DECISION
Introduction
1. This
is an appeal against HMRC’s decision, contained in a letter to the Appellant
dated 29 May 2007, to refuse payment to the Appellant, Manatlantic Limited (“Manatlantic”),
of input tax reclaimed on the Appellant’s VAT return for the periods 01/06,
03/06 and 05/06. The total amount refused is £364,431.39; £65,212.88 for the
VAT period 01/06, £132,685.88 for the VAT period 03/06 and £166,532.63 for the
VAT period 05/06. The disputed input tax was incurred in the purchases of
CPU’s. HMRC say, as set out in the amended Statement of Case, that “the input
tax incurred by the Appellant was done so in a transaction or transactions
connected with the fraudulent evasion of VAT” and that the Appellant “knew or
should have known of this fact”. It is asserted by HMRC that the transactions
formed part of a contrived scheme purposely designed to defraud the revenue. The
Appellant maintains that it did not know and had no means of knowing that its
transactions were connected with such fraud.
2. Mr
Vinesh Mandalia, of Counsel, appeared on behalf of HMRC. Mr Andrew Young, of
Counsel, appeared on behalf of the Appellant. Both produced skeleton arguments
and written submissions which set out the issues to be determined by us. We
were also provided with 6 lever arch files containing witness statements and
documentary exhibits relied upon by both parties. There were many issues upon
which the parties did not agree and we heard evidence from a number of
witnesses. We also had the statements of several other witnesses some of which
dealt with uncontroversial issues and others which, although not agreed,
related to minor or ancillary matters and did not warrant the witness attending
to give evidence.
Missing Trader Intra-Community Fraud
3. It
may assist in understanding the facts of this case to set out the way in which
missing trader intra-community (“MTIC”) fraud operates. The nature of such
frauds has been helpfully summarised in a number of judgments. In The
Commissioners for Revenue and Customs v Livewire Telecom Ltd [20533], Dr
Avery-Jones CBE explained:
“In order to demonstrate where
the loss of tax arises from MTIC fraud we start with a simple example of an
import of goods by X who sells them to Y who exports them. The tax on
acquisition (import) by X is cancelled by input tax of the same amount, and the
output tax charged on sale by X will be cancelled by input tax repaid to Y on
the export, so that the United Kingdom exchequer receives no
net tax. If both X and Y are fraudsters Y will have to finance the output tax
charged by X, which is recovered by X not paying the output tax to Customs.
The only gain by the fraud is if Customs pay the input tax to Y when the
exchequer is left with a loss of the amount of the input tax; the non-payment
of output tax by X is merely the recovery of what Y put in. If the exporter is
innocent of that fraud he is entitled to repayment of the input tax that he has
actually paid to X even though this represents tax never paid by X and the
exchequer is left with the same loss of the amount of the input tax.”
4. There
are a number of terms commonly used when ascribing roles to the parties
involved. The goods are initially purchased from Europe by the defaulting
trader who sells to a trader in the UK, referred to as a buffer. There are
often a number of intermediary traders acting as buffers, the purpose of whose
involvement is to distance the defaulting trader from the repayment claim made by
the trader at the end of the UK transactions known as the broker. The
defaulting trader charges VAT on the goods to the buffer and it is this amount
of VAT which is never paid to HMRC and is subsequently set off against the
repayment claim by the broker. The buffers are able to set off input VAT on the
purchase of the goods against the output VAT charged to the next trader on
sale, thus enabling a valid VAT return to made to HMRC for the difference. The
broker, who is unable to charge VAT on exporting the goods, reclaims the VAT it
was charged on purchase, which is often sufficient to fund the fraud and pay a
profit to the participants of the fraud.
Law
5. The
legislation governing the right to deduct is contained within Sections 24 – 26
of the Value Added Tax Act 1994 and the VAT Regulations 1995. It was common
ground between the parties that these provisions are applicable and conform to
European legislation.
6. The
European Court of Justice in Optigen Ltd and Others v HMRC [C-354/03]
made it clear that output tax can be recovered even though the transaction is
outside the VAT scheme. It was confirmed in the cases of Axel Kittel and
another v Belgium [C-439/04] and Mobilx Ltd (in administration) v HMRC [2009]
EWCH 133 that there is no discretion on the part of the Authorities to withhold
any tax repayment where the objective criteria for compliance with the VAT
regime are met. However where a trader does not comply with the objective
criteria because there is a fraud, that trader cannot recover any tax. Moses LJ
observed in Mobilx Ltd and The Commissioners for Her Majesty’s Revenue and
Customs, The Commissioners for Her Majesty’s Revenue and Customs and Blue
Sphere Global Ltd, Calltel Telecom Ltd & another and The Commissioners for
Her Majesty’s Revenue and Customs [2010] EWCA Civ 517 (“Mobilx”), at
paragraph 24:
“The scope of VAT is identified in Art. 2
of the Sixth Directive. It applies, in addition to importation, to the supply
of goods or services effected for consideration within the territory of the
country by a taxable person acting as such. A taxable person is defined in Art.
4.1 as a person who carries out any of the economic activities specified in
Art. 4.2. Art. 5 defines the supply of goods and Art. 6 the supply of services.
The scope of VAT, the transactions to which it applies and the persons liable
to the tax are all defined according to objective criteria of uniform
application. The application of those objective criteria are essential to
achieve:-
“the objectives of the common system of VAT of
ensuring legal certainty and facilitating the measures necessary for the
application of VAT by having regard, save in exceptional circumstances, to the
objective character of the transaction concerned.” (Kittel para 42, citing BLP
Group [1995] ECR1/983 para 24.)
And at paragraph 30:
“...the Court made clear that the reason why fraud
vitiates a transaction is not because it makes the transaction unlawful but
rather because where a person commits fraud he will not be able to establish
that the objective criteria which determine the scope of VAT and the right to
deduct have been met.”
Moses LJ summarised this position at paragraph 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.”
7. Mr
Young, for the Appellant, conceded in his skeleton argument that the standard
of proof to be applied is the ordinary civil standard; that being on the balance
of probabilities, and not a heightened civil standard as initially asserted in
the Appellant’s Amended Notice of Appeal.
Mobilx
8. Although
the hearing commenced before the handing down of the Court of Appeal decision
in Mobilx, both parties reserved the right to make closing submissions
after judgment was given in that case.
It is helpful at this point to highlight some of the
observations made by Moses LJ in Mobilx which have guided us in reaching our
decision (paragraphs 81 and 82):
“It is
plain that if HMRC wishes to assert that a trader’s state of
knowledge was such that his purchase is outwith the scope of the right to
deduct it must prove that assertion.
But that is far from saying that the surrounding
circumstances cannot establish sufficient knowledge to treat the trader as a
participant...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”
9. Both
parties agreed that the test to be applied is whether, on the balance of
probabilities, HMRC have proved either that the Appellant knew or ought to have
known that the transaction in which he was taking part was connected with
fraud, that being the only reasonable explanation for the circumstances in
which the transactions took place.
Issues
10. The test
established in the case of Axel Kittel can be helpfully summarised as
follows:
(a)
A fraudulent evasion of VAT must be shown to have taken place in each
deal chain;
(b)
A connection between the fraudulent evasion of VAT and the Appellant’s
purchase must be established; and
(c)
It must be shown that the Appellant knew or should have known that the
only reasonable explanation for the circumstances in which the purchase took
place was that the transaction was connected to the fraudulent evasion of VAT.
11. The Court of
Appeal in Mobilx approved this approach and it was common ground between
the parties that each of these elements must be present to justify the denial
of a right to deduction of input tax.
12. It was not
conceded by Mr Young for the Appellant that there was fraud in the deal chains.
It was the Appellant’s contention that “the Appellant has no knowledge as to
the activities of other persons in its supply chain save that it knows who it
bought from and sold to”. Mr Young submitted that “there may or may not have
been a tax loss...” and that although HMRC “have raised the spectre of tax
losses they did not go on to prove it”. The second limb of Mr Young’s
submissions on behalf of the Appellant was that even if fraud did exist in the
supply chains, the Appellant did not know, nor could it be said that they
should have known of such fraud.
13. HMRC put their
case, that the Appellant knew or should have known that there was fraud in the
its supply chain, on the following bases:
(a)
Declarations on the Appellant’s VAT application shown to be inaccurate
and the link between Mr Rogelj, Company Director of the Appellant Company, and
Mr Ryder, Company Secretary of the Appellant Company, with Sirrnet Ltd;
(b)
That Mr Rogelj and Mr Ryder were aware of the prevalence of fraud in the
CPU industry but continued to trade irrespective of the risks involved;
(c)
That the trading model of the company was devoid of any commercial
reality and would have put a reasonable business man on notice that the company
was not involved in legitimate trade;
(d)
That the due diligence undertaken by the Appellant was inadequate and
unnecessary;
(e)
That there was little regard for the terms and conditions of any
insurance policy covering the goods;
(f)
That the same terms and conditions of trading were used for purchase
and supply;
(g)
That the terms of funding were based on recovery of VAT from HMRC and
that the agreements entered into failed to address any liability where
repayment was not made by HMRC to the Appellant or by the Appellant to the
financiers.
(h)
That there was no credible explanation as to why the Appellant stopped
trading, given the Company’s growth, when the “reverse charge” provisions were
introduced in June 2007.
Background Summary
History of the Company
14. The Appellant
Company was incorporated on 7 December 2004. Mr Igor Rogelj was appointed
Company Director and Mr Steven Ryder was appointed Company Secretary. Mr Igor
Rogelj is the sole shareholder of the company.
15. The original
address of the Appellant Company was 77 Oxford Street, London, then, as of 13
October 2006, Trident One, Styal Road, Manchester. HMRC were notified of a new
address on 27 March 2007, that being 13 Moorfield Road, Manchester.
16. The Appellant
Company was registered for VAT with effect from 21 March 2005. The company’s
main business activity was specified on the application, dated 8 March 2005 and
signed by Mr Rogelj, as “the purchase and sale of computer parts.” The
application specified that the company did not expect to receive regular
repayments of VAT and the estimated value of taxable supplies over a 12 month
period was given as £1,000,000.00. The application stated that the value of
goods likely to be bought from, or sold to, other EC member states over the 12
month period was “none.”
17. Within the first
eight months of trading, the turnover of the Appellant Company rose to
£4,539,333.00 per annum.
Sirrnet Limited
18. During the
relevant period, both men were also involved with a company called Sirrnet
Limited (“Sirrnet”); Mr Rogelj was the Company Secretary and Mr Ryder was the
sole Director. Sirrnet was set up by Mr Rogelj and Mr Ryder in 2004. The
Company traded in computer and networking components.
19. Mr Rogelj’s
statement dated 13 November 2008 describes how he loaned £125,000 to Sirrnet in
November 2004 to provide it with the working capital it needed to start
trading. However, Mr Rogelj and Mr Ryder subsequently found that the margins
were slim and that it was difficult to source the stock required by customers. In
December 2004 a Company called Syskal Limited (“Syskal”) made an offer to meet
all of Sirrnet’s stock requirements through its network of companies, leaving
Sirrnet to concentrate on generating sales.
20. On 9 December
2004 Mr Rogelj sold Sirrnet to the main owners of the Syskal group, retaining
10 shares in the company and remaining its Director with Mr Ryder as Company
Secretary until the company went into liquidation on 6 October 2006.
21. On 15 November
2004, HMRC wrote to the Sirrnet in what appears to be a standard letter which
highlighted the dangers of MTIC fraud and requested that traders verify
customers’ VAT numbers via HMRC’s Redhill office.
22. A letter from
HMRC to Sirrnet dated 24 May 2006 outlined in general terms the dangers of MTIC
fraud. It stated that an extended verification exercise conducted into
Sirrnet’s trading activity in the 02/06 VAT period had identified transactions
involving UK defaulting traders and in the periods 01/05 and 02/05 VAT
identified as unpaid within the deal chains exceeded £740,000. The Company was
informed that verification of other deal chains within the same periods was
ongoing. The Company was referred to Notice 726 “Joint and several liability”
provisions and the consequences if it was shown that due diligence had not been
demonstrated by the Company.
23. Sirrnet repaid
£90,000 of the £125,000 loaned to it by Mr Rogelj on 15 December 2004 with a
further sum of £34,000 being repaid on 8 February 2005.
24. Following the
sale of Sirrnet, Mr Rogelj states in his witness statement dated 13 November
2008 that he took the decision to incorporate his own company; that being the
Appellant Company, in order to take full control of all matters pertaining to
the company, in particular any funds invested by him.
HMRC involvement with the Appellant
25. On 3 May 2005
and 25 May 2005, HMRC wrote to the Appellant, in what appear to be standard
letters, which outlined in general terms the dangers of MTIC fraud and
requested that traders verify customers’ VAT numbers via HMRC’s Redhill office.
26. A letter dated
24 June 2005 to the Appellant refers to a meeting which took place at the
Appellant’s premises on 23 June 2005. Mr Rogelj states in his written evidence
dated 13 November 2008 that he does not recall the content of this meeting. The
letter from HMRC reads:
“During our meeting I explained the scale of Missing
Trader Intra Community (MTIC) fraud...within the United Kingdom...it is
particularly prevalent with companies involved in the wholesale of mobile
phones and computer components...traders are expected to make reasonable
commercial checks in respect of their customers and suppliers. Examples of
these checks were included in Notice 726: Joint and Several Liability...and
Notice 700/52...
If you are buying and selling any goods, you should be
able to provide details regarding the goods...such as serial numbers, part
number, batch number, product details, quantity, price per unit, what market
research you carried out, name of the manufacturer, website address, contact
name, etc...
We discussed what additional steps you could take to
protect Manatlantic Ltd...Whilst it is not possible to give a list of cast iron
measures, I strongly recommend you follow the steps outlined in Public Notice
726...
Commercial credit checks should be undertaken on all
suppliers...You should check with the freight forwarder...confirming how long
the goods have been with them and how many times they have been traded in that
period...Also, prior to any deals you must verify the VAT numbers...”
27. A further letter
was sent to the Appellant Company on 4 July 2005 which drew attention to the
fact that four transactions which took place in April and May 2005 for which
the Appellant had provided invoices, originated with a defaulting trader. The
letter reiterated the consequences to the Appellant Company under the joint and
several liability provisions if it was shown that due diligence has not been
demonstrated by the Appellant Company.
28. The Appellant
responded to HMRC’s letter dated 4 July 2005 by email dated 8 July 2005, in
which information was sought as to who the defaulters were, whether they were
importers and querying the incentive to default. In the email Mr Rogelj
requested any information and advice as to how to avoid supplies from
defaulting traders.
29. HMRC responded by
letter dated 18 July 2005, in which Mr Monk, an HMRC Officer, stated that he was
unable to provide specific information relating to another company’s tax
affairs due to confidentiality rules, however as much advice and information as
could be provided was set out within the letter.
30. A letter was
sent to the Appellant dated 7 November 2005 informing the Appellant of tax
losses and defaulters in four sales with which the Appellant was connected on
20 July 2005, 4 August 2005, 9 August 2005 and 24 August 2005. The letter
states that the information is provided to assist the Appellant Company with
its due diligence procedures and reiterates the potential consequences under
the joint and several liability provisions.
31. By letter dated
16 June 2006 the Appellant was advised that transactions carried out in the
period 03/06 commenced with a defaulting trader. Further inquiries appeared to
show that deals carried out by the Appellant in November 2005 and January 2006
also commenced with a defaulting trader.
32. In an email from
the Appellant to HMRC dated 28 July 2006 the Appellant wrote:
“It comes as a great surprise to us that you
identified that some goods I traded with in Nov 05, Jan 06 and March 06
originated from a defaulted trader. We...will approach our suppliers to notify
them about the problems in their supply chains and further question their due
diligence process and supplier vetting procedure...”
The Appellant sought further information as to the
identity of the defaulting trader and stated he would welcome the opportunity
to discuss the matter with HMRC.
33. A meeting took
place on 7 September 2006 at Dorset House, London at which Mr Saul (HMRC
Officer), Mr Outram (HMRC Officer), Mr Rogelj and Mr Ryder were present. During
the meeting Mr Rogelj explained that he was responsible for all of the
Appellant Company’s operational activities, such as buying, selling, marketing
and research. Mr Rogelj stated that the Company advertised via its website and
by attendance at trade fairs. Mr Rogelj stated that he had previous experience
in the trade and had contacts from previous employment. As regards the
Company’s due diligence checks, Mr Saul noted Mr Rogelj’s response as being
that the checks are “time consuming to enable to carry out a deal.” Mr Rogelj
went on to state that the Company made checks with Companies House, HMRC’s
Redhill office and that a procedure recommended by KPMG was followed, although
no written procedure was ever provided to Mr Saul. Mr Rogelj stated that the
Company did not see the goods which were held at freight forwarders; usual
practice being to request inspection of the goods to be carried out by the
freight forwarders.
34. Mr Saul’s
written statement dated 4 September 2008 makes reference to Mr Rogelj stating
at the meeting that the Company had no uniform terms of business; terms were
often dependent on the supplier or customer, the quantity of goods bought
and/or type and age of stock purchased; that there were no written contracts
between the Company and its suppliers or customers and that ownership of the goods
passed on payment. By contrast, the handwritten note of the meeting made
contemporaneously by Mr Saul makes no reference to these matters and
consequently we did not attach any significant weight to these matters.
35. In an email from
the Appellant to Mr Saul dated 2 August 2006, Mr Rogelj queried the reason for
delay in respect of repayment for the 03/06 return and noted that the Appellant
Company was about four trade steps away from the defaulting trader. Mr Rogelj
again reiterated that the Company followed a due diligence procedure
recommended by KPMG prior to the appointment of any supplier and that although
it was felt that the Company could do little more to avoid MTIC fraud any
suggestions made by Mr Saul would be taken into account.
36. In a letter from
Mr Saul to the Appellant dated 21 September 2006, Mr Saul referred to previous
correspondence in which the Appellant was informed that goods purchased from
Multisystems International Limited (“Multisystems International”) in August
2005 had commenced with a defaulting trader. Mr Saul highlighted his concern
that goods purchased thereafter from Multisystems Technology Limited (“Multisystems
Technology”) had also commenced with a defaulting trader. Mr Saul queried why
the Appellant had purchased goods from Technology, knowing that the common
director of both companies was Mr Richard Dawson. Mr Saul also requested
evidence of the due diligence checks undertaken in respect of both Multisystems
International and Multisystems Technology.
37. By letter dated
19 October 2006 from Mr Rogelj to Mr Saul, Mr Rogelj stated that following
advice from HMRC that goods purchased from Multisystems International Ltd started
with a defaulting trader he had “reluctantly made the decision not to trade
with International...notwithstanding the fact that I was very satisfied with
the due diligence that I had carried out on International, and International’s
Director, Richard Dawson, and on the vetting procedures which International
adopted with regard to its suppliers. I informed Mr Dawson of my decision.
Because of my satisfaction with Mr Dawson and International, I was prepared to
consider entering into transactions with Mr Dawson’s company, Technology.
However it was only after having undertaken stringent due diligence on
Technology, and Technology’s vetting procedures, that I made the decision to
buy goods from Technology...”
Transactions subject of the Appeal
38. This appeal
concerns the refusal of payment to the Appellant of input tax reclaimed in
respect of 3 transactions contained within the Appellant’s VAT return for the
periods 01/06, 03/06 and 05/06. The claims were selected by HMRC for detailed
verification, following which HMRC alleged that in each case the transactions
trace back through deal chains to a tax loss.
39. The transaction relating
to the repayment claim made in the period 01/06 in the sum of £65,212.88
concerned the purchase of 4095 SL7Z9 CPU’s from a UK Company called 21st
Trading Ltd and the subsequent export of the goods.
40. The transaction
relating to the repayment claim made in the period 03/06 in the sum of
£132,685.88 concerned the purchase of 9135 SL7Z9 CPU’s from 21st
Trading Ltd and their subsequent export.
41. The transaction
relating to the repayment claim made in the period 05/06 in the sum of £166,532.63
concerned the purchase of 11,970 SL7Z9 CPU’s from a UK company called
Multisystems Technology Ltd and the subsequent export of the goods.
42. A Notice of
Assessment in respect of the transactions was served by HMRC on 8 June 2007.
Evidence
43. We heard oral
evidence from the following witnesses:
(a)
Mr Gary Saul, Case Officer for HMRC who made the decisions under appeal
to deny input tax in relation to the claims made in the 01/06, 03/06 and 05/06
tax periods.
(b)
Mr Simon Haggett, HMRC Officer who links the trading activities of Steven
Philips to HMRC’s decision to deny input tax to the Appellant.
(c)
Mr Michael Downer, HMRC Officer who provides an overview of MTIC frauds,
an analysis of FCIB accounts for traders within the supply chains of the three
transactions subject of this appeal and an analysis of evidence obtained in
criminal investigations; namely a notebook containing transaction chains.
(d)
Mr Colin Miles, HMRC Officer who investigated MS Sethi & Co Ltd, the
defaulter in the supply chain to the 01/06 transaction.
(e)
Mr Robert Lamb, HMRC Officer who investigated the trading activities of
Samson Trading Ltd, the defaulter in the supply chain to the 03/06 transaction.
(f)
Mr Steven Sharrock, HMRC officer who investigated the trading activities
of Focus Racing Ltd, the defaulter in the supply chain to the 05/06 transaction.
(g)
Mr Steven Ryder, Company Secretary of Appellant company
(h)
Mr Igor Rogelj, Director and sole shareholder of Appellant company
44. The statements
of the witnesses who gave oral evidence had been served in advance and those
statements stood as the witnesses’ evidence in chief with further evidence
given to correct the statements and bring the evidence up to date, save for the
evidence of HMRC Officer Mr Colin Miles which was adduced just prior to the
hearing and which, with the consent of the parties, we admitted having taken
the view that the evidence was relevant.
45. We also read the
statements of Mr Roderick Stone who provides an overview of the general nature
and features of MTIC fraud, Mr Michael Kerrigan who exhibits a notebook seized
in a criminal investigation and Mr Kevin Wright who extracted information from
the FCIB Project Server. The Appellant objected to parts of the evidence
contained in these statements where opinions are given or hearsay relied upon
and we bore the objections in mind in reaching our decision.
Was there a fraudulent evasion of VAT in the chain of
each transaction?
46. The three
transactions in respect of which this appeal is brought, were traced by HMRC
back to three alleged defaulting traders; i.e. traders who had not paid the VAT
from their UK sales of CPUs which were subsequently bought by the Appellant.
47. Mr Saul’s
evidence dealt with his investigations, through the enquiries of other
officers, into tracing the goods purchased and sold by the Appellant through
the chain of transactions. There was no dispute as to the identity of the
supplier in each case.
48. Mr Saul produced
the chains in a “deal sheet”. He confirmed in evidence that he obtained the
information used to compile the deal sheet from other HMRC officers and from
checking the records contained on HMRC’s electronic folder; a computerised
system containing data.
01/06
49. The sequence in
relation to the 01/06 transaction shows that 4095 units of SL7Z9 CPU’s were
acquired by Stephen Philips trading as First Call on 13 January 2006. The goods
were purchased on the same date by DDMP Ltd at £90.65 per unit and then by 21st
Trading Ltd at £90.75 as evidenced by 21st Trading Ltd’s purchase
order and DDMP’s invoice. The Appellant purchased the goods on the same date at
a cost of £91.00 per unit and sold them to a Swiss trader, Bergmann Associates,
on 17 January 2006 at Euro 133.00 per unit.
50. Mr Saul gave
evidence that Stephen Philips trading as First Call was initially believed to
be the defaulting trader in the chain and was deregistered as of 19 April 2007.
First Call was subject to extended verification for their claims amounting to
£6,538,329.00 for the period March to May 2006.
51. Mr Haggett, an
Officer of HMRC provided further information as to First Call. Mr Haggett’s
witness statement provides the background to the investigation into Steven
Philips’ trading activities which does not require repetition here. In summary,
enquiries revealed that Mr Phillip’s trading activities were linked to a
company called MS Sethi & Co Limited, which was dealt with in evidence by
Mr Colin Miles.
52. Mr Miles gave
evidence, both oral and written, that information was received from an
insolvency practitioner, Mr Kevin John Hallard, who was dealing with the
bankruptcy of Stephen Philips trading as First Call, that MS Sethi & Co Ltd
had made supplies to Stephen Phillips in December 2005 and January 2006. In 50
days of trading Stephen Phillips had raised purchase orders for a total of 293
separate supplies of mobile telephones and CPUs from MS Sethi & Co Ltd for
a net value of almost £78 million.
53. Mr Miles stated
that an application to register MS Sethi & Co Ltd for VAT was received on
29 June 2004, signed by the company’s sole director, Habib Shahid and dated 17
June 2004. The trading activity declared on the application for VAT
Registration was “Importers of fruit and vegetables” and the principal place of
business was the home address of Mr Shahid of 9 Westwood Road, Ilford, London, Essex, IG3 8SB. The application form stated that the company did not expect to
receive regular repayments of VAT and that the estimated value of taxable
supplies over the following 12 months was £50,000. Mr Shahid declared on the
application for VAT registration that no goods were likely to be bought from,
or sold to, other EC member states. The company was required to submit
quarterly VAT returns; however it failed to submit any returns during the
period of its registration.
54. MS Sethi was
registered for VAT from 16 June 2004. On 28 November 2005, a request for
transfer of the company’s VAT registration was received dated 18 November 2005.
Mr Shahid declared on the form that he had transferred the company as a going
concern to Mr Zeeshan Ahmed.
55. Mr Ahmed
declared that the name of the transferred business was to be “M S Sethi &
Co Ltd.” Mr Ahmed signed the application form, which was dated 15 November
2005, agreeing by so signing to send in his first VAT return with all the VAT
due for the whole of the period shown on the form and any outstanding returns
due from Mr Shahid.
56. A change of
address of the company was notified to Companies House on 19 November 2005; the
new address being Office No 213, Olympic House, 28 – 42 Clements Road, Ilford,
Essex, IG1 1BA.
57. On 17 January
2006 an email was sent by HMRC Officer Ms Rowsell to Newry VAT Registration
Unit requesting that the company be de-registered on the basis that it never
traded and was therefore not liable to be registered. On 15 February 2006 MS
Sethi was compulsorily de-registered from VAT on 16 January 2006.
58. Mr Miles’
written evidence stated that “MS Sethi did not render a final return for the
period 1 December 2005 to 20 January 2006 inclusive, or indeed any return
during its period registered for VAT purposes, before or after the TOGC and
thus failed to account for £1,361,716.44 output tax.” HMRC Officers visited
the last known principal place of business of the company and were met by a
tenant who had moved into the property on 1 October 2006 and had no knowledge
of the company or its directors, Mr Shahid or Mr Ahmed.
59. A visit to Mr
Shahid’s address took place on 8 August 2007. HMRC Officers Mr Patterson and Mr
Armond spoke to Mr Shahid who initially stated he could not recall who he had
sold the company to and that he and his family had been the only residents of 9 Westwood Road, Ilford, Essex. Subsequently Mr Shahid recalled Mr Ahmed, who he stated was
a friend of his younger brother’s friend, had lived at the address, bought the
company and moved out 6 weeks later. Mr Shahid stated he did not have a contact
address for Mr Ahmed and did not know if Mr Ahmed had traded.
60. The
deregistration date for MS Sethi was amended to 20 January 2006 on 10 August
2007.
61. Mr Miles stated
that the link between MS Sethi and the Appellant is seen in the chain of sales which
took place on 13 January 2006, on which date MS Sethi sold 4095 SL7Z9 CPU’s to
First Call which were purchased on the same date by DDMP Ltd then by 21st
Trading Ltd. The Appellant purchased the goods on the same date and sold them
to a Swiss trader, Bergmann Associates on 17 January 2006.
62. Mr Young
submitted that the paper exercise carried out by Mr Saul was constructed on the
basis of information given to him by other officers and that there must be, as
a result, doubt as to the accuracy of Mr Saul’s conclusions. Mr Miles accepted
that he had not seen the source of the deal chain produced by Mr Saul, but
stated that as a result of his involvement with MS Sethi and having consulted
all relevant information that could be obtained, for example that contained on HMRC’s
electronic folder, he had concluded that the defaults in respect of the
transaction 01/06 are fraudulent on the basis that MS Sethi declared its
business activities as importers of fruit and vegetables, the supplies to First
Call were not declared or accounted for and there is no evidence of payment for
the goods.
63. Mr Miles stated
that he had no reason to doubt Mr Hallard’s findings which, from an examination
of First Call’s records, showed purchase orders for CPU’s supplied by MS Sethi,
including the transaction which took place on 13 January 2006.
64. Mr Haggett
confirmed in his written and oral evidence that the spreadsheet compiled by Mr
Hallard was contained on HMRC’s electronic folder, although not exhibited. Mr
Haggett stated that the spreadsheet, complied from First Call’s records, showed
that a supply was made by Stephen Phillips to DDMP Ltd on or about 13 January
2006 of 4,095 CPU’s originating from MS Sethi.
65. Mr Haggett
accepted in cross examination that he had not seen the records from which Mr Hallard’s
spreadsheet was produced and therefore had not had the opportunity to verify
the information.
66. Thereafter, the
evidence of Mr Downer who examined the FCIB statements, showed that following
receipt of payment on 24 January 2006 by the Appellant from Bergmann
Associates, two payments was made by the Appellant to 21st Trading on
24 and 25 January 2006 in the total sum of £437,857.88 which matches the total
amount charged by 21st Trading on sales invoice 2634 dated 13
January 2006. 21st Trading made a payment of £600,000 on 25 January
2006 into the FCIB account of DDMP Ltd. There is no evidence of any payments
made by DDMP to Stephen Philips T/A First Call, however Mr Downer noted a connection
to Best Buy Computers (S) PTE (“Best Buy Computers”) who feature in deal 3.
67. The connection
was made as follows; following receipt of £600,000 from 21st
Trading, DDMP made an immediate payment of £2,000,000 into the account of a
Danish Company, Northcom APS who then made two immediate payments in the sums
£1,319,115 and £661,500 to a Dubai based company called Abyss Int FZE
(“Abyss”). Upon receipt of the two payments, Abyss immediately paid £1,533,641
to the Dutch Rabobank and £744,156 to Singapore based trader Best Buy
Computers.
68. It was submitted
on behalf of the Appellant that a loss had been made in respect of the 01/06
transaction. Mr Rogelj gave evidence explaining that due to an incorrect name
on the invoice, Swiss Customs had rejected the goods which then had to be
shipped back to the UK and shipped back out to Bergmann. Mr Rogelj explained
that as a result of the delay, Bergmann negotiated a lower price, resulting in
a loss to the Appellant in the region of £10,000. It was submitted on behalf of
the Appellant that if the transaction was connected with fraud, there would be
no loss to the Appellant.
03/06
69. The sequence in
relation to the 03/06 transaction shows that 9135 units of Intel P4 SL7Z9 CPU’s
were acquired by Samson Traders Ltd (“Samson”) on 31 March 2006. The supplier
declaration and invoice exhibited showed the goods were purchased on the same
date by The Routers Group at £82.50 per unit and then by Alpha Wholesale Ltd at
£82.55 as shown in the sales invoice and purchase order exhibited, both dated
31 March 2006. Quiass Ltd purchased the goods from Alpha Wholesale Ltd on the
same date at £82.65 per unit as evidenced by an invoice dated 31 March 2006
from Alpha to Qiass. The goods were then purchased by 21st Trading
at £82.75, as shown in the invoice and purchase order both dated 31 March 2006.
The Appellant purchased the goods on the same date at a cost of £83.00 per unit
as evidenced by a purchase order and invoice both dated 31 March 2006. The Appellant
sold the goods to a Swiss Systems based in Switzerland on 31 March 2006 at £86.75
per unit.
70. Mr Robert Lamb
gave written and oral evidence that Samson was the defaulting trader in this
chain. Mr Lamb acted as MTIC controlling officer for Samson from 21 April 2006.
71. The company was
incorporated at Companies House on 11 January 2005. Mr Anthony Rajah Samson was
named as a director appointed from 11 January 2005, Mr Donald Elwell was named
as a director appointed from 23 November 2005 and Mr Fred Hesse was the company
secretary appointed on 11 January 2005.
72. An application
to register for VAT signed by Mr Samson and dated 1 February 2005 was received
at Newry Vat Registration/Deregistration Office on 3 March 2005. The company
was subsequently registered for VAT with effect from 1 February 2005. On the
application form, VAT1, the intended business activities are declared as
“general traders.” The form stated that the company did not expect to receive
regular payments of VAT and the value of taxable supplies over the following 12
months was estimated to be £100,000. The company did not expect to make any
exempt supplies and did not declare any intention to buy goods from, or sell to
other EC member states. The principal place of business for the company was
stated as being the same as the residential address of the director, Mr A.
Samson.
73. On 7 October
2005 the company was contacted by HMRC in order to establish its intended
business activities. The company responded by stating that the trading activity
was the “importation, distribution and installation of electronic and
mechanical components for machinery and cars”.
74. On 21 April
2006, Mr Lamb and Mr Martin of HMRC attended the company address in order to
establish whether sales had been made as identified in the purchase records of
The Routers Group Ltd of £2,400,000. The address was found to be a private
house without any evidence of trade and there was no answer at the property. A
deregistration letter was left by the officers.
75. Mr Lamb
confirmed in his written evidence that he had been contacted on 27 April 2006
by the controlling officer for The Routers Group Ltd and asked to raise an
assessment against Samson in respect of its output tax liabilities totalling
£36,700,000 which had been identified in the purchase records of the Routers
Group Ltd. Mr Lamb produced a schedule showing in excess of 700 sales invoices
from Samson to The Routers Group Ltd upon which his assessment was based.
76. Mr Lamb accepted
in cross examination that he had not seen direct evidence in support of
information he received from the controlling officer for The Routers Group Ltd
that 3rd party payment instructions issued by Samson to The Routers
Group Ltd meant that Samson would not be in a position to meet their tax
liabilities without UK purchased documentation and input tax to reclaim.
77. On 4 May 2006
the Alcohol Strategy Team requested a visit to Unit 407, Premier House, 114 Station Road, Edgware, HA8 7AQ, which was the same address of the known accountants for
Samson, in order to verify alcohol related sales made by Samson. A telephone
number for Mr Samson was obtained from the office receptionist as there was no
response at unit 407. A telephone call was made to Mr Samson on 10 May 2006 to
arrange a meeting with HMRC on 16 May 2006 in order to review the company
records. On 16 May 2006 Mr Samson and his accountant failed to attend the meeting.
78. Mr Lamb
confirmed that Samson failed to submit any VAT returns for VAT periods 05/05,
11/05, 02/06 and final/99 and failed to notify HMRC of a change of address.
79. Samson was
deregistered with effect from 21 April 2006 and on 25 May 2006 the registered address
details were amended to Unit 407, Premier House, 114 Station Road, Edgware, HA8 7AQ.
80. Mr Lamb stated
in oral evidence that he had telephoned and emailed all broker officers linked
to Samson who confirmed that there is no additional business records or
documentation from 3rd parties to show potential alternate acquirers
of the goods and no evidence of Samson ever having acquired the goods.
81. A civil recovery
proceeding order dated 31 August 2006 was issued against Samson. A winding up
order was made on 1 November 2006 requesting information from HMRC as to
enquiries into the directors and their fitness to be involved in the management
of future companies. A letter from Kingston Smith Insolvency Practitioners
dated 20 November 2006 advised that a liquidator had been appointed.
82. An MTIC
assessment in the sum of £36,730,983.99 was raised against the final period
covering 01/03/06 to 21/04/06. A Notice of Assessment in the sum of £73,653.00
was issued to Samson on 31 July 2006 as a result of their failure to render VAT
returns/records for the periods 02/06 and 04/06. A Notice of Assessment of Tax
dated 14 August 2006 in the sum of £9,367.00 was issued to Samson due to a
failure to submit their P02/06 return. A letter was issued to Samson on 14
September 2007 advising of an Assessment in the sum of £726,896.63 relating to
unaccounted output tax due in their final period and a Notice of Assessment
dated 25 September 2007 issued to Unit 407, Premier House, 114 Station Road, Edgware, HA8 7AQ was returned. A Notice of Assessment to Tax in the sum of £11,380.00 was
issued to Samson dated 5 November 2007.
83. Mr Lamb accepted
in cross examination that he had not put his conclusions to the parties
involved, but stated that this was a result of the parties’ failure to contact
or cooperate with HMRC. Mr Lamb confirmed that to date no appeal has been
lodged by Samson in relation to any of the assessments. The conclusion drawn by
Mr Lamb was that the trading pattern of Samson and its failure to co-operate
with HMRC indicates that as a missing trader the company was there to act as an
acquirer of EU goods and sell them with VAT, never intending to account for its
output tax and was a perpetrator of MTIC fraud.
84. Mr Downer analysed
the chain of transactions originating from defaulting trader Samson.
85. There is no
dispute that Manatlantic sold 9135 units of Intel P4 SL7Z9 CPU’s to Swiss based
trader IT Swiss Systems as evidenced by sales invoices 1023a and 1023b both
dated 31 March 2006. Sales invoice 1023a was for £409,893.75 and 1023b was for
£382,567.50 and payments were received into Manatlantic’s FCIB account from IT
Swiss Systems via Bankers Order on 13 and 19 April 2006.
86. It is accepted
by the Appellant that their supplier of the goods was 21st Trading
Ltd who sold the goods to Manatlantic on 31 March 2006 for £890,890.88. This
sum was immediately paid (in sums of £400,000.00 and £490,890.88) into the FCIB
account of 21st Trading Ltd upon receipt of each. In turn, 21st
Trading Ltd made two payments on 12 April 2006 in the sums of £717,935.19 and
£550,000.00 into the FCIB account of Qiass Ltd. A further payment was made by
21st Trading Ltd to Qiass Ltd on 20 April 2006 in the sum of
£709,146.28.
87. Mr Downer
concluded that his analysis of the FCIB statements indicated that Qiass Ltd
were the primary supplier of goods to 21st Trading Ltd and payments
were made by 21st Trading Ltd in bulk as all significant debits
shown on the FCIB statements of 21st Trading Ltd were paid, in the
relevant period, into the FCIB account of Qiass.
88. On 13 April
2006, upon receipt of payment from 21st Trading Ltd, the FCIB
statements of Qiass show a payment of £1,119.954.18 to Alpha Wholesale Services
Limited (“Alpha”). Upon receipt of payment from 21st Trading Ltd on
20 April 2006, the FCIB accounts of Qiass show an immediate payment of
£695,200.62 into the FCIB account of Alpha.
89. Mr Downer
concluded that his analysis of the FCIB statements indicated that Alpha were
the primary supplier of goods to Qiass and payments were made by Qiass in bulk
as all but one of the significant debits shown on the FCIB statements of Qiass
were paid, in the relevant period, into the FCIB account of Alpha.
90. Further analysis
of the FCIB accounts by Mr Downer showed that no payments were made by the
supplier to Alpha, shown on the deal chain as The Routers Group Ltd and
evidenced by a sales invoice dated 31 March 2006. Instead, Alpha made the
following payments immediately upon receipt of payment on 13 April 2006: £595,900.00 and £235,100.00 to Dutch Rabobank, £412,536.00 to Northcom APS (based in Denmark)
and £463,250.00 to Emshel Puerto Banus SL (based in Spain). Alpha then made the
following payments immediately upon receipt of payment on 20 April 2006: £195,200.00 to Bruins Consortium Limited (based in Malta) and £500,000.00 to SNV Worldwide
Limited (based in Cyprus).
91. Mr Downer found
no carousel of monies in this deal and concluded that Alpha had made 3rd
party payments to traders based in the EU rather than to their direct
suppliers, The Routers Group Ltd, leaving the UK defaulter with no means with
which to meet their VAT liability.
92. Mr Young on
behalf of the Appellant put to the witnesses that the conclusions reached have
been based on hearsay and information provided by others which they themselves
have no verified. Mr Young also contended that the Tribunal should be wary as
to the weight attached to any such evidence bearing in mind it involves serious
allegations levelled at third parties who have not had the opportunity to
respond.
05/06
93. The deal chain
relating to the repayment claim made in the period 05/06 has been traced back
to Focus Racing Ltd (“Focus”) as the defaulting trader and concerned the
purchase of 11,970 SL7Z9 CPU’s. Focus sold 15120 SL7Z9 CPU’s to FoneFingz on 23
May 2006 at a cost of £78.00 per unit as shown by invoice number 1702 dated 23
May 2006. Although there is no invoice or purchase order in support of the contention,
HMRC traced the chain to the sale by FoneFingz of the same quantity of goods on
the same date to Sundial International Stock Inter Ltd (“Sundial”) at £78.10.
The goods were then sold as shown by the purchase order and invoice number 2016
of the same date to Emmen Communications Ltd at £78.20. Emmen Communications
Ltd sold 11,970 units to Multisystems Technology on the same date for £78.50 as
shown by purchase order dated 23 May 2006 and invoice number 4040878. There was
no dispute that Manatlantic purchased the goods from Multisystems at a cost of
£79.50 and sold them to GigaAsia Plc Ltd for £83.00 as evidenced by invoice number
1024 dated 23 May 2005.
94. Mr Steven
Sharrock, an officer of HMRC and member of the MTIC team provided written and
oral evidence as to how the trading activities of Focus relate to HMRC’s
decision to deny input tax to the Appellant.
95. Mr Sharrock
confirmed that Focus was incorporated on 3 April 2002 and registered for VAT
with effect from 8 July 2002. The company was de-registered with effect from 10
April 2006. The intended business activity stated on the VAT1 was “building
racing cars”. The VAT registration form also stated that the estimated value of
taxable supplies over the following 12 months was estimated as £100,000 and the
company did not expect to make any exempt supplies. The company declared that
the value of goods likely to be bought from and sold to other EC Member States
was “none”.
96. The initial
address for the company was Unit 2, Hawthorne Business Park, Hawthorne Street, Warrington, WA5 0BT. From 15 January 2003 until deregistration the
company’s address was notified to HMRC as Unit 16, First Floor, Penketh
Business Park, Warrington, WA5 2TJ. Deregistration took place as a result of a
VAT demand being returned from the latter address undelivered and consequently
the trader was listed as a missing trader.
97. On 26 May 2006,
Mr Darren Cooper contacted HMRC identifying himself as an employee of Focus and
querying why the company’s VAT registration number was invalid. Mr Cooper was
directed to contact the VAT registration unit at Newry and the company
subsequently requested that the VAT number be reinstated.
98. A visit to the company
was deemed necessary in order establish whether they were still trading and
verify the VAT position. On 1 June 2006, Mr Sharrock and another HMRC officer,
Mr Crooks, visited the last known address to find that it was occupied by an
unrelated company. Information received from the unrelated company indicated
that Focus was trading from Unit 4 on the same estate. There was no response at
this unit and Mr Sharrock confirmed in evidence his view that there were no
signs of recent use.
99. The company
contacted HMRC on 1 June 2006 and Mr Sharrock returned the call and spoke to Mr
Cooper who identified himself as the company secretary of Focus. Mr Cooper
stated that Unit 16 had been the company’s premises prior to his and Mr Stephen
Musson’s appointments as company officials. Mr Cooper stated that the company
had then used the premises at Unit 4 until 31 May 2006 as sub-tenants of a
company run by Mr Scott who previously ran Focus. Mr Cooper stated that they
were in the process of finding new premises and he would make contact when this
was completed in order to reinstate the company’s VAT number.
100.The address
of the company’s new premises was notified to Mr Sharrock on 2 June 2006. By
letter dated 24 February and signed by Mr Scott, Director, Focus informed HMRC
that the company was “adding to its existing product range of vehicles and
parts and were also going to be trading in general wholesale,
telecommunications equipment and products, electrical equipment and other
commodities.” On the same day that the letter was sent, Mr Scott sold his
interest in the company to Mr Musson.
101.Mr Sharrock
visited the company on 5 June 2006. He was informed by Mr Cooper that the sole
company bank account with Barclays had been closed and that the company
intended to use Mr Musson’s Lloyds TSB account. Mr Cooper also stated that two
more accounts were being set up with Lloyds TSB; a business account and a
second account to be used for funds with which to meet the company’s VAT
liability.
102.Mr Cooper
stated that the first wholesale deal had been put in place on 22 May 2006 and
that up to that point the company had purchased in the region of £3,800,000.00
of stock from a Slovenian company, PZP ENA D.O.O. (“PZP”) which was made with
finance arranged by Mr Musson. Mr Cooper informed Mr Sharrock that this stock
had been sold and released to two UK companies, Fonefinz Ltd and Easy Way Ltd
without payment to Focus by the customers. Mr Cooper stated that no due
diligence had been carried out on PZP. Mr Sharrock was provided with the sales
and purchase invoices which showed that stock in excess of £6,000,000.00 had
been purchased by the company.
103.A further
meeting took place on 14 June 2006 at which Mr Cooper informed HMRC that
although funding for the stock had been arranged, the company’s supplier PZP
had not yet been paid, nor had Focus received payment although the deals had
gone ahead. Mr Cooper stated that there was a formal agreement in respect of
the loan in existence but despite agreeing to forward it to Mr Sharrock, a copy
was never received. At the time of the meeting on 14 June 2006, the company
still had no bank accounts in place. No records were held for the 01/06 tax
period and Mr Cooper told HMRC that together with the company accountants, he
would be reconstructing sales and purchases based on bank records.
104.Mr Sharrock
raised concerns that Mr Cooper and Mr Musson had taken over a company despite
having no knowledge of the company’s liabilities. The 01/06 return was
outstanding and neither Mr Cooper nor Mr Musson had the records to complete the
return. Mr Sharrock queried why such a risk would be taken if the company
intended to run legitimately. Mr Sharrock did not accept that Mr Masson wanted
to take over a company with a trading history given that the history of Focus
was in racing cars and related parts, which is of little value to a company
trading in large wholesale deals of CPU’s and mobile telephones. Mr Sharrock
concluded that the only gain to Mr Musson and Mr Cooper was a company with a
VAT registration number.
105.Mr Sharrock took
into account factors such as the ability to secure millions of pounds worth of
stock without any trading history, the lack of a bank account, the lack of any
evidence to show finance arrangements and the conflicting accounts that Mr
Cooper had given as to the arrangement that the supplier was to be paid in
advance of payment from Focus’ customers (meeting 5 June 2006) as compared with
his account that the supplier had not been paid (meeting 14 June 2006). Mr
Sharrock noted that on 25 May 2006 Mr Musson had issued two separate payment
instructions to request split payments to be made to Easyway Ltd. He concluded
that Mr Cooper had provided false information to disguise the actions of Focus.
Combined with the lack of due diligence checks undertaken as per Mr Cooper’s
account which contradicts the “supplier declaration” signed by Mr Musson in
respect of Easyway Ltd stating that checks had been carried out, the fact that
stock was never seen or inspection reports provided and the inability to
identify stock from poor descriptions on the sales invoices, Mr Sharrock
concluded that the indication was that the company had traded fraudulently with
no intention of meeting its VAT liability for purchase of CPU’s in the relevant
period.
106.Mr Sharrock’s
evidence highlighted the discrepancy in the account of Mr Cooper that Focus had
purchased approximately £3,800,000.00 of stock whereas the invoices produced by
Mr Musson showed stock in excess of £6,000,000.00 and stated that the fact that
the company secretary Mr Cooper was not aware of this further indicates the
contrived nature of the deals.
107.The documents
examined by Mr Sharrock showed that the principal customer was Fonefingz Ltd,
the name of which is recorded on sales invoices in various forms such as “Fone
things”, “Fone Fingz” and “Fone Things”. A number of invoices were issued with
the same reference number and some invoices with different numbers appear to be
for the same stock although it cannot be ascertained whether one or both were
issued. Mr Sharrock found a number of missing invoices and incomplete
sequences, which given the limited number of transactions with only two
customers suggests a lack of control of documentation and that the company was
not trading in normal commercial transactions.
108.Focus were
assessed by letter following a debt to the Crown procedure as proof existed
that invoices had been issued including VAT at a time when the company was not
registered, but it was unknown if supplies had been made. The assessment was in
the sum of £1,191,680.70 that being the amount recorded as VAT on the sales
invoices provided.
109.Once it was
established that supplies were made, a letter assessment in the sum of
£1,191,680.70 was issued on 17 March 2008, amended on 31 March 2008 and
re-issued in the sum of £1,434,335.70. The assessments were issued on the basis
that the purchase invoices show Focus to be the UK acquirer of stock from PZP
in Slovenia which were then sold in the UK and on which the VAT liability has
not been paid.
110.Mr Sharrock
confirmed that Focus have not appealed the assessments and that there has been
no further contact by the company since June 2006; letters from HMRC to Focus have
been returned marked “refused” and undelivered and a visit to the last known
premises on 3 June 2008 revealed that the unit had been occupied by an
unrelated company since July 2006. No further action has been taken to pursue
the company’s debts.
111.Mr Downer
gave oral and written evidence as to his examination of the FCIB statements in
relation to the 05/06 period. There was no dispute that the goods were sold by
Manatlantic to Giga Asia and the FCIB statement for Manatlantic shows the sum
of £993,510.00 being received from Giga Asia on 23 May 2006 which matches the
sum invoiced by Manatlantic.
112.The FCIB
statement for Giga Asia shows that prior to making payment to Manatlantic,
£999,450.00 had been paid into Giga Asia’s account by Best Buy Computers who
are also based in Singapore.
113.Following
receipt of payment from Giga Asia, Manatlantic made an immediate payment of the
same amount (£993,510.00) to Multisystems Technology Ltd who sold the goods to
Manatlantic on 23 May 2006 for £1,118,147.00. Mr Downer found no trace in the
FCIB statements to show payment of the outstanding balance from Manatlantic to
Multisystems Technology Ltd. The FCIB account of Multisystems Technology Ltd
shows that upon receipt of payment from Manatlantic, the sum of £975,000.00 was
immediately paid to Emmen Communications Limited who had sold the goods on the
same date to Multisystems Technology Ltd for £1,104,082.88. Mr Downer found no
evidence of payment of the outstanding balance from Multisystems Technology Ltd
to Emmen Communications Ltd. The FCIB statements showed that the supplier to
Emmen Communications Ltd was Sundial International Stock Traders Ltd
(“Sundial”) who received £975,000.000 on 23 May 2006 from Emmen Communications
Ltd. The sales invoice in respect of this transaction showed that Sundial had
sold the goods on 23 May 2006 for £1,389,301.20; however Mr Downer could find
no evidence within the statements to show payment of the outstanding balance. The
deal chain shows the supplier to Sundial as Fone Fingz Ltd, however the FCIB
statements showed no evidence of payment made by Sundial to Fone Fingz Ltd. A
payment was made by Sundial to Intertech SARL, a company based in France, in the sum of £975,000.000 on 23 May 2006; the same amount was then immediately paid by
Intertech SARL to High Level Trading GMBH, who are based in Switzerland. Two immediate payments were then made by High Level Trading GMBH in the sums of
£544,950.00 and £27,247.50 to the FCB account of Best Buy Computers PTE. Best
Buy Computers PTE then made a payment on 24 May 2006 to Giga Asia PTE in the
sum of £565,582.50.
114.Mr Downer
accepted in cross examination that he could not provide an explanation as to
why the payments to Best Buy Computers and Giga Asia reduced and that the
statements showed payment for goods, but he could not say what those goods
were. However, Mr Downer highlighted the circularity present in the payment chain
and the fact that there appeared to be no end user for the goods.
115.The written
evidence of HMRC officer Mr Michael Kerrigan confirmed that a search warrant
was executed at 67 Worcester Street, Oldham on 14 August 2006. In a cabinet in
the living room of the premises a Sainsbury’s plastic bag was seized which
contained 4 notebooks and various A4 documents.
116.Mr Downer’s
written evidence set out his analysis of the contents of the notebooks which he
concluded were relevant to the transactions on 23 May 2006. A handwritten entry
exhibited by Mr Downer matched the transaction chain of CPU’s as traced by
examination of the traders’ records and FCIB statements of the 23 May 2006.
There is no reference to the Appellant Company, however the notebook contains
annotations which Mr Downer concluded referred to High Level Trading, Intertech
SARL, PZP, Focus, FoneFingz, Sundial, Emmen and Multisystems Technology.The
notebook entry was headed Tuesday 23 May and the quantity, price and order of
supply chain were set out beneath. Mr Downer’s analysis indicated that the
chain set out in the notebook matched that which had been traced below
Manatlantic.
117.Mr Downer
highlighted an apparent price drop contained in the notebook where the buying
price of PZP was higher than the selling price. Mr Downer contended that such
features are common in carousel frauds as without a price drop the unit cost
would keep increasing until it reached a level which was not credible. Mr
Downer also drew our attention to the lack of any payments shown in the
notebook to Focus or PZP and concluded that monies were paid by 3rd
parties to bank accounts of traders purported to be based in other EU
countries.
118.Mr Downer
adduced evidence of documentation seized at the SAS Radisson Hotel, Manchester Airport in November 2005 as part of a criminal investigation. The documentation which
had been found in the room of Mr Darren Bagnall, appeared to contain details of
transactions chains. Mr Downer explained that the relevance of the
documentation to the Appellant’s case is the inclusion of Multisystems
International Ltd within, as accepted by Mr Bagnall in criminal proceedings,
contrived transaction chains. The common director of Multisystems International
Ltd and Multisystems Technology Ltd (the Appellant’s supplier in the 05/06
deal) was Mr Richard Dawson. The documents contain reference to “Rich” which Mr
Bagnall accepted during criminal proceedings was Mr Dawson.
Summary
119.HMRC
submitted that there was no real challenge to the evidence of the defaulter
officers and that all 3 transactions that are the subject of this appeal trace
back to a tax loss. Mr Mandalia submitted that the Appellant had not attempted
to show that the defaulting trader in each transaction had failed to account
for VAT, nor that the failure could be anything other than fraudulent. It was
HMRC’s case that the evidence of contrivance shown in the notebook entry seized
from 67 Worcester Street, Oldham on 14 August 2006 and the link between Mr
Bagnall, Mr Dawson and the associated companies, corroborates the conclusions
of the officers.
120.Mr Young, on
behalf of the Appellant objected to HMRC’s reliance on hearsay evidence in
seeking to establish that there was a fraudulent tax loss in the 3
transactions. It was submitted by Mr Young that the 3rd parties referred
to by HMRC had not had the opportunity to respond to the serious allegations
made against them. Mr Young invited us to follow the principle set out in the
case of Wayne Farley Ltd v Customs and Excise Commissioners [1986]
STC 487 and consider legal questions as to the validity of hearsay
evidence. It was submitted on behalf of the Appellant that there may or may not
be a tax loss but that HMRC have not proved this.
121.Mr Young
highlighted the lack of certainty on the part of HMRC as to whether MS Sethi
was the supplier to First Call and defaulter in the 01/06 deal and the fact
that Mr Miles had not verified the information provided to him by the
insolvency practitioner Mr Hellard. Mr Young referred us to the fact that the
purchase orders relating to MS Sethi had been in the possession of HMRC from,
at the latest August 2007 yet the evidence had not been adduced until the
hearing without any explanation.
122.Mr Young
relied on the fact that no assessment had been raised by HMRC against MS Sethi
and that the submission of HMRC that the object of the fraud is for the
Appellant to obtain a repayment of VAT and the fraud crystallises when that end
is achieved is nonsensical on the basis that the fraudulent tax loss
crystallised when the alleged defaulting traders did not meet their VAT
liabilities.
Findings on whether there was a fraudulent evasion of
VAT in the chain of each transaction.
123.We read the
case of Wayne Farley Ltd v Customs and Excise Commissioners with
care. The objection to hearsay in that case was made on the basis that an
officer of HMRC adduced orally information obtained by his predecessor who was
not a witness at the hearing nor had provided a witness statement. Macpherson J
held:
“prima facie hearsay may be
admitted in the discretion of the chairman of the tribunal... There is nowhere in the rules anything which indicates that
where hearsay is to be sought to be admitted it is necessary or even desirable
that a statement of the possible hearsay witness's evidence must be filed under
r 8. When the matter comes to be heard and if a witness seeks to give hearsay
evidence, which Mr Coulson did in respect of Mr Birkett's limited activity in
this matter, the chairman may decide whether or not it is right that such
evidence should be admitted.”
124. Macpherson J
went on to state that care must be taken in reliance on hearsay and the weight
to attach to it. We did not accept that Mr Young’s objection to hearsay
prevented us from admitting the evidence; rule 15 (3) (a) of The Tribunal
Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 provides that we may
“admit evidence whether or not the evidence would be admissible in a civil
trial in the United Kingdom”. We were satisfied that the evidence should be
admitted and that our assessment of the witnesses would guide us as to the
weight to be attached. We found Mr Young’s argument in reliance on PACE 1984
that the allegations made by HMRC against traders other than the Appellant
which had not been put to those traders affected the reliability to be misconceived.
These are not criminal proceedings, nor were criminal proceedings brought
against the defaulting traders. The standard of proof to which we must be
satisfied is on the balance of probabilities and the issue as to whether we are
so satisfied that there was a fraudulent tax loss is one which can be decided
on the facts before us. We found as a fact that the absence of an explanation
by the defaulting trader came as a result of the actions of each trader by
failing to maintain contact with HMRC. We were satisfied that each of the
default officers who gave evidence had made thorough investigations and that
the weight to be attached to their evidence was sufficient for us to accept the
evidence as reliable.
125.We were
referred to the VAT Act 1994 Schedule 11 paragraph 14:
(1)A certificate of
the Commissioners—E+W+S+N.I.
(a)that a person was
or was not, at any date, registered under this Act; or
(b)that any return
required by or under this Act has not been made or had not been made at any
date; or
(c)that any statement
or notification required to be submitted or given to the Commissioners in
accordance with any regulations under paragraph 2(3) or (4) above has not been
submitted or given or had not been submitted or given at any date; or
(d)that any VAT shown
as due in any return or assessment made in pursuance of this Act has not been
paid;
shall be sufficient evidence of that
fact until the contrary is proved.
126.Mr Young
highlighted the fact that it was open to HMRC to prove tax losses through
certification; however they chose not to so do. We found that the manner in
which HMRC chose to prove tax losses was not a matter for us to make any
determination on; the question for us was whether or not the tax losses were
proven.
01/06 MS Sethi
127.We were
satisfied on the evidence of Mr Miles that MS Sethi was a defaulting trader in
the 01/06 deal. We found the witness to be credible and accepted that he had
received accurate information from the insolvency practitioner dealing with
First Call. We were satisfied that the increase in MS Sethi’s turnover
increased far beyond that which would be expected of a legitimate trader and
that the company failed to submit a final return for the period between 1
December 2005 and 20 January 2006, thereby failing to account for £1,361,716.44
of output tax.
128.We were
satisfied that MS Sethi registered for VAT solely for the purpose of defrauding
the revenue on the basis that its declared business activities were as importers
of fruit and vegetables yet over 50 days of trading, Stephen Phillips T/A First
Call had raised purchase orders for a total of 293 supplies of mobile telephone
and CPU’s for a net value of almost £78,000,000.00. We accepted that these
supplies to First Call, which included the CPU’s subsequently sold to the
Appellant, were not declared or accounted for and there is no evidence of
payment for the goods.
129.We did not
accept that the late admission of the evidence of Mr Miles had any bearing on
the weight to be attached. We found the evidence to be compelling and the
sources of it to be reliable.
130.We were not
satisfied on the evidence before us that the Appellant had incurred a loss in
relation to the 01/06 deal; the price may have decreased but we found that this
resulted in a lower profit rather than a loss to the Appellant. Even if this
had been the case, we did not accept that this affected our decision as to
whether or not the Appellant’s transactions were connected to a fraudulent
evasion of VAT.
131.We rejected
Mr Young’s submission that no actual tax loss had been shown and that it was
pertinent that there had been no assessment raised against MS Sethi; tax losses
from fraudulent evasion are losses arising as a result of the non-payment of
output tax by the defaulting trader and there is no requirement that an
assessment must have been raised in order to find that there has been a failure
to meet VAT liabilities. We were satisfied that MS Sethi was the defaulting
trader in the 01/06 deal chain and that default was fraudulent.
03/06
132.We were
satisfied on the evidence of Mr Lamb that Samson was incorporated and
registered for VAT with the sole intention of defrauding the revenue by failing
to account for its output tax.
133.The declared
business activities were stated as “general traders” and subsequently
“importation, distribution and installation of electronic and mechanical
components for machinery and cars”. No appeal has been lodged against the
assessment raised by Mr Lamb reflecting the output tax liability of
£36,700,000.00 identified from the purchase records of Samson’s customer, The
Routers Group Ltd which we found to be indicative of the lack of legitimacy.
Third party payment instructions issued by Samson to The Routers Group Ltd
meant that Samson would not be able to meet its VAT liability.
134.We were
satisfied that the deal chain had been correctly traced and that the failure to
contact or cooperate with HMRC is a further indication of the fact that the
default by the company was intended to perpetrate the fraud.
05/06
135.We were
satisfied that the deal chain for the period 05/06 had been accurately traced
and we accepted the evidence of Mr Sharrock as to the fact that Focus was a
missing trader. We concluded that Focus had deliberately misled HMRC as to its
trading activity, which was declared as building racing cars and subsequently
extended to “general wholesale, telecommunications equipment and products,
electrical equipment and other commodities”. Despite having no trading history,
no bank account and there being no evidence of any finance in place, the
company purchased in excess of £3,000,000.00 of stock. We were satisfied on
the evidence of Mr Sharrock that Focus had traded without any intention of
meeting its VAT liability upon its purchase of CPU’s.
136.We accepted
that Focus acquired goods from Slovenia which it sold on in the UK without paying the VAT liability arising as a consequence. We found that Focus was a
missing trader and the lack of any appeal against assessments made is
indicative of the fact that the company was not legitimate but was designed to
perpetrate MTIC fraud.
137.We found that
the notebook entry seized from 67 Worcester Street, Oldham on 14 August 2006
left us in no doubt as to the contrivance of the deal chain. We found that
there was no other plausible explanation as to why the entries made matched the
deal chain traced. The lack of any specific reference to the Appellant Company in
the notebook did not negate the overall inference of a premeditated scheme.
138.We attached
less weight to the documents seized from the SAS Radisson Hotel at Manchester Airport which did not contain details of transactions involving the Appellant;
however we did find that to a degree this evidence provided further
corroboration that the suppliers with which the Appellant was directly linked
were closely connected to MTIC fraud.
139.We therefore
find that there was a fraudulent evasion of VAT in respect of each of the
defaulters identified above. It is generally the case in MTIC fraud that the
original acquirer/importer defaults without payment of output tax, however this
need not be so and therefore the fact that HMRC have not proved that every
defaulter was the original acquirer/importer does not affect their right to
deny the Appellant’s repayment claim, so long as the conditions set out in
paragraph 10 above are satisfied; as per Clarke J in Red 12 Trading
Limited v HMRC[2009] EWHC 2563 (Ch) at [84]:
“In many cases of
MTIC fraud the defaulter, ie 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.”
140.And per Moses
LJ in Red 12 Trading Limited v HMRC [2010] EWCA Civ 402 on
appeal:
“The essence of the fraud
consists of depriving the Customs, and therefore the tax payer, of the tax for
which the supplier has to account, whilst at the same time obliging the Customs
to pay the input tax to one who has, by virtue of his knowledge of what is
going on, participated in that fraud. Whether the fraudster was the importer or
someone further down the line seems to me completely irrelevant and unarguable.
There is no basis, in my judgment, in any of the authorities for contending
that the importer has to be the defaulter.”
141.We rejected
the Appellant’s privity of contract submission as set out in Mr Young’s
skeleton argument that the Appellant’s transactions are not connected to fraud
as there is no fraud between the Appellant, its supplier or customer. The
judgment in Mobilx at paragraph 62 makes clear that:
“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.”
142.Having
accepted the deal chains, we were satisfied that they give rise to a connection
between the fraudulent defaults and the Appellant’s purchases in 01/06, 03/06
and 05/06 as evidence by the sales and purchase invoices and FCIB evidence.
In respect of each transaction did the Appellant,
through Mr Roglej and Mr Ryder, know or should it have known that by its
purchase it was participating in a transaction which was connected with the
fraudulent evasion of VAT?
Preliminary issues
143.This was the
principal issue in the case to which the majority of the evidence and parties
submissions were directed.
144.Our approach
to the issue was to recognise that while the question must be applied to each
separate purchase, the fact that the transactions occurred over a short period
of under 6 months was relevant to the developing knowledge on the part of the
Appellant, for example as a result of the notifications and warnings provided
by HMRC that the Appellant’s purchases had been traced back to defaulting
traders. We did not therefore view each transaction in isolation but decided
that the surrounding circumstances of each transaction and the totality of the
deals were relevant considerations; as per Clarke J Red 12 Trading
Limited v HMRC[2009] EWHC 2563 (Ch) at paragraphs 109 - 111:
“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.
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.
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”.
145.HMRC put
their case on the basis that the Appellant, through Mr Rogelj and Mr Ryder, was
a knowing participant in the fraud, relying on the judgment of Floyd J in Calltel
Telecom Limited v HMRC [2009] EWHC 1081 (Ch) at 66 to 67:
“In his oral opening, Mr Cunningham for the
Commissioners made it clear that the Crown would be asking the tribunal to
infer actual knowledge, in the absence of an admission:
“It is of course our case that [the tribunal] are
required to draw inferences here. We would not be here if we had Mr Gohir with
a white flag up saying, 'I knew'. There would not have to be a trial because
there would be no issue. His case is, 'I did not know' and more than that, 'I could
not have known'. So we cannot tackle that with an admission or a plea of
guilty. We can only deal with it by saying, 'You had all of this information,
you must have known,
you should have known'.” (Emphasis supplied)
To assert that an individual must have known something
is of course different from a case of mere constructive knowledge. By asserting
that Mr Gohir “must have known” the Commissioners were saying that the
objective evidence pointed towards a conclusion of actual knowledge, which Mr
Gohir would in due course be called upon to answer”
146.In the
alternative, HMRC submit that the Appellant should have known that its
transactions were connected with fraud by reason of the information available
to it and the lack of precautions taken which could be reasonable required of
it to ensure that that its transactions were not connected with fraud; Kittel
v Belgium, Belgium v Recolta Recycling [2008] STC 1537
at 51:
“...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...”
147. Floyd J made
the following comments on the passage cited above Mobilx v HMRC [2009]
EWCH 133 (Ch) at paragraphs 6 and 7:
“Of course, an otherwise innocent trader can only do
so much to ascertain whether its supply line is “clean” or “dirty” (to use the
expressions used in MTIC fraud cases). It can make enquiries of its immediate
supplier, including enquiries as to the diligence with which its immediate
supplier checks, in turn, on its supplier. Beyond that, the immediate supplier
cannot as a matter of commercial reality be expected to reveal the identity of
its own suppliers without risking being cut out of the business.
In the light of the difficulties of making enquiries
beyond the immediate supplier, there is a danger in reading para 51 of Kittel in a narrow sense
and as suggesting that provided proper checks are carried out by the trader on
a supplier, then the trader's claims to repayment of VAT are not capable of
challenge. That is not, in my judgment, a correct view. Suspicious indications
obtained by a trader from carrying out due diligence checks on its supplier are
one, but not the only basis from which it may properly be inferred that a
trader knew or should have known of its implication in VAT fraud. The test to
be applied is that set out in para 61 of the Judgment, and indeed in the
court's final determination at the end of the judgment. Paragraph 51 needs to
be understood in the sense that “all reasonable precautions” may, in some
cases, involve ceasing to trade in specified goods in a particular market, at
least in the particular manner in which the trader undertakes that trade. Such
a situation may conceivably arise where, from other indications available to
the trader, the trader knew or should have known that it is more likely than
not that, despite all due diligence checking, any further goods traded in the
same way will be implicated in VAT fraud.”
148.We were
conscious to ensure in assessing the knowledge of the Appellant through Mr
Rogelj and Mr Ryder, that we only took account of information known to them
through the relevant period; for that reason we did not take into account the
information provided in witness statements as to the general CPU market or
opinions provided by HMRC officers as to MTIC frauds.
149.HMRC relied
upon a number of features which, they submitted, taken together lead to the
clear conclusion that the Appellant either knew or should have known that its
transactions were connected to the fraudulent evasion of VAT. We will address
each factor in turn.
The Appellant Company
150.HMRC relied on
the fact that the declaration on the Appellant’s VAT application was shown to
be inaccurate in stating that the main business activity was specified as “the
purchase and sale of computer parts”. In evidence, Mr Rogelj stated that it was
correct that Manatlantic had never traded in anything other than CPUs.
151.The VAT
registration application also stated that the Company did not expect to receive
regular repayments of VAT. Mr Rogelj stated in cross examination that the
business had always intended to export goods but went on to state that at the
time of trading “we still weren’t strictly sure what we were gonna be doing...”
Mr Rogelj accepted that the first deal of the Company took place in May 2005
and that the VAT application form was also dated May 2005 and that he could
provide no explanation as to why the form had stated that no regular repayments
were expected.
152.When
questioned as to the basis for the estimated value of taxable supplies, Mr
Rogelj was unable to give any specific detail as to how the estimate had been
arrived at other than to say his target turnover was in the region of
£1,000,000.00 to £2,000,000.00. It was put to Mr Rogelj that this contradicted
his witness statement in which he had stated that his target was £5,000,000.00
in order to achieve a salary of £50,000 plus. Mr Rogelj stated that he had
certain objectives when he started the company but it could not be expected
that the business would be an immediate success and that he could not accept
HMRC’s assertion that within two months of trading the Company had reached
£1,000,000.00 turnover without checking the Company records.
153.Mr Rogelj was
questioned as to the profit and loss account for the 6 month trading period
between 1 April 2005 and 30 September 2005 in which sales in excess of £2,800,000.00
were made by Manatlantic. Mr Mandalia queried how such a significant value of
sales was generated given Mr Rogelj’s oral evidence that “by the time we made
the arrangement in Sirrnet we didn’t have much credibility, that’s why we
couldn’t get the suppliers...it was very difficult to establish trading
relationships...” Mr Rogelj stated that Mr Ryder’s association with Manatlantic
and their experience in the trade of export meant that business was generated
as a result of reputation.
154.Both Mr Ryder
and Mr Rogelj were cross examined about the reason behind establishing
Manatlantic when the pair had both been involved in similar trading activities
in Sirrnet. Mr Rogelj’s witness statement set out his desire to incorporate his
own company in order to be in full control. In cross examination Mr Rogelj
stated he did not “give up” Sirrnet in which he retained a 10% share “in what
was a bigger pie...because by having...better supplies you increase the trading
volume and having a smaller stake in a bigger pie is sometimes much more
beneficial.” Mr Rogelj stated that with Manatlantic he was in charge of his own
money and the Company’s affairs while Mr Ryder helped out with trading. Mr
Ryder explained that the reason for allowing Syskal’s involvement in Sirrnet
was a result of the difficulties in getting supplies and sourcing stock. Mr
Rogelj described the two companies effectively working together as a “joint
operation” and that he was never inclined to create any conflict of interest. Mr
Ryder accepted in cross examination that although the shareholding of Sirrnet
changed to the directors of Syskal, he remained Company Director and Mr Rogelj
remained Company Secretary, in effect both still running Sirrnet. Mr Ryder
explained that Syskal dealt with the procurement side of the business and he
and Mr Rogelj dealt with sales and marketing. Mr Ryder gave no further
explanation as to the reason behind setting up Manatlantic while he still
retained involvement with Sirrnet.
Knowledge of MTIC fraud
155.The contact
between HMRC and the Appellant in both letters and meetings is set out in
detail at paragraphs 34 to 46 of this decision. Throughout the period from May
2005 and September 2006 HMRC had highlighted to the Appellant the existence and
characteristics of MTIC fraud.
156.There was no
dispute by the Appellant that he had no general knowledge of fraud within the
industry which is accepted in Mr Rogelj’s witness statement dated 13 November
2008.
157.In Mr
Rogelj’s capacity as Company Secretary of Sirrnet the same information was provided
by HMRC warning of the dangers of the prevalence of fraud within the industry.
158.HMRC
highlighted the concession made by Mr Ryder in cross examination that, despite
the appearance from his CV of a significant amount of experience within the IT
industry and the impression of a natural progression to wholesale of CPUs
through established contacts, he had never before been involved in the purchase
and sale of CPUs stating “...trading components is trading components, you
don’t need any technical knowledge to do it.”
159. Similarly,
Mr Rogelj confirmed that although he had worked in the same industry, he had no
previous experience of dealing in CPUs.
160.When
questioned as to where he had met the trading partners subject of the appeal,
Mr Ryder’s evidence was vague, stating that the contacts had not been made at
conferences or exhibitions but in a variety of other ways such as through
Sirrnet and Manatlantic’s website. Mr Ryder was unable to recall how specific
relationships were established despite Mr Rogelj’s evidence that Mr Ryder was
heavily involved in the transactions.
161.HMRC submitted
that by continuing to trade irrespective of the risks involved and the lack of
any credible explanation as to why the Appellant stopped trading, given the
Company’s growth, when the “reverse charge” provisions were introduced in June
2007, is indicative of the fact that the Appellant knew that the transactions
they were conducting were connected with fraud.
162.Mr Rogelj
explained that the financing he had is no longer available, and that despite
the “reverse charge” provisions which he was aware came into force in 2007 and
despite the profits he had made with the Appellant Company, he was so
disheartened by the treatment of him by HMRC that he has not continued trading.
Methods and Pattern of Trading
163.Mr Rogelj’s
witness statement dated 13 November 2008 describes the trading methods of the
Appellant Company. The Company initially had a London trading address as Mr
Rogelj found through his experience at Sirrnet that many traders were based in London and he took the view that a London address would assist relationships with trading
partners.
164.Mr Rogelj
sets out how he loaned £80,000 to the Company to use as trading capital and
that he obtained £300,000 from external investors. Mr Rogelj, as Director, was
responsible for the Company’s operational activity and Mr Ryder was heavily
involved in sales, marketing and the transactions.
165.The transactions
subject of this appeal were “back to back” deals, in that each purchase of CPUs
from a supplier linked directly to a sale of exactly the same CPUs to a
customer. The Company had no storage facilities and purchased stock when a
buyer had been found. Mr Rogelj describes in his witness statement dated 13
November 2008 that “back to back trading is common in a lot of industries. It
was exceptionally difficult to enter into transactions. Much negotiation was
required. We had to source supplies to match individual orders so that no stock
was maintained in the Company...it was often taken a number of days to enter
into a transaction...the Company never purchased stock without knowing that
there was a buyer...”
166.Mr Rogelj
states in his witness statement that the Company tried to notify Redhill of
every trade to be entered into and seek validation of the VAT details of
trading partners prior to entering deals. Mr Rogelj describes that he was
unable to validate the VAT details of customers in the transaction subject of
this appeal as they were based in Switzerland and Singapore and Redhill are
only able to validate details in respect of EU trading partners.
167.In oral
evidence, Mr Ryder described how the price of goods fluctuates on a daily,
sometimes hourly basis. Mr Ryder stated that either the Appellant Company would
receive information about available stock from a supplier and attempt to find a
customer to buy that stock, or alternatively, a customer would enquire about
stock it was seeking to purchase and the Appellant would then source that
stock. In oral evidence Mr Rogelj stated that there was no commitment to buy or
supply the stock until a purchase order is sent or received.
168.The passing
of title of the goods was described by Mr Rogelj in oral evidence; his supplier
retained title in the goods until payment was made as stated on the invoice,
however this did not prevent the Appellant supplying the goods to the customer
abroad prior to payment being made. Mr Rogelj contended that permission was
given by the customer to take goods out of the country, although no documentary
evidence was produced to support this assertion; he stated: “They released them to me, which allowed me to release them to my client and I think by
releasing them to me, I would expect that they allowed me to.”
169.Mr Rogelj
stated that the Company would pay its supplier once payment had been received
from the customer and the Appellant did not question whether its suppliers were
in a position to provide goods of such significant value without receiving
payment from the Appellant, stating “I can’t make that sort of enquiries
because I can’t be asking my clients or supplier how their payment
arrangements...nor would they disclose that information.”
Inspections
170.Mr Rogelj
stated that he relied upon either inspections commissioned by the Appellant or
those provided by the Freight Forwarder and carried out on behalf of the
supplier. Mr Rogelj explained that “the inspection is carried out by my
supplier...and I look for that inspection...I don’t see any reason why I would
need to inspect the goods again, because...they are not accessed by anybody
else but the forwarder, they would just be duplicating work.” Mr Rogelj
confirmed that he had never made checks as to how the Freight Forwarders carry
out the inspections but stated Mr Ryder had. Mr Rogelj stated that he saw no
point in doing so.
171.Mr Ryder
stated in evidence that he had visited the Freight Forwarder “Forward Logistics
Ltd” in his capacity as Company Secretary of Sirrnet, although he had made no
record as he did not believe this was necessary. Mr Ryder stated that he had no
cause to view the stock on behalf of the Appellant Company but that he obtained
people’s opinions through casual conversations. He stated that it would not
have been possible for the Appellant to physically inspect the goods, but gave
no further explanation as to why he believed this to be the case, and stated that
this was the job of the Freight Forwarder.
172.Mr Rogelj
stated in oral evidence that it was never suggested that the Freight Forwarders
used by the Company were involved in fraud and that he considered their role to
be independent. Consequently Mr Rogelj stated that he was content to rely on
feedback from other traders.
Specifications
173.Despite
having no previous experience of trading in CPUs both Mr Rogelj and Mr Ryder
stated that they understood the relevance and importance of how the goods were
packaged. Mr Ryder stated in oral evidence that the information provided to the
Appellant in a deal would specify how the goods were packaged. Mr Rogelj
disagreed in cross examination that the manner in which the goods were packaged
would be an important detail expected to appear on the documentation.
174.Mr Rogelj was
referred to purchase orders relating to the 01/06 deal which after comparison
showed that the Appellant’s customer specified “OEM tray packed open boxes”
however the purchase order to the Appellant’s supplier made no reference to
this specification. Mr Rogelj explained that he would always start “with clear
specifications over the phone what the client needed.” Mr Rogelj accepted that
this information may not be included on the purchase order to the supplier but
stated that all of the boxes the Company traded in were in trays.
175.Similarly in
respect of the 03/06 deal, Mr Rogelj accepted that the customer’s purchase
order contained specifications which were not included within the purchase
order provided to the Appellant’s supplier. Mr Rogelj stated “we always deal in
trays, this is a wholesale product...not a product to go into retail...it was
common knowledge amongst all traders...”
176.In respect of
the 05/06 deal where the customer’s documentation did not contain
specifications, Mr Rogelj reiterated that the Company always dealt in trays and
that the customer had also seen the inspection report.
Insurance
177.The evidence
in respect of insurance of the goods was given by Mr Rogelj. As regards the
01/06 deal, Mr Rogelj stated that Bergmann Associates arranged the shipment and
the insurance “so it wasn’t for me to insure those.” Mr Rogelj stated that he
viewed the purchase order as confirmation that insurance was in place.
178.In respect of
the 03/06 deal, Mr Rogelj accepted in his oral evidence that the insurance
information he had provided to HMRC was worthless as the goods had not been
moved by airline security handling, which invalidated the terms of the
insurance. Mr Rogelj expressed surprise and explained that he is not an expert
in insurance, had not appointed an agent to deal with the matter and must have
overlooked the relevant condition.
179.The same
point arose in respect of the 05/06 deal and the documents provided by Mr
Rogelj to HMRC purporting to provide insurance cover for the goods. HMRC
submitted that the inference to be drawn from this evidence was the failure by
the Appellant to have any regard to the terms or conditions of the policy,
which would not be expected of a reasonable businessman trading in such high
value goods.
Terms and Conditions of trade
180.Mr Rogelj explained
that in 2006 the Company had terms and conditions upon which it traded and this
document was exhibited within the bundles. Mr Rogelj stated that the supplier
application form and customer application form, to which the terms and
conditions were attached, were very similar, that the terms and conditions
ought to be different but that he did not know how he had “managed to put the
wrong terms and conditions to the supplier application form.” Mr Rogelj denied
that this was because the terms and conditions were of little or no importance
as the transactions were contrived, stating that it had been a mistake on his
part although he accepted one which could have been “very costly if something
had gone wrong.” Mr Rogelj stated that he believed the purchase order and
invoice to be the legally binding document between the parties which would
provide protection should something go wrong.
181.Mr Rogelj’s
oral evidence was that the terms and conditions had been downloaded from the
internet as he could not afford to appoint a lawyer to draft them. It was put
to Mr Rogelj that the terms and conditions of payment and title as set out on
the documentation of both the Appellant Company and its suppliers/customers
bore no resemblance to what had occurred in the deals, for example in the 01/06
transaction, the goods were transferred to Bergmann Associates prior to the
Appellant receiving or making payment. It was put to Mr Rogelj that this did
not match the conditions of payment which stated that payment would be due upon
receipt of goods or services. Similarly, Mr Rogelj was questioned about the 31
March 2006 deal in which the Appellant’s invoice to IT Swiss Systems stated
“payment on delivery” yet payments were not received until 13 and 20 April
2006. Mr Rogelj stated that in the case of Bergmann Associates he had been
unable to negotiate the terms of payment, but that he knew from experience that
they were credible suppliers and for that reason he was happy to supply the
goods before payment was received.
182.When
questioned as to how the goods could be supplied by the Appellant prior to
making payment to its supplier, such as happened in the 05/06 transaction, Mr
Rogelj stated that although the invoice from Multisystems Technology declared
that the goods remained their property until full payment was made, he had
supplied the goods as they were in his possession which allowed him to release
them. Mr Rogelj stated that he believed such declarations to be common terms
and agreed that only once full payment was made could full ownership be
claimed. Mr Rogelj highlighted the fact that he had made payment on 23 May 2006
and stated that he had adopted common practices which he had learnt in the course
of business and that he found nothing strange in this manner of dealing.
Funding
183.Mr Rogelj set
out the funding arrangements in place to finance the Appellant Company’s
trading activities, which involved Mr Rogelj investing £80,000.00 of his own
money and £300,000.00 from external investors which was unsecured because the
Appellant was unable to offer security. Mr Rogelj explained that he is liable
to his investors and that the only way in which he can meet his liabilities is
by recovery of the disallowed input VAT.
184.Mr Rogelj
accepted in oral evidence that there was no provision in the event of the
Appellant not recovering the disallowed input VAT as both he and his investors
always had the expectation that the VAT would be repaid. Mr Rogelj also accepted
that the finance agreement exhibited failed to specify that the 10% interest
rate for the investors was per 2 months.
Due Diligence
185.The objective
of carrying out due diligence is to provide protection against the risk of a
non-paying customer, a supplier who does not supply the goods or provides goods
from an illegitimate source/goods which fail to meet specifications. It is
therefore in the best interests of the trader to carry out due diligence checks
on his customers and suppliers and to keep records of checks undertaken.
186.HMRC
submitted that the due diligence undertaken by the Appellant was inadequate and
unnecessary. HMRC contended that the Appellant’s due diligence was limited to
establishing that a company existed and had a VAT registration number.
187.Mr Rogelj
explained in oral evidence that he carried out due diligence to understand a
client, verify that they are what they claim to be and understand their
history. Mr Rogelj stated that it is important that he feels comfortable that a
company with whom he trades will deliver what is expected, whether as client or
customer. Mr Rogelj explained that contact would usually be made by telephone
and if he then decided to proceed a meeting would be required, preferably
involving a visit by Mr Rogelj to the company’s offices. Information would be
exchanged either by fax before the meeting or during the meeting and it would
usually take at least a month before a new supplier or customer is appointed.
188.Mr Rogelj
stated that sometimes not all steps are necessary in carrying out due diligence
as “you are satisfied with...the first meeting or you had a recollection of
their trading pattern to show that they are a credible supplier.” Mr Rogelj
explained that he valued information given by Mr Ryder confirming the validity
of a trader known from his experience prior to Manatlantic. Mr Rogelj stated
that the type of due diligence checks carried out were dependent on who the
Appellant was dealing with.
21st Trading Ltd
189.The Appellant
produced the following documents relating to the due diligence checks carried
out in respect of 21st Trading Ltd:
(a)
Certificate of Incorporation dated 24 October 2002;
(b)
Certificate of Registration for VAT effective from 16 November 2002;
(c)
An agreement for the supply of office facilities dated 23 November 2004;
(d)
Copy of driving licence of Mr Haider Al Hasani, Director;
(e)
Faxed letter of Introduction dated 23 August 2005;
(f)
An account application from 21st Trading Ltd to the Appellant
dated 7 October 2003;
(g)
Dunn and Bradstreet Report dated 2 August 2005
190.Mr Rogelj had
been in contact with 21st Trading Ltd while at Sirrnet. He could not
recall the exact circumstances in which contact was first made but confirmed
that he had spoken to the company on the telephone and had visited it twice and
confirmation of the visits was outlined in the due diligence documents
provided. He claimed that the visits had left him with a favourable impression
of it.
191.Mr Rogelj
accepted that the letter of introduction is very limited in terms of
information about the company but stated that he sought further details in his
telephone conversation. Mr Rogelj also explained that he verbally verified the
company with other traders as he did not have time to carry out a full report.
192.21st
Trading Ltd’s certificate of incorporation was obtained which Mr Rogelj stated he
verified via the Companies House website. He explained that he had not printed
off the relevant document as he may have verified the details against the Dunn
and Bradstreet report and although he could not recall the precise nature of
his enquiries, he would have used an independent source of information.
193.Mr Rogelj also
obtained a copy of 21st Trading Ltd’s tenancy agreement as he wanted
to check the location of the company. It was put to him that his suspicions
must have been raised by a clause in the agreement requiring only one month’s
notice to vacate the premises. Mr Rogelj explained that this clause did not
concern him as it was a standard agreement and that the Appellant would not be
left without the goods but rather 21st Trading would be left without
payment if they disappeared. He disagreed that his lack of concern was a result
of knowing he would receive payment irrespective of whether 21st
Trading remained at the premises due to the contrived nature of the transactions.
194.It was
confirmed by Mr Rogelj that he did not seek written references in respect of 21st
Trading as he had verified the company’s credibility by telephone calls to
trading contacts. He accepted that there was no documentary evidence to support
the verbal enquiries made with Forward Logistics.
195.HMRC questioned
whether Mr Rogelj had queried an entry on the trade application form which
stated, in response to whether HMRC had ever raised an assessment against the
company or whether there were any outstanding enquiries or appeals, that the
matter had been resolved. Mr Rogelj explained that he did not carry out any
enquires in relation to this matter as the company had explained to him that
their VAT number had been returned and the issue had related to a bank account.
He said that he had previously confirmed with HMRC’s Redhill Office that the
company was trading. Mr Rogelj stated that he found 21st Trading
Ltd’s director to be honest and credible.
196.The Dunn and
Bradstreet report showed a credit limit for the company of £19,000 with a risk
indicator of slightly greater than average. Mr Rogelj found that to be common
for a company which had only traded for 2 years.
197.It was noted
that the address of the company director as shown on the driving licence
differed from that on the Dunn and Bradstreet report to which Mr Rogelj responded
that he had taken a copy of the driving licence.
198.The Dunn and
Bradstreet report shows under “operations” that the company provides
“miscellaneous business services”. Mr Rogelj stated that he did not know why
this description was given but knew that the company had a trading history in
CPUs which he found sufficient. He accepted that he could not indicate where
within the due diligence documents provided by 21st Trading Ltd it
was recorded that the company traded in CPUs, but believed it to be contained in
the deal documents, and from the oral references he had received it was
obvious. Mr Rogelj explained that many companies change their trade and that he
did not find this a relevant consideration if he had an understanding of the
company’s history.
199.The fact that
21st Trading appeared to have more liabilities than assets was
highlighted to Mr Rogelj who stated that there may have been a number of
reasons for this and speculated that the directors had made a loan to the
company which was not accounted for as capital. Mr Rogelj confirmed his view
that it was appropriate to have a trading relationship of significant value
with 21st Trading Ltd irrespective of the fact that the company has
more liabilities than assets, a small credit rating, a greater than average
risk assessment and operates from shared facilities where one months notice to vacate
is required.
Multisystems Technology Ltd
200.The Appellant
produced the following documents relating to the due diligence checks carried
out in respect of Multisystems Technology Ltd:
(a)
Companies House print out dated 23 May 2006
(b)
Letter of Introduction dated 23 May 2006
(c)
Certificate of Incorporation dated 30 June 2005;
(d)
Certificate of Registration for VAT effective from 10 August 2005;
(e)
Account application and Manatlantic Terms and Conditions fax date 23 May
2006
(f)
Dunn and Bradstreet Report dated 23 May 2006
201.Mr Rogelj’s
written evidence set out the background to contact with Multisystems which came
about through its director Mr Richard Dawson who had also traded as
Multisystems International, a company which had traded with Sirrnet. Mr Rogelj
had visited the premises of Multisystems International in or around July 2005
and the same premises, from which Multisystems Technology traded, on 1 June
2006.
202.He accepted
that HMRC had given a warning that goods bought from Multisystems International
had traced back to a tax loss. Mr Rogelj explained that he considered his
trading relationship with Multisystems International very carefully following
the warning and whilst he had concerns about how the company was carrying out its
due diligence checks, he did not consider that Mr Dawson was involved in any
fraud.
203.Mr Rogelj
decided not to trade with Multisystems International but did trade with
Multisystems Technology, the director of both companies being Mr Dawson. Mr
Rogelj could not recall asking Mr Dawson why he did not continue to trade as
Multisystems International but instead as Multisystems Technology.
204.Mr Dawson
informed Mr Rogelj that the company had a new due diligence system in place,
which Mr Rogelj considered to be a much more professional approach when it was
explained to him and when he met Charley Cullender, the employee in charge of
the procedure.
205.Mr Rogelj
stated that as part of Multisystems Technology’s due diligence they had
required information from the Appellant, although he could not specifically
recall which documents were requested.
206.Mr Rogelj
went through the documents obtained by the Appellant Company in conducting
their due diligence checks on Multisystems Technology. It was noted that the
letter of introduction arrived 15.44 on 23 May 2006; the day on which the
transaction with Multisystems Technology took place. Mr Rogelj stated that the
checks had commenced prior to the day of the transaction and that he had spoken
to the company by telephone and evaluated Mr Dawson as a trader throughout
their trading relationship. Mr Rogelj stated that it is his knowledge of the
trader and company which is important, not paperwork and confirmed that it was
important to him that the company was carrying out its own due diligence.
207.It was
accepted by Mr Rogelj that the letter of introduction from Multisystems
Technology was a standard letter addressed “to whom it may concern” which
stated that the company was a worldwide distributor servicing the demands of
the global market. Mr Mandalia questioned Mr Rogelj’s knowledge of the company
which on the face of it had started trading in August 2005 and 9 months later
achieved clients worldwide. Mr Rogelj stated that he had no reason to doubt the
contents of the letter; that the description encapsulated how the company
perceived itself and that traders are prone to exaggeration.
208.Mr Rogelj
accepted that the company’s VAT registration certificate had been received by
fax at 15.44 on 23 May 2006, as was the certificate of incorporation. Similarly
the Dunn and Bradstreet report was printed out on 23 May 2006, which Mr Rogelj
clarified was done prior to the exchange of invoices and purchase orders.
209.As regards
the Dunn and Bradstreet report, it was highlighted that “line of business” is
stated as “non-classified establishment” with a credit rating being
unavailable. An association with Multisystems International Ltd is declared and
a credit search is recommended in order to “gain additional insight into the
principals of this business.” Mr Rogelj confirmed that he had not undertaken a
credit search of the company, stating that the documents added a little more
additional information beyond that given by Mr Dawson but stated that the
important issue was that he, Mr Rogelj, understood Mr Dawson as a trader and
the manner in which he conducted his business. Mr Rogelj’s stated that his
experience of Mr Dawson was that he was one of the most professional traders.
Mr Rogelj stated that the most important matter for him was to verify the
company’s due diligence checks, not those of the Appellant.
210.Mr Rogelj
accepted that the date of first trade of the company was 2 months prior to the
transaction between the Appellant and Multisystems Technology, but stated that
it was a new company with an experienced trader and he found nothing unusual in
there being different trading companies, which he stated was a common
occurrence.
211.In respect of
the Companies House print out, Mr Mandalia on behalf of HMRC highlighted that
it was obtained on the date of the transaction between the Appellant and
Multisystems Technology and that no information as to the nature of the
business was supplied. Mr Rogelj explained that by collecting document on the
day of the transaction verifies the depth of understanding that he had as to
the company’s credibility. Mr Rogelj stated that in a back to back deal, it is
a case of protecting your own company by “closing off everything at once...this
is a completely normal commercial practice and in fact it was executed really
well.”
Bergmann Associates
212.The Appellant
produced the following documents relating to the due diligence checks carried
out in respect of Bergmann Associates
(a)
A document setting out the company’s address, accountants, contact
details, freight forwarders, bank details and general information about the
company;
(b)
A company report stating the company number and capital from the Swiss
authorities;
(c)
A list of professional references;
(d)
Dunn and Bradstreet report dated 30 June 2005
213.Mr Rogelj’s
written evidence explained that he had been involved in transactions with
Bergmann Associates while at Sirrnet and that he had visited the company’s
premises in Switzerland in 2005 in his capacity as Company Secretary of
Sirrnet, which visit was paid for by the Syskal group, although there was no
documentary evidence before us to confirm that the visit had taken place. Mr
Rogelj confirmed in oral evidence that he did not obtain references as he did
not believe this to be necessary given his level of knowledge about the
company.
214.The Dunn and
Bradstreet report gave the company a credit recommendation of 30,000 Swiss
Francs which at the time equated to approximately £13,000 and the financial documents
showed that the profit and loss account had not been prepared when the
information was obtained. Mr Rogelj explained that his view that the company
could deal in large transactions came from his experience and knowledge of the
company and the traders associated with the company.
215.Mr Ryder’s
written statement stated that he had carried out a significant amount of
business with Bergmann Associates while working at Sirrnet. Mr Ryder recalled
that Sirrnet obtained professional references but could not be certain whether
this was done in writing or orally. In oral evidence, Mr Ryder stated that
although there should be evidence of the references, he had not made any
enquiries in that regard.
IT Swiss Systems Ltd
216.The Appellant
produced the following documents relating to the due diligence checks carried
out in respect of IT Swiss Systems Ltd:
(a)
A print out of information contained on the company’s website;
(b)
A certificate from the Institute of Chartered Accountants in England and
Wales certifying that Geoffrey Senogles was admitted as an associate and dated
1 February 1994;
(c)
An certificate of residence as a foreign national of Geoffrey Senogles;
(d)
A copy of Geoffrey Senogles’ UK passport;
(e)
A trade application form dated 5 October 2005 with references attached;
(f)
A VAT certificate (not translated);
(g)
A registration certificate (the equivalent of a certificate of
incorporation) dated 13 May 2005;
(h)
A telecommunications bill stating the company address;
(i)
Company accounts;
(j)
A credit report dated 10 March 2006
217.Mr Rogelj
explained that his main reference for the company was Mr Ryder who was involved
with IT Swiss Systems Ltd through Sirrnet. Mr Rogelj confirmed that no written
references were obtained.
218.Mr Rogelj
stated that IT Swiss Systems Ltd was a new company and that he had not had the
document purporting to be a VAT certificate translated as it was from the
authorities and confirmed the company’s address which Mr Rogelj considered to
be part of the due diligence check.
219.It was stated
by Mr Rogelj that he noted the company’s financial status, shown on the Graydon
credit report as medium risk with a maximum monthly credit of CHF 10,000. The
report also stated that there was insufficient financial data to provide an
assessment of the company’s financial situation and that IT Swiss Systems Ltd
and other companies in which Mr Senogles holds a position on the Board of
Directors have no official telephone connection and that Mr Senogles was not
contactable through his private telephone number. Mr Rogelj stated that he had
been able to contact Mr Senogles when he needed, had seen Mr Senogles’ offices
and noted his credibility as a chartered accountant and UN forensic accountant.
Mr Rogelj stated that he found nothing unusual in a chartered accountant who
had given evidence as an expert at the United Nations now dealing in CPUs.
220.Mr Ryder’s
written evidence confirmed that he had introduced the company, which had traded
with Sirrnet, to Mr Rogelj. Mr Ryder stated that Mr Senogles had visited the
Appellant at its Manchester Office and that, together with Mr Rogelj, they had
gone out for a meal at a local restaurant.
Giga Asia
221.The Appellant
produced the following documents relating to the due diligence checks carried
out in respect of Giga Asia:
(a)
A letter of introduction dated 22 May 2006;
(b)
An E-biz file internet print out dated 23 May 2006;
(c)
A certificate of incorporation dated 6 June 1995 with a fax/print out
date of 22 May 2006;
(d)
Company Accounts with a fax/print out date of 22 May 2006;
(e)
A Dunn and Bradstreet report dated 15 May 2006;
(f)
An account application dated 22 May 2006 with reference attached from
Best Buy.
222.Mr Rogelj
confirmed that Giga Asia was introduced to him by Mr Ryder in 2006 as a
reliable and credible customer of Sirrnet. Mr Rogelj accepted that a number of
the documents which formed the Appellant’s due diligence checks had been
printed out either the day before or the day of the transaction on 23 May 2006.
Mr Rogelj stated that the purpose of the documents was to verify that the
company existed in addition to the fact that Mr Ryder had visited the company
and made thorough checks approximately 4 or 5 months prior to the transaction.
223.It was accepted
by Mr Rogelj that the Dunn and Bradstreet report showed that the company had no
credit rating and was assessed as higher than average risk level. Mr Rogelj
confirmed that he had requested the written reference provided by Best Buy
which stated that Giga Asia had provided excellent support in the supplies of
computer related products and was recommended as a solid and reliable supplier.
Mr Rogelj confirmed that Giga Asia were in fact a customer, not supplier, in
the transaction involving the Appellant, but stated that he considered a
reference from Best Buy to be credible and was satisfied by the due diligence
that Giga Asia would pay in advance.
224.Mr Rogelj
accepted that the due diligence documents only showed that the company existed,
had an address and a VAT registration number, but stated that due diligence is
not confined to paperwork, but also “getting a feeling for the client and get a
good feeling that they are credible” and that he had taken the limited
information about the company’s financial status on board. Mr Rogelj’s written
evidence sets out that, as a result of the Dunn and Bradstreet report showing a
risk of late payment, he insisted on payment in advance in sterling.
225.Mr Ryder’s
evidence confirmed that he had introduced Giga Asia to Mr Rogelj as a company
with a good track record with Sirrnet. Mr Ryder stated that on behalf of the
Appellant, he had been in discussions with the company director, Mr Bradbury,
for several months regarding potential future trading.
Findings as to whether the Appellant (through Mr
Rogelj and Mr Ryder) knew or should have known, at the time of the
transactions, that they were connected to the fraudulent evasion of VAT
226.We considered
the evidence before us, both documentary and oral, in respect of each of the
matters relied on by HMRC in support of their contention that the Appellant
either knew, or in the alternative should have known, that the transactions
subject of this appeal were connected with fraud.
227.It was
submitted by HMRC that the Appellant’s VAT registration form is inaccurate. The
Appellant responded by referring us to Mr Rogelj’s oral evidence in which he
explained that handwritten amendments had been made to the application by a
person with initials which were not recognised by Mr Rogelj. We noted that Mr
Rogelj accepted in evidence that the application would have been filled out on
the basis of his instructions. We found that there was no evidence of any
attempt by the Appellant to trade in anything other than CPUs, in contrast to
the main business activity declared on the VAT application of “the purchase and
sale of computer parts.” We found that the declaration on the VAT application
that regular repayments of VAT were not expected to have no plausible basis
given the evidence that the Appellant Company was established to make purchases
from UK suppliers and sell to customers abroad. We found the evidence of Mr
Rogelj to be vague as to how he had estimated his target turnover, which was
notably different to the estimated value of taxable supplies over 12 months as
declared on the VAT application form.
228.It was
accepted by Mr Rogelj that he had general knowledge of MTIC fraud within the
industry. We found that this knowledge was a relevant background against which
to assess the nature of the Appellant’s trading and we found, given the number
of warning letters provided by HMRC and correspondence between the parties
relating to MTIC fraud, that Mr Rogelj had a good understanding of the
consequences of being involved in or linked to such fraud both prior to
commencing trade through the Appellant Company and which increased throughout
the trading history.
229.Mr Rogelj’s
evidence was that negotiations took place over a number of days before the
transactions took place. Mr Ryder gave evidence that the price of the goods
traded can fluctuate on a daily basis. We found that there was no explanation
as to why, if negotiations had taken a number of days, documentation relating
to due diligence and the deals themselves was on a number of occasions obtained
either the day before or day of the transactions. The deals then took place
over the course of one day, although in two deals there was a delay between
delivery of the goods to the Appellant’s customer and payment being made, which
we found contradicted the proposition that in such a fast moving market the
price and shelf-life of such goods fluctuates unpredictably. There was no
evidence before us of any significant negotiation to account for the consistent
profits achieved by the Appellant. Taken together with Mr Rogelj’s knowledge of
fraud within the market and risk involved, Mr Rogelj should have been
suspicious that the transactions were fraudulently manipulated.
230.The evidence
of Mr Ryder was vague. Mr Ryder stated that his role within the Appellant
Company was mainly sales and marketing, yet he was unable to give any detailed evidence
as to how the trading relationships with Bergmann Associates, IT Swiss Systems
and Giga Asia had developed with the Appellant Company as opposed to Sirrnet.
Mr Ryder claimed that the transactions subject of this appeal had been
conducted by both himself and Mr Rogelj, but gave no evidence as to the nature
and detail of the “protracted conversations” which had taken place prior to the
transactions, nor was there any documentary evidence to support the assertion
that such negotiations had taken place.
231.There was no
explanation as to why the Appellant did not source the goods directly from
abroad to supply to its customers and we did not accept Mr Rogelj’s evidence
that “I simply bought and sold but by doing so, I actually added value.” There
was no evidence to support Mr Rogelj’s assertion that he added value or
provided anything above and beyond that provided by other traders in the chain.
Mr Rogelj was aware of the profit achieved from his own purchase and sale of
the goods, and that even if unaware of the price of the goods as between other
traders in the chain, there was no explanation as to why the Appellant was able
to consistently achieve such profits, there being no identifiable addition made
to the transaction by Mr Ryder or Mr Rogelj.
232.Mr Rogelj’s
evidence in respect of the title of the goods and terms and conditions of
purchase/sale was vague and unconvincing. The reality of the situation and the
manner in which the goods were released without payment bore no similarity to
the terms and conditions of the parties involved. When set against the
background of the credit and risk assessments contained within the Dunn and
Bradstreet reports, it is implausible that Mr Rogelj, as an experienced
businessman, would not satisfy himself as to the financial arrangements of his
suppliers and purchasers given the significant amount of money involved in the
transactions.
233.We accepted
that the Appellant would not necessarily incur the legal expense of contracts
being drafted for each transaction undertaken, but Mr Rogelj’s evidence that
terms and conditions had been downloaded from the internet and that due to a
mistake the wrong terms and conditions were attached to the supplier
application form was not feasible, particularly given Mr Rogelj’s concession
that it would have been “very costly if something had gone wrong.” Mr Rogelj
and Mr Ryder both placed great emphasis on their experience in business and it
is highly unlikely, given the values of the transactions with which they were
involved, that such an oversight would be made. We found this to be an
indicator as to the fact that little or no significance was placed on the
content of the terms and conditions due to the contrived nature of the
transactions; any reasonable businessman proposing to enter into transactions
of such volume and value would take a significant amount of care to limit any exposure
to risk.
234.The evidence
that there was no commitment to buy or supply stock until a purchase order was
sent or received, and thereafter payment was not made to the supplier until
received by the customer, lacked the commercial viability to be expected from
independent transactions in the normal course of business. Set against the
background of the Appellant Company being relatively young and the credit
ratings of the companies with whom the Appellant traded as shown on the Dunn
and Bradstreet report, this manner of trading lacked any commercial reality and
was such as to put a reasonable businessman on notice that the trade was not
legitimate. In a trade where MTIC fraud is a well known danger, there was no
explanation as to why the Appellant’s customer would make payment to the
Appellant who, at the time of that payment, does not hold title to the goods.
The Appellant’s customer was reliant on the Appellant and thereafter a
purported unknown number of unknown traders to make payment down the chain. This
was a risk which a reasonable and independent businessman would not take and we
inferred from this evidence that it was an indication that the chain of transactions
were fraudulently manipulated. Not only did the Appellant enter into this
manner of trading without hesitation, but neither Mr Rogelj nor Mr Ryder had
questioned why the customers were also content to enter into the transactions
on such a seemingly relaxed basis. The nature of these arrangements would have
made any reasonable businessman exercising precaution suspicious.
235.The lack of
specifications on the documents relating to each of the three transactions was
an indication as to, at the very least, the casual approach taken by the
Appellant. We considered the evidence given by Mr Rogelj that details were
discussed with trading partners via telephone; it lacked any commercial sense
to fail to include such information within the documents as the Appellant would
have been left without recourse if the purchaser ultimately rejected the goods
as not being to the correct specification. We inferred from this evidence that
the only reasonable explanation for the general lack of any detailed
documentation existing was that the transactions formed part of an overall
scheme to defraud.
236.The lack of
insurance in respect of the 03/06 and 05/06 deals was indicative of the
contrived nature of the transactions. Mr Rogelj’s evidence that he overlooked
the invalidating clause was unconvincing given the value of goods involved and
Mr Rogelj’s experience in business. The failure by the Appellant to have any
regard to the terms or conditions of the policy would not be expected of a
reasonable businessman trading in such high value goods, and we did not accept
that in the usual course of commercial trading, a prudent businessman would be
content to shift responsibility onto a customer without enquiries of any
substance so as to ensure his own protection, as happened with Bergmann
Associates.
237.There was no
evidence given by the external investors of the Appellant Company. We
considered the evidence given by Mr Rogelj and found the manner of the
investment, which relied on the Appellant recovering VAT and failed to provide
for the Appellant’s liability if such VAT was not recovered, to lack
credibility and we inferred from the evidence that the Appellant and the
investors had failed to take every precaution which could reasonably be
expected.
238.Given the value
of stock involved in the transactions, it was a reasonable precaution to be
expected of a businessman to ensure that thorough and regular inspections were
undertaken. The Appellant relied on inspection reports either prepared by the
freight forwarder or those commissioned by the Appellant’s supplier. This
approach to inspecting the goods lacked the thoroughness which would be
expected of a trader protecting his own interests and was indicative of a level
of trust placed by the Appellant Company in those with whom it traded which
went beyond that to be expected of an independent commercial relationship.
239.No credible
explanation was given for establishing the Appellant Company. Both Mr Rogelj
and Mr Ryder were involved in the export of CPUs through Sirrnet. We found Mr
Rogelj’s evidence that he had incorporated the Appellant Company in order to be
in full control did not explain the reason for establishing a trading vehicle
(the Appellant Company) which to all intents and purposes was identical to
Sirrnet, in which Mr Rogelj relinquished the majority of his shares. Despite
his involvement in both companies, Mr Ryder was unable to explain with any
clarity the need to set up the Appellant Company. The two companies were
described by Mr Rogelj as “acting together” and as a “joint operation.” There
was no clear evidence as to why transactions would be conducted through
Manatlantic rather than Sirrnet, how or by whom this decision was made, or how
Mr Ryder and Mr Rogelj avoided the clear conflict of interest which existed in
such a situation. We were satisfied, in the absence of any clear explanation
for the existence of the Appellant Company, that the purpose of it was to
participate in the chain of transactions connected to the fraudulent evasion of
VAT.
240.We considered
the significant volume of documents before us showing the due diligence checks
which had been undertaken by Mr Rogelj. It was submitted on behalf of the
Appellant that the documents showed that Mr Rogelj had carried out all
reasonable checks into his suppliers and customers and that HMRC had failed to
identify any additional measures which could have been taken. It was submitted
by Mr Young on behalf of the Appellant that as the Appellant’s trading partners
did not default, there was nothing more that the Appellant could have done to change
the position. HMRC did not dispute that some due diligence checks had been
carried out, but contended that the checks were wholly inadequate and only went
so far as to verify the existence and VAT registration of the companies
involved.
241.The guidance
issued by HMRC within Notice 726 provides a non-exhaustive list of suggested
checks a trader should carry out. Among the suggested checks are enquiries into
a supplier’s history in the trade, insurance on the goods, the commercial
viability of a price increase within a short duration, whether the goods are as
described/exist and checks into existing businesses.
242.Mr Rogelj’s
emphasis throughout, in respect of the documents he did obtain, was on
satisfying HMRC rather than himself. When questioned as to what the documents
produced showed, other than the legal entity and VAT registration of the company
with whom he was trading, Mr Rogelj simply reiterated that due diligence was
not about paperwork and stated that he had verbal assurances as to the
credibility of his suppliers and customers from others within the industry, but
gave no further detail as to who had given such assurances and on what basis.
243.Mr Rogelj’s
attitude was summed up by his oral evidence that due diligence is “...not about
paperwork...Due diligence is about understanding your client and gaining trust
in that client...” yet there was no evidence of any steps taken by Mr Rogelj
such as would afford him understanding and trust in his clients. If anything,
Mr Rogelj ignored the evidence which would cause concern to a reasonable
businessman, as seen from the credit and risk assessments contained within the
Dunn and Bradstreet reports. Mr Rogelj did not follow up the information which
these reports disclosed nor did he, in the majority of transactions, seek
references. The only reference which was provided, attached to the trader application
form, was from Best Buys, who feature in the 05/06 transaction as part of the
deal chain and were connected to the 03/06 transaction. The reference related
to Giga Asia as a supplier when, for the purposes of the Appellant, Giga Asia
were acting as customer and consequently the reference would have been of
limited assistance to the Appellant in satisfying himself as to the credibility
of Giga Asia as a customer.
244.The due
diligence, such as it was, carried out by Mr Rogelj lacked any substance. Mr
Rogelj failed to look beyond the limited documents he had obtained which were
inadequate for the purpose of ensuring that the companies with which he traded
were legitimate.
245.In
particular, we noted the Appellant had been warned by letter from HMRC dated 7
November 2005 that 4 transactions in which the Appellant had been involved
commenced with a defaulting trader and that in each of the 4 deals the
Appellant’s supplier was Multisystems International Ltd. Although trading
ceased with Multisystems International, the Appellant did not cease trading
with Multisystems Technology, which was, in reality, the same entity and had
the same director as Multisystems International but traded under a different
name. It was clear from Mr Rogelj’s evidence that he was reluctant to cease
trading with Multisystems International and had been satisfied with their due
diligence procedure. Mr Rogelj did not provide any evidence in support of his
assertion that he was satisfied that the due diligence checks undertaken by
Multisystems Technology had improved on those used by Multisystems
International to such a degree as to justify trading with the company, in
contrast to his letter to HMRC dated 19 October 2006 which describes having “undertaken
stringent due diligence on Technology, and Technology’s vetting procedures”.
The Appellant took no real precautions to guard against the connection to
fraudulent evasion of VAT or ensure that the transaction in which the Appellant
was involved were legitimate.
246.The
Appellant, through Mr Rogelj and Mr Ryder, was aware of existence, prevalence
and characteristics of fraud within the industry. We were satisfied that he
Appellant’s knowledge went beyond the general existence of fraud within the
industry and that both men were aware that the transactions with which they
were involved were connected to the fraudulent evasion of VAT. The Appellant
took no steps to change its methods of trading in order to take the precautions
which could be expected of a reasonable businessman.
247.We asked
ourselves why the Appellant, a relatively small and
new company with little or no history of dealing in CPUs, was approached with
offers to buy and sell very substantial quantities of such CPUs. We did not
accept that the involvement of Mr Ryder and Mr Rogelj in Sirrnet had
established their reputation within the trade to such a degree as to combat the
difficulties which both men explained existed in sourcing and supplying goods
at Sirrnet and within such a short period of trading had led to such a
substantial turnover “without any difficulty” as stated by Mr Rogelj. If
such had been the case, there would have been little reason to cease trading when the “reverse charge”
provisions were introduced in June 2007. The
explanation as to why the Appellant stopped trading (due to loss of financing
and feeling disheartened by HMRC’s treatment) was unconvincing and we infer
from the overall picture that the true reason for the Appellant ceasing its
trade of CPUs was the reverse charge provision.
248.We considered
how likely in the ordinary commercial world it
would be for a company in the Appellant’s position to be approached to supply substantial
quantities of particular types of CPU and to be able to find without difficulty
a supplier able to provide exactly that type and quantity. We noted the
evidence that on occasion the Appellant was approached but was unable to source
the requested stock, however there was no evidence before us to support such an
assertion and we found the evidence to be unreliable and vague. We found that the
combination of features such as no stock was held, the transactions were always
“back to back” and the Appellant was never left with unsold stock to be
indicative of the artificial market in which the transactions took place.
249.We concluded from the absence of commercial features in
each of the transactions that the only reasonable explanation for the
circumstances in which the Appellant entered into the impugned transactions was
that they were connected with fraud. We could not ignore the compelling
similarities between the transactions, pattern and nature of trading of a
relatively young company which held no stock, had no left over stock and which
consistently achieved a significant turnover. Taking into account the
characteristics of each transaction, the surrounding circumstances in respect
of all of the deals and the acts/omissions of the Mr Ryder and Mr Rogelj, we
concluded that the Appellant knew that the transactions were connected to a
fraudulent scheme.
Conclusion
250.We are
satisfied that there was a fraudulent evasion of VAT connected with each of the
transactions which form the subject of this appeal.
251.We are
satisfied that the Appellant, through Mr Rogelj and Mr Ryder, knew that its
purchases were connected to the fraudulent evasion of VAT, having drawn inferences
from the evidence where there was no clear direct evidence to assess.
252.Accordingly
we found that the decision of HMRC to deny the Appellant’s input tax in respect
of purchases of CPUs reflected in its VAT returns for the periods 01/06, 03/06
and 05/06 was correct and is upheld.
253.The appeal is
dismissed.
Costs
254.We direct
that the Appellant is to pay HMRC costs of, incidental to and consequent upon
the appeal, to be the subject of detailed assessment if they cannot be agreed.
255.No adjustment
to be made to an order for costs in respect of an adjournment of the hearing on
22 April 2010 for which an order directing the Appellant’s costs to be paid by
HMRC was made on 19 May 2010.
256.This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
TRIBUNAL JUDGE
RELEASE DATE: 3 August 2011
