[2010] UKFTT 243 (TC)

TC00540

Appeal number:  MAN/2008/0111		

VAT – MTIC fraud – transaction connected with fraud? – yes – appellant should have known? – yes - input tax recovery denied – appeal dismissed.

FIRST-TIER TRIBUNAL
TAX 

	ROMA II LTD	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL: 		Richard Barlow (Judge)
			Mrs M Kostick (Member)

Sitting in public in Birmingham on 8, 9 and 10 July 2009 and in Manchester on 2 February 2010

Mr Vivek Nayar, director, for the appellant.

Ms Lucy Wilson-Barnes of counsel instructed by Howes Percival & Co for the respondents.

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal against the respondents’ decision given in a letter dated 24 December 2008 to refuse the appellant’s claim for input tax in the sum of £167,737.50 for the prescribed accounting period of three months ending October 2006.

2.	The appellant was registered for VAT from 12 November 2000 and had traded in the music industry as a promoter and distributor of copyright music, mostly in Indian musical genres.  Mr Vivek Nayar, a director of the appellant, gave evidence on behalf of the appellant and represented it at the hearing.  Ms Wilson-Barnes represented the respondents and called Ms Annette Edwards, customs officer, as a witness.  We also read, as agreed evidence, statements from Mr Roderick Stone and Ms Bharti Mistry and Mr Clive White of HMRC.  Much of the primary evidence was not disputed and consisted of documents relating to the transactions in question in the appeal.  The issues in the appeal were mostly concerned with the inferences to be drawn from the documents and the evidence of Mr Nayar.  We were taken to those documents during the hearing and have had regard to them in reaching our decision in the appeal.  The documents run to approximately 700 pages.

3.	The appeal is concerned with what was essentially a single transaction which the appellant entered into at the end of October 2006.  That transaction consisted of the sale of the following goods to a Danish company called Nordisk Tradex ApS (Nordisk): 800 Merlin Portable Multimedia Players, 550 Clarion DVD Players, 650 Panasonic MP 3 Players and 500 Kenwood DDX.  Those goods were all purchased by the appellant from a UK company called IT Players (UK) Limited (IT).  IT had purchased the goods from PCB 2 Ltd which had in turn purchased from Keycomp Limited.  Those two companies are also UK companies.  Keycomp had purchased the goods from Silver Pound which was a company established in the EU (but not in the UK).  In all the relevant transactions up to and including the appellant’s purchase from IT, the Clarion and Kenwood goods were shown on the invoices as two separate quantities, but when the appellant sold to Nordisk the Clarion and Kenwood goods had been amalgamated into one item each.  The same goods passed down the chain of transactions at each stage.

4.	Keycomp’s purchase from Silver Pound was an acquisition from an EU trader and the appellant’s sale to Nordisk was a dispatch to a trader in another EU country.  All the other transactions were taxable supplies in the UK attracting standard rate VAT liabilities on the part of the vendor and affording corresponding input tax claims to the purchasers; at least in principle.

5.	The respondents denied the appellant’s claim to deduct the input tax in dispute on the ground that the transaction by which the appellant bought the goods from IT which it then sold to Nordisk was one in respect of which it either knew or should have known it was thereby participating in a transaction which was connected with fraudulent evasion of VAT.  That principle is derived from the ECJ case of Kittel –v- Belgium [2008] STC 1537.

6.	Ms Wilson-Barnes also referred us to the following authorities: Softwarecore Ltd –v- Pathan IHC 231/05, Commissioners of HMRC –v- Brayfal Ltd Ch/2008/APP 0082, Revenue and Customs Commissioners  –v- Livewire [2009] EWHC 15 (Ch), Mobilx –v- Revenue and Customs Commissioners [2009] EWHC 133 (Ch), Calltel Telecom Ltd –v- Commissioners for HMRC [2009] EWHC 1081 (Ch) and Blue Sphere Global Ltd –v- The Commissioners for HMRC CH/2009/APP0066.    She also referred to the Tribunal decisions in Dragon Futures Ltd (19831) and Honeyfone Ltd (20667).

7.	On the basis of those authorities Ms Wilson-Barnes accepted that the burden of proof lay upon the respondents to show that there had been a tax loss and that it was fraudulent and that the appellant’s transaction was connected with that fraud.  She contended that the burden of proof lay upon the appellant so far as the question of knowledge of that fraud is concerned.  Some doubt about that proposition might be occasioned by the judgment in the Blue Sphere case compared with that in the Brayfal case and Ms Wilson-Barnes fairly brought that to our attention.  

8.	We have heard the evidence of both parties and have reached our decisions on the basis of all the evidence.  We have reached a positive decision on the evidence we have heard and it is not therefore necessary for us to determine on whom the burden of proof lay in any particular respect.

9.	We find the facts to be as follows.

10.	The appellant had traded at a fairly modest level in the prescribed accounting periods before 07/06 having achieved tax exclusive outputs of £6,573 for 10/05, £4,680 for 01/06 and £631 for 04/06.

11.	In the period ending July 2006 the outputs declared were £584,250 and that amount was made up entirely of supplies to the EU.  In fact it was a single supply in which the appellant purchased goods, consisting of 750 Toshiba Laptop computers, from IT which it sold to La Parisienne du Commerce (LPDC) in France.  An input tax claim for £96,613.13 arose from the purchase of the goods that had been sold to the EU customer and in the absence of any other supplies the appellant claimed that amount as a repayment.   

12.	The circumstances of that transaction are relevant to this appeal though it is not directly the subject matter of this appeal.  Mr Nayar’s evidence about it was as follows.  Roma II had suffered from a decline in the amount of business available to it in the music industry and so he had decided to look into other types of trading, such as catering in the UK, which he decided against because the competition seemed too high.  He had contacts in India including a company that was in the music industry but which had itself diversified into diamond dealing and that company wanted to start trading with Roma II in diamonds but on enquiry Mr Nayar found that the 20% margin he had been told would be possible was not feasible and he had spoken to a customs officer who had warned him that the diamond trade required caution because of the risk of fraud, so he decided against the diamond trade.  

13.	Mr Nayar gave evidence that IT Players had approached him to discuss “the export business”.  Both in his oral evidence and when he had been interviewed by a customs officer on 24 October 2006, Mr Nayar’s explanation of how the contact with IT first occurred was that he assumed that Mr Tahir Butt of IT had got his contact details from a CD cover or some such source as his companies (both the appellant and an associated company) were very well known in the Indian music industry.

14.	Mr Butt’s proposal was that Roma II should help to finance a deal with LPDC which was an existing customer of IT.  Mr Butt explained that IT could not finance the deal itself but wanted to make the supply so as to keep its business relationship with LPDC in place.  When Mr Nayar was cross examined about the interview on 24 October he said he had not given the full explanation for why the appellant had become involved in this deal.  He had been asked at the interview why the appellant needed to be brought into the deal with IT when that company would be paid by LPDC just as Roma II would be.  Mr Nayar said when he was cross examined that he had not given the answer he should have given to the customs officer.  He said that was because he was a little bit confused by the questioning.  He said he should have explained that the reason IT needed finance, despite the fact that it would have been paid by LPDC, was that it still needed to account for VAT to its supplier and would not charge output tax to LPDC and “that’s the bit IT couldn’t fund at that time and that’s what we were brought in as financiers (sic)”.  In other words Mr Nayar was well aware that the effect of a purchase of goods in the UK and a sale to a foreign buyer is that the seller has to finance the VAT payment to his supplier until he receives the credit for input tax.   It is reasonable to infer, from Mr Nayar’s reluctance to disclose that to HMRC when he was interviewed, that he felt uneasy, at least, about why his company had been brought into the deal.  We make that inference.

15.	Mr Nayar is a very experienced businessman.  He told us that he was involved in a very large deal concerning a property transaction and he had a long record of trading in the music industry.  We also observed the assured manner in which he gave evidence.  We find it very unlikely that he would have been confused when he was interviewed.  His reply at the interview was that he could not supply a reason for his company being involved in the transaction but he accepted it did not make good business sense for IT to have involved his company in the deal but he would contact them again and find out why they had involved his company.  In those circumstances Mr Nayar must or at least ought to have been suspicious about why a company with which he had never previously dealt had approached him with such a proposal.  The possibility that he had been approached simply because his company’s details appeared on a CD label is so unlikely as to raise a real question about the truthfulness of his evidence about the transaction with IT as supplier and LPDC as purchaser.  

16.	Mr Nayar admitted in the interview that he had made only basic checks about IT and LPDC (confirming VAT numbers and certificates of incorporation and identity evidence) before entering into the transaction and that the checks did not include any about IT’s creditworthiness, which we consider is remarkable given that the reason that company gave for involving the appellant in the deal at all was its inability fully to fund the deal itself.  Mr Nayar claimed that he had asked his accountant what checks he should make and we consider it implausible that an accountant would have recommended only basic checks in those circumstances. 

17.	Mr Nayar explained that he had proposed that Roma II should buy the goods from IT’s supplier but they refused to disclose their supplier and so instead Roma II bought the goods from IT and sold to LPDC.  That transaction occurred in July 2006.  The value of the goods was £584,250 and that was the largest transaction the appellant had been involved with.      

18.	During the interview of 24 October the visiting officer informed Mr Nayar about MTIC fraud and stressed the need for full due diligence checks and the need for serial numbers of goods to be recorded.  Mr Nayar was also asked about current trading and he said no more deals had been done or were planned for that month though he was intending to go to India to discuss the diamond deals already referred to.  In fact Mr Nayar had had some conversations about another deal before 24 October and although it might have been true that at the time of the interview no further deal was expected during that month, Mr Nayar might nonetheless have been expected to have mentioned the discussions that he had had which were shortly before the interview (between late September and 7 October). 

19.	HMRC were considering cancelling the appellant’s VAT registration on the ground that it was no longer trading and Mr Nayar knew that, so he had a good incentive for telling the officer who visited about the negotiations in September and October, even if they had not materialised into actual sales by the time of the interview.  Those facts are therefore further evidence that he was uneasy about the transaction under appeal even before it happened.

20.	Mr Nayar stated in evidence that, in India in September 2006, he had first had conversations with Nordisk, which ultimately became the purchasers of the goods that have given rise to the claim which is the subject of this appeal.  Although Nordisk is a Danish company it is run by a Mr Kalsi who, Mr Nayar told us, comes from the same Indian community as he does.  Mr Nayar stated in evidence that he visits India frequently on business and he produced his passport which shows that he did travel to India in September 2006 (the day of the month is illegible) and returned on 7 October.  Shortly before that visit a Mr Ashok Kumar, a director of Nordisk, had contacted Mr Nayar whose details were then on a website called alibaba.com and there was a discussion about whether Mr Nayar could supply MP3 or MP4 players.  Mr Kalsi was in India at the time and travelled to Delhi to meet Mr Nayar and told him that he had been trying to source MP3 or MP4 players in India but was not satisfied with their quality.  Mr Kalsi asked if Mr Nayar would be able to supply such goods.  After Mr Nayar’s return to the UK, Mr Kalsi contacted him “around 28 October” on the telephone and gave more details about what goods he was seeking, which at that time was Merlin MP4 players.

21.	Mr Nayar said Mr Kalsi wanted 800 Merlins and on 30 October IT told Mr Nayar in a fax message that they were hoping to secure stock consisting of Merlin MP4 players.  Mr Nayar then phoned Mr Kalsi and said there was a possibility he could supply the 800 Merlins (though no evidence was produced that showed IT had said how many they expected to be able to supply until the next day).  Mr Kalsi asked if he could be supplied with other items being Kenwood Clarion and Panasonic players.  Mr Nayar said he passed that information to IT and they said they could supply most of what had been requested but not as many of the Kenwood and Clarion items as Mr Nayar was seeking for Mr Kalsi.  We take it from that evidence that Mr Kalsi must have specified the numbers he wanted.     

22.	IT informed Mr Nayar that they would then be able to supply all the goods requested including those which had previously been unavailable.  Not only that, but all the goods were available at the same freight forwarder’s premises.  The freight forwarder was AFI Logistics and the goods were at their Southall premises.  

23.	We have mentioned in paragraph 3 above how these goods were part of a chain of transactions leading back to Keycomp Ltd.  The appellant did not deal with Keycomp Ltd.  We are satisfied by the evidence of Ms Bharti Mistry (customs officer) that Keycomp failed to account for output tax on the goods in question in this case when it sold them to PCB 2 Ltd (IT’s supplier) and that that failure to account was fraudulent.  

24.	Ms Mistry’s evidence was not disputed by the appellant and was as follows.  

25.	Keycomp was incorporated on 3 October 2005 and registered for VAT from 24 March 2006.  When it registered for VAT, Keycomp stated its main business activity was the wholesale of electrical equipment and in its VAT returns for 05/06 and 08/06 it made small repayment claims (£214.48 and £185.76 respectively).  On 6 November 2006 HMRC received notification that Keycomp had imported mobile phones from Portugal and Ms Mistry immediately visited the company’s office where she interviewed Mr Saeed Shah, the director, who said the company had commenced trading in mobile phones, I-Pods and DVDs.  It had two customers one of which was PCB 2 Ltd and the goods were supplied by Silverpound Trading LDA which had allowed Keycomp credit of £100,000.  Keycomp appeared to have no capital or other assets but Mr Shah claimed to have been given that credit. 

26.	HMRC then issued a direction to Keycomp shortening the period for which it was to make a return and payment and Keycomp then claimed that it had cancelled the transactions relevant to this appeal because PCB 2 had not paid for the goods.  Whether PCB 2 paid for the goods or not, it was untrue that the transaction had been cancelled and Keycomp’s directors must have known that was untrue, because release notes had been issued to AFI Logistics to allow the goods to be transferred to PCB 2.  It is possible that PCB 2 owed Keycomp a debt but the transaction had already occurred.  Thereafter Keycomp changed its address and its director became untraceable despite HMRC’s attempts to trace him.  An assessment of £941,238 was issued and remains unpaid.  The output tax in respect of the first UK sale of the goods in question in this appeal is included in that assessment.

27.	We are satisfied that the evidence proves that Keycomp’s non-payment of VAT was fraudulent.

28.	The salient facts about the transaction so far as the appellant’s involvement are as follows.

29.	The transaction took place very soon after Mr Nayar had been warned, at the interview on 24 October, about the risks of transactions being connected with MTIC fraud and the need, so far as HMRC were concerned, for due diligence checks to be thorough.  Whilst we accept that HMRC have no right to insist on due diligence checks, what a trader does about making enquiries about the bona fides of transactions is certainly potentially relevant to the question whether that trader was a person who knew or should have known that a transaction was connected with fraud.

30.	Mr Nayar said he had carried out VAT number checks and evidence of incorporation of his supplier and purchaser and AFI Logistics but some of the other due diligence checks were plainly worthless, such as a reference from a builder and decorator for IT, or more a cause for concern than a recommendation, such as a checkSURE report on IT saying it had above average risk and had a recommended credit limit of zero.  The due diligence about Nordisk consisted of registration details and self certified assertions and some documents in Danish which Mr Nayar admitted he cannot speak.

31.	This is not a case where the appellant could claim it had no cause to be concerned about the creditworthiness of its purchaser and supplier on the grounds that the goods were not going to be released and the supplier was not going to be paid until the appellant had been paid in full.  The appellant released the goods to Nordisk before that company had paid for the goods and obtained possession and presumably title to the goods before it had paid IT.  It had been agreed that payment by Nordisk was to be on 30 day terms so this was not a back to back transaction and so there was a serious risk of non-payment which materialised.

32.	Given that the goods were also released before the inspection report had been obtained, the appellant was taking a risk about IT’s creditworthiness because, had the goods turned out to be defective or not in accordance with the specification, the appellant could well have faced a claim against it by Nordisk and to have needed to recover damages from IT.

33.	Mr Nayar had requested a 100% inspection of the goods and this was purportedly carried out by A1 Inspections, though it seems likely Mr Nayar did not know that, as he had instructed AFI Logistics to carry it out and that company had sub-contracted it to A1.  Whoever carried the inspection out, in so far as it was carried out, it must have been a cursory inspection given the number of items (2,500) and the time involved (certainly within the 31 October during ordinary working hours) - according to PCB 2 Ltd’s stock offer to IT the price quoted was only available up to 5.30pm so the whole deal must have been completed by that time.  Mr Nayar produced a series of faxes dated 31 October instructing AFI to make 100% inspections.  Contrary to the usual practice these faxes do not show the time they were sent but they had attached to them the allocation notes from IT by which IT instructed AFI to allocate the goods on hold to the appellant.  The inspection must therefore have been ordered after the deal had been otherwise agreed.  The appellant did not order the goods formally from IT until it had agreed to sell them to Nordisk according to Mr Nayar’s evidence so that proves that the inspection must have been ordered after the deal had been agreed.  

34.	In fact the deal then went ahead without Mr Nayar having received the inspection reports and Mr Nayar has refused to pay AFI because of that.  The goods were not in fact sent to France until 8 November so Mr Nayar could have chased up the inspection reports before they were shipped but did not do so.  His evidence was that he had intended that the goods should be shipped on 2 November and the delay was because AFI lost the shipping instructions, which had to be re-issued, but either way he did not delay sending the goods until after he had the inspection report so he took the risk that the goods would not comply with their description as far as the purchase was concerned and that he would be selling goods that did not comply with the description he had given to his customer.  

35.	No detailed terms of business were agreed either with the appellant’s supplier or purchaser and the descriptions of the goods on the invoices did not supply the detail that might be expected for a deal worth £1,015,935.  Given the value of the goods and the lack of an existing trading relationship with Nordisk and the limited relationship with IT it is significant that such terms were lacking and Mr nayar must have realised that.

36.	Mr Nayar stressed that because the owners of Nordisk were from his family community there was a circle of trust between them and so he did not need to worry about such questions as the lack of due diligence and the lack of precise terms of business.  However he admitted that no such circumstance applied between him and IT and we assume no such circumstances applied between him and AFI Logistics.  

37.	When Nordisk failed to pay the appellant in accordance with the agreement the appellant also failed to pay IT but that company took little if any action about that and had not even been paid in full at the time of appeal.

38.	The appellant achieved very close to a 6% mark up for each of the types of goods dealt with in the transaction in question despite the variety of goods and values involved in the separate parcels of goods.

39.	We derive the following conclusions about this appeal from the evidence as a whole and we will set out some of the more important aspects of our reasoning.    

40.	It is a remarkable feature of this case that the appellant was able to supply goods exactly according to his customer’s requirements within a very short time despite the fact that at first it seemed he might not be able to source them all.  It then turned out that all the goods were already in the physical custody of the same freight forwarder including those that had been sourced at the last minute.  

41.	Mr Nayar, despite his obvious intelligence in business matters and his wide experience in business, entered into the largest deal he had ever conducted, in a sector of the economy which was new to him, with a supplier he barely knew (and who, he asserted, had approached him only shortly before this deal in unexplained circumstances) and a purchaser with whom he had never dealt before.  He did so without making much in the way of enquiries of either counterparty and ignoring negative information about the creditworthiness of his company’s supplier.  The transaction was conducted without any detailed terms of business and with only the sketchiest description of the goods and effectively no inspection or examination of the goods.  We regard the instructions for a 100% inspection of the goods as having been made purely for appearance sake not only because such an inspection could not reasonably have been expected to have been carried out in the time available anyway but also because the deal went ahead without it.

42.	 We find that Mr Nayar deliberately withheld information in two important respects when he was interviewed in October.  He failed to mention that he had had discussions about another deal in electrical goods, as we have found in paragraph 17 above, and he failed to disclose the details of why he entered into the first deal with IT, as we have found in paragraph 14.  We have already found that those facts show an uneasiness on Mr Nayar’s part about the deal the appellant was about to enter into.     

43.	Mr Nayar had a good deal of knowledge about the existence of MTIC fraud before he entered into the transaction in question.  HMRC had written to Roma II Ltd on 16 August 2006 specifically referring to MTIC fraud relating to “all types of VAT standard rated goods and services including computer equipment, mobile phones and ancillary equipment” and specifying a wide range of due diligence which should be obtained.  Only a few days before the transaction in question, at the interview already referred to, Mr Nayar had asked the officer who visited him what HMRC were doing about fraudulent trading and what penalties were applicable and he had referred to “arrests, sentences and recovery of asset cases which had been in the press”.  The note of the interview also records that the officer discussed how a business could have the “means of knowledge” to assess the possible risk of entering into certain deals and noted that Mr Nayar “appeared to understand the implications”.  MTIC fraud was clearly in his mind at that time and clearly must still have been in his mind when six days later he started to negotiate about the transaction in question and when on the next day he entered into it. 

44.	We have no doubt that a person of Mr Nayar’s knowledge, ability and experience in business should have known that this transaction was connected with VAT fraud.  The circumstances in which he was asked to supply the goods and the lack of commerciality of the transaction involving the sale of high value goods with minimal formality and with no assurance either from the supplier or to the purchaser that the goods were up to specification and the ease with which the transaction was effected all point to only one conclusion.  Add to that Mr Nayar’s lack of candour in the interview and the case becomes compelling.

45.	We hold that the transaction was one that was connected with fraud and that Mr Nayar, and therefore the appellant, should have known that was the case and it follows that the appellant has thereby lost its right to the input tax claimed and the appeal is dismissed.

46.	The Commissioners seek an award of costs and we direct that the appellant is to pay the costs of and occasioned by this appeal to be assessed by the High Court if not agreed between the parties 

           RICHARD BARLOW

          TRIBUNAL JUDGE
            RELEASE DATE: 27 May 2010