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United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Leogem Ltd v Revenue & Customs [2006] UKVAT V19829 (17 October 2006)
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Cite as: [2006] UKVAT V19829
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Leogem Ltd v Revenue & Customs [2006] UKVAT V19829 (17 October 2006)
    19829
    VAT - INPUT TAX: Appellant innocent victim of a fraud involving supplies of platinum bars – denied input tax on the supply of platinum bars – according to the Respondents no platinum supplied – Respondents' evidential burden not satisfied – platinum was traded – met requirements under section 24 of VAT Act 1994 for the deduction of input tax – Appeal allowed.

    MANCHESTER TRIBUNAL CENTRE

    LEOGEM LIMITED Appellant

    - and -

    HER MAJESTY'S REVENUE and CUSTOMS Respondents

    Tribunal: MICHAEL TILDESLEY OBE (Chairman)

    JOHN LAPTHORNE FCMA (Member)

    Sitting in public in Birmingham 1 June 2006 and 7 August 2006

    Glyn Everett, VAT consultant for the Appellant

    James Pusey, counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

    © CROWN COPYRIGHT 2006

     
    DECISION
    The Appeal
  1. The Appellant was appealing against the Respondents' decision dated 30 March 2005 disallowing a claim for input tax in the sum of £37,093.42 for the period 01/04.

    2. The Issue
  2. The Appellant purchased goods purportedly three bars of platinum from PGM (London) Limited for the sum of £211,962.43 plus £37,093.42 in VAT. The Appellant sold the platinum bars to an agent for an Italian Bank for £217,819.15, which was a zero-rated supply. Despite the bars being collected and signed for, the Appellant did not receive its payment for the bars. It subsequently appeared that the Appellant had been a victim of a "fleecing exercise", unable to recover the monies paid to PGM (London) Limited and losing possession of the platinum bars.

  3. The Appellant submitted that it was entitled to recover the input tax paid on the supply of platinum bars to it by PGM (London) Limited since the bars were to be used for the purpose of its business, namely platinum trading. The Respondents contended that the goods were not platinum bars, and, therefore, there was no entitlement to recover the input tax.

  4. The Appellant countered that if the goods were not platinum, which it did not accept, it was still entitled to recover the input tax because it had entered into a transaction subject to VAT. The Respondents disagreed, arguing that if something was sold which was fraudulently made out to be platinum, there was no entitlement to input tax because the description of the goods on the invoice did not accord with what was sold.

  5. The issues for determination were as follows:

    6. (1) Was there a standard rated supply of platinum bars to the Appellant which were to be used for the purpose of the Appellant's business?
    (2) If the supply did not consist of platinum bars, was the Appellant still entitled to recover the input tax?
  6. The onus was upon the Appellant to demonstrate on the balance of probabilities that it was entitled to recover the input tax. The Respondents, however, bore an evidential burden to show that platinum was not traded.

    7. The Evidence
  7. We heard evidence from:

    8. (1) Rajesh Rai, director of the Appellant company.
    (2) Joseph Baines, Senior Officer of HM Revenue and Customs who refused the Appellant's claim for input tax.
  8. We received separate bundles of evidence from the parties. The Appellant's bundle contained an unsigned statement of Kevin Miles, an employee of Malca Amit (UK) Limited which was read out at the hearing. The Respondents did not object to the statement being read out but queried weight to be attached to the statement.

  9. The Appellant was registered for VAT with effect from 13 October 2003. On its application for registration, the Appellant recorded its main business activity as dealers in precious metals.

  10. Mr Rahman, a director of PGM (London) Limited approached Mr Rai, the director of the Appellant company, with a business proposition from a Mr Mohammed Ali Khan regarding the setting up of a platinum exchange market. Mr Khan intended to start trading in platinum using a number of select companies with a view to these companies becoming part of the exchange. Mr Khan together with his wife and children met Mr Rai at Mr Rai's home to discuss his proposition. Mr Khan informed Mr Rai that he had been an adviser to President Musharraf of Pakistan, and had established the first Islamic Investment Bank in Wall Street. Mr Rai carried out an internet search on Mr Khan, and uncovered an article in Gulf News dated 7 June 2002 on Mr Khan which appeared to confirm his credentials.

  11. In late September 2003 Mr Rai and his brother met Mr Khan at the offices of PGM (London) Limited in Berkeley Square, where Mr Khan stated that he would broker all the platinum trading deals but would divulge to Mr Rai the identities of the buyer and seller. Mr Khan explained that as the transactions involved AAA banks, the banks would deal only with known businessmen such as Mr Khan, not new companies. Mr Rai obtained independent clarification of the convention for doing business with AAA banks, which appeared to confirm Mr Khan's explanation.

  12. On 13 October 2003 Mr Khan contacted Mr Rai to set up a deal which involved the Appellant purchasing platinum bars from PGM (London) Limited and selling them to Oropresident S.r.I, as agent for Banco Bipo Carire, a bank based in Rome. Malca Almit, a firm of freight forwarders, would be responsible for arranging the transporting of the platinum bars from the United Kingdom to Italy. Mr Khan informed Mr Rai that UBS was the source for the platinum bars. Mr Rai carried out checks on Malca Almit and PGM (London) Limited, which in his view confirmed that they were reputable companies.

  13. On 13 October 2003 Mr Khan faxed to Mr Rai, the UBS document confirming the source of the platinum and a purchase invoice from Oropresident S.r.I. The Appellant faxed a purchase order to PGM (London) Limited for the platinum bars described in the UBS source document. PGM (London) Limited supplied the Appellant with an invoice in the sum of £249,055.85, including VAT of £37,093.42. Mr Rai could not recall why the Appellant's purchase order post-dated PGM's invoice by two days.

  14. On 14 October 2003 PGM (London) Limited delivered a package purportedly containing the platinum bars to Malca Almit at its Hatton Garden offices, where it was signed for by Nicola Standen, an employee of Malca Almit. On 16 October 2003 the package was shipped to Rome on flight BA556. Malca Almit insured the package during its transport for the full invoice value. The freight forwarder's delivery note was signed for by a representative of Banca Bipo Carire. On 17 October 2003 the Appellant transferred the sum of £249,055.85 to the bank account of PGM (London) Limited.

  15. Mr Khan advised the Appellant that it would receive payment from Banca Bipo Carire within two days of delivery of the platinum bars to the Italian bank. When the two days elapsed with no payment, the Appellant contacted Mr Khan who told the Appellant not to worry since the delay in payment was due to the late receipt of the platinum bars by Banca Bipo Carire. The payment, however, was still not forthcoming which caused the Appellant to contact PGM (London) Limited and Mr Khan on a regular basis seeking updates on the payment. The Appellant was informed that Mr Khan had travelled to Italy to resolve the situation by arbitration.

  16. On 12 December 2003 the Appellant finally lost patience and contacted Oropresident S.r.I and Banca Bipo Carire direct to enquire about the payment. The bank denied knowledge of the transaction. The Appellant informed PGM (London) Limited of its intention to report the matter to the police. PGM (London) Limited advised the Appellant not to take this course of action as it would jeopardise the arbitration proceedings with the bank. Also Mr Khan undertook to make the payment from his own resources. The Appellant decided to give Mr Khan time to fulfil his promise. When the promise did not materialise the Appellant reported the matter to the police in January 2004. The Appellant discovered from the writer of the Gulf News article that she was now embarrassed by the article because she had been contacted by several people who had been tricked out of money by Mr Khan. The Appellant believed that Mr Khan was now in prison in Dubai.

  17. Mr Rai with hindsight accepted that he had been naοve in his dealings on behalf of the Appellant with Mr Khan. Mr Rai was unsure about the role played by PGM (London) Limited in the fleecing exercise. He believed that PGM (London) Limited had also lost money from their business with Mr Khan. The Appellant was out of pocket of £249,055.85 from the platinum deal organised by Mr Khan. The Appellant has conducted no further transactions in platinum.

  18. The Appellant produced the following documents to demonstrate that a supply of platinum bars took place:

    19. (1) A document from UBS, Geneva, Switzerland dated 13 October 2003 which set out the serial numbers and specifications of the platinum bars. The document was faxed by Mr Khan from the offices of PGM (London) Limited to the Appellant on 14 October to establish the provenance of the platinum bars.
    (2) Invoice from PGM (London) Limited to the Appellant dated 13 October 2003 for a supply of platinum, brand name Krasnoyarsk, at a price of £211,433.85 plus commission of £528.58 and VAT of £37,093.42 making a total of £249,055.85. The invoice stated that the weight of the platinum was 15.0573 kilograms which was purchased by PGM (London) Limited on behalf of the Appellant. The invoice set out the conditions of the contract and contained the VAT registration number of PGM (London) Limited.
    (3) Purchase Order from Oropresident S.r.I as agent for Banca Bipop Carire dated 14 October 2003 for 15.0573 kilograms of platinum to the Appellant. The price quoted in the purchase order was £211,433.85 plus the Appellant's commission of 3.02 per cent. The delivery date was 16 October 2003.
    (4) Purchase order dated 15 October 2003 from the Appellant to PGM (London) Limited for 15.0573 kilograms of platinum at a price of £249,055.85 which included PGM's commission at 0.25 per cent and VAT. The purchase order stated that the Appellant must be given the opportunity to inspect the goods.
    (5) Pro-forma invoice dated 15 October 2003 from the Appellant to Banca Bipop Carire (Oropresident S.r.I agency status was recorded on the invoice) for 15.0573 kilograms of platinum at a total price of £217,819.15 which included the Appellant's commission at 3.02 per cent. The invoice required payment in full by close of business on 16 October 2003. The invoice specified the VAT registration number for Banca Bipop Carire and the contact name for the bank, which was Lorenzo Sili, Branch Manager. Further the invoice set out the specification for the platinum and the shipping details.
    (6) Delivery note from PGM (London) Limited of one box of platinum bullion to Malca-Amit (UK) Limited dated 14 October 2003. The delivery note recited the serial numbers of the platinum bars. The note was signed as "received and checked in good order and condition before sealing by N Standen, an employee of Malca Amit (UK) Limited.
    (7) House Air Waybill issued by Malca Amit(UK) Limited dated 15 October 2003 which set out the shipping details for the platinum with a weight of 15.0573 kilograms, requiring the goods to be signed for by the branch manager for Banca Bipop Carire . A certificate of shipment on flight BA556 dated 16 October 2003 was stamped and initialled on the Waybill.
    (8) Freight forwarders delivery note which confirmed delivery of the platinum to Banca Bipop Carire in Rome on 16 October 2003. The note contained a signature on behalf of Lorenzo Sill, branch manager confirming that the goods had been checked and received.
    (9) Invoice from Malca-Amit (UK) Limited dated 31 October 2003 to the Appellant for ancillary charges associated with the delivery, which included insurance and agency fees. The price of the invoice was £613.03 plus VAT of £105.53. The invoice recorded a weight of 15.057 kilograms and a figure of 14.2 for carats. Mr Spector of Malca-Amit (UK) Limited confirmed to Mr Baines that the figure of 14.2 marked carats referred to the recorded weight of the ingots in its tamper proof packaging. The weight of the additional packaging required for secure transit would probably account for the difference between the recorded weight of 15.057 kilograms for the supply and the weight of the ingots.
  19. Mr Baines carried out an investigation of the Appellant's claim for input tax in relation to the platinum supply from PGM (London) Limited. He discovered from the Respondents' intelligence branch that the cast weight of the platinum ingots with the unique numbers specified in the UBS document was 13.1371 kilograms, almost two kilograms less than the weight specified in the various documents associated with the supply.

  20. Mr Baines examined the trading activities of PGM (London) Limited. He found that on 18 August 2003 PGM (London) Limited purchased 15.0573 kilograms of platinum from Starmack Limited, Glasgow for £209,967.27 plus UK VAT of £36,744.27 with a delivery date of 20 August 2003 on which full payment was required. The bank statement for PGM (London) Limited recorded that a payment of £244,185.82 was made to Starmack Limited on 17 October 2003, the same day on which the Appellant paid PGM (London) Limited for the supply of platinum. The Respondents have de-registered Starmack Limited as a missing trader.

  21. Mr Baines noted that the UBS document did not specify client details. Mr Baines assumed that the platinum bars were in the vaults of UBS in Switzerland on the 13 October 2003. Mr Baines sought documentation from PGM (London) Limited without success evidencing the import of the platinum from Switzerland to the United Kingdom. Mr Baines made internal enquiries about movements of platinum from Switzerland and Italy, which revealed that there had been no customs declarations of platinum during the relevant period except for large commercial transactions. Mr Baines also made enquiries of the Swiss and Italian authorities but they were not prepared to co-operate with his investigation.

  22. As a result of his enquiries Mr Baines was not convinced that the supply of platinum bars to the Appellant, as documented, took place. He relied on the inconsistencies in the documented ingot weights, the absence of evidence to corroborate an import of platinum from UBS in Switzerland and the failure of Banca Bipop Carire to pay the Appellant for the goods.

  23. Mr Baines, however, did not follow through with his investigation into the business affairs of PGM (London) Limited. On 1 June 2004 he made a formal request under Schedule 11 of the VAT Act 1994 of PGM for detailed information under seven headings regarding the supply of platinum to the Appellant. Mr Baines took no action when PGM (London) Limited failed to comply with his request. The Respondents have issued no assessment against PGM (London) Limited to recover the input tax claimed by PGM in respect of its platinum dealings, including those with the Appellant.

  24. Mr Baines allowed £26.25 of the Appellant's input tax claim which related to the Appellant's overheads and expenses associated with the disputed platinum transaction. Mr Baines exercised his discretion to allow this part of the claim because the documents provided by Malca-Amit (UK) Limited supported the possibility that something was supplied between PGM (London) Limited and the Appellant.

  25. Mr Mitchie, Appeals Officer for the Respondents, acknowledged in a letter dated 4 October 2005 to the Appellant's representative that the Appellant had been the victim of a fraud with the VAT loss an unfortunate concomitant of the greater overall loss.

  26. The Appellant did not carry out an inspection of the platinum. The Appellant contended that it was not necessary to assay the platinum because it was said to be of 99.95 per cent purity.

    27. Reasons for Our Decision
  27. Article 17 of the Sixth Directive 77/388 gives a taxable person the right to deduct input tax paid by him on supplies of goods or services from another taxable person provided those goods or services are used by him for the purposes of his taxable transactions.

  28. Section 24(1) of the VAT Act 1994 implements the wording of Article 17 for the purposes of defining input tax. Section 24(6) of the 1994 Act enables Regulations to be made which require claims for input tax to be evidenced by such documents or other information as specified. Regulation 29(2) of the Value Added Tax Regulations 1995 requires a claim for input tax to be supported by VAT invoice for the supply in question. Regulation 14(1) of the 1995 Regulations defines the requirements of a VAT invoice.

  29. We find the following facts in relation to the supply of goods from PGM (London) Limited to the Appellant, except for whether the goods were platinum, which will be dealt with separately:

    30. (1) Mr Rai was easily taken in by Mr Khan's persuasive powers and his concocted image as a successful business person. Mr Rai acknowledged at the hearing that he had been naive. We consider that Mr Rai, made an effort to confirm the bona fides of Mr Khan and the other parties involved before agreeing to take part in the transaction. With hindsight Mr Rai had been unwise to leave the organisation of the deal to Mr Khan. Mr Rai, however, did make some enquiries about how AAA banks conducted their business affairs and ensured that the disputed transaction was properly documented. We are satisfied that Mr Rai was not involved in any wrongdoing and had been duped by Mr Khan.
    (2) The Appellant was an innocent victim of a fraud which on the evidence before us was carried out by Mr Khan. As a result of that fraud the Appellant was deprived of £249,055.85.
    (3) The Appellant was a taxable person, registered for VAT as from 13 October 2003.
    (4) The Appellant's business was as a dealer in precious metals.
    (5) PGM (London) Limited was a taxable person as at the date of the disputed transaction. Mr Baines confirmed in his letter dated 29 April 2004 that PGM's registered status was not an issue in this Appeal.
    (6) PGM (London) Limited made a taxable supply of goods to the Appellant on the 13 October 2003 for which the Appellant paid £249,055.85 including VAT of £37,093.42. We are satisfied that something tangible was supplied by PGM. We placed weight upon the documentation from Malca-Amit (UK) Limited and Mr Baines's evidence of his conversation with Mr Spector, which established that goods to the weight of 15.0573 kilograms were supplied to the Appellant. We also noted that Mr Baines accepted the possibility that PGM (London) Limited supplied something to the Appellant.
    (7) The invoice issued by PGM (London) Limited dated 13 October 2003 to the Appellant met the requirements for a VAT invoice as defined by Regulation 14(1) of the 1995 Regulations provided the goods supplied met the description of platinum.
    (8) The Appellant's reason for purchasing the goods from PGM (London) Limited was to use them for the purpose of its business, trading in precious metals. This purpose was demonstrated by its purported sale of the goods to Banca Bipop Carire as evidenced by the Appellant's invoice and the certificated air waybill. At the time of making the sale the Appellant was unaware that the purported sale was part of a fraud perpetrated on it by Mr Khan.
  30. We are satisfied from the above findings of fact that the Appellant has met the legal requirements of section 24 of the 1994 Act to claim input tax on the supply from PGM (London) Limited provided the goods supplied comprised platinum.

  31. Counsel conceded that the Respondents bore an evidential burden to demonstrate that platinum was not traded. Counsel, however, considered that such a burden was not considerable as described in the VAT and Duties Tribunal decision in Plasma Trading Limited (2005) (VAT Decision Number 19499 ) but on the balance of probabilities. We agree with Counsel's contention.

  32. Our starting point for determining the identity of the goods supplied by PGM (London) Limited was the documentation evidencing the supplies. The documentation produced showed that the Appellant bought and sold 15.0573 kilograms of platinum, with the brand name of Krasnoyarsk. The delivery note from PGM (London) Limited of one box of platinum bullion to Malca-Amit (UK) Limited dated 14 October 2003 was not only received by N Standen, an employee of Malca Amit (UK), but endorsed as checked in good order and condition. The PGM bank statements seen by the Respondents confirmed that the Appellant paid the sum of £249,055.85, the price stipulated for the platinum in PGM's invoice of 13 October 2003. The documentation produced conformed with the requirements in the 1995 VAT Regulations.

  33. In the vast majority of cases where the taxable supply is evidenced by documentation conforming to the VAT regulations, the Respondents admit the claim for input tax. In this Appeal the Respondents considered that the documentation did not establish that a supply of platinum took place because of the inconsistency between the documented weight and the cast weight of the platinum ingots and that they could find no evidence to support the import of platinum from UBS in Switzerland during the relevant period. Mr Baines' investigation, however, revealed that PGM (London) Limited received a supply of 15.0573 kilograms of platinum from Starmack Limited on 18 August 2003, which was paid for on the same day as PGM received the Appellant's payment. Mr Baines acknowledged that the Respondents had not raised an assessment against PGM in respect of the tax claimed on its platinum dealings. Also Mr Baines allowed part of the Appellant's claim for input tax on the platinum supply, albeit involving a small amount of money.

  34. We consider that the facts which emerged from Mr Baines' investigation reinforced the Appellant's claim that a fraud had been perpetrated against it. Mr Baine's investigation indicated that the fraud involved a missing trader and a platinum supply from Starmack Limited, which would explain why the Respondents could find no import documentation from UBS in Switzerland.

  35. Mr Spector of Malca-Amit suggested that the disparity between the documented weight and the cast weight of the platinum ingots was most probably due to the weight of the secure packaging. The Respondents pointed out that if Mr Spector was correct, the Appellant paid an inflated sum for the platinum, as the price was calculated by reference to the documented weight of 15.073 kilograms. In our view the more probable explanation for the disparity in weight and the inflated price was that it was part of the fraud organised by Mr Khan.

  36. The Respondents contended that nobody could say that they saw the platinum in question, not the Appellant, PGM (London) Limited, nor Malca-Amit. The Respondents, however, gave no direct evidence to contradict the certificate by N Standen of Malca-Amit on PGM's delivery note of 14 October 2003 that she received and checked the goods, namely platinum, and that they were in good order.

  37. We are not persuaded for the reasons set out above in paragraphs 33 to 36 that the Respondents have discharged their evidential burden on the balance of probabilities that platinum was not traded in the disputed transaction. We consider that the more plausible explanation arising from the Respondents' evidence was that Starmack Limited supplied the 15.073 kilograms of platinum including the packaging to PGM (London) Limited which in turn supplied the platinum to the Appellant. The Respondents' own actions in allowing part of the Appellant's input tax claim and not raising an assessment against PGM (London) Limited supported our conclusion regarding the inference drawn from the Respondents' evidence.

  38. We are satisfied from the Appellant's evidence regarding the documentation and the Respondents' evidence that platinum, albeit with a net weight of 13.1371 kilograms, was supplied by PGM (London) Limited to the Appellant. Further that the disparity between the documented weight and the cast weight of the platinum ingots was part of the fraud to extract additional monies from the Appellant. Thus the Appellant was an innocent trader, whose supplies belonged to a chain of supplies which involved a missing trader and fraudulent transactions.

  39. The European Court of Justice in Optigen Ltd v Customs and Excise Commissioners and others [2006] STC 419 at paragraphs 51 and 52 ruled that

    40. "It follows that transactions such as those at issue in the main proceedings which are not themselves vitiated by VAT fraud, constitute supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of articles 2(1), 4 and 5(1) of the Sixth Directive, where they fulfil the objective criteria on which the definition of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge.
    Nor can the right to deduct input VAT of a taxable person who carries out such transactions be effected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is vitiated by VAT fraud, without that taxable person knowing or having any means of knowing."
  40. It, therefore, follows from Optigen that we should consider the supply to the Appellant on its own merits without reference to previous or subsequent supplies tainted by fraud as to whether it fulfils the objective criteria for establishing the right to deduct input tax. We held at paragraph 30 that the Appellant met the legal requirements of section 24 of the 1994 Act to claim input tax on the supply from PGM (London) Limited provided the goods supplied comprised platinum. Further at paragraph 38 we found that that platinum, albeit with a net weight of 13.1371 kilograms, was supplied by PGM (London) Limited to the Appellant.

  41. The Respondents argued that if platinum had not been supplied the Appellant would not have a valid claim for input tax because the invoice did not meet the requirements of Regulation 14(1) of the 1995 Regulations for a VAT invoice, in particular (g) "a description sufficient to identify the goods". We found that platinum was supplied which negated the Respondents' argument on Regulation 14(1)(g). However, the same argument could be advanced in relation to Regulation 14(1)(h) because of our finding that 13.1371 kilograms of platinum was supplied rather than 15.073 kilograms as specified in the invoice. Regulation 14(1)(h) provides that "for each description, the quantity of the goods and the rate of VAT and the amount payable, excluding VAT expressed in sterling".

  42. We hold that our finding on the weight of 13.1371 kilograms of platinum supplied was not material so as to render the PGM invoice of 13 October 2003 invalid for the purposes of Regulation 14(1)(h) because:

    43. (1) The Appellant, not the tax authority, was disadvantaged by the weight disparity, in that it paid an inflated price for the platinum upon which the VAT was calculated.
    (2) The difference in weight was part of the fraud perpetrated against the Appellant and which contaminated the whole chain of supplies.
    (3) The Appellant's right to deduct input tax should not be vitiated by a fraud that took place in a previous part of the supply chain.
    Decision
  43. We, therefore, hold that there was a standard rated supply of platinum bars on 13 October 2003 from PGM (London) Limited to the Appellant which were to be used for the purpose of its business upon which the Appellant was entitled to claim input tax.

  44. We allow the Appeal. We order the Respondents to pay the costs of the Appellant in connection with the Appeal. If the costs cannot be agreed between the parties, either party may apply to the Tribunal for a direction on costs.

    45. MICHAEL TILDESLEY OBE
    CHAIRMAN
    RELEASE DATE: 17 October 2006

    LON/

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