’s turnover had increased significantly in February, March and April 2006 from late 2005 and up to January 2006. Mr Rashid disagreed that the increased turnover had anything to do with the release of the Bondhouse decision in January 2006, which he acknowledged that HMRC had lost. According to Mr Rashid the increased turnover was due to supply and demand and the Appellant dealing in Europe as well as Dubai. Mr Rashid, however, denied that he took out the loan with KSC because he knew his turnover was going to increase.

81. In October 2005 Mr Rashid took out a loan with the Bank of East Asia for ₤439,000 which was secured against three properties owned by him. Mr Rashid in his second witness statement [10] said this loan was entered into the Appellant’s accounts as a director’s loan to provide the Appellant with further working capital. No reference to this loan could be found in the Appellant’s balance sheet submitted in evidence.[11] In re-examination Mr Rashid admitted that there was no loan agreement between the Appellant and any of its directors.[12] Mr Rashid, however, on the last day of the hearing produced a letter from the Appellant’s accountants dated 2 December 2010 stating that the director’s loan account balance as at 30 June 2006 was ₤381,967.89 in credit. The account showed that the loan was introduced by Mr Rashid on 9 January 2006.

The Appellant’s First Transactions (September 2002)

82. On 28 August 2002 the Appellant received a fax from KSC stating: I am giving you two customers. Mobilelink (UK) Ltd…So Divine Ltd.. Six days later the Appellant struck its first mobile telephone deals, with the two customers given by KSC. On 9 September 2002 the Appellant received a further fax from KSC stating: I am giving you two customers. Cellucom Ltd…Global Star EC…I do not know the full address and phone numbers. Find it yourself. On the next day the Appellant sold mobile phones to Cellucom and Global Star EC

83. From 3 to 25 September 2002 the Appellant purchased mobile telephones at a VAT inclusive value of £88,040,887 direct from Kennyton Ltd and sold them to the four customers provided by KSC.

84. The Appellant made third party payments in the transactions with Kennyton. Mr. Rashid accepted that he made the payments because the man behind Kennyton asked him to give the money to another person since Kennyton had a problem with its bank account. He also confirmed that the purchases and sales involving Kennyton were the entirety of the Appellant’s trade for the quarter ending 30 September 2002. Mr. Rashid gave different accounts of Kennyton’s business. Mr Rashid first said that it was an existing customer of AA Hosiery Manufacturers and that the owner was a shopkeeper who had retail shops selling socks, textiles, skirts and jeans and mobile phones. Mr. Rashid later said in evidence that Kennyton was not a clothing company but an electronic company.

85. Of the 42 sales made by the Appellant in September 2002: 35 were at a mark up of £1, five were at a mark up of £0.50 and 2 were at a mark up of £1.50. On the Appellant’s net turnover in September 2002, in excess of £75 million, the Appellant was bound to pay nearly £245,000 in commission to KSC, more than half of its gross raw profit of £412,030.50. In a 22 day period from 3 to 25 September 2002 the Appellant went from a dormant trader to a mobile telephone wholesaler that made sales of £75.2 million. Mr. Rashid admitted in evidence that the sort of profits (400K in 3 weeks) that the Appellant was making were completely new to him.

86. An Officer of HMRC attempted to visit the Appellant on 12 September 2002. The Appellant was using the premises of AA Hosiery Manufacturers but Mr. Rashid was not present. His brother, Arif, denied knowledge about the nature of the Appellant’s business. The Appellant’s accountant then postponed the subsequent HMRC visit arranged for 19 September 2002 until 26 September 2002, the day after the Appellant’s final purchase from Kennyton.

87. Mr Rashid denied that he misled Officer Walter at her visit to the Appellant on 26 September 2002. Mr Rashid saw no contradiction in the following two statements to Officer Walter:

“Mr Rashid claims he was not told who to sell to, he bought magazines from WH Smiths and rang different companies, building his own customer base”.

“He had built a customer base in September 2002 which was KSC’s database”[13].

Mr Rashid said in cross examination that his first statement was made in response to Officer Walter’s question about whether Kennyton told the Appellant who to sell to.

88. Mr. Rashid also acknowledged that on 26 October 2002 HMRC warned him not to make any further third party payments.

November 2002 transactions

89. The Appellant, did not trade in mobile phones from the end of September 2002 to the start of November 2002. On 5 November 2002 the Appellant received another fax from KSC which stated: I am giving you two more customers and they already know you are going to ring them. Sol International Ltd…The Export Company (UK) Ltd. Mr. Rashid was away in Pakistan from 2 November to 6 December 2002 and his manager “Danesh” who was experienced in the mobile phone industry dealt with the KSC fax.

90. Danesh” arranged purchases of mobile phones from a Rochdale based trader named Sahil Knitwear Ltd and sold them onto the six customers provided by KSC. The sales exceeded ₤97 million and in every purchase from Sahil Knitwear the Appellant made third party payments. Mr Rashid stated that he told Danesh not to make any third party payments. Mr Rashid confirmed that Danesh knew that he had to sell to the customers given to him by KSC.

91. After the visit of 26 September 2002 HMRC had difficulties in contacting the Appellant with the result that it cancelled the VAT registration of the Appellant as a precaution. Mr Rashid said that he did not know about the de-registration of the Appellant until January 2003 when Cellucom Limited advised him that HMRC had circulated a veto letter in respect of the Appellant. Mr Rashid then contacted HMRC and had the Appellant’s VAT registration restored. As a result of this misunderstanding with HMRC, Mr Rashid made Danesh, the Appellant’s manager, redundant and appointed new accountants.

The Appellant’s Subsequent Trades

92. On 2 October 2003 Mr Rashid informed HMRC that the Appellant would begin exporting goods from the UK. By March 2004 the Appellant was making sales to Dubai and had a claim for repayment delayed by HMRC for investigations to take place. A letter from HMRC to the Appellant dated 5 July 2004 set out the broad scope of HMRC’s enquiries:

“Due to the problems within the industry HMC&E need to verify transactions within chains to be satisfied that there is no circularity of goods/monies and that there is an end user for the goods otherwise there is no economic activity”.

93. HMRC’s investigations into the Appellant’s transaction chains for the 03/04 period revealed a defaulting trader within the chain. HMRC confirmed the above to the Appellant in a letter of 9 August 2004. On 8 October 2004 HMRC wrote to the Appellant by way of a letter stating that £116,550 in input tax claimed in period 03/04 would be denied. The letter stated:

“These transactions were part of a supply chain that was circular in nature, as evidenced by the payments of monies with the original supplier also being the final customer in the deal. The supply chain involved a number of traders including a defaulter”.

The denied amount was later repaid to the Appellant after the European Court’s decision in Bond House Systems Ltd rejecting the non-economic activity argument.

94. Throughout 2005 the Appellant continued to receive repayments of VAT. The Appellant’s input tax claims rose steadily from the 05/05 period. On 4 October 2005 the Appellant wrote to HMRC by way of a letter stating: We will no longer trade in Europe. Please could you stop issuing EC Sales list. Mr Rashid stated that the Appellant stopped trading in Europe because of HMRC’s decision to withhold a repayment claim. When that claim was met the Appellant resumed its trade in Europe from February 2006. In the interim the Appellant exported to Dubai and Singapore, which did not have mutual assistance agreements allowing HMRC to trace the progress of the goods.

95. The amount of the Appellant’s repayments increased significantly from ₤2 million in January 2006 to ₤6.5 million in February 2006. Mr. Rashid put the increased turnover down to demand and supply.

Early 2006

96. Officer Pooke gave evidence on the deals undertaken by the Appellant in January 2006. Officer Pooke had obtained the information on the various deals from documentation originating from a range of sources. Officer Pooke did not attach the FCIB documentation to her statement. Officer Pooke had no direct involvement with the Appellant.

97. Officer Pooke identified two deal chains. Chain One involved the sale of 22,749 Nokia 7610 mobile phones which broke down into three separate transactions, two of which involved the Appellant. The first concerned a consignment of 12,749 phones which the Appellant obtained from Shelford Trading and exported to AS2 International Trading Pte Ltd. The second consisted of a consignment of 5,000 phones. The Export Company Ltd sold 4,000 of the 5,000 phones to the Appellant which in turn sold them to Megantic Services and exported by that company to two separate Singapore based companies, Kuku International Trading Pte Plc and Arrow Star Trading Pte Ltd. These deals were traced back to a defaulting trader, Oxhey Limited.

98. In Chain Two on 17 January 2006 the Appellant purchased 3,000 Nokia 6630 mobile phones from The Export Company Ltd which were sold on to Megantic and exported to Farouk & Sohail Ltd in Dubai. Office Pooke traced the deal to a defaulting trader, St Aimie Ltd.

99. HMRC pointed out the similarities in the composition of the January deal chains with those that were the subject of this Appeal. The parties common to both were CK Communications, The Callender Group, Johnson General Trading, Falcon, Northwest, The Export Company Ltd, Shelford Trading, OCL and Midcom. MIB Trading also appeared in the money movements associated with the Appellant’s January 2006 transactions just as they did in several of the transactions between 03 and 06/06.Asif Rashid, the second brother of the Appellant’s director Mr Rashid, was the director of Arrowstar Trading PTE Ltd, which was one of the overseas customers in the January deals.

100. The Appellant contended that Officer Pooke’s evidence went to transactions in a different accounting period from those under Appeal. Also Officer Pooke’s testimony was based upon conjecture without supporting evidence, and as such should be approached with caution.

101.HMRC raised an assessment against the Appellant in respect of the VAT claimed on the January deals. The Appellant has appealed against the assessment which has been stood over pending determination of this Appeal.

The Disputed 03/06 Transactions

Overview

102.The transactions were carried out during the period 13 March 2006 to 27 March 2006, and broken down into 19 deals (52 transactions in total). Each deal involved the sale of Nokia mobile phones of various model types except deal 16 which concerned Motorola 3i mobile phones. The phones for each deal were imported into the United Kingdom and passed through a supply chain of intermediary companies before reaching the Appellant which despatched or exported the phones to its customers in the European Union, Switzerland and Dubai. The supply chain preceding the Appellant for each deal comprised between six to eight companies with all the transactions in each supply chain being completed back to back.

103.In the 03/06 period the Appellant obtained supplies for the 19 deals from five suppliers: Elite Mobile PLC, Globcom Limited, Shelford Trading Company Limited, Our Communications Limited, and 21st Century Traders Limited. The Appellant’s customers for the goods were Olympic Europe BV (Netherlands), Midcom International FZCO (Dubai), Essential Trading SARL (France), Neo Abaco GmbH (Switzerland), Imaani International Trading (Dubai) and Meridian Telecommunications (Switzerland).

104.The Appellant’s mark up on its sales in the 19 deals ranged from 5.56 per cent to 6.25 per cent. The Appellant’s total profit on the 19 deals was ₤1,909,000 which averaged out at about ₤100,000 for each deal. In contrast the total profit made by the Appellant’s suppliers for the 19 deals was ₤192,000 which averaged out at ₤10,000 per deal. The Appellant’s profit on the 19 deals was between 32 to 36 per cent of the VAT defaulted on by the purported fraudulent defaulting trader.

105.The Appellant split deals 4, 5, 8, 9, 11, 14, 15, 16, 17, 18, and 19 into separate transactions even though the individual deal involved the same customer. In his second witness statement [14] Mr Rashid supplied no explanation for the splitting of invoices, simply stating that he did not understand Officer Wald’s analysis. The Appellant suggested that the splitting of the consignments was necessary to ensure that they fell within the limits of the insurance cover. Officer Wald disagreed, indicating that the March deal 8 was split into 12 consignments despite the fact that the total value of deal 8 was within the ₤1.5 million insurance cover.

Defaulters

106.According to HMRC all of the Appellant’s March deals were traced to one of five defaulters and a blocker trader: The Callender Group (deals 1-3), Oracle UK (deals 4, 5,14-19), Alpha Sim (deals 6 &7), Flooring Centre UK (deal 8), Walk and Talk (deal 9) and Realtech (deals 10 -13).

The Callender Group

107.Officer Outram testified on The Callender Group which was incorporated on 29 September 2004. The VAT 1 for The Callender Group gave its trading name as The Hardwood Floor Company and described the intended business activity as flooring retailer and services.

108. On 20 March 2006 an assessment in the sum £26.5 million was issued against The Callender Group for the period 1 December 2005 to 28 February 2006. On 8 June 2006 a second assessment was raised against The Callender Group for the period 1 – 15 March 2006 for £50.4 million. This assessment included the liability for the VAT unpaid in the chains of transactions in the Appellant’s deals 1-3. The Callender Group have not discharged the assessments.

109.HMRC relied on the following evidence to demonstrate that the default of The Callender Group was wilful and fraudulent:

(1) The company was registered as a flooring retailer yet suddenly from 1-15 March 2006 it created such a high turnover that it incurred a £50 million VAT liability that it has not paid.

(2) Mr. Callender continued to make third party payments despite being given warnings on the likely consequences of such a practice.

(3) The Callender Group purchased mobile telephones from a company that ostensibly was involved in construction without any apparent care for the bona fides of that company.

(4) After the issue of a freezing injunction The Callender Group made £372 million of sales when it did not have a bank account.

(5) The falsification by The Callender Group of telephone card transactions in an attempt to offset the huge output tax liability that it had incurred.

(6) The director’s lengthy disqualification.

110.Officer Outram confirmed in cross-examination the following:

(1) He had no evidence of the due diligence carried out by MC Components Limited [15] on The Callender Group Limited.

(2) He knew of no link between The Callender Group and the Appellant.

(3) From 31 October 2005 Officer Outram had concerns about the propriety of The Callender Group’s dealings in mobile phones. The director was unable to supply comprehensive business records and bank account details for the Group. Further the director confirmed the making of third party payments.

(4) Officer Outram was aware that The Callender Group continued to trade despite the blocking of its VAT registration number, and the making of freezing order over its bank accounts on 22 February 2006. The freezing order was granted some three weeks before the Appellant transacted the deals which involved The Callender Group.

Oracle (UK) Limited

111.Officer Cameron Watson gave evidence on Oracle (UK) Limited which was incorporated as Oracle Wines (UK) Ltd on 25 August 1998 and changed its name to Oracle (UK) Ltd on 19 April 2002. Mr. Paramjit Singh Ratoo, Oracle’s director and company secretary, applied for Oracle to be registered for VAT on a VAT1 form dated 31 March 2000. On the VAT1 Mr. Ratoo described Oracle’s business activity as: wholesalers and distributors of cash and carry goods giving an estimated turnover for the next 12 months of £700,000, estimated EC sales of £200,000 and estimated EC purchases of £400,000.

112.On 28 March 2003 HMRC became aware that Oracle was involved in the wholesale of mobile telephones; Mr. Ratoo was telephoned and he confirmed that he had been involved in one transaction. In December 2005 HMRC received information which indicated that Oracle had a significant trade in mobile phones. HMRC then conducted a series of unannounced visits resulting in an assessment dated 24 July 2006 in the sum of £21.8 million which included the unpaid VAT on its transactions that appeared in the Appellant’s deals 4-5 and 14-19. Oracle was deregistered for VAT purposes from 7 April 2006 with a VAT debt of £28.9 million.

113.HMRC relied on the following evidence to demonstrate that the default of Oracle (UK) Limited was wilful and fraudulent:

(1) The company was registered as a wholesaler/distributor of cash and carry goods yet suddenly moved into the sale of mobile telephones.

(2) Mr. Ratoo continued to make third party payments despite being given warnings as to the likely consequences of such a practice and failed to ensure that he had the funds to meet his VAT liabilities.

(3) Mr. Ratoo’s inability to access the company’s bank account was indicative of another person having control of it.

(4) The creation of false documentation in relation to telephone card transactions after Mr. Ratoo had stated that he was not trading in such goods in an attempt to offset the huge output tax liability that it had incurred.

(5) Oracle’s possession of false PDA Stuff invoices and production of false cancellation notes.

(6) The Director’s lengthy disqualification.

114.Officer Cameron Watson stated in cross-examination:

(1) He assumed responsibility for Oracle (UK) Limited in April 2006 which was after the disputed deals in March 2006.

(2) He had no evidence of the due diligence carried out by Woodworks Limited [16] on Oracle (UK) Limited.

(3) The role of Oracle (UK) Limited as the defaulting trader in deals 14-19 was not discovered until November 2009.

(4) He had no evidence that the Appellant knew or had the means of knowing Oracle’s role in the supply chains for the disputed deals.

(5) He disagreed with the Appellant’s assertions that HMRC could have taken steps in January 2006 to either block the VAT registration of Oracle (UK) Limited or deregister it for VAT purposes. Officer Cameron Watson stated that the trigger for taking action did not come to light until April 2006 when HMRC received Oracle’s VAT return covering its December 2005 transactions.

(6) Officer Cameron Watson confirmed that HMRC administratively altered the effective date of deregistration from 6 to 7 April 2006, so that HMRC could take account of Oracle’s trades on 6 April 2006.

Alpha Sim Limited

115.Officer Parsons dealt with Alpha Sim Limited which was incorporated on 12 July 2005. The directors at the time of incorporation were Sarfaraz Hafeji and Imtiaz Dhan. On 14 July 2005 Mr. Hafeji completed a VAT1 application for VAT registration which stated that the intended business activity of Alpha Sim Limited was Telecommunications. On 18 July 2005, shortly after completing the VAT1 application, Mr. Hafeji resigned as a director Alpha Sim Limited.

116.On 20 February 2006 a new director, Imran Khan, and company secretary, Maqbool Musa, were appointed to Alpha Sim Limited. Between 20 and 22 March 2006 HMRC received documentation from ASR Logistics indicating that Alpha Sim was acquiring goods from the EU supplier PZP ENA D.OO and selling them on to the UK business, MG Components. HMRC also received documentation from Hawk Precision Logistics which showed that Alpha Sim Limited was acquiring goods from the EU supplier Intertech SARL and selling them to Realtech Distribution as well as acquiring goods from the EU supplier Adizainas. In the Appellant’s deals 6 and 7 Alpha Sim Limited sold the goods to MG Components.

117.On 22 March 2006 HMRC visited Alpha Sim Limited. Mr Imran Khan, the director, advised that approximately 40 transactions had been undertaken but that no paperwork was available as it had all been sent to the company’s accountant to complete the shortened period VAT return. Mr. Khan confirmed that Alpha Sim Limited had an account with FCIB which its customer Realtech had opened on its behalf. Further Mr Khan said that Alpha Sim Limited had no access to that account and had never logged into it and that Realtech arranged payments to its suppliers. HMRC issued Alpha Sim Limited with a deregistration letter with an effective date of 23 March 2006 and was asked to retrieve its business records. Alpha Sim Limited did not provide its business records to HMRC and did not appeal the deregistration. A winding-up order was made against Alpha Sim Limited on 1 November 2006. HMRC ascertained that in March 2006 Alpha Sim Limited made net sales to Realtech and MG Components exceeding £79 million in value.

118.An assessment was raised against Alpha Sim Limited for £392,216.47 on 23 March 2006. Further assessments based on documentation from Realtech Distribution Ltd and MG Components Ltd were raised against it dated: 20 April 2006 for £1,578,265; 12 June 2007 for £187,600; 30 August 2006 for £11,266,654 (which included the transactions that formed part of the deal chains in the Appellant’s deals 6 and 7); 12 June 2008 for £235,812; 27 April 2007 for £236,512; and 23 July 2007 for £102,193.

119.HMRC relied on the following evidence to demonstrate that the default of Alpha Sim Limited was wilful and fraudulent:

(1) On registration in July 2005 the company was expected to turn over £50,000 in the next 12 months and not carry out any trade with other EC countries. In March 2006 it managed to achieve a turnover of £79 million in that month.

(2) The arrangement with Realtech regarding its control of Alpha Sim’s bank account was lacking in ordinary commerciality.

(3) Alpha Sim’s failure to provide business records to HMRC.

(4) The company secretary’s convictions for offences of dishonesty.

(5) The director’s lengthy disqualification.

120.Officer Parsons stated in cross-examination:

(1) She assumed responsibility for Alpha Sim Limited on 21 March 2006.

(2) She did not know of any due diligence carried out by MG Components Limited [17] carried out on Alpha Sim Limited.

(3) She did not consider the sending of Redhill letter in August 2005 indicated that HMRC had concerns with Alpha Sim Limited. In her view the letter was part of the usual procedures for dealing with companies trading in telecommunications.

(4) She accepted that the information regarding Realtech’s control over Alpha Sim was drawn to her attention on 22 March 2006. Officer Parsons took no direct action against Realtech. She reported the matter to HMRC’s Central Co-ordination Team. She rejected the Appellant’s criticism that had she taken action, it might have stopped the disputed deals 10-13 which took place on 24 March 2006.

Flooring Centre (UK) Limited

121.Officer Stevens gave evidence in respect of Flooring Centre (UK) Ltd which was incorporated on 14 August 2003. On the same date Mr. Patel, director, completed a VAT1 for Flooring Centre (UK) Ltd which was a transfer of a going concern from the Flooring Centre. From registration to the end of October 2005 the business traded with a turnover of between £7,000-₤31,000 per quarter.

122.On 8 March 2006 both Mr. Patel and the company secretary resigned their posts and replaced by Mr. Shofik Miah and Mr. Akber Osman. On 6 April 2006 HMRC carried out an unannounced visit of Flooring Centre (UK) Ltd when none of the company officers were present. Mr. Miah was spoken to over the telephone and he confirmed that the company was selling telephones. From the deal documentation uplifted it was clear to HMRC that extensive trading had taken place. A regulation 25 notice and return were left at the company’s premises. No notification had been given to HMRC that the company was intending to trade in mobile telephones. On 7 April 2006 when HMRC Officers returned for the arranged visit to see Mr. Miah they were unable to gain access and requested that the company’s VRN be deregistered.

123.HMRC discovered that the turnover of Flooring Centre (UK) was £148 million during 30 March and 5 April 2006. Further the company had issued third party payment instructions and had insufficient monies to meet its VAT liabilities.

124.On 21 April 2006 an assessment for £25 million was raised against Flooring Centre (UK) Ltd and sent to the company. Further assessments for in excess of £8.5m were issued between July and September 2006. The assessment of 27 September 2006 included the transactions that formed part of the Appellant’s deal 8. The company entered liquidation on 24 January 2007 with a VAT debt of £34,075,203.77. The total VAT liability of Flooring Centre (UK) Ltd was calculated to be £36.9 million, which remained unpaid.

125.HMRC relied on the following evidence to demonstrate that the default of Flooring Centre (UK) Limited was wilful and fraudulent:

(1) On registration the company had a main business activity of supply and fitting of flooring yet after a sudden move into wholesaling of mobile telephones in March 2006 it managed to achieve a turnover of £148 million in a space of six days.

(2) The making of third party payments by Flooring Centre (UK) Ltd and its failure to retain sufficient monies to discharge its VAT liability.

(3) The director’s lengthy disqualification.

126.Officer Stevens said in cross-examination that:

(1) He believed that the Appellant could have made enquiries of the freight forwarder in respect of the number of companies in the supply chain for deal 8. Officer Stevens, however, accepted that his belief was not supported by the evidence before the Tribunal.

(2) He acknowledged that he did not know whether the Flooring Centre (UK) Ltd was the acquirer of the mobile phones for deal 8. HMRC had relied on documentation seized from the customer of Flooring Centre (UK) Ltd , Pearl Technology, when putting together the details of deal 8, which also explained why HMRC was unable to extend the supply chain past Flooring Centre (UK) Ltd.

Walk’n’Talk

127.Officer Jackson gave evidence in relation to Mr. Shakeel Ahmed who ran a mobile telephone retail shop under the trade name of Walk’n’Talk. On 23 March 2006 HMRC received notice that as Alpa Sim Limited had been deregistered for VAT, the stock had been allocated to S & S Garments which was immediately deregistered. The same stock was then allocated to a Shakeel Ahmed. An HMRC Officer attempted to visit Mr. Ahmed on 29 March 2006 without success. A false telephone number was given to the Officer by Mr. Ahmed’s brother. As a result of HMRC’s inability to establish contact with Mr. Ahmed the business was deregistered with effect from 29 March 2006. On 31 March 2006 Mr. Ahmed contacted HMRC and stated that the company had just started to wholesale. Mr. Ahmed was then asked to provide all of the records and bank statements that related to the wholesale side of the business.

128. HMRC became aware that Walk and Talk Yorkshire Ltd had acquired goods from the EU supplier PZP ENA D.OO and released goods to UK businesses, Realtech Distribution Ltd and MG Components Ltd, during the period 6 to 19 April 2006. On 11 July 2006 a letter of assessment was sent to Shakeel Ahmed for £1.6 million for sales made to Realtech Distribution Ltd during March 2006.

129.On 17 July 2006 Mr. Ahmed telephoned HMRC having received an assessment letter and stated that when he had earlier referred to his move into wholesaling he had meant the wholesaling of accessories. On 25 July 2006 HMRC held a meeting with Mr. Ahmed who stated that his company was a retail business selling mobile telephones and accessories to the public, which had been open for around a year. Mr. Ahmed further stated that he had never dealt with Realtech Distribution Ltd and had not been involved in the wholesale of mobile telephones. A further meeting was held between HMRC and Mr. Ahmed on 3 October 2006 at which Mr. Ahmed claimed that his VRN had been hi-jacked.

130.Despite reservations over the accuracy of Mr. Ahmed’s version of events, HMRC decided to the treat the case as one of a hi-jacked VRN. In those circumstances HMRC issued assessments in the total sum of ₤11.6 million against a taxable person purporting to be Walk and Talk Yorkshire Ltd to which a pseudo VRN was allocated. The assessments included the VAT due on the transactions in the Appellant’s deal 8.

131.HMRC relied on the following evidence to demonstrate that the default of taxable person purporting to be Walk and Talk Yorkshire Limited was wilful and fraudulent:

(1) The use of another’s VRN without consent can only be fraudulent.

(2) In the alternative, if Mr. Ahmed’s VRN had not been hijacked then he had told a series of lies to HMRC Officers to disguise his involvement in the fraud.

132.Officer Jackson stated in cross-examination that

(1) HMRC had no evidence as to who supplied the person purporting to be Walk and Talk.

(2) She assumed responsibility for the person purporting to be Walk and Talk in October 2007.

(3) Officer Jackson was unable to explain why HMRC did not take action against Walk and Talk on 23 March 2006. HMRC on that day had de-registered two companies to which the stock for the deal involving Walk and Talk had been allocated.

(4) She confirmed that no enquiries were made of the bank accounts for Mr Ahmed’s business of Walk’n’Talk.

Realtech Distribution Limited

133. Officer Cole gave evidence in respect of Realtech Distribution Ltd which was incorporated on 29 July 2005 and registered for VAT with effect from 4 August 2005. The intended business activity in the VAT1 was repair and maintenance of computer networking and supplies.

134.On 31 January 2006 an Officer of HMRC visited Realtech. At the visit Mr. Raza, director, stated that Realtech had made no sales and was unable to provide evidence of any intention to trade. The Officer noted that Mr. Raza was vague about Realtech’s intended business activity and that MTIC fraud, third party payments and Notice 726 were all discussed with him. The Officer recommended that Realtech be deregistered until satisfactory evidence of the company’s intended business activity was provided. Before Realtech could be deregistered Mr. Raza provided evidence of intention to trade.

135.On 9 February 2006 a further visit was made to Realtech at which Mr. Raza stated that he would not be trading in mobile telephones or CPUs but would be trading in computers and peripherals and would not become involved in high-risk transaction chains. The Officer requested further information regarding Realtech’s intended business activities. On 13 February 2006 Mr. Raza wrote to HMRC stating that after careful consideration he did wish to trade in goods including computer chips and mobile telephones.

136.After several unanswered telephone calls a further visit was made to Realtech on 16 March 2006 at which there was no answer. A letter was left at the premises stating that if contact was not made within seven days the business would be deregistered. No answer was received to the letter and Realtech was deregistered on 31 March 2006. On 7 April 2006 another visit was made to Realtech at which three folders of documentation were uplifted. Daniel Green, who stated that he was also a director of Realtech, stated that no third party payments were made by the company and that Mr. Raza controlled the banking and the FCIB account.

137.The uplifted documentation showed that Realtech was involved in several deals which involved third party payments. 34 of Realtech’s transactions were also traced to defaulting traders including purchases from The Callender Group and sales to MG Components and RK Brothers.

138. In the 04/06 quarter Realtech’s declared sales totalled over £710 million which equated to an annual turnover of £2.8 billion. Also in the same quarter every known supplier to Realtech either had assessments raised against it or was a hi-jacked trader.

139.HMRC issued two assessments against Realtech on 21 November 2006 and on 9 January 2007 respectively. The first one was in the sum of £3,236,611, which included the transactions that appeared in the Appellant’s deals 10-13. The second one was for £2,931,821. Further assessments for undeclared transactions were raised throughout 2007 and 2008. Realtech has not appealed or paid the outstanding assessments.

140.HMRC relied on the following evidence to demonstrate that the default of Realtech was wilful and fraudulent:

(1) On registration the company’s main business activity was the repair and maintenance of computer networking and supplies and it was expected to turn over £150,000 in the next 12 months. In fact Realtech’s turnover in the 04/06 quarter was the equivalent of £2.8 billion per year.

(2) Third party payments were made despite claims by Realtech that they did not engage in such a practice;

(3) Every known supplier to Realtech in 04/06 was either a defaulting trader or was using a hi-jacked VRN; and

(4) Realtech’s deliberate failure to produce its business records; and

(5) Realtech’s arrangement regarding its control of Alpha Sim’s bank account was lacking in ordinary commerciality.

141.Officer Cole stated in cross-examination:

(1) He assumed responsibility for Realtech (UK) Limited in January/February 2006

(2) He had no evidence that the Appellant knew or had the means of knowing Realtech’s role in the supply chains for the disputed deals.

(3) HMRC had not been able to identify the suppliers to Realtech in the disputed deals.

(4) He accepted that it was likely that RK Brothers [18] did not carry out due diligence on Realtech.

(5) He agreed that Realtech did not undertake due diligence on Walk’n’ Talk.

(6) Officer Cole accepted that as at 16 March 2006 he held grave concerns about Realtech. In those circumstances Officer Cole was unable to offer a satisfactory explanation for why it took almost two weeks to take action again Realtech. Officer Cole believed that he did not have the power to de-register Realtech at the time because there was evidence that it was trading above the registration limit. He did not have the power to block the VAT number of Realtech, which was a matter for the Central Co-ordination Team.

Evidence of Fraudulent Trading within the 03/06 Deal Chains

142.The analysis of the membership of the deal chains in the 03/06 period showed that 25 traders, excluding the Appellant, were involved in the 129 deals of which 74 deals featured just eight traders (RK Brothers, The Export Company Limited, Euroquest Trading, Globcom, North West Trading, Oracle, UKGTC. and Our Communications)[19]. The length of the supply chain preceding the Appellant ranged from 6 to 8 suppliers. Two of the Appellant’s suppliers, Globcom and Our Communications Limited, also appeared as buffer traders in some of the other deal chains. Globcom appeared either as a buffer or supplier in nine deals. HMRC alleged that the inordinate length of the deal chains, and the recurrence of the same traders in the deals were not characteristic of arms length commercial trades.

143. The evidence showed that in most of the deals a new defaulting trader was introduced soon after de-registration of the previous defaulting trader. This indicated that the organisers of the fraudulent deals had a pool of VAT registration numbers which could be used in the event of HMRC taking steps to frustrate the deal. The Callender Group was deregistered for VAT with effect from 15 March 2006. The Callender Group was the defaulter in the Appellant’s deals 1-3 with its sales invoice dates of 13 March 2006. The Callender Group was replaced as a defaulter by Oracle until Alpha Sim Limited began to operate as a defaulter on 17 March 2006 appearing as the defaulter in the Appellant’s deals 6 and 7. When Alpha Sim Limited was deregistered for VAT with effect from 23 March 2006 HMRC received notice that stock would be allocated to a company called S & S Garments. HMRC immediately deregistered S & S Garments with the stock allocated to Shakeel Ahmed, the proprietor of Walk‘n’Talk, who was the defaulter in the Appellant’s deal 9. The Flooring Centre UK Ltd began to operate as a defaulter on 20 March 2006 and was the defaulter in the Appellant’s deal 8. The Flooring Centre UK Ltd was deregistered with effect from 7 April 2006. Oracle, which appeared as a defaulter in the Appellant’s deals 4-5 and 14-19 was deregistered for VAT with effect from 6 April 2006. Realtech was itself deregistered for VAT with effect from 31 March 2006.

144. The cross-examination of the HMRC Officers revealed flaws in the documentation of the deal chains which preceded the Appellant’s transactions. The flaws included no VRN on invoice (deal 1 RK Brother’s invoice); no invoice produced (no MG component’s invoice in deals 1,2,3,6 and 7; no invoice from Realtech to RK Brothers in deals 10,11,12 and 13); incomplete supplier declarations in deals 9, 14, 15 and 16, and documentation including false signatures (Steven Ellison in deals 14 – 19). The cross examination also revealed that Alpha Sim and Oracle were not the acquirers of the goods in deals 6 and 7, and in 14 to 19 respectively. The acquirers were overseas companies which did not have a valid UK VRN.

145. There was a high incidence of third party payments in the deals, such as The Callender Group to MG Components Limited (deals 1 to 3); Oracle to Woodworks (deals 4 & 5); Alpha Sim to MG Components Limited (deals 6 & 7); Flooring Centre UK to Pearl (deal 8); Walk ‘an’ Talk to Realtech ( Deal 9). The recipients of third party payments included E & I Trading, CK Communications and Rezaco Trading, three Cypriot companies which did not appear in the invoice deal chains identified by Officer Wald. The effect of the third party payments was to deprive the defaulters of the monies to pay the VAT on their purported transactions.

The Disputed 04/06 and 06/06Transactions

Overview

146.During 13 to 27 April 2006 the Appellant made 15 deals (30 transactions) in mobile phones which were purchased from Uni-Brand (Europe) Limited and sold to a range of overseas customers, which were Lavina Trading Limited (Cyprus), MK Digital World (Cyprus), Essential Trading SARL (France), Neo Abaco GmbH (Switzerland), Nano Infinity (France), and Phone Connected SARL (France). The deals concerned Nokia phones of various models except for the deal on 21 April 2006 which involved the purchase and sale of Motorola 3i mobile phone. Uni-Brand (Europe) Limited acquired the phones from EC traders.

147.The Appellant’s mark up on its sales in the 15 deals ranged from 2.38 to 4.24 per cent. The Appellant’s total profit on the 15 deals was ₤1,170,000 which averaged out at about ₤78,000 for each deal. In contrast the total profit made by Uni-Brand for the 15 deals was ₤110,500 which averaged out at ₤7,360 per deal. The Appellant’s profit on the 15 deals was between 13 to 24 per cent of the contra-trader’s output tax. The Appellant split deals 6, 7, 8, 9, 12, 13 and 14 into separate transactions even though the individual deal involved the same customer.

148.On 27 June 2006 the Appellant conducted 2 deals (11 transactions) in Nokia phones which were purchased from Uni-Brand. On 21 July 2006 the Appellant sold the phones to two UK traders, Gold UK and Horizon Import Export Limited, at a total loss of ₤4 million. Uni-Brand also made a loss of ₤1.17m on its deals with the Appellant. Gold UK and Horizon made a total profit of ₤450,000 on its sales of the mobile phones to MK Digital (World) (Cyprus), which was the Appellant’s customer in the April deals 2, 4, 7 ,and 8. The Appellant’s deal with Gold UK was split into six separate transactions, whilst the deal with Horizon was split into five separate transactions.

149. HMRC contended that the Appellant’s deals in the two quarters 04/06 and 06/06 were clean chains in a contra trading scheme. Within the scheme Uni-Brand (Europe) Limited acted as a contra trader offsetting the repayment VAT claims in the Appellant’s deals in periods 04/06 and 06/06 (clean chains) against the VAT claims in chains of deals traced back to defaulting traders (dirty chains).

150. The allocated contra trades to the Appellant’s deals in 04/06 took place on 6 April 2006 (Termina), 11 – 13 April 2006 (ICM UK) and 20 - 26 April 2006 (Eclipse Windows). Whilst the allocated contra-trades to the Appellant’s deals in 06/06 took place on 27 and 28 July (Mobiles 4 U Ltd), and 31 July 2006 (Mountgale Ltd).

151.The Appellant acted as a broker in the 04/06 deals, and as a buffer in the 06/06 deals. Appellant’s counsel pointed out that HMRC had adduced no evidence of action taken to deny the input tax claims of Gold UK and Horizon which acted as the brokers in the 06/06 deals.

The Contra-Trade involving the Appellant’s deals in 04/06

152.According to Officer Lam the 05/06 VAT return for Uni-Brand claimed a re-payment of £55,910.43, which masked a throughput of VAT of in excess of £141 million and outputs of £405.6 million. Uni-Brand had created a trading position whereby it could offset £70.74 million due in output tax against £70.68 million incurred in input tax. Uni-Brand’s schedule of transactions for the 05/06 period showed that Uni-Brand traded in products that it had not traded in previously: CPUs, secure digital cards, software and other computer related products. An analysis of the schedule showed that Uni-Brand had split its sales almost exactly evenly between standard rated sales (50.17%) and zero rated sales (49.83%).

153.Officer Lam stated that in period 05/06 Uni-Brand undertook 56 broker transactions in which it purchased from two different UK suppliers, UKGTC (The Global Trading Company), and Sheba Satellite Ltd. Uni-Brand sold the goods overseas to Estocom Distribution and Con Animo. The goods were purportedly delivered to Magic Transport, freight forwarders in the Netherlands.

154.According to Officer Lam all 56 deals traced back to fraudulent tax losses of £35,077,174 with just four defaulting traders: Termina Computer Services Ltd., ICM UK Ltd, Eclipse Windows Doors & Conservatories Ltd and Performance Europe Ltd. Finally third party payments were made by Sheba Satellite Ltd and UKGTC in these dirty chains.

155.Officer Lam said that alongside the 56 broker transactions Uni-Brand undertook 135 acquisition deals for 988,500 mobile phones in 05/06. The phones were purchased from three EC based traders: WTC Trading, Hi-Tec Electronics [20] and Falcon Trading GmbH. The goods acquired by Uni-Brand in the acquisition deals were ultimately all despatched or exported by one of 13 broker traders to ten EC and Dubai based customers: Midcom International (Dubai), Digital World (Dubai), Lavina Trading (Cyprus), MK Digital World (Cyprus), Nano Infinity (France), Phone Connected SARL (France), Essential Trading SARL (France), URTB SARL (France), Neo Abaco GmbH (Switzerland) and Olympic Europe BV (Netherlands).

156.Officer Lam stated that the Appellant was one of the 13 brokers in the Uni-Brand’s acquisition deals of mobile phones. The Uni-Brand’s invoices to the Appellant were almost all in sequential groups: 446-449, 453-463, 482-485, 490-497, 522, 531. This suggested to Officer Lam that the transactions were pre-ordained as part of Uni-Brand’s contra-trading operation where its onward sales were split over multiple brokers.

157.Uni-Brand’s onward sales of its acquired goods in the UK were made at a fixed mark up of either £0.50 (84 deals) or £1.00 (51 deals), irrespective of the quantity, make and model of the goods or the customer involved in the transactions.

158.The margin per unit achieved by all the traders in the dirty chain (Uni-Brand’s broker transactions) remained constant according to their position in the chain, regardless of the model and quantity of products traded, the identity of the trader and the date on which the sale took place. In relation to the 21 transaction chains involving UKGTC the margin achieved by the UK suppliers was always 10 pence with the defaulter’s unit price always ending in 0.80 pence, the buffer always ending in 0.90 pence with UKGTC always selling in whole pounds. The length of the defaulting transaction chain also remained constant in each deal. The transaction documentation held by the freight forwarder Alpha International for Uni-Brand’s broker deals showed that the EC based companies purported to release goods directly to those in the middle of the UK supply chain. The broker chains also featured a significant number of third party payments being made.

159.Officer Lam stated in cross-examination:

(1) He had no evidence that the Appellant knew about the dirty chains involving Uni-Brand and the almost even spread between standard and zero rated sales achieved by Uni-Brand in its 05/06 VAT quarter.

(2) Officer Lam agreed that there was no evidence that the Appellant knew or had the means of knowing Uni-Brand’s price paid to its supplier for the goods and the mark up achieved. Equally there was no evidence to point to the Appellant knowing that Uni-Brand always kept its account with FCIB in credit.

(3) He confirmed that Magic Transport was not used as a freight forwarder by the Appellant.

(4) Officer Lam explained that he allocated the tax losses on Uni-brand’s 56 deals (the dirty chains) to the 13 UK brokers of Uni-Brand’s clean chains. Thus he allocated nine deals in the dirty chain to match up with the VAT of ₤6.4 million claimed by the Appellant in period 04/06. These nine deals were traced back to defaulting traders which were: ICM UK Ltd and Eclipse and Termina Computer Services Limited. Officer Lam accepted that he had to jiggle with the 56 deals to arrive at the nine deals allocated to the Appellant. Officer Lam, however, pointed out that in the alternative he could have simply listed all 56 deals in his witness statement in order to establish the link between the Appellant’s deals and Uni-Brand’s dirty chains.

(5) Officer Lam acknowledged that the transactions within the nine allocated deals were characterised by third party payments, inadequate due diligence and discrepancies in the invoice documentation. He also accepted that HMRC had allowed the parties in the dirty chains including Uni-Brand their right to deduct VAT whilst refusing the Appellant’s VAT claim in relation to completely separate transactions.

(6) Officer Lam stated the HMRC had disallowed the input tax claimed by the 13 brokers in the clean chains. The amount of input tax disallowed amounted to about ₤35 million.

(7) HMRC would have known by early 2006 about Uni-Brand’s steep increase in turnover for quarter ending 11/05. Officer Lam accepted that HMRC did not visit Uni-Brand to investigate its VAT returns until 14 June 2006 despite the high repayment claim for the 11/05 quarter. Officer Lam, however, explained that during this period HMRC changed its procedures for dealing with repayment claims. In November 2005 HMRC advised its Officers to deal with repayment claims as soon as possible, which involved contacting the trader and requesting evidence in relation to the export and once the evidence was received the claim would be met. In April or May 2006 HMRC introduced extended verification which meant that the Officers had to be satisfied that there was no tax loss associated with any of the deals.

The Defaulting Traders in 04/06

ICM UK Limited

160. Officer Bradley gave evidence on ICM UK Ltd which was incorporated on 3 January 2001. ICM’s VAT1 gave its main business activity as printing machines and recorded that there would be no trade with other EC countries in the next 12 months.

161.In 2006 HMRC conducted several visits to ICM when its director and secretary denied that the company had any involvement with trading in mobile phones.

162.On 8 August 2006 HMRC visited Skysat which claimed that ICM was a supplier to the company. On 3 November 2006 HMRC re-visited ICM which denied that it had heard of Skysat or any involvement in MTIC fraud. ICM bank statements revealed that over £10,000 had been paid to ICM by Skysat. ICM was thereafter assessed for the VAT element of the funds that had been paid by Skysat to ICM. It was then established that ICM had been involved in other purchases and sales of mobile telephones involving sales to Skysat and a further company, Amstech Phones.

163. On 5 December 2006 HMRC issued an assessment against ICM for £8.1 million which represented the VAT on the undeclared sales between 10 April and 19 May 2006. Further assessments totalling some £300,000 were subsequently raised against ICM. The assessment of 5 December 2006 included eleven transactions that was traced to Uni-Brand. ICM have not appealed against the assessments. ICM was deregistered from VAT on 6 December 2006 and placed into compulsory liquidation on 2 November 2006.

164.HMRC relied on the following evidence to demonstrate that the default of ICM UK Limited was wilful and fraudulent:

(1) The company was registered as a printing machine business yet became involved in the wholesaling of mobile telephones on a large scale;

(2) The failure by ICM to declare any of its mobile telephone related transactions;

(3) The clear lies told by the Company Secretary regarding ICM’s relationship with Skysat;

(4) The undertakings given by Mr Moore and Ms Barugh not to act as directors for nine and four years respectively on the grounds of unfit conduct.[21].

165.Officer Bradley stated in cross-examination that

(1) The Appellant did not appear on the deal sheets involving ICM UK Limited. Officer Bradley had no evidence that the Appellant knew of these four deals.

(2) She became the allocated Officer for ICM in October 2008 so she had no direct knowledge of the deals in 2006.

(3) Officer Bradley was unable to assist the Appellant with its questions on ICM.

Eclipse Windows Doors and Conservatories Ltd

166. Officer Gibbons said that Eclipse Windows Doors and Conservatories Ltd was incorporated on 7 February 2003 after previously being called Eclipse Conservatories and Windows Ltd. The VAT 1 for Eclipse stated that its intended business was the supply and the fitting of UPVC window products for retail customers. The estimated value of taxable supplies to be made in the next 12 months was £400,000

167. On 24 April 2006 HMRC Officers uplifted documentation from Amstech Phones Ltd that showed that a business with the same VRN as Eclipse but with the name “Eclipse Wholesale” had, between 19 and 27 April 2006 made sales to Amstech of greater than £88 million.

168.On 21 April 2006 Eclipse’s VAT 04/06 return was returned to HMRC marked “gone away” On 24 April 2006 a Thomas Manning telephoned HMRC to state that the new premises of Eclipse had burnt down and that it was operating from its previous premises. Some of the documentation uplifted from Amstech asked that company to make payments to the personal bank account of Thomas Manning stating that Mr. Manning was a Director of Eclipse Wholesale. Further documentation instructed Amstech to make third party payments to E & I Trading Ltd and Diacomtec Ltd.

169.Eclipse was originally deregistered from VAT with effect from 1 February 2005 which was later amended internally by HMRC to 28 April 2006. On 16 October 2007 an assessment for £15,522,092.00 VAT due on the sales to Amstech was raised against Eclipse which included the VAT defaulted on in the Uni-Brand deal chains.

170.Eclipse was wound up on 16 April 2008. The assessment in excess of £15 million has not been paid or appealed. There has also been no appeal against the de-registration of Eclipse.

171.HMRC relied on the following evidence to demonstrate that the default of Eclipse was wilful and fraudulent:

(1) The company was registered as a UPVC window business yet became involved in the wholesaling of mobile telephones on a large scale.

(2) From a standing start Eclipse achieved a commercially inexplicable turnover of £88 million in just nine days.

(3) Eclipse was not in a position discharge its VAT liabilities because of third party payment instructions.

(4) The conflicting accounts of who was responsible for the running of the company.

172. Officer Gibbons said in cross-examination that

(1) The Appellant did not appear on the deal sheets involving Eclipse Limited. She had no evidence that the Appellant knew of the deal involving Eclipse and Amstech.

(2) Officer Gibbons accepted that there were discrepancies between her statement and attached exhibits, which she relied upon to demonstrate the tax loss occasioned by Eclipse. Officer Gibbons, however, did not consider the mistake undermined HMRC’s case that Eclipse was the defaulting trader.

(3) Officer Gibbons acknowledged that the Amstech’s invoices to Eclipse did not bear a VAT registration, and contained mistaken amounts. Further Officer Gibbons accepted that both Amstech and Eclipse raised third party instructions.

(4) Officer Gibbons accepted that on or around October 2007 she altered on instruction the date of deregistration for Eclipse to 28 April 2006 so that the assessment could include all the deals involving Eclipse.

Termina Computer Services

173. Officer Monk gave evidence on Termina Computer Services which was incorporated on 6 January 2005 with Richard Amaoko as its director. Mr. Amaoko applied electronically for Termina to be VAT registered, giving the intended business activities as: computer related activities etc.., like computer repairing services, software, hardware services etc. Mr. Amaoko estimated the turnover of Termina within the next 12 months to be £70,000 and stated that there would be no trade with other EC countries. Further information was requested from Mr. Amaoko and on 6 January 2006 he returned a questionnaire to HMRC which stated that Termina only provided services rather than selling anything, we just provide computer related activities like repairing and maintenance of office machinery, networking, copier, printer etc…”. Termina subsequently rendered no VAT returns.

174.In April 2006 HMRC received documentation showing that Termina was acquiring mobile telephones from the EC supplier Jakub Impex SL and selling them to the UK business, The Phone Shop. Following the receipt of this information HMRC Officers visited Termina on 4 April 2006 only to find no answer at the premises. On 8 April 2006Termina was deregistered from VAT. Between 15 February and 7 April 2006 Termina sold goods to the value of at least £222 million and did not declare any of the VAT involved.

175.HMRC subsequently discovered that Termina was involved in further undeclared transactions for which assessments were raised of £12.6 million on 5 September 2006 and £6.1 million on 28 September 2006. The latter assessment contained the nine transactions that formed part of the deal chains tracing to Uni-Brand. Further assessments totalling over £20 million were issued in 2007 and 2008. Termina did not query its deregistration. Termina was involved with third party payment instructions.

176.A winding-up order was made against Termina on 29 November 2006 and HMRC’s claim in the insolvency was £39 million.

177. HMRC relied on the following evidence to demonstrate that the default of Termina was wilful and fraudulent:

(1) Termina was registered as a computer business that did not intend to trade with other EC countries yet became involved in the wholesaling of mobile telephones that it had purchased from EC companies on a large scale.

(2) From a standing start Termina managed to achieve a turnover of £222 million in a three month period.

(3) Termina’s failure to declare any of its transactions or render any VAT returns.

178.Officer Monk stated in cross-examination that

(1) Officer Monk first contact with Termina was on 4 April 2006 when he visited the premises.

(2) Officer Monk had no evidence that the Appellant knew of the deals involving Termina.

(3) Officer Monk acknowledged there was no evidence of due diligence carried out on Termina buy its counter party, Easy Way.

(4) Officer Monk agreed that Termina indicated that a Cypriot company, E & I Trading would release the goods to Easy Way.

(5) On 4 April 2006 Officer Monk alerted HMRC’s Central Co-ordination Team of the potential problems with Termina.

Performance Europe Ltd

179.Officer Limpkin said Performance Europe Ltd was incorporated on 16 October 2003. Its VAT1 stated an intended business activity of IT Consultancy, with an estimated turnover over the next 12 months of £350,000.

180. Performance Europe was registered for VAT with effect from 1 June 2004 and was allocated quarterly return periods ending August, November and May. The outputs on its VAT returns were: £101,239, £16,253.64, £92,900, £72,621, £66,825, £56,598 and £21,000 (02/06).

181.On 24 May 2006 HMRC sent Performance Europe a letter outlining MTIC fraud. On 26 May 2006 HMRC Officers visited Performance Europe when they were informed that it was currently trading in CPUs, satellite navigation systems, memory sticks and flash memory units. Mr. Scott, the director, advised the Officers that its only supplier was Beatila, a Lithuanian business, and that his customers were the UK businesses Blackmount and Shamanic. Mr. Scott confirmed that Performance Europe had conducted around 18 deals, all of which had involved third party payment instructions. Further he had received no payments into Performance Europe’s bank account to meet the VAT liabilities that the company had incurred on its onward sales. Mr. Scott was advised that its VAT return period would be shortened under regulation 25 and the Officers uplifted the available deal documentation

182.An assessment against Performance Europe for £9 million was raised, which included the VAT on the transactions involving Uni-Brand. The uplifted documentation indicated that from a standing start Performance Europe had achieved sales of £51.7 million over a period of ten days. The Officers had arranged to visit Performance Europe again on 30 May 2006 but prior to the visit Mr. Scott telephoned HMRC to cancel the visit and stated that he was unable to say when he might be returning to London. On 30 May 2006 Officers were unable to gain access to Performance Europe but posted a letter notifying that it had been deregistered from VAT.

183.Performance Europe did not appeal its deregistration. On 20 September 2006 Performance Europe was wound up. Performance Europe has not appealed against the assessment.

184. HMRC relied on the following evidence to demonstrate that the default of Performance Europe was wilful and fraudulent:

(1) Performance Europe was registered as an IT consultancy business yet became involved in the wholesaling of CPUs, memory sticks and flash memory units on a large scale.

(2) The making of third party payments by Performance Europe such that it would never be able to meet its VAT liabilities;

(3) The turnover of £51.7 million achieved by Performance Europe from a standing start

(4) Performance Europe’s possession of Blackmount’s commercial documentation.

185.Officer Limpkin said in cross-examination:

(1) Officer Limpkin confirmed that Performance Europe made supplies to companies called Blackmount and Shamanic, having obtained those supplies from a foreign company called Beatilla.

(2) The Appellant did not appear on the deal sheets involving Performance Europe. He had no evidence that the Appellant knew of these four deals.

(3) Officer Limpkin’s only involvement with Performance Europe was a visit to the trader on 26 May 2006. His witness statement was largely compiled from information in HMRC records.

(4) Officer Limpkin acknowledged that from August 2005 to February 2006 mail sent from HMRC to Performance Europe had been returned. Office Limpkin, however, did not accept that the returned mail amounted to a catalogue of warning signs, particularly as Performance Europe was still making VAT returns except for November 2005 period.

(5) Officer Limpkin received confirmation by telephone that HMRC had not recovered any funds from FCIB to discharge part or all of the monies due under the assessment against Performance Europe.

The Contra-Trade involving the Appellant’s deals in 06/06

186.Officer Lam stated that the 08/06 VAT return for Uni-Brand declared outputs of £43 million, output tax of £7.92 million and input tax of £7.91 million. Uni-Brand’s payment due on the return was £6,500.46, which masked a VAT throughput of nearly £16 million. In its 08/06 return Uni-Brand had almost managed to offset its output tax liabilities against the input tax that it had incurred and had done so by balancing its standard rated sales at 49.97% of the transactions undertaken and its zero rated sales at 50.03%.

187.In period 08/06 Uni-Brand carried out seven broker transactions in which it purchased goods [22] from two UK suppliers, RK Brothers Ltd and Mountgale Ltd and despatched goods to just one EC based customer, Con Animo[23]. The seven transactions traced back to a tax loss totalling £4,265,460 with two fraudulent defaulting traders: Mobiles 4 U and Mountgale Ltd. According to Officer Lam these transactions constituted the dirty chain. These transactions took place between 27 July and 31 July 2006.

188.In period 08/06 Uni-Brand also carried out 16 acquisition deals of mobile phones which it purchased from one EU supplier, Falcon GmbH. Uni-Brand sold the mobile phones to three UK customers: the Appellant, The Export Company and Shelford Trading. According to Officer Lam these transactions formed the clean chain.

189. Uni-Brand’s dealings with the Appellant took place on 23 June 2006 for a total value of ₤22,148,750 and consisting of 55,000 mobile phones in ten transactions. On 27 June 2006 the Appellant sold these phones onto two UK traders, Gold UK Consulting Limited and Horizon Import Export Limited, making a total loss of ₤4 million. Gold UK Consulting and Horizon Import Export Limited exported the phones to MK Digital World (Cyprus) at a respective profit of ₤10 and ₤4 per unit. Although the invoices for these deals were dated 27 June 2006 the payments did not happen until 24 July 2006, and 9 and 10 August 2006.

Defaulting Traders

Mobiles 4 U Ltd

190. Mobiles 4 U Ltd was incorporated and registered for VAT on 19 July 1999. The VAT1stated that its main business activity was the wholesale and retail of mobile phones and accessories with an estimated turnover of £100,000 per annum and no expectation of any trade with other EC countries. On 15 March 2001 at a visit to Mobiles 4 U by HMRC it was confirmed that the company was a small retail unit selling mainly to passing individuals.

191.On 15 November 2005 a Mr Baptiste was appointed as director of Mobiles 4 U. He sent a new VAT1 on which he estimated the turnover during the next 12 months to be £250,000 and gave the business address as 95 Watling Avenue, Edgware. From Mr. Baptiste’s appointment as a director, Mobiles 4 U did not render any VAT returns.

192.In two days in July 2006 Mobiles 4 U raised sales invoices to RK Brothers to the value of in excess of £15 million without apparently making any due diligence checks on its customer.

193.On 6 February 2007 an HMRC Officer visited Mobiles 4 U and found the shutters closed with a lot of post lying on the floor. A person working in a nearby kiosk informed the Officer that the premises had not been open for a year. Mobiles 4 U was deregistered from VAT on the same date. The information given to HMRC indicated that Mobile 4U was not trading from its registered address when the July 2006 transactions were purportedly carried out.

194.On 29 February 2008 an assessment for £2.9 million was raised against Mobiles 4 U for the VAT due on its onward sales to RK Brothers. The assessment has not been paid.

195.HMRC relied on the following evidence to demonstrate that the default of Mobiles 4 U was wilful and fraudulent:

(1) The company was registered as a mobile telephone business yet became involved in the wholesaling of computer components on a large scale.

(2) The failure to render any VAT returns;

(3) The high turnover of £15 million achieved by Mobiles 4 U in the space of two days.

Mountgale Ltd

196.Mountgale Ltd was incorporated on 18 August 2003. The VAT 1 dated 18 December 2003 stated that its main business activity was import/export general goods and clothing with an estimated annual turnover of £1 million.

197.On 21 May 2007 HMRC Officers met Mr Ghafoor the director of Mountgale. Mr Ghafoor stated that he had undertaken four wholesale mobile telephone transactions in 2004 which had been disallowed resulting in a loss of around £200,000. Mr. Ghafoor stated that he had subsequently only traded in clothing. Further he had never traded in CF cards or CPUs and that his VRN must have been hijacked. Finally Mr. Ghafoor stated that he had received strange telephone calls in relation to goods that he had not purchased or sold.

198.The Officers found within Mountgale’s records copies of sales invoices numbered 359 and 360 which were for the sales of clothing. The authenticity of those invoices were challenged when Uni-Brand produced copies of Mountgale’s invoices with the same numbering (359 and 360) on which the purported goods were AMD Athlon processors and CF cards valued at millions of pounds. Mr. Ghafoor insisted that he had not raised the invoices produced by Uni-Brand despite the invoices containing a header of Mountgale’s fax number and a Mountgale letterhead. Mr. Ghafoor, however, admitted that he had signed the Mountgale trading application that was sent to Uni-Brand and that he had opened an FCIB account. Mr Ghafoor was advised to produce any purchase invoices relating to the onward sales to Uni-Brand but none were produced.

199.On 17 September 2007 an assessment in the sum of £1,396,150.00 was raised against Mountgale for the VAT due on its undeclared onward sales to Uni-Brand in July 2006. Mountgale went into liquidation on 9 January 2008.

200.HMRC relied on the following evidence to demonstrate that the default of Mountgale was wilful and fraudulent:

(1) The company was trading as a clothing business yet became involved in the wholesaling of computer chips on a large scale;

(2) The director’s attempts to cover up the computer chip transactions by creating duplicate invoices and claiming that the company’s VRN had been hi-jacked.

201.Officer Lam stated in cross-examination on the 06/06 contra-trade and the defaulting traders:

(1) He had no evidence that the Appellant knew about the almost even spread between standard and zero rated sales achieved by Uni-Brand in its 08/06 VAT quarter.

(2) Officer Lam confirmed that defaulting trader, Mobiles 4 U, did not disclose its VAT registration number on its invoices. Despite this defect, HMRC allowed the immediate counterparty to Mobiles 4 U, RK Brothers, its right to deduct. Further Officer Lam made no enquiries of the due diligence of Mobiles 4 U undertaken by RK Brothers. Finally Officer Lam acknowledged that third party payments featured in the deals involving Mobiles 4 U.

(3) Officer Lam did not know of any due diligence carried out by RK Brothers on Mountgale Limited. He accepted that the documents indicated that DiaCom Tec, a Cypriot company, instructed Alpha International to release the goods and allocate them to Mountgale Limited.

(4) Officer Lam confirmed that he was not the assurance officer for Mobiles 4 U and Mountgale Limited, and that he had no direct knowledge of the tax losses incurred by the two traders. Further he extracted details of their trading history and assessments from the electronic folder kept by HMRC.

Evidence of Fraudulent Trading in the 04/06 and 06/06 Deals and the Contra-Trades

202. The Appellant’s cross-examination highlighted defects in the documentation in the dirty chains which questioned the authenticity of these deals. There was no VRN on the Amstech’s invoices to Eclipse and a wrong VRN on the Eclipse invoice in the 04/06 deals. Similarly the Mobiles 4 U invoices in the 06/06 deals bore no VRNs. The cross examination brought out the prevalence of third party payments in the dirty chains, involving Termina, ICM, Eclipse and Mobiles 4 U. Further those defaulting traders were not the acquirers of the disputed mobile phone consignments in the UK. The deal documentation revealed the involvement of a Latvian company, Evolution Trading and two Cypriot companies, Rezaco and Diacomtec in the release of the goods and the third party payments.

203. The record of third party payments in the April dirty chain showed that they were passed down to Uni-Brand’s direct suppliers, UKGTC and Sheba Satellite, which had the effect of ensuring the defaulting traders did not have the funds to pay their VAT debt. The recipients of the third party payments, Evolution Trading and the Cypriot companies, were involved in the supplies in the clean chain providing the mobile phones to Uni-Brand’s suppliers, Falcon Trading and WTC Trading [24].

204.In the 06/06 clean chain involving the Appellant, Falcon Trading the supplier to Uni-Brand directed Uni-Brand to pay ₤2.3 million to Artlons Trading and ₤3.7 million to Rezaco [25]. In the Appellant’s 06/06 deal 1c Falcon’s supplier declarations recorded the goods as Nokia 8800 black but on their invoices they were described as being silver.

Uni-Brand operating knowingly as a Contra-Trader in Appellant’s deals of 04/06 & 06/06

205. The Appellant did not challenge the following evidence adduced by HMRC to prove that Uni-Brand operated knowingly as a contra-trader:

(1) The circumstances of the 2002 transactions where Uni-Brand achieved an increase in turnover (₤104.1 million) solely attributable to transactions connected with the fraudulent evasion of VAT.

(2) Uni-Brand’s sporadic trading pattern whereby it ceased trading for three months in period 05/05 followed by a turnover of £15,015,060 in period 11/05 which included products not traded in before.

(3) Uni-Brand’s 63 UK purchases in the six month of periods 05/06 and 08/06 were all traced back to a fraudulent tax loss.

(4) The artificial balancing of Uni-Brand’s trading position such that in period 05/06 a VAT throughput of in excess of £141 million resulted in a payment return for just £55,910.43 and the continuance of that pattern in the 08/06 period.

(5) The fixed margins apparent in the 05/06 defaulter chains and the consistent length of those chains.

(6) Uni-Brand’s own fixed mark up in its 05/06 acquisition chains.

(7) The lack of commercial reality to the allocation arrangements in the 05/06 defaulter chains.

(8) The high incidence of anomalies in the inspection, export and invoicing documentation produced by Uni-Brand.

(9) The risk taken by Uni-Brand in releasing goods prior to being paid.

(10) Uni-Brand’s supplier Falcon’s clear involvement in fraud.

(11) Uni-Brand’s apparent trade with RK Brothers Limited ostensibly before it had any of the documents.

(12) The grouping of invoices to the Appellant indicating pre-ordained contra transactions split between multiple brokers.

(13) The admissions made by the director of Magic Transport, the freight forwarder for the dirty chains, about the involvement of his company in the creation of false CMRs for use by UK carousel fraudster.

(14) Uni-Brand’s creation of ex post facto due diligence documentation and its possession of the Appellant’s due diligence material on Olympic BV.

(15) Uni-Brand’s failure to carry out due diligence before it traded with its counterparties.

(16) The absence of a commercial explanation for both Globcom and Uni-Brand existing as separate corporate entities.

(17) The absence of commercial practices in the way that Globcom was run.

(18) The Experian credit report for Uni-Brand obtained Officer Lam showed a credit limit of ₤11,000 and a credit rating of ₤5,400.

(19) The very small profit margin considering the volume of sales and purchases. Despite the dramatic increase in turnover from ₤1.5 million for year ended 30 June 2004 to ₤500 million for year ended 30 June 2006, the gross profit rate fell from 1.88 per cent in 2004 to 0.21 per cent in 2006. A

(20) Uni-Brand had an extremely low overhead and fixed asset base for a business with an annual turnover of ₤500 million. Uni-Brand did not own any fixed assets except office equipment with a book value of ₤896, and had no employees.

The Evidence on the Appellant’s Loss of ₤4 million in 06/06 quarter

The Circumstances

206. Mr Rashid asserted that the primary cause of the trading loss was the withdrawal of its customer from a proposed deal. Mr Rashid stated that the Appellant had lined up a deal involving the purchase of mobile consignments from Uni-Brand with onward sales of the consignments to Elite Mobiles. The agreed sale price with Elite Mobiles was ₤411 per unit for the Nokia 8800 (₤1 mark up per unit), and ₤263 per unit for the Nokia 72 ((₤1 mark up per unit). Elite Mobiles, however, cancelled the order because of a fall in the market price for these phones. The Appellant decided not to pull out of its trade with Uni-Brand as it did not wish to damage its relationship with a valued supplier. The Appellant tried to sell the mobile phones without success to two other traders, Shelford Trading and Water Fire Limited. The Appellant instead sold the consignments at a loss to Gold (Nokia 8800 at ₤320 per unit) and Horizon (Nokia N72 at ₤210 per unit) because they were able to take the phones quickly, which limited the loss to the Appellant from the dramatic fall in the market. Mr Rashid pointed out that in October 2006 the advertised sale price for Nokia 72 was ₤172 per unit, some ₤38 less than the unit sale price to Horizon.

207.Gold and Horizon sold the mobile phones on the same day as their purchase from the Appellant at a profit to MK Digital which was an existing customer of the Appellant. Mr Rashid stated that he had no way of knowing the identity of the customers of Gold and Horizon or the price they charged. Mr Rashid would have got a higher price for the phones if he was able but according to him the market was in decline and the price secured from Gold and Horizon was the best he could achieve.

208. Mr. Rashid agreed that Elite Mobiles was bound to its deal with the Appellant to purchase the mobile phones sourced from Uni-Brand. Mr Rashid accepted that Elite Mobiles had signed the Appellant’s sale agreement and contracted to its terms. If that sale had gone ahead, the Appellant would have made a ₤55,000 trading profit on the deal rather than a ₤4 million loss. Mr Rashid also accepted that the Appellant had binding deals with Shelford Trading and Water Fire Limited which apparently replaced Elite Mobiles as the proposed customers of the mobile phone consignments. The Appellant, however, allowed the two companies to back out the deals despite the binding agreements. The reason given by Mr Rashid for allowing Elite, Shelford and Water Fire to back out was that the Appellant did not want to have a legal battle with them, particularly as they may be potential suppliers. Mr Rashid’s explanation for the Appellant not withdrawing from the corresponding deal with the Uni-Brand was that Uni-Brand insisted that the Appellant could not renegade on its agreement.

The Appellant’s Due Diligence and Documentation relating to the 06/06 Deals

209.Mr Rashid accepted that the Appellant did not instruct Aberdale to carry out an inspection of the mobile phone consignments sold by Uni-Brand to the Appellant. Mr Rashid’s explained that the Appellant never did inspections involving trades which took place between traders in the UK. Mr Rashid considered that the risk of carousel fraud only applied to sales outside the UK.

210.The Appellant knew that when it entered the deals with Gold and Horizon that they were connected companies. Also the Appellant had struck out the clause supplying the goods at market price in its supplier’s declaration to Gold and Horizon. Mr Rashid said that the striking out was a mistake even though the mistake was repeated eleven times on the declarations for each transaction. Although the Appellant’s invoices were dated 23 June 2006 with Uni-Brand and 27 June 2006 with Gold and Horizon, the payments on the invoices did not happen until late July and early August 2006.

The Appellant’s Financial Position

211. When the Appellant struck the deals with Uni-Brand and Horizon and Gold in June 2006, it held a credit of ₤53 in its FCIB account. Mr Rashid accepted that in June 2006 the Appellant did not have the money in its bank account to finance the broker trades similar to that conducted in March and April 2006. Also on 30 June 2006 the Appellant was due to pay one year commission to KSC (around ₤500,000) and on 15 July it was to pay the first instalment of the KSC loan of £1.5 million, a payment of £50,000.

212.By the end of June 2006 the Appellant knew that its deals in March and April 2006 were subject to extended verification. If the Appellant’s deals had gone ahead with Elite Mobiles, the output tax on those deals would have exceeded the repayment claim. The VAT impact of making the ₤4 million trading loss was that the Appellant was entitled to a repayment of ₤700,000 at the end of June 2006.

213.The Appellant’s FCIB account in the period 17 July 2006 to 10 August 2006 showed payments in from Horizon and Gold and payments out to Uni-Brand relating to the deals, which left the Appellant with a deficit of about ₤4.7 million. This purported deficit, however, was cancelled out by payments into the Appellant’s bank account of ₤5.02 million from Midcom on 9 and 10 August 2006 which left the Appellant with a credit of ₤100,000 in its FCIB account. Mr Rashid explained that Midcom’s ₤5.02 million payment was for another deal in mobile phones which the Appellant obtained from MK Digital. The Appellant produced a pro-forma invoice for that deal. There was also a record of a ₤200,000 payment to MK Digital. Mr Rashid acknowledged that the proposed deal with MK Digital and Midcom represented a change in the Appellant’s pattern of trading. This was the first time the Appellant had planned to purchase mobiles phones from abroad for onward sale overseas. According to Mr Rashid the deal involving Midcom did not proceed because of the collapse of the FCIB bank. The Appellant still owed the ₤5.02 million which Midcom had agreed not to enforce until the conclusion of the Appellant’s dispute with HMRC. Midcom, however, would charge interest on the outstanding sum..

214.The Appellant’s accounts for the year ended 30 June 2006 disclosed a retained profit of ₤2.6 million despite the transaction loss of ₤4 million. Mr Rashid acknowledged that the accounts showed that the Appellant was pretty successful.[26]

The Evidence on the Money Flows for the Disputed Deals

215.Office Orr was tasked to view the data obtained by HMRC from the Netherlands in relation FCIB, and to ascertain the relevance and value of the banking data to the Appellant. The data available to Officer Orr came from two systems Bankmaster plus and Datastore. The first system supplied a print out of the customer details for each trader who held a FCIB account and a transaction enquiry report which was a copy bank statement for each customer. The Datastore system supplied information about the setting up of the accounts for a customer, identifying the account holders and beneficial owners and some of the documents submitted to support the application to open the account. Officer Orr did not have access to the Transaction Narrative stored on FCIB’s e-banking system which was retained on a different server from that which maintained the Bankmaster Plus and Datastore systems.

216.Officer Orr analysed the money flows associated with the Appellant’s deals by starting with its bank account and identifying the payments in and out from its customers and to its suppliers, and then working through the deal chain spreadsheets supplied by Officer Wald. If Officer Orr could match the money to the amount of an invoice or an identified payment on the date of a transaction she took it as relating to that transaction. Officer Orr accepted that she could not say with complete certainty that the money she had allocated to each transaction did in fact relate to that transaction. Officer Orr was, however, satisfied that her analysis was reliable in respect of the identities of the parties involved in the money flows associated with the Appellant’s deals.

217.Officer Orr examined the transactions undertaken by the Appellant in March, April and June 2006. She analysed most of the March deals, and samples of the April and June deals. Many of the deals in April and June had identical structures for the supply chains, which justified the sampling analysis.

218. Officer Orr interrogated the Datastore system in relation to eight traders through which money passed in relation to the Appellant’s transactions. The eight traders were Rezaco Trading, E & I Trading, Intertech Sarl, CK Communications, Link Maze LLC, MIB Trading FZE, Wall Street General Trading and Call Back Trading.

219.Officer Orr made three witness statements. The second statement was an amendment of the first containing two additional paragraphs, and reference to four more traders. When preparing her first witness statement Officer Orr inadvertently failed to request details of the bank accounts of the four traders. After making her second statement Officer Orr received additional information from Officer Wald in the form of intra-account transfer documents which caused her to review the analysis of some of the money flows and to produce a third witness statement. The intra-account transfer documents comprised print outs of individual payments from one trader to the next which were retained by the individual traders. These print outs came to light following Officer Wald’s investigations into the deal chains, and formed part of the documents provided to HMRC by the participant traders within the chains. Officer Orr stated that the additional information did not alter the structure of the money flow charts just the monetary amounts.

220.Officer Orr confirmed in cross-examination that the analysis of the FCIB accounts revealed that the Appellant had paid and received the requisite amount of monies to each of its customers and suppliers. She accepted that her analysis of the money flows did not demonstrate that the Appellant knew the identities of the suppliers to its suppliers. Officer Orr, however, stated that the payments occurred within a short period of time and that the Appellant would know that it could not make payment to its supplier until it received the monies from its customer. Officer Orr pointed out that in deal 1 of the March quarter the money flows did not occur until 17 March 2011 which was some four days after the date of the invoice. This suggested to her that the Appellant was awaiting the approval of its customer before proceeding with the deal.

221.The Appellant challenged the reliability of Officer Orr’s analysis of the money flows outside the Appellant’s immediate transactions with its customers and suppliers. The Appellant pointed out that she did not have the complete transaction narrative on the money flows, and that when she obtained limited information on the narrative from Officer Wald she had to revise her interpretation of the money flows. Officer Orr disagreed. She considered that her analysis was sound in respect of the identities of the parties involved in the money flows. The transaction narrative assisted with the allocation of the exact amount of monies to the parties. Officer Orr’s assessment of the relevance of the transaction narrative was confirmed by the revisions she made to her third witness statement following receipt of the transaction narrative from Officer Wald, which did not alter fundamentally the structure of the money flows. The revisions were restricted to the amounts of the money flowing between particular parties.

222.Officer Orr accepted that she did not look globally at the traders involved in the money flows or caused enquiries to be made about them. Her analysis concentrated on the particular transactions involving the Appellant. Officer Orr did not accept that her analysis failed to support the deal documentation supplied by Officer Wald. Officer Orr pointed out that in some cases she was unable to trace back some of the flows because Elite Mobile did not have an FCIB account. Also the money flows did not involve the defaulting traders which indicated that they were deliberatively deprived of funds with which to pay the outstanding VAT.

223.Officer Orr noted that the electronic banking reference numbers (not account specific) for some of the money flows were out of sequence but this in her view did not impact upon her analysis because of the pre-booking facility available to traders. Officer Orr instead relied on the transaction numbers of the bank accounts of the individual traders which were in sequence and a more accurate guide for identifying the structure of the money flows. In re-examination Officer Orr was directed to various examples of the two types of reference numbers, which in the Tribunal’s view supported her assertion that the transaction numbers were a better guide than the electronic banking reference numbers.[27]

224.Officer Orr rejected the Appellant’s suggestion that her analysis of money flows was no more than a representation of an ordinary commercial situation of payments and receipts between parties which have an established trading relationship. Officer Orr considered that her analysis highlighted indicators of non-commercial activity. For example in deal 1 Zorba received ₤1,855,000 from Link Maze and paid out the exact amount to Olympic Europe which if it had been a normal commercial transaction Zorba would have achieved an element of trading profit. Officer Orr also pointed out that if the money flows in deal 1 represented genuine commercial transactions, it would result in an absurd situation of the same consignment of mobile phones passing through Cyprus, Germany, United Arab Emirates, Spain, the Netherlands, England and then going back out overseas.

225.The Tribunal is satisfied that the methodology adopted by Officer Orr produced a reliable depiction of the parties involved in the money flows associated with the Appellant’s deals under Appeal. The methodology of starting with the account details of the Appellant’s immediate transactions, and then identifying subsequent connected parties from interrogating the bank statements of the trader next in line for amounts of money which corresponded to the sums on the invoice or matched with a transaction of the same date was logical and transparent. The absence of the FCIB narrative for the transactions did not compromise the reliability of the process for identifying the parties. The accuracy of this proposition was tested when Officer Orr checked her conclusions against extracts of the transactions narrative obtained by Officer Wald from some of the traders. This check showed that her conclusion about the identities of the parties was correct but some adjustments were required in the quantum of the money transactions.

226.The Appellant’s attempt to discredit Officer Orr’s conclusions by reference to the electronic banking references was undermined by her evidence which showed they bore no relationship to the date of the actual transaction because of the pre-booking facility available to traders. The Tribunal is satisfied that Officer Orr’s reliance on the individual transaction numbers recorded on the bank statements to establish the chronological order of the money flows was justified. .

227.The Tribunal considered that Officer’s Orr’s reasoning for selecting specific deals in each of the disputed periods for analysis was sound and enabled conclusions to be drawn which had implications for all the disputed transactions. Further Officer Orr’s refusal to go beyond her brief by analysing money flows which did not pass through FCIB maintained the integrity of her investigation even though it limited the scope of her analysis particularly with those deals involving Elite Mobile which did not have a FCIB account.

228.Mr Rashid in cross-examination acknowledged that his brother’s company, High Tech Electrical, appeared in Officer Orr’s depiction of money flows for March deals 1- 4, and that Midcom also appeared in the money flow for deal 4.[28] Mr Rashid stated that the partnership with his brothers in AA Textiles ceased on 31 March 2005 with his brothers going their separate ways. Mr Rashid was also questioned on the circular money flow in June deal 1 upon which he was unable to comment. Mr Rashid said he had no knowledge of the transactions outside the Appellant’s suppliers and customers.

229. The Tribunal finds the following facts on the money flows in relation to the Appellant’s immediate transactions with its customers and suppliers in the three periods:

(1) On each transaction the Appellant received payment from its customers in the amount specified on the relevant invoice.

(2) On each transaction the Appellant paid the requisite amount as stated on the relevant invoice to its suppliers.

(3) On each transaction the Appellant did not pay its supplier until it received payment from its customer.

(4) In most transactions the Appellant’s receipt from its customer and payment to its supplier happened almost instantaneously.

230.The Tribunal finds the following facts on the money flows in relation to the overall scheme of the Appellant’s deals transacted in the said periods:

(1) In the seven deals of 03/06 period where Officer Orr was able to follow the flow of funds, the monies bypassed the defaulting trader which ensured that the trader did not have the resources to discharge its VAT liabilities.

(2) All the traders in the deal chains [29] including the Appellant’s suppliers except Elite Mobile had accounts with FCIB.

(3) Deals 7, 8, 9 and 10 of 03/06 period, deals 1, 2, 5 and 13 of the 04/06 period and deal 1 of 06/06 period were characterised by circular flows of money with the monies returning to the trader that paid it out initially.

(4) All the transactions were in pounds sterling regardless of the country of origin of the parties involved in the flows of money.

(5) The money flows showed a movement of money coming in and out of the United Kingdom in respect of each deal.

(6) The money flows identified 28 companies which did not appear in the invoice chains compiled by Officer Wald.

(7) Four companies from the United Arab Emirates, Call Back Trading (7), Link Maze LLC (12), MIB Trading FZE (15), and Wall Street General Trading (8) appeared regularly in the money movements throughout the three periods[30]. At least one of those companies appeared in every deal characterised by circular flows of money.

(8) The director of Call Back Trading and the signatory to the company’s FCIB account was Fahad Mahmood Butt of Gujranwala, Pakistan. The beneficial owner of Call Back’s FCIB account was stated to be Jamal Hamad Obaid Alshehi.

(9) The directors and beneficial owners of Link Maze Trading LLC’s FCIB account included Malik Nadeem Ashger of Gujranwala, Pakistan.

(10) The director and beneficial owner of MIB Trading’s FCIB account was Mustansar Rafique Butt, of Gujranwala, Pakistan.

(11) The beneficial owners of Wall Street General Trading’s FCIB account included Hamad Obaid Khamis Alshehi.

(12) The directors and beneficial owners behind Call Back, Link Maze and MIB were all from the same place. The director of Call Back and MIB shared the same surname. The beneficial owners of the Wall Street and Call Back accounts also share the same surnamed.

(13) Mr Rashid in his third witness statement stated that Gujranwala was one of Pakistan’s most industrialised cities and its seventh largest. The city has a population of 1.4 million and was known to be a thriving region of Pakistan where many people live and work.

(14) The Appellant affixed to its closing final submissions a brief search of the telephone directories for Gujranwala which revealed about 200 entries with the surname of Butt.[31]

(15) Three Cypriot companies: CK Communications, E & I Trading and Rezaco Trading all featured in the movements of funds connected with the Appellant’s transactions. Each of the three companies received third party payments in the Appellant’s direct default transaction chains in 03/06. CK Communications and Rezaco were suppliers to the Uni-brand acquisition chains and defaulter chains.

(16) The three Cypriot companies were linked companies. The directors of E & I Trading and Rezaco Trading were UK nationals, Ramin Rezaie and Shahin Rad Rezaie Moazen.

(17) Intertech Sarl appeared as a recipient of payments in the money flows for deals 7, 9, 10, and 11 of the 03/06 quarter which according to the transaction chains on the deal sheets should have been made to the companies found to have defaulted on their VAT liabilities.

(18) The director of Intertech Sarl was a Mohammed Sahal Bhamjee, a UK national with his permanent place of residence being 47 Carlton Road, Manchester. The registered address for Intertech Sarl was in Paris. The FCIB application, however, showed the postal address for Intertech Sarl to be the director’s home address in Manchester.

(19) Olympic Europe BV which was a customer of the Appellant in the 03/06 period provided the monies for the Appellant’s customers in the April deals 1, 2, 7 and 13.

(20) Hi-Tec Electronics appeared in the movements of money in the March 06 deals 1, 2, 4 and 5. In deals 1 and 4 Hi-Tec was used to pass on monies received from a third party payment. Hi-Tec was also direct supplier to Uni-Brand in 05/06. The director of Hi-Tec Electronic was Arif Rashid, the brother of the Appellant’s director Mr Rashid.

(21) In March 06 deals 4, 5, 8 Midcom received money payments from Call Back Trading, the identity of which was not disclosed in the invoice chains identified by Officer Wald. Call Back Trading was the ultimate source and recipient in the circular money flow for the Appellant’s June 2006, deal 1.

The Appellant’s Trading Pattern

231.The analysis of the Appellant’s trade in the disputed periods showed that it made a gross profit of ₤3 million on the deals in March and April 2006, and a purported trading loss of ₤4 million in June 2006. In March 2006 the Appellant purchased mobile phones from five different UK suppliers, and sold them overseas to customers in Dubai and mainland Europe. In April 2006 the Appellant procured mobile phones from just one UK supplier, Uni-Brand, and sold them onto customers in mainland Europe and Cyprus. In June 2006 the Appellant used Uni-Brand again as its supplier but dealt only with two UK customers.

232. The Appellant traded in nine Nokia models and one Motorola model of mobile phones in March 2006. In April 2006 the transactions consisted of ten Nokia models (six of which were the same in March) and the same Motorola model as in the March deals. Two Nokia models were the subject of the June deals, both of which appeared in the April deals.

233.The Appellant’s profits in the March and April deals were substantially greater than those of any other party in the invoice chains. The mark up for the March deals ranged from 5.56 and 6.25 per cent which Officer Wald considered a small disparity in range. The Appellant put to Officer Wald that he used the wrong comparator for determining the scale of the range. The Appellant maintained that Officer Wald should have used the average mark up as the point of comparison, which would have a given a totally different perspective on the scale of the range. Officer Wald accepted that he did not examine the scale from the perspective of the average mark up. The Appellant’s mark up on its deals with Uni-Brand in April 2006 was on average about 2.5 per cent lower than the mark up achieved on the deals with its five suppliers in March 2006.

234.Mr. Rashid’s explanation for the Appellant’s change in its purchasing pattern from using five suppliers in March to one supplier in April was that the Appellant purchased from whoever had the stock and that he may have been offered stock by his March suppliers in April.

235.In March 2006 the Appellant only traded from 13 to 27 March. In April 2006 the Appellant began trading again on 13 April and finished on 27 April. The Appellant did not trade at all in May 2006 submitting a VAT return with nil outputs. The Appellant did not trade in June until 27 June and did so only on that day. Mr. Rashid’s evidence was that the Appellant did not complete any trades in the first two weeks of any month because it was awaiting its VAT repayment from previous months but that “Sometimes we had a deals on the table and we did not complete it until HMRC authorised that payment.” Mr. Rashid’s claim that deals were put in place before receipt of the monies from HMRC was not corroborated by documentary evidence. Mr Rashid did not retain records of prior negotiations with customers and suppliers.

236.Mr Rashid accepted that the Appellant did not do any deals in May because it had not received its VAT repayment for the months of March and April. The Appellant knew on or around 8 May 2006 that its March and April claims were subject to extended verification.

237.Mr Rashid gave evidence that Mr Iqbal of Uni-Brand assisted the Appellant with its attempt to recover the VAT on its April deals by providing copies of the inbound CMRs for the goods sold by Uni-Brand to the Appellant in April 2006. Mr Rashid gave a confused account of the events surrounding Mr Iqbal’s offer to provide CMRs [32], saying that it arose from Mr Iqbal’s concern about Uni-Brand not receiving its April repayment. Mr Rashid changed his account when it was pointed out that Uni-Brand’s return for that period was a payment one.

238.The Appellant included copies of the CMRs in its solicitor’s letter to HMRC demanding repayment of the VAT incurred in April by 4pm on 27 June 2006. The solicitors letter stated that

“ of our clients claim relates to purchases from Uni. A schedule of these purchases is attached. Uni imported the goods, which it subsequently sold to our client. Conclusive evidence of this is to be found in the attached CMRs numbered 1-12. As Uni imported the goods the UK supply chain involves only Uni and our client. Uni charged our client output tax of 17.5 per cent. Our client paid this output tax to Uni, and Uni subsequently accounted to the Commissioners for this output tax.

There can be no tax losses in the UK supply chains in respect of which our client purchased goods from Uni. This being the case, our client is entitled to be repaid”.

239.One of the CMRs provided disclosed the name of Uni-Brand’s supplier in its April deals with the Appellant. Mr Rashid did not think it odd that Uni-Brand acquired the mobile phones from an European customer, only for the Appellant to despatch the mobile phones brought into the UK a day later to another European customer. The Appellant also assisted Uni-Brand by allowing due diligence in its name to be in Uni-Brand’s possession at a visit on 14 June 2006.

Evidence of Similarities and Links in the Membership of the Direct Deal Chains 03/06 and the Contra Acquisition and Defaulter Chains 04/06 and 06/06 [33]

240. HMRC as part of its case identified a series of purported links between the direct deal chains and the contra trade deal chains. The Appellant in its closing submissions stated that the contentions were not put to Mr Rashid, and in any event were outside his knowledge. The Appellant has throughout the proceedings denied knowledge of the transactions and the parties outside the immediate dealings with its customers and suppliers. Given the Appellant’s case, cross examination served no useful purpose as any questions put would have simply rendered the response of not within the Appellant’s knowledge. The Tribunal sets out its findings on the principal common features of the respective chains in the following paragraphs. The relevance of which will be discussed under the Tribunal’s consideration.

241. Uni-Brand and Globcom were associated companies with the same director, same personnel and operated from the same premises. Uni-Brand and Globcom featured in 77 of the disputed 93 transactions involving the Appellant.

242.Shelford, Twenty First Traders and North West Trading appeared in the direct deal chains as either a supplier or customer of Globcom, and as a broker in Uni-Brand’s clean chains for the 04/06 contra trade.

243.Global Trading Company (UKGTC) featured in 24 of the transactions in the direct deal chains and in 21 deals of Uni-Brand’s 04/06 contra trade. Similarly RK Brothers took part in 15 transactions of the direct deal chains, and in all but two of Uni-Brand’s contra trades in 06/06. RK Brothers was also linked to Beatila which supplied the goods to Performance Europe one of the defaulters in Uni-Brand’s contra trades in 04/06.

244. Four of the six Appellant’s customers in March 2006 deals appeared as customers in Uni-Brand’s April 2006 clean chain. The common customers were Olympic, Midcom, Essential Trading, and Neo Abaco.

245. In the direct deal chains Global Trading Company made third party payments to one of the three connected Cypriot companies: CK Communications, E & I Trading and Rezaco Trading. CK Communications supplied the phones to Falcon Trading and WTC Trading, the suppliers of Uni-Brand in the 04/06 clean chain.

246. Four companies from the United Arab Emirates, Call Back Trading, Link Maze LLC, MIB Trading FZE, and Wall Street General Trading appeared regularly in the money movements throughout the Appellant’s deal chains. At least one of those companies appeared in every deal characterised by circular flows of money.

247. Since at least 2005 Globcom had been trading with The Export Company which appeared in 25 of the transactions in the direct deal chains. Uni-Brand had been trading with The Export Company from at least February 2006.

248.Since 2002 Uni-Brand had traded with Our Communications Limited which took part in 20 transactions of the direct deal chains.

249.Globcom and Uni-Brand had supplied Midcom which was the Appellant’s customer in deals 4, 5 and 8 in March 2006. Further Uni-Brand had been trading with Gold (the Appellant’s customer in 06/06) since at least February 2006.

Evidence of What the Appellant did in relation to the Disputed Transactions

250.The Appellant followed the same procedures for each of the disputed deals except that some deals were broken down into smaller consignments, which have been identified in the previous sections on the 03/06, 04/06 and 06/06 deals. The 06/06 deals varied from the other deals in certain respects which have been examined under the section on the 06/06 loss. The Tribunal intends to deal with the evidence on what the Appellant did under the headings of contractual arrangements, due diligence, inspection, insurance and deal documentation.

The Contractual Arrangements

The Appellant’s Procedures

251. Mr Rashid in his second witness statement [34] sets out the contractual arrangements for the Appellant’s deals which were:

(1) Once stock levels and availability had been discussed between the Appellant and its supplier and customer, a price was negotiated and agreed on the phone.

(2) The Appellant then sent a stamped and signed written purchase order to the supplier together with a supplier declaration form which must be returned to the Appellant before inspection and shipping of the goods.

(3) At the same time the Appellant’s customer sends a purchase order which the Appellant returned together with a supplier declaration if required.

(4) Sometimes the Appellant’s supplier sent a pro-forma invoice before the purchase order. In the same way the Appellant gave a pro-forma invoice to its customer.

(5) The Appellant’s supplier then sent an allocation notice to the freight forwarder confirming the stock held and the proposed allocation of that stock to the Appellant. The supplier did not generally release title until the goods were paid but may permit a ship on hold process.

(6) At this point the Appellant inspected the stock and subject to the inspection provided shipping instructions to the freight forwarder and permit ship on hold.

(7) Payment was made once the goods had been inspected to each party’s satisfaction.

(8) The Appellant provided a release note to the freight forwarder only after payment had been made to the supplier and received from the customer.

(9) A sales invoice was issued by the Appellant’s supplier and by the Appellant to its customer.

252.The April 06 deal 1 provided a typical example of how the arrangements operated in practice. The mobile phone consignment subject to the deal was held at Interken Freighters Limited. On the 13 April 2006 the Appellant issued a purchase order for 5,000 Nokia 6681 mobile phones to Uni-Brand which returned a signed supplier’s declaration and an invoice. In respect of its sale the Appellant on the same day sent a pro-forma invoice to Lavina Trading Ltd which supplied the Appellant with signed copy of the Appellant’s terms of sale agreement and a purchase order. All the respective documents were dated with 13 April 2006 and sent by fax.

253. On the 13 April 2006 Uni-Brand issued a ship and hold note to Interken allocating the consignment to the Appellant and authorising the Appellant to move these goods on a ship and hold basis. Uni-Brand’s authorisation stated that it was not responsible for the insurance as it did not have legal title to the goods. The Appellant issued shipping instructions timed at 15:14 on 13 April 2006 informing Interken to ship the goods on hold to Freight Connections in the Netherlands for its customer Lavina Trading Limited. The next set of documents was dated 18 April 2006 and included a report from Aberdale certifying that a 100 per cent inspection of the mobile phones had taken place, and a shipping certificate from Interken indicating that the consignment had been shipped on 18 April 2006.

254.The payments for the April 06 deal 1 took place on 19 April 2006 evidenced by transfers to and from the Appellant’s FCIB account. Uni-Brand and the Appellant then issued instructions to Interken to release the goods to the Appellant and Lavina Trading respectively.

The Appellant’s Terms and Conditions

255. The Appellant’s terms and conditions with its supplier were set out on the purchase order and the supplier’s declaration. General condition 4 on the purchase order required the supplier to own the stock. Mr Rashid’s interpretation of condition 4 was that the supplier had reservation of title, and that the supplier did not actually own the goods. Mr Rashid’s explanation for the wording of condition 4 was that it was better to use the phraseology of ownership rather than reservation of title, even though such phraseology was incorrect .

256.The specific conditions on the purchase order required telegraphic transfer of the monies to the supplier after full inspection. Mr Rashid explained that full inspection meant inspection by the Appellant’s customer as well. According to Mr Rashid, the supplier knew of the existence of the Appellant’s customer and during the negotiations on the respective deal had agreed to inspection of the consignment by the customer before completion of the purchase.

257. The Appellant’s supplier’s declaration required its supplier to declare that the goods were bought on the open market with free title, that is without any free encumbrances. According to Mr Rashid, the status of the declaration was a proposal [35] which meant that the supplier did not have to own the goods when they were sold to the Appellant. The supplier would only buy the goods when the Appellant and its customer were happy with them.

258.Mr Plowman confirmed that he was responsible for the drafting of the Appellant’s supplier’s declaration. Mr Plowman eventually accepted after some prevarication that the declaration referring to the goods bought on the open market with free title implied that the goods were owned by the supplier. Further he said that the Appellant understood that a supplier should own the goods when it signed the declaration.[36]

259. The Appellant’s terms and conditions for its sales were found on its pro-forma invoice and terms of sale agreement signed by its customers. The pro-forma invoice stated that the goods would remain the property of the Appellant until paid for in full. Further condition 4 of the terms of the sale reinforced the perception that the Appellant owned the goods at the time of sale with its warranty that it held full title. Mr Rashid, however, acknowledged that when the pro-forma invoice was issued to its customer, and at the time of sale the Appellant did not actually own the goods but merely held a reservation of title which apparently was derived from the supplier’s action of allocating the stock to it. The Appellant was, therefore, unable to fulfil condition 5 of its terms of its sale, namely passing title to its customer when full payment was received.

260.Condition 6 of the terms of sale stated that

“Full payment must be made at the time that the stock is allocated to the customer in the point of dispatch in the European Union”.

261. Mr Plowman was responsible for drafting the Appellant’s terms of sale. Mr Plowman was unsure when he drafted the document whether he took into consideration sales to parties outside the European Union. Mr Plowman presumed that the Appellant told him that it wanted the goods to be paid for at the time the stock was allocated to the customer in the point of despatch. Mr Plowman accepted that the point of despatch for goods in the UK exported to Dubai would be the UK. In those circumstances the Appellant would be expected to be paid for the goods in the UK unless there were terms to the contrary, such as payment on delivery, in another document. The terms of condition 8 reinforced that payment was due on allocation not only delivery by stating that customers were in effect making a pre-payment to the Appellant.

262.Mr. Rashid’s evidence on condition 6 was that it referred to the point of despatch for the Appellant’s customer’s customer. Mr Rashid also said that the terms of sale agreement was not designed for sales outside the European Union despite the fact that the Appellant used the same published terms regardless of whether its customer was in or outside the Union.

263. Officer Wald [37] drew attention to the fact that the Appellant raised sales invoices for all the disputed transactions before it paid its supplier. Officer Wald considered that the Appellant was in breach of condition 4 of its terms of sale agreement. Mr Rashid in his second witness statement did not understand Officer Wald’s concerns. Mr Rashid pointed out that the Appellant issued pro-forma invoices as soon as orders were confirmed, and that once the goods were inspected and confirmed as satisfactory, the Appellant’s customers paid the pro-forma invoices after which the Appellant issued the sales invoice. Mr Rashid pointed out in cross-examination that the invoice bore the same date as the pro-forma invoice because that date was the tax point.

264.Officer Wald identified that all the Appellant’s suppliers had a condition of sale to the effect that they retained ownership and title of the goods until payment in full was made.

Due Diligence

Overview

265.Mr Rashid believed that the purpose of due diligence should be focussed on ensuring the legitimacy and commercial viability of suppliers and customers and enable a trader to keep standards under review and avoid participation in fraud. Mr Rashid accepted in cross-examination that one of the reasons for due diligence was to avoid being caught up in some fraud, albeit innocently. Mr Rashid interpreted legitimately as ensuring that the Appellant’s customers and suppliers were trading honestly. Commercial viability, on the other hand meant that they were suitably financed.

266.The Appellant’s due diligence consisted of eight general stages:

(1) A personal visit of suppliers and customers

(2) A comprehensive due diligence report produced by the Appellant based on its visits to customers and suppliers accompanied by requests for commercial documents and replies to questionnaires..

(3) An independent due diligence report prepared by Veracis Limited, an experienced, independent due diligence specialist professional services company with a good reputation.

(4) Verification of VAT registration numbers with HMRC at its Redhill Central UK VAT Clearing Unit and also with HMRC national telephone number. In addition European VAT registration numbers were also verified on the European Commission Europa website.

(5) An independent stock inspection company, Aberdale Inspection Limited, was instructed to inspect the goods and make sure they existed and not purchased previously by the Appellant.

(6) An Appellant’s employee was present at the time of inspection of the goods and who would normally take photographs of the stock to ensure that it existed.

(7) The engagement of an independent industry specialist freight forwarder, Interken Freighters UK Limited, to secure the stock and physically inspect the goods prior to shipment.

(8) The Appellant sealed the goods with its wrapping tape to ensure that HMRC was able to identify the Appellant’s goods at the port or airport.

267. Mr Rashid asserted that he aimed to carry out due diligence in accordance with HMRC Notice 726. He spent a considerable amount of time and resources on checking the integrity of its supply chain but could only carry out extensive checks on its trading partners, not on the wider supply chain. Mr Rashid stated that he always obtained Dun & Bradstreet reports for the purposes of credit checks on customers and suppliers. Mr Rashid relied on the Veracis report and his personal inspection to verify the supplier’s history in the trade. He stated that payment terms would often be 100 per cent by telegraphic transfer after inspection, and that the goods were always adequately insured.

268.Mr Rashid stated that at a meeting with HMRC in May 2005 Officer Yule told him that he was going to show Appellant’s due diligence to other traders as a good example. Mr Plowman of Veracis corroborated Mr Rashid’s re-collection of the conversation with Mr Yule, although he acknowledged that he and Mr Rashid had given June not May as the date of the meeting with HMRC in their witness statements.

269.The Appellant in its “probity and security in business letter”[38] stated that

“In the light of these developments it is prudent for us enhance all our controls and due diligence and to do so to such an extent that any attempt to apply the J&S provisions, or any interpretation of the same will be confounded.”

270.Mr. Rashid in cross examination stated that credit ratings were irrelevant for suppliers and customers alike. This was because stock was always on hold and never released until payment had been made. The Appellant did not extend credit facilities to its customers. Mr Rashid was of the view that if a supplier had stock available it must have funded it somehow. Mr Rashid stated that the Dunn & Bradstreet reports were still had a use by providing information on changes in directors and judgments against the company.

271.Mr Rashid explained in cross examination the limitations of the Appellant’s due diligence visits to prospective trading partners. He or an employee on a visit would as a rule accept the partners at face value, particularly if they looked genuine and knew what they were doing and which models of mobile phones were famous.

272.The Appellant engaged Veracis Limited in September 2004 to act as its Customs consultants. In 1999 Mr Plowman, a former HM Customs and Excise Officer, set up Veracis Limited, a specialist tax consultancy offering businesses and private clients consultancy services about Customs procedures, investigations and advice on due diligence procedures.

273.Under the terms of its engagement Veracis represented the Appellant in its dealings with HMRC and provided due diligence reports on intending and ongoing business relationships. Veracis undertook a site visit of the Appellant’s customers and suppliers and provided the Appellant with a report which included photographs of the premises, documents evidencing the existence of the company and its management, and information about the way the company traded. Veracis also undertook on line database searches on Companies House, Electoral Roll, Lists of Disqualified Directors and sometimes Land Registry. Each Veracis report included a summary of its findings about each company.

274.In his witness statement Mr Plowman said that he always found Mr Rashid an honest man who was punctilious in his record keeping and due diligence. Mr Plowman believed that the Veracis reports were only a part of an extensive package of due diligence checks which Mr Rashid undertook.

275. Veracis also provided Mr Rashid with advice on due diligence checks which included the drafting of various documents, such as the supplier’s declaration. Mr Plowman also sent regular newsletters to Mr Rashid about changes in the law affecting the mobile phone and CPU wholesale industry.

276.Mr Plowman recalled sending the Appellant a newsletter in May 2006 regarding the April 2006 budget which highlighted what HMRC would regard as hallmarks of MTIC fraud. The hallmarks included a sudden change of trading from one type of goods into mobile phones, rapid increase in turnover by a trader new to the market, goods traded at the same price or margin and exports to destinations used in MTIC frauds such as Dubai, Hong Kong and Singapore. Mr Plowman expected Veracis’ clients to take note of his advice, and was confident that Mr Rashid followed his advice. Mr Rashid in cross examination denied that he received a copy of the newsletter.

277.Mr Rashid considered that Veracis provided the Appellant with further reassurance and enabled it to assist HMRC in genuinely going beyond the requirements in Public Notice 726. Mr Rashid stressed that he did not use the Veracis reports as an indication to trade with a particular company. The Appellant relied on the reports to get a better understanding of the company and enable it to make an informed decision about whether to trade with the company.

278.Mr Plowman accepted that the Appellant did not take up Veracis’ services of transaction verification and expert certification which formed two of the three main subject areas normally covered by Veracis when carrying out due diligence on behalf of its clients. Further Mr Plowman acknowledged that Veracis did not have the financial and accountancy skills to assess the financial viability of the Appellant’s customers and suppliers.

279.Mr Plowman in cross examination made the curious statement that he did not want to get any more evidence in. He was in enough trouble already.

Due Diligence on its Individual Trading Partners

280.Mr Rashid contended that its due diligence was entirely satisfactory on its suppliers and customers with which it had a genuine relationship at all times. Mr Rashid said that it was important that he got to know the Appellant’s suppliers which he did by regularly speaking to them on the telephone, and insisting on a personal visit before the first deal. Further the Appellant verified the VAT registration numbers of its business partners at regular intervals by sending letters to HMRC Redhill which emphasised that the Appellant intended to trade with the relevant companies.

Suppliers

Uni-Brand

281.On 15 November 2004 Uni-Brand and the Appellant exchanged details, and at the same time Appellant verified Uni-Brand’s VAT registration number with HMRC at Redhill. The Appellant conducted its first trade with Uni-Brand on 16 November 2004

282.The Veracis report dated 16 January 2006 noted that Uni-Brand traded from a service business centre where it occupied a small room shared with Globcom Limited. Uni-Brand employed two members of staff, Mr Mohammed Iqbal, director, and Mr Sammer Zubair, who were the same personnel involved in Globcom Limited. The report recorded that Mr Zubair stated that he was responsible for all trading in mobile phones, although he believed that Uni-Brand traded in other items but was not able to provide details of the other sales.

283.Veracis reported that Mr Iqbal had informed it that Uni-Brand traded in branded goods of various types and healthcare products, and that Globcom Limited was set up to deal exclusively with mobile phones. Uni-Brand sourced the mobile phones within the United Kingdom from other traders. A substantial proportion of its onward sales were exports, mainly to Singapore and Dubai. Uni-Brand engaged freight forwarders, principally Interken Freight to handle the mobile phones and carry out the checks on the phones. Consignments in respect of UK to UK trades were not routinely subject to inspection reports.

284. The Veracis report identified the following positive factors in relation to Uni-Brand:

(1) Operated robust due diligence procedures.

(2) Obtained full inspection reports on all export consignments.

(3) Third party payments were not made

(4) The company’s financial status at the end of the last financial year appeared stable.

285.The Veracis report identified the following negative factors for Uni-Brand

(1) Trade application forms not in use.

(2) No evidence of trade references.

(3) The director was not available at the meeting.

(4) No information about other activities.

(5) Companies’ house records were incorrect concerning the director’s date of birth (for Globcom Limited).

286.On 24 January 2006 the Appellant conducted its own visit of the trading premises for Uni-Brand, which was evidenced by a brief written report and a questionnaire completed by Mr Iqbal. The questionnaire stated that Uni-Brand knew about the market value of the goods from accessing the IPT website and phoning other suppliers.

287.On 2 February 2006 the Appellant wrote to Uni-Brand pointing out the negative indicators identified by Veracis Limited plus a copy of the Veracis report. On 6 February 2006 Uni-Brand responded stating that it took trade references and completed trade application forms, and that its other trading activities were in branded goods and healthcare products.

288. On 13 April 2006 the Appellant obtained a Dun & Bradstreet report for Uni-Brand which revealed a tangible net worth of ₤277,194 and a maximum credit of ₤18,000 on monthly credit terms. The Appellant obtained further reports on the day of each deal and the day after each deal. The Appellant also carried out Redhill and Europa website checks on Uni-Brand.

289. Officer Wald pointed out that the Dun & Bradstreet report for Uni-Brand indicated that 59 per cent of UK businesses have a lower risk of paying significantly late. Mr Rashid dismissed Officer Wald’s concerns saying that Uni-Brand was a supplier, not a customer, and credit was not relevant.

290.Mr Rashid did not consider there was anything incorrect in dividing trade between two companies. According to Mr Rashid, Mr Iqbal informed him in early 2005 that as part of his expansion he was to set up a new company, Globcom, to concentrate on trading mobile phones. Further he was going to keep Uni-Brand for trading other products. Mr Rashid understood from Mr Iqbal that some of his customers preferred to continue buying from Uni-Brand because Globcom was a new company. In the end the Appellant traded with both because Mr Rashid trusted Mr Iqbal, having met and dealt with him several times.

291.Mr. Plowman accepted in his evidence that Uni- Brand’s letter of introduction and trade classification were inconsistent with what Veracis was told on the site visit. Mr Plowman surmised that Uni-Brand’s drafting of the letter was done to exaggerate its credentials in the mobile phone market. Mr Plowman acknowledged that the contradictory information was attached to its report which would be seen by the Appellant. Mr Plowman, however, did not consider the inconsistencies between the contents of report with the attached documentation sinister. In his experience a lot of traders exaggerate their own worth when positioning themselves in the market.

292.Mr Plowman’s explanation for the dispute with Uni-Brand over no trade references [39] was that Veracis spoke to an employee who was probably unfamiliar with Uni-Brand’s trade documentation.

Globcom

293.In early 2005 Mr Mohammad Iqbal, director of Uni-Brand, informed Mr Rashid that he was setting up a new company called Globcom to concentrate on trading in mobile phones, and that Uni-Brand would be used for trading in other products. The Appellant’s first trade with Globcom was on 8 April 2005.

294.Globcom supplied the Appellant with a letter of introduction and corporate documents. The various Dunn & Bradstreet Reports of Globcom obtained by the Appellant showed a monthly credit rating of ₤5,000. In his second witness statement Mr Rashid stated that Globcom was a supplier, not a customer, so credit rating and risk of payment was irrelevant, and not a reasonable consideration

295.The Appellant commissioned a report from Veracis on Globcom Limited which was carried out at the same time as the visit to Uni-Brand on 16 January 2006. The Veracis report identified that Globcom operated from the same premises as Uni-Brand with the same personnel. Veracis sought clarity about the protocol for deciding which company dealt with any particular transaction. Veracis was advised that Mr Iqbal made the decision about which company carried out the deal, and that he tried to secure a balance of transactions between the companies.

296.The Veracis report identified the following positive factors in relation to Globcom Limited:

(1) Operated robust due diligence procedures.

(2) Obtained full inspection reports on all export consignments.

(3) Third party payments were not made

297.The Veracis report identified the following negative factors for Globcom Limited

(1) Trade application forms not in use.

(2) No evidence of trade references.

(3) No accounting information available.

(4) Companies’ house records were incorrect concerning the director’s date of birth.

298.On 2 February 2006 the Appellant wrote to Globcom pointing out the negative indicators identified by Veracis Limited. On 6 February 2006 Globcom responded stating that it took trade references and completed trade application forms, and that it was not the end of the accounting period which explained the absence of accounting information.

299.The Appellant also carried out a HMRC Redhill check on 3 January 2006, a Europa check on 13 March 2006, and telephoned the HMRC National Helpline on 13 March 2006.

300.Mr Plowman acknowledged that Uni-Brand and Globcom did not have the facility to hold stock. Mr Plowman’s evidence in respect of the discrepancy of trade references for Uni-Brand applied equally to Globcom.

Our Communications Limited

301.On 3 March 2004 Our Communications Limited contacted the Appellant to introduce itself. Mr Rashid knew the director of Our Communications Limited previously as he used to live in Rochdale. On the same day the Appellant verified the VAT registration of Our Communications with HMRC Redhill and the Europa Website. The Appellant repeated these checks on 23 February 2006 and 20 March 2006 respectively, and in addition telephoned the HMRC National Helpline on 20 March 2006. The Appellant’s first deal with Our Communications was on 24 May 2005.

302.The Appellant’s due diligence report dated 18 January 2006 included a visit report, questionnaire, photographs, letter of introduction and documents, a copy of the Appellant’s letter of introduction and documents.

303. On 24 January 2006 the Appellant obtained a Dun & Bradstreet report which showed a tangible net worth of ₤826,741 and a maximum monthly credit of ₤40,000.

304. The evidence included three reports from Veracis dated 23 September 2005, 22 March 2006 (which updated the September report by telephone), and 23 June 2006. The visit in September 2005 was conducted with Mr Dar, the director, and Mr Sharif, Office Manager. Mr Dar advised that his company had been operating in the wholesale mobile market for over five years. The company sourced the mobile phones from UK suppliers. Seventy per cent of its onward sales were exports to Europe, Dubai and Singapore. Mr Dar used the IPT website, What Cell Phone and Magazine and its existing customer database for new business. The September 2005 Veracis report identified a range of positive indicators and no negative factors for Our Communication Limited:

305.On 23 June 2006 Veracis conducted its enquiry with Mr Lau, the company’s project manager. Mr Dar, the director, was abroad on business. The report recorded that Our Communications Limited was in dispute with HMRC regarding its repayment return for January 2006.

Shelford Trading

306.On 23 July 2004 the Appellant spoke with Shelford Trading which sent its pack of documents. On the same day the Appellant verified the VAT registration of Shelford Trading with HMRC Redhill and then with the Europa Website on 16 December 2004. The Appellant repeated these checks on 22 February 2006 and 13 March 2006 respectively, and in addition telephoned the HMRC National Helpline on 13 March 2006. The Appellant’s first deal with Shelford Trading was 14 July 2005.

307.The Appellant’s due diligence report dated 19 January 2006 included a visit report, questionnaire, photographs, letter of introduction and documents, and a copy of the Appellant’s letter of introduction and documents. The questionnaire completed by Shelford Trading Limited revealed that it checked the market value of the goods from the IPT website, daily phone calls and e mails. The visit was conducted in the presence of Mr Costa Philloppou, the Sales Director. The report did not record any follow up from the November 2005 Veracis report which mentioned a dispute with HMRC.

308. On various dates the Appellant obtained Dun & Bradstreet reports which showed a tangible net worth of ₤839,504, a maximum monthly credit of ₤425,000 and a turnover of ₤33 million..

309.The November 2005 Veracis report recorded that the company traded from premises on a commercial estate which had first floor offices and a secure warehouse on the ground floor. Shelford Trading Limited shared the premises with its sister companies, Mobile Export 365 and Live Telecoms. The property was held on a three year lease. The directors were not present at the inspection. Shelford reported that it had a monthly turnover of ₤15 million, and capital of approximately ₤3 million. Shelford gave Veracis a copy of a telephone bill for ₤2.64 which Mr Plowman in cross examination described as odd.

310.Shelford advised Veracis that it only dealt with Mobile Phones, and until June, 80 per cent of its purchases were delivered to its own warehouse for export through its sister company, Mobile Export 365. The remaining 20 per cent were traded through the UK market. At the present Shelford was selling in the UK market until it resolved outstanding issues with HMRC.

311.The May 2006 Veracis report indicated that Shelford was no longer trading goods from a warehouse, which was now being used by the associated company, Live Telecoms. Also the number of employees had reduced to eight which were shared with Mobile Export. The turnover for Shelford was reported as ₤1 billion, which was a substantial increase from the May position.

21^st Century Traders

312.On 21 September 2004 21^st Century Traders contacted the Appellant sending a letter of introduction and copies of corporate documents. On the same day the Appellant verified the VAT registration of Our Communications Limited with HMRC Redhill. The Appellant repeated the Redhill check on 15 February 2006, carried out an Europa check on 22 March 2006 and telephoned the HMRC National Helpline on 22 March 2006. The Appellant’s first deal with 21^st Century Traders was 21 February 2006.

313.The Appellant’s due diligence report dated 19 January 2006 included a visit report, questionnaire, photographs, letter of introduction and documents, and a copy of the Appellant’s letter of introduction and documents.

314.The Veracis report on 21st Century Traders was dated 17 March 2006 and made no reference to a previous visit. The covering letter for the report was sent to Mr. Rashid on 26 April 2006 which was after 22 March 2006 when 21^st Century supplied the Appellant with mobile phones. Mr Plowman said that Veracis may have sent a second report on 26 April 2006 with an update.

Elite Mobile PLC

315.Mr Rashid stated that he was aware of Elite Mobile PLC from his research of the market in 2002. Mr Rashid considered that Elite Mobile PLC was regarded as one of the leading distributors of Sim Free mobile phones and accessories in the United Kingdom. Mr Rashid was, therefore keen to establish a relationship with the company. On 7 October 2002 the Appellant introduced itself to Elite Mobile which was followed up by a visit of Elite’s premises by the Appellant. The Appellant’s first deal with Elite Mobile was on 27 October 2005

316.The Appellant’s due diligence report of Elite Mobile PLC dated 10 January 2006 included a visit report, questionnaire, photographs, letter of introduction and documents, and a copy of the Appellant’s letter of introduction and documents.

317. The Veracis report was dated 26 January 2006. Mr Plowman accepted that Elite Mobile provided Veracis with no explanation for its fall in turnover between 2002 and 2003. Elite Mobile in its marketing letter stated that it had strong partnerships with leading manufacturers such as Nokia, Motorola, Panasonic, Samsung, Siemens and Sony Ericsson yet told Veracis that 100 per cent of its goods were sourced from the grey market. Mr Plowman did not consider Elite’s contradictory statement was an indication that it was acting dishonestly. In Mr Plowman’s view, Veracis’ role was to give the information to the Appellant which would make an informed choice about whether to deal with the company.

318. The Veracis report identified a number of negative indicators which included that Veracis was unable to interview one of its main directors or gain access to the premises. Further Elite Mobile had not submitted financial accounts to Companies House since the financial year ending 31 December 2004. Mr Rashid pointed out that he had met Elite’s director and had taken photographs of the premises. Finally Mr Rashid said his search of Companies House revealed that Elite Mobile filed up-to-date accounts.

319. On various dates the Appellant obtained Dun & Bradstreet reports which showed a tangible net worth of approximately ₤4 million.

Customers

320. Mr Rashid stated that the Appellant got to know its customers as a result of hard work in marketing the company, and providing a good service so that other traders would recommend it. The Appellant also spent money for several years on advertising and promoting the company in trade magazines and on the specialist IPT website.

Imaani International Limited

321.Imaani was based in Dubai and heard about the Appellant through the industry generally and the IPT website. The Appellant conducted its first trade on 7 July 2005, and carried out two due diligence reports on Imaani on 28 May and 3 December 2005.

Midcom International

322.Midcom was also based in Dubai. The Appellant conducted its first trade on 8 December 2005 following its due diligence visit on 27 November 2005.

Essential Trading SARL

323.The Appellant was recommended to Essential Trading. Mr Rashid visited Essential Trading on 14 February 2006. The Appellant’s first trade with Essential Trading was 20 February 2006.

324. The Veracis report dated 24 March 2006 indicated that it conducted its interview with the proprietor of Essential Trading in a nearby café because of the renovation of its business premises. The report noted that Essential Trading had been trading in mobile phones for less than one year. The director’s experience was in the retail clothing wholesale trade and currently overwhelmed with the paperwork. Essential Trading only had recourse to private funds for trading with a minimal amount of 3,000 Euros deposited with the notary at the time of the company incorporation. Essential Trading did not check IMEI numbers and used a Spanish mobile telephone trader as a due diligence company. Essential Trading cited the Appellant as one of its two suppliers.

325.Veracis identified four negative factors associated with Essential Trading which were:

(1) Essential trading had only recently commenced trading.

(2) Only one member of staff with little experience within the mobile trade.

(3) Stock reports made no reference to IMEI numbers.

(4) Unable to view a previous trade as paperwork was with the customs/accountants.

326. Officer Wald in his second witness statement highlighted the negative factors identified in the Veracis report. Mr Rashid in response said that Officer Wald had failed to mention the positive factors in the Veracis report and the other due diligence on Essential Trading. Mr Rashid believed that having regard to the totality of the due diligence it was acceptable for the Appellant to trade with Essential Trading.

327.Officer Wald gave evidence of the investigation of Essential Trading by the French Authorities which concluded that Essential Trading dealt with missing traders, most of its sales were paid for by third parties and issued sales invoices to a falsely named customer. Mr Rashid pointed out that the allegations of the French Authorities related to deals in 2005, and that he was not aware of the French Authorities’ concerns until HMRC served its evidence in August 2008.

Olympic Europe BV

328.The Appellant conducted its first trade with Olympic Europe on 21 February 2006 after having exchanged details on the phone. On the same date the Appellant did a Europa check and contacted the National HMRC helpline. On 24 May 2006 the Appellant received a positive reply on Olympic Europe BV from HMRC at Redhill and also from the Dutch authorities on 13 April 2006.

329.The Appellant’s due diligence report was dated 1 March 2006 following cancellation of its inspection on 14 February 2006. The Appellant’s Dunn & Bradstreet report on Olympic gave a credit limit of €2,500 and a SIC code as commercial machinery wholesalers. Most of the Olympic business documentation obtained by the Appellant was in Dutch and not translated. Veracis did not prepare a report on Olympic Europe BV.

330.Officer Wald gave evidence of the Dutch Authorities investigation into Olympic’s trading activities which called into question its bona-fides being involved in fictitious consignments of goods between the UK and Holland and the falsification of CMRs. Mr Rashid in response stated that he had no information to suggest that Olympic was involved in questionable trading. As far as he was concerned there was nothing untoward in the Appellant’s commercial dealings with Olympic.

Neo-Abaco GMBH

331.Neo-Abaco contacted the Appellant on the IPT website. On 24 March 2006 the Appellant started trading with Neo Abaco after it had carried out a Europa check and contacted the National HMRC helpline. On 13 April 2006 the Appellant received a positive reply on Neo- Abaco from the Dutch authorities.

332.The Appellant’s due diligence report was dated 6 April 2006. Much of the documentation provided to the Appellant by Neo Abaco was in Swiss and not translated. The Dunn & Bradstreet report on Neo Abaco gave their trade class as radio and television retailers and stated that there were no financial results available due to the recent inception of the business.

333. As with Olympic Neo Abaco featured in the Dutch Authorities investigation into fictitious consignments of goods between the UK and Holland and the falsification of CMRs. Mr Rashid also found Neo Abaco trustworthy in its dealings with the Appellant. Mr Rashid rejected HMRC’s wider allegations concerning Neo Abaco.

Meridian Telecommunications SARL

334.Meridian heard of the Appellant through word of mouth. They conducted their first deal on 27 March 2006. Mr Rashid met the director of Meridian on 6 April 2006 in Zurich. The Appellant’s due diligence report was dated 17 May 2006. The Dunn and Bradstreet report on Meridian stated that there was insufficient information available to determine the risk that it posed and recommended that guarantees be sought for credit. The report also questioned whether Meridian was registered on the Swiss trade register.

MK Digital World (Cyprus) Limited

335.Mr Rashid knew its director, Mr Khan from 2003 when he used to work for Happy Guys Trading Limited. On 10 and 13 April 2006 the Appellant carried out a Europa check and contacted the National HMRC helpline. The Appellant conducted its first trade with MK Digital on 13 April 2006. The Appellant’s due diligence report was dated 11 April 2006.

Lavina Trading Limited

336.Interken, the freight forwarders recommended Lavina Trading to the Appellant. On 13 April 2006 the Appellant conducted its first trade after carrying out a Europa check and contacting the National HMRC helpline. The Appellant’s due diligence report was dated 10 April 2006. Most of the documentation provided to the Appellant by Lavina was in Greek and not translated. The Dunn & Bradstreet report into Lavina stated that the full present financial position could not be ascertained.

Nano Infinity SARL

337.Nano Infinity contacted the Appellant via the IPT website. After speaking on the telephone Mr Rashid carried out an inspection of Nano Infinity on 14 February 2006 The Appellant completed its first deal with Nano Infinity on 21 April 2006 after completing an Europe check on the same day. The letter of introduction from Nano Infinity referred to dealing in general commodities.

338. Veracis visited Nano Infinity on 9 June 2006 and 11 July 2006. The report indicated that Nano Infinity was incorporated on 8 September 2005 and registered for VAT on 29 March 2006 with an estimated turnover of €100 million. It had no French bank account and there was no financial information available about the company. Further, the Veracis report identified Nano as having 15 UK based customers.

339.Veracis report identified the following positive and negative indicators in relation to Nano Infinity

Positive Indicators

(1) Its director was courteous, friendly and agreed to be photographed.

(2) The Company operated from well appointed premises in central Paris.

(3) No third party payments made.

Negative Indicators

(1) Nano Infinity had only commenced trading last year. No financial information available.

(2) No French Bank account.

(3) No accountant’s records available to date.

340.Mr Plowman considered the claimed turnover for Nano Infinity was a lot of money but may not be so in the context of mobile phone trades which were characterised by big turnover and small profit margin. Mr Plowman was not concerned with Nano Infinity having an FCIB account. He pointed out that no charges had been made against the director of FCIB. Mr Plowman after some prevarication considered that something was not quite right with a French company that bought only from the UK and also sold to the UK. Mr Plowman also agreed that Veracis advised its clients to be wary with deals that involved onward sales back to the UK. Mr Plowman accepted that Nano Infinity’s letter of introduction did not mention that it traded in mobile phones. Mr Plowman denied that Veracis was having the wool pulled over its eyes.

341.Mr Rashid considered the positive points in the Veracis report outweighed the negative points. He pointed out that Nano Infinity held an FCIB account. Further it was understandable that Nano Infinity had not prepared annual accounts because it had been trading for less than a year.

342. The Dunn and Bradstreet report stated that there was insufficient information to offer a credit opinion on Nano Infinity. The company was a new business and the represented a significant level of risk.

343.The French authorities investigated the address given by Nano Infinity for its freight forwarder, TCF Logistique, to which the Appellant’s goods were delivered. The authorities found a single corrugated iron prefabricated building which had never been owned or rented by TCF Logistique.

344.On 20 October 2008 Mr Rashid visited and took photographs of the pre-fabricated building used by TCF Logistique. Mr Rashid estimated the height of the building as between 14 and 16 feet. The length of the building was 120 feet, and 54 feet wide. Mr Rashid was of the view that the building was appropriate for a logistics business.

345.Officer Wilkinson was asked to give his opinion on the suitability of the prefabricated building from his inspection of the photograph. Mr Wilkinson had visited in excess of 50 premises used by freight forwarders and considered himself to be experienced in assessing the type of premises used for handling and storing high value products. He accepted in cross examination that his conclusion in relation to the aptness or otherwise of the building to serve as a logistics centre was based on viewing a photograph There was, in fact, no challenge to Officer Wilkinson’s findings that: there appeared to be no anti ram posts, no external CCTV cameras and the building appeared to be made of old corrugated iron.

Phone Connected SARL

346.Phone Connected contacted the Appellant via the IPT website. On 25 April 2006 the Appellant completed its first deal with Phone Connected. On the same day the Appellant carried out a Europa Check and contacted HMRC National Helpline on 25 April 2006. HMRC Redhill provided a positive response on 24 May 2006.

347.The Appellant’s due diligence report was dated 7 June 2006, some seven weeks after it started business with Phone Connected. Mr Rashid explained the delay by saying that due diligence was more difficult with the Appellant’s customers as its visit had to fit in with the customer’s availability. In any event due diligence on suppliers had greater priority. Despite the delay in the visit, the Appellant nevertheless had verified its VAT number, commissioned a Dun and Bradstreet report, and checked its trade references before trading with Phone Connected.

348.The trade reference for Phone Connected was from Waterfire which stated that it had been doing business with Phone Connected for over three years. The VAT registration certificate for Phone Connected, however, was dated 4 May 2005. The Dunn & Bradstreet report dated 25 April 2006 indicated that Phone Connected was a new business which represented a significant level of risk. The Dunn & Bradstreet report also said that Phone Connected was a wholesaler in non durable goods and durable goods.

349. Mr Rashid when questioned about the contradictions between the Waterfire reference and the other documents stated that

“If Waterfire give this reference, I can’t tell them, Don’t give the reference. Please do the five months on it. He give the reference. I just take it and put it in my file”.

350.Mr Rashid was not concerned with the financial risk posed by Phone Connected saying that

“Stock always on hold, they will pay, …otherwise no stock. If his reference is good, I just send the stock. I hope he will pay”.

“I check the reference. People doing business with him. They said, ‘he is trading in mobile phones and is trustworthy. They will take the stock if you send their warehouse. I send the stock there. On that time when this deal take place. I don’t think there is anything wrong with the company. It’s bona fide company”.

351.Most of the documentation provided to the Appellant by Phone Connected was in French and not translated. Mr. Rashid confirmed that he did not speak French but stated that he translated the documents using Google. The documents, however, had no annotations and Mr Rashid produced no translated documents.

352.The Veracis report was dated 10 August 2006 and after the dates when the Appellant conducted its deals with Phone Connected. Mr Rashid denied that the Veracis visit had been prompted by the extended verification exercise which was then being undertaken by HMRC.

353.Veracis noted that the premises used by Phone Connected had little by way of normal office equipment. Also Mr Poelvoorde, the director failed to supply Veracis with a copy of a utility bill for the property, and copies of the financial accounts for the business.

354.Phone Connected had 188 regular suppliers, 95 per cent from the UK, and 50 to 60 regular customers from throughout Europe. All its purchases and sales were denominated in UK sterling. The Veracis report stated that the turnover of Phone Connected was £2 billion. Further Phone Connected carried out no extensive due diligence on its trading partners and no inspections of the mobile phones bought and sold. The latter information was at odds with what the Appellant recorded in its due diligence report of 7 June 2006. Mr Rashid denied receiving a copy of the Veracis report but had he received and read it before 25 April 2005 Mr Rashid stated he would not have traded with Phone Connected and that its director on the basis of the report was a fraudster.

355. Mr Rashid acknowledged that fraud was quite common in mobile phone trading, and that the Appellant had to be very careful with the people it dealt with. Mr Rashid believed that the checks done at the time it traded with Phone Connected were reasonable.

356.The director of Phone Connected, Mr Poelvoorde, was later convicted for his part in the attempt to steal £229 million from the Sumitomo Mitsui bank in London in 2006. The French authorities had also noted that Mr. Poelvoorde’s other company, MDL, was used for “circularizing” invoices where UK companies had sent a van full of clothes that purported to correspond to invoices for Nokia mobile telephones.

Horizon Import Export Limited

357.Mr Rashid knew the director of Horizon, Ayub Khan, as he had traded with him for several years. According to Mr Rashid, Horizon obtained the Appellant’s details from one of the industry magazines and the IPT website. After an initial phone call they exchanged details

358.The Appellant verified the VAT registration of Horizon with HMRC Redhill on 24 May 2006. The Appellant also carried out a Europa Check on 27 June 2006, and contacted the HMRC National Helpline on 27 June 2006

359.The Veracis report dated 23 February 2006 stated that Horizon traded from two modern units at the Cariocca Business Park which contained two well-equipped desks. Veracis conducted its interview with Mr Khan who stated that Horizon employed one person, his wife, and that Horizon had been trading in mobile phones since its incorporation in 2003. The stated business for Horizon recorded at Companies House, however, was for wholesale clothing and footwear, and for computer activities. Horizon provided an example of its supplier declaration to Veracis which revealed that it was in fact the declaration of Uni-Brand. The geographic base of its suppliers was 100 per cent in the UK, whilst the base for its customers was 50 per cent in the UK, and 50 per cent worldwide including Dubai, Switzerland and France.

360.Mr Plowman accepted that the reports for Horizon and Gold did not highlight the fact that Mr Khan was running two almost identical companies from the same address doing the same business. Mr Plowman did not consider it to be a deliberate omission from the report but agreed that it should have been mentioned. Further Mr Plowman could advance no reason for the existence of the two companies.

361.Mr Plowman considered the inconsistency between Mr Khan’s assertion that Horizon had been trading in mobile phones since 2003 and its stated business as wholesale clothing and footwear should have been drawn to the attention of the Appellant. In his view the inconsistency, however, did not constitute a hole below the water line.

362.Mr Plowman acknowledged that Veracis sent the Appellant a copy of the supplier’s declaration in the name of Uni-Brand. Mr Plowman denied that Mr Khan was trying to pull the wool over the eyes of the Veracis’ representative by producing a declaration from another company purporting to be the one produced by Horizon.

363.On 8 May 2006 the Appellant drew the negative indicators in the Veracis report to the attention of Horizon which responded by providing a copies of the lease and financial accounts.

364.The Appellant’s due diligence report was dated 2 May 2006 and included a visit report, questionnaire, photographs, letter of introduction and documents, and a copy of the Appellant’s letter of introduction and documents.

365.The Dunn & Bradstreet report for Horizon dated 27 June 2006 recorded that it was operating as a men and boys clothing wholesaler with a tangible net worth of ₤31,132, and a maximum monthly credit of ₤47,000.

Gold UK Consulting

366.Mr Rashid knew the director of Gold UK, Ayub Khan, as he had traded with him for several years. After an initial phone call they exchanged details

367.The Veracis report dated 23 February 2006 for Gold UK replicated much of the information contained in the Horizon report. The major points of difference were that the VAT registration certificate recorded its business as Other Business Activities, and that the last accounts filed were for the year 31 March 2005, marked as dormant. This indicated to Veracis that Gold had been trading as a limited company for less than one year, despite its incorporation on 31 March 2004, and its VAT registration on 2 June 2004. Gold also provided a supplier declaration which was in fact the declaration of Uni-Brand. Mr Plowman’s evidence on Horizon equally applied to Gold UK.

368.On 8 May 2006 the Appellant drew the negative indicators in the Veracis report to the attention of Gold UK which responded by providing a copy of the lease and advising that the company’s first financial period would be 31 August 2006.

369.The Appellant’s due diligence report was dated 2 May 2006 and included a visit report, questionnaire, photographs, letter of introduction and documents, and a copy of the Appellant’s letter of introduction and documents

370.The Appellant verified the VAT registration of Gold UK with HMRC Redhill on 24 May 2006. The Appellant also carried out a Europa Check on 27 June 2006, and contacted the HMRC National Helpline on 27 June 2006

Inspection of Goods

371.Mr Rashid in his second witness statement said that the Appellant engaged an independent stock inspection company, Aberdale Inspection Limited, at the freight forwarders to inspect, verify and check all stock bought and sold by the Appellant. The purpose of the inspection was to ensure that the mobile phones existed and that they had not been previously purchased by the Appellant. One of the Appellant’s employees was normally present at the inspection, and took photographs of the goods if permitted by the freight forwarders. The employee also applied the Appellant’s wrapping tape on the goods so that they were identified as the Appellant’s goods at the port or airport.

372.The Appellant instructed Aberdale to carry out a 100 per cent inspection of the goods and take a 10 per cent sample of the IMEI numbers. Aberdale was also required to fax a full inspection report and e mail the IMEI numbers to the Appellant. The 100 per cent inspection involved counting the number of cartons on each pallet, and opening a random number of the boxes within each carton to check that the box contained the correct model of mobile phone.

373.The Aberdale inspection reports gave details of the mobile phones, type of inspection, IMEI scan rate [40], whether the phone IMEI matched that on the packaging, the language of the keypad and manual, and a reference number identifying the person(s) who had carried out the inspection. The Appellant paid an inspection fee of 10 pence per phone to Aberdale.

374.HMRC as part of its case prepared a record of the inspection position for each transaction, which was compiled from the faxed instructions and the inspection reports contained in the deal packs [41]. Mr Rashid was cross-examined on purported anomalies identified in the record:

(1) Deals 1-5 (March 2006) the inspection requests were faxed to Aberdale between 18.20 and 18.22 hours on 13 March 2006. The Aberdale inspection reports for these deals were also dated 13 March 2006 and indicated that the inspections were carried out by 003-030 (the references identifying two individuals). HMRC suggested that the claimed inspection of 21,000 mobile phones in a period of just over five hours was not credible. Mr Rashid disagreed, pointing out that the inspection was carried out by a team of five to six persons not just the two persons identified in the report. According to Mr Rashid the team could complete a 100 per cent inspection of goods within a short period of time. Mr Rashid also explained that a 100 per cent inspection was restricted to counting the number of cartons within a pallet and opening a small number of cartons to check the mobile phones within their individual boxes. Mr Rashid accepted that Aberdale would have to open up four layers of packaging to reach a mobile phone and put back the layers once the inspection was completed.

(2) Deals 9a-d (March 2006): the Appellant sent an inspection request to Aberdale at 14.27 on 23 March 2006.after the goods had left the freight forwarders and more than one hour after the time when they were checked in at Eurotunnel. Mr Rashid stated that the Appellant always instructed Aberdale by telephone to carry out the inspection. The faxed instructions post dated the telephone conversation and in effect confirmed its contents. The Appellant, however, kept no records of when the telephone conversations took place.

(3) In Deals 15a-19c (March 2006): the Appellant requested Aberdale to carry out an inspection at 16.03 hours on 27 March 2006. The inspection reports were also dated 27 March 2006, except three reports which were dated 27 February 2006. Mr Rashid stated that the date of 27 February 2006 was a clerical mistake. HMRC suggested that a claimed inspection of 23,000 telephones in nearly eight hours from 16.03 on 27 March 2006 was not credible. Mr Rashid disputed that.

(4) In deal 3 (04/06): Aberdale sent the inspection report to the Appellant at 09.59 on 20 April 2006, which was the day after the vehicle carrying the Appellant’s goods had checked in at the port. The same happened in deals 6a-b (04/06) where Aberdale sent the inspection report some four days after the goods had travelled, and five days after the date of the transactions. Further examples of Aberdale reports being sent after goods had apparently checked in at ports were at April deals 7, 8, 9, 10, 12 and 14. Mr Rashid stated that in effect the date of the inspection reports was irrelevant because Aberdale advised the Appellant of the inspection by telephone once it had been completed. The Appellant kept no records of the telephone conversations.

375.The Appellant requested Aberdale to provide in each of the March deals a full inspection, a 10 per cent IMEI number scan, an e-mail of the IMEI scan and an inspection report. In respect of the April deals, the inspection reports made a nil IMEI return. At first Mr Rashid said this was a clerical mistake by a new employee who struck out the request for IMEI scans. Despite this error Mr Rashid insisted that Aberdale still scanned the IMEI numbers in response to Mr Rashid’s verbal instruction in May 2005. Mr Rashid, however, accepted later that the Appellant did not receive the April scans, which he only became aware of when HMRC requested evidence of the scans. There were also no inspection reports for the June 2006 deals Mr Rashid explained that the Appellant never asked for inspections on sales to UK traders because they did not have the same business risks as overseas sales.

376. According to Mr Rashid, Aberdale took a 10 per cent sample of IMEI numbers for each consignment, and checked them against a database of IMEI numbers compiled from previous inspections of Appellant’s goods. After the end of each inspection Aberdale e-mailed the IMEI numbers to the Appellant and also provided it with a copy of the IMEI records on a CD on a regular basis.

377.Aberdale was unable to supply the Appellant with a copy of its IMEI records for the purposes of the Appeal proceedings. In a letter to the Appellant dated 7 March 2007, Aberdale stated that:

“With reference to your facsimile of today, note that all your company IMEI data, at regular intervals was sent on CD rom. Due to technical problems in our company computing system, there has been an irretrievable loss of your company data and we are unable to provide you with the information you have requested.”

378. Equally the Appellant was unable to produce copies of the e mails and CDs of the IMEI records sent by Aberdale. According to Mr Rashid, the e mails were on the Appellant’s e mail address which had been closed down for almost four years, and to which the Appellant no longer had access.

379. Mr. Rashid claimed that the missing CDs were in HMRC’s possession. According to Mr Rashid, HMRC had not returned CDs containing two years worth of IMEI numbers included in the Appellant’s business records which had been seized by HMRC in November 2006.

380.Officer Kenrick’s evidence was that there were 16 CDs found in the uplifted material from the November 2006 visit. HMRC’s record [42] of the property seized from the Appellant’s premises contained just two references to CDs: PN5 being a wallet containing CD style discs and Myers 005 containing one CD. The receipt also recorded such items as torn pieces of paper from a bin and 4 x pink post it notes. According to Officer Kenrick, the 15 CDs in the wallet contained only pornography whilst the other CD (exhibit SK/2) had limited IMEI information. Officer Kenrick did not take part in the November 2006 visit. His evidence was limited to the outcomes of his search of HMRC’s archives for the Appellant’s records that were seized at the visit.

381.Mr Rashid questioned whether HMRC had sufficient time in November 2006 to record everything it seized from the Appellant’s offices. Mr Rashid pointed out that the search and the recording was completed within one hour and forty minutes. Mr Rashid challenged the accuracy of the list exhibited to Officer Kenrick’s witness statement.

382.The information on the one CD (exhibit SK/2) consisted of one photograph of a way bill, 15 IMEI readings for transactions conducted from 21 to 27 January 2006, and the associated inspection reports. Mr Rashid was unable to give a satisfactory explanation for the inclusion of the inspection reports on the CD. The history of the electronic files of the IMEI readings and reports stored on the CD showed that they were modified on 17 February 2006 at 14.13 hours [43]. The file information on the CD was in an unprotected format which allowed the Appellant to manipulate the IMEI data if it so wanted. Mr Rashid accepted that the Appellant could add and delete the information on the CD but queried why the Appellant would want to do that.

383.Mr Rashid’s second witness statement referred to a letter from Aberdale dated 11 September 2007, which the Appellant solicited following HMRC’s first decision of 17 August 2007. The Appellant sought confirmation from Aberdale of its procedures for carrying out IMEI scans. Aberdale’s response did not mention that it had lost the Appellant’s records despite the fact that Aberdale purportedly reported the loss to the Appellant some six months earlier. Mr Rashid produced Aberdale’s letter of 7 March 2007 reporting the loss as an exhibit to his fourth witness statement dated 19 November 2010.

384. At the request of HMRC the Appellant in August 2006 produced a list of 500 IMEI numbers for Nokia N70 mobile phones which were the subject of the April 2006 deal 10. Officer Wald’s interrogation of this list against the NEMESIS database showed that 215 of the 500 numbers had been scanned on at least two previous occasions by HMRC which suggested that a substantial proportion of the phones had been part of circular trades in and out of the UK. The Appellant challenged the reliability of Officer Wald’s results by attacking his methodology. The Tribunal, however, considered that Officer Wald’s re-examination demonstrated the soundness of his methodology and the reliability of the data produced.

385.The provenance of the 500 IMEI numbers, however, was brought into doubt by Mr Rashid’s cross examination on the April 2006 IMEI scans which revealed that the Appellant had made no requests in April for IMEI scans, and no reports of the scans had been sent by Aberdale. Mr Rashid only became aware of the Appellant’s failure to request IMEI scans for the April deals when HMRC asked for them in August 2006. Bizarrely Mr. Rashid nevertheless insisted that Aberdale had scanned the 500 numbers prior to the completion of the April 06 deal 10 even though the Appellant had not requested them. Mr Rashid refused to accept responsibility for not checking the possible contamination of April deal with goods of dubious integrity. In his view the responsibility rested with Aberdale which had been instructed by the Appellant to carry out the necessary checks on the consignments..

386.HMRC’s record of the inspections revealed that the Appellant’s trades between March and June 2006 were of mobile phones with two pin chargers unsuitable for the UK market. Also the majority of the phones sold by the Appellant had inappropriate manual languages for its customer’s country. Mr Rashid stated that it was not unusual for the Appellant to trade in phones with two pin plugs. According to Mr Rashid, people sold the European specification mobile phones all over the world, since 90 countries used two pins whilst only a handful had three pin plugs. Equally English was the most popular language in the world, which was why it was the preferred keypad and manual language. Nokia Care on 10 February 2008 confirmed that the English language was pre-installed in the software for Nokia phones worldwide, and that English was not market dependent like other languages.

Insurance Arrangements

387.Mr Rashid stated that insurance was a matter of commercial risk and one of the steps the Appellant took to secure the goods and minimise the risks. The Appellant used specialist freight forwarders, Interken, to store, ship and transport goods.

388.Mr Rashid explained that he took out insurance when transporting the mobile phone consignments because he did not want to suffer any commercial risk. Mr Rashid, however, acknowledged that at the time of transportation the Appellant did not own the phones.[44] The commercial risk according to Mr Rashid was that if the consignments were actually lost the freight forwarder would hold the Appellant liable in view of its instruction to release the consignments[45]. Mr Rashid still maintained his position even when it was pointed out that the Appellant’s supplier (Our Communications) bore the risk until the funds had been cleared on the Appellant’s purchase of the phones[46].

389.The Appellant had insurance policies with Norwich Union and Interken. The Norwich Union Insurance was arranged through a professional broker, Michael Hall Associates. The Interken policy was taken out with Willis Limited, a multinational insurance broker.

390.The Appellant’s insurance policy with Norwich Union arranged through Michael Hall and Associates covered the period from 5 July 2005 to 4 July 2006. The premium on this policy was £69,825 and the conditions included an insurance limit for goods on any one vehicle/vessel/aircraft as £1.5 million. The Appellant produced a letter from Robert Finlayson of Michael Hall Associates Ltd dated 12 September 2005 stating that the insurers had agreed to increase the aircraft limit to £2.5 million. The Appellant supplied a copy of the endorsement on the Norwich Union policy dated Friday 16 March 2007, stating that from 2September 2005 the aircraft limit was increased to £2.5 million with the vehicle limit remaining at £1.5 million. Mr Rashid admitted that he did not know what had happened to the original policy and that he had only asked for it after HMRC had begun verifying the disputed claims.

391.Mr Rashid also produced another letter from Robert Finlayson dated 19 February 2006 advising that Norwich Union was unable to provide increased road vehicle insurance to £2.5 million. The letter noted that the Appellant had arranged additional insurance through Interken via Willis Ltd on policy CK1803/26283901. Mr Rashid accepted that the signatures on Mr Finlayson’s letters of 12 September 2005 and 19 February 2006 were different. Mr Rashid, however, pointed out in re-examination that Mr Finlayson used his first name on one of the letters. Mr Rashid said that he told Mr Finlayson about the Interken policy because he alleged the two insurance companies were working together.

392.The Appellant produced a copy of a contract for insurance services from Interken dated 19 February 2006. The insurance services were supplied under a master policy from Willis Limited. Under its terms the Appellant paid a premium of 0.16 per cent of the value insured for transits to and from Dubai and or Hong Kong, and 0.0017 per cent (hand written amendment) in respect of all other transits. The contract stated that a notification of goods, mode of transport, value and route must be sent to Interken for each and every consignment before commencement of a transaction. The Willis Ltd insurance policy stated that the single vehicle limit was $1.5 million. Interken wrote to the Appellant containing an insurance schedule stating the same limit on 31 January 2006. The Appellant also produced a letter from Interken dated 21 February 2006 stating that with effect from 1 February 2006 the single vehicle limit had been increased to $4.5 million. Mr Rashid stated that Interken unilaterally increased the limit because it knew how much stock was going in the vehicles.

393.Mr Rashid stated that each insurer (Norwich Union and Willis Ltd) knew of each other’s interest. Mr Rashid accepted that the Appellant had two insurance policies covering the same risk. According to Mr Rashid, the policies ran parallel to each other with one paying 40 per cent and the other 60 per cent of any potential claim. Mr Rashid stated that the premium for the Norwich Union policy was paid at the beginning of the year and provided cover for that year. Whereas the Interken policy would be activated for specific consignments. The Appellant produced no document evidencing a co-insurance arrangement between Norwich Union and Interken.

394.HMRC in its opening submissions collated a schedule of the Appellant’s insurance arrangements (Appendix 4). The value of the phones in deals 4, 5 and 15 of 03/06 quarter was below the cover provided by the Norwich Union. The Appellant, however, still paid the Interken premium because of the parallel arrangements between the policies and that Interken automatically insured every consignment. Conversely, the Appellant allowed shipments to be made in deals 6, 7 and 10 to 13 [47] that significantly exceeded the combined limits of the Norwich Union and Interken insurance. Mr Rashid’s explanation in respect of deals 6 and 7 was that the Appellant made a mistake, and should have instructed Interken for the goods to be transported in two vehicles. In respect of deals 10 to 13 Mr Rashid asserted that Interken had made a mistake which had not been picked up by him.

395.Appendix 4 also showed that the Interken certificates bore the wrong chronological certificate number in deals 1 to 4 of 04/06. Mr Rashid accepted that the insurance certificates were created after 13 April 2006, the date of deals 1 to 4. Further, five Interken certificates did not appear to cover the Appellant’s shipments because the destination named on them was not to where the goods were shipped (deals 5, 6, 12 & 14 of 04/06). The Interken certificate for deal 13 was for a journey from Paris to London which was for the goods travelling the wrong way. According to Mr Rashid, these errors in the certificates were clerical errors on the part of Interken.

396.Appendix 4 contained a summary of the Appellant’s invoices from Interken and payments made to them. The summary showed that the Appellant had paid £30,000 to Interken in excess of the premium payments known on the insurance certificates produced by the Appellant. Mr Rashid believed that the ₤30,000 represented the insurance payments for the February consignments. Mr Rashid was permitted to use his best endeavours to produce the missing insurance documents, which he did with the Appellant’s final submissions date 17 December 2010. The amount recorded on the missing certificates was ₤13.6 million which produced a premium of about ₤23,000.

The Appellant’s Documentation Produced for the Chains of Transactions

397.The Appellant disclosed extensive documentation in respect of the disputed deals which typically included for each transaction: supplier’s invoice; the Appellant’s purchase order, pro-forma invoice and invoice, terms of sale agreement; completed supplier’s declaration; Europa check on the VAT number; Aberdale inspection report; shipping instructions; transport arrangements (CMRs, waybills etc.); certificate of insurance; payment details including intra-account transfer and bank statement; and release instructions.

398. HMRC highlighted what it perceived to be inconsistencies in the documentation, which in its view established the contrived nature of the transactions. The Appellant disputed the interpretations placed by HMRC on the perceived inconsistencies.

399.In deal 1 the Appellant sent its purchase order to Elite at 16.43 on 13 March 2006. Elite had not sent its purchase order to The Export Company until 16.53 on 13 March 2006 and therefore had not purchased the goods that it was selling to the Appellant despite stating in its supplier declaration sent at the same time that the goods had been inspected by it and were bought at a current market value. The same pattern occurred in deal 3. Also in deal 1 the third party payment instructions from both The Callender Group and MG Components appeared to have been cut and pasted across the two documents indicating that one person has produced documentation for both companies.

400. In deal 2 the Appellant sent its pro-forma invoice to Olympic Europe at 17.33, the document being returned to the Appellant signed at 18.33. The Appellant sent its shipping instructions to Interken at 18.16 before it had received the signed pro-forma invoice. The Appellant pointed out that Olympic Europe was based in the Netherlands which was one hour ahead of UK. Thus the correct timing of the Olympic Europe’s fax was 17.33 which was before the timing of the shipping instructions.

401.In deal 4 the Appellant sent a pro-forma invoice to Midcom at 13.29 on 13 March 2006 at a time when it had not even sent a purchase order to Globcom (it was sent at 17.42 the same day) and before the Appellant had even requested that the goods be inspected at 18.21. The Appellant stated that the pro-forma invoice sent to Midcom was a proposal of sale. Further the deal would have been agreed orally with documentation evidencing the deal being faxed subsequently. Also in deal 4 Globcom’s invoices had different signatures. The Appellant pointed out that it was Globcom’s trading practice to send a pro-forma invoice by fax which was stamped, “Please Pay” and an invoice without a stamp which was sent after payment had been received. These documents also bore different signatures.

402. In deal 5 the Appellant instructed Interken to ship the goods on invoice 446 to Midcom at 13.17 on 13 March 2006 before it had sent or received back either a signed pro-forma invoice or signed terms of sale agreement. The Appellant stated that Midcom was a company based in Dubai which was a minimum of three hours ahead of the UK. Midcom returned the pro-forma invoice and signed the terms of sale agreement at 16.08 local time which would have been either 12.08 or 13.08 in the UK.

403.In deal 5b, the Appellant appeared to have sent its pro-forma invoice to the freight agent Delacher which have stamped it and returned it to the Appellant. Delacher was not purchasing the goods. This also occurred in deal 8b. The Appellant denied that it sent the pro-forma invoice to Delacher. The Appellant’s freight forwarders, Interken, mistakenly included the pro-forma invoice with the CMR and shipping instructions sent to Delacher which stamped all the documents and returned them to Interken which in turn forwarded them to the Appellant.

404.Also in deal 5 The Export Company requested that Interken confirm that the goods were: original manufacturer specification, solely owned, in free circulation and ready for physical inspection. The document was dated 13 March 2006 but was only sent and received on 30 March 2006, some 15 days after their despatch.

405.In deal 6 the Appellant sent their terms of sale agreement to Olympic at 14.55 on 20 March 2006 but had not sent a purchase order until 16.54 on the same date. The Appellant stated that its deals were completed over the telephone and documented in writing after the event. The same pattern occurred in deal 7. Olympic’s declaration to the Appellant made no sense as it was a supplier declaration when they were the Appellant’s customer. The Appellant did not appear to have questioned this document or its function. Mr Rashid in cross-examination said it was a clerical mistake.

406. In deal 6 Our Communication’s purchase order to The Export Company for deal 6 was dated 20 March 2006 but was only sent back to Our Communication Limited on 11 April 2006. The transaction, however, still proceeded on 20 March 2006.Also in deal 6 the third party payment instructions from both Alpha Sim and MG Components have been cut and pasted between the two documents, both of them bearing the phrase: to advise you of the payments to following account.

407.In deal 8 the Appellant instructed its goods to be shipped at 16.26 on 22 March 2006 before it had received a signed and stamped sales agreement at 21.24. The same pattern of instructing goods to be shipped before terms of sale agreements were signed occurred in deal 9. The Appellant stated that its customer, Midcom, was a Dubai based company which was three or four hours ahead of British Summer Time. Thus when Midcom sent the documents it would have been 17.24 in the UK. The deal in any event would have been concluded verbally and documents sent after the event. Further the Appellant asserted that it would have only instructed Interken once the deal had been agreed usually verbally. Those instructions specifically stated that the goods were ON HOLD and were not released until 24 March 2006, two days after the pro-forma invoice was received from Midcom. The Tribunal noted that the mobile phones were shipped to Delacher in Switzerland on 23 March 2006.

408.In deal 9a the Appellant instructed the goods to be shipped at 15.02 before the Appellant had even received Essential Trading’s purchase order at 15.08. The vehicle purportedly carrying the Appellant’s goods had checked in at Eurotunnel at 13.13 more than 1.5 hours before the Appellant had received a purchase order and before it had ordered them to be shipped. This pattern also occurred in deals 9b-d. Further Essential Trading’s customer declarations to the Appellant were sent on 11 April 2006 The Appellant pointed out that Essential Trading was based in France, where the time difference was one hour, in which case there was no discrepancy in the timing of the purchase order. Also the parties sent their faxes after the deal has been agreed.

409. Further, in deal 9 the Appellant’s supplier’s declaration and that of Realtech appeared to have been cut and pasted between the two documents as they were strikingly similar in form and content. The Appellant denied that it had knowledge of Realtech’s document, although it was not uncommon for traders to amend their terms and conditions to be in line with other traders in the same industry. The Appellant disputed that Realtech’s document was a cut and paste job of the Appellant’s declaration. The Appellant pointed out the misspelling of the declaration in the Realtech document. Further Realtech’s document did not contain a clause stating that no third party payments were made, and the terms in clauses 1 – 6 were phrased differently. Mr Plowman took a different view from the Appellant. He agreed with HMRC counsel that the documents were virtually identical subject to the qualifications about third party payments and the bank account details. Mr Plowman confirmed that the declaration in the Realtech’s document replicated the wording of the draft prepared for the Appellant. Mr Plowman did not know of the existence of Realtech, and assumed that it must have copied the declaration, which was done without his consent.

410.In deal 10 the Appellant instructed Interken to ship the goods at 17.16 on 24 March 2006 but the vehicle purportedly carrying the goods did not reach the Eurotunnel check in until midday on 27 March 2006. The same delay occurred in deal 11. The goods for both these deals were purportedly carried on the same vehicles as those in deals 12-13 and on the same occasion. The Appellant explained that the 24 March 2006 was a Friday, which meant that the goods were shipped on the following Monday.

411.The majority of the goods in deal 10 were purchased by Neo Abaco but there was one set of goods for Olympic Europe BV. Neo Abaco instructed the Appellant to deliver its goods to the freight forwarder World Wide Logistics BV in Holland. The director of World Wide has admitted taking care of fictitious consignments from the beginning of February to May 2006 and an employee of World Wide stated:

“I am familiar with the name Neo Abaco because I have done CMRs for Neo Abaco. These are the CMRs I told you about yesterday when I said that a driver comes round with CMRs which Martin Monster told me I had to sign and where there were no goods involved. Another employee of World Wide stated: “Sometimes, usually once a month, two Pakistanis would come round to our office. What exactly they were doing at out company I do not know. Martin Monster allowed them to use our facilities and computers. They also printed out invoices at our company, and the name Olympic Europe BV doesn’t ring a bell with me. This took up a lot of their time. Martin Monster was adamant that the name Olympic Europe BV should not appear in our records because he said they were a bunch of rogues. Why these rogues were then allowed to work at out office I don’t know.” The Director of a further Dutch transport company ML & Co BV has stated: “What I know is that the CMRs addressed to Olympic Europe BV and Nordic, which I think is from Denmark, were definitely wrongly signed because in these cases goods were never delivered.” The Dutch authorities concluded a report: “…it has emerged that a person called James, who was apparently involved with Olympic Europe BV, is the person who is thought to be putting people up to performing facilitating actions in respect of this flow of goods and paper thought to be fictitious”.

412. The value of the goods transported to Neo Abaco and Olympic Europe was £5,424,000, which was in excess of the Appellant’s claimed insurance limit.

413. The Appellant was unable to comment on allegedly fictitious consignments undertaken by parties who were not direct customers or suppliers of the Appellant. Mr Rashid in cross-examination explained that there had been a clerical error in respect of the documentation dealing with the transport of goods to Neo Abaco and Olympic Europe.

414.In deal 12 Shelford’s purchase order and the Appellant’s purchase order appeared to have had the terms and conditions cut and pasted between them as their font and content were exactly the same but for the poorly worded additional clause on the former document: If goods are not released on 27/3/06 deel will be null and avoid (sic). The Appellant disagreed with HMRC’s view about the similarities between the two documents. The Appellant identified the following differences Shelford’s document had eight clauses compared to seven in the Appellant’s document; contained punctuation with clause 6 in bold, and used the title Important Conditions whereas the Appellant had General Conditions.

415.In deal 14a-d the Appellant made two purchases from Elite. The Appellant purchased 12,500 Nokia 7610 on a purchase order dated 27 March 2006. Elite’s invoice reference I5006823 to the Appellant for the 12,500 Nokia 7610 stated: All goods remain the property of Elite Mobile PLC until full payment is received. ES paid Elite’s invoice value on 30 March 2006 giving Elite’s invoice reference in the payment narrative. The Appellant also purchased 12,500 Nokia 7610 from Elite on a purchase order dated 27 March 2006. Elite’s invoice reference I5006824 to the Appellant for the 12,500 Nokia 7610 stated: “All goods remain the property of Elite Mobile PLC until full payment is received”. The Appellant paid Elite £548,625.00 on 30 March 2006 giving Elite’s invoice reference in the payment narrative. The Appellant then paid the balance of the Elite invoice, £1,302,000.00 on 4 April 2006 again giving Elite’s invoice reference in the payment narrative. Based on this chronology HMRC contended that the Appellant did not have title to the mobile phones until 30 March 2006 and 4 April 2006 respectively.

416. In deals 14a-d the Appellant’s customer, Imaani, sent purchase orders to the Appellant for 25,000 Nokia 7610 on 27 March 2006. The Appellant sent terms of sales agreements and invoices for each purchase order referenced: 471, 472, 473, 474 and 475. Imaani paid the Appellant’s invoice values on 29 March 2006. The Appellant’s terms of sale agreement with Imaani stated that at the time of sale the Appellant would have title to the goods and that title would pass to the customer when full payment was received. HMRC submitted that the Appellant under this agreement was to pass title to Imaani on 29 March 2006 which it could not do because it acquired title to half of the goods on 30 March and title to the other half on 4 April 2006. According to HMRC the Appellant was, therefore, in breach of two of the conditions of its sale agreement.

417.The Appellant released the 25,000 Nokia 7610 to Imaani on 29 March 2006. Thus according to HMRC the Appellant released goods to Imaani that it did not have title to, in breach of its own terms of sale agreement and in breach of the terms of Elite’s invoice.

418.The Appellant in response submitted that in commercial transactions title can pass when the parties agree it so passes. Further title in the goods traded by the Appellant passes to the Appellant when goods are released to the Appellant by the specialist freight forwarder who is acting upon instruction from the Appellant’s supplier. Title passes to the Appellant’s customer when the Appellant instructs the freight forwarder to release the goods to the customer. Release generally takes place when payment has been made. Also SHIP ON Hold means that the buyer (eg the Appellant) is entitled to ship the goods even though title has not passed. Finally the original contractual terms remained that the purchaser had undertaken to pay 100 per cent of the price after inspection. However, the parties agreed to those goods being shipped on hold notwithstanding that payment has not been made. Also according to the Appellant it was most unlikely that a freight forwarder would agree to transport, release or otherwise deal with goods without satisfying itself that the party giving such instructions was entitled to do so. The Appellant asserted that the arrangements described above were common practice in wholesale commodity market transactions.

419.In Deal 19c the Appellant amended its release instruction after the event. The Appellant denied any wrongdoing with the amendment, which was done in manuscript for its own records for the purpose of correcting a clerical error.

420.The supplier declarations of Uni-Brand and Northwest have been cut and pasted between the two documents as they both bear the phrase: All relevant commercial documentation in relation to the purchase of these specific is held by us. The Appellant stated that the reasons for the similarities in the documents were outside its knowledge.

421.In deal 3 (04/06) the Appellant instructed Interken to ship the goods on 13 April 2006 but they did not travel until six days later on 19 April A similar delay occurred in deal 4. The Appellant pointed out that this deal took place over the Easter holiday. 14 April was Good Friday with Bank Holiday Monday on 17 April 2006.

422.In deal 8a (04/06) the Appellant sent its terms of sale agreement to MK Digital at 12.52 on 20 April 2006 with the document not being signed and returned until 16.39 on the same date. The Appellant had, without the terms of sale agreement being returned, instructed Interken to ship the goods. A similar pattern occurred in other deal 8 deals. The Appellant indicated that MK Digital was based in Cyprus which was two hours ahead of the UK. The document was, therefore, received at 14.39 hours UK time. Further the agreement was concluded in advance orally, and the faxed documents followed the event. The goods were not released until 16.52 on 21 April 2006.

423.In deal 13 (04/06) there was an eight day delay between the Appellant instructing Interken to ship the goods and them arriving at Eurotunnel. A similar delay occurred in Deal 15. The Appellant stated that the delays were due to the transport company and the intervention of the May Day Bank Holiday. The Appellant kept its customer updated with developments.

Consideration of the Evidence

Preliminary Matters

424.The oral hearing of this Appeal concluded on 3 December 2010. The argument between the parties have continued and developed until the end of April 2011 with the lodging of final written submissions and responses, and further submissions and responses on the High Court decision in HMRC v Brayfal Limited [2011] EWHC 407. The Tribunal in its consideration have addressed the further arguments, and not sought to contend that the scope of the arguments advanced by the parties went beyond the terms of the direction permitting additional submissions.

425.HMRC contended that there were no individual pieces of evidence alone that proved that the Appellant knew or should have known of the connection between the transactions subject to this appeal and the fraudulent evasion of VAT (although the KSC agreement came extremely close to that) and it was the totality of the evidence that, following Mobilx, the Tribunal should assess in coming to its conclusions.

426.HMRC submitted that the totality of the circumstances presented by the evidence in this Appeal painted an overall picture of a web of transactions lacking in commercial reality that were orchestrated across several corporate entities for the sole purpose of defrauding the Revenue of VAT due to it. HMRC’s primary submission was that the Appellant was part of this overall scheme to defraud the Revenue. A scheme that encompassed both the fraudulent defaults in 52 of the Appellant’s transactions, the dishonest contra-trading by Uni-Brand in the remaining 41 transactions and the fraudulent defaults by those in Uni-Brand’s broker chains. In HMRC’s view the totality of the evidence was compelling as to the Appellant’s actual knowledge of the connection between its transactions and the fraudulent evasion of VAT through a MTIC scheme. In the alternative HMRC submitted that the Appellant should have known of the connection.

427. The Appellant contended that it was a genuine trader which was demonstrated by Mr Rashid’s evidence, in particular his detailed evidence on the inspection process, his detailed knowledge about the different Nokia models, and the personal financial risk borne by Mr Rashid in building up the Appellant which had significant commercial outgoings. The Appellant argued that administrative errors in a small number of deal documents and discrepancies in fax timings were not indicators of fraud or contrivance, rather the everyday reflection of commercial realities in any genuine company, indeed had it been seeking to hide evidence of fraud, the paper trail would have been faultless. The Appellant submitted that HMRC had failed on the evidence to prove its case, and that the Appeal should be allowed.

428.The Tribunal’s starting point is the decision in Mobilx which emphasised that the test in Kittel was simple and should not be over-refined. The Tribunal should focus on the essential question posed in Kittel, whether the Appellant knew or should have known that by its purchase it was taking part in a transaction connected with fraudulent evasion of a VAT. The Tribunal considers this essentially a question of fact. The Court of Appeal in Mobilx clarified that the burden of proving knowledge rested squarely on HMRC on the balance of probabilities. Also the relevant time for determining knowledge or means of knowledge was when the Appellant entered into the transactions in question.

429. The Appellant argued that the Appeal raised fundamental principles of European law, in particular proportionality and legal certainty. In the Appellant’s view these principles of the VAT Directive trumped the objective of prevention of tax evasion which underpinned the decision in Kittel. The Tribunal reserves its consideration of the application of these fundamental principles until after its determination of the facts. If the Tribunal decides on the facts that the Appellant had no knowledge of the connection, it would render the analysis of the fundamental principles unnecessary. The Appellant was content with this approach, in view of its primary contention that it was sufficient to apply the law as formulated in Mobilx to the present facts for the Tribunal to conclude that the Appellant’s appeal should be allowed.

430.The Appellant, however, challenged the legal interpretation of the application of Kittel by the Court of Appeal in Mobilx. Further the Appellant argued that the decision in Brayfal was the first opportunity for an Appellate Tribunal to consider how the construct of contra-trading might fit in, if at all, with the principles established by Kittel. The Tribunal will examine the Appellant’s arguments in the round.

431. The Appellant raised various points regarding the Tribunal’s approach to the evaluation of evidence. The Appellant submitted that HMRC had to assert its case and prove it. The first step required HMRC to make clear the precise basis upon which it opposed the Appeal. The Appellant said that the case it had to meet was the one set out in the consolidated statement of case, and then later rather confusingly the one given in the decision letters. The grounds upon which HMRC opposed the Appeal was the same in both the decision letters and the statement of case and remained the same throughout the course of the Appeal proceedings, namely, that the Appellant knew or should have known that its transactions formed part of transaction chains connected with the fraudulent evasion of VAT.

432. Until its final response to the Brayfal decision, the Appellant did not develop its submission in relation to the actual facts relied upon in the statement of case or in the decision letters but instead restricted the submission to a point of law, which will be examined first by the Tribunal. The Appellant argued that HMRC pleaded in its decision letters that the circumstances were such that the Appellant’s right to input tax was denied which was contrary to the approach adopted by the Court of Appeal in Mobilx. The Court of Appeal in contrast used the expression that the circumstances were such that no right of deduction had arisen in the first place. In the Appellant’s view HMRC’s formulation of a loss of right was mutually exclusive of the Court of Appeal’s construction of fraudulent knowledge being outwith the scope of VAT.

433.The Tribunal’s considers the Appellant’s argument misguided in the sense that its primary submission was about a purported flaw in HMRC’s decision letters and or statement of case with the flaw being a disputed point of law not known at the time when the documents were prepared. The Appellant argued in relation to HMRC’s criticism of its Notices of Appeal that one does not need to plead the law. The Tribunal concurs with the Appellant’s rejoinder. The fact that the statement of case or decision letters did not address this legal point which may in any event be a matter of dispute was not a ground for saying that HMRC’s statement of case was flawed or that somehow HMRC had failed to disclose its case beforehand.

434.The Appellant’s reference to the loss of right/outwith the scope was in the Tribunal’s view directed more at its disagreement with the Mobilx decision, and the arguments concerning legal certainty which will be dealt with later in the consideration.

435.The Appellant in its final submission on Brayfal raised a new point on the supposed inadequacies in HMRC’s pleadings. The Appellant referred to HMRC’s allegation in its final submissions that the Appellant was set up to facilitate MTIC fraud from its inception. According to the Appellant, HMRC had not put this allegation in its statement of case, which was required by basic elements of pleading practice and procedural fairness. The Appellant referred to the decision in HMRC v Dempster [2008] EWHC 63(Ch) where Mr Justice Briggs at paragraph 26:

“[26] I emphatically disagree with that submission. First, the tribunal's summary of what was not put in cross examination is stated with clarity on no less than three occasions in the Decision and I was provided neither with a transcript, nor notes (whether by the tribunal itself or by the parties) of the cross examination with which to be in any position to conclude that the tribunal's summary of the cross examination was other than fair and accurate. Secondly, 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. In my judgment the tribunal's conclusion that it was constrained, notwithstanding suspicion, from making the necessary findings of knowledge against Mr Dempster (necessary that is to permit the consequences of the alleged sham to be visited upon him) was nothing more nor less than a correct and conventional application of that cardinal principle”.

436.HMRC’s case against the Appellant throughout these proceedings was that its transactions were connected with fraudulent evasion of VAT and that the Appellant knew or should have known of that fact. Proof of knowledge did not depend upon whether the Appellant acted dishonestly. The question for the Tribunal was whether having regard to objective factors the Appellant knew or should have known by its purchase that it was participating in a transaction connected with fraudulent evasion of VAT.

437.HMRC in its statement of case at paragraphs 25 to 40 set out the objective factors relied upon to establish that the Appellant had the requisite level of knowledge. HMRC in its opening submissions listed 18 bullet points to prove knowledge and 9 further bullet points on the should have known test. In paragraphs 43 to 50 of its opening submissions HMRC dealt with the Appellant’s first MTIC (HMRC’s wording) transactions to January 2006. HMRC devoted one day of cross examination to the events up to February 2006 including the KSC agreement. The cross-examination uncovered a fact not known to HMRC or disclosed by the Appellant prior to the proceedings which was that the KSC agreement had been extended for a further term of two years covering the period of the disputed transactions. The Tribunal’s reading of HMRC’s final submission was that in the light of its cross-examination of Mr Rashid it revised the strength of its evidence on the 2002 events and the KSC agreement, and gave it greater emphasis in its final submissions. In the Tribunal’s view the elevation of this evidence by HMRC did not fundamentally alter the nature of the case against the Appellant but was simply a product of the adversarial system whereby aspects of the evidence relied upon become stronger, whilst other aspects fall away.

438.The Tribunal does not consider the Appellant’s objection to HMRC’s reliance on its submission that it was set up to facilitate MTIC fraud from its inception fell within the territory of procedural unfairness. HMRC’s submission was simply that, a conclusion drawn from the evidence placed before the Tribunal. The question of whether the submission was correct or relevant to the dispute was a different matter and will be examined by the Tribunal when it evaluates the evidence.

439. The Appellant argued that HMRC did not challenge large sections of the evidence contained in Mr Rashid’s witness statements during the Appeal hearing. The Appellant attached a schedule of those matters to its response to HMRC’s written closing submissions which the Appellant said were not subject to cross-examination. The Tribunal adopts the appendix as part of its decision. The Appellant contended that HMRC was not entitled to invite the Tribunal to draw general conclusions adverse to it on fact specific topics where the Appellant’s version of those topics have not been challenged by cross-examination.

440.HMRC disagreed, pointing out that its case was clear from the outset. Mr Rashid can have been in no doubt that HMRC alleged he was an untruthful witness and that he knew that his transactions were connected with the fraudulent evasion of VAT. HMRC was only required to put to a witness matters in dispute. In HMRC’s view the Appellant had failed to understand the basis principles of cross examination and not differentiated between comment based upon factual evidence and that undisputed factual evidence itself.

441.HMRC cited the principle in Re Yarn Spinners’ Agreement [1959] 1 All ER 299 at 309 with reference to the specific complaint regarding cross examination on the Appellant’s due diligence. Devlin J said in Re Yarn Spinners’ that a party’s case may be put to any of the witnesses who deal with the matter in chief and it can then be relied upon by that party in the argument. In those circumstances there was no requirement for HMRC to put matters about the due diligence material upon which Mr Plowman was questioned to Mr Rashid. Equally there was no requirement to put to Mr Rashid matters which he said as part of his case were outside his knowledge.

442.HMRC also cited the First Tier Tribunal decision in Mobile Export 365 Ltd and other [2010] UKFTT 367 TC where at paragraph 171 the Tribunal accepted the submission of Mr Benson QC that it could rely by analogy on similar evidence and similar challenges where inconsistencies have not been put to witnesses:

“Above all, it is clear that those witnesses before the tribunal who had first hand knowledge of how the Axxia Group conducted its deals were less than open and honest in their evidence to the tribunal while others with such knowledge chose to give no evidence to the tribunal. On recurring occasions the evidence given by those individuals was inconsistent with the documentary evidence of the deals actually undertaken and the facts explored in the three Annexes to this decision. Many of those inconsistencies were put to the witnesses by counsel. Where they were not, the tribunal accepts the submission of Mr Benson QC that it can rely by analogy on similar evidence and similar challenges. The tribunal has indicated above why, where the documents referred to in the Annexes tell one story and the Appellants’ witnesses another, it prefers the evidence of the documents. The tribunal is satisfied that the Appellants were given the fullest opportunity in the extended hearings to make any point they wanted to make and to answer any point they wanted to answer about such inconsistencies”.

443.The Tribunal agrees with HMRC’s submissions on those matters which Mr Rashid said were outside his knowledge. The Appellant as part of its case stated that it did not, and could not, have had any wider knowledge of any parties involved in any of the transactions beyond knowledge of its suppliers and customers. Effectively the Appellant denied all knowledge of the factual circumstances outside its immediate transactions. The Tribunal considers cross examination of Mr Rashid on those matters unnecessary which would have only elicited the response: outside my knowledge.

444.The Tribunal intends to deal with the validity of some of the matters identified in the Appendix within the body of its factual findings, including those matters which were not relevant. The Tribunal, however, notes that a significant proportion of the Appendix related to Mr Rashid’s responses to HMRC’s witness statements. The Appellant appeared to be suggesting that if Mr Rashid was not cross examined on his responses the Tribunal was obliged to accept his evidence. Given the nature of these proceedings which has been characterised by extensive disclosure on both sides, the Tribunal questions whether it was proportionate for HMRC to put again all matters in dispute to Mr Rashid in cross examination. Mr Rashid has not been disadvantaged by the approach adopted by HMRC. The Tribunal had before it his responses to the specific allegations of HMRC, albeit in four witness statements. The Tribunal considers that it was entitled to evaluate Mr Rashid’s responses against the evidence, despite the absence of cross examination.

445.HMRC invited the Tribunal in respect of its fact finding to adopt the approach taken in the direct tax case of Hall (Inspector of Taxes) v Lorimer [1992] STC 599 by Mummery J at 612 and subsequently approved by Nolan LJ:

“The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and making an informed, considered, qualitative appreciation of the whole. It is a matter of evaluation of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all the details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another. The process involves painting a picture in each individual case.”

446. HMRC also contended that the Tribunal in determination on knowledge was not restricted to the examination of the facts of the Appellant’s immediate transactions. In support of its proposition HMRC cited Moses LJ in Mobilx at para.83 who could no better than repeat the words of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563:

“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 telephones 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.”

447. The Appellant argued that the judgment delivered by Christopher Clarke J in Red 12 must be approached with particular care. The proper approach to the treatment of VAT was clear, as set out in Optigen v Customs and Excise Commissioners [2006] STC 419 J/[47]:

“As the Advocate General observed in para 27 of his opinion, each transaction must therefore be regarded on its own merits and the character of a particular transaction in the chain cannot be altered by earlier or subsequent events”.

448.According to the Appellant the answer is not in a fine distinction between whether the character of a particular transaction is altered or discerned by earlier or subsequent events. The critical point is whether at the time the Appellant entered into a particular transaction the Appellant knew or should have known that the transaction was connected with fraud. In the Appellant’s view it plainly offended the fundamental EC principle of legal certainty for any reliance to be placed on any matter which the Appellant neither knew, nor should have known at the time of entering into its transactions.

449. The Tribunal considers that the Appellant has not made good its concerns about the approach advocated by Christopher Clarke J. The Appellant’s first argument related to the judgment in Optigen where the European Court of Justice stressed that each transaction must be regarded on its own merits. In the Tribunal’s view Christopher Clarke J addressed this particular point by emphasising that the purpose of having regard to the surrounding circumstances including reference to earlier or later transactions was to discern the true nature of the transactions not to alter it.

450.The Tribunal considers the Appellant’s second argument is a statement of the legal test to be applied by the Tribunal. The argument is not about the scope of the Tribunal’s fact finding exercise but what the evidence is required to prove. The question of whether the Appellant knew or should have known at the time of entering the transaction that the transaction was connected with fraud is the issue to be determined. The suggestion that the Tribunal’s fact finding is restricted only to those facts that the Appellant purportedly knew makes no sense because the extent of its knowledge is the issue.

451.The Tribunal agrees with the Appellant that it should not leap to the conclusion that the Appellant had the requisite knowledge merely because its transactions were part of a fraudulent scheme or its earlier transactions were questionable. The Tribunal accepts that it must be satisfied that each of the Appellant’s transactions was vitiated by knowledge of fraud on its own merits. The Tribunal, however, considers own merits should not be viewed in isolation without regard to the attendant circumstances and context.

452. The Appellant pointed out that so far as the March 2006 transactions were concerned HMRC’s case depended on direct deal chains which were said to be traced back to tax losses. In respect of the March deals it was not part of HMRC’s case that the Appellant purchased from an alleged defaulter. In fact the Appellant was always somewhat removed from the defaulter with a large number of intervening traders.

453.HMRC’s allegations against the Appellant in respect of the April and June deals concerned their connection with fraudulent contra-trading schemes with Uni-Brand acting as the contra-trader. The Appellant stated that it obtained its supplies from Uni-Brand in transaction chains where there was no tax loss to the Revenue. The tax loss arose in completely separate chains in which the Appellant had no involvement. There was an added complication in the June 2006 transactions with the Appellant allegedly performing the buffer role rather than that of a broker.

454. The Appellant contended that the Court of Appeal in Mobilx had wrongly interpreted the principles established by the decision of the European Court of Justice in Kittel. The Appellant submitted that Kittel had a narrow not broad scope of application, and that properly construed the principles established by the Kittel judgment applied only to the fraudster and his immediate counterparties. If the Appellant’s construction was correct the Appeals should be allowed because it was not the immediate counterparty to any of the fraudulent defaulters identified by HMRC.

455.The Appellant pointed out that as Community law is superior to domestic law the Tribunal should follow the decision in Kittel rather than the Court of Appeal judgment in Mobilx. The Tribunal considers the Appellant’s submission misconceived. This is not a situation where the domestic law was in conflict with Community law. The conflict was between the respective interpretations of Kittel by the Appellant and the Court of Appeal. The Tribunal decides there is no contest and that it was bound by the decision in Mobilx. The Tribunal adds that the Appellant’s interpretation amounted to a fraudster’s charter and contrary to the principles of legal certainty. If the Appellant is correct, it would enable sophisticated fraudsters to retain their rights to VAT repayments by distancing themselves from the sources of the VAT loss

456. The Appellant argued in the alternative that if Kittel had a broad construction, the legal test as set out in Mobilx had to be reconsidered in respect of transactions involving contra-traders. In this respect the Appellant believed that the recent Upper Tribunal decision in Brayfal provided helpful guidance on the position relating to transactions involving contra-traders. The Appellant referred to the following extracts from the judgment [2011] EWHC 407at paragraphs 16 & 19:

“The members began their detailed reasoning by saying that the clean chain (in which Brayfal found itself) was created before the dirty chain (§ 138). This was a vitally important point. In order for deduction of input VAT to be withheld, HMRC must prove, having regard to objective factors, that the taxable person, at the time of his transaction, knew or should have known that his transaction was connected with fraud. Where the impugned transactions are transactions in the clean chain this presents evidential 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 a fraud before it happens? If there is a regular course of conduct in which the trader knows that his transactions 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 member correctly dealt with its VAT (§ 149). Thus the members’ findings in §§ 138 and 149 were also relevant to, and supportive of, their rejection of the case based on actual knowledge. In a subsequent passage (§ 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 have been aware”.

19. The essence of contra-trading is that transactions in the clean chain are used to mask transactions in the dirty chain. There is no fraud in the clean chain. The dirty chain is where the fraud takes place. Accordingly in order for a trader in the clean chain to know or have the means of knowledge that his transaction is connected with fraud, he must either know or have the means of knowledge that the contra-trader is a fraudster; or he must know or have the means of knowledge of the fraud in the dirty chain. The members accepted Mr Kibbler’s evidence that he could only check Brayfal’s own customers and suppliers (§158). In other words they found that he had no knowledge or means of knowledge of the dirty chain”.

457. With reference to the Brayfal decision the Appellant contended that HMRC had to prove in respect of the contra-trades in the April and June 2006 transactions:

(1) Deliberate dishonest concealment by Uni-Brand of the fraudster’s fraud in the in the dirty chains, and

(2) Knowledge or means of knowledge on the part of the Appellant at the time of entering into its transactions of either (a) the frauds in the dirty chains, or (b) the contra-trader’s dishonest concealment.

458.The Appellant further argued that the decision in Brayfal had confirmed the principle established by the Chancellor in Blue Sphere Global Limited v HMRC [2009] EWHC 1150 (Ch) which was that in a contra-trade construct a trader had to be part of a conspiracy to defraud the Revenue if he was to be deprived of his right of deduction. In this Appeal the Appellant asserted that HMRC had failed to advance and prove a case of conspiracy against it, in which case there were no grounds for precluding the Appellant’s right of deduction in the April and June 2006 deals.

459.HMRC disagreed with the Appellant’s interpretation of the knowledge test for contra-trades. First HMRC submitted that the Brayfal decision was fact specific and not of general application. Next HMRC took issue with the contention that HMRC had to prove that the Appellant knew or should have known of either (a) the frauds in the dirty chains, or (b) the contra-trader’s dishonest concealment. HMRC submitted that the Appellant’s assertion was wrong in law. HMRC referred to the case of Megtian Limited (in Administration) v The Commissioners for HMRC [2010] EWHC 18 (Ch) where Brigg J rejected the Appellant’s assertion on knowledge at paras 37 and 38:

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

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

460.Finally HMRC disputed the Appellant’s submission that the knowledge test in relation to contra-trading cases is whether it was a conspirator in the fraud. In HMRC’s view the correct test is whether the Appellant knew or should have known of the connection with the fraudulent evasion of VAT. Brayfal cannot be read as altering the test in Mobilx.

461. The Tribunal agrees with HMRC that Brayfal was decided on its particular facts, which did not enlarge upon the Court of Appeal’s rationale in Mobilx. Further the Tribunal prefers HMRC’s construction of the knowledge test in contra-trading which is the same test in relation to all versions of MTIC fraud. The Court of Appeal in Mobilx applied the knew or should have known test when discussing the Chancellor’s decision in Blue Sphere, not a conspiracy test. Moses LJ at paragraph 68 said

“BSG and Mobilx are different. In both those appeals, the question arises whether the Tribunal applied the test in Kittel correctly. If it did not, the question then arises as to whether, on the application of the correct test, the true and only reasonable conclusion is that the trader knew or should have known that his transactions were connected with fraud or that there was no reasonable possibility other than they were was connected with fraud. If a decision either way would fall within the bounds of reasonable conclusion, this Court ought not to interfere”.

462.Equally the Tribunal considers Mr Justice Brigg’s explanation of Mr Justice Lewison’s analysis of contra-trading consistent with the knowledge test laid down in Mobilx. Thus in a fraud involving contra-trading the knowledge threshold was met if at the time of entering into its transactions the Appellant knew or should have known that the transactions were connected with the fraud even though at the time it might not know the precise details of the fraud, for example, whether its chain was a clean or dirty chain or whether contra-trading was necessarily involved at all.

463.The Tribunal will deal later with the Appellant’s contentions regarding the fact that its June 06 transactions pre-dated Uni-Brand’s broker transactions declared in its 08/06 VAT return.

464. The Tribunal is required to determine the following matters in respect of the disputed transactions:

(1) Was there a VAT loss?

(2) If so was it occasioned by fraud?

(3) If so were the Appellant’s transactions connected with such a fraudulent VAT loss?

(4) If so did the Appellant know or should it have known of such a connection?

465.The Appellant contended that it was not in a position to advance a positive alternative case in respect of the first three matters but was entitled to put HMRC to proof of its case. The Appellant pointed out that HMRC’s case was the result of a lengthy reconstruction of the events after they took place facilitated by the use of extensive statutory powers which were not available to the Appellant. The Tribunal does not consider that the Appellant has been prejudiced in the conduct of its Appeal by the manner in which HMRC has put together its case. HMRC alleged the existence of a sophisticated fraud, which by definition would require a substantial investigation and reconstruction of the events to reveal its true nature. HMRC has made full disclosure of its case, and bears the burden of proof. The Appellant has had the opportunity to test the reliability of HMRC’s case, and give evidence in support of its Appeal.

Was there a VAT loss?

466.The Tribunal is satisfied on the evidence that there was a VAT loss in each of the 19 transactions entered into by the Appellant in the 03/06 period, which can be attributed to a defaulting trader (The Callender Group (deals 1-3), Oracle UK (deals 4, 5,14-19), Alpha Sim (deals 6 &7), Flooring Centre UK (deal 8), and Realtech (deals 10 -13), and a hi-jacked trader, Walk and Talk (deal 9). The evidence showed that assessments had been raised against each of the defaulting traders and the hi-jacked trader, which had not been paid or challenged on Appeal by the said traders. The assessments included the VAT loss incurred on the deal chains which incorporated the Appellant’s 52 transactions. The Appellant did not contest HMRC’s evidence of a VAT loss in respect of each defaulting trader

467.The Tribunal finds that Uni-Brand had created a trading position in the 05/06 period whereby it offset £70.74 million due in output tax against £70.68 million incurred in input tax. The output tax was due on 135 acquisition deals for 988,500 mobile phones completed by Uni-Brand, which sold the mobile phones to 13 UK traders one of which was the Appellant (the clean chain). The 13 traders exported the mobile phones to ten EC and Dubai based customers. Uni-Brand claimed the input tax on 56 broker transactions which were traced back to tax losses of £35,077,174 occasioned by four companies: Termina Computer Services Ltd., ICM UK Ltd, Eclipse Windows Doors & Conservatories Ltd and Performance Europe Ltd (the dirty chain). HMRC raised assessments against the four companies for the outstanding VAT. The companies did not pay or appeal their respective assessment with the result that they have been wound up.

468.HMRC allocated the tax losses in Uni-Brand’s 56 broker deals to the 13 UK brokers in Uni-Brand’s 135 acquisition deals. Nine of the 56 broker deals were matched with the Appellant’s April 06 transactions. The tax losses on these nine deals amounted to ₤6.4 million which equated to the sum of VAT claimed by the Appellant in respect of its transactions completed in April 2006. The defaulting traders on the nine deals were: ICM UK Ltd, Eclipse Windows Doors & Conservatories Ltd and Termina Computer Services Limited. Officer Lam accepted that he had to jiggle with the 56 deals to arrive at the nine deals allocated to the Appellant but in the alternative he could have listed all 56 deals. Officer Lam stated that HMRC had disallowed the input tax claimed by the 13 brokers in the clean chains. The amount of input tax disallowed was about ₤35 million.

469.The Appellant did not challenge the VAT loss occasioned by Termina Computer Services Ltd., ICM UK Ltd, Eclipse Windows Doors & Conservatories Ltd and Performance Europe Ltd, and the validity of the subsequent assessments for unpaid VAT against them. The Appellant objected to Officer Lam’s jiggle to equate the amount of the VAT loss with the amount of VAT claimed by the Appellant. The Appellant argued that such a jiggle was incompatible with the principle of legal certainty. The Appellant’s objection did not go to the issue of whether there was a VAT loss in Uni-Brand’s 56 broker deals. HMRC in this instance adduced evidence which proved the totality of the VAT losses in the dirty chain. The Tribunal is satisfied that there were tax losses of £35,077,174 occasioned by four defaulting traders in the 56 Uni-Brand broker deals in the 05/06 period.

470.The Tribunal finds that Uni-Brand had created a trading position in the 08/06 VAT period whereby it virtually offset £7.92 million due in output tax on one set of transactions against £7.91 million claimed in input tax in respect of another set of transactions. Uni-Brand incurred the output tax on 16 acquisition deals of mobile phones which it purchased from one EU supplier and sold onward to three UK customers, one of which was the Appellant (clean chain). Uni-Brand’s input tax claim related to seven broker deals which were traced back to VAT losses of £4,265,460 with two defaulting traders: Mobiles 4 U and Mountgale Ltd (dirty chain).

471. HMRC raised assessments against Mobiles 4 U and Mountgale Ltd for the unpaid VAT, which have not been paid. Mountgale Ltd has since gone into liquidation. The evidence of the assessments was given by Officer Lam who relied on the entries in HMRC’s electronic file on the two defaulting companies. The Tribunal considers that Officer Lam’s evidence was sufficient proof of the existence of the assessments. The Appellant did not challenge the reliability of the information on the electronic files or suggest that Officer Lam was mistaken with his recollection. The Tribunal is satisfied that there were tax losses of £4,265,460 occasioned by two defaulting traders in Uni-Brand’s seven broker transactions in the 08/06 quarter.

472.The Appellant said that it appeared that Officer Lam had allocated all the invoices in Uni-Brand’s 08/06 broker deals to the Appellant’s 06/06 transactions. Officer Lam had not apportioned the invoices between Uni-Brand’s three customers (one of which was the Appellant) for its 16 acquisition deals. The Appellant argued that the allocation of the invoices in Uni-Brand’s 08/06 broker transactions to the Appellant’s 06/06 transactions was discriminatory and offended the EC law principle of equal treatment. According to the Appellant, some of the invoices should have been allocated to the other two UK traders which along with the Appellant acted as brokers in Uni-Brand’s acquisition deals. The Tribunal considers the Appellant’s argument in the same light as the jiggle one advanced in relation to the April 2006 deals. Under the Kittel test the Tribunal must be satisfied that there has been a tax loss occasioned by fraud. The Kittel test does not require that the tax loss should equate with the amount of input tax denied, as explained by Moses LJ in Mobilx at para. 65

“The Kittel principle is not concerned with penalty. It is true that there may well be no correlation between the amount of output tax of which the fraudulent trader has defrauded HMRC and the amount of input tax which another trader has been denied. But the principle is concerned with identifying the objective criteria which must be met before the right to deduct input tax arises. Those criteria are not met, as I have emphasised, where the trader is regarded as a participant in the fraud. No penalty is imposed; his transaction falls outwith the scope of VAT and, accordingly, he is denied the right to deduct input tax by reason of his participation.”

473.In the Tribunal’s view HMRC has discharged its burden of proving a tax loss in relation to the Appellant’s 06/06 deals by its unchallenged evidence on the losses occasioned by the actions of Mobiles 4 U and Mountgale Ltd in Uni-Brand’s 08/06 broker deals. HMRC did not have to prove that the amount of the losses of Mobiles 4 U and Mountgale Ltd equated exactly with the amount of the input tax claimed by the Appellant. Also there was no evidence that the apparent allocation of Uni-Brand’s invoices to the Appellant’s 06/06 deals resulted in improper double counting. The loss arising from Uni-Brand’s broker transactions was £4,265,460 which was considerably more than the input tax of £3,298,750, which had been denied to the Appellant in respect of its 06/06 deals. The Tribunal concludes that the evidence did not support the Appellant’s claim of discrimination and unequal treatment. Further the Tribunal questions the relevance of disputes about allocation to the issue of proof of tax loss.

474.The evidence showed that the defaulting traders, Alpha Sim and Oracle (March 06 deals 6, 7, 14 to 19) Termina, ICM, and Eclipse in the 05/06 contra and Mobiles 4 U in the 08/06 contra-trade were not the acquirers of the mobile phones in the UK. The acquirers were overseas companies which did not have a valid UK VAT Registration Number. Mr Justice Christopher Clarke J in Red 12 v HMRC [2009] EWHC 2563 at paras. 83-4 decided that the question of whether the defaulting trader was also the acquirer was irrelevant for the purpose of establishing a tax loss:

“83. The fact that descriptions of the classic or simplest form of MTIC fraud habitually refer to the defaulter as the importer (or vice versa) does not mean that a right to deduct input tax on the ground of MTIC fraud can only be denied if HMRC establishes that the defaulter was the original importer. No domestic or EU authority establishes that that is so, and such a requirement would, in my judgment, be contrary to principle. As the ECJ held in Kittel:

" a taxable person who knew or should have known that, by his purchase he was taking part in a transaction connected with the fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud"

and

" it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or ought to have known that, by his purchase he was participating in a transaction connected with fraudulent evasion of VAT.

84. In many cases of MTIC fraud the defaulter, i.e. the company which fails to account for VAT and beyond which HMRC will not have been able to trace the chain, will be the actual importer. But it need not be so. Y may be the actual importer who sells (or transfers possession of) the goods to A who sells to B. Both the actual importer and A may go "missing" and make no payment to HMRC at all. The goods may bypass the defaulter and be allocated by the freight forwarder directly to one of the buffer companies although input and output tax is accounted for by a buffer company earlier in the chain. The buffer company serves its function of preventing HMRC tracing back to the original importer. Third party payments may be made by purchasers in the middle of the chain cutting out those above. What is needed for an MTIC fraud to work is an importation without payment of VAT, a trader who disappears without accounting to HMRC for the output tax it has received, and an export which generates an entitlement to claim back input tax. The original importer will make the most profit from failing to pay over output VAT. For that reason the defaulter is usually the original importer; but any company in the chain which defaults at any stage in the chain will make a profit from not accounting for the VAT, assuming that it has sold on at a profit. In order to justify denial of the right to deduct input tax there must be knowing participation in a transaction connected with fraudulent evasion of the tax. If that is established, the right is lost. It would be inconsistent with that principle, and an unmerited boon to fraudsters, to require the authorities to prove that the defaulter was the original importer. In the present case the tribunal had evidence as to who was the defaulter in each of the 46 chains, and HMRC proved a full tax loss i.e. not just the difference between an input tax paid and an output tax not accounted for. None of the defaulters had accounted for output tax or claimed input tax.”

475.The Tribunal is, therefore, satisfied that VAT losses occurred in the Appellant’s March 2006 deals and in the Uni-Brand’s broker transactions of the 05/06 and 08/06 periods.

Were the VAT losses fraudulent?

476. The Appellant’s cross examination exposed the fraudulent nature of the tax losses. The Appellant pointed out in its closing submissions that its cross examination was directed at exposing the proportionality of HMRC’s denial of the Appellant’s input tax claims. Whatever the Appellant’s intention for its cross examination, the answers elicited from the Officers confirmed the fraudulent character of the losses. The Appellant did not concede that HMRC had discharged the probative burden of establishing that Uni-Brand had deliberately dishonestly concealed the fraudster’s fraud in the dirty chains. The Appellant, however, did not challenge Officer’s Lam’s evidence establishing Uni-Brand as a dishonest contra-trader. The Appellant’s questions of Officer Lam were principally directed at whether it knew of Uni-Brand’s role and of the existence of the dirty chains, and the issue of proportionality.

477.The Tribunal finds the following features in the trading of The Callender Group Oracle UK, Alpha Sim, Flooring Centre UK and Realtech:

(1) The details of their trading in terms of the goods traded, turnover, and location of trading partners differed significantly from the information supplied in the VAT 1 registration.

(2) Excessively high turnovers which were achieved in short periods of time, and bore no relationship with the trader’s business infrastructure.

(3) The high incidence of third party payments which had the effect of depriving the traders of the necessary resources to meet their VAT liabilities. In the case of Alpha Sim its FCIB bank account was controlled by Realtech.

(4) The use of fraudulent documents.

(5) Non payment of the assessments issued against them.

(6) The disqualification of their company directors except in Realtech. In the case of Alpha Sim its company secretary was convicted of dishonesty offences.

478.The Tribunal is satisfied on the above findings that the tax losses occasioned by The Callender Group, Oracle UK, Alpha Sim, Flooring Centre UK and Realtech in relation to the Appellant’s 18 deals in March 2006 were fraudulent.

479.The Tribunal is satisfied that the tax loss in the Appellant’s March 2006 deal 9 was fraudulent. The Tribunal finds that the allocation of the mobile phone consignment to Shakeel Ahmed, the proprietor of Walk ‘n’ Talk, was contrived. The allocation happened immediately after the de-registration of the original recipient of the consignment (S & S Garments). This indicated that the organisers of the fraudulent deals had a pool of VAT registration numbers which could be used in the event of HMRC taking steps to frustrate the deal. The Tribunal, however, is not convinced on the evidence that the VAT registration of Walk’n’Talk was hi-jacked. Mr. Ahmed’s lies to HMRC and general evasiveness were compelling evidence that Walk’n’Talk was the defaulting trader.

480.The Tribunal finds the following features in the trading of Eclipse Windows Ltd, ICM Ltd, Performance Europe and Termina Computers Ltd:

(1) The details of their trading in respect of the goods traded, turnover, and location of trading partners differed significantly from the information supplied in the VAT 1 registration.

(2) Excessively high turnovers which were achieved in short periods of time, often from a standing start.

(3) The failure to declare any of its transactions or render any VAT returns (Termina & ICM).

(4) The prevalence of third party payments which meant that they were unable to discharge their VAT liabilities.

(5) Non payment of the assessments issued by HMRC against them.

(6) The lies told by the directors and secretaries about the trading and documentation of their respective companies, and relationships with other traders.

481.The Tribunal is satisfied on the above findings that the tax losses occasioned by Eclipse Windows Ltd, ICM Ltd, Performance Europe and Termina Computers Ltd in Uni-Brand’s 05/06 broker deals (dirty chains) were fraudulent.

482.The Tribunal finds the following features in the trading of Mobiles 4 U and Mountgale Ltd:

(1) The details of their trading in respect of the goods traded differed significantly from the information supplied in the VAT 1 registration.

(2) The failure to render any VAT returns and the high turnover of £15 million achieved by Mobiles 4 U in the space of two days;

(3) . The director’s attempts to cover up the computer chip transactions by creating duplicate invoices and claiming that the company’s VRN had been hi-jacked (Mountgale).

(4) Non payment of the assessments issued by HMRC against them.

(5) The incidence of third party payments (Mobiles 4 U)

483.The Tribunal is satisfied on the above findings that the tax losses occasioned by Mobiles 4 U in Uni-Brand’s 08/06 broker deals (dirty chains) were fraudulent.

484.The Tribunal makes the following findings of fact in relation to Uni-Brand in respect of its dealings in the 05/06 and 08/06 VAT periods.

(1) The circumstances of the 2002 transactions whereby Uni-Brand achieved an increase in turnover (₤104.1 million) solely attributable to transactions connected with the fraudulent evasion of VAT.

(3) Uni-Brand’s 63 UK purchases in the six month of periods 05/06 and 08/06 were all traced back to a fraudulent tax loss.

(5) The fixed margins apparent in the 05/06 defaulter chains and the consistent length of those chains.

(6) Uni-Brand’s own fixed mark up in its 05/06 acquisition chains.

(7) The lack of commercial reality to the allocation arrangements in the 05/06 defaulter chains.

(8) The high incidence of anomalies in the inspection, export and invoicing documentation produced by Uni-Brand.

(9) The risks taken by Uni-Brand in releasing goods prior to being paid.

(10) Uni-Brand’s supplier Falcon’s clear involvement in fraud.

(11) Uni-Brand’s apparent trade with RK Brothers Limited ostensibly before it had any of the documents.

(12) The grouping of invoices to the Appellant indicating pre-ordained contra transactions split between multiple brokers.

(14) Uni-Brand’s creation of ex post facto due diligence documentation and its possession of the Appellant’s due diligence material on Olympic BV.

(15) Uni-Brand’s failure to carry out due diligence before it traded with its counterparties.

(16) The absence of a commercial explanation for both Globcom and Uni-Brand existing as separate corporate entities. T

(17) The absence of commercial practices in the way that Globcom was ran.

(18) The Experian credit report for Uni-Brand obtained Officer Lam showed a credit limit of ₤11,000 and a credit rating of ₤5,400.

(21) Uni-Brand was not run on ordinary commercial business lines.

485.The Tribunal is satisfied on the above findings that Uni-Brand knowingly operated as a dishonest contra trader in respect of its dealings in the 05/06 and 08/06 VAT periods.

Were the Appellant’s transactions (03/06, 04/06 & 06/06) connected with fraudulent VAT losses?

486.The Appellant argued that HMRC’s submissions on the necessary connections between the Appellant’s transactions and the fraudulent tax losses were contrary to the principles established in Kittel. According to the Appellant, HMRC contended that the necessary connection was made out either throughout the entire chain in a direct chain or indirectly through a linkage of two chains or indeed more in the contra trade construct. The Appellant, on the other hand, submitted that on a proper construction of Kittel, connection was limited to the immediate connection as between the fraudster and the counterparty. If that was correct HMRC had failed to prove the necessary connection between the Appellant’s transactions and the fraudulent tax losses. The Tribunal has already indicated [48] its preference for the Court of Appeal’s interpretation of Kittel to that of the Appellant, which was that the test in Kittel was simple and should not be over-refined (Moses LJ Mobilx at paragraph 59).

487.The Appellant did not challenge HMRC’s evidence on the tracing of the Appellant’s 03/06 transactions or the accounting mechanism deployed by Uni-Brand to offset its input tax claim against output tax which linked the clean transaction chains with the dirty transaction chains in Uni-Brand’s 05/06 and 08/06 VAT periods. The Appellant argued that it was not in a position to challenge the evidence which was gathered from HMRC’s use of its wide statutory powers of investigation and with the benefit of several years of hindsight.

488.The Tribunal is satisfied that the traced invoice chains for the Appellant’s March 2006 transactions as set out in Appendix 1 to HMRC’s skeleton demonstrated that each of the Appellant’s March 2006 transactions was connected to a fraudulent VAT loss.

489.The Tribunal finds that the Appellant in April and June 2006 purchased the mobile phones from Uni-Brand which the Tribunal has found to be a dishonest contra-trader concealing its own role in the fraud through its dealings with the Appellant. Further the Tribunal holds that Uni-Brand offset the impending input tax reclaims in its 05/06 and 08/06 broker transactions which were traced to fraudulent tax losses against the output tax liabilities on its onward sales to the Appellant. The Tribunal is satisfied on the above findings that the Appellant’s 04/06 and 06/06 transactions were connected to fraudulent tax losses.

Was there an Overall Scheme to Defraud?

490. HMRC invited the Tribunal to decide whether the evidence established an overall scheme to defraud VAT of which the Appellant was part by virtue of the disputed transactions entered into. HMRC argued that if the Tribunal found as fact the existence of an overall scheme to defraud, it would support the conclusion that such a scheme could not have worked without each party to the transactions knowing at least from whom to purchase, to whom to sell and at what price. The Appellant contended that many of the matters relied upon by HMRC were not put to Mr Rashid and in any event outside the Appellant’s knowledge.

491.The Tribunal intends to make findings on whether an overall scheme to defraud existed but reserve consideration of the relevance of such findings on the Appellant’s state of knowledge until after determination of those matters which the Appellant says were within its knowledge. In this respect the Tribunal will as a rule restricts its findings to the transactions beyond the Appellant’s immediate transactions.

492. The Tribunal is satisfied that there were flaws in the documentation of the deal chains which preceded the Appellant’s March transactions, which indicated that the fraud was not limited to the defaulting traders. The flaws included no VRN on invoice (deal 1 RK Brother’s invoice); no invoice produced (MG component’s invoice in deals 1,2,3,6 and 7); no invoice from Realtech to RK Brothers in deals 10,11,12 and 13; incomplete supplier declarations in deals 9, 14, 15 and 16, and documentation including false signatures (Steven Ellison in deals 14 – 19). The flaws showed fundamental shortcomings in the documentation of specific parties but also in the due diligence of their counterparties which demonstrated that the transactions served no commercial purpose.

493.The Tribunal finds that the length of the March 2006 deal chains from six to eight UK traders made no commercial sense. The length of the chains meant that the mark up achieved by the majority of the traders within the chains was minimal ranging from 0.02 per cent to three per cent. The inordinate length of the March 06 chains was in sharp contrast to the length of the Appellant’s dealings with Uni-Brand in 04/06 and 06/06 which consisted of two and three UK traders respectively. Finally the expert witness, Mr Fletcher, did not understand the commercial rationale for long deal chains involving mobile phones. In his view the longer the chain, the smaller the available margins for each individual traders. Mr Fletcher’s evidence countered the Appellant’s retort that HMRC with its criticisms of the long chains had failed to understand the nature of its business

494.The contrivance of the March deal chains was enhanced by the regular appearance of specific traders in the chains with the traders organised in defined clusters for particular deals. The defined clusters had no inherent commercial logic, constantly regrouping in defiance of previous trading relationships. In deal 5 The Export Company sold direct to Globcob; whereas in deal 8 The Export Company sold to Our Communications Limited which then sold onto Globcom. Similarly in deal 4 Euroquest Trading sold to Globcom, whereas in deals 15-19 Euroquest Trading sold to Northwest Trading which then sold onto Globcom..

495.The Tribunal finds a discernable pattern in the March 2006 deals of a new defaulting trader being introduced soon after the de-registration of the previous defaulting one. This was graphically illustrated with the movement of the stock allocation between Alpha Sim Limited, S & S Garments and Walk “n” Talk, indicating the existence of a pool of valid VRNs which could be used to frustrate the efforts of HMRC to stop suspect trading. In the Tribunal’s view the arrangements involving the replacement of de-registered traders demonstrated the orchestration of the deal chains for fraudulent purposes.

496. The orchestration of the March 2006 transactions was also indicated by the payments to third parties which did not appear in the deal chains, and had the effect of depriving the defaulting traders of the necessary funds to meet their VAT liabilities. Three connected Cypriot companies: CK Communications, E & I Trading and Rezaco and a French company Intertech Sarl figured prominently in the third party payments.

497.The Tribunal holds that Uni-Brand’s 05/06 and 08/06 dirty chains were characterised throughout with hallmarks of fraud which included no valid VAT invoices, no effective due diligence and third party payments [49].

498.Likewise aspects of the Uni-Brand’s clean chains involving the Appellant had questionable commercial credentials, for example, in the 04/06 deals the fixed low mark up of either 0.5 or 1 per cent for Uni-Brand and the high price paid by the Appellant’s overseas customers when compared with the price paid by Uni-Brand to its overseas supplier. In the 06/06 clean chain Falcon Trading the supplier to Uni-Brand directed Uni-Brand to make third party payments of ₤2.3 million to Artlons Trading and ₤3.7 million to Rezaco.

499. The connection between the dirty and clean 04/06 chains was highlighted by the role of the recipients of third party payments in the dirty chain, (Evolution Trading, CK Communications and Rezacco) acting as the suppliers of mobile phones to Uni-Brand’s suppliers, Falcon Trading and WTC Trading, in the clean chain.

500.The Tribunal’s findings on the money flows provided further indications of the fraudulent nature of the transactions, and the connections between them [50]. The Appellants contended that Officer’s Orr evidence on the FCIB analysis was unreliable, and that HMRC did not put the FCIB evidence to Mr Rashid. The Tribunal decided that the methodology adopted by Officer Orr produced a reliable depiction of the parties involved in the money flows associated with the Appellant’s deals under Appeal[51].

501.HMRC contended that there was no unfairness in not putting the FCIB evidence to Mr Rashid because of the Appellant’s case that it only knew its supplier and customer. In fact HMRC asked Mr Rashid about the circular money flow in March 2006 deal 1 about which he denied knowledge as he was only aware of the Appellant’s immediate counterparties [52]. The Tribunal decides that the Appellant suffered no unfairness from HMRC not putting the detailed evidence on money flows to Mr Rashid. The Appellant took the opportunity to test the reliability of the evidence. It was clear to the Tribunal from the Appellant’s case and Mr Rashid’s answers to similar questions Mr Rashid would have answered any questions put on the money flows as being outside his knowledge.

502.The Tribunal found that all the traders in the deal chains involving the Appellant except Elite Mobile and some of the defaulting traders had accounts with FCIB. Also all the transactions were in pounds sterling regardless of the country origin of the parties involved in the money flows. The Appellant argued that the arrangements of an internet bank facility offering immediate money transfers between accounts together with the use of a common international currency for all deals made good commercial sense. HMRC thought otherwise, considering it strange that apparently independent traders should choose the same obscure offshore bank facility in the Dutch Antilles. Equally HMRC argued it made no sense for either two Dubai companies or traders within the single Euro currency to deal with each other in pounds sterling.

503.The Tribunal decides that the common banking and currency arrangements for all the traders in the disputed deals went beyond mere coincidence, suggesting a high degree of co-ordination and control over their activities. These curbs on the operations of supposedly independent traders questioned the commercial arms length characterisation of their transactions. In the Tribunal’s view, the use of common off-shore internet banking and currency arrangements by the traders facilitated fraud. The Tribunal agrees with HMRC’s explanation for such a large number of traders from myriad different countries using pounds sterling:

“…in an orchestrated fraud where it is pre-determined at what price any given party is going to purchase and sell at and from whom the purchase and to whom the sale are going to be made, it would be a very significant additional complexity to use different currencies for some of those sales and purchases as it could not accurately be predicted what the exchange rates would be. The fraudsters’ aim is to keep the transactions as predictable as possible and being at the whim of international foreign exchange markets would have rendered the scheme almost unworkable”.

504. The Tribunal findings on the circularity of money flows were compelling evidence that the transactions were pre-ordained. Circularity of funds indicated that each party in the chain was aware from whom it must purchase, and to whom it must sell. Evidence of circular fund structures was prevalent throughout the Appellant’s three sets of disputed transactions including the clean chain (03/06 deals 7, 8, 9 and 10, 04/06 deals 1, 2, 5 and 13 and 06/06 deal 1).

505.The facts identified 28 participants in the movements of funds within FCIB where there was no evidence of any invoices between those parties for those transactions. Within the 28 participants there were specific companies that appeared regularly in the deal chains. The association of these regularly appearing companies with circular money flows and third party payments highlighted the systematic and orchestrated nature of the fraudulent transactions.

506.Four companies from the United Arab Emirates, Call Back Trading (7), Link Maze LLC (12), MIB Trading FZE (15), and Wall Street General Trading (8) were prominent in the money movements throughout the three sets of transactions. At least one of those companies appeared in every deal characterised by circular flows of money. The beneficial owners of Link Maze and MIB Trading and the director of Call Back were all from Gujranwala, Pakistan. The director of Call Back and the beneficial owner of MIB Trading shared the same surname (Butt), as did the beneficial owners of the Wall Street and Call Back accounts (Alshehi). The Appellant submitted that the commonality of surnames and place between the respective companies were of no significance. Gujranwala was Pakistan’s seventh largest city with a population of 1.4 million, whilst there were in excess of 200 entries with the surname of Butt in the telephone directory. The Tribunal disagrees with the Appellant’s assessment. The regular appearance of these companies in the Appellant’s deal chains, often appearing together in the circular money flows suggested that their other links through surname [53] and place were more than coincidental.

507.The three Cypriot companies: CK Communications, E & I Trading and Rezaco Trading which were involved in the third party payments featured prominently in the group of 28 participants. They too were linked companies. The directors of E & I Trading and Rezaco Trading were UK nationals, Ramin Rezaie and Shahin Rad Rezaie Moazen. The FCIB analysis revealed that the connected Cypriot companies were involved in money flows for the same transactions, and in circular money movements. Further Rezaco used third party payments received in one of the Appellant’s deals to fund another deal [54].

508.The prominent presence of connected companies in the money flows for the Appellant’s transactions, particularly the circular money movements, demonstrated the absence of market forces in the Appellant’s transactions, and underlined their contrived nature. The concrete example of Rezaco using third party payments to fund other transactions was evidence of orchestration.

509.The findings on money flows also revealed links between the participants in the 03/06 direct chains and the various chains involved in Uni-Brand’s contra trades. CK Communications and Rezaco, two of the Cypriot companies were suppliers to the Uni-Brand’s acquisition chains and defaulter chains. Olympic Europe BV which was a customer of the Appellant in the 03/06 period provided the funds for the Appellant’s customers in the April deals 1, 2, 7 and 13. Hi-Tec Electronics appeared in the movements of money in deals 1, 2, 4 and 5 of the 03/06. Hi-Tec Electronics acted as a direct supplier to Uni-Brand in 05/06. The director of Hi-Tec Electronic was Arif Rashid, the brother of the Appellant’s director, Mr Rashid.

510. The Tribunal identified [55] other striking similarities between the disputed deal chains in respect of participating companies, and the existence of established relationships between those companies which played a significant role in the deal chains. The similarities were as follows:

(1) Uni-Brand and Globcom were associated companies with the same director, same personnel and operated from the same premises. Uni-Brand and Globcom featured in 77 of the disputed 93 transactions.

(2) Shelford, Twenty First Traders and North West Trading appeared in the direct deal chains as either a supplier or customer of Globcom, and as a broker in Uni-Brand’s clean chains for the 04/06 contra trade.

(3) Global Trading Company featured in 24 of the transactions in the direct deal chains and in 21 deals of Uni-Brand’s 04/06 contra trade. Similarly RK Brothers took part in 15 transactions of the direct deal chains, and in all but two of Uni-Brand’s contra trades in 06/06. RK Brothers was also linked to Beatila which supplied the goods to Performance Europe one of the defaulters in Uni-Brand’s contra trades in 04/06.

(4) Four of the six Appellant’s customers in March 2006 deals appeared as customers in Uni-Brand’s April 2006 clean chain. The common customers were Olympic, Midcom, Essential Trading, and Neo Abaco.

511. The established trading relationships included:

(1) Since at least 2005 Globcom had been trading with The Export Company which appeared in 25 of the transactions in the direct deal chains. Uni-Brand had been trading with The Export Company from at least February 2006.

(2) Since 2002 Uni-Brand had traded with Our Communications Limited which took part in 20 transactions of the direct deal chains.

(3) Globcom and Uni-Brand had supplied Midcom which was the Appellant’s customer in deals 4, 5 and 8 in March 2006. Further Uni-Brand had been trading with Gold (the Appellant’s customer in 06/06) since at least February 2006.

512.The striking similarities emphasised the interconnections between the Appellant’s three sets of transactions and Uni-Brand’s 05/06 and 08/06 contra-trades with the associated companies of Uni-Brand and Globcom at the hub supported by a small cadre of companies. The existence of established relationships questioned the commercial purpose of certain deals with the interposition of other companies between The Export Company and Globcom (March 2006 deals), and Uni-Brand and Gold (June 2006 deals).

513.The Tribunal concludes that the hallmarks of fraud were pervasive throughout the Appellant’s three sets of transactions and Uni-Brand’s 05/06 and 08/06 contra trades which dispelled the notion that the fraudulent trades were the result of the actions of a few rogue traders at the distant ends of the various chains. The demonstrated connections between the three sets of transactions and Uni-Brand’s contra trades showed that they did not operate independently. The prominent roles played by a selective group of companies, most of which were connected, in the money flows and the transaction chains, highlighted the contrived nature of the arrangements. The cumulative effect of these findings established that the Appellant’s three sets of transactions and Uni-Brand’s contra trades constituted an orchestrated and systematic fraudulent scheme.

514.The fact that the Appellant’s transactions were part of a wider fraudulent scheme did not mean that the Appellant knew of their connection with the fraudulent scheme. The Appellant’s transactions must be considered on their own merits, which left open the possibility that the Appellant was an innocent dupe.

Did the Appellant know or should have known?

Introduction

515.The burden was upon HMRC to prove on the balance of probabilities that the Appellant was not an innocent dupe and that it knew or should have known at the time of entering the disputed transactions that they were connected with the fraudulent evasion of VAT. The evidential burden in relation to the Appellant’s knowledge, however, was likely to be a shifting one with HMRC proving a set of facts demonstrating the requisite state of knowledge which demanded an explanation from the Appellant. If the explanation was plausible the evidential burden shifted back to HMRC. The Tribunal’s enquiry turns now to the examination of the facts which the Appellant stated were within its knowledge and directly related to the disputed transactions. The Tribunal’s determination will follow broadly the headings of the HMRC’s final submission.

Was the Appellant an Entity Set up to Facilitate Fraud?

516.HMRC’s invited the Tribunal to consider whether the Appellant was set up to facilitate MTIC fraud. In HMRC’s view if the Tribunal concluded that the Appellant was so set up, it would be a very short step to decide that Mr Rashid knew that the disputed transactions were connected with the fraudulent evasion of VAT. HMRC contended that the following cumulative circumstances impelled the Tribunal to determine that the Appellant was indeed an entity established for the purposes of VAT fraud.

(1) The Appellant was registered for VAT as a sock and small garment company and dormant effectively from March 2002until September 2002 when it commenced trading in mobile phones.

(2) The massive turnover increase in the September 2002 quarter with the generation of hitherto unseen profit by the Appellant.

(3) The terms of the KSC agreement under which the Appellant was told to whom to sell and at what price.

(4) The Appellant’s compliance with the terms of the KSC agreement by selling mobile phones to the customers provided by KSC in deals with fixed mark ups.

(5) Payments of tens of millions of pounds being made by Mr. Rashid to a party other than his supplier (Kennyton) which was apparently a clothing shop because of a claimed problem with the supplier’s bank account.

(6) Kennyton’s default of about.£13 million of VAT that was supposed to be paid to it by the Appellant.

(7) The postponement of HMRC’s visit by the Appellant until after the Kennyton deals had been completed;

(8) Mr. Rashid’s lies to Officer Walters on 26 October 2002.

(9) Mr. Rashid’s evasive evidence in relation to the KSC agreement.

517. The Appellant contended that HMRC’s invitation was an unjustified distortion of its pleaded case and once again not put to Mr Rashid. Further HMRC had repeatedly taken Mr Rashid’s evidence out of context, and relied on transactions which were concluded in 2002 not within the scope of the deals currently under Appeal. The Appellant considered HMRC’s reliance on earlier transactions was of limited relevance, and patently unfair, holding a sword of Damocles over its head.

518.The Tribunal considers the evidence regarding the Appellant’s formation and the circumstances surrounding its VAT registration confusing. The Tribunal is not prepared to hold on the evidence that Mr Rashid was deliberately concealing the Appellant’s trade in mobile phones. Officer Wald’s testified that HMRC knew that the Appellant was so trading from a very early stage [56]. In October 2002 the Appellant disclosed to HMRC that it was trading in mobile phones.

519.The Tribunal finds the circumstances surrounding the trades with Kennyton in September 2002 had the hallmarks of fraudulent transactions. Kennyton was not a wholesale mobile phone trader despite the Appellant’s protestation that it had a connection with a retail phone shop. The making of third party payments by the Appellant was a strong indicator of fraud. The Tribunal, however, places no significance on the Kennyton trades which were completed in 2002. The probative value of the trades having hallmarks of fraud was outweighed by the prejudicial value. The fact that the Appellant may have been engaged in fraudulent trading in 2002 did not mean that it knew of the fraudulent nature of the disputed deals conducted in 2006.

520.The Tribunal equally is not convinced that Mr Rashid lied to Officer Walters. Mr Rashid’s explanation in cross examination that he was responding to questions on Kennyton was plausible in the absence of contrary testimony. The Tribunal, however, places weight on Mr Rashid’s answer when he said the KSC’s database was his customer’s database.

521. The Tribunal finds the totality of the evidence regarding the KSC agreement highly material to the facts of this Appeal as the terms of the agreement were in force at the time of the disputed transactions.

522.The Appellant asserted that Mr Rashid had been completely open and honest with HMRC about the KSC agreement. The Tribunal considers the Appellant’s submission questionable. Mr Rashid permitted HMRC to contact KSC as a result of an enquiry into the Appellant’s direct tax affairs regarding its claim for interest relief on a loan. Also the Appellant did not reveal the existence of the extension to the agreement in the pre-trial disclosure for these Appeal proceedings. The fact of the extension only came out at the hearing after extensive cross examination on the agreement. Mr Rashid’s offered a lame excuse for its non-disclosure: “You (HMRC) did not ask for it. That’s why it is not here”[57] .

523.The Tribunal was not persuaded with the Appellant’s contention that Mr Rashid’s evidence on the agreement was taken out of context by HMRC. Mr Rashid was caught out by the cross examination and forced to admit that he had sell to whoever KSC told him [58]. The fact that Mr Rashid was caught out suggested that he had something to hide.

524.The Appellant’s construction of clause 3 to the KSC agreement was strained and unclear as to the inference the Appellant was inviting the Tribunal to draw. The terms of the agreement were explicit. The Appellant had no choice over its customers or the price charged. Mr Rashid’s evidence was unambiguous if he broke the agreement, KSC would cancel demand a whole year commission.[59] The penalty for breaking the agreement was punitive, one year commission based on turnover not on gross or net profit, and in a business which had high turnover but low profit margin. This was not a friendly agreement where KSC might walk way without requiring the commission. Mr Rashid described KSC as greedy because they were commercial business people. They want whatever they can[60].

525.The Appellant relied on Mr Rashid’s evidence about his difficulties of getting into the market [61] as the reason for striking the agreement with KSC. The Tribunal interpreted the evidence in a different light. Mr Rashid’s evidence posed serious questions about the thoroughness of his research in the mobile phone market if the Appellant’s sole route in was effectively to surrender its business to greedy commercial people. The truth of Mr Rashid’s claims about research was also severely tested by the identity of the Appellant’s first two suppliers, Kennyton and Sahil Knitwear, whose previous connections were predominantly with clothing wholesale rather than with mobile phones. Likewise the Appellant’s first six customers were those given to it by KSC. One of those, The Export Company, featured in the March 2006 deals. Further the evidence questioned Mr Rashid’s competence and suitability in the mobile phone wholesaling sector if he was repeatedly rejected by other mobile phone traders. Finally Mr Rashid’s justification of a foothold did not explain why he agreed to the extension of the KSC agreement on the same terms. His two years of operating in the market would have been sufficient to establish a foothold, obviating the need to extend the agreement.

526.The Tribunal attaches no weight to the Appellant’s reliance on KSC’s description of the agreement given to HMRC in response to its enquiries into the Appellant’s direct tax affairs. KSC’s description gave the impression that the agreement was a straightforward commercial agency with the payment of commission on successful completion of a deal. The Tribunal disagrees. The calculation of commission as a percentage of turnover, and the punitive terms of the penalty clause if the Appellant breached the contract took the agreement out of the realms of a straightforward commercial agency.

527. HMRC pointed out that as a result of the extension of the KSC agreement the disputed transactions were subject to its terms. This meant that during the period covered by the Appeals. KSC told the Appellant to whom to sell the mobile phones and at what price. Mr Rashid disputed HMRC’s interpretation saying that following the extension he had agreed with KSC that he could choose his own customers because the present arrangements were not working. According to Mr Rashid the price was always dictated by the market.

528.The Tribunal does not believe Mr Rashid’s explanation about the extension. The Appellant was not in a good bargaining position to insist on a change to the terms of the KSC agreement. The Appellant was required to agree to the extension so that that it could delay the payment of ₤560,000 in commission to KSC. Given Mr Rashid’s description of KSC as greedy commercial people, the Tribunal considers it inconceivable that KSC would agree to a change in the terms of the agreement and also delay the commission payment. Further Mr Rashid’s explanation was not evidenced by the wording of the extension or any other document. Mr Rashid’s suggestion that the words through mutual consent somehow signified the existence of an oral variation to the terms was disingenuous. Mr Rashid in cross-examination had been found out about the existence of the extension and its serious implications for the Appellant’s case. The Tribunal placed no weight on his subsequent testimony to limit the damage which he gave after the weekend break in the proceedings.

529.The Tribunal is satisfied that HMRC’s interpretation of the KSC agreement was correct. The terms of the agreement meant that the Appellant had no choice over its customers and the price charged to them from the moment when it commenced trading in mobile phones in 2002 until August 2006. The existence of this agreement seriously undermined the Appellant’s assertions that it was an independent trader subject to the normal market forces of supply and demand. Throughout the period in question KSC exercised significant control over the Appellant’s trading activities. The Tribunal reserves its position on whether the Appellant was an entity set up to facilitate MTIC fraud until after consideration of all the evidence on the Appellant’s knowledge.

The Funding Arrangements

530.The evidence on the Appellant’s funding arrangements showed that the Appellant was beholden to KSC for its funding, particularly during the time of the disputed transactions. Sometime in 2004 the commission of ₤560,000 owed to KSC was converted into a loan for which the Appellant supplied no documentation. On 23 May 2005 Mr Khalid and Mr Choudhary, directors of KSC invested a sum of ₤1,240,000 in return for 150 ordinary equity shares in the Appellant. On 13 March 2006 which coincided with the date of the first disputed transaction KSC agreed a loan in the sum of ₤1.5 million to the Appellant.

531.Under the terms of the March 2006 loan the Appellant was required to pay KSC interest of 10 per cent per annum on the principal amount outstanding from time to time yearly in arrear starting from 15 July 2006. The terms did not require a security from the Appellant in the event of a default, and no period for the duration of the loan was specified. The Appellant has made no repayments on the loan over which KSC has not taken action.

532.HMRC submitted that KSC’s loans to the Appellant displayed a total absence of commercial reality. The sole purpose for the loans was to facilitate fraud by bridging the Appellant’s VAT deficit arising from its pivotal position as a broker in the fraudulent chains. The Appellant disputed HMRC’s claims, arguing that HMRC had overlooked the long-standing relationship of 35 years between Mr Rashid and the KSC directors who regulated their affairs on trust rather than by formal agreements.

533.The Appellant’s business model was unusual in a number of respects:

(1) KSC’s investment in the Appellant outstripped that invested by its owner, Mr Rashid by a significant margin. KSC’s investment was ₤3.2 million as compared with Mr Rashid’s ₤439,000. The contradictory evidence of Mr Rashid over the status of the ₤439,000 as a director’s loan posed serious doubts about whether in fact Mr Rashid had invested that amount in the Appellant.

(2) The circumstances of the first loan agreement enhanced KSC’s control over the Appellant’s business. The first loan was granted by KSC in return for a two year extension to the agreement under which KSC would continue to choose the Appellant’s customers and the price paid by them.

(3) The terms of the second loan agreement were not the usual terms expected in such agreements. There was no period for the loan, and no security given in the event of default. Mr Rashid’s explanation for the absence of usual terms, the parties trusted each other, did not sit comfortably with Mr Rashid’s description of KSC as greedy commercial people, and the fact that KSC instructed a lawyer to draft the agreement. The loan in reality was an injection of cash by KSC to enable the Appellant to fund the March transactions, which indicated that KSC was effectively treating the Appellant as one of its own businesses.

(4) A sizeable proportion of the Appellant’s profits were siphoned off to KSC by virtue of the commission arrangements which were fixed as a percentage of the Appellant’s turnover rather than its profits. The commission provisions worked to the Appellant’s disadvantage because its business as described by Mr Rashid was high turnover, small profit margins.

(5) The Appellant’s costs on its zero-rated sales exceeded the value of its receipts. The Appellant’s profit on its transactions, therefore, amounted to a proportion of the VAT recovered on its purchases.

(6) The Appellant did not have the necessary capital to fund its purchases of mobile phones. Instead the Appellant devised a system whereby it would not pay its supplier for the consignment of phones until it received payment for the consignment from its customer.

(7) The Appellant was unable to meet the cash flow requirements for its business, in that it did not have the resources to bridge the VAT deficit on its zero-rated sales.

(8) The Appellant’s transaction cycle was determined by the dates for the submission of VAT returns and VAT repayments. Thus the Appellant commenced transactions around the 13 day of the month, the date of the VAT repayment, and completed the monthly transactions in time for inclusion on the monthly VAT return. The Appellant’s March and April deals occurred between 13 and 27 of the respective month. The June deal took place on 27 day, in time to be included on the VAT return even though payment was not made on the deal until 24 July 2006.

(9) The Appellant effectively remained idle for the majority of the days in each month. During the period in question the Appellant traded for 14 days in March and April, no trades in May, and one day in June 2006. Mr Rashid told the Tribunal that sometimes the Appellant had deals on the table which were not completed until HMRC authorised that payment. The Tribunal dismissed Mr. Rashid’s claim of deals on table because it was not corroborated by any form of documentary evidence. According to Mr Rashid he did not keep the notes of his discussions on the deals. Also deals on table were inconsistent with Mr Rashid’s description of the wholesale mobile phone market as fast moving.

534.The Tribunal holds that its findings on the funding arrangements demonstrated that the Appellant was not a viable independent business entity. The Appellant was utterly reliant on KSC for providing it with the necessary capital and cash flow to fund its mobile phone business. The Appellant’s relationship with KSC was totally devoid of the characteristics associated with arms length commercial arrangements between two separate businesses. KSC controlled the Appellant’s customers, the prices charged, and its finances. The terms of the documents regulating their relationship had no commercial justification. The Appellant fitted the description of KSC’s stooge.

535. The findings also revealed that the Appellant’s sole business rationale was to make a profit from the VAT repayment. The commission arrangements with KSC meant that it was unable to make a profit from its wholesale dealings in mobile phones. The Appellant’s business activities were inextricably linked with the cycle of VAT return submission and VAT repayments. The Appellant had no business existence outside the cycle and remained dormant for the majority of the time during the period of the disputed deals.

The Appellant’s Business Operations

536. The Appellant purportedly operated in the grey wholesale market for Sim free mobile phones. The Appellant did not hold stock of mobile phones or handle them. The mobile phone consignments for the disputed deals were kept at freight forwarders. Mr Rashid stated that the Appellant added value to its transactions by bringing the parties together. The Appellant sold only the latest and in demand mobile phones. The prices paid and charged by the Appellant were fixed by the supply and demand of the market.

537.HMRC contended that the Appellant was a business which did not exhibit the characteristics of grey market trading. The Appellant secured a contrived mark up on its sales which had no commercial basis. The Appellant argued that HMRC did not put its concerns about the grey market in cross examination to Mr Rashid. According to the Appellant, the only question about the grey market was from the Tribunal which Mr Rashid answered fluently. Further HMRC’s allegations about a fixed mark up were fallacious and derived from unreliable calculations.

538.Mr Rashid used the analogies of an estate agent and insurance broker to describe the value added by the Appellant to its transactions. The Tribunal considers these analogies inappropriate for the Appellant which was dealing solely in the wholesale market. Unlike estate agents and insurance brokers the Appellant was not dealing with customers having a limited knowledge of the market but with wholesalers operating at the same level of knowledge as the Appellant in respect of the type of mobile phones and prices. They had access to the same websites, and as Mr Fletcher pointed out the wholesale market in mobile phones was an open one with a free flow of information. The Tribunal agrees with HMRC that the total sum of the Appellant’s trading activities was to buy at a lower price and sell at a higher one with the exception of the June deals which the Tribunal will consider later. The fact that the Appellant made a gross profit of ₤3.1 million from its March and April 2006 sales when it effectively added no value to the transactions raised serious questions about the propriety of the transactions.

539.Mr Rashid asserted that the Appellant sold only later and in demand models of mobile phones. Mr Rashid’s analysis of the mobile phones sold in the disputed transactions, however, revealed a totally different pattern of trading. The Appellant dealt in a wide range of Nokia models ranging from those at the cheaper end through the Nokia mainstays, and ending with the top of the range Nokia 8800. There were no significant variations in the models traded in the March, April and June deals. Thus Mr Rashid’s suggestion that the Appellant was operating in a niche market was plainly wrong.

540.The Appellant argued that HMRC did not cross examine Mr Rashid on the grey market with the implication that the Tribunal must disregard HMRC analysis of the Appellant’s fit with Mr Fletcher’s categories of grey market trading. The Tribunal disagrees. The Tribunal asked Mr Rashid his understanding of the grey market and in which grey market opportunity the Appellant was trading. The Tribunal was not impressed with Mr Rashid’s response which showed a poor understanding of the grey market and failed to identify the business opportunity for the transactions. The Tribunal rejected the Appellant’s criticisms of Mr Fletcher’s evidence.[62] In the Tribunal’s view the Appellant was simply using the label of grey market trading to give its activities the cover of legitimacy.

541.In this respect the Tribunal adopts HMRC’s analysis of the Appellant’s misfit with the four grey trading opportunities identified by Mr Fletcher.

(1) There was no evidence that the Appellant was a “box breaker,” buying subsidised telephones in the retail market and reconfiguring them. The Appellant met the following negative indicators identified by Mr Fletcher which made it extremely unlikely that the Appellant was box breaking:

§ traded in handsets that did not originate in the UK;

§ had no significant workforce and no storage or warehouse facilities;

§ did not hold stock; and

§ used generic product descriptions on its purchase orders and sales invoices.

(2) Similarly the Appellant fulfilled the majority of the negative indicators associated with arbitrage that was taking advantage of currency fluctuations.

§ Traded almost exclusively in Nokia stock (there being only five non-Nokia sales invoices out of 93) that could not be arbitraged due to Nokia’s homogenous pricing policy across all territories;

§ Used generic product descriptions;

§ Did not source stock from authorised distributors or original equipment manufacturers and traded in long supply chains; and

§ Did not hold stock.

(3) Likewise there was no evidence that the Appellant was exploiting a volume shortage opportunity taking advantage of “spot failures.” The negative indicators applicable to the Appellant were:

§ Used generic product descriptions when a volume shortage would require a very specific type of handset; and

§ Did not have its own stock.

(4) Finally there was no concrete suggestion by Mr. Rashid that the Appellant was exploiting a dumping opportunity taking advantage of oversupply to distributors. Mr Rashid stated that the mobile phones may come from dumping, or value rebate, or from end of the line without explaining his justification for the statement. The Tribunal was satisfied there was no evidence that the Appellant was purchasing dumped phones. As previously found the Appellant was trading in a wide range of phones including top of the range. Also the Appellant met the following negative indicators.

§ Purchased from companies other than authorised distributors or original equipment manufacturers;

§ Was selling stock that could not be traced to a distributor; and

§ Used generic product descriptions.

542.The terms of the KSC agreement were strong evidence refuting Mr. Rashid’s claims that the Appellant’s prices were determined by the market and that the Appellant often negotiated the prices, which incidentally was not corroborated by any notes of the negotiations.

543.Mr Rashid stated that the Appellant tried to achieve a mark up of seven per cent on its deals. The Appellant did not achieve this rate of mark up in any of the deals under Appeal. The mark up on the March deals was 5.56 to 6.25 per cent, and 2.38 to 4.24 per cent for the April deals. The mark up on intra-UK trades was limited to between 50 pence and ₤1.50. When Mr Rashid was asked why the mark up on intra-UK trades was so low he let slip they do not allow us to make more than that. The following day he was given the opportunity to clarify the meaning of they which he said was the market. The Tribunal places more weight on Mr Rashid’s slip than his later correction.

544.The principal dispute between the parties was whether the mark up was fixed, the Tribunal will consider this issue when it examines the wider considerations. The Tribunal, however, considers that the mark up achieved by Mr Rashid in its April deals and the intra-UK transactions was inconsistent with Mr Rashid’s benchmark of seven per cent. Applying Mr Rashid’s benchmarking there was no commercial reason for proceeding with those deals, unless the mark up was fixed by others. Also the mark up on the March deals did not show a significant variation between different models of phones and different traders, and in that respect the Tribunal considers the mark up was fixed.

545.Mr Rashid stated that the Appellant checked the IPT website to compare the Appellant’s prices paid and charged for its mobile phones, which confirms Mr Fletcher’s evidence on the open nature of the wholesale mobile phone market. Given the openness of the market it begs the question why Mr Rashid did not stand back and reflect on why the Appellant was being offered deals by the various traders in the March transactions or by Uni-Brand in April which on the face of it were too good to be true. Mr Rashid was fully aware from his earlier dealings with the HMRC of the risks of fraud in mobile phone trading. The Appellant’s suppliers had the same access to the various websites, which would have given them the same opportunity as the Appellant to secure a better price for their phones. Mr Rashid appeared in his evidence oblivious to the possibility of the deal being too good to be true with his constant restatement of the mantra that the price was determined by supply and demand.

546. The Appellant’s trading pattern shifted significantly from the March to the April deals. In March it dealt with five suppliers, whilst in April and June it obtained its supplies solely from Uni-Brand. Mr Rashid’s explanation was that he purchased from whoever had the stock and that he may have been offered stock by his March suppliers in April. HMRC contended that this shift in trading was astonishing and indicated that the Appellant was being told to purchase from Uni-Brand as part of the contra-trading scheme. The Appellant, on the other hand, did not consider it unusual to purchase exclusively from an established supplier.

547.The Tribunal considers the sudden switch to Uni-Brand in April was remarkable in several respects apart from moving into an exclusive supplier arrangement. As already identified the mark up on the April deals fell far short of Mr Rashid’s benchmark of seven per cent. Also the Appellant had not received its VAT repayment from the March deals, and on the face of it did not have the cash flow to effect the deals. Further the Appellant took its supplies from Uni-Brand rather than from Globcom which was the mobile phone trading arm of the Uni-Brand corporate structure, and with whom the Appellant had traded with in the previous March. The Tribunal considers that the totality of the circumstances surrounding the switch to Uni-Brand was suspicious and added further weight to the questionable propriety of the Appellant’s trades.

548.The Tribunal concludes there was no rational commercial justification for the Appellant’s existence as a profit making business. The Appellant made huge profits from an operation that did not add value to the product it was selling. The Appellant was not active in a niche market or seizing opportunities from failures in the mobile phone distribution market. The Appellant’s mark ups did not conform with its benchmarks, and its competitors were prepared to sell their phones at a lower price to the Appellant that what they could achieve on the open market. The Appellant’s switch to an exclusive supplier arrangement defied the Appellant’s own rationale for doing business of securing phones at competitive prices. The reality was that the Appellant’s only meaningful product from its activities was a completed VAT return at the end of each month supported by VAT invoices.

Contractual Terms

549.HMRC contended the evidence showed that the Appellant breached its own contractual terms, and its documentation did not follow the expected commercial sequences as set out by the terms. Thus the contractual terms served no commercial benefit and were put in place by the Appellant to give the impression of proper ongoing commerce.

550.The Appellant argued that its contractual arrangements mirrored ship on hold arrangements which were the prevailing method of trading in the wholesale sector, and of which HMRC had no understanding. At paragraph 244 of his second witness statement Mr Rashid stated that

“ ….. Mr Wald does not seem to understand how title is transferred in commercial commodity deals….. Customers pay for goods only once inspection has taken place and they are happy to proceed. Once [Appellant] receives payment we pay our supplier and release the goods and therefore transfer title to our customer”.

551. The Appellant explained the ship on hold arrangements to Officer Wald [63]:

“By definition, in an international supply contract, the supplier is in one country and the customer is in another country… Therefore if the customer is going to have a proper opportunity to inspect one of two things has to take place: either the customer has to appoint an agent where the goods are before despatch, or the goods have to be made available to the customer, at the place of delivery…If the arrangement is that the goods are to be inspected at the place of delivery, the destination, then the consignor must have an arrangement whereby they maintain control over goods which have been exported…. The way in which ship on hold operates is that the consignor, the party in this jurisdiction , for present purposes, appoints a freight forwarder in this jurisdiction, stipulating that goods will indeed be shipped on hold to the destination.. And the ship on hold proviso would then allow the customer to inspect the goods in their own country and subject to satisfactory inspection, payment arrangements would be made, and the ship on hold proviso would be released once satisfactory payments had been put in place”.

“The position in international wholesaling is as follows: a supplier to my clients enters into a contract knowing full well that my clients are going to deal with those goods either by way of subsequent wholesale sale or if it were going to be introduced into the retail network, by breaking the wholesale consignment into smaller consignments and selling on. That is the way in which wholesale suppliers operate.

My client then enters into, in this instance, contracts to sell wholesale the consignment that it has agreed to buy for a customer, and it ships, pursuant to a ship on hold arrangement.

We then go through the sequences that we have already described (see above), and on satisfactory inspection, my client is told by his customer that the inspection is satisfactory, payment arrangements are entered into, and release instructions are sent to release the goods against security of payment by my client’s customer to my client. That’s how it operates.

My client then holds the monies received on trust to pay over to its supplier the monies which it owes its supplier in satisfaction of the purchase that my client has entered into”.

552.The Appellant’s description of the way that it conducted the disputed transactions did not conform to its published contractual terms and conditions. The Tribunal finds the following facts on the contractual terms for the Appellant’s dealings [64]:

(1) The Appellant’s supplier held ownership of title of the goods which it was proposing to sell to the Appellant.

(2) The Appellant was required to pay its supplier for the goods by telegraphic transfer after carrying out a full inspection of the goods.

(3) The Appellant’s sale conditions stipulated that the Appellant held full title to the goods and would remain the Appellant’s property until paid in full by its customer.

(4) The customer must make its payment in full when the goods were allocated at the point of despatch in the European Union.

553. The Appellant conducted the disputed transactions in clear contravention of its published terms and conditions. The Appellant did not hold full title to the mobile phone consignments when it issued the invoices to its customers. Equally the Appellant flouted the terms of the purchase order with its suppliers when it did not make payment after full inspection of the mobile phones but instead waited for payment from its customers. Moreover Mr Rashid accepted that he did not expect the Appellant’s suppliers to own the goods despite the clear wording of the Appellant’s supplier’s declaration.

554. Mr Rashid’s justification for the departure from the Appellant’s terms and conditions of sale was that they had a different interpretation to their ordinary meaning. Ownership did not equate to having title in the goods but some form of reservation of title over the mobile phones. Full inspection meant inspection by the Appellant and its customers. The Appellant pointed out that Mr Rashid was not a lawyer and it was, therefore, unsurprising that commercial realities of trade did not mirror exactly the published terms and conditions of sale. The Appellant’s submissions, however, overlooked the fact the Appellant had received Mr Plowman’s professional advice when drawing up the contractual terms. According to Mr Plowman the construction of the terms reflected the manner in which the Appellant conducted its business. Further Mr Rashid’s justification was contradicted by his claim [65] about the Appellant having printed general and specific conditions of sale unlike many other traders in the industry.

555.Mr Rashid answers on the term which required the Appellant’s customers to pay for the mobile phones when they were allocated to the customer in the point of despatch in the European Union were intended to confuse. He eventually disowned the condition in respect of sales to non-EU countries, and argued that the condition was only there to prevent consignments that had already been sent to its customers from allocating them to their customers until payment had been received by the Appellant. The Tribunal finds Mr Rashid’s eventual answer incomprehensible. Mr Rashid accepted that the Appellant allocated the goods to its customers on the shipping instructions to Interken, the freight forwarder, based in the UK. In the Tribunal’s view, the wording of the condition was unequivocal and on the facts would have required the Appellant’s customers, (certainly those not in the EU) to pay for the goods in the UK at the time when they were allocated and despatched by Interken.

556.The Tribunal concludes that the Appellant’s published terms and conditions fulfilled no commercial function. The Appellant had adopted them to give the impression of proper ongoing commerce knowing full well that it had no intention of applying them to its mobile phone deals.

557.The Tribunal considers that the Appellant’s reliance on ship on hold was a belated attempt to give its dealings an aura of commercial legitimacy. The issue in the Appellant’s case, however, was not whether ship on hold was a recognised form of international wholesaling but that the Appellant through its terms and conditions did not hold out as operating ship on hold arrangements. In the Tribunal’s view this was another example of the Appellant finding another justification for its trades once its original rationale had been exposed as false.

558.Mr Rashid’s evidence on the contractual terms was also relevant in one other important respect. His portrayal of the conduct of disputed transactions demonstrated their contrived nature. Mr Rashid revealed that he did not expect the Appellant’s suppliers to own the goods, and that the suppliers would be buying the goods from someone-else once the Appellant had concluded its deal with the customer. Also the suppliers knew about the existence of the Appellant’s customers in that they agreed to await payment until after full inspection which included that of the customers. Thus Mr Rashid’s portrayal of the Appellant’s transactions meant that the parties knew of each others’ existence, no party had ownership of goods, the parties allocated and transported goods they did not own and suppliers would not be paid until the Appellant had received payment from its customers. This depiction belied Mr Rashid’s assertions that the Appellant was operating as an independent trader, arms length from its suppliers and customers in pursuit of the best deal. Instead Mr Rashid’s portrayal unwittingly disclosed the existence of contrived arrangements having no hallmarks of commercial arms length trading and involving a chain of connected traders which went beyond the Appellant’s immediate suppliers.

Due Diligence

559. Moses LJ in Mobilx [2010] EWCA Civ 517 at para 82 advised Tribunals against unduly focussing on due diligence which might deflect the Tribunal from the central question of whether the Appellant knew about the fraud:

“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 focussing 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”.

560.An examination of the Appellant’s due diligence, however, remains an important part of the factual tapestry in determining the Appellant’s knowledge of the fraud. In this Appeal HMRC in its statement of case submitted that the Appellant’s checks were casually undertaken and negative indicators ignored because they were in truth unnecessary as the Appellant knew that the transactions had been pre-arranged and its suppliers and customers would not fail in their obligations. HMRC in its closing submissions reinforced its contentions regarding the Appellant’s due diligence saying that:

“The Appellant’s approach to assessing its counterparties was much the same as its approach to transactions, it would produce reams of documentation to give the illusion of a sustained due diligence effort. The reason for the Appellant conducting due diligence was not to satisfy itself of the commercial viability of any of its counterparties but to defeat the joint and several liability legislation”.

561.The Appellant contended that its due diligence was extensive and proper, and not window dressing. The Appellant had through its employees personally visited its customers and suppliers, and had instructed an independent company, Veracis, to undertake due diligence on its behalf. Moreover HMRC had not cross-examined Mr Rashid on the due diligence carried out on 14 of the 15 companies which were the subject of this Appeal. The Appellant submitted that HMRC was not entitled to use the cross-examination of the due diligence on the one company, Phone Connected, as representative of the due diligence carried out on the other companies. Such an approach was fundamentally wrong in principle and ill-conceived in the context of adversarial proceedings. Also Phone Connected was, in any event, a poor example, in that it was the only company that the Appellant was unable to visit and obtain a Veracis report before the first deal.

562.HMRC in response argued that the Appellant clearly understood HMRC’s case in respect of due diligence, and there was nothing to be gained by either party or the Tribunal in putting that to Mr Rashid on each and every one of the Appellant’s documents. Further the Appellant overlooked the principle in Re Yarn Spinners’ Agreement that a party’s case may be put to any of the witnesses who deal with the matter in chief, and it can then be relied upon by that party in argument. In this instance there was no requirement to cross examine Mr Rashid about the due diligence material upon which Mr Plowman was questioned. HMRC asserted that it addressed the cross-examination of Mr Rashid in a way that was pragmatic and made the best use of the time of the Tribunal.

563.The Tribunal finds that at the outset of the proceedings HMRC explicitly set out its store in respect of due diligence. The Appellant was clearly aware of HMRC’s case and given various opportunities to challenge the case through the service of witness statements, cross examination of HMRC’s witnesses, and opening and closing submissions. In Appeals such as this which were characterised by compendious bundles of documentary evidence and detailed witness statements, the evidence was not restricted to just the questions put by opposing counsel. The evidence was multi-layered and included for example the answers given by Mr Rashid in his witness statement to Officer Wald’s identification of purported gaps in the Appellant’s due diligence.

564.The Tribunal disagrees with the Appellant’s assertion that HMRC’s cross examination of Mr Rashid on due diligence was restricted to that carried out on Phone Connected. Questions were put to Mr Rashid on the purpose of due diligence and on the value of specific checks, which in the Tribunal’s view was relevant to the whole issue of due diligence.

565.The implication of the Appellant’s submission was that the Tribunal must treat the evidence given by Mr Rashid as final unless he had been specifically cross examined on it by HMRC. The Tribunal holds that such an implication was not valid in respect of his evidence on due diligence, which HMRC had challenged through various avenues. The Tribunal considers that it was also entitled to assess Mr Rashid’s evidence on due diligence for inherent consistency, and coherence with what the Appellant actually did.

566. Turning to the evidence on due diligence [66] the Tribunal finds that Mr Rashid contradicted his evidence on the purpose of due diligence. Mr Rashid stated that the purpose was to ensure the legitimacy and commercial viability of suppliers and customers and enable a trader to keep standards under review and avoid participation in fraud. Mr Rashid interpreted legitimately as ensuring that the Appellant’s customers and suppliers were trading honestly. Commercial viability, on the other hand meant that they were suitably financed.

567. Mr Rashid, however, changed his mind when confronted with the due diligence evidence on Globcom which indicated that it was high financial risk. In Mr Rashid’s view, the Appellant was not interested in the credit rating of its suppliers because it did not receive payments from them. In similar vein Mr Rashid stated that the Appellant was also not interested in the financial capability of its customers because the Appellant only released stock when it received payment from them. The Tribunal finds Mr Rashid’s disinterest on the relevance of credit ratings for the Appellant’s customers and suppliers incomprehensible in view of his stated purpose for due diligence. The credit ratings not only gave an indication of the Appellant’s customers and suppliers ability to pay but also their bona-fides as properly run commercial organisations with reliable funding sources.

568.Mr Rashid’s cavalier approach in respect of due diligence extended to ignoring the trade descriptions revealed on the Dunn & Bradstreet reports which was central to the question of whether the companies were legitimate mobile phone traders. The Dunn & Bradstreet reports for Neo Abaco and Olympic Europe revealed their trade classifications as radio & television, and machinery wholesalers respectively. The Companies House entry for Horizon showed that it was a clothing and footwear wholesaler. Given Mr Rashid’s lack of interest in the creditworthiness and the trade classification of the Appellant’s customers and suppliers, the Appellant’s production of copious Dunn and Bradstreet reports served no discernable due diligence function.

569. The Appellant’s assertion that Phone Connected was the only example where it commenced trade prior to an inspection by itself and or Veracis was incorrect. On Mr Rashid’s evidence [67] the Appellant did not inspect nor instruct Veracis to carry out due diligence on three of its six suppliers (Uni-Brand, Globcom, and Elite) before commencing trade with them. Likewise no prior inspections were conducted on four of its customers, Olympic, Neo Abaco, Meridian and Phone Connected. Further the Appellant completed its first deals with Essential Trading and Nano Infinity before receipt of the Veracis report. With the remaining six customers, four of them Immani, Lavina, Midcom and MK Digital, had no Veracis reports presumably because of their geographical distance. Thus the Appellant’s due diligence at the commencement of trading with a significant proportion of its customers and suppliers was limited to Europa checks, confirmation from Redhill, and Mr Rashid’s previous contacts with them.

570.The Tribunal does not accept Mr Rashid’s explanation for failing to implement a system of prior visits for new customers, which apparently was based on their availability. The Appellant had a choice but decided to go ahead with the deals with Olympic, Neo Abaco, Meridian and Phone Connected without effective due diligence. Further the Appellant completed its deals with Essential Trading and Nano Infinity before receipt of the Veracis report. The subsequent Veracis reports prepared on Essential Trading, Phone Connected and Nano Infinity identified substantive negative factors which questioned their status as honest traders, whilst Olympic and Neo Abaco have been implicated in fraudulent trading.

571.The Tribunal finds that Mr Rashid adopted an uncritical approach to the receipt of the information gained from the due diligence conducted by the Appellant. Mr Rashid’s response to the negative factors identified in the Veracis reports on Uni-Brand, Globcom, Horizon and Gold was to write letters asking them to put matters right. Mr Rashid, however, expressed no concerns about why the respective owners of Uni-Brand and Globcom, and Horizon and Gold had each set up two companies which traded in mobile phones. Mr Plowman could advance no reason for the separate existence of Horizon and Gold. Mr Rashid acquiesced with the arrangements for Uni-Brand and Globcom because he trusted their owner Mr Iqbal.

572.Mr Rashid took no action on the contradictory information about Phone Connected, simply filing away Waterfire’s reference. Mr Rashid considered the positive factors in the Veracis reports on Essential Trading and Nano Infinity outweighed the negative factors even though Nano Infinity had an incredibly high turnover for a new company, whilst Essential Trading had no identifiable means of funding. Mr Rashid raised no questions about the links between Uni-Brand and Horizon and Gold as revealed by the supplier’s declaration which Mr Plowman said was given to the Appellant. Mr Plowman also identified potential issues with Elite Mobile (grey market) and Shelford Trading (significant change in turnover) which the Appellant chose to ignore. The question missing from Mr Rashid’s vocabulary when assessing the due diligence was: Should I be doing business with this company?

573.Mr Plowman stated that he always found Mr Rashid an honest man who was punctilious in his record keeping and due diligence. HMRC submitted that Mr Plowman’s evidence must be treated with care. It was clear from his answer I don’t want to get any more evidence in I’m in enough trouble already on that score that he was not an independent witness and that he had some agenda to protect Mr. Rashid.

574.The Tribunal was unsure whether Mr Plowman with his answer was referring to himself or protecting Mr Rashid. The Tribunal’s view of Mr Plowman’s evidence was that he was walking a fine line between protecting his company’s reputation and not antagonising his client. The Tribunal did not place significant on Mr Plowman’s view of Mr Rashid’s honesty, which ultimately was a matter for the Tribunal to decide. The Tribunal attached weight to the contents of the Veracis reports which were uncontroversial and Mr Plowman’s evidence that the Appellant should make an informed choice on the contents. In the Tribunal’s view there was scant evidence that Mr Rashid ever took an informed choice. His decision always was to do business.

576.The Tribunal holds that the Appellant did not fulfil its stated purposes for conducting due diligence on its customers and suppliers. The Tribunal’s findings showed that the due diligence had no influence on the Appellant’s trading. Mr Rashid did not critically evaluate the information provided by the due diligence and ploughed ahead with the transactions regardless of the negative indicators. In short the due diligence formed no part of the Appellant’s decision to trade with the customers and suppliers in the disputed transactions. The Tribunal concludes that the Appellant’s due diligence was just a charade to give the impression that the Appellant was engaged in commercial trading and complying with the joint and several requirements of HMRC Notice 726.

Inspections

577.HMRC contended that the cumulative evidence regarding the Appellant’s inspection of its goods and IMEI checks indicated that the documentation produced had no reality to the claimed checks, and was used for appearances only. In addition Mr Rashid had lied in his evidence, and the Appellant had not carried out the claimed checks.

578.The Appellant argued that it had no legal requirement to carry out IMEI checks and that Mr Rashid was a credible witness. Mr Rashid clearly understood the nature of his business by his detailed description of how the inspections were carried out. Mr Rashid was not cross-examined on the contents of his fourth witness statement in which he insisted that HMRC had in its possession about two years of the Appellant’s IMEI records on CDs seized at the Appellant’s premises in November 2006.

579.The Tribunal formed a different view of Mr Rashid’s evidence finding his answers in cross-examination evasive and implausible. When asked to explain the various inconsistencies [68] in the documentation regarding the timings of the inspection requests, the inspection reports, and arrivals at the port, Mr Rashid’s stock answer was that the Appellant conducted the business over the telephone, and that the documentation simply confirmed the contents of the telephone conversations. Mr Rashid was unable to produce any evidence of when these telephone conversations took place. Further he could offer no logical reason why it was necessary for the Appellant and Aberdale to produce the paperwork connected with the inspections, if their modus operandi was to conduct their business over the phone. Mr Rashid’s reason for keeping the paperwork was that it was the Appellant’s practice and that the Appellant regularly did that anyway.

580. The inspection reports showed that the mobile phones sold in the disputed deals had two pin chargers which were unsuitable for the UK market. Further the majority of the manuals accompanying the mobile phones did not have the language appropriate for the country to which they were sold. The Appellant considered HMRC’s summary of the inspection reports misleading because it did not contain details of the software language installed on the mobile phone. The Appellant’s submission, however, did not undermine the facts of the two pin chargers and the inappropriate language of the manuals. Mr Rashid in cross-examination did not appear to be troubled by these discrepancies and believed that mobile phones with such specifications were a normal feature of the wholesale trade The Tribunal disagreed with Mr Rashid, deciding that these two facts should have raised questions on the part of the Appellant about the nature of the trades, in particular why the Appellant purchased mobile phones with European specification in the UK when they could have been bought cheaper in Europe by the Appellant’s customers. The Tribunal considers Mr Rashid’s unquestioning approach to the details on the inspection reports added to the Tribunal’s disquiet about the true purpose of the inspection reports.

581.The Appellant requested Aberdale to provide in each of the March 2006 deals a full inspection, a 10 per cent IMEI number scan, an e-mail of the IMEI scan and an inspection report. In respect of the April 2006 deals, the inspection reports made a nil IMEI return. Mr Rashid’s evidence regarding the IMEI records for the April deals was evasive. At first he insisted that the Appellant received details of the IMEI scans at the agreed rate of 10 per cent. Later when faced with overwhelming evidence to the contrary, he admitted that the Appellant had not received the IMEI scans but still stated that Aberdale must have done some kind of scan. Mr Rashid acknowledged in cross examination that the Appellant apparently discovered Aberdale’s omission in August 2006 when Mr Wald requested details of the IMEI scans. This purported discovery also begged the question why the Appellant did not query with Aberdale the non receipt of the scans at the time of the April transactions. The Tribunal concludes from Mr Rashid’s evasive answers and the fact that there was no record of IMEI scans for the April deals that Mr Rashid knew at the time of entering into the deals that no IMEI scans of the mobile phone consignments had been carried out in April 2006. Mr Rashid admitted no scans were completed for the June deals.

582. The Tribunal’s finding on Mr Rashid’s knowledge on the April deals brought into focus his purpose for giving Mr Wald a copy of the purported 500 IMEI readings for April deal 10. The Tribunal holds that Mr Rashid provided HMRC with a copy of IMEI readings which did not relate to the April deal with the intention of misleading HMRC into believing the Appellant’s claim that it was a responsible trader which scanned its consignments as a protection against fraudulent trading. Mr Rashid’s attempt to mislead backfired when Officer Wald discovered a high incidence of circular trades in the false records. Mr Rashid’s subsequent challenges to the accuracy of Mr Wald’s discovery were disingenuous in view of his knowledge about the non existence of the April IMEI scans.

583.The Tribunal was not impressed with Mr Rashid’s explanations for the non-production of the records of the IMEI scans. The admission of Aberdale in its letter of 7 March 2007 that the Appellant’s records had been irretrievably lost due to technical problems was in the Tribunal’s view convenient and most probably untrue. Mr Rashid in an earlier witness statement had produced a letter of Aberdale dated 11 September 2007 which post-dated the letter of the 7 March 2007, and made no mention of the irretrievable loss of data. .

584.Mr Rashid excuse for not producing the e-mails of the IMEI scans was that he could not access them because the Appellant’s e-mail address had closed down. In the Tribunal’s view this was an excuse of last resort and avoided the question of why the e-mails were not printed off at the time of entering into the transactions and kept with the other documents connected with the disputed transactions.

585. The Appellant’s effort to persuade the Tribunal to accept Mr Rashid’s evidence about HMRC retaining the Appellant’s CDs of two year records of IMEI scans was singularly unsuccessful. The Appellant’s complaint that Mr Rashid was not cross examined on his fourth witness statement rang hollow. The Tribunal considers HMRC was justified in simply registering with Mr Rashid its disagreement with his evidence on what was seized from the Appellant in November 2006, in view of its extensive cross-examination on the IMEI records which had seriously undermined Mr Rashid’s credibility on this topic. Also the Tribunal did not consider Officer Kenrick’s comment that his search of the Appellant’s files held by HMRC was hurried undermined the fact that there were only two CD exhibits in the seized documents.

586. HMRC’s record of the property seized from the Appellant attached to Officer Kenrick’s statement went into significant detail including references to torn pieces of paper from a bin and 4 x pink post it notes. The record contained just two references to CDs, which were the items found by Officer Kenrick. The Tribunal is satisfied with the reliability of HMRC’s record, and that HMRC held only one CD of the Appellant’s IMEI records which did not consist of the two year records as alleged by Mr Rashid.

587.The Tribunal places weight on the contents of the one CD (exhibit SK/2) which held limited details of the IMEI numbers and copies of the inspection reports. Mr Rashid admitted that the CD’s contents were in an unprotected format which could be manipulated by the Appellant at its choosing. Further Mr Rashid offered no convincing explanation for the inclusion of the inspection reports on the CD. The Tribunal considers the evidence significant in that the CD provided the Appellant with the opportunity to produce its own lists of IMEI numbers and inspection reports without the assistance of Aberdale. Moreover the finding of this CD in the possession of the Appellant shed a different perspective on whether Aberdale actually carried out the inspections.

588.The Tribunal was not convinced with Mr Rashid’s evidence about the presence of the Appellant’s employees at the inspections. Their presence made no sense to the Tribunal, and his statement was not corroborated.

589. The Tribunal’s findings on the Appellant’s inspections for the disputed deals undermined Mr Rashid’s claim that Aberdale was engaged by the Appellant to verify and check all stock bought and sold. The defects in the Appellant’s document trail of requests and reports for the disputed deals indicated that they played no commercial role in the Appellant’s business. The cumulative effect of the findings, however, carried more serious implications for Mr Rashid’s credibility, and the bona fides of the disputed deals. The findings on Mr Rashid’s knowledge regarding the April transactions, Mr Rashid’s attempt to mislead HMRC with 500 bogus IMEI scans, the non-production of the records of the IMEI scans and the Appellant’s capability of producing inspection reports in Aberdale’s name all pointed to the conclusion that Aberdale did not scan the IMEI numbers of the mobile phones in the disputed deals, and that the Appellant not Aberdale was responsible for the production of the inspection reports.

Insurance

590. HMRC contended that there were so many oddities with the Appellant’s insurance position for which Mr. Rashid was incapable of giving a coherent explanation. The Appellant’s insurance position indicated that the enterprise was not being run along commercial lines, and constituted a clumsy attempt to hide inadequate insurance cover for the disputed transactions.

591.The Appellant disagreed with HMRC, arguing that it took out insurance at considerable cost to meet an identified commercial risk. The Appellant opted for parallel insurance to secure better total cover given the value of the insured goods. Finally Mr Rashid gave plausible reasons for the various errors in the documentation.

592.Mr Rashid as with other areas of the Appellant’s operations made inaccurate claims in his second witness statement about the insurance cover, insisting that all the Appellant’s deals were adequately and properly insured. The evidence showed otherwise [69]. The values of six 03/06 deals significantly exceeded the combined insurance cover, the insurance certificates for five 04/06 deals cited the wrong destination or journey, whilst the certificates for deals 1 to 4 of 04/06 bore the wrong chronological certificate number.

593.Mr Rashid’s stock answer for the wide range of discrepancies recorded on the insurance documents was that it was a clerical error on the part of Interken. Mr Rashid, however, failed to explain why these errors were not picked up by the Appellant at the time the transactions were entered into. Mr Rashid’s tolerance of the wide range of errors in the insurance documentation and the absence of proper processes for checking business documentation demonstrated the Appellant’s cavalier approach in respect of the disputed transactions and the running of its business.

594. Mr Rashid asserted that the Appellant took out parallel insurance cover because of the value of the insured goods. There was, however, no independent evidence corroborating the existence of parallel cover. Mr Finlayson’s letter dated 19 February 2006 did not constitute independent corroboration of the parallel arrangements because it was Mr Rashid who supplied Mr Finlayson with the details of the cover provided by Willis Ltd. Also the Appellant’s rationale for parallel insurance cover was undermined by the fact that the value of some consignments exceeded the cumulative cover of the two policies. The Tribunal considers the Appellant’s insurance arrangements unconventional and made no sense with indications of duplicate cover, and the post-dating of endorsements and cover notes.

595.Mr Rashid’s reasoning for taking out insurance on the disputed consignments was equally confusing. He believed that the Appellant would be held liable by the freight forwarder for the loss of the goods in transit. Mr Rashid maintained his position even when it was pointed out that one of the Appellant’s suppliers (Our Communications) bore the risk until the funds had been cleared on the Appellant’s purchase of the phones.

596. The Tribunal decides that Appellant’s insurance arrangements for the disputed transactions were no more than a façade designed to give the transactions an aura of authenticity. The reality behind the façade was that the Appellant did not care whether the goods were adequately insured, and only interested in having a piece of paper which might satisfy the requirements of HMRC Notice 726.

Deal Documentation

597.HMRC highlighted inconsistencies in the documentation which revealed that the deals did not follow the normal sequence of commercial transactions. These inconsistencies were common throughout the various deal chains which were the subject of this Appeal. HMRC with its examples concentrated upon those inconsistencies that directly affected the Appellant. HMRC relied on the inconsistencies to demonstrate that the Appellant was covering up its true purpose, namely the movement of monies connected with fraud.

598.The Appellant pointed out that none of the alleged inconsistencies was put to Mr Rashid in cross-examination except exceeding the combined insurance cover. The Appellant nevertheless offered explanations in its closing submissions for most of the discrepancies, which included clerical errors, the documentation was preceded by oral negotiations and agreement, ship on hold arrangements and differences in the UK time zone with those of other countries.

599. The evidence on the purported inconsistencies in the documentation is found in paragraphs 399 to 423. The Tribunal has analysed the inconsistencies into the following categories:

(1) The Appellant issued shipping instructions before receipt of a signed pro-forma invoice from customers or the issue of a purchase order to a supplier (7).

(2) The Appellant did not have title to sell the goods in contravention of its contractual terms (6).

(3) The Appellant’s supplier did not have title to sell the goods (2).

(4) The Appellant’s invoice sent to and returned by the a company which was not the customer (2)

(5) Significant delays from shipping instructions to the transit date for the goods (6).

(6) Similarities between the Appellant’s documentation and that used by other traders in the supply chain not immediately connected to the Appellant’s deal (2).

(7) Similarities in documentations used by other parties in the supply chain (2).

(8) Single errors, which included: amended release instructions, goods exceeding the combined insurance cover and instructions to deliver goods to a freight forwarder implicated in fraudulent activity.

600.The inconsistencies identified in 599(2) & (3) are covered in the Tribunal’s findings on contractual arrangements over which Mr Rashid was cross examined. The Tribunal notes that the Appellant’s explanations of clerical mistake and oral negotiations preceding the documentation for the inconsistencies in 599(1) & (4) were prevalent excuses used by Mr Rashid to counter allegations of inconsistencies in other areas of the Appellant’s operations. The Tribunal was not impressed with Mr Rashid’s excuses, particularly as he could not produce documentary evidence of oral negotiations.

601.The Tribunal accepts the Appellant’s explanation for the delays in the transit of the goods relied upon by HMRC. The Tribunal notes that the Appellant’s explanation of differing time zones was not a complete justification for some of the anomalies identified by HMRC.

602. HMRC identified similarities between the Appellant’s documentation and those of two traders, Realtech and Shelford Trading. HMRC suggested that similarities in documentation ostensibly prepared by separate companies showed either a single authorship or the sharing of electronic documentation, which in HMRC’s opinion was a key indicator of orchestrated fraud. HMRC cross-examined Mr Plowman on the supplier declaration for the Appellant and Realtech. Mr Plowman agreed that they were virtually identical. The Tribunal accepts Mr Plowman’s evidence. The Tribunal, however, is not convinced that the commonality between the documents was attributable to single authorship or the sharing of electronic documentation. An equally plausible explanation was that Realtech may have simply copied the document of its own accord. HMRC did not cross examine Mr Rashid or Mr Plowman on the Shelford Trading documentation.

603.The Tribunal finds that evidence relied upon by HMRC in respect of the deal documentation except for the contractual arrangements was inconclusive. The evidence neither advanced nor hindered HMRC’s case.

The June 2006 Loss

604. HMRC submitted that the Appellant’s trading loss of ₤4.2 million incurred on its dealings with Uni-Brand and Horizon and Gold in June 2006 was contrived with the intention of securing a repayment of VAT in the sum of ₤700,000.

605.The Appellant, on the other hand, relied on the trading loss to demonstrate that it conducted its mobile phone business on proper commercial lines with the attendant risks associated with fluctuations in the market. The Appellant pointed out that Officer Wald in cross-examination was unable to challenge Mr Rashid’s explanation for the loss [70]. Mr Fletcher answering a question of the Tribunal acknowledged that the Appellant had incurred a substantial loss following the cancellation of the order by its customer. Mr Fletcher, however, was not aware of the existence of the purported trading loss until it was brought to his attention by the Tribunal. Further he had only a brief opportunity to review Mr Rashid’s witness statement and accompanying exhibits.

606. The Tribunal decided that the evidence given by Mr Rashid in cross-examination painted a totally different picture of the trading loss from that portrayed in his second witness statement. The Tribunal finds that the Appellant did not suffer an actual loss. The Appellant’s FCIB account as at 10 August 2006 showed a credit balance of ₤100,000 despite the apparent trading loss of ₤4.2 million. Further the Appellant’s accounts for the year ended 30 June 2006 recorded a retained profit of ₤2.6 million despite the apparent transaction loss of ₤4.2 million. Mr Rashid acknowledged that as at 30 June 2006 the Appellant was a successful business.

607.The credit balance of ₤100,000 as at 10 August 2006 was due to an injection of ₤5.02 million in the Appellant’s bank account from Midcom on 9 and 10 August 2006. Mr Rashid stated that the ₤5.02 million was a down payment for an order of Nokia phones with a delivery date of eight to ten weeks hence. The Appellant used the down payment to discharge the debt to Uni-Brand on the June 2006 transactions.

608.The deal with Midcom apparently collapsed because the Dutch authorities suspended the banking operations of the FCIB bank, which meant that the Appellant was unable to deliver the mobile phones as agreed. The Appellant in its closing written submissions sought to adduce additional evidence in respect of the steps taken by Midcom to recover the ₤5.02 million. HMRC argued that this evidence should not be admitted as the Appellant had closed its case. The Tribunal considers the admission of the evidence makes no difference to its analysis of the June 2006 transactions.

609. The Tribunal does not believe Mr Rashid’s reasons for the injection of the ₤5.02 million. The character of the purported Midcom transaction with a substantial advance down payment for a future deal taking place in eight to ten weeks time was so far out of line with Mr Rashid’s evidence on the Appellant’s way of doing business and on the fast moving wholesale market for mobile phones. The Appellant’s deals in March and April 2006 were completed almost instantly involving exchange of goods and simultaneous payments in and out of its bank account. According to Mr Rashid, the highly competitive price volatile mobile phone market dictated this way of doing business. The Appellant adduced no evidence of another deal involving a substantial down payment. Mr Rashid also offered no explanation of how it would fund the purchase of the mobile phones from MK Digital for the Midcom transaction, since the Appellant had already used the down payment to discharge the debt with Uni-Brand [71]. Finally Mr Rashid accepted that the purported deal between MK Digital and Midcom represented a completely new departure for the Appellant in buying and selling mobiles phones from abroad.

610.Mr Rashid’s rationale for the trading loss of ₤4.02 million was equally implausible, which was apparently due to the withdrawal of Elite Mobile, the Appellant’s customer, from the deal. Mr Rashid accepted that the Appellant had a binding agreement with Elite Mobile but for some inexplicable reason took no steps to enforce it. The Appellant also did not take action against the other purported customers for the phones (Shelford and Waterfire). In contrast Mr Rashid considered the Appellant was obliged to proceed with its purchase from Uni-Brand principally because the Appellant did not wish to damage its relationship with a valued supplier. The Appellant submitted that it did not have the funds to take legal action and had no choice but to acquiesce with the situation forced upon it by the withdrawal of Elite Mobile. The Tribunal disagrees. The Appellant’s actions were irrational, and made no commercial sense. The Appellant decided to forsake a potential profit of ₤55,000 for a trading loss of ₤4.2 million when it had a cast iron case against Elite Mobile which according to Mr Rashid was a well respected long established trader with a strong reputation and net worth of ₤8 million. The Appellant had the option of sitting tight fending off any potential action from Uni-Brand with an action against Elite Mobile.

611. The manner in which the Appellant conducted its deals with Uni-Brand; and Gold and Horizon provided further proof of the contrived nature of the arrangements. The Appellant struck out the clause regarding sale at market price in the eleven suppliers’ declarations to Gold and Horizon which gave a clear indication that the Appellant was embarked on a deliberate loss making exercise. Mr Rashid’s blamed an employee for mistakenly striking out the clause, which carried no sway with the Tribunal, particularly as the error was committed on eleven separate forms. The Appellant undertook no inspections of the mobile phones sold to Gold and Horizon. Mr Rashid stated that the Appellant did not carry out inspections of mobile phones involved in inter UK transactions, which contradicted his claims in the second witness statement that the Appellant inspected the goods to make sure that they had not been previously supplied to it.

612.The Appellant also disregarded warning signs about the commercial viability and bona fides of Horizon and Gold. Mr Rashid knew that they were connected companies run by the same individual, Mr Khan. The Dunn & Bradstreet report on Gold gave it a maximum credit score of ₤900, whilst the report on Horizon revealed that it was trading as men and boys clothing wholesaler until February 2006. The supplier’s declarations provided by Horizon and Gold to Veracis displayed the name of Uni-Brand, inadvertently revealing a connection between the Appellant’s supplier and customers.[72] Mr Plowman said there was no reason for Mr Khan to run Horizon and Gold as two separate entities.

613. The Tribunal is, therefore, satisfied that Mr Rashid’s rationale for the deals with Uni-Brand and Gold and Horizon, and the purported Midcom deal was wholly implausible. Mr Rashid’s rationale was not only inherently flawed but inconsistent with the Appellant’s way of doing business. The contrived nature of the June 2006 transactions with Uni-Brand and Gold and Horizon was demonstrated by the fact that the loss on the deals was reimbursed by Midcom and by the manner in which the Appellant conducted the deals, namely, the amendments to its supplier’s declaration, no inspections and the absence of effective due diligence.

614.The contrived character of the June 2006 transactions was given added colour by the attendant circumstances of the deals. Horizon and Gold sold on the mobile phone consignments at a profit to an established customer of the Appellant. This undermined Mr Rashid’s assertions about the falling market for these phones and demonstrated that the transactions were without commercial authenticity. Falcon Trading, the supplier to Uni-Brand, in the Appellant’s 06/06 chain directed Uni-Brand to pay ₤2.3 million to Artlons Trading and ₤3.7 million to Rezaco [73]. In 06/06 deal 1c Falcon’s supplier declarations recorded the goods as Nokia 8800 black but on their invoices they were described as being silver. Uni-Brand also made a purported loss on its sale to the Appellant.

615.Officer Orr analysed the money flows of one of the Appellant’s 06/06 deals which showed a circular movement of money on 24 July 2006 which was when the Appellant paid for the goods in deal 1. The circular money flow involved four companies from the United Arab Emirates, Call Back Trading, Cellular Trading, Saqqaf & Abid Trading, and Wall Street General Trading. Midcom was also a Dubai company which appeared in circular fund structure for the Appellant deal 8 03/06 and had received payments from Call Back Trading, one of the Dubai traders in the 06/06 money flow. The existence of a circular money flow in the only deal of the June 2006 transactions analysed by Officer Orr was persuasive evidence that the Appellant’s June 2006 transactions were contrived.

616.The additional evidence presented by the Appellant concerned the steps that Midcom had threatened to take to collect the ₤5.02 million debt against the Appellant. Midcom, however, had not carried out the threatened action and apparently prepared to await the outcome of the Appellant’s dispute with HMRC. The Tribunal finds the evidence on the contrived nature of the Appellant’s June 2006 deals, and of the purported transaction involving the Appellant and Midcom overwhelming. In the light of the overwhelming evidence of contrivance, the Tribunal considers the additional evidence simply part of the subterfuge to hide the true purpose of Midcom payments, which were to fund the Appellant’s transactions with Uni-Brand.

617.The Tribunal’s findings support HMRC’s interpretation of the facts concerning the Appellant’s June 2006 loss. The Appellant as at 1 June 2006 was a busted flush with only ₤53 in its bank account. The Appellant’s repayment claims for March and April 2006 had not been met, and it was due on 30 June 2006 to pay one year commission and the first instalment on its loan to KSC. The Appellant knew that any further broker deals in mobile phones would be subject to extended verification. The proposed deal with Elite Mobile would not generate a significant repayment of VAT The only way that the Appellant could make any further VAT reclaims was to make a huge loss on its deals in mobile phones. In the June 2006 deals with Uni-Brand and Horizon and Gold the Appellant operated as a buffer rather than as a broker and stood to recover a ₤700,000 VAT repayment claim. The Appellant occupied the position of buffer with the intention of avoiding extended verification by HMRC of the June 2006 transactions. The repayment claim would enable the Appellant to meet its commitments with KSC. These arrangements also allowed Uni-Brand which also sold at a loss to the Appellant to receive the correct amount of input tax from the Appellant. The input tax was then applied to offset Uni-Brand’s output tax liabilities in its 08/06 contra trades.

618.The Tribunal is satisfied on the facts found that the Appellant’s deals with Uni-Brand and Gold and Horizon in June 2006 were contrived and calculated to produce a purported trading loss of ₤4.2 million in order to generate a VAT repayment of ₤700,000. The trading loss was covered by a cash injection from Midcom, which meant that at the end of the deals the Appellant was left with a ₤100,000 credit balance in its bank account and with the expectation of a substantial VAT repayment claim.

Evaluation of the Findings on Knowledge

619. The Tribunal in its findings on knowledge has concentrated on those facts that were directly relevant to the disputed transactions and within the claimed knowledge of the Appellant. The one exception has been the facts for the June 2006 deals when the Tribunal was decided to refer to the attendant circumstances of the wider deal chains and money flows to provide a full picture of the Appellant’s June 2006 deals. The reference to the attendant circumstances in the June 2006 deals reinforced the Tribunal’s findings on the direct circumstances of those deals which were within the Appellant’s claimed knowledge.

620. The Tribunal summarises below its findings on the Appellant’s knowledge in respect of the disputed transactions:

(1) The terms of the Appellant’s agreement with KSC meant that the Appellant had no choice over its customers and the price charged to them from the moment when it commenced trading in mobile phones in 2002 until August 2006. The existence of this agreement seriously undermined the Appellant’s assertions that it was an independent trader subject to the normal market forces of supply and demand. Throughout the period of the disputed transactions KSC exercised significant control over the Appellant’s trading activities.

(2) The Appellant was utterly reliant on KSC for providing it with the necessary capital and cash flow to fund its mobile phone business. KSC provided the funding for the Appellant’s March 2006 deals with the loan of ₤1.5 million. The Appellant’s relationship with KSC was totally devoid of the characteristics associated with arms length commercial arrangements between two separate businesses. KSC controlled the Appellant’s customers, the prices charged, and its finances. The terms of the documents regulating their relationship had no commercial justification. The Appellant fitted the description of KSC’s stooge.

(3) The Appellant’s sole business rationale was to make a profit from the VAT repayment. The commission arrangements with KSC meant that it was unable to make a profit from its wholesale dealings in mobile phones. The Appellant’s business activities were inextricably linked with the cycle of VAT return submission and VAT repayments. The Appellant had no business existence outside the cycle and remained dormant for the majority of the time during the period of the disputed deals.

(4) The Appellant had no rational commercial justification for its existence as a profit making business. The Appellant made huge gross profits from its operations (including the March and April transactions) that did not add value to the products it was selling. The Appellant in the disputed transactions was not active in a niche market or seizing opportunities from failures in the distribution market for mobile phones. The Appellant’s mark ups in the disputed transactions did not conform with its own benchmarks, and its competitors were prepared to sell their phones at a lower price to the Appellant that what they could achieve on the open market. The Appellant’s switch in April and June 2006 to an exclusive supplier arrangement with Uni-Brand defied the Appellant’s own rationale for doing business. The reality was that the Appellant’s only meaningful product from its activities with the disputed transactions was a completed VAT return at the end of each month supported by VAT invoices.

(5) The Appellant’s published terms and conditions for the disputed deals fulfilled no commercial function. The Appellant had adopted them to give the impression of proper ongoing commerce knowing full well that it had no intention of applying them to its mobile phone deals.

(6) The Appellant’s reliance on ship on hold was a belated attempt to give its dealings an aura of commercial legitimacy. In the Tribunal’s view this was another example of the Appellant finding another justification for its trades once its original rationale had been exposed as false.

(7) Mr Rashid’s portrayal of the conduct of disputed transactions demonstrated their contrived nature. His portrayal of the Appellant’s transactions meant that the parties knew of each others’ existence, no party had ownership of goods, the parties allocated and transported goods they did not own and suppliers would not be paid until the Appellant had received payment from its customers. This depiction belied Mr Rashid’s assertions that the Appellant was operating as an independent trader, arms length from its suppliers and customers in pursuit of the best deal. Instead Mr Rashid’s portrayal unwittingly disclosed the existence of contrived arrangements having no hallmarks of commercial arms length trading and involving a chain of connected traders which went beyond the Appellant’s immediate suppliers.

(8) The Appellant did not fulfil its stated purposes for conducting due diligence on its customers and suppliers. The Tribunal’s findings showed that the due diligence had no influence on the Appellant’s trading. Mr Rashid did not critically evaluate the information provided by the due diligence and ploughed ahead with the transactions regardless of the negative indicators. In short the due diligence formed no part of the Appellant’s decision to trade with the customers and suppliers in the disputed transactions. The Tribunal concludes that the Appellant’s due diligence was just a charade to give the impression that the Appellant was engaged in commercial trading and complying with the joint and several requirements of HMRC Notice 726.

(9) The Tribunal’s findings on the Appellant’s inspections for the disputed deals undermined Mr Rashid’s claim that Aberdale was engaged by the Appellant to verify and check all stock bought and sold. The defects in the Appellant’s document trail of requests and reports for the disputed deals indicated that they played no commercial role in the Appellant’s business. The cumulative effect of the findings, however, carried more serious implications for Mr Rashid’s credibility, and the bona fides of the disputed deals. The findings on Mr Rashid’s knowledge regarding the April transactions, Mr Rashid’s attempt to mislead HMRC with 500 bogus IMEI scans, the non-production of the records of the IMEI scans and the Appellant’s capability of producing inspection reports in Aberdale’s name all pointed to the conclusion that Aberdale did not scan the IMEI numbers of the mobile phones in the disputed deals, and that the Appellant not Aberdale was responsible for the production of the inspection reports.

(10) The Appellant’s insurance arrangements for the disputed transactions were no more than a façade designed to give the transactions an aura of authenticity. The reality behind the façade was that the Appellant did not care whether the goods were adequately insured, and only interested in having a piece of paper which might satisfy the requirements of HMRC Notice 726.

(11) The evidence relied upon by HMRC in respect of the deal documentation except for the contractual arrangements was inconclusive. The evidence neither advanced nor hindered HMRC’s case.

(12) The Appellant’s deals with Uni-Brand and Gold and Horizon in June 2006 were contrived and calculated to produce a purported trading loss of ₤4.2 million in order to generate a VAT repayment of ₤700,000. The trading loss was covered by a cash injection from Midcom, which meant that at the end of the deals the Appellant was left with a ₤100,000 credit balance in its bank account and with the expectation of a substantial VAT repayment claim.

621.HMRC presented its case on the basis the evidence was compelling that the Appellant knew of the connection between its disputed transactions and the fraudulent evasion of VAT through an MTIC scheme. The Appellant defended the case on the basis that it was a genuine trader acting as a rational business seeking to make a commercial profit from an economic activity. The Appellant’s activities were regulated by specific contractual terms and conditions, and properly insured and documented. The Appellant took active steps to ensure that its deals were legitimate by carrying out extensive due diligence of its customers and suppliers and a through inspection of goods.

622.As HMRC’s case rolled out the Appellant’s defence unravelled. Mr Rashid’s first line of defence to the inconsistencies in the Appellant’s transactions as revealed by HMRC was that they were clerical mistakes or dealt with on the telephone, of which no records were kept. When those explanations were found wanting, Mr Rashid was forced to admit that the Appellant did not conduct its transaction in the manner portrayed by the copious documentation and his witness statements. The final picture painted by Mr Rashid of the Appellant’s disputed transactions was that the deals were conducted by telephone, the Appellant and its suppliers did not own the goods, the transactions carried no financial risk, and the Appellant’s documentation, procedures and due diligence were irrelevant because of the ship on hold arrangements. Despite Mr Rashid’s volte face he still maintained that the Appellant’s transactions were legitimate and typical of a wholesale business.

623.The Tribunal’s findings on knowledge which at the moment are limited to those matters that the Appellant said was within its knowledge [74] showed that the Appellant was not a genuine independent trader acting as a rational business. The Appellant’s business and funding for the disputed transactions were effectively controlled by a third party KSC. The Appellant had no rational commercial purpose making huge profits from the March and April deals for doing nothing other than submitting VAT returns. The Appellant in respect of the disputed transaction flouted its contractual terms and conditions, ignored its due diligence, fabricated inspections of the mobile phones, and did not care whether the mobile phones were insured. The Appellant’s deals in June 2006 were contrived and calculated to produce a purported trading loss of ₤4.2 million in order to generate a VAT repayment of ₤700,000. The sum of these findings and Mr Rashid’s volte face on the Appellant’s case are that the Appellant knew that when it entered into each of its March, April and June transactions they were connected with the fraudulent evasion of VAT.

624. The Tribunal considers that the wider circumstances surrounding the Appellant’s transactions heighten the hue of the Appellant’s fraudulent knowledge. The Tribunal findings at paragraph 513 demonstrated that the Appellant’s transactions were part of a systematic and orchestrated fraudulent scheme which encompassed both the fraudulent defaults in 52 of the Appellant’s transactions, the dishonest contra-trading by Uni-Brand in the remaining 41 transactions and the fraudulent defaults by those in Uni-Brand’s broker chains. The Appellant’s positions in the fraudulent scheme for the March, April and June transactions were critical for the successful execution of the VAT frauds. The Appellant operated as a broker in the March and April deals and as a buffer with a potential large VAT repayment in June. The Appellant’s critical roles in the fraudulent scheme were compelling evidence that it knew the transactions were fraudulent.

625.The Appellant’s transactions were all completed within the respective chains on a back to back basis with the suppliers holding the exact quantity of stock that was required by the customers. The mobile phone consignments were all purchased from overseas and then sold back overseas with a very short interregnum within the UK. The only logical reason for the interregnum in the UK was to enable the respective traders to facilitate the VAT fraud. The deal chains showed the difference in the prices paid for the goods at the head of the chain and the Appellant’s sale price of the goods. This price differential was not justified on commercial grounds as the respective deals took place on the same day often within a very short period of time. Also the price differential questioned why the Appellant’s overseas customer was sourcing the mobile phones from the Appellant when it could have got a much cheaper deal by dealing direct with the overseas supplier for the respective deal chains.

626. The setting of the Appellant’s transactions within the wider fraudulent scheme showed that in March the Appellant occupied the role of a broker in a direct deal chain. This changed in April to a broker role in a contra-trade, and finally the Appellant ended up as buffer in the June clean chain of a contra-trade. The Tribunal is satisfied that the Appellant’s switch from a direct deal chain to a contra trade in April was a direct response to HMRC’s investigation of the Appellant’s VAT repayment claim for March with the disguised aim of facilitating a fraudulent VAT repayment claim for its April deals. Similarly the Appellant’s switch from a broker to a buffer role coupled with a contrived loss was another covert act on the Appellant’s part to disguise a fraudulent VAT claim.

627.When the Appellant occupied the key role of broker within the fraudulent scheme it secured significantly higher profits than the other parties in the March transactions or Uni-Brand in the April deals. The Appellant’s average profit on its March deals was ₤100,000 compared to ₤10,000 for the other traders. In respect of its April deals the Appellant secured an average profit of ₤78,000 which was ten times greater than the average profit of ₤7,300 for Uni-Brand. There was no commercial reason for the Appellant securing far greater profits than its suppliers for simply arranging for the mobile phone consignments to cross the English channel. The Appellant said that it had higher transport and insurance costs than the other traders, however, those costs did not justify a tenfold increase in profits. The large profits achieved by the Appellant as compared with the other traders was because as broker it took the highest risk in the fraudulent scheme as it would have to submit a repayment claim to HMRC which may have been refused. The high profit was a reward for taking that risk.

628. The Appellant’s profits in the March deals showed a distinct correlation with the VAT defaulted upon (34-36 per cent). The Appellant dismissed the correlation as pure speculation since HMRC had no evidential basis that the Appellant sold the goods at anything other than at market price. The existence of the KSC agreement shattered the Appellant’s assertions about operating to market forces. The Tribunal agrees with HMRC that the Appellant’s profits should not, if it was an ordinary commercial enterprise, bear any consistent mathematical relationship to the amount of VAT defaulted upon by a fraudster, particularly as the fraudster was apparently three or four companies removed from the Appellant in the chain.

629. The evidence showed that the Appellant in the transactions was repeatedly involved in circular fund structures. The circularities of funds allowed the Appellant to be ultimately reimbursed for its purchase, which was utterly lacking in commerciality. The Appellant’s repeated involvement was also persuasive evidence that it was not negotiating any transactions and instead buying from and selling to those companies that it was instructed to deal with. The prevalence of circular money flows in Uni-Brand’s April and June clean chains involving the Appellant undermined their description as clean and emphasised their fraudulent nature through their connection with the dirty chains.

630.All of the Appellant’s dealings in the four month period from March to August 2006 except for three invoices have been traced to the fraudulent evasion of VAT. The excepted three invoices related to buffer sales to Shelford Trading which also appeared in deals 5 and 10-12 of the Appellant’s 03/06 period. HMRC argued that a near 100% incidence of fraud in respect of its transactions over a four month trading went beyond the realms of coincidence and the true inference to be drawn was that the Appellant knew that they were connected to a fraudulent MTIC scheme. The Tribunal agrees.

631. The Tribunal’s consideration of the wider circumstances reinforced the Tribunal’s conclusion on those facts immediately connected with the disputed transactions that the Appellant knew that when it entered into its March, April and June transactions they were connected with the fraudulent evasion of VAT.

The 04/06 and 06/06 transactions and Contra Trades

632. The Appellant in its further submissions on Brayfal decision argued that on any application of the facts of this Appeal to the law as now clarified by the Superior Courts, the Appellant must succeed in respect of its Appeals on the April and June deals. In the Appellant’s view, HMRC had to prove that the Appellant knew of Uni-Brand’s dishonest concealment of the even spread of its output tax claim in the clean chain with the input tax claim in the dirty chain to defeat the Appellant’s Appeals.

633.According to the Appellant there was no evidence of the Appellant knowing about Uni Brand’s dishonest concealment of the even spread. In the case of the June 2006 deals the Appellant could not know because it completed the deals one month before Uni-Brand transacted its deals in the dirty chain. The Appellant relied on the evidence of Officer Lam who said that he had no evidence that the Appellant knew of Uni-Brand’s even spread between its output and input tax claims. In the Appellant’s view the artificiality of the contra-trade construct in relation to its Appeal was demonstrated by Officer Lam’s jiggle to allocate tax losses to its April deals, and the perceived assignment of the total losses to its June deals.

634.The Tribunal disagrees with the Appellant’s application of the law to the facts of this Appeal. The Tribunal has found as fact that the Appellant’s transactions were part of an overall scheme to defraud the Revenue. The scheme encompassed both the fraudulent defaults in 52 of the Appellant’s transactions, the dishonest contra-trading by Uni-Brand in the remaining 41 transactions and the fraudulent defaults by those in Uni-Brand’s broker chains. Further the Tribunal has found that the Appellant knew at the time it entered the April and June transactions that they were connected with the fraudulent evasion of VAT. The evidence of Officer Lam was irrelevant in that respect. The fact that he had no evidence of the Appellant’s knowledge did not displace the Tribunal’s findings based on consideration of the whole evidence adduced by HMRC.

635.In the light of the Tribunal’s finding that the Appellant knew that its transactions were connected with the fraudulent evasion of VAT it was not necessary as a matter of law for the Tribunal to be satisfied that the Appellant knew the precise details of the minutiae of the fraudulent scheme. As Moses LJ in Mobilx at paragraph 62 said

“The principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader’s purchase. If the circumstances of that purchase are such that a person knows or should know that his purchase is or will be connected with fraudulent evasion, it cannot matter a jot that that 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”.

636. The Appellant argued that the words of Moses LJ were qualified by the prefatory words of the second sentence, if the circumstances of that purchase are such... The Appellant contended that those prefatory words emphasised what was necessary to satisfy the knowledge requirement was variable. The Tribunal considers the meaning of the prefatory words obvious. The Tribunal must make its decision on knowledge on the circumstances of the individual case. This is what the Tribunal has done in relation to the Appellant’s Appeal.

637.The Tribunal has already referred to Mr Justice Brigg’s decision in Megtian Limited (in Administration)[75] which contradicted the Appellant’s understanding of the law. Thus the knowledge threshold in contra trading was met if at the time of entering into its transactions the Appellant knew or should have known that the transactions were connected with the fraud even though at the time it might not know the precise details of the fraud, for example, whether its chain was a clean or dirty chain or whether contra-trading was necessarily involved at all. In this case the Appellant certainly knew that at the time it entered into the transactions with Uni-Brand in April and June 2006 that they were connected with the fraudulent evasion of VAT.

638. Having disagreed with the Appellant’s understanding of the law, the Tribunal in any event considers there was ample evidence to support the conclusion that the Appellant knew at the time it entered the April and June transactions that Uni-Brand was a dishonest contra-trader. The Tribunal makes the following findings in this respect:

(1) The Appellant’s sudden switch from trading with five suppliers in March to the exclusive supply arrangement with Uni-Brand in April and June 2006.

(2) The Appellant made this switch in response to HMRC’s investigation of its March VAT repayment claim with the aim of disguising a fraudulent VAT repayment claim through the cover of contra trades.

(3) The Appellant gave up its established trading relationship with Globcom for one with Uni-Brand. The Appellant knew that Globcom was the mobile phone trading arm of the Uni-Brand corporate structure. Uni-Brand was set up for the purpose of dealing in household goods.

(4) The Appellant’s contrived loss in the 06/06 deals and its connection with Uni-Brand’s contrived loss in the same deals.

(5) The Appellant switch from a broker role to a buffer role in the June 2006 deals when its ruse in April 2006 did not produce the desired result.

(6) The Appellant’s switch to a buffer role coupled with the contrived loss in June 2006 was another covert act on its part to disguise a fraudulent VAT claim through the cover of a contra-trade.

(7) The close relationship between Mr Rashid and Mr Iqbal of Uni-Brand which was not at arms length. Mr Iqbal of Uni-Brand assisted the Appellant with its attempt to recover the VAT on its April deals by providing copies of the inbound CMRs for the goods sold by Uni-Brand to the Appellant in April 2006. One of those CMRs had the name of Uni-Brand’s supplier. Similarly the Appellant helped Uni-Brand by allowing due diligence in its name to be in Uni-Brand’s possession at a visit on 14 June 2006.

(8) Although the invoices for the Appellant’s June deals were dated 23 June 2006 the payments were not made on those deals until 24 July 2006 which coincided with the start of Uni-Brand’s dirty chain on 27 July 2006. The Tribunal is satisfied that the timing of the Appellant’s invoices and the payments on those invoices were pre-arranged and known to the Appellant at the time it entered into the transactions with Uni-Brand and Horizon and Gold. The timing of the Appellant’s invoices was dictated by the date of its VAT return at the end of June. The timing of the payments was set to coincide with the commencement of Uni-Brand’s dirty chains. The delay in the money payments on the Appellant’s June deals was compelling evidence that the Appellant knew of the existence of Uni-Brand’s dirty chain at the time it entered the June deals.

Outstanding Factual Matters

639.The Tribunal’s examination of the facts has concentrated on those directly relevant to the Appellant’s March, April and June 2006 transactions. The Tribunal did not consider it necessary to make findings on those matters relating to the Appellant’s deals from 2003 to January 2006 relied upon by HMRC, unless they impacted upon the directly related facts such as the KSC agreement. The Tribunal as a general rule considered those matters in 2003 to January 2006 of limited relevance. Equally the Tribunal has not placed weight on isolated facts which included lack of ordinary business documentation and invoice splitting. The Tribunal considered these isolated matters as neither advancing nor hindering HMRC’s case.

640.The Tribunal has provided answers in its evaluation of the facts and the introduction to its consideration to a substantial proportion of Mr Rashid’s evidence which the Appellant alleges were not put to Mr Rashid in cross examination. The matters not dealt with by the Tribunal were of no relevance to its fact finding exercise on the question of knowledge.

Proportionality, Legal Certainty and Fiscal Neutrality

641.The Appellant contended that HMRC’s case based on an exception to the right of deduction was in conflict with the Court of Appeal’s formulation that fraudulent evasion of VAT fell outwith the scope of VAT. According to the Appellant, the Court of Appeal was in real difficulties going down the outwith scope route because of the very circumscribed circumstances under which a transaction was outwith the scope of the VAT regime. The Appellant was of the view that HMRC had attempted to avoid those difficulties by arguing that the Appellant should be denied its input tax as an exception to the right to deduct. HMRC’s approach, however, was not without its own difficulties because HMRC had to establish that its case constituted derogation from the right to deduct which satisfied the requirements of legal certainty and strictness within European Law.

642.HMRC in its skeleton argument [76] relied on the principles established by the European Court of Justice in the Kittel case:

“Therefore in principle a broker is entitled to the payment of input tax it claims. The Respondents rely on the exception to this right identified by the European Court of Justice (“the ECJ”) in its judgment dated 6 July 2006:

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

61……where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with the fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.”

643. Lord Justice Moses in Mobilx at paragraphs 41 to 44 explored the meaning of paragraph 59 of the Kittel judgment:

“ 41…. They demonstrate the basis for the development of the Court’s approach. 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.

42. By the concluding words of § 59 the Court must be taken to mean that even where the transaction in question would otherwise meet the objective criteria which the Court identified, it will not do so in a case where a person is to be regarded, by reason of his state of knowledge, as a participant.

43. 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.

44. Once the approach of the court in Kittel is understood, centred as it is on the scope of VAT and of the right to deduct, as measured by the objective criteria, many of the objections raised by traders fall away”.

644.The Tribunal disagrees with the Appellant’s submissions that HMRC’s case was based on precarious legal principles. As can be seen from its skeleton argument HMRC’s reliance on the exception to the right to deduct was derived from the principles established by Kittel. Moreover the Tribunal considers that HMRC’s case was not in conflict with the formulation of the Kittel judgment by the Court of Appeal. The starting point for Lord Justice Moses’ analysis of Kittel was whether the transaction met the objective criteria for the right to deduct. If the transaction did not meet the objective criteria, the transaction fell outwith the right to deduct, and as corollary outwith the scope of VAT. The use by the Court of Appeal of the term outwith the scope of VAT was as a necessary consequence of the transaction failing to meet the objective criteria for the right to deduction. The Court of Appeal’s formulation was firmly grounded on the denial of the right to deduction.

645.The question that remains is whether the Tribunal’s finding that the Appellant knew at the time it entered each of the March, April and June 2006 transactions that they were connected with the fraudulent evasion of VAT constituted an exception to its right to deduct VAT for the said periods.

646.The Appellant argued that European Law principles of proportionality, legal certainty and fiscal neutrality trumped the objective of preventing fraud. The Appellant contended that HMRC had been disproportionate in selecting its repayment claims above those of other traders in the respective chians for refusal. The Appellant in its cross examination of the HMRC Officers established that incidences of fraud were rife in the documentation of the traders preceding the Appellant’s deals. In the Appellant’s view HMRC had grounds for de-registering the defaulting traders before the fraud got off the ground. The Appellant queried in respect of the June 2006 deals about the position of Horizon and Gold which acted as the brokers in the fraudulent transactions.

647.HMRC argued that the concept of “proportionality” was utterly irrelevant to the matters in issue before the Tribunal. The Appellant’s contentions were fallacious. If taken to their logical conclusion an Appellant who was a knowing participant in the fraudulent evasion of VAT would escape the consequences of its actions purely because HMRC acted in some way disproportionately. In HMRC’s view such a conclusion tended to such injustice and was so lacking in common sense that it could not be right. Such a conclusion would be to allow Community law to be used for fraudulent ends, a use to which it cannot be put as per paragraph 54 of Kittel.

648.Moses LJ in Mobilx gave the “proportionality” argument short shrift at para.66:

“It is not arguable that the principles of fiscal neutrality, legal certainty, free movement of goods and proportionality were infringed by the Court itself, when they were at pains to preserve those principles (see §§ 39-50). By enlarging the category of participation by reference to a trader’s state of knowledge before he chooses to enter into a transaction, the Court’s decision remained compliant with those principles.”

649. The Appellant argued that the judgment of the European Court in Pannon Gep Centrum Kft Case C-368/09 15 July 2010 took precedence over the Court of Appeal’s decision in Mobilx HMRC contended that Pannon Gep simply decided a narrow point, that member states cannot impose invoicing burdens beyond those in directive 2006/112, and was of no relevance to this Appeal.

650.The Appellant also argued that HMRC’s refusal was contrary to the principles of legal certainty. HMRC was not entitled to deny the Appellant’s claim for VAT in respect of matters that were not known at the time the Appellant entered into the transactions. Similarly the refusal infringed the principle of fiscal neutrality by not allowing the Appellant to deduct its VAT.

651. On the question of legal certainty the Moses LJ in Mobilx said at paragraph 60:

“ Such an approach does not infringe the principle of legal certainty. It is difficult to see how an argument to the contrary can be mounted in the light of the decision of the court in Kittel. The route it adopted was designed to avoid any such infringement. 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”.

652. Whilst on the question of fiscal neutrality Moses LJ in Mobilx said at paragraph 20 :

“ By focussing on those objective criteria the court avoided infringing the fundamental principles of fiscal neutrality and legal certainty which lie at the heart of the VAT system.”

653. In this Appeal the Tribunal has found that the Appellant knew at the time it entered into the March, April and June transactions they were connected with fraudulent evasion of VAT. In which case the objective grounds were met for refusing the Appellant’s repayment claims in respect of those transactions. The principle of legal certainty was not infringed because the Appellant knew at the time it entered into the transactions that it was not entitled to the VAT on those transactions because of their connection with fraudulent evasion of VAT. Finally the Tribunal’s decision that the Appellant knew that its transactions were connected meant that HMRC’s refusal of the Appellant’s repayment claims did not offend the principles of proportionality. The Tribunal agrees with HMRC’s argument that Community law cannot be used for fraudulent ends. Equally the Tribunal considers that the principles of the Pannon Gep decision were not relevant to the facts of this Appeal.

Decision

654. The Tribunal decides that

(1) VAT losses were incurred in the Appellant’s March 2006 deals and in the Uni-Brand’s dirty chains of the 05/06 and 08/06 periods.

(2) The VAT losses in the Appellant’s March 2006 deals and in the Uni-Brand’s dirty chains of the 05/06 and 08/06 periods were fraudulent.

(3) Uni-Brand knowingly operated as a dishonest contra trader in respect of its dealings in the 05/06 and 08/06 VAT periods.

(4) The traced invoice chains for the Appellant’s March 2006 transactions as set out in Appendix 1 to HMRC’s skeleton demonstrated that each of the Appellant’s March 2006 transactions was connected to fraudulent tax losses

(5) The Appellant in April and June 2006 purchased the mobile phones from Uni-Brand which the Tribunal has found to be a dishonest contra-trader concealing its own role in the fraud through its dealings with the Appellant. Further the Tribunal holds that Uni-Brand offset its impending input tax reclaim in the dirty chains tracing to fraudulent tax losses against the output tax liabilities on its onward sales to the Appellant. The Tribunal is satisfied on the above findings that the Appellant’s April and June 2006 transactions were connected to fraudulent tax losses.

(6) The Appellant’s transactions were part of a systematic and orchestrated fraudulent scheme which encompassed both the fraudulent defaults in 52 of the Appellant’s transactions, the dishonest contra-trading by Uni-Brand in the remaining Appellant’s 41 transactions and the fraudulent defaults by those in Uni-Brand’s broker chains.

(7) The Appellant knew at the time it entered the April and June 2006 transactions that Uni-Brand was a dishonest contra-trader.

(8) The Appellant knew at the time it entered into each of its March, April and June 2006 transactions that they were connected with the fraudulent evasion of VAT.

(9) The Appellant is not entitled to its right to deduct VAT in relation to the March, April and June 2006 transactions.

655.The Tribunal, therefore, dismisses the Appeal and upholds HMRC’s decisions refusing input tax in the total sum of £15,294,335 claimed in VAT accounting periods 03/06 (£5,535,460), 04/06 (£6,460,125) and 06/06 (£3,298,750).

656.The Tribunal reserves its position on costs. If a party wishes to apply for costs it must submit an application to the Tribunal within 28 days of release of this decision with a copy to the other party. If an application is submitted either party may apply for a determination if costs cannot be agreed.

657.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.

MICHAEL TILDESLEY OBE

TRIBUNAL JUDGE

RELEASE DATE: 14 June 2011

[1] The publicly available information was set out in paragraph 1.3.1 of his witness statement dated 3 April 2009

[2] The Tribunal is aware that the Tribunal in Excel RTI Solution Ltd (in administration) v HMRC [2010] decided that there was considerable force to the submissions of Mr Patchett-Joyce, the Appellant’s counsel in this Appeal, on the relevance of Mr Fletcher’s evidence.

[3] See Mr Rashid’s evidence on Elite Mobiles paragraph 110 of second witness statement.

[4] Transcript 30.11.10 lines 4-16 page 103

[5] Transcript 30.11.10 line lines 23-23 page 188 & 189

[6] IBD appears to be a typographical error in transcript.

[7] Transcript 26.11.10 line 9 page 132.

[8] Transcript 29.11.10 line 10 page 6.

[9] Transcript 29.11.10 line 21-18 pages 12 & 13

[10] Para 25

[11] Transcript 29.11.2010 lines 18-22 page 45

[12] Transcript 30.11.2010 line 13 -18 152

[13] Transcript para 17 page 95 26.11.2006

[14] Paragraph 291

[15] The Callender Group’s customer in the disputed deals.

[16] Oracle’s customer in the disputed deals.

[17] Alpha Sim’s customer in the disputed deals.

[18] Realtech’s customer in the disputed deals.

[19] 336 transactions of which 196 were struck by the eight suppliers

[20] The director of Hi-Tec Electronics (DK) was Arif Rashid, the brother of Adil Rashid, the Appellant’s director.

[21] HMRC alleged the Company Secretary’s lengthy disqualification. The Tribunal queries whether a company secretary can be disqualified.

[22] The goods consisted of RAM modules, USBs, CF cards, Adobe creative suited

[23] Con-Animo had been a customer of Uni-Brand in the defaulter chains in period 05/06.

[24] Officer Lam’s witness statement dated 13 August 2008, paragraph 67.

[25] Officer Lam’s witness statement dated 13 August 2008, paragraph 99.

[26] Transcript 30.11.2010 lines 14 – 25 page 185.

[27] Transcript 25 November 2010 para 19, 139 to para 5 144.

[28] Transcript 30.11.2010 page 139 lines 3-20.

[29] The defaulting traders are excluded from this category because Officer Orr did not analyse their bank accounts since the money flows bypassed them.

[30] The figures in brackets represents the number of times the traders appeared in the deals analysed by Officer Orr, see the table to paragraph 67 of HMRC closing submissions dated 2 December 2010.

[31] HMRC objected to the admission of the evidence because it was not given during Mr Rashid’s testimony.

[32] See Transcript 29 November 2011 page 30 & 31.

[33] These chains relate to Uni-Brand 05/06 and 08/6 quarters.

[34] At paragraph 183

[35] The actual wording on the supplier’s declaration was this declaration is mandatory for the proposed deal to continue.

[36] Appellant’s closing submissions at para.55 relied on Mr Plowman’s answer to suggest that the issue of whether the supplier actually owned the goods would depend on the circumstances. The Tribunal considers that the submission did not have full regard to the purpose of the question, which was what the Appellant understood by the words used in the conditions of sale regardless of the specific circumstances for each transaction.

[37] See paragraph 43 of his first witness statement dated 8 August 2008.

[38] See for example the Appellant’s letter to Horizon Import Export Ltd dated 8 May 2006 at page 3034.

[39] The Veracis report found that Uni-Brand did not use trade references which was denied by Uni-Brand in its letter to the Appellant dated 6 February 2006.

[40] The proportion of mobile phones in a consignment which had their IMEI scanned.

[41] Appendix 5 of HMRC’s skeleton argument.

[42] Attached to Officer Kenrick’s witness statement dated 12 November 2010.

[43] As displayed by Microsoft

[44] See Transcript 29.11.2010; line 24-25 page 62; nobody owned them, everybody got reservation of title, somebody owned them somewhere else

[45] See Transcript 29.11.2010; line 5-10 page 64

[46] See Transcript 29.11.2010; line 5-14 page 66

[47] 03/06 period

[48] See above paragraph 455.

[49] See above paragraphs 202-204

[50] See above paragraph 230

[51] See above paragraphs 221-227

[52] See above paragraph 228

[53] The Tribunal expressed concern about drawing conclusions from similarities in family name without knowing the cultural context (see transcript day 15, 3.12.2010, page 42 para. 14 -18. The Tribunal’s concerns were alleviated somewhat by the Appellant’s further evidence of the phone book indicating around 200 entries for the surname Butt, which was relatively small for a population of 1.4 million.

[54] See paragraph 70 of HMRC’s closing skeleton argument for a concrete example.

[55] See above paragraphs 240-249.

[56] Transcript 10.11.2006 page 36 14-18

[57] Transcript 26.11.2010 Page 110 Line 4.

[58] Transcript 26.11. 2010 page 98 line 1-12.

[59] Transcript 26.11.2010 page 97 line 12,25

[60] Transcript 26.11.2010 page 97 line 23.

[61] Transcript 26.11.2010 page 93 lines 3 -14

[62] See above paragraphs 41-43

[63] Transcript 10 November 2010 pages 42 & 43 lines 8 – 20 54 & 55 lines 20 - 21

[64] See the evidence in the above paragraphs 255-262

[65] See paragraph 183.2 of Mr Rashid’s second witness statement dated 9 January 2009

[66] See above paragraphs 265-370.

[67] Comparison of the dates of the first trade for suppliers given in paragraph 82 with the dates of the Appellant’s due diligence reports and Veracis reports given in paragraphs 86, 87,93,94, 111 & 112 of Mr Rashid’s second witness statement dated 9 January 2009. In respect of customers comparison of the first trades in paragraphs 123 with the dates of the Appellant’s due diligence reports and Veracis reports given in paragraphs 141, 145, 149 & 167.

[68] See above paragraph 374 (1) –(4).

[69] See above paragraph 396

[70] Office Wald qualified his answer by pointing out that Horizon and Gold were able to sell the phones at a higher price (Transcript 11.11.2006 line 13 onwards page 132.

[71] Except a payment of ₤200,000 to MK Digital, which can only have represented a small proportion of the purchase price of the goods.

[72] The supplier declaration was included with the Veracis’ report dated 23 February 2006. Veracis re-verified the report on Horizon & Gold on 9 August 2006. It is unclear when the Appellant actually received the 23 February 2006 report.

[73] Officer Lam’s witness statement dated 13 August 2008, paragraph 99.

[74] Except the June 2006 transactions.

[75] See paragraph 459 above

[76] At paragraph 17 of the skeleton

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

The Appeal

Overview of MTIC Fraud

Overview of the Law

The Hearing

The Mobile Phone Industry

The Evidence on the Appellant and its Trading in Mobile Phones until March 2006

Introduction

The Appellant’s Knowledge of the Industry

The Appellant and HMRC

KSC Agreement

Funding

The Appellant’s First Transactions (September 2002)

November 2002 transactions

The Appellant’s Subsequent Trades

Early 2006

The Disputed 03/06 Transactions

Overview

Defaulters

The Callender Group

Oracle (UK) Limited

Alpha Sim Limited

Flooring Centre (UK) Limited

Walk’n’Talk

Realtech Distribution Limited

Evidence of Fraudulent Trading within the 03/06 Deal Chains

The Disputed 04/06 and 06/06Transactions

Overview

The Contra-Trade involving the Appellant’s deals in 04/06

The Defaulting Traders in 04/06

ICM UK Limited

Eclipse Windows Doors and Conservatories Ltd

Termina Computer Services

The Contra-Trade involving the Appellant’s deals in 06/06

Defaulting Traders

Mobiles 4 U Ltd

Mountgale Ltd

Evidence of Fraudulent Trading in the 04/06 and 06/06 Deals and the Contra-Trades

Uni-Brand operating knowingly as a Contra-Trader in Appellant’s deals of 04/06 & 06/06

The Evidence on the Appellant’s Loss of ₤4 million in 06/06 quarter

The Circumstances

The Appellant’s Due Diligence and Documentation relating to the 06/06 Deals

The Appellant’s Financial Position

The Evidence on the Money Flows for the Disputed Deals

The Appellant’s Trading Pattern

Evidence of Similarities and Links in the Membership of the Direct Deal Chains 03/06 and the Contra Acquisition and Defaulter Chains 04/06 and 06/06[33]

Evidence of What the Appellant did in relation to the Disputed Transactions

The Contractual Arrangements

The Appellant’s Procedures

The Appellant’s Terms and Conditions

Due Diligence

Overview

Due Diligence on its Individual Trading Partners

Suppliers

Uni-Brand

Globcom

Our Communications Limited

Shelford Trading

21st Century Traders

Elite Mobile PLC

Customers

Imaani International Limited

Midcom International

Essential Trading SARL

Olympic Europe BV

Neo-Abaco GMBH

Meridian Telecommunications SARL

MK Digital World (Cyprus) Limited

Nano Infinity SARL

Negative Indicators

Phone Connected SARL

Horizon Import Export Limited

Inspection of Goods

Insurance Arrangements

The Appellant’s Documentation Produced for the Chains of Transactions

Consideration of the Evidence

Preliminary Matters

Was there a VAT loss?

Evidence of Similarities and Links in the Membership of the Direct Deal Chains 03/06 and the Contra Acquisition and Defaulter Chains 04/06 and 06/06 [33]

21^st Century Traders