HS Tank & Sons Ltd v Revenue & Customs [2013] UKFTT 777 (TC) (9 November 2012)
DECISION
Introduction
1.
On 4 February 2010 HMRC wrote to the appellant denying the appellant’s
right to deduct input tax on the purchase of 17,500 Apple iPod Nanos (“the
iPods”). The input tax was incurred by the appellant in its VAT period 07/06.
Entitlement to input tax credit was denied on the basis that the purchase of
the iPods was connected with fraud and that the appellant knew or should have
known that this was the case.
2.
The amount of input tax for which credit has been denied is £353,412.50.
The decision refusing input tax credit was the subject of a review which was
notified to the appellant on 14 July 2010. The original decision was confirmed.
3.
The grounds of appeal themselves run to some 68 paragraphs. Essentially
however the appellant puts the respondents to proof that there was a fraud and
that its transactions were connected with fraud. It contends that it did not
know and could not have been expected to know of any connection with fraud. In
the circumstances the appellant seeks directions of the tribunal awarding:
(1)
The input tax in dispute;
(2)
Compound interest, alternatively simple interest on that input tax;
(3)
Damages; and
(4)
Costs
4.
Following the evidence we received written submissions from both parties
on matters of law and matters of fact. We also heard supplementary oral
submissions from both counsel. We have had regard to all material placed before
us by the parties but we do not consider it necessary to deal with each and
every submission in detail.
5.
We set out below our findings as to the background facts which to a
large extent are non-contentious. We then set out the law as we understand it,
based on the submissions of the parties. Any differences between the parties as
to the law were differences of emphasis rather than of substance. We set out
our findings in relation to the contentious evidence and the inferences which
the parties invite us to draw from that evidence. Finally we give reasons for
our decision based on our understanding of the law and our findings of fact.
Background Facts
6.
The business now operated by the appellant was originally set up by Mr
Harbhajan Singh Tank (“HST”) in Birmingham in 1968. It manufactured clothing
products for wholesalers, shops and market traders. HST was later joined in the
business by his four sons, Paramjit Singh Tank (“Paramjit”), Jaspal Singh Tank
(“Billy”), Santokh Singh Tank (“Bobby”) and Kuldip Singh Tank (“Kuldip”).
7.
The business was incorporated in 1976 and in 1977 it became registered
for VAT. In 1979 the business moved to factory premises in Oldbury and expanded
its manufacturing. At this time, Paramjit’s son, Jatinder Singh Tank
(“Jatinder”) was 10 years old and he began helping in the business.
8.
In or about 1985 the business developed a clothing brand called “Oxford
Blue” which became the flagship brand of the business. In the late 1980s HST
retired from the business and it was continued by his sons. In 1995 they took
over Rongar Leisure Wear Limited which specialised in camping and outdoor
equipment. In January 1996 this company changed its name to H S Tank & Sons
Ltd which is the appellant in this appeal. The appellant continues to sell the
Oxford Blue brand in the UK and abroad. At the same time the appellant
manufactures garments for major international retailers and has been recognised
with awards for export achievement. It has substantial manufacturing,
warehousing and office premises in Birmingham. However it has been looking to
diversify its business into other areas. For example it has looked at dealing
in air conditioning units, massage chairs and electronic goods.
9.
Over the years the appellant has had various VAT staggers, as VAT accounting
periods are sometimes called. For certain periods it made monthly VAT returns
and for other periods, including the return 07/06, it made quarterly returns.
We do not consider these changes to be significant for the purposes of this
appeal. The explanation, which we accept, is that the appellant at certain
times was exporting large volumes to Europe.
10.
The appellant entered into the following transactions which are directly
relevant for the purposes of this appeal:
(1)
On 28 July 2006 it contracted to purchase 17,500 Apple iPods from
Fairford Partnership Limted (“Fairford”);
The cost price of the iPods to the appellant was £115.40
per unit, giving a total sum due of £2,372,912.50. That sum included input tax
of £353,412.50.
(2)
On 28 July 2006 the appellant also contracted to sell the same number of
Apple iPods to a Spanish company, Union Maquinista de Tecnologias de Sistemas SL
(“UMTS”).
The sale price to UMTS was £121.00 per unit giving a
total sum due of £2,117,500. The iPods were to be delivered to UMTS at GR
Distribution in France and the supply was zero-rated for VAT purposes.
11.
Jatinder was responsible for conducting these transactions on behalf of
the appellant. Mr Virk described him as the “guiding mind” in carrying out the
deals. Jatinder has a degree in business studies and experience working in IT
systems and support. He started working for the appellant full time in 1998,
applying his skills in relation to the appellant’s systems but he was also concerned
with sales and purchasing. This involved extensive travelling to national and
international trade fairs where he met existing and potential suppliers and
customers.
12.
The directors of the appellant had known the directors of Fairford for
over 30 years. They had a business relationship involving clothing. Fairford
itself traded principally in electronics and was based in Canary Wharf. It was part of a group of companies including Fairford Group plc. We refer to both
companies as Fairford save where it is necessary to distinguish between the
two. Jatinder visited their offices on a number of occasions in 2005 and 2006.
In May or June 2006 he noted that they were dealing in iPods and he talked with
the directors about potential opportunities for the appellant to do business
with Fairford in such products. The demand for iPods was very high at that
time. Indeed Jatinder had previously been to a trade fair in China where he had discussions with a potential supplier of iPods but he was concerned that
they may be counterfeit.
13.
The representative of UMTS was Mr Asif Iqbal. Jatinder’s evidence was
that Bobby met him in 2005 whilst attending an exhibition in Glasgow where the
appellant had a stand exhibiting clothing products. Asif Iqbal had approached
Bobby and told him that he dealt in electronic goods, including MP3 players,
but was looking to get involved in clothing. He was particularly interested in high
street designer brands. We would have expected to hear first hand evidence from
Bobby in relation to his discussions with Asif Iqbal and we say more about this
below. We are prepared to accept however that this is how the introduction to
UMTS came about.
14.
Jatinder’s evidence was that he phoned Asif Iqbal in mid-July 2006 to
see if he was interested in purchasing electronic goods. He was informed by
Asif that he was looking to purchase MP3 players. An iPod is an MP3 player. In
fact it appears that the conversation was some time before 10 July 2006 because
on that date Bobby signed a UMTS “Business Trade Application Form” in his
position as a director of the appellant.
15.
There is an issue between the parties as to whether Fairford offered the
iPods to the appellant before the appellant then contacted UMTS. Jatinder’s
evidence was that he was offered the iPods by Fairford and then approached
UMTS. The respondents suggested that the first contact came from UMTS. We deal
with this issue below. In any event the purchase and sale occurred at the end
of July 2006 in the circumstances set out below. We have included timings on
documents because to some extent they are relevant. However we recognise that
timings particularly on faxes may not be reliable.
The Transactions and
Associated Payments
27 July 2006
16.
Pursuant to the Jatinder’s discussions with Fairford mentioned above, he
faxed Bill Bassi at Fairford Partnership enclosing company details. The fax
stated that the appellant was always looking for a variety of products and
would contact Bill if they had any requirements. It appears that Bill Bassi had
earlier emailed Fairford’s company details to the appellant. Bill Bassi then emailed
Jatinder at 17.15 confirming that Fairford had 17,500 iPods available for
immediate delivery at a unit price of £115.40 excluding VAT. He indicated “I
have already ‘haggled’ with our supplier on the price and this is the very best
that we can do and is not negotiable”.
17.
Jatinder then faxed Asif at UMTS enclosing company details and stating
that the appellant was always buying and selling a variety of products.
18.
At 17.27 Jatinder emailed Asif offering 17,500 iPods at £121.00. He
stated “Unfortunately I am unable to budge on price as there is very little
margin”. He copied the email to Bobby.
19.
On the same date the appellant also obtained a Graydon International
Credit Report on UMTS. We understand that Graydon is a leading credit reference
agency.
28 July 2006
20.
At 10.23 Jatinder emailed Asif giving a full specification of the 17,500
iPods including their colour (black or white), and whether they were Euro, US
or Singapore specification. The email also stated that all came with English
manuals and full warranty. Asif was asked to confirm UMTS’ requirements as soon
as possible.
21.
At 12.00 Jatinder sent a purchase order to Bill at Fairford for the
17,500 iPods. The purchase order as sent was unsigned, but a document in
identical terms with a stamp giving the appellant’s company details and signed
by Kuldip was also produced. At 13.24 Fairford sent a pro forma invoice to the
appellant. The total sum payable for the iPods was £2,372,912.50 including VAT
of £353,412.50. The payment terms were stated to be “as agreed”. There
was a retention of title clause in favour of Fairford Partnership. The invoice
itself was signed by Mr Harjinder Chamdal, director.
22.
At 14.17 UMTS faxed an order to the appellant for all the iPods at a
price of £121.00. The order gave a shipping address of GR Distribution in St
Folquin near Calais in France. The appellant then sent by fax an order
confirmation and pro forma invoice to UMTS. Both those documents showed a
delivery date of 28 July 2006. The total sum payable to the appellant for the
iPods was £2,117,500.00 with no VAT.
23.
At 16.24 Kay, an employee of the appellant, emailed Graydon asking for
confirmation of the UMTS VAT number because the appellant had checked it on the
EU Europa website and it was not showing as valid. Graydon responded at 17.15
that the VAT number appeared to be in order and asking for further details.
24.
On the same date Fairford Partnership asked 1st Freight to
carry out an inspection of the iPods. The inspection request identified Tradex
Corporation Limited as the supplier to Fairford Partnership. The inspection
type requested was “100%” and 1st Freight were asked to fax
back an inspection report as soon as possible. There is no evidence that the
appellant was aware of the contents of this inspection request.
31 July 2006
25.
Fairford Partnership produced a document addressed to 1st
Freight asking them to allocate the iPods to the appellant.
2 August 2006
26.
1st Freight produced 6 inspection reports addressed to
Fairford Partnership Ltd, one for each colour and specification of iPod. In
each case the inspection type carried out was “inspection 5” and stated:
“All goods were present, verified and counted for. All markings matched
product and packaging. No damaged goods. Packaging was in fair condition”.
3 August 2006
27.
The appellant enquired with 1st Freight about opening an
account and they were sent an account application form and a document which described
1st Freight’s services including “full insurance available for
goods in storage and transit”. The appellant completed the account
application.
28.
Jatinder then faxed 1st Freight giving them instructions to
allocate the iPods to UMTS and to ship them to GR Distribution. The instruction
noted that the goods were to be shipped on hold and not to be released until
further written notice from the appellant. The fax also stated that the goods
were to be insured until released to the appellant’s customer.
29.
At 13.30 Graydon emailed Kay following the previous email exchange. They
confirmed that the VAT number belonged to an active trading company.
30.
UMTS made payments totalling £907,500 from their account with First
Curaçao International Bank (“FCIB”) to the appellant’s FCIB account. In
addition UMTS also made a payment of £423,500 to the appellant which was repaid
by the appellant on the same date. We consider evidence as to the circumstances
of that repayment below.
31.
The appellant made payments totalling £906,800 from its FCIB account to
Fairford Partnership’s FCIB account.
32.
International consignment notes known as CMRs show that the goods were
shipped on 3 August 2006 in 3 separate consignments via Eurotunnel. Certificates
of shipment stamped by 1st Freight on 10 August 2006 also show a
shipment date of 3 August 2006. It is common ground however that the goods were
not shipped until a few days later.
4 August 2006
33.
Fairford Partnership repaid £906,800 to the appellant which then made
payment of the same amount to Fairford Group’s FCIB account.
7 August 2006
34.
1st Freight invoiced the appellant for their services,
including secure transport fully insured to destination.
8 August 2006
35.
The Eurotunnel transport documents show that in fact the goods were not
shipped until the evening of 8 August 2006.
14 August 2006
36.
The appellant transferred £275,000 from its HSBC account to its FCIB
account.
17 August 2006
37.
The appellant transferred £250,000 from its FCIB account to Fairford
Partnership’s Alliance & Leicester account.
18 August 2006
38.
Harry Chamdal of Fairford Group faxed Jatinder with the previous invoice
bearing his signature but also now bearing a Fairford Group stamp.
39.
FCIB “Risk Management and Compliance” department emailed Jatinder and
Paramjit seeking specific additional information and documentation for
regulatory purposes in connection with the transfer of £250,000. The request
included documentation to confirm that the VAT number of the customer/supplier
was verified.
40.
On the same day the appellant printed a Graydon report on Fairford
Partnership. There is an issue as to when this was first available to the
appellant.
41.
Jatinder replied by return to FCIB providing the details requested
including the Graydon report on Fairford Partnership.
21 August 2006
42.
The appellant transferred £25,400.78 from its FCIB account to its HSBC
account leaving a zero balance on the FCIB account.
43.
On the same date Jatinder emailed FCIB expressing concern that wire
transfers were taking too long, and asking when transfers dated 18 August and
21 August would be processed.
22 August 2006
44.
Jatinder emailed Asif at UMTS referring to a conversation in the
previous week and asking when payment would be made for the goods. He stated
that the goods were waiting to be released but would not be released until
payment was received. To date only £907,500 had been received with a balance
owing of £1,210,000. Jatinder also faxed a hard copy of this email to Asif on
the same date.
23 August 2006
45.
FCIB responded to Jatinder’s previous email seeking further information
about the £250,000 transfer.
25 August 2006
46.
The appellant opened an account with International Credit Bank Limited
(“ICB”) with a transfer of £500.
18 September 2006
47.
Jatinder re-faxed a hard copy of his email dated 22 August 2006 with a
handwritten note on it stating “Please advise when we can expect payment.??
Please see our bank details”.
1 October 2006
48.
Fairford Partnership sent a “Receipt of Goods Confirmation” form dated 1
October 2006 to be completed and faxed back to Fairford Group as soon as
possible.
2 October 2006
49.
UMTS paid £699,710 into the appellant’s ICB account. The appellant made
a payment of £699,000 to Fairford Group.
50.
UMTS made a further payment of £510,290 to the appellant’s ICB account.
The appellant made a payment of £510,380 to Fairford Group plc.
51.
By this date, the appellant has been paid in full by UMTS. A sum of
£6,732.50 was outstanding from the appellant to Fairford.
52.
Bill Bassi of Fairford faxed 1st Freight with a release note
dated 1 October 2006 authorising the iPods to be released to the appellant.
53.
Jatinder faxed a receipt of goods to Fairford Partnership confirming
that the goods had been received by and released to the appellant in good
condition.
54.
Jatinder faxed both 1st Freight and GR Distribution asking
them to release the goods held at GR Distribution to UMTS.
3 October 2006
55.
Jatinder faxed Asif at UMTS thanking him for payment and confirming that
he had given instructions for the goods to be released to UMTS. He asked for an
acknowledgement of receipt of the goods and confirmation that “everything is
ok”.
9 October 2006
56.
Bill Bassi asked Jatinder to arrange a bank transfer of £6,732.50 to
Fairford Partnership. That was the sum outstanding to Fairford and it was
transferred on the same date.
57.
We are satisfied from the evidence, which includes purchase orders,
invoices and payment details, that the purchase and sale of the iPods by the
appellant formed part of a longer transaction chain in which the same goods
were sold by a French company Kom Team Sarl (“Kom Team”) to A-Z Mobile
Accessories Limited (“A-Z”) who in turn sold to Tradex Corporation Limited
(“Tradex”). Tradex then sold the goods to Fairford Partnership Limited. The
transaction chain may be summarised as follows:
|
Transaction
|
Invoice Date
|
Price / unit
£
|
|
Kom Team to A-Z
|
26/07/06
|
109.25
|
|
A-Z to Tradex
|
27/07/06
|
110.00
|
|
Tradex to Fairford
|
27/07/06
|
112.00
|
|
Fairford to HSTank
|
28/07/06
|
115.40
|
|
HSTank to UMTS
|
28/07/06
|
121.00
|
58.
Kom Team was a French VAT registered company based in Paris. A-Z and
Tradex were both UK VAT registered companies. There is no evidence that the
appellant was aware of or had any knowledge about the identity of the traders
in this transaction chain other than its immediate supplier and customer.
The Law
59.
Domestic legislation governing the recovery of input tax is contained in
sections 24 – 26 of the VAT Act 1994 and in the VAT Regulations 1995. There is
no issue between the parties as to the application of these provisions and we
do not set them out in detail. If a taxable person has incurred input tax that
is properly allowable, he is entitled to set it against his output tax
liability and, if the input tax credit due to him exceeds the output tax
liability, he is entitled to a repayment.
60.
There was no substantial dispute between the parties as to the legal
principles to be applied on this appeal. The starting point is the judgment of
the ECJ in Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C-439/04
and C-440/04) [2006] All ER (D) 69 (Jul) which provides a legal basis for
the respondents to refuse a taxable person the right to deduct in certain
defined circumstances. In Kittel, the ECJ
took the view that:
(1)
where the tax authorities find that the right to deduct has been
exercised fraudulently, those authorities are permitted to claim repayment of
the deducted sums retroactively (at [55]);
(2)
in the same way, a taxable person who knew or should have known that, by
his purchase, he was taking part in a transaction connected with fraud must be
regarded as a participant in that fraud (at [56]);
(3)
that is the case, irrespective of whether or not he profited by the
resale of the goods (at [56]);
(4)
that is because in such a situation the taxable person aids the
perpetrators of the fraud (at [57]).
The ECJ concluded at [61]:
“…where it
is ascertained, having regard to objective factors, that the supply is to a
taxable person who knew or should have known that, by his purchase, he was
participating in a transaction connected with fraudulent evasion of VAT, it is
for the national court to refuse that taxable person entitlement to the right
to deduct.”
61.
In Mobile Export 365/Shelford v HMRC [2009] EWHC 797 (Ch) Sir
Andrew Park gives a helpful description of MTIC fraud generally at [19]:
“A missing trader intra‑community
fraud, when conducted in relation to mobile telephones, always involves at
least two elements. One of them is that one VAT registered trader acquires and
sells telephones in circumstances where it is liable to account to HMRC for VAT
but, for whatever reason, it does not in fact pay the VAT. That trader is
sometimes described as the defaulting trader... The second element is that
another VAT registered trader who is involved in the same chain of sales makes
a claim to repayment of input tax. It will, I think, be apparent that, if the
first trader had a liability to pay output tax to HMRC but did not meet it (for
whatever reason), but the second trader recovers from HMRC an equivalent or
possibly somewhat larger amount of input tax, there will be a serious loss of
VAT to the Exchequer.”
62.
A trader which makes a claim for repayment of input tax on the despatch
or export of goods is often known as a broker. The broker adds liquidity to the
supply chains. It also ensures that the goods can circulate within the fraud -
see Floyd J in Calltel v HMRC [2009] EWHC 1081 (Ch) at [81]:
“81. It will be recalled that the rationale in Kittel for
refusing repayment where the purchaser knows that he was taking part in a
transaction connected with fraudulent evasion of VAT was that he "aids the
perpetrators of the fraud and becomes their accomplice". For my part I
have no difficulty in seeing how the purchaser who is not in privity of
contract with the importer aids the perpetrators of the fraud. He supplies
liquidity into the supply chain, both rewarding the perpetrator of the fraud
for the specific chain in question, and ensuring that the supply chains remain
in place for future transactions. By being ready, despite knowledge of the
evasion of VAT, to make purchases, the purchaser makes himself an accomplice in
that evasion.”
63.
The defaulter is usually the original importer but any company in the
chain or connected chains might dishonestly fail to account for output tax.
See Christopher Clarke J in Red 12 Trading Limited v HMRC [2009] EWHC 2563 (Ch) at [84].
64.
It is alleged by the respondents that the appellant’s transactions are
part of a scheme to defraud the revenue which in the language of MTIC fraud
involved a “contra trader”. The term contra trader is now well understood and
has been considered in many cases by the First-tier Tribunal, the Upper
Tribunal and the Court of Appeal. We note the description adopted by the
Chancellor at paragraph 4 of his judgment in Blue Sphere Global [2009] EWHC 1150 (Ch) as to how contra trading is used to conceal the existence of
MTIC fraud. In the present appeal the respondents allege that A-Z acted as a
contra trader and the appellant’s transactions form part of A-Z’s acquisition
chains, sometimes known as the “clean chains”. Tax losses do not appear in the
clean chains. Rather they appear in transaction chains in which the contra
trader acts as a broker despatching or exporting goods out of the UK, sometimes known as the “dirty chains”.
65.
The Chancellor in Blue Sphere Global considered and rejected an
argument that the connection between the transactions in the clean chain and
the tax losses in the contra trader’s chains was “unreal and is inconsistent
with the principles of legal certainty, fiscal neutrality, proportionality and
freedom of movement”. That broad submission was dealt with at
paragraphs 44 to 46 of the judgement:
“ 44. There is force in the argument of counsel
for BSG but I do not accept it. The nature of any particular necessary
connection depends on its context, for example electrical, familial, physical
or logical. The relevant context in this case is the scheme for charging and
recovering VAT in the member states of the EU. The process of off-setting
inputs against outputs in a particular period and accounting for the difference
to the relevant revenue authority can connect two or more transactions or
chains of transaction in which there is one common party whether or not the
commodity sold is the same. If there is a connection in that sense it matters
not which transaction or chain came first. Such a connection is entirely
consistent with the dicta in Optigen and Kittel because such connection
does not alter the nature of the individual transactions. Nor does it offend
against any principle of legal certainty, fiscal neutrality, proportionality or
freedom of movement because, by itself, it has no effect.
45. Given that the clean and dirty chains can be regarded
as connected with one another, by the same token the clean chain is connected
with any fraudulent evasion of VAT in the dirty chain because, in a case of
contra-trading, the right to reclaim enjoyed by C (Infinity) in the dirty
chain, which is the counterpart of the obligation of A to account for input tax
paid by B, is transferred to E (BSG) in the clean chain. Such a transfer is
apt, for the reasons given by the Tribunal in Olympia (paragraph 4 quoted in
paragraph 4 above), to conceal the fraud committed by A in the dirty chain in
its failure to account for the input tax received from B.
46. Plainly not all persons involved in either chain,
although connected, should be liable for any tax loss. The control mechanism
lies in the need for either direct participation in the fraud or sufficient
knowledge of it ...”
66.
The test in Kittel does not require a connection amounting to
privity of contract between the broker and the defaulter. Such arguments were
rejected by the Court of Appeal in Mobilx at [62]:
“The principle of legal
certainty provides no warrant for restricting the connection, which must be
established, to a fraudulent evasion which immediately precedes a trader’s
purchase ... He is a participant whatever the stage at which the evasion
occurs.”
67.
Where fraud is established the focus of the Tribunal is on the control
mechanism described by the Chancellor at [46] of Blue Sphere Global,
namely whether the Appellant knew or should have known of the connection with
fraud.
68.
The Court of Appeal in Mobilx considered in detail the
“knowledge” element of the Kittel principle. It stated in terms at [59]:
“The test in Kittel is simple
and should not be over-refined. It embraces not only those who know of the
connection but those who ‘should have known’.”
69.
The respondents must satisfy us that the appellant knew, or should have
known that the transaction was connected with fraud. They do not need to
establish knowledge of a particular fraud or the fraudulent intent of specific
individuals. In Megtian v HMRC [2010] EWHC 20 (Ch) Briggs J stated as
follows:
“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 inquiries. In my judgment, sophisticated
frauds in the real world are not invariably susceptible, as a matter of law, to
being carved up into self-contained boxes even though, on the facts of
particular cases, including Livewire, that may be an appropriate basis
for analysis."
70.
In any particular case there may be specific details of the fraud that
the broker knew about or should have known about. HMRC do not need to establish
knowledge of such details. However they must establish that the appellant knew
or should have known that there was a connection with fraud. It is not sufficient
for HMRC to establish that the broker knew or should have known that its
transactions were likely to be connected with fraud (see Mobilx
at [60]). Each case must be dealt with by reference to its own facts and on
the basis of the test outlined in Mobilx.
71.
The respondents’ case on knowledge is based on drawing inferences from a
wide range of facts in order to establish the position that the Appellant must
have known of its involvement in fraud (see the same approach recorded at [66]
and [67] of the Judgment of Floyd J. in Calltel Telecom Limited v HMRC
[2009] EWHC 1081 (Ch)).
72.
In the alternative the respondents maintain that in all the
circumstances the appellant should have known that its transactions were
connected with fraud.
73.
The meaning of “should have known” is considered at [50] – [52] of the
judgment in Mobilx. The Court of Appeal’s conclusions at [52] were
that:
“If a taxpayer has the means
at his disposal of knowing that by his purchase he is participating in a
transaction connected with fraudulent evasion of VAT he loses his right to
deduct, not as a penalty for negligence, but because the objective criteria for
the scope of that right are not met.”
74.
The Court of Appeal gave valuable guidance as to how the “should have
known” test actually operates. The guidance is first articulated at [59],
where, having observed that the test in Kittel “... is simple and
should not be over-refined,” Moses LJ stated as follows:
“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 it turns out that the
transaction was connected with fraudulent evasion of VAT then he should have
known of that fact.”
75.
Similar guidance appears elsewhere in the judgment. We approach our task
on the basis that the respondents have to satisfy us that the evidence, looked
at objectively, demonstrates that the connection with fraud was “the only
reasonable explanation”, or the only “reasonable possibility” or the
“only realistic possibility” to explain the circumstances in which the
appellant entered into the transaction.
76.
As well as clarifying what is meant by the concept of “should have
known”, the Court of Appeal also offers some clear and helpful guidance as to
how Tribunals should approach their fact-finding task.
77.
In addressing the question of whether a trader should have known of the
connection with fraud, the Tribunal must have regard to all the surrounding
circumstances. The relevance of the “surrounding circumstances” is apparent at
[59] and [60] of the Mobilx Judgment and at [84] where Moses LJ adopts
paragraphs [109] – [111] of the judgment of Christopher Clarke J in Red 12 v
HMRC [2009] EWHC 2563. At [111] of Red 12 Christopher Clarke J said,
“... in determining what it
was that the taxpayer knew or ought to have known the tribunal is entitled to
look at the totality of the deals effected by the taxpayer (and their
characteristics), and at what the taxpayer did or omitted to do, and what it
could have done, together with the surrounding circumstances in respect of all
of them.”
78.
As well as having regard to all the surrounding circumstances, the
trader and consequently the Tribunal must have regard to the inferences that
can properly be drawn from the primary facts. This is pointed out at [61] of
the judgment in Mobilx:
“If he [the trader] chooses to
ignore the obvious inferences from the facts and circumstances in which he has
been trading, he will not be entitled to deduct.”
79.
In relation to the significance of due diligence, the Court of Appeal in
Mobilx said this at [75]:
“The ultimate
question is not whether the trader exercised due diligence but rather whether
he should have known that the only reasonable explanation for the circumstances
in which his transaction took place was that it was connected to fraudulent
evasion of VAT.”
80.
Then at [82] it said:
“…Tribunals
should not unduly focus on the question whether a trader has acted with due
diligence. Even if a trader has asked appropriate questions, he is not entitled
to ignore the circumstances in which his transactions take place if the only
reasonable explanation for them is that his transactions have been or will be
connected to fraud. The danger in focussing on the question of due diligence is
that it may deflect a Tribunal from asking the essential question posed in Kittel,
namely, whether the trader should have known that by his purchase he was taking
part in a transaction connected with fraudulent evasion of VAT. The
circumstances may well establish that he was.”
81.
Shortly before this appeal commenced the ECJ released its decision in
the joined cases of Mahageben kft (C-80/11) and Peter David (C142/
11). Both parties agreed that the judgment of the Court of Appeal in Mobilx
was consistent with the judgment of the ECJ in these cases. It was common
ground that the ECJ had not extended or restricted the judgment of the Court of
Appeal in Mobilx.
82.
Mr Virk placed considerable reliance on the tribunal decisions in HT
Purser [2011] UKFTT 860 (TC) and Brayfal [2010] UKFTT 99 (TC). There is now a large volume of authority from the Upper Tribunal, the
Court of Appeal and the Court of Justice. Whilst decisions of the First-tier
Tribunal can sometimes be helpful in illustrating the approach of a particular
tribunal to a particular issue we are conscious that they are not
authoritative. Whilst we have read and are familiar with those decisions we
have not found them of assistance in dealing with the application of the law to
the particular facts of the present appeal. Appeals such as this are extremely
fact-sensitive and the parties accept that the law is well established.
83.
The respondents accept that the burden of proof is on them to establish
the connection with fraud and that the appellant knew or should have known of
that connection. Both parties accepted that the standard of proof by reference
to which we must make our findings of fact is the balance of probabilities.
Findings of Fact
84.
Based on our analysis of the law set out above, the factual issues which
we have to resolve on this appeal may be summarised as follows:
(1)
Is there a tax loss in transaction chains relevant to this appeal?
(2)
If so, does that tax loss result from fraudulent evasion of VAT?
(3)
If so, was the appellant’s purchase of iPods from Fairford connected
with the fraud?
(4)
If so, did the appellant know or should it have known of the connection
with fraud?
85.
In considering each of these issues we set out the position of both
parties.
86.
Mr Virk cautioned us in relation to the effect of the passage of time on
the quality of the evidence. We have taken that factor into account in our
analysis of the evidence.
Is there a Tax Loss?
87.
The respondents contend that A-Z acted as a contra trader. They accept
that there was an apparently clean chain of transactions leading to the
appellant. However they contend that this apparently clean chain is connected
with other transactions of A-Z in which it acted as a broker and which trace
directly to tax losses.
88.
The appellant puts the respondents to proof as to the existence of A-Z’s
tax loss deal chains and its acquisition deal chains, including the deal chain
allegedly leading to the appellant. The appellant also puts the respondents to
proof that there were tax losses in the alleged tax loss deal chains.
89.
The evidence in relation to A-Z is in the form of a witness statement
from Ms Katrina Wheatcroft. The appellant did not challenge Ms Wheatcroft’s
evidence and she did not therefore give oral evidence. On the basis of her
evidence we find the following facts and matters.
90.
In A-Z’s 08/06 VAT period it carried out 122 transactions, mainly
involving mobile phones but also significant volumes of other electronic items.
There were 56 transactions where it acquired goods from EU traders and sold to UK traders (“acquisition deals”), 52 transactions where it purchased goods from UK traders and sold to EU traders (“broker deals”) and 14 transactions where it purchased from UK traders and sold to UK traders (so called “buffer deals”). In this section of our decision we
consider whether the respondents have established the deal chains supporting
those transactions and whether there are tax losses in the chains leading to A-Z’s
broker deals.
91.
Ms Wheatcroft has been able to trace the transaction chains for 41 of
the 56 acquisition transactions. In each case we are satisfied that A-Z
acquired the goods from an EU trader and that each chain leads to a UK company which then sells the goods to an EU trader. The transaction chain involving the
appellant which we have described above was one of these transaction chains.
92.
Ms Wheatcroft has also been able to trace the transaction chains for the
52 broker deals. We are satisfied from her evidence and on the balance of
probabilities that the chains trace back to the following UK traders:
(1)
Grange Solutons UK Limited (“Grange”)
(2)
Worldwide Wholesalers Ltd (“Worldwide”)
(3)
Phone City Limited (“Phone City”)
(4)
G A Couriers (“GAC”)
93.
The VAT registration number of Grange may have been hijacked. We deal
with this aspect below in the context of whether the tax losses were
fraudulent. In any event there were 29 deals which trace back to Grange,
although 3 of those deals were apparently cancelled. Vivien Parsons gives
evidence that on 22 March 2007 an assessment to tax in the sum of £6,336,103
was issued to a taxable person purporting to be Grange, including the output
tax due on these deals. The assessment was unpaid and we are satisfied that
each of the deals traces to a tax loss.
94.
There were 16 deals which trace back to Worldwide. Lydia Ndoinjeh gives
evidence that on 25 June 2007 an assessment to tax in the sum of £1,891,103 was
issued to Worldwide, including the output tax due on these deals. The
assessment was unpaid and we are satisfied that each of the deals traces to a
tax loss.
95.
There were 3 deals which trace back to Phone City. George Edwards gives
evidence that on 6 December 2007 an assessment to tax in the sum of £37,580,412
was issued to Worldwide, including the output tax due on these deals. The
assessment was unpaid and we are satisfied that each of the deals traces to a
tax loss.
96.
There were 4 deals which trace back to GAC. Jason McGuinness gives
evidence that GAC never submitted a VAT return for the short period in which it
purported to trade. The output tax was therefore unpaid and we are satisfied
that each of the deals traces to a tax loss. We understand that there was no
assessment on GAC in relation to these deals because the period fell out of
time. In cases of dishonesty the time periods are extended, but in any event we
do not consider it is necessary for there to be an assessment before there can be
a tax loss. In this case it is clear that there is a tax loss.
97.
We are also satisfied from Ms Wheatcroft’s evidence that A-Z conducted
14 buffer deals. These chains lead back to UK tax losses although we did not
have any evidence as to the circumstances in which those tax losses arose and
make no findings in that regard.
Does the Tax Loss
result from Fraudulent Evasion?
98.
The respondents contend that the tax losses in A-Z’s broker deals described
above were part of a fraudulent scheme. The appellant puts the respondents to
proof that any tax losses which are established arose as a result of fraud.
99.
Evidence as to nature of the tax losses is in the form of witnesses
statements from the officers of HMRC identified above. Those officers were in
some cases responsible for investigations into the defaulters and in other
cases simply produced documents available to HMRC. In each case we are invited
to find that the evidence establishes on the balance of probabilities that the
tax losses we have found are the result of fraud rather than any other
explanation. Again the evidence of the defaulter officers was not challenged by
the appellant and they did not therefore give oral evidence. On the basis of their
evidence we find the following facts and matters.
100. Mr Fateh Ahmed
was the sole proprietor of an off licence business in Eccles and was VAT
registered as such. In February 2006 the business incorporated and the VAT
registration was transferred to Wade Tech Limited. The business activities were
extended to include retail sales of mobile phones and accessories. On 13 June
2006 the company changed its name, or purported to change its name to Grange.
101. On 21 June 2006
HMRC wrote to Wade Tech after it had allegedly sought to verify the VAT
registration details of certain companies. Mr Ahmed subsequently denied that he
ever tried to confirm their details. At a visit by HMRC on 14 September 2006 Mr
Ahmed denied that he had dealt in mobile phones. The company made returns
showing no supplies of mobile phones. However documentation showed that it had purportedly
supplied an extremely large volume of mobile phones, including the 29 deals
which traced to A-Z. Grange has been treated by HMRC as a hijacked VAT
registration and it has been the subject of assessments totalling some £81 million.
Mr Ahmed agreed that the VAT registration number should be cancelled and that
he should be registered as a sole proprietor with a new number.
102. We are satisfied
that Grange either entered into the 29 transactions without any intention of
accounting for output tax thereon, or that it’s VAT number was hijacked by
persons purporting to be Grange. In any event we are satisfied that whoever
entered into the transactions in the name of Grange never intended to account
for VAT on those transactions, including those which led to A-Z’s broker
chains. They fraudulently failed to account for VAT on those transactions.
103. Worldwide was
incorporated on 18 March 2005 and registered for VAT with effect from 1
November 2005. Between April 2006 and November 2006 it had no directors. In May
2006 a Mr Mahmood, holding himself out as a director, phoned HMRC in order to
verify certain VAT numbers. At that time it appeared that Worldwide was
wholesaling iPods and electronic goods. Despite requests by HMRC, Worldwide
failed to produce trading records until October 2006. Thereafter HMRC were
unable to contact Worldwide. It was de-registered with effect from 10 November
2006 having failed to submit a VAT return for period 07/06.
104. The records
provided by Worldwide were incomplete. Assessments were issued totalling more
than £3million. These were based in part on records produced by Worldwide and
in part on records from other traders including A-Z. Nobody on behalf of
Worldwide has contacted HMRC in relation to these assessments.
105. Mr Mahmood was
disqualified from being a director based on his conduct in relation to
Worldwide. The period of disqualification was 13 years which is in the top
bracket and implies serious matters of unfitness on his part.
106. We are satisfied
from the evidence that Worldwide never intended to account for VAT on its
transactions, in particular those which were part of A-Z broker chains. It
fraudulently failed to account for tax on those transactions.
107. Phone City was incorporated on 2 August 2004 and registered for VAT with effect from 1
February 2005. Its stated trading activity was “contract mobile phone distributors”.
In the year ended 31 July 2006 its annual turnover was more than £500 million
generated from wholesaling mobile phones.
108. Phone City had a history of failing to provide records to HMRC on time. In relation to
period 05/06 which was a monthly period it submitted a return seeking a VAT
repayment of £908,006. During this period it appears that Phone City both acquired mobile phones from the EU and sold mobile phones to the EU, thus generating
an overall repayment claim. When it finally provided records to HMRC in support
of this return the records were incomplete. In particular there were no
purchase invoices and insufficient evidence of despatch to the EU for the
purpose of zero-rating such sales. In the absence of such records HMRC
de-registered Phone City for VAT purposes with effect from 25 July 2006.
109. During
subsequent investigations none of the officers of Phone City or its employee
have admitted to any involvement in or responsibility for the company’s deals.
No records have been produced for the final period of trading in June and July
2006 and each individual connected with the company has denied any knowledge of
the whereabouts of those records. Assessments and corrections to the returns
made by HMRC disclose a liability of Phone City to HMRC of £34,014,672, the
bulk of which is in connection with the final period of trading. Whilst the
company made a return for its final period of trading, it under declared the
output tax due by some £4.3 million.
110. Phone City was subsequently wound up and its directors disqualified from acting as company
directors in each case for a period of 12 years. Again, this is in the top
bracket and implies serious matters of unfitness on their part.
111. We are
satisfied from the evidence that Phone City never intended to account for VAT
on its transactions, in particular those which were part of A-Z broker chains.
It fraudulently failed to account for tax on those transactions.
112. GAC was
incorporated on 13 June 2006 and registered for VAT with effect from 15 June
2006 as a delivery service. The directors resigned on 18 June 2006 and were
replaced by Mr Hanif Dar. A visit was conducted by HMRC on 11 September 2006
but the officers were told that the company had moved on 18 August 2006. HMRC
was unable to contact the officers of GAC and it never made any VAT returns or
produced any records. Documentation obtained by HMRC from other sources showed
GAC acquiring electronic goods from Poland. An assessment to output tax in the
sum of £495,923 was issued in relation to some of the deals which HMRC had
identified. GAC was dissolved on 10 March 2009.
113. We are satisfied
from the evidence that GAC never intended to account for VAT on its transactions,
in particular those which were part of A-Z broker chains. It fraudulently
failed to account for tax on those transactions.
114. In addition to
the evidence directly relating to each of the defaulters we also had other
evidence of fraud, including evidence of an overall fraudulent scheme involving
A-Z. The evidence of fraud in relation to the business of A-Z is compelling. We
are satisfied that it was knowingly and deliberately involved in a scheme to
defraud HMRC.
115. A-Z was
certainly offsetting its input tax liability on goods purchased for despatch to
the EU against its output tax liability on supplies of goods acquired from the
EU. In period 08/06 the net value of its broker deals was £49,998,536 and the
net value of its acquisitions was £49,620,293. The net VAT due to HMRC on the
basis of this trading was £24,159. However, the mere fact that it was
offsetting in this way is not without more indicative of fraud. In addition all
of its broker deals in the period trace back to fraudulent defaulters as set out
above. All of its acquisition deals, where traced, end with UK traders supplying to EU purchasers and generating a corresponding input tax credit or
repayment. We find it unlikely that such a pattern would emerge in legitimate
commercial deals. The same pattern emerges in period 05/06.
116. A-Z was
ostensibly able to generate turnover of more than £400 million in the 12 months
ending 31 August 2006. All deals were back to back with A-Z purchasing exactly
the same quantities of goods as it sold to its purchaser. All the participants
in the transaction chains leading to A-Z’s broker deals made and received
payments through FCIB. In very few of its deals did A-Z inspect the goods it
was purchasing. It carried out little by way of the commercial checks or due
diligence one would expect of a legitimate commercial company in a market it
well knew to involve a serious risk of fraud.
117. The transaction
chain we are concerned with in this appeal involved an acquisition by A-Z from
Kom Team. A-Z failed to provide any CMR to evidence the goods arriving in the UK or any evidence of inspection. Whilst we do not question that the goods were imported
into the UK by A-Z, it is telling that they were not able to produce basic
supporting documents in relation to the transaction.
118. We are satisfied
that A-Z acted as a contra trader in order to conceal the fraudulent defaults
which gave rise to the tax losses identified above. By doing so it made it more
likely that HMRC would make repayments of input tax to traders despatching
goods to the EU or exporting goods out of the EU. It does not necessarily
follow from that finding that all traders who despatched or exported goods originally
acquired by A-Z were knowing participants in the fraud. It may be that they
were unwitting accomplices who effectively provided liquidity for the fraud
and/or enabled the goods to circulate giving an opportunity for further tax
losses arise.
119. The existence of
an overall scheme to defraud HMRC is further evidenced by the documentation
available in relation to the FCIB for the transaction chain involving the
appellant. That evidence was adduced by Mr Daniel Payne. In the light of the
cross examination of Mr Payne it is clear that he did not carry out a complete
analysis of the payments made between the various parties in the transaction
chain. In particular he did not take into account payments made through ICB
because his task was limited to considering the material in relation to FCIB.
He also did not consider the following payments related to the transactions which
did pass through FCIB:
(1)
£423,500 repaid by the appellant to UMTS on 3 August 2006.
(2)
£275,000 paid into the FCIB account by the appellant on 14 August 2006.
(3)
£250,000 paid by the appellant from its FCIB account to Fairford’s Alliance and Leicester account on 17 August 2006.
(4)
£25,400 transferred by the appellant from its FCIB account to its HSBC
account on 21 August 2006.
120. We do not
consider that the absence of any reference by Mr Payne in his analysis to these
sums prevents us from making any findings of fact on the basis of his evidence.
Nor does it affect the reliability of the underlying evidence adduced by Mr
Payne. We can see various movements of funds from the account information which
is exhibited to Mr Payne’s witness statement. The narrative in the documentation
associated with most of those movements enables us to be satisfied on the
balance of probability that they were made in connection with transactions
involving the 17,500 iPods with which we are concerned in this appeal. We can
summarise our findings in the following tables:
121. The first table
traces a sum of £423,500 paid by UMTS to the appellant on 3 August 2006. This
is the sum which was repaid by the appellant to UMTS on the same day. It
originated with a company called SNV Worldwide:
|
Payer
/ Payee
|
£
|
|
SNV
> Best in Sweden
|
425,775
|
|
Best in
Sweden > UMTS
|
425,250
|
|
UMTS
> HS Tank
|
423,500
|
122. The second table
traces further sums paid on 3 and 4 August 2006 from UMTS to the appellant and
then to Fairford. They also originated with SNV:
|
Payer /
Payee
|
£
|
£
|
£
|
£
|
Total
£
|
|
SNV
> Best in Sweden
|
121,650
|
364,950
|
182,475
|
243,300
|
912,375
|
|
Best in
Sweden > UMTS
|
121,500
|
364,500
|
182,250
|
243,000
|
911,250
|
|
UMTS
> HS Tank
|
121,000
|
363,000
|
181,500
|
242,000
|
907,500
|
|
HS Tank
> Fairford
|
|
|
|
|
906,800
|
|
Fairford
> Tradex
|
|
|
|
|
908,000
|
|
Tradex
> A-Z Mobile
|
|
|
|
|
900,000
|
|
A-Z Mobile > Kom Team
|
|
|
|
|
900,000
|
|
Kom
Team > RCCI
|
|
|
|
|
895,625
|
|
RCCI
> SNV
|
|
|
|
|
897,000
|
123. RCCI, SNV and
Best in Sweden were all VAT registered companies based in other Member States
of the EU. Payments from SNV, Best in Sweden and UMTS ending with the appellant
were all made on 3 August 2006. Payments from the appellant, Fairford, Tradex,
A-Z Mobile, Kom Team and RCCI ending with SNV were all made on 4 August 2006.
The narratives in the FCIB transaction listings show that all the payments made
were in connection with the iPods which are the subject matter of the present
appeal, save the funds moving between RCCI and SNV for which the only narrative
is “Part payment”. In all other transfers the narrative refers either to
the known invoice number for the transaction between those parties or the
number of iPods and/or the specification of the iPods. For example the transfer
from Kom Team to RCCI of £895,625 has a narrative “PART PAYMENT 17,500 ipods”.
124. The payment from
RCCI to SNV has no more specific narrative but on the balance of probabilities,
based on the amount involved and from RCCI’s account the fact that payment was
made immediately after RCCI received the transfer from Kom Team, we are
satisfied that it also related to the 17,500 iPods.
125. We find as a
fact therefore that a sum of just over £900,000 was transferred in a circular
movement between the parties identified above with the small reductions and in
one case a small increase indicated above. The movement started with transfers
totalling £912,375 from SNV to Best in Sweden and ended with a transfer of
£897,000 from RCCI to SNV. These movements of funds could not have occurred
without contrivance between at least some of the parties involved. Having said
that we do not infer from the movement of funds that the appellant was
necessarily a knowing participant in that contrivance or that it should have
known of the contrivance.
126. Based on all the
evidence set out above we are satisfied that the appellant’s transactions did form
part of a scheme intended to defraud HMRC.
Were the Appellant’s
Transactions connected with Fraud?
127. The respondents
contend that the evidence of a fraudulent scheme involving A-Z deliberately
offsetting input tax on broker deals against output tax on acquisition deals
sold to UK customers establishes the necessary connection with fraud for the
purposes of the Kittel test.
128. As we understand
Mr Virk’s submissions, the appellant puts the respondent to proof of any
connection but specifically denies that the appellant knew or should have known
of the connection.
129. We are satisfied
based on the judgment of the Chancellor in Blue Sphere Global that the
appellant’s transactions were connected with fraud. Indeed the connection in
the present case is stronger than that described by the Chancellor because we
have found that there was a scheme to defraud HMRC which included knowing
participation in the fraud by A-Z. There was also an even more direct
connection with fraud than that described by the Chancellor arising from the
appellant’s involvement, be it witting or unwitting, in the circular movement
of funds described above.
Did the Appellant Know
of the Connection with Fraud?
130. The respondents
must satisfy us that the appellant knew of the connection with fraud at the
time it entered into the purchase of the iPods. Alternatively that it should
have known of that connection. Much of the evidence in this regard is evidence
from which the respondents invite us to infer that the appellant either knew
or should have known of the connection. In each case the appellant denies that
it knew or should have known of the connection with fraud.
131. In the following
sections we consider the evidence relevant to the question of actual knowledge.
We then consider evidence relevant to the question of what the appellant should
have known. We record our findings of fact relevant to these issues and the
inferences we draw from those facts. In the present case there is no single
circumstance from which we can infer that the appellant knew or should have
known of the connection with fraud. It is a matter of considering all the
circumstances and then whether, on balance, we are satisfied that the appellant
knew or should have known of the connection with fraud.
132. Both counsel
provided comprehensive closing submissions on this issue. Mrs Newstead relied
on the following facts and matters as being established and from which she
invited us to infer that the appellant knew of the connection with fraud. There
were a number of other matters relied on by the respondents either in the
Statement of Case or in the witness statement of Mr Griffiths. To the extent
that they were not relied on by Mrs Newstead in closing we have had no regard
to those matters.
(1)
Appellant’s Background
133. We were provided
with turnover figures for the appellant going back to 1996. We can see from
those figures that the appellant had a turnover in 1998 of approximately £5.5
million. By 2005 its turnover had fallen to £2 million. The respondents invited
an inference that a decline in turnover led the appellant to knowingly become
involved in VAT fraud. Jatinder stated in evidence that there was up to £2
million to add to this turnover from other group companies. We find as a fact
on the basis of the evidence before us that the appellant’s turnover had fallen
in the periods leading up to the transaction. However whilst that provides some
context to the transaction it does not really add much if anything to the
respondents case on knowledge. We do not have any material from which we can
see the profits being made by the appellant and it is in our view dangerous to
read too much into the fall in turnover.
134. To some extent
the appellant dealt in other goods outside its core business. There were some
comparatively small deals in electronic keyboards and contract mobile phones.
We accept that the appellant was looking to diversify into areas outside its
core business. Deals in electronic goods such as iPods would be consistent with
a legitimate desire to diversify.
(2) The Value of the Deal to the Appellant
135. We accept Mr
Virk’s submission that there is nothing inherently unreasonable about
purchasing the iPods wholesale at £115.40 per unit and selling at £121.00 per
unit when the evidence is that the retail price was £179.00. Those figures gave
rise to a gross profit on the deal of £98,000.
136. Jatinder’s
evidence in response to questions by Mrs Newstead as to the value of the deal
to the appellant was what we can only describe as evasive. In response to
questions directed towards showing that this was a very valuable deal in the
context of the appellant’s business generally he said that “any transaction
we do in the company is valued to us”. Similar responses followed. In
contrast, at the end of his evidence in response to questions from the tribunal
he agreed that “this was a particularly large deal”.
137. It is
unfortunate that we do not have details of the appellant’s profitability, but
we find as a fact that this was a particularly large deal for the appellant and
was important to the appellant in the context of its business as a whole. As a
result whilst Jatinder had authority from the directors to commit the appellant
to the purchase and sale of the iPods, he discussed the commercial aspects of
the deal with the directors, including matters such as purchase price, sale
price and funding. Jatinder accepted that he discussed those matters with his
father and Bobby, although he was rather unforthcoming in cross-examination
when asked about the involvement of the directors.
138. In the light of
Jatinder’s evidence we find it surprising that Bobby was not called to give
evidence. Bobby was present at the tribunal throughout the hearing. He is a
director of the appellant and his involvement in the deal and the circumstances
leading up to the deal included:
(1)
Opening an account with FCIB in late 2005 and early 2006 in which the
documentation described him as the “primary contact”.
(2)
Meeting Asif Iqbal of UMTS for the first time at a trade exhibition in Glasgow.
(3)
Completing a UMTS’ Trade Application Form on behalf of the appellant on
10 July 2006.
(4)
Discussing with Jatinder the purchase price, sale price and funding of
the transaction.
(5)
Expressing concerns that UMTS had not paid for the iPods as promised.
139. Mrs Newstead
invites us to draw an adverse inference from the fact that none of the
directors chose to give evidence. In circumstances where there is no
explanation for the failure of a material witness to give evidence we are
entitled to draw such an inference (See Wisniewski v Central Manchester
Health Authority [1998] EWCA Civ 596). In our view
it is appropriate for us to take into account the failure of Bobby in
particular to give evidence when we consider the evidence of knowledge generally.
140. Given the value
of the deal to the appellant, any reasonable businessman would want to ensure
that the commercial risk was minimised. We are satisfied that Jatinder, in
association with his father and Bobby, would in ordinary commercial circumstances
have exercised caution in conducting this deal. We accept that there was a
long-standing relationship with Fairford and they were entitled to take certain
matters on trust, but there had been no previous dealings with UMTS. We would
have expected the appellant to have exhibited a fair degree of caution in its
dealings with UMTS in such a large deal.
(3) Conduct of the Deal
141. Mrs Newstead
submits that the deal fitted together surprisingly easily. She relies on a
number of features in support of her submission that the deal was contrived
rather than a genuine arms length commercial deal. We consider that the
following factors relied on by the respondents under this heading are
significant.
142. The evidence of
negotiations as to the terms of the deal with both Fairford and UMTS are not
what we would expect of a legitimate commercial deal. We consider this evidence
in the context of what was a particularly large deal for the appellant which
the directors would ordinarily be expected to approach with caution.
143. Jatinder’s
evidence was that negotiations were conducted by telephone. The documents
before us show that offers of stock showing quantity, price and specification
were confirmed by email. Once agreement was reached the deal was confirmed by
faxing purchase orders, pro forma invoices and invoices. Again, there is
nothing inherently unusual about that, but when one looks at the emails on 27
and 28 July 2006 they do not record what must have been key aspects of the
deal, in particular dates of delivery and dates of payment. No other documents
record these key aspects of the deal.
144. As far as price
is concerned, Fairford’s email on 27 July 2006 states this is the best price Fairford
can do. It is quite plausible that this email was sent following prior
negotiations by telephone which was Jatinder’s evidence. At or about this time
Jatinder says he researched the retail price of the iPods. Shortly afterwards
Jatinder emailed UMTS offering the goods at a price of £121.00. He also told
UMTS that he was unable to budge on price. At the same time Jatinder says he
offered the goods at the same price to various other UK and EU potential
customers. It is a little odd that in a market in which Jatinder accepted the
price could change on a day to day basis there is no evidence of negotiations
or counter-offer by UMTS or any movement in price by the appellant. Jatinder’s
evidence was that he wanted a margin of around £4 to £6. The offer to UMTS therefore
would give him the top end of that margin but UMTS were not able, if they tried,
to negotiate the price downwards. This is surprising given that UMTS was
apparently a specialist dealer in electronic goods and the appellant was
principally a clothing manufacturer new to the market.
145. If there were
any meaningful negotiations with UMTS, and we are not satisfied that there
were, it is surprising that those negotiations are not evidenced by any
documents or by evidence from the directors of the appellant with whom Jatinder
was allegedly discussing the deal.
146. As far as the
date of delivery and date of payment are concerned, whilst the emails are silent
it is true that the purchase orders and invoices do identify a date of delivery
of 28 July 2006. However Jatinder’s own evidence was that this was not the
agreed date of delivery. He had simply discussed with UMTS that they wanted the
goods as soon as possible, they would only have them when the appellant had
been paid and a timescale of 7 days was discussed. We find it unlikely that in
the circumstances of this deal such matters would not have been documented,
either by way of email or fax.
147. We mention above
Jatinder’s evidence that he researched the retail price of iPods and contacted
potential purchasers apart from UMTS offering them the iPods at a price of
£121. The respondents suggest that this could not have happened in the 12
minutes between receiving Fairford’s email offering the goods at £115.40 and
offering the goods to UMTS at £121. We are not satisfied that the 12 minute
timescale identified by Mrs Newstead is really relevant. Firstly because there
is nothing inherently implausible about Jatinder’s evidence that the email from
Fairford was preceded by telephone discussions. Secondly because the email to
UMTS which asked whether they were interested in purchasing the iPods does not
preclude offers to other interested parties after that email was sent. It is
however of some significance that there is no evidence of any faxes or emails
to other potential customers at or about the same time as the email to UMTS.
148. Mrs Newstead relied
upon contrivance based on the manner in which title and possession of the goods
was dealt with by the parties to the transactions. The appellant did not
dispute that on the basis of Fairford’s invoice terms Fairford retained title
to the goods until it was paid in full. The goods were shipped on hold. We do
not consider it significant that the goods were allocated to the appellant
prior to payment. From the documentation we have seen the process of allocation
notified to 1st Freight simply identifies the particular goods as
being those which the appellant has contracted to purchase. Similarly we accept
Mr Virk’s submission that the shipping of goods on hold is entirely consistent
with a legitimate commercial deal.
149. On 3 August 2006
UMTS made payments totalling £907,500 to the appellant. On the same date the
appellant made payments totalling £906,800 to Fairford Partnership. At that
stage the appellant gave instructions to 1st Freight allocating the
goods to UMTS and also to ship the goods on hold to GR Distribution. It is
notable that the appellant made no written request to Fairford asking if it
could ship the goods to GR Distribution in France and there is no document from
Fairford authorising such a shipment.
150. The
circumstances in which shipment took place do suggest that the deal was not a
legitimate commercial deal. The appellant was dealing with a customer it had
never previously dealt with, in a large deal worth £2 million. The price of the
goods could change on a daily basis. Jatinder’s evidence was that UMTS had said
that it wanted the goods as soon as possible, it had the funds available and
would arrange payment within about 7 days. On 3 August 2006, some 6 days after
the deal was done, £907,500 was paid. Jatinder said it was this payment which
prompted him to give instructions for shipping. He was promised the balance
within the next day or so. We find it surprising in those circumstances that
the appellant was prepared to ship the goods to France before it had received
the balance of the purchase price.
151. More surprising is
that whilst the instructions to ship the goods were given by the appellant on 3
August 2006, the goods were not actually shipped until late on 8 August 2006.
Jatinder did not know why there was a further period of 5 days before the goods
were shipped to France. Whatever the reason, by 8 August 2006 UMTS had failed
to pay the balance due of approximately £1.2 million. There was no reason why
the appellant should not have withdrawn the shipping instruction when it was clear
UMTS had not paid the balance due. Jatinder said he was concerned that UMTS had
not paid but that he was reassured by them that payment would be made.
152. We think it
unlikely that any reasonable businessman in these circumstances would have
shipped the goods to France incurring shipping and insurance costs of £12,608
excluding VAT. We have no reason to think that Jatinder, discussing the deals
with the directors, would have acted other than as a reasonable businessman in
connection with this deal. He is an intelligent man with a degree in business
studies and has been brought up in a commercial environment.
153. There was a
period of almost 2 months between shipping the goods on 8 August 2006 and
releasing the goods to UMTS on 2 October 2006 when the final payment was made.
Jatinder’s evidence was that he and Bobby were very concerned about the delay
in payment. Jatinder said that he made various phone calls to Asif Iqbal
chasing payment. The only documentary evidence of payment being chased is an
email from Jatinder to Asif on 22 August 2006. It refers to a conversation
between the two the previous week and asking when payment might be expected. A
hard copy of the email appears to be have been faxed to Asif Iqbal on 18
September 2006 with the following handwritten note:
“please advise when we can
expect payment.?? Please see our bank details”
154. Whilst it wasn’t
canvassed in evidence it is likely that the reference to bank details was the
appellant confirming to UMTS its ICB bank account details. We are surprised at
the absence of any further emails, faxes or letters chasing payment, either
from the appellant to UMTS or from Fairford to the appellant. Notwithstanding a
relationship of trust between the appellant and Fairford, in a transaction of
this nature we would expect each party to commit its position to writing. Hence
we would expect to see such documents expressing increasing concern at the
delay in payment and the additional storage and insurance costs that were being
incurred. We find as a fact that the appellant allowed the matter of payment to
drift and that is a factor which suggests that the relationship between the
appellant and UMTS was not an arms length commercial relationship.
155. Jatinder’s
evidence in cross examination was that the appellant did not try to find a new
customer for the goods because UMTS had already paid a substantial sum towards
the goods. He suggested that the appellant would have to recover the £906,800
it had paid Fairford in order to repay UMTS and that this was not practical. At
the end of his evidence in response to questions from the tribunal Jatinder
accepted that he could have sold the goods to a new customer and used funds
from that sale to complete the purchase from Fairford. Not only did he accept
that was a viable option but for the first time he said that following
discussions with the directors they looked around for a new customer but there
was no-one available to purchase the iPods. He put this forward as a factual
account of what had happened. If this was true it is not credible that the
first time it would be put forward is at the end of his oral evidence. We do
not accept that the appellant ever tried to find a replacement customer.
156. The respondents
point to the payment of £423,500 made by UMTS on 3 August 2006 and the
repayment of that sum by the appellant on the same day. It is suggested that
Jatinder’s initial explanation, namely that Asif Iqbal had requested repayment because
of an issue with UMTS’ bank account lacks credibility. Narratives on the FCIB
accounts of UMTS, and Best in Sweden show the same sum passing through their
accounts described as “refund of funds” and “cancelled deal”
respectively. The funds ended up with SNV Worldwide. We cannot impute any
knowledge of these transfers to the appellant, however the narrative on the
appellant’s account when the money was returned reads “INSPECTION CHECKLIST
3.5K WHITE USA NANO”. That narrative was entered by Jatinder but he could
not recall why he had entered it. Indeed when he was asked about the narrative
he changed his evidence as to why the money was returned. He said he couldn’t
remember why the money was returned. We regard his evidence on this point as
unsatisfactory.
157. Jatinder said in
evidence that the appellant did the deal on a “pro forma” basis to
counter the risk of non-payment by UMTS. We can understand that contracting on
terms whereby the goods will not be released until payment has been received
significantly reduces the risks associated with the transaction. However that
protection arises from the contractual terms. It does not arise from the
practise of issuing pro forma invoices which themselves make no reference to
the terms of payment. Indeed VAT invoices were issued by the parties on the
same day that the pro forma invoices were issued. In answer to questions from
the Tribunal Jatinder acknowledged that the pro forma invoice simply confirmed
the details of the order.
158. Mr Virk
submitted that the only credible evidence as to how traders in this market
operate comes from Jatinder. He submitted that we cannot make any findings as
to what might reasonably be expected of businesses operating in this market. We
disagree. The whole purpose of a specialist tribunal including a lay member is
to bring to bear its experience as to commercial practices and the way in which
businesses operate. In some appeals and in relation to some issues expert evidence
as to commercial practices will be necessary. The issues in the present appeal
do not fall into that category.
159. Mrs Newstead
also relies on further matters as suggesting that the deal is contrived. We do
not consider that they really point towards knowledge on the part of the
appellant, but for completeness we set out our reasons below.
(1)
The purchase and sale were back to back, with the appellant able to
source and sell the exact quantity of mixed specification iPods on the same
day. We do not consider that this factor indicates contrivance. We are
concerned here with one deal. The fact that in a single deal the appellant was
able to find a purchaser for a single consignment of iPods offered by a particular
supplier may be consistent with a contrived deal but it is not in our minds
indicative of contrivance. On this particular aspect we accept Mr Virk’s
submission that there is nothing inherently contrived about the mechanics of
the deal.
(2)
Jatinder’s evidence as to how the deal came about, in particular whether
Fairford or UMTS made the first enquiry about supplying or purchasing iPods, is
inconsistent with the documents. In his evidence Jatinder stated that Fairford
offered to supply the iPods and Jatinder then offered them to UMTS. By that
time he knew that UMTS were interested in purchasing MP3 players. There is
nothing inherently unreliable about Jatinder’s evidence in this regard. We do
not think that the contemporaneous faxes from Fairford and Jatinder on 27 July
2006 are necessarily inconsistent with his evidence. Mrs Newstead relies on
notes of a meeting involving Jatinder and HMRC officers on 23 July 2007 where
it is recorded that:
“[UMTS] contacted HST to
purchase electronics from [China], but HST purchased these from Fairford
instead – [Jatinder] phoned round contacts, Fairford gave [Jatinder] a price
for the goods. ”
We accept that there is an inconsistency with Jatinder’s
evidence, but none of the HMRC officers present at the meeting have given
evidence before us. We are prepared to accept that the note in this regard may
not be a reliable record of what Jatinder said at the meeting.
(3)
Mrs Newstead submits that the appellant ought to have queried why
Fairford was not exporting the iPods itself when it held itself out as a
specialist global trader. We do not consider that in the circumstances of this
transaction there was any real reason for the appellant to make such an
enquiry.
(4)
It is suggested on behalf of the respondents that Jatinder was vague and
contradictory about when the deal with Fairford was done, in particular when
the appellant became contractually bound to purchase the goods from Fairford. Jatinder
was certainly not clear in relation to contractual matters but we take into
account that he is not a lawyer. We do not consider that Jatinder’s evidence
this regard was vague. In his mind at the time, UMTS committed to the deal when
they sent a purchase order to the appellant. As soon as he received that document
he sent a purchase order to Fairford committing the appellant to the purchase.
(5)
The respondents identify the specification of the iPods, namely 10,000 United States specification, 2,500 Singapore specification and 5,000 European specification. It is suggested
that this indicates the importation was not for genuine commercial reasons
because there was no apparent reason for the iPods to be imported into the UK in the first place. We do not regard this as a relevant factor in the present appeal.
Firstly, as Mr Virk pointed out we had no evidence as to the significance of
iPod specification, other than from Jatinder himself. Jatinder told us that in
reality the specification of iPods was universal and they could be used in any
market, subject possibly to a straightforward language change. Secondly, this
is not a case where the appellant had previously received any warnings about
the prevalence of MTIC fraud in such markets. It might have been wise for the
appellant to have sought advice from its professional advisers as to the risks
associated with the specific transactions. However we are prepared to accept
that in the circumstances of this case the appellant’s failure to seek such
advice does not indicate knowledge of the connection with fraud.
(6)
Funds paid by the appellant to Fairford Partnership on 3 August 2006 were
paid back to the appellant so that it could then make a payment to Fairford
Group’s FCIB account. On other occasions funds were paid either to Fairford
Partnership or Fairford Group. We do not consider these to be “third party”
payments in way Mrs Newstead uses that term in her submissions. The companies
were plainly part of the same group and under the same control. We accept Mr
Virk’s submission that the way in which Fairford wanted the payments dealt with
does not suggest contrivance or knowledge on the part of the appellant.
160. Mrs Newstead did
not place much if any reliance in her closing submissions on the fact that
payments received by the appellant from UMTS were immediately paid to Fairford.
This factor is consistent with the way in which MTIC frauds operate, but we
accept Mr Virk’s submission that it is also consistent with a legitimate
commercial deal.
161. For the sake of
completeness we should also say that we accept Mr Virk’s submission that
shipping the goods to France when the purchaser is a Spanish company is
entirely consistent with a legitimate commercial deal.
(4) Due Diligence
162. The respondents
submit that the due diligence conducted by the appellant on Fairford and UMTS
was very limited and the appellant largely ignored the commercial checks which
were carried out.
163. We can deal with
the due diligence in relation to Fairford relatively briefly. The appellant had
never previously traded in electronic goods and had received no warnings as to
the risk of MTIC fraud in that market from HMRC or its professional advisers.
It was not disputed that the appellant’s directors had a long established
trading relationship with the directors of Fairford. We are satisfied that the
Appellant obtained a Graydon credit report on Fairford on 27 July 2006, before
it committed to the purchase. Its practice was to obtain Graydon reports on all
new customers and suppliers. However the appellant relied more on its own
personal knowledge of the directors. In the circumstances we accept Mr Virk’s
submission that there was no reason for the appellant to carry out any further
commercial checks on Fairford.
164. UMTS was quite
different. Mr Virk submitted that the supplier was more relevant than the
customer when it comes to carrying out due diligence. We do not accept that
submission. The appellant had never traded with UMTS before and knew little about
its commercial history or that of its director. Whilst the appellant was not
giving credit to UMTS, it was entering into a very sizeable commitment on the
strength of a purchase order from UMTS. We are satisfied that the appellant
would, in ordinary commercial dealings, want to satisfy itself that UMTS would
be able to fulfil its obligations and pay for the goods on time. If it did not,
the appellant risked having to find another buyer for the iPods with the
possibility of an adverse price movement in the meantime. It also risked
incurring wasted costs shipping the goods to France and back to the UK if the deal was not completed.
165. There is some
difficulty in identifying what material was available to the appellant in
relation to UMTS prior to entering into the transaction. It certainly had a
Graydon credit report indicating that UMTS had been incorporated on 1 September
2000. No indication is given as to when UMTS had commenced trading. “Trade
morality” was described as good and “Payments” were described as regular. What
these terms meant is not described. The credit rating was 3, which is an above
average risk in the Graydon scales. The “amount advised” for credit was €1,202
and the director was identified as Asif Iqbal.
166. It is clear that
none of the other documents, whether they were obtained before or after the
transaction, does anything more than confirm that UMTS was a commercial entity
in Spain and registered for VAT. Many of the documents are formal documents in
Spanish. For the first time at the hearing Jatinder claimed that he had asked
various contacts to translate those documents for him over the phone. He
purported to give a detailed account of who had translated the documents for
him and described making a note of what each of the documents was. We have
serious reservations as to whether this evidence was true. In any event we find
as a fact that there was no material from which Jatinder or the directors could
make any judgment as to the risk of non-payment.
167. Jatinder
accepted that trade references are a useful form of due diligence, but that he
did not seek trade references for UMTS.
168. The absence of
any material from which the appellant could assess the financial standing and
reliability of UMTS is telling. In his evidence he stated that due diligence
was carried out to confirm that the customer existed, and if they were asking
for credit how much credit they should be given. However that ignores the other
commercial risks associated with the transaction, in particular the risk of
non-payment and being left with the goods.
169. Jatinder did
have cause to question the VAT number of UMTS. We accept that the appellant
searched on the Europa website of the EU in order to confirm the validity of
UMTS’ VAT number. The number was not confirmed as valid and on 28 July 2006 the
appellant emailed Graydon asking them to confirm that the number was valid. On
3 August 2006 Graydons confirmed that the VAT number belonged to an active
trading company. This is an example of at least some due diligence on the part
of the appellant. However we do not consider it very significant in relation to
the issue of knowledge because in order to zero rate the supply to UMTS the
appellant would need to satisfy itself that the VAT number was valid.
170. Jatinder gave
evidence that the iPod was a very popular product and it was “a seller’s
market”. He said that the appellant could easily have found a customer from
its database. In those circumstances it seems strange that the appellant should
contract to sell the goods to UMTS, knowing so little about its financial
standing and reliability.
171. The significance
of due diligence in the present case is the fact that Jatinder agreed to sell
to UMTS, exposing the appellant to the risk that UMTS would not complete the
deal, without carrying out any real commercial checks. That is a factor
indicating that it was not a legitimate commercial deal.
172. The respondents
also rely on the fact that the appellant did no due diligence on 1st
Freight which was responsible for storing the iPods and shipping them to France. We do not consider this to be a significant factor in the context of this appeal.
We consider that a business in the position of the appellant would ordinarily be
entitled to rely on the recommendation of Fairford. What is significant in our
view is the fact that Jatinder did not visit 1st Freight at any
stage to inspect the goods himself and we consider this aspect below.
(5) Insurance
173. We have touched
upon the insurance position above. We have made findings of fact in relation to
the conduct of the transaction, including our finding that in the circumstances
of this transaction no reasonable businessman would have shipped the iPods to France when £1.2 million was outstanding and overdue from UMTS.
174. The iPods were
shipped to France on 8 August 2006. The balance was not finally paid until 2
October 2006. There is no evidence or documentation to suggest that Jatinder
gave any consideration to the insurance position whilst the goods were in
storage at GR Distribution. Indeed there was no evidence or documentation referring
to the responsibility for storage charges during this period.
175. Mrs Newstead
relies upon what she described as a “casual attitude to insurance”. On
the one hand she says that the appellant did not seek insurance for the iPods
until 3 August 2006 when it asked 1st Freight to ship the goods to France. At the same time as it gave those instructions the appellant requested “shipment
is to be insured until released to our customer”. On the other hand Mrs
Newstead states that the appellant did not have an insurable interest in the
goods. Whether or not that is right is debatable. However the point appears to
be that if the appellant thought that it required insurance it failed to
adequately check that it had sufficient insurance. Mr Virk submits that the
evidence establishes that the goods were in fact fully insured, through a
combination of 1st Freight’s insurance policy and the Appellant’s
marine insurance policy.
176. The position in
relation to insurance is far from clear and we do not have copies of the
relevant insurance policies. We are unable to make findings of fact as to
whether or not the goods were fully insured in transit to France. More significant is what Jatinder believed the insurance position to be at the time
of the deal, both in relation to transit and storage.
177. In the ordinary
course, a business in the position of the appellant would want to satisfy
itself that it was covered by insurance for any risk of damage or loss to which
it was exposed whilst goods were in storage or being transported. It did not
appear from the evidence that Jatinder had any real understanding of the risks
against which the appellant might want to be insured, or the sufficiency of the
insurance which was in place. The real point here is that we would expect a
reasonable businessman to take steps to satisfy himself as to the insurance
position, raising the matter directly with the vendor of the goods, the freight
forwarder and the appellant’s own insurance broker. He failed to do so, other
than simply making a request to 1st Freight to insure the goods
until release. Having said that, the nature of that failure is such that it is explicable
as an oversight.
178. More significant
is that there is no evidence of Jatinder obtaining any quotes for that
insurance or that consideration was given by him to the insurance position or the
costs of storage whilst the goods were at GR Distribution in France. He had asked for insurance until the goods were released to UMTS. On 7 August 2006
1st Freight sent invoices covering “Secure Transport – Fully
Insured to Destination”. On any view Jatinder and the directors ought to
have been alert to the fact that there would be additional costs for insurance
and storage depending on how long the goods were at GR Distribution in France. In the circumstances of this transaction it does not appear to us that this is
readily explicable as an oversight.
(6) Inspections
179. Fairford
provided a copy of its inspection reports on the iPods to the appellant. The
reports were dated 2 August 2006. We do not regard it as significant that
Jatinder did not know what a “type 5” inspection entailed. The description of
the packaging as “fair” is something that we would have expected Jatinder to
query. In particular we would have expected him to clarify whether the
condition of the retail packaging was anything less than good. However we
accept that this may be accounted for as an oversight.
180. Jatinder copied
the inspection reports to UMTS. He said this was an oversight. He accepted that
by copying the inspection reports to UMTS he was effectively disclosing the
identity of his supplier, Fairford. He further accepted that this risked
prejudicing future business with UMTS who might go directly to Fairford in
future. Again, we accept that it may have been an oversight.
181. It is relevant in
our view that at no stage did Jatinder go to 1st Freight to inspect
the goods himself. Jatinder accepted that he had thought about visiting 1st
Freight but did not do so and gave no explanation as to why he did not do so.
He was alert to the possibility from attending trade fairs in the Far East that iPods were susceptible to counterfeiting. 1st Freight’s warehouse
was at Chadwell Heath in Essex. It would not have been a long trip and would
also have given him an opportunity to look at 1st Freight’s
operations. We acknowledge that to some extent he relied upon trust and long-standing
relationships with the directors of Fairford. However this was a large
transaction for the appellant involving a consignment worth over £2 million. We
regard this as a further example of Jatinder not taking the steps a reasonable
businessman might be expected to take.
(7) Serial Numbers
182. The respondents
submit that a reasonable commercial businessman would have obtained the serial
numbers of the iPods in the transaction. Obtaining the serial numbers would
enable the appellant to validate any returned iPods. If the purchaser did want
to return some or all of the iPods for any reason the appellant would be unable
to verify whether they were the same iPods it had sold. Likewise if the
appellant needed to return the iPods to Fairford for any reason.
183. We can see that in
relation to warranty issues, wholesalers and retailers could return goods
directly to Apple Inc. However where for example goods are damaged in transit
or whilst in storage circumstances can plainly arise that a purchaser will have
cause to return the goods to its supplier. Jatinder did not appear to be alert to
this possibility. He did not enquire with 1st Freight as to the
feasibility or cost of obtaining the serial numbers of the iPods. It may be
that it wasn’t feasible or would have been prohibitively expensive. The relevant
point is he did not attempt to find out.
184. We do not go so
far as to say, as the respondents submit, that the appellant should have
obtained the serial numbers. We had no evidence before us as to where the
serial numbers were on the product and/or its packaging. Nor did we have any
evidence as to whether those serial numbers were in machine readable form. We
do however find that Jatinder did not even consider the issue. Again, that may
be a question of oversight on his part. This was his first transaction in such
products and he might not have fully considered the possibility. We accept Mr
Virk’s submission that it does not necessarily indicate that Jatinder knew that
the transaction was connected with fraud.
(8) Banking Arrangements
185. All parties in
the transaction chain banked with FCIB. For the reasons given above we are
satisfied that there was circularity in the movement of funds on 3 and 4 August
2006. We do not consider that it was a matter of co-incidence that all parties
involved in the circular flow of funds banked with FCIB. It appears to us that
this was a matter of design. It is a factor pointing towards knowledge on the
part of the appellant although it is not in our view determinative of that
issue. It remains possible that the appellant was unwittingly persuaded to open
an FCIB account and to use it for the purposes of these transactions.
186. Jatinder’s
evidence was that FCIB approached the appellant in 2005 with a view to
obtaining their business. An appointment was arranged and Jatinder briefly
attended a meeting which took place with a representative of FCIB together with
his father and Bobby. The reason Jatinder gave for the appellant opening an
FCIB account was that HSBC were unable to offer online banking with
instantaneous transfers of large amounts. We were referred to evidence as to
whether HSBC were able to provide online CHAPS or SWIFT transfer facilities to
customers such as the appellant. We are prepared to accept Mr Virk’s submission
on the evidence before us that FCIB did offer facilities to businesses such as
the appellant which HSBC were not able to offer. Hence there was a commercial
reason why the appellant might have wanted to open and use its FCIB account in
order to make immediate payments.
187. It is clear that
on 21 August 2006 the appellant had decided to close its FCIB account and the
balance was reduced to zero. The account itself was not formally closed until 9
November 2006. As we have found above, the appellant opened its ICB account on
25 August 2006. The ICB account number was “1054601936”. Payments into that
account from UMTS were described on the statement as “Transfer from ‘umtssl’
– ‘1054601634’”. Payments out of the account to Fairford were described on
the statement as “Transfer to ‘FAIRFORDGROUPPLC’ – ‘1054601820’”. The
account numbers are very close together and we find as a fact that at or about
the same time as the appellant opened its account with ICB, UMTS and Fairford
Group also opened accounts with ICB. We asked Jatinder about this and he “could
not be 100% sure” whether UMTS or Fairford had an ICB account. He said that
he had had no discussions with Fairford or UMTS about opening an ICB account.
188. We note that the
documents obtained by HMRC from Tradex include an ICB statement for Tradex
showing account number 1054601207 opened on 30 June 2006. From this it also
appears and we find as a fact that A-Z had an ICB account number 1054602137.
Both these accounts were used for payments in relation to the 17,500 iPods in
October 2006.
189. The evidence of
Mr Griffiths was that he was unable to find any trace of ICB on the internet.
The ICB statements in evidence give no address, telephone number or other
identifying details. His evidence in this regard was not challenged and we
accept it.
190. Jatinder’s
evidence was that the appellant was approached by ICB to open an account. The
fact that the appellant opened an account with the same bank to which Fairford
and UMTS also migrated cannot be put down to co-incidence as Jatinder’s
evidence would suggest. We consider that the appellant’s banking arrangements
are significant in suggesting that the appellant and its counter-parties were
not dealing on a commercial basis at arms length. There was no commercial
reason why they should arrange their affairs so as to share the same bank.
(9) Fluctuations in
the Appellant’s Turnover
191. The respondents
rely on fluctuations in the appellant’s turnover. In particular they point to
the fact that the turnover in 2006 was some £7 million against a turnover of
between £ 2-3 million in the previous 3 years. £2 million of that turnover
related to the transaction in this appeal. The balance appears to be related to
various other deals with Fab Designs Ltd (“Fab”) referred to below.
192. The increase in
turnover due to the transaction in this appeal does not add anything to the respondents’
case on knowledge. For the reasons given below we are not satisfied we can make
any relevant findings of fact in relation to the appellants deals with Fab. The
increase in turnover therefore does not help us in assessing whether the
appellant knew of the connection with fraud.
(10) Circularity of
Funding
193. We have found
that there was a circular movement of just over £900,000 between the parties
identified above. The movement started with transfers totalling £912,375 from
SNV to Best in Sweden and ended with a transfer of £897,000 from RCCI to SNV. We
have also found that the appellant’s transactions with Fairford and UMTS formed
part of a scheme intended to defraud HMRC.
194. We accept Mr
Virk’s submission that the mere fact that the appellant’s receipts and payments
in August 2006 formed part of the circular flow of funds does not necessarily indicate
that it knowingly participated in the fraud.
(11) Previous Involvement with MTIC
Fraud
195. The respondents
rely on what they say is the appellant’s previous involvement with MTIC fraud
as part of their case on knowledge. In particular that the appellant acted as a
buffer trader in 10 deals between May and August 2006. They allege that those
deals have all the hallmarks of MTIC fraud, including:
(1)
Absence of any effective due diligence by the appellant,
(2)
Use of an account with an overseas institution, Universal Mercantile
Building Society Ekonomisk Forening (“UMBS”).
(3)
Circularity of funds in each of the deals with all parties banking with
UMBS
(4)
Various alleged links between the appellant, Fab and Fairford and other
companies in the deal chains.
196. There is no
evidence before us which establishes the deal chains for the 10 deals in
question. Nor is there any sufficient evidence from which we can be satisfied
that there was a fraudulent defaulter in those deal chains. In the
circumstances we have had no regard to the appellant’s dealings with Fab.
197. The respondents
also rely on deals involving a company called Chak de Phattay Limited (“Chak”).
We make the following findings of fact in relation to Chak.
198. Chak was a
company registered for VAT with a business activity declared to be “wholesale
of spirits”. The directors of Chak were Bobby and Kuldip. Jatinder’s oral
evidence to us confirmed an account previously given in correspondence. He had
a contact in Birmingham called Assad Chohan (“Chohan”) who had experience of
dealing in diamonds. Towards the end of 2005 Chohan told Jatinder that there
was a shortage of quality diamonds due to the war in Sierra Leone which gave an
opportunity to make substantial profits. Chohan told Jatinder that his company
had been deregistered by HMRC and he could not become registered because of his
previous history. He asked Jatinder if he could buy diamonds through one of
Jatinder’s companies. Jatinder didn’t enquire as to why Chohan’s company had
been de-registered or why Chohan was unable to be registered for VAT. However
he put forward Chak as a trading vehicle, apparently with the consent of
Kuldip.
199. Chohan
introduced Jatinder to a Dutch company called African Networks BV. In turn
Jatinder introduced African Networks to a Birmingham based company called
Diamond Merchants Ltd which he knew through a contact called Imran Sarwah.
Jatinder gave evidence that his understanding of the deal was that he would be
paid a 1% commission by Chohan on behalf of African Networks for making the
introduction.
200. Jatinder’s
evidence about the circumstances of these dealings was inconsistent and vague.
In his witness statement Jatinder’s evidence was that he considered the
transactions involved minimum risk as he would only be taking a commission.
Further, that he decided to make use of Chak to facilitate the transaction. He
made no mention of Chohan wanting to use a company because he could not be VAT
registered.
201. Jatinder
arranged the documentation for the deal. In fact that documentation shows that
on 29 November 2005 Chak invoiced Diamond Merchants for a supply of diamonds in
the sum of £3,090,369.60 plus VAT of £540,814.68 rather than for commission.
Jatinder did not explain why he had not simply invoiced African Networks for
his commission. When asked why, he simply said “I thought this transaction
would have been best suited for this, using the company”. He conspicuously
failed to answer the question.
202. In January 2006
there were further invoices but this time Chak was buying from Diamond
Merchants and selling to African Networks. The result of the diamond deals was
that Chak’s VAT return for 01/06 showed total sales of £6,268,279 and purchases
of £6,229,454. There was a net VAT reclaim of £13,993. In fact the reclaim was
queried by HMRC and during the course of their enquiries Chak reversed the
transactions by issuing two credit notes on 28 April 2006.
203. Jatinder’s
evidence was that he thought he had been drawn into a fraud but he did not understand
the nature of the fraud. In his closing submissions Mr Virk accepted that Chak
had been drawn into a sham transaction. The evidence before us is not
sufficient for us to make any findings of fact in relation to the fraud other
than those set out above. We are satisfied that the transactions were connected
with fraud but we cannot be satisfied that Jatinder was aware of the fraud at
the time the transactions were carried out. However Jatinder is an intelligent
man. We find that the circumstances in which Jatinder caused Chak to enter into
these transactions suggest that he was prepared to disregard what must have
been obvious concerns about the transactions in pursuit of a profit. In making
this finding we reject Mr Virk’s submission that the circumstances of the Chak
dealings are irrelevant to the issues before us. They provide evidence which is
relevant to Jatinder’s state of mind at the time he entered into the iPod
transactions.
204. Finally in this
section the respondents also rely upon transactions involving a company called
Azure Promotions Limited (“Azure”). Jatinder’s uncle Billy is a director of
Azure which has had a VAT repayment claim of £649,923 for period 05/06 refused
by HMRC. They rely upon various connections involving the officers of Azure and
similarities between Azure’s dealings in mobile phones and the dealings of the
appellant.
205. There was no
documentary evidence before us from which we could make any findings of fact in
relation to Azure’s transactions and we do not take it into account in our
consideration of the issues on this appeal.
(12) Subsequent Non-Compliance
206. Finally the
respondents say that the appellant has failed without reasonable excuse to pay
certain VAT returns subsequent to period 07/06. The outstanding liability is
£124,356. Jatinder’s evidence, although he did not have responsibility for such
matters, was that the accountants had advised the appellant it could
legitimately withhold payment pending resolution of the 07/06 claim.
207. Whether or not
the accountants advised in those terms, Mr Griffiths’ evidence was that HMRC do
not pursue outstanding amounts in such circumstances. We do not consider that
the appellant’s failure to pay this liability casts any light on whether it
knew that the transactions in 2006 were connected with fraud.
(13) Miscellaneous Points in
relation to Knowledge
208. We have covered Mr
Virk’s submissions in response to the matters relied upon by the respondents. The
broad thrust of his submissions was that there are a number of reasonable
explanations for the circumstances of the transactions which do not involve
fraud. In addition he also relied upon the following facts and matters as
supporting an inference that the appellant did not know of the connection with
fraud.
209. Mr Virk submitted
that the evidence relied upon by the respondents to establish knowledge was
entirely circumstantial. That is undoubtedly the case but often in civil fraud
cases there is no direct evidence of fraud. In Dadourian Group International
Ltd v Simms [2009] EWCA Civ 169 the Court of Appeal dealt with a similar
submission:
“… At times
[counsel] came close to suggesting that fraud can only be established where
there is direct evidence. If that were the case, few allegations of fraud would
ever come to trial. Fraudsters rarely sit down and reduce their dishonest
agreement to writing. Frauds are commonly proved on the basis of inviting the
fact-finder to draw proper inferences from the primary facts…”
210. Fraud, as Mr
Virk submitted, is a concealed act. It is concealed from the victim and it may
also be concealed from other parties. It is likely that the orchestrator of a
fraud will want to conceal his identity and in so far as possible the existence
and nature of the fraud from any persons who do not need to know. Depending on
the circumstances it may be difficult for an innocent party to know or have the
means of knowing that a transaction is connected with fraud.
211. We accept that
submission and take it into account in our consideration of the inferences we
can draw from the evidence. However the nature of MTIC fraud is such that a
business can effectively participate in the fraud either wittingly or
unwittingly. A business can know that a transaction is connected with fraud
where it does not know the identity of the fraudster and where it does not know
the detailed nature of the fraud itself. The knowledge or means of knowledge
comes from all the circumstances in which the transaction presents itself.
212. In some cases of
MTIC fraud the goods do not actually exist. The respondents accept that the
goods in the present transaction existed and were shipped to France. Mr Virk invited us to draw a positive inference in favour of the appellant from
this fact. We do not think it appropriate to do so. The existence of the goods
sheds no light on whether or not the appellant knew or should have known of a
connection with fraud.
(14) The Credibility of Jatinder’s
Evidence
213. Mrs Newstead
submitted that Jatinder lacked credibility as a witness. She relied upon the
following matters in this regard:
(a)
New evidence which he gave for the first time at the hearing in relation
to translating due diligence documentation for UMTS.
(b)
That his answers were often evasive, for example his refusal to accept
that this was a particularly valuable deal for the appellant.
(c)
The failure of the directors to give evidence.
214. We have dealt
with each of these matters above in our consideration of the factors relied
upon by the respondents to establish knowledge. We found Jatinder’s evidence
unsatisfactory in a number of other respects and we have noted these in our
findings above.
215. For his part Mr
Virk invites us to take into account that the evidence was concerned with
matters of great detail some 6 years ago and which will involve some slippage
of memory due to the passage of time. He also submits that neither Jatinder nor
the appellant have ever been involved in any allegation of fraud before. The
appellant has a good reputation and would risk losing it if it became involved
in a transaction connected with fraud.
216. We have taken
these factors into account in assessing the significance of the evidence.
Decision on Knowledge
217. We have
considered all the factors and inferences referred to above. As we have
previously said there is no one circumstance from which we can infer knowledge.
It is a process of considering all the circumstances as a whole.
218. There are a
number of areas where we have found that a reasonable businessman would not
have acted as Jatinder did in carrying out the iPod transactions. The relevance
of those findings is that we would not expect an intelligent commercially aware
businessman such as Jatinder, consulting with the directors, to carry out such
a significant transaction in the way that he did. The fact that he did is a
further indicator of knowledge.
219. There are also a
number of areas where we have found that the explanation may be oversight
rather than anything more sinister. However we do not lose sight of the fact
that the cumulative effect of a number of oversights can lead to an inference
that the Jatinder’s approach to the transaction was so casual that he did not
really care about the commercial risks associated with the transaction.
220. We have
identified under each heading the significance we place on the various facts
and matters relied upon by both parties in their submissions. On the basis of
all the evidence the inescapable conclusion is that Jatinder knew at the time
he entered into the transaction that it was connected with fraud.
Should the Appellant
have Known of the Connection with Fraud?
221. The respondents
contend that if the appellant did not know of the connection with fraud then it
should have known of that connection. The appellant denies that it should have
known of any such connection.
222. The facts and
matters relied upon by the respondents in this regard are much the same as
those set out above in relation to actual knowledge. The respondents say that
those facts and matters should have made the appellant aware, through Jatinder,
that the only reasonable explanation for the circumstances in which the deal
took place is that it was connected with fraud.
223. Mr Virk
submitted that there were a multitude of reasonable and legitimate explanations
for the circumstances in which the transaction came to be carried out. He
cross-examined Mr Griffiths to this effect. It is only right and proper that Mr
Virk should put his case to Mr Griffiths, and that Mr Griffiths should answer
the questions put to him. In the end however we have not found these passages
of cross-examination particularly helpful in reaching our decision. As Mr Virk submitted
Mr Griffiths is “essentially a desk based witness and is not a witness of
fact”. We agree with that submission. We can illustrate the point by
reference to the cross-examination and re-examination of Mr Griffiths. The
following passages are from cross-examination:
“Mr
Virk: … it is possible that this transaction wasn’t actually
connected with fraud and was a genuine transaction, isn’t it? That’s possible.
Mr
Griffiths: It is possible.
Then later:
“Mr
Virk: So it is possible that a reasonable company looking at the
circumstances of the transaction … could not have known of the fraud. That’s
possible, isn’t it?
Mr
Griffiths: It is possible.
224. The following
passage is from re-examination:
“Ms
Newstead: Given all the circumstances of the transaction that you have
looked at what did you consider to be the only reasonable explanation for the
iPod transaction to be?
Mr
Griffiths: I considered it the only possible explanation was that it was
connected to fraud.
225. Whether or not
Mr Griffiths thinks that there is a reasonable explanation for the transactions
other than fraud is really beside the point. With due respect that is a
question we as a tribunal must answer.
226. Mr Virk also put
to Mr Griffiths various criticisms of the enquiries he made for the purposes of
making his decision and bringing evidence before this tribunal. In some
respects there were omissions and Mr Griffiths acknowledged as much. However,
as we have said we are concerned with determining the issues on this appeal by
reference to the underlying evidence.
227. We have
considered each of the factors set out above in the context of whether the
appellant should have known of the connection with fraud. In this context we do
not rely on the absence of due diligence. HMRC do not put their case on the
basis that the appellant would have been likely to discover the connection with
fraud if it had carried out further checks. Rather it is all the circumstances
in which the appellant was able to secure a supplier and a customer for the
iPods and generate a substantial profit with no experience in the market.
228. We are satisfied
that if the appellant did not know of the connection with fraud the
circumstances were such that Jatinder must have realised that the only
reasonable explanation for the circumstances in which appellant came to enter
into the transactions was the connection with fraud.
Generally
229. The input tax
credit denied by HMRC is in the sum of £353,412.50. This is the input tax
incurred by the appellant on purchasing the iPods. After denying that input tax
credit the appellant’s VAT return for 07/06 showed net tax repayable for the
period of £17,791.90. The respondents say that the appellant has been given
credit for that sum in its VAT account. Any issues as to the treatment of that
sum do not arise from the decision of HMRC to refuse input tax credit and are not
otherwise within the jurisdiction of the tribunal. If the appellant considers
that it has not been repaid this sum or that it has not had an appropriate
credit in its VAT account then that is a matter to be pursued with HMRC, if
necessary through the civil courts.
230. In the event
that it should succeed on the appeal the appellant claimed compound interest on
the repayment due. We did not hear detailed argument on that claim and in the circumstances
we need say no more about it.
231. The appellant
also claimed entitlement to damages. The tribunal has no such jurisdiction and even
if the appellant had been successful Mr Virk did not identify any basis upon
which we could award damages.
232. For all the
reasons set out above we dismiss the appeal. Any application for costs pursuant
to Rule 10 of the Tribunal Rules should be made within 28 days of the release
of this decision. The requirement of Rule 10(3)(b) to include a schedule of
costs may be dispensed with.
233. 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.
JONATHAN
CANNAN
TRIBUNAL JUDGE
RELEASE DATE: 9 November 2012
