Crotek Systems Ltd v Revenue & Customs [2011] UKFTT 836 (TC) (16 December 2011)
DECISION
Introduction
1. Crotek
Limited (“CL”) and Crotek Systems Limited ("CSL") (collectively
"the Appellants") appeal against five decision letters of the
Respondents ("HMRC") denying the Appellants the right to deduct input
tax totalling £5,690,347.25 in respect of 34 transactions concerning the
purchase of mobile telephones between February 2006 and May 2006.
2. Of
those five decision letters, two relate to CL and concern six transactions. The
remaining three decision letters relate to CSL and concern 28 transactions. In
addition, input tax was denied in respect of nine transactions by a decision
letter dated 29 August 2006 and the decision in respect of those nine
transactions has not been appealed.
3. There
are, therefore, 34 transactions which form the subject matter of this appeal.
The total amount of input tax denied in respect of those 34 transactions is
£5,690,347.25.
4. HMRC
denied the Appellants' right to deduct input tax on the basis that the
Appellants' transactions were connected to the fraudulent evasion of Value
Added Tax ("VAT") and that each Appellant knew or should have known
that its transactions were connected to such fraudulent evasion.
The decisions under appeal
The first Appellant
5. The
first decision in relation to CL is contained in a letter from HMRC dated 13
July 2006. This letter informed CL that input tax totalling £605,010 in respect
of three transactions falling within the VAT period 04/06 had been denied.
6. The
second decision letter, dated 29 August 2006, notified CL that its claim to
deduct input tax in respect of three transactions falling within the VAT period
04/06 in the amount of £396,760 had been denied.
The second Appellant
7. As
noted above four decision letters related to CSL. The first decision letter was
dated 13 July 2006 and notified CSL that input tax totalling £1,687,542.50 had
been denied in respect of 10 transactions falling within VAT periods 02/06,
03/06 and 04/06.
8. The
second decision letter was dated 28 July 2006 and notified CSL that input tax,
totalling £1,738,415, in respect of a further 10 transactions falling within
the VAT periods 02/06 and 03/06 had been denied.
9. The
third decision letter was dated 4 August 2006 and notified CSL that input tax,
totalling £239,120, in respect of one transaction falling within the VAT period
02/06 had been denied.
10. The fourth
decision letter was dated 8 March 2007 and notified CSL that input tax,
totalling £1,023,499.75, in respect of seven transactions falling within the
VAT period 05/06 had been denied.
11. As noted above,
another decision letter dated 29 August 2006 was not appealed. This decision
letter notified CSL that input tax, totalling £1,843,087.75, in respect of nine
transactions falling within the VAT period 04/06 had been denied. The evidence
put forward by HMRC included these nine transactions as part of the factual
background to the 34 transactions under appeal.
12. The Appellants
appealed against all the decision letters (except that contained in the letter
dated 29 August 2006) referred to above.
MTIC Transactions – Background
13. HMRC contend
that all the transactions entered into by the Appellants, on which they based
their claims to deduct input tax, form part of what is described as “Missing Trader Intra-Community” (“MTIC”)
fraud. The “classic way” in which the fraud works was described by Christopher
Clarke J in Red 12 Trading Ltd v HMRC [2009] EWCH 2563 as
follows (at paragraph 2):
“2….Trader A imports goods, commonly computer chips
and mobile telephones, into the United Kingdom from the European Union (“EU”).
Such an importation does not require the importer to pay any VAT on the goods.
A then sells the goods to B, charging VAT on the transaction. B pays the VAT to
A, for which A is bound to account to HMRC. There are then a series of sales
from B to C to E (or more). These sales are accounted for in the ordinary way.
Thus C will pay B an amount which includes VAT. B will account to HMRC for the
VAT it has received from C, but will claim to deduct (as an input tax) the
output tax that A has charged to B. The same will happen, mutatis mutandis, as
between C and D. The company at the end of the chain – E – will then export the
goods to a purchaser in the EU. Exports are zero-rated for tax purposes, so
trader E will receive no VAT. He will have paid input tax but because the goods
have been exported he is entitled to claim it back from HMRC. The chains in
question may be quite long. The deals giving rise to them may be effected within
a single day. Often none of the traders themselves take delivery of the goods
which are held by freight forwarders.”
“5. A jargon has developed to describe the
participants in the fraud. The importer is known as “the defaulter”. The
intermediate traders between the defaulter and the exporter are known as
“buffers” because they serve to hide the link between the importer and the
exporter, and are often numbered “buffer 1, buffer 2 etc. The company which
exports the goods is known as “the broker”.
14. For simplicity,
but without thereby prejudging the issue, we shall adopt the same terminology
of "defaulter (s)" (sometimes also known as "missing
traders"), "buffers" and "brokers". References to HMRC
in this decision also include its predecessor, HM Customs and Excise.
15. Some MTIC
appeals involve a variation on the typical transaction, described above by
Christopher Clarke J, known as contra-trading. These appeals, however, do not
involve contra-trading.
Issues in dispute
16. During the
hearing of this appeal, Mr Kramer, representing the Appellants, accepted that
the Appellants' transactions were all connected with the fraudulent evasion of
VAT. He also accepted that HMRC had sustained a tax loss in the transaction
chains of which the Appellants' transactions formed part.
17. The issue in
dispute, therefore, was whether the Appellants, through their "controlling
minds", knew or should have known that their transactions were connected
with the fraudulent evasion of VAT. It was accepted that Mr Safdar Dad
("Mr Dad") was the controlling mind of each Appellant for these
purposes.
The evidence
Documentary evidence
18. We were provided
with 41 files of witness statements and supporting exhibits.
Witness evidence
19. Witness
statements from the following witnesses were admitted as evidence. These
witnesses did not give oral evidence and their witness statements were accepted
and were not challenged by the Appellants. The witnesses were:
(1)
Andrew Paul Monk – an HMRC officer allocated responsibility for the
defaulting trader XS Enterprise Systems Limited ("XS Enterprises").
(2)
Terrence Mendes – an HMRC officer allocated responsibility for the
defaulting traders FX Drona Limited ("FX Drona”) and Ultimate Security
Agency Limited ("Ultimate"). Mr Mendes submitted separate witness
statements for each defaulting trader.
(3)
Sheila Edmead -an HMRC officer allocated responsibility for the
defaulting trader Stella Communications UK Limited ("Stella").
(4)
Peter Allen Cameron-Watson – an HMRC officer allocated responsibility
for the defaulting trader Oracle (UK) Limited ("Oracle").
(5)
Damien Mario Parsons – an HMRC officer allocated responsibility for the
defaulting trader Puwar Business Co-Operation (UK) Limited ("Puwar").
(6)
Claire Sharkey – an HMRC officer allocated responsibility for a trader
called Adworksuk.com Limited ("Adworks”).
(7)
Mathew Charles Bycroft – an HMRC officer allocated responsibility for
the defaulting trader Midwest Communications Limited ("Midwest").
(8)
Robert James David Lamb – an HMRC officer allocated responsibility for
the defaulting trader Roble Comm Limited ("Roble").
(9)
James Smallbone – an HMRC officer allocated responsibility for the
defaulting trader Red Rose Consultancy Limited ("Red Rose").
(10)
Gordon Murray Fyffe – an HMRC officer allocated responsibility for the
defaulting trader Bullfinch Systems Limited ("Bullfinch").
(11)
Kyle Angus Martyn – an HMRC officer allocated responsibility for Goldex
International Plc ("Goldex").
20. The following
witnesses were called by HMRC. They produced witness statements which were
admitted to evidence and gave oral evidence. The witnesses were as follows:
(1)
Nigel Saunders – an HMRC officer allocated responsibility for the
Appellants. Mr Saunders produced three witness statements. The third witness
statement related to evidence obtained from the Paris server of the First
Curacao International Bank ("FCIB"). The admission of the evidence
contained in the third witness statement and its supporting exhibits was
disputed by the Appellants. For reasons given later in this decision, we
decided to admit the evidence.
(2)
Roderick Guy Stone – a senior HMRC officer who gave background evidence
in relation to MTIC fraud.
(3)
Susan Elizabeth Hirons – an HMRC officer allocated responsibility for
the defaulting trader Zoom Products Limited ("Zoom").
(4)
Alan John Ruler – an HMRC officer who gave evidence in relation to the
trader Urban Spice Buyer Limited ("Urban ").
(5)
David Young – an HMRC officer who gave evidence in relation to data
derived from the FCIB Paris server. As with the third witness statement of Mr
Saunders, the same dispute arose as to whether this evidence should be
admitted. For the reasons given later in this decision, we decided to admit the
evidence.
(6)
John Fletcher – a Director in KPMG LLP ("KPMG") who gave
expert evidence in relation to the grey market in mobile telephone handset
distribution in 2006.
21. The Appellants
called Mr Dad to give evidence. Mr Dad was a director of both Appellants. Mr
Dad produced two witness statements, which were admitted into evidence, and
gave oral evidence.
Credibility of witness evidence
22. We wish to make
some initial comments about the credibility of the witnesses who gave evidence
before us.
23. We considered
the witnesses called by HMRC to be credible witnesses.
24. In relation to
the evidence given by Mr Ruler concerning Urban, this evidence was mainly
hearsay evidence. We express our reservations as regards the weight to be
placed on this evidence later in this decision. However, in expressing those
reservations we make no criticism of Mr Ruler's credibility. On the contrary,
in our view, Mr Ruler was a credible and truthful witness.
25. In our view, Mr
Dad was not a credible witness. As explained below, Mr Dad was frequently
evasive in cross-examination and often failed to give direct answers to
questions which were asked of him or gave answers were simply not credible. There
was no doubt in our minds that important parts of Mr Dad's evidence were
untruthful, as we explain more fully below. We therefore treated Mr Dad's
evidence with considerable circumspection.
Applications to admit and exclude evidence
26. In the course of
this hearing there were two applications by the Appellants to exclude evidence
put forward by HMRC (the evidence of Mr Fletcher and Mr Stone). In addition,
there was one application to admit new evidence made by HMRC in respect of the
FCIB evidence of Mr Saunders and Mr Young derived from the "Paris server"
27. A Directions
hearing in relation to these appeals was held on 11 April 2011 (before Judge
Brannan) in order to deal with any preliminary issues between the parties prior
to the substantive hearing of the appeals and because of uncertainty concerning
legal representation of the Appellants. Objections to the admission of evidence
should have been made at the Directions hearing. The Appellants did not appear
and were not represented at the hearing. As far as we are aware, no explanation
was given for their failure to attend. HMRC attended the hearing. HMRC stood
over their application to admit the new FCIB evidence of Mr Saunders and Mr
Young derived from the "Paris server" until the substantive hearing
because the Appellants had failed to appear.
28. One of the main
purposes of an interlocutory hearing is, inter alia, to avoid appeal timetables
being disrupted by the making of applications that could conveniently have been
dealt with at an interlocutory stage. Whilst the admission or exclusion of
evidence is subject to the basic overriding principle in the Tribunal Rules
that matters must be dealt with fairly and justly, the failure of a party to
attend interlocutory proceedings without good reason is a matter that can be
weighed in the overall balance by the Tribunal in the application of that
overriding principle.
The transactions
29. The 34
transactions and (associated deal chains) which form the subject matter of
these appeals and the nine un-appealed transactions covered by the decision
letter of 29 August 2006 are set out in Appendix 1 to this decision. This
information was derived from the witness evidence admitted on behalf of HMRC
and was not in dispute between the parties.
The law
30. There was no
dispute between the parties regarding the applicable legal principles, which we
set out below. We have applied these principles in reaching our decision.
31. The legal
right to a deduction for input tax is enshrined in Articles 167 and 168 of
Council Directive 2006/112/EC of 28 November 2006 and in sections 24, 25 and 26
of the Value Added Tax Act 1994.
32. There is no
legal right to a deduction for input tax, however, where fraud is involved.
There is now extensive case law on the subject both before the European Court
of Justice and our domestic courts. The position was conveniently summarised by
Lewison J in the recent decision of the Upper Tribunal in Brayfal Ltd v HMRC
[2011] UKUT B6 (TCC) as follows:
"While Brayfal’s appeal has been making its way
through the system, the law has been considered by the courts on a number of
occasions. It finds its latest authoritative pronouncement in the decision of
the Court of Appeal in Mobilx Ltd v HMRC [2010] EWCA Civ 517. This
decision was handed down on 12 May 2010, a couple of months after the revised
decision of the FTT. That case examined the ramifications of the decision of
the ECJ in Axel Kittel v Belgium; Belgium v Recolta Recycling Joined Cases C-439/04 and C-440/04 [2006] ECR
1-6161 (“Kittel”). What the Court of Appeal decided was:
A taxable person who knows or should
have known that the transaction which he is undertaking is connected with
fraudulent evasion of VAT is to be regarded as a participant and fails to meet
the objective criteria which determine the scope of the right to deduct. (§
43)
If a taxpayer has the means at his
disposal of knowing that by his purchase he is participating in a transaction
connected with fraudulent evasion of VAT he loses his right to deduct, not as a
penalty for negligence, but because the objective criteria for the scope of
that right are not met. (§ 52)
The principle does not extend to circumstances in
which a taxable person should have known that by his purchase it was more
likely than not that his transaction was connected with fraudulent evasion. But
a trader may be regarded as a participant where he should have known that the
only reasonable explanation for the circumstances in which his purchase took
place was that it was a transaction connected with such fraudulent evasion. (§
60)
The test 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. (§
59)
If HMRC wishes to assert that a
trader's state of knowledge was such that his purchase is outwith the scope of
the right to deduct it must prove that assertion. (§ 81)
In answering the factual question, Tribunals
should not unduly focus on the question whether a trader has acted with due
diligence. Even if a trader has asked appropriate questions, he is not entitled
to ignore the circumstances in which his transactions take place if the only
reasonable explanation for them is that his transactions have been or will be
connected to fraud. The danger in focusing on the question of due diligence is
that it may deflect a Tribunal from asking the essential question posed in Kittel,
namely, whether the trader should have known that by his purchase he was taking
part in a transaction connected with fraudulent evasion of VAT. The
circumstances may well establish that he was. (§ 82)
I should also record that it was common ground that
these principles should be applied in the light of the circumstances prevailing
at the date of the taxable person’s own transactions: C-354/03 Optigen Ltd v
Customs and Excise Commissioners [2006] ECR I-483. "
33. We
respectfully adopt Lewison J's summary of the law as a correct statement of the
current position. Both parties accepted that this Tribunal was bound by the
Court of Appeal’s decision in Mobilx.
34. We would also
draw attention to the comments of Moses LJ in Mobilx in relation to
questions of evidence, where he said (at page 1459):
The questions posed in BSG …by
the tribunal were important questions which may often need to be asked in
relation to the issue of the trader's state of knowledge. I can do no better
than repeat the words of Christopher Clarke J in Red 12 Trading Ltd v Revenue
and Customs Comrs [2009] EWHC 2563 (Ch) at [109]–[111], [2010] STC 589 at [109]–[111]:
'[109] Examining
individual transactions on their merits does not, however, require them to be
regarded in isolation without regard to their attendant circumstances and
context. Nor does it require the tribunal to ignore compelling similarities
between one transaction and another or preclude the drawing of inferences,
where appropriate, from a pattern of transactions of which the individual
transaction in question forms part, as to its true nature e.g. that it is part
of a fraudulent scheme. The character of an individual transaction may be
discerned from material other than the bare facts of the transaction itself,
including circumstantial and “similar fact” evidence. That is not to alter its
character by reference to earlier or later transactions but to discern it.'
[110] To look only at the
purchase in respect of which input tax was sought to be deducted would be
wholly artificial. A sale of 1,000 mobile telephones may be entirely regular,
or entirely regular so far as the taxpayer is (or ought to be) aware. If so,
the fact that there is fraud somewhere else in the chain cannot disentitle the
taxpayer to a return of input tax. The same transaction may be viewed
differently if it is the fourth in line of a chain of transactions all of which
have identical percentage mark ups, made by a trader who has practically no
capital as part of a huge and unexplained turnover with no left over stock, and
mirrored by over 40 other similar chains in all of which the taxpayer has
participated and in each of which there has been a defaulting trader. A
tribunal could legitimately think it unlikely that the fact that all 46 of the
transactions in issue can be traced to tax losses to HMRC is a result of
innocent coincidence. Similarly, three suspicious involvements may pale into
insignificance if the trader has been obviously honest in thousands.
[111] Further in determining
what it was that the taxpayer knew or ought to have known the tribunal is
entitled to look at the totality of the deals effected by the taxpayer (and
their characteristics), and at what the taxpayer did or omitted to do, and what
it could have done, together with the surrounding circumstances in respect of
all of them.'"
35. It is worth
adding that the standard of proof is the normal civil standard of proof i.e.
the balance of probabilities.
The Appellants: background
Crotek Systems Limited
36. CSL was
incorporated as a limited company in August 2004. The company's registered
address was in High Wycombe, Buckinghamshire.
37. In the periods
relevant to these appeals, CSL had one director: Mr Safdar Dad. The company
secretary was Frieda Dad, the wife of Mr Dad's brother Mr Shafqat Dad. Mr
Shafqat Dad had previously been a director of CSL but resigned on 24 August
2005. He had also been a company secretary of CSL but resigned when his wife
took over the position on 17 June 2005.
38. Mr Dad stated
that he purchased CSL from his brother. Nonetheless, his brother continued to
hold the one share in CSL until on or around 29 August 2006, according to the
annual return declaration signed by Mr Dad. However, a company report on CSL
dated 11 January 2007 stated that Frieda Dad owned 50 £1 ordinary shares, a
further 49 £1 ordinary shares were owned by Mr Safdar Dad and that Shafqat Dad
owned 1 £1 ordinary share. Mr Dad stated that this constituted an
"oversight". Nonetheless, from the documentary evidence it seemed to
us more likely than not that CSL was owned by Shafqat Dad until on or around 29
August 2006. It was also clear that the company's issued share capital never
exceeded £100.
39. CSL applied to
be registered for VAT by submitting Form VAT 1 on 15 September 2004. It was
Shafqat Dad who was responsible for the VAT registration process. It was stated
that the company would be making pharmaceutical supplies and that the estimated
value of taxable supplies in the following 12 months would be £100,000. Box 25 relating to anticipated sales and purchases with other EC member states was left
blank. CSL indicated that it was likely to be in a VAT repayment position.
Crotek Limited
40. CL was
incorporated as a limited company on 16 July 2003. The company's name was
Jenny's Limited and this was changed to Crotek Limited on 23 June 2005. CL
shared the same registered address as CSL in High Wycombe, Buckinghamshire.
41. For the periods
material to these appeals, there were two directors: Mr Safdar Dad and his
sister-in-law Frieda Dad. Mr Dad's brother, Mr Shafqat Dad, had previously been
CL’s sole director but resigned as a director on 17 June 2005 when his brother
was appointed as a director.
42. The
shareholdings in CL were unclear. The annual return dated 7 August 2006
indicated that “F Dad” (presumably Frieda Dad) had transferred 99 ordinary
shares, although the name of the transferee was not stated. The return also
stated that "S Dad" had transferred one ordinary share and gave Mr
Dad's address in High Wycombe.
43. The annual
return dated 13 August 2007 shows that Mr Dad and Frieda Dad each owned 50 £1
ordinary shares of the company's £100 issued share capital. Mr Dad stated that
he had bought the company from his brother. At any rate, it was clear that the
company's issued ordinary share capital never exceeded £100.
44. Mr Dad completed
Form VAT 1 on 1 August 2005, applying for VAT registration. The Form stated that
the company would be making supplies of "retail electronics". It also
stated that the first taxable supply had been made on 1 July 2005. The annual
turnover was anticipated to be £125,000. Box 25 on Form VAT 1, relating to the
value of goods anticipated to be brought or sold with other EC member states,
was left blank. The Form indicated that CL was likely to be in a VAT repayment
position – this would have been an unlikely outcome if CL was really engaged in
the trade of retail electronics.
Mr Safdar Dad
45. Mr Dad was a
director of both Appellant companies at all times material to these appeals. As
already noted, it was accepted by the parties that Mr Dad was the controlling
mind of both companies.
46. After leaving
school in June 1987, Mr Dad undertook an apprenticeship in electronic
engineering. In 1994 he took a position with international electronics
wholesaler called Globalsource, the principal trading activity of which was
importing and exporting electronic computer chips. Mr Dad left Globalsource and
between 1996 and 2000 continued to work in the electronic products sector,
specialising in export sales.
47. In 2000, Mr Dad
changed his career direction and became a financial adviser for an estate
agency called Connells. Connells supported Mr Dad in obtaining the necessary
qualifications.
48. From 2002, Mr
Dad was a self-employed mortgage consultant. His only retail experience was in
running a small newspaper kiosk.
Commencement of the Appellants’ businesses and early contact with HMRC
Crotek Systems Limited
49. In 2004, Mr Dad
decided to set up a high street mortgage business. Together with a Mr Stephen
Biggs, Mr Dad, through a company called Pebble Rose Limited, bought a shop at 14 High Street, Aylesbury in November 2004. The acquisition price was approximately £230,000
and was financed by a mortgage (which, Mr Dad stated, had a high loan to value
ratio).
50. According to Mr
Dad's evidence, the local planning authorities required that the ground floor
of the shop should be used for retail purposes and only the upper floor could
be used for the mortgage business.
51. Mr Dad's
evidence was that in order to utilise the downstairs retail area, he decided to
sublet the space to CSL and retail mobile phones to the general public. He
explained that, at that stage, his intention was to use CSL for the sale of
mobile phones, while retaining CL as a more general supplier of other
electronic devices. However, we note that Mr Dad was not a director and most
probably was not a shareholder of CL at that time.
52. Mr Nigel
Saunders, the HMRC officer responsible for both Appellants, visited CSL's
premises (CL was not at this stage registered for VAT) on 7 December 2004 and
met Mr Dad. Mr Dad confirmed that CSL would not be making pharmaceutical
supplies but would be making retail and wholesale supplies of mobile phones.
53. On the question
of the statements in CSL's application for registration for VAT as regards the
intention to make pharmaceutical supplies, Mr Dad in his witness statement said:
"CSL was initially intended to trade in
pharmaceuticals however the plans never took off once we realised the
pharmaceutical trade required licensing and testing of products and
considerable red tape all at considerable costs."
54. In
cross-examination, however, Mr Dad appeared to contradict himself:
"Q: If I have understood this, and tell me if I
have this wrong, you knew nothing about the fact that this company was
incorporated as a pharmaceutical supplies company at the time?
A: That is correct."
55. We concluded
that Mr Dad was less than frank about this understanding of the significance of
the trade category under which CSL had originally been registered for VAT.
56. At their
meeting on 7 December 2004, Mr Dad told Mr Saunders that the supplies of mobile
telephones would be made under a franchise agreement with a company called
Mobizone Limited, a subsidiary of European Telecom Plc ("European
Telecom"). Mr Shafqat Dad had been an employee of European Telecom,
working as their financial controller for two years. Mr Dad also told Mr
Saunders that he had no experience of the mobile telephone industry.
57. Mr Saunders
asked Mr Dad why he had opened a freight forwarder account and was informed
that he had been advised to do so by European Telecom.
58. As noted above,
on Form VAT 1 Mr Shafqat Dad had indicated that CSL would be a repayment
trader. On 21 January 2005, Mr Saunders wrote to CSL noting that the business
would normally pay VAT to HMRC and informing CSL that he was arranging for its
VAT returns to be switched from monthly returns (which were normal for a
repayment trader) to a three monthly cycle. On 24 January 2005, Mr Dad sent an
e-mail to a colleague of Mr Saunders, Mr Owen Lloyd, stating that his business
would be in a repayment position every month and asked to remain on monthly
returns. Mr Lloyd replied on 24 January asking that CSL set out why it would be
in a repayment position and asking for evidence to support that claim. Mr Dad
(i.e. Mr Safdar Dad) replied on 25 January 2005 stating:
"… We have relationships with many countries
from Australia to the USA. Please find enclosed a list of five pages of
companies to whom we will be supplying. We will be buying in the UK and exporting to these overseas companies.
We understand that monthly returns are for companies
who receive regular repayments from HMC&E [HMRC]. This will apply in our
case as we will be exporting every month and therefore will be in a repayment
situation for the foreseeable future and beyond. We do not foresee our business
normally paying VAT to HMC&E due to our exports."
59. Mr Dad's letter
was dated approximately one month before CSL's first wholesale mobile phone
deal. In cross-examination Mr Dad was asked for details of the
"relationships" with the companies to which he referred in his
letter. Mr Dad accepted that he had not at that time concluded any deals with
the companies referred to in the letter. He also accepted that these were
companies to whom he "hoped" to make supplies. He conceded that he
did not have specific relationships with any of the businesses referred to in
the list. He said that he may have engaged in some "exploratory
undertakings" with these companies.
60. On 2 February
2005 Mr Lloyd (together with a colleague) visited CSL to consider Mr Dad's
request in his letter dated 25 January 2005 that CSL should remain on monthly
returns. Mr Dad provided a list purporting to be a list of potential foreign
customers together with copies of enquiries from other potential customers
outside the UK. A check of the www.NextGSM.com website on 3 February 2005
indicated that the list of traders had been copied from its database as the
companies appeared in the same order. The enquiries that Mr Dad provided
contained mainly greetings and request for quotes, although one asked about a
mobile telephone advertised on IPT .Com for sale. Following the meeting, Mr Lloyd
wrote to CSL on 4 February 2005 confirming that the company could remain on
monthly VAT returns.
61.
In our view, it was clear that Mr Dad did not have relationships with
these companies and that the letter of 25 January 2005 was deliberately
misleading .We found Mr Dad's explanation unconvincing and evasive. That letter
was plainly intended to justify the retention of monthly returns and the letter
contained misleading information. It was clear that there were no existing
relationships with these companies and, indeed, Mr Dad was unable to point to
any subsequent transactions concluded by CSL with these companies. Mr
Saunders’s evidence, which was not challenged, was that, of the companies on
the list, very few if any were supplied by either CSL or CL.
Crotek Limited
62. As noted above,
CL applied for VAT registration on 1 August 2005 stating that its business
activity was "retail electronics".
63. Mr Saunders
(together with a colleague) visited CL's premises (the same as those of CSL) on
2 September 2005 and asked Mr Dad about the new business. Mr Dad informed him
that he was intending to supply Sony PlayStations, handheld consoles and other
handheld electronic devices and that he would be retailing and wholesaling
them from the shop premises. At the time there were no customers and no
suppliers. The new business would be financed from the profits from CSL. Mr Dad
was not certain about the amount of capital required for the new business but
thought it was between £10,000 and £20,000. Mr Saunders said that he was not satisfied
that at that time there was a business that could be registered or a clear
intent to trade. He pointed out that the statement made on the VAT application
that a taxable supply had been made on 1 July 2005 was not correct.
64. At a further
visit by Mr Saunders to CL's premises on 13 September 2005, Mr Dad confirmed
that the main business activity of CL would be the retail and wholesale of
gaming devices such as PSP, Nintendo and software. Mr Dad said that initially
he would only deal in Nintendo goods and that, when supplied, the goods would
be held at a freight forwarder's premises. Mr Dad produced a letter from
Nintendo dated 8 September 2005 setting out terms of trade. The letter was
unusual because, although it was addressed to Mr Dad, there was no personalised
salutation and the letter was unsigned. Mr Saunders thought this was strange
because the letter was setting out possible terms of trade. In
cross-examination Mr Saunders conceded that he had not contacted Nintendo to
ascertain whether the letter was genuine. In cross-examination Mr Dad accepted
that he had not reached an agreement with Nintendo.
65. CL's Form VAT 1
stated that CL had made its first supply on 1 July 2005, but no paperwork was
ever produced to substantiate this claim and, as noted, Mr Saunders pointed out
to Mr Dad that the statement was incorrect. At the meeting on 13 September
2005, Mr Dad then produced paperwork to show that CL had made a wholesale phone
sale to Starup Trading in Hong Kong on 6 September 2005. The transaction was
for £286,806.80. This exceeded the compulsory registration threshold and
accordingly HMRC were obliged to register CL for VAT.
66. In our view,
CL's Form VAT 1 was misleading. The description of CL's business that was given
was "retail electronics", but just over a month later CL was
undertaking a significant wholesale transaction in mobile phones with Starup
Trading (transaction which forced HMRC to register CL). It is, in our view,
significant that this transaction came immediately after Mr Saunders had raised
objections to the registration of the company. We infer that the reason for the
transaction was, as HMRC allege, to force Mr Saunders to register CL. Moreover,
the statement that CL had made its first supply on 1 July 2005 was untrue.
Documentation to substantiate the existence of this transaction was never
produced and it appears that Mr Dad made no attempt to justify the existence of
this transaction.
67. At their meeting
on 13 September 2005, Mr Saunders asked Mr Dad why a separate registration was
needed if CL was to sell mobile phones as well as CSL. Mr Dad replied that he
wanted to keep separate accounting for the two companies. In practice, as Mr
Dad noted in his witness statement, CL was used to sell mobile phones if that
accounting system happened to be open on his computer:
"… the rigid distinction between the sales
activities of the two companies became a little blurred."
68. As Mr Saunders
noted in his witness statement, CSL and CL seemed to be used interchangeably.
69. Finally, in
relation to the meeting of 13 September 2005, Mr Saunders reminded Mr Dad of
the problems caused by MTIC fraud and he was again issued with HMRC Notices 726
and 700/52.
Mr Dad's alleged general awareness of MTIC fraud
70. Mr Saunders' s
evidence was that Mr Dad had been told about MTIC fraud or had had the fraud
brought to his attention during visits from HMRC officers on 7 September 2004,
17 January 2005, 17 May 2005, 13 June 2005, 13 September 2005 and 23 January
2006.
71. Mr Saunders also
gave evidence to the effect that a number of joint and several liability
warning letters were hand-delivered by him to CSL, at a meeting on 23 January
2006, drawing attention to tax losses in deal chains for various VAT periods.
These letters explained that if the Appellant knew or had reasonable grounds to
suspect that VAT would go unpaid the joint and several liability measure could
be applied.
72. The letters
identified those deals which had been traced back to defaulting traders.
Importantly, the letters noted that the trader should be able to establish,
from its records, which supplier had supplied it with the relevant goods and
suggested that the trader may wish to consider what appropriate action was
needed to ensure that VAT did not go unpaid in respect of any future
transactions.
73. The letter in relation
to the period 04/05 was dated 23 January 2006 i.e. shortly before the first
transactions to which these appeals relate. That letter notified CSL that of
the seven transactions selected for verification in that period all the
transactions commenced with defaulting traders and resulted in a loss of
revenue exceeding £648,000. In some of those transactions CSL played the role
of broker and in others that of a buffer trader.
74. The letters in
respect of the other periods were similar. In respect of the period 05/05, CSL
was warned, also by a letter dated 23rd of January 2006 that four out of five
transactions selected for verification commenced with defaulting traders,
resulting in a loss of revenue exceeding £200,000.
75. The letter in
respect of period 06/05 was also dated 23 January 2006. This explained that one
transaction out of six transactions selected for verification commenced with a
defaulting trader and resulted in a loss of revenue exceeding £70,000.
76. A letter, also
dated 23 January 2006, notified CSL that in respect of period 08/05 one
transaction out of the four transactions selected for verification commenced
with a defaulting trader and resulted in a loss of revenue exceeding £84,000.
77. A final letter
dated 23 January 2006 in respect of the period 09/05 notified CSL that, out of
five transactions selected for verification, two commenced with defaulting
traders and resulted in a loss of revenue exceeding £118,000.
78. After these
letters had been sent to CSL, a letter was received from solicitors acting for
CSL and CL dated 7 February 2006. The letter referred to the joint and several
warning letters and stated that their client had "considered that
information carefully."
79. CSL was also
sent a joint and several liability warning letter in respect of period 10/05 on
25 January 2006 i.e. shortly before the first deal for the periods which form
the subject matter of these appeals. The letter notified CSL that of the two
transactions examined both commenced with a defaulting trader resulting in a
loss of revenue exceeding £145,450.
80. Finally, a
further joint and several liability warning letter was sent to CSL on 1 March
2006 in respect of the period 11/05 noting that of the four transactions
selected for verification, one commenced with a defaulting trader resulting in
a loss of revenue exceeding £78,000.
81. As we shall see
later, Mr Dad continued to deal with some of the same suppliers who had
supplied him in respect of deals which were the subject matter of these joint
and several liability warning letters.
82. On 8 December
2004 CSL was sent a letter from Rod Stone of HMRC's Redhill office advising of
the difficulties faced by HMRC in respect of MTIC fraud and advising that the
verification of the VAT status of new customers and suppliers should be cleared
through the Redhill office. A similar letter was sent on 21 September 2005.
This letter was sent to large numbers of traders in the mobile phone and
computer component sectors and is often referred to as the "Redhill
letter". HMRC’s Notice 726 (Joint and Several Liability) was enclosed with
those letters as a matter of course. Mr Dad acknowledged receiving the letter
from Redhill dated 8 December 2004.
83. Notice 726 was
also issued to Mr Dad, as noted above, on 17 May 2005. Notice 726 was also
re-issued to Mr Dad on 13 September 2005.
84. So-called
"veto letters" were sent by HMRC to CSL notifying the Appellant that
certain companies in the same trade sector as the Appellant had been
deregistered. The letters were dated 15 March 2005, 22 April 2005, 8 August
2005, 9 August 2005, 6 September 2005 (two letters), 24 November 2005, 7
December 2005, 12 December 2005, 5 January 2006, 11 January 2006, 12 January
2006 25 January 2006, 6 February 2006, 9 February 2006, 16 February 2006, 28
February 2006, 16 March 2006, 21 March 2006, 30 March 2006, 3 April 2006, and
20 April 2006. The letters were in standard form and the first letter of 15
March 2005 from Mr Rob Stone (who sent the Redhill letter of 8 December 2004,
referred to above) at HMRC's Redhill office is typical:
"For the attention of the Directors
CROTEK SYSTEMS LTD…
Dear Sir/Madam
You are a trader who deals in the buying and selling
of Mobile Phones, Computer Processing Units or Other Goods from the European
Community and from within the United Kingdom. As part of the care and
management of Value Added Tax we should bring to your attention that a Company
called ADF Enterprises Ltd, VAT Registration Number: 847163806 Which Was
Registered for Value Added Tax has been deregistered with effect from 01/12/04.
Any input tax claimed in relation to transactions
involving this company, which purported to have taken place after the effective
date of cancellation of its registration, may fall to be verified. If you have
any queries relating to this letter please contact Mr T Mendes [telephone
number supplied]
Yours faithfully
Mr R Stone
Tax Operations Manager
Redhill VAT Office"
85. The veto letters
exhibited to Mr Saunders's witness statement were sent by one of three
different HMRC officers. The last 10 letters were sent by a Mr P R Birchfield
who was described in the letter as belonging to the "South MTIC
Division."
86. Mr Saunders's
statement that the veto letters would have repeatedly brought the issue of MTIC
fraud the attention of CSL was challenged by Mr Kramer on behalf of the
Appellants. Mr Kramer pointed out that the veto letters did not, on their face,
refer to fraud. Mr Saunders accepted that the letters did not refer to fraud.
However in re-examination Mr Saunders stated that clearing VAT numbers through
the Redhill office was something that every dealer requested to do (and it was
not disputed that CSL had received a "Redhill letter").
87. We also note
that the first veto letter was sent by Mr Stone (the same person who sent the
"Redhill letter" to CSL on 8 December 2004 which had clearly
explained the difficulties faced by HMRC in relation to MTIC fraud). Moreover,
the final 10 letters in the sequence of veto letters were plainly sent by a
member of the "South MTIC Division". It was, therefore, clear to us
that although these veto letters did not explicitly use the word
"fraud" they were, by clear implication, dealing with deregistration
in the context of MTIC fraud rather than deregistration for a more routine
reason (e.g. cessation of trade).
88. We also note
that CL received a "Redhill letter" dated 21 September 2005 in
essentially the same terms as a letter sent to CSL on 8 December 2004.
Moreover, on 22 December 2005, Mr Saunders wrote to Mr Dad in respect of CSL
noting that Mr Dad had "not been contacting Redhill in order to verify the
VAT details of traders registered in other member states." Mr Saunders
asked Mr Dad to ensure that all EU VAT registration details were "verified
via Redhill."
89. We concluded
that Mr Dad was well aware of the risks of MTIC fraud in his trade sector
before he entered into the first of the transactions which are the subject of
the present appeals.
Expert evidence on the grey market
Application to exclude Mr Fletcher’s evidence
90. Expert evidence
was given by Mr John Fletcher, a director in KPMG LLP's London office, in
relation to mobile phone handset distribution in the authorised and grey
markets in 2006.
91. Mr Kramer
applied to exclude Mr Fletcher's evidence on the following basis:
(1)
Mr Fletcher's career history (as set out in his witness statement) did
not qualify him as an expert in the grey market in respect of mobile
telephones.
(2)
There was no body of expertise on the mobile telephone grey market.
(3)
The existence or characteristics of the grey market in respect of mobile
telephones was not an issue for determination by the Tribunal since it was not
referred to in the decision letters under appeal or in HMRC's Statement of
Case.
92. Mr Kramer relied
on the judgment of Evans-Lombe J in Liverpool Roman Catholic
Archdiocesan Trust v Goldberg [2001]
All ER (D) 75 and in particular on paragraph 7:
" The
authorities show that to qualify as expert evidence within section 3, the party
seeking to call the evidence must satisfy the Court of the existence of a body
of expertise governed by recognised standards or rules of conduct capable of
influencing the Court's decision on any of the issues which it has to decide
and that the witness to be called has a sufficient familiarity with and
knowledge of the expertise in question to render his opinion potentially of
value in resolving any of those issues."
93. Mr Parroy
submitted that the admissibility of evidence was governed by Rule 15 (2) of The
Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 ("the
Tribunal Rules") which provides:
"The Tribunal may—
(a) admit evidence whether or not the evidence would
be admissible in a civil trial in the United Kingdom; or
(b) exclude evidence that would otherwise be
admissible where—
(i) the evidence was not provided within the time
allowed by a direction or a practice direction;
(ii) the evidence was otherwise provided in a manner
that did not comply with a direction or a practice direction; or
(iii) it would otherwise be unfair to admit the
evidence. "
94. In Mr Parroy's
submission the Tribunal was not bound by the Civil Procedure Rules and that it
was a matter for the Tribunal to determine what evidence should be admitted.
Guidance could be obtained from the authorities. However, the Goldberg case
relied on by Mr Kramer was primarily an authority relevant to determining
whether an expert witness was truly independent and this point was not in issue
in the present case. Mr Parroy cited the decision of the South Australian
Supreme Court in R v Bonython (1984) 38 SASR 45 (referred to in Phipson
On Evidence (17th edition) as the "classic statement as
to the test of admissibility" in respect of competency of expert evidence)
where King CJ said that there were two questions for the judge to decide:
"The first is whether the subject matter of the
opinion falls within the class of subjects upon which expert testimony is
permissible. This… may be divided into two parts: (a) whether the subject
matter of the opinion is such that a person without instruction or experience
in the area of knowledge of human experience would be able to form a sound
judgement on the matter without the assistance of witnesses possessing special
knowledge or experience in the area, and (b) whether the subject matter of the
opinion forms part of the body of knowledge or experience which is sufficiently
organised or recognised to be accepted as a reliable body of knowledge or
experience, a special acquaintance with which by the witness would render his
opinion of assistance to the court. The second question is whether the witness
has acquired by study or experience sufficient knowledge of the subject to
render his opinion of value in resolving the issues before the court."
95. Mr Parroy also
drew attention to a passage in Phipson. After quoting the above passage
from Bonython, Phipson at paragraph 33 – 62 says:
"In some cases, the reliability of the evidence
might be relevant to whether the conditions of admissibility are met. However,
in itself reliability goes to weight. There is no requirement as to
admissibility that the evidence must be seen to be reliable because the methods
used are sufficiently explained to be tested in cross-examination and so to be
verifiable or falsifiable."
96. Secondly, Mr
Parroy submitted that the objection to Mr Fletcher's evidence should have been
taken at a much earlier stage and should not be left until the hearing of the
appeal. The fact that Mr Kramer had only recently been instructed was
irrelevant because Mr Fletcher's witness statement had been in the Appellants'
hands for over a year.
97. As regards Mr
Fletcher's expertise, Mr Parroy referred to paragraph 1.2 of Mr Fletcher's
witness statement which read as follows:
"I have been employed by the parent company of
several Servers Providers ("SPs") and Mobile Network Operators
("MMOs"), in addition to my recent work as a consultant. My
operational and advisory experience has provided me with a detailed
understanding of MNOs and the role they play in the mobile handset distribution
segment.
My work has involved the examination of distribution
channels for handsets in numerous markets in Western and Central Europe, the
Middle East, and Asia. This work has looked at the structure of distribution
networks, consumer preferences and the use of handset subsidy to stimulate
demand. As part of this work, I have met with Original Equipment Manufacturers
("OEMs"), distributors and retailers in several countries to discuss
local market conditions. I have direct experience from markets in the Middle
East (Iran, Lebanon, Oman and the UAE) of handsets being purchased on the
international grey market and imported into these markets.
I have been involved in the design and performance
of audits, reviewing the effectiveness of controls designed to minimise the
risk of phones sold with handset subsidy being reconfigured (i.e. unlocked) to
allow them to be used on any suitable GSM network. This work involved visiting
retailers, interviewing their staff, and performing checks on the effectiveness
of their controls and the accuracy of their documentation. I have undertaken
work of this nature in the UK, France and Germany.
I have advised Dial-A-Phone and the UK's largest mobile handset direct sales operator on the strategy of its business
development. Specifically this work considered the client's response to the
changing mix of prepaid and postpaid ("contract") customers and the
likely impact that this would have on its revenue, a significant proportion of
which was derived from commissions paid by MNOs to connect new customers.
My experience has also provided me with first-hand
insight into the varying international consumer preferences for handsets,
features and formats."
98. Therefore, in Mr
Parroy's submission the question was essentially one of weight. As he put it if
ordinary people would be assisted by evidence from someone who is more
knowledgeable the evidence is primer facie admissible if the witness has
sufficient experience. He submitted that Mr Fletcher clearly had sufficient
experience. Moreover, the distribution of mobile telephones in the authorised
and grey market was an area in which most lay people did not have sufficient expertise
to be able to form an independent view without assistance. Rule 15 entitled
the Tribunal to admit the evidence and, after cross-examination, to decide what
weight should be given to it.
99. We decided that
Mr Fletcher's evidence should be admitted. We considered that Mr Fletcher was
suitably qualified by his experience to assist the Tribunal in an area where
specialist expertise would, in our view, be of benefit to the Tribunal. As
regards the issue whether evidence in relation to the grey market had been
pleaded in the Statement of Case, we considered that HMRC had plainly pleaded
that the Appellants' transactions "were artificially contrived and
fraudulent nature as opposed to being genuine commercial transactions taking
place within a competitive market". It is true that the Statement of Case
does not particularise evidence relating to the grey market in mobile phones.
But we do not think that a Statement of Case must particularise every item of
evidence that is being put forward to support the main thrust of the
Respondents' case. Moreover, the Appellants had had Mr Fletcher's witness
statement for a considerable time and it was obvious that HMRC were intending
to rely on this evidence to support their basic proposition that the Appellants
knew or ought to have known that their transactions were connected with the
fraudulent evasion of VAT. Applying the overriding principle of dealing with
cases fairly and justly, as we are required to do by the Tribunal Rules, we did
not consider that the Appellants could claim to have been unfairly or unjustly
prejudiced. For that reason, we decided that the evidence of Mr Fletcher should
be admitted. We also accepted Mr Parroy's submission that the weight to be
attached to expert evidence was a matter for the Tribunal.
100. As we have
noted above, the application to exclude Mr Fletcher's evidence should have been
made at the PTR on 11 April 2011. Indeed, it should have been made very much
earlier than that. Mr Kramer brought to our attention the Goldberg case
(the earlier decision of Neuberger J), where the question of admissibility of
expert evidence was held over to be determined by the trial judge. We consider
that the issues raised in that case were different from those in the present
appeal and do not derive much assistance from that decision, save as mentioned
below. We were conscious that a late application to exclude expert evidence can
mean that the party seeking to adduce the evidence is denied the opportunity to
bring forward alternative suitable expert evidence. This is hardly fair or
just. In such circumstances, we consider that it is fairer to admit the
evidence and leave it to the Tribunal to decide the weight that should be
attached to it. This approach commended itself to Neuberger J in earlier
proceedings in the Goldberg case.
Mr Fletcher's evidence
101. As noted
above, Mr Fletcher appeared as an expert witness called by HMRC.
102. Mr Fletcher
set out in the appendices to his first witness statement (his second witness
statement made certain relatively minor amendments to his first witness
statement) the documents which he had relied upon in preparing his witness
statement. These documents included the deal documentation for the 43 deals
(i.e. the appealed transactions and the un-appealed transactions), the Appellants'
Notice of Appeal, HMRC's Statement of Case, the second witness statement of Mr
Dad and the Appellants' VAT returns for the relevant periods. Mr Fletcher had
not independently verified this documentation.
103. His
evidence was that the Appellants appeared to be trading primarily as mobile
handset distributors. The mobile handset distribution industry consisted of a
white market and a grey market. The grey market resulted from opportunities to
profit from the failure of the white market fully to meet the needs of certain
market participants.
104. It was
common ground that the Appellants' transactions were not part of the white
market. The white market in mobile telephone handsets comprised of two types of
trading: first, trading directly between OEMs and MNOs and, secondly, trading
directly between OEMs and Authorised Distributors ("ADs").
105. The two
main types of market failures in the white market which gave rise to grey
market opportunities were as follows.
106. Firstly
there were price-related market failures. Nokia's policy at the time was to set
identical prices for its wholesale customers in all geographical markets. In
its European market Nokia priced its handsets in Euros and converted those
prices to sterling for the UK market, using exchange rates which were reviewed
and set monthly. In contrast, other OEMs (including Sony Ericsson) did not
employ the same consistent pricing policy and this gave rise to international
"arbitrage" i.e. buying handsets in countries where prices were lower
and then exporting them to those countries where prices were higher.
107. In some
markets such as the UK, MNOs subsidise handset prices. This gave rise to
"box-breaking" where handsets were bought at a subsidised price in
one country, then unlocked (i.e. reconfigured) and sold on in a country where
the subsidy was lower..
108. The second
main white market failure was volume related. Sometimes shortages arose when
MNOs and large retailers underestimated demand for handsets and the OEMs were
unable to supply additional handsets on a timely basis. Excess stock could
arise when distributors overestimated demand or purchased surplus stock in
order to receive additional volume discounts from OEMs. This stock was then
"dumped" onto international markets to minimise costs.
109. Not all
grey market trading opportunities were profitable and not all traders could
address all opportunities. Mr Fletcher gave the example of arbitrage which had
low margins but low barriers to entry. Box-breaking, on the other hand,
required significant resources but could earn greater margins.
110. There were
four main grey market opportunities, as follows.
111. First,
box-breaking, as described above. Mr Fletcher did not consider that the
Appellants were involved in box-breaking and, indeed, there was no evidence to
this effect.
112. Secondly,
there were some indications that the Appellants could be involved in arbitrage
trading. In particular the Appellants held stock for minimal periods. Arbitrage
traders would usually have distribution lines put in place to avoid the risk of
orders falling through and creating unintended ownership of stock. This often
resulted in "back-to-back" deals. In addition, arbitrage traders
would seek to repeat transactions with their customers for as long as a pricing
differential was maintained. Therefore a stable, but short distribution
relationship to enable multiple, similar shipments for the same customer from
the same source was required.
113. In Mr
Fletcher's opinion these two positive indicators were insufficient evidence
that the Appellants were engaged in rational and profitable arbitrage trading.
The Appellants' transactions displayed a number of characteristics, which he
described as negative indicators, that were not consistent with participation
in the arbitrage market. These negative indicators were as follows:
(a)
the homogenous international pricing policy of Nokia precluded the
Appellants from pursuing arbitrage opportunities. A large number of the
Appellants' transactions (86% by quantity) involved Nokia handsets. The
Appellants' margins exceeded the profits likely to be achieved by currency
fluctuations. There was no explanation why these margins were available to the
Appellant in respect of trades in Nokia handsets. In cross-examination, Mr
Fletcher accepted that Nokia might sell handsets to distributors at different
prices depending on the level of volume discounts achieved. Nonetheless, its
volume discounting policy was applied consistently throughout the European
market.
(b)
The Appellants traded two types of Nokia handset within six months of
the first release to the public. It could have been that these handsets
experienced supply restrictions in the early weeks of release so that the
Appellants were profiting from an asymmetry of supply. However, this was
unlikely to be the case in respect of one of the handsets in question (Nokia
9300i). he Appellants' market share for this handset in February, March and
April 2006. Whilst it was possible that the other Nokia handset (N80) was
affected by supply restriction, the other five models and the other Nokia
handsets involved in the 43 deals subject to the appeals were not sold within
the first six months of their release so that it was unlikely that an arbitrage
opportunity existed because of supply restrictions.
(c)
The Appellants did not source stock from OEMs or ADs. Traders failing to
source stock from OEMs or ADs were unlikely to be making profits by arbitrage
due to the smaller margins possible in longer supply chains. In Mr Fletcher's
opinion the Appellants' deal changes were too long to maintain profitability at
reasonable levels for all companies in the chains. Given that the Appellants
were not purchasing from an AD the Appellants must have known that there were
at least three middlemen (their supplier, the Appellants and the Appellants' customer)
in the chain adding to the cost of the handset when sold to an end consumer.
None of the Appellants' UK suppliers in respect of the deals under appeal were
ADs. None of the appellants customers were end users.
(d)
The Appellants were trading too high a volume of specific handsets when
compared to the total volume of those handsets sold through non-OEM sourced
distribution channels in Europe. Given the highly fragmented and
"national" nature of the handset distribution market, it was in Mr
Fletcher's opinion unusual for the European (plus UAE) market share of any one
distributor company to exceed 5%. In that context, Mr Fletcher found it
surprising that the Appellants' market share (based on GfK data) in respect of
the periods under appeal exceeded 5% on 19 occasions, representing 99% (by
volume) of handsets in the 43 (which included the nine un-appealed deals) deals
in question. Only in respect of one handset (Nokia N 80) was the Appellants'
market share plausible and therefore consistent with rational grey market
trading. Volumes of three handsets sold on four occasions by the Appellants
during the periods in question were extremely unlikely: sales of the Nokia 9500
and Nokia 9300i in April, and sales of the Nokia 9500 and Samsung i 300 in May
represented 370%, 284%, 199% and 367% respectively of the total distributor
market for Europe and the UAE. In addition, the Appellants also dealt in more
handsets than the total European market share for three models. In April 2006
the Appellants’ Nokia 9500 handset sales were 133%, and their Nokia 9300i
sales were 102% of the total European (plus the UAE) retail market. In May 2006
their Samsung i300 sales were 132% of the total European (plus UAE) retail
market. In other words, the Appellants were claiming that their sales of three
of the nine handsets sold in the 43 deals in question represented more sales
than were required to satisfy customer demand in all of Europe and the UAE
during the relevant months.
(e)
The level of detail on the Appellants’ purchase orders and invoices was
inadequate and lacked the specifications necessary to ensure successful and
profitable arbitrage trading. It was vital that the handset model and variant
(e.g. colour) and the regions covered in the warranty (e.g. Europe) as well as
the inclusion of the charger, battery, CD and manual should be specified.
Failure to specify the handset could leave a trader with the cost of adapting
the handset for additional languages, or inserting new software CDs or sourcing
an instruction manual in the appropriate language. In none of the 43 deals was
the colour of the handsets specified on the purchase order and invoices. In
only six of the transactions were the geographic specification identified. In none
of the deals was the PC software, the language of the manuals and software, the
type of charger (two or three pin), the existence of (and the regions covered
by) the warranty, specified. Mr Fletcher noted that for the 36 deals involving
Nokia handsets where inspection reports recorded warranty information, 23 deals
did not record the region of the warranty. In Mr Fletcher's opinion this detail
appeared insufficient to give confidence that the warranty was appropriate for
a customer in Europe. Four inspection reports showed the region of the warranty
as "European and African". Mr Fletcher was unaware of the existence
of such a warranty. In his opinion Nokia would cover these territories by
providing either a European limited warranty or a Middle Eastern and African
limited warranty.
114. Mr Fletcher
considered that there was no evidence that he had seen (although under
cross-examination he conceded that he had not seen all the evidence relating to
these appeals) to suggest that the Appellants were exploiting a grey market
opportunity in volume shortages. This market opportunity had high barriers to
entry, requiring strong relationships with MNOs and the ability to supply stock
on an urgent basis. There was no evidence that the Appellants had strong
relationships with MNOs. Satisfying a volume shortage required access to the specific
type of handset required to address the market opportunity. The descriptions
of the handsets traded in would be very specific, very different from the
generic detail shown on purchase orders and invoices in the Appellants' deals.
In addition, a trader was highly unlikely to be able to compete in relation to
volume shortages without its own stock (or rapid access to the exact stock
required) due to the rapid response expectations of its customers. Finally, the
extraordinary volume of specific handsets dealt in by the Appellants was a
negative indicator. For these reasons, Mr Fletcher considered that the
Appellants were not exploiting a grey market opportunity in relation to volume
shortages.
115. Finally, as
regards "dumping", this was a practice usually initiated by an AD. It
involved the speculative ownership of stock and was usually loss-making.
Dumping usually involved single transactions where stock was sold in regions
with an anticipated additional demand. Mr Fletcher considered that it was
extremely unlikely that the Appellants were exploiting this grey market
opportunity as the Appellants did not speculatively purchase stock, but bought
and sold it on the same day. In addition, the enormous market share that the
Appellants appeared to have achieved also suggested that the Appellants were
not engaged in dumping.
116. Mr Fletcher
considered that the presence of these negative indicators was overwhelming and,
accordingly, he concluded that the Appellants' transactions in February, March,
April and May 2006 were extremely unlikely to be part of the profitable
arbitrage market or any other type of grey market opportunity.
117. In
cross-examination Mr Kramer queried, in relation to estimations of market
share, why Mr Fletcher had used data from GfK rather than information from his
contacts at Nokia. GfK Retail and Technology was described by Mr Fletcher as
the world's leading market research for tracking point-of-sale data in
technical consumer goods and entertainment media markets. Mr Fletcher added that
he was not sure that Nokia would have supplied the necessary information and in
any event he already had the information from GfK. The approach suggested by Mr
Kramer would also have entailed Mr Fletcher approaching other manufacturers to
obtain their data. It seemed to us that Mr Fletcher was entitled to use an
independent source of information such as GfK. Mr Fletcher said that he had not
sought to undertake an audit of the information provided by GfK but was
satisfied with the quality of that information for the purposes of this report
and his analysis.
118. Mr Kramer
questioned Mr Fletcher's statement that the grey market in large corporate
sales would not be open to the Appellants. He asked Mr Fletcher whether an
independent retailer might maximise its profits by independently buying airtime
from a network and, separately, buy handsets for the best price available. Mr
Fletcher did not disagree with the hypothesis in theory but did not consider
this to be realistic in practice. The vast majority of handsets in the UK were sold by providing a network handset and airtime for the same network. Moreover, the
Appellant did not have the resources (e.g. personnel and account management)
necessary to sell phones to large corporate customers. He was unaware of any
large corporate customer buying its handsets independently from its airtime. Mr
Fletcher accepted that he had not seen all the evidence in these appeals and in
particular had only seen Mr Dad's second witness statement but he had examined
all the deals currently before the Tribunal.
119. Also in
cross-examination, Mr Kramer questioned Mr Fletcher about an article from
"Mobile News" dating from 2009 which indicated that Carphone
Warehouse may have "dumped" 67,000 mobile phones. Mr Kramer asked Mr
Fletcher why he had not referred to this article in his report. Mr Fletcher
explained that in his report he had made specific reference to grey market
dumping by MNOs and ADs. He regretted that he had not included in the
definition specialist multiple outlet retailers, such as Carphone Warehouse,
but he thought it was clear from the diagram contained in his second witness
statement that he was also referring to such specialist multiples. Moreover,
the "Mobile News" article relating to Carphone Warehouse concerned
2009, whereas Mr Fletcher's report related to 2006.
120. On the
question of generic product descriptions in purchase orders and invoices, Mr
Kramer put it to Mr Fletcher that if there was mutual trust between the
customer and supplier it was not beyond the bounds of possibility that there
would be no need for comprehensive descriptions, accepting that it might be
foolhardy business practice. Mr Fletcher agreed. It was not something that he
would recommend but it was possible.
121. Mr Fletcher
accepted that the man in the street would not know about the existence of GfK,
but he would expect someone involved in the trading of mobile phones to be
aware of market research available from that company.
122. Mr Kramer
put it to Mr Fletcher that because he had not reviewed all the evidence before
the tribunal he did not have adequate information to express his opinion on
whether the Appellants were exploiting a grey market opportunity in relation to
volume shortages. Mr Fletcher disagreed and considered that he had sufficient
information to reach an opinion as an expert.
123. Mr Fletcher
seemed to us a reliable and knowledgeable witness. We accept his evidence. Our
conclusion is that the Appellants' transactions did not form part of legitimate
grey market trading in mobile telephones. We accept Mr Fletcher's conclusions
and his reasons in this regard. We also considered that the information
considered by Mr Fletcher was sufficient to allow him reasonably to reach his
conclusions.
Deal 25 – purchase from Datakey
124. On 17 May
2006, CSL purchased 2910 Nokia 8800 mobile phones from Datakey Products Limited
("Datakey") for a total price (including VAT) of £1,248,026.25 (Deal
25). CSL made a payment of £1,244,607 annotated "full 1321",
obviously referring to the invoice number. Although it appears that CSL were
attempting to pay in full, the payment was insufficient. Later that day a
further payment of £3,419.25 was made by CSL to Datakey and annotated
"Balance inv 1321".
125. Datakey had
brought the same quantity of Nokia 8800 mobile phones from Bluewire Connections
Limited ("Bluewire") on the same day for £1,244,607.
126. CSL,
therefore, had originally paid Datakey the exact amount which Datakey owed to
its supplier, Bluewire. HMRC submitted that the chances of CSL inadvertently
paying its supplier the exact sum that the supplier had paid its own supplier
for the goods was infinitely small. It indicated that CSL must have had
detailed knowledge of the overall deal chain i.e. more knowledge than any
legitimate trader would have. Mr Parroy suggested that Mr Dad had made a
mistake: he had paid Datakey not the amount that he was supposed to have paid
them but the amount the Datakey was supposed to be paying Bluewire. A balancing
payment was then paid by CSL to Datakey to pay Datakey's mark-up. This was, in
Mr Parroy's submission, wholly inconsistent with Mr Dad’s evidence that he was
only aware of his own contracts. He should have known whom he was buying from
and whom he was selling to, and the amounts paid to and by, respectively, his
immediate supplier and customer. He appeared to know more.
127. In
cross-examination, Mr Parroy put the following questions to Mr Dad:
"Q Did you know how much Bluewire were paid by
Datakey?
A How was I supposed to know? And the answer to that
question is no….
Q [Mr Parroy shows Mr Dad the documents relating to
the payments and the invoices] How has that happened?
A I suspect it may have been a typographical error.
Q A typo?
A Yes
Q…. £1,244,607 is what Bluewire are invoicing your
supplier, Datakey. And that is precisely the same figure, to the penny, which
you pay Datakey. Can you explain that for us?
A Yes, I paid Datakey. I didn't pay Bluewire so I
fail to see the connection here, or the relevance.
[Mr Parroy explains the sequence of payments again
to Mr Dad]
Q If what you have told us has a word of truth about
it, there is no way that you can know what Bluewire are owed by Datakey. Are we
agreed?
A That is correct.
Q So, you explain to this Tribunal, please, how it
comes to be that you pay Datakey exactly what Datakey owes Bluewire?
A There could be 101 valid reasons.
Q Give me one?
A trying to think back five or six years ago,
working in many busy environments; is it possible that Datakey originally sent
the incorrect invoice amount to Crotek Systems?
Q Can you show me any paperwork in your possession
that has £1,244,607 as being what you owe Datakey?
A Can we go through the deal paperwork in the files?
Q You are looking at the deal paperwork that you
produced to Customs.
A No, sorry, I am looking at an invoice and I am
looking at a transaction report. The deal paperwork would have been Crotek
Systems' paperwork.
Q You are looking at it.
A I suspect this is just a genuine error.
Q Explain to me, please, "a genuine
error"? You are paying the exact price that Datakey owe Bluewire, not
something close to it?
A No doubt –
Q But down to the penny accurate?
A No doubt Datakey may have sent the incorrect
invoice, at that time.
Q We have the invoice, we have just looked at it….
A This could be the subsequent one, prior.
Q If you look at page 431… Narrative: "full 1321". What is the invoice number on page 416?
A Does this tell us that it's a first copies [sic] –
sorry, a first amendment, second amendment?
Q It doesn't say anything about amendments at all.
It just says its invoice number 1321?
A And first amendments, second amendment.
Q What first amendment, second amendment?
A Did they invoice Crotek Systems incorrectly?
Q Mr Dad, this is your case. This is an issue that
is raised by Mr Saunders in his statement. Have you any paperwork to show this
Tribunal that explains how you apparently know the price that Datakey have paid
to Bluewire?
A The bundles were prepared by HMRC. The bundles
arrived at – to my solicitors. Please do correct me if I'm wrong.
Q 2009?
A No.
Q That is when Mr Saunders's statement with its
exhibits was served on you.
128. We consider
that the payment by CSL to Datakey of the exact amount owed by Datakey to
Bluewire is important and revealing. It clearly demonstrates that Mr Dad knew
more about the transaction chain than he claimed. Mr Dad claimed only to know
about the transactions with his immediate supplier and his customer. In our
view, this was plainly untrue. It was highly improbable that Mr Dad could have
arranged a payment to Datakey in the exact amount owed by Datakey to Bluewire
without having more extensive knowledge of the deal chain. Mr Dad's responses
under cross-examination were, in our view, evasive and untruthful. We do not
accept the suggestion that there were different original documents. No evidence
was produced to substantiate the suggestion and, indeed, the documents produced
in evidence make it improbable that there were other invoices. We consider that
this is an important piece of evidence which, when viewed in the context of the
evidence as a whole, indicates that the Appellants had actual knowledge that
their transactions were connected to the fraudulent evasion of VAT.
Trading patterns and trading behaviour of the Appellants
Deals traced back to defaulting traders
129. All of the
34 deals under appeal in the periods 02/06, 03/06, 04/06 and 05/06 traced back
along the relevant deal chains to defaulting traders. The Appellant was the
broker in each of these deal chains. Nine deals covered by the un-appealed
decision of 29 August 2006 also traced back to defaulting traders.
130. As can be
seen from Appendix 1 to this decision, there are 11 different defaulting
traders in the deal chains. It was accepted by the Appellants that all the
deals under appeal traced back to the fraudulent evasion of VAT by the defaulting
traders. Mr Saunders (as well of the responsible HMRC officers for the traders
concerned) gave evidence in relation to the defaulting traders. Mr Saunders’s
evidence (and that of the other officers – except on certain points described
below, Ms Hirons) was not challenged. The defaulting traders and the amounts of
unpaid VAT owing to HMRC are as follows.
(a) Bullfinch
Systems Limited ("Bullfinch")
Bullfinch was the defaulting trader in three deals under
appeal (and one deal covered by the un-appealed decision of 29 August 2006).
Bullfinch was deregistered with effect from 13 May 2006 owing £51,613,591.16.
This sum is still outstanding.
(b) FX Drona
Limited ("FX Drona")
FX Drona was the defaulting trader in one appealed deal. FX
Drona was deregistered with effect from 6 April 2006 and the sum of
£33,529,656.85 is still outstanding to HMRC.
(c) Mid West
Communications Limited ("Mid West")
Mid West was the defaulting trader in six deals (and five
deals covered by the un-appealed decision of 29 August 2006). Mid West was
deregistered with effect from 3 May 2006 and continues to owe HMRC
£58,931,430.83.
(d) Oracle UK
Limited ("Oracle")
Oracle was the defaulting trader in one appealed deal (and
three un-appealed deals covered by the decision of 29 August 2006). Oracle was
deregistered with effect from 7 April 2006 and continues to owe HMRC
£28,861,738.05.
(e) Puwar
Limited ("Puwar")
Puwar was the defaulting trader in one appealed deal. Puwar
was deregistered with effect from 16 February 2006 and continues to owe HMRC
£74,253,091.19.
(f) Red
Rose Consultancy Limited ("Red Rose")
Red Rose was the defaulting trader in one appealed deal. Red
Rose was deregistered with effect from 4 March 2006 and continues to owe HMRC
£3,686,051.
(g) Roble
Comm Limited ("Roble Comm")
Roble Comm was the defaulting trader into appealed deals and
was deregistered with effect from 24 March 2006 and continues to HMRC
£25,195,599.
(h) Stella
Communications UK Limited ("Stella")
Stella was the defaulting trader in for appealed deals.
Stella was deregistered with effect from 31 March 2006 and continues to owe
HMRC £10,409,242.
(i) Ultimate
Security Agency Limited ("Ultimate")
Ultimate was the defaulting trader in five appealed deals.
Ultimate was deregistered with effect from 24 February 2006 and continues to
owe HMRC £63,101,478.
(j) XS
Enterprise Systems Limited ("XS Enterprise")
XS Enterprise was the defaulting trader in seven appealed
deals. XS Enterprise was deregistered with effect from the 20 May 2006 and
continues to owe HMRC in excess of £45million.
(h) Zoom Products Limited
("Zoom")
Zoom was the defaulting trader in three appealed deals. Zoom
was deregistered with effect from 15 March 2006 and continues to owe HMRC
£74,596,848.
131. As noted
above, the Appellants did not challenge the fact that the above amounts of VAT
were tax losses arising from fraudulent evasion.
132. The HMRC
officers who were allocated responsibility for the above defaulting traders
gave witness statement evidence which (with the exception of Susan Hirons, the
officer responsible for Zoom) was not challenged.
133. In relation
to Zoom, Ms Hirons was cross-examined on three main points.
134. First, it
was put to her that HMRC could have issued a regulation 25 notice earlier than
they did. Ms Hirons disagreed with this because she did not have sufficient
information in her possession to issue such a notice before 13 March 2006.
135. Secondly, Mr
Kramer questioned Ms Hirons about a meeting on 13 March 2006 when Ms Hirons,
together with a colleague, visited Zoom's offices. She met Mr Khera, a director
of Zoom, and an employee called Mr Steven Singh. Mr Khera indicated that Zoom's
books and records had been taken to his accountant on 10 March 2006
(notwithstanding that HMRC by a letter dated 2 March 2006 had requested Zoom's
books and records be made available at the visit). Ms Hirons asked Mr Singh if
there were any records on the premises. Mr Singh produced a laptop computer and
identified at least 218 transactions that had taken place during the whole of
February 2006 and the first seven days of March 2006. He estimated the gross
value of his transactions to be £250 million. Although requested to do so, Mr
Singh could not print off or save this data to disk.
136. Mr Kramer
suggested to Ms Hirons that she could have asked Mr Khera and Mr Singh to hand
over the laptop computer using HMRC's powers under Schedule 11 to the Value
Added Tax Act 1994. Ms Hirons replied that she was just visiting officer. She
asked for the books and records and if they were offered to her she could
uplift them. She did not consider that she could remove the computer.
137. Finally, Ms
Hirons was cross-examined in relation to the basis on which the assessment
against Zoom was made. Ms Hirons explained that the assessment figure was made
up of two parts. First, the assessment was calculated on the basis of the
output tax as declared by Zoom on its VAT returns and, secondly, from the
figures in respect of transactions which Zoom declared as zero rated dispatches
to the EU. Mr Kramer suggested to Ms Hirons that the figures in respect of
goods exported could be correct i.e. that the goods were genuinely exported. Ms
Hirons replied that she had seen no evidence from Zoom to support such zero
rating and to support Zoom's repayment return. Zoom had not queried the
assessment.
138. We were
satisfied on the basis of Ms Hirons's evidence that the regulation 25 notice
was issued on a timely basis. It was clear Ms Hirons did not have sufficient
factual evidence to issue the notice at an earlier date. Furthermore, we were
satisfied that Ms Hirons genuinely did not consider that she had power to
remove the laptop computer. On the issue of whether the assessment against
Zoom overstated its VAT liabilities, we could see no evidence that Zoom had
exported goods to the EU to support the figures used in their VAT return. On
that basis, we conclude that, for the purposes of these appeals, the assessment
against Zoom (and consequently the outstanding tax) was and remains valid.
Buffer deals
139. Exhibited to
Mr Saunders's witness statement were details of deals in which CL and CSL acted
as buffer traders. There were 103 deals in which CL acted as a buffer trader.
CSL acted as a buffer trader in 77 deals. Mr Saunders's evidence was that all
these transactions traced back to defaulting traders and fraudulent tax losses.
140. The mark-ups
achieved by CSL and CL in these buffer deals were normally 50 pence per unit
regardless of the stock specification or quantity.
141. In
cross-examination, Mr Kramer challenged the view of Mr Saunders, that the high
incidence of buffer deals which could be traced back to fraudulent defaulting
traders could not be pure chance. Mr Saunders conceded that a high proportion
("vast") of mobile phone transactions in the grey market traced back
to tax losses. Mr Kramer therefore suggested that, on that basis, the high
incidence of the Appellants’ buffer deals being traced back to tax losses could
have occurred by chance. Mr Saunders disagreed.
142. Reviewing
the exhibits to Mr Saunders's witness statement dealing with the Appellants'
buffer deals, we noted that out of the 103 deals where CL acted as a buffer, 63
deals featured one of the 11 defaulting traders appearing in the deal chains in
respect of the transactions which form the subject of these appeals (and which
we have listed above). Ultimate features in 22 deals, Oracle in 20 deals, Puwar
in 10 deals, Zoom in six deals, FX Drona in three deals, Bullfinch in one deal
and Mid West in one deal.
143. In respect
of the 77 deals in which CSL acted as a buffer, 71 deals also feature one of
the 11 defaulting traders appearing in the deal chains which form the subject
of these appeals. FX Drona features in 20 deals, Roble Comm in 16 deals,
Bullfinch in 13 deals, Zoom in eight deals, Ultimate in seven deals, Stella in
four deals, XS Enterprise in two deals and Red Rose in one deal.
144. In our
view, the very high proportion of buffer deals involving the Appellants which
traced back to fraudulent tax losses was unlikely to be the product of
coincidence or chance. In addition, the fact that the Appellants consistently
made the same mark-up, regardless of the quantity or specification of mobile
phones involved, also suggests that their buffer transactions were contrived.
It is hard to understand or credit how it could be possible that the same
mark-up was repeatedly achieved in such a large number of deals which were
supposedly made at arm’s length in a vibrant commercial market. We do not
believe that these deals were concluded on a genuine arm's-length basis and
consider that they indicate, as part of the overall factual matrix, that the
Appellants were knowingly involved in contrived transactions.
Chronological rotation of defaulting traders
145. At the
hearing, HMRC produced a schedule showing both the deals and the defaulting
traders appearing in each deal in chronological order. The deals included the
deals covered by the un-appealed decision of 29 August 2006. Broadly speaking,
the schedule showed that the defaulting traders appeared by rotation for a few
deals and were then replaced by other defaulting traders. Thus, Puwar was the
defaulting traders for the first (chronological) deal and was then replaced by
Ultimate for the next five deals. Zoom took part in the next deal, with Red
Rose appearing for the following deal and Zoom then participated in the next
two deals. Roble Comm took part in the next two deals but was replaced by
Stella for the next four deals. FX Drona then took part in one deal, followed
by Oracle for the next four deals, Bullfinch for the next four deals, Mid West
for the next 11 deals and XS Enterprise for the final seven deals.
146. This
chronology was not challenged.
147. HMRC
submitted that this indicated that the deal chains were contrived. We agree,
but note that this chronology does not, by itself, indicate that the Appellants
were or ought to have been aware that their transactions forming part of these
deal chains were connected to the fraudulent evasion of VAT.
Profit margins and mark-ups
148. The profit
margins and mark-ups in the deal chains relating to the present appeals require
some examination.
149. First, an
unusual feature of the deal chains involved in these appeals is the consistency
of the mark-ups made by the Appellants' supplier. The mark-ups for the the deals
are set out in Appendix 2 . Mr Dad's evidence was that he did not know what his
supplier paid for the goods which were eventually bought by one of the
Appellants (see above in relation to Deal 25 involving Datakey). We concluded
as a result of the documentation relating to Deal 25 that this was likely to be
untrue.
150. Accepting,
however, for the sake of argument that this was true, it leads to a curious
result. Looking at the 34 deals under appeal and the nine deals included in the
un-appealed decision of 29 August 2006 (43 deals in total), the Appellants'
immediate supplier makes a mark-up of either 50 pence (in 28 deals) or £1 (in
15 deals). Elsewhere in the deal chains different mark-ups of 10 pence, 25
pence and 75 pence are often made by other participants in those chains. It is
hard to credit how the Appellants, if they were negotiating with their suppliers
on an arm's length basis, always inadvertently agreed on a price with its
supplier which left that supplier with a mark-up of either 50 pence or £1 in
every case. Although not conclusive by itself, we consider that this evidence
forms part of the overall factual matrix which indicates that the Appellants
knew that its transactions were contrived and were connected to the fraudulent
evasion of VAT.
151. Secondly,
the profit margins made by the Appellants appear remarkably consistent. Mr
Saunders gave evidence in relation to the Appellants' profit margins in the
form of tables attached to his witness statement. In short, in five of CL's six
deals (all in April 2006 – Deals CL 1 to 6) its profit margin was 6%. In the
remaining deal, CL's profit margin was 5.9%. For three of the deals the EU
customer was Balsim SARL ("Balsim") and for the other three the EU
customer was URTB SARL (" URTB”).
152. As regards
CSL, its deals in February 2006, with one exception, showed remarkably
consistent profit margins. The exception was Deal 21 which showed a profit
margin of 4%. However, the other deals (Deals 1, 2, 11, 12, 13 and 14) all
returned a profit margin of 9%.
153. CSL's deals
in March 2006, with two exceptions, showed consistent profit margins. The two
exceptions were Deals 3 and 15 which showed profit margins of 4%. Of the other
deals, Deals 19 and 20 showed profit margins of 8.7%, Deals 4, 5 and 18 showed
profit margins of 8.8% and Deals 6, 16 and 17 profit margins of 8.9%.
154. CSL's deals
in April 2006, with one exception, showed consistent profit margins. The
exception was Deal 29 which returned a profit margin of 8%. Deals 7, 8, 10, 33,
36 and 37 showed profit margins of 5.9%, Deals 8, 31, 32 and 34 showed profit
margins of 6% and two deals (Deal 30 and 35) showed profit margins of 6.1%.
155. CSL's deals
in May 2006 also showed consistent profit margins. Deals 24 and 27 showed a
profit margin of 3.9%, Deals 22, 23, 26 and 28 showed a profit margin of 4% and
Deal 25 showed a profit margin of 4.1%.
156. It is hard
to understand how, in an open market with parties dealing at arm's length, such
consistency of profit margins could so regularly be achieved and why the
average profit margin differed each month. We considered that this consistency
of profit margins indicated that the Appellants' transactions were contrived
rather than the product of genuine open market trading.
157. Thirdly, it
is not clear why CL's and CSL's customers bought goods from the Appellants,
which charged a significant mark-up, when they could have bought the goods more
cheaply from other participants in the deal chain. Even allowing for the
additional cost of exporting the goods there seems no logical reason why, in an
open, rational and competitive market, the Appellants' customers would not have
sourced their goods from a cheaper source of supply – particularly when most of
the participants in the deal chains advertised on internet-based trading
platforms such as IPT. Mr Dad, in his second witness statement, addresses issue
and emphasised that it was the "personal relationship that seals the deal
as to who is supplied the product and who is not… It is simply who we like,
when you like them and how you deal with them." However, it his earlier
witness statement Mr Dad in the course of explaining why he used TSP to carry out
due diligence, noted: " I rarely had personal contact with my business
partners and it was helpful to know that someone had visited them on my behalf
…." When cross-examined on this issue Mr Dad's replies were unconvincing.
He said:
"We sell stock to Handel [CSL's customer in
Deal 2]. I am sure if they could have got it cheaper elsewhere they would have
done, but at that time no doubt we were offering them stock, what would have
seemed competitive, and the true value of the stock for the market for these
particular commodities at that time."
Trading patterns
158. Mr Dad
accepted in cross-examination that trading in an open and competitive market
should be a random process i.e. there should be no pattern as to whom he bought
from and to whom he sold. However, in the 43 deals (including the un-appealed
deals in relation to the decision letter of 29 August 2006) CL and CSL had only
eight suppliers and six customers. Mr Dad's reply was, in our view, evasive. He
said:
"I – well it has just been brought to my attention,
so I don't know what to say really."
Position of Appellants in deal chains
159. In all the
43 deal chains (with one exception Deal 36 – one of the un-appealed deals) set
out in Appendix 1, the Appellants are the fifth UK company in the deal chain.
The defaulting trader is the first UK company and is followed by three UK buffer companies before one of the Appellants enters the chain as the broker.
160. In our
view, this pattern gives rise for the clear inference that the deal chains were
organised or contrived. It is very difficult to envisage circumstances in
genuine open market trading where such a pattern would arise so consistently
over so many transactions.
Evidence of negotiation
161. The
Appellants produced no evidence of negotiation in respect of any of the 43
transactions which were the subject of the decision letters referred to earlier
on this decision. Nor was any evidence of negotiation produced in respect of
any of the buffer transactions in which the Appellants participated.
162. Whilst it
is to be expected that many of the transactions were concluded over the
telephone, by MSN Messenger or by e-mail it seems odd to us that no evidence of
negotiation (e.g. telephone records, copies of e-mails or manuscript notes in
day books) were produced. It is not, of course, for the Appellants to prove
that they had no knowledge that their transactions were connected to VAT fraud.
Nonetheless, the absence of any documentary evidence of negotiation is one
factor, in the overall factual matrix, of which we can take account.
Appellants' turnover
163. The
turnover of both CSL and CL grew rapidly. Mr Saunders's evidence, which was not
challenged, was that in the first calendar year for CSL its turnover exceeded
£41 million (the year to 31 December 2005) and its turnover for the first four
months of the year to 31 December 2006 produced a turnover in excess of £78
million. The value of taxable supplies forecast on Form VAT 1 for the 12 months
after registration was £100,000. CL achieved a turnover of £89 million from 8
September 2005 to 30 April 2006 – approximately 8 months. This was to be
contrasted with the forecast on Form VAT 1of a 12 month turnover of £125,000.
Mr Dad had no previous experience in trading mobile phones. The share capital
of the Appellants was minimal, according to the audited accounts of CL for the
year ended 31 July 2006 and for CSL for the year ended 31 August 2006.
164. Mr Stone's
evidence was that there was a rapid increase in the volume of exports of mobile
phones from the UK in the months following the decision of the European Court
of Justice ("ECJ") in Bond House Systems Limited (C-483/03) on
12 January 2006. In that case the ECJ rejected HMRC's argument that carousel
MTIC trading was not a genuine economic activity. For example, CSL's turnover
in February 2006 was more than double its turnover in January 2006 and its
turnover in March 2006 (slightly more than £40 million) was more than double
its February 2006 turnover. Mr Parroy submitted that there was a clear
correlation between the sudden increase in turnover of the Appellants and the
decision of the ECJ in the Bond House case and the announcement by the UK government on 26 January 2006 of its intention to apply for a derogation permitting a
reverse charge on mobile phones. This increase in mobile phone trading by the
Appellants was not the result of genuine commercial market conditions such as a
doubling of consumer demand. Rather it was an attempt by those involved to use
an opportunity for fraud before changed legislation prevented them Mr Kramer argued
that the increase in certainty following the Bond House decision led to
greater commercial activity and this was a perfectly legitimate result.
Due diligence
165. In his
witness statement, Mr Dad stated that he had not had the requirement to
undertake due diligence checks explained to him by HMRC. Mr Dad said:
"19. During this period, I was generally aware
from various media sources that there were some irregularities within the
mobile phone industry which seems to indicate that fraud was taking place.
However, in the light of the measures I was taking and the regular and
stringent checks being made upon both my companies by HM Revenue and Customs, I
was confident that my trades were legitimate and that I was not, even
inadvertently, involved in the general fraud that I had read about. I was never
directed to undertake due diligence checks, nor was I directed as to their
content. I knew about the Joint & Several Liability leaflet, but its
significance [was] not fully understood. HMRC and its Officers never explained
the leaflet to me and I was never invited to a training seminar. I was asked at
regular visits by HMRC Officers what checks had been carried out and ad hoc
copies of the details of my checks were supplied as and when requested by HMRC.
HMRC had not indicated to me that I had been involved in any chains of
transactions that had led to VAT losses at some point in the chain.
20. I would like to point out that during all my
years in business, both as an engineering salesman and financial adviser, checks
on sellers such as creditworthiness checks and so on, were a natural part of
conducting business for me. Furthermore, the sale of mortgages requires a
degree of fiduciary care that is designed to protect both the mortgage or and
the mortgagee. This was a daily routine requirement for me and I brought this
level of care to my business of selling mobile phones from the outset. I now
set out below the kinds of 'due diligence checks' I undertook on all the
companies that I traded with."
166. In the
light of the evidence of Mr Saunders, summarised above under the heading “Mr
Dad's alleged general awareness of MTIC fraud”, Mr Dad's assertion that he was
never directed to make you diligence checks and did not understand the Joint
& Several liability Notice is difficult to understand. We consider that Mr
Dad was fully aware of his responsibilities to conduct due diligence of his
trading partners.
167. Mr Dad
stated that he only traded with a company after he had received stamped
confirmation from HMRC that the company's VAT number was valid at the time he
commenced opening trade accounts. He submitted written requests to HMRC's
office at Redhill. In those instances where HMRC informed him that VAT
registration was invalid, he did not develop trading relationship with those
companies.
168. Mr Dad's
evidence was that he put together "due diligence packs" for each
customer and supplier prior to dealing with them – he described these as his
own "internal" due diligence. These packs included passport details,
home addresses for key personnel, proof of address of the company, letters of
introduction, copies of their VAT certificate, certificate of incorporation,
bank account details, trade references, Companies House records and annual
accounts for the most recent period.
169. Mr Dad said
that he requested these details in order to enable him to judge the liquidity
and credit worthiness of the supplier or customer. He felt qualified to
undertake this task due to his previous training as a financial adviser.
170. Mr Dad said
that he reviewed his due diligence checks on a six monthly basis and updated
them as necessary. Because of cost and his growing familiarity with his
suppliers and customers, he did not find it was cost-effective to carry out due
diligence checks for every transaction, although he always checked the 'Europa'
website for confirmation of VAT number of validity. The due diligence he had
conducted in respect of his trading partners, in his view, showed them to the
best of his knowledge to be legitimate business entities.
171. Mr Dad
noted that when a credit check was conducted, he looked only for a poor rating
or a warning not to trade. As none of his customers was offered credit terms,
he did not regard a credit check as a particularly significant check. If a
company was relatively new and he was unable to obtain a satisfactory credit
check, as long as the other checks carried out were positive, he felt able to
trade with that company.
172. Mr Dad
stated that he required his suppliers to complete a "suppliers'
compliance" form in respect of every purchase which the Appellants made.
On this form, the supplier confirmed that the goods were not being sold at a
lower price than purchased; that reasonable due diligence checks had been
carried out with all their own suppliers and that there was no reason to
believe that VAT had not been paid on the goods; that VAT would be declared to
HMRC; that the stock existed; that no third-party payments of any kind would be
entered into; and that the certificates of incorporation, VAT registration and
a company introduction and letterhead had been obtained.
173. In relation
to the transactions to which these appeals related, Mr Dad said that he did not
know who supplied his supplier or to whom his customers sold. Therefore, his
due diligence was conducted only on those parties with whom he had direct
contact. In addition, Mr Dad said that he carried out due diligence checks on
the freight forwarders that he used for all the transactions relevant to these
appeals (AFI Logistics Limited).
174. In addition
to the above measures, Mr Dad engaged in independent firm, "The Security
People" ("TSP") to carry out checks on his trading partners – he
described TSB's reports as "external" due diligence. TSP was an
independent company the key personnel of which were, according to Mr Dad, all
former Metropolitan Police or HM Customs & Excise officers. Typically, a
TSP report would cost approximately £300. A check could be done within 24
hours, at a higher cost, or at seven days’ notice, which was Mr Dad's usual
requirement. In practice, notwithstanding Mr Dad's statement, it appeared that
typically TSP reports took longer to compile than seven days.
175. Mr Dad's
evidence was that TSP would visit his customer or supplier, interview the
directors, photograph premises and collect directors' identification, utility
bills from directors' home addresses, utility bills from trading addresses,
company letterheads, suppliers' declarations, company VAT certificates and
company incorporation certificates. TSP would also obtain a Companies House
verification report and electoral roll report. Mr Dad considered that through
the interviews conducted and the questions asked, TSP were able to inform him
as to whether the companies he was trading with appeared to be legitimate
businesses. Mr Dad found the TSP reports especially useful because he rarely
had personal contact with his trading partners and it was helpful to know that
someone had visited them on his behalf to examine their business practices. Mr
Dad said that he engaged TSB to carry out an investigation once he knew a
business was going to be a regular supplier or customer.
176. As regards
TSP reports, a number of the reports were produced after rather than before the
Appellants entered into deals with relevant trading partner. Mr Dad stated in
his first witness statement:
"I have never dealt with the company without
first carrying out a due diligence check. Because my due diligence checks are
regularly updated, I do not retain records of the earlier checks, but keep only
the latest information on the company as this will be the only relevant
information for deciding whether to conduct the next deal with it or not. At no
stage did the Commissioner request or direct or even recommend me either in
writing or verbally that I should retain the out of date due diligence checks
even after an update had been obtained."
177. Mr Dad
maintained, under cross-examination, that the TSP reports produced in the
bundles for the appeals were simply the latest copies of these reports and that
there would have been earlier reports. He said that the reports for each
trading partner would have been continuously updated. However, Mr Dad and his
advisers did not produce any earlier reports. It seemed odd to us that TSP
reports, which were relevant to the Appellants' state of knowledge at the time
when they entered into particular deals would not have been retained or
produced, and that, if Mr Dad were to be believed, only later reports had been
produced by the Appellants. We did not regard Mr Dad's assertion, which was
challenged in cross-examination, to be credible. Moreover, Mr Saunders's
notebook contained notes of a visit which he and a colleague paid to CSL's
offices on 13 June 2005. The notebook states:
"Explained need to keep all records for six
years including due diligence checks. Discussed due diligence checks."
We therefore did not accept Mr Dad's contention that he
had not been asked by HMRC to retain due diligence records.
Due diligence on SLC Handelsmaaschappiij BV ("Handel")
178. In
cross-examination it was put to Mr Dad that, in fact, he had not carried out
any due diligence on one of CSL's customers, Handel, with which CSL entered
into five transactions. In his witness statement Mr Dad said that he was unable
to carry out due diligence on this customer "due to cash flow problems at
the time". Mr Parroy pointed out to Mr Dad that, using information from
CSL's VAT return for February 2006, CSL appeared to have made a profit of
approximately £400,000 and in March 2006 had made a profit of approximately £700,000.
In April 2006, according to its VAT returns, CSL made a profit of approximately
£800,000. Mr Dad maintained that because the returns were repayment returns the
business had little available cash at the time, although he conceded that a
profit was being made. In our view, that does not explain why due diligence
was not carried out in respect of the initial deals (e.g. Deal 11 on 27
February 2006 and Deal 15 on 6 March 2006). Accordingly, although Mr Dad’s cash
flow explanation may be plausible as regards later deals, it is not credible as
regards earlier deals.
Due diligence on DGB Sarl ("DGB")
179. DGB was
CSL's customer in nine appealed deals and five un-appealed deals. The first
deal was Deal 21 on 9 February 2006. The last deal was Deal 24 on 17 May 2006.
180. The TSP
report for DGB, produced as an exhibit to Mr Dad's witness statement, was dated
15 June 2006, four weeks after the last deal.
181. Mr Dad
maintained that this was simply the most recent TSP report available and that
there would have been earlier reports, but he was unable to produce an earlier
one. He stated that the reports were continuously updated. We did not find this
credible for the reasons given above.
182. The TSP
report on DGB noted that the company had an FCIB account. It noted that DGB's
suppliers were based in the UK but its customers were based in "Europe". The report noted, under the heading "Risk Assessment" (which was
apparently based on a Dun & Bradstreet report) that there was: "Insufficient information to offer a credit opinion. Represents high level of risk."
Mr Dad stated that all his European sales were on a "carriage, insurance
paid 100% on landing" basis. He described the risk assessment as
"subjective".
183. In his
witness statement, Mr Dad stated that he was not concerned about the credit
check for DGB as he was not extending credit to them and the goods were not to
be released until payment was received. However, according to Mr Saunders's unchallenged
evidence, the goods were shipped to DGB in France by CSL's freight forwarder
before payment was received. For example, in Deal 21 CSL sold to DGB a quantity
of 2800 Nokia 8800 handsets for £1,421,000. The goods were shipped by AF1 to Paris on 9 February 2006 and CSL was not paid until 17th February 2006. As Mr Saunders
pointed out it was important when shipping goods to a customer in a different
country to establish the creditworthiness of that customer because the expenses
incurred in exporting, and reimporting the goods would fall on CSL if the
customer was unable to pay.
Due diligence on URTB Sarl ("URTB")
184. URTB was
CSL's customer in (in chronological order) Deal 14, 11, 4, 19, 6, 8, 22, 26 and
27. The first deal took place on 20 February 2006 and the last deal took place
on 18 May 2006. URTB was CL's customer in Deals CL 5, CL 6 and CL 2. The first
deal involving CL took place on 24 April 2006 and the final deal took place on
the following day, 25 April 2006. In total, therefore, CSL and CL undertook 12
deals with URTB in the relevant periods.
185. The TSP
report in respect of URTB exhibited to Mr Dad's witness statement was dated 30
May 2006 i.e. approximately 2 weeks after CSL's last deal with URTB.
Notwithstanding that date, the report refers to the VAT number of URTB being
cleared with HMRC's Redhill office on 19 June 2006. It appears, therefore, that
the report was completed significantly later than 30 May 2006. Therefore all
the mobile phone transactions with URTB which are subject to these appeals were
undertaken more than four weeks before this due diligence check had been finalised.
186. Mr Dad
confirmed that he would have read the report but noted that he would only have
given it a "cursory glance."
187. The report
indicated that the directors of URTB, a company with a French trading address,
were based in Spain. The fixed line telephone was a French number but the
principal contact numbers were Spanish mobile telephone numbers. Under the
heading "Products dealt in" the TSP report stated "mobile
phones". In relation to the question "How do you determine the market
value of the goods?" The answer was "Not provided". The same
answer was given to the question "What checks do you undertake on your
suppliers?" The answer to the question "Where are your suppliers
based?" was left blank.
188. The TSP
report asked two further questions: "Have you made third-party payments in
the past?" and "Do you currently make third-party payments, if Yes
what percentage of transactions? The answer to both questions was "Not
provided".
189. One of the
two trade references provided for URTB was Goldex International – a company
controlled by Mr Dad's brother, Mr Shaftaq Dad.
190. The report
indicated that the officers of URTB were based in a "furnished building
with numerous offices to let. Small office within building suitable for one
person."
191. In reply to
a question: "Do the company directors/managers possess an adequate
awareness of the industry they are trading in?" the report stated: "Difficult to ascertain having not been able to meet the director and also concern that
company secretary has not met the director." In relation to the question: "Does the company have a track record of trading in this industry or related
sectors?" the report stated:
"The Director resides in Spain and it is difficult to establish what his role as in the company except as Director. The Second
Director is Mr Neyer Uzman who is also referred to as the Trade Manager. He
also resides in Spain. The company Secretary was Linda Bouraoud who states she
has the company secretary and also refers to herself as the sole trader. She
stated that she has not ever [sic] met the director however in front of the
investigator signed paperwork on his behalf as if she was the director. It is
not clear whether she has the right to sign on behalf of the director but the
fact she signed her name as the director could well be an issue of concern. It
has not been possible to acquire a utility bill from the director’s home
address despite several requests. Also of note is a piece of paper that was
signed by Linda as if she was a director, is a self-declaration by Mr S David
[the director] that he resides [at an address in Marbella] Spain. This document
has no validity as it was signed by the trader purporting to be the Director
and it would have been of importance to get a person of professional standing
to attest the director’s address."
192. Mr Parroy
questioned Mr Dad about the statements and asked whether he was concerned. Mr
Dad replied that it was common in organisations for documents to be signed
"pp". As regards the signature on the self-declaration, Mr Parroy suggested
this was tantamount to an observation of forgery. Mr Dad replied that he could
not comment "on someone else's comments." Mr Dad denied that the TSP
reports were mere "window dressing". Mr Dad suggested that the report
would have been just an update and further suggested that the previous copy
might have been more favourable. He was, however, unable to produce an earlier
report.
Due diligence on Balsim International ("Balsim")
193. Balsim was
CSL's customer in six deals (including un-appealed deals). The first deal was
14 March 2006 and the last deal was 17 May 2006. Balsim was CL's customer in
three deals. The first deal took place on 18 April 2006 and the last deal took
place on 26 April 2006.
194. The TSP
report was dated 15 June 2006. Notwithstanding this date, the report refers to
a Redhill clearance on 27 June 2006, indicating that the report was not
completed until that date at the earliest, six weeks after the last deal.
195. The report
gives details of the home address of the director, but no details for the
secretary or bank, save in respect of FCIB. There are no details in relation to
accountants, auditors or solicitors and no financial details. In relation to
the question: "What checks do you undertake on your suppliers?" the
report states: "None." Notwithstanding this answer (and apparently
unaware of the contradiction), in response to the question: "Does the company appear to have a professional approach in dealing with suppliers and
customers?" the report stated: "The company appears to have a very
professional approach towards customers and suppliers." The report also
stated: "This company has only been trading since January 2006 so does not
have a strong track record in this sector." Mr Dad, in cross-examination,
suggested that the answer "None" in relation to checks on suppliers,
may have been a typo. He said he would have spoken to TSP if he had any issues
or concerns. In relation to the fact that the company had only been trading
since January 2006, Mr Dad stated that he could not comment on someone else's
comments.
196. The TSP
report also included a credit report which indicated, on the basis of a Dun
& Bradstreet credit rating that Balsim's credit constituted a significant
level of risk. In response, under cross-examination, Mr Dad commented simply
that: "Credit reports are subjective."
197. Remarkably,
the trade references provided by Balsim, notwithstanding that the report was
commissioned by CSL, were to be given by "Crotek Systems" and
"Goldex International" (the company run by Mr Dad's brother). When
asked about this in cross-examination, Mr Dad suggested that the page may have
been put in the bundle by error. Mr Parroy reminded Mr Dad that these were the
exhibits to his own witness statement. Mr Dad replied that the bundle had only
been provided to the Appellants in the week prior to the hearing. However, Mr
Kramer confirmed that these were indeed the exhibits to Mr Dad's witness
statement.
Due diligence on Calltel Telecom Limited (also trading as Callmate)
("Calltel")
198. The
Appellants carried out due diligence checks on Calltel. Mr Dad carried out
checks in June/July 2005, although there was no evidence of third-party
references having been taken up.
199. Calltel
supplied CSL in Deals 12 and 14 on 20 February 2006. The TSP report is dated 14
March 2006 at refers to Redhill checks made on 28 March 2006. Therefore, the
TSP report post-dated the relevant deals by five weeks.
Due diligence on Cellular 1 Communications Limited ("Cellular")
200. Cellular
was a supplier to CSL in Deals 21 (9 February 2006) and 13 (22 February 2006).
No TSP report was prepared for the supplier. However, the due diligence checks
carried out by the Appellants included seeing its financial statements for the
year ended 30 April 2004. The balance sheet of Cellular indicated that it had a
balance sheet deficit of £9640. Mr Saunders's unchallenged evidence was that
tax losses had been traced for every deal chain in which CSL bought from this
supplier for the periods in question.
Due diligence on Mobile Heaven Limited ("Mobile Heaven")
201. Mobile
Heaven supplied CSL in Deal 1 (22nd of February 2006), Deal 3 (2 March 2006),
Deal 6 (21 March 2006), Deal 7 (6 April 2006) and Deal 27 (18 May 2006). Mobile
Heaven supplied CL in Deal CL 1 (21 April 2006).
202. The due
diligence carried out by the Appellants on Mobile Heaven in August 2005
included obtaining their financial statements. The balance sheet for the year
ended 30 June 2003 showed a balance sheet surplus of £28,990. The balance sheet
for Mobile Heaven to the year ended 30 June 2004 included in the TSP report
dated 27 March 2006 showed a balance sheet surplus of £118,382.
203. On 23rd of
January 2006 HMRC had advised CSL of a tax loss in a deal chain in which it had
previously bought from Mobile Heaven in the period 08/05. However, there was no
evidence of more up-to-date due diligence having been carried out before CSL
again dealt with Mobile Heaven in February, March and April 2006.
204. As noted
above, the TSP report is dated 27 March 2006 but it contains a reference to a
Companies House verification report dated 20 April 2006. This indicates that
the TSP report was not available until after all the transactions (except Deal
27) in which Mobile Heaven supplied CSL had been concluded i.e. Deals 1, 3, 6
and 7.
205. Mr
Saunders's evidence, which was unchallenged, was that on 18 May 2006 (Deal 27)
CSL purchased mobile telephones from Mobile Heaven for £723,520 plus VAT. These
handsets were sold on the same day to URTB for £752,080. However, CSL did not
pay Mobile Heaven until 16 June 2006 – almost one month later. On 21 April 2006
CL purchased handsets from Mobile Heaven (Deal CL 1) for £1,002,400 plus VAT.
The handsets were sold by CL to Balsim on the same day for £1,062,600. CL did
not pay Mobile Heaven for these mobile phones until 28 April 2006. Mr Saunders
pointed out that no consideration appeared to have been given as to how –or why
-Mobile Heaven could or would extend such generous credit facilities. Tax
losses have been traced in every deal chain where CSL and CL bought from Mobile
Heaven for the periods in question.
Inter Communications Limited ("Inter")
206. Inter
supplied CSL in Deal 2 (23 February 2006) and Deal 29 (18 May 2006). Inter also
supplied CL in Deal CL 2 (25 April 2006) and Deal CL 3 (26 April 2006).
207. As part of
the Appellants' due diligence on Inter an abbreviated balance sheet was
obtained showing a surplus of £6871 for the year ended 31 March 2004.
208. HMRC
advised CSL by letter on 23 January 2006 that purchases from this supplier had
been traced back to tax losses in the deal chain for the period 06/05.
209. The
Appellants obtained a TSP report dated March 2006, but the contents of the
report indicated that the report could not have been made available before 21
April 2006. The report was therefore produced after Deal 2.
210. Tax losses
have been traced in every deal chain where CSL and CL bought from this supplier
for the periods in question.
Due diligence on Datakey
211. Datakey
supplied CSL in Deals 16 (14 March 2006), Deal 17 (14 March 2006), Deal 18 (20
March 2006), Deal 19 (20 March 2006 or 23 March 2006), Deal 20 (27 March 2006),
Deal 22 (16 May 2006), Deal 23 (16 May 2006) and Deal 25 (17 May 2006). Datakey
also supplied CSL in 8 un-appealed deals between 4 April 2006 and 27 April
2006. Datakey also supplied CL in in Deal CL 5 (24 April 2006).
212. A TSP
report on Datakey was dated 11 April 2006, and the contents of the report
indicates that it was not completed until 21 April 2006. The TSP report
indicated that Datakey's profit and loss account for the year ended 31 December
2004 showed a trading loss and a balance sheet deficit. The company had no
credit rating and at 7 October 2005, under the heading “Credit Rating”, is
shown as “not trading”.
213. Tax losses
have been traced in every deal chain where CSL and CL bought from Datakey in
the periods in question.
Due diligence on Technology Plus limited ("Technology Plus")
214. Technology
Plus supplied CSL in Deal 26 (18 May 2006). It supplied CL in Deal CL 4 (18
April 2006) and Deal CL 6 (24 April 2006).
215. The TSP
report on Technology Plus was dated 16 May 2006, although the report refers to
a VAT registration verification carried out on 30 May 2006. It therefore
appears that the report was not available until 30 May 2006.
216. In response
to the question from TSB: "What checks do you undertake on stock?"
the reply was: "Confirm with freighter if stock is physical." In
response to the question: "Are goods insured?" the reply was: "Now and then."
217. The company
credit rating suggested credit should be limited to £9,000 and suggested
further enquiry was needed.
218. Tax losses
have been traced in every deal chain where CSL and CL bought from the supplier
for the periods in question.
AR Communications Limited ("AR")
219. AR supplied
CSL in Deal 11 (27 February 2006), Deal 4 (7 March 2006), Deal 5 (21 March 2006),
Deal 8 (7 April 2006), Deal 9 (11 April 2006), Deal 10 (26 April 2006) and Deal
24 (17 May 2006).
220. The TSP
report was dated 28 March 2006, but parts of the report are dated 4 April 2006,
suggesting that the report was not available before that date. The report,
therefore, post-dated Deals 4, 5 and 11.
221. On 17 May
2006 (Deal 24) CSL purchased handsets from AR for £745,500 plus VAT. These
handsets were removed from the UK by CSL before payment had been made. There
was no evidence indicating how or why this credit was made available to CSL.
222. A joint and
several liability warning letter dated 1 March 2006 in respect of a supply from
this trader in period 11/05 had been sent to CSL.
Due diligence and warning letters
223. As
described above, CSL received warning letters from HMRC dated 23 January 2006
that a number of its transactions in VAT periods in 2005 traced back to tax
losses. Those letters noted that CSL would be able to establish from its
records the identity of its supplier in the relevant transactions.
224. In the case
of three of those suppliers (Mobile Heaven, Inter Communications and AR) CSL
undertook further transactions with those companies in which they supplied CSL
with mobile phones in February 2006 and subsequently. Those transactions are
included in the deals currently under appeal.
225. It was
apparent from the evidence that the deals in February 2006 (and some in March
2006) with these suppliers (e.g. Deals 1, 2, 3, 4 and 11) were undertaken
without any significant recent updating of the due diligence on these
companies.
226. Mr Dad, in
cross-examination, stated that he would have followed all the due diligence
procedures referred to in HMRC Notice 726 (a point which, in our view,
contradicted his claim in his witness statement not to have been advised by
HMRC to carry out due diligence). There was no evidence that any earlier due
diligence checks had been updated before CSL recommenced dealing with these
three suppliers in February and March 2006. Moreover, given the warnings
contained in HMRC's letters 23rd of January 2006 CSL could simply have refused
to deal with these particular suppliers.
227. In our
view, this indicated that Mr Dad took a cavalier attitude to the warnings
received on 23 January 2006. He seems not to have cared whether he dealt with suppliers
whose earlier transactions have been traced back to VAT losses and his claim
that he had been "livid" when he received HMRC's warning letters of
23 January 2006 was contradicted by his failure to take appropriate action.
IMEI Numbers
228. There was a
dispute concerning whether the Appellants had kept IMEI
numbers.
229. In his
first witness statement Mr Dad noted that it was alleged against him that he
had not kept IMEI numbers and that he therefore had failed to take prudent
precautions against involvement in carousel fraud. He stated as follows:
"First, as far as I am aware, it has not been
alleged that I have been involved in carousel fraud. Secondly, it is not clear
whether the allegation that I did not "keep" such numbers is meant to
mean that I have not made any such records or that I have not retain such
records. I have carried out IMEI number checks since September 2006. I
initially retained the IMEI numbers on paper, though not electronically.
However, although I offered those records to HMRC, they would not look at them
unless they were electronic.
Paper records were made at the time of the
inspection and I did not consider the duplication of transferring them to
electronic media as a prudent use of my resources. I checked the IMEI listed on
paper on a random basis against a sample quality of each batch of phones
purchased. I would check the IMEI numbers against a net-checker, the address of
which is www.numberingplans.com. Once this was completed and the IMEI numbers
were confirmed as valid, I did not keep a check of these records as I
was
happy
that my stock was as described on my paperwork. At the time of these
transactions, I had not been directed to check and retain IMEI numbers. I was
only required to record IMEI numbers after the periods which are the subject of
this appeal and have of course done so."
230. This
statement was not challenged in cross-examination.
231. In his
first witness statement Mr Saunders recorded a visit which he and a colleague
paid to CSL's offices on 13 June 2005. Mr Saunders's notebook contains the
following entry:
"Mr Dad… Stressed that whilst phones are not
scanned, records of phones traded are recorded on sales and purchase orders,
but IMEI numbers are not recorded."
232. Mr Saunders
visited CSL's premises, with another colleague, on 22 July 2005. His notebook
records:
"I asked Mr Dad whether IMEI numbers were now
being recorded and he said no. I asked how any returns could be verified to
show that Crotek had supplied them and how he could be satisfied without IMEI
numbers… That the goods were not stolen. Mr Dad could not be sure. Mr Dad will
talk to the inspection team he uses to see if IMEI numbers can be made
available."
233. In his
first witness statement Mr Saunders states:
"… [A]t the time of the transactions subject to
this appeal neither CL nor CSL recorded IMEI numbers of mobile phones being
traded."
234. This
statement and the above extracts from Mr Saunders's notebooks were not
challenged in cross-examination.
235. In answer
to a question from the Tribunal, Mr Saunders stated that to the best of his
knowledge the Appellants had not recorded IMEI numbers prior to the issuance of
a notice of direction. The notice of direction was in September 2006. Mr
Saunders explained that HMRC had been given no IMEI numbers for any of the
deals at issue in these
appeals.
236. In our view,
on the basis of the evidence contained in Mr Saunders's notebooks, we consider
that the Appellants did not record IMEI numbers of mobile phones before
September 2006, despite being advised by Mr Saunders to do so.
237. As noted
above, Mr Dad in his witness statement stated that he had "… carried out
IMEI number checks since September 2006." This information was only
recorded, however, after HMRC had directed the Appellants to record this
information.
Conclusions on due diligence
238. It was
plain to us that the due diligence comprised in the TSP reports in respect of
the Appellants' customers referred to above was inadequate. In addition, many
of the TSP reports were received after the Appellants had commenced dealing
with the companies concerned. Moreover, insofar as the reports highlighted
concerns, Mr Dad appeared not to have taken any account of the issues raised. Moreover,
Mr Dad failed to record IMEI numbers prior to September 2006 with the result
that he could not be certain that the mobile telephones with which he was
dealing had not been stolen or the subject of carousel fraud. We found Mr Dad's
replies in cross-examination to be evasive. He consistently failed to engage
with the questions he was asked.
Urban Spice Buyer Limited ("Urban")
239. CL bought
mobile telephones worth £2,135,625 from Urban on 29 June 2006 in a transaction
which is not subject to these appeals.
240. A TSP
report on Urban commissioned by CSL was dated 12 July 2006, although a report
on electoral roll information contained in the main report was dated 25 July
2006, indicating that the main report was not, in fact, finalised until that
date. At any rate, it was clear that CL dealt with Urban before carrying out
any external due diligence checks.
241. Mr Alan
Ruler, an HMRC officer, gave evidence in relation to visits he paid to Urban.
242. Mr Ruler's
first visit to Urban was on 24 April 2006 and he interviewed the director, Mr
Rahman. Urban's business involved the introduction of restaurants to suppliers
of food produce, restaurant furniture, china, cutlery etc. In return for
introducing restaurants to suppliers, Urban would charge a "membership fee".
243. Urban's
offer to sell telephones to a customer gave rise to an enquiry by the customer
to HMRC's Redhill offices to check Urban's VAT registration. It was this
enquiry that alerted HMRC to Urban's possible involvement in what Mr Ruler
described as "MTIC activity" and prompted Mr Ruler's visit.
244. Mr Ruler
discussed MTIC activity with Mr Rahman and, inter-alia, issued Notice 726 on
Joint and Several liability. He discussed unsolicited approaches from traders
wishing to do "large value deals", of which Mr Rahman said he had had
none. Mr Ruler also explained that if Mr Rahman was asked to make a "third
party" payment this should be taken as an indication that the VAT would
not be paid to HMRC.
245. Mr Ruler
also explained how VAT registrations could be hijacked and the function of
HMRC's Redhill office, which was to be used to confirm whether or not customers
and suppliers were VAT registered. Mr Rahman asked that his VAT registration
number should be "blocked" at Redhill so that others could not verify
it without his authority.
246. Mr Ruler
was asked to visit Urban again in August 2006 because its VAT status had been
verified by a "known" MTIC trader.
247. He
explained that his restaurant supply business was struggling and that his wife
had suggested that they should engage in some mobile phone deals. They
therefore logged onto a mobile phone trading website (IPT) and found a customer: Crotek Limited. He said he had two other customers: Adworks Limited and Ancillary Engineering
Limited.
248. Mr Rahman
was asked by Mr Ruler how he had found his supplier, Advertising South Limited.
He said that "luckily" his customer, CL had introduced him to the
supplier. Mr Ruler asked why his customer was effectively increasing the price
he would have to pay by introducing a further business into the supply chain.
Mr Rahman said he had never thought of that. Mr Ruler also asked if Mr Rahman
thought that Urban had been introduced into the supply chain or "put
there" for a specific reason – Mr Rahman did not respond.
249. Mr Ruler
noted that Mr Rahman knew about the IPT website, IMEI numbers (distinctive
mobile telephone serial numbers) and the due diligence checks that a normal
business would carry out.
250. Mr Rahman
confirmed that he had done some deals. When Mr Ruler asked how this could
happen when part of the due diligence checks should have been to check the VAT
status the business through Redhill, Mr Rahman replied that CL had told him
"not to worry about that." Mr Rahman said that he had done 12 deals
amounting to approximately £20 million sales in two days.
251. Mr Rahman
told Mr Ruler that he had exchanged business details with both CL and
Advertising South (VAT certificates, certificates of incorporation, directors'
IDE and utility bills). Mr Rahman had also checked if the businesses were genuine
through a credit reference company called Creditsafe.
252. Mr Rahman
confirmed to Mr Ruler that he was paid by his customer before he had to pay for
the goods from his supplier. He said that CL had asked for £10 million credit
to which Mr Rahman had agreed. He, in turn, was given £10 million credit by
Advertising South Limited. There were no written credit agreements and no
security.
253. Mr Rahman
confirmed that there was no insurance and there were no stock inspection
reports. He also considered that the reservation of title provisions in the
invoices did not apply to this kind of business. He was asked whether it
appeared that CL appeared to be controlling the deals but he did not respond.
He agreed that £20 million’s worth of deals in two days appeared too good to be
true.
254. Mr Rahman
appeared to be shaken when Mr Ruler informed him that he would contact him
again if his enquiries revealed a tax loss within his supply chain. Mr Rahman
asked if his VAT number could continue to be "blocked" at Redhill. Mr
Ruler informed him that the number could be blocked, but this action was
meaningless if he did not make Redhill checks or took no notice of the results.
255. Finally, Mr
Ruler asked whether or not Mr Rahman was thinking of entering into any further
deals and Mr Rahman replied that he was not.
256. In his
second witness statement, Mr Dad stated as follows:
"Urban Spice Buyer This is… a matter of
which I have only just been made aware and had no previous knowledge of
although obviously the allegation against me is that I did have previous
knowledge of this and I was fully aware of the situation. All I can say is that
I vehemently deny that this is the case; I am and was totally unaware of Urban
Spice. I did not set up any deal, nor tell them that I would make introductions
or anything else. I am very concerned about the allegations made by the
Respondents which I take personal offence to and it is my intention if at all
possible to obtain and produce evidence in this regard. I have spoken to the
Director of Urban Spice who denies the comments attributed to him and states
they are a distortion of his words."
257. In
cross-examination, Mr Ruler accepted that Mr Rahman's story was
"fishy" and that he was suspicious about a trader who had told him
that he was not going to have any dealings with MTIC activities and yet
suddenly became involved in MTIC trading, finding a customer which then
introduced him to a supplier.
258. Mr Dad was
cross-examined about his statement and said, "I am and was totally unaware
of Urban Spice." Mr Parroy suggested this was a clear and definitive
statement and directed Mr Dad to the Statement of Truth at the end of his
witness statement and to his signature. He asked Mr Dad
"Q No doubt you would have looked carefully at
this matter before you put your name to that statement?
A The statement states what it states.
Q Is it true?
A It states what it states.
Q Is it true?
A At [sic] what I would have been aware of at the
time.
Q The allegation being made is effectively that you
were setting up Urban Spice to use them as one of the buffers in the deals,
isn't it?
A That is not correct."
259. Mr Ruler's
evidence in relation to what Mr Rahman said to him was hearsay. Whilst
admissible, the real issue concerning hearsay evidence is the weight that
should be attached to it by this Tribunal. In this connection, Mr Rahman did
not appear before us to give evidence. It was not possible for Mr Kramer to
test the evidence concerning Mr Rahman's statements in cross-examination.
Certainly, it seemed to us that the statements attributed to Mr Rahman seemed
strange. We consider that Mr Ruler was a truthful witness. Nonetheless, it was
difficult for us to evaluate the truthfulness of Mr Rahman.
260. On the
other hand, when questioned about his statement that he was unaware of Urban Spice,
Mr Dad was plainly evasive. It was plain from the TSP report and the
unchallenged fact that CL had entered into a transaction with Urban in June
2006 that the statement in Mr Dad's witness statement that he was ‘unaware of
Urban Spice’ was incorrect.
261. On balance,
because the story attributed to Mr Rahman seemed strange and unlikely,
accepting (as we did) that Mr Ruler was a truthful witness, and because it was
not possible for his story to be probed in cross-examination by the Appellants,
it seemed to us fair to give very little weight to Mr Ruler's evidence.
Moreover, in reaching this conclusion, we have borne in mind that we were given
no explanation as to whether efforts have been made to call Mr Rahman as a
witness so that we could have heard his evidence directly rather than
second-hand.
262. On the
other hand, Mr Dad was plainly evasive when his statement that he was unaware
of Urban was challenged.
263. Our
conclusion on this issue was that it was impossible to establish whether Mr
Rahman's allegation that, in effect, CL had arranged the deal was, on the
balance of probabilities, true. However we considered Mr Dad's responses in
cross-examination further undermined his credibility.
Adworks.Com ("Adworks")
264. Mr Saunders
gave evidence about a meeting with Mr Dad at CSL's premises on 13 June 2005. Mr
Saunders questioned Mr Dad about one of his suppliers, Adworks. He pointed out
to Mr Dad that payments to Adworks appeared to have been made after the goods
in question had moved to Mr Dad's customer, Future Communications Limited
("Future").
265. Mr Saunders
also noted (having been alerted by Claire Sharkey, an HMRC officer responsible
for Adworks) that the paperwork for CSL invoice 3934 dated 27 April 2005
included a purchase order from Adworks addressed to its supplier, Apex UK
Distribution Limited, asking for stock (mobile telephone handsets) to be
delivered to CSL's customer, Future. The delivery note was dated 27 April 2005
and part payment for the goods in the sum of £600,780 was made by CSL on 10 May
2005. When Mr Saunders asked Mr Dad about this delivery request, Mr Dad saw
nothing untoward in this. He also seemed unconcerned about the possibility that
his supplier might cut out CSL in in future deals. Mr Dad replied that he was
happy to trust Future based on the checks he had made.
266. Mr Saunders
also asked Mr Dad whether he considered it reasonable that he had been able to
get, and Adworks had been able to offer, credit of £4 million. Mr Dad said that
he saw nothing out of the ordinary in being able to obtain a credit line from
Adworks of £4 million.
267. Mr Dad, in
his second witness statement on which he was not cross-examined, said he did
not know precisely why Adworks agreed to give him such a large amount of
credit. Mr Dad noted that he was a licensed Financial Services Adviser. He
speculated that if he did not discharge an obligation to Adworks they could
bankrupt him and he would be unable to work as a Financial Services Adviser. He
considered that this gave Adworks some comfort and thought it unlikely that
they would undertake further checks on him. He was not going to look a gift
horse in the mouth. He said he was extremely concerned and felt the severity of
the responsibility upon him in the event that things went wrong and he was
unable to repay £4 million.
268. The due
diligence checks on Adworks showed that it had only three issued £1 shares and
no credit enquiries were made of this supplier. Information from the Companies
Register stated that the last accounts of Adworks were made up to 30 November
2003 and showed that the company was dormant. The business classification of
the company was "advertising."
269. Ms Sharkey
noted that, following the 07/05 period, Adworks became involved in broker deals
that were subject to extended verification resulting in denials of input tax in
the sum of £8,869,705. Adworks then returned to buffer deals before going into
liquidation. Ms Sharkey's evidence was not challenged.
270. In
cross-examination, Mr Saunders accepted that it was normal for suppliers and
customers to trust each other and undertake transactions without investigating
matters. However, he considered that a credit line of £4 million was "a
little beyond the normal trust."
271. The
transactions with Adworks were not the subject of these appeals. However, the
fact that CSL arranged for its supplier's supplier to deliver directly to CSL's
customer is very strange. In our view, this indicated that this transaction was
not a genuine transaction in the open market, leading to the conclusion that
the transaction was contrived.
Goldex Services Limited ("Goldex"), Goldex International Limited
("GIP") and Mr Shafqat Dad
272. As
explained above, Mr Shafqat Dad was Mr Dad's brother. He was originally a
director of both Appellants, but resigned as a director of CSL in June 2005 and
of CL in August 2005. Also, as noted above, it appears that Mr Shafqat Dad
continued to hold shares in CSL until 29 August 2006.
273. HMRC
alleged that Mr Shafqat Dad had previously been involved in dealing in mobile
telephone handsets and that he had set up two businesses which moved away from
their original stated business activity to become wholesalers of mobile
telephones. HMRC invited us to draw parallels with the behaviour of the
Appellants.
274. Mr Saunders
gave evidence, which was unchallenged as to the essential facts (although Mr
Dad's knowledge of these facts was disputed).
275. In July
1999 Mr Shafqat Dad applied to register a company, Cellular Consultants Limited
("Cellular") for VAT. In the application, its trade classification
was described as "consultancy services to the cellular industry."
Having been registered for VAT, Cellular commenced wholesale trading in mobile
phones.
276. Mr Shafqat
Dad applied to register a second company for VAT, Goldex, in November 2004. In
the application for registration its business was described as follows:
"We are a subsidiary of Goldex International
Plc and will be providing legal, accounting, Treasury and admin services."
277. No trade
was declared by Goldex until it commenced wholesale mobile phone trading in the
September 2005 VAT period.
278. By a
decision letter dated 13 March 2009, HMRC denied Goldex's claim for repayment
of input tax. Goldex was dissolved on 5 May 2009, but was, we understand,
subsequently restored to the Companies Register in order to litigate its appeal.
A further input tax denial letter was dated 30 March 2009.
279. In addition
to Goldex, Mr Shafqat Dad was also a director of Goldex International Plc
("GIP"). GIP was also involved in the wholesaling of mobile phones.
In April and May 2007 HMRC denied input tax in relation to repayment claims
submitted by GIP. These decisions were subsequently appealed.
280. The
evidence of Mr Martin, the HMRC officer allocated responsibility for GIP, was
that there were similarities between the deal chains involving the Appellants
and those involving Goldex and GIP. The evidence of Mr Martin was not
challenged.
281. In respect
of CSL's Deal 19 (23 March 2006), CSL bought from Datakey and sold to URTB. The
full deal chain was as follows: Stella sold to Deepend which sold to Bluewire
which sold to Datakey which sold to CSL which sold to URTB. On 22 March 2006,
Goldex was involved in an identical deal chain, as follows: Stella sold to Deepend which sold to Bluewire which sold to Datakey which sold to Goldex which
sold to URTB.
282. Secondly,
in CSL's Deal 8 (7 April 2006) the deal chain was as follows: Bulfinch sold to Wireless Warehouse which sold to AE Resources which sold to AR Communications
which sold to CSL which sold to URTB. GIP's deal chain (5 May 2006) was
identical, save that GIP occupied CSL's position in the deal chain.
283. Finally,
CSL's Deal 27 (18 May 2006) involved XS Enterprise Systems which sold to
Deepend, which sold to IT Players which sold to Mobile Heaven which sold to CSL
which sold to URTB. GIP's transaction chain (15 May 2006) was identical save
that GIP took the place of CSL.
284. In each
transaction chain the immediate supplier of CSL, Goldex and GIP made a mark-up
of £.50.
285. In his
second witness statement Mr Dad said:
"There is a specific allegation with regards the
fact that my brother formed this company and then removed himself from the
company. I actually find it difficult to respond to this as I am not aware of
all the actions of my brother. I simply, as I have already stated, purchased
this company from my brother who had no actual involvement in the
business."
286. Our
conclusion on this evidence was that it was clear that Goldex and GIP were
operating in conjunction with CSL. We did not find Mr Dad's statement that he
was unaware of his brother’s activities to be credible. It was simply too much
of a coincidence that the deal chains, which were close together in time,
should be identical. We regard this as further evidence that the Appellants'
transactions were contrived.
FCIB evidence
Mr Stone's evidence relating to FCIB
287. Mr Stone, a
senior HMRC officer with responsibility for dealing with MTIC fraud, gave
background evidence in relation to MTIC fraud. In the course of his evidence he
commented on offshore banking arrangements with FCIB.
288. In his
witness statement Mr Stone noted that between 2005 and 2006 many EU suppliers,
defaulting traders, buffers, brokers, contra brokers, and overseas customers in
the computer and mobile phone sector whose transactions were connected with
MTIC fraud opened offshore bank accounts. He noted that some traders claimed
that this was because UK banks were closing their accounts. This was first
reported in a mobile phone trade publication called Mobile News on 21
October 2005.
289. The most
popular offshore bank was FCIB. On 5 September 2006, the Dutch and local
authorities visited FCIB as part of an investigation into alleged
money-laundering by the bank in relation to alleged VAT fraud by clients of the
bank.
290. In a press
release dated 11 October 2006 by the banking authority in the Netherlands
Antilles, it was announced that as a result of several criminal investigations
in relation to alleged VAT fraud involving a large number of customers, and
subsequent attachments on funds, FCIB was no longer able to process payments. A
number of other banks terminated their relationships with FCIB and the banking
authority in the Netherlands Antilles decided to revoke FCIB's banking licence
with effect from 9 October 2006.
291. In
cross-examination, Mr Stone was asked whether an uninitiated party joining the
industry could assume that FCIB was an entirely legitimate, substantial and
significant financial institution. He replied: "FCIB is a registered bank,
yes."
292. Mr Stone
also accepted that there was a significant concern within the mobile phone
industry that traders’ bank accounts might be closed with extremely short
notice, leaving them without banking facilities.
Opening the Appellants' FCIB accounts
293. On a visit
to CSL on 17 May 2005 Mr Saunders asked Mr Dad what bank accounts CSL held. Mr
Dad said that CSL held two bank accounts: the first account was with Bank of
Scotland and the second account was with FCIB. Mr Saunders asked Mr Dad why it
was necessary to have an account with a bank in the Netherlands Antilles. Mr
Dad replied that FCIB had been advertised on the IPT website as a fast payment
processor.
294. In his
second witness statement dated 11 March 2009 Mr Dad stated:
"… [I]t was impossible and remains extremely
difficult for traders to open accounts with any bank which I understand from having
read some websites and spoken to people has been caused by the actions of the
Respondents in this appeal.
Therefore the only bank that could provide services
and was willing to provide services was FCIB whom I understood to be a
well-regarded and substantive Dutch bank. It further had the infrastructure to
provide very efficient service for all customers which is why I banked with
them.
I further understand that the problems that have
arisen with FCIB have also been caused by the direct actions of the Respondents
and although the Respondents directly or indirectly have made allegations for
some three years against FCIB nothing has been proven to date.
To explain we used to have banking with the Bank of
Scotland a mainland UK regulated bank. Unfortunately our accountants were
concerned that our accounts would be closed I believe through the direct and/or
indirect actions of HMRC on the basis of information that I have been told both
by the bank and other third parties none of whom were prepared to make a
statement about this. The actions of HMRC were to close down accounts as that
was a way and manner of using the Respondents' term obstructing and
interrupting "the fraud". I in line with numerous other traders were
[sic] left unable to open bank accounts other than with an overseas bank. I
consider FCIB can be fairly described as less favourable an option compared to
a UK bank however we were denied the option of operating a UK account by the
actions of HMRC."
295. There was,
however, no suggestion at the meeting on 17 May 2005 between Mr Saunders and Mr
Dad that the FCIB account had been opened because HMRC were threatening or
attempting to close CSL's Bank of Scotland account.
296. In
addition, Mr Dad confirmed in cross-examination that he had opened an account
for CL with Bank of Scotland (Reading branch) on or around 1 September 2005. Mr
Dad also confirmed that CSL had an account with bank of Scotland in February 2005 when it undertook its first transaction in mobile telephones. Mr Dad also
confirmed that the application for an FCIB account was made on 17 February
2005. Mr Dad also confirmed that the CSL account with the Bank of Scotland was
closed in December 2005. He recalled receiving a letter from Bank of Scotland
informing him that banking facilities would be withdrawn within 30 days.
297. Earlier, in
cross-examination, Mr Dad confirmed that CSL's application for an account with
FCIB had preceded the first deal by approximately 8 days at which time CSL had
banking facilities in place with Bank of Scotland. He said that a letter from
Bank of Scotland stating that CSL's banking facilities were going to be
withdrawn was received "soon thereafter." Mr Parroy asked Mr Dad:
"Q Had the Bank of Scotland told you, before
you made this application [the application to open an FCIB account], that their
banking facilities were to be withdrawn?
A The letter would have been received soon
thereafter [sic] the first few transactions."
298.
Subsequently, Mr Dad said that he could not recall, after six years, the
precise sequence of events.
299. As regards
advice from his accountants expressing concern that the Appellants' accounts
with UK banks would be closed, Mr Dad was unable to produce a copy of any such
advice and could not remember whether it was written or an oral discussion.
300. We did not
consider Mr Dad's claim, that he had opened an FCIB account because of concern
expressed by his accountants that his existing accounts would be closed, to be
credible. Apart from his statement, Mr Dad produced no evidence to this effect.
CSL's Bank of Scotland account remained open until early December 2005. The
application to open an FCIB account was made in February 2005. Mr Dad's
comments made to Mr Saunders on 17 May 2005 contained no suggestion that the
FCIB account had been opened to safeguard against the closure of the Bank of
Scotland account.
Objection to the admission of evidence relating to the FCIB Paris server
301. Mr Saunders
in his second witness statement gave evidence in relation to information
derived from FCIB. The information contained in that statement was derived from
what was called the Dutch server containing a database relating to FCIB.
302. At the PTR
on 11 April 2011 the Tribunal was asked by HMRC to consider the status and
future direction of the appeals. This was caused by the difficulties HMRC were
experiencing in contacting the Appellants’ legal representatives. On 24
December 2011 HMRC had discovered in the course of another appeal that Mr
Kramer, who is representing the Appellants before the Tribunal, was leaving his
(then) firm. On 3 February 2011 HMRC wrote to Mr Kramer's previous firm
enclosing an application to update HMRC's witness statements. Mr Kramer's
previous firm advised HMRC that they were no longer instructed and suggested
that HMRC should contact Mr Kramer's new firm. However, the new firm also
indicated that they were not instructed to act for the Appellants.
303. On 14
February 2011, HMRC wrote to the Appellants advising them that HMRC was
applying to the Tribunal for a Directions hearing to consider the status and
direction of the appeals.
304. On the same
date HMRC applied to the Tribunal requesting an urgent Directions hearing due
to the Appellants' lack of representation. The Tribunal notified the Appellants
of the date of the Directions hearing.
305. The
Appellants did not appear and were not represented at the Directions hearing on
11 April 2011. In the circumstances, HMRC stood over until the main hearing
their application to admit the third witness statement of Mr Saunders and the
witness statement of David Young (together with exhibits) in relation to the
Appellants' transactions with FCIB. These witness statements were based on new
information available from what was called the Paris server in relation to FCIB
and which had become available more recently than the information from the
Dutch server.
306. On 2 May
2011, the Appellants' current solicitors notified the Tribunal that they were
instructed to act on behalf of the Appellants. This letter stated that it
included an application in relation to the appeal, but through a clerical error
the correct application was not enclosed.
307. At the
hearing of these appeals HMRC applied to admit the third witness statement of
Mr Saunders and the witness statement of Mr Young. Mr Kramer, on behalf of the
Appellants objected. The witness statements and exhibits comprised one lever
arch file, although part of that file comprised formal legal documentation
(e.g. incorporation documents of companies) rather than printouts of records
from FCIB accounts.
308. At the
outset of the hearing, it was agreed that HMRC would proceed to open their case
and that Mr Saunders would give evidence in chief in relation to the
information derived from the Dutch server and that Mr Kramer would then be
given time to absorb the FCIB material. One and a half days were set aside to
allow Mr Kramer to study the material (it appears Mr Kramer mislaid the lever
arch file containing the new evidence with which he had previously been
provided, thus preventing him from studying the material until that time).
309. After
studying the new material, Mr Kramer maintained his objection to its admission.
310. Mr Parroy
argued that the new evidence was both relevant and probative. It had recently
become available. Until December 2010 (or the late autumn of 2010) the French
authorities had not allowed access to the Paris server evidence for use in
civil cases. The French authorities had previously limited access to the Paris server material to use in criminal cases. Mr Saunders gave evidence to the effect
that he was not allowed to access the information on the Paris server until he
had been trained in its use. He received that training on 1 February 2011.
311. Mr Parroy
submitted that the money movements contained in the new evidence would be
material which the Appellants would have to argue Mr Dad knew nothing about. If
not, they were money movements in which he was directly involved, and the
material fell within his personal knowledge.
312. Mr Parroy
submitted that the Paris server material was needed to correct and complete
information derived from the Dutch server. We had heard evidence from Mr
Saunders that the information on the Paris server was more reliable than that
contained on the Dutch server.
313. Mr Kramer
drew attention to a statement in Mr Saunders's witness statement to the effect
that the Paris server was made available to HMRC on 27 September 2010.
Therefore, HMRC had had access to the Paris server for approximately 8 months.
In considering the balance of prejudice, the Appellants would not be able to
test the raw data and would not have time to investigate the evidence without
an adjournment. Mr Kramer therefore requested that the application to admit the
evidence should be denied.
314. Mr Parroy
insisted that the information on the Paris server was not available to be used
until December 2010 because of the need to test the integrity of the process.
As a result, the data wasn't actually fully available until the start of 2011.
Also, once it became known that the Paris server information was available,
HMRC were under a duty to examine the Paris server material to ensure that the
material derived from the Dutch server was correct and to make available the
information from the Paris server. It would not be possible, without major
technological problems and without disclosing information which was not
relevant to these Appellants, to provide an "image" of the Paris server. The material bank statements contained in the exhibits was the raw material
contained in the FCIB file. The various companies concerned in the new evidence
were, in fact, not new and were referred to in evidence that had already been
admitted.
315. We decided
that the new material relating to the Paris server should be admitted. The
material was plainly relevant and material. We considered that there were valid
reasons for the late production of the evidence and accepted Mr Parroy's
submissions in this respect. We agreed with Mr Parroy's submission that the
prejudice to the Appellants was limited. We also denied Mr Kramer's application
for a further adjournment to consider the evidence.
316. In short,
Mr Saunders's third witness statement relating to the Paris server made certain
relatively minor corrections to the information contained on the Dutch server.
In addition, however, the new evidence disclosed loans to CSL from a sub-
account of a company called Padani Developments ("Padani") which we
set out later in this decision.
The Dutch server information
317. Based on
the information derived from the Dutch server, Mr Saunders's evidence was based
on a sample of the deals in respect of this appeal. The samples included at
least one deal for each appealed VAT period and at least one sale to each EU
customer as well as all defaulters. The deals sampled were (in chronological
order) as follows: Deals 21, 1, 11, 3, 16 (and 17), 18, 20, 30, 32, 10, 22, and
28 and CL 4.
318. Mr Saunders
commenced his analysis from the account of either CSL or CL, tracing the
receipt of the money where possible from the EU customer of either CSL or CL
and then tracing along the deal chain to their suppliers in the UK. Mr Saunders also traced the payment backwards from the EU customer in order to identify
money movements beyond the UK deal chain. Mr Saunders compared the amounts
appearing in the trading accounts of the Appellants with the date and value of
the invoices identified in the deal chain spread sheets. He then traced the
monies paid and received by CSL and CL through the recipient and the payer of
the funds. Where there were no known payments or invoices, he had had to use
his judgement to identify the relevant onward payment. It was not always
possible to identify sums of money which exactly matched those shown on the
invoices.
319.
Essentially, the analysis performed by Mr Saunders showed payments moving from
the Appellants' EU customers to the Appellants. The Appellants paid their
suppliers and the payment moved along the deal chain until, significantly, the
defaulting trader paid a company called Elvissa International Holdings
("Elvissa"). Elvissa received a payment from the defaulting trader in
every deal that Mr Saunders examined. In a significant number of deals it was
possible to trace payment from Elvissa to a company called Amex FHU
("Amex"). Amex, in a number of deals, provided the funds for the
Appellants' EU customer to make their purchase. In a number of cases funds were
received by Elvissa from the defaulting trader and payments were made by Amex
to the Appellants' customer but it was not possible to trace with certainty the
payment from Elvissa to Amex. It appeared that Elvissa was the financier of the
deal chains.
320. Mr Saunders
exhibited information received from the Polish authorities in relation to Amex.
This information stated:
"Company is not existing [sic] – Mr R
Jarkiewicz is missing trader in Carousel fraud. At present he is hijacker – he
use [sic] VAT numbers which belongs to legal taxpayers."
321. Further
information received from the Polish authorities stated: is
"Mr Robert Jarkiewicz – the owner of the AMEX
FHU was deregistered from VIES on the 30/09/2005 until now he has not renewed
the registration. A warrant is out for the owner Mr Robert Jarkiewicz's arrest
for swindling bank credits and for economic crimes. As the Polish Prosecutor
informed us he is staying at [sic] the UK territory but we do not [know]
exactly where."
322. Elvissa is
registered in the British Virgin Islands with a mailing address in Israel.
323. The forms
opening CSL's FCIB account show that approval for the opening of the account
was given on 3 March 2005. The secretary and quoted director was Mr Dad. Mr
Shafqat Dad and Mr Safdar Dad were stated to be the beneficial owners.
324. The forms
opening CL's FCIB account show that approval for the account was given on 12
April 2006. The signatory was given as Mr Dad. The directors were stated to be
Mr Dad and Frieda Dad, who were also said to be the beneficial owners.
Information from the Paris server
325. Besides
correcting some aspects of the payment chains in respect of information
available from the Dutch server, Mr Saunders's evidence in relation to
information from the Paris server drew attention to a loan of £100,000 and a
further loan of £17,500 that CSL received from a sub-account with FCIB of an
entity called Padani. Mr Saunders had previously been unaware of the existence
of these loans and had seen no documentation in respect of them.
326. Information
received by HMRC from the Spanish authorities stated that Padani, a company
incorporated in Spain, was a missing trader.
327. The FCIB
account number for Padani was 202082 with subaccounts 202082 – 02, designated
as Amber Communications Management Limited ("Amber"), and 202082 –
03, designated Seaside Mediteranea Limited ("Seaside"). The signatory
for those accounts was Maria Teresa Jimenez Suarez.
328. The loan to
CSL was paid from the account designated Seaside and was made on 6 December
2005. A further loan to CSL in the amount of £17,500 was made from the same
account on 7 December 2005. The funds in that account were provided by a
company called Juleo Limited ("Juleo"). Juleo's FCIB account number
was 201744 and the signatory was a Michael Touitou, a French passport holder
resident in Israel. Michael Touitou was also the signatory of Elvissa and its
sub-account designated as Helvissa International Holdings Limited. Elvissa, as
noted above, was the recipient of funds from the defaulting traders in all the
deals sampled by Mr Saunders. Although the account was opened in the name of
Elvissa, the sub-account was designated Helvissa (although Helvissa was the
same company as Elvissa).
329. Although a
different passport and mother's maiden name were given for Michael Touitou in
respect of Juleo and Elvissa in FCIB's records, the date of birth is the same
and they shared the same notary. The signatures of Michael Touitou signing for
Juleo and for Elvissa appeared very similar.
330. A search by
HMRC revealed a company in the name of Seaside Mediterranea SL, of which the
director was Michael Touitou.
331. Mr Saunders
identified the UK incorporated company called Amber Communications Management
Limited. This company had been denied input tax by HMRC on the grounds of
knowledge/means of knowledge of fraud and had appealed HMRC's decision.
Mr Young's evidence – Paris server
332. Mr David
Young was an intelligence analyst with HMRC. When asked to do so by an HMRC
Department, he would analyse information to establish facts from that data. He
had been trained to use the FCIB Paris server and confirmed that he had
received this training in May 2010, at which time the information on the Paris server was available to be used in criminal proceedings.
333. Mr Young
received e-mails from Mr Saunders on 16 March and 22 March 2011 containing deal
sheets for Deals 16 and 17, Deal 18, Deal 22 and Deal CL 4.
334. Mr Young
was asked to compare the deal sheets with the information recently acquired
from the Paris server. The comparison was used to produce a payment chain
relating to the transactions shown on the deal sheets. Each payment chain was
displayed as a chart showing the payment chain and the signatory or all
signatories associated to those accounts.
335. In
compiling his analysis, Mr Young used proprietary HMRC software called iBridge.
This software carried out searches of the FCIB Paris data to identify accounts
and payments that matched details in the deal sheets.
336. Mr Young
created four charts illustrating the movement of money and mobile telephones in
the above deal chains.
337. Three of
those charts showed money moving from Elvissa's sub-account
("Helvissa") to Amex and from Amex to CSL's EU customer. CSL paid the
money to its supplier and the money then proceeded up the UK deal chain as far as the defaulter. The defaulting trader then transferred the money to the
Helvissa sub-account.
338. The fourth
chart showed that the money transfers began chronologically with CSL (Deal 18)
on the 22 March 2006 nineteen hours before it received the funds from Balsim on
23 March 2006. In that period the funds moved from company to company through
the links of the UK deal chain, passing from the defaulting trader, Stella, to the
Helvissa sub-account which then paid Amex. Amex paid Balsim and nineteen hours
after the initial transfer from CSL, Balsim paid CSL and the money had moved in
a complete circuit.
339. A feature
of the Paris server information was that Mr Young was able to identify the time
of each payment. In Deal CL 4 £1,121,850 is paid out of the Helvissa
sub-account at 15.30 on 24 April 2006 and £1,229,343.75 is paid back to the
same sub-account at 16.45 on the same day. The funds passed through seven other
FCIB bank accounts in that time.
340. In
addition, Mr Young looked for all IP addresses used by signatories to the
accounts around the time the payments were made, where these were available.
This provided the dates and times that an FCIB account signatory logged in. It
also provided the IP address they were using when they logged in. Mr Young then
identified which IP address was being used at the time of the payment or within
3 min prior to the payment being made (to account for the FCIB server refresh).
The FCIB data did not hold details of IP address logins prior to 29 April 2006.
341. Mr Young
explained that the IP address was effectively the gateway or router that
someone had used to access the Internet.
342. In Deal 7
it was apparent that URTB (CSL's customer) was using the same IP account as
Amex and Elvissa. In other words, those three companies were using the same IP
address to access FCIB online accounts at the time they were making their
payments.
Cross-examination of Mr Saunders and Mr Young on FCIB evidence
343. Mr Kramer
cross-examined Mr Saunders, asking him whether he could vouch for the integrity
of the information that came from the Dutch server. Mr Saunders replied that he
had no direct knowledge as to the method by which the information was seized,
stored, packaged and interrogated.
344. Mr Kramer
suggested to Mr Saunders that moving money around a payment chain was a
difficult logistical exercise to have been used in a fraud. Mr Saunders did not
agree that the payment chain was particularly complex.
345. In
cross-examination, Mr Young noted that from the information available on the Paris server it was not possible to ascertain the purpose of any payment.
346. Mr Kramer
questioned Mr Young about a payment of 2,080,000 from Helvissa to Amex in
relation to Deal 18. He suggested that it might have nothing to do with the
other money transfers in the payment chain because it was of an entirely
different amount. Mr Young acknowledged that the payment was of a different
amount but explained that it was shown on the chart because the analytical
software he used could see the account balances before and after the payments
were made. The software could establish that in order for Amex to make the next
payment in the chain to Balsim, Amex had to have received the funds from
Helvissa. There were not enough funds in the Amex account to have made the next
payment without the incoming funds from Helvissa.
347. In response
to Mr Kramer's question about iBridge, Mr Young confirmed that the charts he
had produced using it were effectively taken straight from the Paris server data. iBridge automatically converted the information into a chart.
Cross-examination of Mr Dad on FCIB evidence
348. Mr Dad
denied any knowledge of the loan of £100,000 on 6 December 2005 and of £17,500
on 7 December 2005 from Padani's FCIB sub-account in the name of Seaside. He stated that he had not seen the loan entries before. He was asked where the
£100,000 loan came from and replied that he did not know. He was asked:
"Q I take it you noticed? You couldn't fail to
miss £100,000 coming into your bank account, could you?
A However, I believe this is the server's printout,
it is not, as opposed to the banking information I had available when I was
operating the account? And it is our main account so…
Q £100,000 to the penny comes into the account. You
couldn't fail to notice, could you, the arrival of £100,000?
A No, you could not.
Q And, needless to say, like any careful
businessmen, Mr Dad, you would check your bank statements and the transactions
in your bank extremely carefully?
A Yes
Q You didn't have an overdraft facility with FCIB,
did you?
A No
Q So you need to know the balances in your account
among other things to know if you can afford to do a deal, can you do this
trade… can you pay the rent, all the basics. Where did the £100,000 come from?
A Like I said, I do not know.
Q It's not just the £100,000, is it? Because if we
go back to page 253, 7 December 05, £17,500 comes in. Where does it come from?
A I don't know.
349. When Mr
Parroy pointed out that £117,500 had come into CSL's FCIB account from Seaside, Mr Dad said: "This information does not look correct." Later, Mr Parroy
asked Mr Dad:
"Q So you are getting paid money which has
originated with a man whose account has put £100,000 into your account. Now you
are not trying to tell us that that's mere coincidence, are you?
A Like I said, this is the first this was brought to
my attention. I had no loans from any other business. Our accounts were fully
audited. Bank statements were provided to Nigel [Mr Saunders] on a monthly
basis with printouts of all large transactions. This information is just fully
disputed.
Q If it is true, and you knew about it, it means
that you have had a loan from somebody who is absolutely at the heart of this
fraud, doesn't it?
A Like I said, this is the first it was brought to
my attention obviously at the start of this Tribunal.
Q But if it is true and you knew about it what I
said is wholly correct, isn't it?
A It is not true and I didn't know about it."
350. In our
view, Mr Dad's replies were unconvincing. He was, in our view, plainly
uncomfortable whilst he was being questioned about the loans from the Padani
sub-account and we did not consider his evidence to be credible.
Our conclusions on FCIB evidence
351. As already
discussed, we did not consider Mr Dad's evidence that he had opened an FCIB
account because he was concerned that his existing UK bank accounts would be
closed was credible.
352. The
evidence concerning the Dutch server clearly indicated that the transaction
chains were being financed by Elvissa (via Amex) and we considered it more
probable than not that the money in the transaction chain flowed round in a
circle. There was, however, no indication from the Dutch server evidence that
the Appellants were aware of this circular flow of funds or of the existence of
Elvissa or Amex. The evidence did, in our view, establish that the deal chains
were contrived.
353. The Paris server evidence changed the picture in respect of the Appellants’ knowledge. The two
loans to CSL's FCIB account of £100,000 and £17,500 from the Padani sub-account
in the name of Seaside, plainly connected CSL to Mr Michael Touitou and to
Elvissa. Mr Young's evidence made the circular flow of funds even clearer and
the use of the same IP addresses supported the conclusion that the transaction
chain was contrived.
354. The loans
from the Padani sub-account to CSL connected CSL (and Mr Dad), in Mr Parroy's
words, to those who were at the heart of this fraud.
Submissions of the parties
Submissions of HMRC
355. Mr Parroy's
primary submission was that the evidence clearly established that, through the
knowledge of Mr Dad, the Appellants knew that their transactions were connected
with the fraudulent evasion of VAT. His secondary submission was that the
Appellants ought to have known that their transactions were connected to the
fraudulent evasion of VAT.
356. In summary,
Mr Parroy submitted in support of his primary submission:
(a)
the Appellants were set up under false trade categories and then traded
in mobile phones;
(b)
the VAT applications for the Appellants were misleading;
(c)
Mr Dad was aware of fraud in the mobile phone industry;
(d)
Mr Dad's brother, Shafqat Dad, participated in the trading of the
Appellants and coordinated this trading with Goldex and GIP;
(e)
Mr Dad lied about his knowledge of the original purpose of CSL;
(f)
Mr Dad's account of why an account with FCIB was established was untrue;
(g)
the trading patterns of the companies indicated that the deals
were fraudulent:
– all deals led back
to defaulting traders
– buffer deals ended
up with defaulting traders
– the Appellants and
Goldex and GIP dealt with the same suppliers and customers frequently in
identical chains
– the defaulting
traders were used chronologically
– the profit margins
on the buffer deals were consistent
– profits from
broking deals always substantially exceeded profits made by buffers. The major
profits from these broker deals went to the Appellants.
– The volume of trade
of the Appellants increased rapidly following the Bond House decision
– the Appellants
failed to obtain proper due diligence on suppliers/customers prior to dealing
and when due diligence was obtained scant regard as was paid to it
– failure to specify
in deal documentation the precise nature of mobile telephones being traded
(i.e. language, model software, keypad etc)
– all the deals where
Mr Saunders traced the flow of funds involved Amex. The person operating this
company was sought by the Polish authorities for fraud and operated
fraudulently
– all deals involved
European stock with two pin plugs. No credible explanation was given as to why
such goods would ever have been imported into the UK in huge numbers
– the Appellants
failed to obtain IMEI numbers
– none of the
Appellants' suppliers was either a manufacturer or an authorised distributor
and the deal chains never led to a consumer
– arbitrage was
unlikely according to Mr Fletcher’s evidence, particularly with Nokia handsets
– if the Appellants
were "innocent dupes" inserted into fraudulent chains, how were they
manoeuvred so that they always bought from and sold to those participating in
the fraud?
(h)
The Appellants were connected to those
involved in the control of the fraud as indicated in
– Deal 25: payment by CSL of the precise sum due by Datakey to its own supplier Bluewire
– Loans from the
Padani sub-account of £117,500 to CSL was derived from Michael Touitou who
played a prominent role in financing the fraud
– Urban Spice Buyer: the evidence of Mr Ruler showed that the Appellants were actively promoting and organising
fraudulent dealing. Mr Dad denied being aware of Urban but had obtained a TSP
due diligence report on the company
(i)
the Appellants continued to trade with
companies whom they knew (HMRC warning letters of 23 January 2006) had supplied
goods in transaction chains tainted by fraud
(j)
Mr Dad was evasive and untruthful on
important issues.
357. In support of his secondary submission that the
Appellants ought to have been aware that their transactions were connected with
fraudulent evasion of VAT, Mr Parroy's submissions, in addition to those listed
above, can be summarised as follows:
(a)
there was only a very limited grey market
(the evidence of Mr Fletcher)
(b)
market research showed that the available
market was smaller than the alleged sales by the Appellants (the evidence of Mr
Fletcher)
(c)
there was no basis for the level of
profits achieved by the Appellants
– the Appellants
achieve huge turnovers shortly after being established
– no value was added
by the Appellants
– the major
percentage of profits were received by the Appellants
– profits were
consistently earned without the company sustaining losses or being left with
unsold stock
– profits were earned
despite the lack of experience of Mr Dad in mobile phone dealing
– the Appellants
earned profits despite the lack of capital available to them
– the Appellants were
apparently able to obtain massive credit without formal credit agreements or
assets/trading history to support the applications
– the Appellants have
been unable to point to any transactions which were not tainted by fraud
358. In response to Mr Kramer's opening submission that
HMRC should have prevented or have done more to prevent the Appellants from
being parties to fraudulent deal chains, Mr Parroy submitted that HMRC were
constrained in what they could say about other traders because of statutory
taxpayer confidentiality. Moreover, the question with whom a company trades was
the responsibility of that company. Mr Parroy cited the judgment of Floyd J in Mobilx
Limited v HMRC [2009] EWHC 133 (Ch) at paragraph 87 where the learned judge
said:
"It is true, as
the Tribunal accepted, that the directors took comfort from the actions of
HMRC. But the company has to exercise independent judgment, not delegate its
judgment to HMRC. I agree entirely with the Tribunal when it said that
"there must come a time when a trader, told that every one of his
purchases followed a tainted chain, is compelled to recognise that without a
significant change in his trading methods every one of his future purchases is
more likely than not also to follow a tainted chain". The trader is not
entitled, when that point has been reached, to wait the HMRC to tell him to
cease to trade. Moreover, as the Notice [726] explained, HMRC's advice is not
intended to create a shield for fraud."
359. Moreover, the Appellants chose to remain in the
business of wholesaling mobile phones knowing that the sector was rife with
fraud. The Appellants did not take adequate steps to protect themselves from
fraudulent dealings and were regularly warned by HMRC of the dangers inherent
in the trade that they pursued.
360. Mr Parroy drew particular attention to the approach
of Christopher Clarke J (approved by Moses LJ in the Court of Appeal in Mobilx
[2010] EWCA Civ 517) in Red 12 Trading Limited v HMRC [2009] EWHC 2563 (Ch) at paragraph 110:
:
“Examining
individual transactions on their merits does not, however, require them to be
regarded in isolation without regard to their attendant circumstances and
context. Nor does it require the tribunal to ignore compelling similarities
between one transaction and another or preclude the drawing of inferences,
where appropriate, from a pattern of transactions of which the individual
transaction in question forms part, as to its true nature e.g. that it is part
of a fraudulent scheme. The character of an individual transaction may be
discerned from material other than the bare facts of the transaction itself,
including circumstantial and "similar fact" evidence. That is not to
alter its character by reference to earlier or later transactions but to
discern it.
To look only at the purchase in
respect of which input tax was sought to be deducted would be wholly
artificial. A sale of 1,000 mobile telephones may be entirely regular, or
entirely regular so far as the taxpayer is (or ought to be) aware. If so, the
fact that there is fraud somewhere else in the chain cannot disentitle the
taxpayer to a return of input tax. The same transaction may be viewed
differently if it is the fourth in line of a chain of transactions all of which
have identical percentage mark ups, made by a trader who has practically no
capital as part of a huge and unexplained turnover with no left over stock, and
mirrored by over 40 other similar chains in all of which the taxpayer has
participated and in each of which there has been a defaulting trader. A
tribunal could legitimately think it unlikely that the fact that all 46 of the
transactions in issue can be traced to tax losses to HMRC is a result of
innocent coincidence. Similarly, three suspicious involvements may pale into
insignificance if the trader has been obviously honest in thousands.
Further in determining what it was
that the taxpayer knew or ought to have known the tribunal is entitled to look
at the totality of the deals effected by the taxpayer (and their
characteristics), and at what the taxpayer did or omitted to do, and what it
could have done, together with the surrounding circumstances in respect of all
of them."
361. Mr Parroy
submitted that these words of Christopher Clarke J were particularly apposite
in the present case.
362.
Accordingly, Mr Parroy submitted that the Appellants either knew or ought to
have known that their transactions which formed the subject of these appeals
were connected with a fraudulent evasion of VAT and that, therefore, the
appeals should be dismissed.
Submissions for the Appellants
363. Mr Kramer
submitted that the appeals had to be determined by reference to the Appellants'
knowledge at the time they entered into the relevant transactions. Mr Kramer
emphasised that the Appellants had limited resources with which to conduct
investigations. They voluntarily produced the information and documents that
HMRC requested. By contrast, however, HMRC had much greater resources with
which to conduct investigations.
364. Mr Kramer submitted that HMRC were under an
obligation to undertake adequate investigations and to be certain of the information
in relation to matters placed before the Tribunal. HMRC had greater
investigative tools available than the taxpayer. Mr Kramer cited Calltell Telecom Limited
Opto Telelinks (Europe) Limited v HMRC 20266 at paragraphs 11 – 17.
At paragraphs 14 – 16 the Tribunal (Colin Bishopp (Chairman) and Cyril
Shaw FCA) made the
following observations:
"The adverse effects on a business of the
withholding of substantial amounts of input tax credit are obvious, and a
decision to withhold should, correspondingly, be based on proper enquiry and
sound evidence rather than on supposition. So much, we imagine, is
uncontroversial, but there are nevertheless limits to the extent of the burden
which can be imposed on the Commissioners, on which some guidance was offered by
Lightman J in R (UK Tradecorp Ltd) v Customs and Excise Commissioners [2005] STC 138 when, at [18], he said:
“The commissioners are under a duty to conduct a
reasonable and proportionate investigation into the validity of claims for a
refund and repayment and a duty to act proportionately both in respect of the
investigation and in dealing with the taxable person’s claims generally. See R
(on the application of Deluni Mobile Ltd) v Customs and Excise Comrs [2004] EWHC 1030 (Admin). The duty to investigate is applicable both to the claim to
the refund and repayment and to the question whether there is a right to
set-off (or indeed a claim for a further payment from the taxable person). The
duty embraces an obligation to keep all investigations under review. The
commissioners are entitled to take a reasonable time to investigate claims
prior to authorising deductions and repayments and what is a reasonable time
within which to complete an investigation must depend on the particular facts: Strangewood [1987] STC 502 at 505. The availability and proper exercise of the
commissioners’ powers of investigation are essential to maintain the fiscal
neutrality of VAT and prevent refunds being made to parties not entitled to
them. The postponement of repayment of input tax pending the outcome of the
investigation is, as a matter of principle and subject to questions of
proportionality, entirely compatible with the Sixth Directive. Whilst the
burden of proof is upon the taxable person to establish that the investigation of
his unadmitted and unadjudicated claim and the failure to make a part or
interim payment is unreasonable or disproportionate, the burden is on the
commissioners to justify non-payment of it once the claim is admitted or
established and the period of investigation of any cross-claim.”
The question whether the Commissioners’
investigations were adequate is, we think, more properly dealt with in the
context of the evidence adduced at the hearing and the conclusions which can be
legitimately drawn from it, rather than by way of general observations, but
that question does have some additional bearing on the extent of the duty of
disclosure of documents.
It is inevitable that, unless traders in the
Appellants’ position are conspirators in a fraud, they will not have access to
the documents and information which the Commissioners are in a position to
secure, and elementary natural justice demands that the Commissioners should be
open and generous in determining the scope of the disclosure of documents which
they offer, regardless of any direction by the tribunal. Certainly all those
documents on which they relied, directly or indirectly, in reaching a decision
to withhold a claimed input tax credit should be volunteered. It is in our view
clear that it is not sufficient in a case of this kind for them to limit
disclosure to the bare minimum required by rule 20(1) of the Value Added Tax
Tribunals Rules 1986 (SI 1986/590) as amended, namely to those documents they
wish to produce at the hearing. Commonly, the tribunal will be asked to make a
direction in accordance with rule 20(3) for additional, specific, disclosure,
but an appellant seeking such a direction will, often, be hampered in that he
will not know the nature of the documents which are available and which he
should endeavour to have included in the direction."
365. Mr Kramer
noted that a number of HMRC witnesses have been trained in how to give
evidence. He described them as "professional witnesses". He
contrasted this with Mr Dad, who had no experience of giving evidence before a
Tribunal. He explained that Mr Dad’s evidence was, in his words, confused and
stressed.
366. As regards
the FCIB evidence, Mr Kramer drew attention to the evidence of Mr Stone who
accepted that, to the external world, FCIB was a legitimate bank. Mr Kramer
also submitted that the FCIB evidence in respect of the Paris server, according
to Mr Young, had become available to HMRC in the middle of 2010 and not more
recently as Mr Parroy had submitted. Mr Kramer noted, however, that HMRC were
only given permission in September 2010 to allow FCIB evidence to be used in
civil cases. Mr Kramer submitted that no weight should be given to the Paris server evidence and that its late introduction should be taken as an indication of
the manner in which HMRC had dealt with the provision of information and
placing of evidence before the Tribunal.
367. Mr Kramer
drew attention to the fact that neither Mr Saunders nor Mr Young could vouch
for the integrity of the FCIB Paris server data. Mr Kramer submitted that the
position was that the Tribunal had evidence placed before it in respect of
which it did not know the source and which had not been available for testing.
368. Referring
to the evidence of Mr Saunders and Mr Young, Mr Kramer noted that although the
diagrams attached to their evidence indicated that money went round in a circle
it did not indicate the money coming out of the circle. The Tribunal had not
been told where the money went. There was no evidence that the Appellants
received the money. In Mr Kramer's submission this was a significant indicator
that the Appellants were not parties to the fraud.
369. Mr Kramer
referred to the evidence of Mr Monk in relation to XS Enterprise Systems
Limited, where it took a maximum of 48 hours to deregister the company for VAT.
A Regulation 25 letter had been issue the previous day. Mr Kramer submitted
that Regulation 25 notices and the registration were tools that were available
to HMRC to enable fraud be prevented.
370. Mr Bycroft
gave evidence concerning the criminal convictions of one of the directors of
the defaulting trader Midwest Communications. Information about criminal
convictions was not available to the Appellants and they had no tools to
investigate such matters, unlike HMRC.
371. Mr Kramer
drew attention to the evidence of Ms Hirons. She stated that she did not uplift
a computer belonging to the defaulting trader Zoom Products because she did not
have authority to do so. Mr Kramer drew her attention to HMRC's powers under
the Value Added Tax Act 1994. He suggested that the Tribunal should consider
the manner in which evidence was given by HMRC officers and ask whether they
were genuinely trying to assist the Tribunal to their maximum ability.
372. As regards
Mr Fletcher's evidence, Mr Kramer queried whether Mr Fletcher had real
experience of start-up companies. He also submitted that Mr Fletcher had used
selective quotations from articles to indicate that there was no legitimate
grey market. Mr Kramer also queried Mr Fletcher's evidence concerning Nokia
pricing. He noted that Mr Fletcher had indicated that he had a direct
relationship with Nokia but had relied on third-party information with regards
to Nokia's sales. Mr Kramer noted that Mr Fletcher had conceded that there was
a significant grey market in Samsung handsets.
373. Mr Kramer
drew attention to Mr Fletcher's statement that he has seen no evidence that the
Appellants were involved in the retailing of airtime and his subsequent
admission that he had not seen all the evidence in the appeals. In Mr Kramer's
submission this demonstrated that Mr Fletcher was a partisan witness rather
than a dispassionate expert.
374. Mr Kramer
noted, however, that Mr Fletcher had accepted that mobile telephones with two
pin chargers could be used anywhere in the world. Mr Fletcher had also accepted
that the only way to undertake grey market trading was by back-to-back deals.
375. Mr Kramer
also drew attention to Mr Stone's evidence that for external purposes the FTI
was a legitimate organisation. Therefore, when the FTI discussed trading and
advertised traders on their trading board, there was no reason for the
Appellants to question their commercial credentials. It was not legitimate,
some six years later and with the benefit of hindsight, to suggest that the
Appellants should have asked more questions.
376. As regards
the Appellants opening bank accounts with FCIB, Mr Kramer noted that Mr Stone
had indicated that rumours had been circulating in the market that UK banks were closing the bank accounts of mobile phone traders. According to Mr Kramer, this
was something that was being reported by the FTI. It was, therefore, something
that the Appellants could legitimately consider and it was therefore
appropriate and legitimate of the Appellants to have decided to open an account
with FCIB.
377. Mr Kramer noted
that in the evidence of Mr Stone and Mr Saunders it was accepted that
"veto letters" simply stated that a trader had been deregistered
(unless it was a case of a hijacked registration) and gave no reason for the
deregistration. In Mr Kramer's submission these letters would not have put the
Appellants on notice.
378. Mr Kramer
also noted that Mr Stone had accepted that an exporter would have needed to
generate greater profits than a domestic trader e.g. a buffer, because an
exporter would be incurring significant transport costs and would also have to
finance the carrying cost of the VAT prior to its repayment. On the question of
why the Appellants' customers did not purchase the goods from a trader higher
in the deal chains than the Appellants, Mr Kramer submitted that this was
because not every trader had the financial muscle, resource and ability to
export and finance the VAT repayment.
379. Mr Kramer
drew attention to Mr Stone's agreement ("Potentially, yes.") that the
increase in trading following the Bond House decision could have related
to the increased certainty resulting from that decision.
380. In relation
to Mr Saunders's evidence, Mr Kramer submitted that in a number of instances Mr
Saunders appeared not to be attempting to be helpful to the tribunal e.g. Mr
Saunders had not wanted to accept that he knew that European Telecom was listed
on the stock exchange and was a significant company.
381. Mr Kramer
also submitted that Mr Saunders had accepted that it was normal for there to be
trust between the customer and supplier, even if it was ill-advised. Mr Kramer
made a submission in the context of the £4 million credit that had been
extended to CSL by Adworks. Mr Kramer noted that Mr Dad had not been
cross-examined on his evidence in relation to why Adworks advanced £4 million
of credit to CSL.
382. Mr Kramer
submitted that it was legitimate for the Appellants to carry out Europa checks
on its trading partners rather than request a Redhill check. Mr Kramer noted
that at no time had the Appellants been informed that Redhill was providing a
service of anything other than checking VAT numbers.
383. As regards
the letter from Nintendo, although Mr Saunders suggested that the letter was
fraudulent, he had indicated that he saw no reason to investigate it.
384. The
Appellants had used TSP to assist in due diligence. It was accepted that TSP
was a legitimate organisation.
385. Mr Kramer
invited this Tribunal to treat Mr Ruler's evidence in relation to Urban with
extreme caution. He suggested that Mr Ruler was less than open in his evidence
to the Tribunal. Moreover, no attempt had been made to require Mr Rahman to
give evidence before the Tribunal so that his evidence could be heard directly
and cross-examined.
386. In response
to Mr Parroy's submission that it could not be coincidence that all of the
trades in which the Appellants were involved led back to a tax loss, Mr Kramer
submitted that the Appellants had not been told that the whole industry was
fraudulent. The Appellants had not been told this and it was appropriate for
them to rely on the information that was available.
387. As regards the registration of the Appellants for
VAT, it had to be accepted that when a new businesses started it could not know
with certainty exactly where the business will go. Mr Dad had indicated that he
was going to undertake both retail and wholesale trading but when wholesale
trading was more successful than retail trading. It was entirely sensible for
him to invest resources and effort into wholesale trading.
388. Mr Kramer acknowledged that the Appellants'
paperwork was not always up-to-date but submitted that this was common with
small family companies. Mr Kramer submitted that the fact that Mr Dad has
stated that one of the Appellants was going to enter into pharmaceutical
trading but ended up trading in mobile phones should be disregarded. It was not
being suggested by HMRC that Mr Dad was surreptitiously trading in mobile
phones - he was open with HMRC about his trades.
Our decision
389. The
Appellants accepted that all their transactions in respect of the periods under
appeal were connected to the fraudulent evasion of VAT. The evidence of those
HMRC officers who had responsibility for each of the defaulting traders was not
challenged on this issue. It was also accepted that HMRC had incurred a tax loss
through the fraudulent evasion of VAT by the defaulting traders in respect of
each relevant deal chain.
390. We have
concluded that the Appellants knew that their transactions under appeal were
connected with the fraudulent evasion of VAT. We further conclude, in the
alternative, that the Appellants should have known that their transactions were
connected with the fraudulent evasion of VAT.
391. We have
reached these conclusions having considered all the evidence and the
submissions of the parties. The burden of proof lies on HMRC. We have applied
the civil standard of proof, ie the balance of probabilities in reaching our
conclusions.
392. Our reasons
for reaching these conclusions are set out below. We should emphasise that the
conclusions are based on the evidence considered as a whole rather than on any
individual item of evidence. Some factors were, in our view, more compelling
than others. Some aspects of the evidence were not conclusive by themselves but
when viewed in the context of the evidence of the whole, supported our
conclusion that the Appellants had actual knowledge that their transactions
were connected with fraud.
393. For
convenience, in the course of this decision we have indicated our views on
particular issues or aspects of the evidence. In the following paragraphs we
draw these strands together in order to explain our conclusions.
394. In reaching
our conclusions we have borne in mind the words of Christopher Clarke J (at
paragraph 110) in Red 12 Trading cited above and, whilst appreciating
that every case must be judged on its own facts, agree with counsel for HMRC
that they are particularly appropriate in this case:
"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."
Actual knowledge of the Appellants
395. We base our
conclusion that the Appellants knew that their transactions were connected with
the fraudulent evasion of VAT on the following reasons.
396. As we have
indicated at various places in this decision, we did not find Mr Dad to be a
credible witness. We have no doubt that on a number of occasions his evidence
was untruthful. During cross-examination he was repeatedly evasive and refused
to engage directly with the questions being asked of him. We considered his
evidence to be unreliable.
397. We consider
that the incorrect trade descriptions given in respect of both CSL
(pharmaceutical supplies) and CL (retail electronics) were intentionally
misleading. We also note, in relation to CSL, that Mr Dad contradicted himself
in relation to his knowledge that CSL had originally been registered with the purpose
of making pharmaceutical supplies (see paragraphs 52 – 55).
398. Moreover,
CSL's application to remain on monthly repayments, particularly the description
of CSL's trading relationships attached to the letter of 25 January 2005, was,
in our view, deliberately misleading. It indicated deliberate planning for an
export trade.
399. In respect
of CL's application for registration, there was a false statement that a supply
had been made on 1 July 2005.
400. Mr Dad was
fully aware of the risks of MTIC fraud. It was explained to him on numerous
visits by HMRC officers in visits to his premises and in letters written to him
by HMRC (see paragraphs 70 – 89).
401. Mr
Fletcher's evidence, which we accepted, made it clear that the Appellants'
transactions were not part of the legitimate grey market. The Appellants failed
to sufficiently specify the goods in which they were dealing in their invoices
and purchase orders. Moreover, Nokia's homogenous pricing policy effectively
ruled out arbitrage trading. In addition, the Appellants traded unrealisticly
high volumes of the mobile handsets in question. We concluded that the
Appellants, as dealers in mobile phone handsets, were more likely than not to
have known of these factors.
402. Deal 25
involving Datakey was, in our view, a telling piece of evidence. It revealed
that Mr Dad knew the price paid by and therefore the mark-up made by his
immediate supplier. There seemed to be, in our view, no credible alternative
explanation for the issue of the first payment. Certainly we did not consider
Mr Dad's explanation to be remotely credible. It showed that Mr Dad knew more
than he claimed and, in our view, was a significant indicator that Mr Dad was
aware that the dealings of the Appellants were connected with the fraudulent
evasion of VAT.
403. The trading
patterns and trading behaviour of the Appellants clearly indicated that the
transactions subject to this appeal were contrived. In our view, these
transactions manifested few features in common with legitimate trading
transactions.
(1)
All the deals of the Appellants in the periods under appeal traced back
to 11 defaulting traders.
(2)
The buffer deals in which the Appellants participated contained
significant features which indicated contrivance. Mr Saunders's evidence was
that all the buffer deals in which the Appellants featured traced back to
defaulting traders. In 63 of the 103 deals where CL acted as a buffer trader
the deal chains featured one of the 11 defaulting traders appearing in the
transactions which form the subject matter of these appeals (paragraph 137). In
respect of the 77 deals where CSL acted as a buffer trader 71 deals also
featured one of the 11 defaulting traders appearing in the deal chains in
respect of these appeals. Moreover, in our view, the fact that the Appellants’
buffer deals all or mainly traced back to defaulting traders and the fact that
in a high proportion of the buffer deals the same defaulting traders as those
in the Appellants' broker deals are involved could not be mere coincidence but
indicated the Appellants' awareness of the overall scheme to defraud HMRC. (See
paragraphs 139 – 144).
(3)
The mark-ups made by the Appellants' suppliers showed a remarkable
degree of consistency. Mr Dad's evidence was that he was unaware of his
supplier's mark-ups. This was, in our view, shown to be untrue in relation to
Deal 25 involving Datakey. However, the degree of consistency of the mark-ups
made by the Appellants' suppliers, when considered in the context of the
evidence as a whole, strongly indicates that the Appellants knew that their
transactions were contrived. It is hard to understand how the Appellants, if
they were dealing in genuine commercial transactions at arm’s length, could
unknowingly agree to buy goods from suppliers at a price which so consistently
left the supplier with the same profit margin. (Paragraphs 149 – 150)
(4)
The Appellants' profit margins were remarkably consistent. Again, it is
hard to understand how such consistency could be achieved in an open market
with parties dealing at arm's length. (Paragraphs 151 – 156).
(5)
The chronological rotation of defaulting traders was an indication that
the deal chains were contrived, although this does not by itself indicate
actual knowledge of the Appellants that their transactions were connected with
fraudulent evasion of VAT. Nonetheless, the rotation of defaulting traders is
part of the overall factual background relating to the underlying VAT fraud.
(Paragraphs 145 – 147)
(6)
There was no reason why the Appellants' customers should purchase the
goods from the Appellants (thereby incurring an additional mark-up) rather than
sourcing the goods from traders lower down the deal chain. The evidence was
that all the traders in the deal chain advertised on the same internet trading
platforms. The trades took place within a very short timescale. There was no
sensible reason why the customers would not seek, if trading in a rational and
open market, to shorten the deal chains. We were unconvinced by Mr Dad's
explanation. (Paragraph 157)
(7)
The Appellants always occupied the same position in the deal chains
(i.e. the fifth UK company in the deal chain). This occurred in every one of
the 43 deal chains (including the un-appealed deals). It is hard to see how
this could arise otherwise than by virtue of the fact that the deal chains were
contrived. (Paragraphs 159 – 160)
(8)
There was no evidence of negotiation of any of the deals which were the
subject of these appeals (or, for that matter, in respect of the un-appealed
deals). (Paragraph 161 – 162)
(9)
The rapid and huge increase in turnover of both the Appellants was
highly suspicious. The Appellants had very little capital and Mr Dad had no
previous experience of wholesale trading in mobile phones. The actual turnover
achieved by the Appellants contrasted markedly with the estimated turnover stated
in the Appellants’ application for registration for VAT. (Paragraph 163-164)
404. As regards
due diligence, many of the TSP reports were produced after the Appellants had
commenced trading with the companies concerned. In some cases, the reports were
produced after all the trades, in the relevant period with a particular
company, had been concluded. We did not find Mr Dad's explanation, that these
reports were merely the latest version of earlier reports, to be credible.
These were the reports exhibited to Mr Dad's witness statement. It was
obviously important to produce a report which indicated the Appellants' state
of knowledge at the time the transactions were concluded. If there had been
earlier reports they would surely have been exhibited to Mr Dad's witness
statement.
405. In
addition, there was no credible evidence that Mr Dad took heed of warnings or
matters of concern arising from these reports. For example, in relation to
URTB, there were a number of matters which should have given rise to serious
concern (including the wrongful signature by the company secretary of the
director's self-certification) but which left Mr Dad untroubled.
406. After
receiving the warning letters issued by HMRC on 23 January 2006, alerting the
Appellants to the fact that earlier transactions had been traced back to VAT
fraud, Mr Dad continued to deal with three suppliers (Mobile Heaven, Inter
Communications and AR) in February and March 2006 without any apparent updating
of existing due diligence. (Paragraph 223 – 227)
407. Furthermore,
the Appellants did not begin to record IMEI numbers (a reference number unique
to each mobile handset) until September 2006 and only then because HMRC had
directed the Appellants to do so. Mr Dad had previously been advised to record
this information to ensure, for example, that the goods had not been stolen.
(Paragraphs 228 – 237)
408. In relation
to Adworks, the evidence showed that in April 2005, before the transactions in
respect of the present appeals were concluded, CSL had permitted the supplier
of its immediate supplier to deliver stock directly to CSL's customer. By this
action CSL risked being cut out of future deals. This strongly suggested that
CSL was involved in trade which was not founded on legitimate commercial
principles. (Paragraph 264-271)
409. We
considered that CSL operated in conjunction with Goldex and GIP, resulting in a
further clear indication that CSL was aware that its transactions were
contrived. The similarities in the deal chains and the mark-ups made by the
immediate suppliers of Goldex, GIP and CSL were not, in our view, matters of
coincidence. We did not find Mr Dad's statement that he was unaware of his
brother's activities to be credible.
410. In relation
to the FCIB evidence, we did not accept Mr Dad's evidence about his reasons for
opening an account for CSL with FCIB (i.e. that he was concerned that his
account with Bank of Scotland would be closed). We did not consider the reason
he gave to be credible. (Paragraph 293-300)
411. The
evidence of the Dutch FCIB server clearly indicated the circular nature of the
deal chains and the fact that the deal chains were contrived.
412. The
evidence in respect of the Paris FCIB server of loans from the Padani
sub-account to CSL plainly connected CSL (and Mr Dad) to those persons
operating the VAT fraud. This evidence, therefore, simply added further
confirmation that the Appellants knew that their transactions were connected to
the fraudulent evasion of VAT.
413. The
admission and the provenance of the Paris FCIB server evidence were disputed.
We should make it clear, however, that we would have reached the same
conclusion even if the evidence in respect of the Paris FCIB server had not
been admitted. In our view, the cumulative evidence (disregarding the evidence
from the Paris FCIB server) was overwhelming and plainly showed that the
Appellants had actual knowledge that their transactions were connected with
fraud.
Means of knowledge
414. Having
concluded that the Appellants had actual knowledge that their transactions were
connected with the fraudulent evasion of VAT, it is strictly unnecessary for us
to decide whether they ought to have known that their transactions were so
connected. However, for completeness and alternatively, we consider that the
Appellants ought to have known that their transactions were connected with the
fraudulent evasion of VAT.
415. In reaching
this conclusion, we rely on the reasons referred to above under the heading
"Actual knowledge of the Appellants."
416. In
addition, in reaching our conclusion under this heading, we rely on the fact
that the Appellants were, in every transaction under appeal, able to sell their
stock and make profits without being left with any unsold stock or having
defective stock returned. They never had to split a purchased batch and sell
sub batches to different customers at different times. They never merged
purchased batches into larger consignments. They were able to grow their
business at speed to enormous volume without adding any value to the goods by
manipulation or skill. Very simply, the adage ‘too good to be true’, ought to
have warned them that fraud was the mechanism underlying their success.
417. The
Appellants were able to obtain large amounts of credit even though they had a
short trading history, limited capital and no credit agreements in place.
(Paragraph 266 – 270)
418. Finally, all
the transactions under appeal involved handsets with two pin chargers. There
was no obvious reason why such goods would be imported into the UK and traded between UK traders.
Conclusion
419. For the
reasons given above, we dismiss these appeals.
Costs
420. The
Tribunal has already directed that Rule 29 Value Added Tax Tribunals Rules 1986
shall apply to these appeals and HMRC have indicated that if the appeals were
dismissed they would seeking their costs. Accordingly, we direct that the
Appellants pay the reasonable costs of HMRC, the amount to be assessed by a
costs judge, if not agreed.
421. 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.
GUY BRANNAN
TRIBUNAL JUDGE
RELEASE DATE: 16 December 2011
