First-tier Tribunal (Tax)

·                 Roderick Guy Stone, who gave evidence with regard to MTIC fraud in general 

·                 Paul Christopher, an officer of HMRC’s missing trader team at Oxford, who gave evidence as to the Companies’ dealings

·                 Simon Japes, an officer of HMRC’s missing trader team at Reading, who gave evidence as to the Companies dealings in the First Curacao International Bank (FCIB) in the Dutch Antilles.

Axel Kittel and another v Belgium [C-439/04]

“5(1) Subject to the provisions of the Tribunals, Courts and Enforcement Act 2007…. regulate its own procedures

(2)….

(3) ….

(d)  permit or require a party or another person to provide documents, information or submissions to the Tribunal or to a party

(e) deal with an issue in the proceedings as a preliminary issue

(f) ……

(g) decide the form of any hearing.

·            Mr Bridge objected to Mr Christopher expressing opinions about the consequences of his findings. He submitted that Mr Christopher had no experience as a businessman and was not an expert. Judge Porter allowed Mr Christopher’s expressions of opinion to remain in his witness statement. Mr Christopher had been working for HMRC since 2004 and had experience as an inspector of various businesses. He had dealt with several MTIC cases and had experience with regard thereto. The Tribunal noted that opinion was not fact and that it would take notice of such opinion as it thought appropriate

·            Mr Bridge objected to the introduction of Mr Hussey’s criminal conviction for theft. He stated that the offence was spent by 1991 and that it was an offence for Mr Christopher to introduce the same into his witness statement under section 9 of The Rehabilitation of Offenders Act 1974. Mr Mandalia pointed out that sub-section 2 of section 9 allowed such an introduction when introduced by Mr Christopher in his capacity as an officer of HMRC. Judge Porter indicated that in those circumstances the matter could be introduced, but that he doubted that the Tribunal would take any notice of it considering Mr Hussey was 18 at the time of the offence and the fine appeared to have been £200.

·            Mr Bridge wished to introduce evidence of video recordings made at the time of the inspections. Mr Spurgeon had arranged for such video’s to be taken and due to their age he had arranged for them to be recorded on DVD. Judge Porter allowed the videos to be introduced, subject to HMRC having the opportunity to view the same. The DVDs were made available to Mr Mandalia for that purpose.

·            During Mr Stone’s evidence Mr Mandalia sought to introduce details of the financial circumstances of the present appeal so that Mr Stone could advise whether it followed the scheme of a typical MTIC case. Mr Bridge objected as he had not had the opportunity to consider the documentation and he understood that Mr Stone’s evidence was generic in content and that he had not been involved in any of the matters giving rise to this appeal. Judge Porter agreed with Mr Bridge and refused the introduction of such an opinion.

·            Mr Bridge also sought to require HMRC to produce details of the IMEI numbers ostensibly contained on a computerised list sent to HMRC during discovery. Mr Bridge was unable to produce the email sending that listto HMRC nor could he produce the list at the time of this request. He indicated that it was hoped that it might be possible to recover the list from the computer, but he thought this might prove difficult, in view of the time lapse since its production. Judge Porter refused to make an order requiring HMRC to produce the list. He considered that this was evidence provided by Mr Spurgeon and that Mr Spurgeon had had adequate time to ensure that the IMEI lists could be made available during discovery and that it was too late and unreasonable to expect HMRC to do that for him now.

·            Mr Mandalia had sought to introduce evidence with regard to Trading’s turnover from May 2001. Mr Bridge objected on the basis that the earlier trading was not the subject of this appeal and it was not appropriate to allege dishonesty with regard thereto. Judge Porter agreed that as there was no evidence that Trading’s earlier deals were connected with fraud therefore it was not appropriate to consider them. He confirmed, however, that Mr Spurgeon had not disputed the turnover figures as follows:

1 May 2001 to 30 April 2002 £161,365,685

1 May 2002 to 30 April 2003 £122,856.432

1 May 2003 to 30 April 2004 £  56,540,482

1 May 2004 to 30 April 2005 £  48,014,164

1 May 2005 to 30 April 2006 £  50,704,328

Total £439,481,091 *3% = £13,184,432,73

Mr Spurgeon had agreed that Trades gross profit was in the region of 3%. Judge Porter asked why, in view of the fact that Trading appears to have achieved a profit in excess of £11,000,000 over the earlier period, it had been necessary for the Companies to borrow any money. Mr Spurgeon replied:-

“I didn't need to, no.  It would have made more sense not to borrow the money, not to pay all the interest.  But again, that is hindsight”.

·            At the end of the hearing Mr Bridge sought to introduce details of the emails which passed between Mr Spurgeon and HMRC and details from Hawk, the Companies freight forwarders, as to the supply of IMEIs. The evidence had been prepared by Sandro Placidi, a Solicitor, instructed by Mr Spurgeon during the hearing. The Tribunal was satisfied from the evidence that some IMEI numbers had been produced.However, due to the lateness of the application, and the fact that Sandro Placidi had not been involved in the hearing, Judge Porter refused the application.

6. Most readers of this decision will be familiar with the way in which Missing Trader Fraud operates. Christopher Clarke J has helpfully explained the position of  the “classic way” that MTIC fraud works in Red 12 Trading Limited v HMRC at paragraph 2:-

“2… Trader A imports goods, commonly computer chips and mobile phones, into the United Kingdom from the European Union (EU). Such importation does not require the importer to pay VAT on the goods. A then sells the goods to B, charging VAT on the transaction. B pays the VAT to A, for which A is bound to account to HMRC. There is then a series of sales from B to C to E (to more). These sales are accounted for in the ordinary way. Thus C will pay B an amount which includes VAT. B will account to HMRC for the VAT it has recovered from C, but will claim to deduct (as an input tax) the output tax that A has charged B. The same will happen, mutatis mutandis, as between C and D. The company at the end of the chain E will then export the goods to a purchaser in the EU. Exports are zero rated for tax purposes, so that trader E will receive no VAT. He will have paid input tax but because the goods have been exported he is entitled to claim it back from HMRC. The chain in question might be quite long. The deals giving rise to them may be affected within a single day. Often none of the traders themselves take delivery of the goods which are held by a freight forwarders.

[----]

5.  A jargon has developed to describe the participants in the fraud. The importer is known as “the defaulter”. The intermediate traders between the defaulter and the exporter are known as “buffers” because they serve to hide the link between the importer and exporter, and are often numbered buffer1, buffer 2 etc. The company which exports the goods is known as “the broker”.

As to the common variant of contra-trading, this is summarised in paragraph 7 as follows:-

“7… Goods are sold in a chain (“the dirty chain”) through one or more buffer companies to (in the end) the Broker (“Broker 1”) which exports them, thus generating a claim for repayment. Broker 1 then acquires (actually or purportedly) goods, not necessarily of the same type, but of equivalent value from an EU trader and sells them, usually through one or more buffer companies, to Broker 2 in the United Kingdom for a mark up. The effect is that Broker 1 has no claim for repayment of input VAT on the sale to it in the dirty chain, because any such claim is matched by the VAT accountable to HMRC in respect of the sale to Broker 2. On the contrary a small sum may be due from Broker 1 to HMRC. The suspicions of HMRC are, by this means, hopefully not aroused. Broker 2 then exports the goods and claims back the total VAT. The overall effect is the same as in the classic version of the fraud; but the exercise has the effect that the party claiming the repayment is not Broker 1 but Broker 2, who is, apparently, part of a chain without a missing trader (“the clean chain”) Broker 2 is party to the fraud.”

7. The case law,  subject to the decision in Peter David, which we discuss later in this decision, has developed through Moblix Ltd (in administration); and others, which provided that an exporter will not be innocent if he knew or ought to have known that his transaction was connected with the fraudulent avoidance of tax.

8. Mr Stone, in his witness statement, states that carousel fraud was rife from 2003 up to 2007, when the reverse charge was introduced. Any loss to the exchequer only occurs when the input tax is refunded on a repayment claim. HMRC had been repaying substantial sums of money, in many cases well in excess of £10,000,000. The total loss to HMRC during those years amounted to in excess of £15 billion. It appears that many of the frauds have been financed by third parties outside of the various transaction chains. In evidence, he stated that the difference between ‘an acquisition fraud’ and ‘a carousel fraud’ is that in the former the goods end up with a domestic consumer, a trader retaining the VAT and in the latter the fraud is a financial fraud as the goods and the money are circulated and recycled for the purposes of being reused in the fraud and do not reach an end consumer. The loss crystallises when HMRC make the repayment. He also confirmed that, in the main, in most of the MTIC cases to date it is the dispatcher, in the Companies’ position, which has its VAT repayment refused. No cases have been taken forward under the ‘joint and several’ liability. He confirmed that the implementation of the ‘reverse charge’ has removed the fraud from the United Kingdom.

9. We think it would be helpful to set out how the money flows in such schemes. Mr Stone has stated that an MTIC ‘carousel’ fraud is a financial fraud and is an abuse of the VAT system that results in the fraudulent extraction of revenue from the United Kingdom Treasury. He further states in his witness statement that the fraud predominantly involved computer chips and mobile phones. The finance for the deals is often provided from an outside source and is introduced to the chain when the Broker is paid by his European customer. It then cascades down the chains, each trader withdrawing their agreed profit and paying their appropriate amount of VAT. That VAT is often very small (apart from the Brokers repayment claim) because the intermediate Buffers can set off their input tax against their output tax. The money is then returned to the original funder.

10.  The participants in the chain are all seen to make a small profit.  Mr Stone has indicated that this amounts to 3% of the sale price for the intermediary Buffers and 6% of the sale price for the Brokers, who take the risk of not receiving a repayment. Apart from the defaulter, who ostensibly purchases the goods from Europe, each of the traders thereafter makes appropriate VAT payments to the Revenue. However, they do not necessarily pay each other the correct amounts, either under the apparent contracts, or of VAT.  The participants are required, if the transactions are fraudulent, to make an initial contribution to the scheme. In the example below only half the VAT liability due to their supplier has been paid, so that the participants carry some of the risk and thereby reduce the risk of the fraudsters not receiving the VAT. When the repayment is obtained by the Broker, he will have sufficient money to repay the VAT he was required to introduce, receive his profit and to pay his outstanding VAT liability to his supplier or in the alternative, the loan he has taken to pay the VAT. That supplier will then be in a position to pay his outstanding VAT to the defaulter, who will then receive all the VAT he should have paid to HMRC, but which he intends to keep, less the contribution to the profits and VAT down the chain. A variation on the theme is for the VAT to be introduced as a loan in addition to the initial money being provided. As a result the loan is effectively repaid when the VAT loaned is returned to the person who made the loan. This may well explain why the loans are not pursued once the repayment has been refused. The vast majority of these transactions were handled by the FCIB in sterling although the participants were, in part, European. The transactions are dealt with in sterling because the United Kingdom VAT repayments are made to the Brokers in sterling. It appears from the unique numbering of each transaction in the FCIB that the cash transfers are affected in a very short time. The shortness of the time suggests that the payments are orchestrated by the fraudsters, as it is unlikely that the several traders in a chain would be available at their computer consoles to make the payments in the time scales suggested. The outsider, who financed the transaction from the beginning, is presumably repaid his original investment and the loan (if any) plus any agreed interest or charges.

11.   Example

The participants are “E” the customer in Europe.

“D” the broker, who will seek the repayment from HMRC and who sells the goods to “E”

“C” a buffer who sells the goods to “D” having purchased them from “B” and who pays the net VAT to HMRC.

“B” the defaulter, who purchases the goods from Europe and charges VAT on the sale to “C”, but does not account for the VAT to HMRC.

“A” the trader in Europe sells the goods to “B” in the United Kingdom (the defaulter) and receives the money back from “B” which he or the fraudsters introduced into the chain in the first place.

12.                Many of these transactions took place through the FCIB which was based in the Dutch Antilles, it appears to have been the bank of preference and has since been closed down by the Dutch Authorities. All the money appears to take a significantly short time to pass through the account, so that the initial payment, in the example £1,124,544 is only at risk for a brief period. It would appear that the account may well be manipulated by one person as all the accounts appear to be internet accounts prefaced by the number 801, which can be accessed by an agreed password. The example below indicates the way in which the fraud is constructed, but it does not represent any of the deals in the chains the subject of this appeal.

A (in the EU) sells the goods to B (the Defaulter) for £1,000,000

B sells the goods to C (the Buffer) with a profit of 3 % for £1,030,000

plus VAT on £1,030,000 at 17.5 % £ 180,250

£1,210.250

C sells the goods to D (the Broker) with a profit of 3% for £1,060,900

Plus VAT on £1,060,900 at 17.5% £ 185,657

£1,246,557

D sells the goods to E (in the EU) with a profit of 6% (but

without VAT) for £1,124,554

As a result: 

E pays the full price to D £1,124,554

(being the money introduced by the fraudsters) 

D has to introduce some of his own funds to pay C amounting

to £122,003 (i.e. £1,246,557 - £1,124,554) to pay the to C * £1,246,557

On receipt of the VAT refund of £185,657 D can then

Repay the funds introduced £122,003

and take his 6% profit £  63,654

C then pays B £1,210.250

and pays HMRC VAT of £ 5,407

(£185,657 -£180,250)

and take his 3% profit £  30,900

B then pays A £1,000,000

keeps his 3% profit £  30,000

and defaults on the VAT of £180,250

* If D does not have any funds to introduce then he may part pay the amount owing to C and pay the balance when the VAT refund is obtained.

14.                 HMRC indentified a counter measure introduced by the fraudsters in July 2005 and as a result HMRC introduced a more robust verification system. In a contra-trade the fraudsters, instead of making repayment claims in excess of £10,000,000, inserted another chain (an apparent ‘clean chain’), and the Broker appears in the new chain as well as the dirty chain. In that way the Broker was able to set off its VAT liability as described by Mr Justice Clarke above. This case relates to the Companies deals in April and May. The Companies have conceded that there are tax losses arising from all the transactions and it accepts that those losses were fraudulent. It does not accept, however, that its deals were connected to those transactions. We have not considered the other defaulter chains in detail other than to satisfy ourselves that the losses have arisen as agreed by the parties.

The Legislation.

15. In view of the decision in Moblix Ltd (in administration) and  Peter David we think it would be helpful, before considering the evidence, to identify the law as we understand it. The right to deduct is contained in sections 24 -29 of the Value Added Tax Act 1994 (the Act). Section 25 requires such a person to account for and pay any VAT on the supplies of goods and services which he makes and entitles him to a credit of so much of his input tax as is allowable under s 26: see s 25(2). Section 26 gives effect to what is now Article 168 of EC Council Directive 2006/112 (the VAT Directive) and allows the taxable person credit in each accounting period for so much of the input tax for that period as is attributable to supplies made by the taxable person in the course or furtherance of his business: see s 26(2).

16. These provisions are in mandatory terms. If a trader has incurred input tax, which is properly allowable, he is entitled, as of right, to set it against his output tax liability or to receive a repayment if the input tax credit due to him exceeds that liability. He is required to hold evidence to support his claim (see article 18 of the Sixth Directive and regulation 29(2) of the Value Added Tax Regulations 1995 (SI 1995/2518). As a result, the right to deduct or the right to a repayment is absolute, and no element of discretion is conferred on the tax authority, save that the authority may accept less evidence than normally required; it has no right to demand more evidence than that prescribed by article 18. The right is also immediate, that is it may be exercised “when the deductible tax becomes chargeable”. The only limitation is the practical one that, although deductibility is determined on a transaction by transaction basis, the mechanical process of deduction or repayment is affected by reference to prescribed accounting periods.

The Case law

17. The case law has developed from Optigen Ltd where it was decided that a repayment must be made to a trader, who is innocent of the fraud, even though the transaction did not amount to an economic activity, through Axel Kittel and another which extended the concept of knowledge to include a trader, who ought to have known that there was a fraud, to Moblix Ltd (in administration), which refers to the various cases and has refined the concept of knowledge and the evidence required to prove it. In the light of that decision, we do not think it is necessary to trace the development of the concept through all of the cases we have been referred to, but rather to refer to Lord Justice Moses’ observations in the Court of Appeal. Moses LJ stated;

“…The scope of VAT, the transactions to which it applies, and the persons liable to the tax are all defined according to objective criteria of uniform application. The application of those objective criteria are essential to achieve:-(see Kittel para 42, citing BLP Group [1995] ECRI/983 para 24) the objectives of the common system of VAT of ensuring legal certainty and facilitating the measures necessary for the application of VAT by having regard, save in exceptional circumstances, to the objective character of the transaction concerned.” [Paragraph 24]

“In Kittel after §55 the Court developed its established principles in relation to fraudulent evasion. It extended the principle, that the objective criteria are not met where tax is evaded, beyond evasion by the taxable person himself to the position of those who knew or should have known that by their purchase they were taking part in a transaction connected with fraudulent evasion of VAT… It extended the category of participants who fall outwith the objective criteria to those who knew or should have known of the connection between their purchase and fraudulent evasion. Kittel did represent a development of the law, because it enlarged the category of participants to those who themselves had no intention of committing fraud, but who, by virtue of the fact that they knew or should have known that the transaction was connected with fraud, were to be treated as participants. Once such traders were treated as participants their transactions did not meet the objective criteria determining the scope of the right to deduct…”[paragraph 41]

 “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”; [paragraph 43].

18.  The European Court of Justice in Optigen Ltd has made it clear that a trader can recover his output tax even though the transaction is outside the VAT scheme. Both Kittel and Moblix confirm that where a trader meets the objective criteria for compliance with the VAT regime, it is not open to the Authorities to withhold any tax repayment. If, however, a trader does not comply with the objective criteria, because there is a fraud, that trader cannot recover any tax. Moses LJ at paragraph 30 states:

30.  “The Court (The European Court of Justice when considering Optigen) rejected the United Kingdom’s argument that unlawful transactions fell outside the scope of VAT. Fiscal neutrality prohibits the distinction between lawful and unlawful transactions; such a distinction must be restricted to transactions concerning products which by their very nature may not be marketed, such as narcotic drugs and counterfeit currency (see paragraphs 49 and the Advocate General’s Opinion paragraph 40). By its rejection of the United Kingdom argument, the Court made it clear that the reason why the fraud vitiates a transaction is not because it makes the transaction unlawful but rather because where a person commits fraud he will not be able to establish that the objective criteria, which determine the scope of VAT and the right to deduct, have been met.”

And at paragraph 52:

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”;

19. As the Advocate General stated at paragraph 40:

40.   “As becomes clear from the Commissioners own description of what they consider to constitute carousel fraud, its characteristic is that it makes use of lawful economic channels in order to facilitate the retention of money paid as VAT”

At paragraph 59

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 (our emphasis) 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”;

At paragraph 61

61, “A trader who decides to participate in a transaction connected to fraudulent evasion, despite knowledge of that connection, is making an informed choice; he knows where he stands and knows before he enters into the transaction that if found out, he will not be entitled to deduct input tax. The extension of that principle to a taxable person who has the means of knowledge but chooses not to deploy it, similarly, does not infringe that principle. If he has the means of knowledge available and chooses not to deploy it he knows that, if found out, he will not be entitled to deduct. If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct”;

20. Moses LJ also expressed concern that HMRC have in the past placed too much importance on a traders’ failure to carry out due diligence and not enough on the circumstantial evidence available. At paragraph 75 he stated.

“ 75 The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT…..

21.  In contra-trading cases HMRC’s ability to establish a connection between the actual tax losses in the contra-trade to the specific repayment claim in the clean chain is extremely difficult. This is not least because of the timing of the payments, where the Broker, in the clean chain, will be on monthly returns, and the transactions to which that repayment relates, will be some two or three months later, dependent on the accounting dates in the dirty chain. In Livewire Telecom Ltd Mr Justice Lewison stated:

Paragraph 102: “In my judgement in a case of alleged contra-trading, where the taxable person claiming repayment of input tax is not himself a dishonest conspirator, there are two potential frauds:

i) The dishonest failure to account for VAT by the defaulter or missing trader in the dirty chain; and

ii) The dishonest cover-up of that fraud by the contra-trader.

Thus it must be established that the taxable person knew or should have known of a connection between his own transaction and at least one of these frauds. I do not consider it is necessary that he knew or should have known of a connection between his own transaction and both of those frauds. If he knows or should have known that the contra-trader is engaging in fraudulent conduct and deals with him, he takes the risk of participating in a fraud, the precise details of which he does not and cannot know.”

22.  In Blue Sphere Global Ltd at paragraph 44 the Chancellor held that:

“44. There is force in the argument of Counsel for BSG but I do not accept it. The nature of any particular necessary connection depends on its context, for example electrical, familial, physical or logical. The relevant context in this case is the scheme for charging and recovering VAT in the member states of the EU. The process of off-setting inputs against outputs in a particular period and accounting for the difference to the relevant  revenue authority can connect two or more transactions or chains of transactions in which there is a common party whether or nor the commodity sold is the same. If there is a connection in that sense it matters not which transaction or chain came first. Such a connection is entirely consistent with the dicta in Optigen and Kittel because such connection does not alter the nature of the individual transactions. Nor does it offend against any principle of legal certainty, fiscal neutrality, proportionality or freedom of movement because, by itself, it has no effect.

45. Given that the clean and dirty chains can be regarded as connected with one another, by the same token the clean chain is connected with the fraudulent evasion of VAT in the dirty chain because, in a case of contra-trading, the right to reclaim enjoyed by C (Infinity) in the dirty chain, which is the counterpart of the obligation of A to account for input tax paid by B, is transferred to E (BSG) in the clean chain. Such a transfer is apt, for the reasons given by the Tribunal in Olympia  to conceal the fraud committed by A in the dirty chain in its failure to account for the input tax received from B.

46. Not all persons involved in either chain, although connected, should be liable for any tax loss. The control mechanism lies in the need for either direct participation in the fraud or sufficient knowledge of it.”

The Chancellor concluded at paragraph 55.

“55 .In my view it is an inescapable consequence of contra-trading that for HMRC to refuse a reclaim by E it must be in a position to prove that C was party to a conspiracy also involving A. Although the fact that C is a party to both the clean chain with E and the dirty chain A constitutes a sufficient connection it is not enough to show that E ought to have known of the fraudulent evasion of VAT involved in the subsequent dirty chain. At the time he entered into the clean chain there was no such dirty chain of which he could have known, nor was the occurrence of such a dirty chain inevitable in the sense of being pre-planned.”

23.                 We have also been referred to Christopher Clarke J’s comments at paragraph 109 of Red 12 Trading Ltd as authority for the proposition that the Tribunal may consider compelling similarities between one transaction and another and that it is not precluded from drawing inferences where appropriate, from a pattern of transactions of which the individual transaction in question forms part. Christopher Clarke J also highlighted the following as important factors in assessing the knowledge or means of knowledge of a trader:

                                i.“compelling similarities between one transaction and another”.

                              ii.“pattern[s] of transactions”.

                            iii.“transactions all of which have identical percentage mark ups…”.

                             iv.“…made by a trader who has practically no capital…”.

                               v.“…as part of a huge and unexplained turnover…”.

                             vi.“… with no left over stock”.

                           vii.“ A Tribunal could legitimately think it unlikely that the fact that all 46 transaction in issue can be traced to tax losses to HMRC is a result of innocent coincidence”.

24.  Briggs J in Megtian V HMRC [2010] EWHC 20 (CH) stated as follows:-

“37. In my judgment, there are likely to be many cases in which a participant in a sophisticated fraud is shown to have actual or blind-eye knowledge that the transaction in which he is participating is connected with that fraud, without knowing, for example, whether his chain is a clean or dirty chain, whether contra-trading is necessarily involved at all, or whether the fraud has at its heart merely a dishonest intention to abscond without paying tax, or that intention plus one or more multifarious means of achieving a cover-up while the absconding takes place.

Similarly, I consider that there are likely to be many cases in which facts about the transaction known to the broker are sufficient to enable it to be said that the broker ought to have known that his transactions were connected with a tax fraud, without it having to be, or even being possible for it to be, demonstrated precisely which aspect of a sophisticated multifaceted fraud he would have discovered, had he made reasonable enquiries. In my judgment, sophisticated frauds in the real world are not invariably susceptible, as a matter of law, to being carved up onto self-contained boxes even though, on the facts of particular cases, including Livewire that may be an appropriate basis for analysis.”

25. In Moblix at paragraph 62 Moses LJ states:

“62. The principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader’s purchase. If the circumstances of that purchase are such that a person knows or could know that his purchase is or will be connected with fraudulent invasion, it cannot matter a jot that the evasion precedes or follows the purchase. That trader’s knowledge brings him within the category of participant. He is a participant whatever stage at which the evasion occurs.”

26. It is worth bearing in mind the observation by Judge Colin Bishopp’s in Calltell TelecomLtd & Another –v- Revenue and Customs [207] UKVAT V2066 in the First – tier Tribunal:

“Much will depend on the facts, but an obvious example might be the offer of an easy purchase and sale generating conspicuously generous profit for no evident reason. A trader receiving an offer would be well advised to ask why it had been made; if he did not he would be likely to fail the test set out in paragraph 51 in the judgement of Kittel.”

27.            We have been referred to the Judgement of the CJEU in the joined cases of Mahageben KFT (C-80/11) and Peter David (C-142/11). Mr Mandalia did not argue the cases, but stated that he did not consider that they had altered the decision in Mobilx. Mr Bridge submitted that the decisions are important because of the impact they have on the inferences that can properly be drawn from often uncontroversial facts. The tax authorities must adequately “police” the market to ensure that traders keep proper records and defaulters are pursued. Failing to police the market and effectively delegating the responsibility to police the market to exporters by imposing a de facto blanket policy of denying input reclaims (extended verification) is unlawful.

28.            Mr Bridge further submitted that HMRC had the opportunity to prosecute individuals in relation to VAT fraud. In spite of this HMRC has apparently taken either no, or alternatively no adequate, steps to stop persons responsible from defaulting on VAT payments in the United Kingdom. He submitted that on the facts of the instant case there is evidence that HMRC failed to police the internal market in mobile telephones adequately, or at all, during the period of the relevant trading. In around February 2006 (as evidenced by Mr Stone) in the face of eye watering losses from fraud, and approximately 18 months before the introduction of the reverse charge in June 2007, HMRC instituted a blanket policy of denying input tax reclaims in all cases where extended verification led to a defaulting trader.

29.             In view of the fact that several cases have been adjourned behind these decisions, and although the cases of Bonik Eood, and Gabor Toth from Bulgaria and Hungary respectively are yet to be decided, we think it would be helpful to give our views on the cases. Both cases related to valid VAT invoices for work done and goods delivered in circumstances where both Appellants had not been put on notice that there was anything unusual in the transactions. Both the repair to the dam and the delivery of the logs had taken place and both Appellants had correctly accounted for the VAT. The Hungarian law at paragraph 45 (5) of the law LXXIV of 1992 states:

“The issuer of the invoice or simplified invoice is responsible for the veracity of the information given therein. The taxation rights of the taxable person indicated as the buyer in the certificate cannot be compromised if the taxpayer acted with due diligence bearing in mind the circumstances under which the product was sold or the service provided”

30.            That law required a trader to act with due diligence. The ECJ held that such a provision was outside the right to deduct, which is an absolute right, to be interpreted strictly.( See paragraph 17 above). Even though the Hungarian Tax Authorities had established that both transactions were subsequently found to be fraudulent, the ECJ held that a taxable person can be refused the benefit of the right to deduct only on the basis of the case law resulting from paragraphs 56 to 61 of Kittel and Recolta Recycling. According to which, it must be established, on the basis of objective factors, that the taxable person to whom the goods or services were supplied, which then served as the basis to substantiate the right to deduct, knew or ought to have known, that the transactions were connected with fraud previously committed by the supplier or another trader at an earlier stage in the transaction.

31.    The ECJ has said that, in principle, it is for the tax authorities to carry out the necessary inspections of taxable persons in order to detect VAT irregularities and fraud as well as to impose penalties. Further:

“It is a matter for the national authorities and courts to refuse to allow the right to deduct where it is established on the basis of the objective evidence that that right is being relied on for fraudulent or abusive ends”

32. At Paragraph 46 of the judgment states;

“A taxable person who knew, or ought to have known, that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of Directive 2006/112, be regarded as a participant (our emphasis) in that fraud, irrespective of whether or not he profited by the sale of the goods or use of the services in the context of the taxable transaction subsequently carried out by him (see Kittel and Recolta Recycling.paragraph 56).

33.  The ECJ confirmed that preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by Directive 206/112. In that regard, the ECJ has already held that European law cannot be relied on for abusive or fraudulent ends. It is a matter for the national courts 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 or abusive ends.

34. The cases related to a single transaction for work done and goods delivered in circumstances where the traders were not put on notice that there might be a fraud. In MTIC cases in the period of this appeal all traders were on notice that fraud was prevalent in the market place.

35.  We have decided that the references require HMRC to establish, to the requisite legal standard, the objective evidence which allows the conclusion to be drawn that the taxable person knew, or ought to have known, that the transactions relied on as a basis of the right to deduct are connected with fraud previously committed by the issuer of the invoice or by another trader acting earlier in the chain of supply. The fraud can be ‘previously’ committed in the sense that the necessary preparations have been made to enable the fraud to be brought to fruition at a later date. The appellant’s transaction or transactions must be connected to the earlier chains in such away that the fraud could not be brought to fruition without the appellant’s participation.  As a result of the proposals being put to him, an appellant would know, or ought to know, that the only reasonable explanation (our emphasis) for the transactions in which he was involved was that it was connected with fraud. As the right to refuse to deduct is an exemption, it has to be interpreted strictly.

  Standard of Proof

1 May 2001 to 30 April 2002 £161,365,685

1 May 2002 to 30 April 2003 £122,856.432

1 May 2003 to 30 April 2004 £  56,540,482

1 May 2004 to 30 April 2005 £  48,014,164

1 May 2005 to 30 April 2006 £  50,704,328

We have not allowed Mr Mandalia to allege fraud with regard to any of these transactions because they do not form part of this appeal and have not been pleaded. We have allowed this detail as Mr Mandalia considers that the trading pattern is relevant to the subsequent transactions carried out by Group.

41.  Group was incorporated on 16 May 2003 and Mr Spurgeon and Mr Hussey were appointed directors. Mr Spurgeon was appointed the secretary. Group registered for VAT on 11 August 2003 and indicated that it would be supplying internet telephony services to the public. It did not expect to receive regular VAT repayments and Group’s estimated turnover was £2,000,000 with sales of £60,000  to Europe. The company was intending to exploit the possibility of making ‘voice calls’ between computers. It appeared that the £500,000, needed to set up the company, came through Trading’s bank account. A substantial amount of the investment passed through Group’s bank account from Unistar. Mr Hussey invested £250,000 as identified on the bank statement of 17 November 2003. Mr Spurgeon recalled that Mr Hussey had had to remortgage his home. There are identified payments from Mr Spurgeon’s mother and grandmother and, on the balance of probabilities, we believe the £500,000 came from their personal resources.

42. Group commissioned advertising and marketing initiatives and it traded for a number of months after its launch. However, the venture was not successful and in April 2005 the shareholders decided to abandon the project. Their accountants had advised that if they were able to start up another business utilising Group they would be able to set of the losses in the company against any future profits. We are satisfied from the evidence that that was the case.  Group started to trade in mobile phones to recoup the losses it would otherwise have made and by March 2005 achieved £368,000 sales. Mr Christopher has produced evidence, which is not disputed, as to the turnover for Group from the date of registration 31 October 2003 to 31 October 2006 as under:-

31 October 2003 £ 250

1 November 2003 to 31 October 2004 £ 32,472

1 November 2004 to 31 October 2005 £ 2,675,316

1 November 2005 to 31 October 2006 £14,228,141

43.  Mr Spurgeon accepted that he had learnt about VAT fraud whilst working at European Telecoms PLC but that his knowledge, by the time of the hearing, was substantially different. He understood that sales into Europe would not involve a payment of VAT from the Companies’ customers and that the Companies would have to recover that VAT by way of a repayment, which they did in the deals before those which were the subject of this appeal. He had learnt about MTIC fraud as a result of meetings with HMRC and reading notice 726 setting out the joint and several liability. We are satisfied that Mr Spurgeon was well aware of the difficulties in relation to the mobile phone trade. The impression he had obtained by the time of the hearing was that there was a very high level of fraud in the market place. He said that the Companies were taking precautions to ensure that they did not get involved with fraudulent transactions.

44.  Mr Spurgeonhad insisted that the Companies only dealt with customers and traders who banked with a United Kingdom Bank. In cross-examination he accepted that details of three FCIB accounts appeared in the deal packs. He had not appreciated, until the hearing, that that had happened. He now realised that some of the traders would have used a United Kingdom Bank as an accommodation account. Payments appeared to have been made from their FCIB accounts through the United Kingdom Bank. We found Mr Spurgeon,s evidence throughout to be succinct, informed and detailed, demonstrating that he had a thorough understanding of the mobile trade industry.

45.  Mr Stone gave evidence under oath but agreed that he had not been involved with this case and that his evidence related to MTIC trade in general. He confirmed that the market had effectively collapsed once the reverse charge was introduced in June 2007. He also confirmed that only 179 traders remained in the market thereafter, out of some 179000 before. The reverse charge puts the onus on the customer to account for the VAT he has been charged by his supplier. Mr Stone produced a schedule which revealed that over four billion phones were being traded in March, April and May of 2006. Extended verification was introduced in May 2006 and by December the market had reduced to 61 million phones. Mr Bridge suggested to Mr Stone that the collapse in the market in mobile phones from May/June in 2006 was because HMRC had adopted a general policy to stop making repayments and to insist on extended verification on all traders dealing in mobile phones, whether they were involved with MTIC fraud or not. Mr Stone denied that there was any such policy, but it is significant to note that in a period of 6 months the problem had been eradicated, as, by December 2006, the mobile phone trade was down to where it had been six/seven years earlier. We do not know, nor has any evidence been produced, that there was a policy of this nature from the Treasury, but we do accept that there were sufficient non-repayments and extended verifications for the problem to be resolved.  We also accept that as a result of that innocent, as well as fraudulent, traders would have been affected.

46. We have been told that Mr Spurgeon, and both Aircall and Sunico, continued trading in mobile phone on the introduction of the reverse charge. Mr Spurgeon indicated that his company had achieved £12,000,000 of turnover since the introduction of the reverse charge. Mr Spurgeon gave evidence as to the way in which the Companies carried on their businesses. We have been told that apart from Mr Spurgeon, as Managing Director, and Mr Hussey, the Sales Director, three others were employed at Trading. Rohen Badhar, the International Business Development Manager; Helen Leheup, the office Manager; and Marie Hawkes, an administration assistant. Mr Spurgeon is 34 years old and is now living in Bude in Cornwall. With hindsight, he believes that the only way the Companies could have avoided fraud is by ceasing to trade. The impression he had received from HMRC now was that fraud had permeated 99% of the market at the time of the deals. As part of his verification process, he took the steps recommended by HMRC through their various policies and guidance notes. He supplemented these with further checks and precautions by visiting the suppliers and customers, where possible, and making appropriate enquiries of Redhill. He accepted that the checks that the Companies made were never going to completely eliminate all the risks that the goods might in someway be linked to fraud. He commenced trading in 1999 and by the time of the deals in question he had built up good relationships with the owners of the business that the Companies traded with. Those links extended outside of the business environment. He only purchased from people he trusted- Mr Darren Bee of DVB Ltd and Mr Neegum of Aircall had become good friends and they occasionally socialised together. The Companies provided complete transparency to HMRC in respect of all their trades and HMRC had full knowledge of all the deals.

47.  As far as Mr Spurgeon was concerned, none of the deals were contrived. All of the deals were negotiated either in transactions in the United Kingdom or in Europe. Most of the deals were brokerage deals involving the onward sale of goods purchased specifically for the companies. Redhill was checked regularly and where they confirmed that the VAT details were correct he was content to trade with that business. The Companies sent monthly returns to HMRC together with a spreadsheet relating to previous trading periods. He visited the premises of the Companies suppliers. He had visited Aircall, DVB and Elite and Mr Hussey visited Insignia. The Companies freight forwarders were Hawk Precision Logistics Ltd (Hawk) based at Jas Buildings, Cargo Point, Bedfont Road, Stanwell, Middlesex. The Companies have never used any other freight forwarder. The products that the Companies purchased were individually inspected and IMEI numbers verified. Before an inspection took place Hawk were asked to send 10 specimen IMEI numbers so that the Companies could check that they were in order. Mr Spurgeon confirmed that the Company had checked all the IMEI numbers in each of the deals; downloaded the information from the computer at Hawk and made them available to HMRC.  He indicated that the results had been emailed to HMRC during the preparation for the appeal, although he had been unable to produce the list. Mr Christopher confirmed that he had not checked any emails.

48. Mr Spurgeon told us that deals were concluded as a result of calls looking for buyers and sellers. He produced to the Tribunal details of approximately 1450 telephone calls logged for Trading from 2 May 2006 to 31 May 2006 which represents 21 working days excluding weekends. This is an average of 69 calls each day. Mr Spurgeon suggested that it was not surprising that all the figures and timings matched from the evidence that was produced of the deals. All the documentation in the deal packs represented the completed deal and could not therefore show the work that might have gone into setting up the deal. Deal 1 involved the purchase from Aircall of 2000 units and a sale to Sunico. The deal arose either because Sunico would have told them what they wanted or Group had offered it units, knowing that Aircall had the units available. Requests from customers rarely matched and deals would be struck on the basis of what the Companies had available or could source. The goods might already have been at Hawk for Aircall and the Companies would have been offered inspection facilities. The price of the units sold to Sunico by Group would be based on the price Group had to pay for them from Aircall plus a mark up. At this stage, everything would have been verbal and the deal would have been confirmed over the telephone. If the goods were not in Aircall’s possession, the Companies might proceed on the basis that the goods would be available and find a customer accordingly. If the goods were not available the sale would not proceed, but it would not have been firmed up until the Companies knew the goods were available.

49. Inspectors would look at the IMEI numbers on 10% of the boxes and they would take out a sample to check the IMEI numbers on the individual units. Where a discrepancy occurred at the time of the inspection, the Companies would advise their customers before going ahead with the deal. Videos, ostensibly taken at the time of all the inspections for all of the deals, were produced during the appeal to HMRC and one was viewed by the Tribunal. Mr Mandalia confirmed that he had examined some of the videos carefully and he was able to confirm that they followed the pattern of the video shown to the Tribunal. We were told that the videos had been prepared by a professional firm and we were surprised at its poor quality. The video showed the back of one of the operatives, which obscured the actions being taken by the individual opposite to him at the table. We would have expected the video to have shown the boxes being opened, examined and the products being returned to the box. The inspection reportedly took place at Hawk. We had understood that Hawk was a substantial and busy freight forwarding business. We were surprised that there appeared to be very little evidence of any other activity than the inspection of the goods. We were even more surprised to be told that Mr Spurgeon had supplied the video camera for the inspectors to film the activity. We would have expected a professional organisation to have had its own video cameras and to have set the video up in such a way that a viewer could see what was taking place. On the balance of probabilities we do not believe that the videos related to the inspection of this stock. Nor do we believe it would have been necessary to video the inspections if they were being carried out by a reputable business, that the Companies had used for many years.

50.  Once the units had been inspected and confirmed to the Companies order they were held by Hawk for the Companies. Once payment had been received the companies would advise Hawk to release the goods to the customers. As evidence that the Companies were involved in genuine transactions, Mr Spurgeon has also produced evidence of credit notes given in relation to transactions, which did not proceed, over a period from June 2005 to August 2006.  Mr Spurgeon said that he was not aware that DVB and Aircall also made supplies to some of the Companies’ customers. He was not surprised by this as it might well have suited Aircall and DVB to deal directly with the Companies’ customers depending on the state of the market at the time. He said that the profit margin on European sales was about 5%.  This was always higher than a sale in the United Kingdom because of the additional expense and risk. Mr Christopher suggested that the margins were fairly uniform. He has calculated the profit on the difference between the selling and purchase price per unit. The profit margins below are based on the total sales price as against the acquisition price, hence the slight variation. Given that the average price for the transactions is approximately £287,000 and the variation in margins in Mr Christopher’s tables at pages 175 to 177 vary from 4% to 6% a difference of 2% would amount to £5740. That is more than the profit on some of the deals and we would not, therefore, consider them to be ‘fairly uniform’.

51. We set out details of all of the deals in the Deal Table below.

Deal Table

UGR

Quarter 04/06

Purchase EU

UK Supplier Net Value VAT  Customer Sale Profit %Profit

Aircall £75000 £13125

Aircall £149000 £26075 Sunico  £234000 £10000 4.46

Aircall £144530 £25292.75  Planet 3G £150350  £5820 4.02

Elite Mobile £229500 £40162.50  Sunico £238500  £9000 3.92

Aircall £360000 £63000  Planet 3G £235,500   £10500 4.67

DRT £141300  £6300 4.67

Aircall £299000 £52325  Sunico £317000    £18000 6.02

Insignia £182700 £31972.50  Sunico £191800    £9100   4.98

Aircall £226908 £39708.90  Sunico £240660  £13752  6.06

Insignia £121000 £21175.00  Mobile World £127000   £6000 4.96

Insignia £450240 £78792 Mobile World £477120 £26880 5.97

TOTAL £2,237,878 £391,628.65  £2,353,230 £115352

UGR 

Quarter 05/06 

Purchase EU

UK Supplier Net Value VAT Customer Sale Profit % Profit

1 Aircall £354,000 £61,950 Q Evolution £375,000  £21,000 5.93 3.Aircall £390,000 £68,250  Q Evolution £413,419  £23,419 6.00

4. Aircall £148,190  £25,933.25Q Evolution £157,325  £  9135  6.16

5  Aircall  £73,750 £12,906.25 Sunico £77,500  £  3750 5.08

6. Aircall  £73,750  £12,906.25  Planet 3G  £78,105  £ 4355 5.91

7  Aircall  £307,000 £53,725  First Telecom£322,000  £15,000 4.89

8. Aircall £381,312  £66,729.60 World Coms £404,151  £22,839 5.99

 9.Aircall £121,800 £21,315 Q Evolution £128,100 £ 6300 5.17

9  Aircall £68,100  £11,917.50 Q Evolution   £  71,700 £ 3600  5.28

11.ircall £381,000 £66,675  First Telecom £401,000  £20,000 5.25

12  DVB £286,000  £50,050  World Coms £300,000  £14,000 4.90

 13 DVB £172,500 £30,187.50  World Coms  £180,500  £ 8000 4.64

 14 DVB  £147,000  £25,725  World Coms  £154,000  £ 7000 4.76

15.Aircall £386,000 £67,550 First Telecom£406,000 £20,000  5.81

16. DVB £878,000 £153,650  World Coms  £920,000  £42,000 4.78 17 DVB £191,904  £33,583-20  World Coms  £202,000  £10,096 5.26

18 Aircall £463,000  £81,025 Sunico £490,000  £27,000 5.83

19 Aircall £261,464  £45,756 Sunico £276,115  £14,651  5.60

20  DVB £134,520 £23,541 World Coms  £141,360 £  6840  5.08

21.  DVB £314,404  £55,020.70 World Coms  £331,450 £17046 5.42

22 DVB £348,000 £60,900 World Coms  £366,000 £18,000 5.17

 23  DVB £201,500 £35,262.50 World Coms  £212,000 £10,500 5.21

 TOTAL £6,083,194  £1,064,558.95  £6,407,725 £324,531

UTL

Quarter 04/06

  UK Net EU

 Supplier Value VAT Customer Sale Profit %Profit

1 Aircall £450,000 £78,750 Sunico £470,000 £20,000 4.44

2 Aircall £75,000 £13125 Sunico £78,000 £3000 4.00

3 Aircall £201,960  £35343 Sunico £213,840 £11,880 5.88

3b Aircall £84,375 £14,765.63 Sunico £88,125 £3750 4.44

4Insignia £249,665  £43691.38  Sunico £258,850 £9185 3.68

5DVB  £108,900  £19,057.50 World Coms  £113,850 £4950 4.55

6 DVB  £303,000 £53025 DRT £318,000  £15000 4.95

7 Insignia  £713,700  £124,897.50 World Com  £746,850 £33150 4.64

7b. Insignia £713,700  £124,897.50 World Com  £746,850 £33150 4.64

8 Aircall £441,000  £77,175 World Com £462,000 £21,000 4.76

9 DVB £457,195  £80,009.13 Sunico £479,680  £22,485  4.92

10 DVB £372,000  £65,100 World.Com £390,000 £18,000 4.84

TOTAL  £4,170,495  £729,836.64 £4,366,045 £195,550

Quarter 05/06

  UK EU

Supplier Value VAT Customer Sale Profit %Profit 

1 Aircall £178,143 £31175.03  Sunico £187,873.50  £9730.50 5.46

2Aircall £105,000 £18375 Sunico £110,400 £5400 5.14

3Aircall £102,600 £17955 Sunico £108,225 £5625 5.48

4 Aircall £149,000 £26,075 Sunico £156,000 £7000 4.70

5 Aircall £430,500 £75,337.5 Sunico £456,000 £25,500 5.92

6 Aircall £724,000 £126,700  World C £768,000 £44,000 6.08

7 Aircall £187,985 £32,897.38 World C £199,120 £11,135 5.92

TOTAL  £1,877,228 £328,514.91  £1,985,618.5 £108,390.5

52.  We do not propose to examine all the documentation for all the 49 deals but we have examined 20 deals picked at random save for the deal involving litigation. We have only considered the transactions as they affected Unistar Trading and Group as emboldened at the start of each deal. Mr Spurgeon has indicated that he had done everything that HMRC required of him and in giving evidence, as to the deal packs, appeared to be able to answer all the queries raised in cross-examination. We were satisfied that Mr Spurgeon had a very thorough understanding of his deal packs.  We have separately identified the standard packs for Group and Trading and highlighted the discrepancies in each deal where appropriate. It is agreed by the parties that all the deals form part of a fraudulent scheme. We have followed the numbering in the Deal Table at paragraph 51. Mr Bridge has produced a detail of all the deal packs at the end of his written submissions. These have been considered by Mr Spurgeon and variously commented on where the documents are missing. Our observations in relation to the deal packs are dealt with in our decision, but we have not considered the details provided in the submissions as we can only rely on the evidence before us.

UGL 04/06

Deal 2. (Vol 12.p 4) 3 April 2005. The goods have passed through the following traders. Attick Attack UK Ltd > Phone Shop (Bloxwich) Ltd > JOS UK Ltd > Lettings Solutions UK Ltd > Aircall International Ltd > Unistar Group Ltd > Planet 3 G SARL.

·       10 IMEI numbers supplied by Hawk to Group prior to the goods being purchased to be checked by Trading to ensure that they had not been dealt with before. The sheet notes the specification for the goods which comply with both deals requirements and which were checked at 12.53 noon, when Hawk was instructed to proceed. Mr Spurgeon told us that this check was carried out on all the deals before an order was placed. The form refers to 2715 units but the deals were subsequently amended to 1970.

·       Packing list provided by Trading of 2 20 kgs pallets for 500 and 470 (970) Samsung D600s by fax on 4 April 2006 at 10.20. This should have been for 1970.

o      Pre-Alert addressed to Hawk dated 4 May 2006 in relation to 1015 x Samsung D620 indicating that Group were expecting the goods to be delivered to Hawk’s warehouse by 12 pm on 5 May 2006 by Aircall and that the goods were to be held to Group’s order pending further instruction. This document does not appear to relate to any of the deals the subject of this appeal. There were no Samsung D620s dealt with by Group in this period.

o      A similar Pre-alert dated 17 May 2006 to AFI, the freight forwarders in Paris advising that 1999 x Motorola V3 were being delivered on 18 May 2006 for World Communications France SARL. These goods would fall within Group’s period 05/06. Only 2000 Motorola V3s were sold in deal 7 to First Telecom International Ltd on 5 May 2006. This document does not relate to the deals in this appeal.

o       Confirmation of allocation of goods dated 4 May 2006 addressed to Hawk asking for confirmation that 1000 x Samsung D600 had been allocated to Group by Aircall and asking Hawk to advise if an attempt was made by Aircall to move the goods as Group had not, at that time, paid for them. This would fall within group’s period 05/06. Aircall have only sold Nokia phones at deals 18 and 19 on 18 May 2006. This document does not relate to the deals in this appeal. 

o      A similar confirmation allocation dated 18 May 2006 confirming the allocation of 1140 x Nokia 7610s to group from DVB Ltd. This document may relate to deal 20 in Group’s period 05/06.

o      Transport instructions date 12 May 2006  for 2000 x Samsung P850s to be consigned to First Telecom International Ltd in Hong Kong. This document does not relate to the deals in this appeal. 

o      Transport instruction dated 3 April 2006 to Hawk for 1500 x Samsung D600 consigned to Sunico in Denmark (1000 to be taken from 1970 , presumably already held to Group’s order, and 500 from separate batch) which might relate to deal 1 of Group’s period 04/06 save that deal 1 above refers to two transport instructions for deal 1 which are not the same.

o      Confirmation of release of 1500 x Samsung D600s dated 5 April 2006 from Elite Mobile PLC to Group at 15.50pm. This release to deal 3 of Group’s period 04/06

o      Release of goods date 8 May 2006 addressed to Hawk releasing 500 x Samsung D600 to Sunico.This appears to relate to Group’s deal 5 in  period 05/06 and indicates that the goods were at the time on hold at K&N Copenhagen.

o      Release of goods dated 19 May 2006 addressed to AFI in Paris releasing 1140 x Nokia 7610 to World Communications France Ltd. This appears to relate to Group’s deal 20 in period 05/06.

Other due diligence.

56.There is a note of a meeting on 24 June 2004 when extensive verification was undertaken of transactions carried out by UTL in 05/04. It transpired that most of the transactions were related to supplies that did not take place in the United Kingdom.  There were only 3 transactions where the goods were sourced in the United Kingdom. The supplier was DVB and the customers Phoenix Sarl and Sunico. All the tax had been declared and recovered and a repayment of £24,6821.73 was made. HMRC explained to Helen, an employee of UTL, that merely checking Redhill would not protect the company if a joint and several claim was made. A letter had been written to Mr S King at McIntyre Hudson, accountants to UTL and UTG, in which HMRC confirmed that further repayments had been made, on a without prejudice basis, on 17 September 2004 in the sum of £60,900 and on 8 October 2004 in the sum of £153,055.  The letter went onto to say that HMRC’s enquiries in relation to the period 05/04 showed that transaction chains examined in the VAT period originated with either a missing trader, hijacked VAT registration or other defaulting traders. The revenue loss associated with these transactions had been significant but, not withstanding that, they assumed that UTL were unaware of these facts. Mr Spurgeon said that he was unaware of this letter as it had been addressed to the Companies accountants.

57. At a meeting in September 2006 with HMRC Mr Spurgeon advised that no due diligence checks had been made of the suppliers as they had all been known to him personally for about 5 years. Mr Spurgeon confirmed that each supplier completes a supplier declaration for each deal and that the Companies required the same to be completed before any transaction took place. The supplier declarations also contained further statements as to the goods; that full IMEI checks had been carried out; and that they were VAT compliant. Mr Christopher considered that Group and trading should have carried out regular checks on all its suppliers. He had carried out an Experian Silver report on 14 September 2007 on Insignia Telecom (UK) Ltd showing a credit limit of £50,000 and a credit rating of £25,000 and a credit opinion “ A below average risk company; little reason to doubt credit transactions to the limit assigned”. Mr Spurgeon pointed out that it would say that as HMRC had probably not repaid their VAT entitlement either. Mr Christopher had carried out similar reports for Aircall and DBV Ltd.

Loans.

a.    Long term loan of from Mr Case of £1,573,000

b.    Short term loan of from Cairns of £1,500,000

c.    Further short term loan from Cairns of £1,500,000

d.    Further short term loan from Cairns of £ 175,000

e.    Further short term loan from Cairns of £ 325,000

Total £3,573,000

Repaid Cairns £1,500,000

Balance still outstanding Case £1,573,000

Cairns  £ 500,000 £2,073,000

Interestingly, the total VAT funded by the Companies in the deals amounted to £1,950,451.10 so that it is clear that Mr Case and Cairns between them were funding the VAT. The balance of the VAT came from the Companies’ customers.

“In the account of Unistar Trading Ltd there is a post-balance sheet event stating that a debenture (value not given)  had been signed by Ruarri Spurgeon (on a date not given) in favour of the main creditor (not identified but the phrase implies that this is the ‘ unconnected third party’ holding the unsecured loan). ……The interest rate on this is disclosed as between 12.5% and 18% …..Total interest payable in 2005 represented more than half the gross profit figure.”

Insurance

FCIB and payments.

• UTL’s deal 6 (the subject of the litigation) for the period 04/06 is the sale to DRT Vertriebs of 1000 Nokia 9300i. The chain was Mingele >  I Connect U > Afflecks Phones > Fonedealers  > Emmen Communications > Diginett >  New Way Associates > DVB > UTL > DRT.

• DRT paid Trading 13 April 2006 £318,000
• Trading paid DVB  same day £356,025
• DVB’s payment to New Way, its supplier, is unidentified
• New Way paid Diginett £557,530. The FCIB narrative states “B/O New Way Associates for ref mobile phones inv 2026, 2029 paid in full”. (Mr Christopher’s exhibit p 132 volume 9 is of Diginett’s invoice number 2026 for 1000 Nokia 9300i valued at £349,562.50 )
• Diginnet paid £630,505 to Emmen. The FCIB narrative states “PO1844/ inv 404696, PO1847/ inv 4040705”.  (Mr Christopher’s exhibit p146 volume 9 is of Diginnet’s purchase order no 1847 to Emmen for 1000 Nokia 9300i at £348,975)
• Emmen paid £348,740 to Fonedealers. The FCIB narrative states “PO 40437 in 50272”.  ( Mr Christopher’s exhibit p152 volume 9 is of Fonedealers invoice 50272 for £348,740)
• Fonedealers paid Sunico £603,000. The FCIB narrative states “inv 50263,72 800x91 and 1k x93i”. Although the invoices are for 100 phones less we are satisfied that it is the same transaction because of the dates and the sequential nature of the payments. The Fonedealer’s account shows the payment to a/c 00836444, which is not an FCIB account. That account is identified at p 115 exhibit SJ55 through an HSBC account as Sunico’s account in Denmark.

We are satisfied that the ultimate payment for this DRT transaction, the subject of the litigation referred to above, ended up with Sunico. We are also satisfied with the methodology Mr Japes has adopted for his analysis.

71. We have examined the flow charts and identify 4 below:-

UTL period 05/06 Deals 1, 2 and 3. The chain from the flow chart appears to start at continue before (World > A C Primetech > Zaagoug > Ramsha >) but from the listing at p85 bundle 1 from Regal for all 3 was Regal > Zentith Sports > New Ora >Aircall > UTL > World

• World paid UTL £1,423,120 ( £199,120 + £758,000 + £456,000)
• UTL paid Aircall £1,577,419.88

• Aircall paid Phone City £1,565,123.50 and retained £12,296.38
• Phone City paid I Connect (t/a Zenith Sports) £1,562,194.23 and retained £2,929.27 (.2%)
• I Connect paid Regal £1,559,753.16 and retained £2,440.84 (.2%)
• Regal paid Ramsha £1,563,406.4 and paid £3,653.4 more than it received
• Ramsha paid Zaagoug £1,549,231.4 and retained £14,175
• Zaagoug paid AC Primetech £1,433,923 and retained £129,483.4
• AC Primetech paid World £1,431,430 and retained £2,499 (.2%)

It appears that £164,263.40 has been retained within the circle made up of:

£   8.310 excess returned to World 

£  12,296 retained by Aircall

£  14,175 retained by Ramsha

£129,482.40 retained by Zaagoup

£164,263.40

72.   The fraud requires money to be placed in the scheme by a fraudster, for individuals to take their share out and the balance to be returned to the fraudster. World or a third party appears to have put £1,423,120 in when it paid UTL and received £1,431,430 back which is an increase of £8,310. All the rest of the money had effectively been put in by UTL, who had paid £154,299.78 as their share of the VAT to Aircall. UTL appear to have borrowed the VAT from Mr Case.

It appears that the following profit has been taken out excluding the larger payments above:

£2.929.27 retained by Phone City

£2,440.84 retained by I Connect

£2,449.00 retained by AC Primetech

£7,819.11

If that is deducted from £164,263.40 the result is £156,444.29 which is within £2144.51 of the VAT paid in by UTL which must be more than a coincidence. When the repayment is made by HMRC, UTL will repay its loan to Mr Case.

73.  UGL period 04/06 Deal 1. We do not propose to go through the deal in detail. The flow chart does not, in our opinion, show circularity other than to Lettings Solutions. In fact the first three payments are from Sunico to UGL to Aircall and fall outside the circular movement of the cash thereafter from Letting Solutions and back to Lettings solutions. The payments to and from UGL were for the correct amounts.

74.  UGL period 04/06 Deal 3. The full chain for cash purposes is Data Solutions > Bond Corporation > Bodytec > Fima Consulting > Top Brandz > Diginett > New Way > Elite > UGL > Sunico. Mr Mandalia referred Mr Spurgeon to this flow chart:

• Sunico paid UGL £238,500.
• UGL paid Elite £269,662.50 (wrongly described as £369,662.50 both in the chart and at paragraph 157 of his statement. We have checked the invoice which is for £269,662.50) 
• The payment from Elite to New Way is missing as both used non-FCIB accounts
• New Way paid Diginett £838,719.74. the FCIB narrative reads “b/o new way associates ltd for mobile phone invoices 1991,1996,1997,1999 paid”
• Diginett paid Top Brandz £557,655 and retained £281,064.74
• Top Brandz paid Firma £555,598.75 and retained £3,943.75
• Firma paid Bodytec £738,458 for the 1500 D600s, 1000 6680s and 2000 K750i and appears to have paid an additional £182,859.25.
• Bodytec paid Acquired Solutions £259,351.87 for the 1500 D600s 
• Acquired Solutions paid Sunico £412,000 for 1000 6680s and 1500 D600.

• Sunico Paid  UGL £191,800
• UGL paid Insignia £214,672.50
• Insignia paid Signal £213,020.56 and retained £1,651.94
• Signal paid London Mobile £212,205 and retained £815.56
• London Mobile paid Fonestop £211,382.50 and retained £822.50
• Fonestop paid Cobra £209,737.50 and retained £1645
• Cobra paid Raja £ 209,079.50 and retained £658
• Raja paid Sunico £203,000 and retained £6079.5

77. Sunico, or a 3^rd party, introduced £191.800 into the scheme and received £203,000 gaining £11,200. £11,672.50 has been retained by the members of the circle, which when added to the £11,200 equals £22,872.50 the VAT introduced by UTL at the start. This is more than a coincidence. UGL has borrowed the Money from Cairns and Mr Case who are to be repaid out of the HMRC repayment.

a.      Q.Evolutions paid UGL £375,000

b.     UGL paid Aircall £415,950.

c.      Aircall paid New Ora £412,425 and retained £3,525

d.     New Ora paid Zentih Sports £411,367.50 and retained £1057.50

e.      Zenith Sports paid Computec £410,486.25 and retained £881.25

f.        Computec paid Rezaco  £408,195 and retained £2,291.25

g.      Rezaco paid Zaagoug £406,830 and retained £1,365.

h.      Zaagoug paid Q-Evolutions £350,000 and retained £56,830

Q-Evolutions or a third part introduced £375,000 and received £350,000 - £25,000 less. UGL introduced £40,950 as VAT when it paid Aircall. The VAT appears to have been withdrawn by Zaagoug when it deducted £56,830.

Submissions by Mr Mandalia

a.      Are the Appellants’ transactions in respect to which the input tax has been denied, connected with the fraudulent evasion of VAT elsewhere in the transaction chains?

b.     Did the Appellants know,, or should they have known that the transactions were so connected?

To the extent that HMRC’s case on knowledge of the fraud is based on inferences, from a wide range of facts in order to establish the position that the Appellants must have known that their transactions were connected with the fraudulent evasion of VAT. In the alternative, the Appellants’ should have known that their transactions were connected with the fraudulent evasion of VAT as they did not take every precaution that could reasonably be required of them to ensure that their transactions wre not connected with the fraudulent evasion of VAT. (See Kittel).

a.      The Appellants’ (through their directors Mr Ruarri Spurgeon and Mr Anthony Hussey or employees) had actual knowledge that the relevant transactions were connected with fraud: or alternatively 

b.     The Appellants (through their directors Mr Ruarri Spurgeon and Mr Anthony Hussey or employees) should have known that the relevant transactions were connected with fraud. 

a.      There is clear evidence in each deal that the goods had been imported in to the United Kingdom from Europe

b.     In a number of the deals the phones traded had two pin plugs and that they must have been imported other than through the manufacturers or main distributors.

c.      There have been payments to third parties within the deal chains, which Mr Stone states are a feature of MTIC.

d.     HMRC allege that each of the Appellants transactions trace back through the deal chains to a tax loss. HMRC are not required to prove the identity of the designer(s) of those chains or that the participants were knowingly involved in a single fraud. HMRC do not need to demonstrate the precise parameters of the fraudulent activity or its particular participants.

“ ..We fully accept that there are defaulting trader cases and incorrect refund claims, which are not “economic activities” however would like to state on record that we do not fall into those categories…”. 

On a number of occasions the Appellants were notified that repayment claims made would not be authorised until the Commissioners were satisfied with the bona fides of the repayment claim and verification of the transactions. Mr Mandalia also noted that the Appellants Purchase Orders stated:

 “ In the event that H M Customs and Excise should disallow any amount claimed by the supplier on a purchase invoice as VAT on the grounds that the transaction was part of a chain of supply that was circular in nature and involved a defaulting trader, any amounts shown as VAT will be refunded and a credit note issued”. Customs and Excise should disallow any amount claimed by way

88.   

a.      easily transportable high value goods of the kind normally used in MTIC fraud;

b.     bought in large quantities;

c.      of Central European specification but being traded in the United Kingdom, or of United Kingdom specification being exported outside of the United Kingdom  by the Appellants;

d.     manufactured outside the United Kingdom.

Notably the relevant transactions had the following characteristics:-

e.      back to back transactions;

f.       purchases and sales in the same quantities;

g.      not held in stock by the Appellants, but held at the freight agent’s premises;

h.      paid for by the customer before payment is made to the supplier.

The characteristics of the goods traded:

                                               i.Easily transportable high value goods of the kind normally used in MTIC fraud;

                                             ii.Mobile phones bought in large quantities;

                                           iii.Mobile phones manufactured outside of the United Kingdom and having 2 pins (being a clear indicator that the phones had been imported into the United Kingdom by companies other that the manufacturers or authorised distributors, but were not intended for the United Kingdom market)and mobile phones having a 3 pin charger ( and this intended for the United Kingdom market) being exported to an European customer‘.

The characteristics of the relevant transactions:

a. The transactions were back to back;

b.     All of the transactions involve purchases and sales in the same quantities;

c. All the stock was held by freight forwarders;

d.     All traders accede to releasing the goods before payment was made;

e. The Appellants were not required to make payment to their supplier until they received payment  from their customer;

101. Mr Mandalia submitted that due diligence was not something that traders undertake because HMRC expect to see it. Its function is to protect a trader against the risk that either the customer will not pay, the supplier will not supply the goods or that the goods do no meet the required specification or do not come from a legitimate source. The suppliers and customers had been known to the Companies for several years and no further enquiries, other than to Redhill for the supplier and customers VAT registration certificates, had been made. The Companies required all traders to sign a declaration before each deal was carried out confirming that the transactions were legitimate. Apart from that no updates had been obtained and the Appellants had no means of knowing whether there had been a change in the way in which its suppliers and customers traded. The Appellants due diligence simply betrays the notion that the Appellants were simply concerned that its trading partners were a business that had an address and a VAT registration. Any of their enquiries were perfunctory. The Appellants undoubtedly ignored facts which should have alerted them to the serious possibility that those trading partners could not afford to be involved in the transactions in question.

102                                        Mr  Mandalia submitted that the evidence enables the Tribunal to be satisfied to the requisite standard of proof that;

a.      The relevant transactions that are the subject of this appeal were connected with the fraudulent evasion of VAT; and

b.     The Appellants knew or ought to have known that the deals were connected with the fraudulent evasion of VAT.

Accordingly, HMRC submit that the appeal be dismissed.

Submissions by Mr Bridge

“The relevant knowledge is that BSG ought to have known by its purchases it was participating in transactions which were connected with a fraudulent evasion of VAT; that such transactions might be so connected is not enough”

The true principle in Kittel does not extend to circumstances in which it is more likely than not that the transactions were connected with fraud.The essence of the approach of the court in Kittel was to provide a means of depriving those who participate in a transaction connected with fraudulent evasion of VAT by extending the category of participants and, thus, of those whose transactions do not meet the objective criteria which determine the scope of the right to deduct. 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. The burden of proof rests with HMRC.

“The tax authority must adequately “police” the market to ensure that traders keep proper records and defaulters are pursued. Failing to police the market and effectively delegating the responsibility to police the market to exporters by imposing a de facto blanket policy of denying input reclaims (extended verification) is unlawful”.

1.Like the officers and directors in JDI Mr Spurgeon was a very experienced trader with years in the industry as was Mr Hussey.

2.Like JDI Trading and Group did not operate using an FCIB account.

3.Like JDI, the directors were well aware of the problems in the market and of the dangers and need for due diligence.

4.Like JDI some, but by no means all of the transactions appear from the FCIB evidence to establish circularity.

5.When asked to explain, what with the benefit of hindsight, now appeared to be revealed by HMRC’s evidence Mr Spurgeon gave similar explanation to that given by Mr Smith described at paragraph 221.

6.When asked to explain the discrepancies between goods ordered and delivered, Mr Spurgeon provided a similar response to Mr Cuthbertson in paragraph 151.

7.Like JDI, Trading had entered deals which had failed and in one instance had led to legal action being pursued.

8.Like JDI, Trading was funded by way of loans from a United Kingdom based financier who had many years experience in the mobile phone trade.   

a.      IMEI numbers had clearly been provided to Caroline Walkerdine.

b.     Mr Christopher refused to accept that the video was evidence that the phones had been properly inspected.

c.      Mr Christopher had not checked any of the emails allegedly sent to HMRC and had not produced any of them during the hearing.

d.     Despite the fact that Mr Spurgeon had produced evidence of documents provided to Hawk, the freight forwarders, Mr Christopher would not concede that such documents had been made available in the deals the subject of the appeal.

e.      Mr Spurgeon gave evidence that he had provided HMRC with complete deal packs. It appeared, at the hearing, that many of those documents were missing.

f.       At paragraph 30 of his first statement Mr Christopher suggests that Mr Spurgeon arranged for Group to take over 50% of Trading’s business to reduce the level of repayments to a level where they might not be challenged. Mr Christopher was not qualified to express such an opinion and it displays a bias on his part which renders other parts of his evidence less credible.

g.      Mr Christopher’s evidence was contradictory, in his first witness statement at paragraph 123 he states “there seems to be no element of commercial risk to the Appellants in the deals they participated in”.  At paragraph 59, in his second statement, he states 2 it is not unusual for losses to be made in contrived deals”.

a.      Trade and Group had good relations with HMRC until the application for repayments the subject of this appeal. In the 7 years they had been trading they had never been formally notified of a connection between any of the trades they undertook and fraud.

b.     They never made any third party payments.

c.      They only traded with longstanding known and trusted suppliers.

d.     They did not use on line market facilities such as IPT.com.

e.      They required the sellers to make a detailed declarations as to due diligence.

f.       They treated the United Kingdom as a substantial hub for all makes a specification of phones.

g.      They carried substantial insurance.

h.      They employed elaborate security measures to prevent robberies.

i.       They used a United Kingdom bank account and their bank never voiced any concern about them.

j.       They scanned and checked IMEI numbers.

k.      They were aware of MTIC fraud but not of its extent.

l.       Their margins varied from deal to deal.

m.    Mr Spurgeon has continued to trade even after the introduction of the reverse charge.

n.      Trade and Group employed staff to assist with the transactions.

The decision.

“A taxable person who knew, or ought to have known, that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of Directive 2006/112, be regarded as a participant (our emphasis) in that fraud, irrespective of whether or not he profited by the sale of the goods or use of the services in the context of the taxable transaction subsequently carried out by him (see Kittel and Recolta Recycling.paragraph 56)”.

DAVID S PORTER

TRIBUNAL JUDGE

RELEASE DATE:  19 February 2013