Global Corporation Trading Ltd v Revenue & Customs [2013] UKFTT 170 (TC) (06 March 2013)
DECISION
Decision appealed
1.
This is an appeal against a decision of the Commissioners for Her
Majesty’s Revenue and Customs (“HMRC”) contained in a letter dated 13 February
2008 to Global Corporation Trading Limited (“Global”) denying Global’s right to
deduct input tax in the sum of £327,995.55 claimed in Value Added Tax (“VAT”)
in respect of the accounting period 09/06 – 11/06.
2.
The Commissioners’ grounds for the decision were that the input tax was
incurred by Global in transactions connected with the fraudulent evasion of
VAT, and that Global either knew or should have known of that fact.
3.
The decision relates to two separate deals involving the purchase of
Intel SL7Z9 computer processor units (“CPUs”). The first deal took place on 31
October 2006 (“deal 841”) and involved Global’s purchase of CPUs from Euro
Plastic Components Limited (“EPC”), which were subsequently exported to a
company based in Denmark. The input tax denied for this deal is in the sum of
£157,106.25. The second deal took place on 22 November 2006 and involved the
purchase of CPUs, again from EPC (“deal 852”), which were subsequently exported
to a company based in Spain. The input tax denied in this deal is in the sum of
£169,057.35. It is HMRC’s case that both of these transactions can be traced
back to a loss of VAT involving a missing trader; that is Missing Trader Intra
Community (“MTIC”) fraud.
4.
By a Notice of Appeal dated 7 March 2008 brought under the Value Added
Tax Act (“VATA”) 1994 s 83, Global denied that it “knew or should have known”
that its transactions were part of a scheme involving the fraudulent evasion of
VAT and that the decision to deny its claim for repayment of input tax was
wrong.
Missing Trader Intra Community (MTIC) fraud
5. Many
previous tribunals and higher Courts have given a description of MTIC fraud.
We rely on the descriptions given by Burton J in R (Just Fabulous (UK) Ltd)
v HMRC [2007] EWHC 521 at paragraphs 5-7; by Lewison J in HMRC v
Livewire Telecom Ltd [2009] EWHC 15 (Ch) at paragraph 1 and by Floyd J in Mobilx
Ltd (In Administration) v HMRC [2009] EWHC 133 at paragraphs 2-3.
6. Simple
missing trader fraud relies on a VAT free purchase by the fraudster. The
fraudster then sells the goods on at a price including VAT but fraudulently
fails to account to the tax authority for the VAT. A normal method of
acquiring goods VAT free is to purchase them from another EU member state as
the VAT rules provide that intra-EU transactions are free of VAT. This gives
simple missing trader fraud the name of “acquisition fraud” as VAT legislation
refers to cross border intra-EU purchases as acquisitions.
7. Although
this is the simplest form of the fraud, it depends on the defaulter having a
genuine buyer willing to purchase the goods and pay the price plus VAT. The
profit to the defaulter is the VAT which is paid by the genuine buyer but which
the defaulter fails to account for (hence the description “defaulter”). It is
possible, in order to induce a genuine buyer to buy the goods, that the
defaulter enticed the buyer with a price below the market price, possibly a
price below the price he paid for the goods: in such a case the “profit” of
the fraud will be less than the VAT defaulted on as it will be reduced by the
loss on the net sale price.
8. This
“simple” fraud has a limit. It requires the identification of genuine buyers
prepared to buy stock, so the need for genuine market demand limits the
possible extent of this fraud. As the defaulter is dealing in a genuine
market, it is also limited by the likelihood that the genuine buyer would
prefer to buy from a trader known to the market, so it will have come-back if
something goes wrong. And although pricing below the market price might tempt
some buyers, it might also make them suspicious.
Organised missing trader fraud or carousel fraud
9. But out of
this simple missing trader fraud was born a much more sophisticated fraud.
This fraud dispenses with the genuine market: the defaulter creates an
artificial market. Therefore, a genuine market does not limit the extent of
the fraud: on the contrary the fraud can be committed as often as the
fraudster desires – at least until suspicions are raised. It is a pernicious
fraud as it has no natural limit other than perhaps the pockets of the
governments of EU member States.
10. As it relies on an
artificial market, how does the fraudster realise his profit? The fraudster
realises his profit through more sophisticated means. This fraud relies not
only a VAT free acquisition by the defaulter but a VAT free cross-border sale
by the buyer. This person is in MTIC-speak termed the “broker”. The point of
the fraud is that the broker, when dealing in the goods pays his vendor more
than he receives from his buyer. The difference is (less expenses) the profit
of the defaulter. In this organised fraud the defaulter still defaults on the
VAT on the sale to his buyer of course: otherwise he would be out of pocket.
But what is perhaps not always appreciated is that that default, although
fraudulent, is no longer the object of the fraud. The sale by the defaulter is
artificially generated for the purpose of creating a chain of transactions in
which the broker is induced to pay more for the goods than he receives.
11. Why would a broker pay more
than he receives? This is because he makes a VAT-free cross border sale. This
means the net VAT buying price he pays is less than his VAT free
sale price. But once the broker has reclaimed the VAT paid to his vendor from
the tax authorities, as subject to Kittel he is entitled to do by law,
he has made a profit on the deal. This is also a VAT fraud by the defaulter
because, even if the broker is unaware of the fraud, the defaulter has
organised a series of transactions the purpose of which was to get the broker to
pay more than he receives by relying on a VAT refund from the tax authorities.
12. In this artificial market,
the goods are bought and sold but there is no real market for the goods. For
this type of fraud it is not even necessary for the goods to actually exist.
Why sometimes termed ‘carousel fraud’
13. The fraudster is arranging a
chain of transactions in which the sale to and by the broker is essential for
the fraud to work. So he has to arrange a sale to the broker and a sale by the
broker. Rather than selling to and buying from the broker directly, the
fraudster is likely to use other persons or companies (“buffers”) who may or
may not understand their role in the fraud. But to induce them to participate
in the transaction chain he has to arrange for them to ‘trade’ at a profit.
Therefore, ultimately a company controlled by the fraudster must be at both the
start and end of the chain of deals to ensure these artificially generated
deals take place.
14. As the fraud has no limit,
it made sense for the fraudster to re-use the same goods and the same buffers
and brokers and commit the fraud as often as possible sending the same goods
round the same transaction chain. This gave the fraud its name of “carousel”
fraud because the goods may go around in circle. But it is often a misnomer.
Although the transaction chain (or at least the chain of money as the goods may
not exist) must start and end with the fraudster or a company or person
controlled by him, it is not necessarily the same person or company at the start
and end of each chain. Further, the fraudster is likely to use a large number
of buffers and brokers in lots of different chains in order to commit the fraud
as often as possible. Therefore, although the same goods may circulate many
times, they do not necessarily pass through the hands of the same broker more
than once.
Variations on a theme
15. There are a number of
variations on this fraud. The fraud as described does not depend on the broker
knowing that his role is vital to a fraud. It is possible that so far as the
broker is aware, he is simply buying and selling goods at a profit. Whether
any particular alleged broker is aware of the fraud (if proved) is a question
of fact.
16. In another version of the
fraud, however, the broker is not independent of the fraudster. In such a
case, the fraudster controls and funds both the defaulter and broker and the
object of the fraud is quite simply the broker’s VAT refund. But otherwise the
fraud works as described in the previous paragraph where the broker is
independent of the fraudster.
Protecting the broker
17. It will be important to the
fraudster (even where the broker is entirely independent of the fraudster) that
the broker recovers its input tax (or at least believes that he will) because
otherwise the broker will not buy the goods. The fraudster must be supposed to
want to protect the brokers he uses, as a fraud takes effort to organise and it
must be easier if the same broker can be used in a transaction chain time and
time again.
18. A method of protecting the
broker’s input tax reclaim, as mentioned above, was to introduce buffers in the
chain between the defaulter and the broker so that the broker was not
purchasing directly from the defaulter. Of course, the buffers themselves may
not understand that their transaction was part of a series of transactions
organised for the purpose of fraud.
19. A more sophisticated method
of protecting the broker’s reclaim is known as “contra-trading” which relies on
two chains of transactions. This was not alleged in this case and we do not
outline it here.
20. We move on to consider the
law applicable to persons who have purchased goods in a chain of transactions
involving VAT fraud.
The law
21. Article 17(1) and (2) of
Council directive 77/388/EEC (the Sixth Directive) provides:
“1. The right to deduct shall arise at the
time when the deductible tax becomes chargeable.
2. In so far as the goods and services are used for
the purposes of his taxable transactions, the taxable person shall be entitled
to deduct from the tax which he is liable to pay:
(a) value added tax due or paid within the
territory of the country in respect of goods or services supplied or to be
supplied to him by another taxable person;
…..”
22. Article 17 was incorporated
into UK domestic legislation as sections 24, 25 and 26 VATA
“24(1) Subject to the following provisions of
this section, “input tax”, in relation to a taxable person, means the following
tax, that is to say-
VAT on the supply to him of any goods or services;
VAT on the acquisition by him from another member State of any goods; and
VAT paid or payable by him on the importation of any
goods from a place outside the member States,
being (in each case) goods or services used or to be
used for the purpose of any business carried on or to be carried on by him.
…..
(6) Regulations may provide –
(a) for VAT on the supply of goods or services to a
taxable person, VAT on the acquisition of goods by a taxable person from other
member States, and VAT paid or payable by a taxable person on the importation
of goods from places outside the member states to be treated as his input tax
only if and to the extent that the charge to VAT is evidenced and quantified by
reference to such documents or other information as may be specified in the
regulations or the Commissioners may direct. either generally or in particular
cases or classes of cases;
25 (1) A taxable person shall –
(a) in respect of supplies made by him, and
(b) in respect of the acquisition by him from other
member States of any goods
account for and pay VAT by reference to such periods
(in this Act referred to as “prescribed accounting periods”) at such time and
in such manner as may be determined by or under regulations and regulations may
make different provision for different circumstances.
Subject to the provisions of this section, he is
entitled at the end of each prescribed accounting period to credit for so much
of his input tax as is allowable under section 26, and then to deduct that
amount from any output tax that is due from him.
…..
26(1) The amount of input tax for which a
taxable person is entitled to credit at the end of any period shall be so much
of the input tax for the period. (that is input tax on supplies, acquisitions
and importations in the period), as is allowable by or under regulations as
being acceptable to supplies within subsection (2) below.
…..”
23. Sections 24 to 26 are in
mandatory terms and a VAT registered trader therefore enjoys the right to
repayment of input tax where the input tax credit due to him exceeds his output
liability. However the right can be lost if the facts fall within the legal
principles stated by the Court of Justice of the European Communities (“ECJ”)
in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined cases
C-439/04 and C-440/04) (“Kittel”).
24. In Kittel the ECJ
held that:
“49. The question whether the VAT payable on prior
or subsequent sales of the goods concerned has or has not been paid to the
Treasury is irrelevant to the right of the taxable person to deduct input
tax.….
51. Traders who take every precaution which could
reasonably be required of them to ensure that their transactions are not
connected with fraud, be it the fraudulent evasion of VAT or other fraud, must
be able to rely on the legality of those transactions without the risk of losing
their right to deduct the input VAT.
….54. … preventing tax evasion, avoidance and abuse
is an objective recognised and encouraged by the Sixth Directive (see Joined
Cases C-487/01 and C-7/02 Gemeente Leusden and Holin Groep [2004] ECR I-5337, paragraph 76. Community Law cannot be relied on for abusive or
fraudulent ends (see, inter alia, Case C-367/96 Kefalas and Others
[1998] ECR I-2843, paragraph 20; 373/97 Diamantis [2000] ECR I-1705,
paragraph 33; and Case C-32/03 Fini H [2005] ECR I-1599, paragraph 32).
55. Where the tax authorities find that the right to
deduct has been exercised fraudulently, they are permitted to claim repayment
of the deducted sums retroactively (see, inter alia, Case 268/83 Rompelman [1985] ECR 655, paragraph 24; Case C-110/94 INZO [1996] ECR I-857, paragraph
24; and Gabalfrisa, paragraph 46). It is a matter for the national
court to refuse to allow the right to deduct where it is established, on the
basis of objective evidence that that right is being relied on for fraudulent
ends (see Fini H, paragraph 34).
56. In the same way, a taxable person who knew or
should have known that, by his purchase, he was taking part in a transaction
connected with the fraudulent evasion of VAT must, for the purposes of the
Sixth Directive, be regarded as a participant in that fraud, irrespective of
whether or not he profited by the resale of the goods.
57. That is because in such a situation the taxable
person aids the perpetrators of the fraud and becomes their accomplice.
58. In addition, such an interpretation, by making
it more difficult to carry out fraudulent transactions is apt to prevent them.”
25. The ECJ summarized the
position as follows:
“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 the fraudulent evasion of VAT, it is for the national court to
refuse that taxable person entitlement to the right to deduct.”
26. In the case of C-354/03 Optigen
v HMRC [2006] the ECJ was asked to give a ruling on issues relating to the
recoverability of input tax in circumstances where the traders were innocently
caught up in a chain of transactions which were fraudulent. The ECJ concluded
that:
“47 Each transaction must be regarded on its own
merits and the character of a particular transaction in the chain cannot be
altered by earlier or subsequent events.
…..
51 Transactions which themselves are not vitiated by
VAT fraud constituted supplies of goods or services, and where an economic
activity within the relevant legislation, where they fulfil the objective
criteria on which the definitions of those are based, regardless of the
intention of the trader other than the taxable person concerned, involved in
the chain of supply, and/or the possible fraudulent nature of another
transaction the chain, prior or subsequent to the transaction carried out by
the taxable person of which the taxable person had no knowledge and no means of
knowledge.
……
55 The right to deduct input VAT by a taxable person
who carries out such a transaction can be affected by the fact that in the
chain of supply, of which those transactions form part, another prior or
subsequent transaction is vitiated by VAT fraud, without that taxable person
knowing or having means of knowing.”
27.
Kittel was considered by the Court of Appeal in the conjoined
appeals of Mobilx Ltd (in Administration) v HMRC; HMRC v Blue Sphere Global
Ltd (“BSG”); Calltel Telecom Ltd and another v HMRC [2010] EWCA Civ 517 (“Mobilx”).
28. Moses LJ made clear that this refusal of the right to
deduct does not depend on any specific UK legislation. Moses LJ stated:
“43. A person who has no intention of undertaking
an economic activity but pretends to do so in order to make off with the tax he
has received on making a supply, either by disappearing or hijacking a taxable
person's VAT identity, does not meet the objective criteria which form the
basis of those concepts which limit the scope of VAT and the right to deduct (see
Halifax § 59 and Kittel § 53). A taxable person who knows or
should have known that the transaction which he is undertaking is connected
with fraudulent evasion of VAT is to be regarded as a participant and, equally,
fails to meet the objective criteria which determine the scope of the right to
deduct.”
29.
On the meaning of “should have known” Moses LJ said:
“50. The traders contend that mere failure to take
reasonable care should not lead to the conclusion that a trader is a participant
in the fraud. In particular, counsel on behalf of Mobilx contends that Floyd J
and the Tribunal misconstrue § 51 of Kittel. Whilst traders who take
every precaution reasonably required of them to ensure that their transactions
are not connected with fraud cannot be deprived of their right to deduct input
tax, it is contended that the converse does not follow. It does not follow,
they argue, that a trader who does not take every reasonable precaution must be
regarded as a participant in fraud.
51. Once it is appreciated how closely Kittel
follows the approach the court had taken six months before in Optigen,
it is not difficult to understand what it meant when it said that a taxable
person “knew or should have known” that by his purchase he was participating in
a transaction connected with fraudulent evasion of VAT In Optigen the
Court ruled that despite the fact that another prior or subsequent transaction
was vitiated by VAT fraud in the chain of supply, of which the impugned transaction
formed part, the objective criteria, which determined the scope of VAT and of
the right to deduct, were met. But they limited that principle to circumstances
where the taxable person had “no knowledge and no means of knowledge” (§ 55).
The Court must have intended Kittel to be a development of the principle
in Optigen. Kittel is the obverse of Optigen. The Court
must have intended the phrase “knew or should have known” which it employs in
§§ 59 and 61 in Kittel to have the same meaning as the phrase “knowing
or having any means of knowing” which it used in Optigen (§ 55).
52. 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. It profits nothing to contend that, in domestic law, complicity in
fraud denotes a more culpable state of mind than carelessness, in the light of
the principle in Kittel. A trader who fails to deploy means of knowledge
available to him does not satisfy the objective criteria which must be met
before his right to deduct arises.”
30.
He concluded:
“59. The test in Kittel is simple and should
not be over-refined. It embraces not only those who know of the connection but
those who “should have known”. Thus it includes those who should have known
from the circumstances, which surround their transactions that they were
connected to fraudulent evasion. If a trader should have known that the only reasonable
explanation for the transaction in which he was involved was that it was
connected with fraud and if it turns out that the transaction was connected
with fraudulent evasion of VAT then he should have known of that fact. He may
properly be regarded as a participant for the reasons explained in Kittel.60.
The true principle to be derived from Kittel does not extend to
circumstances in which a taxable person should have known that by his purchase
it was more likely than not that his transaction was connected with fraudulent
evasion. But a trader may be regarded as a participant where he should have
known that the only reasonable explanation for the circumstances in which his
purchase took place was that it was a transaction connected with such fraudulent
evasion.”
31.
With regard to the burden of proof Moses LJ said:
“81. It is plain that if HMRC wishes to assert that
a trader’s state of knowledge was such that his purchase is outwith the scope
of the right to deduct, it must prove that assertion. No sensible argument was
advanced to the contrary.
82. But that is far from saying that the surrounding
circumstances cannot establish sufficient knowledge to treat the trader as a
participant. ….Tribunals should not unduly focus
on the question whether a trader has acted with due diligence. Even if a
trader has asked appropriate questions, he is not entitled to ignore the
circumstances in which his transactions take place if the only reasonable
explanation for them is that his transactions have been or will be connected to
fraud. The danger in focusing on the question of due diligence is that it may
deflect the 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.”
32.
The Court went on to say:
“84 ….circumstantial evidence …. will
indicate that a trader has chosen to ignore the obvious explanation as to why
he was presented with the opportunity to reap a large and predictable reward
over a short space of time.
85 A trader who chooses to ignore circumstances,
which can only reasonably be explained by virtue of the connection between his
transactions and fraudulent evasion of VAT participates in that fraud and, by
his own choice, deprives himself of the right to deduct input tax.”
33.
The standard of proof was not considered by the Court of Appeal in Mobilx
and it was accepted that the standard of proof was the normal civil standard on
the balance of probabilities. And on this the latest authority is the decision
of the Supreme Court in Re S-B (Children) [2009] UKSC 17 where Lady
Hale, giving the judgment of the Court said, at [34]:
“ ... there is no
necessary connection between the seriousness of an allegation and the
improbability that it has taken place. The test is the balance of
probabilities, nothing more and nothing less.”
The issue
34.
Before and at the hearing Global accepted that there were missing
traders in the deal chains; in particular it accepted, in respect of both deal
chains at issue in this appeal, that there had been tax losses resulting from
the fraudulent evasion of VAT, and that Global’s purchase transactions were
connected to those tax losses It did not challenge HMRC’s identification of
the participants in the deal chains.
35.
Global’s case is that at the time of its transactions it had no actual
knowledge of the frauds and that it did not and could not have known of any
such frauds and therefore, as per Kittel, it is entitled to be repaid
its input tax.
The facts
The evidence and witnesses
36.
The documentary evidence consisted evidence relating to the deal chains
and the documents relating to the deals at issue in this appeal.
37.
We had witness evidence from Gareth Lewis, the sole director of Global
at the time of the deals, and, for the Respondent, from Angela Small, the HMRC
Officer who decided that Global’s claim for repayment of input tax should be
denied; Dr Kevin Findlay, who provided expert evidence on the CPU market in
2006; Roderick Stone, whose statement provided generic evidence relating to
HMRC's practice and policy in MTIC proceedings; Alison Banner who was the
“defaulter” office for Do or Try Limted, Matthew Elms, who was the “defaulter”
officer for Jafton Limited, Terence Mendes who also gave evidence about Jafton
Limited and Alan Tulley who gave evidence in respect of UMBS.
38. The evidence of HMRC’s
witnesses except Miss Small’s and Dr Findlay’s was unchallenged. We heard from
the remaining three witnesses.
Miss Angela Small
39. Miss Small was what is known
as the “broker” officer. She was the officer who investigated Global’s input
tax reclaim.
40. A great many questions were
directed at answers completed in respect of an aide memoire. Ms Tanchel’s cross
examination showed that this was not a verbatim account of a conversation with
Mr Lewis. In particular Miss Small completed some of the questions herself
relying on documents she had. But we read nothing into that as the aide memoire
was not intended to be anything other than a tool for HMRC to decide whether or
not to make the repayment. It did not purport to be a verbatim report of a
conversation with Mr Lewis.
41. Overall we found Miss Small
to be a reliable and accurate witness.
Dr Findlay
42. Dr Kevin Findlay has a PhD
in electronic engineering and is now an independent consultant with
associations with PwC. His current work includes analysing the strategy,
operations and business prospects of companies in electronics, semiconductors,
IT and software sectors. He has a history of working in the technical and then
business side of electronic and computer engineering. We had no hesitation in
accepting him as an expert qualified to give opinion evidence to this Tribunal
on the grey market in CPUs in the UK in 2006. We found him to be a credible and
knowledgeable witness.
43. We agree with Ms Tanchel
that his evidence was not directly relevant to the question of what Mr Lewis
(the alter ego of the appellant) knew or did not know in 2006. Mr Lewis did
not have access to the research to which Mr Findlay referred us.
44. However we found his
evidence relevant to the question of whether the fraud to which it was admitted
the appellant’s transactions were connected was simple acquisition fraud or
orchestrated MTIC fraud.
Our findings of facts
45.
From the evidence we heard and saw we find the facts to be as follows.
46.
Global was incorporated on 27 April 2005. Mr Lewis was the sole director
of the company. He had previously worked in banking and the financial services
industry. We find the actions, and state of knowledge, of Mr Lewis should be
regarded as those of Global for the purposes of this appeal. His sister,
Sharon Eluned Lewis, was appointed Company Secretary on 1 November 2005.
47.
Global applied to be registered for VAT on 11 November 2005. The
application was signed by Mr Lewis and was accompanied by a handwritten letter
from him stating that although Global had not yet begun to trade, its purchases
would regularly exceed the VAT on its supplies (i.e. that it would be in a
repayment position). The application was stamped as received on 25 November
2005. Mr Lewis estimated the value of the company’s taxable supplies to be made
in the following 12 months as £100,000, although (in apparent contradiction) he
also stated that Global expected to buy and sell £150,000 to the EC in the same
period.
48.
On 15 December 2005 Mr Lewis supplied another handwritten note to HMRC
saying that he would be trading in “…commodities that diverse [sic]
from gold, other metals and precious stones”.
49.
On
5 January 2006, Global’s application for VAT registration was granted and it
was allocated VAT number 867958054.
50.
On 23 January 2006, Mr Lewis spoke to the VAT National Advice Line,
advising that he “had a general commodities business and planned to do additional
activities”. On the same day, Mr Lewis sent a fax to HMRC stating he had
parted company with the colleague with whom he intended to trade in precious
metals. He stated that “two experienced friends approached me last week and
I have decided to employ them as I believe there is a specific niche in the
market. One is experienced in electrical sales and the other in web design and
services. I will potentially pursue the commodities trading but obviously
wanted to notify you of a specific business change”. This was a reference
to the company’s two part-time employees Mr Charles Holcombe, and Mr Adam
Stanier. Mr Holcombe also worked full-time for Emerson (a multinational company
specialising in the manufacture and sale of engineering and technology) and the
intention was (according to Mr Lewis) that he would use Mr Holcombe’s contacts
for the purpose of locating potential purchasers.
51.
The company parted company with Mr Stanier as they could not agree on
salary. So the web-design aspect of the business did not take off.
52.
On 31 January 2006 HMRC’s Redhill office sent a formal ‘Redhill
Verification’ letter to Global advising the trader to verify the VAT status of
new customers and suppliers prior to entering into transactions. The letter
advised on the checks that could be undertaken to help ensure the integrity of
the supply chain and recommended reasonable checks to ensure the goods will be
as described by the supplier. The letter also contained the warning: “Although
the Commissioners may validate VAT registration details, it does not serve to
guarantee the status of suppliers and purchasers. Nor does it absolve traders
from undertaking their own enquiries in relation to proposed transactions. It
has always remained a trader’s own commercial decision whether to participate
in transactions or not and transactions may still fail to be verified for VAT
purposes.”
53.
Enclosed with the letter was ‘Public Notice 726 - Joint and Several
liability’. This Notice provided Global with considerable detail about the nature
of MTIC fraud. Section 8.1 comments on the checks and reasonable steps that
should be taken in order to make best efforts to avoid becoming involved in VAT
fraud. The Notice also outlined a trader's potential liability to HMRC for
unpaid VAT if they received a taxable supply from another VAT registered
business of specified goods and knew or had reasonable grounds to suspect that
the VAT on the supply, or any previous or subsequent supply of those goods
would go unpaid to the Commissioners.
54.
On 7 February 2006, Mr Lewis visited HMRC’s Uxbridge office for a
pre-arranged meeting to consider Global’s business records. Mr Lewis advised
that Global would be trading in “…hardware and software, CPUs, Intel chips,
laptops and web designing in the UK, China and Malaysia”, with an estimated
turnover in the following 12 months of £5 million. He said that the business
would be funded by a £250,000 loan from his father. Mr Lewis provided a copy
lease agreement for the company’s trading address which was for a three month
period from 1 January 2006.
55.
Global’s records revealed that the company had sent letters of
introduction to 21 businesses and that in each case contact had been made
through IPT (“Interactive Prospect Targeting”, a direct marketing and lead
generation website). The importance of due diligence was explained to Mr Lewis
and he was provided with a list of suggested checks that could at that time be
undertaken prior to dealing with other traders.
56.
We note that 14 of these 21 businesses were later identified by HMRC as
suspected MTIC traders, but these concerns were not communicated to Mr Lewis,
and he cannot be taken to be aware of them.
57.
On 13 and 17 February Mr Lewis queried with HMRC the process of
verification at Redhill VAT Office, including the time taken to verify numbers,
and enquired whether he might verify traders by phone. On 21 February HMRC
replied to Mr Lewis explaining that Redhill had a backlog of work, but
reiterating the importance of using Redhill to verify VAT numbers. The email
also stated “An EU website is also available to check a valid VAT number.” This
was a reference to ‘Europa’ – a European Commission facility that
provided on-line VAT number validation.
58.
On 21 February HMRC wrote again to Mr Lewis setting out the points,
which had been discussed at the meeting of the 7 February. 
In the
letter HMRC advised Mr Lewis “it is imperative that you apply ‘reasonable
commercial checks’ to all your business transactions, and you must satisfy the
Commissioners that you have taken reasonable steps to ascertain the bone fides
of all your customers and suppliers – please refer to section 6 of Notice
700/52. These checks should include verification of the VAT numbers of all
suppliers and customers that your company intends to deal with. Those VAT numbers
should be verified via out Redhill office as per previous correspondence with
you”. Global was advised to check VAT registration on a transaction by
transaction basis.
59.
From February 2006 onwards there was a continuing exchange of
correspondence between HMRC and Global as to the company's due diligence
requirements and on 21 February 2006 HMRC informed Global of the problems being
experienced in particular trade sectors. HMRC advised Mr Lewis to verify VAT
numbers through Redhill and to keep specified information in respect of each
transaction, including serial numbers of goods for identification purposes.
60.
In March 2006 Mr Lewis and Mr Holcombe attended a CeBit technology
exhibition (a computer and technology Trade Fair) in Hanover where, it was
their evidence, they met representatives from AliBaba (a web based marketing
company) and IPT and that they came back with a lot of marketing material which
they then used to send out to potential suppliers and customers.
61.
Using standard ‘veto letters’ HMRC advised Global of businesses involved
in the supply of electronic goods which had been de-registered. In some
instances these included companies that Global had previously tried to verify
through Redhill. Global received ‘veto’ letters on five occasions before it
carried out the deals in issue in this appeal. The first veto letter Global
received was on 10 March 2006, before it had ever carried out a trade,
following Global’s request for verification of the VAT number of a company
which had been deregistered.
62.
As at mid April 2006 Global’s only trade was the sale of a small number
of TFT screens on Ebay. However, on 20 April, having obtained funding on 19
April from his father, Mr Lewis undertook a wholesale deal of CPUs valued at
£2.6 million. Global’s supplier was Goodluck Employment Services Ltd which
Global had previously attempted to verify with Redhill. Goodluck was
deregistered for VAT with an effective date of 25 April 2006. On 7 August 2006,
Mr Lewis contacted the National advice service stating that he had purchased
goods from a trader which was now deregistered. He was informed that as long as
he had carried out reasonable steps, HMRC would not seek to recover the VAT
claimed as input tax.
63.
On 7 June 2006 Global was reminded by letter from HMRC of the risk to
the VAT system from bogus companies applying for VAT registration. The letter
warned that this might lead to fraud of many millions of pounds.
64.
On 1 October 2006, Global moved address to 120 Bridge Road, Chertsey. The accommodation consisted of an office room with three workstations within a
serviced office building.
Deal 841
65.
Table A below is a full schematic of the transaction chain of which
deals 841 and 852 form part. Deal 841 was undertaken on 31 October 2006, and
consisted of the supply of 11,970 Intel Pentium MHZ SL7 Z9 CPUs to Munch
Marketing APS (“Munch Marketing”), registered in Denmark. The products were
supplied to Global by EPC on the same day. An examination of invoices, purchase
orders, freight forwarder documentation and bank transfer evidence, showed that
EPC was supplied by Bluestar Trading Ltd (“Bluestar”), Bluestar was supplied by
Neon Leicester UK Limited (“Neon”), and Neon was supplied by Sport Trading Ltd,
(“Sport”), all on 31 October 2006.
66.
The freight forwarder’s records show that the goods had been released to
Sport by another UK trader, Jafton Limited (“Jafton”) and that Jafton was
supplied with the goods by Acquired Solutions a company registered in Portugal. Jafton is the missing trader in this chain, having defaulted on its liability for
VAT due to HMRC. The tax loss was £157,106.25.
67.
When Jafton registered for VAT in 1994, its business activity was given
as “importers, exporters, manufacturers, indenting agents of all kind of
merchandise and shipbrokers”. On 22 August 2006 new officials were appointed
and the company changed its address. Soon after, Jafton began trading in CPUs.
Verification enquiries revealed that Jafton was not in fact at, or trading from
the address it had given and was deregistered for VAT. Following examination
of paperwork supplied by other traders, a pattern of Jafton’s undisclosed trade
was built up. Jafton was assessed for tax owed and copies of the assessments
were posted to all known addresses for the directors. These letters were
returned stating that the addressee was unknown.
68.
The tax charged by Jafton in invoices has never been returned nor paid,
nor has the assessment been appealed. Jafton’s deregistration
has
never been appealed or challenged. We find (and it was admitted by the
appellant) that Jafton’s non payment of its VAT debt in this chain of
transactions was fraudulent.
The Katian chain
69.
On the same day as Global entered into deal 841, another company Katian
Ltd, sold the same type of goods, SL7Z9s to the same acquirer, Munch Marketing.
The goods also initiated with the same trader. Two alleged buffers differed
from the chain involving Global but otherwise the ‘Katian chain’ involved the
same companies.
70.
Again the VAT charged by Jafton was neither put on a VAT return nor paid
by Jafton and so both chains led to a tax loss. Jafton incurred a total VAT
debt (which includes other deals) of £2,481,366. The assessment
has never been appealed or challenged.
71.
As in the Global deal 841, the Katian deal and all the
chain’s traders used Alpha Freight for freight forwarder services. In each case
the goods remained at Alpha Freight for the sequence of trades until export,
changing hands only on paper. The goods were imported from Acquired Solutions
in Portugal. The stock which was later to be exported in the Katian deal was
allocated a job number by Alpha of AE2303. The stock, which was later to become
that in Global deal 841, was allocated a job number by Alpha of AE2304. We find
on the balance of probability that the sequential order of these two job
numbers combined with the identify of deal chains means that the goods were
imported and received into Alpha’s warehouse together.
72.
The Global and Katian stock were both shipped for Munch Marketing to
Intersprint Logistics in Belgium together by ferry from Dover to Calais on 2 November in the same vehicle.
73.
We note in passing that there was no suggestion by HMRC and there is no
finding by us that the appellant knew anything about the ‘Katian chain’ at the
time of its own transactions. Its sole relevance to this appeal is to the
question of orchestration of the fraud and we return to this below in
paragraphs 83-89.
Deal 852
74. This deal was transacted on
23 November 2006. The goods were sold by Global to Agrupación Iberica de
Ultramar (“Agrupación”) registered in Spain and consisted of 12,915 Intel
Pentium MHZ SL7 Z9 CPUs manufactured in China and the Philippines, supplied by
EPC on 22 November 2006. EPC was supplied by Bluestar, Bluestar was supplied by
Neon, and Neon was supplied by Sport, all on 22 November 2006. Once again, the
freight forwarder’s records showed that the goods had been released to Sport by
another UK importer, Do Or Try Limited which had been supplied by Acquired
Solutions, Portugal. Do Or Try Ltd invoiced for VAT on its transaction in this chain,
and yet neither returned nor accounted for this VAT to HMRC. We find (and it
was admitted by the appellant) that Do Or Try Limited’s default was fraudulent.
75. Do or Try was incorporated
on 10 March 2006 and registered for VAT on 1 June 2006. Its main trading
activity was stated to be the “wholesale selling of accessories, toys, spot
goods, exhibition products etc”. Its estimated annual turnover was £100,000. On
12 September 2006 the company advised HMRC of a new business address. In early
January 2007, HMRC discovered via evidence from the freight forwarders that Do
or Try was acquiring goods from the EC. Unsuccessful attempt
s were
made to contact the trader by telephone and a visit to the company’s premises
revealed that they had been rented since October 2006, but were unfurnished and
the directors had never been seen. As a result, Do or Try was
de-registered for VAT from 9 January 2007.
Was this orchestrated MTIC fraud?
76. The appellant has admitted
that its transactions were connected to fraudulent tax loss. It has not sought
to challenge the evidence relating to the chains of transactions. But it has
not accepted that the fraud to which its transactions were connected was
necessarily MTIC fraud. We have explained above the difference between a simple
acquisition fraud and an MTIC fraud. If this was simple acquisition fraud, it
occurred several traders ahead of Global in the chain and Global’s own
transactions would have been on the open market, and it follows there is no
obvious reason why Global would have known anything about the fraud. On the
other hand, if the fraud was MTIC fraud, then the entire chain of transactions,
including Global’s own transactions, must have been organised, and therefore
the question arises whether Global knew its own transactions were part of an
organised fraud.
77. As the point was not
admitted, we have to decide on the facts whether HMRC has proved its allegation
that the appellant’s transactions were part of organised MTIC fraud. And we
consider a number of factors, as set out below, before reaching our conclusion.
Banking evidence
78. Ms Tanchel suggested that
even if we found circularity of funds, it is irrelevant as Mr Lewis did not
know, and there is no evidence to suggest he did know, of it. We agree that
there is no evidence that Mr Lewis knew of the circularity of funds and we
agree that therefore circularity is not directly relevant to the question of
knowledge. But we find it is indirectly relevant. This is because circularity
of funds, if proved, goes to show whether the fraud (which was admitted) was
simple acquisition fraud or orchestrated MTIC fraud. And the type of fraud is
relevant to the question of knowledge as explained above.
79. We find that HMRC have made
out its case that the funds moved in a circular fashion. For both the deals at
issue in this appeal we find that the funds originated and ended with a company
called Strathmore Worldwide Inc. We also find that the money in the Katian
chain started and ended with Strathmore Worldwide Inc.
80. Ms Tanchel argues that
whilst HMRC asserts that all of Global’s suppliers banked with the same
institution there were only two deals, for which there was only one supplier
and only two customers which is too small a sample of counterparties from which
to draw any significant conclusion of contrivance. However, we find that all
the parties in three transaction chains (two for Global and one for Katian)
used the same bank, UMBS. In a chain of transactions which are not
orchestrated but taking place on the open market, we consider that the chances
of all the parties, unknown to each other apart from their immediate trading
partner, choosing to bank with the same, small offshore bank seem vanishingly
small.
81. Ms Tanchel also argues that
there is no cogent evidence to support HMRC’s statement or assumption that
because transaction payments within the UMBS accounts had sequential numbering,
they necessarily took place on the same day and in extremely quick succession.
Indeed, she argues, a close examination of the schedule of transactions
produced by HMRC reveals that there were in fact gaps in the sequential
numbering. We find that the evidence points to the transfers happening on the
same day and in quick succession.
82. In conclusion, we find that
putting aside the question of what Mr Lewis knew about the banking
arrangements, the circularity of funds through numerous accounts all with the
same small offshore bank point unerringly to the fact that the transactions
were orchestrated for the purpose of fraud.
Patterns in chains
83. The chains of companies
buying selling the CPUs only varies between Global’s two deals in issue in that
(a) the defaulter differs and (b) the buyer differs. Otherwise the deal chains
mirror each other. Further there is an explanation for why, if it was
organised fraud, the organiser would have substituted defaulters: by the time
of the second chain, Jafton had been deregistered for VAT.
84. Even assuming that there was
some commercial rationale for having long transaction chains of CPUs all traded
on the same day (which we do not accept as explained below), as none of these
companies had a particular role, such as authorised distributor, it would be a
remarkable coincidence that the same chain of deals supposedly negotiated on
the open market would occur twice. The pattern in the chains therefore
suggests that the chains did not arise by chance. We set out the chains
diagrammatically below:
85. The pattern in chains
continues when we look at the ‘Katian chain’.
86. There are two “coincidences”
in the comparison of these two chains. Dealing in the same product, the chain
of buyers and sellers (barring the identity of the “broker” and buffer 1 and 2)
were identical, yet Mr Lewis did not know of the parallel chain. The second
coincidence is the price per unit paid was the same for much of the chain,
including the price paid and received by the “broker”.
87. Could this happen on an open
market? It might happen where there was a single transaction which for some
reason of administrative convenience was split into two separate invoices,
explaining the identity of unit price and traders. But we cannot accept that
as the explanation here. It fails to explain why there was a different broker
and different buffers 1 & 2, and it fails to explain why all the traders,
having negotiated a single transaction, then found it sensible to split the
invoice chain into two. In particular Mr Lewis says he knew nothing of the
Katian deal, therefore this was not a single commercial deal split into two, or
he would have known this.
88. Another explanation could be
that the price is fixed by the market so the seller sells at the same price to
lots of unconnected buyers. But that is not the explanation here: these
transactions took place on the same day at a variety of prices
throughout the chains.
89. We are unable to think of
any explanation for this phenomenon on the open market. Therefore, we conclude
that there is no rational explanation on the open market for this parallel
chain, with small but regular increases in price but with each price identical
at each stage in the two chains: our conclusion is that it is very strong
evidence that both chains were entirely contrived by someone for the purpose of
fraud and did not occur on the open market.
Mark ups
90. An examination of the
distribution of the margins made by the various participants in the two chains
involving Global shows consistency. The alleged broker, Global, had a much
higher markup than the alleged buffers, that of 7.10% in the first deal and
7.05% in the second deal. The first line buffer (EPC in Global’s two deals and
Tradestar in the Katian deal) and the third line buffer (Neon in all 3 chains)
all made 0.13% profit. The second line buffers in all 3 deals (Bluestar in
Global’s and Linbar in Katian’s) all made 0.16% profit.
91. The consistency continues
when we look at Global’s earlier CPU trades. Again the alleged broker makes a
much higher profit (in those cases between 4.61% and 6.19%) and many of the
alleged buffers made 0.13%.
92. Not only is there
consistency but there is irrationality in the mark ups. Buffers make extremely
low mark ups while brokers make mark ups many multiples higher. As an example,
EPC in deal 841 made just over £1,000 gross profit while Global made over
£64,000 gross profit. There is no reason on an open market for the profit made
by the UK-EU dealer to be so many multiples higher than the profit made by a UK
to UK dealer. But in the world of MTIC fraud it makes sense: only the broker
is at risk of a non-repayment of VAT by HMRC (as the buffers are in a net payment
position). The buffers take no risk, do little more than shift paperwork, and
get little reward.
Long chains without commercial input
93. Both deal 841 and 852 are
characterised by long chains of traders. None of the companies added any value
to the goods: they merely bought and sold, very quickly and at a small profit,
the identical quantity of CPUs. None of them were a manufacturer or authorised
distributor.
94. Yet in the real world it is
not possible to regularly buy and sell goods, put no input into the transaction
by way of added value or combining or dividing quantity, yet keep making a
profit. And for one trader after another to do this in quick succession in (so
far as chains involving Global are concerned) some 10 chains of transactions,
without anyone making a loss, beggars belief.
95. Further the chains
themselves were irrational. The CPUs originated on the Continent and returned
there a very short time afterwards having increased in price so that not only
did the 6 or more UK traders involved make a profit but the cost of transport
over the channel was covered too. To the extent there was a genuine demand for
CPUs on the Continent, rational market forces would dictate that the chain of
supply via the UK and lots of buffers would be cut out. But that did not
happen.
Back to back trading
96. The chains were not only
long but all the transactions took place on the same day as all the other
transactions in the chain.
97. We also find from the UMBS
banking evidence and release notes that the chains of transactions followed
sequentially on the same day in quick succession. In deal 841 the traders all
released the goods on the same day, 2 November 2006, with the exception of
Jafton, which released them early on 30 October 2006 in respect of the Global
deal and 31 October 2006 in respect of the Katian deal. That this should have
occurred on the open market seems very unlikely.
98. While back to back trades
clearly happen in a real trading environment, that so many transactions in the
same chain should occur on the same day stretches coincidence.
Grey market trading
99. Global
was not an authorised distributor or otherwise in a distribution chain approved
by the manufacturer of the CPUs which it sold. If it traded on a genuine
market, it was trading on the grey (or legitimate but unapproved) market.
100. Dr Findlay gave evidence of how the grey market in CPUs
acted in 2006. His very long report can be summarised briefly as follows:
(a) The grey market in
Intel CPUs was very small in 2006. Specifically he estimated that its value
was only £7.3million, and of that only £1.4m represented exports from the UK in 2006.
(b) Chains would be very short
(to maximise profit);
(c) Margins were very
small and there would be little room for a middleman in between an authorised
distributor and end user
(d) Chains would involve an
authorised distributor or manufacturer at the top and an end user (such as an
assembler or contractor) at the end;
101. Dr Findlay’s
evidence was that the size of the grey market was tiny. The appellant does not
accept that, although they did not put forward expert evidence of their own.
We accept Dr Findlay’s evidence overall as he was an expert and the evidence he
gave was of a market acting rationally. The appellant, in suggesting that
Global’s transactions were not part of an orchestrated chains of transactions,
was asking us to believe that long, back to back chains with each player adding
no value yet always making a profit, could arise on a genuine market. It was
therefore asking us to believe in an irrational market. We preferred Dr
Findlay’s view of a rational market.
102. Global exported
over £2,000,000 worth of Intel CPUs in the two deals at issue in this appeal.
This was well over Dr Findlay’s estimate of the entire export of Intel CPUs on
the grey market for that year. Even if we were to accept that Dr Findlay’s
estimate was conservative, unless we were to disregard it entirely it would
seem that Global had entirely cornered the market. Yet (as is explained below)
Mr Lewis had no real business plan or knowledge of the CPU market and waited
for buyers and sellers to approach him, so it is impossible to see what Global
did that could have cornered the market and driven out all competitors.
103. Dr Findlay’s
evidence, therefore, by itself is convincing evidence that Global’s trades were
not in fact on the genuine grey market. It strongly corroborates our findings
based on the other evidence (in paragraphs 76-98 above) that Global’s trades
were orchestrated and not on a genuine market. The combination of the three
types of evidence (banking, the transaction chains, expert) is overwhelming
evidence, and we find, that Global did not trade on a genuine market but rather
its trades were orchestrated for the purpose of fraud
Conclusion
104. The banking
evidence alone, proving as it does circularity of funds, we find proves that
the transactions did not take place on the open market but were part of an
organised MTIC fraud.
105. The rest of the
evidence to which we have referred above also proves the same. There is no
other explanation for the long, irrational deal chains through the UK for goods
originating and ending on the Continent; no other explanation for the
repetitive patterns in the chains and the small consistent and repetitive
profit margins for the buffers. On this evidence alone, irrespective of the
banking evidence, we would find the two deals at issue in this appeal were
predetermined to facilitate fraud and did not take place on the open market.
The orchestration is also evidenced by the virtually identical Katian chain.
That such an identical chain could have arisen by chance defies reason
and is strong evidence that Global’s chains were orchestrated and did not arise
by chance. We find the Katian chain was also orchestrated for MTIC fraud and
clearly masterminded by the same fraudster as masterminded the two chains at
issue in this appeal.
106. Dr Findlay’s
evidence on the genuine grey market corroborates what is already apparent from
our findings on the other evidence about these specific deal chains, which is
that they were orchestrated for the purpose of fraud and did not take place on
an open market.
107. We also find
that Global’s earlier transactions in CPUs were connected to fraud and characterised
by consistent profit margins and long irrational chains. Bearing in mind that
Mr Lewis did not suggest that these transactions had come about in any
different manner to those deals at issue in this appeal, and indeed as they to
some extent involved the same trading partners for Global, we find they too, on
the balance of probability, were orchestrated for the purpose of MTIC fraud.
108. We do not know
whose was the guiding hand which organised this fraud. But we are not asked to
identify the fraudster. The question for this Tribunal is whether the
appellant knew or ought to have known that its purchases and sales were
connected to fraud and we move on to consider this.
Knowledge or Means of knowledge?
Appellant’s case
109. Global’s case is
that it had no actual knowledge of the frauds and that it did not and could not
have known of any such frauds or that its transactions were connected to the
fraudulent evasion of input tax. Global asserts that HMRC are unable to show
that the company knew or should have known of the connection between its own
transactions and fraud.
110. Ms Tanchel on
behalf of Global submits that HMRC's case relies on facts which were not known
and could not have been known to Global at the time of the transactions. She
says that HMRC did not make any decision to deny the input tax claimed until
mid-December 2008 by which time its enquiries had lasted more than 14 months.
She says that the case against Global has been constructed entirely with the
benefit of hindsight and with the benefit of substantial resources not
available to Global. She submits that extreme care must be exercised in
ensuring that the admitted fact of the existence of a fraudulent scheme is not
taken as amounting to proof of knowledge or assumed knowledge. The relevant knowledge
or means of knowledge must be shown to have existed at the time of the
transactions.
111. We agree that in
assessing Global’s knowledge or means of knowledge we should only consider
facts which were known to Mr Lewis at the time of the transactions, and this is
what we do below. We agree that Global’s admission at the hearing that its
transactions have been proved by HMRC to be connected to fraud is no guide to
what it knew at the time of the transactions.
112. Ms Tanchel
points out that HMRC do not contend there is direct evidence of Global’s
knowledge of or involvement in fraud and therefore HMRC is asking the Tribunal
to arrive at conclusions on the basis of inferences to be drawn from
circumstantial evidence. The chain of inferences becomes weaker as it becomes
longer. We agree that in our findings below we rely on circumstantial
evidence: but we find in this case that all circumstantial evidence combined is
very strong, as explained below.
113. Ms Tanchel
submits that Global never traded with a company whose registration had been
suspended or withdrawn at the time of trading. This is true. But it tells us
very little: it is consistent with either genuine trading on the open market
or with an orchestrated fraud (because the fraud would not work if the traders
in the chain were not validly registered). As we discuss below, a trader
seeking to protect its own commercial position would seek to know a good deal
more about its trading partners than merely that they were properly VAT
registered.
121. Ms
Tanchel asserts that HMRC have not produced any evidence to show that Global
had knowledge of other banking transactions in the deal chain at the time it
was trading and that it is unclear what steps Global could have taken to
ascertain the payment arrangements between other companies in the chain with
which it had no commercial relationship and the existence of which Global was
unaware. We agree that there is no evidence that Global knew, or could have
discovered, anything about the banking transactions entered into by other
traders, other than knowing that its trading partners used the same off-shore
bank as itself.
122. Ms
Tanchel also argues that, unlike many missing trader fraud cases, in this case
the striking feature is that Global did not need third a third-party source to
fund its transactions. It had been accepted by HMRC that the source of Global’s
£250,000 start up capital was perfectly legitimate. We find that that means
nothing. We explained how MTIC fraud words above. There is no requirement for
MTIC fraud to work for the fraudster to fund the broker (ie the company in
Global’s position in the chain). The fraud works where the broker uses its own
capital and that is what happened here. Global has admitted that its
transactions were connected to fraud and we have found that that fraud was
orchestrated MTIC fraud. That Global used its own funds tells us nothing about
whether it knew at the time it was participating in fraud. Using its own funds
is as consistence with knowledge as with innocence and vice versa.
123. In
evidence Mr Lewis accepted that his company banked with FCIB and then with
UMBS, as did Global’s supplier and customers. He also acknowledges that both
banks have now been closed down and investigated for criminal activity. Ms
Tanchel argues that nothing can be read into this and we agree in so far as
these two facts are concerned. We also agree that Ms Small confirmed in
evidence that no information, records, or other documentation had been found
linking Global to the other entities named in the banking evidence apart from
its supplier and two customers. We go on to consider Global’s relationship with
UMBS in paragraph 125-130 below and the conclusions which can properly be drawn
from it.
124. Although
UMBS itself had been convicted of fraudulent trading and money laundering in
March 2011 and, although the directors of the bank had been arrested in
November 2007 (some 12 months after the disputed deals), they were both
acquitted. Ms Tanchel says that if the very directors of UMBS were acquitted,
that is to say they neither knew nor suspected that the funds passing through
the bank were the proceeds of crime, it is difficult to see how Mr Lewis,
unaware of the other entities in the deal chain, could have been any the wiser.
We do not know what the directors of UMBS knew or did not know: all we
consider below is what Mr Lewis and Global knew and we make our findings about
knowledge based on that.
The witness - Mr Gareth Lewis
114. The only witness
for the appellant was Mr Garath Lewis. Before considering his evidence of why
Global did as it did, and whether it had actual knowledge of the fraud or ought
to have known of the fraud, we first consider the reliability of Mr Lewis’
evidence.
115. Mr Lewis took a
degree course in economics which he discontinued due to illness in 1994.
Thereafter he worked in various multinational banks such as Deutsche Bank,
Merrill Lynch, and Morgan Stanley. In August 2004 he set up a company called
Global Gateway Investments with a partner which traded in shares. He split
with the partner and in April 2005 decided to set up his own company (the
appellant). He said he decided to move to tangible commodities rather than
trading in shares.
116. We find his
evidence was of concern in many areas and we outline some of these below.
117. Terms and
conditions: Mr Lewis was asked to provide terms of trading on several
occasions during the course of the HMRC’s verification. They were not provided
to HMRC until February 2009, more than two years after the deals were
completed. His first witness statement says:
“The HMRC assertion
that there were no written contracts with regard to the transactions in
question is incorrect, since I have a signed supplier declaration form.
Furthermore, there are invoices….In addition, Global CTL in fact had its own
written terms and conditions, and that I understand that those documents
constitute a legal contract.”
But in his third witness statement, he said the terms and
conditions:
“were created in that
form in or about late 2006/early 2007”
And in examination in chief, he says the terms and
conditions were not created until after a meeting with HMRC officers in April
2007. Yet his original witness statement at the least implied they existed at
the time of the transactions in issue which both occurred in late 2006. It was
put to him in cross examination that his witness statement was misleading
which he denied. We find it was misleading.
118. Mr Holcombe’s
involvement with the trades in issue: In examination in chief, Mr Lewis’
evidence was that his friend and Global’s part-time employee, Mr Holcombe had
contacts in computer chips, was responsible for sales and marketing and would
make contact with people on behalf of Global whereas Mr Lewis’ job was to deal
with Global’s website and banking. They both attended the CeBit conference in
March 2006. However, in cross-examination he agreed that Mr Holcombe had no
experience in CPUs and provided no contacts for trading in CPUs. He also
agreed that it was himself who put together the two deals at issue in the
appeal despite Mr Holcombe being employed for sales and marketing. It seems Mr
Holcombe was paid a salary plus 30% commission on sales, but Mr Holcombe was not
paid commission on CPU sales. We find that Mr Lewis tried to give the
impression Mr Holcombe was more involved in the CPU side of the business than
he actually was.
119. Foreign
travel: Another aspect of Mr Lewis’ evidence we found indicated
unreliability was what he said over foreign travel. He paid visits to his UK suppliers but not to his European purchasers, although they were based only in Spain and Denmark. Yet (were this a genuine market) Global’s real exposure was on the sales side as
the goods were shipped before payment. Yet Mr Lewis described making a visit
to his purchasers’ premises as “very expensive”. Yet we find that both he and
Mr Holcombe travelled to the Cebit conference in Germany to find trading
partners and Mr Lewis also agreed that he had travelled abroad on numerous
occasions in his life. We consider that the cost of travelling to Spain and Denmark was insignificant compared to the value of these two deals (over £2,000,000) and
we do not accept that expense was the reason Mr Lewis did not undertake these
journeys.
120. Price
negotiation: Mr Lewis was asked whether he negotiated the prices of the CPUs.
He said he negotiated prices and was adamant he did not have the deals dictated
to him. He says he negotiated his buy and sell price to get the best profit
margin and knew what the price should be from consulting trading boards on the
internet. He gave the Tribunal no more detail than this: this was vague in the
extreme and we are very far from convinced that looking at a trading board
enabled Mr Lewis to negotiate CPU prices.
121. Further, we find
it is inherently improbable that Global, an inexperienced newcomer, operating
in the open market would be able to negotiate prices always to its advantage
without taking any risk or adding any value. But even putting that aside, it
is a finding of fact in this case that the purchases and sales by Global did not
take place on the open market. They were transactions orchestrated by a
fraudster. More than that, in the first of the two deals in issue, Global’s
purchase and sale price (and therefore gross profit margin) was identical to
that of Katian’s. The Katian deal was unknown to Global but we have found with
the benefit of hindsight that it was organised on the same day by the same
fraudster with largely the same companies. It is very unlikely that Katian’s
and Global’s deals, if they had been individually negotiated, happened to be
at the same prices by chance. Indeed, Global’s purchase price had to be
exactly the figure it was to give its seller its 0.13% margin and that 0.13%
margin was clearly no mere coincidence as it appeared repetitively in the chains.
Again, in the second of its deal Global’s purchase price had to be exactly the
figure it was to give EPC its 0.13% profit margin, which as we have said
appeared repeatedly in chains involving Global. And Global’s profit margin (7.05%)
was very similar to its earlier profit margin (7.1%).
122. Bearing in mind
that we have found that the two deals in issue in this appeal were orchestrated
for the purpose of fraud, it seems extremely unlikely that these similarities
in price arose in negotiations. We also note that Mr Lewis accepted that the
buyer and seller both approached him: bearing in mind the context of this is
that of orchestrated fraud it seems highly unlikely that when they approached
him with the orchestrated deal, the buyer and seller would have then negotiated
with him on price. It seems considerably more probable that the buy and sell
price was dictated to Global. Global may well have known nothing about Katian
and nothing about EPC’s profit margin, but, we find, it did not negotiate its own
buy and sell prices. The prices must have been dictated to Global: Mr Lewis
must have been told what price he would buy at and what price he would sell
at. Mr Lewis denied this in the hearing but we are unable to accept his denial
as reliable.
123. Credit checks
and risk: Mr Lewis’ evidence was not always internally consistent. Miss
Small’s witness statement said Global was at risk so it was odd that Mr Lewis
chose not to check out the financial status of its trading partners. Mr Lewis’
response (oft repeated) was that he did not do credit checks as Global was not
giving credit and Global wasn’t at risk because it did not pay for the goods
until it was paid. Later in the same witness statement, in answer to the
accusation that Mr Lewis should have been suspicious because Global was able to
make so much money for doing very little and taking no real risk, his answer
was that Global was at risk because the buyer might renege on the deal.
124. Trade
references: Another example of contradiction is Mr Lewis’ position on
trade references. At one point in cross examination he seemed to say he could
not remember if Global took up trade references; at another point he said he
accepted he could be open to criticism for not taking up trade references but
said he had not been advised to do so; yet it was also his case that Global did
everything HMRC advised it to do in Notice 726 but then he accepted in cross
examination that Notice 726 did advise traders to take up trade references.
Most glaring of all, in its own suppliers’ declarations Global required its
suppliers to certify they took up trade references on their suppliers, yet
Global did not take up trade references on its suppliers. He did not give any
satisfactory explanation of the inconsistency in his position on trade
references: the only explanation for it we find, is that in 2006 Global had no
interest in carrying out effective due diligence on its suppliers but wished to
be seen as doing so.
125. UMBS: We
found Mr Lewis’ evidence over the banks used by Global to be very telling on
the overall reliability of it. Originally he banked with FCIB. By the time of
these deals he had switched to UMBS. He was asked why. In examination in
chief, he said that it was recommended by traders in the industry for the
benefit of faster payments.
126. However, in
August and September 2006 his funds had been frozen in FCIB and it had been
difficult to retrieve them. It was put to him odd that he should chose to bank
with a second offshore bank having been burnt by his experience with FCIB. He
denied that it was odd and said that he was acting on recommendations and was
no expert in bank accounts (despite being a banker). In his witness statement
he described UMBS as “reputable”.
127. For the two
deals at issue in this appeal we find that his buyer paid the money into his
UMBS account. Global then used this money, together with a transfer of the
balance of the price from Global’s Co-op account, to pay his seller. He was
asked to explain why he kept his funds in the Co-op bank in the UK, as well as using UMBS, he said:
“I wasn’t going to
put – after the experiences I had with FCIB, I wasn’t going to deposit funds –
further funds – funds were kept in the Co-op account…”.
It was put to him he was wary of UMBS to which he replied:
“…It wasn’t wary. I
just wasn’t going to deposit funds in the account”
He denied that he was told to bank with UMBS in order to
facilitate the deals.
128. We take into
account that, despite saying UMBS was preferred for faster payments and having
the same account as his trading partners, in fact Global paid the balance due
to EPC from Global’s Co-op account, not into EPC’s UMBS account but into EPC’s
account with Lloyds. So speed of transfer and identity of banks with his
supplier were not a motivating factor for Mr Lewis’ choice of banks
129. We take into
account that these were transactions orchestrated for the purpose of fraud by
some unknown fraudster and that every participant in the chain banked with UMBS.
As we have already said, in both chains the funds started and ended with an
entity called Strathmore Worldwide Inc. We find that Strathmore was controlled
by the fraudsters and funds which moved in a circle “belonged” to the
fraudsters. Therefore, it seems more likely than not that the fraudsters desired
the monies moving in a circle to stay within the same bank (a bank that was
itself convicted of fraud) to keep more control over it.
130. Taking into
account the factors in the above two paragraphs and that, despite his denial,
Mr Lewis clearly did not trust the UMBS with Global’s funds, yet decided to
have an account with UMBS, we are therefore unable to accept Mr Lewis’ denial
that he was told to have an UMBS account to facilitate his transactions. It is
the only explanation for his conduct in opening an account with a bank he did
not trust.
131. Conclusion:
Overall our assessment of Mr Lewis’ evidence was that it could not be relied
on. On a number of occasions it was put to him that his answers were not
correct, which he denied, but we do not accept his denials.
132. We go on to
consider what Mr Lewis, as the alter ego of Global, knew at the time of the
transactions in questions. Firstly we consider his overall awareness of MTIC
fraud and secondly what Global did to protect itself (a) from that fraud but
(b) more generally from ordinary commercial risks. Then we reach our
conclusion.
Appellant’s awareness of MTIC fraud
133. As referred to
above, Global was registered for VAT as a trader in commodities, including
precious stones on 5 January 2006. On 23 January 2006, only 18 days after
obtaining a VAT registration, Global indicated an intention to diversify into
“electrical sales” and only three days later, Mr Lewis contacted HMRC’s Contact
Centre seeking to verify the VAT number of A-Z Mobiles Limited.
134. It is of note that
Mr Lewis’ verification of A-Z Mobiles took place before he had been
advised by HMRC of the need to verify the VAT status of trading partners when
trading in commodities at risk of MTIC fraud. We agree with HMRC that this
means Mr Lewis had some awareness of MTIC fraud risk in mobile phone
wholesaling from the outset.
135. As at the date
of Mr Lewis’ meeting with HMRC, Global had not begun to trade and had not
arranged any deals. Despite this, Mr Lewis said that he anticipated turnover to
be £5 million.
136. Ms Tanchel says
that much of the evidence adduced by HMRC about fraud in the industry and
Global’s exposure to companies involved in fraud was only made available to Mr
Lewis long after the disputed deals had been conducted. We agree that so far
as the specific traders with whom Global traded, HMRC did not communicate to
the appellant their suspected/known involvement in fraud until long after the
event: however, that is not the point. The point is what Mr Lewis actually
knew about the risk of MTIC fraud at the time.
137. Ms Tanchel says
that although Mr Lewis does not dispute that he was aware of MTIC fraud he
maintains that he was totally unaware of its scale and scope. We find from the
warnings and information provided to Mr Lewis (see paragraphs 52-63 above) that
he was well aware of the risks of becoming involved in MTIC fraud if he traded
in CPUs. Indeed at a meeting with HMRC officers on 5 January 2007 investigating
the deals made as part of the 11/06 return, we find Mr Lewis confirmed that he
had been aware of problems within the industry from the media and from contact
with HMRC soon after Global was incorporated. We find he had seen a Panorama
documentary about MTIC fraud broadcast on 16 July 2006. He was able to
describe the basic mechanics of the fraud to officers.
138. Further, by the
time the deals involved in this appeal took place, Global had been advised that
one supplier it had traded with previously, Goodluck Employment Services, had
been deregistered for VAT. It was deregistered for VAT with an effective date
of 25 April 2006 and Global were told this on 7 August 2006. We find that this
information would have made any trader in the Appellant’s trade sector, with
the knowledge that Mr Lewis had of the risks of MTIC fraud, very concerned.
139. Global had earlier
received a “veto” letter on 10 March 2006 informing it that another of the
traders which it had sought to verify had been deregistered. This was not a
company with which they ever traded but, as Mr Lewis agreed that he had probably
found out about this company on one of the websites Global used to resource
leads, it should have caused him concern.
140. We find at the
time of the two trades in issue Mr Lewis understood MTIC fraud risk very well
and was well aware that it could directly affect the industry in which his
company traded.
Global’s response to the known risk and Global’s commercial checks
141. Much of Mr
Lewis’ witness statement is about whether Global complied with HMRC’s
recommended checks. What it does not really seem to consider is whether Global
was acting to protect its position with respect to ordinary commercial risks.
Yet Global’s response to commercial risks is highly relevant because a company
which thought it was trading on the open market would seek to protect itself
from commercial risks such as defaulting buyers, but a company which knows its
transactions are orchestrated is likely to much less concerned with commercial
risks as it knows it is not trading on the open market.
142. For instance, Mr
Lewis points out that a bad credit check on a trading partner would not
necessarily indicate that the trading partner was involved in MTIC fraud (which
is true), but the Tribunal asks itself why would Global chose to sell to a company
until it was satisfied that company was able to pay for what it was buying? So
we consider how Global traded and what this tells us.
Due diligence generally
68. The 726 Notice sent to
Global on 31 January 2006 provided Mr Lewis with a great deal of detail about
the nature of MTIC fraud, the indicating factors and the reasonable steps that
should be taken in order to make best efforts to avoid becoming involved. The
Notice at paragraph 8.1 provided 3 main examples of the type of reasonable
commercial checks that could be carried out:
(a) checking the
legitimacy of customers and suppliers, including whether normal arrangements
were in place for the financing of the goods and whether they were adequately
insured.
(b) checks to ensure the
commercial viability of a transaction, including ensuring that there is a
market for the goods, and being satisfied that it is commercially viable for
the price of the goods to increase within the short duration of the supply
chain.
(c) checks to ensure the
goods will be as described by the supplier, including establishing that the
goods exist, ensuring that they have not previously been supplied and that they
are in good condition. Paragraph 8.2 also provides guidance on the type of
checks to be carried out on existing businesses. These include credit checks,
making visits to business premises, obtaining bank details and in the case of
imports, checking that the supplier and their bank share the same country of
origin.
Global’s supplier and customers
143. Due
diligence on Euro Plastics Components: Global’s supplier in
each of the deals in the appeal was EPC. EPC was registered for VAT in 1998. In
April 2005 its business activity was ‘making plastic moulding and heels for
ladies shoes’. However, from April 2006, it diversified into trading in mobile
phones and CPUs.
144. Contact with EPC
came about when Global employee Mr Holcomb was offered phones by EPC. Global
held an introductory pack which had been faxed to it by EPC on 19 May 2006. The
pack comprised (inter alia):
(a) An undated letter of
introduction from EPC. The letter claims EPC’s success and experience in the mobile
telephones and computer peripherals trade sector (falsely, given that it had
entered this arena only in the previous month). The letter also contained many
spelling and grammatical errors, which would suggest the company was more
likely to be a small-scale operation.
(b) A copy of EPC’s VAT
certificate. This certificate includes a trade class ‘Other Service not
elsewhere classified’. This is in contrast to the letter of introduction, which
claims EPC as “a premier distributor of mobile telephones and computer
peripherals in the UK, Europe and the Globe”.
(c) EPC’s bank details,
setting out accounts with Lloyds TSB and FCIB.
145. Following Mr
Lewis’s reply to EPC and at Global’s request, EPC sent out details of two trade
referees (IH Technologies and Exhibit Enterprises). However, we find that
Global did not take up either of EPC’s trade references.
146. Mr Lewis claimed
to have met the director of EPC, and visited its principle place of business.
His evidence was that he went there to assure himself that the business
physically existed and to meet the director. We find he did not use the
meeting to discuss with EPC its systems and what checks it carried out on its
suppliers, freight forwarders and goods, including whether databases of traded
stock are kept, and what action taken if duplicates are found, nor their
financial standing. When asked what impression he formed he said “no impression
at all”. Later under cross-examination he agreed he got no meaningful information
from the visit.
147. The ‘due
diligence’ retained for EPC shows that little or no
commercial checks were carried out
in respect of the company. No credit checks were carried out. While the
appellant points out that credit checks can result in false positives (as a
credit check of Global would have done), nevertheless, as we have said, this
is no explanation of why Mr Lewis would not have done them. Certainly it is no
explanation of why Mr Lewis did not attempt to check out Global’s trading
partners’ financial position prior to trading with them in very large sums of
money. It could have, for instance, but did not, ask for a banker’s reference.
148. We also agree
with HMRC that EPC’s willingness to trade with Global, giving Global very
favourable terms despite being a fledgling business, should itself have made
Global’s management wary.
149. On 13 September
2006 Global received a fax from MM Leicester asking for a trade reference for
EPC. Global responded on 21 September describing a ‘strong’ relationship with
EPC with whom it had traded many times. In fact, at that stage Global had only
previously traded with EPC once, in May 2006.
150. Due
diligence on Munch Marketing: Munch Marketing was the customer in
deal 841. Mr Lewis told HMRC that the contact with Munch had come about via www.cputrade.cc in May 2006.
151. Global had
retained a copy of a fax to Munch dated 24 May 2006 headed “Re Company
Introduction” [sic]. It thanked Munch for making contact via CPUTRADE.CC,
and attached Global’s introduction pack, asking that the trade application form
be completed and faxed back “with your company details for my due
diligence”.
152. Munch’s trade application
form provided an FCIB bank account and two trade references. Global obtained
Europa VAT validation responses for Munch Marketing dated 26 May 2006 and 31
October 2006.81. Global also held a translation of a ‘Compiled Summary’
on Munch Marketing from the Danish Commerce and Companies Agency, dated 24
February 2006. It showed that Munch had registered on 25 January 2005. The
company’s activities were listed as “primarily to carry out consultancy work
in the fields of marketing, financial products and property renovation. Also
the Company undertakes consultancy work on other business areas, including
property management. Furthermore the Company provides light contractor’s work,
including ventilation”. We consider that this would have given an honest
trader, contemplating a wholesale deal in CPUs with a company it had never
traded with before, serious cause for concern.
153. Global also held
an undated ‘Company Details’ sheet for Munch. These listed a bank account with
UMBS and two trade references. One was Katian Limited and the other was Global
Corporation Trading, of 120 Bridge Road, Chertsey. Mr Lewis subsequently
asserted that this document was received at the time of initial contact in May
2006. However, the 120 Bridge Street address is the one Global moved to on 1
October 2006. Therefore we agree with HMRC and find Mr Lewis’ evidence on
this unreliable. We find Global did not hold this sheet at the time it
initiated trade with Munch.
154. We find Global
did not carry out any credit checks on Munch, despite the fact that it was to
ship goods out of the country before Munch paid for them. Neither did Global
seek trade references. Mr Lewis told HMRC on 30 April 2007 that he had never
met with anyone from the company, nor had he ever visited the business. In the
same statement Mr Lewis claimed that Munch was based in the Netherlands, information which we find contradicted the due diligence he obtained at the time, and
in fact, serves to undermine it.
155. Due
diligence on Agrupación: Agrupación was the customer in deal
852. Global had never dealt with them before. Mr Lewis told HMRC that the
initial contact with Agrupación had come about via www.cputrade.cc, but could not
indicate when contact had been made. From a letter held on Global’s files, we
find Global sent its introductory pack to Agrupación on 20 November 2006, which
was two days before deal 852 took place. The letter requested that Agrupación
fill in the ‘trade application form’ as soon as possible. On 21 November Global
received a fax from Agrupación including (inter alia
) the following details
(a) An undated and
unaddressed ‘Company Profile’. The profile lists areas of trade specialisation;
it did not include trade in CPUs or electronics.
(b) a VAT certificate
(c) A document annotated,
‘Director Utility Bill’ (which the Tribunal noted appeared to be a pension plan
notification for Antonio Garcia Ovies (Ovies)),
(d) A telephone bill for
Agrupación for €19.24 – (which we find was not suggestive of a large company )
(e) A copy of an
identification card for Ovies
(f) A sheet of blank
headed paper with no address or contact other details.
156. Mr Lewis did not
meet with anyone from the Agrupación, nor visit the business. He did not carry out
any credit checks, despite the fact that Global was to ship valuable goods
abroad before it was paid. On 23 November 2006, after deal 852 was completed,
Agrupación returned a completed trade application form including bank details
for La Caixa Bank, Madrid, and trade references from Urban Styles and Bristol
Cash and Carry. The references were not taken up.
157. Due
diligence on the Freight Forwarder: Global verified Alpha
International Freight Forwarders through Redhill on 8 and 21 September 2006 but
did not request further verification of Alpha after September 2006. It also
made no other checks on the company, despite the fact that it was to be
custodian to Global’s high value goods. We find had Mr Lewis or Global
undertaken any credit checks on Alpha it would have discovered that it was a
maximum risk company, for which all credit transactions had to be supported by
a director’s guarantee and that a County Court Judgment had existed against it
since July 2005.
158. Mr Lewis on 30
April 2007 told officers that he did not know whether Alpha was a member of
BIFA (British International Freight Association, the UK trade
association for international freight forwarding, imports and exports),
and that he had not seen a copy of Alpha’s standard terms and conditions. He
also believed (wrongly) that when the goods were in storage they were insured
by Alpha, despite the fact that Alpha’s invoices are clear that this was not
the case. We find he failed to undertake even the most basic checks on
Global’s freight forwarder, which is difficult to understand unless Mr Lewis
knew that the object of the transaction was fraud rather than a genuine sale of
goods.
Appellant’s submissions on due diligence
159. Global maintains
that it took such reasonable and proportionate steps as were appropriate to
verify the legitimacy of its trading partners. Its due diligence complied as
far as was practically possible with the suggested steps set out in Public Notice
726. Global says that its due diligence included obtaining copies of
certificates of incorporation from both suppliers and customers, the VAT
registration certificate of both EPC and Agrupación as well as utility bills
from BT and confirmation of the identity of the directors of the business by
obtaining copies of passports.
160. We consider its
due diligence wholly inadequate. Not only was the appellant advised to
undertake due diligence to ensure it was not involved in fraudulent
transactions, it could be expected to wish to protect itself from ordinary
commercial risks. We find that Global shipped abroad the goods (for which it
had agreed to pay albeit it had not yet paid) before Global itself was
paid. Ordinary business prudence should have meant that it would have wanted
to ensure the identity of the business with whom it was trading, that it was
reputable and that it would be able to pay the very large sums due. But we find
it did not carry out credit checks or request trade references. It did not visit
its buyers and even its visit to its supplier appeared to be for the sake of
form and not with the objective of actually finding out anything useful about
the company. Mr Lewis was content to trade with companies, and to ship goods
to their order prior to payment, without any independent view on the financial
standing of its trading partners. If he genuinely thought he was trading on
the open market, we do not think he would have acted in this fashion in a deal
where so much money was at stake.
161. Ms. Tanchel
submits that any additional steps would not have revealed the fact that deals
were conducted for fraudulent purposes by others in the deal chain. We agree
with this as far as it goes: checks may have given Global cause for concern
(eg Alpha’s lack of credit standing) but they would not have proved a
connection to fraud. But the relevance to this Tribunal is why Global
chose not to inform itself of its trading partner’s financial standing. We
reach a conclusion on this below.
162. Ms Tanchel says
that Public Notice 726 requires traders only to take “reasonable steps” to
establish the integrity of its customers and suppliers, which Global submits
means immediate customer and immediate supplier. The relevant version of Public
Notice 726 at the time of deals 841 and 852 states “you are not necessarily
expected to know your suppliers’ supplier”. She argues that it cannot
reasonably have been expected for Global to go further than one step up or down
the deal chain. It is argued that the “value-added “of each trader in the chain
is their knowledge of where to find a product to sell and who to sell it on to.
Commercial logic dictates that it would be unreasonable to expect them to
reveal this information, as that would expose them to the likelihood of being cut
out of future deals.
163. We agree with
this as far as it goes: a trader would not expect to be able to identify, let
alone carry out due diligence on, his supplier’s supplier or his customer’s
customer. However, the criticisms of Global’s due diligence made by HMRC and
which we have found justified as set out above are not concerned with a lack of
checks on Global’s supplier’s supplier or its customer’s customers: the
criticisms are centred on the lack of checks on Global’s customers and
suppliers themselves.
164. Ms Tanchel
argues that a realistic overview of the steps actually taken by the trader to
avoid involvement in fraud has to be taken rather than an excessive focus on
exhaustive due diligence.
165. Again we agree
with this and we consider many other matters below, and do not decide this case
on Global’s due diligence (or rather its lack of effective due diligence)
alone.
166. Ms Tanchel says
that when considering whether or not due diligence supports a negative
inference, it is necessary to ascertain whether or not certain steps, if taken
would have been alerted the company to the connection between its own
transactions and the fraud. If not, the fact that they were not taken is
irrelevant. Ms Tanchel referred to the observations of Lewison J. in HMRC v
Livewire Telecom Ltd [2009] EWHC 15:
“The taking of every
reasonable precaution has sometimes been referred to as a positive duty. This I
think is potentially misleading the taxable person does not have a duty to take
precautions… The taking of all reasonable precautions (and acting on the basis
of what he discovers as a result of taking of precautions) provides him with an
impenetrable shield against an attack by HMRC.”
167. We were also
referred to paragraph 75 of Lord Justice Moses decision in Mobilx:
“The ultimate question
is not whether the trader exercised due diligence but 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 the fraudulent evasion of
VAT.”
168. Ms Tanchel says
that although Mr Lewis accepts that he had not undertaken credit checks when
carrying out due diligence, the weakness of credit checks is exposed when it is
considered that a check carried out against Global in May 2007 would not have
revealed its precarious financial position.
169. We agree with Ms
Tanchel that when one is considering means of knowledge due diligence is
only relevant to the extent that (a) actual answers were received which should
have alerted the trader to a problem and (b) where obvious enquiries should
have been made and if they had been made would have revealed problems or at
least led to more questions. However, when one is considering actual knowledge
the position is different. A failure to ask obvious questions or carry out
obvious due diligence, irrespective of what answers might have been received,
leads the Tribunal to consider why the question was not asked or the due
diligence not undertaken.
170. Conclusions
on due diligence: Mr Lewis conceded that after having learnt that Goodluck
had been deregistered, nothing was done to improve or bolster the due diligence
procedures of the company and the later due diligence undertaken by Mr Lewis
was almost identical in quantity and quality to that done before.
171. We find Mr Lewis
did not carry out credit checks (or any other checks into Global’s trading
partners’ financial reliability; he did not take up trade references or carry
out any other independent check; he did not ask any questions in
respect of features of obvious concern such as why a business was trading in
goods which were not its usual trading commodity but was trading in goods known
to Mr Lewis to be used in MTIC fraud.
172. So far as credit
checks are concerned it is Mr Lewis’ case that they were unreliable and Global
was not at risk. However, as he was shipping very valuable goods to its
customers without payment or security, Global was very much at risk. While
credit checks might give false positives, they were better than no check at all
on a trading partner’s financial position. Yet we find Mr Lewis was content to
trade with no independent reassurance that his buyer could actually pay for the
goods.
173. He visited his
supplier but admitted the visit gleaned nothing useful; he did not even bother
to visit his buyers and, as we have said, we do not accept the reason he gave
that such a visit was too expensive. So despite the high value of the deals he
did not visit his trading partners, or on the occasion he did, did not use the
visit for due diligence. This begs the question of why he carried out the
visit at all.
174. We find Mr Lewis
appeared to carry out due diligence (eg asking for trade packs and his visit to
EPC) but at the same time failed utterly to carry out effective due diligence,
yet Mr Lewis was a rational man who we find (from previous employment) had some
understanding of how the commercial world operates. We find that Global’s
carrying out ineffective due diligence was window dressing. Mr Lewis carried
it out because he knew HMRC expected it but he did not carry it out because he
wanted any kind of reassurance of the probity and financial reliability of his
trading partners. This suggests to us he knew that the transactions would take
place and Global would be paid in any event. How could he have known this
unless he knew it was all part of an orchestrated fraud?
Redhill verifications
175. Global obtained
a Europa VAT validation response relating to EPC on 19 May 2006 and again prior
to the date of deal 841 (31 October), but not for the date of deal 852 (26
November). Global attempted to verify EPC with the Redhill VAT office on
21 May 2006 and 30 May 2006. On 31 May HMRC replied, requesting a copy of the
invoice/purchase order between Global and EPC. On 2 June a further attempt to
verify was made and again, on 8 September Global received a response from HMRC
stating “we are awaiting further verification for [EPC]. Please resubmit
your application after 10 working days”. Following that, Global made no
further attempts to seek verification with Redhill of EPC before the 31 October
or 22 November deals.
176. Global had a
Europa VAT validation response dated 20 November 2006 for Agrupación. We find
he did not attempt to verify Agrupación with Redhill. Mr Lewis’ explanation
for this is that he had been relying on the e-mail from Redhill), which he says
supported his belief that a Europa check was sufficient. He also said he did
not realise that Redhill would do a check on non-UK companies.
177. Therefore, we
find Global traded with EPC, Munch and Agrupación without a Redhill
verification on any of them.
178. We also find
that in Global’s earlier wholesale CPU trading, which deals did trace back to
tax loss but which are not at issue in this appeal, its customer Universal
Traders UK, and its supplier was Goodluck. Global attempted to verify the VAT
numbers of both of these traders on 20 April, but the trades were carried out
before the responses were received (and in any event the response received for
Goodluck was negative).
179. Ms Tanchel says
that neither of the two customers or suppliers relevant to the deals 841 and
852 had been deregistered for VAT at the time of the transactions. She says
that repeated requests were made of Redhill for verification of suppliers and
confirmation of VAT registration but that Mr Lewis encountered numerous difficulties
in obtaining a timeous response. Because of this Global conducted Europa checks
and did so on the not unreasonable understanding that these checks were of the
same standing as those done with Redhill.
180. We find that Mr
Lewis had been told on many occasions the importance of a Redhill verification
and that he knew that it was not the same as a Europea VAT number check because
he knew he had to (and he did) send an information pack about the deal and his
trading partners to Redhill with each verification request. We do not accept
he thought that a Redhill verification was the same as a Europa VAT number
check, which required him to do no more than enter a VAT number into a website.
181. Nevertheless, he
was clearly prepared to trade without a Redhill verification, as he did so.
125. Ms
Tanchel said that Global transacted with only a limited number of suppliers and
customers which indicated a prudent business practice of dealing only with
those in whom Global had commercial confidence. We do not accept this: it had
only dealt with Munch once before and with Agrupación not at all. They were
not well known to the appellant.
126. Overall
we conclude that Mr Lewis showed a disregard for HMRC’s advice. Having been
told to verify his trading partners, he did not do so. While with EPC this
might be explained away on he basis HMRC took so long to respond, it does not
explain why he did not check whether he could verify his customers, or why he
did not wait for the response in earlier deals.
182. We consider that
by itself this lack of regard for HMRC’s advice tells us little as Global did
carry out Europa checks. And while Mr Lewis must have appreciated the checks
were not the same, it was not made clear to him what the difference actually
was. It is possible Mr Lewis would have acted in the manner he did with
respect to Redhill verifications whether or not he thought the deals were on
the open market.
183. Having
considered Global’s response to the known risk of MTIC fraud and also what it
did (and did not do) to protect its commercial position, we now consider the
appellant’s overall actions and what this tells us.
Business plan
184. In cross examination,
Mr Lewis was asked what was his business plan – what did he know of CPU
market? Apart from desire to talk about other aspects of the business such as
an IT platform, which failed, his answer was that they did research on the
internet and at CeBit and were optimistic.
185. He said he knew
the different names but not functions of CPUs and he said he knew the prices.
He admitted he did not look at Intel’s website (on which prices were published)
nor speak direct to Intel nor any of its authorised distributors. He agreed he
did not know who the authorised distributors were nor their role in the
market. He did not approach assemblers or manufacturers to offer CPUs for
sale.
186. As we have
commented before, he said he looked at trading boards on websites. But all he
ever claimed to get from these was the knowledge that the quantities Global
traded in and the prices it paid/charged were “in line with similar quantities
and prices that were being traded at that point in time.” This could not
have given Mr Lewis any detailed knowledge of the market. In any event he did
not need to research the market, as on his own evidence buyers and sellers approached
him with deals.
187. We agree with Mr
Kinnear for HMRC that Mr Lewis did virtually no effective research on the CPU
market. He merely satisfied himself from these websites that big deals appeared
regularly to take place.
188. Mr Lewis said he
believed his buyers and sellers were wholesalers. He was asked to explain,
therefore, why he thought there would be 3 wholesalers in a chain. He could
not explain this to the Tribunal. He accepts he knew that goods from outside UK were traded through at least two UK companies before being sold to European buyers. In his
witness statement, he says he does not know why his European buyers would buy
from him rather than direct from country of manufacture. He could not explain
to our satisfaction why, knowing the structure of MTIC fraud was that goods
would be imported to UK sold through chain and exported back to continent, he nonetheless
chose to participate in a chain which had the same structure.
189. His only
explanation, as it was for a number of oddities, was that he thought it was
okay as he had done it before and been repaid by HMRC. We reject this as an
explanation as explained below in paragraphs 210-213.
190. Therefore, we
find he had no kind of rational explanation of how the market in which he said
he thought he was trading worked.
The appellant’s amazing success
191. We find it odd
(were the deals negotiated on an open market) that Mr Lewis, with no wholesale
trading experience whatsoever, let alone in the specialist market in CPUs,
should have been able to source a new customer, a new supplier, and the
necessary supporting trade relationships and resources (for example, a suitable
freight forwarder and warehouse facilities), in order to arrange deals of
significant volume within a day of securing the necessary funds from Mr Lewis’
father. The value of its very first wholesale trade was £2,673,227. These were
sales of Intel Pentium 4 SL7Z9 CPUs and as referred to above were subsequently
traced to a significant tax loss. In fact, as we have found, all of its
wholesale CPU trading (some 11 deals) traced back to tax loss.
192. We find that
Global’s trade was achieved on a low resource base and with minimal expenditure
on advertising and promotion. It was also achieved without any previous
experience trading in CPUs. Global had managed to carry out 11 deals in seven
months in relation to CPUs to a total value of £11.5 million. In evidence
Mr Lewis said his suppliers approached him by phone or fax. He gave no
explanation why they should single him out, or importantly, why they did not
simply advertise on the same websites he was using and cut him out of the
chain. In cross-examination, Mr Lewis’ evidence in relation to this aspect was
confused and lacked clarity. The general thrust of his evidence was that EPC,
Munch and Agrupación (and also Goodluck and Universal) had all contacted him,
but that it was his own choice who he bought from and who he sold to. He
offered no satisfactory explanation as to why they had all contacted him.
193. Mr Lewis denied
that his exponential increase in business from selling 3 TFT screens on ebay to
sales of CPUs worth well over £2m was amazing. He considered it was due to his
research on the internet. We have already said that his research on the
internet appeared to amount to very little other than comparing the size of
transactions in CPUs and so we find he failed to give any kind of a credible
explanation for how Global could be so successful. Bearing in mind this was
not a credible explanation and that we have found him to be an unreliable
witness but one with a background in business, we do not accept he truly
believed his success was down to his research.
194. It was put to
him that it was odd that it just so happened someone called him wanting to sell
£2.6m of CPUs and someone else called him coincidentally wanting to buy that
same quantify of CPUs. His witness statement described it as “fortunate”. We
find he failed to give any explanation of why a company with no experience or
track record could suddenly start trading in those quantities at a profit. In
fact he said “I don’t know”. It was put to him that it was a sure thing which
he denied, but we do not accept the denial. It was put to him that it was
lucky that he was offered goods to buy and almost immediately got a customer
wanting to buy that exact quantity at a profitable price. He said this did not
give him pause for thought because it had happened before and HMRC had repaid
him. We reject this as an explanation as set out below in paragraphs 210-213.
In summary, we do not believe he thought Global’s ability to enter into these
trades was due to good fortune.
Trading risk
195. We have
mentioned this above in eth context of Global’s purported due diligence.
Although Mr Lewis was not consistent in his evidence over whether Global took
any risk in these trades, we find, were they trades on the open market which Mr
Lewis said at the time he thought they were, it would have been at risk. It
bought goods and transported them out of the country before the buyer had
accepted them and paid for them. At the very least Global would be at risk if
the buyer reneged on the deal.
196. In cross
examination, Mr Lewis said that he had not considered the risk of the buyer
reneging. Mr Lewis then seemed to suggest his contract with his supplier was
conditional, but there is no evidence of this, and if so it is odd it was not
mentioned before. He then agreed that Global would be in difficulties if the
buyer reneged as Global did not have the funds to pay the supplier. We find
his evidence shows how little concerned he was at the time with the possibility
of things going wrong: it is clear to us he didn’t consider it a real risk at
the time and we find the reason for that was that he knew the purchase would go
ahead as it was all arranged and not happening on the open market.
Benign trading environment
197. Assuming these
transactions were on the open market, which Mr Lewis said he thought they were,
Global’s supplier (EPC) was prepared to allow Global to put it at very
significant risk of loss. It permitted its buyer (Global) to ship the goods to Global’s
customer before Global had paid. Indeed it did not require payment from Global
until Global had been paid.. Yet we find there were no contracts in which EPC
even attempted to retain title. They certainly did not require payment (or a
deposit) in advance. Despite having no reputation in the field, Global was
therefore able to arrange payment with its suppliers and customers on terms
which were extremely generous to it.
198. We find that
this was an uncommercially benign trading situation and that Mr Lewis, a man of
at least average intelligence with a background in banking, must (and did)
know this. He knew it was too good to be true. He offered no rational
explanation of why he traded in such circumstances.
Terms and conditions of trading
199. We have already
commented on the inconsistency in Mr Lewis’ evidence over the terms of
trading. We find that Global had no written terms and conditions at the time
of the deals in question, despite their very high value and despite the fact it
shipped goods abroad before it was paid. There was nothing else apart from
invoices and a supplier’s declaration. There was nothing about, for instance,
retention of title or damage to the goods.
200. Ms Tanchel says
if there are inadequacies with the contractual paperwork, this tells the
Tribunal nothing because all Global’s deals (not just the two in this appeal)
were on the same basis and in any event HMRC had not adduced any evidence
relating to standard business practice in CPU trade by small traders in the
grey market.
201. In other words,
Ms Tanchel’s case is that she considers that the Tribunal cannot draw adverse
inferences from the lack of written contracts. We do not agree. We do not
consider that the lack of terms & conditions in Global’s trading tell us
anything about normal trading as, so far as wholesale trades are concerned they
have all been traced to fraud and were therefore not normal trading
(irrespective of what Global knew at the time) and, secondly, the rest of its trading
was on a much smaller scale and cannot be a guide. Further, we do not consider
that HMRC need to introduce evidence of standard trading practices. This case
does not turn upon the niceties of exactly what are the normal conditions of
trade on wholesale CPU exports: it turns upon why Mr Lewis acted as he did.
The Tribunal is entitled to ask why a trader would enter into a transaction
which puts it at a large financial risk without imposing even a retention of
title clause or indeed any express terms and conditions
202. We also find
that Mr Lewis was well aware that it is not normal business practice to trade
without terms and conditions because otherwise he would not have been
misleading over it in his evidence. Again it seems to us that the reason Mr
Lewis was not concerned with the lack of a contract at the time of the deals
was that he knew that it was not necessary as the deals were pre-ordained and
not taking place on the open market.
Box numbers
203. We find Mr
Lewis, despite advice from HMRC, did not compile or retain a database of box
and lot numbers (the purpose of which is to avoid trading in the same goods
twice). He did not utilise the freight forwarder’s knowledge to undertake any
further checks on the goods.
Inspection of the goods
204. Mr Lewis’
evidence from his witness statement is that his supplier would ask the freight
forwarders to inspect the goods, but Global would pay for this inspection.
Global would be given the inspection report by the supplier. Global
would then provide the inspection report to the buyer with its invoice.
205. We find many
inconsistencies in this evidence. It seems very odd that Global would be
content with an inspection report provided by its supplier – who in the
commercial world must be the one person who might not provide an unbiased report.
Further, there is no evidence that Global did pay for the report: Alpha did
not invoice for an inspection. The inspection report in any event did not deal
with the condition of the stock, just quantity and type. And indeed Mr Lewis
himself said that the inspections were only done so that he could verify that
the goods physically existed and it was a requirement of his customer. Yet he
also said the buyer had the goods inspected on arrival on the Continent and
before they paid for them, so we do not accept that the buyer would have
insisted on an earlier inspection.
206. Mr Lewis’ case
is that he had no reason to think there was a problem with the inspection
reports because HMRC had not queried them on earlier deals. We reject this as
an explanation in paragraph 210-213 below.
207. In any event it
is not for HMRC to tell a trader how to protect itself commercially. And we
find Global did not protect itself commercially: despite knowing its buyer
would inspect the goods, we find Global had no interest in the condition of the
goods, only whether they physically existed. Such a lack of concern indicates
that he knew that the buyer would buy the goods whatever the condition of them
and such knowledge is only consistent with knowledge that the transactions were
pre-ordained rather than genuine commercial transactions happening on the open
market.
Insurance
208. Global’s stock
was not insured whilst it was held at the freight forwarder. Mr Lewis’
evidence is that he thought he was insured by Alpha, but this was wrong and Mr
Lewis had clearly not investigated the possibility. By contrast, Global then
took on the cost of insuring the goods during and after transit.
209. So we find that
Global held an insurance policy but at the same time did not take steps to
ensure that the goods were fully insured during the whole time that Global was
at risk. This again appears to indicate a concern with appearances rather than
reality and again suggests that Mr Lewis knew Global was not acting in a
genuine commercial environment.
Location of goods
127. Ms
Tanchel said that, although HMRC had made much of the fact that Global had been
asked to deliver goods to Belgium and the Netherlands, despite its customers
being based in Denmark and Spain, which HMRC asserted should have been a
warning sign that the deals were connected to fraud, Dr Findlay's research
shows that Belgium and the Netherlands assemble more computers than Denmark and
Spain and in that context it cannot be said that a request to ship goods to a
country which was not the country of origin of the buyer could be said to have
been unusual or suspicious.
128. We
agree with Ms Tanchel that nothing can be read into the location of the
warehouses.
HMRC endorsed trading practices?
210. We have noted a
number of occasions where Mr Lewis’ explanation for an oddity in his trading
model was that he had traded like that before and it had not been queried by
HMRC.
211. Firstly we do
not accept that HMRC made any representation that Global’s trading was not
involved in MTIC fraud. At best HMRC’s earlier repayment to Global could be
taken as reassurance that HMRC would repay despite any concerns.
212. Secondly, we do
not accept in any event that Mr Lewis did rely on representations made by
HMRC. On the contrary it is clear that Mr Lewis disregarded HMRC’s opinion on
a number of occasions: he ignored the recommendations in Notice 726 (eg to
undertake credit checks and take up trade references); he ignored the
recommendation to undertake a Redhill check.
213. Thirdly, and
more importantly, if Mr Lewis knew that his transactions were connected
to fraud, to the extent HMRC made any representation by its repayment, it would
be irrelevant. In so far as it is a question of ought to have known,
then that requires the appellant to have acted reasonably. It would not be
reasonable to rely on HMRC’s repayment unless Mr Lewis knew that HMRC had the
same information that he had. Mr Lewis knew many things about the transactions
which HMRC did not know. We have found he knew, for instance, that buyers and
sellers approached him with a done deal. But he knew HMRC did not know this:
it would not have been reasonable for him to rely on the repayment as a
representation that trading in such circumstances was okay.
Conclusions
214. Mr Lewis was
clearly aware of the high incidence of MTIC fraud in the type of trade in which
Global was operating. His background was in banking and financial services and
he therefore possessed a degree of commercial acumen. He would have been aware
of the need for caution, particularly given the substantial amounts of money
involved. However his evidence to the Tribunal was unsatisfactory in terms of
his inability to explain the lack of due diligence and almost total absence of
contractual documentation with identifiable terms and conditions, which could
be relied upon in the event of any legal or other disputes arising from the
transactions. There were no real attempts at inspecting the condition of the goods
and very little interest in the creditworthiness and bona fides of its supplier
and customers.
215. Global had a
dramatic surge in turnover immediately after Mr Lewis secured loan facilities
from his father; and was able to sell entire consignments of stock which it had
bought without any negotiations or difficulty. Both buyers and sellers
approached Global offering the transactions to it despite its novice position
in the market and despite Mr Lewis, the alter ego of Global, knowing very
little about the market or the product, and certainly without Global adding any
value. Mr Lewis could not offer a satisfactory explanation of why he was not
suspicious of such an unrealistically benign trading environment.
216. The deals were
described by Mr Lewis as “zero risk” and it is clear that although (on paper at
least) there was a risk of the buyer reneging on the purchase after the goods
had been shipped leaving Global with goods it could not pay for stranded on the
Continent, Mr Lewis acted as if there was no such risk in that he did nothing
to protect Global’s position.
217. All of Global’s
11 CPU deals, which includes the two at issue in this appeal, traced back to
fraud. This is of course the explanation for why it was so easy for a novice
to quickly undertake transactions of such high value. Did Mr Lewis understand
that at the time? We think he did. He gave us no convincing explanation of
why he was not suspicious at the time yet he was clearly a rational man with
business experience. The fact he went ahead in these suspicious circumstances
must mean, and we find it does mean, that he knew he was being offered an opportunity
to make easy money by participating in transactions engineered for the purpose
of fraud.
218. Mr Lewis’
actions in 2006 are only consistent with knowledge that the deals were connected
to fraud. This explains his lack of interest in effective due diligence, his
lack of interest in the financial standing of his trading partners, his lack of
interest in visiting them, his lack of interest in understanding the real CPU
market, his lack of interest in ensuring the goods were properly insured at all
times Global was at risk, and his failure to require proper terms and
conditions of trading. He knew he did not need to be concerned because these
deals would take place in any event. They were orchestrated and he knew that.
219. Moreover, we
find Mr Lewis had an interest in appearing to do things properly. The goods
were insured albeit only for part of the time Global was at risk; he carried
out some due diligence albeit without finding out anything useful, he visited
EPC albeit again without using the opportunity to vet them. He had the goods
inspected but was not interested in their condition. We find he was merely
going through the motions and generating some paperwork in a poorly organised
attempt at window dressing.
220. Further, Mr
Lewis knew the buyer and seller approached him with a done deal. He knew he did
not negotiate the deals (we have rejected his evidence to the contrary). He
was unable to explain why he, a novice in this area, should have been presented
on numerous occasions with the opportunity to make a risk free profit, without
his having to do anything other than undertake some administrative work to earn
it.
221. We note he chose
to bank with UMBS, a bank which it is clear from his evidence he did not trust
with a deposit of Global’s money, and we have found using this bank was
dictated to him for the reasons given above.
222. We also take
into account that his evidence to this Tribunal was not reliable. We think that
this was because he had something to hide.
223. We take into
account that the scheme required each participant to play its part. If Global
had sold elsewhere, to the wrong person, the scheme would immediately have
broken down. The scheme required each participant, including the Global, to
play a preordained role in order to make it successful. We do not accept that
Mr Lewis was a “dupe” in either of these two deals. And we note he took a
significant percentage of the VAT at stake in the two chains.
224. Taking all these
matters into account, we are more than satisfied that Global, through its alter
ego Mr Lewis, knew that its transactions were connected to fraud.
225. As Global knew
its transactions were connected to fraud, it is irrelevant that HMRC repaid VAT
on its earlier wholesale export.
226. As we have found
Mr Lewis, and therefore Global, knew at the time of the connection of its
transactions to fraud, we do not need to consider the second limb of the Kittel
test which is whether they did not, but ought to have, known of the
connection to fraud. However, had we been called upon to consider this, we
would find that Global (and Mr Lewis its alter ego) ought to have known of the
connection to fraud as they chose to ignore the obvious inferences from the
facts and circumstances in which Global was trading.
227. In particular,
it failed to draw the obvious inference from the facts:
·
Why should Global, which was a small new company which had
previously only succeeded in trading a few FTF screens on ebay, be approached
with offers to buy and sell very substantial quantities of CPUs, generating
large profits for doing very little? It knew it did not negotiate its prices
yet would receive a substantial profit.
·
It is unlikely that any trader, let alone one without track
record, would be offered large quantities of CPU and then be contacted by a
buyer looking for exactly that quantity at a price which enabled it to make a
substantial profit
·
Mr Lewis was well aware of the trading boards, so he should have
asked himself why would the buyer and seller not use the trading boards to
locate each other and cut the unnecessary link (Global) out of the chain and
trade with each other direct
·
It knew that the goods were imported into the UK and swiftly sold out of the UK again. It knew there were at least three wholesalers in the
chains. This was obviously an irrational supply chain.
·
It should have known, from undertaking a credit check of Alpha,
that it was a high risk company with which to deal, yet its supplier chose to
use this company.
228. As we have said
it should not have drawn any comfort from HMRC’s earlier repayments as it knew
matters about its own trades which were not known to HMRC at the time and
therefore without such full disclosure it was not reasonable to treat HMRC’s
repayment as a representation there was no connection to fraud.
229. We also take
into account that at the same time Mr Lewis was very well aware about the risk
of fraud, which combined with the above factors means Global most certainly
ought to have realised that it was entering into transactions with all the
hallmarks of MTIC fraud. It should have known its transactions were connected
to fraud. Indeed, we have found that Mr Lewis and Global did know this at the
time.
230. The appeal is
dismissed.
Costs
231. By a direction
dated 9 August 2010 made with the agreement of the parties, the Tribunal
directed that Rule 29 of the VAT Tribunal Rules 1986 would apply to these
proceedings. Rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax
Chamber) Rules 2009 is therefore disapplied giving the Tribunal a general costs
discretion. HMRC asked for its costs if successful. We therefore award costs
to HMRC on the standard basis to be assessed by a tax judge if not agreed.
Full decision and appeal rights
232. 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.
MICHAEL S CONNELL
TRIBUNAL JUDGE
BARBARA MOSEDALE
TRIBUNAL JUDGE
RELEASE DATE: 6 March 2013
