1.             These are the appeals of BTS Specialised Equipment Limited (“BTS”), a company in liquidation, and NTS Specialised Equipment Limited (“NTS”).  BTS, through its liquidator, appeals against decisions of HM Revenue and Customs (“HMRC”) contained in letters of 10 May 2007, 15 June 2007, 27 July 2007 and 28 August 2009 denying its entitlement to the right to deduct input tax in relation to various transactions occurring in its monthly VAT periods 04/06, 05/06 and 06/06. NTS appeals against a decision of HMRC contained in a letter of 25 June 2008 denying its entitlement to the right to deduct input tax in relation to transactions occurring in NTS’s quarterly VAT period 04/06. 

2.             In relation to BTS:

(a)      the decision in the letter of 10 May 2007 relates to input tax of £1,591,372.35 claimed in respect of 9 deals which took place in April 2006;

(b)      the decision in the letter of 15 June 2007 relates to input tax of £5,657,177.94 claimed in respect of 41 deals which took place in May 2006;

(c)      the decision in the letter of 27 July 2007 relates to input tax of £4,164,467.54 claimed in respect of 37 deals which took place in June 2006; and

(d)     the decision in the letter of 28 August 2009 relates to input tax of £612,955.00 claimed in respect of a further 4 deals which took place in June 2006.

3.             In relation to NTS, the decision in the letter of 25 June 2008 relates to input tax in the sum of £3,051,538.75 claimed in respect of 23 deals which took place in the quarter ended April 2006. 

4.             The input tax sought by the two companies totals £15,077,511.58. 

5.             In order to consider whether the Appellants were involved in MTIC fraud, HMRC subjected their returns for the VAT periods in question to extended verification.  That involved officers using copies of transaction documentation provided by BTS and NTS, and transaction documentation obtained from other traders, to establish “deal chains” for each of the transactions in issue. All the claims were denied on the basis that the director of both companies, Mr Nigel Christopher Tomlinson, knew their transactions were connected to fraud, or should have known that to be the case.

6.             In notices of appeal given on 30 May 2007, 10 July 2007, 17 August 2007, 11 July 2008 and 25 September 2009, the Appellants broadly claimed that their transactions did not form part of a scheme or schemes to defraud the public revenue, nor were there features of the transactions that they entered into, and conduct on their part, which demonstrated that they knew, or should have known, that the transactions formed part of such scheme or schemes.

7.             BTS did not accept that it deliberately or recklessly ignored factors which indicated that the transactions may have formed part of an overall scheme or schemes to defraud the revenue.

8.      In the case of NTS, the company claimed:

(a)      that it invested “significant” sums in undertaking sufficient, appropriate and reasonable due diligence procedures and on many occasions it decided not to conduct business with third parties due to their failure to meet its due diligence criteria;

(b)      that there was no legal requirement for any trading business to use detailed written contracts;

(c)      that there was no legal requirement to record IMEI numbers and historically it had never been directed to do so;

(d)     that there was no legal requirement for goods in transit to be insured, and in any event many of the goods were covered by insurance policies of the freight forwarding companies; and

(e)      that HMRC had failed to take into account relevant factors regarding the company’s trading experience and reputation.  

9.             In what became the consolidated Statement of Case, HMRC plead that, in relation to the fraud limb of the MTIC test, the Appellants’ transactions in the periods in question were connected to the fraudulent evasion of VAT, and that the Appellants knew or, alternatively, should have known of the connection with fraud.

11.          In the instant case, in relation to those transactions alleged to involve a contra-trader, the appellant company concerned is in the position of Broker 2.  In relation to other transactions we must also consider, NTS acted as a buffer in dirty chains.

12.         HMRC do not accept that in contra-trading cases the chain connected to the appellant is “clean”: they assert that it is fraudulent. They observe that the difference between the two chains is that the clean chain does not have a fraudulent loss in it.  Nevertheless, for ease of reference, we shall throughout our decision continue to use the expression “clean chain”.

13.         Mr James Pickup QC and Mr Simon Gurney appeared for the liquidator of BTS and for NTS, and HMRC were represented by Mr Mark Cunningham QC and Mr Joshua Shields. 

14.         Initially the parties presented us with 27 lever arch files of witness statements and 196 such files of exhibits.  Two more files of exhibits were added during the hearing, and we were also presented with three files entitled “Deal Sheets”, “Materials Bundle” and “Mr Vincent D’Rozario’s Progress Logs”. Further evidence of the deals with which we are concerned was included on 3 CD roms.

15.         The amended consolidated statement of case and the supplemental statement of case in relation to BTS were served on the CD roms.  The CD roms contain supporting materials referred to as Annexes A to L.  The contents of the Annexes were corrected and amended by statements of officer Murphy of 8 June 2011 and 21 March 2013.

16.         Pursuant to a direction of Judge Bishopp made on 28 September 2010 (“the Direction”) Annexes C, F, G, I and K and the deal sheets of Annex H on the CD roms are admissible in evidence of the truth of their contents and are deemed to be agreed by the Appellants..

17.         Some of the witness statements were agreed, so that their makers did not give oral evidence.  The witness statements in question were those of:

Andrew Shorrock, Stephen Mills, David Young, Andrew Leatherby, Andrew Adamson, Angela McCalmon, Elizabeth Rowlands, Wayne Conroy, Richard Saxon, Matthew Lee, Huw Gingell, David Berry, Michael Downer, Daniel Outram, Steve Jenner, Des Lewis, Julie Sadler, Stephen Crooks, Andrew Monk, Andrew Siddle, Graham Taylor, David Ball, Jennifer Davies, Martin Evans, Dean Foster, Kulvinder Kumar, Fu Sang Lam, Romaine Lewis, Michael McBrine, Vivian Parsons, Barry Patterson, Kym Richards, Allistair Strachan, Lisa Connelly, Anthony Gray, Susan Tressler, Michael Quartey, Phyllis Mee, Graham Speight, Huw Griffiths, Frank Spackman, Mark Appleby, David Lee, Daniel O’Neill, Stephen Doyle, Daniel Payne, Patricia Westwell, Gail Savage, John Foy, Sue Hirons, Laurence Smith, Verna Gellvear, Heather Arnold, Sarah Allen, Howard Flint, Claire Sharkey, Chris Harbidge, Victoria Clarke, Reginald Broers, Elaine Isaacs, Mark Jarrold, Lynda Baker, Peter Davies, Rebecca Jackson, Pamela Banks, Paul Cole, Wendy Gilbert, Farzana Malik,  Karen Cummins, Catherine Clarke and  Roderick Guy Stone.

18.         The remaining witness statements formed the evidence in chief of the witnesses who appeared before us but, in some cases, for completeness the evidence was updated or added to orally.  The witnesses in point, with their respective offices or positions, were:

Nigel Humphries, a specialist officer of  HMRC dealing with MTIC fraud

Roger Cooper Murphy, a senior officer of HMRC

David Kenneth Leach, an accountant with HMRC who carried out a review of BTS’s rapid increase in turnover

Philip Sarocka ACCA, an accountant with HMRC who carried out a review of work of officer Stephen Crooks

Peter Richard Birchfield, the team manager of HMRC’s special investigation appeals and review technical team

Elaine Yvonne Emery, HMRC’s assurance officer for First Touch Communications Ltd (“First Touch”)

Smita Parikh, an HMRC higher officer who, on Mr Birchfield’s instructions prepared a series of charts showing the movement of monies between various traders in the Appellant companies’ transaction chains.

Vincent Gregory Mark D’Rozario, HMRC’s assurance officer for BTS

Gordon Murray Fyffe, HMRC’s assurance officer for a defaulter company, Bullfinch Ltd

Fidelis Mayungbe, HMRC’s assurance officer for Brightime Ltd

Matthew Charles Bycroft, an HMRC higher officer responsible for Midwest Communications Ltd (“Midwest”)

Ian Michael Simmons, HMRC’s assurance officer for Kwality Trading International PLC (“Kwality”)

Alan John Ruler, HMRC’s assurance officer for Digital Satellite 2000 Ltd which traded under the name of Powerstrip (“Powerstrip”)

Graham Taylor, HMRC’s assurance officer for C&B Trading (UK) Ltd (“C&B”)

Richard Hywel Davies, HMRC’s assurance officer for David Jacobs Ltd (“David Jacobs”)

Ian Clifford White, HMRC’s assurance officer for Epinx Ltd (“Epinx”)

Nigel Huw Clarridge, HMRC’s assurance officer for Selectwelcome Ltd (“Selectwelcome”)

Christopher Alexander Williams, HMRC’s assurance officer for Svenson Commodities Ltd (“Svenson Commodities”)

Sara Evans, HMRC’s assurance officer for NTS

Nigel Christopher Tomlinson, the director of BTS and NTS

Kenneth Peter Edmonds FCA, CTA, the accountant for BTS and NTS

Gary Taylor, a director of PricewaterhouseCoopers, and an expert witness called for HMRC

Nigel Attenborough, an expert witness called for BTS and NTS

19.          The files produced to us bore either the prefix WS, indicating that they contained witness statements, or E, indicating that they contained the exhibits referred to in the witness statements. We propose to indicate the files to which we refer by means of their prefixes followed by the relevant page numbers, e.g. E4/111 relates to Exhibit file 4 page 111. In some cases the files contain tabs, and in relation to them we interpose the tab numbers between the file name and the page number, e.g. E5/B/100 relates to Exhibit file 5, tab B, page 100.

20.          It is from the whole of the evidence presented to us that we make our findings of fact.

Two-tier contra-schemes

21.         The present appeal also involves consideration of what HMRC describe as “Two-tier” contra-schemes.  In such schemes they say that the first contra-trader (“Contra 1”) operates in the same way as in a single contra-trading scheme.  However, it uses an additional source of supply for the goods it sells to its EU customers.  The additional source is a second contra-trader (“Contra 2”) which also follows the normal single contra-trader pattern of trading in that the net input tax in a third chain is offset against the net output tax in a fourth chain.  Contra 1 takes the position of broker for Contra 2’s UK suppliers.  That results in Contra 2’s repayment claim arising from the third chain “shifting up” the chains to Contra 1.  However, because Contra 1 is not acting simply as a broker, the claim does not remain there.  Contra 1 is itself offsetting the tax liabilities on different types of supply (input tax in the first and fourth chains against output tax in the second chain).  Because of the relative values of the first and fourth chains against the second chain, the bulk of the repayment claim is further shifted to the broker sourcing goods from Contra 1.  In such a scheme the repayment claim made by the broker is linked partly to the tax loss at the defaulter in the first chain (Contra 1) and partly to the tax loss at the defaulter in the third chain (Contra 2).

2. THE LAW

22.         Articles 167 and 168 of Council Directive 2006/112/EC of 28 November 2006 on the common system of VAT provide:

“167 – A right of deduction shall arise at the time the deductible tax becomes charged.

168 – In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:

(a)  the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person.”

23.          Sections 24, 25 and 26 of the Value Added Tax Act 1994 (“VATA”) provide:

“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 –

(a)      VAT on the supply to him of any goods or services;

(b)     VAT on the acquisition by him from another member State of any goods; and

(c)      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 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.

(2)   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 attributable to supplies within subsection (2) below.”

24.         Regulation 29 of the VAT Regulations 1995 provides:

“29.-(1) Subject to paragraph (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.

(2) At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of –

(a) a supply from another taxable person, hold the document which is required to be provided under regulation 13; …

provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold, instead of the document or invoice (as the case may require) specified in sub-paragraph (a) … above, such other documentary evidence of the charge to VAT as the Commissioners may direct.”

25.         Thus, if a taxable person has incurred input tax that is properly allowable, he is entitled to set it against his output tax liability and, if the input tax credit due to him exceeds the output tax liability, receive a repayment.

27.         Mr Cunningham maintained that paras 56 and 57 of the judgment in Kittel showed that it was not the trader’s transaction that was the fraudulent one referred to in the former paragraph, but rather the transaction with which his transaction was ultimately connected, however many times further removed.  Further, actual participation in the relevant transaction was unnecessary; participation was a matter of deeming.  We agree.

29.         Mr Cunningham contended that para 59 of Mobilx confirmed that HMRC did not have to show that the Appellants were actual participants in the fraudulent evasion of VAT; although HMRC might prove that they were, it was not a necessary part of the case they had to establish.  Again, we agree.

30.         However, the Court of Appeal emphasised the need for certainty as to the existence of fraud stating that:

“56. It must be remembered that the approach of the Court in Kittel was to enlarge the category of participants.  A trader who should have known that he was running the risk that by his purchase he might be taking part in a transaction connected with fraudulent evasion of VAT cannot be regarded as a participant in that fraud.  The highest it could be put is that he was running the risk that he might be a participant.  That is not the approach of the Court in Kittel.  In those circumstances I am of the view that it must be established that the trader knew or should have known that by his purchase he was taking part in such a transaction.

. . .

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.         As to the time in identifying a connected fraud the Court said:

“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 should have known that his purchase is or will be connected with fraudulent evasion it cannot matter a jot that that evasion precedes or follows the purchase. That trader’s knowledge brings him within the category of participant.  He is a participant whatever the stage at which the evasion occurs.”

32.         The Court of Appeal gave further guidance to domestic tribunals as to how to approach the matter of due diligence:

“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 I which his transaction took place was that it was connected to fraudulent evasion of VAT,

. . .

33.         We pause there to observe that in his skeleton argument (at paras 2.12 and 2.13), Mr Pickup said, “A supplier/trader must equally be able to rely on the lawfulness of the transaction it carries out (its purchase) without risk in the loss of its right to deduct, when it is in no position – even by exercising commercial care – to identify fraud.  There are parameters to the reasonable commercial checks that a trader can make namely that a trader (absent actual knowledge – as a co-conspirator) is limited to questioning his commercial partners.  If where exercising due commercial care, a trader would not be able to deduct fraud connected with his transaction, then he should be allowed to deduct his input tax.”  As Mr Cunningham observed, almost the Appellants’ entire defence was that they carried out proper due diligence and that took them into a safe harbour: due diligence was all that was required.  Mr Cunningham added that due diligence was only a factor to be taken into account, and not an escape route.  The appeal was not a trial of the Appellants’ due diligence, but rather one of their trading.  Once more, we agree with Mr Cunningham.

34.         Later in its judgment in Mobilx, the Court of Appeal provided the following further guidance on the application of the Kittel test:

82. But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant.  As I indicated in relation to the BSG [Blue Sphere Global] Appeals, tribunals should not unduly focus on the question whether a trader has acted with due diligence.  Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud.  The danger in focussing on the question of due diligence is that it may deflect a tribunal from asking the essential question posed in Kittel namely whether the trader should have known that by his purchase he was tasking part in a transaction connected with fraudulent evasion of VAT the circumstances may well establish that he was.”

35.         Finally, the Court of Appeal said:

37.  In his skeleton argument, Mr Pickup stated at 2.10 that a trader’s right to deduct input tax was just that – a right, and one that could be displaced only by HMRC satisfying the tribunal to the appropriate standard that the taxable person was actually a participant (either directly or by reason of what he knew or should have known) in the fraudulent evasion of VAT.

38.  Mr Cunningham maintained that it was unnecessary for the taxable person to be an actual participant for the right to deduct to be denied; that was a misunderstanding of both the Kittel and Mobilx cases, and Kittel was an extension of the Optigen case.  Optigen Ltd v Commissioners of Customs and Excise (Decision 18113) (“Optigen”). For that purpose, Mr Cunningham relied on the statement in para 59 of the Kittel judgment that the referring court should deny entitlement to the right to deduct where the “taxable person knew or should have known by his purchase he was participating in a transaction connected with the fraudulent evasion of VAT.”  Mr Cunningham maintained that it was not the trader’s transaction to which that sentence referred, but rather the transaction with which his transaction was ultimately connected, however many further times removed.  Further, actual participation in the relevant transaction was unnecessary; participation was a matter of deeming.  As the ECJ explained at para 56 of its judgment in Kittel a person who knew or should have known that he was taking part in a fraudulent transaction “must … be regarded as a participant in that fraud” because he” aids the perpetrators of the fraud and becomes their accomplice “(para 57).  And as Moses LJ added at [59] in Mobilx, if the only reasonable explanation for the transaction in which the taxpayer was involved was that it was connected with fraud, and it turned out so to be, he should have known of that fact; “he may properly be regarded as a participant for the reasons explained in Kittel.”  In other words, Mr Cunningham submitted, HMRC did not have to establish that the appellants were actual participants; although HMRC might prove they were participants, it was not a necessary part of Kittel or Mobilx. 

39.  We accept Mr Cunningham’s submission for the reasons he advanced in support of it, and reject that of Mr Pickup.

4. THE CONNECTION OF THE APPELLANTS’ TRANSACTIONS IN CONTRA-TRADING CASES WITH THE FRAUDULENT EVASION OF VAT

40.  It is common ground that in contra-trading cases it is for HMRC to prove that there is a connection between the Appellants’ “clean” transaction chains and the “dirty” chains containing the defaulting traders and the fraudulent evasion of VAT. The Appellants accept that their despatch transactions were connected to the contra-traders’ acquisition transactions in the “clean” chains, so that the issue for us is whether they are further connected to the defaulting traders’ acquisitions in the “dirty” chains.  HMRC maintain that those distinct transaction chains were connected by virtue of the offsetting exercise allegedly undertaken by the contra-traders in the various cells.

42.         At [46] the Chancellor added that the control mechanism, which ensures that not all persons in the chains, whether dirty or clean although connected should be refused the deduction of input tax, lies in the need for either direct participation in the fraud or sufficient knowledge of it.  There is no need, in assessing whether connection with fraud has been made out, for the purchase to be found to have assisted the fraud.

43.         Mr Cunningham further submitted that the evidence in the present case clearly showed that the fraud ran through each transaction chain both individually and collectively; there could realistically be no argument but that the transactions were connected to fraud.

44.         Mr Pickup, acknowledged that the necessary connection between a broker’s deals and the tax losses in a contra-trader’s chains was a question of fact and that was established simply by the tracing of a trader’s deals to a contra-trader

5. PARTICIPATION IN CONTRA-TRADING FRAUD

45.         In Mr Pickup’s submission, whether the Appellants, in their position as the brokers in ‘clean’ transaction chains, were or were not knowing participants in an overall scheme to defraud was a matter of fact for the tribunal to determine. If it concluded that the Appellants’ broker transactions were part of a contra-trading fraud,  that did not necessarily mean that the Appellants were knowing participants in the fraud. The fact of connection did not prove knowledge. It was equally possible for the broker to be an innocent dupe. His knowing participation was not a necessary ingredient of either aspect of the fraud.

46.         We shall deal with Mr Pickup’s submission in that behalf in our conclusion.

6. HMRC’s CASE

47.         In opening, Mr Cunningham explained HMRC’s case as being a “cumulative” one; an accumulation of strikingly uncommercial features, the sum total of which pointed clearly to a connection with fraud, and of Mr Tomlinson knowing of that connection.

48.          HMRC sought to build their case on four cumulative layers:

(1)   to show that the Appellants’ trading was connected to the fraudulent evasion of VAT;

(2)   to show that the trading was part of orchestrated and contrived trading through the medium of cells;

(3)   to show that the movement of money within FCIB bank accounts was controlled and orchestrated; and

(4)   to show that the Appellants’ trading, when viewed contemporaneously, was obviously uncommercial such that they, i.e. Mr Tomlinson, must have known that their trading was connected with fraud.

7. THE FRAUDULENT SCHEMES GENERALLY

49.         A particular feature of HMRC’s case is that many of the transactions with which we are concerned were conducted through cells or schemes that were collectively organised. They contend that 75 of BTS’s 91 transactions were conducted through a scheme identified as Cell 5, 12 were conducted through other cells, and the remaining 4 were non-cell transactions.  In the case of NTS, HMRC maintain that four of its 23 transactions were in cells; the remaining 19 were non-cell.

50.         In relation to their claim that the Appellants were knowing participants in the fraudulent evasion of VAT, HMRC through officers Humphries and Murphy assert that the majority of the transactions under appeal were part of an overall contrived and orchestrated scheme to defraud HMRC in which all participating traders must have played a knowing part.  In cross-examination Mr Humphries did, however, accept that, although unlikely, an innocent trader may have been inserted into the transaction chains.

51.        HMRC maintain that a compelling aspect of evidence of the fraud related to the cells within which traders they allege to be fraudulent contra-traders operated.  They say that transactions within each of the cells they identified followed a pattern distinct to that cell.  They contend that the Appellants’ broker transactions fitted those patterns, in each case following the same pattern as that forming the chains of other brokers operating within the cell, and varied according to the cell in which the transactions were conducted.

52.         The Appellants concede that HMRC’s evidence suggests that there may have been contrivance or artificial trading patterns between certain traders.  But they do not admit the nature and extent of such patterns, and whether they constitute the alleged overall scheme or schemes.  They put HMRC to strict proof of the scheme, its nature and extent, and whether the evidence establishes the Appellants’ knowingly participated in it.

53.         In cross-examination, Mr Tomlinson accepted that, looked at objectively, HMRC’s evidence established that there was an element of fraud in the overall scheme presented and, with hindsight, he said he could see that at least some of his counter parties in the relevant transaction chains must have been involved in the fraudulent evasion of VAT.  He was, however, adamant that he was unaware of any specific counter party having been a knowing party to a fraudulent scheme.  He further claimed that, in the relevant transactions, he had been manipulated or duped by other traders themselves engaged in fraud who must have been traders with whom he engaged in business.  He recognised that there must have been some form of collusion occurring between the supply side and the customer side of the Appellants’ transactions.

54.         Against that background, Mr Cunningham submitted that the case we were required to decide was a very narrow one: were the Appellants duped as they claimed to have been?

55.         The Appellants’ own case on duping was that there was an overall VAT fraud being conducted on their supplier and customer sides with BTS and NTS innocent and unknowing brokers in the middle. However, Mr Pickup did not confine the Appellants’ case to that of duping, but rather extended it to challenges against every, or almost every, aspect of HMRC’s case.

56.         In view of the extent of the evidence we heard and the amount of money at stake in the appeal, we propose to deal with every question raised before us, rather than deal with the appeal solely on the basis that the Appellants were duped.

57.         In cases such as the present one, it is for HMRC to prove in respect of every disputed transaction:

(i)       that there is a tax loss;

(ii)     if so, that tax loss results from the fraudulent evasion of VAT;

(iii)   that if there is fraudulent evasion, the Appellants’ transactions were connected with the fraud; and

(iv)   that if they were connected, the relevant appellant company knew or should have known that its transactions were connected with the fraud.

58.          In relation to the deals involving contra 2 traders, HMRC must also prove that the contra-traders were parties to conspiracies involving the defaulters in their transaction chains.

59.         In relation to the first question we must answer – whether there was a tax loss – as we earlier said, the Appellants admit that, with the benefit of hindsight and knowledge of the results of HMRC’s extended verification programme, the transactions they undertook in the relevant periods of trading fell into HMRC’s template of MTIC trading.

60.         They further admit that in their direct tax loss transaction chains the UK traders acquiring the goods from the EU failed to account for the VAT collected on the sale of the goods on selling them within the UK, so that in each such case there was a tax loss.  They also admit that in the clean chains involving contra-traders, those traders engaged in different, unconnected transactions in which they despatched goods to the EU, which goods had been acquired by traders who had themselves defaulted in accounting to HMRC for the output tax due.

61.          The Appellants also admit that there was fraudulent evasion of VAT in their direct tax loss chains except those of Anfell Traders Ltd, and in the broker chains of the alleged contra-traders. 

62.         As to (iii), connection, the Appellants admit that in their direct tax loss chains their transactions were connected to the fraudulent evasion of VAT

63.         However, they do not admit that, where HMRC allege that their transactions were connected with a tax loss by way of a contra-trader, such a connection is established on the evidence, and put HMRC to strict proof of connection.

64.         The Appellants also do not admit that at the time of entering into their transactions they knew or should have known that their transactions were connected with the fraudulent evasion of VAT, and put HMRC to proof of knowledge or means of knowledge of connection.

65.         The issues for determination are therefore whether HMRC have proved, in the transactions alleged to be connected to a tax loss by way of contra-trading, a connection between the Appellants’ transactions and a fraudulent tax loss and, if so, whether at the time the Appellants entered into those transactions they knew, or should have known, of that connection.  In relation to the direct tax loss chains, the issue for determination is, in the case of Anfell, whether there was a tax loss and, in all the chains, whether at the time the Appellants entered into those transactions they knew, or should have known, of the connection between their transactions and the fraudulent evasion of VAT.

66.         It is common ground that, in determining whether the Appellants knew, or should have known, of the connection between their transactions and the fraudulent evasion of VAT, the relevant state of mind is that of Mr Tomlinson, as director of both Appellants.

67.         It is convenient at this juncture to deal with what might be described as the “Anfell point”, and we proceed to do so.

8. ANFELL TRADERS LTD 

68.         Anfell was the UK acquirer in the deal chains in which NTS’s deals 5-13, 16, and 18-23 took place.  Deals 5-9 were carried out on 13 April 2006, deals 10-13, 16, and 18-20 on 19 April 2006, and deals 21 to 23 on 26 April 2006.

69.         Anfell failed to account for VAT it had charged its customers, and was classified as a defaulting trader.  Consequently, the company was deregistered for VAT on 18 April 2006, i.e. before NTS deals 10-13, 16, 18-20 and 21-23 were carried out.

70.         Although NTS accepted that Anfell was a defaulting trader, it disputed that its, NTS’s, deals occasioned any tax loss that could be connected to the company’s input tax reclaims in respect of the transactions conducted after 18 April 2006.  It claimed that Anfell was deregistered at the time those supplies were made, and thus was unable to charge output tax; the amount purportedly charged as output tax was recoverable as a debt due to the Crown, and not as VAT.

71.         The transactions in question resulted in NTS reclaiming the sum of £1,679,475.

72.         Anfell was originally registered for VAT as a college providing private tuition.  On 6 March 2006 it informed HMRC of various changes to its registration details, a change in director, and that its new business activity was general trading.  It wished to change its VAT registration details, but to continue trading using the same VAT registration number.  Officer Peter Davies visited Anfell’s principal place of business to obtain details of the changes sought and to enquire into information HMRC had obtained indicating that the company was trading in MTIC products.  Having done so, and considered the evidence before him, he was not prepared to accept that Anfell’s revised business activities met the criteria for transfer of a going concern.  Consequently, HMRC deregistered Anfell for VAT.

73.         However, Anfell continued trading and purported to charge VAT on supplies using its old registration number.  It should, of course, have issued invoices without charging VAT.

74.         In three letters to Anfell in the final quarter of 2006, HMRC wrote to it claiming as debts due to the Crown the VAT it had purported to charge on supplies made following its deregistration.

75.         On 20 February 2007 HMRC wrote to Anfell amending its effective deregistration date from 18 April 2006 to 1 May 2006.  They then withdrew the letters referred to in the last preceding paragraph.

76.         Next, HMRC assessed Anfell to VAT covering the deals in deal chains involving NTS.  They made two assessments, one on 1 March 2007 in the sum of £18,279,289, and the other on 16 March 2007 in the sum of £5,344,312. The former covered NTS deals 21, 22 and 23, and the latter the eight NTS deals 10-13, 16, and 18-20.

77.         It was against that factual background that NTS required HMRC to prove that there was the fraudulent evasion of VAT in the Anfell tax loss chains. The legislation we must consider in dealing with the point is to be found in the following sections of and schedules to VATA.

78.         Section 3 of VATA provides that a person is a taxable person while he is, or is required to be, registered under the Act.

79.         Pursuant to Schedule 1, paragraph 13 to VATA, where HMRC are satisfied that a registered person has ceased to be registrable, they may cancel his registration with effect from the day on which he so ceased or from such later date as may be agreed between them and him.  HMRC “shall not cancel a person’s registration unless they are satisfied that it is not a time when that person would be subject to a requirement, or entitled, to be registered under this Act.”

80.         Section 4 of VATA addresses the “scope of VAT on taxable supplies.”  It provides that “VAT shall be charged on any supply of goods … made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.”

81.         Paragraph 5 of Schedule 11 to VATA provides that:

(1)     VAT due from any person shall be recoverable as a debt due to the Crown. 

(2)     Where an invoice shows a supply of goods or services as taking place with VAT chargeable on it, there shall be recoverable from the person who issued the invoice an amount equal to that which is shown on the invoices as VAT or, if VAT is not separately shown, to so much of the amount shown as payable as is to be taken as representing VAT on the supply.

(3)     Sub-paragraph (2) above applies whether or not –

(a)      the invoice is a VAT invoice issued in pursuance of paragraph 2(1) above; or

(b)     the supply shown on the invoice  actually takes or has taken place, or the amount shown as VAT, or any amount of VAT, is or was chargeable on the supply; or

(c)      the person issuing the invoice is a taxable person;

(d)     and any sum recoverable from a person under the sub-paragraph shall, if it is in any case VAT be recoverable as such and shall otherwise be recoverable as a debt due to the Crown.

82.         Mr Pickup submitted that, as Anfell was not registered for VAT at the time of the relevant supplies to NTS, it was not a taxable person under s.3 of VATA, and therefore was not able to charge output tax on its supplies; the amount shown as VAT on Anfell’s invoices was not output tax as defined in s. 24 of VATA, and therefore was not payable to HMRC under s.25 thereof.  There was no tax loss caused to HMRC and, consequently, there could be no connection between NTS’s despatch transactions and the fraudulent evasion of VAT. Para 5 of Schedule 11 to VATA provided that VAT shown on invoices that was not VAT was recoverable as a debt due to the Crown; and it was on that basis that HMRC wrote to Anfell in 2006 notifying it that the amount shown as VAT on the invoices concerned was owed as a debt to the Crown, rather than an amount of VAT for which it was to be assessed.

83.         At the beginning of the hearing, Mr Pickup did, however, concede that all NTS’s direct tax loss claims, including those in which Anfell was involved, traced back to defaults.  That contrasted with a reservation of the Appellants’ position on the Anfell point in previous correspondence.  However, he withdrew the concession in his closing submissions, doing so without warning, saying that the earlier withdrawal of it had been due to his “oversight”.

84.         It is simply not good enough for leading counsel to try to resile from a concession his client has made, particularly where, as here, no notice whatsoever of the intention to do so has been given to the opposing party.  Nevertheless rather than deciding whether NTS can resile from its concession, since we are able quickly and easily to deal with the underlying question, we propose to do so.  We are grateful to Mr Cunningham for having been able without notice to deal with the matter.

85.         In Mr Cunningham’s submission, the ECJ judgment in Kittel clearly indicated that Mr Pickup’s submission should be rejected.  Relevantly, at paras 51 and 52 of its judgment, the ECJ said:

“51 …it is apparent that 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 …

52 … It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.

53… 

54. As the Court has already observed, preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive …” (Mr Cunningham’s emphasis).

86.         Thus Mr Cunningham maintained that the notion that a debt due to the Crown was not caught by the Kittel principle was belied by the Kittel case itself; it was a much wider principle than the extremely technical version Mr Pickup would have us accept. We agree.  Plain reading of the relevant paragraphs of Kittel is sufficient to enable us so to hold.

87.         But we can take further comfort from para 125(2) of the recent judgment of Hildyard J in Edgeskill Ltd v Comrs of Revenue and Customs [2014] UKUT 0038 (TCC), where he said:

“The submission that there was no VAT loss, if the transactions fell out with the scope of VAT for input deduction purposes is untenable.  I accept the Commissioners’ argument that the fact that a defaulting trader’s transaction is outside the scope of VAT does not mean that he has not charged and received an amount of tax due to HM Treasury: there was still a tax loss created by the defaulting traders whether or not their own transactions were within the scope of VAT.”

88.  In our judgment, it is clear on the authorities that there is no merit in Mr Pickup’s submission, and we reject it.  Having done so, it follows that we proceed on the basis that in all NTS’s direct tax loss cases the tax loss was occasioned by a defaulter.

9. THE APPELLANTS’ BACKGROUND 

89.  Before we consider the cell schemes on which HMRC rely, we propose to disclose the Appellants’ background leading to and their involvement in the wholesale trade in mobile phones.  Evidence was given to us by Mr Tomlinson and Mr Edmonds, the latter having been responsible for carrying out most of the Appellants’ due diligence. It took the following form.

90.  Throughout his business life Mr Tomlinson has been engaged in the telecommunications industry. In 1988 he commenced employment with NAS Ltd as general manager of its branch at Hyde. That company’s principal business was the retailing of car accessories, including car phone units.  It was part of Mr Tomlinson’s duties within NAS to ascertain how the mobile phone industry operated. In the process he began to acquire specialist knowledge, attending a number of training courses arranged by, amongst others, Vodafone.

91.  By the early 1990’s NAS had moved its focus to the growing personal mobile phone trade, a leading player in which was Martin Dawes Telecom, an accredited Vodafone distributor. 

92.  In 1993 Mr Tomlinson decided to set up in business on his own account trading in the wholesale distribution of mobile phone handsets. Together with a colleague, Mr Paul Bradshaw, he established BT Specialised Equipment Ltd.  The company initially operated through one retail outlet but later expanded to three shops. 

93.  Mr Tomlinson became an accredited agent of Phones 4U.  As part of his commitment, he was required to sign up about 100 customers per month. He supplemented his income by trading handsets directly to the trade.  BT Specialised Equipment Ltd registered for VAT from 6 March 1994, the business engaging in the “retailing of cellular equipment and in-car accessories”. Mr Tomlinson concentrated on retail sales from the shop while Mr Bradshaw marketed directly to local businesses.  Delays in receipt of commissions from Phones 4U meant that trading in handsets played a larger and larger part in the running of the business.  Once mobile network operators such as Vodafone and Orange opened retail shops in high streets small independent operators such as BT Specialised Equipment Ltd could not compete and many were forced to close.

BTS

94.  As the business of BT Specialised Equipment Ltd expanded it became obvious to Mr Tomlinson that the company would require further capital.  He and Mr Bradshaw decided to approach the Royal Bank of Scotland in Stockport for funds.  The bank offered to help but required security in the form of a mortgage on each director’s home.  Mr Bradshaw was not prepared to enter into such a commitment, leaving Mr Tomlinson to decide how to proceed. Mr Tomlinson then formed BTS, the company being incorporated on 23 May 1996.  Mr Tomlinson remained the company’s director until it went into liquidation in 2007, and his wife was the company secretary. The VAT registration number of BT Specialised Equipment Ltd was transferred to BTS in August 1996.

95.  At about that time Phones 4U moved into direct retailing. The company approached Mr Tomlinson and invited him to become a franchisee selling Vodafone products.  He considered the targets set by the company to be too high and ended the relationship with  Phones 4U to concentrate on trading in mobile phones.

96.  Whilst trade in mobile phones had steadily expanded between 1994 and 1998, the introduction of pay-as-you-go in 1996 had led to a significant increase in demand for phones.  In the same period the retail market became dominated by multiple retailers such as Carphone Warehouse and Phones 4U.  At the same time traders in the wholesale distribution market were in a position to take advantage of the technological developments on handsets. There were opportunities to take advantage of price differentials between markets which Mr Tomlinson sought to take advantage of.

97.  In BTS’s early trading years Mr Tomlinson traded in volumes of between 50 to 100 handsets per transaction.  But as demand for phones grew the volumes in which he traded rose. However, to achieve a reasonable return on capital, he said he found it necessary to trade in larger quantities to ensure the commercial viability of BTS.

98.  Between 1996 and 2002 Mr Tomlinson claimed to have developed a wide range of contacts in the mobile phone market.  He said his method of trading in those years was exactly the same as it was between 2003 and 2006, and as it substantially remains for NTS today, save for the introduction of the reverse charge in 2007.  He also claimed the phones he currently trades not only to have a market within the UK and the EU, but also in the middle and far east.  He did not further develop his claim to continue to trade as he did in earlier years, nor did he produce any corroborative evidence as to that matter.  In those circumstances, we are unwilling to accept his evidence.

99.  On formation, Mr Tomlinson was the sole (100%) shareholder in BTS.  On 28 March 2001 he sold his shares in the company to Blue Moon Holdings Limited (“Blue Moon”).  Mr Tomlinson was at all material times, and remains, the sole owner of the entirety of the issued share capital in Blue Moon.  He and Andrea Tomlinson are respectively the director and secretary of that company.  Blue Moon has three other wholly-owned subsidiary companies, namely Browns Bistro Limited, Scotia Trading Services and NTS.  BTS was wound up on 26 November 2007 on the petition of a creditor, and the company’s VAT registration was cancelled with effect on 6 December 2007.

100.     In relation to period 12/02, BTS made an input tax repayment claim.  It was based on the company having made a standard-rated purchase of phones in the UK, followed by a sale to a customer in the EU in a zero-rated supply.  HMRC submitted its claim to extended verification.  They rejected it on the basis that the sums claimed were not for amounts which were input tax within s.24 VATA, and were not allowable amounts of input tax within s. 26 of VATA.  On a similar basis, HMRC later rejected an input tax repayment claim by BTS for period 11/02.  To recover the input tax BTS had offset against its liability to VAT in periods 12/02 and 11/02, on 26 June 2003 HMRC made an assessment for period 12/02 in the sum of £105,420, and on 9 October 2003 one for period 11/02 in the sum of £93,747.50.

101.     BTS appealed both assessments, claiming HMRC’s decisions to be “incorrect”.  The appeals were subsequently consolidated and, in the consolidated statement of case, HMRC disclosed that the goods the subject of the appeals had been supplied in a series of transactions in the UK, all of which were standard rated for VAT purposes and took place on the same day, until they eventually reached BTS.  They had then been exported to customers in the EU in zero-rated supplies.  Consequently, judged objectively, HMRC claimed the relevant sales and purchases were devoid of economic substance and were not part of any economic activity.

102.     In the cases of Bondhouse Ltd v Commissioners of Customs and Excise (Decision 18100) and Optigen Ltd v Commissioners of Customs and Excise (Decision 18113) two VAT and Duties Tribunals separately held, in circumstances very similar to those in BTS’s case, that HMRC were right; the sales and purchases of phones were devoid of economic substance and were not part of any economic activity.  The tribunals dismissed the traders’ appeals.  Their decisions were appealed to the European Court of Justice (“the ECJ”), and BTS’s appeal was stood over the ECJ judgment.

103.      Mr Tomlinson knew that unless and until the appeals were determined in the company’s favour it would not have the liquidity to trade. It was apparent to him that the “Bond House problem” would not be resolved quickly. Nevertheless, he said he did not want to end his involvement in the mobile phone sector given the experience he had and his range of contacts.  However, for him to continue, since he was reliant upon regular input tax repayments for working capital, he would either have to refinance BTS or, alternatively, re-enter the market with a new company.

104.     He considered using factoring services provided by Barclays Bank. The bank was prepared to advance some 85% of the total value of input tax repayment reclaims to fund further trading but did not wish to continue to fund BTS given the existence of the VAT assessments and the fact that HMRC indicated their intention to offset those assessments and any further repayment claims BTS made against the company’s outstanding corporation tax claim for trading expenses. Consequently, the bank suggested that he form a new company through which to trade.

105.     In the event of providing factoring services Barclays insisted on a one off fee of £20,000 plus VAT and a service charge of 0.6% of the total VAT repayment due in any given month. Mr Tomlinson considered that too high a price to pay and consequently looked for alternative sources of funding. However, at that time the wholesale refusal by HMRC to repay traders’ input tax repayment claims not only in his opinion significantly reduced market volume but also meant that investors and finance houses were reluctant to provide funding. Mr Tomlinson further claimed that it was in the interests of existing traders to fund other traders to promote market liquidity. He therefore discussed potential funding with fellow phone traders including Re Cellular U.K. Limited and Britwap LDA, a Portuguese trader, both having indicated that they would be willing to support a new venture were he minded to embark on one.

106.     Mr Tomlinson agreed with the two companies that each would advance £50,000 should it be necessary to enable a new company to trade. No formal agreement was entered into, Mr Tomlinson claiming that the arrangement was an understanding between established business colleagues that did not require formalisation. The understanding provided Mr Tomlinson with the necessary comfort to permit a new company to begin trading on a limited basis. In the event he found it unnecessary to take up those funding offers.

107.     The Optigen appeal was listed for hearing with that of Bond House. In the Optigen case, as we shall hereafter call the joined case, before the ECJ the Advocate General opined that a taxable person who did not and could not know that a transaction which was connected to fraud and/or lacked any economic substance could not be denied the benefit of the right to deduct. 

108.     On the Advocate General’s opinion being delivered on 16 February 2005, HMRC, recognising that the ECJ would almost certainly follow his opinion, started to make repayment of claims made by traders that had been withheld on a non-economic substance basis, and consented to appeals made to the tribunal being allowed.

109.     On 12 January 2006 the ECJ gave judgment in Optigen, essentially confirming the Advocate General’s opinion. Following release of that judgment, both BTS and NTS were allowed the credits they had taken, the assessments made against them were discharged, and their accounts with HMRC were adjusted accordingly.

110.     We should record that the statements of case prepared for the appeals of both Mr Tomlinson’s companies included full details of how HMRC claimed carousel fraud to work, and set out in full the chains of transactions in which the relevant company was involved.  Consequently, Mr Tomlinson could have been in no doubt as to what MTIC fraud was, how fraudsters operated and the steps necessarily being taken by HMRC to prevent it occurring.

NTS

111.     NTS was incorporated on 10 June 2003 as a wholly owned subsidiary of Blue Moon. Mr Tomlinson claimed that all the events leading to its formation, its rationale and funding were communicated to HMRC in a meeting on 25 September 2003 at the offices of Mr Edmonds. Mr Tomlinson explained to Mr D’Rozario as BTS’s assurance officer that NTS intended to follow the same trading pattern as that for BTS, i.e. to purchase mobile phones from UK suppliers and to export them to EU customers. He also stated that in the future NTS intended to trade with companies in South Korea and Dubai.

112.     At the same meeting Mr Tomlinson and Mr Edmonds discussed with Mr D’Rozario the threat of MTIC fraud within the mobile phone sector and the methods NTS proposed to adopt to minimise the risk of the company becoming involved in it. The methods included the use of a freight forwarder to transport the goods, payment by telegraphic transfer; and NTS operating both a sterling and Euro account to accommodate customers from the Eurozone.  Mr Tomlinson said he intended to insist on 100% IMEI scanning, to arrange insurance through the freight forwarder instructed, and stated that he would sign up to the Memorandum of Understanding which a number of mobile phone wholesalers had entered into with HMRC.

113.     Subsequently, it was claimed that the Appellants had not entered into the Memorandum of Understanding as they had not been provided with a copy of it.  We should also record that, on a date unknown but prior to period with which we are concerned, the Appellants ceased to record the IMEI numbers of phones, Mr Tomlinson saying that they did so as HMRC did not ask to see their records of them and the operation was expensive (about 10p per handset was quoted by Mr Tomlinson).

114.     NTS was registered for VAT on 7 October 2003 its registration being effective from 14 August 2003.

115.     Despite the cash flow difficulties encountered by all mobile phone traders resulting from HMRC acting on the Optigen decision and refusing to meet input tax repayment claims, Mr Tomlinson maintained that the global market for mobiles phones continued to expand.

116.     In 2003 NTS obtained a short term loan of £25,000 from Pacific Communications to enable it to begin trading. It continued to trade throughout the remainder of 2003. During that year BTS was dormant, it having no cash; as we have said, it could not trade until the Optigen decision was effectively reversed.

117.     On 17 December 2003 Mr Edmonds, acting for NTS, requested that the company be allowed to make monthly returns to assist its cash flow since an increasing amount of its trade was exporting to the EU. The request was refused.

118.     For period 02/04 NTS submitted a VAT repayment return to HMRC in the sum of £65,613.15. The return was selected for full verification and on 3 June 2004 HMRC notified Edmonds & Co. that one of the traders NTS had dealt with, Excalibor, had not traded since October 2003. Nevertheless, HMRC’s Redhill office, which was established specifically to deal with the verification of trades in MTIC goods, confirmed that Excalibor’s VAT number was valid at the time of its transaction with NTS.

119.     On 8 July 2004 HMRC concluded their verification of NTS’s 02/04 return and decided that its transactions had “no economic substance”. As a result, on 3 August 2004 they notified it that they were denying its repayment claim. It appealed the decision, but having little working capital to continue trading, and against a background of HMRC having generally denied wholesalers their own repayment claims, trading ground to a halt.  Again the appeal was stood over the decision of the ECJ in Optigen.

120.     Due to “uncertainty” in the wholesale market arising from the tribunal decisions in Optigen and Bond House, NTS did not trade between February and October 2004.  It resumed trading in October 2004, and in the following accounting period its turnover was some £728,500. The company’s turnover gradually increased between February and December 2005, reaching a peak of over £14 million in July before declining towards the end of that year.  Turnover again increased in what Mr Tomlinson maintained was a “vibrant market” early in 2006, but trading was abruptly halted by HMRC’s policy of extended verification and their denial of the input tax repayment claim for period 04/06. Mr Tomlinson claimed that that had a catastrophic effect on the ability of NTS and other traders in the market resulting in their having to stop trading.

121.     Mr Tomlinson claimed to have welcomed the introduction of the reverse charge in June 2007saying that he accepted it as a guarantee that the sector would go forward free from fraud, and seeing it as an opportunity to continue to pursue his business activities. NTS resumed trading in 2007 and has continued to trade in the wholesale mobile phone market, albeit on a very much smaller scale than in 2006, to the present day.

NTS/BTS

122.     Faced with what Mr Tomlinson described as a “dilemma” on the Advocate General’s opinion in Optigen being released, and it becoming apparent to mobile phone traders that the ECJ would reverse the tribunals’ decisions, he claimed to have had to decide whether to dissolve NTS and trade solely through BTS or trade through both companies in tandem. In the event he decided it was more sensible to continue to trade through both companies. He gave his reason for so deciding as that each company was on a different VAT stagger. BTS was on monthly returns whereas NTS was on quarterly returns. By entering NTS into BTS’s deal chains he could improve cash flow. By purchasing from NTS, BTS could remit VAT which NTS then held as output tax to be paid to HMRC no later than one month following its return date – a date that could be four months after a transaction. The presence of NTS in the deal chains gave Mr Tomlinson an opportunity to invest the NTS output tax in further transactions. NTS was always able to pay its output tax, but both NTS and BTS had more working capital available.

Process of extended verification

123.     From 1 May 2006 HMRC greatly extended their verification programme of input tax repayment claims of large numbers of wholesale traders in CPUs and mobile phones, effectively withholding the claims until they had determined the extent to which (if any) they considered their sales had been tainted by MTIC fraud.  BTS submitted VAT returns for the VAT periods 04/06, 05/06 and 06/06, in the usual way; and NTS submitted its VAT return for the quarterly VAT period ending 30 April 2006.  The returns submitted by the Appellants were selected for in-depth verification due to the large repayments sought, and HMRC conducted detailed enquiries into the build-up of the figures on the returns and traced the transactions back through the supply chains.

124.     Following completion of the verification process, being satisfied that the Appellants’ claims were tainted with fraud, HMRC issued the decisions under appeal denying entitlement to the right to deduct input tax.

Funding of the Appellants

125.     As the Appellants were not required to make payment to their suppliers until they had been paid by their customers, the financial risks they faced were minimal.  They did, however, require cash to finance the VAT on goods they purchased and which were then exported in zero-rated supplies.  The finance they required was arranged in the following way.

126.     In May 2005 Mr Tomlinson met representatives of Desert Wing LLC at a trade fair in Dubai.  They expressed an interest in funding the Appellants as established traders in technology stock.  BTS entered into an agreement with Desert Wing whereby it agreed to provide a drawdown facility for BTS’s use in mobile phone trading in return for a percentage return on the monies drawdown.  BTS started to take advantage of the facility in the autumn of 2005. By then Mr Tomlinson believed that BTS would receive repayment of the input tax it had been denied, so that the company resumed trading.  Mr Murphy confirmed that he had seen the loan agreement between the two companies, and we were provided with a schedule of advances and repayments which established a pattern of trading between them. A second agreement, made in May 2006, contained the facility for any sums outstanding under the first agreement to be rolled forward. Desert Wing is a creditor in BTS’s liquidation.

127.     In February and June 2006 BTS was lent sums of £250,000 and £300,000 by Afzal Khan and 3 Cuba Real Estate.  The loans were not subject to interest, but rather to profit sharing calculated in terms of the business operation of BTS.  The agreement with Mr Khan operated on the basis of a cash injection to allow BTS to trade pending repayment of its input tax, and represented a 66:33 division of profits in his favour.

128.     The first loan of £250,000 made on 7 February 2006, was repaid on 5 June 2006, together with a premium of £60,000.  But BTS could not repay the later loan of £300,000 as its repayment claim for period 06/06 was subjected to extended verification.  Subsequently, Mr Khan successfully petitioned for the winding up of BTS on the basis of its failure to repay the loan.

129.     Mr Khan lent a further £250,000 to NTS on 31 March 2006, the monies being paid to the company via a business associate of Mr Tomlinson, one David Pilkington.  Because NTS was denied its right to deduct VAT on its sales to EU customers in 04/06 the loan has not been repaid.  Mr Khan has taken civil proceedings to recover the monies lent against Mr Tomlinson and Mr Pilkington.

10. THE TRADING MODEL OF BTS AND NTS

130.     We then proceed to explain the trading model of BTS and NTS. Mr Tomlinson claimed the market in which the Appellants traded in the appeal period was very competitive and involved a large number of traders.  Implicitly, he claimed that in the Appellants’ dealings time was of the essence.

131.     Mr Tomlinson described himself and Mr Campbell, BTS’s only employee, on a general trading day as being in contact by phone and fax with suppliers to confirm stock availability and the location of goods, and with customers regarding their stock requirements. He said that contact with both suppliers and customers could be initiated by either potential party to a deal, and that negotiations were generally started by telephone.  Prices and product descriptions quoted by potential counter parties were recorded on a whiteboard in the office and on sheets of paper.  Mr Tomlinson added that attached to the whiteboard was a list of traders with which the appellant companies were prepared to trade, they having met his due diligence criteria.  No corroborative evidence was adduced to confirm that position. He further added that the whiteboard was updated throughout the day to show the current position as to availability of stock and customers’ requirements.  His companies “usually traded in the latest products”, and sought to keep up to date with which products were attracting the most interest.

132.     Mr Cunningham challenged Mr Tomlinson’s evidence in that regard as “rubbish”, observing that on the latter’s own admission fraudsters successfully manipulated him on every occasion.  The cross-examination, critically in our judgment, then proceeded as follows:

“C. Where is the evidence to support this?  Where are your jottings?  Where are the suppliers and customers who would testify to this description of your trading?

T. There are no jottings.  We didn’t keep any records.  We weren’t required to keep any jottings or post-it notes of negotiations.  I didn’t take pictures of our dry whiteboard on a daily basis to show.

C. No, there is nothing, is there … There is your say so and nothing else at all to confirm that this all went on.

T. There is my honesty, Mr Cunningham.”

133.     We accept Mr Tomlinson’s admissions as to not keeping records, jottings and notes of negotiations as fact. We shall deal with the matter of Mr Tomlinson’s honesty in some detail later, and for the present confine ourselves carefully to note that he himself raised it as central to the Appellants’ case

134.     A little later in cross-examination, following a claim by Mr Tomlinson to have been “a victim” in that he had been duped, the exchange again in our opinion significantly, continued:

“C. Can you think of any reason why a successful and clever fraudster would allow a free agent into his fraud?

…

T. I can’t think of any reason, no.”

135.     The Appellants required their suppliers to provide a suppliers’ declaration form saying that they had purchased the phones they were selling. Mr Tomlinson provided very little information about the way in which he and Mr Campbell went about identifying possible purchases and sales, of reaching agreement with suppliers and customers, and of creating and processing the related documentation. Whilst a lack of absence of evidence is not conclusive, we must record that the Appellants produced nothing to counter HMRC’s contention that they were trading in contrived markets.

136.     The Appellants undertook “back-to-back” trades, Mr Tomlinson implicitly claiming that expression to include not only consignments disposed of as a whole but also those split on sale but sold on a single day.  He maintained that such dealing protected his companies in that in customer led deals it agreed no purchases until corresponding sales were agreed, and in supplier led ones arranged no sales until supplies had been secured.  Thus there was no possibility of either company being left with stock on a deal being completed.

137.     Mr Tomlinson also contended that periodically Nokia reduced the prices of certain of its products, and issued a credit note reflecting any price reduction to each of its agents holding the particular model(s) concerned.  As a result of his extensive experience of the mobile phone market, he said it was unnecessary for him to record emerging information; he could take advantage of such situations and predict movements within the market.  We were presented with no records to confirm his evidence as to his taking advantage of emerging information and, in its absence, are not prepared to accept it.

138.     Mr Tomlinson also claimed that where more than one deal was available to him he would consider a number of factors before deciding which deal to carry out.  Perhaps the most important was the profit that could be obtained.  Another factor he said he would take into account was the situation of the goods, i.e. where they were held and by whom.  BTS and NTS had accounts with some freight forwarders but not all, and he did not wish to incur the expense of moving stock from one freight forwarder to another, so that if a deal were on offer including stock at a freight forwarder with which the Appellants had an account it would be preferred to one involving stock at a forwarder not so qualifying.  We might add that since in every transaction with which we are concerned whilst in the UK stock remained with the UK freight forwarder holding it for the trader identified as the head of the chain reconstructed by HMRC, i.e. the UK acquirer, Mr Tomlinson’s claim was irrelevant.

139.     The Appellants never held stock themselves, nor did Mr Tomlinson, Mr Campbell or Mr Edmonds ever personally inspect stock they had agreed to purchase.

140.     Mr Tomlinson claimed further to take into account the identity of the freight forwarder nominated by a customer, and said that it was important whether there was an agreement in place between the UK freight forwarder holding stock and the EU freight forwarder nominated by the customer.  He did not explain what evidence he sought as to the existence of such an agreement; certainly none was produced to us and in the absence of any such agreement, we reject the claim.

141.     The only documents put before us from the freight forwarders holding stock whilst phones were in the UK were some inspection reports on the stock, invoices for inspection of it and documents relating to its transport to destinations in the EU.  We thus had no confirmation to the Appellants that the forwarders held the stock being traded.

142.     Nor were we provided with any instructions to the Appellants from suppliers or their freight forwarders.

11. MR TOMLINSON’S KNOWLEDGE OF MTIC FRAUD

143.     HMRC contend that Mr Tomlinson contemporaneously knew that the only reasonable explanation for his trading was fraud.  They rely for the purpose on a number of factors.

144.     By letter of 22 January 2002 HMRC informed Mr Tomlinson that 13 of his suppliers had to that date been identified as missing traders and had, between them, failed to account to HMRC for VAT in excess of £15 million. 

145.     Mr Tomlinson was informed that MTIC fraud had infected BTS’s trading. Between 11 March 2002 and 10 March 2006 HMRC sent it 14 veto letters.  Each letter stated that either a UK supplier or EU customer BTS had previously validated with HMRC Redhill had been removed from the VAT register.

146.     On 26 February 2003, Mr D’Rozario, as assurance officer for BTS, held a meeting with Mr Tomlinson and Mr Edmonds to discuss BTS’s VAT repayment claims for periods 11/02 and 12/02.  At that meeting Mr Edmonds said that he thought HMRC could perform better in undertaking more appropriate checks.  Mr D'Rozario recorded in his progress log “… it is the trader’s responsibility to undertake all due diligence checks.”  The question of BTS providing security for the tax on its future supplies was discussed, but Mr Tomlinson said that it would cost the company approximately £1 million and was therefore not feasible.  It would appear that HMRC did not pursue the question of provision for security.

147.     On 25 September 2003 Mr D’Rozario paid a pre-registration visit to NTS.  During it Mr Tomlinson undertook to maintain records of all IMEI numbers of telephones in which BTS and NTS traded, and to enter into the Memorandum of Understanding that a number of major traders in the wholesale phone market had entered into with HMRC. Mr D’Rozario noted that Mr Tomlinson was provided with a copy of Public Notice 726. On a date not disclosed to us, but admitted by Mr Tomlinson to have been before the appeal period, the Appellants ceased to record the IMEI numbers of the phones in which they dealt.

148.     Mr Tomlinson acknowledged having received Public Notice 726 in September 2003 and having read it.  That Notice was published in August 2003.  It concerns the operation of s.77A VATA and explains the ability that section gives HMRC to impose liability on a trader receiving supplies for the VAT payable by a supplier if the recipient knew, or had the means of knowing, that the supplier or any previous supplier had defaulted in the payment of VAT.

150.     In evidence, Mr Tomlinson claimed that as a trader he had knowledge only of his own suppliers and customers; he knew no one above or below them in the deal chains.  He accepted that Notice 726, which he claimed to have read and understood, required him to make a judgment on the integrity of the whole supply chain, but said that he could make a judgment only on his own counterparties; he “had to believe” that his counterparties were doing their own due diligence on their own counterparties and that correct behaviour was taking place throughout each chain.  That, he maintained, amounted to the Appellants taking reasonable steps to ensure that they were not involved in MTIC fraud.

151.     Mr Tomlinson said he understood that Notice 726 provided for the possibility of the Appellants being jointly and severally liable for VAT on previous supplies. He further admitted that the import of goods from the EU formed the first part of the MTIC template, and that wholesaling of goods back to the EU formed the second part of the template

152.     Notwithstanding Mr Tomlinson’s familiarity with Notice 726, he claimed not to have realised that in selling on phones to customers in the EU, he was completing the MTIC model.

153.     We were presented with a significant volume of material showing the due diligence said to have been carried out by the Appellants on their customers.  We shall later deal with that material. However, we record that they carried out no due diligence checks on their suppliers, the UK freight forwarders who held goods whilst they were in the UK, or the EU freight forwarders to whom the goods were shipped on their being sold to EU customers.

Discussion

154.      It is plain, indeed we regard the evidence as overwhelming, that throughout the periods concerned in the appeal the Appellants in the form of Mr Tomlinson knew that there was fraud in the wholesale mobile phone industry, and that the fraud involved an importer of phones defaulting on its VAT liability on selling the phones to another UK trader.  He also knew that the fraud was fed by the sale of phones in a chain of transactions within the UK and by the export by brokers such as the Appellants.  He was further aware of the possibility that their purchases could be connected to a fraud committed by a trader who was not the Appellants immediate supplier.  He had been informed that the fraud was widespread, involved very large sums of money, and that HMRC were extremely concerned about it.

155.     We are simply unable to accept his claim to have “had to believe” that the Appellants’ counterparties in deals were doing their own due diligence: the claim completely ignores all the advice offered in Notice 726.

156.     Whilst Mr Tomlinson could claim that the information he had was insufficient for him to conclude that every transaction the Appellants entered into was connected with fraud, he must have known that the information he had indicated that fraud might be present in each one, and that he should consider that possibility in the forefront of any unusual factors that might emerge in their transactions.

157.     That HMRC did not apply s. 77A could not be said to have afforded the Appellants any comfort, for the operation of that section relies on similar factual conclusions before HMRC’s reliance on it.  Delays were only to be expected before the section was invoked.

12. THE APPELLANTS’ TRADING IN THE APPEAL PERIODS

BTS

Period 04/06

158.     In period 04/06, BTS carried out 10 broker deals, of which 9 are under appeal.  The deal sheets relating to those 9 deals appear in Annex H of the CD Rom, and pursuant to the Direction are deemed to be evidence of the truth of their contents and agreed.

159.     Four of the deals appealed led directly back to the defaulter C&B (deal sheets at Annex C of the CD rom).  Pursuant to the Direction the deal sheets are deemed to be evidence of the truth of their contents and agreed by BTS. Evidence of the tax loss in those chains was provided by Graham Taylor [WS9/114].

160.     The remaining five deals led back to fraudulent tax losses through chains leading back to contra-traders. The contra-traders identified by HMRC were Svenson Commodities (4 deals) (deal sheets at Annex D) and Powerstrip (1 deal) (deal sheets also at Annex D).  Those traders entered into transactions which led directly back to tax losses.  The traders also entered into transactions which led back to tax losses through other contra-traders. HMRC maintain that those deals were part of a broader scheme to defraud the revenue.  That scheme was referred to in the documents as “Cell 5”. The scheme, and the relevant tax losses, are discussed below under that heading.

161.     BTS’s final broker deal in the period was a purchase from an EU supplier and sale to an EU customer, which, pursuant to the triangulation rules, was not liable to UK VAT.  As such, no denial was issued in relation to that deal, and it is not under appeal.

Period 05/06 

162.     In period 05/06, BTS carried out 45 deals, of which 41 are under appeal.  The deal sheets relating to those 41 deals also appear in Annex H of the CD Rom, and pursuant to the Direction are deemed to be evidence of the truth of their contents and agreed.

163.     Thirty eight of the 41 appealed deals were broker deals that led back to tax losses through Svenson Commodities (5 deals), Powerstrip (10 deals), David Jacobs (14 deals) (deal sheets at Annex D), Selectwelcome (5 deals) (deal sheets also at Annex D) and TC Catering Supplies Limited (“TCCS”) (4 deals) (deal sheets at Annex F).  HMRC maintain that those transactions were within the Cell 5 scheme, and again the tax losses are dealt with in more detail below under that heading.

164.     Three were broker deals that traced back to the fraudulent defaulter Eutex Limited (“Eutex”) (deal sheets at Annex E).  Evidence of the tax loss was provided by Andrew Siddle [WS9/ 103].

165.     The remaining 4 deals were acquisition deals.  As such, no denial was issued in relation to them and the deals were not appealed.  The effect of those deals was to reduce the VAT claim in relation to the 3 broker deals mentioned in the last preceding paragraph.  HMRC maintain that BTS acted as a contra-trader in relation to those deals, and that they formed part of a broader scheme to defraud the revenue – a scheme distinct from Cell 5, and which is also dealt with in more detail below.

Period 06/06

166.     BTS carried out 41 deals in period 06/06, all of which are under appeal.  The deal sheets relating to them again appear in Annex H of the CD Rom, and pursuant to the Direction are deemed to be evidence of the truth of their contents and agreed.  All of the deals traced back to fraudulent defaulters through alleged contra-traders.

167.     Thirty-two were broker deals which led back to tax losses through Powerstrip (15 deals) and TCCS (17 deals) (deal sheets at Annex G).  HMRC maintain that those transactions were within the Cell 5 scheme, and the tax losses are dealt with in detail below under that heading.

168.     The remaining 9 deals were also broker deals that led back to tax losses. They did so through the alleged contra-traders Epinx (5 deals) and Kwality (4 deals) (deal sheets of both companies at Annex H).  Those 9 deals were said to form part of an overall scheme to defraud the public revenue which was separate from Cell 5, and which HMRC say operated with the knowing participation of all involved, including BTS.  Beside Epinx and Kwality, this scheme also involved the contra-traders A-Z Mobile Accessories Ltd, Intertrade Worldwide Limited, S&R International ltd, Waterfire Limited, Highfield Distribution (UK) Limited t/a Celex UK, Prime Telecom Limited, Skywell UK Limited and Worldwide Distribution (NW) Limited.  HMRC further say that BTS also acted as a contra-trader within the scheme, carrying out both broker and acquisition transactions.  The contra-traders purchased from one of 10 EU suppliers.  The goods were sold through chains of UK traders before being exported by one of a group of 24 UK traders, including BTS, to one of a group of 11 EU customers, of which 9 were among the 10 EU suppliers from whom the contra-traders purchased. 

NTS

169.     In the three month accounting period 04/06 NTS carried out 57 deals, of which 23 were broker deals. All 23 broker deals are under appeal.

170.     Sixteen of those 23 deals led directly back to the defaulter Anfell.  Evidence of the tax loss was provided by Peter Davies [WS14/1].  Although that tax loss was not admitted by NTS, it will be recalled that we earlier held the loss to be one of VAT.

171.     Three deals led directly back to Midwest, a company admitted by NTS to be a fraudulent defaulter.  Evidence of the tax loss was given by officer Matthew Bycroft [WS15/39].

172.     The remaining 4 broker deals led back to tax losses through the alleged contra-trader First Touch. Evidence in relation to that company was given by officer Lynda Baker [WS13/1].  The movement of goods in relation to those four deals was circular.  In the relevant period, First Touch entered into 10 transactions which led directly back to tax losses.  Evidence of the tax losses was given by officers Farzana Malik [WS15/5], Pamela Banks [WS15/1] and Rebecca Jackson [WS14/15]. The tax losses are shown in the deal sheets within Annex K if the CD rom.  Yet again, pursuant to the Direction, the deal sheets are deemed to be evidence of the truth of their contents and agreed by NTS. HMRC maintain that the deals leading back to First Touch were part of a broader scheme to defraud the revenue.  The scheme is described in the evidence of Nigel Humphries, and a diagram showing an overview of the scheme appears at E3/26.

173.     Of the remaining 34 deals carried out by NTS in period 04/06, 32 were buffer deals all of which traced back to a fraudulent tax loss.  The other 2 deals were acquisitions from Pol Comm, each of which was carried out the day after NTS engaged in broker deals where it sold to Pol Comm, and which involved a circular movement of goods tracing back to Pol Comm.

174.     HMRC say that NTS’s transactions in 07/06 were similarly connected with fraud.  In that period, NTS was involved in 38 deals.  In 34 deals, NTS’s customer was BTS.  In 3 deals, NTS’s customer was David Jacobs and in one deal its customer was Megantic Services Limited.  Three deals traced directly back to tax losses.  The remaining deals were said to be contra-trading.

175.     Having broken down the Appellants’ transactions by accounting period, we then proceed to allocate them to the groups to which HMRC consider them to belong. 

BTS

176.     In the case of BTS, HMRC maintain that its sales in the appeal period fell into the following 4 groups:

1.             its April  2006 deals 2-5 were direct tax loss deals. As we have said, all took place on 27 April 2006 and involved as UK acquirer the defaulter C&B.  Thereafter the phones C&B bought in each consignment passed through the hands of different chains of buffers before in every case reaching NTS as the final buffer.  NTS proceeded to sell them to BTS, taking a nominal profit or commission on each phone.  BTS then sold all the phones it had bought to Planetmania.  By way of example we set out in tabular form the transactions in April deal chain 2, each invoice relating to 3750 Nokia 8800 phones:

*Defaulter

2.             its April 2006 deals 6-10, May deals 5-31 and 35-45, and June deals 1-15 and 25-41 all involved companies identified by HMRC as contra-traders in Cell 5.  In many of the transactions the UK acquirer of the goods sold them direct to NTS as buffer, which in turn sold them on to BTS as broker.  In others of the transactions the goods passed from the UK acquirer through a single buffer (or in one case two buffers) before reaching NTS.  Later in our decision we shall carry out an analysis of deals in which BTS divided consignments it had purchased into two or three smaller consignments before onward sale, which we describe as “split deals”.  Such deals covered 63 of the 75 BTS deals in Cell 5.  In that analysis we shall show that BTS sold to but six EU traders. We take April deal 6 as the example for this group of transactions, each invoice relating to 2100 Nokia 8801 phones. The table therefor reads:

177.     The two categories into which NTS’s transactions fell were the following:

1.             deals 1-4 which took place on 30 March 2006 and were said by HMRC to be in the First Touch contra-trading scheme.  In each case the EU supplier was Pol Comm of Poland.  It sold to First Touch itself.  First Touch sold to NTS which in turn sold to Opal 53 of Germany before the goods were returned to Pol Comm.  The table for NTS deal 1, all the invoices relating to 2000 Nokia 9500 phones, reads as follows:

2.             deals 5-23 which were non-cell direct tax loss deals, the FCIB evidence showing them as being financed by Multimode.  In 14 of those deals the original EU supplier was Multimode.  In 17 of the deals the UK acquirer was Anfell, and in the remaining cases Midwest.  Various buffers were then involved in the chains of transactions, some chains running to 8 buffers before NTS was supplied as broker.  NTS had four EU customers: East Telecom of Estonia, Opal 53 of Germany, Sigma Sixty of Holland and CIDP of France.  They made onward supplies to Pol Comm of Poland, and to East Telecom where that company was not the immediate EU customer.  The example we have chosen to illustrate this group of transactions is the chain of which NTS deal 5 forms part, all the invoices dealing with 3400 Nokia 9300I phones. The table reads as follows:

13. THE CELL SCHEMES

178.     We then turn to consider the various cell schemes. The deal chains identified by Mr Humphries were set out in diagrammatic form on deal sheets he and other officers of HMRC prepared.

179.     As part of the overall scheme to defraud the Revenue, Mr Humphries identified what he claimed to be four contra-trading cells: Cell 5, Cell 1, Cell 10 and the “First Touch Scheme”.  He considered the overall scheme to include all of the acquisition and despatch transactions flowing through the contra-traders involved. He proceeded on the basis that those cells were composed of all the traders involved in the contra-traders’ acquisition chains, and in their despatch chains, i.e. the sources of the tax loss.  Where different cells were inter-linked, as he considered to be the case of two-tier contra-trading undertaken by Cells 5 and 1, or the linking of Cells 5 and 10, Mr Humphries opined that the traders conspired together.  He claimed it obvious that a particular trader could have operated in more than one scheme.  Looking at the FCIB evidence, i.e. going beyond the transaction information, Mr Humphries said that other companies, which did not appear in the transactions themselves, were parties to the overall scheme.

180.     In relation to each cell, the deal sheets Mr Humphries produced showed so far as HMRC had been able to trace them the chains of sales of mobile phones made by EU traders through a series of UK buffer traders and broker traders on to a group of EU customers which were mostly the same as, or were connected to, the EU suppliers. In asserting that the Appellants were knowing parties in the alleged overall scheme to defraud, Mr Humphries took no account of the Appellants’ due diligence on their counter parties.

181.     By virtue of the Direction the deal sheets for all the chains of transactions with which we are concerned are agreed to be accepted by the Appellants, and thus their contents could not be disputed. Nor was there any dispute that each supplier had accounted for VAT on its sales to one of the Appellants.  In the deal sheets, by enquiry of other officers and HMRC’s own records, mainly those on computer, HMRC traced the chains of transactions back several steps from the broker concerned until they reached either a defaulting trader or a contra-trader.

182.     The deal sheets showed the transactions between the various traders who had dealt with the goods before they were sold to the Appellants, and the Appellants’ customers.  In the majority of cases involving BTS, the company split the consignments it purchased before selling part of each to one customer, and the remainder to one or two others.  In most of BTS’s remaining cases there was a simple sequence of transactions, each trader buying a consignment of goods and selling it as a whole to its EU customer.  The four cases not falling within the two categories we have described consisted in BTS buying two consignments and combining them in a single sale.  As far as NTS’s transactions were concerned, each one consisted of a sequence of transactions in a consignment of goods which it sold unbroken to its EU customer.

183.     The evidence of the assurance officers for the traders with which the Appellants dealt was largely accepted, so that we took oral evidence from but few of them.  The evidence as a whole revealed that a number of the Appellants’ counter parties had managed to establish a high turnover, in some cases running to millions of pounds a month, within a short time of setting up in business; and some had carried on, and been registered for VAT in respect of, quite different types of classes of business from mobile phone sales.  Some trading companies, the Appellants included, had a single director, and but one or two employees.  In some cases, HMRC were able to establish that third party payments had been made, that is payments to parties who were not part of an invoice chain.

184.     All the transactions took place at speed between trading companies with little capital, in chains which bore a remarkable similarity to each other, and which never contained authorised agents, retailers or OEMs.  Further, every chain revealed an apparent absence of any trading risk; customers were required to pay for stock purchased only on themselves being paid by their own customers.

185.     In both the BTS and NTS transactions involving sales of unbroken consignments of phones, and in the consignments that BTS split prior to sale, if not within a single day then certainly within 2 days the consignments entered the UK, whilst there were traded by several UK dealers, and were then re-exported. 

186.     We were presented with ample evidence from which to infer in relation to the direct tax loss chains of transactions there was either fraudulent default or from which we could draw an inference of fraud.  We infer that there was a tax loss in each such chain.

187.     We accept HMRC’s contention that, whilst in contra-trading a clean chain does not lead to a tax loss, it is designed to conceal a dirty chain, and make the offsetting of the input tax incurred by the contra-trader in that chain harder to detect and counter. The clean chains identified by Mr Humphries bore the same characteristics as the dirty chains; goods arriving in the UK early in the day, rapidly changing hands, and leaving by the end of it.  The contra-traders sought to offset large output tax liabilities against closely matching input tax credits.

188.     Mr Humphries reviewed the deal sheets of the identified contra-traders supplying BTS in April, May and June 2006. He did so using information prepared by other officers, supplied by other traders, and stored in the HMRC VAT electronic folder (“EF”) system.  In the process he examined various chains of transactions of EU suppliers, through UK traders to EU customers, noting similarities in the trading patterns of the contra-traders concerned, and those of their customers.  He then compiled charts of the completed transaction chains on the deal sheets in EF which showed the flow of goods from the EU suppliers through the contra-traders and any buffer traders involved to the various brokers and their EU customers.

189.     Mr Humphries identified six contra-traders in the scheme he referred to as Cell 5. The majority of BTS’s acquisitions led to those traders. 

190.     The remaining two contra-traders identified by Mr Humphries whose acquisitions led to BTS were Epinx and Kwality.  To Mr Humphries those two companies appeared to be operating as part of a separate group of six contra-traders. The other four companies in that group were A-Z Mobile Accessories Ltd, Intertrade Worldwide Ltd, S&R International Ltd and Waterfire Ltd. Although the transactions of those other four companies did not lead to the broker deals of BTS, Mr Humphries included them in his evidence as they appeared to him to form part of a single overall scheme involving all six companies.  Mr Humphries referred to those six companies as forming Cell 10.

191.    In the case of NTS, Mr Humphries identified a single contra-trader, First Touch.

14. THE CELLS

Cell 5

192.    Cell 5 was made up of non-tax loss chains and tax loss chains, and we proceed to consider it in that way.

a) Non-tax loss chains (clean chains)

193.     In the clean chains Mr Humphries found that in the quarter ended 30 June 2006 goods were traded in a circle from a very small group of traders, through a number of companies, and back to the original small group of traders.  He identified six contra-traders who operated within the scheme, Powerstrip, David Jacobs, Svenson Commodities, TCCS, Svenson Worldwide Limited (“Svenson Worldwide”) and Selectwelcome Limited (“Selectwelcome”).  They had 8 EU suppliers. The goods then passed through 29 buffer traders, including NTS, and 16 broker traders, including BTS, before arriving at a group of 23 EU customers which included the 8 EU suppliers. Three of the contra-traders, Svenson Commodities, Powerstrip and David Jacobs, also appeared as brokers in some of the deals. Further, Svenson Commodities also appeared as a buffer. Mr Humphries produced a diagrammatic overview of the scheme which appeared as Exhibit E3/1.  That diagram appears as NH001 in Annex F to the CD Rom and, pursuant to the Direction, is admissible as evidence of the truth of its contents and is deemed to be agreed by BTS.

194.     The diagram and analysis are based on further material also in evidence before us.  Pursuant to the Direction, excel spreadsheets RM1 and RM2, which form part of Annex C to the CD Rom, are also admissible as evidence of the truth of their contents and are deemed to be agreed by BTS.  Those spreadsheets summarise deal chains in terms of, inter alia, the identity of the broker, the customer and the acquirer.  Whilst they have been updated by Mr Murphy, as set out in his witness statement WS1/71, we accept that the updating has no material impact on the patterns identified by Mr Humphries.

195.     In every case where transaction information was held by HMRC identifying the supplier of those EU suppliers (53.8%), it showed the suppliers were themselves supplied by the eventual EU customers of the goods, namely Parasail Distribution Spain SL (“Parasail”) (Spain), or Comica Handelsondering BV (“Comica”) (Holland) or other entities connected to those two companies in terms of trading and money movements, namely SM Systems, a BVI company, and Forex Handelgesellschaft GmbH (“Forex”) (Germany).  That evidence is contained in the statements of Mr Humphries beginning at WS1/1. Both Parasail and Comica were companies owned and managed by a German national, Adil Kamran.

196.     In every case where transaction information was held by HMRC identifying the customer of the EU customers (67.4% of the total of the transactions), the EU customers made onward sales to Parasail, Comica and Negresco (Spain), another of Mr Kamran’s companies, the goods thus having both originated and ended with companies run by him. Again the evidence is contained in Mr Humphries’ statements.

197.     Mr Humphries claimed that circularity of goods was thus demonstrated; the goods sold by Mr Kamran’s companies returned to them having passed through 58 UK and EU companies, and Mr Kamran’s companies purchased by them for higher prices shortly after they had sold them.  Mr Humphries added that the FCIB evidence showed circularity of money flows, thus showing monetary contrivance as well as goods contrivance. 

198.     He prepared a series of charts showing details of the transactions carried out by the various companies referred to in the penultimate paragraph, together with a chart summarising the EU suppliers, UK contra-traders, buffer traders, broker traders and EU customers involved in their deal chains.

199.     Mr Humphries identified 30 buffer traders in Cell 5, 10 of whom also appeared in deal chains as brokers.

200.     On a chart exhibit NH023, Mr Humphries identified 19 defaulting traders in the buffer and broker deals of 4 of the alleged contra-traders.  He claimed that 10 of the defaulters were common to all 4, and 8 of the remainder common to 2 or 3. That exhibit was selected by Mr Pickup for detailed cross-examination, the content whereof we shall shortly consider.

201.     Mr Humphries separated the EU customers in those transaction chains into two main groups. With the exception of 5 deals, the group of customers used appeared to him to depend on the identity of the defaulter.  Since one of those groups contained the same EU customers as those of the brokers who sourced goods from those contra-traders, he maintained that there was a link between the acquisition deals and the tax loss undertaken by the contra-traders.

202.     There were 18 broker traders, 13 of whom appeared as either contra-traders or buffers in some of the deals.  The UK brokers had many customers in common.

203.     There were 23 EU customers overall – in Mr Humphries’ judgment, a very small customer base for 18 different UK traders, and, as previously stated, 8 of the customers were also suppliers to the contra-traders in that series of transactions.

204.     Mr Humphries traced 17 of Selectwelcome’s 24 acquisition deals in May 2006 back beyond the immediate EU supplier, and 9 of them forward beyond the immediate EU customer.  All of the deals showed the original supplier to be either Parasail or Comica. Those two companies also appeared as customers in the 9 deals traced forward.

205.     He found the same pattern to exist in Selectwelcome’s June 2006 acquisition transactions. Seventeen of 28 acquisitions were traced back beyond the immediate EU supplier to Parasail, Comica, or Forex.  Twenty-four of the 28 acquisitions were traced forward beyond the immediate EU customer to Parasail, Comica or Forex.

206.     Initially Mr Humphries considered it notable that in chains where further tracing had been carried out, goods originating with Forex went to Parasail or Comica, those originating with Comica went to Forex or Parasail, and those originating with Parasail went to Comica. Subsequently he found chains in which the goods returned to the trader from whom they originated.

207.     Mr Humphries further traced 8 of David Jacobs acquisitions, and 8 of Svenson Commodities acquisitions forward to either Comica or Parasail. Two of Svenson Commodities transactions he traced back to Parasail.  Although the transactions in question were few in number, Mr Humphries maintained that the pattern of trading they indicated extended to transaction chains other than those of  Selectwelcome. 

208.     Mr Humphries examined HMRC’s EF system for the companies Base Interactive and Intangible Media SL.  Their files contained information supplied by the fiscal authorities in the relevant EU Member States under mutual assistance provisions. Five files contained transaction information further extending the pattern of supplies involving Parasail, Comica and Forex.

209.     The 11 pages of transaction information held in the EF system for Adobcom Equipamentos Electronicos Unipessoal LDA (“Adobcom”), a Portuguese supplier in Cell 5, showed that in the period between 10 April 2006 and 30 June 2006 inclusive it made 146 sales to UK acquirers – 24 to David Jacobs, 42 to Powerstrip, 24 to Svenson Commodities, and 26 to TCCS.  The goods in those transactions originated from Parasail in 78 deals, Comica in 33 deals, and Forex in 35 deals.

210.     In the same period, Adobcom made 10 purchases from UK traders, 4 from Megantic Services, 4 from David Jacobs, 1 from Evenmore and 1 from Powerstrip.  The goods involved in those transactions were sold to Parasail in 5 deals, to Comica in 4 deals, and to BRD Werburg und Handels GmbH (“BRD”) in 1 deal.

211.     Adobcom was not registered for VAT in Portugal until 28 March 2006; it was deregistered on 22 November 2007 on the basis that it was a “non-declaring conduit company.”

212.     The transaction information in the EF file for Hilton Moore Ltd (“Hilton Moore”) showed that, in the period between 25 April 2006 and 30 June 2006 inclusive, that company made 127 purchases of goods, 113 of which were from companies identified as being within Cell 5. 

213.     In the 32 pages of information in the EF file for Opal 53 Gmbh (“Opal 53”), a German customer of BTS in Cell 5, Mr Humphries noted that in the period between 15 March 2006 and 30 June 2006 the record showed the company as having made 31 purchases from the UK traders Megantic Services, Base Interactive, Cellular Solutions, Fonecode and BTS.  In 22 of the onward sales the goods were sold to Parasail; and in the remaining 9 deals to Comica.

214.     In the same period, the records showed that where goods were purchased from suppliers within Cell 5, they were sold mainly to customers within the Cell; and where goods were purchased from suppliers outside Cell 5, they were sold to customers outside the Cell.

215.     The 22 pages of information forming the EF file for IMD Trade Ltd (“IMD”) showed that in the period to 30 June 2006 it made 21 purchases from Megantic Services, Tojen, Evenmore, David Jacobs and Base Interactive.  The goods concerned were sold to BRD (2 deals), Parasail (8 deals), Comica (8 deals), and Forex (3 deals).

216.     Transaction information for Compagnie Internationale De Paris (“CIDP”) provided by the French authorities, as collated by officer Downes, showed 34 purchase and sale invoices.  The 34 purchases were made from Megantic Services, BTS, Base Interactive, Evenmore and Tojen.  The goods in those deals were all sold to BRD (98 deals), Comica (8 deals), Forex (6 deals) and Parasail (12 deals).

217.     Mr Humphries maintained that the EF evidence enabled him to claim: “Taking the [Cell 5] … transactions into account, almost all the transactions which can be further traced involve Parasail, Comica and Forex.  The remainder involved BRD which is known to buy from Parasail and Comica, and to sell to Parasail.”

218.     From the EF system for Parasail and Comica, Mr Humphries was able to confirm that they were Kamran companies.  Mr Humphries also confirmed Negresco to be a further entity in the “Kamran empire”. He explained that Negresco appeared in some of the payment chains relating to transactions in point in the appeals, but not in the transaction, i.e. invoice, chains.

219.     In a report provided by the Spanish fiscal authorities under mutual assistance dated 16 March 2007, Parasail was said to have been acting as a “triangular operator”, to have gone missing having not really existed as a normal Spanish trader, and to have been “used for fraud purposes by foreign people”.  Consequently, it was deregistered for “false trading” in September 2006.  And, in a report prepared by the Dutch fiscal authorities dated 21 November 2007 and obtained by HMRC, they were informed that Comica had been deregistered in December 2006 “because the company was suspected to be involved with carousel fraud”.

220.     Mr Humphries maintained that there was evidence of a further link between the acquisition transactions of the contra-traders in Cell 5 and their tax loss transactions to be found in sales by Parasail to three Cypriot companies, Flash Tech, Destonia and Leriant Trading, and in sales by Comica to Destonia. Flash Tech appeared as the supplier to UK defaulter Stockmart Limited in Powerstrip’s April 2006 deal 42; and Leriant Trading appeared as supplier to UK defaulters in 23 of Selectwelcome’s June 2006 deals – 7 supplies to Birdwood Ltd (deals 3, 5, 6, 7, 9, 12 and 15); 15 supplies to Many Services Ltd (deals 49, 50, 52, 54, to 57, 60, 85 to 89, 91 and 92); and one supply to Heathrow Business Solutions Ltd (deal 104).

221.     The evidence with which we have just dealt resulted in Mr Humphries claiming at paras 41 and 42 of his first witness statement:

“41. Overall, the transactions involving Parasail, Comica and Forex must be contrived.  They occur within a closed cell of traders which appear to be operating in concert. The goods originate within a very small group of EU suppliers, and end up with the same group of companies at the end of the transaction chains.  Where both ends of the chains have been further traced and with one exception, [notwithstanding that goods remained within the same small group of suppliers] none of the companies involved received, as customers, goods which they had originally supplied as suppliers. This has happened no matter which combination of UK traders the goods passed through on the way.

 42. This could not happen in the course of normal commercial trade, and I do not believe it would be possible unless the traders involved at each stage of the transaction chains had knowledge of the contrived scheme.”

222.     Subsequent to making his first statement, Mr Humphries found the penultimate sentence in para 41 to be wrong in that in some cases companies acting as customers did receive goods they had originally supplied.

223.     Mr Humphries considered what he referred to as the Powerstrip two-tier contra-trading scheme of June 2006. He noted that in period 06/06 Powerstrip claimed input tax of £14.53 million on goods purchased in the UK and despatched, zero-rated, to its EU customers, and £12.41 million on goods sourced in chains involving defaulting traders.  The output tax due from the company on goods it acquired from EU suppliers and sold to UK customers in the same period was £24.33 million.  Powerstrip claimed the difference between the two tax figures, £2.61 million, as a VAT repayment.  Mr Humphries observed that had the acquisition transactions not taken place there would have been no offset, and Powerstrip would have claimed the full £26.94 million input tax. He maintained that the whole of Powerstrip’s repayment claim, made partly by the company itself and partly by the brokers it had supplied, could be traced to a similar amount of tax losses arising from defaulting traders in the chains of supply leading to the contra-traders – some £12.41 million in chains, leading directly to Powerstrip in the position of contra-trader 1, and some £14.53 million in chains leading to Export-Tech, Digicom, 385 North, Rioni and Pan Euro Ventures in the position of contra-trader 2.

b)  Tax loss chains (dirty chains)

224.     Mr Humphries’ analysis also showed that certain broker transactions of the contra-traders Powerstrip, David Jacobs, Svenson Commodities, TCCS, Svenson Worldwide and Selectwelcome led directly back to tax losses.  Their chains of transactions are summarised on the tab marked “Tax Loss Chains” on RM2 as updated by the evidence of officer Murphy.  As we have said, the original RM2 is, pursuant to the Direction, admissible as evidence of the truth of its contents and deemed to be agreed by BTS.

225.    Neither BTS nor NTS carried out deals within a contra-trading cell identified by Mr Humphries as Cell 1. However, it is HMRC’s case that part of the tax loss in relation to Cell 5 transactions arose in Cell 1. Three of the Cell 5 contra-traders – David Jacobs, Svenson Commodities and Powerstrip – carried out broker deals that led back to 6 alleged contra-traders in Cell 1, which in turn carried out broker deals that traced back to tax losses.  The operation of this element of the Cell 5 contra scheme, and Cell 1 in general, is summarised on diagram NH051 (E1/355), as updated at E3/4.

226.    The six contra-traders identified by Mr Humphries as forming part of Cell 1 were Blackstar UK Ltd, Digikom Ltd, Export-Tech Ltd, Rioni Ltd, 385 North Ltd and Pan Euro Ventures Ltd.  He referred to them as “2^nd tier contras”. He contended that those traders were part of a large group that also operated in a contrived manner similar to that involving the first group of six Cell 5 contra-traders.  The remaining contra-traders in Cell 1 identified by Mr Humphries were Mark Corporation Ltd, H&M UK Trading Ltd and RWIR Ltd. The chains of transactions of the 2^nd tier contras are summarised on the tab marked “No UK Tax Loss (Contra Chains)” on RM2, as agreed updated by the evidence of Mr Murphy.  Again the original RM2 is, pursuant to the Direction, admissible as evidence of the truth of its contents and is deemed to be agreed by BTS.

227.     Moreover the 2^nd tier contras were part of a further overall alleged scheme to defraud the revenue, as appears from a diagrammatic overview of that scheme at E3/4.  That diagram appears as NH003 of Annex F to the CD Rom and, once more, pursuant to the Direction, is admissible as evidence of the truth of its contents and is deemed to be agreed by BTS.

228.     The transactions of the 2^nd tier contras led directly back to tax losses.  Their chains of transactions are summarised on Annex G to the CD Rom.  Again, pursuant to the Direction, the contents of Annex G are admissible as evidence of their truth and are deemed to be agreed by BTS.

229.     Mr Humphries found patterns in the tax loss chains, and claimed  the destination of the goods in general to be connected to the identity of the defaulter.  Breaking down the customers into groups pursuant to this pattern, he showed that one group contained the same EU customers as the customers of the brokers in the non-tax loss chains.  He identified further connections between the transactions in the tax loss chains and those in the non-tax loss chains in that customers of Parasail and Comica were the EU suppliers in certain transactions in the tax loss chains.

230.    Mr Humphries reviewed the deal sheets of all nine 2^nd tier contras, the base documents having been prepared by other officers as part of HMRC’s verification of suspected MTIC transactions and being stored as EF documents.  As part of his review, he prepared charts showing the flow of goods in transaction chains involving acquisitions of goods from EU suppliers to 8 of the 9 traders.  His charts also showed the flow of goods from the EU suppliers, through the contra-traders and buffers concerned to the broker traders and EU customers (exhibits NH030 to NH048).  Exhibits NH049 and NH050 consisted of charts similar to those for the ninth contra-trader Mark Corporation Ltd prepared by officer Swindon, the assurance officer for that company.

231.    From information provided to HMRC under mutual assistance and stored in the EF, and further information on the Latvian company Valdemara provided by officer Wyatt, Mr Humphries produced exhibit NH052, the first 62 pages of which showed links between many of the EU companies concerned; and on the 63rd page of that exhibit he summarised the information contained in the earlier pages. It showed one Joakim Peter Broberg was formerly a director of Total Telecom, a Spanish company, and Alexis Ludwig Leroy was an employee of that company.  Those two individuals were directly involved in 6 of the EU companies.

232.    There also appeared to be links between Mr Broberg and a further 4 of the EU companies, Avoset of Estonia, FAF of Italy, Scorpion of Portugal, and Prabud of Hungary.  For instance, both Avoset and FAF were run by Tommi Neuvoneu, a Finnish national.  Sebastian Davolos-Davila was directly involved  with a further five of the EU companies, Nano Infinity, Con Animo, Microzero, Regent Sp and Zorba SRO.

233.    The traders Mr Humphries considered to be linked were based in 9 different EU Member states, and controlled by three residents of Malaga, Spain.  The traders appeared variously as EU suppliers and EU customers in both the acquisition transaction chains and the UK tax loss transaction chains which passed through the 9 contra-traders.  Mr Humphries maintained that that provided a link between the two types of transaction entered into by the contra-traders.

234.     From the evidence before him, Mr Humphries concluded that the whole series of transactions entered into by the 9 2^nd tier contras had been contrived as an overall fraudulent scheme; the goods in them passed from a small group of EU traders via the 9 UK contra-traders and 33 UK broker traders to another small group of EU traders which had links to the first group.  The acquisition transactions and tax loss transactions entered into by the contra-traders were also linked via those EU traders.

235.     We were provided with evidence of tax losses in respect of each of the defaulters identified in the deal chains.  All the tax loss deals are summarised on Annex K to the CD Rom.  The identities of the defaulters, and evidence in relation to the tax losses, are shown on the schedule attached to Annex K as “Cell 5 defaulters”.  Pursuant to the Direction, the contents of Annex K are admissible as evidence of their truth and are deemed to be agreed by BTS. The Appellants accept that there is tax loss in relation to the defaulters, as summarised on the schedule.

Cell 10

236.    Mr Humphries identified a second group of six contra-traders, which included Epinx.  He referred to the group as Cell 10.  He maintained that charts he had prepared showing the trading pattern with Cell 10 to be contrived.  Cell 10 involved three separate sets of transactions.

237.    HMRC identified Cell 10 as the major contra-trading cell affecting BTS June deals 16 to 23. At para 42.2 of the statement of case they say that Epinx and Kwality, the contra-traders, acted fraudulently.  Para 42.2 continues:

“Furthermore, although it is not necessary for [HMRC] to prove that these 9 deals form part of an overall scheme to defraud the revenue, it is averred that in fact the deals did form part of such a scheme, which was separate [from] Cell 5 and which was necessarily the product of contrivance and orchestration and which operated with the knowing participation of all involved, including BTS.”

239.    We were provided with evidence of tax losses in respect of each of the defaulters identified in the deal chains of Epinx and Kwality.  The identities of the defaulters, and the witnesses in relation to the tax loss are shown on the schedule attached to the CD rom as “other contra scheme defaulters”. Once more its contents are admissible as to its truth, and are deemed to be agreed by BTS.

240.    Mr Humphries prepared a series of charts NH055 to NH068, showing the flow of goods from the EU supplier, through UK contra-traders and in some cases buffers to the UK brokers and their EU customers.  The charts showed three distinct sets of transactions.  He considered the charts to show trading patterns indicating contrivance.

a) Non-tax loss chains  (clean chains)

Set 1

241.    In the first set of transactions, the 6 contra-traders used the same 10 EU suppliers, nine of whom also appeared as EU customers of the brokers in the chain. There were 24 UK broker traders who had many EU customers in common. They used only 11 EU customers between them.  Mr Humphries considered that a very small customer base for 24 different UK traders and, as just mentioned, 9 of the 11 customers were also suppliers in the series.  Where the EU traders appeared as both customers and suppliers, none of them received as customers goods they had originally supplied. That fact was construed by HMRC as an attempt to avoid circularity in the transaction chains.

Set 2

242.    The two contra-traders identified as being involved in the second set of transactions, Epinx and A-Z Mobile Accessories, used only 3 EU suppliers between them, two of whom also appeared as EU customers.  The goods were sold to 22 UK brokers, including 7 who were also involved in the first set of transactions referred to above.  The UK brokers then sold the goods concerned to a different group of 6 EU customers, 2 of whom, Kom Team and St Charles Consulting, were also EU suppliers, and another two of whom, 2 Trade BUBA and CZ International, were linked via directors who shared a common address.  (The last mentioned piece of information emerged from mutual assistance provided by the Belgian and Czech fiscal authorities respectively). The information on the EF file for 2 Trade BUBA also showed that both directors of that company had been arrested by the Belgian authorities in connection with the issue of false invoices for mobile phones in a total sum exceeding 1 billion euros. All goods originating with Kom Team found their way to Evolution or CEMSA, regardless of which UK broker supplied them.  All goods originating with Nordic Telecom ended up with Kom Team, and all goods originating with St Charles Consulting ended up with the linked traders 2 Trade BUBA and CZ International. Neither Kom Team nor St Charles Consulting received as customer’s goods they had originally supplied.  Again it appeared to Mr Humphries that efforts had been made by the traders concerned to avoid circularity in the transaction chains.

Set 3

243.    The third set of transactions identified by Mr Humphries involved but a single EU supplier, a single UK contra-trader, A-Z Mobile Accessories, a single UK broker trader and a single EU customer.  Although Mr Humphries accepted that it was impossible to establish a pattern in the circumstances, he observed that since it was notable that as goods originating with Modular BV were not sold to any of the EU customers in the other two sets of transactions, there appeared to be a third set.

b) Tax loss chains (dirty chains)

244.     Mr Humphries examined the transactions of all 6 contra-traders in Cell 10 in which they purchased goods in the UK and sold them to EU customers in their broker transactions.  Having analysed the transactions, he found that of the 12 EU customers 8 appeared as both customers and suppliers in the first set of acquisition transactions with which we have just dealt, and two appeared as both customers and suppliers in the second set.  As a result, Mr Humphries maintained that there was a firm link between the acquisition transactions and the broker transactions undertaken by the 6 contra-traders.  He further considered the destinations of the goods in all the 22 contra-traders transactions to be determined by their origin, adding that it was notable that all the UK broker traders selling to the EU had distinct sets of EU customers and their use depended on the identities of the suppliers. Further, when they purchased goods originating with certain defaulters they sold them to one of six companies within a small group of EU traders, namely to J Corp Aps, EC Trading Aps, D Jensen, DGB Sarl, Fone Link SL and Servicios Operativos Surcom.

245.     When they purchased goods originating with certain defaulters, or with the EU suppliers to the first group of 6 contra-traders (“Contra 1”), they all sold them to a second group of EU customers.

246.     When they purchased goods originating with the EU suppliers to the second group of 9 contra-traders (“Contra 2”), they all sold them to a third group of EU customers.

247.     When they purchased goods originating with the third group of 6 contra-traders, they all sold them to further groups of EU customers, depending on the origin of the goods.

248.     BTS was involved in two of those contra-trader groups, and its sales followed the separate pattern for each group.  All the goods originating from the first group it sold to Sigma Sixty, Pol Comm, Planetmania, CIDP, Intangible Media, or Opal 53.  All the goods originating from the second group it sold to FAF or PhoneC@nnected.

249.     Mr Humphries concluded:

“Overall, each series of transactions shows a distinct pattern with the EU destination of the goods being dependent on their origin. In each separate series, the goods pass from a distinct, very small group of EU suppliers, to a distinct, very small group of EU customers – the first group often being linked to the second, or even containing the same companies.  The correct destinations are maintained even after the goods have passed through a large number of different UK traders in various combinations, with the goods effectively remaining under the same control throughout.

It would not be possible for this to occur in the course of normal commercial trade.  The transactions are clearly contrived as overall fraudulent schemes.  I believe that these schemes could not operate successfully unless the EU and UK traders involved at each stage of the transaction chains had knowledge of them.”

250.     Mr Humphries identified the single feature indicating that a transaction fell within Cell 10 as the fact that the monetary carousel identified started with Global Financial Services Ltd, proceeded through Eutex Ltd as the hijacked trader, Yodem and Epinx and ended with Global

First Touch Scheme

251.     In the course of his review of the deal sheets setting out the transaction chains of First Touch, Mr Humphries identified similarities in that company’s transactions with those of 11 other contra-traders.  All of them appeared to him to be operating in a single, contrived, fraudulent scheme.

252.     Mr Humphries compiled charts from the completed transaction chains he found on the deal sheets in EF.  They showed the flow of goods acquired from EU suppliers by all 12 contra-traders, through the contra-traders, and any buffer traders involved, to the various broker traders and their EU customers.

253.     The other 11 contra-traders involved were Davenport Global Ltd, DebTechno, FK Media Services Ltd, Julecom Ltd, Limelight Solutions Ltd, Scorpion, Skywell UK Ltd, Web IT Systems Ltd, Whitestream Ltd, Wildberry Ltd, and NTS itself.  Mr Humphries considered the transactions of all twelve traders to be very similar and to comprise a single contrived overall scheme.  He prepared a chart for each trader (exhibits NH001 to NH013), and a further one summarising the EU suppliers, UK contra-traders, UK broker traders, and the EU customers involved in all the transactions (NH014).

254.     Mr Humphries concluded that the trading patterns indicated that the overall series of transactions was contrived.  The factors he identified for so concluding were:

i)          The 12 contra-traders had common EU suppliers, using only 3 suppliers between them.  In every transaction HMRC had been able fully to trace the same 3 traders found at the beginning of the chains were the eventual customers of the goods.

ii)        Seven of the contra-traders, Davenport Global, Deb Techno, First Touch, Julecom, NTS, Whitesteam, and Wildberry also acted as buffers (see NH014).  To Mr Humphries it did not appear logical for those traders to undertake contra and buffer transactions when they already had an EU client base providing them with the opportunity to make far higher profits.

iii)      Two companies, X stream and 3D Computer Systems, were buffer traders that also featured as brokers in some of the deals (see NH014).  Again their transactions appeared illogical to Mr Humphries.  To illustrate the illogicality Mr Humphries extracted from First Touch’s deal sheet for May 2006 the margins it obtained on transactions (NH014A).  It showed margins on buffer transactions of between £1.50 to £2.50 and those on broker deals of between £17 and £50.

iv)      In his chart at NH015 Mr Humphries identified 9 defaulting traders and 5 EU suppliers which featured in the transactions of two or more traders.

v)        The 6 EU customers in the transaction chains (summarised on exhibit NH016) also featured in the acquisition transactions summarised on NH014, providing a link between the acquisition transactions and the tax loss broker transactions entered into by the 12 contra-traders.

vi)      There was no commercial reason for the goods in the acquisition transactions to be physically imported into the UK; the contra-traders all had existing EU customers, many of them being the same companies which bought the gods from the brokers in those transactions.  The contra-traders could have sold the goods with direct delivery to the EU customer; the only apparent reason to bring the goods into the UK was to create a tax charge and subsequent VAT repayment claim.

vii)    The UK brokers had EU customers in common; there were only 5 immediate EU customers – a very small customer base for 11 UK brokers.

255.     Mr Humphries examined the EF files for the 5 customers.  They contained information provided by the fiscal authorities in the relevant EU Member states under mutual assistance provisions (NH017 pages 1 to 73).  The information showed that:

i)          CIDP (France) rendered no tax returns to the French fiscal authority and produced no transport documents for the goods in which it purportedly traded.  Its transaction listing showed all goods purchased from UK brokers were sold either to Ascomp Aps of Denmark or to East Telecom of Estonia, both of which were original EU suppliers to the UK contra-traders (NH017)

ii)        Opal 53 (Germany) was suspected of VAT fraud by the German authorities.  Its transaction listing also showed that all goods purchased from UK brokers in the scheme were sold to Ascomp or East Telecom.

iii)      Forex was a missing trader in Germany.  It made no VAT returns in periods 04/06 and 07/06 and its director was the subject of an international arrest warrant.  Its transaction listing showed that all the goods it purchased from Atomic, a UK broker in the First Touch Scheme, were sold to East Telecom.

iv)      Sigma Sixty was under investigation in Holland. The transaction details provided by the fiscal authority in that country showed that all the goods purchased from UK brokers in the First Touch scheme were sold to Ascomp, East Telecom or Pol Comm SP of Poland, all three of which were original suppliers of the goods to the UK contra-traders

v)        There was no transaction information in the EF of Lavina Trading, and Mr Humphries thus found it impossible to determine the ultimate destination of the goods in the three transactions in which it was a customer.

256.     Overall, in every transaction he could trace, Mr Humphries found all the goods supplied to the UK contra-traders by Ascomp, East Telecom and Pol Comm returned to those companies.  The goods sold to Ascomp originated with East Telecom or Pol Comm.  There were also four deals in which goods originated with Pol Comm and were returned, by the broker deals of NTS, to that same company.

257.     With the exception of the last four mentioned deals, it appeared to Mr Humphries that efforts had been made by the traders involved to avoid circularity in the transaction chains.

258.     Mr Humphries noted that the margins obtained by the 4 EU traders were remarkably consistent.  With the exception of two sales by Forex at £1 margin and a single sale by Opal 53 involving no profit whatsoever, all goods were sold at a 50p margin regardless of considerations of type, quantity or value.  To Mr Humphries that consisted of further evidence of contrivance, and indicated that the four traders were operating under the same direction.

259.     He also examined the EF files of the three EU suppliers who became eventual customers.  They showed that the director of East Telecom was linked to fraud, Ascomp had been deregistered in Denmark not having traded in that country, and Pol Comm had been deregistered in Poland as a missing trader, having had no business establishment in the country and having declared no intra-community trade.  The information further showed that the directors of Ascomp and Pol Comm were both resident in Glasgow, Scotland.

260.     On a single spreadsheet, exhibit NH019, Mr Humphries disclosed that, as a group, Ascomp, East Telecom and Pol Comm paid an additional £4.6million to repurchase goods they had originally sold to UK contra-traders.  In the four transactions passing through BTS, Pol Comm repurchased the same goods it had originally supplied to First Touch at an additional cost of over £247,000 – a fact Mr Humphries considered would not have happened in the course of genuine commercial trade.

261.     Sales by CIDP, Opal 53, Forex and Sigma Sixty to Ascomp and East Telecom included goods in both the acquisition and the tax loss deals entered into by the contra-traders, providing yet a further link in Mr Humphries’ opinion between the two types of transaction.

262.     Mr Humphries concluded that the transactions in the First Touch Scheme were clearly contrived for the purposes of fraud, and were highly organised.  In his opinion the overall pattern could not have occurred in the course of genuine commercial trade.  The Scheme clearly required that the goods be directed to certain destinations in order for it to operate successfully.  It was inconceivable that those controlling the scheme would have left any element to chance.  The traders involved at each stage of the transaction chains must have had sufficient knowledge of the scheme to direct their sales accordingly.

15. CLOSED CELLS.

263.    In the 91 sale transactions carried out by BTS in the appeal period, it dealt with only 8 customers.  And in NTS’s deals in March and April 2006 it dealt with only 2 customers.

264.    Further, NTS dealt with only 3 suppliers, one, First Touch itself in its First Touch transactions, and two, Scorpion and Deb Techno, in the 19 direct tax loss deals which pointed to Multimode as the financier.

265.    In BTS’s 9 deals in Cell 10 it dealt with only two suppliers, Epinx and Aram, the former being considered a contra-trader by HMRC and the latter a buffer interposed between NTS and another contra-trader Kwality.

266.    The deal sheets show that all the transactions with which we are concerned occurred within the closed cells identified by HMRC.

267.     When brokers purchased goods originating with the EU suppliers to the contra-traders in Cell 5, they always sold to EU customers in that Cell, and never to anyone else.  The same situation prevailed in relation to the other cells or schemes.

268.     In each separate cell transaction, the goods emerged from a distinct, very small group of EU suppliers and passed to a similar group of EU customers, the latter frequently being linked to the former, or even containing the same companies.  That happened irrespective of the number of intermediate hands through which goods passed, indicating to HMRC that they remained under the same control throughout. 

269.    The Appellants’ deals followed the pattern for whichever group of contra-traders they were dealing in.  They sold all goods originating in Cell 5 transactions to EU customers in that cell; all those originating in Cell 10 were sold to EU customers in that cell; and all those originating in the First Touch scheme to customers in that scheme. 

16. MR PICKUP’S CHALLENGES TO MR HUMPHRIES’ EVIDENCE

270.    Mr Pickup challenged Mr Humphries’ evidence in a number of respects.  We propose to deal with the challenges under four separate headings:

1)   whether Mr Humphries correctly removed Scorpion as a contra-trader from Cell 5;

2)   whether amendments required to Mr Humphries’ chart NH023 invalidated his evidence in relation to Cell 5;

3)   whether certain trading patterns of the alleged contra-traders in Cell 5 indicated that they were not contra-trading; and

4)   whether the size of the overall scheme was “plausible”.

271.    We propose to deal with challenges (1) and (2) together at this point in our decision.  We do so by reference to what Mr Pickup identified as serious errors in Mr Humphries’ evidence.  We shall then deal with challenge (3) followed by (4) a little later, but should note at this stage that, in relation to challenge (4) we shall separate the item into two parts: (a) a general one, and (b) the “split deals”.

272.    In respect of each contra-trader alleged to be part of the overall scheme to defraud the revenue, Mr Humphries exhibited to his first witness statement one, and sometimes more than one, flowchart showing the flow of goods in that trader’s acquisition chains. He maintained the trading patterns revealed by the charts to indicate the overall series of transactions they covered to have been contrived.

17. MR PICKUP’S CHALLENGES TO ASPECTS (1) AND (2) OF MR HUMPHRIES’ EVIDENCE

273.    Following service of Mr Humphries’ evidence, those representing the Appellants requested, and were additionally provided with, copies of the documents underpinning the analysis.  We were told that the copies so provided exceeded 1200 in number. Mr Humphries was, however, unable to provide the deal sheets he had originally considered as he had not retained a copy of them, and the information they contained had later been updated or amended on HMRC’s EF system. Consequently, such deal sheets as were provided to the Appellants were the then current versions of them.

274.    Mr Pickup cross-examined Mr Humphries over four days with particular reference to the flow charts exhibited to his first and fourth witness statements (the latter statement made in 2011 updating the former made in 2008) seeking reasons for the changes he had made, and identifying numerous errors found in the charts. Mr Humphries admitted having made the changes to the documents, explaining his reasons for doing so as including their updating to reflect additional information coming into HMRC’s possession and correcting errors and mistakes, some of which he acknowledged as having arisen from his misreading deal sheets.

276.    It was quite plain from the cross-examination of Mr Humphries that the additional documents provided by HMRC had been analysed by those representing the Appellants in minute detail.  Every discrepancy found in the analysis, including many in transaction chains that had nothing whatsoever to do with the Appellants, was used quite properly by Mr Pickup to discredit Mr Humphries’ evidence as to the existence of the various cells of traders, and the identification of their constituent members.

277.    In relation to the first of the “errors” he identified, Mr Pickup focused particularly on the involvement of Scorpion Connections Ltd (“Scorpion”) in Cell 5. Scorpion was a supplier to NTS in 11 transactions, but featured in but one of BTS’s Cell 5 transactions, as a buffer.  Mr Humphries initially considered Scorpion to be a contra-trader in Cell 5 but later decided to exclude it.

278.    In his fourth witness statement of 29 September 2011 (WS1/32), Mr Humphries explained that he had originally included Scorpion in Cell 5 “because its acquisition transaction chains included some of the same EU traders as those of the other six contra-traders”.  He continued, “However, I no longer consider Scorpion to be part of the Cell 5 scheme [other than as a buffer], because none of the onward sales of those EU customers involve Comica or Parasail.” (The words in square brackets are required to correct the statement following Mr Humphries’ cross-examination).  He accepted having made “a significant oversight” in originally including Scorpion in Cell 5, but claimed his change of mind to have been due to his being unable to trace forward Scorpion’s transactions to Comica, Parasail or Forex for its transactions “go circular and then through a company called Multimode Marketing.”  Mr Humphries added that although the scheme into which he considered Scorpion should be put “invoices the same traders, [it] has a different pattern altogether.”

279.    In another witness statement, in this case prepared for the NTS appeal (WS1/55), Mr Humphries addressed the question of the First Touch Scheme involving First Touch itself and 11 other contra-traders, one of which was said to be Scorpion.  He said that that scheme was nothing to do with Comica, Parasail, or Forex, but that the transactions in it followed a particular pattern whichever contra-trader was involved. Mr Humphries believed that to be the scheme to which Scorpion should have been allocated initially.

280.    Mr Pickup claimed Mr Humphries’ evidence to indicate that: Scorpion was a member of Cell 5 whenever it undertook buffer transactions which could ultimately be traced to either Comica or Parasail; it was a member of the First Touch scheme whenever it acquired goods from either Ascomp, East Telecom or Pol Comm (two of which were also Cell 5 traders) or despatched goods to one of five traders (four of which were also in Cell 5); and it was involved as a buffer in a wholly separate scheme in which NTS acted as broker in direct tax loss chains (NTS deals 5-10, 13, 19 and 21-23). In each type of transaction, although its counter-parties were often the same, Scorpion was apparently being controlled by a different entity, for a different purpose and for the benefit of a different third party.

281.    In order to scrutinise Mr Humphries’ reasoning for removing Scorpion as a Cell 5 contra-trader, Mr Pickup cross-examined Mr Humphries about that company’s acquisition and broker deals.  In relation to the acquisition deals, Mr Pickup focused on deals carried out by Scorpion in April and June 2006, and in relation to the broker deals on those carried out in April 2006.  Since in both cases the cross-examination lead to transactions outside the scope of the evidence presented to us, it proved inconclusive.  Mr Pickup invited us to construe that as demonstrating that Mr Humphries was uncertain as to whether Scorpion should be removed from Cell 5.

282.    Having initially asserted that the presence of Multimode was an indicator of a wholly different money flow from that found in Cell 5, Mr Humphries eventually conceded that it was also a significant party within transaction chains that fell within Cell 5.  He did so against a background of the evidence of Mr Birchfield at exhibit PB1, a flow chart analysing the money flows involving the participants in Cell 5, showing Multimode as being an EU participant in the Cell 5 money flows.

283.    Mr Humphries summarised his removal of Scorpion from Cell 5 as a contra-trader  in the following way:

“Scorpion is a knowing participant in a scheme which involves purchases from Ascomp [of Denmark], East Telecom [of Estonia] and Pol Comm [of Poland], and [the goods in] which end up with Ascomp, East Telecom and Pol Comm.  The goods all start and end in the same places.  It is nothing to do with Comica, Parasail or Forex [the base members of Cell 5] but some of the same traders appear in both schemes.  The different schemes concern different final destinations and are perhaps controlled by different people: it’s to do with the money.”

284.    The second and, in Mr Pickup’s submission, “most serious” error in Mr Humphries’ preparation and presentation of his charts related to the content of his exhibit NH023 (E1/47), a summary of “Defaulters in Contras’ broker deals”.  That chart contained an analysis of the chains of transactions of four of the six contra-traders in Cell 5 identified by Mr Humphries.  In relation to the chart, in his first witness statement (WS1/4), Mr Humphries said:

“18.  I have not made a detailed examination of the chains containing defaulting traders, but I have identified 19 defaulting traders in the broker deals of 4 of the contra-traders.  Ten of them are common to 2 or 3. The EU customers in these transaction chains fall broadly into two main groups.  With the exception of 5 mobile phone deals, the group of customers used appears to depend on the identity of the defaulter.  One of these groups contains the same EU customers as those of the brokers which source goods from these contra-traders.  This provides a link between the acquisition deals and the tax loss deals undertaken by the contras.  I have prepared a chart summarising this which I produce as NH023”. 

285.    In cross-examination, Mr Humphries accepted that the chart was incorrect; rather than the defaulting traders being identified in the broker deals of the four contra-traders, they were to be found both in their buffer and broker deals.  He claimed the error made no difference; his analysis remained valid whether goods were exported by a contra-trader or another broker. But he accepted that the change in his evidence reduced its strength.

286.    Mr Humphries also accepted that the first of the three central assertions in para 18 of his statement - that there were 19 defaulters in the four contra-traders’ deal chains whose transactions he had considered, and that there was commonality of defaulters, i.e. ten were common to all four traders, and eight to two or three - was incorrect.  Only one defaulter was common to all four contra-traders; three were common to three of them; four were common to two of them; seven to only one; and four were not found in any of their transaction chains.

287.    Mr Humphries further accepted that his second assertion - that the defaulters fell into two groups and, with five exceptions, the group used depended on the identity of the defaulter - was incorrect. Mr Pickup showed in cross-examination that there were exceptions to that claim.  He contended that errors in it undermined Mr Humphries’ identification of the groups, and suggested he had pre-determined which companies should be included in them.

288.    In the original chart NH023 Mr Humphries indicated the identity of the defaulter to determine the destination of the goods, but when amended and brought up to date he accepted that the factor determining the identity of the EU customer seemingly changed to that of the broker (contra-trader).

289.    As to Mr Humphries’ third assertion - that one of the groups contained the same traders who were customers of the brokers in the contra-traders’ acquisition chains - there was no dispute that the group identified with defaulters 8-18 identified on NH023 was composed of traders which were also EU customers in the contra-traders’ acquisition chains, save for Nano Infinity (which appeared in the group identified with defaulters 8-18 on NH023, but not Mr Humphries’ updated Cell 5 overview at NH4/015).  The significance of that point to Mr Pickup was that almost all of the transactions which led to those traders were dispatches by Selectwelcome, and not by the other contra-traders; the identity of the EU customer was principally determined by the identity of the UK broker. 

290.    Finally on exhibit NH023, Mr Pickup questioned Mr Humphries’ decision to look only at the four contra-traders he chose rather than all six he initially identified.  Mr Humphries explained that he had chosen “some of the biggest ones”.  Mr Pickup raised various questions relating to the transactions of the two contra-traders not selected by Mr Humphries, TCCS and Svenson Worldwide, to show that their transactions revealed some EU customers not disclosed on NH023 and some new defaulters.  In response, Mr Humphries accepted that TCCS was “out of sync” with the pattern identified in NH023, and that there were some EU customers and new defaulters not included in the chart. 

291.     In conclusion, Mr Humphries maintained that the basic pattern shown in exhibit NH023 remained good, while accepting that some transactions referred to by Mr Pickup fell outside it.

292.     Having admitted to having misread the deal sheets in the preparation of his flowcharts, and corrected his summary at NH023 as relating to both brokers and buffers, Mr Humphries accepted as correct a “counter-schedule” prepared on behalf of the Appellants.

Discussion

293.     Mr Pickup accepted that the analysis conducted by Mr Humphries as to the overall scheme to defraud suggested that there may have been contrivance or artificial trading patterns between certain traders. The Appellants conceded, with the benefit of hindsight, that they may have been duped by participants in the fraud who were involved in their chains of supply. However, Mr Humphries’ analysis told the tribunal nothing about the state of mind of the Appellants:  it was limited in scope, selective, inconsistent, unreliable, misleading, in areas implausible and based upon a substantial degree of judgment and discretion. It could not be relied upon to determine the issue of knowledge. Further, the role of the contra-traders in the alleged cells, when considered in the light of HMRC’s evidence, made no sense; nor did the role ascribed to the Appellants. If they were, as HMRC suggested, knowing participants in the fraud, why would they have exposed themselves to the risk of relying on a reclaim? Why would they not have contra-traded, thereby obtaining the money from an unwitting trader by way of output tax rather an input tax reclaim from HMRC?

294.    Mr Pickup submitted that in view of the admitted errors and mistakes in Mr Humphries’ work, we should carefully reflect on them in deciding whether Mr Humphries was a reliable analyst and witness, and what conclusions could safely be drawn from his analysis. On innumerable occasions, he had misread the deal sheets or made mistakes with significant consequences for his conclusions. He prepared schedules and charts in a simplified and incomplete manner, omitting important details in order to advance a point rather than to assist the tribunal with the complete picture of the evidence. His chart NH023 was presented in an entirely misleading fashion both here and before the tribunal in Regent, and his corrections to that chart, on his own admission, significantly undermined his conclusions. His evidence should be approached with care.

295.    We do not accept that Mr Humphries deliberately set out to deceive the tribunal. His charts were detailed and designed to deal with many hundreds of cell transactions.  We do not find it surprising that he chose not to deal with everything with which he could have dealt.  Had he done so the volume of documentation with which we were provided, already vast, would probably have increased three or four fold. That some charts produced were so full and contained printing so small that we literally had to use a magnifying glass to read them perhaps illustrates the extent of their content.

296.    As we shall show when we come to deal with the FCIB evidence, Multimode appeared as the money provider in all but one of NTS’s deals in the first scheme referred to by Mr Humphries i.e. that involving NTS’s purchases from and the return of the goods to Ascomp, East Telecom and Pol Comm; Amira, the financier of Comica, Parasail and Forex, the base members of Cell 5, appeared in none of them. For the reasons given by Mr Humphries, we accept that Scorpion should never have been included in Cell 5, except as a buffer.  Mr Humphries’ initial decision to include it as a contra-trader was wrong.  However, we can see no reason to find that Scorpion’s exclusion (other than as a buffer) makes any difference to Cell 5; the scheme fundamentals remain intact.

297.    The overall effect of Mr Pickup’s cross-examination, not only in relation to exhibit NH023 but also in relation to a number of Mr Humphries’ other charts and documents, served to correct errors which Mr Humphries had made, to fill gaps in his analysis, and to add companies to the charts that should have been included but for one reason or another had been omitted. But most importantly the cross-examination resulted in our being presented with Mr Humphries’ charts and documents in their complete and correct form.  All were confirmed to be based on the deal sheets before us.  None of the deal sheets was challenged, nor as a result of the Direction, could they be.

298.    Mr Pickup ensured that the picture we had of Cell 5 (and the other cells) was as accurate and up to date as possible; he put right flaws in the evidence of Mr Humphries. Paradoxically, whilst the cross-examination might have weakened a number of individual aspects of Mr Humphries’ evidence – aspects which did not affect the Appellants’ deals - cumulatively it strengthened the core of it.

299.    In the light of Mr Humphries’ errors, mistakes and omissions as to his charts and other documents, we have taken even more than usual care to consider his evidence.  Having done so, and importantly taken full account of the related FCIB evidence available to us, we express ourselves satisfied that his conclusion as to the operation of Cell 5 is the correct one: Comica and Parasail were the companies at the start and end of each transaction chain, and the transactions were financed by the Amira Group.  We are also satisfied that Mr Humphries’ basic assertions in relation to the operation of the other cells and schemes before us are correct.

300.    We accept that Mr Humphries’ analysis did not extend to all the deals a given trader might have entered into, or reveal all available details of its deals.  That there were further matters he might have considered does not deprive his evidence of force.

18. MR PICKUP’S CHALLENGE TO ASPECT (3) OF MR HUMPHRIES’ EVIDENCE.

301.     We then move to deal with Mr Pickup’s claim that the traders identified by Mr Humphries as contra-traders did not act as such. The claim was made against the background of the unchallenged witness statement of Mr Stone, HMRC’s principal specialist officer in the field of MTIC fraud.  In it he described contra-trading as a counter measure introduced by fraudsters in response to the activities of HMRC to combat MTIC fraud. He suggested that the aim of a contra-trader was to submit VAT returns for nil net tax, or to make limited reclaims. Even if a contra-trader were not aiming specifically for a nil VAT return, his aim was to submit a VAT return that would not attract the attention of HMRC.

302.      At the end of period 06/06 most of the contra-traders involved in the cells Mr Humphries’ identified made substantial input tax reclaims, reclaims that HMRC would certainly have subjected to extended verification. Mr Humphries claimed that process would have shown each contra-trader to have undertaken a vast number of ‘dirty’ broker deals that traced back to defaulting traders, and a tax loss which had been off-set by distinct acquisition deals. In turn, that would have exposed the true nature of the so-called “clean” chains and, in particular, identified the broker or exporter in those chains as a potential participant in the wider fraud.

303.     For period 06/06 Mr Humphries produced figures for Cells 1 and 5 as follows:

NH5/012 Cell 1 Tax Summary

NH5/013 Cell 5 Tax Summary

Thus in period 06/06 a number of the contra-traders submitted multi-million pound repayment returns. When challenged as to whether the returns indicated that the traders concerned did not act as contra-traders, Mr Humphries said that they did so act; the controlling minds concerned in the frauds “were not very good at their job”.

304.     To Mr Pickup the fact that those traders’ input tax repayment claims did not fit HMRC’s standard contra-trader plan cast doubt on the accuracy of the schemes devised by Mr Humphries, or at least the reliance that could safely be placed upon his evidence in our determination of the Appellants’ knowing participation in them.

305.     Mr Pickup submitted that the “starkest weakness” in Mr Humphries’ thesis was that Svenson Commodities, as an alleged contra-trader in Cell 5, ended the 06/06 quarter making a repayment return in the sum of £8,820,907; that amount would inevitably have brought the return to the attention of HMRC and ensured that it would have been subject to extended verification.

306.     Mr Pickup contended that examination of Svenson Commodities’ trading history in the 06/06 period suggested that its behaviour was inconsistent with its having been a contra-trader, as characterised by HMRC’s witnesses. By 15 June 2006 it had completed all of the acquisition deals it undertook in 06/06, receiving total output tax of £18,138,010.63.  By the same date it had undertaken despatch transactions attracting input tax of £16,185,831. It undertook no transactions between 15 June and 30 June 2006, so that on the final day of period 06/06 the company would have had a liability to HMRC of £1,952,179.47.  Mr Pickup observed that the rational thing for a contra-trader to have done in that situation would have been to undertake despatch transactions to generate an input tax reclaim to off-set against its liability to HMRC, thus reducing its exposure to VAT at the end of the period. What Svenson Commodities did was to undertake nearly £70 million worth of despatch transactions on the final day of the period, despatching goods acquired by Cell 1 contra-traders in 26 transactions. On those transactions it paid input tax of £10,558,887.50. The result was that, instead of a £1.9m liability to HMRC, Svenson Commodities had a £8.6m repayment claim. Mr Humphries could offer no explanation for Svenson Commodities’ behaviour.

307.     In that light, and since other contra-traders had behaved in a manner similar to Svenson Commodities, Mr Pickup submitted that the supposed contra-traders in Mr Humphries' analysis had not behaved as one would have expected them to have behaved; their behaviour had no obvious rationale, and must cast doubts on HMRC’s case as to the essential structure of the contrived schemes and, in particular, with Mr Humphries’ contention that all traders concerned were knowing participants in them

308.     Svenson Commodities, Powerstrip and David Jacobs were all denied their 06/06 input tax repayment claims, and appealed the denials to the tribunal. Subsequently, in 2011 all three companies withdrew their appeals

309.     In his unchallenged statement, made on 6 October 2008, Mr Stone dealt at paras 121-127 with “variations in the level of wholesale phone trading” saying that “operational indicators during 2005 and the first half of 2006 suggested that there was a great increase in trading in goods that were commonly the subject of MTIC fraud, with no apparent commercial or economic explanation for that increase”. At the beginning of 2005 turnover on the grey market in mobile phones was in the region of £250 million per month. Following release of the Advocate-General’s opinion in Optigen on 16 February 2005, monthly turnover increased greatly until in the final quarter of 2005 it reached over £1,250 million. On 12 January 2006 the ECJ gave judgment in Optigen, and the UK government announced its intention to introduce the reverse charge on the importation of mobile phones and CPUs. On 14 March 2006, the Advocate-General gave his opinion in Kittel, and on 1 May HMRC introduced a major expansion of their extended verification programme. The grey market turnover in phones continued to increase and in May 2006 reached almost £4,400 million.

310.     On 14 February 2006 Vantis plc, a company advising on accounting, tax and business to the “grey market” in inter alia mobile phones and advertising on websites widely used by mobile phone traders on the “grey market”, published an article on its website concerning the introduction of the reverse charge on mobile phones and computer chips.  The article stated that “the Government announced on 26 January 2006 that it has applied to the European Commission to remove VAT from supply chains involving mobile phones and other specified goods used as part of MTIC frauds”.  The article continued, “There is likely to be an initial rush to trading by those behind fraudulent businesses over the coming months seeking to take advantage of the VAT system before this legislation comes into force”.

311.     In Business brief 10/06 HMRC gave advance notice of their intention to introduce the reverse charge on mobile phone transactions by 1 October 2006. In the event, implementation of the charge was delayed as a result of the UK having to obtain a derogation from the Sixth Directive, and it was not introduced until 1 June 2007. 

Discussion

312.     Mr Birchfield, Mr Humphries and Mr Davies on behalf of HMRC conceded that the concept of contra-trading did not necessarily involve the knowing participation of the broker in the clean chain. Mr Pickup submitted that trader was not necessarily pivotal, as suggested by HMRC. Contra-trading fraud could work, in different forms, depending on the participants involved. The broker might be an innocent dupe or equally might be a knowing participant. Deciding which of those roles the Appellants held was a matter of fact for the tribunal to determine.

313.     HMRC preferred the concept of contra-trading in which the broker in the clean chain was “pivotal.”  Their policy of targeting brokers by denying reclaims rather than pursuing contra-traders and defaulting traders drove them to rely on such a concept. However, as Mr Birchfield agreed, their preferred concept fell down because of its reliance on the success of the reclaim from HMRC. The alternative concept which Mr Pickup urged us to accept, where the contra-trader procured his reclaim from an unwitting third party trader rather than seeking it from HMRC, was a much more credible concept and considerably more attractive to anyone organising a fraud.

314.     The concept of contra-trading was not known to any of the witnesses before May 2006. It was not known to Mr Tomlinson and Mr Edmonds before May 2007 when the denial letters were sent, and was not explained to the former until even later. To Mr Pickup that was yet a further factor suggesting that the connection with a fraudulent tax loss by way of offsetting could not have been known by Mr Tomlinson in April, May or June 06, unless he was a participant in the fraudulent scheme. That further confirmed that the issue for decision was whether HMRC had proved that Mr Tomlinson was a knowing participant, i.e. the case brought by HMRC was one of actual knowledge or nothing.

315.     Mr Pickup submitted that Svenson Commodities and the other companies said by Mr Humphries to be contra-traders in Cell 5 and Cell 1 did not act as such; behaving rationally they would have undertaken despatch transactions to generate input tax reclaims only sufficient to offset against their liabilities, and reduce them to minimal amounts.

316.     We accept that the situation Mr Pickup described seemingly prevailed until June 2006. However, as Mr Stone disclosed, the value of wholesale exports plummeted from £3,163 million in June 2006 to a mere £758 million in July 2006 – a drop of almost 75% - to be followed by further huge decreases in the immediately following two months. By December 2006 monthly exports had fallen to £61 million. As Mr Stone further said in his unchallenged statement, there was no apparent commercial or economic explanation for the increase in turnover in 2005 and early 2006.  The distinct change in the behaviour of the contra-traders from June 2006 onwards points to their having recognised, perhaps in the knowledge of the Vantis article, that the judgment of the ECJ in Kittel, due for delivery a few days after the end of the period 06/06, would almost certainly provide HMRC with the powers they required to enable them to deal with MTIC fraud. The MTIC opportunity to obtain large profits at no risk would effectively be at an end: they might as well make input tax repayment claims as large as they could arrange. Notwithstanding that the behaviour of the companies concerned at the end of period 06/06 was not that until then to be expected of contra-traders, since we accept that there was no apparent commercial or economic explanation for the huge increase in turnover in the grey wholesale market in mobile phones, and since the “clean chains” identified by officers Humphries and Murphy bore the same characteristics as the “dirty chains” – of goods rapidly changing hands in the UK, arriving in the country at the beginning of the day and leaving by the end of it  - in our judgment, the traders identified by HMRC as contra-traders acted as such.

19. ADDITIONAL EVIDENCE OF THE CONTRA-TRADERS’ KNOWLEDGE

317.     An essential element in HMRC’s case for disallowing the Appellants’ input tax repayment claims in relation to their transactions with contra-traders is that the contra-traders used their clean chains as a dishonest means of covering up the tax evasion involved in their associated dirty chains (see Megtian at para 20).  It is therefore necessary for HMRC to establish that the contra-traders knew that the transactions in which they participated at the foot of dirty chains were connected with fraud.

318.      In that connection, HMRC adduced evidence which they claim to show that the contra-traders’ deals were contrived, to provide further support for their claim that there was a connection between the Appellants’ denied deals and fraudulent defaults, and to prove that the operations of the contra-traders were themselves fraudulent.  In that evidence, with which we shall now deal, the officers for the eight contra-traders concerned set out the features of those traders’ activities – features similar to those found in the Appellants’ own deal chains – which HMRC contend imply fraud. HMRC’s case is that each of the contra-traders was aware that its broker deals were connected with fraud, either because there was a fraudulent default in a chain of its transactions, or by connection with a fraudulent default via another contra-trader.

319.     In relation to each contra-trader, we list first its assurance officer and the relevant deals of the Appellants. We make no apology for including to a limited extent information also found in the section of our decision devoted to the Appellants’ due diligence on the contra-traders.

a) Digital Satellite 2000 Ltd (“Powerstrip”) (Alan John Ruler WS7/532)

[BTS deals April 10, May 7, 20-22, 35-37, 40-42]

320.     Powerstrip was incorporated on 20 September 2000, and was registered for VAT from 6 August 2001.  Its director on registration was Mohammed Yousef .  He held 99 of the 100 issued £1 ordinary shares, and Tahir Yousat, the company secretary held the remaining share.  Mohammed Yousef resigned on 21 March 2006 when Umar Haq became the director.  Mr Haq remained in post until Powerstrip went into members’ voluntary liquidation on 19 April 2007.  The company moved premises several times between August 2001 and April 2006, but throughout operated from a base in a relatively small area of Manchester.

321.     In its Form VAT 1, Powerstrip’s trading activity was declared as “Design and Installation of satellite systems”.  However, from October 2005 onwards it traded in mobile phones, CPUs and some other electrical items.  It acted as a UK acquirer, as a buffer, and as a broker. From the types of trading Powerstrip entered into, coupled with information gleaned during extended verification of its returns, Mr Ruler considered it to be a contra-trader.

322.     All Powerstrip’s deals were back to back, and the goods in which it dealt entered the UK and left within a very short time.  Its goods were always held by a freight forwarder, and never by itself.  None of the company’s deal chains could be traced from a manufacturer or authorised distributor, or to a retailer, and no trader within a deal chain ever made a loss.

323.     From his examination of the records, Mr Ruler revealed Powerstrip’s declared turnover as:

Y/e 31/7/2003 £72,000

Y/e 31/7/2004 £81,000

Y/e 31/7/2005 £37,000

Y/e 31/7/2006 £604,960,185 

324.     In so far as Powerstrip’s VAT returns were concerned, those for 2004 and 2005, with one exception, were below the VAT registration threshold.  The exception was the return for period 12/05 which showed sales of £44,642,558.  The return for period 03/06 showed sales of £182,116,541.

325.     Powerstrip’s return for period 06/06 showed net sales of £367,201,086, total output tax (including acquisition tax) of £59,277,988.05, total input tax (including acquisition tax) of £61,927,365.29, and a net repayment claimed of £2,649,377.24.

326.     Declared turnover in the three months ended on 30 September 2006 was £33,928,548.  (We note that that figure includes sales made in the year to 31 July 2006). In the following three months, i.e. to 31 December 2006, Powerstrip declared sales of £40, followed by no sales whatsoever in the first three months of 2007. 

327.     Mr Ruler considered the incredible growth in Powerstrip’s turnover from October 2005 to 31 July 2006, followed by what appeared to be a complete cessation of trading, to form “a remarkable set of circumstances”.  He so concluded against a background of Powerstrip never having had any employees, its business being conducted from an office suite consisting of two or three rooms, there being no injection of capital to fund the increase in its purchases, and Experian having advised traders dealing with it not to exceed a credit limit of £500 without a director’s guarantee.  Mr Ruler added, “Based on my extensive experience in dealing with traders involved [in] MTIC activity, this huge increase and sudden decrease in turnover is by no means unique to Powerstrip, and in my view is wholly typical of an MTIC trader.”

328.     In dealing with Powerstrip’s awareness of MTIC fraud, Mr Ruler disclosed that on 21 September 2005 HMRC Redhill informed the company by letter that the then current tax loss estimated by HMRC through MTIC trading was between £1.06 billion and £1.73 billion.  The letter explained that the safest way for traders to protect their input tax claims was by verifying VAT numbers before conducting deals, exhibit AJR12.

329.     Mr Yousef was interviewed by HMRC in September 2005.  He informed them that he had been looking at the IPT website for potential contacts, and mentioned that he had found Svenson Commodities and David Jacobs.

330.     During period 03/06 HMRC sent Powerstrip four deregistration veto letters, i.e. letters informing the trader that companies with which it had either been trading or had indicated an intention to trade had been deregistered for VAT.  In the following period, 06/06, they sent it a further 22 such letters.

331.     On 22 June 2006 Powerstrip was informed by letter (exhibit AJR16) that 24 transactions in which it had been involved in periods 12/05 and 03/06 had resulted in tax losses totalling £2.8 million.

332.     Mr Ruler made a number of comments on Powerstrip’s due diligence. He noted that it had no evidence of checks made on suppliers and customers, it did not enter into written contracts, and it did not receive goods in which it was dealing or, indeed, ever saw or examined them. To demonstrate his claim that the whole scheme of Powerstrip’s trading was contrived, Mr Ruler pointed to consistent behaviour in its trading patterns which ignored differences in products, quantities, suppliers and customers.  In April 2006 Powerstrip was a UK acquirer in the BTS April deal 10 chain of transactions. Eight companies appearing in BTS’s 9 other deal chains in that month also appeared in Powerstrip’s deal chains.  Two EU suppliers to Powerstrip, Mighty Mobile and Mountainrix, appeared in the same capacity in 5 of the 10 BTS chains in that month, and also appeared as suppliers in 18 of Powerstrip’s 46 acquisition chains.  C&B Trading appeared as a defaulter in four of BTS’s deal chains, and in four of Powerstrip’s buffer deal chains.  Further, in April 2006 Svenson Commodities, as a UK supplier to NTS in 4 deals, also bought goods from Powerstrip in 5 transactions and sold goods to it in a further three transactions.

333.     In May 2006 Powerstrip acted as UK acquirer in 10 of BTS’s deals.  The following companies that took part in BTS’s other 35 deals in May 2006 also appeared in Powerstrip’s deal chains: TCCS (4 deals), Yalegate (5 deals), Selectwelcome (5 deals), Evenmore (13 deals), Regent Commodities (3 deals), Pol Comm (2 deals), and Planetmania (8 deals).  The two EU suppliers Mighty Mobile and Adobcom appeared in 37 of BTS’s 45 deal chains, and also appeared in 35 of Powerstrip’s 47 acquisition deal chains.  In Powerstrip’s 41 tax loss broker chains there were only three defaulters: Stockmart (18 deals), XS Enterprises (16 deals) and Prompt Info (7 deals).  Svenson Commodities again appeared in Powerstrip’s transaction chains, on 5 occasions acting as contra-trader to BTS, and as customer on 3 occasions.  The spreadsheets showing Powerstrip’s suppliers and customers in April and May 2006 are to be found at exhibit AJR 19, and Powerstrip’s deal packs are included at exhibit AJR 26.

334.     Mr Ruler established that the total tax losses attributable to Powerstrip’s deals in April and May 2006 totalled £12,416,566.66 (exhibit AJR6).  He noted that in Powerstrip’s April 2006 transactions the margins it obtained in mobile phone sales were between £14 and £36 per handset in broker sales, whereas in buffer sales they were between 75p and £1.65 per handset.  In Powerstrip’s CPU broker sales in May 2006 the margins were between £10.25 and £12 per unit, and all the deals led back to tax losses; and in its mobile phone broker deals its margins were between £10 and £69 per handset, whereas in its buffer sales they were between 50p and £1.70 (see exhibit AJR 19 as showing the consistency of the achieved margins).

335.     In all of Powerstrip’s deals the goods were bought and sold within 48 hours, and were imported into the UK and exported therefrom within a very few days.  Every supplier in every chain of transactions was able to buy and sell the exact quantity, make and model of goods required.  None of Powerstrip’s deal chains traced from a manufacturer or authorised distributor, or to a retailer; and none of the traders in any deal chain made a loss.

336.     Despite HMRC having made several requests to inspect the CMRs for goods Powerstrip purchased from EU customers and said to be despatched from the UK – a matter of 104 deals in period 06/06 – none was ever produced.

337.     From his analysis of Powerstrip’s trading records and the verification of its suppliers, Mr Ruler established tax losses in period 06/06 as follows:

April 2006 £2,875,215.00

May 2006 £5,652,333.66

June 2006 £3,889,018.00

338.     Those losses occurred as the result of Powerstrip’s trading activities.  Seventy-seven of 149 deals involving sales to EU customers and purchases from a UK supplier traced direct to tax losses.  Sixty-five of the remaining 72 deals in period 06/06 traced back to an EU acquisition with no apparent UK tax loss.  In those deals HMRC claimed that contra 2 traders were involved further to hide the tax losses.  Mr Ruler was unable fully to verify Powerstrip’s remaining 7 deals due to one company, Nobel Wireless Ltd, having failed to provide its records to HMRC.

339.     After Powerstrip went into voluntary liquidation – a fact that HMRC considered unusual in itself since the company was said to owe its creditors in excess of £50 million – HMRC were approached by two creditors seeking recovery of output tax said to have been paid on purchases they had made from Powerstrip for goods with which they were never supplied.  Mr Ruler was unable to understand how creditors could have existed since if, as Powerstrip claimed, it first found a customer and only paid for goods when it had itself been paid. Subsequently, the liquidator of Powerstrip provided HMRC with a list of its creditors.  On inspecting it they found the creditors to be traders who claimed to have supplied MTIC goods to Powerstrip to a value of over £48.8 million, but had not been paid.  Thus HMRC found themselves exposed to bad debt relief claims notionally exceeding £7 million for transactions which may or may not have been carried out.

340.     From an Experian report produced by Mr Ruler (exhibit AJR2), Powerstrip was shown as a high risk company with a suggested credit limit of £500, and a recommendation that any credit granted above that figure be accompanied by a director’s guarantee. Mr Ruler considered that factor should have warned the company’s prospective customers of the financial risks they would be taking were they to trade with it; those trading with it chose either not to make credit checks or ignored their results and thus must have been sure that they would receive goods they had paid for, or be paid for supplies made.  To Mr Ruler those matters exhibited contrivance, and a certainty that there would be no problems with deals running into millions of pounds carried out by a relatively new trader.

341.     Mr Ruler identified three other factors which he claimed clearly to point to Powerstrip’s knowledge of fraud.  First, the company did not need capital to purchase goods; money was paid to Powerstrip by its customers which was then paid to its suppliers after deduction of profit.  Secondly, Powerstrip did not require credit from its suppliers because they did not release goods until they had received payment for them.  Thirdly, the deals which led to bad debt relief being claimed from HMRC (see the penultimate paragraph) all formed part of a single pattern: the goods were sold by Powerstrip to customers in the EU in zero-rated sales so that it could not have reclaimed VAT previously paid under the bad debt relief provisions.

b) Selectwelcome Ltd (Nigel Huw Clarridge  WS7/494)

[BTS deals May 15-19, June 1-2, 5-8, 13-15, 25-26, 29-30, 40-41]

342.     Selectwelcome was registered for VAT on 4 February 1990, and from the date of its registration operated a convenience store in Swansea.  It was registered as a retail greengrocer.

343.     On 11 January 2006, as a result of a trader having sought verification of Selectwelcome’s registration number at HMRC Redhill, or the company itself having sought verification of another trader, it was sent a letter by HMRC containing advice about MTIC fraud and requesting that it make any verification requests to Redhill.

344.     Mr Mahmood Ahmed, a director of Selectwelcome, approached HMRC on 27 January 2006 asking whether the company’s registration details could be changed to show it as an export company and allowing it to submit monthly returns.  He was asked to submit the request in writing.

345.     As a result of receiving the written request, HMRC arranged to visit Selectwelcome on 16 February 2006.  The visiting officer met two of the company’s directors, Mr Ahmed and Mr Ayaz Rasool.  The officer was told that Selectwelcome had established a separate part of its business to deal with non-grocery transactions, specifically the sale of air time, CPUs and mobile phones to overseas customers.  The two directors admitted having little knowledge of trading in those commodities, but said that a friend had advised them that such sales could be very profitable.  Mr Ahmed added that the company had £3,000 in the bank, and would fund activities by initially selling airtime and gradually building up profits.

346.     In March 2006 Selectwelcome began trading in mobile phones in a small way, and its involvement in the market continued until July 2006.

347.     In the year ending 31 December 2005, Selectwelcome declared turnover of £461,448.  For the period 03/06 it declared turnover of £8,163,049, and for that of 06/06, £224,014,062.

348.     Selectwelcome’s return for 06/06 contained the following information:

Output tax £24,508,344.38

EU acquisitions Nil

Total output tax £24,508,344.38

Input tax £24,579,265.90

Repayment claim £70,921.62

Net sales £224,014,062.00

Net purchases   £224,004,839.00

EC supplies £83,948,520.00

EC acquisitions £83,532,073.00

The return was subjected to extended verification

349.     In the process of verifying Selectwelcome’s transactions in period 06/06, Mr Clarridge established that it completed 190 transactions consisting of 72 acquirer transactions, 52 buffer transactions, and 66 broker transactions.

350.     In the 72 acquisition transactions Selectwelcome purchased phones VAT-free from 5 EU suppliers, namely Adobcom, Mighty Mobile SL, Forex, BRD, and Pol Comm.  The goods were sold via buffers to 9 brokers including BTS.  The UK brokers sold the goods to 18 EU customers, including four of the five EU suppliers.

351.     In relation to the 52 buffer transactions, using internal HMRC databases Mr Clarridge found that a missing, hijacked or otherwise defaulting trader existed at the foot of 38 of the UK supply chains.  As the 38 companies concerned had failed to meet their output tax liability, HMRC suffered tax losses which they sought to recover by means of assessments. Mr Clarridge further established that in every case Selectwelcome’s customer then sold the goods to one of 14 EU customers and one non-EU customer.  Of those customers four were companies with which Selectwelcome had traded directly in the appeal period. Mr Clarridge produced spreadsheets showing the full supply chain listing of the 52 transactions (Exhibits NHC7 to NHC14, NHC18 to NHC40, NHC70, NHC71, NHC82 to NHC91, NHC101 to NHC106, NHC119, NHC120 and NHC137). Input tax on the 52 buffer deals totalled £9,854,730.42 and output tax thereon £9,863,197,45.  In relation to the tax loss chains, Selectwelcome incurred input tax of £7,859,208.21 and charged output tax of £7,865,852.75.  It appeared to HMRC that there were 8 clean buffer chains in April 2006. When Mr Clarridge made his witness statement, which became his evidence in chief, he had been unable to classify the remaining 6 transactions due to an absence of transaction documentation.

352.     As far as Selectwelcome’s 66 broker deals were concerned, 63 of them took place in May and June 2006 with supplies being made to 5 EU customers.  The remaining three deals, in April 2006, all resulted in supplies made to a company in Dubai. Selectwelcome incurred input tax of £14,676,301.33 on the deals. Of the 63 broker deals Mr Clarridge established that in 52 of them a missing, hijacked or defaulting trader existed at the foot of the transaction chain resulting in tax losses of £12,280,777.35.  He confirmed the losses by establishing each full supply chain concerned using internal HMRC databases for the purpose. The defaulting traders identified by Mr Clarridge were Birdwood Ltd, Stock Mart Ltd, Many Services UK Ltd, Advertising Slough Ltd and RS Sales Agency Ltd.  Each was assessed to the tax due from it.  None of the assessments has been challenged; none has been paid. Mr Clarridge indicated that HMRC were pursuing the position in relation to the remaining 14 transactions.

353.     From all 190 deals of Selectwelcome, Mr Clarridge concluded that, after expenses paid by the companies concerned, on a total output tax base of £24,495,599.44, repayment of £35,432,31 was due.

354.     Mr Clarridge found a number of unusual features in Selectwelcome’s trading practices.  HMRC could not obtain details of any money injected into the company to fund its trading resulting in them concluding that the subsequent number and value of its transactions, bearing in mind that it had only one employee, was not credible.  Selectwelcome and all the other traders in its deal chains banked with the FCIB, a bank to which he knew other tribunals had referred as aiding money launderers.  In most of its deals Selectwelcome did not pay its suppliers until it had itself been paid, resulting in the enterprise effectively being risk free.  Further, payment was made some time after deals were completed on a back-to-back basis, i.e. payment was made to the supplier immediately after Selectwelcome was paid by its customer.  HMRC could find no evidence of goods purchased by Selectwelcome ever being insured, or of the company ever having recorded IMEI numbers.  Many of the phones the company purchased were invoiced as of “European specification”, and thus unsuited without adaptation for use in the UK.  During a visit to Selectwelcome an officer of HMRC was informed that it did not undertake credit checks or verify that goods were owned by their supplier.  That in April, May and June 2006 Selectwelcome sold over £220 million worth of mobile phones and other electronic equipment in 190 separate deals without having undertaken what HMRC considered to be meaningful due diligence checks indicated to Mr Clarridge that its transactions were uncommercial.

355.     Further, four of the five EU customers to which Selectwelcome sold goods in its 66 broker deals in the period had been de-registered by the authorities in their respective countries by the end of February 2007.  To HMRC that demonstrated a lack of credibility in the deals, and a clear association of the various companies with MTIC fraud.

356.     Other features commonly associated with MTIC fraud found by Mr Clarridge, and said by him to suggest orchestration, were that Selectwelcome never entered into written contracts with its suppliers and customers, that the EU suppliers and customers at each end of its transaction chains were companies with which it had traded directly in the same accounting period, that all its deals were back-to-back, and they involved low volume high value items.  To those matters, Mr Clarridge further added the facts that in two acquirer transactions in May 2006 the deals had been split at some point in the chain and a proportion of the goods had been repurchased by the original supplier, and in none of Selectwelcome’s transaction chains did an end user appear.

357.     Mr Clarridge concluded that the VAT repayment claim of approximately £14.67 million for period 06/06 that would normally have arisen from Selectwelcome’s 66 broker deals had been artificially reduced to a figure of some £35,000, and that had been done by its introducing the £14.632 million tax charged on the sales of goods to the 9 UK brokers in its 72 acquisition deals.  BTS was one of the 9 brokers concerned, and £1,837,430.02 of the repayment claim with which we are dealing represented the input tax it incurred in 10 separate deals in which Selectwelcome was the UK acquirer. Mr Clarridge took the view that Selectwelcome had “deliberately offset an element of its VAT repayment claims, i.e. £14,676,301.33 to the 9 UK broker traders, each of which later submitted its own claim for a VAT repayment covering the periods 04/06 or 05/06 or 06/06 as part of a contrived scheme to defraud HMRC”.

c) David Jacobs UK Ltd (Richard Hywel Davies WS7/292)

[BTS deals May 5, 9-14, 30-31, 38-39, 43-45]

358.     David Jacobs was incorporated on 2 March 2004, and registered for VAT from 2 February 2005 with a trade classification of “Business consultancy”. It submitted returns on a quarterly basis, its quarters ending in March, June, September and December.

359.     Mohammed Asqher Iqbal was appointed its director on 10 March 2004. He resigned on 24 June 2005, but remained its single shareholder.  He was also a director of Svenson Commodities until 19 January 2004, forming a link between that company and David Jacobs.  Naveed Aslam was appointed director of David Jacobs on 23 May 2005.

360.     HMRC identified David Jacobs as a possible trader in MTIC products when two UK VAT registered companies sought validation of its registration details on 28 June 2005.  The following day HMRC sent a letter to the company explaining the verification process and enclosed Notice 726.

361.     On 7 July 2005 officer Richard Saxon paid an unannounced visit to David Jacobs and informed its director Mr Aslam of HMRC’s concerns about MTIC fraud.  Mr Aslam, whose business background was in the retail clothing business, admitted having some knowledge of MTIC fraud.  The visit report (exhibit RHD7) mentioned that David Jacobs was looking to trade in electronic goods and that the “company profile” sent to its prospective customers and suppliers described it as involved in “monitor/TV recycling.” A further visit was carried out on 14 July 2005 by when David Jacobs had carried out its first deal in MTIC products. The only due diligence the company had carried out on its supplier in that deal was to make a Redhill check.

362.     Mr Saxon arranged to meet Mr Aslam on 11 August 2005, but the latter cancelled the meeting claiming to be very busy carrying out due diligence checks on prospective counter parties.  Mr Saxon did however met Mr Aslam on 19 October 2005 when it was revealed that David Jacobs banked with Barclays and the FCIB, and carried out all trading in MTIC products through its FCIB account.  Mr Aslam also claimed that all the deals the company had carried out to that date were UK trader to UK trader in mobile phones.

363.     In VAT period 07/05 HMRC found that in four tax loss deals David Jacobs’ customer was Svenson Commodities.  They found a further 6 tax loss deals in period 10/05.

364.      David Jacobs’ turnover increased exponentially from early 2005 onwards as follows:

365.     At Mr Saxon’s meetings with Mr Aslam, the latter was asked to produce David Jacobs’ due diligence documentation on its suppliers and customers.  He was also asked to do so in five letters and in a number of faxes and telephone calls.  Every request was ignored resulting in HMRC concluding that the company carried out no due diligence.  Similar requests for the production of CMRs met with the same response, leading HMRC to question whether the goods concerned existed at all.

366.     HMRC obtained information from EU revenue authorities under the mutual assistance arrangements showing that seven EU companies with which David Jacobs had dealt had been deregistered, some were defaulters, others were simply conduit companies.  Forex was one conduit company.  HMRC also found that UK nationals were running all but one of the seven companies.  In HMRC’s opinion, much of the information they obtained could have been discovered by David Jacobs had it carried out the reasonable due diligence required; it did not carry out due diligence as it had no need to do so.

367.     In the Experian report on David Jacobs obtained by the Appellants, (as we have mentioned), it was described as a “maximum risk company”.  Yet it was able to find trading partners.  In those circumstances HMRC concluded that those trading with the company also carried out no diligence on it or, if they did, proceeded to ignore the results.

368.     HMRC identified 40 despatch deals carried out by David Jacobs in period 06/06, the UK acquiring trader in each case being one of 8 contra-traders in David Jacobs’ deal chains.  Those chains had no immediate tax losses; but losses were found in the direct tax loss transactions of the contra-traders when they acted as brokers.

369.     In period 06/06 David Jacobs trading led to direct tax losses totalling £15,563,708.25.  Mr Davies allocated that entire sum to meet input tax repayment demands made by 10 of 13 identified broker traders.  However, the claims for input tax received from David Jacobs’ 13 broker traders totalled £25,514,572.45 – a figure that could not be met in full from the company’s direct tax losses.  Mr Davies therefore used the direct tax losses identified in David Jacobs contra-trader deals for the remaining three brokers.  He then applied the difference between the two figures of £9,951,864.20 to the remaining brokers.

370.     Mr Davies denied BTS’s input tax repayment claims on the basis that it knew or should have known that its transactions were connected with fraud; its deal transactions traced back to contra-traders of which David Jacobs was one.  Although those deals appeared not to trace back to a UK tax loss, HMRC’s investigations showed that David Jacobs offset its transactions with BTS.

371.     Of David Jacobs’ own broker transactions, 97 traced back to a direct tax loss.  It also entered into 40 despatch deals with no apparent loss, contra deals that traced to one of 8 contra-traders.

372.     £1,772,522.51 input tax was denied to BTS in respect of its deals involving David Jacobs.

d) Svenson Commodities Ltd (Christopher Alexander Williams WS7/1)

[BTS deals Apr 6-9, May 6, 23-24, 28-29]

373.     Svenson Commodities was incorporated on 13 January 2003.  It was registered for VAT on 3 February 2003, its trade category being  “Wholesale of computer/communication devices and accessories.”  It was placed on quarterly returns.  The company had a founding director with David Jacobs in Mohammed Asqhar Iqbal. 

374.     On 27 April 2004 officer Blake visited the company.  His visit report stated that its main business activity was “sale and purchase of mobile phones”, and its director Abdul Salam Koser.  In correspondence in July 2004 Svenson Commodities requested permission to make monthly returns saying that it could only enter into planned export deals once it could make such returns.  Its request was refused.

375.     Svenson Commodities’ sales growth was said by Mr Williams to be “extraordinary”. From the company’s VAT returns, he extracted the following information:

376.     On 12 January 2006 HMRC informed Svenson Commodities by letter that a supply chain in which it had acted as a buffer had traced to tax losses of £264,957.

377.     In April 2006 Svenson Commodities conducted acquirer deals of greater value than broker deals it also carried out.  In doing so, it initially placed itself in a payment position at the end of period 06/06.  In May 2006 it conducted broker deals that served to convert its potential payment position at the quarter end to one of repayment.  And in June 2006 it conducted acquirer deals to the value of £16 million, but followed them on 30 June 2006 with 26 broker deals valued at over £60 million.

378.      Given the proportion of its broker deals that were connected to a further contra chain, HMRC considered that to be a highly irregular form of trading and to have been necessary to ensure that the contra-traders in their own dirty chains could conduct sufficient acquirer deals before the end of the period to disguise and offset their own fraudulent repayment claims. The result was that the company’s resulting repayment claim was, although still very substantial, much smaller than it would otherwise have been. HMRC regarded that overall trading behaviour to be most irregular and to point clearly to contrivance.

379.     In period 06/06 Svenson Commodities also conducted 126 buffer deals, 73 of which HMRC traced to a tax loss. In its acquirer deals it was supplied by three different EU companies which appeared to HMRC to have been involved in fraud. One of those companies was Mighty Mobile, a company said by the Spanish authorities to be a property company whose offices had long been closed.

380.     The goods included in the 26 broker deals Svenson Commodities undertook on 30 June 2006 were not released in accordance with its normal practice, i.e. within 2 weeks of the invoice being raised, but were retained for some 1 to 2 months. The company attributed the delay in release to the closing of its bank accounts with the FCIB, yet it was not until 15 August 2006 that FCIB informed its clients their accounts should be closed by 15 September 2006. As ordinarily Svenson Commodities’ customers would have released payment by mid-July, HMRC considered the explanation offered unacceptable.

381.     A supplier and customer questionnaire were all that Svenson Commodities regularly obtained by way of due diligence on its counter parties: it undertook few credit checks and obtained no trade references or bank documents. Such credit checks as it did undertake were often performed after deals had been completed.

382.     To Mr Williams the level and details of its due diligence could not have provided the company with adequate assurance that it was not involved in MTIC fraud before deals were carried out. It suggested that Svenson Commodities “went through the motions of due diligence with the objective of demonstrating compliance with HMRC examples”.  The checks actually carried out fell far short of those suggested in Notice 726.

383.     The company requested inspection reports on goods only when it exported them.  The reports were thus too late to serve a normal commercial purpose.

384.     Mr Williams provided the following “non-exhaustive list of factors which … indicate(d) that Svenson Commodities knew its transactions were connected with fraud: back-to-back deals, no losses, no commercial risk, no added value, no written terms and conditions, no evidence of shipping terms or costs, and its turnover figures did not resemble those of a legitimate business.”

e)  TC Catering Supplies Ltd (TCCS) (Wayne Anthony Conroy WS7/247)

[BTS deals May 8, 25-27, June 3-4, 9-12, 27-28, 31-39]

385.      Mr Conroy was entrusted with the task of reviewing certain of the records and tracing the deal chains of TCCS in the three months ended on 30 June 3006.  He was provided with the deal packs for the transactions collected by officers Joanne Ewan and Thomas Lane.  Those officers informed Mr Conroy that TCCS had carried out no trading in MTIC goods before May 2006.  However, in the remaining two months of that quarter the officers reported that it had been involved in wholesale back-to-back transactions in mobile phones, CPUs and other electrical items as an acquirer, a buffer, and a broker.

386.     From the evidence presented to him, Mr Conroy considered TCCS to be involved in contra-trading.

387.     TCCS submitted its VAT return for period 06/06 (Exhibit WC1) showing the following:

Total Net Sales   £258,420,612.00

Total Net Purchases   £256,863,661.00

Net EU supplies   £104,309,524,00

Net EU Purchases   £102,687,975.00

Total Output Tax (including acquisition tax) £27,328,179.82

Total Input Tax (including acquisition tax) £27,318,412.40

Net Tax Due £9,767.42

The MTIC deals that were included with the above figures were:

Total Net Sales £257,810,925.00

Total Net Purchases   £255,890,813.75

Net EU supplies   £104,309,524,00

Net EU Purchases   £102,687,975.00

Acquisition transactions

388.     In May 2006 TCCS made 50 sales, and in June 2006 158 sales.  On 17 occasions in May 2006 and 64 occasions in June 2006, the company acted as UK acquirer, selling goods purchased to a UK customer.  On a further 22 occasions in May 2006 and 15 occasions in June 2006 it acted as a buffer. And on the remaining 90 occasions (11 in May 2006 and 79 in June 2006), it acted as a broker.

389.     Mr Conroy analysed the TCCS deal chains in which BTS appeared as broker in May and June 2006 (exhibit WC2). The analysis showed that in 4 deals in May 2006 (originating from 2 TCCS acquisition deals which were split) where BTS acted as broker (i.e. TCCS May deals No 13 and 41) there were two UK traders between TCCS and BTS; on each occasion TCCS sold to Yalegate which sold to NTS before the latter sold to BTS.  The EU supplier in deal 13 was Forex of Germany and in deal 41 Adobcom of Portugal.  The EU customer at the end of the former chain was Planetmania of Portugal and the 3 EU customers at the end of the latter chain Planetmania, CIDP of France and Opal 53 of Germany.  The deal chains were produced as exhibit WC3.

390.     In the 16 deals in June 2006 (originating from 9 TCCS acquisition deals) BTS acted as broker.  In 8 of the 9 TCCS deals there were two UK traders between TCCS and BTS and in the remaining one there were 3 UK traders between the two companies. In 8 of the 9 TCCS deals the EU supplier to it was Mighty Mobile of Spain and in the one other deal Adobcom of Portugal.  There were 4 EU customers at the end of those deal chains i.e. Intangible Media of Spain, Planetmania of Portugal, Opal 53 of Germany and Sigma Sixty of Holland (see exhibit WC4).

Broker Transactions

391.     There were 90 deals where TCCS purchased from a UK supplier and sold to an EU customer in broker transactions.  In 87 of those deals a defaulting or contra-trader existed at the foot of each of the UK supply chains.  That was confirmed by Mr Conroy establishing the full supply chain.  He established the full chains by tracing the supplier from the traders’ deal packs.  He then checked HMRC’s computer system to trace other trader records from the supplier’s supplier.  Where that information was not available, Mr Conroy sought information from the relevant HMRC officer and continued along the chain until he arrived at a defaulting trader and could go no further.

392.     As each defaulting trader had failed to discharge its output tax liability to HMRC, they suffered tax losses.  In order to recover the unpaid tax, HMRC made assessments for the appropriate amounts of output tax. Mr Conroy issued tax loss letters to TCCS in respect of the tax loss deals (exhibit WC5).

393.     He produced copies of the deal chains for all the TCCS deals resulting in tax losses, along with the supporting documentation for each step in those deal chains, (exhibited within Files E42 to 54).

394.     From his analysis of TCCS’s trading records and his verification of its supply chains, Mr Conroy established tax losses totalling £17,372,409.94 for the 87 deal chains he had finalised, and confirmed that they had occurred as a direct result of its trading activity in May and June 2006.

f) Epinx Ltd (Ian Clifford White WS7/185)

 [BTS deals May 32-34, June 16, 19-21 and 23]

395.     Epinx effectively took over the business of Pinx Ltd, which became insolvent in February 2005, both companies having Paula Susan White as director. Epinx registered for VAT with effect from 10 April 2005, but made its first taxable supply on 1 March 2005.  The company was sent a letter about MTIC fraud shortly after the latter date. The letter was followed by a visit by MTIC officers on 27 June 2005.  In Form VAT 1 Epinx estimated its annual turnover would be £700,000, and said that it did not anticipate making sales to and purchases from companies in the EU.

396.     On 21 July 2005 Epinx submitted a repayment return for period 06/05 (exhibit ICW6) in the sum of £82,243.60.  Its outputs declared in the period exceeded £1 million.  HMRC initiated enquiries into the return and found that the repayment claim it was based on the zero-rating of two sales to a Spanish customer. Epinx’s return for 09/05 was also a repayment one (exhibit ICW7), but in the much reduced sum of £1,611.78.  The return showed turnover exceeding £3.3 million – an increase of 230% on period 06/05.  The return for period 12/05, exhibit ICW8, sought repayment of £8,448.88 based on turnover in excess of £23 million – a further increase in turnover, on this occasion of 596% on the previous period. HMRC dealt with the 09/05 and 12/05 returns without enquiry.  In contrast to the three immediately preceding periods, the return for period 03/06 was a payment one of £7,670.15 (exhibit ICW9).  Turnover in that period was shown as £77.7 million – an increase of more than £54 million (235%) on the immediately preceding period.  In period 03/06 Epinx carried out 32 broker deals and 39 acquisition deals.  Had it not carried out the latter, its return for the period would have shown it to have been entitled to a repayment of some £5.815 million

397.     On 9 March 2006 Epinx made application both for a change of trade class to “wholesale of electrical items”, and for permission to make monthly returns.  HMRC refused the latter as the company failed to provide evidence of its being in a regular repayment position.

398.     Epinx’s return for period 06/06 (exhibit ICW10) reverted to the repayment pattern established earlier.  It sought £18,999.15 based on turnover exceeding £212.4 million, or an increase in turnover of 172% over the immediately preceding period.

399.     In period 06/06 Epinx completed 232 deals.  Forty-five of them were broker deals, of which HMRC traced 43 back to defaulting traders.  A further 70 were acquirer deals, the goods in all of which were despatched from the UK by a number of broker traders, including BTS.  The remaining 117 were buffer deals, 116 of which were traced back by Mr White to defaulting traders.

400.     Mr White found a number of features which indicated to him that Epinx’s business and pattern of trading were inconsistent with normal commercial practice and were artificially contrived.  He did so against a background of all the company’s fully verified deals in which it had acted as acquirer from the EU tracing back to broker traders who had despatched them abroad.  In every fully verified deal chain in which Epinx acted as the broker, the chain had been traced to a defaulting trader.

401.     Mr White considered Epinx’s turnover in its first 15 months of trading, of over  £316 million “incredible”.  The company had little capital and no significant financial backing or experience in its trade sector.  Epinx and all its suppliers and customers had accounts with the FCIB.  Epinx’s director withdrew £780,000 from the company’s FCIB account shortly before the authorities froze accounts with the bank in October 2006.  It entered into no written contracts with its customers or suppliers claiming that to have been unnecessary since it offered no credit facilities, nor did it insure any goods in which it traded.  In its highly competitive trading environment, Epinx made a profit in every one of the 316 deals it undertook between January and June 2006.  The company never inspected goods in which it dealt, but relied on its freight forwarders to make inspections.  The form of a large number of Epinx’s deal chains was remarkably consistent, the same traders appearing in the same order – see exhibit ICW24 as an example showing goods passing from Eutex Ltd to Dialhouse Electronics Ltd, to Yodem Ltd, to Sabretone Electronics Ltd to Epinx – an order that was repeated in all 14 of Epinx’s deal chains in May 2006. Epinx was never left with stock it could not sell, and every deal was structured so that it did not have to pay for supplies until it had been paid by its customer

402.     In a number of broker deals, Epinx was supplied by FAF. The Italian authorities concluded that FAF was a “fictitious company” and the transactions it purportedly conducted were false. Epinx carried out no Redhill checks on FAF, nor did it make any credit or other checks on it.

403.     Epinx made contact with its suppliers and customers using the websites IPT and ICB - sites used by wholesalers of mobile phones and CPUs which no manufacturers, authorised distributors or retailers used.

404.     The company undertook minimal due diligence on its suppliers and customers. Its due diligence consisted of obtaining an introduction pack, making a check of a customer on the EU Europa website, and an occasional site visit. (In contrast with Redhill checks, which not only confirmed the validity of a VAT registration number searched but also ensured that it related to the trader searched, the Europa site simply confirmed that a registration number searched existed). The documentation Epinx provided to HMRC was mainly undated and unsigned. Epinx made no credit or other checks on the companies with which it dealt, despite its being specifically asked to do so by HMRC in correspondence, and made no Redhill checks on companies with which it intended to deal.

405.     Mr White concluded that Epinx and BTS were operating in an overall scheme to defraud the revenue.  The former’s transactions did not take place under ordinary trading conditions; it acted as a contra-trader in the overall scheme which was designed to disguise its actual tax loss transactions by off-setting them against transactions with other broker traders.

406.     He maintained that the overall scheme could not have worked without the participation in it of all the traders in the transaction chains.  He further opined that, based on the evidence before him, the actions of Epinx as a contra-trader were instrumental to the working of the scheme to defraud the revenue, and it must have known that its transactions were fraudulent.  Nine primary factors led to Mr White so concluding:

i)              the director of Epinx had previous knowledge of MTIC fraud based on correspondence and visits from HMRC;

ii)            the deals completed were not commercial transactions carried out at arm’s length;

iii)          the deals were contrived in nature, with identical chains in many instances and all parties making small profits;

iv)          Epinx failed to provide any evidence of the contracts in which it claimed to have entered and of insurance;

v)            parties to all contracts used accounts with the FCIB;

vi)          every one of Epinx’s broker deals that had been fully verified had been traced to a defaulting trader.  Further, Epinx appeared as a buffer in 117 deal chains that originated with a defaulting trader;

vii)        all of the deals were back-to-back, all consignments being sold in their entirety.  Epinx was never left with unsold stock, nor had it ever taken possession of stock or personally inspected stock dealt in;

viii)      Epinx achieved extraordinary levels of turnover in the first 6 months of 2006. Following HMRC’s expansion of its extended verification programme in May 2006, its trading ceased; and

ix)          the due diligence carried out by Epinx was totally inadequate to protect it from fraud. 

g)  Kwality Trading International plc (Ian Michael Simmons WS7/119)

[BTS June deals 17, 18, 22 and 24]

407.     Kwality was incorporated on 24 June 2002.  Its original name was AG Com Holdings Ltd.  It was registered for VAT from 2 October 2002.

408.     In its Form VAT 1, signed by George Sauva, the director until 20 February 2003, its business activity was stated to be “Commodities, transaction, commission”, the date of the first taxable supply disclosed as 1 January 2002 (before the company was formed), and its annual turnover estimated to be £400,000.  The EU trade section of Form VAT 1 was not completed.

409.     Other directors of the company, with the dates on which they took office and ceased to hold office, were as follows:

Spencer Sharpe (24/6/02 – 2/07 – when the company was wound up)

Giles McIver (15/6/06 – 2/07)

Ms Sandra Sharpe (10/3/03 – 15/6/06)

410.     Kwality declared no outputs until period 07/05.  In that period it declared outputs of some £5 million, followed by some £17 million in period 10/05.  Outputs dropped back to the 07/05 figure in period 01/06.  They then increased dramatically to over £60 million in period 04/06, and to some £75 million in period 07/06, plummeting to nil in period 10/06.  Mr Simmons considered that Kwality began contra-trading towards the end of 2005.

411.     On 19 April 2005 three officers of HMRC visited Kwality and spoke to Spencer Sharpe.  The officers reported that the company was distributing Dunlop watches, but that “the mini scooter side was not doing very well”.  At the time of the visit Kwality had carried out a small number of transactions in mobile phones, having sourced them from retailers.  The visit was followed on 15 June 2005 by an assessment to VAT of  £69,125 plus interest to deal with an invoice Kwality had failed to declare.

412.     By fax of 18 August 2005, the accountant for Kwality requested that the company be allowed to make monthly returns as it was entitled to a very large refund of VAT.  The request was denied on 19 September 2005.

413.     In interview on 17 July 2006 Spencer Sharpe informed HMRC that the start up capital for Kwality consisted of a £60,000 personal loan he made to the company.

414.     When Kwality registered for VAT security for supplies was required from it due to its director’s previous involvement in a number of failed companies.  The sum specified was £4,120.67.

415.     Kwality failed to declare any acquisition tax in periods 04/06 and 07/06 despite acquiring goods to the value of over £60 million in the two periods.  The company offset its output tax liability arising from the acquisition transactions against the input tax liability created by the export/despatch transactions, resulting in its having a very small tax liability.

416.     Kwality’s VAT returns for periods 04/06 and 07/06 contained the following information:

417.     The returns for 04/06 and 07/06 were both subjected to extended verification.  Sixty three of the 64 broker transactions entered into by Kwality in that period were traced to direct tax losses, but due to a lack of EU paperwork HMRC were unable to trace the remaining one to a tax loss.

418.     In addition to the 64 broker transactions, Kwality entered into 110 acquisition transactions. Of those 110 transactions, HMRC traced 6 to BTS (BTS deals 17 (split deal), 18, 22 (split deal) and 24), which brokered them to companies in the EU.  Of the remaining 104 transactions, HMRC traced a further 59 to other brokers who exported them.  At the time Mr Simmons made his statement, on 14 February 2011, HMRC were continuing to make enquiries into the other 45 transactions, but he expressed himself confident that, given the previous trading of Kwality, they were likely to be traced to brokers who exported the goods.

419.     Two officers visited Kwality on 17 July 2006 when they met Mr Sharpe.  In interview, he disclosed, inter alia, that he did not know whether the company had entered into written contracts with its suppliers and customers, whether its counter parties were well established or not, how the release of stock was controlled, who arranged transport of goods bought and sold, what the purpose of inspections was, and whether Kwality obtained inspection reports.

420.      Over the two accounting periods concerned, 103 of the 110 (93%) of Kwality’s acquisition transactions took place between 31 January 2006 and 30 May 2006, while 42 of the 64 (63%) of the broker transactions took place in June 2006, indicating to HMRC that the transactions were contrived.

421.      Of the output tax of £5,261,399.40 declared by Kwality for period 04/06, £1,505,482.38 was denied by HMRC against broker traders who exported the goods from the UK to the EU.  The balance was said in large part to be the subject of ongoing enquiries by HMRC. Of the output tax of £6,512,636.09 declared for period 07/06 £6,218,208.91 was denied by HMRC against broker traders who made tax repayment claims and exported goods from the UK. In 55 of 63 transactions traced back to a UK acquirer where Kwality later despatched goods from the UK, HMRC found that Kwality made 50% or more of the profit generated within the supply chain, indeed in some cases it made more than 80% of the profit generated.  The remainder of the profit was split between the remaining traders in the chain, of whom there were generally at least 5.

422.     In period 04/06 Kwality carried out 27 transactions involving a UK supplier.  In every such case, HMRC traced the supply chain back to a defaulting or hijacked trader resulting in a tax loss exceeding £5 million. And in period 07/06 Kwality carried out a further 237 such transactions.  In all but one of them HMRC traced the supply chain back to a defaulting or hijacked trader resulting in a tax loss exceeding £6.15 million.

423.     Where Kwality exported goods in period 04/06 the tax losses incurred in the supply chains concerned exceeded £5 million, and the input tax denied to the brokers in the acquisition chains exceeded £1.5 million.  That resulted in tax losses in Kwality’s supply chains exceeding the denied input tax against the brokers by approaching £3.6 million.  The corresponding figures for period 07/06 were

Tax losses in Kwality’s removal transactions £6,153,343.03

Input tax denied against brokers  £6,128,208.91

424.      HMRC found differences in prices Kwality paid for phones which they considered required explanation.  For instance, in a transaction Kwality entered into on 20 June 2006 (no 449), it paid £269.50 per handset for 5000 Nokia 9300i phones.  In transaction 458 it paid £243 per handset for 4000 handsets of the same make and model of phone on 12 June 2006.  That constituted a 10.91% difference in the two prices.  As that situation was repeated many times over in Kwality’s transaction chains, HMRC questioned why Kwality did not demand lower prices for greater volumes of stock.  HMRC found a remarkable consistency in mark-ups achieved by the buffers in Kwality’s broker chains.  In more than 25% of Kwality’s 64 broker transactions, each buffer made 10p regardless of where it appeared in a transaction chain.  None of Kwality’s transaction chains ever led to a manufacturer or retailer.  In many other ways, Kwality’s transactions bore all the hallmarks HMRC considered indicative of MTIC transactions.

425.     The membership of Kwality’s supply chains showed a remarkable degree of consistency.  Several supply chains contained exactly the same members in the same order; other chains contained the same members but in a different order.  HMRC considered the chances of such coincidences occurring in a genuine market between traders dealing at arm’s length to be “very remote.”

426.     On 19 July 2004 two HMRC officers visited Kwality’s premises but were unable to make contact with anyone.  Another two officers paid a visit on 20 July 2005 and met Mr Sharpe, who was told about the risks involved in wholesaling mobile phones and advised to document due diligence checks carried out.

427.     Those factors were considered by HMRC to indicate that Kwality had knowledge that its transactions were connected with fraud. Other indicators they took into account in arriving at that conclusion were the fact that the majority of its purchases and sales were carried out on the same day, were back-to-back, involved no losses in its transaction chains, added no value to the supply chain, and the company did not enter into written contracts and seemingly did not insure goods.

428.     Mr Simmons expressed himself satisfied that Kwality’s transactions on 22 and 26 June 2006 (in which it indirectly supplied BTS) were part of a deliberate scheme to defraud HMRC, and that the company was fully aware of and knowingly entered into transactions that were associated with MTIC fraud.  He concluded that Kwality was provided with enough information about MTIC fraud to have been aware of it, and that there were sufficient objective factors to have alerted a reasonable and conscientious business to the fact that transactions it was entering into were connected to MTIC fraud. The factors he so identified were:

(i)            Kwality’s trading patterns showed that it entered into acquisition and broker transactions designed artificially to offset its VAT liability and to disguise substantial fraudulent tax losses from HMRC.  BTS, and all the other broker traders who exported goods imported by Kwality, were a necessary part of the overall scheme to defraud the revenue;

(ii)          the goods were bought and sold in large wholesale quantities, and the vast majority of transactions entered into were back-to-back;

(iii)        almost without exception, Kwality was able to source a particular number of phones from one of only a handful of suppliers and find a customer for exactly the same quantity and description of goods at a price that gave it a very consistent profit on the same day as they were sourced;

(iv)        in the vast majority of transactions Kwality received payment from its customers before payment was required by its suppliers, creating a risk free environment for the company;

(v)          the bank account operated by Kwality in the relevant periods was an FCIB account.  All payments were made to suppliers through their own FCIB accounts; and all receipts were paid into its own FCIB account;

(vi)        Kwality failed to provide any evidence of due diligence checks carried out on its suppliers and customers;

Kwality also failed to provide any evidence of written contracts with its suppliers’ customers, freight forwarders or transport companies.

h) C&B Trading (UK) Ltd (Graham Taylor WS9/114)

[BTS April deals 2-5]

429.     Four deals into which BTS entered into in April 2006 originated with C&B. They were recorded as purchases made from C&B within the spreadsheets of purchases and sales made by V2 (UK) Ltd (exhibit GT58) and Bluestar Communications Ltd (exhibit GT59).  The VAT due from C&B on the sales was included in an assessment of £59,047,843.54 of 7 July 2006 (exhibit GT43).  That assessment has not been paid, nor has it been appealed.

430.     C&B was incorporated on 30 January 2001 as C&B Car Care Ltd.  It applied to be registered for VAT on 17 April 2003 declaring its main business activity as car valeting, and estimating annual turnover of £80,000.  Its Form VAT 1 contained a declaration by director Delroy Chambers that the company would not buy goods from or sell goods to traders in other EU Member States, and that it did not expect to receive regular repayments from HMRC.  C&B was registered for VAT with effect from 1 May 2003, and was put on a quarterly tax stagger ending in July and quarterly thereafter.

431.     The company changed its name to C&B Trading (UK) Ltd on 24 August 2005,  Mr Chambers in a letter of the same date to HMRC informing them that the company had changed its trading activity but not disclosing the new one.

432.     C&B opened a sterling bank account with the FCIB on 19 September 2005, some six months before the company started trading in MTIC goods.

433.     On 5 September 2005 HMRC received a letter requesting the company be placed on monthly returns. It was followed by a further similar request from Ms Sarah Dunn, who was later found to be the ultimate owner of C&B and its only shareholder.  On 21 September 2005 HMRC refused the request.

434.     C&B was selected for a VAT assurance visit on 9 November 2005.  HMRC made several attempts to contact Ms Dunn between that date and 5 December 2005, but all were unsuccessful.  On 11 January 2006 HMRC wrote to C&B saying that an officer would visit its principal place of business on 26 January 2006 to inspect its records and verify its VAT returns.  The visit was not carried out due to C&B’s lack of co-operation with them.

435.     On 24 February 2006 HMRC received a letter from C&B advising them that it had changed its trading activity to the sale of chemicals and alloy wheels, and that it had also changed its trading address.

436.     HMRC were notified by letter that Mr Chambers and the company secretary had resigned on 20 February 2006, and that the new director was Mr D Heath and the company secretary Mr B Mooney.

437.     C&B’s VAT return for period 01/06 was a “nil” return (exhibit GT25).

438.     By letter received by HMRC on or about 16 March 2006 signed by Mr Heath, they were informed that the company had again changed its trading activity, on this occasion to that of the purchase and sale of chemicals, car components, alloy wheels etc, and requesting that its trade classification be changed to “general trading”.

439.     In a telephone call to HMRC’s National Advice Centre on 10 April 2006, Highbeam Ltd sought to verify C&B’s VAT registration number.  The note of the call referred to C&B as being a supplier of mobile phones to Highbeam

440.     On 11 April 2006 HMRC’s Redhill centre sent C&B a letter informing it of problems in its trade sector and requesting that it verify customers and suppliers with that centre (exhibit GT 34).  A copy of Notice 726 was enclosed with the letter.

441.     Mr Taylor and another officer paid an unannounced visit to C&B on 26 April 2006, HMRC having received information from a warehouse company, Paul’s Freight, that a Swiss company, Integralphone GmbH, (“Integralphone”) was releasing goods to C&B and it, in turn, was releasing them to Highbeam in the UK.  Evidence subsequently obtained by HMRC from Paul’s Freight showed that P G Hightech of Cyprus was supplying goods to Integralphone. They were sold on to C&B and then to Highbeam.

442.     Mr Taylor and his colleague were unable to gain access to C&B’s premises on visiting them on 26 April 2006.  Mr Taylor telephoned the company and was told by Mr Mooney, the company secretary, that they were “too busy” and could not see him that day.  Mr Taylor asked what goods C&B was trading in, and was told mobile phones, purchasing them from a Czech company and selling them in the UK.

443.     A meeting with C&B was then arranged by Mr Taylor for 28 April 2006.  Mr Mooney telephoned HMRC on 27 April 2006 and left a message for Mr Taylor that he was unable to meet him on 28 April 2006, but agreed to do so on 2 May 2006.

444.     On 28 April 2006 Mr Taylor faxed to C&B what is known as a Regulation 25 letter and a duplicate return for period 04/06 (exhibit GT39).  (Regulation 25 of the VAT General Regulations 1995 empowers HMRC to vary the length of any particular accounting period where they consider it necessary to do so).  The letter brought forward the due date for its 04/06 return to 2 May 2006.  The letter was not appealed.

445.     A further letter was sent to C&B on 28 April 2006 advising that its VAT registration was to be cancelled with effect from 1 May 2006 (exhibit GT40).  That was done on the basis that C&B had been a willing participant in trade on which it appeared to have no intention of accounting for the VAT charged on invoices it raised.

446.     Mr Taylor and officer Saxon visited C&B’s premises on 2 May 2006 but were unable to contact anyone connected with the company.

447.     From information obtained by various officers of HMRC contained in the purchase records of other traders they established that C&B had made a considerable number of UK sales in period 04/06.

448.     C&B failed to make a VAT return for period 04/06.

449.     As a result, on 7 July 2006 HMRC made a VAT assessment against C&B in the sum of £59,047,843.54 (exhibit GT43). They made a further assessment on 14 November 2006 in the sum of £23,022,219 (exhibit GT44).  In each case the assessment was based on known VAT amounts due from the company, copies of the calculations and spreadsheets relating to them being produced as exhibit GT54. Neither assessment has been appealed or paid.

450.     Details of the sales made by C&B were obtained from five known customers and were set out in exhibits GT55-59.

451.     The assessment of 14 November 2006 was subsequently reduced to £22,614,728.

452.     Four further assessments were later made against C&B (exhibits GT60-63), and again have neither been appealed nor paid.

453.     Mr Taylor expressed himself satisfied on the balance of probabilities that C&B had acted as a UK acquirer of goods from other EU Member states and that the goods were used in MTIC chains.  He so reasoned because:

i)        in addition to the information provided by phone by Mr Mooney in April 2006 that C&B was acquiring goods from a Czech company (exhibit GT36), HMRC obtained release notes relating to deals in 2006 (referred to in exhibit GT35) of goods being allocated directly to Highbeam by Integralphone.  Looked at in isolation, the release notes indicated that Highbeam was purchasing goods direct from overseas suppliers;

ii) the FCIB statements (exhibited by Mr Taylor as GT65 and based on the evidence of officer Peter Dean) showed that C&B routinely made substantial payments to overseas companies, chiefly Integralphone, and paid the majority of the proceeds of its sales (including the VAT it collected from the UK customers) to that company.  Consequently, its actions resulted in its being unable to pay the VAT due from it;

iii) he had been unable to trace C&B’s transaction chains back beyond the company, or to trace any other UK company supplying C&B;

iv) C&B went into compulsory liquidation on 10 January 2007.

454.     Mr Taylor concluded that the business activity and trade class allocated to C&B were disclosed solely to enable it to obtain a VAT registration certificate. They ensured that the intentions of the directors of the company remained hidden from HMRC, and enabled it to enter MTIC deals without challenge by them.  C&B acted as a defaulting trader in acquiring goods from traders based outside the UK and made or purported to make taxable supplies to other UK VAT registered entities but failed to render a VAT return for period 04/06 and so did not disclose those sales to HMRC.  The result was the tax loss of £84,368,677.22, which remains unpaid.

i) First Touch Communications Ltd (“First Touch”) (Lynda Sally Baker WS13/1)

(NTS deals 2-5)

455.     A contra-trading cell identified by HMRC as affecting the four transactions NTS conducted in April 2006 was the “First Touch scheme”.  The scheme is dealt with in the consolidated statement of case as follows:

“78. In respect of the remaining 4 deals in the VAT period 04/06 [NTS deals 2-5] … [HMRC] have traced the chain of transactions via a contra-trader, First Touch which acted fraudulently, to fraudulent tax losses.  The 4 transaction chains featured the same participants in the same order and, in each case, there was a circular flow of goods, the original supplier Pol Comm… purchasing the goods back a few days later for a price higher than that for which it had sold the goods.”

Thus, HMRC claim that the First Touch scheme also involved circularity, with NTS as part of the circle.

456.     Ms Baker’s evidence showed that First Touch was incorporated on 17 May 2002, and was registered for VAT from 16 October 2002 under the trade classification of “telecommunications.” There was a link between Scorpion and First Touch in that Scorpion’s director had previously been a director of First Touch. 

457.     Although the two companies operated from the same premises and dealt in the same commodities, in periods 03/06 and 04/06 Scorpion and First Touch did not deal with each other.  However, they and NTS shared some of the same customers in Opal 53, Sigma Sixty and CIDP.  NTS and Scorpion also shared the same suppliers in Deb Techno, Svenson Commodities and Pol Comm.  Further, tax losses were to be found in defaulters in both First Touch’s and NTS’s transaction chains.

458.     First Touch was said to have originally been financed by a family loan of £100,000.  An Experian report including the company’s accounts to 31 May 2004 showed it as having no capital assets, and did not include a family loan (exhibit LSB1 pp 572-584).

459.     Records uplifted from First Touch in August 2006 showed it to have been lent £490,000 in January 2005 by Oman Trading LLC of Dubai.  First Touch obtained that loan at a time a sum of £640,250 belonging to it was the subject of a freezing order.  The case in which that order was made went to the Court of Appeal where in February 2005 Waller LJ refused to vary the order.  His decision was not appealed.  In the judgment the Lord Justice considered First Touch to be a knowing participator in MTIC fraud, and carried out a detailed analysis of the working of the fraud.

460.     First Touch declared turnover as follows:

Year to 31 May 2004   £21,707,158

Year to 31 May 2005 £80,347,510

Year to 31 May 2006 £169,551,864

461.      In period 03/06 First Touch carried out 14 deals, 10 of which were broker deals that traced back to defaulters resulting in tax losses totalling £1,512,971.  First Touch claimed repayment of input tax of £1,523,952.50 against those 10 deals, which claim was reduced by the output tax of £293,037.50 declared on four contra deals to NTS.  The overall loss to HMRC from First Touch’s claim and the unpaid defaulter losses in period 03/06 amounted to some £2.7 million ignoring the net tax accounted for by the buffers in the various chains.  Ms Baker noted that in the 4 contra deals to NTS the supply chains were identical, and took the form recorded at para 78 of the statement of case (see deal sheets at pp 12-15 exhibit LSB2). In each case there was a circular flow of goods, the original supplier Pol Comm repurchasing the goods a few days after selling them at a higher price.  A copy of the deal sheets in respect of the contra-trading chains was annexed to the statement of case, and the tax losses for First Touch were shown in the deal sheets within Annex K of the CD rom, and were thus deemed to be agreed by the Appellants.

462.     Ms Baker claimed First Touch was involved in contra-trading in periods 03/06, 04/06 and 05/06, having just 3 customers for all the broker deals it carried out – Sigma Sixty, CIPD and Opal 53.  Those three customers also appeared in NTS deals in period 04/06.

463.     In period 04/06 First Touch carried out 39 deals between 20 and 28 April 2006, of which 36 were broker deals and 3 acquisition deals (exhibit. LSB2/31-69).  For period 04/06 First Touch submitted a repayment claim of £4,033,805.76. Neither the repayment claim for period 03/06 nor that for period 04/06 was met by HMRC

464.     The company’s 06/06 return indicated that it had carried out no trading.  Consequently, it was deregistered with effect from 15 August 2006 (exhibit LSB1/ 101).  By 23 August 2006 the deal chains for First touch’s 04/06 transactions had been established by HMRC.  They showed 20 of its 39 deals traced back to a defaulter; and by 30 October 2006 a further 4 deals had similarly been traced back to a defaulter.

465.     As we explained earlier, on 30 March 2006 First Touch acquired goods which it sold to NTS in four deals.  The total value of those purchases was £1,668,300 on which it declared acquisition tax of £291,952. The acquisition tax was subsequently reclaimed in its entirety as input tax.  In all four deals, the goods which had originated with Pol Comm were returned to that company 3 days later.  That showed a “lack of commercial sense” and that the deals were “contrived in order to offset tax losses in other chains.”

466.     On 26 April 2006 First Touch carried out a further three deals in most respects identical to those set out in the last preceding paragraph.

467.     In April 2006 First Touch carried out 36 broker deals, exporting goods to just 4 EU customers.  Its sales invoices showed the value of those deals to be £29,307,150, but their EU sales value declared in its VAT return was only £28,657,150.  Twenty-eight of the 36 sales were traced back to defaulting traders by HMRC, the tax loss arising amounting to £3,328,378.41.  The remaining 8 deals were traced back to other contra-traders.

468.     Ms Baker observed that the supply chains in 03/06 of First Touch lacked any commercial rationale, and most (containing up to 6 buffers) were too long to be commercially viable. All the deals in individual chains took place on the same day, and no chain could be traced to a manufacturer, authorised distributor or end user.  None of the traders within the chains ever took possession of the goods, which whilst in the UK remained with two freight forwarders.  The goods were traded on a back-to-back basis, and no trader made any loss.  There were no formal contracts.  First Touch failed to record IMEI numbers.

469.     Anfell was a defaulter in 16 transactions between First Touch and NTS, the tax losses wherein totalled £2,235,820, and a further 16 transactions entered into by First Touch resulted in losses of £1,870,904.

470.     In her witness statement Ms Baker dealt with HMRC’s evidence as to First Touch’s knowledge or means of knowledge that its transactions were connected with VAT fraud.  First, she observed that in a report prepared at the time the company commenced trading HMRC made a note that it had been sent a copy of their MTIC monitoring letter on 11 November 2002.  A post-registration visit was carried out on 20 November 2002, and the resulting report indicated that First Touch was dealing only with UK suppliers and customers, and was acting only as a buffer.  On 23 April 2003 a further visit was made and it was found that the company had been making third party payments Although HMRC could not say for certain that Notice 726 had been served on First Touch, its director Mr Jaji and company secretary Mr Samra were aware of its contents, a copy of the Notice having been served on First Touch’s associated company Scorpion.  On 6 March 2006 First Touch was sent a letter informing it that its supply chains contained defaulting traders in 08/05 and 09/05 resulting in a loss of revenue of £146,800 – a further indicator in Ms Baker’s opinion that at the time of its transactions First Touch had knowledge that it was involved in transaction chains in which tax losses were being made.

471.     Of First Touch’s due diligence, we need report but an observation of Mr Teji to officer Bowyer made during the meeting of 23 November 2006 (exhibit LSB1/108-113), “I think due diligence is a waste of time”.

472.     Other factors Ms Baker took into account in concluding that First Touch knew that its trading was connected with the fraudulent evasion of VAT were that it purchased and sold goods on the same day, there appeared to be no problem in the immediate sourcing of goods, it never made losses on its deals, it added no value to its deals, it did not enter into written contracts, its sales invoices referred to standard terms and conditions of trade on its non-existent website, and it failed to provide evidence that its goods were insured.

473.     For the 4 First Touch deals of 30 March 2006 with NTS, Pol Comm was the EU supplier and Opal 53 was the EU customer.  In period 04/06 Pol Comm was the EU supplier at the commencement of 6 deals carried out by First Touch.  Three of the deals were broker deals, and the EU customer in two of them was Opal 53, and in the third CIDP.  The other three deals were contra deals in which First Touch acquired goods direct from Pol Comm.

474.     In period 05/06 Pol Comm was the EU supplier in a further 6 of First Touch’s deals, and Sigma Sixty was the EU customer in 3 of the deals, CIDP was the EU customer in 2 of the deals and Opal 53 was the EU customer in the remaining one.

475.     The deal chains of both First Touch and NTS for periods 03/06 and 04/06 showed “overwhelming similarities” because the same defaulters and buffers appeared in the same positions within the transaction chains.  Thirteen of the NTS deals in point in the appeal traced back to the defaulter Anfell, as did 17 of First Touch’s in period 04/06.  No less than 15 buffer traders appeared in both the deal chains of NTS and First Touch in periods 03/06 and 04/06.

20. CONCLUSION ON ADDITIONAL EVIDENCE OF THE CONTRA-TRADERS’ KNOWLEDGE

476.     On the basis of the evidence so adduced as to the 8 contra-traders’ knowledge, we are satisfied that each one deliberately and fraudulently offset some or all of the input tax repayment claims it would otherwise have had to make by conducting acquirer deals as well as broker deals.  In acting so, we find that each contra-trader was aware of the connection of its broker deals to fraud.  However, we accept that those responsible for the defaults in the contra-traders’ supply chains, and whether the defaults involved for example a missing trader as opposed to a hijacked VAT number, may not have been known to the contra-traders.  But we observe that it is unnecessary for a contra-trader to have that knowledge in respect of its broker chains for it knowingly to conduct its deals so as to disguise those connections.

THE ANSWERS TO QUESTIONS 1 AND 2

477.      HMRC traced each one of the Appellants’ “contra-trading” transactions back to a trader they identified as a contra-trader.  As we have said, they allege each contra-trader to have knowingly offset its input tax repayment claims in broker chains against its output tax liability on its acquisition deals in which goods it imported were then brokered to EU companies.  Mr Humphries claimed that it followed that the Appellants’ repayment claims were linked to tax losses by virtue of the contra-traders offsetting exercises: by virtue of those exercises the Appellants’ deals were connected to every broker deal conducted by the contra-trader in the relevant period. He further contended that the evidence established a connection with a large number of broker chains, which HMRC traced back to fraudulent defaults; it was the offsetting process that provided the connection.

478.     On the basis of the evidence adduced as to the transactions of all eight contra-traders, since in the light of the judgment in Blue Sphere the connection via a contra-trader between the clean and dirty chains is established by the simple fact of the offsetting of the input tax against the output tax of the contra-trader, we are satisfied that there were fraudulent VAT losses in the contra-traders’ deal chains.  We are further satisfied that the Appellants’ transactions, the subject of their appeals, were connected with the fraudulent evasion of VAT.

ADDITIONAL QUESTION: HAVE HMRC PROVED THAT THE CONTRA-TRADERS WERE PARTIES TO CONSPIRACIES INVOLVING THE DEFAULTERS IN THEIR TRANSACTION CHAINS?

479.     HMRC’s case is that each of the contra-traders knew that its broker deals (i.e. those in dirty chains) were connected with fraud, either by virtue of there being fraudulent defaults in chains of transactions, or by connection with fraudulent defaults via other contra-traders; each contra-trader deliberately and fraudulently offset some or all of what otherwise would have been its input tax claims arising from acquirer deals as well as its broker deals.  In acting in that way the contra-traders knew of the connection of their broker deals to fraud; if they had not known, they would not have needed to perform the fraudulent balancing offsets.

480.     HMRC further claim that the evidence of transactions above and below those of each contra-trader in its transaction chains establishes clearly that there was a scheme in which that trader played a particular role. We accept that to be the case. It follows that each contra-trader clearly knew that its broker deals were connected with fraud. That is so notwithstanding that the identities of those responsible for the default, and its nature, may not have been known to the contra-trader. The contra-trader would have to have known, at the time it was conducting its broker and acquirer deals, that each of the former was connected to a fraudulent default, otherwise it would not have been in a position to choose to perform offset deals.

481.     In reliance on Mr Humphries’ and Mr Murphy’s evidence, that of the assurance officers for the other contra-traders and the contents of the documents to which they referred, we conclude that the schemes in which the contra-traders were involved were fraudulent in nature and that each contra-trader, as a participant therein, clearly knew of that nature. We hold that each was involved in conspiracies with the various defaulters in its dirty chains.

482.     In so concluding, we have taken no account of whether a contra-trader was either assessed to tax, or had a decision letter.  We are required to determine whether the contra-traders knew they were involved in conspiracies with the various defaulters; the test does not require us to consider whether traders have been assessed to tax or received decision letters. And, in relation to the evidence of those officers for the contra-traders who stated that they did not know whether the individual companies for which they were responsible were so involved, we observe that we have evidence covering the overall picture, whereas they had only the information relating only to the individual companies with which they dealt.

21. MR PICKUP’S CHALLENGE TO ASPECT (4) OF MR HUMPHRIES’ EVIDENCE:

A)  BTS SPLIT DEALS

483.     An aspect of the behaviour of individual traders, including BTS, that in Mr Pickup’s submission did not appear consistent with Mr Humphries’ evidence as to the existence of an overall contrived scheme was the splitting of a deal or the breaking of a consignment received from a supplier before onward sale to a number of EU customers.  If those transactions were part of an overall contrived scheme, he maintained that it made no sense for a broker to split the deal as it would have made managing the scheme considerably more difficult without any real advantage.

484.     Sixty-three (of a total of 75) of BTS’s broker transactions said by HMRC to be in Cell 5 were “split deals”.

485.     We shall deal with the question of whether size of the overall scheme made the cell claims of Mr Humphries “implausible” a little later, but consider it necessary to introduce the matter in the present context. Mr Humphries accepted that between 1 April 2006 and 30 June 2006 the six Cell 5 contra-traders he identified carried out 440 separate acquisition transactions and the consignments were split at the time of despatch to the EU into 885 separate broker transactions.  To Mr Pickup the controlling minds organising Cell 5 would have had difficulty keeping track and control of 440 transactions. But to ensure that 885 separate transactions all proceeded according to their design, he submitted would have been virtually impossible: it was difficult to conceive why those controlling minds would have complicated their task in such a way for no apparent benefit. There was very real detriment to the organisers given the added complexity of controlling and managing 885 transactions instead of 440.

486.     Mr Humphries was asked whether he thought it would have been unusual, if BTS were participating in a fraud, for it to split its deals.  He replied “not necessarily, no”, adding that it helped “to hide the fraud because if everybody was selling to the same trader that would make it obvious from their own records that there were goods going to the one place”.

487.     We have carried out our own analysis of the “split deals” using only information contained in BTS’s own documents, and make a number of surprising findings of fact from it.  (We use the deal references in the tribunal papers followed by those contained in the Appellants’ exhibit bundles).

488.     By way of introduction to the analysis, we should observe that every transaction in an individual chain took place on the same date, and NTS was the supplier i.e. buffer, to BTS in every chain. NTS so acted consistently with the standard form found in MTIC fraud transactions, i.e. it took a nominal profit or commission, and disposed of all the goods in each purchase the same day as it acquired them in back-to-back deals.

489.     NTS was itself supplied in the single deals leading to the split deals by the contra-traders Svenson Commodities (7 direct deals + 2 as buffer), Powerstrip (5 deals), and David Jacobs (9 deals). In the remaining deals NTS was supplied by various other buffers, but in every case the invoice trail led back to one of the contra-traders in Cell 5 identified by Mr Humphries.

490.     In its 63 deals, BTS made sales to only 6 customers: Pol Comm in Poland, Sigma Sixty in Germany, CIDP in France, Intangible Media in Spain, Planetmania in Portugal, and Opal 53 also in Germany. Those traders used but 5 freight forwarders: Freight Connection in Holland, Pro Logic in France, Euresco in Holland, Intersprint in Belgium, and Heinrich Sneider in Germany.

491.     We have included the aggregate percentage profits obtained by NTS and BTS per split deal in Cell 5 to show that all fell within the narrow range 1.8% to 2.6%. We shall further consider the profit percentages when we come to deal with the mark-up percentages obtained by the Appellants a little later.

492.     For analysis purposes, we have restored each split sale to the original purchase from which it was derived to create a group of two or three sale transactions.  The exercise produces the following results.

493.     May deals 9, 10, 11  (15, 16 and 17) (E160B/221-241)

Date: 26 May 2006

Phones sold in transaction to broker: 6500 Sony Ericsson W810i

EU supplier: Adobcom

UK acquirer: David Jacobs

Buffer: NTS

Broker: BTS

BTS sales: 

494.     May deals 12, 13, 14 (18, 19 and 20) (E160B/277-333)

Date: 26 May 2006

Phones sold in transaction to broker: 8000 Nokia N91

EU supplier: Mighty Mobile

UK acquirer: David Jacobs

Buffer: NTS

Broker: BTS

BTS sales: 

495.     May deals 23, 24  (21 and 22) (E160B/334-369)

Date: 30 May 2006

Phones sold in transaction to broker: 4000 Sony Ericsson W810i

EU supplier: Mighty Mobile

UK acquirer: Svenson Commodities

Buffer 1:Yalegate Ltd

Buffer 2. NTS

Broker: BTS

BTS sales: 

496.     May deals 38, 39  (23 and 24) (E160B/370-395)

Date: 31 May 2006

Phones sold in transaction to broker: 5000 Nokia 8800

EU supplier: Adobcom

UK acquirer: David Jacobs

Buffer 1: Team Mobile Ltd

Buffer 2. NTS

Broker: BTS

BTS sales:

497.     May deals 43,44,45  (25, 26 and 27) (E160B/386-434)

Date: 31 May 2006

Phones sold in transaction to broker: 7000 Nokia N91

EU supplier: Adobcom

UK acquirer: David Jacobs

Buffer 1: Team Mobile ltd

Buffer 2: NTS

Broker: BTS

BTS sales:

498.     May deals 15, 16  (28 and 29) (E160B/436-469)

Date: 26 May 2006

Phones sold in transaction to broker: 5000 Nokia 8800

EU supplier: Mighty Mobile

UK acquirer: Selectwelcome

Buffer 1: Yalegate Ltd

Buffer 2: NTS

Broker: BTS

BTS sales: 

499.     May deals 17, 18, 19 (30, 31 and 32) (E160B/470-526)

Date: 26 May 2006

Phones sold in transaction to broker: 8000 Nokia N70

EU supplier: Adobcom

UK acquirer: Selectwelcome

Buffer 1: Regent Commodities Ltd

Buffer 2: NTS

Broker: BTS

BTS sales:

500.     May deals 20, 21, 22  (34, 35 and 36) (E160C/11-63)

Date: 30 May 2006

Phones sold in transaction to broker: 7250 Nokia 9500

EU supplier: Adobcom

UK acquirer: Powerstrip

Buffer: NTS

Broker:  BTS

BTS sales: 

501.     May deals 35, 36, 37  (37, 38 and 39) (E160C/64-106)

Date: 31 May 2006

Phones sold in transaction to broker: 7500 Nokia N80

EU supplier: Mighty Mobile

UK acquirer: Powerstrip

Buffer: Evenmore Ltd

Buffer 2: NTS

Broker: BTS

BTS sales: 

502.     May deals 40, 41, 42  (40, 41 and 42) (E160C/107-147)

Date: 31 May 2006

Phones sold in transaction to broker: 10,000 Nokia 9300

EU supplier: Adobcom

UK acquirer: Powerstrip

Buffer 1: Yalegate Ltd

Buffer 2: NTS

Broker:  BTS

BTS sales:

503.     May deals 23,24  (44 and 45) (E160C/164-208)

Date: 30 May 2006

Phones sold in transaction to broker: 6500 Sony Ericsson W900i

EU supplier: Mighty Mobile

UK acquirer: Svenson Commodities

Buffer1: Yalegate Ltd

Buffer 2: NTS

Broker:  BTS

BTS sales:

504.     May deals 28, 29  (46 and 47) (E160C/209-248)

Date: 30 May 2006

Phones sold in transaction to broker: 4000 Nokia 8801

EU supplier: Adobcom

UK acquirer: Svenson Commodities

Buffer: NTS

Broker: BTS

BTS sales: 

505.     May deals 25, 26 , 27  (49, 50 and 51) (E160C/264-320)

Date: 30 May 2006

Phones sold in transaction to broker: 6500 Nokia N90

EU supplier: Adobcom

UK acquirer: TCCS

Buffer 1: Yalegate Ltd

Buffer 2: NTS

Broker: BTS

BTS sales: 

506.     June deals 1, 2  (62 and 63) (E160C/428-450)

Date: 22 June 2006

Phones sold in transaction to broker: 4000 Nokia N90

EU supplier:  Adobcom

UK acquirer: Selectwelcome

Buffer 1: Crotek Ltd

Buffer 2: NTS

Broker:  BTS

BTS sales:

507.     June deals 5, 6  (64 and 65) (E160C/451-467)

Date: 22 June 2006

Phones sold in transaction to broker: 3500 Sony Ericsson W900i

EU supplier: Mighty Mobile

UK acquirer: TCCS

Buffer1: Megantic Services Ltd

Buffer 2: NTS

Broker:  BTS

BTS sales: 

N.B. Uniquely the sale price of the handsets differed in these two sales. As the difference in price was nominal, we treat it as resulting from a minor mistake by one of the parties which was overlooked.

508.     June deals 8, 9  (66 and 67) (E160D/1-24)

Date: 22 June 2006

Phones sold in transaction to broker: 4500 Nokia 9300i

EU supplier: Adobcom

UK acquirer: Selectwelcome

Buffer 1: Svenson Commodities

Buffer 2: NTS

Broker: BTS

BTS sales:

509.     June deals 14,15  (69 and 70) (E160D/39-66)

Date: 22 June 2006

Phones sold in transaction to broker: 3500 Nokia N80

EU supplier:Adobcom

UK acquirer: Selectwelcome

Buffer1: Yalegate Ltd

Buffer 2: NTS

Broker: BTS

BTS sales: 

510.     June deals 25, 26  (71 and 72) (E160D/67-96)

Date: 27 June 2006

Phones sold in transaction to broker: 3500 Nokia N71

EU supplier: Mighty Mobile

UK acquirer: Selectwelcome

Buffer 1: Crotek Ltd

Buffer 2: NTS

Broker: BTS

BTS sales: 

511.     June deals 29, 30  (73 and 74) (E160D/97 -120)

Date: 27 June 2006

Phones sold in transaction to broker: 2300 black Nokia 8800

EU supplier: Mighty Mobile

UK acquirer: Selectwelcome

Buffer 1: Crotek Ltd

Buffer 2: NTS

Broker: BTS

BTS sales: 

512.     June deals 40, 41  (75 and 76) (E160D/121-149)

Date: 27 June 2006

Phones sold in transaction to broker: 3500 Nokia 9500

EU supplier:  Adobcom

UK acquirer: Selectwelcome

Buffer 1: Powerstrip

Buffer 2: NTS

Broker: BTS

BTS sales:

513.     June deals 3, 4  (77 and 78) (E160D/150-170)

Date: 22 June 2006

Phones sold in transaction to broker: 5000 Nokia 9500

EU supplier: Mighty Mobile

UK acquirer: TCCS

Buffer 1: Tracker Trading ltd

Buffer 2: NTS

Broker: BTS

BTS sales:

514.     June deals 11, 12  (81 and 82) (E160D/197-221)

Date: 22 June 2006

Phones sold in transaction to broker: 3500 Sony Ericsson 9500i

EU supplier: Mighty Mobile

UK acquirer: TCCS

Buffer 1: Megantic Services Ltd

Buffer 2: NTS

Broker: BTS

BTS sales:

515.     June deals 27, 28  (83 and 84) (E160D/222-249)

Date: 27 June 2006

Phones sold in transaction to broker: 5000 Nokia N91

EU supplier: Mighty  Mobile

UK acquirer: TCCS

Buffer 1: Powerstrip

Buffer 2: NTS

Broker: BTS

BTS sales:

516.     June deals 31, 32, 33  (85, 86 and 87) (E160D/250-282)

Date: 27 June 2006

Phones sold in transaction to broker: 6000 Nokia N90

EU supplier: Mighty Mobile

UK acquirer: TCCS

Buffer 1: Yalegate Ltd

Buffer 2: NTS

Broker: BTS

BTS sales:

517.     June deals 29, 30  (88 and 89) (E160D/283-304)

Date: 27 June 2006

Phones sold in transaction to broker: 3000 silver Nokia 8800

EU supplier: Mighty Mobile

UK acquirer: Selectwelcome

Buffer 1: Crotek Ltd

Buffer 2: NTS

Broker: BTS

BTS sales:

518.     June deals 36, 37  (90 and 91) (E160D/305-334)

Date: 27 June 2006

Phones sold in transaction to broker: 4500 Nokia N80

EU supplier: Mighty Mobile

UK acquirer: TCCS

Buffer 1: Crotek Ltd

Buffer 2: Svenson Commodities

Buffer 3: NTS

Broker: BTS

BTS sales: 

519.     June deals 38, 39  (92 and 93) (E160D/335-362)

Date: 27 June 2006

Phones sold in transaction to broker: 4850 Nokia 9300i

EU supplier: Adobcom

UK acquirer: TCCS

Buffer 1: Tracker Trading Ltd

Buffer 2: NTS

Broker: BTS

BTS sales:

520.     As we shall show when we come to deal with the FCIB evidence, in every case where BTS split consignments of phones it purchased, the original consignments were restored to the relevant circular money flow either by BTS’s own customer or at one step removed therefrom.

521.     The matter of negotiation of purchase and sale prices of phones was raised with Mr Tomlinson in cross-examination.  He emphatically denied having been told at what prices to buy and at what to sell, claiming to have negotiated purchase and sale prices at arm’s length in every transaction.  Mr Pickup took up the matter in re-examination, and his exchange with Mr Tomlinson ran as follows:

P. Did anybody at any time, Mr Tomlinson, tell you what price to pay and what price to sell for in respect of any of your transactions?

T.  No, nobody.

P. It has been suggested to you that you were controlled –

T. No, I wasn’t

P. – by another, that you were, in effect, a puppet?

T. No, I wasn’t

P. If anybody had suggested to you that you should buy a certain stock at such a price and sell to a particular customer at such a price, what would you have done?

T. Run a mile

P. Why?

T. Because it’s not within my business to do what someone else directs.  I do my own trades.  I negotiate my own prices and I buy and sell from an open market and deal with people that I’ve customarily dealt with.  No one dictates what I do and what I don’t do.

Discussion

522.     In Megtian, in dealing with circumstantial evidence, but in an observation equally applicable in the present context, Briggs J said at [24]:

523.     Within each individual group of “split deals” we have created for analysis purposes, except what we consider to have been the minor error deals of June 5 and 6, the price BTS obtained per handset from its customers was the same irrespective of the quantity dealt in; the date the goods were despatched abroad was the same; the EU freight forwarder used was the same; and, with a handful of exceptions, which in our judgment are all accounted for in the FCIB evidence, all payments were made on the same date. Further, the aggregate percentage profits obtained by BTS and NTS in all the split deals fell within the narrow range established by HMRC for Cell 5. Those are hard facts, drawn from BTS’s own deal documentation: they cannot be disputed.  In our judgment, the facts provide the clearest possible evidence of orchestration and contrivance.

524.     No evidence was adduced to corroborate Mr Tomlinson’s claim to have negotiated purchase and sale prices for the split deals. Coupled with the facts set out in the last preceding paragraph we consider that absence of evidence to give the lie in the clearest possible way to his claim to have negotiated individual purchase and sale prices within a highly volatile market. We infer that BTS was told when and from whom to buy, when and to whom to sell, in each case at what price, and acted on the instructions given to it.  We also infer that Mr Tomlinson knew from his own documentation that the “split deals” were not genuine commercial sales.  It follows that we further infer that he is dishonest.

525.     Far from supporting Mr Pickup’s claim that the “splitting” of deals was inconsistent with Mr Humphries’ contention that traders operated in schemes, in our judgment the analysis we have carried out proves just the opposite.

526.     From the present tribunal’s own experience of MTIC fraud, we can say that in most MTIC cases there is usually little or no direct documentary evidence of a connection with fraud. In the present case BTS’s own documents relating to its split deals provide that evidence in abundance.

527.     We note that the 63 split deals represent over 55% of all the deals concerned in the appeal.

Single deals in Cell 5 

528.     BTS carried out 12 single deals in Cell 5 additional to the 63 “split deals”. All the customers were the same as those supplied in the “split deals”: Sigma Sixty (6 deals), Pol Comm (1 deal), PhoneC@nnect (1 deal), Planetmania (2 deals) and Intangible Media (2 deals) and in each case NTS was the final buffer in the chain. Details of the single deals are as follows:

1.  April deal 6 (Deal 6) (E160B/99-108)

EU supplier: Mighty Mobile. UK acquirer: Svenson Commodities.

2.  April deal 7 (Deal 7) (E160B/109-118

EU supplier: Mighty Mobile. UK acquirer: Svenson Commodities.

3.  April deal 8 (Deal 8) (E160B/119-128)

EU supplier: Mighty Mobile. UK acquirer: Svenson Commodities.

4.  April deal 9 (Deal 9) E1260B/129-138) 

EU supplier: Mighty Mobile.  UK acquirer: Svenson Commodities.

5.  April deal 10 (Deal 10) (E160B/139-152)

EU supplier: Mountainrix. UK acquirer: Powerstrip

6.  May deal 5 (Deal 11) (E160B/153-172)

EU supplier: Mighty Mobile. UK acquirer: David Jacobs

7.  May deal 6 (Deal 43) (E160C/149-165)

EU supplier: Mighty Mobile. UK acquirer: Svenson Commodities.

8.  May deal 17 (Deal 33) (E160C/1-10)

EU supplier: Adobcom. UK acquirer:  Selectwelcome  First UK buffer: Regent Commodities Ltd.

9.  May deal 8 (Deal 48) (E160C/166-209)

EU supplier: Forex. UK acquirer: TCCS.  First UK buffer: Yalegate Ltd