[2010] UKFTT 470 (TC)

TC00732

Appeal number: LON/2008/0335 

INPUT TAX – MTIC fraud – whether the Appellant knew or ought to have known of the connection to fraud – yes in relation to ought to have known, and the same with actual knowledge if blind-eye knowledge suffices – appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	TELEMENT LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	JOHN F AVERY JONES CBE (TRIBUNAL JUDGE)					SONIA GABLE				

Sitting in public at 45 Bedford Square, London WC1 on 13 to 17 September 2006

Simon Livingstone, counsel, for the Appellant

Simon Baker, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal by Telement Limited against the Respondent’s (“HMRC”) refusal to repay £71,487.50 of the input tax for the period 03/06 on the basis that the Appellant knew or ought have known of the connection of a particular transaction in mobile phones entered into by the Appellant to MTIC fraud.  The Appellant was represented by Mr Simon Livingstone, and HMRC was represented by Mr Simon Baker.
2.	The only issue in this appeal is whether the Appellant knew or ought to have known about the connection of the particular transaction with MTIC fraud.  The transaction in question (“the Transaction”) consisted of the purchase on 31 March 2006 of 1,900 Nokia N 70 mobile phones from Crotek Limited for £215.00 per phone, total £408,500 plus VAT £71487.50=£479,875, and their sale on the same day to La Parisienne du Commerce Sarl (“LPDC”) for £228.00 per phone, total £433,200.  Since it is conceded that there was a VAT fraud and that the Transaction was connected with it, it is unnecessary for us to spell out the details of the fraud.  It is sufficient to say that the Transaction forms part of a “dirty” chain with a missing trader. 
3.	We had 8 bundles of documents and heard evidence from Mr Mickey Opacic, director of the Appellant, officer Jerimiah Scanlon, officer Narinder Hunjan, officer Matthew Snoding, Mr Roderick Stone (at the time HMRC MTIC Deputy National Coordinator and senior policy advisor), and Mr John Fletcher (KPMG).  Witness statements of officers Hew Lloyd Griffiths, Michael Phipps, Clive White and Nigel Saunders were admitted unopposed, We find the following facts (where we attribute a statement to a particular person we are accepting this as a fact unless the contrary is clear from the context):
(1)	 The Appellant was established in 201.  Its director, Mr Mickey Opacic had previously had 8 years’ experience of the mobile telecoms industry having been an Account Manager at Motorola, Business Development Director at PMC Telecom, Marketing Director at Fone Range plc, and Managing Director at Kondor Limited.  
(2)	The Appellant had an established business dealing in mobile phone accessories.  Occasionally they deal in mobile phones.  Two of HMRC’s witnesses gave evidence that they had been told that the Appellant did not deal in mobile phones.  Mr Snoding’s witness statement said that at a visit on 4 June 2004 Mr Opacic said that the Appellant had no intention of dealing in mobile phones, but his handwritten notes recorded “Hasn’t bought & sold mobile phones themselves (last January ’03).  Had a call from Eurosystems but isn’t doing any phones.”  Mr Hunjan recorded in the Appellant’s electronic folder on 11 January 2006 “Trader claimed that over the last 18 months they have been in a repayment situation and has not dealth (sic) in mobile phones or CPUs.  The only products trader deals in are Nokia LCD, accessories etc.”  If the 18 months also related to dealing on mobile phones this is untrue because we saw an invoice dated 21 November 2005 for a deal in mobile phones.  Mr Opacic said that he had always occasionally dealt in mobile phones and would not have committed himself not to deal in them in the future.  We consider that the explanation of the different perceptions is likely to be that Mr Opacic wanted to give the officers the impression that the Appellant was not likely to be dealing in mobile phones but without expressly saying that he was not intending to do so and perhaps while playing down the occasions on which it had dealt in them in the past.  The reference to 18 months in Mr Hunjan’s note could have been restricted to the period during which it was a repayment trader without the statement being untrue.  We do not therefore consider that Mr Opacic was being untruthful when speaking to the officers but he was probably trying to create an impression that would lead HMRC to take less interest in the Appellant’s business.  Since HMRC had investigated the Appellant’s transactions on a number of occasions and had not found any connection with MTIC fraud he would not have had any dishonest reason to reduce HMRC’s interest at the time the statements were made, regardless of his knowledge relating to the Transaction.  Warnings about MTIC fraud had been given at visits on 3 January 2003, 6 February 2003, a letter of 4 May 2004, a visit on 4 June 2004, a letter of 7 June 2004, a copy of Notice 726 sent on 23 February 2005, and a letter of 6 May 2005. 
(3)	The full deal chain of which the Transaction was part as identified by HMRC was as follows.  All transactions relate to 1,900 Nokia N 70 mobile phones (“the phones”) held at a warehouse owned by AFI Logistics UK (“AFI”) in Southall, Middlesex (until they were shipped to AFI’s associated company’s warehouse in France as mentioned in (g) below).
(a)	Destonia General Trading (Cyprus).  They invoiced CHP Distribution Limited on 31 March 2006; unit price £213.20; mark-up and date of payment unknown.  They informed AFI that the phones would be arriving 31 March 2006 faxed at 2.31 pm (here and elsewhere we give the time on the fax header which we assume to be correct while recognising that the time may not have been altered for summer time etc).  The phones were released to V2(UK) Limited [note not CHP] faxed 31 March 2006 at 1700 hours.
(b)	CHP Distribution Limited (UK, missing trader).  They invoiced V2 (UK) Limited on 31 March 2006, description “Nokia N70”; unit price £213.45; mark-up £0.25 (£475) 0.12%; paid 12 April 2006 by First Curacao International Bank NV (“FCIB”) intra account transfer.
(c)	V2 (UK) Limited (UK, buffer).  Purchase order issued to CHP at £213.45 per unit 31 March 2006.  It invoiced South Wales Electrical Goods Limited (“SWEG”) T/A Mobile Phones World on 31 March 2006; unit price £213.70; mark-up £0.25 (£475) 0.12%.  It issued an Allocation Note dated 31 March 2006 to AFI to allocate the phones to SWEG and ship on hold, which was faxed 30 March 2006 [the day before the invoice] at 2.12 pm.  It also issued a Release note to AFI to release the phones to SWEG on 31 March 2006 which was also faxed on 30 March 2006 at 2.12 pm.  It was paid on 12 April 2006 by FCIB intra account transfer.
(d)	SWEG (UK, buffer).  Purchase order issued to V2 (UK) Limited at £213.70 per unit on 31 March 2006.  It invoiced Raptor Commerce Limited on 31 March 2006; unit price £214.20; mark-up £0.50 (£950) 0.23%.  It issued an undated instruction to AFI to “allocate/release” the phones to Raptor which was faxed on 30 March 2006 [the day before the invoice] at 2353 hours. It was paid 12 April 2006 by FCIB intra account transfer.
(e)	Raptor Commerce Limited (UK, buffer).  Purchase order issued to SWEG at £214.20 per unit on 31 March 2006; description “Nokia N70, Euro Spec, Sim Free.”  It issued a pro-forma invoice to Crotek Limited on 31 March 2006; unit price £214.50; mark-up £0.30 (£570) 0.14%.  It also issued an Invoice to Crotek Limited on 31 March 2006 with title retention provision.  It allocated and shipped on hold the phones to Crotek Limited on 31 March 2006.  It was paid on 12 April 2006 by FCIB intra account transfer.
(f)	Crotek Limited (UK, buffer).  Purchase order issued to Raptor at £214.50 on 31 March 2006.  Order confirmation and Invoice to the Appellant on 31 March 2006, description “Nokia N 70 Sim Free Handset” with a title retention provision stated on the invoice (and also in their terms and conditions which were supplied to the Appellant); unit price £215.00; mark-up £0.50 (£950) 0.23%.  It was paid on 11 April 2006 from the Appellant’s Lloyds TSB account, and received at Crotek’s FCIB account on 11 April 2006 (value date 12 April 2006).  Crotek issued amended [we did not see an un-amended version] “Allocation Instructions” to AFI 31 March 2006 stating “please allow the following customer [the Appellant] to carry out an inspection of the goods” and ending in bold capitals “please release the goods to the customer.” 
(g)	  The Appellant (UK, broker).  Pro-forma invoice issued to LPDC on 31 March 2006 with title retention provision describing the phones as “Nokia N70 new. SIM free. Euro spec. retail box pack.”  It invoiced LPDC on 31 March 2006 (with no reference to title retention) describing the phones as “Nokia N70 Sim Free”; unit price £228.00; mark-up £13.00 (£24,700) 6.05%.  Payment from LPDC was received in the Appellant’s account with Lloyds Bank on 6 April 2006.  The phones were shipped on hold on 31 March 2006 to AFI Logistique France Sarl, Roissy, France.  The Appellant authorised AFI to release the phones on 7 April 2006.
(h)	LPDC (France).  Purchase order (bon de commande) to the Appellant on 31 March 2006 at £228.  It invoiced Infortec 300 SL on 31 March 2006; unit price £230.00 (this is stated in sterling); mark-up £2.00 (£3,800) 0.88%.  It was paid on 6 April 2006 by FCIB intra account transfer.
(i)	Infortec 300 SL (Spain).  Paid LPDC by FCIB intra account transfer on 6 April 2006.  There is no information about further transactions.
(4)	There are some strange features of this chain, such as V2’s separate allocation and release documents faxed the day before the invoice date, SWEG’s instruction to allocate/release also the day before the invoice date, and Crotek’s Allocation Instruction of 31 March 2006 which ends up releasing the phones (which since it is stated to be an amended document one might have expected to be corrected if this was not intended).  The effect of the title retention provisions by Raptor (paid 12 April 2006), Crotek (paid 12 April 2006) and the Appellant (paid 6 April 2006) on the Appellant’s release of the goods on 7 April 2006 is unclear.  If the transactions are to be taken at face value (although it is agreed that some part of the chain is fraudulent) we assume that each party in the chain took title subject to the previous parties being paid, so that LPDC (and Infortec) did not in fact take a clean title until Raptor was paid on 12 April 2006 but once the goods had left the warehouse as a result of the Appellant’s release on 7 April 2006 it may have been impossible for the title retention to be enforced. 
(5)	The Appellant’s due diligence contains the following:
Crotek
(a)	Undated letter of introduction stating that Crotek are distributors and wholesalers of electronic equipment, and stating that “Crotek Limited import and export from a large database of Domestic, European and Non-European Distributors, you can be assured that our products will be priced competitively.”
(b)	Crotek provided terms and conditions for purchases and (a different set) for sales
(c)	As already mentioned, the Appellant completed Crotek’s trade credit application form on “7-11-2006” giving Unique Distribution and Elite Mobile as trade references.  Mr Opacic said that the referees were telephoned but there is no record of this and we are unable to find this as a fact.
(d)	Amended VAT registration certificate dated 8 February 2006 with effective date 8 September 2005, trade classification “51860 Other electronic and equipment.”
(e)	Incorporation certificate on change of name dated 23 June 2005
(f)	Bank account details with FCIB
(g)	There is no evidence of credit rating or other checks.  Mr Opacic said that his accounts department routinely checked credit ratings but in the absence of any evidence we are unable to find this as a fact.  There is a later Experian Limited report on Crotek (see paragraph 4(1) below) containing information that the Appellant could have found out at the time but did not.
LPDC 
(h)	Letter of introduction faxed 30 March 2006 at 1317 hours stating that it is an import/export company dealing across Europe dealing in all major mobile phone brands.
(i)	French VAT certificate dated 24 February 2004 stating that it had been registered since 1 January 2004.
(j)	Copy of the register of commerce registration showing registration on 22 January 2004 with a capital of Euros 8,000.  Its activity is stated as achat et vente en gros et au detail negoce de produits en tous genres intermediaires et commissionnaires importation et exportation de tous produits non reglementes (this is in block capitals and so omits any accents, which we have not attempted to add).  The gérant is given as M. RAFIQ Rizvan.
(k)	FCIB and BNP Paribas bank details.
(l)	(Not included with the faxed documents as it does not have a fax header) LPDC apparently completed the Appellant’s trade credit application giving FCIB as a bank reference but no trade references and the document is undated. 
	AFI
(m)	Certificate of incorporation dated 18 June 2004
(n)	VAT registration certificate issued on 9 August 2004 with effective date of 18 June 2004
(o)	Price list (see paragraph 4(3) above)
4.	This paragraph is, unless stated otherwise, restricted to facts that would be known to the Appellant in entering into the Transaction. 
(1)	 Mr Opacic had known the director of Crotek for 3 or 4 years having met at trade fairs.  They had discussed prospective deals but this was the first one that they entered into together.  The Appellant faxed HMRC on 3 April 2006 at 1354 hours (the Monday after the Transaction which was on a Friday) for verification of Crotek’s VAT number.  While Mr Opacic said that the fax was not sent on Friday 31 March 2006 because he could not get through, the fact that it was not sent until 1345 hours on the Monday does not suggest the Appellant was giving this priority and we are unable to find as a fact that the Appellant tried unsuccessfully to send it earlier.  The reply on 4 April said “The information provided by you concerning (see below) [this is Crotek Limited and its VAT registration number] differs from that held by Customs and at this time I am not able to confirm that this is a valid registration.”  Mr Stokes explained that it was likely to be other information that did not correspond to that held by HMRC.  But on 5 April 2006 HMRC verified Crotek’s VAT registration.  The Appellant completed Crotek’s “Trade Credit Application” on a form that is in identical format to the one completed by LPDC for the Appellant (except for the names and logo—the logo on Crotek’s form says Crotek Systems, whereas other Crotek documents have a logo with Crotek Limited) dated “7-11-2006” giving Lloyds TSB as its bank reference and Unique Distribution and Elite Mobile as trade references.  No explanation was given for the date of this document.  We saw an Experian Limited report on Crotek dated 8 August 2006 (about 4 months after the Transaction) that showed that the then last accounting date the company had current assets of £100 and current liabilities of £469 and which suggested that it was not trading.  The report suggested a credit limit of £100 as “There is insufficient basis upon which to assign a firm credit rating.”  The details showed its SIC codes to relate to “department stores and mail order retailing” (1980 codes) or “other retail non-specialised stores, other business activities” (1992 codes).  This report is an exhibit to Mr Scanlon’s witness statement and so we assume was not obtained by the Appellant, or if it was it was obtained after the Transaction, but it contains information that the Appellant could have obtained at the time of the Transaction.  What is clear is that Crotek’s business of “import and export from a large database of Domestic, European and Non-European Distributors” (to quote from their letter of introduction, see paragraph 3(5)(a) above) must have started after its last accounting date of 31 July 2005 (and probably at the time of the effective date of 8 September 2005 on the amended VAT registration certificate) and so no accounts of its trading could have been made up by the time of the Transaction.  Mr Opacic said that he had done an online check on Crotek using Creditsafe which showed a credit limit of £5,000, but did not keep a print-out of it.  Even if he did this (which we doubt), it could not have revealed any accounts since it started trading and so we do not accept that it would have showed a credit limit of £5,000.  Mr Opacic assumed that Crotek was using an offshore bank account because its suppler was overseas.  
(2)	The Appellant had not previously dealt with LPDC but had met its director at trade fairs.  No application was made to HMRC for verification of LPDC’s VAT number.  Mr Opacic said that he did not know that Redhill could do this, which we do not accept.  In any case their current VAT registration could have been checked on the Europa website.  The Appellant’s trade credit application completed with FCIB as a bank reference but without including any trade references.  The document is undated and does not have a fax header, which raises suspicions that it was completed later.  Since no trade references were given the Appellant cannot have made any such checks.  Mr Opacic said that he did not know that it was possible to carry out trade checks abroad but we do not accept that as an experienced businessman he thought this.    
(3)	The Appellant had not previously dealt with AFI.  It opened an account with AFI on 31 March 2006, the account opening application giving bank details and Unique Distribution and European Telecom (Mr Opacic said that this was a trading name of Global Telecom Distribution plc, not European Telecom plc) as trade references.  The Appellant’s instruction to AFI faxed at 1813 hours on 31 March 2006 “further to our telephone conversation” states “Agreed rate £tba, Insurance £tba (required), IMEI & Inspection report (required).”  Mr Stone explained that because of the EU Insurance Mediation Directive which took effect in February 2005 AFI would not have been able to provide insurance (unless they registered with the FSA, which no freight forwarder did) and would have had to give details of who the Appellant could contact to arrange insurance.  In evidence Mr Opacic maintained that there was insurance for the phones and that he paid almost treble the normal cost for shipping on account of insurance.  However the amount the Appellant paid to AFI (as shown by AFI’s invoice produced during the hearing) was 90p per phone for freight and 20p per phone for IMEI and inspection charges which is the same figure as shown on AFI’s price list headed “Mobile phone road export charges (excluding insurance charges),” the 90p per unit figure being for shipping to Paris.  If Mr Opacic had, as stated in the fax, spoken on the telephone to AFI he would surely have been quoted the cost of the freight because he was charged the amount shown on AFI’s price list and so there cannot have been any negotiation, and that he had to go elsewhere for insurance.  This suggests that they had not spoken on the telephone.  We find that the phones were not insured while in AFI’s warehouse or during their transfer, and Mr Opacic must have known this (or would have appreciated this if he had thought about it).  As most of the Appellant’s transactions were export ones (as stated, it was trying to go onto monthly returns in January 2006 on the basis that it had been a repayment trader for 18 months) Mr Opacic must surely have known about how to obtain freight insurance and that freight forwarders could not provide it as agents.  The limit of liability under the CMR Convention is about £7 per kilo, and the weight declared on the CMR dated 31 March 2006 was 1,646 kilos, which means that the carrier’s liability was limited to about £11,500.  The CMR gives the carrier as Mr D Morris 9484 DYW.  AFI issued a shipping certificate on 3 April 2006 confirming that they were shipped on 31 March 2006.  Eurotunnel details showed that vehicle 9484 DWY (the different order of the letters could be a transposition error by Eurotunnel) travelled on 1 April 2006 with check-in time 0958 departure at 0950.  
(4)	AFI sent the Appellant an email on 5 April 2006 at 1406 hours saying “Please find attached the inspection report you were looking for.”  This attached an Inspection report by A1 Inspections Limited (“A1”) dated 31 March 2006.  A1’s website and report states that it is an ISO 9001:2000 registered firm.  Although Mr Opacic said that he had instructed A1 himself we consider it more likely (and we so find) that this was arranged by AFI as the cost was quoted in AFI’s price list and that figure was invoiced by them.  If at 1813 hours on Friday 31 March 2006 the inspection report was “required” it cannot have taken place before then, and the phones were checked in at Dover at 0958 next morning so this does not give much time for A1 to be instructed and do the inspection on 31 March 2006 in Southall as the report states they did, leading to the suspicion that AFI and A1 were part of the fraud.  It is odd that the fax of 5 April 2006 refers to “the inspection report you were looking for” when if it served any useful purpose the Appellant would have wanted to see it before buying the phones and certainly before spending money on transporting them to France.  The report stated: excellent condition (both boxes and cartons); new goods; English keypad; 2 pin chargers; “0 IMEI duplicates found when checked on your database”; language codes 332 (manual type: Spanish; limited warranty; software languages: “English, French, Dutch, Spanish, Italian”); and 909 (manual type German; warranty: “European Bloc Warranty”; software languages “Auto, English, French, German, Italian, Turkish, Netherlands”).  We saw an extract from A1’s website as it had then been, explaining: 
“A1 can now manage a duplication database for traders of CPUs, Hardrives, etc.  We will confirm if the stock has been traded previously by yourselves and provide a report of serial numbers and a letter confirming whether or not the goods have been seen before by yourselves.”  
Accordingly even if A1 did record IMEI numbers, since the Appellant had not previously dealt with A1 the only items on “your database” would have been the phones in the Transaction.  The numbers would have been available to the Appellant by logging on to A1’s website with a username and password (the archive website shows a log in section) but the Appellant did not consider it necessary to download them.  By the time they were asked for the numbers by HMRC on 14 May 2007 they were unable to download them.  A1 ceased trading shortly afterwards on 6 June 2007 according to the liquidator’s notification of insolvency details to HMRC, the liquidator being appointed on 9 January 2008.  We are unclear about the meaning of the language codes relating to the phones as there is no breakdown between the numbers of each one.  The archive website states that A1 offered a new service checking for stolen goods but this seems to have been from 2 May 2006, but even if it was available, it was at an additional cost of 3p per IMEI number which the Appellant did not pay as it was not included in AFI’s invoice.  Mr White’s unchallenged evidence was that in June and July 2006 HMRC found seven cases where A1 had given inspection reports of electronic goods where the loads were of something else.  While this is evidence to show that A1 were (at least by then) part of the fraud, it is not evidence of the Appellant’s knowledge of doubts about A1.
(5)	The Appellant’s “Trade Credit Application” form (which, as mentioned, is the same form as Crotek’s except for the names and logo) was filled in by LPDC giving FCIB as a bank reference and no trade references; the form is not signed or dated and nor (unlike other material from LPDC) is there any fax header.  
(6)	The Transaction was of significant size to the Appellant.  The Appellant’s outputs in its VAT returns were: £992,596 (12/04), £529,172 (03/05), £748,553 (06/05), £437,017 (09/05), £704,237 (12/05), £1,371,919 (03/06, the period in question).  The Transaction accounted for £433,200 of the total outputs (31%) in the last period.
(7)	Mr Opacic initially said that he thought that the Appellant was taking advantage of price and currency fluctuations, in evidence he changed this to taking advantage of stock shortages.  If an authorised distributor was able to purchase the phones from Nokia at a price between £220 and £240 depending on volume discounts the Appellant’s sale price of £228 (having paid £1.30 on freight and inspection) would indicate a purchase from the largest authorised distributor and a sale to a purchaser who could not obtain them from a distributor in France.  The price is suspicious but there is no evidence that the Appellant knew this, although Mr Opacic used the www.ipt.cc website and could have found the prices being quoted at the time.
5.	Mr Fletcher’s evidence was that the grey market caters for market failures in price (arbitrage in different prices between countries, or box-breaking where phones are subsidised by a network operator and then unlocked) or volumes (where a retailer needs more stock or an authorised distributor has too much stock).  
(1)	On arbitrage, Nokia has a pricing policy that is the same in every country with exchange rates fixed quarterly.  The price Nokia would have sold the phones to an authorised distributor was £240 and with the maximum volume discount was £220 (although he was relying on his memory for this last figure).  Both of these prices are stated in Nokia’s price list for authorised distributors.  There was little opportunity for arbitrage in Nokia phones based on exchange differences between sterling and the euro as the largest change in 2006 was 1.68% in July 2006.  Arbitrage in new phones can also arise through staggered release dates in different countries, but this was not relevant here.  In an arbitrage deal the minimum information about the phones would be the warranty, battery, charger, manual and any auxiliary software, such as a CD-Rom containing applications allowing the phone to interface with a computer.  Traders not sourcing stock from the manufacturer or an authorised distributor are extremely unlikely to be pursuing arbitrage opportunities.  
(2)	Volume shortages can arise where the manufacturer cannot immediately meet the demand of network operators who approach authorised distributors who can configure the phones for the particular network operator.  A request for proposal by a retailer or network operator to an authorised distributor where there was a volume shortage was very specific as to the numbers of phones, the model, colour, the frequency, whether it was configured to a particular network, the type of charger (eg 3-pin) and language of the manual, that it was boxed including software CD, the type of warranty (eg European Limited Warranty), the deadline (eg by tomorrow close of play), and that the phones are the own stock of the seller without a chain.  A trader is unlikely to be able to operate in this market without holding stock.  
(3)	Dumping occurs when excess stock is dumped in other markets.  This is likely to apply to older models.  A trader will buy from an authorised distributor or the manufacturer.  
(4)	In all grey market deals one expects short chains, ideally with the authorised distributor or network operator selling direct to the retailer.  Longer chains can occur on the first occasion but market forces tend to eliminate intermediary traders in order to increase profits.  Information about grey market opportunities was available at the relevant time from a website, www.ipt.cc.   
(5)	Retail sales of the Nokia N70 phone in March 2006 in Europe were 257,462 units.  Sales were fairly constant at the time with the highest number in 2006 being December 2006 with 296,087 units.
(6)	Nokia phones in the European market come in several varieties involving both keypads and software.   Terms such as “central European stock” and “European specification” do not provide sufficient detail fully to describe a handset. 
6.	Mr Stone said that the Government announced in December 2005 that it intended to apply to the European Commission for a derogation to introduce a reverse charge mechanism for mobile phones and computer chips to reduce fraud.  This received substantial press publicity in the period up to March 2006.  The ECJ’s decision in Bond House and Optigen was given on 12 January 2006 which also gave rise to publicity.  He considered that a trader operating in this field at the time of the Transaction would have been aware of the considerable danger of fraud.  We do not, however consider it relevant to the issue of knowledge or ought to have known that with hindsight the statistics suggest that at the time about 90% to 95% of deals in mobile phones and CPUs combined were tainted with fraud.
Law
7.	In Mobilx v HMRC [2010] STC 1436 in the Court of Appeal Moses LJ (with whom Sir John Chadwick and Carnwath LJ concurred) explained Kittel at [43]:
“A person who has no intention of undertaking an economic activity but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person's VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax § 59 and Kittel § 53). A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct.”
On the meaning of “should have known” Moses LJ said:
“50. The traders contend that mere failure to take reasonable care should not lead to the conclusion that a trader is a participant in the fraud. In particular, counsel on behalf of Mobilx contends that Floyd J and the Tribunal misconstrue § 51 of Kittel. Whilst traders who take every precaution reasonably required of them to ensure that their transactions are not connected with fraud cannot be deprived of their right to deduct input tax, it is contended that the converse does not follow. It does not follow, they argue, that a trader who does not take every reasonable precaution must be regarded as a participant in fraud.
51. Once it is appreciated how closely Kittel follows the approach the court had taken six months before in Optigen, it is not difficult to understand what it meant when it said that a taxable person “knew or should have known” that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT. In Optigen the Court ruled that despite the fact that another prior or subsequent transaction was vitiated by VAT fraud in the chain of supply, of which the impugned transaction formed part, the objective criteria, which determined the scope of VAT and of the right to deduct, were met. But they limited that principle to circumstances where the taxable person had “no knowledge and no means of knowledge” (§ 55). The Court must have intended Kittel to be a development of the principle in Optigen. Kittel is the obverse of Optigen. The Court must have intended the phrase “knew or should have known” which it employs in §§ 59 and 61 in Kittel to have the same meaning as the phrase “knowing or having any means of knowing” which it used in Optigen (§ 55).
52. If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.”
He concluded:
“59. The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who “should have known”. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel. 
60. The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”
8.	In relation to the standard of proof, it used to be said that the more serious the allegation the less likely it is that the event occurred and the stronger (or more cogent) should be the evidence before a court concludes that the allegation is established on the balance of probability.  The House of Lords in In re B [2009] AC 11 has clarified this.  As Lord Hoffmann (with whom, Lord Rodger and Lord Walker agreed) said:
“There is only one rule of law, namely that the occurrence of the fact in issue must be proved to have been more probable than not. Common sense, not law, requires that in deciding this question, regard should be had, to whatever extent appropriate, to inherent probabilities. If a child alleges sexual abuse by a parent, it is common sense to start with the assumption that most parents do not abuse their children. But this assumption may be swiftly dispelled by other compelling evidence of the relationship between parent and child or parent and other children. It would be absurd to suggest that the tribunal must in all cases assume that serious conduct is unlikely to have occurred. In many cases, the other evidence will show that it was all too likely. If, for example, it is clear that a child was assaulted by one or other of two people, it would make no sense to start one’s reasoning by saying that assaulting children is a serious matter and therefore neither of them is likely to have done so. The fact is that one of them did and the question for the tribunal is simply whether it is more probable that one rather than the other was the perpetrator.”
Lady Hale (with whom Lord Scott, Lord Rodger and Lord Walker agreed) said:
“70…Neither the seriousness of the allegation nor the seriousness of the consequences should make any difference to the standard of proof to be applied in determining the facts. The inherent probabilities are simply something to be taken into account, where relevant, in deciding where the truth lies.
72.  As to the seriousness of the allegation, there is no logical or necessary connection between seriousness and probability. Some seriously harmful behaviour, such as murder, is sufficiently rare to be inherently improbable in most circumstances. Even then there are circumstances, such as a body with its throat cut and no weapon to hand, where it is not at all improbable. Other seriously harmful behaviour, such as alcohol or drug abuse, is regrettably all too common and not at all improbable. Nor are serious allegations made in a vacuum. Consider the famous example of the animal seen in Regent’s Park. If it is seen outside the zoo on a stretch of greensward regularly used for walking dogs, then of course it is more likely to be a dog than a lion. If it is seen in the zoo next to the lions’ enclosure when the door is open, then it may well be more likely to be a lion than a dog.”
9.	Our understanding is that the dangers of the old formulation were first, that it could be misunderstood to be increasing the civil standard of proof to something above the balance of probability; and secondly, that it was illogical to start with considering the seriousness of the allegation in a vacuum and assume that all serious allegations were unlikely and therefore needed cogent proof.  Now one starts with determining the likelihood of the allegation having regard to the surrounding circumstances and not in a vacuum.  Having done so the only question is whether the allegation is proved to the balance of probabilities.  In other words, the inherent probability itself includes the particular circumstances.
Contentions of the parties
10.	We have listed in paragraphs 12 and 14 below the factors principally relied on by Mr Baker as showing that the Appellant either knew or ought to have known of the connection of the Transaction with fraud.  Where relevant we have included Mr Livingstone’s answers to them and our own views.  There was no obvious disagreement between them on the law.
11.	In relation to the In re B standard for determining the balance of probabilities we have accepted Mr Stone’s evidence that a trader in mobile phones at the time of the Transaction would have been aware that the danger of fraud was a significant one.  It follows that in a transaction contains features that are out of the ordinary the trader is on notice that the likely explanation is that there may be a connection to fraud which needs to be investigated.  Mr Baker contended that the issue was not whether the trader knew that other people were being fraudulent but rather whether he actually was being fraudulent.  In assessing the inherent probability of that, the appropriate context and circumstances must therefore not merely be the extent to which fraud was known about, but rather the extent to which fraud was actually perpetrated and common-place.  We do not accept this since it is illogical to test whether knowledge is proved to the balance of probabilities by taking into account probabilities that were not known about at the time.
Actual knowledge
12.	The following factors were relied on by Mr Baker as indicating that the Appellant was aware that the Transaction was connected with fraud:
(1)	The inadequacy of checks and due diligence undertaken by the Appellant.
In particular no credit or other commercial checks were carried out on Crotek and the Redhill check was made on 3 April 2006 after the Transaction (and after shipping the phones to France on 1 April 2006, although they were still held to the Appellant’s order in the French warehouse).  The use by Crotek of an FCIB account was not questioned by the Appellant as Mr Opacic assumed that it was because Crotek’s suppler was overseas.  However, we do not think that FCIB was under any suspicion at the time and the use of an offshore account does not of itself indicate fraud.
Nor were any credit references taken up for LPDC.  No trader references were given.  No Redhill check was made. 
(2)	The inference to be drawn by the seeming fabrication of evidence.  
Mr Baker relies on the dating of Crotek’s trade credit application form on “1-11-06” as suggesting that Mr Opacic completed the document later than the transaction and dated it without thinking.  The fact that the form is the same layout as the one completed by LPDC for the Appellant is suspicious.
(3)	Lies about Telement’s involvement in the mobile phone market.  
We have concluded that these were short of being deliberate lies but were probably intended to reduce HMRC’s interest in the Appellant’s business.  
(4)	Inferences from the lack of Insurance.  
We have found that there was no insurance and that Mr Opacic must have known this, which is commercially stupid, but is it more than this?  Mr Baker contends that this indicates that the Appellant knew it was not taking any risk and therefore knew that the Transaction was fraudulent.  This might be because Mr Opacic had been told that he would incur no loss, which would indicate that he knew that the Transaction was connected to fraud.  On the other hand, assuming that someone was masterminding a fraud in relation to the VAT on the Transaction (£71,487.50) for which he needed to purchase phones worth £433,200 at the Appellant’s selling price (which is within Mr Fletcher’s range of what an authorised distributor would need to pay) we do not understand why the fraudster would not want to insure the phones since their loss would be far greater than the VAT evaded and if lost they could not be used for future fraudulent transactions.  It would surely have been in the fraudster’s interest to ensure that AFI (if it was party to the fraud) would help to ensure that the phones were insured not only to protect the fraudster but also to make the Appellant’s transaction look more genuine.  We could understand the lack of insurance if the phones did not exist, but we have no evidence which would enable us to make any such finding.  We are there unable to come to any firm conclusion about the significance of the lack of insurance but given the Appellant’s experience in the export market we consider that it is suspicious.
(5)	The relationship with AFI.  
The fax to AFI of 31 March 2006 stated to be following a telephone conversation including “Agreed rate £tba, Insurance £tba (required) is strange because the Appellant in fact paid the freight rate on AFI’s price list and AFI knew that they could not provide insurance as agent but needed to tell the Appellant who to contact, which as a frequent exporter Mr Opacic must have known.  
(6)	IMEI inspections and the role of A1. 
There does not seem to have been time for A1’s inspection report it to have taken place between the fax to AFI in Southall requiring it at 1813 hours on Friday 31 March 2006 and the phones being checked in at Dover at 0958 next morning, in order for the Appellant to act on the contents of it.  In any case the Appellant was not sent the report, which is dated 31 March 2006, until 5 April 2006.  One would have thought that the report was needed in order for the Appellant to be satisfied about what it was buying.  It is difficult to see what purpose the report served if the Appellant did not receive it in time to do anything about it.  At the time it seems that A1 did not check for stolen phones (or if it did the Appellant did not pay for the service).  We consider that the Appellant’s lack of interest in the inspection report is suspicious.  We deal with IMEI numbers in paragraph 14 below.
(7)	Non-commerciality of the transactions.  
Mr Baker relies on the Appellant making a greater mark-up than others in the chain, that there is no commercial sense in the Transaction in non-UK specification phones which had been imported into the UK, the absence of international pricing differences in Nokia phones, the absence of currency differences at the time, the Transaction not being typical of grey market stock shortages or dumping transactions, long chains, back to back transactions and the timing of the transactions and payments under which the phones were released by the Appellant on 7 April 2006 but Crotek was not paid until 11 April 2006.  We would expect the Appellant to make a greater mark-up than others in the chain as it had to finance the VAT.  We are not particularly concerned with the phones not being UK specification.  We agree that the chain was not a normal grey market one but we must concentrate on what was known by the Appellant.  On that basis it might have been suspicious of the price offered by Crotek of £215 which is below what Mr Fletcher said an authorised distributor with the maximum discount would have paid.  Mr Opacic used the www.ipt.cc website and could have found the prices being offered at the time.  Although Crotek did authorise AFI to release the phones to the Appellant on 31 March 2006 before being paid this can be analysed as parting with possession of the phones while they were still subject to a title retention provision.
(8)	The deliberate keeping of legitimate trading partners separate from the fraudulent deals.  
Mr Baker relies on the fact that the trade references given to AFI were Unique Distribution and European Telecom, and those given to Crotek were Unique Distribution and Elite Mobile.  He contends that it would have been more normal to give AFI a reference of another freight forwarder, DMS, that they used frequently.  He suggested that when doing a transaction that it knew was fraudulent the Appellant did not want to use names of its normal business partners.  Mr Opacic said that they always used these companies as references as they were known in the trade and they had dealt with them over a long period.  In the light of this we are not prepared to find that the names given as references is indicative of knowledge of fraud.
(9)	Circumstances of the other fraudulent traders in the chain.  
Mr Baker relies on the fact that we now know that every party in the chain has been involved in MTIC fraud and therefore “The sheer implausibility of [the Appellant] being the sole ‘innocent’ trader in the chain is so great that the possibility can safely be discounted.”  We are not impressed by arguments of guilt by association.  Does not the person masterminding an MTIC fraud need an innocent exporter (we use the expressions exporter and importer for simplicity recognising that this is not correct within the EU) or at least someone who does not ask too many questions?  The fraudster is not going to put up the input tax to be paid by the exporter in order to disappear with the same money as importer.  We would expect the exporter to be someone who puts up the input tax and can reclaim it so that the loss of tax by the disappearing importer is borne by the state.
13.	There may be an innocent explanation for some of the above but it is important to look at them as a whole.  Our conclusion is that Mr Opacic is not dishonest but that he was turning a blind eye to the possibility of fraud and he was not acting in a commercial way, for example, in completing the Transaction without receiving the inspection report, not making any enquiries about LPDC, not obtaining more details about Crotek and in particular not obtaining HMRC’s confirmation about Crotek’s VAT registration until 5 April 2006, and not insuring the phones.  We would categorise this as “blind eye” knowledge which is higher than the test for ought to have known (see HMRC v Olympia [2009] STC 643 at [122]) and amounts to constructive knowledge (at [86]).  We would infer that by not taking reasonable precautions the Appellant had actual knowledge of the connection with fraud, but even if this is wrong we shall find below that the Appellant ought to have known of the connection with fraud.
Ought to have known
14.	In support of his contention that the Appellant ought to have known of the connection with fraud Mr Baker relies on the following:
(1)	The circumstances of the transaction (as above).
(2)	Failing to make any further enquiries:
(a)	Enquiries of Crotek, LPDC, AFI and A1, would be likely to have thrown up questions.  For example, further checks on Crotek would have revealed that it was not trading at its last accounting date of 31 July 2005 (see (f) below).  
(b)	Failing to follow up A1’s statement that they had checked for IMEI numbers against “your database.”  We do not accept this.  All a trader can do is to check that it has not traded in the phones before for which there will be a first time.  The possibility of checking these against another database of earlier deals done by the Appellant was not explored.
(c)	Not obtaining and checking the IMEI numbers which might have indicated that the phones did not exist or that they included stolen ones.  We are not sure what checks the Appellant could have done, particularly within the time scale of the Transaction.  HMRC could, we assume, have checked them against their NEMESIS database but not in the time scale of the Transaction and we not think that they would have done this at the Appellant’s request.  The Appellant might have been able to check the IMEI numbers for stolen phones but how this could be done was not explored.  We do not therefore rely on this.
(d)	Crotek’s using an offshore bank account should have led to further enquiries.
(e)	If the Appellant was told that Crotek was using an offshore bank account because its supplier was abroad the Appellant should have investigated this.  We are not sure what investigations the Appellant could have made.
(f)	Crotek’s credit limit should have raised questions.  Even though the Appellant was not giving any credit to Crotek its supplier must have been.  If the Experian Limited report had been obtained at the time of the Transaction it would not have been more favourable that the one at 8 August 2006 which showed that it was not trading at 31 July 2005.  We have not accepted that Creditsafe would have given a credit limit of £5,000 but even if it had, a sale of phones to the Appellant for £408,500 plus VAT 9 months later, for which its supplier must have been giving it credit of its purchase price would be slightly less than this amount would raise questions.
15.	As with the issue of actual knowledge, some of these may have an innocent explanation but it is important to look at them as a whole.  What is clear is that the Appellant could have found out that Crotek had started to trade in mobile phones after 31 July 2005 and in the absence of any accounts since then its financial position would have been unknown.  The amended VAT registration with an effective date of 8 September 2005 suggests that it started to trade in electronic goods then, which is less than 7 months before the Transaction.  The Appellant did not wait for the Redhill check on its VAT registration.  The sale was to LPDC about which virtually nothing was known.  The Appellant did not wait for the inspection report before shipping the phones to France.  We ask ourselves is this a commercial transaction or is it a transaction in which “he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”  We consider that it is the latter.  There are far too many odd features of the Transaction for any other conclusion to be possible.
16.	Accordingly we dismiss the appeal.  In their statement of case HMRC warned that they would ask for costs if they won and accordingly we direct, pursuant to the paragraph 7(3) of Schedule 3 to the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, that the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 do not apply in respect of costs and that the former VAT Tribunals Rules 1986 apply, and that the Appellant pay HMRC’s costs of and incidental to the appeal to be determined in default of agreement on the standard basis by a tax judge.
17.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN F AVERY JONES

TRIBUNAL JUDGE
RELEASE DATE: 6 October 2010