AR Communications & Electronics Ltd v Revenue & Customs [2011] UKFTT 637 (TC) (28 September 2011)
DECISION
Introduction
1. This
is an appeal by AR Communications & Electronics Ltd (“ARC”) against the
refusal by the Respondents (“HMRC”) to make a repayment of input tax of
£1,214,801.88, all as set out in their letter to ARC dated 25 April 2008 (A/120).
The input tax was paid by ARC in respect of 16 purchases of mobile phones made
in June and July 2006.
2. HMRC
argue that ARC knew or ought to have known that these transactions were
connected with the fraudulent evasion of Value Added Tax and found on the
decision of the ECJ in Kittel, infra.
3. HMRC
agreed to lead under reservation of all questions anent the onus of
proof. They led 7 witnesses, 6 of whom were their own officers, and Mr John
Fletcher CA, an expert witness who is in private practice. (James McGee, one
of their officers, was led simply to enable him to be cross-examined on behalf
of ARC, and the evidence of a further HMRC officer, Sangita Parmar, was agreed
and admitted, as was part of the evidence of a third officer, Lesley Camm).
The Law
4. Section
25 of the Value Added Tax Act 1994 provides:-
“(2) subject to the provisions of this section, [a
taxable person] is entitled at the end of each accounting period to credit for
so much of his input tax as is allowable under Section 26, and then to deduct
that amount from any output tax as is due from him”.
Section 26 (1) provides:-
“(1) the amount of input tax for which a taxable person
is entitled to credit at the end of any period shall be so much of the input
tax for the period………. as is allowable by or under regulations as being
attributable to [taxable supplies]”.
Section 77A makes provision for joint and several liability
of traders in supply chains where tax is unpaid.
Counsel referred also to the following authorities in the
course of their submissions:-
(i) Axel Kittel v Belgium [2006] ECR 1-483; [2008] STC 1537
(ii) Mobilx Ltd (in Admin)
v HMRC [2010] EWCA Civ 517
(iii) Red 12 Trading Ltd v
HMRC [2009] EWHC 2563 (Ch)
(iv) Euro Stock Shop Ltd v
HMRC [2009] UKFTT 182 (TC)
(v) Blue Sphere Global Ltd
v HMRC [2009] EWHC 1150 (Ch)
(vi) Pars Technology Ltd v
HMRC [2011] UKFTT 9 (TC)
(vii) Calltel Telecom Ltd v
HMRC [2009] EWHC 1081 (Ch)
(viii) Livewire Telecom Ltd
v HMRC [2009] EWHC 15 (Ch)
(ix) HMRC v Brayfal Ltd
[2011] FTC/53/2010
(x) Eyedial Ltd v HMRC
[2011] UKFTT 47 (TC) and
(xi) Emblaze Mobility
Solutions Ltd v HMRC [2010] UKFTT 410(TC)
(xii) Optigen Ltd v HMRC (and
related cases) [2006] STC 419
(xiii) R (Just Fabulous UK
Ltd) v HMRC [2007] EWHC 521 (Admin), 2008 STC 2123
(xiv) Emsland-Starke
GMBH v Hauptzollamt Hamburg Jonas, 2000 ECRI 11,556
Reference was made also to
HMRC’s Notice no 726 entitled “Joint and Several Liability for Unpaid VAT”.
The Evidence
5. At
the outset a brief Statement of Agreed Facts was negotiated. In the course of
the hearing three Joint Minutes of Admissions in respect of evidence of certain
HMRC officers, in particular Sangita Parmar and Lesley Camm were lodged. All these
are produced in Vol K together with Parties’ Written Submissions.
6. Roderick
Stone gave evidence first for HMRC. He is a senior officer of HMRC with
specialist experience in the investigation and combating of Missing Trader Intra
Community (“MTIC”) fraud and has supervised investigation teams. His
experience in this area has been acquired over an extended period. He spoke to
his Witness Statement (No 13) which, we noted, is dated 19 November 2008. It
represents a consideration of this form of fraud, noting relevant developments
over the years, identifying key features of it, and describing various
counter-measures.
7. Mr
Stone explained that there is a succession of “deals” in an MTIC fraud chain
whereby the same subjects are bought and sold by several parties in quick
succession, often within one day. Firstly, the goods are imported free of VAT
into the UK usually from another EU member state by a UK VAT registered trader.
That party sells the goods charging output tax, for which he fails to account
to HMRC. He is known as the defaulter, or missing trader. The goods
are sold on by the defaulter to one of several intermediaries, or buffers.
Each of them in successive deals will charge output tax on re-sale and deduct
the relative input tax on purchase, typically making a token profit and
accounting for a small balance of VAT. The party at the end of the chain, the broker,
will export the goods VAT free (“zero-rated”). He will attempt to recover the
input tax which he paid on acquisition. If a VAT fraud is suspected by HMRC,
arising from the original failure to account by the importer/defaulter, then it
may refuse to make any repayment of input tax to the broker. (That, of course,
compensates for the initial default at the start of the chain). A chain
with a defaulter is known as a dirty chain. The inclusion of several
parties or buffers between importer and exporter serves to “distance”
the party seeking repayment from the defaulter. Mr Stone explained that
following certain measures introduced by HMRC in 2005 applications for
repayment of input tax were in instances subjected to an extended verification
process. This occasioned a further development in the pattern of MTIC fraud, viz
contra trading. Contra trading serves to camouflage the broker
by introducing an offsetting output tax liability which he sets against his
repayment claim. This arises from a new chain in which the broker imports a
separate batch of goods. He will re-sell these, charging output tax, thus
creating a tax liability to be set against his repayment claim in the first (or
dirty) chain. The purchaser, or a subsequent purchaser, then exports
the goods zero-rated, so generating a repayment claim in his hands as second
broker. This second chain is usually short, and serves to further “distance”
the party making recovery of input tax from the defaulter. There is no
default in the second chain, known as the contra or clean chain.
At each stage VAT is duly accounted for. The contra or clean
chain extends the original chain in a sense. However, it is “clean” in the
sense that the relative VAT is duly accounted for. Different goods are
introduced with the contra chain.
8. The
circulation or passing of title to the goods is shown on the successive invoices,
or invoice chain. Its counterpart is the cash chain which, as
representing payments, runs in the opposite direction. The party financing,
usually based abroad, and who probably instigates the transaction chain,
introduces a substantial cash consideration which passes from purchaser to
seller. That sum will return to the financing party, albeit slightly
diminished by small profits extracted by the buffers. There is, of course,
introduced into the chain the amount of the VAT repayment, which customarily
can be used in funding (the VAT element of) future (and unrelated) chains.
Where there has been a default, a VAT repayment would represent a loss to HMRC,
and be fraudulent where knowledge can be imputed to the broker in the second clean
chain, who sells and exports the new goods zero-rated.
9. Mr
Stone explained certain features characteristic of MTIC fraud, which again are
set out in his Witness Statement. In particular payment for the goods often
would not pass down the supply chain to the importer/defaulter.
Frequently instructions are given for the diversion of the payment to another
party, often based abroad, who is, or is associated with, the instigator. Such
third party payments, diverting monies from the defaulting importer,
frustrate the recovery of output tax due to HMRC. He commented also on
typically the apparent lack of commercial purpose and absence of any sale to an
ultimate consumer.
10. While title to
the goods passes between the UK-based parties in the chain(s), the goods
themselves generally remain physically on the premises of a freight
forwarder in the UK until re-export. Customarily the freight forwarder
would deal with storage, transport, insurance and even inspection, the costs
thereof being met by the broker. IMEI (identity) numbers of the phones can be
verified then too.
11. The pricing
structure of the goods tends to create a profit for each party involved.
While the buffer will receive a minimal amount (and while not usually
adding value to the product), the broker is ensured a moderate profit
(typically 4-5%). However, the broker does not seek to maximise his profit by
buying from the cheapest source or the supplier abroad (which, of course, would
eliminate the defaulter and buffers from the chain). So too the EU-based purchaser
from the broker does not buy at cheapest price from the original EU exporter,
who sold the goods in the first instance to the defaulter.
12. The succession
of deals in each chain are customarily back-to-back, being of the same
type and specification and the same quantities, and all arranged within the
space of about one or two days. Since credit is not usually available, broker
traders have to have sufficient funds to bear VAT liability until repayment.
13. The banking
arrangements favoured by the participants in the chains were often peculiar
in his view. The offshore arrangements of the First Curacao International Bank
(“FCIB”) became increasingly popular as the major UK banks, fearful of
involvement with possible VAT fraud and money-laundering, withdrew their
facilities from mobile phone traders. In cross-examination Mr Stone accepted,
however, that such offshore banking arrangements were perfectly legitimate for
trading purposes.
14. Having explained
the various counter-measures taken by HMRC and by the UK Government against
MTIC fraud and their effects in shrinking the volume of such trading, Mr Stone
finally referred to the grey market opportunities. This topic was more
fully explained by Mr Fletcher infra but essentially there are
legitimate business opportunities for trading in mobile phones by parties who
are not officially authorised by the manufacturers. Briefly, subsidies linked
to various network operators in different territories, paid by the operators or
manufacturers, can create price differences. However, modification of these
subsidised phones for use in another territory is often necessary. This
process of box breaking requires technical staff and premises with
facilities to carry out the modification work. There can be different
manufacturers’ price lists for different territories too giving rise to arbitrage
opportunities. Finally, unexpected variations in demand for particular models
of phone can create other grey market opportunities. However, in Mr Stone’s
view the legitimate grey market was small in relation to the volume of mobile
phones sold by independent traders during the relevant period.
15. We found Mr
Stone’s “overview” of MTIC fraud helpful and comprehensive. He was, of course,
speaking to a general pattern rather than a consideration of the facts of the
present appeal. We found his evidence credible and reliable.
16. HMRC’s next
witness was Christopher Grieve, the officer responsible for the verification of
ARC’s VAT liabilities. He referred to his Witness Statement (No 1). He is a member
of an MTIC investigation team based in Glasgow and took over responsibility for
reviewing ARC in succession to a colleague, Spencer Vaughan, in January 2007.
Where he spoke to matters pre-dating his personal involvement, he referred to
HMRC’s records.
17. He explained the
circumstances in which ARC’s Returns for 06/06 and 07/06 became subject to
extended verification. He referred to its Application for Registration, VAT 1
(B/I/1) completed in about September 2002 and its contents, including in
particular an estimated annual turnover of £60,000. He described the modest
business premises of ARC at the material time, and noted that at one stage it
had 2 employees. There had been a switch from 3 monthly to monthly Returns
from November 2005. Contrary to ARC’s indication in its VAT 1 a repayment of
VAT was claimed in each Return since May 2005. Monthly Returns enable speedier
repayment of VAT.
18. Mr Grieve spoke
to meetings with Mr Satnam Rakhra, as a Director of ARC and VAT notices and
other relative information passed to him. He explained the facility offered by
HMRC’s Redhill Office, confirming on enquiry the VAT registration status of
businesses, available to their prospective customers and suppliers. Redhill had
issued to ARC a series of letters (about 15) intimating de-registration for VAT
purposes of several traders with whom it had dealt or enquired about. While
“Redhill” letters do not state the reason for de-registration, some
impropriety, possibly involving MTIC fraud, is, perhaps, suggested. In certain
cases ARC had traded in substantial amounts. Yet, its pattern of diligence
checks on trading contacts had not been changed. This and other factors had
suggested to Mr Grieve that ARC’s “due diligence” system checks were
inadequate.
19. Mr Grieve explained
that repayments of VAT had been withheld in respect of 16 transactions for
mobile phones concluded in June and July 2006 in which ARC had acted as broker,
exporting the phones and seeking a repayment of input tax paid on purchase.
(These are set out on pages 4-6 of his Witness Statement). They involve 3 suppliers
and via a contra chain, as Mr Grieve sought to show, are related back to
a defaulting or missing trader. He considered that the chains in which the
contested transactions fell, were contrived.
20. Mr Grieve spoke
to notes of an extended interview with Mr Rakhra held on 13 April 2007 and
continued later in respect of certain supplementary questions, about ARC’s VAT
affairs. (The questions and answers are set out separately in B/83). In the visits
to ARC’s premises during 2007 he had recovered extensive documentation relating
to inter alia these 16 transactions (being the disputed transactions
noted in para 1 herein) and ARC’s trading “relationship” with the immediate
suppliers and purchasers of the phones. It was clear to Mr Grieve that due
diligence checks of suppliers and customers had not been made before
trading but after or during the course of trading. This seemed curious given
the substantial sums of money and volume of goods involved in each
transaction. He considered the checks made in respect of ARC’s suppliers in
these 16 transactions (viz RVM Ltd (“RVM”), Lighthouse Technologies Ltd
(“LHT”) and Optronix Ltd (“Optronix”)) and its customers (La Parisienne du
Commerce, EC Trading, and Francphone SARL) each in turn. In many instances the
checks revealed doubtful financial and credit status of these parties. A
related aspect of due diligence checks was the obtaining of trade or business
references. In several instances ARC and its prospective trading partner had
proposed the same third party as each other’s trade reference, suggesting a
background, he suggested, of interdependence rather than independence.
21. Mr Grieve
explained the succession of transactions in each of the 16 “chains” of which
these transactions formed part. Strictly, ARC became involved in the contra
chain, the “clean” chain set up to produce a liability on a fresh importation,
to be offset by the repayment sought at the conclusion of the associated
“dirty” chain. Helpfully he explained this by reference to a sequence of
invoices and related documentation in each case, then to “spreadsheets” which
he himself had prepared. In Vol B/108 spreadsheets showing the 25 chains which
included ARC’s deals concluded in June 2006 are produced. Where ARC acted as buffer,
the deals are not contested. However, where ARC acted as broker, they
are contested. These latter, 12 in number are set out on pages 4-15 inclusive
of B/108, and are included in the deals noted in the Table annexed to para 10
of Mr Grieve’s Witness Statement. They are dated 9-15 June 2006. In Vol B/109
spreadsheets showing the 5 chains including the 4 disputed transactions entered
in July 2006 are contained. These are shown at pages 2, 3, 4 and 5 and are included
in the Table annexed to para 12 of Mr Grieve’s Witness Statement. They are
dated 18 and 19 July 2006. He noted also Mr Loureiro’s cashflow diagrams.
(See para 29 infra).
22. Mr Grieve
identified certain factors as suggestive of an MTIC fraud. In the chains the
series of transactions are invariably “back-to-back” – for the same model and
same numbers of phones. They are relatively expensive models. The deals are
usually all concluded on the same day. There is a consistent pattern of
mark-ups, more to the broker than to the buffers, and increasing
for the last buffer. The sequences of the parties in the chains are
similar. No value seems to be added at any of these stages. ARC had the same
3 suppliers in all the disputed deals, viz RVM, Optronix and LHT. The
same freight forwarder was used in many transactions. No retailer,
manufacturer, or authorised distributer appeared in any of the chains. Further
the level of profit was low in relation to the value of the turnover. There is
also the common involvement of the FCIB.
23. Mr Grieve spoke
finally to factors suggestive of the Appellant company’s and Mr Rakhra’s
awareness of MTIC fraud at the material time. In addition to the letters of
de-registration from the MTIC fraud unit of HMRC the company was warned by
letter dated 1 December 2005 (A23) that while repayment for the period to 31
August 2005 was being made, it was subject to the process of extended
verification. Turnover in the Year to August 2006 had increased to over £278M
as compared with its estimated annual turnover of £60,000 volunteered in 2002
on registration. This increased turnover had been achieved by a small company
with modest premises and a staff of only 4.
24. In
cross-examination Mr Grieve agreed that the Appellant company and Mr Rakhra
had not been advised actually to stop trading in mobile phones. However,
according to Mr Grieve, Mr Rakhra had confirmed to him his general awareness of
the prevalence of fraud in this trading sector. The “Redhill” letters did not
in terms warn of MTIC fraud although they referred to the nature of the goods
involved. In instances these letters are dated months’ after HMRC’s decision
to de-register.
25. Mr Grieve
accepted that he had not been involved personally with ARC in June and July
2006, the dates of the disputed Returns. His information relating to that
period was gleaned from other officers’ records. He acknowledged certain
discrepancies between his written notes of a meeting with the Appellant company’s
representatives on 13 April 2007 (B77) and a subsequent typed aide-memoire
(B83) relating to that and subsequent meetings. At the meetings he learned of
Mr Rakhra’s experience in the retail telecoms industry with DX Communications
and on his own account. In cross-examination he confirmed that there had been
a good record of co-operation by ARC with HMRC’s officials.
26. Mr Grieve
conceded that his remarks in para 101 of his Witness Statement about Mr
Rakhra’s being a director of Inter Communications Ltd were incorrect and he
withdrew them. (The Joint Minute of Admissions corrects this in any event). He
acknowledged (significantly) that there was no direct evidence of a
“controlling mind” orchestrating the deal chains. He was pressed that he had
not considered or understood the nature of the Appellant company’s business as
that of “matching” supply and demand. Viewed individually certain aspects of ARC’s
trading (eg mark-ups, back-to-back deals, absence of writing) might not be
reliable indications of MTIC fraud and be consistent with commercial trading,
Mr Grieve accepted, but he explained that his conclusions were inferred from
their totality.
27. Mr Grieve was
questioned closely about the manner in which his Witness Statement had been
composed. Apparently certain senior and specialist officers had reviewed it.
However, Mr Grieve insisted, the authorship was his.
28. While Mr
Grieve’s personal involvement post-dated the months in issue, we considered his
investigation to be thorough and conscientious. We found him credible and
reliable and his conclusions to be well-reasoned.
29. The Respondents’
third witness was Juan Jose Loureiro, an official of HMRC and previously of HM
Customs & Excise since 1990. He explained that since 2006 he has been a
specialist officer involved in countering MTIC fraud. Recently he has had to
consider data obtained by HMRC from the Netherlands Government relating to
records of the FCIB. He noted that its principal shareholder had been arrested
on suspicion of money-laundering, and that its banking licence had been
withdrawn. Many traders suspected of MTIC fraud had held accounts with the
FCIB.
30. Mr Loureiro’s
Witness Statement required to be revised somewhat in light of certain
discrepancies in the numbering of the Deals, but its fundamental conclusions
remained constant and he confirmed its accuracy. A revised form was produced
for ease of reference for the Tribunal and we understand that the revisals are
not controversial. In addition to his Witness Statement Mr Loureiro prepared a
series of productions (Vol F) containing comparisons in respect of each deal
examined of the invoice chains prepared by Mr Grieve in relation to the
sequences of transactions in which the Appellant company took part with
corresponding money flows between the bank accounts in the FCIB held by the various
participants. Vol F contains details of 11 of the 16 disputed deals in which
the Appellant acted as broker, viz June Deals nos 4, 5, 6, 7, 9,
11 and 14 and July Deals nos 27, 28, 29 and 30 and details of 11 other deals
which are uncontested in which it acted as a buffer viz June
Deals nos 2, 3, 16, 17, 18, 19, 21, 22, 24 and 25 and July Deal no 26.
31. Most of the
productions in Vol F contain 2 diagrams – one showing an invoice chain, the
other a corresponding cash flow prepared by reference to FCIB records which HMRC
have recovered. (The source of these is admitted in para 10 of the Joint
Statement of Agreed Facts). The illustrations of the invoice chains set out
information contained in the invoices themselves. The cash flow diagrams show
payments passing between the participants’ FCIB records reflecting the
consideration recorded in the invoices. The invoices in each chain bear the
same day’s date in many cases. Otherwise they are all concluded within a few
days. Similarly each of the cash flows is completed within a few days. The
cash flows are dated only days after the invoice chains, and bear to be for the
same amounts or almost the same amounts recorded in the invoices.
32. In respect of
certain deal chains it proved impossible to produce cash flow diagrams and in
others they are incomplete. What they showed, where complete, Mr Loureiro
argued, was a circulation of funds back to an originating financial source
based outwith the UK and that in the reverse direction to the invoices and the
passing of title to the phones. (The Tribunal notes in the cases of Deals nos 3
and 16 there is a substantial divergence between the amount of cash passing and
the consideration recorded on the invoices. In these instances any connection
between invoices and cash flow seems at best tenuous. However, recovery of input
tax in these deals is not disputed).
33. Mr Loureiro
acknowledged that in 5 of the 16 contested deals, viz June Deals nos 8,
10, 12, 13 and 15, he had not produced any cash flowchart evidence from FCIB
records, while in certain uncontested cases he had prepared such flowcharts.
He referred to the Deals Spreadsheet, produced with agreement as a late
production. (K/5). He noted particularly Marxman International (“Marxman”),
which is based in Dubai, as a party suspected of initiating the circular cash
flow. He commented particularly also on 3 other parties which appeared
regularly in the flow charts, viz MAKS Information Technology (“MAKS”),
Kima Estates and Mobile Direct. (Kima is based in the Czech Republic and MAKS and Mobile Direct are both based in Pakistan). These businesses did not
appear on the invoice chains and in instances appeared to be no more than a
conduit for the circulation of the cash funds. Their presence in the cash
chain seemed to serve no purpose and was inconsistent with a dynamic market.
As the cash consideration seemed to pass from company to company, it diminished
in amount after the payment by Marxman. While there was no documentary
evidence clarifying Marxman’s possible role, Mr Loureiro believed that a
circular cash flow had been shown, which all suggested the involvement of a
“controlling mind”. (The transaction sheet records recovered for Marxman had
been produced after an adjournment of the Hearing. However, that information
had been derived earlier from the records of its immediate transacting
parties).
34. In
cross-examination Mr Loureiro explained that he first became involved in this
investigation in about October 2008 when he was instructed to access FCIB
records. He was given information about the invoice chains and directed to
trace any evidence of a corresponding money flow. He was aware that the FCIB
was favoured by MTIC traders. He accepted that he was able to access
information not available to traders like the Appellant company. From this he
was able to compile the analyses on 22 of the Deals as contained in Vol F.
While the information gleaned from FCIB records would not link payments to
particular goods or invoices, he had discovered money flows involving the same
traders. These in many instances were of amounts corresponding to invoice
totals and near in date too. He considered this more than mere coincidence.
Moreover, the cash flows included certain other parties not issuing or
receiving invoices. The same names tended to re-appear in that context.
35. Aspects of Mr
Loureiro’s response were confirmed in re-examination. He agreed with Mr
Stone’s view that the circularity of the cash flow was by design. The
transactions appeared to be structured and organised rather than resulting from
a dynamic market place. The regular appearance of Marxman, MAKS, Kima Estates
and Mobile Direct called for an explanation. Their recurring presence was
inconsistent with a dynamic market. While Mr Loureiro had tried to complete a
“circle” in tracing movements of cash, that proved impossible in certain
instances. He explained that in each case he tried to add “links” at each end
of the chain of known transactions on a progressive basis. Such inferences as
he drew from the sums of money traced and the sums recorded on the invoices
were a matter of judgement, he accepted. To enable the fraud to work a “clean”
chain had to follow on a “dirty” chain in which there had been a loss of
revenue to HMRC.
36. We accepted
substantially Mr Loureiro’s evidence but we would observe particularly in
relation to Deals 3 and 16 that we considered his conclusion as to circularity
of cash movements somewhat strained.
37. The evidence
from Messrs Grieve and Loureiro related to the “clean” chains which had not
been the subject of a loss of revenue. However, in a contra MTIC
scenario the “clean” chains are used to disguise or offset a repayment claim in
respect of the “dirty” chains which must be traced back to a fraudulently
defaulting or missing trader. The “clean” chains in which the Appellant
company became broker seeking a repayment of input VAT, were used,
according to HMRC, to camouflage the true size of the repayment in certain
“dirty” chains in which three other concerns were brokers. These three
also acted as acquirers, initiating the “clean” chains by importing
further batches of mobile phones from the EU. They are LHT, RVM, and
Optronix.
38. In respect of
the first of these concerns, LHT, the Tribunal heard evidence from Richard
Taylor, an officer of HMRC, with experience of investigating MTIC contra
schemes. (Witness Statement no 2). He had been asked by Christopher Grieve in
the course of his investigation into the Appellant company to provide
information about LHT and the possible relevance of its activities to trading
by ARC. Mr Taylor explained that he was responsible for the MTIC verification
process for LHT for the three month period ending in June 2006. He had
analysed its records and scrutinised its business transactions.
39. Mr Taylor
explained that he considered that LHT had acted as a contra trader,
being the broker in “dirty” chains, and also an acquirer in
“clean” chains, who imported other goods (again mobile phones) and used the
output tax charged to its customers to offset and conceal the amount of the
repayment claim made in respect of the “dirty” chains. He explained his
reasoning helpfully by reference to two diagrams, produced as Vol C, Part 2
Folder 1 tabs 15 and 16. In tab 16 LHT was broker in 31 chains in June 2006.
Each of these chains started with a missing trader, whose default was
deliberate and fraudulent, he explained. These missing traders were only three
in number, viz 3D Animations Ltd, Restar UK Ltd and West I Facilities
Management Ltd, and he had confirmed fraudulent default on the part of each of
these concerns with the tax officers responsible. He had considered the
transactions in detail. In nature they appeared to be inconsistent with a
pattern of legitimate commercial trading and bore to be contrived. The deals
were “back-to-back”, not for a commercial return, and completed within a very
short period. The goods were resold to only 3 EU customers.
40. In tab 15 the
“acquisition” deals entered into by LHT are shown. Of the 26 such deals
entered into in June 2006 ARC was the broker in 5. The output tax
charged on the resale of the items purchased is thus set against the total
repayments claimed by LHT on the “dirty” broker deals. Mr Taylor argued
that this ploy represented a deliberate attempt to conceal the true nature and
value of the repayment sought in respect of the “dirty” chains. Ex facie
it was thus reduced from about £4M to about £1M. At that reduced level the
prospect of an extended verification process being conducted by HMRC was reduced.
Viewed in conjunction with tabs 15 and 16 this ploy illustrated a deliberate
fraud on public funds according to Mr Taylor. He noted also that the same
parties regularly appeared in the chains and that LHT had sold to only 6 broker
companies, one being ARC, the Appellant.
41. Mr Taylor had
considered the sufficiency of the due diligence and verification processes
undertaken by LHT in relation to its suppliers and customers. These, he
argued, were unsatisfactory. Frequently, these checks or their completion
post-dated the start of trading with the particular concern. Trade references
were often not pursued and verified. Credit ratings, where obtained, were
unsatisfactory. On examination the invoices showed the same profit margins and
mark-ups varying only on whether the trader was a broker or a buffer,
the former receiving more. On the other hand profit-margins and mark-ups did
not seem to vary according to the type, value and volume of the sales of phones
negotiated. All this strengthened the impression that LHT was not dealing in a
normal commercial environment.
42. The
circumstances of a loan of £875,000 by Sotodelia Investments SL, a Spanish
company, to LHT was considered. (Sotodelia was subsequently de-registered in Spain as a missing trader associated with MTIC fraud in September 2006). This sum was
banked with the FCIB as “an advance for stock”. Yet Sotodelia does not appear
as a customer or supplier of LHT in the various deal chains examined. However,
it is associated with IH Technologies Ltd, which does feature in deal chains
involving ARC. In cross-examination Mr Taylor acknowledged that his
description of contra trading corresponded with the narrative of other
tax officers. (This appears to have been taken from an internal guidance
manual). He indicated that he had examined all the deal chains of LHT in which
ARC was involved. He had noted the increase in LHT’s level of trading in early
2006 but accepted that the repayment for the period 03/06 had been made after
investigation. It appears that LHT had appealed belatedly against the refusal
of the repayment for the period 06/06. (The Tribunal notes that leave to
appeal late was refused: reported at [2010] UK FTT 374(TC)). In view of that,
Mr Taylor accepted, the merits of that dispute had not been addressed
judicially. Mr Taylor accepted too that consideration of the Appellant’s
(LHT’s) disputed Return would indicate the full amount of the repayment
sought. In re-examination Mr Taylor clarified a further matter that had been
raised in cross-examination. He confirmed that the total value of repayment
claims of all LHT’s customers, including ARC, would not exceed £3,101,345.63,
and that was less than the tax lost on the broker deals concluded by LHT which
amounted to £3,132,882.19. In other words viewing the repayment claims of
LHT’s customers individually or collectively, these would not exceed the tax
lost to HMRC on the “dirty” chains in which LHT had been the broker.
43. Finally Mr
Taylor confirmed that his inferences had been drawn not from individual factual
aspects but from their totality.
44. We found Mr
Taylor’s account credible and reliable and his reasoning and conclusions seemed
sound.
45. The fifth
witness for HMRC was Mrs Lesley Camm, a higher officer specialising in MTIC
fraud. (She completed three Witness Statements, nos 3, 15 and 15A). Initially
she was involved in investigating the activities of only Optronix, one of the contra
traders, which initiated “clean” chains as “acquirer”, in which ARC was
ultimately the broker, seeking repayment of input VAT on export of the
goods. Subsequently she took on the further responsibility of analysing data
recovered from FCIB computer records, relating to transactions concluded not
only by Optronix, but also by RVM and LHT so far as relevant to broker
deals concluded by ARC in June and July 2006. For the purpose of this exercise
she had access to Officer Loureiro’s records and some further computer
information recovered by another colleague. Mrs Camm read firstly her
Witness Statement dated 28 May 2010 as amended in October 2010. She spoke to
analyses prepared by her in respect of certain of Optronix’s transactions as broker
in June and July 2006, the two months in question for the disputed repayments
sought by ARC. (These are produced in Vol G/1/1-17). Essentially these
individually contain a spreadsheet recording the series of transactions
affecting the goods, then a flowchart showing the invoice sequence and the
movement of the cash consideration. (The traders had, of course, FCIB accounts).
Significantly in Mrs Camm’s view, the invoice dates coincide or are
immediately consecutive. So too are the dates of the payments. Moreover, she
concluded that there was a circularity of payment. She explained that
in the circulation of cash in respect of the deal chains the role of one
trader, Marxman, was pivotal. The pattern was of its receiving
ultimately the exact sum which it had paid out. In response to the Tribunal’s
questioning Mrs Camm accepted that the immediately preceding participant,
frequently MAKS, seemed to derive the profit in the circulation of cash, but
she explained that other payments could be traced which tended to pass the
profit element also to Marxman. (In the event it would seem that it is the
circulation of cash which was significant rather than the identity of the party
deriving the gain). Both Marxman’s and MAKS’s directors live near each other
in Islamabad, according to Mrs Camm’s information (see para 22 of her third
Witness Statement dated 17 December 2010).
46. In a further
series of sample chains Mrs Camm examined sequences of deals in which LHT was
broker in June 2006. Similar documentation, particularly spreadsheets of
invoices and flowcharts of money paid, are produced (G/1/27-30 and G/2/31-34).
Her conclusion again was that there had been a circularity of payments, with
Marxman being in the pivotal position.
47. Finally, Mrs
Camm considered 10 broker deals concluded by RVM in June and July 2006
(G/2/37-46). These also, she argued, showed the same circularity of payment,
with again Marxman in the pivotal position.
48. Mrs Camm spoke
to information recovered from other computer records relating to various
parties which featured repetitively in the transaction “chains” spoken to. Her
overall conclusion was that there was an “extreme similarity” shared by the
supply chains of Optronix, LHT, and RVM.
49. At the
conclusion of this Witness Statement (no 3 para 73A) Mrs Camm refers to Officer
Loureiro’s diagrams showing money movements in 9 of ARC’s broker deals. These,
she argued, bore similarities to RVM’s and LHT’s chains, with Marxman being
pivotal and including MAKS too. There was a circularity of payment indicative
of orchestration. Holding FCIB accounts was a common factor, raising her suspicion.
The chains were contrived, with the purpose of defrauding HMRC, she believed.
50. As noted supra
Mrs Camm’s initial involvement had been to investigate the pattern of trading
and VAT Returns of Optronix. That was the subject of her initial Witness
Statement dated 8 December 2008 and its contents so far as admitted and agreed
are reflected in the terms of a Joint Minute of Admissions (K-2). Optronix’s
Return for 08/06 which sought a repayment of VAT was subjected to the process
of extended verification. The first Witness Statement records that in the
critical period 08/06 the VAT recoverable on Optronix’s exports was
approximately equal to that charged on re-selling its imports. In particular
all the 103 chains in which it acted as broker in June and July commenced with
a tax loss by a defaulting trader. These losses totalled slightly in excess of
£10m. (We refer to paras 30-36 of the Joint Minute). The manner of Optronix’s
trading was indicative of a scheme to defraud HMRC. She inferred that there
was a “link” between the dirty and clean chains (para 63). All
goods exported by Optronix during this period (the dirty chains) were
the subject of a tax default. All goods imported by Optronix (the clean
chains) were subsequently exported (paras 47-48).
51. This Joint
Minute of Admissions notes also Optronix’s officers’ awareness of the
prevalence of MTIC fraud prior to the material period, a sudden increase in
turnover (paras 5-10), a lack of adequate “due diligence” and credit checks on
suppliers and customers, and the pattern of the transactions in the chains,
being “back to back” and often conducted on the same day, invariably
profitable, with a similarity in mark-ups, often the same order of
participants, and the absence of any manufacturing source or authorised
distributor at the start and the absence of any consumer or small retailer at
the end of the “chain” (paras 52-58). This was not consistent with commercial
trading in her view. Rather Optronix had acted as a contra trader to
disguise repayment claims made by it in respect of “dirty” chains in which it
had acted as broker. By disguising a repayment claim in this way, the
likelihood of the particular taxpayer’s Returns being subjected to extended
verification by HMRC was reduced. She identified ARC as variously a buffer
and a broker in several chains involving Optronix in the relevant months
(see paras 26-29).
52. Recently Mrs
Camm prepared a third Witness Statement dated 17 December 2010 setting out
further conclusions from the FCIB records recovered. She noted that Optronix’s
account was always in credit as a result of its manner of trading. Acquisition
or contra deals were concluded before broker (tax loss/default)
purchases, with the result that additional finance to fund payment of VAT was
not required. Also she detected what seemed to be a circularity of funds in
other transactions entered by Optronix in June 2006 with Marxman again
featuring in a pivotal position.
53. In
cross-examination Mrs Camm conceded that in her cashflow diagrams the
Electronic Banking (“EB”) numbers are not in sequence although they would have
been issued sequentially. She suggested that they might possibly have been
issued in advance for a later payment. She accepted too that it was not
sinister for a trader to maintain a cashflow in credit, although in the case of
Optronix no loans or cash injections were required, of course. She
acknowledged that the Datastore information referred to by her was available
only to HMRC, not the wider public.
54. While Mrs Camm’s
conclusion narrated in para 63 of the Joint Minute of Admissions in respect of
her evidence is not the subject of admission, it is by consent open to the
Tribunal to concur with that. We do so, and that on the basis that all the
evidence available supports that conclusion. Having heard her oral evidence we
found Mrs Camm credible and reliable.
55. While she did
not give evidence orally it seems appropriate at this stage to note the
evidence of Sangita Parmar, which is the subject of admission in another Joint
Minute of Admissions (K3). She also is an HMRC officer in the MTIC fraud team
and since April 2007 has been allocated as a special responsibility the VAT
liability of RVM, including in particular for the period 08/06, which covers
the relevant months of June and July. In particular para 31 traces the
background to RVM’s broker deals in which the goods were sold,
zero-rated, to EU customers. These all bear to be in supply chains tainted by
deliberate default in payment of VAT. (Certain of these chains pass via
Optronix transactions, some being “dirty” chains, others being tainted by contra
trading. We refer especially to paras 31-38 of the Joint Minute).
56. Mrs Parmar
considered also the pattern of trading of RVM. This was consistent in her view
with an overall scheme to defraud HMRC of VAT due. The company had knowledge
of the nature and characteristics of MTIC fraud prior to June 2006. Trading
was wholesale and “back to back”. Its “due diligence” and verification
procedures appear to have been unsatisfactory. Transactions in the deal chains
took place on the same day or closely consecutive days. No losses were ever
sustained. No stock was held. There were no returns of stock. Often there
was the same sequence of traders in the chains, with similar mark-ups.
Commonly the traders had FCIB accounts. (Paras 41-52). There was a lack of
normal contractual documentation. She noted ARC’s involvement as broker
in a number of RVM’s deal chains (para 26).
57. RVM did not
appeal against the refusal by HMRC to repay its input tax claim for 08/06 and
the company was dissolved in December 2008. (Para 54). It may be noted that the
total input tax paid by it was almost equal to its admitted output tax
liability.
58. While Mrs
Parmar’s conclusion narrated in para 53 of “her” Joint Minute of Admissions viz
that RVM was involved in MTIC fraud and was or should have been aware of that,
and that it acted as a contra trader, is not the subject of admission,
it is by consent open to the Tribunal to concur with that. Again we do so, and
that on the basis that all the available evidence supports such a conclusion.
59. HMRC’s
penultimate witness was James McGee, a retired officer at their Ayr MTIC office.
His evidence (essentially uncontroversial and comparatively brief) was taken in
cross-examination. Mr McGee had accompanied a senior colleague,
Spencer Vaughan, to visit ARC. He had met Mr Rakhra there and had
collected paperwork relating to the Appellant company’s VAT Returns. His last
visit was in May 2006 when Mr Rakhra was not present. Having read his Witness
Statement, his evidence was not disputed in re-examination for HMRC.
60. The final
witness for HMRC was John Fletcher, CA, MBA, presently a director in the London offices of KPMG. He gave expert evidence about the telecommunications industry, its
development and marketing, in which he has extensive experience. In the course
of his career he has considered especially the European, Middle East and Asian
markets. The volume of these markets increased substantially in the 1990s.
61. He confirmed the
terms of his two Witness Statements, the first being essentially a
consideration of the grey market in telecoms, the opportunities it
offers and its distinctive features, the second being a response to the Witness
Statement of Mr Rakhra the director of ARC.
62. Essentially the white
market is controlled closely by the manufacturers, who sell to major outlets
and chains and otherwise to their authorised distributors. The grey
market is not unlawful as such but is not controlled by the manufacturers. It
exists because of the failures and limitations of the white market. The
grey market is complementary to the white market. For instance,
as manufacturers will not deal directly with small retail outlets, the grey
market fulfils this need. According to Mr Rakhra ARC was a wholesaler and
direct retailer trading in the grey market.
63. Mr Rakhra
indicates in his Witness Statement (para 17) that the basis of his trading was arbitrage.
Mr Fletcher described this concept as exploiting price differences for
phones between different territories. It, he considers, is one trading
opportunity offered by the grey market, the others being “box-breaking”,
exploiting volume shortages, and “dumping”. He explains the characteristics of
each of those grey market opportunities and identifies factors tending
to exclude their presence.
64. Mr Fletcher
noted that ARC did not hold stock. That is consistent with arbitrage.
However, trading in Nokia merchandise was a strong negative indicator. Nokia,
he explained, had at the material time a policy of common pricing across all
its different territorial markets. (This policy, it seems, was a consequence
of its having a potentially dominant market share). Arbitrage
opportunities from different price structures could not arise as most of the
merchandise dealt in by ARC was Nokia’s. Currency arbitrage too, in his
opinion, was unlikely to have been worthwhile in 2006.
65. Further, it was
significant in Mr Fletcher’s view that ARC did not deal directly with any
manufacturer, authorised distributor or a retailer. It would have been clear
to Mr Rakhra that he was one of several “middle men” in a chain. He could
increase his share of profit by seeking to eliminate other middle men. (A
process described – albeit inelegantly – as “deintermediarising” by Mr Fletcher).
There is relatively a free flow of information within the grey market,
Mr Fletcher explained, such as via the website, IPT.cc, which Mr Rakhra
acknowledged he used. Furthermore, it was difficult to discern an “added
value” in ARC’s dealings. (“Added value” could even take a marketing form,
such as providing a variety of phone models within a small batch to a modest
retail outlet). All this tended to undermine the transactions as “arm’s
length” commercial trading.
66. Mr Fletcher
considered too the level of turnover of ARC. This seemed exceptionally large
for a modest business operation. At its peak its turnover was about half of
that of well-known major participators in the market such as Virgin Media. This,
Mr Rakhra claimed, had been achieved by ARC’s widening its customer base
and providing new services. These, Mr Fletcher noted, had not been identified.
67. Other possible
forms of grey market trading were considered by Mr Fletcher. None of
these seemed compatible with ARC’s operations. “Box-breaking” (or
“unlocking”), common in the UK because of the availability of handset
subsidies, was not likely. It involved the re-configuring of phones to suit
different service providers. The procedures involved require a large expert
staff. Storage and technical facilities were necessary too. ARC did not have
these.
68. “Volume
shortages” and “dumping” (of excess stock) arise when manufacturers or
distributors fail to estimate correctly the level of demand. These both can
afford profitable opportunities to grey market traders. However, Mr
Fletcher did not consider that either was present in this case. He identified
negative indicators tending to exclude the exploitation of such opportunities.
In any event Mr Rakhra’s own evidence did not suggest the pursuit of these
trading strategies.
69. Mr Fletcher did
not consider the IMEI checks described by Mr Rakhra to be adequate to ensure
that the handsets met the required specification and condition. Mr Rakhra
claimed that dealing in phones of other than UK specification could be
commercially viable. A replacement charger, he said, could render them
compatible for sale in other markets. However, Mr Fletcher considered that
even the need to replace chargers for particular markets, however modest the
cost, would significantly reduce an already small profit margin. He failed too
to appreciate why phones should be imported physically into the UK only to be re-exported within days.
70. Mr Fletcher
noted also the “UK deals”, viz the buffer deals, which are not
contentious for this Appeal. These cannot be arbitrage as they arise in
the same market, viz the UK. This, in his view, did not seem to be
rational commercial trading.
71. We considered Mr
Fletcher’s evidence to be credible and fair-minded. He presented a sound
analysis of the white and grey markets in the telecoms industry,
and had taken into account the implications of Mr Rakhra’s Witness Statement.
72. Finally, on
behalf of the Appellant company, ARC, Mr Robertson called Mr Satnam
Rakhra. He is a director of the company and in effect has controlled its
business operations throughout. He was ARC’ s sole witness. He confirmed the
terms of his Witness Statement and elaborated it in evidence.
73. Mr Rakhra
outlined his career and business background. He worked at various stages in
the family business, Weatherwear Glasgow Ltd, a clothing manufacturer. Also he
had traded as a stall-holder selling clothing. Mr Rakhra had added a
telecommunications “arm” to Weatherwear, trading as “Easy Talk Communications”,
before setting up ARC as an independent company in 2002. He had gained
experience in that field in the course of his employment with DX Communications
Ltd between 1992 and 1998. He had worked for that company in retail sales,
eventually having been promoted to branch manager of one of its retail outlets.
74. Although Mr
Rakhra had not personally completed the VAT registration document (B/I/1) he
had approved the estimate of annual turnover of £60,000 and the indication that
European sales of any significant volume were not expected. In
cross-examination Mr Rakhra was questioned about the prodigious increase in the
level of sales thereafter. Within a year turnover was £14M. (This was never
satisfactorily explained). While Mr Rakhra’s initial experience in
telecommunications was in the retail market, he considered that there was a
business opportunity in relation to the wholesale market. There, his business
philosophy was “piling them high and selling them cheap”. Volume of turnover
and dealings in high value phones compensated for the low margin of profit, he
explained. It may be noted that while Mr Rakhra aimed to achieve a profit of
6% on export deals, in Table A annexed to his Witness Statement, only 3-5% was
achieved. On purchases and re-sales within the UK an even lower profit margin
was achieved. Mr Rakhra felt that such deals were commercially justified,
however. There was a profit ultimately and the deals maintained his company’s
profile.
75. In essence, Mr
Rakhra explained, ARC’s activity was “matching” buyers and sellers of
quantities of phones. He did not buy speculatively and he never held unsold
stock. He had regular business contacts and also used well-known websites. He
described this business activity as “arbitrage”. (Mr Fletcher explained this
term as descriptive of a more limited, sophisticated activity. This was
pursued further in cross-examination – infra).
76. There is no
doubt – indeed it was not disputed – that Mr Rakhra had a general awareness of
the prevalence of MTIC fraud in the telecommunications trade in the period
proceeding the relevant months of June and July 2006. In particular he had
received about fifteen “Redhill” letters before then advising of
de-registrations for VAT purposes.
77. Also, Mr Rakhra indicated
that he had become aware of “joint and several” liability as arising
potentially from this type of trading. (WS para 13). He then had thought it
necessary to have professional help in relation to the maintenance of VAT
records and Returns. He had engaged for this purpose Mr Holmes, of Border
VAT Services. However, while he had regular monthly contact with HMRC’s
officers, he did not receive a copy of Notice no 726 until April 2007, some 10
months after the crucial period of June and July 2006. (This Notice sets out
HMRC’s policy on joint and several liability of members of a supply chain
giving rise to tax losses and warns of the existence of MTIC fraud). Officers
Vaughan and McGee had visited ARC in the period preceding. They had never
criticised ARC’s procedures. (This, Mr Rakhra considered, confirmed the
effectiveness of ARC’s due diligence procedures – infra). This
contrasted with the attitude of Officer Grieve, who had not been involved in
the company’s affairs until after June and July 2006. Mr Grieve, Mr Rakhra
considered, had little understanding of ARC’s business activities.
78. Mr Rakhra
explained his system of “due diligence” which had been applied in relation to
his three suppliers in the contested deals, viz Optronix, LHT and RVM.
He referred to the relative files (SR/9/10 and 11). He confirmed that such
procedures had been pursued in relation to the three customers in the contested
deals viz EC Trading ApS, Francphone SARL, and La Parisienne Du
Commerce. (SR/12, 13 & 14). He acknowledged that his due diligence
procedures in respect of foreign business contacts were not as thorough. He
explained that HMRC had indicated to him that the risk of VAT loss arose in the
UK, not abroad. Mr Rakhra spoke also to the paperwork arising in relation to
the 16 contested deals.
79. Mr Rakhra was
insistent that he had knowledge of only his immediate trading partners. He was
satisfied that his suppliers had accounted for output VAT (paid by him on
purchases). He was unaware of any scheme to defraud HMRC, he maintained
strenuously. No concern with which he had traded had been de-registered before
June and July 2006. He had carried out certain IMEI checks. These did not
disclose anything untoward about the merchandise or his dealings. He had
opened an account with FCIB as his original (UK based) bank account had been
closed.
80. Mr Rakhra sought
to explain away the “back to back” pattern of dealing. It was common in this
trade, and there was a commercial risk in holding stock as prices could fall
suddenly and without warning. He accepted that there had been no returned
goods from dissatisfied customers. However, these were new stock, carrying a
full guarantee. While some phones in which he traded did not suit the UK market, they could be readily and cheaply adapted, he maintained. Further, the UK was very suitable as a commercial and logistical base for the nature of ARC’s trading.
81. Mr Rakhra was
cross-examined in great detail for over a day. (His evidence in its entirety
was not concluded until a fourth day). He acknowledged that his Witness
Statement, while fully approved by him, had been based on his advisor’s
Mr O’Donnell’s, draft. Essentially it was a response to Mr Grieve’s
allegations. Mr O’Donnell had not acted for Mr Rakhra until about August
or September 2006, after the period in which the contentious transactions took
place.
82. Mr Rakhra was
asked about the physical extent of ARC’s premises. He estimated these at about
the floor area of the Hearing room – relatively modest – in which both its
wholesale and retail business was conducted. Surprisingly Mr Rakhra was not
able to indicate the ratio of wholesale to retail activity. While he
had described his manner of trading as “arbitrage”, Mr Rakhra seemed to have
only a vague understanding of the concept. In response to cross-examination he
explained it simply as dealing in excess stock on the grey market. He
could not explain satisfactorily how ARC could handle about half of the
turnover of Virgin Media, which had over 1500 employees and extensive
premises. ARC had in addition to Mr Rakhra only three other employees and
that at various times. One was a secretary: another handled retail sales: a
third did some sourcing work. Mr Rakhra himself concentrated on the company’s
wholesale operations with the employee, Sam, who helped to source stock. All
necessary finance for the company’s operations had been provided by Mr Rakhra
alone.
83. Mr Rakhra was
invited to explain by Mr Gray why he did not intend to call any witnesses such
as the employees mentioned or Mr Holmes of Borders VAT Services (to whom a
monthly fee of £1000 had been paid). (Admittedly, Mr McGee, the HMRC officer,
had been called by them at his request). Also, he was asked why telephone
bills with records of calls, documents of negotiation in deals which had not
been concluded, and receipts for the IPT website and for advertisements in
mobile trade magazines had not been produced. There was no real attempt to
explain all this away.
84. When pressed by
Mr Gray about the suggested lack of commerciality in his pattern of trading as
being “risk free” and with a low profit margin, Mr Rakhra insisted that the
extent of his knowledge was only of his immediate trading partners and that he
believed his trading was legitimate and untainted by fraud. He was unaware of
the length of the chains, he claimed. He did acknowledge the absence of any
ultimate consumer in these. Again, when pressed by Mr Gray, Mr Rakhra could
not explain satisfactorily his apparent lack of any detailed enquiry to his
advisors about the nature and characteristics of MTIC fraud.
85. The adequacy of
ARC’s due diligence procedures was then scrutinised. When ARC was dealing with
a new customer or supplier Mr Rakhra would check its VAT particulars, its
Companies House registration and have a Creditsafe check done. References
would be sought and enquiry made of freight forwarders. He also instructed
reports from a concern, The Security People, (each costing about £1000) which
had tended to confirm the results of his own enquiries. Given their cost,
these reports seemed to the Tribunal to be of only limited value. Mr Rakhra
indicated that he did not consider that his procedures could be improved. He
was again referred to the “Redhill” letters (notification of de-registration).
He accepted that for a period, before receiving the relative letters of
de-registration, he had traded with several businesses, such as Samova Ventures,
Electron (GB) Ltd, Kwik Projects Ltd, and Dualite Ltd. Nothwithstanding, he
still considered his due diligence procedures had been sufficient.
86. Mr Rakhra was
then invited to scrutinise the company’s due diligence procedures in relation
to its three suppliers at the material time, viz Optronix, LHT and RVM
and its customers, viz EC Trading ApS, Francphone SARL and La Parisienne
Du Commerce. Mr Rakhra rejected the suggestion by Mr Gray that ARC’s
procedures were simply “going through the motions”. It seemed in several
instances that the date of due diligence procedures and their completion
post-dated significantly the start of trading. The premises of certain trading
partners according to photographs produced to the Tribunal seemed to be quite
modest, and of a temporary nature. All this apparently had not concerned Mr
Rakhra. He felt that ARC’s interests were protected sufficiently by its practice
of not releasing goods until receipt of payment.
87. ARC, it
appeared, had expected its customers to complete a “trade credit application”.
This, Mr Gray suggested, was wholly inconsistent with ARC’s apparent policy of
not allowing credit. Mr Rakhra could not explain this.
88. Mr Rakhra was
asked about ARC’s trading terms. It seemed that these were wholly incorporated
in the purchase order forms and customer declarations noted in the
documentation produced for the contentious deals. Of greater concern was the
lack of specification in respect of merchandise. Apart from the model of
phone, its colour could be important, Mr Gray suggested. After extended
questioning Mr Rakhra did acknowledge that trading in pink, as well as
black and silver coloured phones was typical in the market in which he
operated.
89. Mr Rakhra was
asked about the extensive use made by ARC of one particular freight forwarder,
AFI Logistics. He responded that ARC used 3 freight forwarders commonly –
Paul’s and Interken too. The choice of freight forwarder was often dictated by
the supplier, if he had stock in particular premises. In conclusion,
notwithstanding the factors raised in cross-examination, Mr Rakhra was
insistent that his pattern of trading was not inconsistent with legitimate commercial
business.
90. We approached
the assessment of Mr Rakhra’s testimony with considerable care. It was
obviously crucial in addressing the implications of Kittel and
especially so given that there was no supporting evidence – even documentation
– on various aspects on which reasonably it might have been available. (We
comment further on this infra). We make due allowance for Mr Rakhra’s
lack of understanding of certain technical terms used in his evidence
(especially the concept of arbitrage referred to in his Witness
Statement). However, he could not provide convincing explanations about the
increasing scale of his business operations and the nature and pattern of his
trading. In considering the level of knowledge and understanding of MTIC fraud
which might reasonably be imputed to Mr Rakhra (and ARC) at the crucial period,
we did not find his account of a lack of awareness credible or convincing.
91. On the basis of
that evidence we make the following Findings-in-Fact:-
(a)
The Appellant company, ARC, was incorporated on 30 July 2002 and carried
on business initially at 31 Alloway Drive and later and at the material time at
151 Oxford Street, Glasgow. Its premises there consist of a small
retail area and a small office. Mr Rakhra is its director and his wife is the
company secretary. It has never had more than two other employees at any one
time and only three in total since it started trading. It was registered for
VAT with effect from 30 July 2002 (Vol B/1). In terms of its registration its
annual turnover was estimated at about £60,000 per annum. Repayments of excess
input tax were not expected. Its business was described as being in
distribution telecommunications.
(b)
In each of the years since registration for VAT ARC’s turnover
substantially exceeded the estimate of £60,000 per annum. In the year to
31 August 2003 its turnover exceeded £14m. In the year to 31 August
2004 it exceeded £30m. In the year to 31 August 2005 it exceeded £69m. In the
year to 31 August 2006 it exceeded £278m. And in the year to 31 August 2007 it
exceeded £3m.
(c)
Having completed Returns for VAT on a three-monthly basis ARC was
allowed from November 2005 to make monthly Returns as it had started to export
supplies. Each Return since May 2005 was for a repayment as input tax paid
exceeded output tax due.
(d)
Trading wholesale in mobile phones in bulk quantities is conducted in
two markets. The official (or white) market is authorised and approved
by the manufacturers, and phones are distributed either directly by them or via
their authorised distributors. In addition, although not formally approved by
the manufacturers, trading is conducted on the grey or unofficial
market. It is not unlawful. It complements the system of distribution
afforded by the white market, and facilitates distribution to smaller
retailers in particular. ARC traded in the grey market.
(e)
The structure of an MTIC fraud involves typically the following stages:
(i) the purchase and importation of the goods into
the UK;
(ii) the re-sale of the goods to a UK customer, subject to the imposition of VAT;
(iii) the failure by the party importing (i.e. the defaulting
or missing trader) to account to HMRC for the VAT output tax on
re-sale;
(iv) a sequence of sales and purchases of the goods
within the UK and subject to VAT regulation by parties known as buffers;
and
(v) the sale and export of the goods by the final UK purchaser, the broker, zero-rated.
These stages, by virtue of the default, are known as
the “dirty” chain.
In a contra trading scenario there is an
additional “clean” chain:-
(vi) the broker exporting in (v), who
ordinarily would have a repayment claim for input VAT, imports other goods into
the UK. He thus becomes also an acquirer;
(vii) these other goods are re-sold within the UK
incurring liability to output VAT, which crucially is offset against the
repayment claim on the “dirty” chain and serves to disguise a suspect repayment;
and
(viii) after a brief sequence of sales and
purchases in the UK, within the VAT system, the other goods are re-exported,
with a (potential) claim for repayment of input tax.
Essentially the contra trade, and its “clean”
chain, serves to “distance” a repayment claim for VAT at the conclusion of the
“clean” chain from the default at the start of the “dirty” chain.
(f)
In its Returns for 06/06 and 07/06 ARC sought repayments of respectively
£1,015,826.88 and £198,975, which HMRC refused. Reference is made to the terms
of their letter dated 25 April 2008 (A/120). The repayments sought related to
purchases of mobile phones, and in particular to 16 deal chains in which ARC
acted as broker noted in Finding no (i) infra.
(g)
On about 13 April 2007 and subsequent dates Christopher Grieve and Paul Russell,
both HMRC officers, visited ARC’s premises at 151 Oxford Street, Glasgow, and discussed its VAT liability with its Director, Mr Rakhra. Notes of
their questions and Mr Rakhra’s replies are noted in B83. In the course of
their visits they uplifted extensive documentary records, certain of which are
produced in process. Only then did Mr Rakhra receive a copy of Notice 726.
(h)
Juan Josè Loureiro, another HMRC officer, accessed bank records of the FCIB
in which the participants in the chains of transactions noted infra had
accounts, from which he prepared records of cash flows as set out in Vol F.
(i)
Details of the 16 contested deal chains are set out on spreadsheets
lodged by HMRC and prepared by Mr Grieve. (See B/II/108, pages 4 to 15 inclusive
for deal nos 4-15 and B/II/109 pages 2, 3, 4 and 5 for deal nos 27-30).
Separate files in respect of each deal containing relative documentation
including invoices etc are produced. (These are identified in a Reference
Table provided by HMRC). Reference is made to paragraphs 7 and 8 of the
Statement of Agreed Facts. Flowcharts prepared by Mr Loureiro showing the
sequence of invoices in each chain and their dates and, also, the flow
of money in payment with dates are produced (F/I 18-23, 25, and 27-30). In
particular:–
(i) in Deal 4 ARC bought 1500 Nokia N91 phones from
Optronix which it re-sold to a Danish customer EC Trading APS. ARC seeks a
repayment of VAT of £80,850. The net cost was £462K. ARC made a “mark-up” of
3.89% on re-sale. The dates of invoices are between 7-9 June 2006 and all
cash payments in both the related dirty and contra chains were
made on 12 June 2006 via FCIB.
(ii) in Deal 5 ARC bought 2300 Nokia 9500 phones
from Optronix which it re-sold to EC Trading APS. ARC seeks a repayment of VAT
of £116,725. The net cost was £667K. ARC made a mark-up of 4.13% on re-sale.
The dates of the invoices are 9 June 2006 and all payments in the chain were
made on 12 June 2006 via FCIB.
(iii) in Deal 6 ARC bought 1000 Nokia N80 phones
from Lighthouse Technologies which it re-sold to Francphone SARL. ARC seeks a
repayment of VAT of £55,938.75. The net cost was £319,650. ARC made a mark-up
of 4.02% on re-sale. The dates of the invoices are 12 June 2006 and all
payments in the chain were made on 13 June 2006 via FCIB.
(iv) in Deal 7 ARC bought 2500 Nokia 9300i phones
from Lighthouse Technologies which it re-sold to Francphone SARL. ARC seeks a
repayment of VAT of £107,034.38. The net cost was £611,625. ARC made a
mark-up of 4.02% on re-sale. The dates of the invoices are 12 June 2006
and all payments in the chain were made on 13 June 2006 via FCIB.
(v) in Deal 8 ARC bought 1000 Nokia N70 phones from
Lighthouse Technologies which it re-sold to Francphone SARL. ARC seeks a
repayment of VATof £31,438.75. The net cost was £179,650. ARC made a mark-up
of 4.09% on re-sale. The dates of the invoices are 12 June 2006 and all
payments in the related chain were made on 13 June 2006 via FCIB.
(vi) in Deal 9 ARC bought 2100 Nokia 8800 phones
from RVM which it re-sold to EC Trading APS. ARC seeks a repayment of VAT of £124,950.
The net cost was £714K. ARC made a mark-up of 3.97% on re-sale. The dates of
the invoices are 14 June 2006 and all cash payments in the chain were made on
16 June 2006 via FCIB.
(vii) in Deal 10 ARC bought 2300 Sony Ericsson W900i
phones from Optronix which it re-sold to EC Trading APS. ARC seeks a repayment
of VAT of £119,945. The net cost was £685,400. ARC made a mark-up of 4.026%
on re-sale. The dates of the invoices are 14 June 2006 and all payments in the
chain were made on 16 June 2006 via FCIB.
(viii) in Deal 11 ARC bought 1800 Nokia 9300i phones
from Optronix which it re-sold to EC Trading APS. ARC seeks a repayment of VAT
of £55,755. The net cost was £318,600. ARC made a mark-up of 3.95% on
re-sale. The dates of the invoices are 14 June 2006 and all payments in the
chain were made on 16 June 2006 via FCIB.
(viiii) in Deal 12 ARC bought 2050 Nokia N70 phones
from RVM Ltd which it re-sold to EC Trading APS. ARC seeks a repayment of VAT
of £65,292.50. The net cost was £373,100. ARC made a mark-up of 4.01% on
re-sale. The dates of the invoices are 15 June 2006 and all payments in the
chain were made on 16 June 2006 via FCIB.
(x) in Deal 13 ARC bought 3000 Nokia N90 phones from
Lighthouse Technologies which it re-sold to EC Trading APS. ARC seeks a repayment
of VAT of £140,700. The net cost was £804K. ARC made a mark-up of 3.99% on
re-sale. The dates of the invoices are 15 June 2006 and all payments in the
chain were made on 16 June 2006 via FCIB.
(xi) in Deal 14 ARC bought 1900 Nokia 6280 phones
from RVM Ltd which it re-sold to EC Trading APS. ARC seeks a repayment of VAT
of £54,197.50. The net cost was £309,700. ARC made a mark-up of 3.98% on
re-sale. The dates of the invoices are 15 June 2006 and all payments in the
chain were made on 16 June 2006 via FCIB.
(xii) in Deal 15 ARC bought 2000 Sony Ericsson W810i
phones from LHT which it re-sold to EC Trading APS. ARC seeks a repayment of
VAT of £63,000. The net cost was £360K. ARC made a mark-up of 4% on re-sale.
The dates of the invoices are 15 June 2006 and all payments in the chain were
made on 16 June 2006 via FCIB.
(xiii) in Deal 27 ARC bought 1500 Samsung P300
phones from Optronix which is re-sold to La Parisienne du Commerce. ARC seeks
a repayment of VAT of £47,512.50. The net cost was £271,500. ARC made a
mark-up of 4.97% on re-sale. The dates of the invoices are 18 July 2006
and all payments in the chain were made on 19 July 2006 via FCIB.
(xiv) in Deal 28 ARC bought 1800 Samsung E900 phones
from RVM which it re-sold to La Parisienne du Commerce. ARC seeks a repayment
of VAT of £55,125. The net cost was £315K. ARC made a mark-up of 5% on
re-sale. The dates of the invoices are 18 July 2006 and all payments in the
chain were made on 19 July 2006 via FCIB.
(xv) in Deal 29 ARC bought 1500 Nokia N71 phones
from RVM which it re-sold to La Parisienne du Commerce. ARC seeks a repayment
of VAT of £52,237.50. The net cost was £298,500. ARC made a mark-up of 5% on
re-sale. The dates of the invoices are 18 July 2006 and all payments in
the chain were made on 20 July 2006 via FCIB.
(xvi) in Deal 30 ARC bought 1400 LG KG800 phones
from Optronix which it re-sold to La Parisienne du Commerce. ARC seeks a
repayment of VAT of £44,100. The net cost was £252K. ARC made a mark-up of 5%
on re-sale. The dates of the invoices are 19 July 2006 and all payments in the
chain were made on 20 July 2006 via FCIB.
(j) Of the 30 deals concluded by ARC in June and July 2006 the
remaining 14, in which it acted as a buffer, are uncontested for the
purposes of this Appeal.
(k)
The characteristics of the pattern of trading which emerges from the 16 contested
Deals are:-
(i) that ARC was purchasing from one seller a
substantial quantity of one type of mobile phone and re-selling them all to one
purchaser on the same day;
(ii) that ARC was deriving a mark-up of about 4-5%
without adding to the value of the phones on its re-exporting them;
(iii) that ARC’s purchases of the phones were each a
link in a clean/contra chain, linked to a “dirty” chain;
(iv) that the linked transactions in each of the
related “clean” and “dirty” chains had all been concluded within a few days;
and
(v) that the payments for the sequence of sales and
purchases of the phones had all been made shortly after, within about one day,
and via the individual traders’ accounts with the FCIB.
The total of the above repayments sought in respect
of the 16 contested deals equals the sum of input tax presently withheld by HMRC.
(l)
Further, ARC had only three suppliers in relation to these 16 batches
of mobile phones viz Optronix, LHT and RVM, all UK companies. Each of these suppliers was a contra trader, starting a “clean” chain
to disguise or offset a repayment claim on a “dirty” chain on which there had
been an earlier default. ARC had three customers on re-sale viz La
Parisienne du Commerce, EC Trading APS, and Francphone SARL, respectively
French, Danish and Luxembourg companies. Each batch of these phones was the
subject of a contra chain initiated by the supplier. That contra
chain was an extension to a “dirty” chain in which the supplier was broker.
There was a failure to account for output tax at the start of each “dirty”
chain, which was fraudulent.
(m)
In June 2006 LHT was broker in 31 “dirty” chains seeking
repayment of input VAT on export. Each of these chains started with a missing
trader, causing a fraudulent default and loss to HMRC. However, LHT acted also
as acquirer in 26 “clean” chains in that month. In five of these ARC
acted as broker. LHT had only one supplier, Northcom Handels, and sold
to only six brokers, one being ARC. Accordingly LHT had acted as a contra
trader in June 2006. The amount of tax not accounted for in respect of the
“dirty” chains is at least equal to the amount of input tax on LHT’s “clean”
chains, of part of which ARC seeks recovery. By offsetting the output tax due
by it on selling newly imported goods LHT reduced its repayment claim for VAT
from about £4m to about £1m, camouflaging the full amount of the fraudulent
claim in respect of the “dirty” chains. LHT knew or ought to have known that
it was involved with MTIC fraud.
(n)
In June and July 2006 (VAT period 08/06) Optronix was broker in
103 dirty chains, seeking to offset input tax (otherwise potentially
recoverable) on export. These related to electronic goods, not mobile phones.
In each of these chains there was a defaulting trader at the start, causing a
tax loss to HMRC of just over £10M. Optronix acted also as acquirer in
June in 66 deals, and in July in 36 deals involving mobile phones. In 4 of the
deals in June and in 2 in July ARC acted as broker. Optronix acted as a
contra trader in these two months. In VAT period 08/06 Optronix’s
trading was such that its imports and exports were of almost equal value, with
output and input tax almost cancelling out each other. From the nature and
pattern of its trading Optronix knew or ought to have known that it was
involved in MTIC fraud.
(o)
In June and July 2006 (VAT period 08/06) RVM was acquirer in
16 deals, purchasing mobile phones from EU traders. In 5 of these ARC
acted as broker re-exporting the goods to the EU. In all 16 deal chains
the broker re-sold the goods to an EU customer on the same day as they
were purchased. Also, in June and July RVM acted as broker in 12 deals,
exporting to EU customers goods purchased from UK suppliers. Seven of these
deals lead back through the UK supply chain to a deliberate tax loss by a
defaulting trader. In the other 5 deals RVM purchased from Optronix. All 103
deals in 08/06 in which Optronix purchased from a UK supplier and re-sold to an
EU customer, can be traced back to a deliberate tax loss either directly or
indirectly via contra trading. RVM acted as a contra trader
during these 2 months. In 08/06 its trading was such that its output and
input tax almost cancelled out each other. From the nature and pattern of its
trading RVM knew or ought to have known that it was involved in MTIC fraud.
(p)
The due diligence checks taken by ARC in relation to its suppliers and
customers were not adequate or taken timeously having regard to the value of
the goods in which they were transacting. In particular they were not
undertaken before starting trading. Moreover, ARC apparently disregarded them
by continuing to trade even when the financial status, credit-worthiness, and
business structures of these parties were commercially suspect.
(q)
Parties negotiated and agreed in relation to the Appeal a Statement of
Agreed Facts and three Joint Minutes of Admission relating to additional
evidence of Lesley Camm, the evidence of Sangita Parmar, and that of other
officers of HMRC in relation to defaults in payment of VAT. (These are
produced as K/1, 2, 3 and 4).
(r)
Failing actual knowledge, Mr Rakhra (and hence ARC) knew or ought to
have known that the disputed transactions were connected with the fraudulent
evasion of VAT. That was the only reasonable explanation for the increased volume
and nature and pattern of trading at the material time and for these
transactions in particular. They did not have the characteristics of arms-length
commercial trading.
Submissions
92. Counsel provided
helpfully Written Submissions which they presented and in turn responded to at
the Hearing (K8 and 9). These deal with both the legal and factual issues
arising. To a great extent the legal aspects were not controversial and
accordingly it may be useful to set out these relevant principles at this
stage. Essentially, HMRC has to demonstrate, firstly, a loss of revenue, then
that that was deliberate and attributable to fraud, and, thirdly and crucially,
that the taxpayer (here ARC) knew or ought to have known of the fraud. This
final element of actual or imputed knowledge is critical to the outcome of the
present appeal. It was prescribed by the ECJ in Kittel and, recently,
interpreted by the Court of Appeal in Mobilx (and certain conjoined
cases). Moses LJ in Mobilx (para 59) opined that, short of actual
knowledge, the Kittel test was satisfied where the “only reasonable
explanation” for the disputed transaction was fraud. Moreover, he approved
dicta of Christopher Clarke J in Red 12 Trading Ltd, which
set out characteristics typical of MTIC trading.
93. Mr Gray conceded
that the burden of proof here rested on HMRC but that the standard of proof was
the civil standard, viz the balance of probabilities. He invited the
Tribunal to infer actual knowledge of a fraud from the circumstances
here. We would observe that, if we are to rely on imputed knowledge,
the test of “the only reasonable explanation” denotes in our view a high
level. Indeed, Mr Gray acknowledged that cogent evidence was required to
satisfy the Kittel test. He referred to the characteristics of MTIC
fraud set out in Euro Stock Shop Ltd.
94. Two other legal
principles were emphasised in HMRC’s Submissions, which apply in cases of contra
dealings. While the dirty and clean (or contra) chains
will occur in the same Return period, so as to disguise the fraudulent claim,
one need not precede the other. (Blue Sphere Global Ltd). Further, the
consequence of the Kittel rule is that an offending trader loses his
entitlement to make a repayment claim. In effect he takes himself outwith the
VAT system and the benefit under Section 26 VATA of recovering input tax. In
particular it is not necessary for the amount of the refused repayment to be
restricted to the amount of tax loss sustained by HMRC (Pars Technology
Ltd).
95. In the contra
trading scenario in the present appeal, Mr Gray submitted, there were 3 contra
traders, viz LHT, Optronix and RVM. In June and July 2006 they each had acted
as brokers exporting goods at the conclusion of dirty chains in
which there had been earlier defaults in payment of VAT. These failures were
deliberate and the pattern of trading in each case fraudulent. Mr Gray
referred to the evidence of Mr Taylor in relation to LHT, the oral
evidence of Lesley Camm and the Joint Minute of Admissions anent her (further)
evidence and opinion (K2) in relation to Optronix, and the Joint Minute of
Admissions anent the evidence and opinion of Sangita Parmar (K3) in relation to
RVM. Their opinions were that the clean chains initiated by each of
LHT, Optronix and RVM, and in which ARC was broker, were contra
dealings to disguise fraudulent repayments on dirty chains in which
they, ie LHT, Optronix and RVM, had acted as broker. In effect the clean
chains involving ARC and in respect of which repayments of input tax are
sought, were extensions of dirty chains in which the contra
traders, ie LHT, Optronix and RVM, had acted as brokers. All the
transactions formed part of an organised scheme to defraud HMRC. (While in
terms of the Joint Minutes of Admission Mr Robertson did not concur with that
opinion, he conceded that it was a conclusion with which the Tribunal might
competently agree).
96. Factors
recognised as indicative of MTIC trading in the decisions in Euro Stock Shop
Ltd and Red 12 Trading Ltd are itemised towards the conclusion of Mr
Gray’s summary of the legal aspects arising.
97. At Sections 6
and 7 of his Written Submissions Mr Gray addresses the factual aspects,
assessing Mr Rakhra’s evidence and thereafter considering the circumstances
peculiar to ARC’s appeal as against the factors suggestive of MTIC trading
identified earlier. As the critical issue to be determined by the Tribunal in
this appeal is what inferences as to the taxpayer’s knowledge – actual and imputed
– may properly be inferred, these matters are addressed more fully in our
conclusion infra.
98. On behalf of ARC
Mr Robertson submitted essentially that the disputed transactions were not part
of a scheme to defraud HMRC but that in any event the circumstantial evidence
was insufficient to impute the necessary degree of knowledge to the company and
Mr Rakhra. At most Mr Rakhra was an “innocent dupe”.
99. Mr Robertson
referred to essentially the same body of case-law and noted in particular from
the judgment in Kittel that “traders who take every precaution which
could reasonably be required of them to ensure that their transactions are not
connected with fraud…must be able to rely on the legality of those transactions
without the risk of losing their right to deduct the input VAT…”.
100.The benefit
of deducting input tax in terms of Section 26 VATA, Mr Robertson submitted,
should not be withheld from a taxpayer “who did not and could not know that the
transaction concerned was connected with a fraud committed by the seller”.
101.He noted too
the decisions in Brayfal Ltd and Emblaze Mobility Solutions Ltd,
which, he argued, supported his contention that Kittel had set a high
test for the denial of Section 26 entitlement.
102.Mr Robertson
then reviewed the witness evidence. He contrasted the “professional” evidence
of HMRC’s witnesses. Mr Stone and Mr Grieve were Government officials, versed
in technical practice. They were professional and in certain respects
defensive in their approach and tended to speak in technical jargon. They
spoke of “best practice” rather than taking into account the realities of
commerce. Mr Fletcher, while an impressive professional, had not addressed the
practicalities of ordinary trading. Mr Robertson questioned the sufficiency of
his evidence relating to Nokia’s having a common pricing policy at the material
time.
103.Mr Rakhra on
the other hand had frankly acknowledged that the technical language in his own
Witness Statement had been prompted by his professional adviser, Mr O’Donnell.
The Tribunal in assessing his evidence should not expect of him the same level
of technical knowledge and sophistication shown by HMRC’s “professional”
witnesses.
104.Mr Robertson
then considered the presence and absence, so far as ARC was concerned, of
certain features considered in the relevant case-law as indicative or
suggestive of MTIC trading. Certain features, he argued, were absent: others
he sought to explain away. (These indicia were, of course, addressed by
Mr Gray, and we set out in some detail in the Decision infra our
own view of their presence individually and what significance we attach to
them).
105.Mr Robertson
referred us to Mr Rakhra’s description of trading as “arms-length” and
independent. He had experience as an employee, then as branch manager of a
shop, then as sole trader in the telecoms industry. He acknowledged that the
estimated turnover of £60K fell far short of that achieved shortly after, but
that estimate had not been adversely commented on by HMRC’s Mr Vaughan and Mr McGee.
Deal packs supporting this pattern of trading were produced.
106.Mr Rakhra, Mr
Robertson argued, did not have the resources and advantages available to HMRC
and knew little, if anything, of the “chains” beyond the identity of his
immediate supplier and customer. Although there was speculation on the part of
HMRC about an overall controlling mind, no evidence directly in support of this
had been produced.
107.ARC had a
system of “due diligence”. It had engaged a specialist advisor. It kept
business records. These had been scrutinised yet never criticised in the
period preceding June 2006 by HMRC. Nor had HMRC warned ARC about particular
customers or freight forwarders. Even where ARC’s “due diligence” checks had
not been completed before trading, they were of value where there was a pattern
of continuing trading. ARC was not simply “going through the motions”, Mr
Robertson submitted.
108.Mr Robertson
then considered the circumstances of the 3 contra traders, LHT, Optronix
and RVM. ARC had not been involved in the dirty chains. How, he asked,
could ARC have discovered another allegedly related fraudulent chain. The
process of investigation was complicated enough for HMRC with their resources.
Apparently when the contested deals were concluded, there had been no default in
the contra chains. In relation to the deals in which LHT had been
broker, the goods concerned had been other than phones. The relative HMRC
witness, Mr Taylor, could give only indirect evidence of the enquiries and
conclusions drawn by other officers. That information would not have been
available to Mr Rakhra. A Joint Minute of Admissions had been negotiated in
relation to Optronix and the evidence of the investigating officer, Lesley
Camm. Again the sample deals considered did not involve mobile phones. The
information derived by Ms Camm was obtained after the months of June and July
2006 and, indeed, a repayment had been made by HMRC to Optronix in July.
Similarly a Joint Minute of Admissions had been concluded in relation to RVM
and the evidence of Sangita Parmar. Mr Robertson stressed that HMRC did not
form a definitive view about fraudulent activity until after June and July
2006. He criticised particularly Ms Parmar’s opinion set out at para 53, as
having no real basis. There was no evidence of an overall scheme, Mr Robertson
submitted, and there was no objective evidence supporting the clean/contra
chains as extensions of the dirty chains. There was nothing to
attribute the knowledge or means of knowledge to Mr Rakhra of a fraudulent
link.
109.Mr Rakhra, Mr
Robertson submitted, had gained an understanding of contra trading only
after his repayment of input tax was denied. He had received the Notice no 726
only in April 2007. He knew only his immediate trading contacts and that
inevitably precluded knowledge of repeated patterns of trading. He (and his
advisers) only understood the basis of the allegation of contra trading
here after hearing Mr Taylor’s evidence.
110.Mr Robertson
then referred to the flow of money via FCIB accounts spoken to by Mr Loureiro
and Ms Camm. He urged us not to draw any sinister inference from the use of
the FCIB’s facilities. It offered a 24 hour service. Other banks had
withdrawn account facilities from traders in the mobile phone sector. The
defect in HMRC’s analysis was that there was a lack of narrative in the bank
records. Inferences had been drawn in the absence of specific information.
Significantly, Mr Robertson observed, Mr Loureiro and Ms Camm differed as to
which of certain offshore parties had initiated the money-flow. The
involvement of ARC was simply in the purchase and sale of the goods in the
contested deals, Mr Robertson said.
111.In
conclusion, Mr Robertson submitted, there was no evidence of actual knowledge
of a fraudulent scheme and no justification for inferring “constructive
knowledge” on the part of his client and the Appeal accordingly should
succeed. The information available to HMRC was simply not available to his
client. His client had co-operated with HMRC’s officers. Its practices,
including due diligence, had not been the subject of any criticism or warning.
Parties with whom ARC had traded had not been de-registered at that stage. The
details of the tax losses and dirty chains had been identified by HMRC
only after June and July 2006. Further, Mr Robertson submitted, HMRC had not
shown that their actual losses exceeded the repayment claims. Steps taken to
recover these losses had not been evidenced. This was important as the
relevant tax liabilities were joint and several. Liability, Mr Robertson
argued, had to be in respect of an actual loss.
112.On an
objective view of the circumstances Mr Rakhra had, Mr Robertson submitted, a
reasonable basis for proceeding in the belief that the transactions were not
affected by fraud. Mr Grieve’s assessment should be viewed critically. In
cross-examination, Mr Robertson claimed, he had accepted that certain sections of
his Witness Statement required to be re-worded. In particular para 101, which
contains a seriously prejudicial allegation, was now accepted as being
factually unwarranted. Mr Grieve had been prepared to draw definitive
conclusions without a sound factual foundation.
Decision
113.Ultimately
the nub of this appeal was what actual knowledge or suspicions and concerns
might reasonably be imputed to the company, ARC Ltd, and Mr Rakhra as its
controlling mind. We have been guided particularly by the decisions of the ECJ
in Kittel, the Court of Appeal in Mobilx and Christopher Clarke J
in Red 12 in formulating the criteria to be applied in relation to the
circumstances of this case. However, we have to be satisfied at the outset (i)
that there was a loss of revenue to HMRC, (ii) that this was deliberate and
fraudulent, and (iii) that the transactions for which the repayments of input
tax are presently sought, can be related to the default. We are so satisfied
and this is reflected in our Findings in Fact. We accepted the evidence and
opinions of the officers of HMRC who investigated the tax affairs of Optronics,
LHT and RVM. The chains in which ARC was involved had no commercial
purpose. The obvious and only inference in our opinion is that they were a camouflage
to conceal repayments of tax in the “dirty chains.”
114.The essence
of the ECJ’s Decision in Kittel is explained thus –
“[55] It is a matter for the national court to refuse to
allow the right to deduct where it is established, on the basis of objective
evidence, that that right is being relied on for fraudulent ends.
[56] In the same way, a taxable person who knew or
should have known that, by his purchase, he was taking part in a transaction
connected with fraudulent evasion of VAT, must for the purposes of the Sixth
Directive be regarded as a participant in that fraud, irrespective of whether
or not he profited by the resale of the goods.
[57] That is because in such a situation the taxable
person aids the perpetrators of the fraud and becomes their accomplice.
[58] In addition, such an interpretation, by making it
more difficult to carry out fraudulent transactions, is apt to prevent them.
[59] Therefore, it is for the referring court to refuse
entitlement to the right to deduct where it is ascertained, having regard to
objective factors, that the taxable person knew or should have known that, by
his purchase, he was participating in a transaction connected with fraudulent
evasion of VAT, and to do so even where the transaction in question meets the
objective criteria which form the basis of the concepts of ‘supply of goods
effected by a taxable person acting as such’ and ‘economic activity’.
[60] It follows from the foregoing that the answer to
the questions must be that where a recipient of a supply of goods is a taxable
person who did not and could not know that the transaction concerned was
connected with a fraud committed by the seller, art 17 of the Sixth Directive
must be interpreted as meaning that it precludes a rule of national law under
which the fact that the contract of sale is void – by reason of a civil law
provision which renders that contract incurably void is contrary to public
policy for unlawful basis of the contract attributable to the seller – causes
that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant
in this respect whether the fact that the contract is void is due to fraudulent
evasion of VAT or to other fraud.
[61] By contrast, where it is ascertained, having regard
to objective factors, that the supply is to a taxable person who knew or should
have known that, by his purchase, he was participating in a transaction connected
with fraudulent evasion of VAT, it is for the national court to refuse that
taxable person entitlement to the right to deduct”.
115.This has been
helpfully explained by Moses LJ in Mobilx in which he postulated the
“only reasonable explanation” test -
“[58] As I have endeavoured to emphasise, the essence of
the approach of the court in Kittel was to provide a means of depriving
those who participate in a transaction connected with fraudulent evasion of VAT
by extending the category of participants and, thus, of those whose
transactions do not meet the objective criteria which determine the scope of
the right to deduct. The court preserved the principal of legal certainty; it
did not trump it.
[59] The test in Kittel is simple and should not
be over-refined. It embraces not only those who know of the connection but
those who “should have known”. Thus it includes those who should have known
from the circumstances which surround their transactions that they were
connected to fraudulent evasion. If a trader should have known that the only
reasonable explanation for the transaction in which he was involved was that it
was connected with fraud and if it turns out that the transaction was connected
with fraudulent evasion of VAT then he should have known of that fact. He may
properly be regarded as a participant for the reasons explained in Kittel.
[60] The true principle to be derived from Kittel does
not extend to circumstances in which a taxable person should have known that by
his purchase it was more likely than not that his transaction was connected
with fraudulent evasion. But a trader may be regarded as a participant where
he should have known that the only reasonable explanation for the circumstances
in which his purchase took place was that it was a transaction connected with
such fraudulent evasion”.
116.He approved
also dicta of Christopher Clark J in RED 12 –
[83]… I can do no better than repeat the words of Christopher
Clark J in Red 12 v HMRC [2009] EWHC 2563:-
“[109] Examining individual transactions on their merits
does not, however, require them to be regarded in isolation without regard to
their attendant circumstances and context. Nor does it require the tribunal to
ignore compelling similarities between one transaction and another or preclude
the drawing of inferences, where appropriate, from a patter of transactions of
which the individual transaction in question forms part, as to its true nature
e.g. that it is part of a fraudulent scheme. The character of an individual
transaction may be discerned from material other than the bare facts of the
transaction itself, including circumstantial and “similar fact” evidence. That
is not to alter its character by reference to earlier or later transactions but
to discern it.
[110] To look only at the purchase in respect of which
input tax was sought to be deducted would be wholly artificial. A sale of
1,000 mobile telephones may be entirely regular, or entirely regular so far as
the taxpayer is (or ought to be) aware. If so, the fact that there is fraud
somewhere else in the chain cannot disentitle the taxpayer to a return of input
tax. The same transaction may be viewed differently if it is the fourth in
line of a chain of transactions all of which have identical percentage mark
ups, made by a trader who has practically no capital as part of a huge and
unexplained turnover with no left over stock, and mirrored by over 40 other
similar chains in all of which the taxpayer has participated and in each of
which there has been a defaulting trader. A tribunal could legitimately think
it unlikely that the fact that all 46 of the transactions in issue can be
traced to tax losses to HMRC is a result of innocent coincidence. Similarly,
three suspicious involvements may pale into insignificance if the trader has
been obviously honest in thousands.
[111] Further in determining what it was that the
taxpayer knew or ought to have known the tribunal is entitled to look at the
totality of the deals effected by the taxpayer and their characteristics, and
at what the taxpayer did or omitted to do, and what it could have done,
together with the surrounding circumstances in respect of all of them”.
117.In the present
case it is not claimed that the default and the disputed claim for repayment both
arise in the same chain of transactions ie from the import of the goods to
their eventual export by the Appellant taxpayer. HMRC’s assertion is that the
disputed transactions were at the conclusion of a clean chain (on which
the appropriate VAT had been paid on the occasion of each re-sale), used to
disguise at its start (and offset) a repayment at the end of a dirty
chain. Lewison J in Livewire Telecom Ltd opined that in the case of contra
trading knowledge, actual or imputed, of either the default in the dirty
chain or of the attempt at concealment in the clean or contra chain
was sufficient to refuse payment –
“[103]…it must be established that the taxable person
knew or should have known of a connection between his own transaction and at
least one of these frauds. I do not consider that it is necessary that he knew
or should have known of a connection between his own transaction and both of
these frauds. If he knows or should have known that the contra-trader is
engaging in fraudulent conduct and deals with him, he takes the risk of
participating in a fraud, the precise details of which he does not and cannot
know”.
118.We have found
in fact that the clean or contra chains originate with three
other traders, LHT, Optronix and RVM. There is evidence before us from the testimony
of Mr Taylor and the Joint Minutes of Admissions relating to the testimonies of
Lesley Camm and Sangita Parmar, that each of these companies had been
knowingly involved in a scheme to defraud HMRC of VAT or should have known this.
The clean or contra chains were thus initiated to offset or
disguise the repayment claims in respect of dirty chains in which these
three other companies had been brokers. We had the advantage of hearing
Mr Taylor, whom we found a persuasive witness, who had addressed the pattern of
LHT’s trading logically and with care. While the testimony of Lesley Camm and
Sangita Parmar is in the form of their Witness Statements, there is no contrary
evidence and in a prescribed context is the subject of agreement. Their reasoning
too seems compelling and their conclusions logical.
119.The clean/contra
chains do not appear to be of a commercial nature. Their only conceivable
purpose, in our view, is a means of disguising a repayment in a related dirty
chain, by creating a tax “offset”. All this fortifies us in our conclusion
that the contested transactions in this appeal are the conclusion of a
deliberate scheme to defraud HMRC.
120.We agree with
the reasoning of the Tribunal in Pars Technology that we do not have to
relate in amount the size of the disputed tax repayment to the sum defaulted
on. In terms of Kittel it is the entitlement to make a repayment claim
which is forfeited by furthering the fraud, not a particular amount of tax. Moses
LJ observed in Mobilx –
“[65] The Kittel principle is not concerned with
penalty. It is true that there may well be no correlation between the amount
of output tax of which the fraudulent trader has defrauded HMRC and the amount
of input tax which another trader has been denied. But the principle is concerned
with identifying the objective criteria which must be met before the right to
deduct input tax arises. Those criteria are not met, as I have emphasised,
where the trader is regarded as a participant in the fraud. No penalty is
imposed: his transaction falls outwith the scope of VAT and, accordingly, he
is denied the right to deduct input tax by reason of his participation”.
121.The Tribunal
emphasised this principle in Pars Technology Ltd by reference to Floyd
J’s ruling in Calltell Telecom Ltd –
“Amount of tax loss
[27] [Counsel] cited S&I Electronics PLC 920090
TC76 where the Judge concluded, even where knowledge or means of knowledge of
connection to fraud was proved against the Appellant, that unless HMRC can
prove the defaulter was an importer only input VAT equivalent to the
defaulter’s margin should be denied. He also concluded that even where HMRC
could prove the defaulter was an importer the input VAT could not be denied to
the extent it exceeded the VAT defaulted upon.
[28] This was, however, in the context that there was no
finding that any of the chains were orchestrated which distinguishes it from
this case (see our findings below).
[29] In any event, we are bound by the ruling of Floyd J
in Calltel Telecom Limited [2009] EWHC 1081 (ch) at paragraphs 83-100:
“(paragraph 96) In my judgment there is no
principle which requires HMRC to acknowledge a claim to repayment to the
extent that the claim exceeds HMRC’s tax loss…(paragraph 97) …none of
the statements in Kittel suggest that the right is lost only to
the extent that tax is lost elsewhere in the chain….
(paragraph 99) It seems to me that the
objective of not recognising the right to repayment is not simply to
ensure that the exchequer is not harmed by fraud: the objective
includes combating fraud and discouraging taxpayers from entering into
transactions of this nature. In that context, considerations of fiscal
neutrality of the impugned transaction are, it seems to me, beside the point”.
[30] We note that this was also the view of the Court of
Appeal in Mobilx at paragraph 65:
“The Kittel principle is not concerned with
penalty. It is true that there may well be no correlation between the
amount of output tax of which the fraudulent trader has defrauded HMRC and
the amount of input tax which another trader has been denied. But the
principle is concerned with identifying the objective criteria which
must be met before the right to deduct input tax arises. Those criteria are not
met, as I have emphasised, where the trader is regarded as a participant in the
fraud. No penalty is imposed; his transaction falls outwith the scope of VAT and,
accordingly he is denied the right to deduct input tax by reason of his participation”.
[31] It is therefore the law, contrary to [counsel’s]
assertions, that where a taxpayer knows or ought to have known its transaction
was connected to fraud, it loses its right to deduct its input tax in full”.
122.Accordingly
no issue as to proportionality arises. In any event creating a clean
chain without commercial purpose giving rise to a repayment in excess of the
tax repayment in the dirty chain to be offset and concealed, would serve
no purpose.
123.Further, the
decision in Blue Sphere Global directs that, provided that the clean
and dirty chains can be related, neither one need precede the other.
The necessary connection arises where there is an offsetting of input against
output tax in a particular Return period by a party common to the dirty
and clean chains. Sir Andrew Morritt C explained –
“[44]…The nature of any particular necessary connection
depends on its context, for example electrical, familial, physical or logical.
The relevant context in this case is the scheme for charging and recovering VAT
in the member states of the EU. The process of off-setting inputs against
outputs in a particular period and accounting for the difference to the
relevant revenue authority can connect two or more transactions or chains of
transaction in which there is one common party whether or not the commodity
sold is the same. If there is a connection in that sense it matters not which
transaction or chain came first. Such a connection is entirely consistent with
the dicta in Optigen and Kittel because such connection does not
alter the nature of the individual transactions. Nor does it offend against
any principle of legal certainty, fiscal neutrality, proportionality or freedom
of movement because, by itself, it has no effect”.
124.The
characteristics identified as indicative of MTIC trading are present too. (We
have regard to the dicta in Euro Stock and Red 12 Trading as
approved by Moses LJ supra). In particular there is a recurrence of the
same parties, a pattern or template of consistent mark-ups and profit margins,
the absence of arms-length commercial trading, the absence of added value, and
lengthy deal chains without apparent purpose, which do not include
manufacturers, retailers or final consumers. A circularity of payments for the
goods was shown in many instances also. Certain of these features appear also
in ARC’s non-contested buffer deals.
125.Mr Rakhra
argued, of course, that his awareness did not extend beyond his immediate
supplier and customer. He did not have the resources of HMRC (which we accept)
and, indeed, their information had been collated only long after the dates of
the transactions in question. However, Mr Rakhra did acknowledge that he was
aware of the prevalence of MTIC fraud in the mobile phones market at the
material time, although he did not receive a copy of Notice no 726 until much
later. He had regular visits from HMRC officials. He received many “Redhill”
letters. He had engaged a professional advisor to assist him in VAT
compliance. He had extensive experience of both the retail and wholesale
markets in the telecoms industry.
126.In gauging Mr
Rakhra’s state of mind we view the unexplained, prodigious and sudden increase
in turnover as highly significant. In response to one of the Tribunal members
Mr Rakhra remarked - “It was a high amount but I never really took into
consideration what my turnover was”. This seemed curious as the response of
the controlling director.
127.Such a market
share was comparable to that of a major participant in the sector. Yet ARC
continued to trade from the same, small premises, with a minimal staff. Over a
period there were only three employees – not all employed at the same time –
assisting Mr Rakhra. In our view trading conditions which gave rise to such a
sudden and substantially increased turnover should have alerted Mr Rakhra’s suspicions.
128.The pattern
of the deals, each following only days after another, should have triggered a
natural curiosity. Purchases and sales were for matching numbers, possibly
explicable for cheap basic models, but less readily so for the high value
phones which were traded here. None seemed ever to be faulty. None was ever
returned. (In any event ARC did not have service staff or facilities). There
was only a limited specification in the invoices which would tend to expose a
trader to unsatisfactory commercial risks. Apparently there was no need for
storage space as stock was never held by ARC on its premises. Rather it was
always at a freight forwarder’s.
129.In the view
of the Tribunal such a pattern of trading, invariably resulting in a small but
assured margin of profit, should surely have seemed “too good to be true”.
Applying the test prescribed by Moses LJ in Mobilx, the “only reasonable
explanation” must surely have been that the goods were tainted by MTIC fraud.
On any view this pattern of trading is too far removed from ordinary commercial
undertakings to be regarded as innocent and legitimate, which points to that
one inexorable inference.
130.The system of
“due diligence” pursued by ARC was clearly inadequate in a context of
“arms-length” trading. The process was often not completed before trading
started, but even then it would have had only limited value in relation to
subsequent dealings. The information obtained as to the subject’s financial
resources and credit worthiness was often inadequate and on occasion
cautionary. The implications of the de-registration notices for previous
trading associates seem to have been ignored. Business premises were often no
more than serviced accommodation and of a short-term nature. We agree with Mr
Gray’s contention that such procedures were no more than “going through the
motions”. The making of such limited efforts, with no real benefit emerging,
arguably is suggestive of actual awareness of MTIC fraud.
131.The manner of
conduct of ARC’s business was obviously significant. While documentation
relating to concluded deals was available, similar records relating to
negotiations and dealings which did not reach fruition were not produced. We
have in mind items such as jottings, notebooks recording information, records
of phone calls, emails, and computer printouts – the basic records of matters
too detailed to be committed to memory. Mr Rakhra spoke of receiving and
making many phone calls on a daily basis and of using the internet. No phone
bills were produced or receipts for websites. The evidence of even one of
ARC’s employees other than Mr Rakhra or of Mr Holmes of Border VAT Services
could have been helpful. The dearth of evidence from such sources, which
should have been readily available, raises our concern.
132.We commented
earlier (para 90) on the credibility of Mr Rakhra’s evidence. Mr Gray in
his submissions notes discrepancies in Mr Rakhra’s oral evidence and Witness
Statement. Minor discrepancies we would consider inevitable, but one aspect
not explained away satisfactorily was the Trade Credit Application document.
Mr Rakhra claimed not to have granted credit. In that event what was the
purpose of this document? It seems to have been part of ARC’s documentation.
We consider that no satisfactory explanation for this was forthcoming.
133.Our
conclusion is that the Kittel test as to imputed knowledge is satisfied
in this case. While certain factors are arguably indicative of actual
knowledge on the part of Mr Rakhra, we have no hesitation in concluding in any
event that it should have been clear to him that the “only reasonable
explanation” for the nature and pattern of the disputed transactions was that
they were tainted with MTIC fraud. The disputed deals do not bear the
hallmarks of arms-length commercial trading. Taking all the relevant factors in
cumulo that is the only and inevitable conclusion in this case. For these
reasons we dismiss this appeal.
Expenses
134.The
Respondents, HMRC, conceded the expenses of Tuesday and Wednesday, 8/9 June
2010 as their witness, Mr Stone, could not attend the hearing on these days.
Because of procedural difficulties they conceded also a half-day’s expenses for
Friday 8 October 2010 to the Appellant. Quoad ultra in view of our
decision it is appropriate that expenses be awarded to the Respondents. These
are subject to taxation, if necessary, in terms of Rule 29(3) of the VAT
Tribunal Rules 1986.
135.Finally we
would express our thanks to Counsel and their advisers for the excellent
presentation of their detailed arguments and other assistance afforded to the
Tribunal in the course of the Hearing.
136.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.
MR KENNETH MURE, QC
TRIBUNAL JUDGE
RELEASE DATE: 28 SEPTEMBER 2011
