P S Gill & Son (UK) Ltd v Revenue & Customs [2012] UKFTT 374 (TC) (21 May 2012)
DECISION
Introduction
Background to the appeal
1.
This is an MTIC appeal. It arises from the refusal of the Respondents
(“HMRC”, which will be used in this decision to refer also to Her Majesty’s
Customs & Excise, the predecessor body to the Respondents) to repay sums
totalling £2,448,530 claimed by the Appellant (“PSG”, which in this decision
also refers to its predecessor entities in carrying on its business) in respect
of input VAT on the following purchases:
(1)
in PSG’s VAT accounting period for the month of April 2006 (period
04/06), the purchase on 26 April 2006 of 5,000 Nokia 8800 and 7,000 Nokia N90
mobile phones for a total price of £3,721,000 plus £651,175 of VAT from
Kingswood Trading Services Limited (“Kingswood”, which in this decision also
refers to the other companies managed by Ian Tuppen with which PSG traded over
the relevant period), which phones were sold by PSG to 2Trade BVBA of Belgium
(“2Trade”) on the same day for £3,869,500 (free of VAT);
(2)
in PSG’s VAT accounting period for the month of May 2006 (period 05/06):
(a)
the purchase on 25 May 2006 of 5,000 Nokia 9300i, 3,750 Nokia N70 and
2,000 Nokia 8800 mobile phones for a total price of £2,749,250 plus £481,118.75
of VAT from Kingswood, which phones were sold by PSG to 2Trade on the same day
for £2,859,875 (free of VAT);
(b)
the purchase on 30 May 2006 of 2,400 Nokia 8800, 3,000 Nokia 9500 and
3,500 Sony Ericsson W810i mobile phones for a total price of £2,497,100 plus
£436,992.50 of VAT from Kingswood, which phones were sold by PSG to 2Trade on
the same day for £2,597,100 (free of VAT); and
(c)
the purchase on 31 May 2006 of 63,000 Pentium P4 SL7Z9 CPU’s for a total
price of £5,024,250 plus £879,243.75 of VAT from Crestview Enterprises Limited
(“Crestview”), which CPU’s were sold by PSG to Fone Link SL of Spain (“Fone
Link”) on the same day for £5,229,000 (free of VAT).
2.
HMRC claim to be entitled to refuse the repayment because they say PSG’s
purchases giving rise to the relevant input VAT were connected to a fraudulent
evasion of VAT and PSG should have known of that fact. They do not allege that
PSG actually knew of that fact.
3.
In relation to the purchase referred to at [1(2)(c)], HMRC say that the
purchase can be traced back, through what they describe as a “contra trader”,
to traders who fraudulently evaded VAT on supplies of other goods.
4.
In relation to the remainder of the purchases listed above, HMRC say
that the purchases can be traced directly back, through chains of sales and
purchases of the same goods, to traders who fraudulently evaded VAT on their
respective supplies of those goods.
5.
PSG does not dispute the chains of sales alleged by HMRC. PSG accepts
that the relevant VAT defaults took place. It does not however accept that the
defaults were fraudulent and therefore it does not accept that a connection
exists between PSG’s purchases and any fraudulent default. It also raises
certain detailed objections to the “connections” asserted by HMRC to exist
through the contra trader.
6.
Even if a connection is in fact established between all of PSG’s
purchases and one or more fraudulent VAT defaults, it also asserts that it
neither knew nor should have known of such a connection.
Structure of this decision
7.
We first summarise the sources of evidence made available to us, then
set out the basic facts of the appeal which are substantially agreed between
the parties. As the parties have largely agreed the legal principles which are
applicable, we then set out those principles (identifying the few outstanding
issues on them).
8.
We then turn to the detail of the matters which are required to be
proved by HMRC. First, we consider whether they have established the existence
of VAT fraud connected to PSG’s purchases. We then consider the matters which
lie at the heart of the appeal, namely whether PSG should have known of the
connection to any such fraud. We do this by examining PSG’s trading history
and then focusing specifically on the deals the subject of this appeal.
The Evidence
Introduction
9.
We were supplied with a large amount of documentary evidence, mostly in
the form of witness statements and exhibits from the following HMRC officers:
(1)
Joseph Baines (responsible for verifying PSG’s VAT returns and
associated VAT repayment claims which are the subject of this appeal);
(2)
Michael Donald Phipps (PSG’s control officer for most of the time from
May 2003 to April 2006);
(3)
Sarah Jane Barker (responsible for verifying the VAT return of Crestview
Enterprises Limited (“Crestview”), the alleged contra trader, for its VAT
accounting period from 1 April to 30 June 2006);
(4)
Peter Goulding (in relation to the alleged defaulter C and B Trading
(UK) Limited (“C&B”));
(5)
Vivian Barbara Parsons (in relation to the alleged defaulter RS Sales
Agency Limited (“RS Sales”));
(6)
John Michele Christopher Cordwell (in relation to the alleged defaulter
Red Rose Consultancy (UK) Limited (“Red Rose”));
(7)
Barry Michael Patterson (in relation to the alleged defaulter Zenith
Sports (UK) Limited (“Zenith”));
(8)
Fu Sang Lam (in relation to the alleged defaulter West 1 Facilities
Management Limited (“West 1”));
(9)
David Kenneth Leach (referring to and commenting on a witness statement
of Officer David Skelly, who had since left HMRC, concerning an earlier
disputed claim of PSG for a VAT repayment);
(10)
Terence Mendes (in relation to First Curaçao International Bank NV (“FCIB”));
(11)
David Young (in relation to FCIB’s Paris server information);
(12)
Andrew Leatherby (in relation to IP address logging); and
(13)
Guy Roderick Stone (in relation to MTIC generally and in relation to Ian
Tuppen of Kingswood).
10.
We also received a witness statement from Sukhdev Singh Gill (“Mr Gill”),
the managing director of PSG. He had previously carried on PSG’s business as a
sole trader and, before that, in partnership with his father and brother.
11.
At the hearing, Mr Gill gave extensive oral testimony and the following
HMRC officers also gave oral testimony: Mr Phipps, Mr Baines, Mr Leach and Mr
Mendes (who, by agreement between the parties, gave some evidence about
“Redhill verification” procedures as well as being cross examined on his
evidence in relation to FCIB).
Non-contentious facts
12.
Arising from this evidence, Mr Chapman’s well-structured closing
submission on behalf of HMRC included the following list of “apparently
non-contentious” facts (which we have edited only to fit the context and to
remove cross-references to the evidence):
(1) PSG
carries on business in the trade of clothing, electronics, general trading,
import and export, and wholesaling of a variety of goods (“the Business”).
(2)
PSG’s VAT registration number is 112 6012 33.
(3)
The Business, with its VAT registration number, had originally begun as
a sole proprietor under the name of Mr Piara Singh, trading as PS Gill and
Sons. In the original VAT1 the main trade classification was selected as being
code 8217 – girls’ wear and household textiles.
(4)
With effect from 1 April 1981, the Business became a partnership between
Mr Piara Singh and his two sons, Mr Gill and Mr Inderjit Singh.
(5)
With effect from 1 April 2004, Mr Gill became the sole proprietor of the
Business.
(6) PSG
subsequently took over the Business, and its VAT registration number, following
a transfer of a going concern on 1 April 2006.
(7)
PSG stated on its VAT registration form dated 24 March 2006 that its
estimated turnover in the following twelve month period was to exceed
£1,000,000, that it expected [the VAT on] its purchases regularly to exceed the
VAT on its taxable supplies and that it did not expect to be either buying from
or selling goods to other EU Member States.
(8)
PSG submitted VAT returns for the period 04/06 on or about 8 May 2006
and for the period 05/06 on or about 9 June 2006 (“the Returns”). The Returns
were selected for in-depth verifications.
(9) By a
decision dated 27 March 2007, Mr Joseph Baines (Higher Officer of HMRC) denied
input tax claimed by PSG in the period 04/06 in the sum of £651,175. This
related to six purchases of mobile phones from Kingswood which were
combined into one sale to 2Trade.
(10) By a further decision dated
27 March 2007, Higher Officer Baines denied input tax claimed by PSG in the
period 05/06 in the sum of £918,111.25. This related to seven purchases of
mobile phones from Kingswood, which were combined into two sales to 2Trade.
(11)
By a further decision dated 7 May 2008, Higher Officer Baines denied
further input tax claimed by PSG in the period 05/06 in the sum of
£879,243.75. This related to the purchase of computer processing units
(“CPUs”) from Crestview, which PSG sold to Fone Link.
(12)
The basis for each of these decisions was that Higher Officer Baines was
satisfied that the transactions formed part of an overall scheme to defraud
HMRC and that PSG knew or should have known that this was the case.
(13)
PSG issued a notice of appeal against the decisions of 27 March 2007,
which was served on 3 April 2007. The grounds of appeal are as follows:
“The Appellant denies that he deliberately or recklessly
ignored factors which indicated or may have indicated that the transaction
entered into formed or may have formed part of an overall scheme to defraud the
revenue.”
(14)
PSG issued a notice of appeal against the decision of 7 May 2008, which
was served on 20 May 2008. The grounds of appeal are in the same terms as the
appeal against the decisions of 27 March 2007.
(15)
By an order dated 14 July 2008, the two appeals were consolidated and
directed to proceed under the reference MAN/07/0411.
(16)
Various orders for directions have been made, culminating in a consent
order approved on 22 January 2010 (“the 2010 Order”) listing the hearing of the
appeal and providing for consequential directions.
(17)
The appeal was listed for fifteen working days commencing on 9 May 2011.
13.
Mr Brown on behalf of PSG, in his equally well-structured submission,
agrees the above facts with one qualification. In relation to paragraphs [12(9)]
and [12(10)], he states that in the two VAT periods PSG made only three
purchases from Kingswood, each consisting of several different types of phone;
it was Kingswood’s decision to invoice each type of phone separately, resulting
in 13 separate invoices. He submits that this is important when assessing
circumstantial evidence of PSG’s knowledge, an exercise which he says should be
carried out in the context of three mobile phone deals, not 13.
The Law
14.
There was a large measure of agreement between the parties as to the law
to be applied in this case. The basic law flows from the decision of the
European Court of Justice in the combined cases of Axel Kittel v Belgium;
Belgium v Recolta Recycling [2006] ECR 1-6161, as explained in the Court of
Appeal’s judgment in the combined cases of Mobilx and others v HMRC [2010] EWCA Civ 517.
15.
In his closing submissions on behalf of HMRC, Mr Chapman set out a
summary of the legal principles which he said should be applied, as follows:
(1)
A claim for the repayment or deduction of input tax may be denied where
the trader knew or should have known that, by his purchase, he was
participating in a transaction connected with the fraudulent evasion of VAT.
(2) 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 fraudulent evasion.
(3)
Tribunals should not unduly focus on due diligence.
(4)
It would be artificial only to look at the purchase in respect of which
the input tax is to be denied. Surrounding circumstances and the totality of a
trader’s deals should be considered.
(5)
The relevant time of knowledge is the time of the trader’s transaction.
(6) In a
contra transaction, the apparently clean chain need not pre-date the allegedly
dirty chain.
(7)
The burden of proof as to the state of the trader’s knowledge is upon
HMRC.
(8)
The standard of proof is the balance of probabilities.
(9)
Circumstantial evidence of fraud of a sufficiently definite type will
often indicate that a trader has chosen to ignore the obvious explanation as to
why he was presented with an opportunity to reap a large and predictable reward
over a short space of time.
(10) There is no need for the tax
losses to be allocated to specific traders or apparently clean chains.
16.
Mr Brown in his closing submissions on behalf of PSG took issue only
with paragraphs [15(6)] and [15(10)] of the above summary.
17.
In relation to paragraph [15(6)], he did not fundamentally disagree with
Mr Chapman’s submission, he simply pointed out that:
“Insofar as contra-transactions where the evasion occurs
post-date the Appellant’s transaction, HMRC must prove the Appellant ought to
have known at the time of its transactions that another party was going to
evade VAT at some point in the future.”
18.
In relation to paragraph [15(10)], his point was more substantial, and consisted
of two limbs. If tax losses were not allocated to specific traders or
apparently clean chains, he pointed out (in summary) that:
(1)
the identity of the alleged fraudulent defaulter would not be known,
which would mean that fraud on the part of that defaulter could not be
established; and
(2)
there was a real possibility that the amount of input tax denied to PSG
would exceed the amount of VAT allegedly or actually unaccounted for by the
defaulter, which would contravene the principle of fiscal neutrality.
19.
He also submitted that if HMRC were to satisfy the test set out in
paragraph [15(2)], they would have to exclude all other reasonable explanations
for the circumstances in which each purchase took place. Finally, whilst
accepting that the standard of proof was the usual civil standard of “balance
of probabilities”, he submitted that the strength of evidence required to prove
dishonesty was greater than that required to prove negligence.
20.
We consider these submissions later in this decision, in the appropriate
context
21.
Subject to the points raised by Mr Brown (which we address in context
later in this decision), we see no reason to disagree with the above general
statements of legal principle set out by Mr Chapman.
Were PSG’s purchases connected with fraudulent evasion of VAT?
Introduction
22.
This question clearly comprises two interlinked elements. First, HMRC
must show that a fraudulent evasion of VAT has taken place and second, they
must show that PSG’s purchases were connected with that evasion.
23.
The evidence presented by HMRC was broken down by reference to “deals”
to which they ascribed reference numbers. A summary of the deals is set out in
tabular form in Part 1 of Schedule 1 to this decision. It is to be noted that
this referencing system is entirely HMRC’s. It pays no regard to the fact that
PSG negotiated and documented what it regarded as only four deals (three with Kingswood and one with Crestview):
(1)
All the deals in 04/06 (numbered 1 to 6 by HMRC) which PSG documented as
one purchase from Kingswood and sale to 2Trade on 26 April 2006;
(2)
Deals 5 to 8 in 05/06, which PSG documented as one purchase from Kingswood on 25 May 2006 and sale to 2Trade on 26 May 2006;
(3)
Deals 1 to 3 in 05/06, which PSG documented as one purchase from
Kingswood on 30 May 2006 and one sale to 2Trade on 31 May 2006; and
(4)
Deal 4 in 05/06, which comprised a single purchase from Crestview and
sale to Fone Link on 31 May 2006.
24.
It is also to be noted that HMRC’s referencing system does not align
naturally with the chronological order of events. In particular, in period
05/06 deals 5 to 8 took place before deals 1 to 4.
25.
HMRC have traced the chains of supply of the relevant goods back from
PSG and Crestview, using information obtained from PSG and other traders.
26.
Diagrammatic summaries of the deal chains so traced and of Crestview’s
trading activities during its relevant VAT accounting period are set out in
parts 2 (PSG’s deal chains) and 3 (Crestview’s activity) of Schedule 1 to this
decision.
Direct connection to VAT defaulters
27.
In relation to all of the deals except Deal 4 in 05/06, HMRC were able
to trace back the chains of supply of the relevant goods (all of which were
mobile phones of various types) directly from PSG to the VAT defaulters C&B
and RS Sales.
28.
PSG accepts that these chains of supply have been correctly traced
(there was originally some doubt in relation to one of the chains, but this has
been satisfactorily resolved and PSG no longer dispute it. In any event, we
are also satisfied that all the chains have been correctly traced).
29.
PSG also accepts that the VAT on the original supplies of the goods by
C&B and RS Sales has gone unpaid.
30.
However PSG does not accept that the defaults by C&B and RS Sales
were fraudulent, and in relation to those defaults it therefore does not accept
that PSG’s purchases can be connected to fraudulent evasion of VAT.
31.
As we understand PSG’s position, it accepts that if the defaults of
C&B and RS Sales are found to be fraudulent, then PSG’s purchases would be
connected with that fraudulent evasion of VAT (and we would also hold such
connection to be self-evident).
Connection to VAT defaulters through contra trader
32.
In relation to deal 4 in period 05/06, HMRC say that Crestview was
acting as a contra trader, having acquired the CPUs on an intra-EU acquisition
from a trader in Portugal, effectively free of VAT. (Readers of these
decisions will require no explanation of contra trading, and for those seeking
an explanation, a summary explanation is set out in Schedule 2 to this
decision.)
33.
An understanding of Crestview’s overall trading activity in its relevant
VAT accounting period (the three month period ended on 30 June 2006) can be
obtained from the diagrammatic summary in Part 3 of Schedule 1 to this
decision.
34.
In a contra trading situation, HMRC must either:
(1)
establish that the contra trader was acting fraudulently (in which case
a clear “connection” to fraudulent VAT evasion within Kittel is easily
established, the fraud in question being the contra trader’s fraudulent contra
trading activity); or
(2)
establish a connection with some other VAT fraud (which will generally
need to be the fraud of a fraudulent defaulter at the beginning of a “dirty
chain” leading up to the contra trader).
35.
Whilst Officer Barker in her first witness statement asserted that she
was “satisfied that Crestview knew that they were involved in a fraud which
also involved the appellant in this case”, HMRC did not press this assertion in
their statement of case or at the hearing. Whilst there were some aspects of
the evidence before us which pointed in that direction, we did not consider the
overall evidence was sufficient to justify a finding that Crestview was itself
acting fraudulently. It is quite clear however that it was acting as a contra
trader, i.e. it was arranging its trading in a way designed to reduce the size
of its VAT repayment claim by entering into deals, such as the sale to PSG in
the present appeal, which generated an output tax liability (for which it
received immediate payment from PSG) without any corresponding input tax
liability. In its 06/06 VAT return, Crestview reclaimed net VAT of
£1,540,386.52. But for the sale of CPUs to PSG on 31 May 2006, its VAT
repayment claim would have been £2,419,630.27.
36.
Given that HMRC have not established that Crestview was acting
fraudulently, they must establish a connection between PSG’s purchases and the
fraudulent default(s) of one or more traders in a “dirty chain” (or chains)
leading up to Crestview.
37.
In the nature of contra trading structures, it is not generally possible
to identify any specific link between any particular default in the contra
trader’s “dirty chains” and any particular taxable sale of the contra trader.
Whether the contra trader is acting innocently or fraudulently in offsetting
its input tax on its “export or dispatch” sales against its output tax
liability on its “acquisition” deals, the reality of the situation is that the
offsetting takes place on an overall basis rather than by matching specific
input and output tax liabilities. Therefore there is generally no logical
basis for directly linking a specific output tax amount of a contra trader
(which forms the denied input tax liability of a trader in the position of PSG
in this case) with any particular defaulter in the “dirty chains” of the contra
trader.
38.
HMRC have not made it clear whether they think this matters or not. In
their statement of case, they argued that a connection existed with the VAT
defaulters at the start of each dirty chain leading up to Crestview. In their
closing submissions, however, they have referred to an alleged connection to a
single dirty chain (citing factors which they say show a clear connection
between PSG’s purchase and the dirty chain leading back to the defaulter Red
Rose) but they have also referred to the evidence of the alleged fraudulent
default of Zenith and West 1, defaulters at the start of the other dirty chains
leading up to Crestview. In doing so, they have covered all dirty chains of
Crestview in its VAT accounting period 06/06 which culminate in a zero rated
export or EU sale by Crestview. They are thus effectively saying that
whichever such dirty chain or chains is (or are) connected to PSG’s purchase,
they can show a fraudulent VAT default at the start of the chain (or chains).
Thus, they appear to be saying, a Kittel connection exists between PSG’s
purchase and one or more of a short list of fraudulent VAT defaults.
39.
PSG does not accept that Red Rose, Zenith and West 1 have been guilty of
fraudulent evasion of VAT, but it does accept that if they have been, then a
connection can be established for the purposes of the Kittel test
between such fraudulent evasion and PSG’s purchase.
Allocation of fraudulent VAT defaults
40.
We note that the input VAT being denied to PSG in respect of its
purchase from Crestview is £879,243.75, and that the fraudulent VAT defaults
alleged by HMRC to be potentially connected to PSG’s purchase are as follows:
(1)
Red Rose: £882,398.13;
(2)
West 1: £350,962.50;
(3)
Zenith: £351,750.00.
41.
We note that HMRC maintain these fraudulent defaults are also connected
to other input tax claims by Crestview and by Network Euro Limited (a purchaser
of other goods from Crestview to a value of £976,250 plus VAT of £170,843.75 on
15 June 2006). They may well be seeking to disallow those other input claims
based on a connection to the same fraudulent VAT defaults.
42.
PSG have argued that any fraudulent VAT defaults found to exist must be
specifically allocated to particular denials of input tax. If this is not
done, they say, then two problems arise:
(1)
There is a very real possibility that HMRC would be seeking to deny more
input VAT than has actually been fraudulently evaded by the defaulter. This,
they say, would be contrary to the fundamental principle of fiscal neutrality.
(2)
It would not be possible to prove there has been a fraudulent VAT
default. To prove fraud requires proof of the necessary mental element on the
part of the perpetrator, and unless you have identified who the alleged
perpetrator of the fraud is, that cannot be done.
43.
The first of these two problems was addressed head on by the Court of
Appeal in Mobilx, and they held it to be irrelevant. As Moses LJ said
at [65] and [66]:
“65. The Kittel principle is not concerned with
penalty. It is true that there may well be no correlation between the amount
of output tax of which the fraudulent trader has defrauded HMRC and the amount
of input tax which another trader has been denied. But the principle is
concerned with identifying the objective criteria which must be met before the
right to deduct input tax arises. Those criteria are not met, as I have
emphasised, where the trader is regarded as a participant in the fraud. No
penalty is imposed; his transaction falls outwith the scope of VAT and,
accordingly, he is denied the right to deduct input tax by reason of his
participation.
66. It is not arguable that the principles of fiscal
neutrality, legal certainty, free movement of goods and proportionality were
infringed by the Court itself, when they were at pains to preserve those
principles (see §§ 39-50). By enlarging the category of participation by
reference to a trader’s state of knowledge before he chooses to enter into a
transaction, the Court’s decision remained compliant with those principles.”
44.
We accept and agree with this approach. In a non-contra trading
situation, it is almost always the case that the amount of input tax being
denied to the trader seeking repayment exceeds the amount of VAT fraudulently
evaded by the original defaulter – as can be seen to be the case here (see the
figures given in part 2 of Schedule 1 to this decision). We see no reason why
that should not be the case in a contra trading situation. The rationale for
denying the input VAT, as Moses LJ said in Mobilx, has nothing to do
with any correlation between the amount denied and the amount of the connected
fraudulent default. It depends entirely upon the fact that the trader, as a
participant in fraud, has forfeited the right to recover input VAT.
45.
HMRC appear to have addressed the second problem by adducing evidence of
the fraudulent VAT evasion of all potentially connected defaulters. They are
effectively saying “we decline to allocate the input tax in this case to any
one defaulter, but there are three such defaulters with whom we consider a
connection primarily to exist. Whichever of those three defaulters you
consider (and the evaded output VAT of the three of them totals nearly double
the amount of input VAT being denied to PSG), we say that fraud can clearly be
proved.”
46.
Whilst we are of the view from the evidence we have seen that the
default most obviously connected to PSG’s purchase of CPUs from Crestview is
that of Red Rose, HMRC’s approach seems to us to overcome any difficulty of the
type identified by PSG which might otherwise arise from declining to allocate
specific VAT defaults.
47.
Both in relation to the mobile phone deals (all of which trace back
directly to tax losses) and the CPU deal (which traces back, indirectly via the
contra trader Crestview, to tax losses), we find the relevant connection to
have been established. Tthe crucial issue is therefore whether the tax losses
in question were fraudulent.
Was C&B guilty of fraudulent evasion of VAT?
48.
From the witness statements of Officer Goulding, we are satisfied that
C&B was guilty of fraudulent evasion of VAT.
49.
All attempts by HMRC to set up a meeting with C&B from November 2005
were blocked, including after it came to light as a potential MTIC trader in
April 2006 (as a result of evidence obtained from a freight forwarder). It
made no response to formal demands to deliver a VAT return, none of its
officers could be found and it was established from other MTIC traders that it
had defaulted on payment of VAT totalling over £84 million in respect of
activities during the months of March and April 2006.
50.
Included in this default was the output VAT due on the sale of the
telephones comprised in deals 1 to 6 in period 04/06 referred to in the
schedule to this decision.
Was RS Sales guilty of fraudulent evasion of VAT?
51.
From the witness statement of Officer Parsons, we are satisfied that RS
Sales was guilty of fraudulent evasion of VAT.
52.
In spite of being expressly told by HMRC that he was not permitted to
use his personal VAT registration (in the name of “RS Sales Agency”) for the
business of his company RS Sales Limited, Mr Rafik Sodawala did so or permitted
a third party to do so. Having generated a total turnover as a sole trader
from 14 May 2003 to 30 September 2005 of £115,141, no further VAT returns were
submitted by him.
53.
During the six weeks from 26 April 2006 to 4 July 2006, RS Sales issued
false VAT invoices bearing the VAT number of Mr Sodawala as a result of which
it incurred a VAT liability of some £29 million, none of which was returned or
accounted for to HMRC. Mr Sodawala claimed that RS Sales’ business activity
during the period in question was conducted by a third party called Mr Patel,
who could not now be traced. Included in this default was the output VAT due
on the sale of the telephones comprised in deals 1 to 3 and 5 to 8 in period
05/06 referred to in the schedule to this decision.
Was Crestview (the contra trader) guilty of fraudulent evasion of VAT?
54.
See [35] above. Notwithstanding Officer Barker’s opinion (expressed in
her first witness statement) that Crestview was acting fraudulently, that position
was not pressed at the hearing. In any event, we do not consider the evidence
before us to be sufficient to establish on a balance of probabilities that
Crestview was acting fraudulently in the course of its contra trading
activities.
Was Red Rose guilty of fraudulent evasion of VAT?
55.
From the witness statements of Officer Cordwell, we are satisfied that
Red Rose was guilty of fraudulent evasion of VAT.
56.
After a Mr Askandar Almahruqi had registered for VAT towards the end of
2005, giving his proposed business as “IT Consultancy, Web Writing, Computer
Accessories, Telecommunication and General Trading”, he applied in January 2006
for the transfer of the VAT registration into a newly incorporated company,
which later changed its name to Red Rose. The company’s business was described
as “other software consultancy and supply” and the expected turnover for the
following 12 months was stated as £84,000.
57.
It appears that the VAT registration number was transferred. On 24 May
2006 Red Rose wrote to HMRC (received on 30 May 2006) to notify them of its
change of business address and name, and asking for a revised VAT registration
certificate. In that letter, Red Rose said “the nature of our business will
remain the same”.
58.
Red Rose delivered VAT returns for its 02/06 and 05/06 VAT accounting
periods. They showed a net VAT liability of £110 on total sales of less than
£2,000.
59.
Between approximately mid to late June 2006 and at least the end of
August 2006, Red Rose was dealing in mobile phones in large volumes. This only
came to HMRC’s attention through information from other traders. From that
information, it became apparent that Red Rose enjoyed a turnover of
approximately £18 million from its trading during that period.
60.
On 25 September 2006, HMRC attempted to visit Red Rose at its place of
business. The premises were locked and HMRC obtained a mobile telephone number
to contact the company. They cancelled Red Rose’s VAT registration and
informed the company over the telephone that if it wished to obtain reinstatement,
it would need to supply all its business records. Nothing further was heard
from Red Rose. It did not appeal the cancellation of its VAT registration or
the assessments which were in due course raised against it by HMRC, totalling
some £3.2 million. Those assessments all remain outstanding.
61.
Included in the assessments was a sum of £882,398.13 in respect of
output VAT on the sale of mobile phones which were sold on through two
intermediary companies to Crestview; it is Crestview’s input VAT of £885,066.87
on the purchase of those phones which HMRC claim was “designed to offset the
output tax due on the 3 acquisition deals [i.e. PSG’s purchase of CPU’s and
Network Euro Limited’s purchase of phones from Crestview on 26 May and 15 June
2006 respectively] along with the input tax claimed by Crestview in respect
of other deals traced to tax losses.”
62.
Red Rose was placed into liquidation on 21 February 2007.
Was Zenith guilty of fraudulent evasion of VAT?
63.
From the witness statements of Officer Patterson, we are not satisfied
that Zenith was guilty of fraudulent evasion of VAT.
64.
An electronic application to register Zenith for VAT as an “intending
trader” was received on 12 August 2005. Its intended business was stated as
“wholeseller of sports accessories, mobile phone accessories, memory and
more”. Its expected turnover was given as £100,000 for the first twelve
months. The application was “signed” by one Nasar Hussain, though the name of
the director was given as Tarneum Butt (apparently a female name), who was
described as Mr Hussain’s sister.
65.
Mr Hussain initially played a very active part in Zenith’s contacts with
HMRC in his capacity as “manager” or “employee”, even describing himself as
“director” at one point. He also appeared to be the most knowledgeable person
concerning the company’s business at a meeting with HMRC held on 27 March 2006.
But he never became a director.
66.
It appears that Zenith started to trade in CPUs, mobile phones and
similar goods very shortly after that meeting, at the end of March 2006, though
it was clearly making preparations to do so from an earlier date; in
particular, HMRC received requests for verification of Zenith’s VAT
registration from other traders intending to deal with it from around the end
of February 2006. Having submitted small payment VAT returns (less than £600
in total) for the VAT periods ended 30 November 2005 (11/05) and 28 February
2006 (02/06), it submitted a late return for the period to 31 May 2006 (05/06).
67.
There appears to have been a change of officers at Zenith around the
start of June 2006, and after a number of abortive attempts and telephone
conversations HMRC made a further visit to Zenith on 29 June 2006. A Miss
Basharat introduced herself as the director (though Companies House records indicate
that she resigned as such on 1 June 2006). An accountant also attended the
meeting. Zenith’s due diligence checks on trading partners were regarded as
“poor” and records were produced showing sales of £122 million and purchases of
some £125 million up to the end of May 2006, with a net VAT repayment claim of
some £427,000.
68.
Zenith’s records were taken by HMRC and after piecing the picture of
trading together from them, HMRC wrote on 21 July 2006 saying that their
examination of the records demonstrated a net VAT liability for the period
05/06 of some £1.7 million, and that Zenith’s purchases all traced back to VAT
defaults totalling some £19 million. This compared to Zenith’s VAT return
showing a VAT liability (which was apparently paid) of some £30,000.
Zenith continued to trade. On 19 June 2006,
it carried out the sales to Coast Telecom to a value of £2,010,000 plus VAT
which generated a £351,750 VAT liability which it has never settled. This is
one of the defaults identified by HMRC as a fraudulent default in a dirty chain
leading up to Crestview. This trade appeared to be a near exact repeat of an
earlier trade on 8 June 2006, when it sold the same number and description of
goods to Coast Telecom at the same price. In the earlier trade, its records
showed it as having bought the goods from West 1 but in the later trade there
was no record of Zenith’s supplier.
69.
There were a number of suspicious features to Zenith’s trading but the
picture that emerges is of a trader that had carried out a large number of
trades without adequate checks on its suppliers and without keeping proper
records. This was not a trader that simply absconded with large amounts of VAT
and could not be found or contacted by HMRC. There were a number of contacts
and a great deal of information and material supplied by Zenith to HMRC.
Zenith accounted for £30,000 of VAT on its trading in period 05/06.
70.
On the basis of the evidence we have seen, we do not feel there is
sufficient to establish on a balance of probabilities that Zenith was acting
fraudulently when it defaulted on payment of the £351,750 of VAT arising from
its 19 June 2006 sale to Coast Telecom.
Was West 1 guilty of fraudulent evasion of VAT?
71.
From the witness statements of Officer Fu Sang Lam, we are not satisfied
that West 1 was guilty of fraudulent evasion of VAT.
72.
West 1 was registered for VAT in 2000. For all its VAT accounting
periods from 06/02 up to 09/05, it either made a nil return or it made or
claimed VAT payments/repayments of between £200 and £7,000, based on net output
supplies to a total value during that period of some £195,000.
73.
West 1 appears to have started trading in CPUs at some time before 13
March 2003. There was some kind of problem arising out of that trading, as a
result of which the owner of the business, a Mr Richard Harrison, had sold it
in around April 2003 having only owned it for a few months. Although he said
he was selling the business to a Mr Sajid Hussain, it appears he in fact sold
it to a Mr Michael McGrath. The business made no supplies in its VAT periods
06/03 to 12/03 inclusive. Mr McGrath was appointed a director of West 1 on 27
January 2004, and it appears he had previously been involved in the company.
74.
HMRC became aware in about July 2004 that West 1 was still active in a
trade sector which was experiencing MTIC problems, though its trade does not
appear to have been extensive at that time. In September 2004 they tried to
arrange a meeting with West 1 but were unable to do so until they made a visit
to Mr McGrath in his capacity as sole trader in another business called
“Firecraft” on 7 October 2005. At that point they established that West 1 was
buying and selling mobile phones, and discussed some of the issues around such
trading with Mr McGrath.
75.
West 1’s major trading in MTIC goods started in October 2005. In its
VAT return for period 12/05, it reported nearly £62 million of net output
sales, and a net VAT liability to HMRC of just £5,708.87.
76.
HMRC visited West 1 on 1 and 9 February 2006 to establish the basic
pattern of its trading. Mr McGrath explained this to them and asked if West 1
could be placed on monthly VAT returns as it was seeking to get into the export
market.
77.
It was around this time that a Mr Ryan Foley became formally involved in
West 1. He was appointed as company secretary on 10 February 2006, and as a
director on 28 February 2006. He stated (at a meeting with HMRC on 8 November
2006) that he had bought West 1 from Mr McGrath for £20,000 which was paid at
the end of April 2006. At this point, Mr McGrath drops out of the picture.
78.
West 1’s reported net sales figure for period 03/06 was £372.9 million
(subsequently adjusted by HMRC on the basis of other records received by them
to £690.8 million). West 1 (in a VAT return signed by Mr Foley) claimed a VAT
repayment of £164,665. This was amended by HMRC, based on the records seen by
them, to a VAT liability of £48.9 million. The basis of this amendment was set
out in two letters from HMRC to West 1 dated 16 August 2006 and 19 September
2006.
79.
In the meantime, HMRC had raised enquiries on specific details of West
1’s trading for the purposes of its investigations of other traders,
culminating in a letter dated 12 May 2006. By way of reply, they received (on
15 May 2006) a letter dated 12 April 2006 from West 1, purportedly from Mr
Foley (though it was unsigned). It said that Mr Foley had recently acquired
West 1 and it advised change of address details. On the same day, HMRC
received West 1’s VAT return for period 03/06 (referred to above). Attempts to
contact Mr Foley at West 1’s new address proved mostly unsuccessful and what
contact there was proved unsatisfactory, with only sketchy business records
being produced. Eventually on 20 June 2006 HMRC left a “Regulation 25” letter
addressed to West 1 at its business address, requiring it to make up a VAT
return to 20 June and deliver it by the following day. When West 1 failed to
deliver this return, it was de-registered for VAT with effect from 22 June
2006.
80.
Using the few records which West 1 had supplied, HMRC compiled the
amendments referred to above to West 1’s 03/06 VAT return.
81.
There was no contact from Mr Foley until some 4 months later in late
October 2006. This resulted in a meeting at HMRC’s Uxbridge office on 8
November 2006. At that meeting, Mr Foley demonstrated a lack of understanding
of the VAT rules and explained the inaccurate 03/06 return as a mistake. No
VAT return was ever submitted in respect of the period from 1 April 2006 up to
West 1’s deregistration.
82.
Whilst inaccuracies of the scale found by HMRC in West 1’s 03/06 VAT
returns are hard to explain away as a “mistake”, we note that Mr Foley did not
simply disappear when the repayment claim was rejected and he did contact and
meet with HMRC in the autumn of 2006. Whilst his motivation for doing so was
clearly not altruistic, the fact that he did so does not sit comfortably with
HMRC’s view of him as a fraudulent VAT evader who had been caught red handed.
Without further evidence we do not consider there is sufficient in the material
before us to enable us to make a finding that West 1 was acting fraudulently
(as opposed to grossly negligently, motivated by greed).
Summary of findings on whether PSG’s purchases were connected with
fraudulent evasion of VAT
83.
We therefore find that the only VAT defaults which have been proven on a
balance of probabilities to be attributable to fraud are those of RS Sales,
C&B and Red Rose.
84.
We find that PSG’s purchases from Kingswood in deals 1-6 of period 04/06
are connected to the fraudulent default of C&B.
85.
We find that PSG’s purchases from Kingswood in deals 1-3 and 5-8 of
period 05/06 are connected to the fraudulent default of RS Sales.
86.
We find that PSG’s purchase in deal 4 of period 05/06 is connected to
the fraudulent default of Red Rose. The fact that we have not felt able to
find the defaults of Zenith and West 1 to be fraudulent does not affect our
conclusion that this purchase of PSG’s is sufficiently “connected” to a
fraudulent evasion of VAT for the purposes of the Kittel test.
Should PSG have known of the connection?
Introduction
87.
First, it is important to point out that it is not necessary for HMRC to
show that PSG should have known of the details of the specific fraud (nor,
therefore, of the particular connection to it) in each case. As Briggs J said
in Megtian v HMRC [2010] EWHC 18 (Ch) at [37] to [38]:
“[37] In my judgment, there are likely to be many cases
in which a participant in a sophisticated fraud is shown to have actual or
blind-eye knowledge that the transaction in which he is participating is
connected with that fraud, without knowing, for example, whether his chain is a
clean or dirty chain, whether contra-trading is necessarily involved at all, or
whether the fraud has at its heart merely a dishonest intention to abscond
without paying tax, or that intention plus one or more multifarious means of
achieving a cover-up while the absconding takes place.
[38] Similarly, I consider that there are likely to be
many cases in which facts about the transaction known to the broker are
sufficient to enable it to be said that the broker ought to have known that his
transaction was connected with a tax fraud, without it having to be, or even
being possible for it to be, demonstrated precisely which aspects of a
sophisticated multifaceted fraud he would have discovered, had he made
reasonable enquiries. In my judgment, sophisticated frauds in the real world
are not invariably susceptible, as a matter of law, to being carved up into
self-contained boxes even though, on the facts of particular cases, including Livewire,
that may be an appropriate basis for analysis.”
88.
To put it more succinctly, as Moses LJ said in Mobilx at [59]:
“The test in Kittel is simple and should not be
over-refined. It embraces not only those who know of the connection [with
fraud] but those who “should have known”. Thus it includes those who
should have known from the circumstances which surround their transactions that
they were connected to fraudulent evasion. If a trader should have known that
the only reasonable explanation for the transaction in which he was involved
was that it was connected with fraud and if it turns out that the transaction
was connected with fraudulent evasion of VAT then he should have known of that
fact. He may properly be regarded as a participant for the reasons explained
in Kittel.”
89.
In order to form a view of what PSG (through Mr Gill) should have known,
it is therefore important to set these particular transactions in their proper
context. As Moses LJ made clear, it is only by doing so that an informed view
can be reached as to what PSG “should have known”. An examination of the
context requires, as a first step, an examination of the trading history of
PSG.
History of PSG’s dealings
(a)
Introduction and summary
90.
The business currently run through PSG was started no later than 1
February 1975 by Mr Piara Singh Gill. The subsequent history of its structure
is set out at [12(1)] to [12(6)] above.
91.
From 1975 until March 2003, the business manufactured and sold
weatherproof outerwear and clothing materials.
92.
We set out in tabular form in Schedule 3 to this decision a summary of
the VAT returns made by the business for the period from 1 January 1999 to 31
May 2006. From this it can be seen that:
(1)
Up to December 2002, the business was averaging just under £121,000 of
outputs per quarter; for the calendar year 2003, that changed to nearly
£321,000 per quarter; for the calendar year 2004, it changed to over £2.75
million per quarter; for the calendar year 2005, in spite of a slow start it
changed to £18.9 million per quarter; and in the first five months of 2006 it
was running at a rate equivalent to an average of £77.3 million per quarter.
(2)
The turnover was very erratic, especially from March 2003 onwards.
Months or quarters generating sales of many millions of pounds were
interspersed with months or quarters in which there were next to no sales.
(3)
The general levels of sales in the “busy” months grew in early 2004 to a
level of between approximately £0.5 million and £2.4 million. In the second
half of 2004, it levelled off somewhat in the range £1.2 million to £2.6
million. During this period (in September 2004) PSG sold one batch of CF
memory cards for export to Dubai to a value of £2.55 million (we heard evidence
about this deal – see below).
(4)
During the first five months of 2005, there was only one “busy” month
(approximately £1.5 million of sales in February 2005). From June 2005
however, things accelerated rapidly, from £4 million to £13.6 million in
September 2005.
(5)
There were then just two large individual transactions (about which we
heard some evidence – see below) in October/November 2005 and in January-March
2006, in which PSG traded some computer software to a value of some £100
million plus VAT, which it sold in an export deal to Dubai. These were the last
deals before the deals in April and May 2006 which are the subject of this
appeal.
(b)
March 2003 deals
93.
In March 2003 PSG commenced trading in electronic goods. Mr Gill’s
evidence was that he had investigated the market intensively in 2002-03 and had
attempted (unsuccessfully) to get chip manufacturers or authorised distributors
to sell to him. He had a contact in Dubai (a Mr Showki) who ran a company
called Data Easy, which dealt in such goods. Mr Showki told Mr Gill that he
was interested in purchasing some memory chips if Mr Gill could source them at
a competitive price. Mr Gill found a small UK supplier called Westpoint
Services Limited in Cardiff via their website through a search engine, obtained
some samples (which he had checked by a friend in the electronic retailing
sector) and then bought and sold the goods for export to Dubai.
94.
In his witness statement, Mr Gill gave evidence that he had done a
second deal involving the same parties and double the quantity of the same
product in May 2003. As before, he made a net profit of approximately £1 per
chip, which satisfied him as he was new to the market. In fact, from records
supplied by PSG to HMRC, it is apparent that this second deal took place also
in March 2003, just eight days after the first deal. The combined value of the
two deals was just over £300,000 plus VAT, and the records supplied to HMRC
showed that PSG made exactly £1 gross profit per chip. HMRC subsequently
traced Westpoint’s purchase of the chips back to a company called Risebrook
Resources Limited, which officer Baines described as a “defaulting missing
trader”.
(c)
August 2003 deal
95.
In or about August 2003, PSG carried out another trade in computer
chips. It bought from a company called Redstar Marketing (GB) Limited
(“Redstar”) in Llanelli (which Mr Gill said he had found through internet
trading sites) and exported the goods to a company in Hong Kong called Vortex
Technology Limited. The size of this deal was of the order of £200,000. Mr
Gill said he had generated this deal himself by visiting Redstar and then
offering the available chips to Vortex, a company he had made contact with as a
result of his research.
96.
HMRC’s records show that Redstar’s annual return to Companies House
dated 28 March 2003 shows that its entire issued share capital was transferred
on 25 November 2002 to one Shiao Chuan Yang of Taiwan (its sole director) and
Redstar had two joint company secretaries (Tai Chim Lau and Yeung Tak Tang),
with addresses in Swansea and Hong Kong. Mr Gill made no mention of any
Chinese connections of Redstar known to him and he was not asked about it in
cross examination, so it is not possible to read anything more than coincidence
into this.
97.
Mr Gill was clearly intending to expand the overseas trading of the
business at this time. His advisers wrote to HMRC on 6 November 2003
requesting that the business be placed on monthly VAT returns as things had now
changed so that the majority of sales were by way of export. HMRC placed the
business on monthly VAT returns with effect from the period 01/04. It remained
on monthly returns until 1 September 2007.
(d)
November 2003 deals
98.
In November 2003, the business sold three large consignments of clothing
for export, having been approached by three different UK suppliers and three
different EU purchasers (all of whom were previously unknown to Mr Gill) “out
of the blue” within a very short space of time. The three deals came to a
combined value of approximately £500,000. According to the notes of an HMRC
visit to PSG on 17 May 2004, Mr Gill could not recall the names of any of the
contacts he had dealt with at the three suppliers and three customers. He did
not ask any of the three customers (Green Leaf in Spain, Negolux and Masters
Trading in Luxembourg) how they had obtained PSG’s details. One of the deals
related to leather jackets, a product in which PSG had not previously traded.
(e)
First deal with Ian Tuppen’s companies – January and March 2004
99.
There is some uncertainty about the date of Mr Gill’s first contact with
Mr Ian Tuppen, the individual behind Kingswood and its associated companies.
In his witness statement, Mr Gill said Mr Tuppen had contacted him “in January
2004”. References to contact with Mr Tuppen in other correspondence and in a
meeting placed the date somewhat earlier. But whatever the date of that first
contact, it appears that the first trading between the business and Mr Tuppen’s
companies took place on 30 January 2004, when the business bought 21,600 “surface
mounted semi conductors” from Mr Tuppen’s company for £473,040 plus VAT and
sold them on to a company called Grantwell Limited in Hong Kong for £496,800.
This was followed up by another trade of 43,200 semi-conductors on 25 March
2004 at a slightly lower unit price (bought for £915,840 plus VAT and sold for
£961,200), with delivery initially required to Moscow (but subsequently changed
to Dubai).
100.
From January 2004, the business dealt regularly with Mr Tuppen’s
companies, indeed we were informed that from then on, until PSG’s deal with
Crestview in May 2006, Kingswood was PSG’s sole supplier for its non-clothing
trading deals.
(f)
April 2004 – first deal with United Kingdom Trading of Dubai
101.
In a report of a meeting that took place between officers Furber and
Skelley of HMRC and Mr Gill on 17 May 2004 (which was predominantly concerned
with discussions about the clothing deals done in the previous November), there
is a record of some discussion which also took place about a deal which PSG had
done in April 2004. Some further detail about this deal also emerged from a
report of a meeting between officers Phipps and Skelley of HMRC, Mr Gill and
his tax advisers on 3 December 2004.
102.
Mr Gill said that a “first time customer” had approached PSG to source
some semi-conductors. It is apparent from the report of the 3 December 2004
meeting that this customer was United King Trading Company (“UKT”) in Dubai. Mr Gill said UKT had initially approached him with a letter of introduction, and
he made no checks on them. In spite of this, he had sold them £1.6 million of
semi-conductors sourced from Kingswood, allowing “14-20 days” of credit, on the
strength of a phone call and the fact that UKT was based in Dubai, where Mr
Gill considered the laws to be “strict”.
103.
From a comparison of an analysis of deals between PSG and UKT contained
in the report of the 3 December 2004 meeting and the VAT return information of
PSG, it is apparent that all PSG’s deals of any size from April until at least
some time in November 2004 were sales to UKT. It is also noteworthy that the
mark-up made on each of those deals was almost exactly 5% - ranging from 5.002%
to 5.004%.
(g)
September 2004 deal with UKT
104.
One of the deals with UKT “went wrong”. This was a sale of 15,000 Lexar
Compact Flash memory cards on 30 September 2004 for £2,550,000. PSG bought the
cards from Kingswood for £161.90 each (plus VAT) and sold them to UKT for
£170.00 each, (a mark-up of 5.003%).
105.
Mr Gill explained to officers Phipps and Skelley on 3 December 2004 that
Kingswood had approached him with an opportunity to sell the products, without
discussing quantities. Mr Gill had contacted UKT and established they were
interested. He spoke to someone called “Jane” there, but did not know her
surname. When asked why he had not carried out any trades in the months from
June to August 2004, he explained it was because he did not have the necessary
finance to do so. He only lined up the September trade when he received the
VAT repayment from HMRC from his May and June 2004 returns. As this was issued
by cheque on 21 September 2004, this deal was therefore clearly arranged in a
matter of a few days.
106.
Mr Gill told the officers that he had “used the internet” to check on
similar products in arriving at a selling price. He did not check prices on
the manufacturer’s website.
107.
The goods were supposedly sent by air to Dubai, on 4 October 2004.
Officer Phipps started to verify the deal for the purposes of the claimed VAT
repayment on 8 October 2004. On that same day, he received notification that
HMRC had inspected the shipment in question at Heathrow and found that it
consisted of 500 mobile phones rather than 15,000 Compact Flash memory cards.
108.
On 15 October 2004, Mr Gill telephoned officer Phipps to enquire about
progress on the verification. Officer Phipps asked Mr Gill if he could supply
any further documents in relation to the sale; Mr Gill said he would try to
obtain some and rang back later the same day to say he had received
confirmation from UKT that the goods had been received in Dubai. This letter
was faxed to HMRC the following day. It took the form of a letter from UKT
dated 15 October 2004 with the following content:
“Dear Sir,
This is to inform that we have received the goods in proper
order and good condition.
Thank you and best regards.”
109.
In fact it is clear that this letter was giving inaccurate information.
Officer Phipps only told Mr Gill of his information about the incorrectly
described mobile phones when they spoke on 29 October 2004. In reply, Mr Gill
said he had heard from UKT that they had not received the goods and he had
requested their written confirmation of this. UKT sent a fax dated 19 October
2004 to PSG stating that their 15 October letter was “an error”, and that they
had not in fact received the goods. The fax dated 19 October 2004 from UKT
appears to have been sent only on 2 November 2004, along with two further
communications bearing the dates 26 October and 2 November 2004, supposedly
chasing up the delivery of the goods in increasingly assertive terms. However
on 22 October 2004 PSG had received five BACS payments totalling just under
£1.1 million from UKT and on 25 October 2004 PSG had paid over approximately
£1.3 million to Kingswood.
110.
PSG also contacted their forwarding agent Syrius (UK) Limited (“Syrius”)
for an explanation and on 1 November 2004 Syrius informed them that the goods
had been mistakenly shipped to Luxembourg but they would be redirected to “Apex
in Dubai” (Apex obviously being a different company from UKT).
111.
Syrius subsequently told PSG that the goods had been road freighted from
there back to Schipol Airport in Holland and flown from there to Dubai on 4 November 2004. The evidence of that air shipment took the form of an
airwaybill for a shipment said to be from PSG to UKT on 4 November 2004 via
Malaysia Airlines. On that document, the goods were described as “computer
parts” and a weight of 162kg was given for the entire load. HMRC enquiries
established the unpackaged weight of the 15,000 cards would have been
approximately 270kg (and PSG’s own invoice gave a total weight of 765-770 kg),
so they were not satisfied that the document provided sufficient evidence that
the goods had indeed been exported.
112.
The confusion lasted a long time, and on 6 December 2004 Syrius sent a
fax to PSG which appears to have been a copy of a fax they were sending to a
company called “My Secrets Limited” concerning a similar mix-up; the documents
in this fax included a letter from Negolux to Syrius complaining that Syrius
had delivered “30,000 pieces of Lexuar [sic] 2GB Compact Flash instead
of 256 MB memory cards”. It does not seem that PSG expressed any surprise that
the mysterious Negolux who had approached them out of the blue the previous
November to source some exported clothing now appeared to be entangled with
their memory card trading.
113.
The documents and account provided by Syrius were so garbled that it was
impossible to establish a clear picture from them of precisely what had
happened. All that was certain was that UKT had sent a fax to PSG on 15
October 2004 confirming that they had received the expected goods, and they had
made payments of some £1.1 million to PSG before it came to light that the
goods could not have been received by them. Also, they paid the final balance
of the money due to PSG even though it is clear that the goods supposedly sent
to them by airfreight on 4 November 2004 cannot have been the contract goods,
due to their inadequate weight.
114.
Mr Gill seeks to explain this experience away as a mix-up by Syrius
which was largely sorted out before Syrius became insolvent. He says that
there were no features of this experience which should have made him suspicious
about carrying on trading as he had before, because the problems were “entirely
with Syrius”. Accordingly, he claims there was nothing to give rise to any
suspicions on his part as to continued dealing with Kingswood.
115.
We consider that a cautious and prudent businessman (as Mr Gill
described himself) should have been suspicious at the repeated and easy
opportunities offered to him, without any significant expertise or effort on
his part, to generate apparently risk-free profits of 5% even when goods
clearly went missing. The fact that Kingswood was offering him these
opportunities out of the blue was too good to be true, and the fact that UKT
also approached him out of the blue shortly after he started dealing with Kingswood should also have made him suspicious.
116.
Mr Gill did accept in cross examination that on any view his experience
in the September 2004 deal with UKT acted as a “wake up call” as to the
importance of insurance as the goods were not insured in that deal and he had a
real concern that if they did not arrive at UKT he would not get paid but still
have to pay Kingswood.
(h)
October 2005 deal with Euro Gulf Trading of Dubai – Safeguard Secure
Viewer software
117.
We had very little evidence about PSG’s dealings from September 2004 up
to October 2005. On 27 October 2005, it bought 70,000 units of “Safeguard
Secure Viewer” which Mr Gill described as “a software program to open documents
where nobody else can view them”. It bought them from Kingswood and sold them
on in two equal halves on 4 and 14 November 2005 to Euro Gulf Trading (“EGT”)
in Dubai, at a mark-up of 5.16%. Mr Gill said this was not the first deal he
had done with EGT, but he was not asked how he had first come to deal with
them.
118.
Mr Gill said that in October/November 2005, Kingswood were giving PSG
about 30 days credit, and he was sure he never paid them more than 7 to 10 days
late. He allowed EGT 30 days credit. In cross examination, he said he thought
EGT had paid him within the 30 days he allowed them. The deal generated a VAT
repayment claim of £6,639,500, which was paid by HMRC without significant delay
and was received by PSG on 29 December 2005.
119.
In fact, rather than PSG paying Kingswood by the end of November 2005
and EGT paying PSG around the middle of December 2005 (in accordance with the
stated credit terms), EGT paid PSG on 17 January 2006 and PSG paid Kingswood on
the same day.
120.
The payments were made through accounts with FCIB and they were not a
straightforward matter of a single payment received by PSG and paid on to EGT.
PSG received the money due to it from EGT in a large number of instalments and
paid it on to Kingswood in different instalments in the following sequence, all
on 17 January 2006:
|
Money
received from EGT
|
Money paid on
to Kingswood
|
|
3 payments totalling £7.9 million
|
£8 million in one payment
|
|
3 payments totalling £8.5 million
|
£9 million in one payment
|
|
2 payments totalling £3.55 million
|
£4 million in one payment
|
|
2 payments totalling £5 million
|
£5.3 million in one payment
|
|
2 payments totalling £6 million
|
£6.5 million in one payment
|
|
£3 million in one payment
|
£3.2 million in one payment
|
|
2 payments totalling £5.95 million
|
£8,579,500 in one payment
|
|
Total
received: £39.9 million
|
Total paid:
£44,579,500
|
121.
The difference between the two amounts was funded by the VAT refund of
£6,639,500, which had been received by PSG on 29 December 2005; just over £5
million of it had been transferred to PSG’s FCIB account on 4 January 2006.
122.
Mr Gill was unclear and unconvincing in his answers to questions about
how these payments came about. He could not remember whether he had chased EGT
for payment after their 30 days were up, even though this was by far the
largest deal he had done at that time and he would have been personally ruined
if he had had to pay Kingswood without receiving payment from EGT. He was
unclear about whether EGT had warned him the money was on its way, though he
was expecting it in tranches rather than a single payment. He said Kingswood did chase him for payment, but he was not clear about what he told them. After
some hesitation he said he had been checking his account (as he usually did,
twice a day) and saw that some money had been received. He passed it on. He
did not think to wait until he had received all the money that was due, nor did
he question why it was being received in such a large number of comparatively
small instalments. He denied that the payments had been prompted by the
receipt of PSG’s VAT repayment, but we found his evidence in that regard wholly
unconvincing.
123.
Mr Gill did not allege he could have paid Kingswood without receiving
the bulk of the funds first from EGT. On his evidence as to the credit terms
between PSG and its two counterparties, he was due to pay Kingswood between 8
and 18 days before he could expect to receive the funds from EGT and yet he
asserted there was no arrangement with Kingswood that he would only pay them
when he received payment from EGT. Given that he described himself as
“cautious” and “prudent” in business matters, we consider there must have
either been such an arrangement (in which case he was at best misleading the
Tribunal in his evidence) or he was showing a quite extraordinary lack of basic
business sense in this, his largest deal to date. Having seen Mr Gill give
evidence, we find that there was an understanding or arrangement with Kingswood that they would only be paid as and when PSG received payment from its customer
EGT and its VAT repayment. The willingness of Kingswood to enter into such an
arrangement should have aroused Mr Gill’s suspicions about the bona fides of Kingswood.
(i)
January 2006 sale of further software to EGT
124.
There was a further large transaction involving the purchase of more of
the same software from Kingswood and its sale for export to EGT in January
2006. This sale of 105,000 units generated a VAT repayment claim of nearly £10
million. However, there were problems with the deal, summarised in a letter
dated 20 March 2006 from PSG to HMRC. In essence, there appears to have been a
problem with the shipping. The goods were shipped by sea in three containers,
one of which was misdirected by the shipping company and arrived late in Dubai. As a result of the late arrival of the third container, EGT was unable to fulfil
its own customer’s requirements so it cancelled the order. The customer did
agree to keep the goods in its warehouse in Dubai and attempt to find another
buyer, but in the meantime the original deal was effectively cancelled, with
new invoices to be issued as and when the goods were sold.
125.
It appears that Kingswood went along with this, cancelling their
invoice(s) to PSG and agreeing to re-invoice them as and when new buyers were
found for the software. PSG said that activation codes were required to make
the software work, which perhaps explains why Kingswood felt comfortable with
this arrangement. The net effect was that PSG included an entry in its March
2006 VAT return which effectively reversed the nearly £10 million VAT repayment
claim in its January 2006 return.
126.
Although the evidence about this deal before us was sparse, there are a
number of obvious points arising from this sequence of events which were not
addressed during Mr Gill’s cross examination. The first is that on his own
evidence, he was personally extending further credit of over £55 million to EGT
at a time when they were already overdue in paying him some £30 million from
the October 2005 deal referred to above (this deal took place at a time when
the business was still being conducted by him as a sole trader with full
personal liability). Second, Kingswood were affording him the same benefit
(except that the amounts were larger, because of the additional VAT). There is
no suggestion that the goods had been shipped “on hold”, and Mr Gill’s letter
dated 20 March 2006 refers to the fact that the goods which had by then arrived
in Dubai were already in the customer’s warehouse. PSG was therefore entirely
dependent upon the customer and EGT to fulfil their promises, with no continued
hold over the goods. Mr Gill gave no indication as to why he thought Kingswood
should be so relaxed about the non-receipt of payment for their goods that had
been shipped to Dubai out of their control, nor that he had even given the
matter any thought.
127.
We find the apparent ease with which this very large transaction was
effectively deferred as suspicious as the fact of it being entered into at all
at a time when there were very large overdue payments outstanding from previous
trading with the same counterparties. There is nothing in PSG’s VAT returns
for April or May to indicate that the problem in relation to the January
shipment of software to EGT had been resolved at the time PSG and Kingswood
were doing the deals the subject of this appeal during those months, in
particular there is no repayment claim by PSG in respect of any later invoicing
from Kingswood resulting from a sale of all or part of the software which had been
languishing in the customer’s warehouse in Dubai.
April and May 2006 deals
128.
This then is the background against which we are to assess the deals the
subject of this appeal. We consider those deals in turn.
(a)
April deal – sale of Nokia telephones to 2Trade BVBA for £3,869,500
(input VAT claimed of £651,175)
129.
The first deal the subject of this appeal took place on 26 April 2006. It
was documented by Kingswood as six separate sales to PSG, but PSG invoiced it
as a single sale to 2Trade.
130.
This was PSG’s first deal in mobile phones. Mr Gill said in evidence
that he had done some “limited general research” into that market sector over
the two or three months leading up to this first trade. As a result, he
decided to move into the sector (though it is not disputed he was well aware of
the VAT fraud prevalent in that market sector). In his witness statement he
said he found 2Trade as a possible customer as a result of finding them “on one
of the trading websites” (though he could not remember which one). He said that
he telephoned “Mrs de Volere” (the correct spelling is “Voldere”) of 2Trade,
who introduced herself as the proprietor of 2Trade, and they subsequently
exchanged details of their respective companies by faxed letters.
131.
Officer Baines’ witness statement on the other hand was quite clear in
saying that Mr Gill had told him on two occasions that the first approach had
come from 2Trade, and officer Baines was not pressed on the point during his
cross examination.
132.
In their first meeting on 24 May 2006, officer Baines’ note of the
meeting contains the following:
“ JB Customers?
SSG 2 Trade BV Europe. They contacted me.
JB Why?
SSG Think they looked at websites.
JB Do you know what IPT website it?
SSG Generally get people contact us, could be re CPUs,
freight forwarder, can’t explain why other than get known in trade.”
133.
Further, in a long and detailed letter dated 20 June 2006 which was sent
to PSG by officer Baines in the early stages of verification of PSG’s April VAT
return, the following text was included:
“How and why did your customer come to contact you out of the
blue? Have you any correspondence prior to this contact? Have you further
auditable evidence of e-mail or telephone contact – I would think it not
unreasonable to expect some degree of contact prior to entering into
multi-million pound deals.”
134.
In replying to this letter on behalf of PSG, Tax and Legal Services
Limited (“TLS”) said in their even longer letter dated 4 July 2006:
“3. INTRODUCTIONS: Our client receives many letters
of introduction, usually as a result of customers looking at their web site.
Our client only deals with those customers following extensive due diligence
which in this case comprised discussions with Mrs Hyacint de Voldere who is a
director of 2Trade BVBA, and credit and tax checks which proved satisfactory.”
135.
If Mr Gill had previously said that the approach to 2Trade had come from
him and not them, this would have been a very obvious point to have picked up
and corrected in TLS’s letter of 4 July 2006.
136.
In a subsequent meeting, spread over two days (17 and 21 August 2006),
officer Baines’ typed note of the relevant question and reply reads as follows:
“197. How did contact come about? A. By phone – I got an
unsolicited introduction and stock request from 2Trade – people in the trade
know me – I get about 5 introductions a week but I do not record them”
137.
The typed note was prepared after the meeting on the basis of manuscript
notes taken at the meeting. The manuscript note in question reads as follows:
“Got to meet 2Trade through an introduction and stock request
– people in the trade know me, I don’t know how people get hold of my name – I
may get 5 a week but I don’t keep copies.
Just an introduction – unsolicited.”
138.
Having seen Mr Gill give evidence, we are satisfied that officer Baines’
record of what Mr Gill said at the meetings in May and August 2006 gives the
truth. We therefore find as a fact that 2Trade did indeed approach PSG “out of
the blue”. This is all the more suspicious because PSG had never traded in
mobile phones before, so there would be no reason why someone involved in that
market would think to approach them for stock.
139.
In TLS’s letter dated 4 July 2006, it was said that Mr Gill had carried
out “extensive due diligence” on 2Trade, in the form of:
“discussions with Mrs Hyacint de Voldere who is a director of
2Trade BVBA, and credit and tax checks which proved satisfactory. The foreign
language documents provided comprise copies of the Belgian VAT/Tax Certificate
and details of the company showing share capital, date of commencement, tax
registration details and directors details. Our client confirmed the contents
of these documents prior to trading.”
140.
In fact, the due diligence carried out by Mr Gill on 2Trade before
dealing with them consisted of:
(1)
the receipt by fax on 25 April 2006 (timed at 17.48) of an introductory
letter in English, in which 2Trade described itself as “worldwide traders in
mobile phones and computer parts and have several years of experience in the
industry.”
(2)
Attached to this letter were two official looking documents, apparently
in Flemish, totalling three pages. One of them appears to include an official
looking stamp and a number that is clearly a Belgian VAT number. The other
appears to be some kind of summary of constitutional information, but beyond
the reference to Hyacint de Voldere’s name there is no obvious significance to
any of the information in it. Mr Gill did not pretend to understand it.
(3)
There was also some reference in the documentary evidence to the
existence of some kind of check on 2Trade’s VAT number – possibly even a
verification of it by HMRC’s Redhill office. We were not directed to (and
could not find) a copy of such a document in the evidence, but we are prepared
to assume for present purposes that such a check was made.
141.
Mr Gill confirmed that he had not sought or taken up any references on
2Trade, or visited their business premises.
142.
Mr Gill said he sent a copy of his own introduction documents to 2Trade,
and at lunchtime on the following day (26 April 2006), Mr Gill received a fax
from Ms de Voldere at 2Trade entitled “Stock Request”, as follows:
“Dear Mr Gill,
We are looking for the following stock CIF Netherlands.
Quantity Description
10,000 Nokia 8800
10,000 Nokia N90
5,000 Nokia 9300i
Please transmit us your best price cif.
Best regards”
143.
Mr Gill said he contacted Kingswood in an attempt to source the stock.
They told him they only had available smaller quantities of the phones
requested, namely 5,000 Nokia 8800’s and 7,000 Nokia N90’s. Mr Gill discussed
prices with Kingswood, offered a price to 2Trade (which was accepted without
negotiation) and then agreed the deal with both parties. He agreed with 2Trade
that they would insure the goods but he would pay for the shipping cost. He
obtained no evidence from 2Trade that any insurance had been put in place, in
spite of his previous experience when goods had gone astray and he might have
ended up having to pay for them without being able to require payment from his
customer.
144.
It is notable that the price charged by PSG to 2Trade represented a mark
up of almost exactly 4%. The slight variation is accounted for by the fact
that the unit prices per phone have clearly been marked up by 4% and then
adjusted to the nearest round figure.
145.
2Trade, in spite of being a Belgian company, required the phones to be
shipped to a warehouse in the Netherlands. This did not concern Mr Gill. The
goods were held on behalf of Kingswood at the warehouse of a company called
Capital Logistics (GB) Limited (“Capital”) in Stoke on Trent. Kingswood
released the phones to PSG unconditionally by an instruction to Capital on 26
April 2006 and they were transported by SKD Transport Limited of Oldbury to the
Netherlands. The shipping document which accompanied the goods included the instruction
“ship on hold”, though there was no reference to that instruction on the fax
sent by PSG to Capital or in Capital’s records. Nor was there a copy of any
written release note from PSG instructing the release of the consignment.
PSG’s invoice stated “Terms: Strictly 30 Days Net” as well as “C&F”.
146.
In his witness statement, Mr Gill said he had made no attempt to source
from another supplier the remainder of the mobile phones requested by 2Trade.
He said this was because he was “concerned about the cost”. Given the size of
the deals he had completed with Kingswood over the previous six months, this
seems a little odd. This point was not put to Mr Gill in cross examination, so
we do not read too much into it, except to observe that it implies Mr Gill
clearly had a very special relationship with Kingswood. This is borne out by
the fact that the invoices from Kingswood contained no reference to payment
terms, nor did the purchase order from PSG to Kingswood.
147.
It is apparent from the statement of officer Mendes that Mr Gill
received into his FCIB account on 9 May 2006 two sums totalling £3,869,500 (the
exact net sale proceeds of PSG’s invoiced sale to 2Trade). Mr Gill paid this amount
on to Kingswood’s FCIB account on the same day. In his statement, officer
Mendes confirms there is no evidence in Mr Gill’s FCIB account of the
outstanding balance of £502,674.50 ever being paid by him to Kingswood, and
this is also apparent on the face of the FCIB statements included in the
documents before us. Mr Gill was not expressly asked about this in his cross
examination, but he gave no evidence to suggest he had in fact paid this
outstanding amount through any other means, or that there had been any serious
attempt by Kingswood to pursue it. We find this suspicious. Either there was
an understanding between PSG and Kingswood that PSG would not be required to
pay any more than it received, or Kingswood were simply not chasing up payment
of very large amounts of money due to it. Either way, we find it very suspicious
and consider that Mr Gill should have had the same reaction.
148.
Mr Gill said he had carried out a Creditsafe check on 2Trade before
dealing with them, but he was unable to produce any evidence to that effect and
we find that he did not in fact do so. He admitted he had not met anyone from
2Trade or visited their premises or attempted to take up any trade or other
references before dealing with them.
(b)
25 & 30 May 2006 deals – sale of Nokia and Sony Ericsson telephones
to 2Trade BVBA for £5,456,975 (input VAT claimed of £918,111.25)
149.
We received much less evidence about this pair of deals. They appear
to have followed a similar pattern to the April deal referred to above. A
stock request was received for a large number of phones from 2Trade. A stock
offer (presumably in response to a telephone call, though that was not made
clear) was received from Kingswood for a much smaller quantity.
150.
PSG appears again simply to have taken the prices offered by Kingswood
and marked up the unit price for each phone by 4%, then rounded to the nearest
25p (except, oddly, in the case of the phones comprised in deal 05/06 – 7 as
referred to in Schedule 1, in which the unit price was rounded up to the
nearest 25p, even though that meant a larger adjustment (18p per unit) than if
the price had been rounded down).
151.
Payment followed a similar pattern as before. Mr Gill received payment
into his FCIB account for three of the 25 May 2006 deals from 2Trade on 21 June
2006 (by way of three separate payments, which he aggregated and passed on to
Kingswood in one payment, after making a small deduction whose purpose was
unclear). He received payment for the other 25 May deal on 4 July 2006, by way
of a single payment which he passed on with an extra amount which made up for
the shortfall on the earlier payments apart from a few hundred pounds.
152.
He received payment for the 30 May deals into his FCIB account in three
instalments on 4 July 2006. He aggregated them, added another £3,000 or so to
round the combined amount up to £2.6 million and then paid that amount out to Kingswood on the same day in one payment.
153.
As before, PSG had therefore paid over the sale proceeds (more or less)
but not the balance of the purchase price due to Kingswood. In aggregate, the
sum due to Kingswood under the 25 and 30 May invoices was £5,246,350 plus
£918,111.25 VAT, totalling £6,164,461.25. The only evidence before the
Tribunal is that a total of £5,459,461.25 was actually paid by PSG, leaving an
outstanding balance of £687,000. Similar observations apply to this unpaid
balance as to the unpaid balance on the April 2006 deals, as set out above.
(c)
May 2006 deal with Crestview and Fone Link
154.
On Mr Gill’s own admission, both Crestview and Fone Link approached him,
unsolicited, on 25 May 2006. He had given contradictory stories to HMRC as to
whether Crestview or Fone Link approached him first, but it was within a matter
of hours on 25 May.
155.
He confirmed that after exchange of introduction letters, Crestview had
sent him a stock offer of 63,000 CPUs and within a matter of hours Fone Link
had also introduced themselves and submitted an entirely unsolicited enquiry
for the same number of the same items.
156.
Crestview’s introduction fax was timed at 10.24 on 25 May 2006. PSG’s
reply with its own introduction letter and material was timed at 11.53 on that
day.
157.
Fone Link’s introduction fax was timed at 15.05 on 25 May 2006. PSG’s
introduction fax to Fone Link was timed at 14.13 (though with a one hour time
difference to Spain, that would have been 15.13 Spanish time) so it appears to
have been sent almost immediately in reply to Fone Link’s introduction.
158.
Perhaps the immediacy of PSG’s response is explained by the timing of
the most significant document in this section of the evidence. Timed at 14.00
(i.e. more than an hour before the introduction fax sent from Fone Link) there
was a fax from Fone Link to PSG. This fax was headed “shipping instructions”,
and read as follows:
“Dear Sir/Madam,
In reference to the purchase order that we have faxed to you
(P.O. NUMBER 115) asking for 63,000 SLZ79 P4/630 INTEL PENTIUM CPU PROCESSORS,
please deliver the goods to the following address:
Luxemburg Logistics S.A.R.L.
Unit 18, Rue Desjoncs L-18
18 Howald (Luxemburg)
We also need copy of inspection certificate.
Regards
T.H. Sarfraz”
159.
It can be seen that this document, referring to a particular purchase
order which had not even been sent to PSG by that time, was unintentionally
sent out of sequence. When it was received, it was the very first thing PSG
had heard from Fone Link (preceding even the introduction letter). The actual
purchase order to which it refers was only faxed by Fone Link to PSG at 18.29.
160.
By then, PSG had been approached by Crestview with a stock offer, timed
at 16.13 on their fax. That stock offer read as follows:
“Hi
We have the following stock to offer in JSA Logistics:
UNITS: 63000 (200 BOXES) STOCK: CPU SL7Z9 PRICE: £80.00
Please advise if you are interested in the above.
Kind Regards,
Kevan Anderson”
161.
Mr Gill said he had not noticed that the shipping instructions appeared
to have been received from Fone Link before their introduction or any
negotiations about an order. His explanation was that he worked in a fairly
large building and often he was out of his office for a while, with
correspondence being piled on his desk for him to consider on his return. We
find that explanation wholly implausible. From this sequence of events alone,
it should have been completely plain to Mr Gill that the only explanation for
the Crestview/Fone Link deal was that it was connected to VAT fraud.
162.
The price agreed follows the pattern of PSG’s previous deals. Crestview
offered the stock to it at a certain price per unit. PSG added 4%, rounded it
to the nearest 25p (in this case, a rounding up from £82.94 to £83) and
obtained agreement to that price without difficulty.
163.
The pattern of payments made pursuant to this transaction is also
suspicious. Mr Gill was not asked about the payment arrangements that had been
negotiated with Crestview and Fone Link. No payment terms appear to have been
mentioned in the negotiations with Crestview – certainly none appeared on their
invoice.
164.
PSG’s invoice to Fone Link included the endorsement “Terms: Strictly 30
Days Net”. The invoice was dated 1 June 2006, and payment should therefore
have been made by 1 July 2006. In fact, payment was received by PSG in eight
instalments of between £429,000 and £760,000 each over the period 24 July to 4
August 2006. Mr Gill did not mention any difficulties about obtaining payment,
or any attempts by him to chase payment once it was overdue (or indeed any
chasing by Crestview for payment). The total sum of £5,229,000 was received
into PSG’s FCIB account and paid on to Crestview but there is no evidence that
PSG ever paid the outstanding balance of £674,493.75 or was chased for that balance
by Crestview. We consider that this would only have happened if there was some
understanding in place at the time of the deal that PSG would only pay over
what it received or if Mr Gill totally closed his eyes to the question of
payment terms at that time. Either way, if Mr Gill was not actually aware of a
connection to VAT fraud, we consider that he should have been.
Other issues relating to constructive knowledge
165.
Mr Chapman sought to persuade us that a number of other circumstances
indicated that PSG should have been well aware of the connection of its deals
to fraud.
166.
It is true that PSG’s due diligence on 2Trade, Crestview and Fone Link
was extremely sketchy, and much of it was carried out late. Personal visits to
traders can reveal a certain amount about their business and we would expect
any sensible businessman trading in such high values at least to visit the
business premises of his customers and suppliers and personally meet the
individuals managing them. Mr Gill did not do this. The discovery, for
example, that one individual was supposedly running a multi-million pound
import/export business on his own from his home might prompt a prudent
businessman to question the substance and bona fides of the business. Beyond this
sort of general impression, it is however difficult to say what extra useful
knowledge PSG would have acquired from carrying out due diligence on its
trading partners, including personal visits, trade and professional references
and obtaining timely full financial information. As for due diligence on
Kingswood, there is again something to be said for the proposition that after
dealing with them exclusively for two apparently largely trouble-free years,
there would have been very little to be gained by going through the exercise of
gathering further information about them which would have been unlikely to
uncover fraud.
167.
Similarly, detailed points about whether PSG insured the goods or failed
to obtain evidence that they had been insured by its purchasers might point to
commercial naivety, but in the circumstances of this case we do not consider
them to point unequivocally in the direction of constructive knowledge of
fraud. Similar observations apply to the lack of detailed trading terms and
conditions – a common feature among many businesses.
168.
There is undoubtedly voluminous evidence that strongly supports the
proposition that orchestrated fraud lay behind all of the deals the subject of
this appeal (and many others to which we were referred in the course of the
evidence). In the absence of some evidence unequivocally showing PSG’s
involvement in that fraud, however, that evidence does not advance HMRC’s case
against PSG. It is quite possible for parties to be involved on the fringes of
a massive fraud as innocent and naive dupes rather than as actual participants
and the size and complexity of the fraud does not change this fact.
169.
Mr Brown submitted that because PSG had traded with Kingswood for over
two years by April 2006, without any comment from HMRC in respect of the
previous transactions where tax losses had occurred, as to the nature of the
deals including due diligence, HMRC had effectively affirmed PSG’s view that it
had undertaken sufficient checks to protect itself. This, in our view, misses the
point. A trader must exercise his own independent judgment based on his own
detailed knowledge not only on the due diligence he has carried out on his
counterparties but also on the circumstances surrounding each individual deal,
set in its historical context.
170.
We take the view that this is one of those cases where the circumstances
in which the deals were generated (including the history of the trading
relationship with Kingswood) and the basis on which they were conducted are far
more relevant in assessing what knowledge PSG should have had of the connection
to fraud. In our view, for all the reasons set out above, we find that PSG
should have been aware that the only explanation for the deals the subject of
this appeal was that they were connected to VAT fraud.
Conclusion and decision
171.
HMRC have established on a balance of probabilities that fraudulent VAT
evasion did take place by the traders C&B, RS Sales and Red Rose (see [48]
to [50], [51] to [53] and [55] to [62] above) and that the purchases by PSG the
subject of this appeal were connected to that fraudulent evasion (see [47]
above).
172.
HMRC have not pleaded or argued that PSG actually knew of the
connection. However, we find that even if it did not know of that connection,
the nature of the deals it carried out in the circumstances in which it did so
were such that it should have known that those deals were connected to VAT
fraud.
173.
The appeal is therefore dismissed.
174.
In accordance with the order made in the preliminary application at the
start of the appeal hearing, we direct that PSG should pay HMRC’s costs of the
appeal up to (but not including) 1 April 2009 on the standard basis, to be
assessed if not agreed.
175.
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.
KEVIN POOLE
TRIBUNAL JUDGE
RELEASE DATE: 21 May 2012
Schedule 2
Explanation of contra
trading
1.
The essence of the concept of contra trading (which is HMRC’s own
coinage) is that it comprises an extra step inserted into what might be called
a “classic VAT fraud” in order to conceal that fraud and in order to make it
harder for HMRC to recover the lost VAT if and when they do detect it.
2.
A classic VAT fraud for these purposes arises when a UK trader acquires goods from another EU country, effectively free of VAT. He then
supplies them to another UK trader, charging VAT. He then disappears with that
VAT without paying it over to HMRC. That is where the actual fraud is
perpetrated.
3.
The goods are then supplied to another overseas customer without having
to charge VAT (but reclaiming the VAT paid to the missing trader as input tax
under the normal rules), either directly by the first purchaser from the
missing trader or (more usually, in the interests of concealment) after a chain
of supplies through other UK traders (all of whom will charge output VAT and
suffer input VAT under the normal rules, usually each generating a very small
profit and corresponding net output VAT liability).
4.
Each of the UK traders will ensure that he receives the VAT on his
onward sale in order to pay the VAT due to his own supplier. At some point,
however, the goods must be sold overseas in order to generate the VAT repayment
claim from HMRC which repays to the last UK trader in the chain the VAT which
he has paid to his supplier.
5.
In practice that last trader in the chain is the party mainly at risk in
the whole structure, as HMRC can withhold his VAT repayment until they are
satisfied that it is untainted by fraud.
6.
As HMRC became more careful about investigating chains of transactions
before releasing VAT repayments, the the concept of contra trading was
developed as a counter measure. A trader with a potentially large (and
therefore suspect and vulnerable) repayment claim (“Trader 1”) would enter into
a separate transaction or series of transactions designed to substantially
reduce or eliminate that repayment claim.
7.
The means of doing so would be to acquire goods from an EU supplier (to
an appropriate value) in a VAT free purchase and then generate an output VAT
liability by selling them on to a UK trader (“Trader 2”) who would then sell
the goods overseas again in a zero rated sale.
8.
The repayment claim of Trader 1 (which could be traced back directly to
fraudulent VAT defaults by traders who had supplied goods to him, directly or
through other UK traders) would be reduced or cancelled out by his output tax
liability to Trader 2, so HMRC would be less likely to investigate Trader 1’s
dealings in detail and would not have the leverage of an outstanding VAT
repayment claim while doing so; and if they investigated Trader 2’s large VAT
repayment claim, they would find no fraudulent VAT default in the chain of UK
purchases and sales of the goods leading up to Trader 2.
9.
The chain of transactions leading from Trader 1 to Trader 2 (there may
be other UK traders between them, all accounting properly for input and output
VAT) is known by HMRC as the “clean chain”.
10. In
contrast, the chain of transactions leading from the original fraudulent trader
to Trader 1 (usually involving other UK traders, called “buffers” by HMRC, all
accounting properly for input and output VAT) is known as the “dirty chain”.
11. The
shifting of the VAT repayment claim by Trader 1 from the dirty chain to the
clean chain means that effectively a “cut-out” has been inserted between the
original fraud and the trader (Trader 2) which is ultimately claiming the
repayment that actually crystallises the loss flowing from that fraud.
12. Trader 2
will assert that it neither had nor could have had knowledge of any fraud.
This gives HMRC another hurdle to overcome if they try to recover their loss by
refusing to satisfy the repayment claim of Trader 2, the ultimate
dispatcher/exporter.
Schedule 3
Summary of VAT returns from
1.1.99 to 31.5.06
|
VAT Period
|
Outputs
|
Inputs
|
Net VAT
|
EC Supplies
|
EC Acquns
|
|
03/99
|
0
|
26,113
|
-13,367
|
0
|
0
|
|
06/99
|
118,163
|
119,310
|
-10,178
|
0
|
0
|
|
09/99
|
142,095
|
45,380
|
-1,197
|
0
|
0
|
|
12/99
|
171,577
|
112,244
|
-4,588
|
0
|
0
|
|
03/00
|
119,711
|
76,290
|
1,696
|
0
|
0
|
|
06/00
|
60,977
|
71,122
|
-1,058
|
0
|
0
|
|
09/00
|
114,178
|
85,631
|
-2,434
|
0
|
0
|
|
12/00
|
259,090
|
415,240
|
-26,596
|
0
|
0
|
|
03/01
|
179,421
|
55,184
|
11,667
|
0
|
0
|
|
06/01
|
84,620
|
39,400
|
2,922
|
0
|
0
|
|
09/01
|
159,879
|
57,317
|
15,057
|
0
|
0
|
|
12/01
|
203,425
|
187,125
|
-13,246
|
0
|
0
|
|
03/02
|
27,795
|
70,903
|
-8,229
|
0
|
0
|
|
06/02
|
77,210
|
38,370
|
2,973
|
0
|
0
|
|
09/02
|
156,335
|
32,638
|
7,107
|
70,851
|
0
|
|
12/02
|
60,267
|
64,150
|
-3,040
|
8,602
|
0
|
|
03/03
|
349,348
|
353,136
|
-53,265
|
0
|
21,675
|
|
06/03
|
28,187
|
38,168
|
2,483
|
0
|
9,009
|
|
09/03
|
299,327
|
273,628
|
-39,235
|
0
|
8,505
|
|
12/03
|
606,481
|
555,666
|
-84,978
|
525,041
|
17,612
|
|
01/04
|
498,523
|
505,950
|
-83,051
|
0
|
8,946
|
|
02/04
|
1,864
|
5,781
|
-600
|
0
|
0
|
|
03/04
|
996,208
|
926,292
|
-157,782
|
0
|
0
|
|
04/04
|
1,682,100
|
1,627,221
|
-281,164
|
0
|
14,092
|
|
05/04
|
2,406,804
|
2,339,494
|
-401,492
|
0
|
37,367
|
|
06/04
|
6,234
|
32,057
|
-962
|
0
|
19,903
|
|
07/04
|
10,595
|
13,270
|
-395.69
|
0
|
0
|
|
08/04
|
26,223
|
17,367
|
1,708
|
0
|
0
|
|
09/04
|
2,578,374
|
2,440,544
|
-422,485
|
0
|
0
|
|
10/04
|
36,276
|
13,402
|
2,346
|
0
|
0
|
|
11/04
|
1,186,680
|
1,763,535
|
-305,146
|
0
|
14,810
|
|
12/04
|
1,616,489
|
920,803
|
-157,859
|
960,000
|
0
|
|
01/05
|
14,855
|
38,567
|
-602
|
0
|
16,491
|
|
02/05
|
1,567,121
|
1,524,020
|
-260,659
|
1,015,000
|
23,468
|
|
03/05
|
7,904
|
29,663
|
-830
|
0
|
16,673
|
|
04/05
|
1,520
|
43,284
|
-1,201
|
0
|
24,159
|
|
05/05
|
0
|
3,970,155
|
-690,303
|
0
|
23,160
|
|
06/05
|
4,146,620
|
4,569,121
|
-794,566
|
0
|
1,789
|
|
07/05
|
4,806,731
|
9,508,514
|
-1,661,460
|
0
|
0
|
|
08/05
|
9,987,906
|
12,912,539
|
-2,253,094
|
0
|
2,532
|
|
09/05
|
13,645,842
|
16,647,678
|
-2,894,094
|
0
|
0
|
|
10/05
|
1,747,341
|
37,970,907
|
-6,639,530
|
0
|
0
|
|
11/05
|
39,881,676
|
103,699
|
-11,561
|
0
|
0
|
|
12/05
|
7,090
|
7,435
|
300.68
|
0
|
0
|
|
01/06
|
59,850,653
|
56,973,559
|
-9,968,202
|
0
|
0
|
|
02/06
|
851
|
90,435
|
-5,846
|
0
|
0
|
|
03/06
|
59,678,434
|
76,793,323
|
9,957,387
|
0
|
0
|
|
04/06
|
3,871,051
|
3,731,000
|
-652,653
|
0
|
0
|
|
05/06
|
5,457,808
|
10,309,224
|
-1,801,881
|
5,456,975
|
0
|
