The decisions under appeal

Denial of Input Tax

i. £5,605,119.74 claimed on 17 invoices from Stratex in VAT period 06/09 but denied on the bases that (i) the invoices were invalid for VAT purposes and HMRC refused to exercise their discretion in CFE’s favour to accept alternative evidence, and (ii) CFE knew, or should have known, that the transactions were connected with the fraudulent evasion of VAT;

ii. £798,892.24 claimed on invoices from GW Deals Ltd (“GWD”) (1 invoice), AH Marketing and Distribution Ltd (“AHMD”) (7 invoices), and Ayres t/a Mettec Ltd (“Ayres” or “Mettec”) (1 invoice) in VAT period 06/09 but denied on the basis that CFE knew, or should have known, that the transactions were connected with the fraudulent evasion of VAT; and

iii. £1,322,800.16 claimed on 4 invoices from the supplier Westis Ltd (“Westis”) in VAT period 09/09 but denied on the basis that CFE knew, or should have known, that the transactions were connected with the fraudulent evasion of VAT.

(1)           The Stratex transactions - A total of 17 transactions which took place between 18 May and 3 June 2009 between CO2e and Stratex Alliance Ltd producing input tax of £5,605,119.74.

(2)           The AH Marketing and Distribution transactions - A total of 7 transactions which took place between 8 and 18 June 2009 between CO2e and AH Marketing and Distribution Ltd producing input tax of £675,488.54.

(3)           The G W Deals Limited transactions - One transaction which took place on 8 June 2009 between CO2e and G W Deals Ltd producing input tax of £42,477.62.

(4)           The Ayres Limited t/a Mettec transactions - One transaction which took place on 10 June 2009 between CO2e and Ayres Ltd (trading as Mettec) producing input tax of £84,926.28.

(5)           The Westis transactions - A total of 4 transactions which took place on 28 and 29 July 2009 between CO2e and Westis Ltd producing input tax of £1,322,800.16.

VAT Recovery Assessments

The issues in the appeal

The Evidence

Witness                       Date of statement(s)               Position

(at the relevant time unless otherwise stated)

Laurence Rose             24/2/15                        Chairman of CO2e

Mark Cooper               24/2/15, 19/5/17          General Counsel for Europe and BGC Group

(including CFE and CO2e)

Wayne Buchan            23/2/15                        Chief Risk Officer at the Cantor Fitzgerald

                                                                        Group (“CFG”)

Tracey Ann Mills        24/2/15, 28/4/17          Head of Compliance at Cantor Fitzgerald

(since 2011 only)

Martin Sharratt            24/2/15                        Partner and Head of VAT at Smith &

Williamson LLP, tax advisers and accountants

Steven Adcock           24/2/15                        Operations Manager at CFG

Robert Snelling           28/4/17                        Director of Legal (Europe and Asia) at

Cantor Fitzgerald and BGC Partners

David Ball                   22/12/14 (x3), 24/03/17,20/02/18                                           

Original decision maker

Peter Birchfield           17/12/14                      Review decision maker          

Duncan Smith             26/11/14

Gavin Stock                18/12/14 (x2)

John Lyon                   19/12/14

Stewart McCaskell      19/12/14                     

David McMaster         22/12/14

Jasvinder Bhabra         23/12/14

Steven Kenrick           23/12/14

Roderick Stone           23/12/14

The First Issue

The Facts on the First Issue

(a)           CFE was at all material times a taxable person;

(b)           the carbon credits were supplied to CFE and used for the purposes of its taxable business. The carbon credits supplied to CFE were to be used by CFE for the purposes of its own onward (taxable) transactions in carbon credits;

(c)           The carbon credits in question were supplied to CFE by Stratex, which was also, given the volume and nature of its trades, a “taxable person” for the purposes of the Directive.  Stratex was a taxable person (by virtue of the size of the transaction in issue); and

(d)          VAT was due in respect of the supply by Stratex to CFE.

The Law on the First Issue

The following transactions shall be subject to VAT:

(a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such…

‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner.”

A right of deduction shall arise at the time the deductible tax becomes chargeable.

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;

…

In order to exercise the right of deduction, a taxable person must meet the following conditions:

(a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Articles 220 to 236 and Articles 238, 239 and 240;

…

The taxable person shall make the deduction by subtracting from the total amount of VAT due for a given tax period the total amount of VAT in respect of which, during the same period, the right of deduction has arisen and is exercised in accordance with Article 178.

Member States may authorise a taxable person to make a deduction which he has not made in accordance with Articles 178 and 179.

Member States shall determine the conditions and detailed rules for applying Articles 180 and 181.

Without prejudice to the particular provisions laid down in this Directive, only the following details are required for VAT purposes on invoices issued pursuant to Articles 220 and 221:

…

(3) the VAT identification number referred to in Article 214 under which the taxable person supplied the goods or services;

…

(5) the full name and address of the taxable person and of the customer;

(6) the quantity and nature of the goods supplied or the extent and nature of the services rendered;

(7) the date on which the supply of goods or services was made or completed or the date on which the payment on account referred to in points (4) and (5) of Article 220 was made, in so far as that date can be determined and differs from the date of issue of the invoice;

…

(9) the VAT rate applied;

(10) the VAT amount payable, except where a special arrangement is applied under which, in accordance with this Directive, such a detail is excluded;

Member States in whose territory goods or services are supplied may allow some of the compulsory details to be omitted from documents or messages treated as invoices pursuant to Article 219.

UK Domestic Law

(1) VAT shall be charged on any supply of goods or services 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.

(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.

VAT on the supply to him of any goods or services ...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.

...only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents [or other information] as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases;

... 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.

(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.

(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business—

(a) taxable supplies;...

“(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. 

(1) Subject to paragraph (2) below and regulation 16 save as the Commissioners may otherwise allow, a registered person providing a VAT invoice in accordance with regulation 13 shall state thereon the following particulars—

…

(d) the name, address and registration number of the supplier,

(e) the name and address of the person to whom the goods or services are supplied,

[...]

(g) a description sufficient to identify the goods or services supplied,

(h) for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in [any currency]

…

(l) the total amount of VAT chargeable, expressed in sterling,

…

(1)           Section 24 VATA defines “input tax” in relation to a taxable person as, inter alia , VAT of the supply to him of any goods or services used or to be used for the purpose of any business carried on or to be carried on by him.

(2)           Section 25 VATA sets out a taxable person’s obligation to account for output tax and provides a right to deduct input tax.

(3)           Section 26 VATA sets out the input tax allowable under s.25.

(4)           Regulation 14 VATR details the particulars that a VAT invoice is to contain.

(5)           Regulation 29 VATR governs claims for input tax. It implements the requirement that the taxable person making the claim hold a VAT invoice. It also provides (in reg.29(2)) that, in the event that the taxable person does not hold a VAT invoice, HMRC have a discretion to accept alternative evidence of the VAT charge.

The relevant case law

Having regard to the above considerations, the answer to Questions 1 and 2 is that Article 167, Article 178(a), Article 179 and Article 226(3) of Directive 2006/112 must be interpreted as precluding national legislation, such as that at issue in the main proceedings, under which the correction of an invoice in relation to a detail which must be mentioned, namely the VAT identification number, does not have retroactive effect, so that the right to deduct VAT exercised on the basis of the corrected invoice relates not to the year in which the invoice was originally drawn up but to the year in which it was corrected.

Zipvit in the Court of Appeal

“49. Nevertheless, this principle cannot be applied in isolation, and in particular does not in my judgment override the requirement for a person exercising the right of deduction to produce a VAT invoice evidencing payment of the relevant VAT by the supplier. I will return to this point in my consideration of the second main issue on the appeal.”

“108. At first sight, the decision in Barlis may appear to provide some support for Zipvit’s case. But the facts could hardly have been more different. The only defects in the relevant invoices were that they did not provide a proper description of the legal services which had been supplied, and thus did not comply with Article 226(6) and (7) which required details of “the extent and nature of the services rendered” and the date on which the supply had been made or completed. There was no reason to doubt that the corresponding output tax had been paid by the lawyers, nor was there any doubt about its chargeable rate and amount. In the present case, by contrast, the original invoices issued by Royal Mail to Zipvit described the supplies as exempt, and Zipvit has been wholly unable to provide any evidence that tax on the supplies was paid or accounted for by Royal Mail when it became clear that the supplies were in fact standard rated. Zipvit is therefore claiming to be entitled to exercise its right to deduct without being able to produce either a compliant VAT invoice, or supplementary information which shows that the conditions of Article 226(9) and (10) are satisfied, that is to say details of “the VAT rate applied” and “the VAT amount payable”, coupled with evidence of payment of that amount by Royal Mail.”

‘ 112. I have referred to these parts of the Advocate General’s opinion because they were expressly endorsed by the Court in paragraph 27 of its judgment. I have already quoted that paragraph, but will repeat the critical sentence:

“As the Advocate General observes in points 30, 32 and 46 of her Opinion, the objective of the details which must be shown in an invoice is to allow the tax authorities to monitor payment of the tax due and, if appropriate, the existence of the right to deduct VAT.”

Properly understood, therefore, the decision of the Court in Barlis appears to me to expose a fatal flaw in Zipvit’s case. One of the main purposes of the mandatory requirement for a VAT invoice is to enable the taxing authorities to monitor payment by the supplier of the tax for which a deduction is sought, or as the Advocate General put it “to enable a check on whether the person issuing the invoice has paid the tax.” Zipvit remains wholly unable to satisfy this condition, because the only invoices which it can supply show the complete opposite, namely that no tax was paid because the supplies were considered to be exempt. Nor can it be said that the position was remedied by the exiguous further information supplied with the letter of claim in September 2009. All this did was to show the VAT component of the original purchase prices, on the assumption that the supplies were taxable. It provided no evidence that a penny of that tax had been paid by Royal Mail to HMRC, and still less did it do so in the form of an invoice issued by Royal Mail.’

113. Mr Thomas argues that none of this matters, because Zipvit was entitled to exercise its right to deduct input tax referable to the supplies which it made to its own customers, on which it accounted for output tax in the usual way. To deny a deduction on the sole basis that Royal Mail cannot be shown to have paid tax on the relevant supplies which it made to Ziptvit is, he submits, to rely on a wholly irrelevant consideration, because it would offend the well-established principle that the right of deduction is unaffected by the question whether VAT due at an earlier stage in the chain of supply has been paid to the public purse. In my view, however, this objection misses the point. Exercise of the right to deduct is subject to a mandatory requirement to produce a VAT invoice, which must contain the specified particulars. Zipvit is unable to produce invoices which satisfy the requirements of Article 226(9) and (10), and it is also unable to produce any supplementary evidence showing payment of the relevant tax by Royal Mail. A necessary precondition for exercise of the right to deduct therefore remains unsatisfied.

114. I also fail to see how Zipvit could hope to circumvent this fundamental difficulty by arguing that the requirement for a compliant VAT invoice is one of form rather than substance, and by invoking the discretion which HMRC have to accept alternative evidence under regulation 29(2) of the 1995 Regulations. It is true that Barlis (at paragraphs 40 and 41), and a number of other cases which we were shown, consistently draw a distinction between the substantive conditions which must be met in order for the right to deduct VAT to arise, and the formal conditions for the exercise of that right. But to describe a requirement as “formal” does not necessarily imply that compliance with it is optional, or that a failure to satisfy it is always capable of being excused. Cases like Barlis show that some of the requirements relating to invoices in Article 226 must be dispensed with, if the tax authorities are supplied with the information necessary to establish that the substantive requirements of the right to deduct are satisfied. But the Court was careful in Barlis to confine its discussion to the requirements in Article 226(6) and (7), and I do not think its reasoning can be extended to cover a failure to comply with the fundamental requirements relating to payment of the relevant tax in Article 226(9) and (10). Provision of an invoice which complies with those requirements is essential to the proper performance by HMRC of their monitoring functions in relation to VAT, and is needed as evidence that the supplier has duly paid or accounted for the tax to HMRC.

115. It needs to be remembered in this context that the amounts for which Zipvit is claiming a deduction have not been paid by Zipvit in response to a request by Royal Mail for payment once the taxable status of the supplies had been established. In that situation, Royal Mail would have rendered an invoice showing the VAT due, and would then have been liable to account for it to HMRC as output tax in the usual way. In those circumstances, there would have been no difficulty about Zipvit deducting the amount shown on the new invoice as input tax. All that has actually happened, however, is that Zipvit now wishes to treat the payments which it originally made to Royal Mail, on the common understanding that the supplies were exempt, as comprising an element of VAT, and to obtain a deduction for that element on the strength of nothing more than the original payment.

116. Even if it is open to Zipvit to recharacterise the original payment in this way (which at this stage of the argument must be assumed in Zipvit’s favour), there would be an obvious detriment to HMRC and the public purse if Zipvit were able to obtain such a deduction without first showing that the tax in question had been paid by Royal Mail. The normal way of fulfilling that obligation is by production of a fully compliant VAT invoice. Since Zipvit is unable to produce such an invoice, I am unable to see any grounds upon which HMRC could properly conclude that Zipvit should nevertheless be allowed the deductions claimed, to the detriment of the general body of taxpayers. In effect, a retrospective recharacterisation of sums originally paid on the footing that the supplies in question were exempt would now yield an uncovenanted bonus to Zipvit, generated by nothing more than Zipvit’s unilateral decision to treat the amounts originally paid as VAT-inclusive. It would, I think, be offensive to most people’s sense of fiscal justice if a mechanical accounting exercise of this nature were permitted to generate a very substantial input tax credit, in circumstances where (for whatever reason) none of the tax in question has been paid by the supplier.

117. Whether the situation is described as one in which HMRC have no discretion, because the requirements of Article 226(9) and (10) cannot be dispensed with, or as one where there is in law a discretion but on the facts of the present case it can only be exercised in one way, does not seem to me to matter. The important point is that the inability of Zipvit to produce a compliant VAT invoice in support of its claim to deduct input tax is in my judgment fatal. This was rightly recognised by the two Tribunals below, although I would (with respect) not adopt their analysis of the position in terms of the absence of an “economic burden” on Zipvit. That way of looking at the matter seems to me misconceived, because Zipvit did bear the economic burden of paying the original purchase price for the supplies. The real issue, as I see it, is whether Zipvit can claim a deduction for VAT by treating the original price as VAT-inclusive, without producing evidence that the tax in question has been duly paid by the supplier.

118. My conclusion also makes it unnecessary to resolve the question, as a matter of EU law, whether the requirements of Article 226(9) and (10) should be treated as both formal and substantive, in the sense that compliance with them is essential to a valid exercise of the right to deduct input tax. There are passages in the interesting discussion by Advocate General Kokott in Biosafe which would lend support to such a conclusion, and it seems to me that the law may well develop in that direction. As Mr Thomas rightly points out, however, this reasoning was not adopted by the CJEU in its judgment, which was able to decide the case on grounds which did not require a re-examination of the existing law on the right to deduct. The same is true of the Court’s decision in Volkswagen, which repeats the now familiar jurisprudence of the Court on the principles which govern the right to deduct: see the judgment at paragraphs 36 to 42. Put negatively, I am satisfied that no support can be found in either case for the proposition that a right to deduct may be recognised and given effect without production of a VAT invoice showing that the tax in question has been paid by the supplier.

119. Finally, I should make it clear that the need for a VAT invoice which complies with Article 226(9) and (10) is in my judgment fatal to Zipvit’s claims, whether or not the new contractual material is admitted, and whether or not the original purchase price was agreed to be inclusive of VAT. It also follows that it is unnecessary to make a reference to the CJEU on the first main issue, because all the claims must anyway fail on the second issue.’

[ Emphasis Added ]

Appellant’s submissions on the First Issue

        (1) As regards the substantive requirements:

(a)           The Appellant was at all material times a “taxable person” within the meaning of Art.9 of the Directive;

(b)           The carbon credits in question were supplied to the Appellant by Stratex, which was also, given the volume and nature of its trades, a “taxable person” for the purposes of the Directive; and

(c)           The carbon credits supplied to the Appellant were to be used by the Appellant for the purposes of its own onward (taxable) transactions in carbon credits.

(1) the Appellant was at all material times a taxable person;

(2) the carbon credits were supplied to the Appellant and used for the purposes of its taxable business;

(3) Stratex was a taxable person (by virtue of the size of the transaction in issue); and

(4) VAT was due in respect of the supply by Stratex to the Appellant.

Appellant’s reply to HMRC’s post hearing submissions

Appellant’s submissions on the application of Zipvit

42. The Court has held that the fundamental principle of the neutrality of VAT requires deduction of input VAT to be allowed if the substantive requirements are satisfied, even if the taxable persons have failed to comply with some formal conditions. Consequently, where the tax authorities have the information necessary to establish that the substantive requirements have been satisfied, they cannot, in relation to the right of the taxable person to deduct that tax, impose additional conditions which may have the effect of rendering that right ineffective for practical purposes …

43. It follows that the tax authorities cannot refuse the right to deduct VAT on the sole ground that an invoice does not satisfy the conditions required by Article 226(6) and (7) of [the Directive] if they have available all the information to ascertain whether the substantive conditions for that right are satisfied.

44. In this respect, the authorities cannot restrict themselves to examining the invoice itself. They must also take account of the additional information provided by the taxable person. That conclusion is confirmed by Article 219 of [the Directive], which treats as an invoice any document or message that amends and refers specifically and unambiguously to the initial invoice.

‘Cases like Barlis show that some of the requirements relating to invoices in art 226 must be dispensed with, if the tax authorities are supplied with the information necessary to establish that the substantive requirements of the right to deduct are satisfied. But the Court was careful in Barlis to confine its discussion to the requirements in art 6 226(6) and (7), and I do not think its reasoning can be extended to cover a failure to comply with the fundamental requirements relating to payment of the relevant tax in art 226(9) and (10). Provision of an invoice which complies with those requirements is essential to the proper performance by HMRC of their monitoring functions in relation to VAT, and is needed as evidence that the supplier has duly paid or accounted for the tax to HMRC.’

Appellant’s reply to HMRC’s post hearing submissions

“[w]hether a taxable person in possession of an invalid VAT invoice can provide any evidence that the supplier of that invoice has paid any of the VAT on that invoice to HMRC is relevant to the question of whether the conditions for the right to deduct to arise are met”

‘It needs to be remembered in this context that the amounts for which Zipvit is claiming a deduction have not been paid by Zipvit in response to a request by Royal Mail for payment once the taxable status of the supplies had been established. In that situation, Royal Mail would have rendered an invoice showing the VAT due, and would then have been liable to account for it to HMRC as output tax in the usual way. In those circumstances, there would have been no difficulty about Zipvit deducting the amount shown on the new invoice as input tax. All that has actually happened, however, is that Zipvit now wishes to treat the payments which it originally made to Royal Mail, on the common understanding that the supplies were exempt, as comprising an element of VAT, and to obtain a deduction for that element on the strength of nothing more than the original payment.’

‘In terms of the exercise of HMRC’s discretion to allow an input tax deduction in the absence of a valid VAT invoice and where there is no evidence that the supplier has paid the output VAT charged, it is now tolerably clear from Zipvit at [116] that there will no grounds upon which HMRC could properly conclude that the such deduction could be permitted.’

‘Even if it is open to Zipvit to recharacterise the original payment in this way (which at this stage of the argument must be assumed in Zipvit's favour), there would be an obvious detriment to HMRC and the public purse if Zipvit were able to obtain such a deduction without first showing that the tax in question had been paid by Royal Mail. The normal way of fulfilling that obligation is by production of a fully compliant VAT invoice. Since Zipvit is unable to produce such an invoice, I am unable to see any grounds upon which HMRC could properly conclude that Zipvit should nevertheless be allowed the deductions claimed, to the detriment of the general body of taxpayers.’

Conclusion

HMRC’s submissions on the First Issue

i. In EU and domestic law where a taxpayer cannot produce a VAT invoice to support its claim to deduct input tax, the tax authority has a discretion whether to accept alternative evidence as satisfying it that a taxable supply has taken place entitling the taxpayer to the credit [52];

ii. That discretion is clearly contemplated by the PVD and Invoicing Directive [53];

iii. The case of Petroma Transport SA and others v Belgium (C-271/12) confirms the distinction that the CJEU has always drawn between the existence of the right to deduct which arises when the substantive requirements have been met and the need for the taxpayer to comply with the formal requirements before exercising that right; and

iv. The case of Senatex , was not relevant to the issue.

“…whether Articles 167, 168(a), 178(a), 220(1) and 226 of Directive 2006/112 must be interpreted as precluding a national practice whereby the tax authority refuses a taxable person the right to deduct from the VAT which he is liable to pay the VAT due or paid in respect of services supplied to him on the ground that the issuer of the invoice relating to those services, or one of his suppliers, acted improperly, without that authority establishing that the taxable person concerned was aware of that improper conduct or colluded in that conduct himself.”

“44 Moreover, it is apparent from the order for reference that the questions referred are based on the premises, first, that the transaction relied on as a basis for the right to deduct was carried out, as is to be inferred from the corresponding invoice, and, second, that that invoice includes all the information required by Directive 2006/112, with the result that the substantive and formal conditions provided for by that directive for the creation and exercise of the right to deduct are fulfilled. It is necessary to point out, in particular, that the order for reference does not indicate that the applicant in the main proceedings himself acted unlawfully by, for instance, filing false returns or issuing improper invoices.”

“45. In those circumstances, a taxable person can be refused the benefit of the right to deduct only on the basis of the case-law resulting from paragraphs 56 to 61 of Kittel and Recolta Recycling, according to which it must be established, on the basis of objective factors, that the taxable person to whom were supplied the goods or services which served as the basis on which to substantiate the right to deduct, knew, or ought to have known, that that transaction was connected with fraud previously committed by the supplier or another trader at an earlier stage in the transaction.”

“52 In that regard, it is apparent from the order for reference and, in particular, the first question, that the questions referred in Case C-80/11 are, like those referred in Case C-142/11, based on the premise that the substantive and formal conditions provided for by Directive 2006/112 for the exercise of the right to deduct are fulfilled, in particular the condition which requires the taxable person to be in possession of an invoice which confirms that the goods were actually supplied and which complies with the requirements of that directive. Accordingly, in the light of the response given in paragraph 50 of the present judgment, which also applies in the case of the supply of goods, the right to deduct can be refused only where it is established, on the basis of objective evidence, that the taxable person concerned knew, or ought to have known, that the transaction relied on as a basis for the right to deduct was connected with fraud committed by the issuer of the invoice or by another trader acting earlier in the chain of supply.”

“60. It is true that, when there are indications pointing to an infringement or fraud, a reasonable trader could, depending on the circumstances of the case, be obliged to make enquiries about another trader from whom he intends to purchase goods or services in order to ascertain the latter's trustworthiness.

61. However, the tax authority cannot, as a general rule, require the taxable person wishing to exercise the right to deduct VAT, first, to ensure that the issuer of the invoice relating to the goods and services in respect of which the exercise of that right to deduct is sought has the capacity of a taxable person, that he was in possession of the goods at issue and was in a position to supply them and that he has satisfied his obligations as regards declaration and payment of VAT, in order to be satisfied that there are no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction or, second, to be in possession of documents in that regard.”

“66. In the light of the foregoing considerations, the answer to the questions referred in Case C-80/11 is that Articles 167, 168(a), 178(a) and 273 of Directive 2006/112 must be interpreted as precluding a national practice whereby the tax authority refuses the right to deduct on the ground that the taxable person did not satisfy himself that the issuer of the invoice relating to the goods in respect of which the exercise of the right to deduct is sought had the status of a taxable person, that he was in possession of the goods in question and was in a position to supply them, and that he had satisfied his obligations as regards declaration and payment of VAT, or on the ground that, in addition to that invoice, that taxable person is not in possession of other documents capable of demonstrating that those conditions were fulfilled, although the substantive and formal conditions laid down by Directive 2006/112 for exercising the right to deduct were fulfilled and the taxable person is not in possession of any material justifying the suspicion that irregularities or fraud have been committed within that invoice issuer's sphere of activity.”

Discussion and Decision on the First Issue

“Without prejudice to the particular provisions laid down in this Directive, only the following details are required for VAT purposes on invoices issued pursuant to Articles 220 and 221:

… (3) the VAT identification number referred to in Article 214 under which the taxable person supplied the goods or services; …

(5) the full name and address of the taxable person and of the customer; …”

“(1) Subject to paragraph (2) below and regulation 16 and save as the Commissioners may otherwise allow, a registered person providing a VAT invoice in accordance with regulation 13 shall state thereon the following particulars –

… (d) the name, address and registration number of the supplier,

(e) the name and address of the person to whom the goods or services are supplied, ….”

“…It would, I think, be offensive to most people’s sense of fiscal justice if a mechanical accounting exercise of this nature were permitted to generate a very substantial input tax credit, in circumstances where (for whatever reason) none of the tax in question has been paid by the supplier.”

Conclusion on the First Issue

The Second Issue

The Facts on the Second Issue

“3. Regulations 13(1) of the VAT Act 1994 requires taxable persons to have a valid VAT invoice in order to reclaim input tax on taxable supplies.  The contents of a VAT Invoice are set out in Regulation 14(1).  You do not have a valid VAT invoice for a number of transactions on which you seeking to claim input tax as detailed below.

4……..

As you can see above Regulation 14(1)(d) requires the VAT invoices to have a valid VAT number.

5. On 18 ^th May 2009, CO2e received an invoice for Stratex Ltd.  The invoice from Stratex bore no VAT Registration Number, however Stratex Ltd charged CO2e VAT, which CO2e paid to Stratex on or about 19 ^th May 2009.  Payment would have been processed by the accounting department and the input tax posted to the VAT account.  As Stratex was not registered for VAT none of their invoices could have had a valid VAT registration number.

6. Under regulation 14(1)(d) CO2e did not have a valid VAT Invoice on which to recover VAT and therefore it has no right to claim input tax on these particular transactions.

7.Any recovery of input tax in these circumstances is subject to HMRC’s discretion under VAT regulation 29(2).  However, given the low level of commercial checks, particularly in light of what FSA, FATF & JMLSG guidelines recommend, undertaken by CO2e in relation to these transactions (see para14(ii) below) I have decided to deny CO2e’s claim to input tax.  This is on the basis that it does not have a valid VAT invoice, Stratex was not registered for VAT at the time of the transactions, the transactions were connected with VAT fraud and CO2e did not carry out a reasonable level of due diligence and therefore we would decline to apply our discretion to allow the input tax.”

“416. The copy of Stratex’s invoice sent to us by CFE shows that Stratex’s banker was Marfin Popolare Bank Cyprus.  The invoice does not show a UK VAT number although VAT is included on the invoice.

417. On the basis of the information received CFE has made very few third-party checks such as financial checks from Dunn & Bradstreet or similar organisations.

418. CFE has not provided any: annual accounts, independent references, banking references, checks on Stratex’s director and his background and experience.

419. Despite having no financial information about the company between 18 ^th May – 3 ^rd June 2009 CFE did 17 trades totalling €48,882,969.  There is no evidence that CFE sought to check with HMRC whether Stratex was registered for VAT.

420. Stratex had only been incorporated on 6 ^th October 2008 and therefore had no or very little track record.  CFE state the business was “no risk” as they did not pay Stratex Limited until they had received the EUAs.  On this basis Stratex would have received credit facilities from the trader who sold the EUAs to them.  In the case of the trades mentioned above on 28 ^th May 2009 Stratex would have needed credit of about €13,139,440.

421. Had CFE applies its KYC checks and risk management systems properly and taken notice of the available information it would have been able to identify the fact that Stratex had no financial or trading history, that the director Avi Alkobi was unknown in the field of environmental trading and that Stratex had no permanent premises in the UK, instead relying upon a third party to provide office services.  In addition, Stratex were not registered for VAT in the UK, but were charging VAT.  CFE also failed to take into account that Stratex could purchase large volumes of carbon EUAs at a price less than CFE could purchase and the payments made by CFE, including the amounts due as VAT to HMRC were to an account at Marfin Popular bank in Cyprus.

422.The 17 invoices that CFE provided from Stratex were invalid because they did not show any VAT registration number on them and could not, because Stratex were not registered for VAT and had never been registered for VAT.  Despite the fact that the invoices were invalid under Regulation 14 of the Value Added Tax Regulations 1995 for the reason set out above I nonetheless had the discretion to accept other evidence of the charge to VAT as evidence of the supplies in question having been made and to permit an input tax deduction on that basis.

423. The only documentation that CFE provided me with in relation to the Stratex transactions were the invalid invoices themselves and the due diligence documents listed above.  No proof of payment to Stratex was provided by CFE.  As set out in my letter of 6 ^th December 2012 to CFE I declined to exercise my discretion in favour of allowing the input tax deduction because: CFE’s due diligence checks into Stratex were inadequate especially in the light of what the FSA, FATF and JMLSG guidelines recommend.  The transactions were also connected with fraud.”

“I have examined a sample of the invoices for all the suppliers in question and (……) the invoices are invalid in that they are deficient in one of the requirements for a Tax Invoice detailed in Regulation 14(1)(d).

…………

Officer Ball was then required to exercise his discretion as to whether to allow deduction of input tax based on alternative evidence.  Officer Ball has considered allowing deduction based on alternative evidence and decided to refuse deduction (his reasoning is given in paragraphs 7 and 9 of his letter to Tower Bridge GB Ltd of the 6 ^th December 2012).

The invalid invoices issued by Stratex Alliance Ltd are in a different category to the other invalid invoices for which input tax has been denied in that the trader was not registered for VAT.  Officer Ball has decided that in this case discretion does not apply and he therefore has not exercised it.  Following Policy advice I agree with this approach (but see under the section on MOK as the fact that the Stratex Invoices are Invalid will form part of the evidence available to determine the appellant’s knowledge of the connection to fraud under the section on MOK).

In relation to the remaining invalid invoices I have considered the alternative evidence available to Officer Ball and some additional evidence of payment supplied by Tower Bridge following my meeting with representatives of the company and their legal advisors of the 14 ^th March 2013 and I have concluded that:

…………………

Conclusion

Officer Ball has correctly denied the input tax in relation to the Stratex Alliance invoices and has correctly exercised his discretion to refuse deduction based on alternative evidence.  This element of the invalid invoice assessment will be upheld.  The input tax denied is:

Period 06/09 £5,605,117.74

Towerbridge has satisfactory alternative evidence to support deduction for that part of the input tax denial based on the fact the invoices are invalid solely on their technical deficiencies (even where they can be shown to be connected to a fraud) and that part of the decision will be withdrawn.  The input tax denied solely on invalid invoices was:

……………..”

21. I categorised the transactions into two groups, those where Towerbridge bought from Stratex and then all those dated after the 9 ^th June 2009.

22. In the Stratex deals the supplier was not registered for VAT at the time of the transactions and in fact was never registered for VAT.  The invoices issued by Stratex to Towerbridge had no VAT number on the face of the invoices.  There were 17 transactions including VAT of £5,605,119.74 million pounds and no VAT Registration number was shown on any of these invoices.  A VAT Number is a mandatory entry on a VAT Invoice so these 17 invoices were all invalid.

23.Officer Ball considered allowing the deduction of Input tax on an Invalid invoices using alternative evidence in line with the Statement of Practice on deduction of VAT without a valid invoice and so did I but this was not a business error or administrative oversight by Stratex; it was a deliberate fraud, VAT was charged, collected and not paid by Stratex.

24. With that being the context it was then relevant to note that there was a direct connection to a fraud between Stratex and Towerbridge and Towerbridge knew or should have known of that connection primarily because the most obvious reason a supplier doesn’t show a VAT number on their invoices is that they don’t have one and can’t therefore account for the VAT to HMRC.  It is a fundamental requirement of a VAT invoice that it shows a VAT number.

25. Therefore, Towerbridge had no or no sufficient grounds on which to suggest that the discretion to allow alternative evidence of the charge to VAT should be exercised and, moreover the Kittel test outlined above was met.

26. In relation to the remaining transactions denied by Officer Ball I have drawn a distinction between “could have known” and “should have known”.  There are a number of indicators of fraud in the supply chains prior to the 9 ^th June 2009 (which are identified in the original decision letter by Officer Ball) but prior that date the indicators when viewed in isolation and without a well-publicised context of fraud in the market against which to judge them, did not convince me that Towerbridge should have known that they were connected to fraud.”

The Law on the Second Issue

The proper decision maker whose decision is to be challenged

83    Appeals

(1)     Subject to [sections 83G and 84], an appeal shall lie to [the tribunal] with respect to any of the following matters—………………..

(c)     the amount of any input tax which may be credited to a person;……………………

(p)     an assessment—

(i)     under section 73(1) or (2) in respect of a period for which the appellant has made a return under this Act;  ………………………

83C    Review by HMRC

(1)     (1) HMRC must review a decision if—

(a)     they have offered a review of the decision under section 83A, and

(b)     P notifies HMRC accepting the offer within 30 days from the date of the document containing the notification of the offer.

(2)     But P may not notify acceptance of the offer if P has already appealed to the tribunal under section 83G.

(3)     HMRC must review a decision if a person other than P notifies them under section 83B.

(4)     HMRC shall not review a decision if P, or another person, has appealed to the tribunal under section 83G in respect of the decision.

83F    Nature of review etc

(1)     This section applies if HMRC are required to undertake a review under section 83C or 83E.

(2)     The nature and extent of the review are to be such as appear appropriate to HMRC in the circumstances.

(3)     For the purpose of subsection (2), HMRC must, in particular, have regard to steps taken before the beginning of the review—

(a)     by HMRC in reaching the decision, and

(b)     by any person in seeking to resolve disagreement about the decision.

(4)     The review must take account of any representations made by P, or the other person, at a stage which gives HMRC a reasonable opportunity to consider them.

(5)     The review may conclude that the decision is to be—

(a)     upheld,

(b)     varied, or

(c)     cancelled.

(6)     HMRC must give P, or the other person, notice of the conclusions of the review and their reasoning within—

(a)     a period of 45 days beginning with the relevant date, or

(b)     such other period as HMRC and P, or the other person, may agree.

(7)     In subsection (6) “relevant date” means—

(a)     the date HMRC received P's notification accepting the offer of a review (in a case falling within section 83A), or

(b)     the date HMRC received notification from another person requiring review (in a case falling within section 83B), or

(c)     the date on which HMRC decided to undertake the review (in a case falling within section 83E).

(8)     Where HMRC are required to undertake a review but do not give notice of the conclusions within the time period specified in subsection (6), the review is to be treated as having concluded that the decision is upheld.

(9)     If subsection (8) applies, HMRC must notify P or the other person of the conclusion which the review is treated as having reached.

83G    Bringing of appeals

(1)     An appeal under section 83 is to be made to the tribunal before—

(a)     the end of the period of 30 days beginning with—

(i)     in a case where P is the appellant, the date of the document notifying the decision to which the appeal relates, or

(ii)     in a case where a person other than P is the appellant, the date that person becomes aware of the decision, or

(b)     if later, the end of the relevant period (within the meaning of section 83D).

(2)     But that is subject to subsections (3) to (5).

(3)     In a case where HMRC are required to undertake a review under section 83C—

(a)     an appeal may not be made until the conclusion date, and

(b)     any appeal is to be made within the period of 30 days beginning with the conclusion date.

(4)     In a case where HMRC are requested to undertake a review in accordance with section 83E—

(a)     an appeal may not be made—

(i)     unless HMRC have notified P, or the other person, as to whether or not a review will be undertaken, and

(ii)     if HMRC have notified P, or the other person, that a review will be undertaken, until the conclusion date;

(b)     any appeal where paragraph (a)(ii) applies is to be made within the period of 30 days beginning with the conclusion date;

(c)     if HMRC have notified P, or the other person, that a review will not be undertaken, an appeal may be made only if the tribunal gives permission to do so.]

(5)     In a case where section 83F(8) applies, an appeal may be made at any time from the end of the period specified in section 83F(6) to the date 30 days after the conclusion date.

(6)     An appeal may be made after the end of the period specified in subsection (1), (3)(b), (4)(b) or (5) if the tribunal gives permission to do so.

(7)     In this section “conclusion date” means the date of the document notifying the conclusions of the review.

Invalid invoices and the discretion to allow input tax

(1) Subject to paragraph (2) below and regulation 16 save as the Commissioners may otherwise allow, a registered person providing a VAT invoice in accordance with regulation 13 shall state thereon the following particulars— …

(d) the name, address and registration number of the supplier, …

(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. 

“VAT Strategy – Input tax deduction without a Valid VAT invoice

1.This statement of Practice explains and clarifies HMRC’s policy in respect of claims for input tax supported by invalid VAT invoices.  It also explains why amendments were made to ….regulation 29(2) of the Value Added Tax Regulations 1995 to introduce new measures……This guidance does not apply to situations where HMRC may deny recovery of input tax for other reasons such as “abuse” of the right to deduct.

…………………………

How do I know I have an invalid VAT invoice?

12.The first step is to ensure that you hold an invoice that contains all the right information.  It is difficult to spot an invalid invoice where a false name, address or VAT number has been used.  HMRC have established a team who can confirm that supplied VAT registration details are current, valid and match information held by HMRC…….

Invalid Invoice and HMRC’s discretion

“Appendix 2 Questions* to determine whether there is a right to deduct in the absence of a valid VAT invoice

1. Do you have alternative documentary evidence other than an invoice (e.g. supplier statement)?

2. Do you have evidence of receipt of a taxable supply on which VAT has been charged?

3. Do you have evidence of payment?

4. Do you have evidence of how the goods/services have been consumed within your business or their onward supply?

5. How did you know that the supplier existed?

6. How was your relationship with the supplier established? For example:

    • How was contact made?     

    • Do you know where the supplier operates from (have you been there)?     

    • How do you contact them?     

    • How do you know they can supply the goods or services?     

    • If goods, how do you know the goods are not stolen?     

    • How do you return faulty supplies?

  *This list is not exhaustive and additional questions may be asked in individual circumstances”  

The relevant case law on invalid invoices

HMRC’s submissions on the Second Issue

“Two reasonable [persons] can perfectly reasonably come to opposite conclusions on the same set of facts without forfeiting their title to be regarded as reasonable…Not every reasonable exercise of judgment is right, and not every mistaken exercise of judgment is unreasonable.”

i. Those which the legislation expressly or impliedly identifies as relevant or which are obviously relevant; and

ii. Those which the decision maker may take into account if they see fit to.

“HMRC were wrong to refuse to allow the input tax in respect of the invoices which were invalid because they did not include a VAT registration number and discretion should have been exercised in accordance with the Statement of Practice so as to allow recovery.”

Appellant’s submissions on the Second Issue

The correct decision maker

(5) The review may conclude that the decision is to be—

(a) upheld,

(b) varied, or

(c) cancelled.

(1) First, sections 83A to 83G, VATA 1994 do not provide for a distinct right of appeal against a review conclusion itself; rather, there is one relevant decision, being the original one as either upheld, varied or cancelled on review.

(2) If one were to treat a reviewing officer’s decision on discretion as a discrete appealable matter (as opposed to something which supersedes the original exercise of discretion) then, in principle, it would itself be subject to its own statutory review under ss.83A to 83G, VATA 1994. If the officer reviewing that decision re-exercised the discretion on review then that would generate yet another appealable matter which itself would be capable of being subjected to a statutory review, and so on ad infinitum . That would plainly be an absurd state of affairs.

(3) Further, if one were to adopt HMRC’s approach of focussing on the original exercise of discretion rather than the reviewing officer’s decision then in a case where, as happened to some extent in the present case, the original officer refuses to accept the alternative evidence but the reviewing officer disagrees and does accept it, the taxpayer nonetheless has to challenge the original decision by way of appeal. Again, that would be a surprising consequence.

The reasonableness of HMRC’s decision not to accept alternative evidence and deny input tax based upon the invalid invoices

(1)           Section 24 VATA defines “input tax” in relation to a taxable person as, inter alia , VAT of the supply to him of any goods or services used or to be used for the purpose of any business carried on or to be carried on by him.

(2)           Section 25 VATA sets out a taxable person’s obligation to account for output tax and provides a right to deduct input tax.

(3)           Section 26 VATA sets out the input tax allowable under section 25.

(4)           Regulation 14 of the VATR details the particulars that a VAT invoice is to contain.

(5)           Regulation 29 of the VATR governs claims for input tax. It implements the requirement that the taxable person making the claim hold a VAT invoice. It also provides (in reg.29(2)) that, in the event that the taxable person does not hold a VAT invoice, HMRC have a discretion to accept alternative evidence of the VAT charge.

(a) Regulation 29(2) is actually quite prescriptive as to the nature and extent of the discretion: it is a discretion to accept “other documentary evidence of the charge to VAT” .

(b) So whilst it is true that the legislation does not list factors which are to be taken into account, it does specify the matter to which the discretion relates, namely the adequacy of alternative documentary evidence of the charge to VAT in respect of which deduction is claimed.

(c) To be relevant, therefore, a given factor must go to whether the evidence in question is adequate to demonstrate that charge to VAT. Indeed, that is the very premise of HMRC’s published Statement of Practice on the exercise of their discretion.

Discussion and Decision on the Second Issue

Who is the decision maker whose decision is being appealed?

“Officer Ball has decided that in this case discretion does not apply and he therefore has not exercised it.  Following Policy advice I agree with this approach (but see under the section on MOK as the fact that the Stratex Invoices are Invalid will form part of the evidence available to determine the appellant’s knowledge of the connection to fraud under the section on MOK).

…………………

Conclusion

Officer Ball has correctly denied the input tax in relation to the Stratex Alliance invoices and has correctly exercised his discretion to refuse deduction based on alternative evidence.” 

The reasonableness of Officer Ball’s decision not to accept alternative evidence for the invalid invoices

“17. For supplies of goods not listed at Appendix 3, claimants will need to be able to answer most of the questions at Appendix 2 satisfactorily. In most cases, this will be little more than providing alternative evidence to show that the supply of goods or services has been made (this has always been HMRC's policy).

……….

19. As long as the claimant can provide satisfactory answers to the questions at Appendix 2 and to any additional questions that may be asked, input tax deduction will be permitted.”  

The reasonableness of HMRC’s policy when denying input tax and not accepting alternative evidence for invalid invoices

Conclusion on the Second Issue

The Third Issue

Stratex Alliance Ltd (17 transactions between 18 May – 3 June 2009);

AH Marketing and Distribution Limited (7 transactions between 8 – 18 June 2009);

GW Deals Limited (1 transaction on 8 June 2009);

Mettec trading as Ayres Limited (1 transaction on 10 June 2009); and

Westis Limited (4 transactions between 28-29 July 2009). 

The Facts on the Third Issue

Constitution of the Appellant and related companies

Relationship between CO2e and CFE

Relevant officers and employees

Background to CO2e

Leadership within CO2e

The background to carbon credits and their use in VAT and MTIC fraud

“EUA transactions in 2009 reached US$118.5 billion (€88.7 billion), making the EU ETS the largest existing carbon credit market. Over 6.3 billion tons of CO2e changed hands in 2009 through spot, futures and options contracts. A substantial portion of the growth came from the spot market, which totalled 1.4 billion tons, an increase of 450% over 2008. Over 70% of spot transactions occurred during the first half of the year… Spot volumes in the first half of 2009 increased 75-fold over the year-earlier period…”

“72. The European VAT authorities first became aware of the fact that VAT carousel fraud was being committed in relation to CO2 allowances in May 2009. VAT carousel fraud was particularly pronounced in France and the UK during the summer and both countries therefore chose in different ways to abolish VAT on allowance trading without prior approval by the EU.

73. On 30 August 2009 SKAT recommended to the Minister for Taxation that Denmark requested the EU to approve an amendment of the Danish VAT rules to eliminate the risk of VAT carousel fraud in Denmark.”

“4 VAT fraud in carbon trading

Extremely large scale fraud

Between the third quarter of 2008 and June 2009, VAT fraud in the carbon trading market developed in France, undoubtedly involving the highest amounts ever detected by tax authorities. The Cour des Comptes estimates the tax loss to the state from this fraud as €1.6 billion. The scam was halted only after the administration issued a tax instruction on 11 June 2009 exempting carbon quotas from VAT.”

Risk and Due Diligence at CO2e - The regulatory and legislative context

The Joint Money Laundering Steering Group (“JMLSG”) Guidance

Customer Due Diligence

“( 1) identifying the customer and verifying his identity;

(2) identifying the beneficial owner, where relevant, and verifying his identity; and

(3) obtaining information on the purpose and intended nature of the business relationship. The JMLSG Guidance recognised that in some situations this may be self-evident: see para.5.3.21 of the Guidance .”

“(1) full name;

(2) registered number;

(3) registered office in country of incorporation; and

(4) business address.

For private or unlisted companies the following additional evidence is required:

(5) names of all directors (and equivalent); and

(6) names of individuals who own or control over 25% of the company's share capital or voting rights .”

Monitoring customer activity

Cantor's compliance function

Enhanced due diligence

(1) the name of the company and its registered number;

(2) the registered office and business address;

(3) the names of all directors;

(4) the names of shareholders owning more than 25% of the company; and

(5) whether the company or its directors or shareholders were Politically Exposed Persons (“PEPs”) or whether they appeared on any sanctions lists (a World Compliance check). This was carried out using the World Compliance or the Accuity System, which is powered by World Compliance.

Responsive Due Diligence

Background to CFE’s trading in carbon credits

(1) generating credits at all; or

(2) generating as many carbon credits as expected; and/or

(3) generating carbon credits at a sufficiently low cost to be sold at a profit.

“Until now CantorCO2e has operated as an execution only broker. As such it has only been able to match buyers and sellers that have a pre-existing legal relationship with each other. This has limited the scope of CantorCO2e to expand its client base as it has been unable to offer a service to the many infrequent users of the market (non-professional compliance traders). These infrequent users of the market currently have very limited access to the market. Their only route to market presently is either via their bank or their energy provider, and they are being offered very uncompetitive prices but have no choice because of the compliance nature of the market.

Cantor CO2e will seek to capture this untapped potential of the market by evolving its business model from execution only to a matched principal business. The matched principal business will be channelled through Cantor Fitzgerald Europe (primarily because of their FSA status that allows them to hold client money and assets but also because of their superior balance sheet which provides comfort to clients….

By virtue of Cantor Fitzgerald operating as a matched principal in future, the parties to any trade will all be matched with Cantor Fitzgerald rather than with each other. This removes the requirement for the buyer and seller to be contractually related with anyone other than Cantor Fitzgerald. By deploying this methodology CantorCO2e will be opening the doors of the market to all those companies that were unable to access in directly in the past. This ought to provide CantorCO2e with liquidity that is not being seen by any of its competitors.”

“The primary opportunities that exist in the market centre on the enormous number of companies that do not have direct market access but for whom the trading of emission certificates is an intrinsic part of their business, Cantor CO2e is re-designing its business model in order to specifically target this segment of the market”.

Counterparties encountered following initiation of the Business Plan

Subsequent appraisal of the business

 “7. Mr Drummond had equity in CantorCO2e, LLC and he wanted to use this to raise money to fund the purchase of the house, but there was little value in the equity because the company had sustained significant losses over a number of years and it was envisaged that this would continue over the short to medium term.”

“19. …I did not expect CantorCo2e, LLC to do well in the short term…”

“28. I recall that I did have some high level discussions with Mr Rose about a potential new compensation structure for the CantorCO2e group business. I believe this was in the early part of 2008. The business had been suffering from significant losses and was not covering its costs. Mr Rose came to me to discuss possible options for restructuring compensation in a way that would help motivate the employees to produce revenue….”

Performance of the market from July 2008 onwards

Performance of CO2e’s EU Carbon Desk in accordance with the Business Plan

Chronology of CFE’s trading in the carbon credits market from March to July 2009

March 2009

“As agreed on the phone we confirm our interest to buy or sell EUA allowances on the spot market so please can you give me the procedure to trade with you and also your delivery your commissions…”

“I understand that March ties into some sort of EUA higher volume month. So although this is great it’s not necessarily a permanent thing?”

“Nice, huh?

I have never run a non-profitable desk… Problem for the last 3 years at Cantor, I wasn’t really running the desk or allowed to use my initiative.

I hope Howard does the right thing. It’s in his interest to keep us motivated

…”

CFE’s transactions connected to fraudulent evasion of VAT in April 2009

May 2009

CFE’s transactions with Stratex Alliance Ltd in May 2009

Stratex - No VRN – supplier to CFE, fraudulent defaulter and provider of invalid VAT invoices

Due Diligence

(1) the name of the company and its registered number;

(2) the registered office and business address;

(3) the names of all directors;

(4) the names of shareholders owning more than 25% of the company; and

(5) whether the company or its directors or shareholders were Politically Exposed Persons (“PEPs”) or whether they appeared on any sanctions lists (a World Compliance check). This was carried out using the World Compliance or the Accuity System, which is powered by World Compliance.

(1)           Mr Avi Alkobi of Stratex emailed the Appellant’s EU Desk on 13 May 2009 requesting that they commence work with CO2e and attaching Know Your Client (“KYC”) information. Stratex was approved as a new client by the Compliance Department on 14 May 2009.

(2)             In an email on 1 May 2009 Mr Simon Chatterton, a Central Compliance Analyst, asked John Bush, an Emissions Broker, whether Stratex had a prospectus or website as he could not find a public description of the business activity of the company.

(3)             Mr Alkobi stated in an email to John Bush on 14 May 2009 that the company was new and the website was under construction. Mr Bush forwarded this response to Mr Chatterton on 14 May 2009. Mr Chatterton approved Stratex for compliance/AML on 14 May 2009.

(a) a Certificate of Incorporation dated 6 October 2008;

(b) the Memorandum and Articles of Association;  

(c) minutes of first board meeting held on 6 October 2008;

(d) a resolution of the Directors dated 6 October 2008 signed by Alfred Brewster executing the share certificate for 1000 Shares to Rea Ketty Yolande Barreau;

(e) a letter of resignation as a director dated 6 October 2008 signed by Alfred Brewster;

(f) a shareholders' resolution appointing Mr Avi Alkobi as director and terminating the appointment of Ms Rea Ketty Yolande Barreau dated 13 April 2009;

(g) a directors' resolution dated 14 April 2009 in respect of transfer of 1000 shares from Ms Rea Ketty Yolande Barreau to Mr Avi Alkobi along with a stock transfer form;

(h) a share certificate dated 14 April 2009 for 100 shares held by Mr Avi Alkobi;

(i) a letter of resignation dated 14 April 2009 signed by Ms Elisana Marie-Antoinette Labonte for and on behalf of ABS Secretary Services Ltd;

(j) an undated director's resolution signed by Ms Barreau in respect of the appointment of Mr Alkobi as a director; and

(k) a certificate of non-trading dated 6 October 2008 showing that the company had not traded up until that date (the company was only incorporated on that date).

(a) a Companies House WebCheck webpage displaying basic company details;

(b) a Companies House Current Appointments Report showing Nantia Efstathiou and Avi Alkobi as company secretary and director of the company respectively and the registered address as Suite 2, 23-24 Great James Street, London, WC1N 3ES .  According to Ms Mills, the fact that the address was that of a corporate service provider was not necessarily something that would be taken into consideration if other indicators did not show that it needed to be investigated; and

(c) a World Compliance search on 13 May 2009. World Compliance is a provider of customer and vendor screening content used for AML purposes. It hosts a database of PEPs across 240 countries with more than 420,000 profiles. The screening process shows up other adverse news or information in the public domain about an individual or a company. This would include adverse press coverage, which might show, for example, that a person has been accused of something or has been fined or is under investigation. The World Compliance search of the company name and the names of the two directors returned no results. This went above and beyond the requirements of the JMLSG Guidance.

June 2009

1-2 June 2009

3 June 2009 – Rumours of VAT fraud

“’BlueNext and the Vat Scammers’

…

It IS a title for a discussion on the recent flurry of trading activity that has many suspicious elements, but no one can quite put their finger on it.

And the only ones that seem to be interested in it are a bunch of financial regulatory   Frenchmen with the investigative power of Inspector Clouseau from the Pink Panther Movies.  However, I do not expect the ending will be amusingly happy as in the Pink Panther movies, with culprits behind bars and the imbecile/hero getting the lovely girl at the end.

Rather, I am worried that the integrity of the EUA market in the whole of the EU will decline suddenly and become a market full of money laundering menaces, devoid of even the most basic controls: a breeding-den for corruption that will cost the European union billions of Euros.

So what am I referring to?

First let’s look at the EUA…

…

And nowadays, in France, this seems to make it ripe for a further level of abuse: VAT scams.

VAT scams work like this: if an invoice is issued in one EU? Country, the payer in the same country has to pay the invoice with the additional 10 to 20 percent for VAT. But if the paying party is in a different country, there is a double taxation clause which means they are exempt from paying VAT.

And if you are able to do false invoices from country to country, in some connected ring, then there is a chance that one link will fall away and the 10 to 20% will never be seen again by the collective states of the EU ever again. A few years ago this was used for real factory orders. Now, it is believed that the transactions will be used with EUA movements.

But are all these transactions originated by real purchases of EUAs?...I think not.

It could also be a function of money laundering. The movement of the EUA is actually done within minutes by a simple internet website transaction… 

But what is the proof you ask?

All I have seen thus far is anecdotal evidence and I am hoping to provoke the real investigators into action after they read these:

1. Recent volume on Bluenext has increased significantly, and it was thought that it was the reaction of selling compliance companies looking to cash in on surplus sales as the market decreased in value since December 2008 (a valid argument) or even perhaps the tightened credit lines that have affected all areas of finances have also constrained forward trading lines and even cash deposits for futures trading, making more transactions move to the spot market (also a valid point).

2. And a recent drop in fees for BlueNext to draw in more business (very, very low costs). This isn’t a factor that is suspicious, but shows that the procedural costs to scams also dropped a lot. But these don’t answer all the curiosities.

3. Recently a spate of Frenchmen have been opening new and newer accounts, seemingly replicating themselves. This is similar to some poorly regulated IPO market seekers that wanted better allocations. But why would a large bunch of Frenchmen open accounts with an inept Dutch trading house with no regulatory control, or with starved-for-business English brokers, only to trade BACK into the French exchange?

4. A few investigations have arisen lately regarding some specific deals in the market, asking the brokers if they had the correct KYC (Know Your Client) Documents. KYC is basically due diligence that hopefully avoids money laundering and perhaps even terrorist money, as well as making it more difficult for tax avoidance.

5. The administrators of BlueNext have been unusually tight lipped lately, when asked about volumes and procedures. As a trader with 20 years of experience in a wide range of securities, my instinct says they are hiding something: the response claiming confidentiality and ‘anonymity’ rang hollow in my opinion. I believe that they are undergoing some sort of internal and external investigation and are well scared of the result.

…

A final thought, should efforts be made to delve further into the origin of this surge in activity, I suspect we could see precipitous drop in volume on the BlueNext.

Note to self: Look further into compliance activities and oversight of the exchange and trades of carbon credits.”

“…it provided further confirmation to me that the increase in trading volumes experienced by the EU Carbon Desk was consistent with the wider market .”

“ Spot euas is a great business...easy and huge mkt .” 

“AL: I just wanted to tell you that about the VAT number I don’t have it yet but promise to you I will send it to you as soon as possible.

EW: Yes, no problem at all.

AL: And I wanted to tell you that as you are a UK company we are too a UK company I think it’s not a problem if I don’t have it just now, but I promise you I will send it as soon as I have it, okay?

EW: Okay that’s absolutely fine…”

“It is very important that you provide us with your VAT number, otherwise we won’t be able to pay you tomorrow. This is because CantorCO2e includes 15% tax in the payment and then CantorCO2e reclaims this tax from the U.K Government. Please try to get hold of the number as soon as possible.

It was good to do the first trade with you!”

4 June 2009

“…This is because we do not have your VAT number and so CantorCO2e cannot send out the 15% of VAT without any guarantee of being repaid. This is in fact not a problem for two reasons:

- If you have a VAT number, you would need to send that 15% VAT to the U.K. government in any case. Therefore Axle Ltd is not losing anything if we send you the above sum of money.

- When you do provide CantorCO2e with a VAT number we will be able to pay you the accrued VAT…”

“As requested our vat number is 915 7270 21, please proceed with paiement now and send me copy of the swift so I can send you more allowance for trade today.

Also I ask my back office to go ahead with adding the vat number in all the invoices did to you.

Finally for your information my back office confirm to me that sales within the same country do no need vat number for invoicing and collecting the taxes…Anyway were following your policy.”

“Caller wished to verify a VRN –

915 7270 21 [Epicure] – valid number – name and address incorrect

893 9840 57 [Adduco] – valid number – name correct – address not provided.

Also advised called on invoicing prior to receiving VRN but after EDR.

Caller also wished to verify a further 12 VRNs. Spoke to Tech who advised to pass as a call-back. Caller said he will ring back to verify numbers later today.”

“Thank you for the VAT number that you sent. However it appears to be incomplete. A VAT number has two letters at the beginning…Please send me a complete VAT number for Westis Ltd. Also, may I correct your back office who seem to have misadvised you. As a matter of law, if you are invoicing for VAT then the invoice must also contain a VAT number.

If there is no VAT number on the invoice then we cannot pay you VAT and you will need to send us a new invoice without the VAT element included.

Since the invoices that you have sent us to date do not have a VAT number on them, we should not have paid you VAT on those invoices. As a result, the current situation is that we have overpaid you on past invoices and will need to make an adjustment in relation to the amount that is outstanding today.

If however, you are able to amend and resend all of the past invoices to include your complete VAT number then no adjustment will be made.

Please confirm how you would like us to proceed.”

“Sorry GB 915 7270 21

Ok I will send you all the invoices again but please in the mean time process with paiement due. I try to send all invoices corrected with the vat number within 3 hours.”

“There is a problem with these invoices.

The VAT number that they contain is not registered to Westis Limited.

Either the VAT number is wrong or else the invoice needs to be made in the name of the company that has that registration number.

Please amend and resend accordingly.”

“Dear james,

As discuss please find all set of document of Epicure business solutions limited owner of the vat number GB 915727021.

I will send you all amend invoices in the next 30 mns, please start proceeding in order for us to have the paiement made today.”

“It has been claimed by Westis that the VAT number they supplied was a group number for Epicure Business Solutions Limited with themselves being part of the group. There is no available evidence to link Westis with Epicure, as Franck Stork is sole shareholder of Westis.

Also there is no mention of Franck Stork or Westis in the available company information.”

“On 3/6/2009, James Emanuel, a CantorCo2e Limited manager, forwarded an internet blog concerning spot EUA trading on the Bluenext market and a VAT fraud. Further investigation by the Legal and Tax department raised suspicions about a number of CantorCo2e clients, Westis Limited being one of them.

It was found that Westis Limited had supplied a UK VAT number for another entity (Epicure) claiming that this was their parent company. No evidence could be found for this. AT 8/6/09, €2,781,133 VAT had been paid to Westis, although €3,987,165 was still being held on account by Cantor leaving Westis owed €1,206,031 by Cantor.

The account has been frozen pending further legal and regulatory reports.”

5 June 2009

“IMPORTANT please make NO payments today from our blotter until we give you the green light to do so.”

“There is no documentation in this information pack that states that Westis Ltd is part of a group owned by Epicure as you told me earlier. Please provide me with evidence of the group if my understanding is correct.

If not, due to money laundering legislation, we cannot retrospectively change past trades into the name of Epicure Ltd when payment has been made to a bank account of Westis Ltd when there is no evidence of a relationship between the two companies.

One possible solution is that we approve Epicure as a client (subject to due diligence, etc) and then book these trades in the name of Epicure then we will need to make payment on those trades direct to Epicure. As such, Westis will have to return all money that we have paid to it to date, we will cancel the trade booked to Westis and we will then pay that same money to Epicure. Please confirm that this is agreeable to you and I will seek the necessary internal approvals for this to happen.”

CFE’s internal investigations into the potential for fraud in its trading

“please find attached the share certificate that is evidence that Westis belongs to Epicure Business Solutions, you will also find attached minutes and form j30. Also my agent would like to speak to you in order to arrange agreement with the 3 parties for resolving right now the problem and for you to be able to pay those 2 invoices immediately in a legal way.”

“I am seeking approval to make payment of money without VAT as you suggested.

…

This issue has taken up my whole day so far and as a result of having paid you VAT when I shouldn’t have paid you VAT I am also fighting to keep my job.  I am sorry if this is not happening quickly enough for you, but honestly this problem was created by you claiming VAT when you were not registered to do so. As a result you will have to allow us to sort out the mess that has been caused and that will take as long as it takes. Hopefully it will be resolved on Monday.”

“Find attached draft made by my agent, apparently you didn’t find the time to call me. I sent you the evidence that you asked me and I tried to reach you all day, I will appreciate that you call me ASAP, also our lawyer ask me how you clear companies that don’t have vat number and paid them the vat, so apparently we are not the only one that made mistakes, hopefully I believe that we can find a solution together with the help of the holding so take a quick decision on my paiement, without answer from you we will understand that you don’t wanna pay and that you are trying to keep money that on one side is states money and on the other side is our client money and we will proceed and react on it.”

“…I think that you want easily put the fault on our side, cantor is one of the biggest finance company and is not my fault if your clearance department never asked us vat information, as you can notice, as soon as you realise YOUR mistake we immediately react and sent to you required information. You are the one hiding from the phone and the responsibility, I would like you to phone me to know the position of cantor before us to take any decision, we are not worry about scandal as we are not publicly known but we are worry about not paying our client for 3 days. The draft agreement sent to you before is a legal way for you to be covered and to pay us our due.”

(1) those to whom CO2e had only sold EUAs and from whom it had not acquired EUAs;

(2) those who were based outside the UK and to whom CO2e had not accounted for VAT on purchases; and

(3) those who were “known entities”, for example Barclays Capital. These appear largely to be entities who were regulated.

“Where a company has purchased any goods or services in good faith from an unconnected business, and holds a tax invoice from the supplier showing a valid UK VAT registration number, there should in principle be no problem in covering the VAT on your return, even if it is subsequently discovered that the supplier did not pay the VAT over to HMRC. If you checked that the VAT number on the invoice is genuine I can confirm that you would not normally be expected to carry out further checks in order to prove (for example) that the VAT number quoted on the invoice belongs to the person or organisation to which the payment was made; indeed, there is no easy way for any taxpayer to do so.

…

… Optigen – Case C-354/03) considered the position of an innocent party in a supply chain where MTIC fraud took place. In Optigen the court ruled that “the right to deduct input VAT of a taxable person who carries out such transactions cannot be affected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is vitiated by value added tax fraud, without that taxable person knowing or having any means of knowing.” HMRC confirmed their acceptance of this principle in Business Brief 01/06 (copy attached).”

“I had several conversations with CantorCO2e during the following weeks and my primary contacts were Steve Treanor and Mark Cooper, the General Counsel for Europe and Asia. My recollection of these conversations is that the business was aware that they were dealing with new entrants to the EUA market. However, they were unable to tell whether the anomalies on VAT invoices which they had discovered had arisen from a lack of business sophistication and back office functions or whether their counterparties might be in fact involved in VAT fraud. The suppliers were saying that their main concern and driver for their threats of legal action was the effect on their cash flow - if CFE withheld the VAT they would be unable to pay their own suppliers and would be placed in financial difficulty, for which they would blame CFE. Until there was clearer evidence of fraud, there was no assumption that CantorCO2e’s supply chains might be tainted by VAT fraud. As a result, the principal focus of my advice was on the requirement to obtain a valid VAT invoice in order for CantorCO2e to recover its input VAT and, subsequently, on the question of whether HMRC might exercise their discretion in favour of CantorCO2e’s claim for recovery if the suppliers were unable to rectify their invoices.”

“28. Following checks carried out by CO2e by the end of Friday 5 June 2009, the counterparties appeared to break down into a number of separate groups at this stage:

(a) There were those who appeared to be validly VAT registered, whose VAT registration numbers had been checked. These were:

- GW Deals;

- AH Marketing;

- Northumberland Consultants;

- ADE International Limited (“ADE”);

- Mettec; and

- Duntai.

(b) There were four businesses who had not supplied any VAT information on their invoices, meaning that it was not possible to confirm whether they were validly VAT registered. These were: 

- Stratex;

- Axle Limited (“Axle”);

- BMC; and

- Aristo Partners Limited (“Aristo”).

Of these four, Cantor CO2e was potentially financially exposed to Stratex and Axle. However CantorCO2e held sufficient funds on account to cover any potential liabilities in respect of trades with BMC and Aristo.

Of the remaining counterparties, Adduco had provided an invalid VAT number on their invoice. Westis Limited (“Westis”) had provided a VAT number which belonged to another entity, Epicure Business Solutions Limited, which Westis had stated was its parent company…”

6 June 2009 – Board meeting and suspension of trading

7 June 2009

8 June 2009 – suspension of BlueNext exchange and date from HMRC allege knowledge or means of knowledge of VAT fraud

“BlueNext – the biggest exchange for spot carbon transactions, said it halted European Union emissions permit trading in Paris today. The exchange plans to make a statement to members shortly,…”

“Dear John,

Find attach the 5 invoices that haven’t been paid, please provide copy of the swift this morning so I can send you 300k that we will have to sell today.

Also my accounting department asked me to re-do all the past invoices with our vat number on it, so I will send them to you in 5 minutes, please replace the old ones with them in your files.”

“I am glad that I had spoken with you, this morning and that you found the solution of the problem, please confirm to me per return if the 2 unpaid invoices will finally be paid on westis or epicure business solutions for to forward your mail to my back office.

Also don’t hesitate to contact me if you need any help from our agent to make agreement or paperwork for your accounting, and please let us know which will be the 26 invoices that you will keep in files for us to keep the same in our declaration of taxes.”

“Dear john,

find attached all the invoices where we ad vat number on it, please replace with existing one, also please send me copy of the swift of Friday deals. …”

“There is a risk of VAT carousel fraud so as a preventative measure, we are changing the VAT regime on (emissions exchange) BlueNext’s transactions… There has been no evidence of VAT fraud. It is only a rumour…but it could have potentially hurt BlueNext’s ability to compete, so we had to react.”

“Through carousel fraud, also called missing trader fraud, fraudsters import goods VAT-free from other countries, then sell the goods to domestic buyers, charging them VAT. The sellers then disappear without paying the collected tax to the government collection agency.

Emissions traders said rumours were circulating that a recent surge in volumes in European Union emissions permits traded over BlueNext, Europe’s main exchange for spot permit trading, were suspicious.

“Part of this volume was sound, coming from the market expanding and new players entering, but a share of it might be hard to explain,” said one emissions analyst.

…”

“I have been investigating the issue of your payment today.

It seems that the delay has been caused today because we have surprisingly received a new set of invoices from you today in respect of prior deals.

We now need to compare details of all invoices with all records on our files in order to ensure that we have reconciliation with prior invoices and with out [sic] systems…”

“As hinted at in my earlier post, there seems to be a real VAT problem in France.

I did not claim to have all the details, but it seems that VAT is a factor. And if I am correct, the main victim was the Le Ministere du Budget.

…

But to what extent are they victims?

It is thought that the last leg of the VAT scam would be when the last player in the chain claims the money back from the government. And going by the amounts traded over the last few months (daily 4 to 8 million, and one day over 19 m) it can be assumed that there is now a very big snafu in the Budget Ministry.

But as I say, I am not sure of these details and would APPRECIATE any emails with theories. I must add that my peers simply have a contemptuous view of Bluenext on normal days, and this would only compound the contempt.

Also, it seems that reporting on this has been taboo. Methinks I must be more prudent before levelling accusations.

In the end, however, it is hoped by many that the carbon trading will rise above these manipulations and become a bit more transparent.”

The disputed transactions with AH Marketing & Distribution and GW Deals

GW Deals Ltd – VRN 884 9920 60 – supplier to CFE

CFE’s due diligence on GWD

9 June 2009

“I understand we may pay out BMC today (14mUSD). Howard [Lutnick] has asked for us to confirm directly to him that there is no risk in doing so. Please can you double check VAT registrations with HMRC, invoices etc. Also I would like written advice that paying out to someone who checks out ok but subsequently does not pay HMRC does not expose us to a claim from HMRC. We are on notice that there may be an issue in the market and these are big numbers.”

“JB: Yes, I’m alright. So how’s things, are you looking to do some trading with us today? Are you going to send me loads of allowances?

EA: I don’t think to be honest with you (Inaudible) I don’t think.

JB: Why’s that?

…

EA: No problem to do this because the new law, because of the new – I have to search everything with my (inaudible). So for one month we don’t send.

JB: Okay

…”

“… On 3/6/2009, James Emmanuel, a CantorCo2e Limited manager, forwarded an internet blog concerning spot EUA trading on the Bluenext market and a VAT fraud. Further investigation by the Legal and Tax department raised suspicions about a number of CantorC02e clients, Adduco Consulting being one of them.

It was found that Adduco Consulting had supplied an invalid UK VAT number after trading. At 8/6/09, €6,075,931 VAT had been paid to Adduco exposing Cantor group as this could not be claimed back.

The account has been frozen pending further legal and regulatory reports.”

“Please see the attached invoices that you have sent to us.

Please would you explain what they relate to.

We did not execute these deals for ADE International Ltd.”

“Dear Emmanuel, sorry this was a mistaken invoice that we sent you with all invoices but that was not trade, please disregard them. …”

“Will you please re-issue these invoices with the words CANCELLED across them.

They appear to be Westis trades.

Could you please explain how ADE International are related to Westis Ltd?

Would you please disclose any other companies in the carbon market to whom you are affiliated?”

“These invoices have nothing to do with westis, they are just an error that we made doing invoices on past trades that was saved on the computer and that was resend to you per mistakes. We are not affiliate with any other companies working with you.

“It is curious that you say you are not affiliated to any other company working with us because your invoices are exactly the same, with the same spelling errors as four other companies. The only difference is the company logo at the top. How would you explain this?”

“Dear james, what do you mean by affiliates companies, we have no lien with those companies, I am ADE international limited and that s’it, I am worry just about ADE and my paiements in order to be able to pay my clients and maybe be able to keep working with you if you assure me that this kind of problem will not happen any more.”

10 June 2009

The Mettec (Ayres) transactions

Background Ayres Ltd t/a Mettec VRN 943 9490 85 – supplier to CFE

“JB:…Don’t send those allowances at the moment, I’ll call you back. Something’s going on at the moment, I’ll call you straight back, all right?

ME: Problems?

JB: Yes, there’s problems, okay. I’ll call you back in a short while but don’t send me allowances at the moment okay?

…”

Other events on 10 June 2009

“ We have not chosen to determine whether the VAT number is valid to Northumberland Consulting Ltd as the concern is that if it isn’t then we are on notice and would have to account for the overpayment .

WHAT IF ANYTHING ARE WE DOING WITH GW DEALS LTD AH MARKETING?”

11 June 2009 – CFE’s suspension of matched principal trading

“JE:…I mean, the issue for our guys is this, we’re obviously paying out VAT to you.

MA: Of course, and we’re paying it out as well, yeah I know.

JE: You’re paying it out the other side and you’ve got to account for it to HMRC. Now if for whatever reason that chain breaks down then there’s a chance that HMRC come to us and say, “Right, you know, you’ve got the VAT liability.”

MA: This is because of the French (Inaudible) isn’t it?

JE: Exactly, they would say to us, “You’ve got to pay the liability because you should never have paid it out to x, y, z company?” So the only defence we’ve got to that is to say, “Well, they gave us a valid VAT invoice.”

MA: That’s right.

JE: That is a full and complete defence but of course, we don’t have any valid VAT invoices because the invoices haven’t been prepared properly. So at the moment, we’re on the hook, potentially, for a liability of all the VAT that we’ve ever paid out, which is tens and tens of millions.”

“Following this email we are not doing any matched principal trades until we receive explicit instructions to do so. My feeling is we get comfortable with our process first and settle all outstanding trades before entering into new ones. We have already refused to accept allowances to sell from two clients: GW Deals and Mettec.”

“Laurence, I spoke to Avi at Stratex at approximately 09.25 this morning. He assured me he would be sending me his VAT application today, and also that he was very happy as he had signed contracts for three million tonnes of spot EUA’s which he would be bringing to the market in a week to ten days”

“For the record I took the liberty of checking the ADE situation with our external adviser Martin Sharratt.

Considering all the circumstances, as discussed concerning the company address and so on, he agreed that there was no technical tax reason why the company should not be paid.”

12 June 2009

The implementation of new procedures

“I don’t believe that we have the green light to pay any of these yet anyway. However, if the green light is given, we need first to offset past overpayments against money currently owed. The blotter doesn’t reflect that so we need to speak before payment is made to any of these companies.”

“I apologise for the inconvenience of the last few days, but from a legal and regulatory perspective it was unavoidable.

We are now back to business as usual and as a gesture of goodwill we would like to offer you the ability to use CantorCO2e today FREE of brokerage charges.”

“James you do not have authority to approve any release of payments or emissions units to external clients, the procedure, which should have been made crystal clear over the last 48 hours is thus:

1) Outstanding settlements/Obligations

Customer Wire transfers must be approved by:-

Finance and reconciled by Financial Control, Blotter vs Client invoice and sign off

Tax – Check all data vs HMRC web site or phone call and validate format and authenticity of invoice from client and sign off

Legal – Double check all of the above and sign off

Operations – check all data and approve wire or registry release and sign off

All authentication data to be held by Mark Morris

2) New Trades

1 – Laurence Rose must approve Client and Trade

2 – Wayne Buchan or delegate must approve any free of payment or Emission transfer instruction

3 – Tax validate invoice

4 – Operations release Cash or Units

We must have a meeting today to close out these procedures I have a draft Operations check point which I will distribute we need a new AML/KYC/Onboarding procedure from Compliance/Credit/Tax before any new customers can trade.

Operations Management I must sign all CO2e payments do not release anything without my approval respond to this mail as confirmation of this.”

(1) the Finance Team having reconciled the numbers on the trade blotter against the client's invoice;

(2) the Tax team having checked the data against HMRC's website or through a phone call to HMRC and also having validated the VAT invoice from the client;

(3) the Legal team having double checked this data and approved it; and

(4) the Operations Team having then checked all the above data and approved the wire or registry release with all authentication data to be held by Mark Morris.

The Glove Test

“Things looking fairly positive mate we’ve paid out to bmc/duntai/ade stratex claim they are sending VAT application docs today, and we have hmrc on tape telling us adducos VAT number was ok. Stratex also claim to have 3 mio tonnes to do in the next 10 days, so fingers crossed….”

“We could get through this after all, if we do lets go pound some beers. If we sign off on all these guys, will we be paid out?”

“Haven’t thought it appropriate to ask about bonio at the moment !!! but I absolutely believe we should be if we get through this with money intact, and then lets go pound some beers.”

“EW: Right, okay, that’s one thing. So were you aware that – do you remember, like, the discussion we had last week about the VAT number and whether we can invoice you? Okay, so what’s happened us in the last week – I don’t know if you are aware that with Blue Next – and there’d been these VAT issues in France and all this stuff and Blue Next closed for a few days.

AL: Yes.

EW: What’s happened is that our back office has – well, we obviously spoke to the back office to let them know about it and they’ve just been looking through, well people’s VAT status and things and they’ve become a bit more strict. What happened last week is they said, “Well, if you promise that you’re going to give us the VAT number in the future we can then invoice you with the full amounts”, but because there are now these issues they’ve become very strict. So what we have to do, I’m afraid – and we can’t change our position on this – is to do what we originally agreed which is that we can now only charge you less VAT until you provide us with a VAT number.

AL: Oh. So it means that you cannot send me the totality but just less the VAT because you don’t have the VAT number?

EW: Yes, because this is such a new market the spot market and, you know, traditionally we’ve dealt with let’s say bigger, bigger companies that I guess the whole procedure has been a bit more relaxed but in the last week because – and therefore historically we might have been able to, I guess, give some sort of leeway, some sort of benefit of the doubt, you know as we did last week. Because of this whole thing has changed, you know, with Blue Next closing down for a few days this week …”

“To confirm HMRC checks today

AH Marketing and GW Deals checked exactly the name, number and address per their invoices.

Northumberland – VAT number checks against the company name but not against the address on the invoice nor the address on Companies House

I suggest that we therefore need to validate further who/where they are.

…”

“ADE International already told us voluntarily that they are in the same offices as Westis when they wanted their money and asserted that they knew that we were holding the money of others too. They used the same incorporation agent and share an office infrastructure apparently in the same way that many UK trading houses provide a trading environment for individual proprietary traders. This explains the common invoice style.”

The Draft Suspicious Event Report – the draft report

“If a SAR is made no further action should be taken on the account including the receiving of additional credits without informed consent. This would extend to accepting further credits for the affected accounts as we may be caught by s329 of POCA.”

“ Findings

All the UK accounts have only recently been opened with CFE. Most of companies comprising one individual who is the shareholder of the company and in many cases the individuals are resident in France. Westis Ltd, Stratex Alliance Ltd and Aristo Partners Ltd are operating from the same premises. Separately Adduco Consulting Ltd, Business Management Consulting Ltd and Northumberland Consultants Ltd also operate out of the same premises.

Several clients have bank accounts in Marfin Popular Bank Co Ltd, a listed registered bank in Cyprus (Westis and Adduco).

Volumes traded are on context albeit at the upper end. These firms are often set up by sole traders and therefore the trading activity being undertaken which of itself is not suspicious.”

“ INVALID VAT NUMBER SUPPLIED

Adduco Consulting Limited

Became invalid around time of trading was dormant company [written in Mr Taylor’s handwriting next to the name of the company].

….