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United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Calltell Telecom Ltd & Anor v Revenue & Customs [2007] UKVAT V20266 (20 July 2007)
URL: http://www.bailii.org/uk/cases/UKVAT/2007/V20266.html
Cite as: [2007] UKVAT V20266, [2007] BVC 2544
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- These are the joined appeals of Calltell Telecom Limited ("Calltell") and Opto Telelinks (Europe) Limited ("Opto"). They are associated companies, in the common ownership and control of Mohammad Safdar Gohir (to whom we shall refer as Mr Gohir), and are wholesale dealers in mobile phones. They are both repayment traders, and render their VAT returns monthly. The Commissioners have refused to meet more than a small part of their repayment claims for the months of January, February and March 2006. The net amounts claimed (after allowing for the output tax for which the Appellants were liable to account) amounted, in Calltell's case, to £8,040,291.70 and in Opto's case to £10,208,421.26. It is not necessary for the purposes of this decision to deal with the arithmetical detail of the claims.
- The Commissioners had significant misgivings about the claims and embarked on an extended verification process. That process led to decisions, communicated by letter to Calltell on 8 June 2006 and to Opto on 12 June 2006, to disallow their respective claims, save to the extent that they related to overhead expenses and to one purchase of phones. In the course of the hearing the Commissioners agreed that the input tax relating to a second purchase of phones could not be withheld and that a further sum, modest in the context of the aggregate amount in dispute, should be paid, and we shall return to that concession. It was suggested at the hearing that the tax in dispute is the net amount claimed, less the conceded items, but we do not think that is necessarily correct. Rather, we think the parties will need to reconsider the input tax claimed, transaction by transaction, and it may be that there will be ramifications for the Appellants' output tax liabilities.
- The Commissioners say they are not required to pay the disputed input tax because the Appellants dealt in goods knowing, or with the means of knowing, that their so doing was connected with a fraud elsewhere in the chain, or a related chain, of supply, that fraud resulting in a tax loss. Initially their position was that the Appellants had the means of knowledge of the fraud, but they did not go so far as to assert actual knowledge. As the hearing progressed, however, their position changed and they added an argument that the Appellants knew of, and indeed were party to, the fraud which, they say, the transactions were designed to perpetrate.
- The transactions with which we are concerned were of a kind now familiar in these tribunals. Typically Calltell bought consignments of mobile phones from other United Kingdom traders and sold them immediately, and almost invariably intact, to customers, usually in other member States of the European Union, although in many cases it sold the phones to Opto, which then sold the consignment to a trader in another member State. Occasionally Opto obtained its supplies from other traders, but the great majority of the phones in which it dealt were sold to it by Calltell. There were also cases in which the order in which Calltell and Opto dealt in the goods was reversed. The Commissioners have traced the chains of transactions leading to Calltell's and Opto's acquisitions back through a number of steps, and can demonstrate that a series of sales and purchases, on occasion extending to as many as eight, occurred on the same day. They contend that it can be shown, or inferred, that the true purpose of the chain was to defraud the revenue, by means of what is known as a "missing trader intra-community fraud", commonly abbreviated to "MTIC fraud".
- Most readers of this decision will be well aware of what is meant by that phrase, but we should nevertheless set out a brief explanation, ignoring for these purposes the reverse-charge mechanism which was not in effect at the time with which we are concerned. Goods, usually a small, high-value commodity (of which mobile phones are an example), are sold by a trader in one member State, A, to a trader in another, B. A may zero-rate the supply in his own member State, while B should account, in his member State, for acquisition VAT based on the cost of his purchase, an amount which he can set off, as input tax, against the output tax for which he must account on his onward sale of the goods to C, another trader in the same member State. In net terms, therefore, B must account for the output tax which he has charged to C and which C has paid to him. There then follows a series of sales and purchases within the same member State, say by C to D, by D to E and by E to F. C, D and E all account correctly for the output tax generated by their sales, while claiming relief for the input tax which they have suffered; they each make a small payment to the revenue authority, assuming (as is almost always the case) that they have made a profit. F sells the goods to G, a trader in another member State. F may zero-rate the sale, so has no output tax for which he must account, while (assuming the transactions are legitimate) he may claim repayment of the input tax he has suffered—the output tax for which E has accounted. C, D and E, in that example, are known as "buffers", while F is a "broker".
- B is the perpetrator, or one of the perpetrators, of the fraud, because he does not account for the output tax generated by his sale to C, but "goes missing"; B is known as a "missing trader" or, sometimes, a "defaulter". A variation is that the fraudster, still in the position within the chain of B, masquerades as a legitimate trader, by "hijacking" that trader's VAT registration. It is essential, if the fraudulent scheme is to work, that all those involved have VAT registrations (or a hijacked registration), and that the buffers and the broker all account correctly for their VAT liabilities. In most of the cases with which we are concerned, Calltell was a buffer, and Opto a broker, though occasionally their roles were reversed, and there were some cases in which Calltell was, but Opto was not, involved. G, the trader to whom the broker sells, may be a missing trader in its own state, or it may start the process over again by re-exporting the goods to the UK, or to yet another member State.
- While a trader in B's position is, necessarily, a fraudster, there is less certainty about the other participants. They may all be entirely ignorant of B's conduct and intentions, and have no means of discovering them. B may have set out to pocket the VAT he has been paid by C, leaving those who follow him in the chain to deal as well as they can with the Commissioners. An entirely innocent broker whose input tax claim is denied (because the Commissioners wrongly consider he knew or should have known of B's default) becomes, in effect, the victim of B's fraud. As the Commissioners accept, they focus on brokers, who make repayment claims, rather than on buffers who make payments, even if the payments are relatively modest. At the other extreme, all may be knowing participants in a scheme to defraud the revenue authority, the buffers earning their reward through the profit they make from their participation in deals which, in the absence of a fraud, would not have occurred at all. There is no reason for a knowing buffer to default: he has received the net amount of tax for which he must account, and it is in his interest not to prejudice his relationship with the Commissioners, as he wishes to participate in further transactions. It may be that the defaulter, B, and the broker, F in the example above, are acting together and agree to share the spoils once F's input tax claim has been paid, though a sharing can be achieved quite simply by judicious setting of the prices at which the goods change hands. The output tax for which B should have accounted plus the excess of output tax over input tax for which the buffers account will always equal the input tax for which the broker claims credit, whatever the selling price at each stage. If the scheme is successful, therefore, the Commissioners fund the fraud by paying F's claim. In this case, the purpose of the arrangements is as much the extraction from the Commissioners of F's input tax claim as the evasion by B of his liability, and it is the Commissioners, representing the body of taxpayers, rather than F who are the victims.
- In a number of cases, Calltell made purchases from suppliers in other member States. It then sold the goods to Opto (and in some cases, again, the order was reversed) which sold them to other United Kingdom traders, who in turn sold them on until, after several such sales and purchases, the goods found their way to a trader in a member State other than the UK, sometimes the same as that from which Calltell had bought them, and sometimes a different country. In a number of cases, the Appellants were the only UK traders involved—Calltell or Opto bought from a trader in one member State and sold to the other Appellant, which then sold the same goods, without the involvement of any other UK dealer, to a trader in a different member State. It is not asserted that these transactions led to any tax loss—all the traders involved, or at least those within the UK, accounted correctly for VAT—but, the Commissioners say, they are examples of what they term "contra-trading", a device designed (they maintain) to conceal fraud or to make its prevention more difficult, particularly by deflecting the Commissioners from their policy of targeting brokers' repayment claims. It is convenient to deal with the concept in more detail later, rather than at this stage.
- The Appellants do not advance a positive case that there was no fraud or tax loss elsewhere in the chains of transactions in which they participated—they say they are unable to make any such assertion—but they put the Commissioners to proof of their contentions and argue that, in some cases, such evidence as is available favours the proposition that there was no loss rather than the reverse, while in others there is no material from which either a tax loss or fraud can be inferred, still less directly established. They maintain that, even if there was a tax loss due to fraud, they neither knew of it nor had any means of knowing that such a loss had occurred, or was likely to occur. They point to the fact that (as the Commissioners accept) none of their immediate suppliers can be shown to have defaulted in its obligation to account for VAT, and argue that it is impossible for them to look beyond their immediate suppliers since they have no means of knowing, or of finding out, from whom their suppliers obtained the goods. Moreover, in every case in which the Commissioners say there was a loss, by a trader's failure to account for the tax for which it was liable, that failure occurred after Calltell or Opto had already sold the goods. They accept that the Commissioners warned them, on several occasions, that goods in which they had previously dealt had been traced back to defaulting traders but say that merely warning them achieved nothing; the Commissioners could and should have provided them with the information which would have enabled the Appellants to make proper enquiries themselves, and that, rather than simply asserting that they were inadequate, they should have made suggestions about how they could improve their procedures, but they did neither. The Appellants contend that they took proper precautions and did everything reasonably possible to ensure that their suppliers had done likewise; there was, they say, nothing more they could do.
- Before us, the Appellants were represented by Michael Patchett-Joyce of counsel, and the Respondents by Mark Cunningham QC, leading Philip Moser. Each put in very helpful written arguments, both by way of opening and by way of closing submissions. We were provided with the statements of various witnesses, some of whom gave oral evidence in addition, and with a considerable amount of documentary evidence, extending to almost 60 lever arch files. Mr Patchett-Joyce complained that even that volume of documentation was inadequate, and his complaint was the subject of more than one application before us. Although we resolved the applications as the hearing proceeded and do not now need to deal with the details, the matter remained contentious throughout the hearing and we think it appropriate to make a few observations about disclosure in appeals of this kind.
- Mr Patchett-Joyce began by referring us to what had been said on the subject by the tribunal in Aircall Export Ltd v HMRC (2005) Decision 19185, at paragraphs 7 and 8:
- This is not a case in which a carousel is alleged, but we agree with Mr Patchett-Joyce that the same principles must apply in any case where the Commissioners have, but the appellant does not have, access to the relevant documents. A comment linking that fact to the duty of disclosure was made by the tribunal in Deluni Mobile Ltd v HMRC (2005) Decision 19205 at paragraph 51:
- Mr Patchett-Joyce added the comment that, not only do appellants in the position of Calltell and Opto lack the power to obtain documents themselves, so that if there are gaps in the disclosure they have no means of filling them, but their dependence on the completeness of disclosure by the Commissioners goes even further: they have no means of knowing whether documents which have not been disclosed exist and, if they do, whether they might be helpful to them. Here, he maintained, the Commissioners had not made investigations in some respects, when such investigations should have been undertaken; and they had withheld some of the documentation in their possession on the grounds that it was not relevant, when it was not appropriate that the Commissioners should be the judges of what was and what was not relevant. Here, he said, they had withheld documents, claiming they were irrelevant, when that was plainly not the case. As the hearing proceeded, some further documentation was produced, but the material went only part-way to satisfying his concerns.
- Irrespective of the comments of other tribunals which we have set out, there is undoubtedly some merit in Mr Patchett-Joyce's contentions. The adverse effects on a business of the withholding of substantial amounts of input tax credit are obvious, and a decision to withhold should, correspondingly, be based on proper enquiry and sound evidence rather than on supposition. So much, we imagine, is uncontroversial, but there are nevertheless limits to the extent of the burden which can be imposed on the Commissioners, on which some guidance was offered by Lightman J in R (UK Tradecorp Ltd) v Customs and Excise Commissioners [2005] STC 138 when, at [18], he said:
- The question whether the Commissioners' investigations were adequate is, we think, more properly dealt with in the context of the evidence adduced at the hearing and the conclusions which can be legitimately drawn from it, rather than by way of general observations, but that question does have some additional bearing on the extent of the duty of disclosure of documents.
- It is inevitable that, unless traders in the Appellants' position are conspirators in a fraud, they will not have access to the documents and information which the Commissioners are in a position to secure, and elementary natural justice demands that the Commissioners should be open and generous in determining the scope of the disclosure of documents which they offer, regardless of any direction by the tribunal. Certainly all those documents on which they relied, directly or indirectly, in reaching a decision to withhold a claimed input tax credit should be volunteered. It is in our view clear that it is not sufficient in a case of this kind for them to limit disclosure to the bare minimum required by rule 20(1) of the Value Added Tax Tribunals Rules 1986 (SI 1986/590) as amended, namely to those documents they wish to produce at the hearing. Commonly, the tribunal will be asked to make a direction in accordance with rule 20(3) for additional, specific, disclosure, but an appellant seeking such a direction will, often, be hampered in that he will not know the nature of the documents which are available and which he should endeavour to have included in the direction.
- The list of documents first served by the Commissioners in Opto's appeal was manifestly inadequate, but there was a direction, made in August 2006, and before any list had been served in Calltell's appeal, that the Commissioners should serve "a list of documents relating to each appeal". That rather imprecise wording seems to have been suggested, or at least agreed to, by the parties. The lists served by the Commissioners in response to that direction indicated that they were of "The copy documents in the Commissioners' custody, power and control which it is intended to produce at the hearing of this matter." That indication appears to have reflected the reality, that the Commissioners had listed only those documents they intended to produce, rather than the documents they had, and we have considerable doubts whether the lists complied with either the letter, imprecise though it was, or the spirit of the direction. However, in November 2006 the tribunal made a further direction to the effect that the Commissioners should serve "a further and better list of documents identifying … the categories of documents and the individual documents themselves on which reliance is placed by the Respondents …". That direction went little further than the minimum requirements of rule 20(1), and the tribunal has not exercised (nor, it should be said, has it been asked to exercise) the power conferred on it by rule 20(3) to make a direction for specific disclosure. It cannot, therefore, be said that the Commissioners are in breach of the rules or of a direction by reason of any inadequacy of disclosure. On the other hand, it is right to record that the Appellants' solicitors had been repeatedly asking, by way of correspondence, for further documentation, with little response.
- As the hearing proceeded it became apparent that, even allowing for the absence of a direction for specific disclosure, there were some omissions from the documents which were produced, a fault of which both parties were guilty. To some extent the omission of documents which should have been disclosed merely undermined the case of the party which had failed to make timely disclosure, and it was necessary for that party to seek the tribunal's indulgence in order that the documents could be introduced late. As we have indicated, those failings were dealt with in the course of the hearing, and they have no significance beyond the confines of this appeal. Different considerations arise when documents in the possession or control of one party, which does not intend to rely upon them, are not disclosed to the other party. In a case of this kind, for the reasons we have explored, it will almost always be the Commissioners who have documents which might be of help to an appellant.
- Although , in principle, we see no reason why the Commissioners cannot, in addition to those documents on which they intend to rely, disclose all of the documentation they unearth in the course of carrying out an enquiry, even when they do not intend to rely on it, and are of the view that the Commissioners should offer more than the rules require, whether or not a specific direction has been made, we do not accept Mr Patchett-Joyce's argument in its entirety. Indeed, were his argument to be followed to its conclusion, there would be an unending paper trail as one document led to another. The provisions of Part 31.7 of the Civil Procedure Rules are not, strictly, binding on this tribunal but they provide a useful guide: each party to litigation is subject to a duty of search tested by the yardsticks of reasonableness and proportionality, taking into account:
- We echo too the comments made by Charles J in Megantic Services Ltd v HMRC [2006] EWHC 3232 (Admin), at [8], that it "is also quite apparent that the relevant trading activities [are] many and complicated and thus the relevant investigations can be complicated and lengthy. It is also clear … that at times full co-operation is not provided to [HMRC] in carrying out those investigations. They have a considerable task." It is necessary to strike a reasonable balance between an appellant's need to have access to documents within the Commissioners' power but not their own, while the burden to be imposed on the Commissioners must not be excessive, and the disclosure required must be of relevant material—the tribunal must not permit disclosure to be used as a tactical device.
- There are five pertinent factors which we consider to be of some importance. First, we do not accept that the Commissioners deserve the criticism Mr Patchett-Joyce suggested for their failure to secure and disclose documents which they might have been able to secure had they pursued their investigations further. Though they must pursue a reasonable and proportionate investigation diligently and expeditiously (UK Tradecorp Ltd) the Commissioners must retain a measure of discretion about the lengths to which an investigation should be pursued, always bearing in mind that it is for them to produce the evidence which supports their decision to deprive a trader of a repayment to which he may be entitled. Second, it cannot be overlooked that in cases of this kind the Commissioners are under great pressure, often reinforced by the threat of judicial review proceedings, to make decisions quickly (understandably, since the traders concerned are seeking payments of large sums of money) and the decisions they make may, of necessity, be based on inference rather than on clear documentary evidence. Third, if the Commissioners are right in their belief that there is fraud, the fraudulent traders will have gone to some trouble to make investigation difficult if not impossible. Fourth, as became very clear during the hearing of these appeals, even allowing for those factors the amount of documentation which may come to light, or be created, during the course of the investigation can be vast. The officer in charge of the investigation told us that the hearing room would not have been able to accommodate all the documentation Mr Patchett-Joyce was demanding. Even allowing for a degree of hyperbole we can accept that the volume of paper which might conceivably have some bearing on the issues in an appeal of this kind could become unmanageably great. Fifth, one should not lose sight of what those issues are. We develop that point in due course; for the present we can state them briefly: whether there has been a tax loss, whether it is attributable to fraud, and whether the trader in question knew or should have known of the loss and the fraud.
- We recognise the importance of these proceedings to the Appellants, and accept that paragraphs (b) and (d) of Part 31.7 of the CPR favour an extended search, while factors (a) and (c) point in the opposite direction. It is clear that it is not the Commissioners' function to pursue investigations indefinitely and regardless of expense merely because they might discover something of help to an appellant. It should also be borne in mind that, once documents have been disclosed which identify traders remote from the appellant in the chain of transactions, there is nothing to prevent an appellant from approaching that trader himself, albeit he will lack the Commissioners' statutory powers. Additionally, even though some of the documents Mr Patchett-Joyce sought were, clearly, within the Commissioners' possession because they had themselves created them, there must be a reasonable limit to the extent to which the Commissioners are required to trawl even through their own records in case something of relevance might be found. Though it is true that some relevant documents were disclosed only in consequence of Mr Patchett-Joyce's persistence, it was also true, in our view, that some of his demands went too far. Very little of the additional material his persistence brought forth was relied on by him.
- Unless a specific direction in some other form is made, it is our view that the appropriate course for the Commissioners to adopt in cases of this kind is to serve a list of the documents on which they intend to rely (with supplementary lists if further documents become available—the duty of disclosure, in this tribunal as elsewhere, is a continuing one) and at the same time to serve a list, by category rather than individually if the labour of so listing them would be disproportionate, of those other documents in their possession which relate to the transactions in question but on which they did not intend to rely (irrespective of their perceived relevance to the issues between the parties), and to allow an appellant or his advisers access to those documents. The incidence of the burden of proof, on which shall also comment later, dictates that the documents so disclosed should encompass most of those which are likely to be of relevance. There may well be further documentation in the Commissioners' possession relating to the other traders in the chains of transactions, which are not specific to the transactions themselves, but relate to their failure (if it should be the case) to account for their VAT liabilities and which tend to show that any such failure is attributable to fraud. We recognise that, by reason of sections 18 and 19 of the Commissioners for Revenue and Customs Act 2005, no such documents may be disclosed before an appeal is brought, and that there may be other reasons why some documents, or parts of documents, should be withheld but, subject to those limitations, we are of the view that the Commissioners should disclose everything in their possession within that category. We are not persuaded that, unless there is a specific reason in an individual case, the Commissioners' obligations should be of any greater extent.
- We think it is convenient to deal with the law first, partly because our interpretation of the law informs our approach to the evidence, and partly because, without an understanding of the relevant principles, the significance of much of the evidence will not be apparent. We shall return to the application of the law when we come to the parties' submissions and to our conclusions.
- The principal relevant legislative provision in force at the time at which the transactions with which we are concerned was article 17(1) of the Sixth VAT Directive (77/388/EC) (since replaced, in a slightly different form, by article 167 of Council Directive 2006/112/EC). It is important to put the provision in its context, that is the fiscal neutrality of VAT for taxable persons, who may set against the output tax for which they must account the input tax they have incurred on the cost components of their taxable supplies. Article 17(1) provided that:
- In the United Kingdom's domestic law the concept of fiscal neutrality and the terms of article 17(1) are implemented by sections 24 to 26 of the Value Added Tax Act 1994. So far as presently material, those provisions are as follows:
- Those provisions are in mandatory terms. If a trader has incurred input tax which is properly allowable, he is entitled as of right to set it against his output tax liability or to receive a repayment if the input tax credit due to him exceeds that liability. He is required to hold the evidence to support his claim (see article 18 of the Sixth Directive and regulation 29(2) of the Value Added Tax Regulations 1995 (SI 1995/2518) and the observations of Lightman J in UK Tradecorp, above, at [28] to [34]) but, provided he does so, the right to deduct or to a repayment is absolute, and no element of discretion is conferred on the tax authority, save that the authority may accept lesser evidence than that normally required; it has no right to demand more evidence than that prescribed by article 18. The right is also immediate, that is it may be exercised, as article 17 puts it, "when the deductible tax becomes chargeable." The only limitation is the practical one that, although deductibility (at least, in the present context) is determined on a transaction-by-transaction basis, the mechanical process of deduction or repayment is effected by reference to prescribed accounting periods.
- Taking these provisions alone, the Appellants' claims seem unanswerable. They have paid VAT to their suppliers, which is input tax in their hands, or in the case of goods purchased from traders in other member States, have accounted for acquisition VAT which is also input tax in their hands. That input tax is in either case attributable to the making by them of onward taxable (even if zero-rated) supplies to their own customers. The Commissioners accept (or, in a few instances, do not advance a positive case to the contrary despite harbouring some doubts) that the transactions in question were exactly as stated, that is the goods bought and sold were those the Appellants claim to have bought and sold, that the goods and the consideration for them duly changed hands, that goods said to have been transported out of the United Kingdom—the necessary condition for zero-rating—were so transported and that the Appellants have the necessary, and genuine, evidence to support their claims. They also accept that the Appellants' UK suppliers have accounted to them for the output tax to which the claimed input tax corresponds. They contend, however, that the requirements of the legislation are excluded, or are to be set aside, where those requirements are relied on for abusive or fraudulent ends, and the trader concerned is party to, or knew or had the means of knowledge of, those abusive or fraudulent ends. That, they say, is the position in this case. For the proposition that the requirements, or apparent requirements, of the legislation do not apply they rely on a number of decisions of the Court of Justice.
- The concept of abuse of law is by no means a novelty in the European jurisprudence. It dates back at least as far as 1985 (see Association des Centres distributeurs Édouard Leclerc v Sàrl 'Au blé vert' (Case 229/83) [1985] ECR 1) and was developed in Emsland-Stärke GmbH v Hauptzollamt Hamburg-Jonas (Case C-110/99) [2000] ECR I-11556, in which the court struck down a scheme by which a trader sought to gain an advantage by the literal application of a provision in a manner which was contrary to its purpose, or which was designed to circumvent the correct application of another provision. Neither of those was a tax case. The concept has been further developed, in a tax context, in the recent case of Halifax plc and others v Customs and Excise Commissioners (Case C-255/02) [2006] STC 919. There, the court made it clear that the starting point is that transactions must be considered objectively, without regard to their purpose or results. They may be struck down as abusive only when it can be shown that they rely on the formal application of a legislative provision in order to secure an advantage—in that case a tax advantage—contrary to the purpose of the provision and when it can be shown that the obtaining of that advantage was the essential aim of the transactions. Transactions will not be considered to be abusive when a legitimate commercial purpose can be demonstrated, even if a tax advantage is also secured.
- In reaching that conclusion the court relied, in part, on its earlier judgment in Optigen Ltd, Fulcrum Electronics Ltd and Bond House Systems Ltd v Customs and Excise Commissioners (Joined cases C-354/03, C-355/03 and C-484/03) [2006] STC 419 ("the Optigen cases"), the first cases similar to the instant appeals to reach the court. There, the traders dealt in computer chips which, unknown to them, had previously been dealt in by others whose intention was to defraud the Commissioners by failing to account to them for the VAT which they had collected from their customers. Like Calltell and Opto in this case, the appellants were repayment traders whose claims for payment of the excess of their input tax over their output tax were refused by the Commissioners. They were, or were assumed to be, swept up innocently in what is commonly known as a carousel fraud. Their appeals to this tribunal failed on the grounds that, regardless of their ignorance of it, the appellants' dealings were tainted by the illicit purpose of the chain of transactions which were no more than a vehicle for fraud, and the dealings were consequently not economic activities within the contemplation of the Sixth Directive. That view was rejected by the court.
- At paragraphs 27 to 29 of his opinion the Advocate General said:
- The United Kingdom correctly submits that VAT must be applied in accordance with the actual economic situation. However, this does not imply that the character of a transaction in a supply chain must be determined by reference to the whole chain. Quite the opposite, the case law reaffirms the rule that an activity must be considered objectively and per se when it states that regard must be had to the actual economic situation and that legal form is not conclusive. (To that effect see Banque Bruxelles Lambert SA (BBL) v Belgium (Case C-8/03) [2004] STC 1643, para 36; Empresa de Desenvolvimento Mineiro SGPS SA (EDM) v Fazenda Pública (Ministério Público, intervening) (Case C-77/01) [2005] STC 65, para 48; van Tiem v Staatssecretaris van Financiën (Case C-186/89) [1993] STC 91, para 18; Rompelman v Minister van Financiën (Case 268/83) [1985] ECR 655, para 23.)
- The rule that each transaction must be considered individually and per se, without regard to its purpose or results, is founded on the requirement that the common system of VAT should be neutral and on the principle of legal certainty, which requires that the application of Community legislation be foreseeable by those subject to it. It ensures that, at the time of the taxable transaction, it can in principle be determined whether or not that transaction comes within the scope of the Sixth Directive."
- Those comments were taken up in the judgment:
- 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 arts 2(1), 4 and 5(1) of the Sixth Directive, where they fulfil the objective criteria on which the definitions 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 affected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is vitiated by VAT fraud, without that taxable person knowing or having any means of knowing.
- As the Court of Justice has repeatedly held, the right to deduct provided for in art 17 et seq of the Sixth Directive is an integral part of the VAT scheme and in principle may not be limited. It must be exercised immediately in respect of all the taxes charged on transactions relating to inputs (see, in particular, BP Supergas Anonimos Etairia Geniki Emporiki-Viomichaniki kai Antiprossopeion v Greece (Case C-62/93) [1995] STC 805, para 18, and Gabalfrisa SL v Agencia Estatal de Administración Tributaria (Joined cases C-110/98 to C-147/98) [2002] STC 535, para 43).
- The question whether the VAT on the earlier or later sale of the goods concerned to the end-user has or has not been paid to the public purse is irrelevant to the right of the taxable person to deduct input VAT (see, to that effect, the order of the Court of Justice in Transport Service NV v Belgische Staat (Bea Cars BVBA, third party (Case C-395/02) [2004] ECR I-1991, para 26). The Court of Justice has consistently held that, according to the fundamental principle which underlies the common system of VAT, and which follows from art 2 of the First and Sixth Directives, VAT applies to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components (see, inter alia, Midland Bank plc v Customs Excise Comrs (Case C-98/98) [2000] STC 501, para 29, and Zita Modes Sàrl v Administration de l'Enregistrement et des Domaines (Case C-497/01) [2005] STC 1059, para 37).
- Therefore, the answer to the first question referred for a preliminary ruling in each case should be 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 arts 2(1), 4 and 5(1) of the Sixth Directive, where they fulfil the objective criteria on which the definitions 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. 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 VAT fraud, without that taxable person knowing or having any means of knowing."
- The question whether or not the appellants knew, or had the means of knowing, of the fraudulent purpose of other traders was not in issue in the Optigen cases—although the point was touched on in Bond House they proceeded in the domestic courts on the assumption that knowledge was immaterial—and the Court of Justice did not expand upon its comments about knowledge and means of knowledge. It had to be assumed that it intended to indicate that a trader fixed with such knowledge forfeited the right to deduct. The issue did, however, come before the court again in Kittel v Belgium and Belgium v Recolta Recycling SPRL (Joined cases C-439/04 and C-440/04) [2006] All ER (D) 69 (Jul). In that case, Mr Kittel was the liquidator of a company, Computime, which had knowingly participated in a carousel fraud and in the making of fictitious supplies (that is, purported supplies of goods, computer components, which did not exist). He continued an appeal launched by Computime before its liquidation against an assessment to recover input tax, or purported input tax, for which it had received credit. Recolta, a car dealer, was the innocent counterparty to a trader who was involved in a carousel fraud (unconnected with Computime's fraud); Recolta too appealed against an assessment designed to recover input tax for which it had received credit.
- The Belgian Cour de Cassation decided to refer questions to the European Court of Justice. The principal question, put in identical terms in each case, was designed to discover whether a provision of Belgian law, that a contract by which one party, unknown to the other, intended to commit a fraud was rendered incurably void for public policy reasons, had the effect of causing the innocent party to lose his right to deduct the input tax he had incurred. Supplementary questions explored differences which might arise where the fraud related to the VAT itself. In its judgment, the court began by restating the law which it had already developed, and then expanded on what had been said in the Optigen cases:
- It is clear from paragraph 53 of the judgment that the right to deduct (or "right of deduction", the term used by article 167 of Council Directive 2006/112/EC) is lost where the person claiming that right has himself evaded, or sought to evade, VAT. It is also apparent that the court takes the same view of a person who could properly be described as an accomplice. The judgment is, however, ambiguous about its application. In paragraphs 56, 59 and 61 the court refers to transactions "connected with fraudulent evasion of VAT", without further limitation; but in paragraphs 52 and 60, and in the restatement of its conclusion following paragraph 62, where the formal answers to the referred questions are to be found, it refers to transactions "connected with a fraud committed by the seller" (emphasis added). Leaving the supposed contra-trading transactions, for the present, to one side, the Commissioners do not contend that any of the traders from whom Calltell or Opto purchased goods was itself committing a fraud—all accounted correctly for the output tax due on the transaction—but that Calltell or Opto knew, or had the means of knowing, that other traders, more remote from them in the chain, who had previously dealt with the same goods were engaged in the fraudulent evasion of VAT. It is therefore of some importance to establish precisely what the Court of Justice meant: that is, is the right to deduct forfeited only where there is privity of contract between a fraudulent seller and the person whose right to deduct is in question, or is knowledge, or the means of knowledge, of a fraud at one or more removes enough?
- Mr Patchett-Joyce sought to persuade us that the ambiguity could be resolved by resort to the original, French, text of the judgment. The phrases used in it are (in paragraphs 56, 59 and 61) "une opération impliquée dans une fraude à la TVA" and (in paragraphs 52 and 60 and the conclusion) "l'opération concernée était impliquée dans une fraude commise par le vendeur". His argument was that the use of the word "dans" implied, even when it was not specifically mentioned, privity of contract between the fraudster and the person whose right to deduct was in question, and that any remoter relationship, regardless of the latter's knowledge, was not within the court's contemplation.
- We do not agree that the French text can be interpreted in that way. Dans is no more than the preposition ordinarily taken by the verb impliquer, and no particular significance can be read into its use. It is true that in paragraphs 52 and 60 and the conclusion the court specifically referred to fraud "committed by the seller" (or "commise par le vendeur"), but it did so in the context of a case (Recolta) in which the fraud had indeed been committed by the person selling to the trader claiming the right to deduct, and where the referred questions, for that reason, contained the same phrase. But the reasoning of the court, as it is presented in the extract from the judgment we have set out above, and its stated view, at paragraph 61, does not limit the conclusion to cases in which the fraud has been perpetrated by the seller, and we do not think the court intended, in paragraph 60 or the conclusion, to impose that limitation; rather, we think, it was providing an answer to the questions in the form in which they were put. It is difficult to accept that the court would have concluded, in a case in which A, a fraudster, sold goods to an innocent party, B, who sold them to C, a trader knowing of though not participating in the fraud, that C's right to deduct was unimpaired. Such a conclusion can be reconciled with paragraphs 52 and 60 of the judgment in Kittel, if one attaches significance, beyond the confines of that case, to the phrase "committed by the seller", but not with paragraphs 56, 59 and, most importantly, 61. Nor, in our view, is the interpretation urged on us by Mr Patchett-Joyce consistent with the tenor of the judgment, from which it is clear that combating fraud was very much in the court's contemplation.
- Further European jurisprudence is to be derived from Customs and Excise Commissioners v Federation of Technological Industries (Case C-384/04) [2006] STC 1483 ("FTI"), in which the court was required to consider the compatibility with article 21 of the Sixth Directive of section 77A of the Value Added Tax Act 1994, inserted by section 18 of the Finance Act 2003, and of the amendments of paragraph 4 of Schedule 11 to the 1994 Act effected by section 17 of the 2003 Act. The new and amended provisions enabled the Commissioners to direct that one trader should become jointly and severally liable with another for the latter's VAT debt, and to require him to provide security for that liability. All we need to say about the case is that the court did not conclude that the power to make such a direction, or to demand security, was limited to those cases in which the two traders were in a direct contractual relationship.
- We do not need to rely only on our own views. In Dragon Futures Ltd v Customs and Excise Commissioners [2006] V & DR 348 the tribunal considered Optigen, Kittel and FTI. The principal question in Dragon Futures was the meaning of the term "means of knowledge" (and variants on that phrase), a question to which we shall come shortly, but the tribunal had also to consider the nature of the facts or circumstances of which knowledge was material—that is, in particular, whether knowledge of a trader's counterparty's purposes, alone, was to be taken into account, or the taxing authority could look further afield. At paragraph 67 the tribunal said:
- At paragraph 69 it went on to say:
- Those comments were considered by Burton J in R (Just Fabulous (UK) Ltd and others) v HMRC [2007] EWHC 521 (Admin). The judge was required to deal, primarily, with the application of the principles of Optigen and Kittel to contra-trading. As we have mentioned, the Commissioners contend that some of the transactions into which the Appellants entered were of that description, and it is convenient to describe such trading now.
- A contra-trading transaction, if the Commissioners are correct, is one entered into within a series of transactions which does not itself lead to any tax loss: the traders involved all account correctly for their VAT liabilities. Typically, goods are imported by a trader, A, from outside the European Union or, more usually, acquired from another member State. A accounts for import VAT or acquisition tax, and claims credit for it, as input tax, by offsetting it against the output tax for which he must account on his onward sale of the goods to another UK trader, B. The goods are then the subject of one or more sales through which they find themselves in the hands of a trader, say F, who exports them to, usually, another member State. F claims credit for the VAT he has incurred in buying the goods, but does not have to account for any output tax on the sale as it is zero-rated. All of the UK traders, from A to F, account correctly for their VAT liabilities and, taken alone, the series of transactions appears to be entirely legitimate—which, say the Commissioners, is an essential characteristic of a contra-trading sequence.
- However, there are, they maintain, two true purposes behind the series: the creation of the illusion that the traders concerned are engaged in legitimate trade; and the manufacture of an output tax liability against which the importer can offset an input tax credit, arising from another, apparently unconnected, transaction, which the Commissioners might otherwise refuse to pay to him—that is, the Commissioners are deprived of the weapon which they could have deployed of withholding an input tax credit, and are forced to assess instead. Commonly, but not necessarily, the exporter (or "broker") in a chain of transactions in which a fraud has occurred will be the importer (A in the example in the preceding paragraph) in the chain of contra-deals. A might have had his input tax repayment claim blocked, but instead he may set it off against the manufactured output tax (usually, but not necessarily, of a very similar amount) for which he must account. (A fuller description of contra-trading is to be found in Just Fabulous, particularly at [10], and helpful diagrams are annexed to the judgment.)
- Burton J quoted paragraph 67 of the tribunal's decision in Dragon Futures—including its references to the "chain of transactions"—with evident approval, and also set out some of the passages from Kittel which appear above. He then said, at [43]:
- If that conclusion is right—and it is in any event binding on us—it is impossible to accept Mr Patchett-Joyce's narrower interpretation of Kittel, that one may have regard only to the transaction giving rise to the claim for input tax credit in question. The argument requires us to accept that knowledge of the activities of one's counterparty is relevant, while knowledge of the activities of others in the same chain is to be left out of account, yet the trader is nevertheless to be judged by his knowledge of the activities of traders in other chains. That is, plainly, illogical. In our view there can be no doubt that Burton J was endorsing the opinion expressed in paragraphs 69 to 71 of the decision in Dragon Futures that it is permissible to look up and down the entire chain. We also agree with that opinion.
- It follows that if a trader in the Appellants' position has actual knowledge that he is participating in a transaction which forms part of a chain whose purpose is the fraudulent evasion of tax, even if he has no privity of contract with the perpetrator of the fraud, he will forfeit his right to deduct. What is less clear is what, short of actual knowledge, is sufficient to lead to the same result. Some guidance can be derived from the reference by the Court of Justice, at paragraph 51 of its judgment in Kittel, to "traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud". That passage suggests a high standard: the trader is not to be judged only by reference to knowledge he could easily have obtained, or information which he has ignored or disregarded, but is under a positive duty to take precautions. The tribunal made an attempt to formulate a test in Dragon Futures; at paragraph 74 of its decision it identified six criteria against which a trader's means of knowledge were to be tested—the test being objective—and at paragraph 75 set out a question which it considered the tribunal should ask itself. The question was designed to summarise the criteria and was as follows:
- That question was quoted in Just Fabulous (at [26]) but Burton J expressed no opinion about it, beyond remarking that it was in wide terms, since the question in that case was not whether the test was correctly formulated but whether the question, whatever its correct formulation, applied to contra-trading. In our view it is, at the least, a useful starting point for what will almost always be an intensely fact-sensitive enquiry. The question we must consider, in the context of this case, is the extent of the positive duty referred to at paragraph 51 of the judgment in Kittel. It is apparent from that judgment, and echoed in Dragon Futures, that the duty is to take practical and proportionate steps, but there is considerable scope for disagreement about what is practical and what is proportionate. Mr Patchett-Joyce's position, for the Appellants, was that the bounds of what a trader can and should do are quite narrowly drawn; Mr Cunningham maintained that inference and probability were important factors which a trader must take into account, and (though he did not quite put it this way) that he must err on the side of caution. We will return to the nature of the test, as we perceive it, when we have dealt with the evidence, but it is appropriate to consider at this stage Mr Patchett-Joyce's point that, because of the timing of the transactions and of the submission of the various participants' VAT returns, the fraud, if there was a fraud at all, could be committed only after Calltell and Opto had sold the goods, a factor which was necessarily relevant to their knowledge and their means of knowledge. The argument is not relevant to "hijack" cases or to contra-trading, but is of some importance in those cases where the Commissioners allege that the fraudster has "gone missing" without accounting for the relevant output tax.
- As a matter of fact, it seems to us that Mr Patchett-Joyce's proposition is correct. Typically, the chain of transactions leading from the fraudster, or supposed fraudster, to Calltell and Opto and on to their own customer all took place on the same day or, in a few cases, within a period of about 48 hours. It is unlikely, in fact almost inconceivable, that the fraudster was required, on that same day, to submit a VAT return including that sale; the return would, probably, be due a month or more later, at least if the fraudster were, at that stage, required to account in the usual way, that is at the end of the month following the end of a prescribed period. That prescribed period would usually comprise three calendar months unless, like the Appellants, the trader concerned made monthly returns. The default alleged by the Commissioners is the failure to account for the output tax either by omitting it from a return which was rendered or, more often, by not rendering a return at all.
- Mr Patchett-Joyce's argument was that, at the time when Calltell or Opto, or both, dealt in the goods, they (or more precisely Mr Gohir) could not know whether, at some time in the future, the trader concerned would submit a return, nor, if he did, whether it would be an honest return. The fraudster might form the intention to evade his liability only after the Appellants had dealt in the goods; he might have had a dishonest intention on the day on which the Appellants dealt in the goods but could then have decided that his sale should be declared; or he might have had several changes of mind. It should be borne in mind, too, that a trader who has received a payment representing VAT does not hold that sum on trust for the Commissioners, but is merely required to account for it, in due course, as output tax: see 21st Century Logistic Solutions Ltd v Madysen Ltd [2004] STC 1535 at [19]. Thus it was impossible for anyone to say, merely because the supposed defaulter had used the money for some other purpose in the period between his receiving it and his being obliged to account for it, that he was intending to default; his intention could be judged only when he submitted his VAT return. If that analysis is right it must also follow, Mr Patchett-Joyce contended, that the Commissioners must show that the trader whose input tax deduction is being denied knew, or had the means of knowing, the defaulting trader's identity.
- Mr Cunningham did not dispute the underlying basis of Mr Patchett-Joyce's argument which, in our view, has some substance. It is clear from what was said by the Court of Justice in Kittel that the knowledge of the trader whose claim for credit has been refused is to be tested at the time the transaction took place. That time may not be a moment, but might be a period extending over a few days, or even longer, depending upon the manner in which the deal is struck although, as the evidence we heard showed, typically the time would extend for no more than a few hours. He cannot, consistently with the tenses used in paragraph 61 of the judgment and as a matter of logic, be affected by knowledge which came into his possession, or which could have come into his possession, only after the transaction had been completed. It follows therefore that, if he is to be deprived of the right to deduct, the trader must be shown to have known, or to have had the means of knowing, that the defaulter had already formed the fixed intention of evading his VAT liabilities. The task facing the Commissioners is, therefore, formidable.
- We are not persuaded, however, that it is essential for the Commissioners, if they are to succeed, to show that a trader in the Appellants' position knew, or had the means of knowing, the defaulter's identity. Such a requirement cannot be derived from what the Court of Justice said in Kittel, and we see no reason why a trader, knowing that a default was to occur but ignorant of and indifferent to the identity of the intending defaulter, should not suffer the consequences of entering into a transaction which he knew or should have known was merely the vehicle for fraud.
- In cases of contra-trading the Commissioners' task may be more formidable still. Mr Patchett-Joyce argued that nothing short of actual knowledge could suffice and, at first sight, logic is on his side. It is difficult to see how a trader, entering into a chain of transactions in which every trader accounts correctly for VAT (and which is not tainted for some other reason) could have the means of knowing that it is a device for concealing, or avoiding the consequences of discovery of, another, fraudulent, chain of transactions. Nevertheless it is, we think, possible that a trader could have the means of knowing that, by his participation, he is assisting a fraud. Much will depend on the facts, but an obvious example might be the offer of an easy purchase and sale generating a conspicuously generous profit for no evident reason. A trader receiving such an offer would be well advised to ask why it had been made; if he did not he would be likely to fail the test set out at paragraph 51 of the judgment in Kittel.
- A further argument pursued by Mr Patchett-Joyce was that the Commissioners' approach to this case, if successful, would result in their penalising the Appellants and some of the other traders involved in the chains of transactions. The argument had two limbs: that the amount of input tax credit refused would be unlikely to match (and, since generally, if not invariably, the fraudster or alleged fraudster sold for a lower price than that at which the Appellants bought, would probably exceed) the VAT lost, by reason of any fraud which might be established, with the consequence that the Appellants were being required to forego more than the Commissioners' loss; and that there was a risk that the Commissioners would recover the loss (or an approximation of it) twice over since in several cases they had, as well as refusing the Appellants' repayment claim, assessed the supposedly fraudulent trader for the tax said to have been evaded. A linked argument was that the Commissioners' approach was discriminatory in that they had denied the Appellants' input tax claims, while accepting the VAT returns submitted by their suppliers without demur.
- Similar arguments were raised in Just Fabulous but, although Burton J dealt with the opposing contentions at some length, he did not come to a concluded view on the matter since it was unnecessary for him to do so. He made the observation (at [54]) that the consequences of the Commissioners' actions would need to be worked through, to ensure that there was no risk of penalty or double recovery, but then indicated that the matter was essentially one for this tribunal. Mr Cunningham assured us that, should the Commissioners obtain any of the tax thought to have been evaded from another source, the Appellant's corresponding claims would be met to the same extent, and that there was in consequence no risk of double recovery. He did not accept that the Commissioners' treatment of other traders was a material consideration at all.
- That abusive practices may lead to the loss of the advantage sought to be gained, but no more, was made clear by the Court of Justice at paragraph 93 of its judgment in Halifax:
- We are, in this appeal, dealing with alleged fraud rather than abuse, and for that reason there may be a distinction to be drawn; but we also bear in mind that we are considering the fiscal rather than the criminal consequences of the conduct. We take therefore as our starting point the presumption that, unless there is a clear indication to the contrary, the principle enunciated in Halifax is of equal application here. In order to deal with the argument we must return to the evolution of the European Court's jurisprudence.
- As we have mentioned, this tribunal concluded, in both Optigen (2003) Decision 18112 and Bond House [2003] V & DR 210, that transactions forming part of a chain whose purpose was the fraudulent evasion of VAT did not amount to economic activities, or in UK terms supplies, regardless of the traders' knowledge, and that what was claimed to be deductible as input tax was not input tax at all. That conclusion was rejected by the court, but at paragraphs 51 and 55 of its judgment, which we have set out above, it clearly indicated that the position would be different if the trader claiming the right to deduct was himself the fraudster. That would lead to the result that what was output tax for which an innocent seller must account would not be input tax in the hands of a fraudulent purchaser, a concept difficult to reconcile with the system of fiscal neutrality.
- Nevertheless, that appeared to remain the court's view when it delivered its judgment in Halifax. At paragraphs 58 and 59 it said:
- It is true that those criteria are not satisfied where tax is evaded, for example by means of untruthful tax returns or the issue of improper invoices …"
- However, in Kittel the court appears to have adopted a different conclusion, that the VAT which a trader participating in or knowing of the fraud claims to deduct as input tax remains input tax, even if the transaction is itself fraudulent, but the right to deduct is lost. That conclusion can be derived from the reasoning in paragraph 50 of the judgment, and the repeated references thereafter to the loss of the right to deduct, and to the tax authority's ability, or even duty, to refuse to allow deduction. The right to deduct applies only to input tax; there can be no right, at least within the meaning of the VAT directives, which a fraudulent trader might lose, to deduct something which is not input tax. The conclusion is consistent with the fiscal neutrality of the VAT system, but it has, it seems to us, the consequence that the trader who has lost the right to deduct may be exposed to what could be regarded as a penalty. The court did not indicate that the right to deduct is lost only to the extent of the tax lost, nor that it might be regained to the extent that the tax authority is able to recover the tax lost by assessing another trader who is able to and does pay. On the contrary, the indications of the judgment are that a trader, with the requisite knowledge, who enters into a transaction of the kind under consideration forfeits the entire right to deduct regardless of the measure of the tax lost, and (as paragraph 58 suggests) that that outcome is desirable as a means of discouraging fraud. The question, therefore, is whether the loss of the right to deduct is properly to be regarded as a penalty, either to the extent that the value of the lost right exceeds the tax loss elsewhere, or to the extent that it is not regained when tax originally lost elsewhere is recovered.
- In our judgment the loss of the right, in either circumstance, is not to be equated with a penalty: in that, we take the same view as Burton J in Just Fabulous (see [48] to [50]). If the Commissioners are right in their factual analysis of the Appellants' activities (and for the purpose of considering this argument we must assume they are), they were participants or, as the Court of Justice said, accomplices in the perpetration of a fraud. The objective of the fraud is to extract from the Commissioners the very input tax which is the subject of the appeals. If that objective is not achieved, there is no purpose at all behind the transactions, if the Commissioners' perception of them is correct. It cannot be said that preventing the participants from achieving that objective is tantamount to the imposition on them of a penalty, just as one would not regard the preventing of a thief from taking the property he intended to steal amounted to the imposition on him of a penalty. Viewed in that way, it is immaterial whether there is any relation between the value of the tax for which, elsewhere in the chain, another trader has failed to account: what the Commissioners are seeking to do is to prevent a theft, rather than to recover a loss. In our judgment there is no basis on which it can be said that they are seeking to impose a penalty on the Appellants, and we do not accept that what was said by the Court of Justice at paragraph 93 of its judgment in Halifax is of any application in this case.
- We should add that it remains unclear whether the right is lost only when there is some demonstrable loss of tax elsewhere, whether or not it is of the same value as the input tax in dispute, or whether it may be lost even if there is no more than an unsuccessful attempt at failing to account for output tax which is due—thwarted, perhaps, by the offsetting of the output tax against a claim. For the purposes of this decision, since we heard no argument on the matter, we shall assume that there must be some actual loss of tax. We do not need to deal with a possible argument that the right to deduct, once lost, should be restored if the tax is in fact recovered, though our tentative view is that it should not.
- We can deal also at this stage with Mr Patchett-Joyce's argument that the Commissioners' approach leads to discriminatory treatment of the Appellants, by comparison with the other traders who preceded them in the chain, and whose VAT returns, claiming deduction of the input tax incurred and declaring an output tax liability in respect of the same goods, have been accepted, with payment of the modest net liability. In our view the argument is misconceived. The Court of Justice has sanctioned the withdrawal of the right to deduct in those cases where the trader has participated in a transaction knowing, or with the means of knowing, that the transaction is connected with fraud. Absent such actual or deemed knowledge, the right is unimpaired: so much is apparent from the Optigen cases, as well as from Kittel. Thus unless the Commissioners can demonstrate the requisite knowledge in the preceding traders (and Mr Patchett-Joyce did not suggest that there was any evidence of such knowledge, still less that the Commissioners could establish it), they have no grounds for rejecting their VAT returns. The Commissioners have discriminated between traders who (if they are right) did have the requisite knowledge or means of knowledge, and those who did not; but their doing so is consistent with, and a necessary consequence of, the jurisprudence of the Court of Justice.
- We should, lastly, deal with Mr Patchett-Joyce's arguments that the Commissioners' approach offended the principles of legal certainty and of effectiveness, and could not be reconciled with the rights to the peaceful enjoyment of property and to pursue a lawful trade. The first argument was dealt with comprehensively by Burton J in Just Fabulous. At [45] he said "The principle of legal certainty must be trumped by the 'objective recognised and encouraged by the Sixth Directive' (paragraph 54 of the judgment in Kittel) of preventing tax evasion, avoidance and abuse." We respectfully agree.
- For the second argument, Mr Patchett-Joyce relied on the comment of the Court of Justice in Weber's Wine World Handels-GmbH (Case C-147/01) [2005] All ER (EC) 224, at paragraph 118, that "the principle of effectiveness precludes national legislation or a national administrative practice which makes the exercise of the rights conferred by the Community legal order impossible in practice or excessively difficult." We agree with Mr Cunningham that the argument is, for practical purposes, indistinguishable from the requirement, advanced by the court in Garage Molenheide and others v Belgium (Joined Cases C-286/94, C-340/95, C-401/95 and C-47/96) [1998] STC 126, that measures which are adopted in order to protect the revenue must be proportionate, and must go no further than is necessary to achieve their objective. In our view this argument, too, is misconceived. The very question we must determine is whether, applying the court's own jurisprudence, the Appellants have the right which they claim. If they do not, these principles cannot assist them. If they have the right, the Respondents accept that they cannot impede their exercise of it.
- Although Mr Patchett-Joyce put forward separate arguments relating to the rights to the peaceful enjoyment of property and to pursue a lawful trade, they are in our view, in the context of this case, the same thing put in different words. He relied on what was said by the European Court of Human Rights at paragraph 38 of its judgment, delivered on 9 January 2007, in Intersplav v Ukraine (Application no. 803/02):
- That passage, he said, made it clear that only direct involvement is sufficient to deprive a trader of his right to deduct input tax he has incurred. The Commissioners' approach, he continued, acted as a deterrent to legitimate trade and was a brake on the free movement of goods, a cardinal principle of Community law. We reject that argument. If the Commissioners are right that the Appellants knew, or had the means of knowing, that the transactions in which they engaged were tainted by fraud, they were not legitimate transactions and measures which were designed to prevent them, or to negate their effect, could not offend any of the relevant principles, which protect only legitimate trade. And, again, if we find that the Commissioners are wrong, the Appellants' right to deduct is unimpeded. If by "direct involvement" the court meant to indicate that only those transactions in which the trader concerned participated with a view to securing a dishonest benefit for himself may properly be affected by any power to deprive the trader of the right to deduct—an inference we do not draw—there is, or may be, a conflict between the ECHR and the Court of Justice. We do not, ourselves, think there is any such conflict—in our view "direct involvement" is sufficient to include cases in which the trader had the means of knowing that he was participating in an abusive transaction—but if there is, we must apply the binding jurisprudence of the Court of Justice in preference to the persuasive guidance of the ECHR. And it is quite impossible to accept that the principle of the free movement of goods encompasses abusive movement.
- Mr Cunningham made the point that it was for a trader seeking to exercise the right to deduct to show that he was entitled to do so: Rompelman v Minister van Financiën (Case 268/83) [1985] ECR 655. He did not concede that, in a case such as this, the burden shifted to the Commissioners; rather, he said, the rule remained as it had been since the decision of the High Court in Tynewydd Labour Working Men's Club and Institute Ltd v Customs and Excise Commissioners [1979] STC 570 that, save in prescribed cases of which this was not one, the burden of proof before this tribunal lay with the appellant. Nevertheless, he accepted that it was for the Commissioners to establish the chain of transactions, the relevant default and the fraudulent purpose of the default. So much was decided by the tribunal in Bond House and that allocation of the burden has been generally accepted, including by the Commissioners themselves—see, for example, paragraph 82 of the decision in Dragon Futures. For those reasons Mr Cunningham was willing to lead the Commissioners' evidence first.
- Where the burden lies of establishing knowledge, or means of knowledge, and whether the Appellant has taken "every precaution which could reasonably be required of them", to adopt the words of Kittel, is more problematical. In Dragon Futures, at paragraphs 85, the tribunal said that it
- Then, after dealing with the burden of establishing the fraudulent nature of the transactions, a burden it agreed rested on the Commissioners' shoulders, it continued, at paragraph 86:
- Though we agree with the thrust of that proposition, we think it slightly over-simplifies the questions the tribunal must answer in cases of this kind. Any trader in the position of these Appellants will say, as the Appellants did, that he can look no further than his own supplier and customer. If there is no evidence that either the supplier or the customer was the perpetrator of the fraud, demanding of such a trader that he establish that he knew nothing of another trader, earlier in the chain, requires him, as Mr Patchett-Joyce pointed out, to prove a negative. All he can say is that he did not know. He can give evidence about the quality of his enquiries, but enquiries into his supplier, however good, will not, of themselves, tell him anything about a trader several steps removed. And knowledge cannot always be inferred merely because the enquiries made were of poor quality.
- For those reasons we think it is incumbent on the Commissioners to raise a case, not necessarily amounting to proof but sufficient to demand an answer, that there were facts or circumstances which support, or at least are consistent with, the conclusion that the appellant knew, or should have known, of fraud in the chain. The mere fact that there was fraud will not be enough; there must be some reason which might lead the tribunal to conclude that the trader knew or could have known of it, or that he should have taken precautions. Although, as we have already pointed out, the Court of Justice, at paragraph 51 of its judgment in Kittel, referred to traders "who take every precaution" as those who are not liable to forfeit their right to deduct, it should be borne in mind that most traders do not, and do not need to, carry out extensive enquiries into the honesty and creditworthiness of their suppliers and customers. But if the Commissioners are able to mount a case which demands some explanation, the burden shifts to the appellant to show that he took the precautions which could reasonably have been required of him and that, despite his having done so, he did not know, and could not have known, of the fraudulent purpose of others.
- It was common ground that the standard of proof in a case of this kind is the ordinary civil standard of the balance of probabilities. We accept, however, Mr Patchett-Joyce's argument that the quality and cogency of the evidence necessary to establish an allegation must be commensurate with the gravity of that allegation, that we should bear in mind that the Commissioners are alleging fraud, and that an allegation of fraud is grave.
- In this section, we intend to deal with the evidence and undisputed facts on a topic-by-topic basis, rather than by relating the evidence of each witness one after the other. There were some matters on which there was little dispute, while others were contentious, some very much so. Where necessary, we set out the evidence in detail; where we do not do so it can be taken that the matters described were common ground, or at least not disputed. We set out our findings on the matters in dispute in our conclusions.
- The parties had exchanged witnesses' statements in advance of the hearing, and we were invited to, and did, read them. Some witnesses did not give oral evidence and it was agreed that we should accept their statements as their evidence. They were:
- John Lewys-Lloyd, a chartered accountant employed by HMRC, whose evidence dealt with the Appellants' trading accounts;
- Roderick Stone, an officer with responsibility for HMRC's counter-MTIC strategy;
- David Leach, also an accountant employed by HMRC, who had investigated the Appellants' due diligence;
- Kareemah Al'Hassan, a solicitor employed by Calltell;
- Angus Marshall, a chartered accountant and a partner in Bentley Jennison, the Appellants' accountants and auditors;
- James Taylor, a VAT consultant acting for the Appellants; and
- Frazer Holmes, also a VAT consultant acting for the Appellants.
- The Appellants had also submitted the statements of Rahilah Faruqi, who is, or was, employed by Calltell but who undertook transactions on Opto's behalf, and of Mr Gohir's brother, Mohammad Sarwar Gohir (known as "Jimmy", and to avoid confusion we shall refer to him by that name), also employed by Calltell, but their evidence was abandoned (in Jimmy's case because of illness) and, although we were invited to, and did, read the statements before their evidence was abandoned, we have disregarded them, save to the extent that they were referred to by other witnesses. After the evidence had been concluded, Mr Patchett-Joyce asked us to admit two further statements, of Sukhdeep Bassi and Nadim Khan, both employees of freight forwarders used by the Appellants. Neither was tendered for cross-examination and Mr Cunningham objected to the admission of the statements. The statements had not been served in compliance with the Value Added Tax Tribunals Rules and, in the light of Mr Cunningham's objection, the proper course is to exclude them altogether. However, a compromise was reached, that we would read the statements but attach no more weight to them than we thought appropriate, bearing in mind that the evidence had not been tested by cross-examination. Since the evidence of these two witnesses is directed to disputed matters on which we did have live evidence, we do not think we can properly attach any weight to the statements, and we do not do so.
- As we have already mentioned, the Commissioners agreed to call those of their witnesses who were to give oral evidence first. We heard from two:
- Ann Bushby, the assessing officer; and
- Simon Kiefer, an officer working in the Commissioners' office at Redhill.
- Mr Gohir; and
- Badruzzaman Khan, who is employed by Calltell as a warehouseman.
- For completeness we should add that we had also oral evidence from another of the Commissioners' officers, Charlotte Jackson and from Shamona Sinnathuray, a solicitor acting for the Appellants. They were called, without advance disclosure of statements, to deal with points which arose during the course of the hearing, but those points are of no lasting significance and we shall not deal with them below.
- Opto was incorporated in 1998 and Calltell in 1999. Mr Gohir has at all material times been the only shareholder and director of both companies. Opto is the company secretary of Calltell, and Calltell the company secretary of Opto. (At the time such an arrangement was prohibited, as it remains, though the prohibition is soon to be repealed and nothing of significance turns on it.) Mr Gohir was, therefore, in complete control of both companies and anything which he knew, or could have known, would be equally known, or could equally be known, by both of them. Opto employed no staff, but relied on Calltell to provide staff and deal with the overheads of the two businesses, in return for which Opto paid a management charge. The two companies shared trading premises in Bradford, though there was an element of separation in that Calltell occupied one floor and Opto another, and Opto's dealings were conducted in some cases by Mr Gohir but otherwise by Ms Faruqi, who did not deal on behalf of Calltell; its dealings were undertaken, in the main, by Mr Gohir or by Jimmy. We were told that Mr Gohir approved every transaction, by telephone if (as was often the case) he was away from the Appellants' offices, and that Jimmy was allowed to authorise a transaction only when his brother was not available at all.
- Both of the companies became registered for VAT on 1 December 2001. Both have always been dealers in mobile phones, in the secondary, or "grey", market. It appears that Calltell had a fairly high turnover from 2001, while Opto traded at a low level or, despite being registered for VAT, was dormant, until early 2005, when its turnover increased significantly (the information available to us about Opto's trade, if any, before 2005 was conflicting and confusing, but the point is of little importance). In December 2004 it asked for permission to submit monthly VAT returns (which, we understand, Calltell was already doing), stating in its letter of request that it "has been brought into existence to make only zero-rated sales of goods either as despatches to other EC states or as exports outside the EC. There will be no sales within the UK. Therefore no output tax will be charged but input tax will be incurred within the UK. The company will therefore be in a permanent repayment situation." Whatever its position before December 2004, Opto has, it seems, since then done business very much as the letter indicates. It has bought almost all of the phones it has sold from Calltell although, as we have indicated, the companies have from time to time reversed their roles. Calltell has bought both within the United Kingdom and from traders in other member States, and has sold to both United Kingdom and overseas traders, as well as to Opto.
- In fact both of the Appellants have been consistently repayment traders, that is, their claims for input tax credit have always exceeded their output tax liabilities. In most, but not all, months Opto made only zero-rated sales, and had no output tax liability. Until the end of 2005 their respective claims were, we understand, met by the Commissioners. However, the Commissioners had considerable misgivings about the claims and at meetings and in letters they warned Mr Gohir about the nature of the trade in which, they believed, the Appellants were engaged. We shall deal with the warnings in more detail later.
- In his statement, Mr Gohir gave some particulars of Calltell's history, of no immediate relevance, and explained that it dealt not only in mobile phones but also in computer components and other electronic goods. We did not see evidence of any such transactions, though that may be because the Commissioners have taken no action in respect of them. Calltell had begun trading in 2002, achieving turnover of £49 million in that year, rising to almost £406 million by 2005. In the same period its employees had increased from two to ten, including Jimmy, whom Mr Gohir described as its general manager. The phones in which it deals are, he said, mainly surplus stock which an authorised distributor has released onto the grey market at a reduced price, because they will need some kind of modification if they are to be sold. There are, he said, also opportunities in the grey market when a new model is introduced and is very much in demand. Opto had originally been formed to sell airtime for what Mr Gohir described as the Indian market, but that venture did not proceed and in February 2005 it began dealing in mobile phones, initially exporting them but then embarking also on imports and, occasionally, sales within the UK. Its turnover, in the eight months from September 2005 to April 2006, amounted to almost £120 million.
- Mr Gohir described the market as very fast-moving, with deals struck for a purchase and a sale of a consignment within a short time-scale, usually a single day (in fact all of the transactions with which we are concerned occurred within a day, although sometimes there was a short delay before the goods were shipped overseas). It was unusual to hold stock for any time, and risky to do so, since prices changed, usually downwards, quickly and without warning, and any trader holding stock would expose himself to losses. We saw only one example of a purchase after which Calltell was left with stock—and then only for two days—and none in which Opto did so; and we saw no example of a case in which their immediate suppliers sold from stock. Occasionally, Mr Gohir said, Calltell might buy goods without having already found a purchaser (though we saw only the one example). Rather illogically, he went on to say that it would nevertheless not pay its supplier until it had been paid by its own purchaser. What is clear is that this method of trading—that is, waiting for payment before paying one's own supplier—was Calltell's and Opto's usual practice and, it seems, the practice of other similar traders.
- In 2005, Mr Gohir said, Calltell took a lease of premises near Heathrow airport, for use as a storage facility. We were told at the hearing that a copy of the lease was available, but it was not produced then and has not been provided to us since (we imagine by oversight), and we do not know the terms of the lease, save that we were told it was for a 12-month period. Hitherto, both Calltell and Opto had used freight forwarders' premises for the (invariably short-term) storage of their goods, and for their inspection prior to acceptance of delivery (a topic to which we shall return). Mr Gohir's evidence was that a significant sum of money had been spent on the adaptation of the newly-leased premises for the secure storage of valuable goods; the possession of its own facility was, he said, a sign that the Appellants were serious traders, to be distinguished from others who had no facilities of their own. Mr Khan was employed by Calltell as the warehouseman at the facility.
- The Appellants' financial background was the topic of Mr Lewys-Lloyd's evidence. He had examined Opto's (though not Calltell's) annual accounts, and compared them with those of other traders in its sector, and had prepared a report on his findings. As we have indicated, his evidence was not challenged, although Mr Gohir offered some explanations.
- Mr Lewys-Lloyd accepted that the accounts were properly prepared—they were, in fact, produced by independent chartered accountants—but identified some minor errors, of no immediate relevance, and some matters of more serious concern, though not all of those are material to this appeal. His first significant observation was that Opto, from a standing, or near standing, start in February 2005, had managed to increase its turnover to more than £43 million per month by March 2006. In its first 14 months of trading, and even though, for unexplained reasons, it made no sales in two of the months, its turnover was £190 million. The annualised equivalent of its March 2006 turnover is over £500 million, comparable to that of many listed companies. Opto's repayment claims grew in line with its turnover. Mr Lewys-Lloyd identified a discrepancy between Opto's VAT returns and its audited accounts, and a possible undeclared output tax liability. Although the discrepancy gives rise, potentially, to a serious concern we were not addressed on the matter—and Mr Gohir was not invited to explain it—and we shall leave it out of account.
- Although Calltell's full audited accounts had not been made available to him, Mr Lewys-Lloyd had made some enquiries about the company, which revealed that for the year to 31 August 2005 it had turnover of £405.8 million and a pre-tax profit of £1.8 million (the equivalent figures for Opto for the same period were £71.6 million and £1.1 million). He had also considered an inter-company loan of £2.29 million, made by Calltell to Opto, at an interest rate of 8 per cent above base rate, a rate which he considered would normally reflect a high risk, and two smaller loans of £150,000 each, made by a company and an individual in Dubai. The interest rate was, in each case, expressed to be 15 per cent of Opto's gross profit, while payment of the amount so due was contingent upon, and to be made within five days after, payment by the Commissioners of Opto's input tax claims. We had some evidence from Mr Gohir about the inter-company loan, to which we shall return at a later stage; although he made some brief comments in his statement, he was not asked about the others, the terms of which we consider to be unusual. We do not, however, consider that any conclusions are to be drawn from that fact.
- Mr Gohir accepted the analysis of the Appellants' turnover and profitability, as it had been summarised by Mr Lewys-Lloyd, and that the companies had been able to develop their businesses quickly and profitably. It became clear from evidence which both the Appellants and the Commissioners had obtained that the Appellants' turnover levels were not unusual in their trade sector. There was further evidence available to us about several of the buffers and, as a result of Calltell's own due diligence, of the overseas traders with which it and Opto had dealt. We do not need to go into detail about each of those traders, since there are common themes. Almost all were companies recently formed, or occasionally which had been trading in a completely different business, turning recently to electronic goods. They were, apparently without exception, companies with only one or two directors and few, if any, staff. None seemed to have any significant capital resources (in that respect Calltell and Opto were unusual). All had managed, within a very short period, to achiever turnover measured in millions of pounds per month. With the single exception that two chains had been traced back to Nokia, none of the traders in any chain had a name recognisable as that of a manufacturer, authorised distributor or retailer, nor did Mr Gohir claim that any of them fell into one of those categories. He agreed that neither of the Appellants ever dealt with a manufacturer or retailer, although he had tried without success, he said, to trade with authorised distributors.
- During 2002 the Commissioners, concerned about the level, as they perceived it, of MTIC fraud, agreed with a number of traders in the mobile phone industry, including manufacturers and major retailers as well as traders in the "grey" market, on a Memorandum of Understanding, coupled with a Code of Conduct. The Memorandum recites the recognition by the mobile phone industry that "VAT fraud involving mobile phones is widespread and growing significantly". It also records the objective of the industry, with what was then HM Customs and Excise, to reduce the level of VAT fraud by cooperation and by the observance by traders of the Code of Conduct. The Code's requirements are of some importance, as will become apparent when we deal with the evidence relating to the Appellants' "due diligence" (the checking on the creditworthiness and reliability of their suppliers and customers), and we have set it out in full in an annex to this decision. Calltell was a signatory to the Memorandum, although Opto, by reason of its then small, or non-existent, volume of trade, was not, and it apparently did not become a signatory after the volume of its trade increased. It was not, however, suggested—nor, realistically could it have been—that Opto was ignorant of the Memorandum and of the motives behind it, nor of the Code of Conduct.
- Mr Stone's evidence was directed to the nature of MTIC fraud and the revenue losses in the United Kingdom to which, the Commissioners believe, it has led: somewhere between extremes of £1.06 billion and £2.53 billion in each of the financial years from 1999-2000 to 2003-04. He mentioned also a feature of MTIC trading which is of importance in relation to one of Mr Patchett-Joyce's arguments to which we have already referred, namely that while brokers, such as Calltell and Opto, who are repayment traders generally make monthly VAT returns, buffers and the defaulting traders more commonly make three-monthly returns. Thus, as Mr Patchett-Joyce argued, it is probable that a broker's repayment claim will have been submitted before the preceding buffers are required to, and do, submit their returns including the transactions leading to the broker's acquisition of the goods, and also before the due date for the defaulting trader's return, which is often, though not always, not submitted at all.
- Mr Stone also identified another common feature of MTIC trading, that a purchaser, usually a buffer, is required to transmit the bulk of the payment he makes for the goods not to his own supplier, but to a third party; the supplier receives a modest amount, usually his own profit and the net amount of VAT for which he must account, while the bulk of the purchase price goes to his immediate supplier or, sometimes, to a trader several links earlier in the chain. In effect, the supplier is using his purchaser's money to fund his own purchase, as he does not have sufficient resources of his own. Although, as we have recorded, Calltell and Opto waited until they had been paid before themselves paying their suppliers, third party payments are not a feature of this case. We shall need to deal later, in more detail, with the manner in which the payments were made by one trader to another in the chains with which we are concerned.
- Mr Stone was involved in the setting up of the Memorandum of Understanding and in its implementation, particularly by means of the verification unit at the Commissioners' office in Redhill which progressively took over the verification task for the whole of the United Kingdom. Its principal role, so far as the outside world was concerned, was to act as a means by which a trader might verify that another trader with whom he intended to deal had a valid VAT registration, and that other basic details, particularly name and address, provided by the intended counterparty matched those held by HM Customs and Excise and, latterly, HMRC, within their own records. An intending trader might instead approach the Commissioners' National Advice Service or use the European Commission's website, which had a facility for the verification of VAT registrations. All three would, however, do no more than confirm, if it were the case, that the details supplied matched those already held; no approval of the intended trade was to be implied.
- That was made clear in a number of the Commissioners' publications which were exhibited to Mr Stone's statement. Those publications explained that the trader must decide for himself whether he should trade; verification of the counterparty's VAT registration was no more than a recommended check—the Commissioners did not (and could not) make it compulsory. The same publications offered guidance, in the form of suggestions, about the further checks which a trader might undertake, but it was no more than guidance and HMRC's policy, Mr Stone explained, was to expect a trader to take those steps which were reasonable in the circumstances. Only if he failed to take reasonable steps would HMRC seek to apply the provisions of section 77A of the Value Added Tax Act 1994, by which he could be made jointly and severally liable for payment of the VAT due from his supplier, or require him to provide security, in accordance with paragraph 4(2) of Schedule 11 to the Act. Failure to make reasonable checks would also be taken into account in other respects, for example in the context of HMRC's deciding whether to accept evidence less than a valid VAT invoice in support of a claim for input tax credit.
- Mr Kiefer works, in a supervisory capacity, in the operation of the verification unit at Redhill. He told us that a trader making a check with the unit received confirmation (if it were the case) that the given particulars matched those held by HMRC but, as Mr Stone's statement also records, that the unit added to the confirmation the rider that it should not be taken as any kind of authorisation by HMRC of the contemplated transaction. Occasionally the unit traced a chain of supply, from details provided to it by traders or intending traders, and identified within it a known defaulting trader or hijacked VAT number. In such cases it was the practice to indicate to an enquiring trader that there was a problem about a trader within the chain, but the duty of confidentiality imposed on the Commissioners made it impossible to give more specific information, in particular the identity of the defaulting trader. Only two Redhill officers were assigned to the tracing of chains and, Mr Kiefer said, relatively few of the many chains were traced at all. He agreed that it would be very difficult for a trader to carry out a tracing exercise himself.
- Mr Kiefer dealt also in his evidence with the rapid increase during 2005 in the volume of enquiries which the Redhill office received. They had been received at a steady rate of about 4,000 per month throughout 2004, but from January 2005 the numbers went up to more than 13,000 in November 2005, though for unknown reasons there was a sudden drop in the following month. The rapid increase led to delays in the processing of requests—the processing was not limited to the checking of name, address and VAT registration number against the Commissioners' database, but extended also to the checking of any further information, such as bank account numbers, the enquirer was able to provide, and the checks and their logging within the Commissioners' computer system took some time—and those delays in turn prompted the Commissioners (as the Appellants complained) to implement changes in the manner in which requests for verification were accepted. As the Commissioners' own documents showed, enquiries by telephone and email were progressively discouraged, and they were ultimately accepted only by fax or letter. We shall return to this issue when we deal with the Appellants' due diligence. Mr Kiefer told us that in the relevant period, January to March 2006, Calltell was recorded to have made 242 verification requests and Opto 44.
- Mr Gohir told us that many, if not most, of the other traders with whom Calltell and Opto dealt were controlled by people whom he knew, or who were known to his brother or other members of his family. Some of the traders were themselves controlled by members of his family. Although he nevertheless undertook due diligence checks, he was reassured by the acquaintance. He had, he said, been involved in the trade for several years and had built up a considerable network of trading partners whom he knew he could trust. He assured us that he was very conscious that fraud was rife in the industry, and that he was well aware of the terms of the Code of Conduct and anxious to comply with it. He laid great store by the fact that neither Calltell nor Opto had ever bought goods from a defaulting trader; that, he said, was an indication of the effectiveness of the due diligence they had carried out.
- He told us that he had devised a due diligence programme with Mr Taylor and, latterly, with Mr Holmes. The programme was directed at both suppliers and customers (the Appellants both bought from and sold to some traders) and, as he emphasised, was being continuously improved. As a matter of routine prospective suppliers and purchasers were asked for copies of their certificates of incorporation, VAT registration certificates and letterheads and their banking details, and in addition Calltell made searches at the Companies Registry as well as checking on the traders' VAT registrations with the Commissioners' Redhill office or, when the delays there became unacceptable, by using the Commissioners' helpline or the European Commission's website.
- Mr Taylor's statement indicated that he was instructed by Calltell in 2002 to assist it in the preparation and verification of its VAT returns, a task he also undertook for Opto once it had begun trading. Supporting information was provided to HMRC on a CD-ROM, and it was Mr Taylor who was the Appellant's point of contact with HMRC during the processing of each return. He did not, at first, deal with the Appellant's due diligence processes, but was drawn into the matter when the topic was raised by Mrs Bushby at a meeting on 9 May 2005. We shall deal with the meeting in more detail later; for the present we need only observe that the adequacy of the Appellants' due diligence was called into question because, Mrs Bushby said, many of its transactions could be traced back to defaulting traders.
- Mr Taylor was very critical of the service provided by the office at Redhill, complaining that response times were much too slow in the context of the Appellant's trade, involving as it did negotiations, sales, changing of hands of goods and payment all on the same day, and of Mrs Bushby's comments: she had made adverse remarks about the due diligence carried out, but had made no suggestions about how it might be improved and, while claiming that transactions had been traced back to defaulting traders, had refused (on grounds of taxpayer confidentiality) to identify those traders or to give the Appellants any information which might have enabled them to identify the traders themselves. It was, he said, quite impossible in those circumstances to do more than make checks on the Appellants' immediate suppliers.
- Nevertheless Mr Taylor did make attempts, on the Appellants' behalf, to effect an improvement. Starting in, it seems, December 2005, he sent letters to Calltell's and, in those cases where it had not bought from Calltell, Opto's suppliers, asking for confirmation not only that the supplier had accounted correctly for the output tax due on the consideration, but that it had also carried out due diligence checks, with satisfactory replies, on its own suppliers. Most of the suppliers to whom the letters were sent responded, reasonably promptly, with the confirmation which had been requested. The exercise continued over succeeding months and, it seems, repeat letters were sent to some suppliers.
- Mr Holmes is the principal director of a VAT consultancy which has acted for Calltell and Opto since June 2005, specifically in order to advise it about its due diligence procedures. He explained in his statement that he did not examine a client's existing due diligence procedures, but began afresh, with a set of his own recommendations. Mr Holmes emphasised his awareness of the Commissioners' practice, and of the importance of carrying out properly documented due diligence procedures which, he said, he ensured that Calltell and Opto did, in respect of both suppliers and customers (though he made no mention of any checks which were, or might have been, undertaken in respect of other traders). He too was critical of the delays which were experienced when traders such as the Appellants attempted to verify VAT registration numbers by contacting the Redhill office, and explained that it was necessary to carry out the checks by other means, including telephone calls to the Commissioners' National Helpline; he did not mention checks using the European Commission's website. He, like Mr Gohir, commented that Calltell's taking a lease of its own warehousing facility in January 2006 was unusual in that few traders in its sector had such facilities, that it had involved Calltell in substantial expense and that it was an indication, in itself, that Calltell was a legitimate trader.
- The quality of the due diligence checks undertaken by Calltell—which acted for this purpose on Opto's behalf as well as for itself, save that Opto made its own checks with the Redhill office—was the topic of Mr Leach's evidence. He divided the necessary checks into two categories: those directed to the honesty, reliability and creditworthiness of other traders; and those related to an individual transaction, designed to verify, in summary, that the goods are of the correct model, of the right quantity, in good condition and from a legitimate source. Nevertheless, he dealt in his evidence only with the former category, and at this stage we too confine ourselves to it.
- Mr Leach was highly critical of the quality of Calltell's due diligence. He pointed out in his statement that the primary purpose of carrying out due diligence checks is to protect a trader against risk—that his customer will be unable to pay him, or that his supplier will fail to supply what he has contracted to supply, or that the goods he supplies, even if they answer to the correct description, do not come from a legitimate source. His criticism was, in essence, that most of Calltell's checks were carried out only after trade had been completed; in addition, in several cases the results of such enquiries as were made showed that Calltell or Opto should not have dealt with the other trader at all. He also made the comment that it was odd that Mr Gohir undertook due diligence enquiries into companies owned by members of his own family.
- We take two of Calltell's suppliers as examples. Calltell first purchased goods from Impact World Limited ("Impact"), a UK company, in June 2005. In that month its total purchases amounted to £24,648,735, of which £3,743,700, or 15.2 per cent, were from Impact. In November 2005 made its first sale to Impact, to a value of £1,006,334, 53.5 per cent of its total sales in the month of £1,878,926. Overall, between June 2005 and March 2006, a period of 10 months, trade between the two companies amounted to £64,466,131, or 9.5 per cent of Calltell's turnover for the period. There was no documentary evidence of the manner in which Calltell and Impact first established contact with each other, save for a letter of introduction sent by Impact to Calltell with which were enclosed copies of its VAT registration certificate, showing it had been registered from 1 May 2005, its certificate of incorporation on 15 April 2005 and a document providing further details, some (such as address, telephone number and fax number) set out in the letter of introduction, and others not—the most important were its bank details, revealing that it had accounts with HSBC in Huddersfield, with First Curaçao International Bank NV in the Netherlands Antilles ("First Curaçao") and with Rabobank Nederland, in Utrecht. The letter of introduction is undated, and bears no indication of the date on which it was received, but it is evident that it was received in or about early June 2005.
- Calltell sent to Impact a "Trading Application Form" which was completed and faxed back to Calltell on 13 June 2005. Some of the information required by the form had already been provided, though it also sought details of Impact's directors, which had not been volunteered. On the same day Calltell applied to the office at Redhill for verification of Impact's VAT registration. For reasons which did not become clear the response was not sent until 3 October 2005; even allowing for the delays on which we have already touched and with which we deal further below, the interval between the request and the response seems remarkable (though it occurs to us that the response we saw was sent following a later request, made in anticipation of the November transaction). On 24 June 2005 Calltell obtained a credit agency report on Impact which revealed that there was no information available on which a credit rating could be based. It was recorded that the one director of Impact, a Mr Ahmed, had been a director of a dissolved company, Lindley Legal Costs Limited.
- No other due diligence, or none of which evidence was produced to us, was undertaken until January 2006, when Calltell instructed Veracis Limited, a company providing a due diligence service to intending traders, to visit Impact and prepare a report on it. The report provided is dated 30 January 2006, but for unexplained reasons was not received by Calltell (as its own receipt stamp indicates) until 18 April 2006. Despite the general cooperativeness of Mr Ahmed, as the report records it, and the satisfactory answers given to most of their questions, some negative factors were identified, particularly the very recent start of trading, and a number of questions were not answered. Mr Ahmed claimed that while at Lindley Legal Costs Limited he had acquired experience in trading in mobile phones, a statement which, despite its inherent improbability, appears to have been accepted at face value. Calltell wrote to Impact, also on 18 April, asking for answers to the outstanding questions, but despite reminders no reply was received. We observe in passing that Veracis record that they had also visited Impact on 26 July 2005, but the report does not indicate whether they had done so on Calltell's instructions, or on behalf of another client, nor is there any indication of the result of the visit.
- Calltell and Opto both traded with World Communications Sàrl, a French company. We were provided with copies of World Communications' letter of introduction and of its enclosures, including details of its VAT registration in France. The letter is undated and it is again unclear when it was received, though it bears an unexplained fax header dated 13 June 2006, long after trade between the Appellants and World Communications began. Some of the accompanying documents bear additional, earlier fax headers (though none earlier than 2 March 2006) and among them is a copy of World Communications' French VAT return of 19 January 2006. Several of the documents are in French or Spanish, without an English translation—we did not discover whether Mr Gohir or any of the Appellants' staff understands either language. The details supplied showed that World Communications, too, had an account with First Curaçao. One of Calltell's Trading Application Forms was sent to World Communications; it is not clear when it was sent, but it was not completed and returned until 29 June 2006.
- Nevertheless, trade between the companies began in July 2005 and by the end of March 2006 the value of the trade between the Appellants and World Communications amounted to almost £61 million. There is no evidence that further due diligence of any kind was undertaken until Veracis were asked to prepare a report in February 2006; their report is dated 9 June 2006 and seems to have been received by Calltell, by email, on 19 June 2006. Some of the information provided was in French or Spanish, and Veracis relied on translations into English provided by World Communications itself. The information provided was in some respects inadequate or confusing, and some conflicted, or at least differed, in material respects from that supplied by another agency similar to Veracis, The Security People, also in June 2006: quite why Calltell commissioned two similar reports at about the same time was not explained. The latter report indicated that World Communications was controlled by a Spaniard resident in the Canary Isles (the Veracis report suggested he was a shadow director while his wife was the only registered director), who also controlled a Spanish company, World Communications Imp-Exp, to which we shall refer later. A Dunn & Bradstreet report was also commissioned; it revealed that World Communications merited a poor rating, though largely because of its recent formation and the absence of any relevant information. Again, Mr Gohir took up a number of matters on which the reports were inconclusive or unsatisfactory with World Communications, but no response was, it seems, ever received.
- There are differences of detail between the steps taken by Calltell and Opto in relation to these and the other traders about which Mr Leach provided details, but these two cases are typical. He had criticisms to make in every case and, in essence, his evidence was that such due diligence as was undertaken was too late, superficial and often incomplete; and that the information which was obtained frequently indicated that the trader concerned was not reliable, but was disregarded. Despite Mr Patchett-Joyce's agreement that we should read Mr Leach's evidence and accept it as unchallenged, his conclusions were disputed.
- Mr Gohir's evidence was that the Appellants' due diligence procedures were being continually improved, and that what Mr Leach had said related to only part of what had been done. He emphasised his acquaintance, directly or indirectly, with the other traders, and the fact, as he claimed it to be, that traders in the industry relied on the trust which was built up over a course of dealing. The Appellants were protected, too, by their manner of dealing: with very few exceptions, no purchase was agreed until a sale had been arranged, and no sale was arranged until a supply had been secured. In addition, the Appellants did not part with goods until they had received payment, and did not pay for goods until they had been inspected and found to be correct and in good condition. He made the point, repeatedly, that neither Calltell nor Opto had ever been shown to have dealt with a defaulting trader; thus, he said, its due diligence had been one hundred per cent effective.
- We should deal briefly at this point with one further matter of contention, although it did not seem to us to be of great significance. The Commissioners point to the fact that most of the Appellants' purchases were from other traders within a fairly small area, centred on West Yorkshire. The defaulting traders, by contrast, as Mr Patchett-Joyce pointed out, are much more widely distributed over the United Kingdom. We do not find the latter in the least remarkable. Nor, at first sight, is it remarkable that the Appellants traded with local suppliers; in many trades that would be commonplace. What is a little surprising is that the pattern of acquiring from local suppliers is at variance with Mr Gohir's evidence that many of the Appellants' supplies were obtained following an inspection of other traders' websites, belying the possibility that the location of the supplier was of any importance. We do not, however, regard that oddity, if oddity it is, as a material factor, and we read nothing into the distribution of the Appellants' suppliers.
- All of Calltell's and Opto's dealings consisted of a purchase followed immediately, or almost immediately, by a sale. In one case identified to us, a purchased consignment was divided into three parts, two of which were sold on the day of purchase while the other part was sold two days later, and in a few others a consignment seems to have been divided into two parts, both sold on the same day. Occasionally, one or two phones fewer were sold than had been bought; whether this was due to error, stock shortage or some other reason was not explained. In every other case the sale was of the entire consignment which had been bought, and in every case but the single one we have identified, the sale or sales took place on the same day as the purchase. Sometimes the goods were dispatched to an overseas buyer a day or two after the sale but otherwise the goods changed hands by the simple expedient of their being "released" to the purchaser. That is, the goods were stored in the premises of a freight forwarder, who successively held them for one trader, released them to the next, held them for that trader until they were released again, and so on until the goods were transported overseas. While the goods were being dealt in by UK traders, they almost invariably did not move; there was no instance identified to us when the Appellants had arranged the movement of goods within the UK. Often the freight forwarder was expected also to inspect the goods—that is, verify that the model and quantity matched those given to him by the owner or the purchaser. He might be asked to do so by several of the traders in the chain but, of course, a single inspection would be sufficient if the goods did not move.
- The Commissioners accepted that the Appellants' documentation was in what Mr Patchett-Joyce described as "apple pie" order. They maintained a file in respect of each transaction, and invariably held a copy of the purchase order sent to the supplier, and of his invoice, a purchase order from their customer, and a copy of the invoice sent to the customer. Where relevant, there were copies of appropriate shipping documents, including items provided by the freight forwarders. In most of the later cases the supplier had completed a form provided by Calltell or Opto stating that it had carried out appropriate due diligence checks on its own supplier, and that it would account to the Commissioners for the output tax due on the transaction. The invoices were prepared in accordance with the prescribed formal requirements. There was also good evidence of payment. In no case, as the Commissioners also accepted, did either Calltell or Opto make a third party payment although, as we have mentioned, the Appellants did not pay for goods until they had themselves been paid.
- On the other hand, it is conspicuous that neither company entered into contracts with clearly defined terms and conditions. Their purchase orders sought to impose some conditions, and their invoices others, while their counterparties' corresponding documentation stated that their (the counterparties') conditions were to apply. There was no evidence that any attempt was made to ensure that one set of conditions rather than the other was to be effective. We could find no copies of suppliers' or purchasers' conditions of trade within the deal documentation provided to us. The Appellants' own conditions of sale are, in our view, somewhat rudimentary. The description of the goods in the purchase orders and invoices was confined in some cases to the make and model number, in others words such as "Central European Specification" were added. We were not shown any instance in which the International Mobile Equipment Numbers (IMEI) of the phones had been recorded by any participant, as the Code of Conduct suggested. Mr Gohir agreed that no attempt was made to record IMEI numbers, and we had evidence that in one consignment which the Appellants had handled, there was an oddity about the IMEI numbers which, it was suggested, indicated that recording them was an unreliable method of identifying the individual phones within a consignment. Mr Gohir agreed that neither Calltell nor Opto insured the goods, and that he did not know what, if any, insurance arrangements had been made by the freight forwarders whose facilities the Appellants used. None of the contractual documentation we saw—including that relating to imports and exports—made any mention of insurance nor, indeed, of the incidence of the cost of shipping.
- We are concerned with a very large number of transactions, 152 in all, most involving both Calltell and Opto, but some Calltell alone. Each one was reconstructed, or traced back, by Mrs Bushby, though it will, fortunately, not be necessary for us to describe more than two individual chains here. Starting with the supporting documentation which the Appellants had already submitted with their VAT returns, she identified the purchaser and the supplier. She then ascertained the identity of the HMRC officer responsible for the VAT affairs of the supplier, and asked that officer to trace, from the information supplied to the Commissioners by that trader or, if necessary, from a visit, the source of the goods, the price at which they had changed hands and some further items of information, the most important of which for present purposes was the identity of the trader's bank. She continued in that manner for as far back as it was possible to go. In two cases the goods could be traced to the manufacturer, Nokia, and the Commissioners accepted, though in respect of one of them not until the hearing had begun, that they could not establish any tax loss within that chain. They have accepted that Calltell's input tax claim in respect of those purchase must be conceded, and we were invited to allow the appeal to the extent of the transaction conceded in the course of the hearing.
- The remaining chains can be divided into four categories: those which began (in the United Kingdom) with a defaulting trader, those which began with a sale made using a hijacked VAT registration number, those where the chain could not be traced back to its beginning, and contra-trading chains.
- Mrs Bushby included within the description of "defaulting trader" those who had failed altogether to account to the Commissioners for their VAT liabilities, and had disappeared, as well as those who had simply failed to pay what was due from them. We do not think that, within the latter category, there were any who had correctly declared their liabilities but had failed to meet them; rather, the Commissioners had determined that tax had been under-declared and had, in most cases, raised assessments. Mr Patchett-Joyce accepted that, where a trader could be shown to have incurred a liability but had disappeared, a true default was made out and, while not expressly accepting it, he did not demur from the proposition that the default could be assumed to be attributable to a fraudulent purpose. Where, however, the trader had not disappeared he did not accept that a default, even if it was made out, was necessarily attributable to a fraudulent purpose. It might as easily be due, he said, to simple business failure. Moreover, he did not accept that, in many cases, a default in relation to the relevant chain had been established at all.
- It could be shown that the Commissioners had assessed one trader, whom Mr Patchett-Joyce accepted to be a defaulter, for a sum of tax which included the tax due in respect of several chains which led to one or both of the Appellants. So much was apparent from the calculation which accompanied the assessment. However, the Commissioners had included such a calculation, in the evidence available to the Appellants and to us, in respect only of that trader: in the other cases of supposedly defaulting traders they had shown no more than that the trader had received an assessment for a greater sum than that attributable to the relevant chains, or some other material, such as their own electronically kept records, which showed that an amount was due, but no evidence that the sum said to be the tax lost because of the relevant default was included in the overall sum claimed to be due. We will deal with the significance of these points, and the conclusions we consider can be drawn, when we come to Mr Patchett-Joyce's submissions and our conclusions.
- It was not disputed that a person who hijacked the identity of another trader was a defaulter, since he did not account for the VAT for which, ostensibly, the victim of the hijack was liable, and that he must be assumed to have had a fraudulent purpose. There was, however, some doubt whether one trader which claimed that its identity had been hijacked was in fact a victim; there was a possibility that it was merely making the claim in order to avoid accounting for the VAT for which it was in truth liable. We can deal with this issue now: it does not seem to us to matter where the truth lies since, in either case, the only possible conclusion is that there was a trader which had engaged in transactions forming part of the chain with the dishonest intention of failing to account for the tax which became due. We are, therefore, satisfied that there was a fraudulent trader in the chain.
- Most of the chains were, at least superficially, straightforward. If Mrs Bushby's analysis is right, a typical chain began with a defaulting trader, or with a trader whose identity had been hijacked, who sold to a buffer. The phones then passed through the hands of, usually, two or three further buffers (though occasionally more or fewer) before being bought by Calltell which, in most cases, sold them to Opto, which then sold them to an overseas customer. We take one such chain as an example. On 20 January 2006, a date to which we shall return in another context, Ultimate Security Agency Ltd (which Mr Patchett-Joyce agreed was a defaulter) sold 4780 Samsung D600 phones for £183.55 each to Perrypoint Ltd which, on the same day, sold the same phones to W A Communications at £183.80 each, making a profit of 25p per phone (an aggregate profit of £1,195). They were then sold, also on 20 January, to Global Enterprise (GB) Ltd at £184.45 each, a profit of 65p per phone (£3,107). Global Enterprise immediately sold them to Calltell at £185 each, a profit of 55p each or £2,629. Calltell sold them, on the same day, to a Swiss company, Digi Trading GmbH, at £192.50, a gross profit of £7.50 per phone, or £35,850 in total. Some chains of transactions are longer, some shorter, and some also include Opto. In those cases, whichever of the two appellant companies sold to the other made a gross profit of, almost always, £1 or, sometimes, 50p per unit, while the second company, selling to an overseas customer, made a substantial profit.
- It is conspicuous that the same names occur repeatedly in the chains, though by no means always in the same order; there are several permutations. Nevertheless, there are in the relevant chains a finite number of defaulting traders and hijacked identities, and a larger though still finite number of buffers. In several cases Mrs Bushby could not trace the chain back to a known defaulter, but only as far as what she described as a "first line buffer", by which she meant a buffer who could be shown to have bought from a defaulter all those of his supplies which could be traced one step further back. Usually, the trail could not be taken further because the traders' records were missing or unavailable for some other reason, but in several cases she encountered what she considered to be obstruction by the freight forwarder at whose premises the goods had been stored. She took the view, and based her decision on it, that in those cases the likelihood was that, if she had been able to trace the full chain, it too would be found to begin with a defaulting trader.
- It is in the nature of a contra-trading chain (at least, if the Commissioners are right in their view that such a concept exists) that it will not, itself, lead to any loss of tax. The obvious question, therefore, is: how can such a transaction be identified? Mrs Bushby's explanation was that the transactions identify themselves by their lack of any commercial rationale. Typically, a trader in (say) the Netherlands sold a consignment of mobile phones to Calltell, which immediately sold them to Opto (sometimes the order was reversed) which then sold them to a trader in (say) France. In a few cases, Mrs Bushby said, information she had received from the revenue authorities in the member State from which the goods originated cast doubt on whether the transactions had occurred at all, but she has not refused the claims for input tax credit on that ground. The documents evidencing the transactions (or, if the suspicion is right, alleged transactions) show that in each case both Calltell and Opto have made a gross profit, although that profit would be diminished to some extent by the costs of transport and storage of the goods.
- Our attention was drawn particularly to one chain. On 31 March 2006—the last day of the period with which we are concerned—Opto bought 1200 Nokia phones from World Communications Imp-Exp at £292 per unit (it appears that all the transactions in every one of the chains with which we are concerned, regardless of the nationality of the participants, were priced in sterling). It sold them, on the same day, to Calltell for £293 per unit. Also on the same day, Calltell sold the consignment to World Communications Sàrl—the French company associated with the Spanish supplier—for £304.70 per unit. The Appellants, between them, made a gross profit of £12.70 per unit, or £15,240. We were not provided with any information about the shipping and storage costs. Mr Gohir was unable to offer any explanation of the purpose, from World Communications' point of view, behind its making a loss of £12.70 per unit when it could as easily have arranged a sale from the Spanish company to its French associate without the Appellants' intervention. Mr Patchett-Joyce made a suggestion, with which we shall deal later.
- Mrs Bushby also told us that she had obtained some information from the Dutch revenue authorities which linked Mr Gohir to the director of a Dutch company, BGT BV, which had sold (or claimed to have sold—the Dutch authorities evidently doubted that the transactions took place at all) two consignments of goods to a UK trader, which then sold the goods to Calltell which, without any participation by Opto, sold the goods to French customers. Mrs Bushby, too, doubted that the transactions had actually taken place, but her decision was based on her perception that these were contra-trading deals, rather than that they were not genuine transactions. Mr Gohir insisted that the transactions had indeed taken place, but did not deny his acquaintance with BGT's director. We were invited to conclude that, because Calltell had bought goods sold by a trader with whom Mr Gohir was acquainted, but indirectly, the chain, even if the transactions took place at all, was contrived.
- Mr Gohir agreed that, as the only director and shareholder of each company, he had earned a substantial personal income from their activities, even though some of the profit had been retained within the companies. Mr Cunningham asked him to explain what earning profits entailed for him and the Appellants' employees, and identified a single day, 20 January 2006, for the purpose of illustration.
- On that day, Calltell bought five consignments of phones from other UK traders, and sold each consignment, intact, to traders in other member States. There were two suppliers, Global Enterprise (GB) Limited and IA Associates, and two customers, World Communications France and Digi Trading GmbH: of three consignments bought from IA Associates two were sold to World Communications and one to Digi Trading, while of the two consignments bought from Global Enterprise, one was sold to each of the customers. On the same day Calltell also bought four more consignments, one from each of Global Enterprise, Impact World Limited, SGM Limited and Xcel Solutions Limited. All of those consignments were sold, intact, to Opto which sold all of them, but in four separate transactions, to Digi Trading. In the course of that one day, the two Appellants bought and sold 26,045 phones and made an aggregate gross profit of £180,572.50.
- Mr Gohir was asked, at some length, what he and the Appellant's employees had done during the day, and how it was that they had managed to synchronise nine purchases and sales in such a manner that all of the necessary steps occurred on the same day. Indeed, if the Commissioners are right—and it was not suggested that they were not—not only the Appellants, but several traders preceding them in the chains had managed the same feat.
- We can describe his evidence only as vague in some parts and evasive in others. He mentioned telephone calls and checks on other traders' websites, in order to ascertain what stock was available and who was interested in buying, but he was quite unable to explain, at least to our satisfaction, how it was that Calltell was able to buy goods for which it had a customer from a supplier who had no stock of his own, but had to buy the goods from another trader who, also, had no stock but had to buy from yet another trader with no stock, and how all of the necessary negotiations of model, quantity and price, the paperwork, the payments, the inspections and the release of the goods, in a chain which might involve as many as eight traders, could all take place in the course of a single day. He told us that he and the Appellants' staff viewed other traders' websites and made and received telephone calls, but we were left with no clear impression at all of the process by which they were able to find suppliers of the right quantity of the required model of phone when those suppliers held no stock, nor how they managed to identify purchasers of entire consignments of phones which the Appellants were able to secure.
- In the majority of the cases with which we are concerned Calltell sold the goods to Opto, or vice versa. As we have said, the mark-up applied on the transaction was usually £1 per unit, though it was occasionally 50p. Mrs Bushby told us that she regarded such transactions as wholly artificial, lacking any commercial purpose, and the fact that they had occurred clearly entered into her thinking in the course of making her decision. Mr Gohir's explanation was that he had been advised by Calltell's UK bankers to spread his trading risk by using two companies and it was for this reason that Opto had begun trading. In order to finance its trade it had had to borrow money—that was the reason for the loans identified by Mr Lewys-Lloyd—and it needed to generate income in order to service the loans. The simplest way of generating that income was for the trading of the two companies to be distributed as it had been. He emphasised, repeatedly, that (as she accepted) Mrs Bushby was aware that the two companies sold goods to each other.
- Mr Gohir was asked why each company had done so, when his objectives of sharing the risk and generating sufficient income for Opto to enable it to service its loans could have been achieved by the expedient of sharing the available deals between the two companies, by their handling the available transactions alternately, or in some similar fashion. He was unable to provide an answer, but merely repeated that the Commissioners were aware of what the companies were doing. We deduce that we were asked to draw the inference that the mere fact that the Commissioners knew of the practice was sufficient justification of it.
- We have mentioned already that some of the traders in respect of whom due diligence was undertaken banked with First Curaçao. In fact, it appears, every one of the traders, both within the United Kingdom and overseas, with whom the Appellants dealt, as well as others within the chains with whom neither Appellant had direct contact, maintained accounts there, as did the Appellants themselves. This, too, was a factor which Mrs Bushby told us she found suspicious: it was, she thought, remarkable that every trader in the relevant chains had an account with the same bank.
- Mr Gohir's explanation was that it made good sense for all the traders to use the same bank, as it facilitated quick payment. Payments between different UK clearing banks could take some time unless a premium charge for an instant service was paid. Once a few traders in the grey market had opened accounts with First Curaçao, others followed suit. In addition, UK banks were unwilling to open accounts for traders such as the Appellants because, he thought, pressure had been put on them by the Commissioners themselves to reject such accounts, and they were fearful of becoming involved in money-laundering transactions (it is noteworthy that the Dutch authorities have closed First Curaçao because of suspicions that it had aided money-launderers, though there is no suggestion that the Appellants were engaged in such activities). We should add that, in addition to their First Curaçao accounts, the Appellants in fact maintained accounts with UK clearing banks, though they did not use those accounts for their dealing transactions.
- Although, very occasionally, there seems to have been a delay between the agreement of a sale and purchase and payment for it, in almost every case the transaction was agreed, the goods were handed over and payment was made on the same day. The evidence available to us did not show the time of day at which payments were made, but we were left with the distinct impression that all, or almost all, of the traders in the relevant chains adopted the same policy of paying their suppliers when they had themselves been paid. Thus money paid by its customer to Calltell or, as the case might be, Opto was effectively moved from account to account within the same bank until it reached the defaulting trader's account (in cases where there was a default) on the same day; once the money had reached the defaulter's, or hijacker's, account, the goods were released to the next trader and so on until they were released or, in the case of an overseas sale, transported to the final customer. At the end of that process. each trader was left with his profit margin and the net amount of VAT for which he must account. The system of making payments and releasing goods was the same in those cases which the Commissioners identify as contra-trading chains.
- We have already mentioned that the majority, if not all, of the sales between UK traders did not result in the physical movement of the goods; they remained in a freight forwarder's warehouse and were simply released from one trader to the next, as money moved correspondingly from one First Curaçao account to another. There was evidence of movement of the goods when Calltell or Opto sold them to an overseas customer, and usually some similar evidence when one of them made a purchase from an overseas supplier. In some cases there was also written evidence that the goods had been inspected, by either the freight forwarder or a third party inspection agency, on Calltell's or Opto's instructions. Mr Gohir told us that on other occasions he relied on an oral report from the freight forwarder who, as we have mentioned, may have carried out a single inspection (since the goods did not move) on which he reported to a succession of traders in the same consignment. Mr Gohir told us that inspections varied in their depth, from a simple check that the make, model and quantity of phones was correct, to a more intensive check in which a proportion—perhaps ten per cent—of the phones were unpacked and individually checked. There was some documentation available which supported what he told us, indicating that a detailed examination of a (usually very small) number of the phones within a consignment had been examined. We mention in passing that we could find no instance in which the IMEI numbers (which can be read by a bar code reader) had been examined, and certainly none in which they had been recorded,, and that in every case in which a detailed examination had been undertaken and the type of mains charger was recorded, it was of the two-pin variety.
- When Calltell took the lease of the warehouse near Heathrow airport, it also engaged Mr Khan's services as warehousekeeper and inspector, although he told us that he did not inspect all of the consignments dealt in by the Appellants, but only those which were brought to the warehouse or were held by local freight forwarders, when he had sufficient time to visit their premises; in other cases the inspections were carried out as they had been before he became employed by Calltell. Mr Khan told us that he telephoned the results of an inspection to Calltell's office in Bradford, and only sometimes recorded it. His records were produced: they consisted of nothing more than entries in a diary, the record being written on the page appropriate to the day the inspection took place. A typical entry reads "4000 x N9300 Interken (checked)". The entry signifies that Mr Khan inspected a consignment of 4000 Nokia 9300 phones at the premises of Interken, a freight forwarder. No further detail of any kind is recorded. Mr Khan was, to say the least, very vague in his recollection of what an inspection entailed.
- He was even more vague in his evidence about changes of the specification of phones, a topic on which Mr Gohir also gave evidence. Mr Gohir told us that the Appellants sometimes bought phones with, for example, a UK specification while the customer might require a central European specification. It was, therefore, necessary to convert the phones, which could sometimes be done by using the keypad alone, but which might require the use of a laptop computer to which the phone was connected in order that new software could be downloaded. Neither Mr Gohir nor Mr Khan was able to give us a coherent explanation of what the process involved. Mr Gohir's evidence was nothing short of evasive, and it became quite obvious to us that Mr Khan could not offer an explanation because it was a process he did not understand.
- They were both asked about the time the process of changing the specification of an entire consignment might occupy and, again, we received no coherent answer. Mr Cunningham put it to both of them that there was insufficient time between the release to Calltell or Opto of the goods and their despatch to an overseas buyer for the task to be accomplished. If the modification of a single phone took two minutes, the modification of an entire consignment of, say, 1000 (a relatively small consignment, in the Appellants' case) would require 2000 minutes, or 33 hours. We were told that the freight forwarders provided staff to assist in the task. At this stage we comment only that there was no evidence that any freight forwarder had charged the Appellants for assistance in a specification change, and we saw no evidence (nor do we have any reason to believe from what little Mr Gohir did tell us) that the Appellants bought replacement chargers, to allow for differences in mains sockets, or replacement manuals, to allow for language differences. Mr Gohir suggested that the purchasers of the phones could use adapters, and maintained that most instruction manuals were written in several languages.
- It was not disputed that Mr Gohir was well aware that fraud was rife in the mobile phone trade. He was a signatory to the Memorandum of Understanding, and Calltell's website carried, prominently, the message "Due to the large-scale fraudulent activity in this sector we will only buy and sell goods after rigorous commercial checks and thorough scrutiny of our suppliers and the origin of the goods." The extent, if at all, to which he knew or ought to have known that the transactions into which the Appellants entered were tainted with fraud was, however, highly contentious.
- Between 2002 and 2005 there were several visits by HMRC officers to Calltell and, latterly, Opto at which the continuing levels of VAT fraud in the industry were mentioned to Mr Gohir. During the same period there was correspondence between the parties in which the Commissioners' officers expressed misgivings about Calltell's claims for input tax credit. On 27 February 2004 an officer wrote to Calltell's accountants making the specific assertion, apparently for the first time, that some of the goods purchased by Calltell had been traced back to defaulting traders. On 29 September 2004, at which time only Calltell was trading, two of the Commissioners' officers visited Mr Gohir, and advised him again of their concerns about the provenance of some of the goods in which it was dealing, informing him that many of the consignments had been traced back to defaulters. One of the transactions included in Calltell's VAT return for September 2004 was selected for verification, and Mr Gohir was notified in December 2004 that its repayment claim would not be met until the verification had been concluded. We understand that the repayment was, eventually, made.
- Mrs Bushby became the assurance officer for both Calltell and Opto, which had recently begun to trade, in April 2005. She paid her first visit to Mr Gohir on 11 April, and a second on 9 May 2005. Mr Taylor attended both meetings. Mr Gohir arranged to tape record the discussions, and transcripts were produced at the hearing. At the second meeting Mrs Bushby told Mr Gohir that almost all of the goods in which Calltell had dealt in July and August 2004 had been traced back to defaulting traders. Mr Gohir assured Mrs Bushby that he was equally concerned about fraud in the industry, and identified a transaction which he had cancelled because he had received adverse information from the Redhill office. There was a lengthy discussion of Calltell's due diligence procedures. Mrs Bushby wrote further letters to Calltell in September and December 2005. In them, she identified a large number of transactions which, she said, she had traced to a defaulter. One of the letters contained the following passage:
- In this letter, as on other occasions, the transactions were identified by means of Calltell's or Opto's sales invoice number, from which Mr Gohir was able also to determine the identity of the customer and, indirectly, the supplier (since consignments were not kept in stock but, almost invariably, sold intact), but no information was provided which would have enabled him to identify the trader who, the Commissioners contended, had defaulted. The officers maintained that they were prevented, by various statutory provisions, from providing such information; Mr Gohir and his advisers protested that, without the identity of the defaulting trader, the information was of little or no value. Mr Gohir made the same point, repeatedly, in his evidence: he could and did undertake effective due diligence in respect of his suppliers and customers, and the fact that neither Calltell nor Opto had ever dealt directly with a defaulter or hijacker showed that their due diligence was effective; but he could do no more because he had no means of finding out the identities of other traders who had dealt in the goods.
- We begin this section with a summary of the matters we must decide, before proceeding to the Commissioners' (since the burden was initially on them) and then the Appellants' submissions. We have dealt already with most of the law; here we deal with the facts and the application of the law to them.
- Mr Patchett-Joyce identified the factual issues which, he said, we must determine as follows:
- Mr Cunningham did not contend that Mr Patchett-Joyce's formulation was incorrect, but we have some, fairly minor, reservations of our own. As we have already indicated we intend to assume that the Commissioners must demonstrate an actual tax loss, rather than an attempt to achieve one. For the reasons we have already given, it is unlikely that the first part of question (3) could ever be answered in the affirmative—and, unsurprisingly, in no case before us could an antecedent loss be identified. The consequence, in our view, is that the Commissioners must show that the chain of transactions had no rationale other than the perpetration of a fraud, even if one or more of the participants was ignorant of that purpose. Mere failure to account for output tax is not enough; it must be the intention from the outset of at least one participant that it will not so account.
- The Commissioners' principal argument had become, by the conclusion of the hearing, that Mr Gohir knew of, and was very probably one of the organisers of, an attempt to defraud them. What had, originally, been their principal contention, that he had the means of knowing that there was a fraud, had become a secondary argument. If Mr Gohir did not have actual knowledge of the fraudulent nature of the transactions, they say, it could be only because he had deliberately shut his eyes to it. They point to his admitted awareness of the prevalence of fraud in the mobile phone trade, the poor quality of the Appellants' due diligence procedures and their irrelevance to Mr Gohir's having decided whether or not to enter into any transaction, his failure to heed the repeated warnings given by Mrs Bushby and other officers and what they contend was the incredible evidence of Mr Gohir and Mr Khan about inspection and modification of phones. The whole, they say, leads inexorably to the conclusion that the transactions were contrived and that Mr Gohir was well aware of that fact.
- It is not enough, the Commissioners argue, for Mr Gohir to contend that the Appellants could look no further than their own suppliers and customers. They had been warned, on several occasions, that very high proportions, and in some cases all, of their purchases could be traced back to fraudulent sources, yet they had carried on regardless. Had Mr Gohir been an honest trader anxious not to deal in tainted goods, as he maintained, it would have been simple for him, having been told by Mrs Bushby that all or almost all of the Appellants' purchases could be traced back to defaulting traders, to approach his suppliers, to tell them that the Appellants had encountered problems with the Commissioners, and to say that they could not deal again with that supplier until they could be confident that the supplier was no longer offering tainted goods. But instead they had carried on trading with that supplier without taking any action at all, and sheltering behind the assertion that, because the supplier had not defaulted, there was no reason not to continue trading with him, and nothing more they could do.
- The Commissioners also contend that, in determining whether Mr Gohir and, through him, the Appellants knew, or should have known, that the transactions in which they engaged were connected with other, fraudulent, transactions, it is legitimate to take into account the volume and value of their and their counterparties' trade, and the manner in which the transactions were agreed and executed. They contend that it is not credible that transactions of the kind with which we are concerned are legitimate, arm's length deals, between honest traders. They point to the evident ease with which transactions were agreed, the fact that no trader ever seems to have held any stock, the ability of traders to achieve turnover measured in millions of pounds per month within a short period despite their having no capital and few, if any, employees, and the absence of insurance and comprehensive documentation relating to very valuable consignments.
- We have already mentioned that Mr Patchett-Joyce accepted that a hijacker of another trader's VAT registration number was unlikely to account for the output tax generated by a transaction in which the hijacked identity had been used and, after some debate, he accepted too that, in cases where the trader concerned could be shown to have accounted for no VAT at all, it must follow that he had not accounted for the relevant tax. He did not accept that the Commissioners could demonstrate any default when they could not show that the trader had accounted for no VAT at all, or that any assessment which had been raised included the relevant tax. Additionally, he did not accept that a trader who had not disappeared could necessarily be regarded as a defaulter at all, whatever the measure of his outstanding liability.
- His argument was that there must be an identifiable connection between the transaction in question and a tax loss; merely showing that the trader had failed to account for some tax did not imply that it had failed to account for the relevant tax. If a trader had not disappeared, but (as in some cases it appeared to be) was disputing an assessment raised by the Commissioners, it could not be said to have defaulted since it might well be found not to owe the assessed tax. Many of the assessments which the Commissioners had raised against supposedly defaulting traders had been raised long after Mrs Bushby made her decision to refuse the Appellants' claims, some even during the course of the hearing. The conclusion must be that the decisions had been made on supposition rather than true evidence of fraudulent default, and that the Commissioners were trying to improve their evidence at the last minute.
- Even where the Commissioners could show that the tax in question had not been paid, and the trader was unable to pay it, it did not follow that the failure was necessarily attributable to fraud, at least in those cases where the trader had not disappeared and was not a hijacker. It could as easily be due to business failure or some other misfortune. He emphasised that fraud needs to be proved rather than assumed and, although he did not argue that it could not be established by inference, urged us to the view that we should be very confident that fraud had indeed been established before endorsing the Commissioners' refusal of the Appellants' claims.
- We have already dealt with part of the argument that the relevant tax loss, if any, had not occurred when the Appellant entered into the transactions. Mr Patchett-Joyce's further argument, which went also to the Appellants' means of knowledge, was that they could not know, when they entered into any given transaction, what the intentions of a trader several steps removed from them might be. As Mr Gohir had said, repeatedly, the Appellants could look no further than their own suppliers and customers. They had no means of finding out what was happening elsewhere in the chain, and it was unrealistic and unreasonable to expect them to do so.
- The argument had more force still when one came to examine the alleged contra-trading transactions; it was impossible for the Appellants to know what was going on in an unrelated chain in which neither of them was a participant, and it was obviously wrong to deprive them of an input tax credit because someone else, wholly removed from them, was engaged on a fraudulent purpose. From the Appellants' perspective these, like all the other transactions into which they had entered, amounted to ordinary wholesale trade in mobile phones, the business in which the Appellants were engaged.
- Even had Mr Patchett-Joyce not made the concession, it would in our view be impossible not to conclude that, when a trader with an outstanding liability for output tax disappears, or when a trader masquerades as a legitimate trader by hijacking his VAT registration number for the purpose of collecting VAT for which he does not account, there is a relevant tax loss and it is attributable to fraud. More difficult are the questions whether there is a tax loss at all when the Commissioners cannot trace a chain back to its origin, or at least its United Kingdom origin, and whether, in such a case, it is legitimate to draw the inference that there is fraud. Similarly, there may be substance in Mr Patchett-Joyce's contention that one cannot infer from his failure to meet his tax liabilities, alone, that a trader has acted fraudulently.
- Although the identification of a tax loss and the establishment of fraud were the first two of the issues which Mr Patchett-Joyce identified, and we accept that both must be clearly shown, we have concluded that we should first examine the nature of the trade in which the Appellants were engaged, and deal with our conclusions about the third and fourth issues, before returning to the first and second. In adopting that approach we have been conscious of the danger of allowing our conclusions on the third and fourth issues to colour, in an inappropriate manner, our conclusions about the first two which, as we accept, logically come first, and we have done our best not to fall into that trap.
- In Megantic Services, a case which we have already mentioned, Charles J referred to the judgments of Moses J in R (Deluni Mobile Limited) v Customs and Excise Commissioners, of Lightman J in R (UK Tradecorp Ltd) v HMRC and of Underhill J in R (Mobile Export 365 Limited) v HMRC [2006] STC 1069 and added, at [9]:
- We have followed that suggestion, and have stood back from the chains of transactions we have to consider, in order to determine what is their true character. A single chain, taken in isolation and without knowledge or even awareness of any other, might well appear entirely legitimate; but the picture could change fundamentally when what the tribunal in Dragon Futures described as a "web of contracts" is examined. Having conducted that examination it is, in our view, perfectly obvious that trade of the kind in which the Appellants were engaged is not legitimate.
- While we are quite willing to accept that there is a genuine grey wholesale market in mobile phones we consider it an inescapable conclusion from the evidence we heard and read, and not least Mr Gohir's own evidence, that the Appellants were not engaged in it. We were left in no doubt that almost all, if not, indeed, all, of the transactions into which the Appellants entered were wholly artificial. We are satisfied that, far from being a means by which those with a genuine surplus can dispose of their unwanted stock to other traders who have a genuine need, it is nothing more than a device by which the taxing authorities, in the United Kingdom and elsewhere, can be cheated. We are also driven to the conclusion, from the content of Mr Gohir's evidence as well as the manner in which it was given, that he knew perfectly well that the purpose of the chains of transactions in which the Appellants participated was fraudulent, and that the Appellants entered into them in order to benefit from the fraud.
- The only explanations for the trade which were offered were that manufacturers sometimes over-supply in one country and under-supply in another, and that a model which has been replaced by a new version in one country nevertheless remains in demand in another. Even if those explanations were true, to a significant degree—and we doubt that manufacturers do make such egregious mistakes, and repeatedly—it is impossible to understand why the manufacturers and their authorised distributors do not themselves take steps to redress the imbalance, but instead (as we are implicitly asked to believe) release surplus stock, in very large quantities, onto the grey market in order that others might profit from that imbalance. We have dealt already with the Appellants' trade on a single day, 20 January 2006. On that day the Appellants, together, bought and sold as many as 26,000 phones. That is a vast quantity, and the day was not atypical.
- Although Mr Gohir did not suggest it, we can certainly understand that the high-street chains might find that a particular model has sold less well than they had expected, or has been superseded unexpectedly, that they cannot sell their stock to retail customers by discounting and that they need to dispose of it in some other manner; but such disposals would account for a few dozen, or at most a few hundred, phones, and not the huge quantities in which the Appellants were dealing. It is impossible to believe that, day after day, many thousands of surplus phones are released onto the grey market, to pass through the hands of several traders before finding a willing buyer in another member State of the European Union. It is clear from the evidence we saw that there were many other chains in which the Appellants had no involvement, and that the thousands of phones in which they dealt must be multiplied by a significant number in order to calculate the aggregate number traded each day.
- There was nothing to suggest that either of the Appellants or (with the two exceptions we have mentioned) any of the traders who preceded them in the chains was, or even dealt with, a manufacturer, an authorised distributor or a recognised high-street trader, nor that any of them had bought several smaller parcels and combined them into a single, larger consignment; and we saw only one example of a purchase by the Appellants of a consignment sold otherwise than intact, and no examples of transactions in which other traders had done so. It is, in our view, so extraordinary that it is unbelievable that in a sequence of seven or eight traders every purchaser is willing to buy the exact quantity which his vendor has available or, putting the sequence in reverse, that each supplier is able to lay his hands on the precise quantity his purchaser requires. These were not small parcels of a dozen or two, which trade convention might dictate are sold, wholesale, only intact, but almost always of thousands, yet not always of round thousands.
- There were several instances documented within the bundles of the Appellants selling phones with a central European specification (including mains charger) to a trader in another member State. It was, we have concluded, this fact which led to Mr Gohir's and Mr Khan's evidence, vague and evasive as we have described it, about the process of modification. But it is impossible to understand why phones with such a specification might have been released onto the UK market by a manufacturer, nor is there any commercial reason why they should have been imported into the UK from a central European country in which there happened to be a surplus. They would be unsaleable on the UK retail market; the only conceivable purpose of importing them would be in order to export them again. Absent a fraud on the taxing authorities, it seems obvious to us that there could not possibly be sufficient profit available to cover the costs of transport, insurance and temporary storage of a consignment sent from the Netherlands to the UK and thence to France, or from Spain to the UK and on to France, both of which patterns appeared in the Appellants' transactions.
- Mr Gohir's and Mr Khan's evidence about the alteration of phones before they were exported was wholly incredible. We can accept (though Mr Gohir's evidence on the point was unconvincing) that it might be possible to change the specification of a phone from one appropriate to the UK to one for use in, say, Germany. But his evidence about how the change was made was not merely unconvincing; it had all the hallmarks of evidence he was making up as he was in the witness box. He was evasive about the method by which the language of the phone display might be changed. He plainly had not even thought, until it was put to him, about the need to ensure that the instruction book was in the correct language (even books written in several languages will not always include the desired language) and that it would be necessary to ensure that the mains plug of the charger was suitable for the destination country. There was no evidence at all that the Appellants had ever secured a supply of replacement instruction books or chargers. The claim that freight forwarders had small armies of people, available at a moment's notice, trained and properly equipped with laptop computers loaded with the correct software, when they were needed to assist in the conversion of phones is not capable of belief. Had it been true, copies of the freight forwarders' invoices for their services—which Mr Gohir accepted would not have been rendered gratis—could have been produced; the fact that they were not leads us to the conclusion that no such charges were ever levied, because the claim that their staff assisted is invention. It was perfectly clear to us that Mr Khan's inability to explain to us how the task was accomplished was attributable to the fact that he had never done it.
- Mr Gohir offered no explanations of the transactions in which Calltell bought a consignment of phones from World Communications Imp-Exp in Spain, then sold them to Opto, which in turn sold them to World Communications Sàrl, the associated French company. The Appellants, together, made a significant gross profit and the associated Spanish and French companies a corresponding loss. Mr Patchett-Joyce suggested that they may have entered into the transactions in order to boost the apparent value of their turnover, though he emphasised that it was merely a thought which had occurred to him, and that the true explanation might be quite different. While it is (just) conceivable that companies might seek to inflate their apparent turnover by generating artificial transactions, it is not believable that they would do so by this means, or at such cost. It is conspicuous that we had no evidence from World Communications about the transaction (or, indeed, any evidence from any of the traders who, Mr Gohir insisted, were all as honest as he).
- It is true that neither of the Appellants dealt with another trader which has been shown to have defaulted, but it is perfectly obvious that the Appellants' success in avoiding dealing with a defaulter has nothing to do with the quality of their due diligence. Despite Mr Gohir's claim that Mr Leach had identified only some of what had been done, we were not shown any documentation demonstrating that full due diligence enquiries had been undertaken before trading between one or both of the Appellants and a supplier or customer began. The Appellants were provided with company registration documents, evidence of VAT registration and bankers' details, but rarely, if ever, anything else. We agree with Mr Leach that most of the Appellants' enquiries, certainly all those which involved verification from third party sources of a counterparty's creditworthiness, were not carried out at all until after trading had begun, and that Mr Gohir ignored the results when they indicated that the trader concerned was not sound. In one conspicuous case, Calltell was positively advised not to deal with the trader; Mr Gohir's response was that he had met the trader's brother and was satisfied, despite the advice, that the trader could be trusted. We doubt if many traders dealing in consignments worth hundreds of thousands of pounds would adopt so blasé an attitude. In our view Mr Leach's evidence is compelling. We are left in no doubt that the Appellants went through the motions of due diligence, with the objective of demonstrating compliance with the Code of Conduct (though even that has been barely achieved). We view the acquisition of the warehouse as equally cosmetic.
- A trader in a legitimate market trading in goods worth millions of pounds would not deal with others without first satisfying himself that his suppliers could supply what they contracted to supply, and that his purchasers could pay for what they had agreed to purchase. It is not enough, in our judgment, to contend that goods would not be paid for until they had been inspected, nor handed over until paid for. In a genuine market, traders dependent, as the Appellants were, on payment by their purchasers in order that they could themselves pay their suppliers would not commit themselves to a purchase without near certainty that the purchaser would pay, and would not commit themselves to a sale without near certainty that their own supplier was in a position to deliver. Here, neither their due diligence nor their contractual conditions provided the Appellants with any true assurance that, assuming they were genuine, arm's length deals, they would be honoured by their counterparties. Instead, they were exposed to the risk that they would be left with goods for which their purchasers could not pay, or that they would be unable to fulfil orders from their customers.
- The conclusion we draw from the Appellants' approach is that the checks were casually undertaken, and the contract conditions poor or non-existent, because they were, in truth, unnecessary: they knew perfectly well that their suppliers and customers would not let them down because the transactions had all been pre-arranged. We are left in no doubt that Mr Gohir was well aware that another trader, well removed from the Appellants, would fail to account for output tax, while the remaining traders between the defaulter and the Appellants would not.
- We found Mr Gohir's protests that the warnings the Commissioners gave were inadequate unconvincing. As he accepted, he could easily identify from what he was told who his suppliers were, and he could as easily have refused to deal with them in future, or have approached them to see whether steps might be taken, short of cessation of trade, to avoid their handling goods which could be traced back to a defaulting trader. Instead, he did nothing at all, save to send the suppliers a form for completion, by which they could assure the Appellants that they had carried out proper due diligence. The completed forms were taken at face value. In our view they were worthless. It is inconceivable that traders in mobile phones, all made very well aware by the Commissioners of the measures which they should adopt, and of the possible consequences if they did not, would admit, even to other traders, that they did not carry out proper due diligence. We have no real doubt that the forms were sent in order to show that something had been done. In reality Mr Gohir carried on regardless.
- Perhaps the most telling feature of all is the extraordinary size of the turnover achieved not only by Calltell and Opto, but also by others who dealt in the phones which they bought and sold. As the evidence we have recorded showed, in the year to 31 March 2006, Calltell and Opto had a combined turnover of about £678 million. Even allowing for some duplication by reason of sales between the two, the figure is comparable to that achieved by long-established listed companies—yet Calltell began trading in 2001 and Opto in 2005, and between them they had a staff of fewer than ten people. Several of the traders who preceded them in the chains had been established for very short periods and had few, if any, staff, yet were able, from a standing start, to achieve an annualised turnover measured in hundreds of millions of pounds within three or four months. It is, in our view, impossible to believe that, in a legitimate market, small, "one man band" traders can achieve turnover figures of which most legitimate traders, with years of business behind them, can only dream, by quickly identifying sources of huge numbers of mobile phones which they can as quickly sell to another trader who is willing to pay more, even if little more, than the cost of acquisition.
- It is also impossible to understand why, if trading is done by means of internet advertising, as Mr Gohir claimed, those (if they exist) who genuinely do require large quantities of mobile phones for release onto a retail market cannot identify those (if they exist) who have such quantities available, but instead (as the Appellants' case implies) have to secure their supplies through a long succession of dealers who, by some means unknown to the genuine purchaser, have all been able to identify a supplier. Similarly, we agree with Mr Cunningham that some explanation is necessary of the fact that newly-established traders were able to identify sources of supply which Mr Gohir, with (as he told us himself) his many years of experience and extensive network of contacts was not; but no explanation was forthcoming.
- Mr Cunningham made much of the fact that Calltell and Opto dealt with each other, a feature of their trading to which Mrs Bushby had referred in her letters and which also affected her reasoning. We can accept Mr Gohir's explanation that his UK bankers had recommended that he spread his trading risk by the use of two companies. We cannot accept that there is any legitimate explanation for the trade between the two. The fact that the Commissioners were aware of the practice does not explain it, nor does Mr Gohir's repetitive answer, when asked to explain why one had sold to the other in a particular case, that "it was a commercial decision made at the time" throw any light on the matter. The absence of any rational explanation can only suggest that the motive was not legitimate. We have concluded that the only reasonable explanation is that the purpose was to shift VAT liabilities, and available claims, from one Appellant to the other.
- We return to the questions whether tax losses attributable to fraud have been shown, and remind ourselves of the warning we have set out. The first matter to determine is whether Mrs Bushby correctly drew the conclusion that, where a buffer could be shown to have acquired its supplies from a defaulter in those chains which could be fully traced, it was reasonable to infer that, in those chains which could not be fully traced, it had acquired its supplies from the same source. In our judgment the inference is not merely reasonable, but compelling. It would be remarkable if illicit deals could be traced, while legitimate deals could not. There would be no reason for a buffer to conceal its source in such circumstances; on the contrary, it would be in its interests to be forthcoming about it. The simple fact that Mrs Bushby was unable to complete the chain (accepting as we do that her efforts were diligent) speaks for itself.
- The evidence showed that the traders who were said by the Commissioners to have defaulted without disappearing had been assessed, where assessments had been raised, for very large amounts of tax, measured in millions of pounds. In other cases the Commissioners' records showed similarly large liabilities, albeit no assessment had been made. We are satisfied that the proposition (as Mr Patchett-Joyce's argument implies) that such traders had carefully accounted for the output tax due on the supplies they had made of goods which later found their way to the Appellants, while failing to account for the tax due on other transactions, can be rejected as implausible. We also think it implausible that a trader, engaged in a business for, usually, a matter of a year or two, and with little or no capital, could amass a tax debt of millions of pounds because of ordinary business failure.
- It is, however, possible that the Commissioners are mistaken in their view that a trader who has been assessed in that way is indeed liable for the tax. We were made aware of one such trader who has appealed against the assessment to this tribunal. There is an obvious reason why we, in this appeal, should be cautious about expressing any conclusion which might appear to prejudge the outcome of another. Nevertheless, we must decide whether, on the balance of probabilities but to the high standard we have already mentioned, the Commissioners have demonstrated that, in such cases, there is a tax loss and, additionally, that it is attributable to fraud.
- We are satisfied that they have. There is an obvious pattern to the transactions, of a sequence of traders drawn from, as we have indicated, a finite pool. The ability of any of them to generate turnover of such magnitude in a short period is, as we have also indicated, implausible in a genuine market. Had any of the traders in this category—whose identities were known to the Appellants—been legitimate traders wrongly assessed by the Commissioners, the Appellants could have called them to give evidence to that effect, but they did not. We were impressed by the care with which Mrs Bushby had recreated the chains of transactions, and we are satisfied that she has equally carefully drawn her conclusions about the tax due from the relevant traders. It is a proper inference that there is a relevant tax loss, using Mr Patchett-Joyce's formulation.
- We were left in no doubt, from the manner in which he gave his evidence, and on which we have already commented, that Mr Gohir was not an innocent swept into a fraud committed, at several removes, by someone else. On the contrary, we are satisfied that he took great care to distance the Appellants from frauds which he knew were being committed. The Appellants' due diligence served no useful purpose other than the cosmetic one of showing that some steps had been taken. The claim that phones had been modified was transparently false. There is, in our view, almost nothing in the transactions which is consistent with the workings of a genuine market. We are quite sure, from his demeanour and from his untruthful evidence, that Mr Gohir was under no illusion about the nature of the trade in which the Appellants were engaged. We think the Commissioners are right to contend that he was one of the ringleaders. But even if he was not, we are satisfied that he was well aware that the Appellants were dealing in goods which were being used as the instrument of fraud. We are equally satisfied that the transactions were arranged for no other purpose, and that the fact that the defaulters' failure to account for output tax post-dated the Appellants' dealings in the relevant goods is irrelevant. The Appellants, for those reasons, were properly deprived of their right of deduction.
- We do not need to deal with the question whether the Appellants had the means of knowledge, since we have concluded that they had actual knowledge of the fraudulent purpose of the transactions. However, even if we had not so found, it would in our view be impossible not to conclude that the Appellants had failed, in the words of the Court of Justice in Kittel, to "take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud". Their due diligence and their response to it fell, in our judgment, well below the requisite standard.
- We should add, so that there is no doubt about it, that we do not consider that any of the Appellants' transactions in the relevant period (including those conceded by the Commissioners) were legitimate. We think it more likely than not that the two consignments which originated from Nokia were also to be used for the purposes of a fraud. Unless transactions are fictitious, or the phones used are counterfeit, it is obvious that they must all originate with a manufacturer. We see no reason why those two chains should be viewed in any other way.
- Similarly, we are satisfied that those of the Appellants' transactions which the Commissioners have identified as contra-trading chains have been correctly so identified. We share their view that the transactions—beginning with an importation into the UK, followed by a succession of UK deals and an export out of the UK—have no identifiable legitimate purpose. We are sure that their analysis of the purpose of such transactions is the correct one.
- We are satisfied that:
- Mr Gohir knew that the Appellants were engaged in transactions whose purpose was the commission of a fraud on the Commissioners;
- The Appellants' creation and assembly of the documentation relating to each deal into which they entered and their due diligence were designed only to persuade the Commissioners that they were legitimate traders;
- The transactions between the two Appellants had no true purpose other than to shift their respective VAT liabilities and repayment claims;
- Every one of the transactions, including those described as contra-trading, had as its objective the defrauding of the Commissioners;
- The decision to withhold the Appellants' repayment claims was correct.
- We allow Calltell's appeal to the extent of the conceded sum of £86,187.50 but its appeal is otherwise dismissed, as is Opto's appeal in its entirety. As we indicated at the beginning of this decision, our conclusions may necessitate a recalculation of the Appellants' returns, a task we leave to the parties save that either party may apply, if necessary, for the hearing to be continued if the calculations cannot be agreed.
- We direct that the Appellants pay the Commissioners' costs of the appeals, such costs to be the subject of detailed assessment on the standard basis by a costs judge of the High Court if they cannot be agreed.
- How long have they been trading and do they have any history in the trade?
- Does the supplier have sufficient knowledge of the industry to warrant their level of anticipated business?
- Is the business registered for VAT?
- If the trader is new to the business how can he have the contacts to provide products at such an attractive price?
- is the suggested price per unit too low for the type, age and model of the phone?
- should this product be provided at this price at this time?
- Are the delivery arrangements for the goods financially viable and do you know where they come from?
- Have they been unable to sell to your competitors - if so why?
- Will the IMEI numbers of each phone be shown on invoices?
- Have you met the supplier - if not do you have to contact them through a third party?
- What knowledge do credit search companies used by you have of the supplier?
- Is the supplier's bank account in a different town or country to their main business address?
- Do you recognise the person supplying you with the mobile phones; have they changed their name or other details to present a new identity?
- Does the supplier use a local address; do you know if the address is a residential or accommodation address?
- Is payment or part-payment for the mobile phones being made to a third party?
- Do you have doubts over the suppliers credibility or feel there is risk attached to the deal - is it good business acumen to trade with this person?
- Is there a similarity between the invoices/paperwork of different suppliers?
- How long have they been trading and do they have any history in the trade?
- Does the customer have sufficient knowledge of the industry to warrant their level of anticipated business?
- Have they been unable to purchase stock from your competitors - if so why?
- Does the customer always want to buy, no matter what the price?
- Are the goods to be delivered to the country where the customer is resident or are they to be delivered to another country?
- Will the country of destination of your goods be the same as the country that your customer operates in and will payment originate from that country?
- Is their courier or shipper reputable - if goods are being exported will original documents be available?
- What are the arrangements for payment - do you trust the customer?
- Have you met the customer - if not do you have to contact them through a third party?
- What knowledge do credit search companies used by you have of the customer?
- Is the customer's bank account in a different town or country to their main business address?
- Do you have doubts over the customer's credibility or feel there is risk attached to the deal - is it good business acumen to trade with this person?
VALUE ADDED TAX — input tax — traders' repayment claims unpaid on grounds that Commissioners believed goods acquired had been used for missing trader intra-Community fraud — whether tax loss established — whether fraud established — whether Appellants knew or had means of knowledge of fraud — Sixth Directive art 17 (VAT Directive art 167), VATA 1994 ss 24 to 26 — Optigen, Kittel, Halifax, Dragon Futures and Just Fabulous considered — tax losses established — finding that majority of transactions had no purpose other than to defraud the tax authorities — Appellants found to be aware of that purpose — appeal allowed in respect of one transaction but otherwise dismissed
MANCHESTER TRIBUNAL CENTRE
CALLTELL TELECOM LIMITED
OPTO TELELINKS (EUROPE) LIMITED
Appellants
- and -
THE COMMISSIONERS FOR
HER MAJESTY'S REVENUE AND CUSTOMS
Respondents
Tribunal: Colin Bishopp (Chairman)
Cyril Shaw FCA
Sitting in public in London on 23 to 27 and 30 April and 1 to 4, 14 and 15 May 2007
Michael Patchett-Joyce, counsel, instructed by Hassan Khan & Co, for the Appellants
Mark Cunningham QC and Philip Moser, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2007
DECISION
Introduction
Disclosure
"7 … the Appellant is in the difficult position that it knows about only the purchase and sale transaction that it entered into and has no means of finding out about other steps in the alleged carousel fraud. Only [HMRC] have the powers to investigate the other steps …
8 … the existence of a carousel fraud has to be proved on the balance of probabilities but with cogent evidence because the Appellant has entered into an apparently normal commercial transaction and [HMRC] are trying to prove that it is not a normal transaction. They are trying to show it was the equivalent of a lioness rather than an Alsatian in Lord Hoffmann's example [see Secretary of State for the Home Department v Rehman [2002] 1 All ER 122 at 141a]. In determining whether Customs have satisfied this burden we bear in mind that [HMRC] are the only party who could obtain information about the other steps in the alleged carousel fraud. If they fail to try to obtain information, as opposed to try and fail, we take this into account in determining whether [HMRC] have proved their case bearing in mind that the Appellant is not even in the position to try to obtain the evidence."
"In most cases coming before these tribunals, the burden of proof is on the appellant. But in cases where fraud is alleged, as in the instant one, the burden of proof falls on the party making the allegation. Further, in cases such as the instant one, where only one party has access to documents and information necessary for the tribunal to make its adjudication, it necessarily means that that party must disclose the documents and information."
"The commissioners are under a duty to conduct a reasonable and proportionate investigation into the validity of claims for a refund and repayment and a duty to act proportionately both in respect of the investigation and in dealing with the taxable person's claims generally. See R (on the application of Deluni Mobile Ltd) v Customs and Excise Comrs [2004] EWHC 1030 (Admin). The duty to investigate is applicable both to the claim to the refund and repayment and to the question whether there is a right to set-off (or indeed a claim for a further payment from the taxable person). The duty embraces an obligation to keep all investigations under review. The commissioners are entitled to take a reasonable time to investigate claims prior to authorising deductions and repayments and what is a reasonable time within which to complete an investigation must depend on the particular facts: Strangewood [1987] STC 502 at 505. The availability and proper exercise of the commissioners' powers of investigation are essential to maintain the fiscal neutrality of VAT and prevent refunds being made to parties not entitled to them. The postponement of repayment of input tax pending the outcome of the investigation is, as a matter of principle and subject to questions of proportionality, entirely compatible with the Sixth Directive. Whilst the burden of proof is upon the taxable person to establish that the investigation of his unadmitted and unadjudicated claim and the failure to make a part or interim payment is unreasonable or disproportionate, the burden is on the commissioners to justify non-payment of it once the claim is admitted or established and the period of investigation of any cross-claim."
"(a) the number of documents involved;
(b) the nature and complexity of the proceedings;
(c) the ease and expense of retrieval of any particular document; and
(d) the significance of any document which is likely to be located during the search."
The law
The legislation
"The right to deduct shall arise at the time when the deductible tax becomes chargeable."
"24 Input tax and output tax
(1) Subject to the following provisions of this section, 'input tax', in relation to a taxable person, means the following tax, that is to say—
(a) VAT on the supply to him of any goods or services;
(b) VAT on the acquisition by him from another member State of any goods;
(c) VAT paid or payable by him on the importation of any goods from a place outside the member States,
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.
(2) Subject to the following provisions of this section, 'output tax', in relation to a taxable person, means VAT on supplies which he makes or on the acquisition by him from another member State of goods (including VAT which is also to counted as input tax by virtue of subsection (1)(b) above) …"
"25 Payment by reference to accounting periods and credit for input tax against output tax
(1) A taxable person shall—
(a) in respect of supplies made by him, and
(b) in respect of the acquisition by him from other member States of any goods,
account for and pay VAT by reference to such periods (in this Act referred to as 'prescribed periods') at such time and in such manner as may be determined …
(2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.
(3) If either no output tax is due at the end of the period, or the amount of the credit exceeds that of the output tax then … the amount of the credit or, as the case may be, the amount of the excess shall be paid to the taxable person by the Commissioners; and an amount which is due under this subsection is referred to in this Act as a 'VAT credit' …"
"26 Input tax allowable under section 25
(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 for the period) as is … 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;
(b) supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom …"
The case law
"27. … carousel fraud concerns a series of consecutive activities, performed by a number of traders in a supply chain. It is an essential feature of the common system of VAT that VAT becomes chargeable on each transaction in a supply chain (see art 2 of the First Directive). Each transaction must therefore be regarded on its own merits. Consequently, the character of a particular transaction in the chain cannot be altered by earlier or subsequent events. (To that effect see Staatssecretaris van Financiën v Coffeeshop Siberië vof (Case C-158/98) [1999] STC 742 para 22.)
"47. As the Advocate General observed in para 27 of his opinion, each transaction must therefore be regarded on its own merits and the character of a particular transaction in the chain cannot be altered by earlier or subsequent events. …
49 The question whether the VAT payable on prior or subsequent sales of the goods concerned has or has not been paid to the Treasury is irrelevant to the right of the taxable person to deduct input VAT (see, to that effect, the order of the Court in Case C-395/02 Transport Service [2004] ECR I-1991, paragraph 26). According to the fundamental principle which underlies the common system of VAT, and which follows from Article 2 of the First and Sixth Directives, VAT applies to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components (see, inter alia, Midland Bank, paragraph 29; Zita Modes, paragraph 37; and Optigen, paragraph 54).
50 In that context, as the referring court observed, it is settled case-law that the principle of fiscal neutrality prevents any general distinction between lawful and unlawful transactions. Consequently, the mere fact that conduct amounts to an offence does not entail exemption from tax; that exemption applies only in specific circumstances where, owing to the special characteristics of certain goods or services, any competition between a lawful economic sector and an unlawful sector is precluded (see, inter alia, Coffeeshop Siberië, paragraphs 14 and 21, and Case C-455/98 Salumets and Others [2000] ECR I-4993, paragraph 19). It is common ground, however, that that is not the case with either the computer components or the vehicles at issue in the main proceedings.
51 In the light of the foregoing, it is apparent that traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT (see, to that effect, Case C-384/04 Federation of Technological Industries and Others [2006] ECR I-0000, paragraph 33).
52 It follows that, where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void, by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller, causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.
53 By contrast, the objective criteria which form the basis of the concepts of 'supply of goods effected by a taxable person acting as such' and 'economic activity' are not met where tax is evaded by the taxable person himself (see Halifax and Others, paragraph 59).
54 As the Court has already observed, preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Joined Cases C-487/01 and C-7/02 Gemeente Leusden and Holin Groep [2004] ECR I-5337, paragraph 76). Community law cannot be relied on for abusive or fraudulent ends (see, inter alia, Case C-367/96 Kefalas and Others [1998] ECR I-2843, paragraph 20; Case C-373/97 Diamantis [2000] ECR I-1705, paragraph 33; and Case C-32/03 Fini H [2005] ECR I-1599, paragraph 32).
55 Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively (see, inter alia, Rompelman, paragraph 24; Case C-110/94 INZO [1996] ECR I-857, paragraph 24; and Gabalfrisa, paragraph 46). It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends (see Fini H, paragraph 34).
56 In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.
57 That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.
58 In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.
59 Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of 'supply of goods effected by a taxable person acting as such' and 'economic activity'.
60 It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void - by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller - causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.
61 By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct."
"The tribunal has little hesitation in applying the test potentially across the whole of any relevant chain of transactions, and not limiting it to the contract of sale to, and the contract of sale by, the taxable person. It does so bearing in mind the evidence it has seen of the deals in these appeals already. It is over-simplistic to look only at the individual contract of sale or purchase. Of course, the European Court made it clear in Optigen that a particular claim to input tax must be based on a particular contract. Entitlement to input tax from that contract cannot be taken away simply by reference to the fact that the contract was one of a chain of transactions affected by fraud elsewhere. Kittel was also concerned with the contract of sale itself. But the Court did not blind itself, and its judgments should not be used to blind others, to the context of what it decided."
" … A web of contracts is inevitable in that kind of business [that is, wholesale dealing in mobile phones]. A taxable person operating in such an environment can properly be assumed to know of all the constituent parts of the web in each transaction. The analysis cannot be confined to the parties to the purchase, or the purchase and sale, alone.
70 The tribunal does not accept that Kittel limits the extent of the knowledge base against which the test of 'means of knowledge' from Optigen is to be tested in the way suggested for the Appellant. The tribunal sees nothing in any of the judgments of the European Court that suggests that the Court was taking so narrow a view. The Court rejected the purist view put to it by the Advocate General in Optigen. It accepted that the Sixth Directive allows both national legislative initiatives (in FTI), and a wider Directive-based approach to fraud. And it was clearly taking a common view across each of the three judgments analysed in these reasons. In so doing, it was accepting from FTI a wider knowledge base than the individual contracts alone for both national and Directive-based approaches.
71 The tribunal therefore does not accept that there is any specific limit 'up' or 'down' the chain to the knowledge to be considered by a taxable person. More specifically, the taxable person may be alerted to third party elements in its contracts by the terms of those contracts, by its counterparties, or by others of the web of supporting contracts that facilitate the trade. Any of those elements may put a taxable person on notice that it ought to consider steps beyond the immediate contracts of purchase and sale. That must also be in addition to what the taxable person actually knows of the market beyond the immediate contracts …"
"The words which record these definitive statements are untrammelled by any reference to the need for establishing that the taxable person must be a member of a defaulter chain, or that he must be dealing in the same goods as had been the subject of a defaulter chain. The only such references in the judgment are for the purpose of differentiating the result in relation to Kittel from that with regard to Recolta, where the taxable person was innocent but was said to be rendered liable to sanctions by the Revenue because of his participation in the defaulter chain in relation to the same goods."
"Has the taxable person, at the time of entering [into] a transaction involving payment of value added tax by or to that person, and taking into account the actual knowledge of the taxable person at that time (including knowledge acquired from any enquiry or investigation), taken all proportionate steps available to it to ensure that, on the balance of probabilities, no aspect of the transaction is connected with any other party involved in, or any other transaction involving, fraud on the public revenue through the value added tax system?"
"It must also be borne in mind that a finding of abusive practice must not lead to a penalty, for which a clear and unambiguous legal basis would be necessary, but rather to an obligation to repay, simply as a consequence of that finding, which rendered undue all or part of the deductions of input VAT."
"58. … transactions of the kind at issue in the main proceedings are supplies of goods or services and an economic activity within the meaning of arts 2(1), 4(1) and (2), 5(1) and 6(1) of the Sixth Directive, provided that they satisfy the objective criteria on which those concepts are based.
"In the Court's view, when the State authorities possess any information about abuse of the VAT refund system by a concrete entity, they can apply appropriate measures to prevent or stop such abuses. The Court cannot, however, accept the argument about a general situation with the VAT refunds advanced by the Government, in the absence of any indication of the applicant's direct involvement in such abusive practices."
The burden and standard of proof
"sees no inherent excessive difficulty in a taxable person establishing what it did or did not know at a particular time, and the steps that it took before and at that time to ensure it met to the required standard the obligation put on it to enquire."
"… on other matters, and in particular on the issue of establishing whether proportionate action has been taken, the burden should rest on the Appellant."
The facts
For the Appellants we head oral evidence from
The Appellants and their business
The Commissioners' response to MTIC fraud
Due diligence
The transactions
The dealings between Calltell and Opto
Payments and banking arrangements
Inspections and changes of specification
Knowledge and means of knowledge
"The continued incidence of MTIC VAT fraud in the verified supply chain (100% of the 4 months covered above) would indicate that a fundamental reappraisal of the due diligence carried out by your company is now appropriate. If the due diligence routinely undertaken by Calltell Ltd in these periods was carried out with the aim of ensuring that the company would not profit in trade from deals emanating from a UK MTIC VAT fraud, then it can be seen, as evidence above, this due diligence has not worked.
… can you please explain how the company can continue to deal in this way in future whilst at the same time claiming neither the knowledge or the grounds to expect that the VAT due on the supply of those goods will go unpaid."
Submissions
(1) Has a tax loss referable to the supply chain in question been proved?
(2) If so, has the fraudulent nature of the tax loss been proved?
Only if both of those questions are answered in the affirmative is there, he said, a "relevant tax loss". If there is no relevant tax loss the Commissioners cannot succeed, but if the answers are in the affirmative it is necessary to go on to ask two further questions:
(3) Had the relevant tax loss been suffered at the time of the Appellants' transactions? If not, what, if any, consequences flow?
(4) Did the Appellants know, or have the means of knowledge, of the relevant tax loss in the supply chain in question at the time of entering into their transactions in that supply chain?
The Commissioners' case
The Appellants' case
Conclusions
"It is also clear from those authorities, in particular, for example, the decision of Moses J, that in this industry or in trading of this type (here essentially in mobile phones) those who take part in it are, or certainly should be, aware that they are at risk of being the subject of an investigation by Customs. Standing back from chains of transactions it can, in some cases, be demonstrated that what is being shared out is the 17-and-a-half per cent of tax amongst a number of people, and the only real purpose of the chain of transactions is to enable that money to be extracted unlawfully from the Revenue for the benefit of those involved in the chain."
Summary of decision
COLIN BISHOPP
CHAIRMAN
Release Date: 20 July 2007
MAN/06/0424
MAN/06/0425
ANNEX
Code of Conduct for the Mobile Phone Industry
This Code of Conduct is associated with, and forms part of, the Memorandum of Understanding between HM Customs and Excise and the Mobile Phone Industry.
It will be applied by distributors within the industry, but is supported and endorsed by manufacturers and network providers.
Major distributors who are signatories to the Memorandum of Understanding have agreed that they will adhere to the following procedures when purchasing mobile phones from a new supplier or supplying mobile phones to a new customer.
Purchasing from a new supplier
The following factors will be considered before purchasing stock from a new supplier:-
If you decide to purchase from the supplier obtain a copy of the supplier's headed paper and VAT certificate, notify HM Customs and Excise of impending trade and request confirmation from HM Customs and Excise of the validity of the VAT number.
If you decide not to go ahead with the purchase, notify HM Customs and Excise.
Supplying to a new customer
The following factors should be considered before supplying stock to a new customer:
If you decide to supply the customer, obtain a copy of the customer's headed paper and VAT certificate, notify HM Customs and Excise of impending trade and request confirmation from HM Customs and Excise of the validity of the VAT number.
If you decide not to go ahead with the sale, notify HM Customs and Excise.