Excel RTI Solutions v Revenue & Customs (Rev 1)[2010] UKFTT 519 (TC) (27 October 2010)

DECISION

1. This appeal is against the denial of input tax totalling £3,302,830 on 21 consignments of mobile phones purchased between 5 April and 12 June 2006 and sold to overseas customers.

2. There were four decisions, the main decision being the first on 21 December 2006. All were based on the decision of the Court of Justice in Kittel v Belgium and Belgium v Recolta Recycling (Joined Cases C-439/04 and C-440/04) [2006] ECR I-6161; [2008] STC 1537 being made on the footing that the input tax was incurred in transactions connected with the fraudulent evasion of VAT and that the Appellant (“Excel”) knew or should have known that this was the case.

3. Customs contended that 19 of the consignments were traced through intermediate suppliers which they described as “buffers” to defaulters which had failed to account for the VAT charged by them to the first buffer. Customs contended that the other two consignments involved contra-trading in that, although Excel’s consignments were not traced back to a defaulter, Excel acquired the goods from suppliers which sold other goods to overseas customers which other goods were traced back to defaulters so that the sale to Excel removed the need for Excel’s suppliers to make a repayment claim.

4. Mr Cunningham contended that the 21 transactions were part of an overarching contrived scheme or schemes and that Tony Constantinides, the managing director of Excel, knew this. Alternatively, relying on the recent decision of the Court of Appeal in Mobilx Ltd v Revenue and Customs Commissioners [2010] STC 1436, he contended that Excel should have known that the only reasonable explanation for the transactions was that they were connected with fraudulent defaults.

5. Mr Patchett-Joyce did not advance a positive case that Excel’s transactions were not connected with fraudulent defaults but put Customs to proof. Excel’s case was that the director, Mr Constantinides, did not know of any such connection and that it was not established that he should have known.

The evidence

6. 26 witnesses were called by Customs, all of whom confirmed witness statements and were cross-examined. Susan Rita Bransgrove and Tracey Ellen Beard were responsible for Excel, Mrs Bransgrove up to the end of April 2006 and thereafter Mrs Beard who made the decisions under appeal. 14 witnesses gave evidence as to the defaulting traders in the 19 direct chains as follows: Peter Alan Cameron-Watson (Deal 1), Barry Michael Patterson (2), Jonathan Carl Laing (4), Douglas Armstrong (5, 7 and 9), Stewart Yule (6), Joanne Katie Gibbons (8), Mathew Charles Bycroft (10), Timothy Reardon (11, 12 and 14), Colin Needs (15), Andrew Paul Monk (16), Patricia Mary Westwell (17), Allistair Duncan Strachan (18), Martin Russell William Evans (19) and Fu Sang Lam (20 and 21). Patricia Mary Wilson gave evidence as to Ultimate Wholesale (UK) Ltd (“Ultimate”), an intermediate trader in Deals 5, 7 and 9 and also in 13 which was a contra chain. Joseph Baines, Peter Harold Davies, Michael James Downer and Pankaj Madalia gave evidence of the contra chain in Deal 3 together with Mr Bycroft; Judith Mooney gave evidence as to Top Grade Marketing Ltd (“Top Grade”) in Deal 13, a contra chain. Farzana Shaheen Malik gave evidence based on data extracted from the electronic records of First Curacao International Bank (“FCIB”) which was used by Excel and all the other traders in the chains. Tatjana Harris ACCA, an employee of Customs, gave evidence analysing Excel’s financial statements. Rodney Stone gave evidence of Customs’ policy and practice which was not specific to this appeal. John Fletcher, CA, a principal advisor in KPMG LLP, produced a report in the form of a witness statement.

7. There were two witnesses for Excel: Mr Constantinides and Stephen Plowman, director of Veracis Ltd, both of whom confirmed witness statements and were cross-examined. A statement of Socrates Socratous was put in evidence.

8. The hearing bundle consisted of 52 lever arched files containing around 22,000 pages.

Undisputed evidence

9. It is convenient to start with the evidence which was agreed or which was not subject to any substantial challenge. Most of this is contained in documents including Customs’ Statement of Case which was amended on 30 April 2010 pursuant to a direction.

10. Excel was registered for VAT with effect from its incorporation on 6 November 2002. The application form signed by Mr Constantinides gave the intended business as “internet resourcing and IT consultancy services.”

11. Initially Excel made quarterly returns but was placed on monthly returns from 1 December 2004. Excel had advised Customs in a letter of 15 July 2004 of the intention to expand into the import and export of mobile phones, which we refer to as “mobiles”, with turnover increasing to £3 million.

12. On 14 October Excel was visited by Rachel Woodfield and another officer. She noted that wholesale of mobiles was a new venture with the first supply expected in early November; Mr Constantinides had a 15 year history in the telecoms industry; he hoped to achieve a 4 to 8 per cent mark up. She noted, “He appears well versed with the risks apparent in this sector and is carrying extensive due diligence checks on all customers and suppliers.” He was familiar with Notice 726 and Redhill procedure. Projected turnover in the first 12 months was £12 million Mr Constantinides gave her examples of Excel’s introductory pack and the due diligence checks and list. Excel had been advertising extensively by internet and mailshots.

13. On 18 October Mr Stone wrote a standard letter from Redhill stating that the estimated loss of VAT from fraud in the sector was £1.7 to £2.6 billion. He wrote that verification of the VAT status of new customers and suppliers should be faxed to Redhill. He asked for a purchase and sales listing to be forwarded monthly with VAT numbers.

14. Various interchanges by letter and e-mail followed between Excel and Rachel Woodfield. On 8 November Excel sent a list of companies so far approved which include Inter Communications (UK) Ltd (“Inter Comms”) (the supplier in Deals 1, 4 and 10 in this appeal), Cell Trading Ltd (the supplier in Deal 2) and Cybacomms Ltd (the supplier in Deal 17).

15. On 1 December Rachel Woodfield carried out a further visit. She recorded that Excel had decided not to sell in the UK and that all sales would be to the EU or third countries. Excel had carried out extensive due diligence checks. She noted, “The checks and paperwork carried out are comprehensive.” Excel had employed A1 Inspection Ltd (“A1”) and had gone for 100 per cent cover; A1 recorded all IMEI numbers of phones traded.

16. On 4 January 2005 Excel e-mailed a summary of purchases and sales for the VAT period December 2004 showing four deals, three involving sales to Switzerland and one to Dubai. The December return dated 10 January 2005 showed £137,628 input tax and a repayment due of that amount.

17. Rachel Woodfield visited Excel again on 25 January and approved repayment. She noted that a new member of staff, Jodie Curl, had been employed.

18. On 3 February Mrs Bransgrove who had taken over responsibility visited Excel. The return for 01/05 had been received on 2 February with a repayment claim of £203,072. She noted that there was no factoring of VAT, no third party payments and that full payment was always received prior to release of goods. She asked for the IMEI numbers to be forwarded with the deal sheets. There were three deals in the period. Repayment was approved.

19. On 9 February Mr Constantinides wrote that a new procedure “Notification of stock arrival” to be stamped by the freight forwarders had been introduced. An e-mail of the same day asked whether there was a method to check whether the supplier’s returns were up to date and whether any liability was outstanding.

20. On 8 March Mrs Bransgrove visited Excel to verify the 02/05 repayment claim of £241,905 arising from two deals with sales to Switzerland. Mr Constantinides said that Excel was continuing to research how to ensure that it was not caught up in any non-economic activity or joint and several liability enquiries. The repayment was authorised.

21. On 11 April Mrs Bransgrove and another officer visited Excel to verify the 03/05 claim for £275,883. There was a discussion as to the eventual destination of European specification goods sent to Dubai; Mr Constantinides thought that they were likely to go back to Europe. He stated that due diligence was sometimes done at the same time as the deal. Repayment was authorised.

22. On 4 May Mrs Bransgrove wrote a letter regarding joint and several liability. We refer to such letters as “J and S letters”. It included the following:

“I am writing to you because as a result of our enquiries in respect of your January 2005 VAT claim, we now know that of the three transactions selected for verification, two commenced with a defaulting trader, and resulted in a loss of revenue exceeding £185,000.

Full details of your sales that resulted in a loss of revenue are as follows.”

The letter then gave the invoice number, customer name, invoice number, description of goods and net value of each of the two sales. The letter referred to Notice 726 and said that “if you knew, or had reasonable grounds to suspect, that VAT would go unpaid then [joint and several liability] can be applied to you.” The letter also stated,

“For the avoidance of doubt I should finally tell you that the letter is without prejudice to any enquiries Customs may be making, or have made, into transactions with which you have already been involved and which are in a chain of transactions where VAT has gone unpaid.”

Mr Constantinides telephoned on 6 May in response; he was very concerned and said that he would be contacting his suppliers to try to get them to tighten their procedures. Mrs Bransgrove noted,

“I confirmed the letter is for information and does not imply that I am asking for anything to be done at this stage.”

She told Mr Constantinides that the letter did not mean that 11/04, 12/04, 02/05 and 03/05 were not problematical.

23. Due to pressure of work, the claims for £356,715 for 04/05 and for £166,300 for 05/05 were cleared without a visit.

24. On 31 May Mrs Bransgrove wrote a further J and S letter stating that two transactions carried out in February commenced with defaulting traders with a loss of tax of £234,668. In both transactions the customer had also been a customer in an invoice in the letter in relation to 01/05.

25. On 6 June Mrs Bransgrove was informed by a colleague of an Excel consignment in a freight shed at Heathrow. Jodie Curl at Excel told Mrs Bransgrove the name of the supplier. Mr Constantinides telephoned from Dubai and said that if Customs did a full line check he would bring the goods back from Dubai if a tax loss was found. Mrs Bransgrove’s colleague traced the chain back to a defaulter. Excel was informed. Mr Constantinides telephoned again from Dubai and said that he thought the goods had been loaded and would have to be returned from Dubai.

26. On 16 June Mrs Bransgrove wrote to Excel stating that all of the three transactions in 01/05 were now known to commence with a defaulter, see paragraph 22 above.

27. On 20 July Mrs Bransgrove visited Excel for 6 hours to check on possible joint and several liability for periods 11/04 and 12/05; it does not appear whether Mr Constantinides knew the reason for the visit apart from verifying the 06/05 claim for £459,429. She noted the bank accounts as Allied Irish Banks and FCIB. The repayment claim was cleared; it did not include the Dubai consignment, the transaction not having been completed due to the default at the start of the chain; the goods did not belong to Excel and remained in Dubai unclaimed. Mrs Bransgrove recorded that the directors of Excel were concerned that no J and S letters had been received by their suppliers. She noted, “Generally discussed J&S provisions and the high quality of due diligence carried out by Excel.” She repeated a request for disclosure of the IMEI numbers gathered by AI; she told them that a large number of the 5000 IMEI numbers given in February had now been found re-entering the UK in May. Mrs Bransgrove was told that Excel had just been approved as account holders by 20/20 Logistics who were authorised distributors.

28. On 13 September Mrs Bransgrove visited Excel to check the paperwork for the 07/05 and 08/05 claims. She noted that Excel had been developing relationships with Unique and 20/20 Logistics with a view to buying direct from them and might be moving to acquire some warehouse space to take delivery of stock. Excel had received an ISO 9002 kitemark for office procedures. Mr Constantinides had tried to source all August stock directly from traders importing stock. He said that Excel had not yet used FCIB, being required to produce a lot of documentation; Excel was considering using it for quicker transmission of money as it took 2 days from Dubai via Allied Irish Banks. Mrs Bransgrove examined the due diligence files for Inter Comms, Secure Trader Network and Mobile Heaven (Europe) Ltd (“Mobile Heaven”), all being suppliers. She traced all July and August transactions to the bank statements. The 08/05 claim was approved for £308,623 reduced by £121,450 because one deal fell through just after the return.

29. On 15 November Mrs Bransgrove wrote a further J and S letter stating that of three transactions carried out in May 2005 one commenced with invoice XL 2011 to a defaulting trader with tax loss of £114,500.

30. On 18 November, three days later, Mrs Bransgrove visited Excel with another officer to verify the 10/05 claim for £654,494. The visit lasted 3 hours. She noted, “Discussed due diligence in general, as ever, the company are thorough in this aspect.” She took away due diligence files for three Swiss customers. Mr Constantinides told them that he was not too bothered about credit ratings as no credit was given. Her notes and visit report contain no reference to her letter of 15 November.

31. On 24 November Mr Constantinides wrote that a new company Excel RTI (Europe) Ltd had been formed to be used for all exports to EU destinations while the existing company would be used as the vehicle for all non-EU exports. He asked for a VAT number and monthly returns. Sales to Europe continued to be by the Appellant company.

32. On 30 November Mr Constantinides responded to the letter of 15 November, stating that the supplier in question was Kinetic Distribution Ltd (“Kinetic”) and that he had asked Kinetic to investigate its supplier. He asked for details of the May defaulter and whether the other two May transactions including XL 2012 to Kinetic commenced with a defaulter. He asked for confirmation that all deals in March and April were free of defaulting traders.

33. On 8 December Mrs Bransgrove replied that she could not supply any information which would be in breach of the Data Protection Act and therefore could not give details of the defaulter in the May deals. She did confirm that invoice XL 2013 on 19 May involved a defaulter. She wrote that she could not confirm that any of the deals in March, April and the remaining deals in May did not involve a defaulter; enquiries were ongoing.

34. Excel’s return for 11/05 reclaimed £689.583, that for 12/05 reclaimed £419,125 and that for 01/06 reclaimed £658,098.

35. On 10 February Mrs Bransgrove wrote a J and S letter stating that of five transactions carried out in June 2005 three commenced with a defaulter with a tax loss of £176,500, one of these being XL 2015. On 15 February she wrote that of three transactions carried out in March 2005 one commenced with a defaulter involving a tax loss exceeding £145,000. On 22 February she wrote that of three transactions carried out in November 2005 one (XL 2048) commenced with a defaulter resulting in a tax loss exceeding £178,000. Excel knew from its records that the relevant supplier was Inter Comms.

36. On 22 February Mrs Bransgrove wrote to inform Excel that repayment for 01/06 would not be authorised until Customs were satisfied with the bona fides of the repayment including verification of transactions. On 24 February Mrs Bransgrove asked for all IMEI numbers in electronic form for 01/06; she acknowledged receipt of the sales and purchase invoices and air waybills; she asked for bank statements, inspection reports for the goods and copies of due diligence files for suppliers and customers for 01/06; she asked whether each deal was instigated by the supplier or the customer.

37. Mr Constantinides replied to the letters of 24 February on the same day. He wrote that Excel did not hold IMEI numbers on its database; IMEI verification was outsourced. He provided bank statements, inspection reports and due diligence summaries saying that the files were available for inspection. As to sales he wrote that Excel advertised extensively on the internet and made sales calls. Excel received offers of stock and requests for stock daily. In January Excel received a number of requests for large volumes of stock (20,000 plus) from Midcom and Digital World in Dubai. Excel advertised for the stock and made calls. TEC had the volumes requested for two models and North West Trading (“North West”) had another. Excel proceeded following checks and Redhill verification.

38. On 1 March Excel sent the 02/06 return reclaiming £549,187. This showed £4,187 output tax, whereas the previous returns showed no UK sales.

39. On 2 March Mrs Bransgrove visited Excel with Chris Hodge to discuss the withheld repayment for 01/06. Mrs Bransgrove told Mr Constantinides that enquiries were still ongoing as the matter was being dealt with by Barry Johnson following an exercise at Manchester Airport. She said that two other deals related to defaulting companies. Mr Constantinides said that Mr Johnson had not returned his call. The officers inspected due diligence files and inspection reports. Mr Hodge noted:

“Overall the due diligence details are very detailed and the traders carry out many checks on their suppliers and customers such as visiting them in the UK and overseas.”

Mr Constantinides said that Excel’s bank had threatened to close its accounts and said that it should not deal in the EU so that Excel had to use an FCIB account. Mr Constantinides said that Excel would discuss the J and S letters with the suppliers and “may or may not” trade with them again. The officers collected the records for the 02/06 return.

40. Following the visit, Mrs Bransgrove wrote on 6 March that based on the evidence currently available the January VAT was being repaid without prejudice to any other action resulting from continuing enquiries.

41. On the same day Mrs Bransgrove wrote another J and S letter stating that of the three transactions carried out in January 2006 two commenced with a defaulting trader resulting in a loss of £1,008,000. She listed two invoices, XL 2052 and 2054, which totalled £3,075,000. We note that the figure of £1,008,000 appears incorrect. A further letter on 6 March stated that out of seven transactions carried out in September one (XL 2033) commenced with a defaulter resulting in a tax loss of exceeding £45,000.

42. The last two J and S letters from Mrs Bransgrove were on 21 and 28 March and related to transactions carried out in October 2005. Taken together they informed Excel that four of the seven transactions commenced with a defaulting trader resulting in a tax loss exceeding £505,000.

43. On 24 March Mrs Bransgrove wrote two letters to Excel. The first stated that the VAT for February was being repaid without prejudice to any action from continuing enquiries. The second was headed, “Road exports of mobile phones from the UK to Switzerland”. It stated that documents obtained as a result of enquiries in Switzerland and France showed that in the year 2005 in every case thus far verified the goods exported to Switzerland were consigned to a freight forwarder in France and back to the UK being only outside the UK between 48 and 72 hours; evidence held showed that many of those transactions began and ended with a UK defaulter. The letter gave as an example XL 2015 in June 2005 (see paragraph 35 above) involving Digi Trading GmbH. She wrote,

“It is our view that the Swiss transaction chains you have been involved in with Digi Trading GmbH form an integral part of an overall scheme to defraud the revenue.”

Mrs Bransgrove wrote that Excel may wish to review its trading pattern in regard to exports of mobiles to Switzerland. The letter went on to state that Customs was considering whether to direct returns to be changed from monthly to quarterly.

44. Mr Constantinides replied on 27 March that he hoped that any action would be held off until Excel had conducted enquiries and discussed them with Customs. Excel had not traded with Digi since June 2005. Quarterly returns would severely jeopardise cashflow. There was “no way that we knew or had the means of knowing that those transactions formed part of a chain contaminated by fraud.”

45. On 7 April Customs received Excel’s return for 03/06 claiming £871,520. On 27 April Mrs Bransgrove wrote that the VAT was released for payment without prejudice to continuing enquiries. She asked for documents with the April return including original bills of lading, CMRs, details of IMEI numbers and signed declarations from Dubai customers.

46. On 3 May Mr Constantinides wrote to Mrs Bransgrove complaining about a verification delay at Redhill which had resulted in a deal being lost. This followed an earlier e-mail on 10 April complaining that the Redhill fax had been busy for three full days.

47. The VAT return for April, the first period under appeal, showed Box [1] £9,724, Box [4] £1,325,040 and Box [5] £1,316,316. Total sales were £8,026,719 of which EU sales were £4,896,653. On 26 May Mrs Hurst wrote from Wigan that a period of time would be needed before repayment could be authorised and that the case officer responsible would be contacting Excel. On 31 May Mr Constantinides wrote that the information supporting the claim had been couriered to Excel’s local officer on 4 May and Excel had been trying unsuccessfully to make contact for 3 weeks.

48. The VAT return for May showed [1] NONE [4] £1,161,813 [5] £1,161,812. Total sales were £7,041,786 of which EU sales were £3,844,286.

49. On 7 June Mrs Beard who had been assigned as case officer visited Excel as part of the verification of 04/06. She worked through a questionnaire and booked another appointment for 14 June. Further visits followed on June 20 and 21. On 21 June Mrs Hurst from Wigan wrote that a period of time would be required to verify the May repayment claim. Mrs Beard visited Excel again on 29 June.

50. On 4 July Mrs Beard wrote a J and S letter stating that six transactions in 04/06 and 05/06 commenced with defaulting traders resulting in a tax loss exceeding £742,000. On 6 July in response to a telephone call Mrs Beard told Mr Constantinides that only six transactions had been fully traced back and that nothing would be repaid until the whole return had been verified. On 17 July Mr Constantinides wrote a letter with a section explaining “performance metrics” to identify suppliers with a high number of defaulters in their supply chain. He wrote, “We do not operate a one strike and you’re out rule” but acted once a minimum of three deals had been transacted; as a rule of thumb Excel ceased trading if the supplier had more than 60 per cent defaulters in the chain and proceeded with caution if the percentage was 40-60; below 40 per cent was acceptable.

51. Further correspondence followed until the main decision on 21 December 2006. There were also visits and meetings on 19 July and 4 and 18 September.

The 21 transactions and deal chains

52. We now turn to the actual transactions and deal chains as to which there was no real dispute. Customs’ counsel produced a master schedule as to which there was no challenge apart from a minor amendment to Deal 17.

53. 17 deals involved Nokia mobiles with a variety of models and quantities varying from 1,000 to 11,000. The other four deals involved Motorola, Sony and in two deals E 50 mobiles. Excel’s suppliers were Inter Comms (four deals) including Deal 1 in which Oracle (UK) Ltd (“Oracle”) was the defaulter, The Fones Centre Ltd (“Fones Centre”) (three), The Accessory People Global (UK) (“TAP”) and Top Telecomms (two each), Cell Trading, Atomic, Letting Solutions (“Letting”), North West, RS 23, Cybacomms, Cobra Comms and Mobile Heaven. Excel’s customers were Navigo.IT Spa (“Navigo”) (an Italian company) for 5 deals; World Comms Sarl (a French company) for 3 deals; Goldphone SL (a Spanish company) and GNJ General Trading LLC (“GNJ”) (a Dubai company) for two deals each; four French customers for one deal each, CIDP, France Affaires, LDPC and Francphone; four other Dubai customers for one deal each, Digital World FZE, Mobilink FZE, Plus 971 FZE and Buy & Cell Trading; and J Corp Aps (“J Corp”) a Danish company. The sales by Excel covered 14 different Nokia models for a total of 69,808 mobiles, 5,000 Motorola V 3i and 2,600 Sony W900i.

54. Two of the deals where Inter Comms was the supplier had the same three buffer companies although those did not feature elsewhere. Two of the deals where Fones Centre was the supplier had the same three buffer companies; all appeared in one or the other of the other two chains involving Fones Centre; three were buffers in the chain involving RS 23 as supplier. The two chains involving Top Telecomms had the same four buffers. The two deals in June 2006 both on 12 June had the same defaulter, the same supplier, the same four buffers and the same customer, World Comms.

55. There were 14 different defaulting companies. KEP was defaulter in three chains all leading to Navigo as customer and two having the same supplier and buffers. Computec was defaulter in three chains, two of which led to Top Telecomms as supplier with the same four buffers.

56. There was no primary evidence that Excel had any knowledge of the buffers or defaulters in any of the chains.

Deal 1 (20202-20205)

57. Deal 1 was taken by Mr Cunningham as an example in opening. Mr Patchett-Joyce stated that he was not asking him to go through more than one example (Day 2, page 71).

58. We start with the transactions to which Excel was a direct party. These involved 3500 Nokia N90 mobiles bought by Excel at £270 each from Inter Comms on 5 April and sold on the same day to J Corp Aps (“J Corp”) at a gross profit margin of 6.5 per cent excluding VAT (invoice XL 2065). Most of the documents had been provided by Excel to Customs in support of the claim.

59. At 1338 hrs on 5 April Jodie Curl faxed a supplier confirmation of goods to Inter Comms,

“Further to our recent telephone conversation, please complete the following to confirm the location of the goods and your agreement to supply them at the price quoted below.”

She then specified 3500 Nokia N90 C/E Spec SIM free at £270 located at AFI Logistics (“AFI”). “C/E” is short for Central European. The time is taken from the Deal Check List initialled by Jodie Curl which showed the document as received back at 1358 hrs, the same time as on the fax header. Also at 1338 hrs Jodie Curl sent a fax to AI at Greenford, Middlesex instructing them “to inspect and provide a 100% IMEI/Serial number scan 100% inspection, 5-7 pictures of 3500 Nokia N90”; the instruction stated that the stock was “coming direct from the manufacturer via our supplier”. At 1356 hrs AFI confirmed that the goods were at its premises and had been allocated to Excel by Inter Comms, this having been faxed by Excel to AFI at 1345 hrs.

60. A purchase order was faxed by Excel to Inter Comms at 1350 hrs and returned signed at 1387 hrs for 3500 Nokia N90 C/E Spec Not Sim or Ex-Sim locked “Subject to satisfactory inspection report”, the price being £370 and the cost before VAT £1,215,000. A further purchase order was sent and returned on the following day showing the price as £270 and the cost £945,000 before VAT but otherwise with the same details. It was accompanied by a supplier declaration by Inter Comms including that there were no third party payments with Inter Comms’ supplier and that Inter Comms had no grounds to suspect that its supplier would not pay the VAT; against the date of verification of supplier with Redhill there appeared, “Awaiting Redhill Reply.” The Deal Check List showed the proforma invoice from Inter Comms as received at 1357 hrs; it showed the unit price as £270.

61. At 1509 hrs Excel faxed a Notice of Intention to Trade (“NOITT”) to Customs consisting of nine pages giving the purchase and sale prices and the VAT numbers of Inter Comms and J Corp asking for confirmation that the information was valid. The deal check list showed the reply as received at 0859 hrs on the following morning.

62. The proforma invoice by Excel to J Corp was faxed at 1626 hrs and recorded on the Deal Check List as received back at 1705 hrs on 5 April. It showed the total due as £1,006,250 and the deposit as £100,625 and the bank as FCIB. The conditions of sale included,

“10% Deposit required on receipt of inspection report. Full payment to be received on inspection at delivery destination. Stock will only be released on receipt of cleared funds.”

The deal check list showed “N/A” against Client Deposit Received.

63. At 1633 hrs Excel faxed to AFI instructions to “Ship on hold” the goods to AFI Logistics (sic), Paris for J Corp as client. It included this, “It is paramount that if the value of those goods exceed £1 million they are not transported on the same vehicle.”

64. The inspection report by AI was faxed to J Corp at 1711 hrs on 5 April and “Client Sign Off” was shown on the Deal Check List as 0900 hrs 6 April. It showed quantity inspected and scanned as 3,500 with no duplicates on the database, that the stock appeared new and the keypad language was English. The report had a manuscript endorsement “Approved David Jensen.” That was the name of the signatory for J Corp on the proforma invoice.

65. The CMR or International Consignment Note completed by AFI showed the sender as Excel and the consignee as AFI Logistique, Roissy, France and the place and date of taking over the goods as Southall, 5 April; in the space for signature of carrier there appeared “Mr D Musielak” and “PO 48148”. A Eurotunnel ticket showed a check-in time of 0051 hrs 6 April and the registration number “PO 48148”. A counterpart of the CMR carried a stamp “Contents Unchecked AFI Logistique” with the date 6 April and the driver’s signature.

66. At 1007 hrs on 7 April Excel faxed a Client Goods Acceptance form to J Corp asking J Corp to arrange to have the goods accepted and then sign to confirm acceptance. This was signed on behalf of J Corp and recorded as received back at 1115 hrs.

67. The Deal Check List recorded the invoice to J Corp as sent on 7 April at 1007 hrs. It stated “Full payment to be received on inspection at delivery destination.”

68. The Deal Check List showed full payment as received on 10 April and as the supplier being paid on 10 April. This agreed with FCIB’s records which showed Excel as receiving £1,006,250 and paying £1,110,375 on 10 April.

69. Deal Notes for Deal 1 over the name “Lee Goulding” and the date 5 April 2006 produced by the Appellant recorded Excel as receiving a phone call from Inter Comms offering “3.5k Nokia N90’s @ £271 based at AFI Logistics” and also another stock, as having advertised the stock on the IPT website for export only and as having received a call from J Corp an approved customer. The note recorded negotiation over the price with J Corp and Inter Comms before prices were agreed and that Mr Jensen asked for the stock to be sent to AFI, Paris.

70. Excel’s insurance policy showed the limit of liability for goods in any one vehicle as £1 million with the basis of valuation being purchase invoice plus 10%. The premium was £7,500 per quarter. The Deal Check List showed against Marine Insurance “annual premium”.

71. We now turn to the transactions in the Deal 1 chain to which Excel was not a party, working back from the purchase by Inter Comms from Datakey Products Ltd (“Datakey”) to the sale by Mezinaradni Velkoobchad s.r.o. (“MV”) in Slovakia to Oracle. All five transactions from MV down to Inter Comms were on 5 April. The documents were obtained from the officers responsible for the other traders and from a visit to AFI.

72. Inter Comms ordered 3,500 Nokia N90 Sim Free mobiles from Datakey at £209.50. Datakey made a supplier declaration to Inter Comms Datakey issued a proforma invoice stating that the goods were at AFI and giving FCIB under payment details. The invoice to Inter Comms showed a price including VAT of £1,108,318.75. There was an instruction to AFI to allocate to Inter Comms dated 5 April and a release note dated 10 April.

73. Datakey ordered 3,500 Nokia N90 at £268.50 from Bluewire Connections Ltd (“Bluewire”), the goods being at AFI. There was an undated stock offer of 3,500 Nokia N90 Sim free handsets at £268.50 by Bluewire. The invoice by Bluewire to Datakey was for 3,500 Nokia N90 Sim Free handsets for a price including VAT of £1,104,204.25 payable into its FCIB account. There were instructions to AFI on 5 April for stock allocation and on 10 April for stock release to Datakey.

74. The purchase order from Bluewire to Deepend Trading Ltd (“Deepend”) for 3,500 Nokia N90 Sim free handsets at £268.25 for delivery at AFI provided for full payment after inspection. There was a supplier declaration by Deepend to Bluewire dated 5 March, however this was clearly an error since the fax header was 5 April. The invoice of Deepend was for £1,103,178.13 including VAT to be paid to a sterling bank account at FCIB. The release note to Bluewire was dated 10 April.

75. The purchase order from Deepend to Oracle was for 3,500 Nokia N90 Sim free at £268. The supplier declaration by Oracle included, “We have examined these goods personally or through our appointed agents”. The invoice from Oracle for £938,000 plus £164,150 VAT making £1,102,150 provided for payment at NatWest Walthamstow. There was a combined stock release and allocation note to AFI in favour of Deepend dated 5 April.

76. There was a purchase order from Oracle to MV for 3,500 Nokia N90 Sim free euro spec at £267.70 for delivery at AFI Freights Ltd dated 29 March. The invoice from MV to Oracle was dated 5 April for Nokia N90 for £936,950; it stated “deliver as requested”.

77. FCIB records showed payments on 10 April equal to the amounts due on all the invoices referred to in paragraphs 72-76. The FCIB statements for each trader show the relevant receipts as appearing before the relevant payments. The only statement showing a debit balance is that for Catseye SL (“Catseye”), see the next paragraph. Without the payment from J Corp, Excel could not have funded the payment to Inter Comms without being overdrawn. The flow chart produced by Mrs Malik for Deal 1 is annexed to the decision.

78. The FCIB records show no payment by Oracle to MV but a transfer by Oracle of £1,095,364 on 10 April to Mobile Direct, a Pakistan Company, immediately after receiving a credit of £1,102,150 from Deepend. A transfer from Mobile Direct to Gulf Phones, a Pakistan Company, of £1,102,375 is also shown on 10 April and a further transfer of £1,012,375 from Gulf Phones to Catseye SL, a Spanish Company, is shown on the same day. A transfer from Catseye to J Corp of £1,009,750 is again shown on 10 April immediately before the transfer by J Corp to Excel of £1,006,250. Catseye’s statement showed a debit balance at one stage on 7 April but a credit balance at the close of that day of £560,618; without the credit from Gulf Phones on 10 April, Catseye would have been overdrawn by £498,426 after paying J Corp. Without the credit from Catseye, J Corp would have been £612,352 overdrawn after paying Excel. The credit balance for Gulf Phones on 10 April varied from £6.6 million to £13.6 million. Without the transfer from Oracle, Mobile Direct would have been overdrawn by over £1 million after the payment to Gulf Phones.

79. Oracle was visited by Mr Cameron-Watson and another officer on the morning of 5 April (the day of Deal 1) in connection with the period from 1 February. During the visit Mr Ratoo, the director, told them that Oracle used FCIB and that he personally made payments; when asked to log in to the FCIB account he was unable to do so with the password he was using. Mr Ratoo said that Oracle had received third party payment instructions. At the visit Oracle was issued with a Regulation 25 direction requiring a return by 6 April covering the period up to 4 April. A further Regulation 25 direction was issued on 6 April requiring a return covering 5 and 6 April. No return was received. On a further visit on 18 May Mr Ratoo told the officers that he had problems getting onto the FCIB system; the officers collected all Oracle’s trading records up to 6 April. On 24 July Mr Cameron-Watson issued an assessment for £21,833,536 which included the output tax due in respect of Deal 1. Oracle did not appeal. The assessment was not paid; Oracle is now in liquidation.

80. The due diligence by Excel on Inter Comms, the supplier in Deal 1, is now outlined. Before the first trade on 23 June 2005 Excel obtained a letter of introduction and carried out a site visit on 1 November 2004. It had received a completed trade application form, copies of Inter Comms’ certificates of incorporation and a letter of introduction. Redhill confirmed Inter Comms’ VAT registration on 18 July 2005. Before trading in April 2006, Excel obtained the following: copy VAT registration certificate, bank account details including FCIB, FTS credit services report, N2 check company details, references including from AFI and Inter Comms’ auditors, Companies House details and copy driving licence, bank statement and passport for the director, Perminder Bassi.

81. Invoices XL 2033 and 2048 which were referred to in the J and S letters at paragraphs 35 and 41 above related to goods supplied by Inter Comms. On 27 February Excel wrote to Inter Comms about the XL 2048 letter asking Inter Comms to conduct its own checks on its supply chain, stating that Excel was requesting further declarations by suppliers regarding the background of their suppliers and asking for a meeting to discuss strengthening the supply chain due diligence. On 10 March Excel wrote a similar letter relating to the goods covered by XL 2033. On 6 April (the day after Deal 1 but before Deals 4, 10 and 16) Mr Constantinides visited Inter Comms’ premises in Glasgow. He noted,

“We were very impressed with the set up … Altogether the company employs 11 staff in their new and very impressive office in Glasgow … Really impressed with the company and should be treated as a preferred supplier in the first instance for all stock requirements.”

82. The due diligence material for J Corp was as follows: trade application form dated 20 March 2006, confirmation of membership of IPT, Europa VAT validation, company report, VAT registration document, bank details including FCIB, letter of introduction, N2 check report and copy passport of director. Excel had not carried out a site visit, J Corp being in Denmark. Excel obtained a trade reference from Forward Logistics (Heathrow) Ltd.

FCIB Material

83. Flow charts were drawn up by Mrs Malik for the 21 deals from transaction enquiry reports produced from the Bankmaster + system which was operated by FCIB. Access to this data was obtained by Customs from the Netherlands authorities. Mrs Malik was provided by Mrs Beard with deal sheets showing the movement of goods; her task was to follow the money.

84. In each deal moneys were received and paid by Excel through its account with FCIB number 04/801/203142/01. In the majority of deals transfers were made which were equal to the sums invoiced by and to Excel. In some deals part of the payments due from Excel to its supplier were paid from its account with Allied Irish Banks.

85. In each deal, apart from Deal 3, onward payments were made by Excel’s supplier usually equal to the accounts invoiced. In seven deals three onward payments were made by intermediate traders up to the defaulting traders, most of which acquired the goods from EU traders. For the most part those onward payments were equal to the invoices. In those seven deals the defaulters made payments to third parties rather than to their suppliers.

86. In twelve deals no payments were made to the defaulter, however third party payments were made by intermediate suppliers. Four of those payments were made to Alfa Tradezone (“Alfa”), a German trader, which then made payments in three cases to a French company, Imanse Sarl; in another case the third party payment was made to Imanse Sarl but Alfa made a similar payment to Imanse Sarl. Three of the third party payments were made by Ultimate. Two third party payments were made to officers of the defaulting companies and two were made to other UK companies. The other three third party payments were to EU Traders. In nine of the twelve deals where the third party payments by-passed the defaulter, Excel’s customer received through the third party chain sufficient sums to cover the payments it made to Excel; in one deal the customer received a lesser sum. In two deals the circle was not complete.

87. In seven deals the defaulting trader made the third party payment, thus paying away both the sum due to its supplier and the VAT on the supply by the defaulter. In all of those seven deals Excel’s customer received, through the third party chain, sufficient money to pay Excel. Three of the third party payments were to companies in Pakistan, two being to Maks Information Tech.

88. In Deal 10 Excel was paid 12 days after the deal; in Deals 19 and 20 it was paid 19 and 17 days after the deals respectively; in Deal 21 Excel was paid in two tranches 15 and 17 days after.

89. The previous six paragraphs leave out Deals 3 and 13, the two contra chains which we cover separately.

90. A total of 43 non-UK traders were present in the money movement chains for the 21 deals; of these 10 were based in Dubai, 3 in Pakistan, 2 in the Seychelles and 28 were in nine EU countries.

91. In 15 deals all the money movements including third party payments were on the same day; in two they were in two days, in one three days and in the other three the money movements covered from 7 to 10 days.

The contra deals

92. Deal 3 involved 2,000 Nokia 9,500 mobiles bought by Excel on 7 April from Atomic Ltd (“Atomic”) at £311 each at a total cost of £662,000 plus £108, 850 VAT and sold to Goldphone SL, a Spanish company, at £329 each making £659,000. The Deal Notes by Excel show Atomic as having offered 4,000 mobiles based at ASR by telephone, Excel as advertising 2,000 phones on the IPT website and Goldphone as telephoning and agreeing the price. The CMR shows the goods as despatched on 10 April. Excel were paid in full on 10 April and paid Atomic by three transfers through FCIB on 12, 13 and 18 April. The freight forwarder was ASR Logistics. The goods were bought by Atomic from Forex Handels GmbH, Frankfurt, at £309 each making £618,000 on 7 April and released by Forex on that day by instruction to ASR Logistics.

93. In its return for 04/06 Atomic reclaimed £2,552,543 having offset input tax of £10,046,524 against its output tax liability (including VAT on EC acquisitions) of £7,493,981. The output tax included that on the supply to Excel. The return showed EC sales of £22,773,000.

94. 22 of the consignments sold by Atomic to EC customers were traced back to supplies by Apollo Communication Centre Ltd (“Apollo”), Anfell Traders Ltd (“Anfell”) or Midwest Communication Ltd (“Midwest”).

95. Apollo had acquired the goods in eight of the chains leading to Atomic from EC suppliers and had instructed its customers to make third party payments. A Regulation 25 direction was made but it appears that no return was made by Apollo. On 24 April the director telephoned a Customs officer and said that Apollo would be unable to pay its £24 million VAT because it had not been paid. Apollo then purported to issue credit notes although the supplies had in fact been made. Apollo was put into liquidation. The statement of affairs showed £26,526,234 outstanding VAT. Assessments totalling £27,899,156 were made which remain unpaid.

96. Anfell never applied for VAT registration. Invoices in the name of Anfell Traders Ltd were issued between 13 and 20 April 2006 in respect of ten consignments of goods which were supplied through chains to Atomic, the immediate customer being Realtech Distribution Ltd which was instructed to make third party payments. On 6 March 2006 Customs had been informed that Anfell College Ltd had changed its name to Anfell Traders Ltd and was operating as general trader from Britannia House, Glenthorne Road, Hammersmith. On 18 April Mr Davies visited Britannia House but could not contact Anfell; he left a letter cancelling the VAT registration number. On 19 September 2006 he visited Britannia House and was told that Anfell had left leaving rent unpaid. Assessments totalling £27,899,156 had been made and remain outstanding. Six of the invoices on the relevant supplies were issued after deregistration. The assessment includes the supplies leading to Atomic.

97. Four of the transactions by Atomic in April 2006 led back to Midwest, those were on 13 and 19 April and all involved acquisitions from Megatek Sarl, which was also involved in the third party money movements in Deals 12 and 14. Mr Bycroft was told at a visit on 16 March that the company had not traded for 6 months. On 28 April 2006 Mr Bycroft and another officer visited Midwest and were given a spreadsheet of all deals done to date. Analysis of the initial batch of sales invoices indicated a VAT liability in excess of £30 million, all on sales to the UK of goods purchased from EU. A Regulation 25 notice was issued shortening the return period to 2 May. At a visit on 4 May another officer was given a VAT return showing a net tax liability of £8,109. He was told that at the previous visit Mr Powell-Smith had forgotten to tell Mr Bycroft that substantial EC sales had been made. On another occasion Customs were told that the EC sales were of phone cards with a face value of £50 supplied by Bestleg Ltd and sold to Umbria Equitazione in Italy. The Italian authorities informed Customs that Umbria Equitazione had never traded in international prepaid phone cards; researches by Mr Bycroft showed that the cards were an American product only available in dollar denominations. A VAT assessment for £57,583,433 was made on Midwest which has gone into liquidation. There has been no appeal.

98. Deal 13 involved 1,000 Nokia 6680 mobiles bought by Excel from Fones Centre on 5 May at £140 each, making a net total of £140,000 plus VAT £24,500; the invoice showed “CE Spec”, “Bank Detail The First Curacao Bank” and “Stock at Hawk Precision”. The Deal Notes showed GNJ in Dubai as having requested 1,000+ of each of three Nokia models including 6680 silver/blue, Excel as advertising to buy on the IPT website stating that the supplier must be a UK company, Excel as contacting 11 suppliers before Fones Centre offered 1,000 Nokia 6680 silver/blue mobiles at £140 based at Hawk and Excel as having offered them to GNJ at £147 which GNJ agreed. The mobiles were invoiced to GNJ on 5 May at a total cost of £147,000; the invoice stated that the mobiles would only be released on receipt of cleared funds and specified FCIB under “Bank”. An airway bill showed the goods as exported by Hawk to Dubai on 8 May. Excel was paid £147,000 by GNJ on May 12 and paid £164,500 to Fones Centre.

99. 1,000 Nokia 6680 mobiles were invoiced by Ultimate to Fones Centre on 5 May for a total price of £163,912. A similar quantity of the same model was invoiced by Top Grade VAT No 764976470 company registration No.5612269 to Ultimate on 5 May for a total of £164,500. Again the same quantity of the same model was invoiced by Imanse in France to Top Grade on 5 May for £139,300; it stated “Please arrange for payment ASAP”. On 5 May there was an instruction by Navigo to Hawk to release 1,000 Nokia 6680 to Imanse. On 8 May there was an instruction by Imanse to Hawk to allocate and release 1,000 Nokia 6680 mobiles to Ultimate.

100. FCIB statements show Fones Centre as paying Ultimate £163,912.50 on 12 May the day on which it received £164,500 from Excel. Also on 12 May Ultimate paid £783,909 to Alfa and Alfa made payments of £162,600 and £609,217 to Imanse. On 12 May Imanse paid £162,500 to EC Trading Aps in Denmark which paid £160,000 to GNJ which in turn paid £147,000 to Excel. The page of the transaction statements for Ultimate showed no debit matching the £164,500 due from Ultimate to Top Grade.

101. On 6 August 2006 Top Grade rendered a VAT return for the period to 31 May showing £1,211 tax as due and enclosing a cheque for that sum which was dishonoured. The return showed £1,863,167 output tax and £1,861,956 input tax. The output tax included the supply to Ultimate. Documents provided by Top Grade in relation to the return showed that it included three back-to-back deals for phone cards purchased from Ultimate for £10,639,750 (of which £1,861,956 was VAT) and despatched to Equipo Logistics Occidental SL in Madrid. At a visit on 18 December 2006 Mr Mirza, the director of Top Grade, was asked how he paid for such high value items; the officer noted,

“Mr Mirza advised that the customer paid the supplier direct and he only received a commission payment.”

The export evidence provided by Top Grade was insufficient to satisfy Customs that the goods were actually despatched to Spain and an assessment for £1,696,819 was notified on 10 June 2008. The difference between £1,861,956 and the assessment of £1,696,819 was accounted for by an earlier assessment on 9 November 2007 for £163,162 for June 2006 of which the £24,500 invoiced to Ultimate formed part. There was no explanation for the mismatch in periods.

102. Top Grade did not account for the VAT on either assessment. Ultimate did not render a return for its period 07/06 which included May 2006.

Mrs Bransgrove

103. We now turn to the evidence of the main witnesses starting with Mrs Bransgrove, a Higher Officer, who was responsible for checking and authorising Excel’s repayment chains from February 2005 until the function passed to Mrs Beard in May 2006. There was no substantial dispute as to her evidence and correspondence with Excel, much of which we have covered in paragraphs 18 to 46 above. Her first visit to Excel was on 19 January 2005 with Rachel Woodfield. Initially she only had responsibility for Excel.

104. Cross-examined, she told Mr Patchett-Joyce that in 2005 although new to MTIC she had 24 years’ experience as an assurance officer. Since March 2007 she had been seconded to the MTIC technical and co-ordination team.

105. She said that Excel’s office was a small office with possibly four desks and three people. There were charts and cuttings from magazines on the wall. There was a whiteboard on the wall with a week’s buying and selling prices. There were phone calls coming in during her visits. She did not ask to see the actual nuts and bolts of what happened. Towards the end Excel moved to new and bigger premises.

106. She agreed that Excel’s due diligence was as good as most broker companies she had visited and outdid that of buffer companies selling within the UK. She recognised a Deal Check List as the type of document she had seen but did not recognise Deal Notes with a narrative. She remembered the Notice of Intention to Trade, an Excel innovation, and being told about the freight forwarder’s notification of arrival. She agreed that every stage of transactions were documented carefully. She said that at her visit on 6 March she had seen the due diligence on North West and had raised no query.

107. Mrs Bransgrove agreed that Excel made full use of the Redhill facilities for checking. She had written to Excel on 29 March 2005 stating “pre-checks on proposed chains are offered by the Redhill office.” She said that line checks at Redhill were not always possible; she recalled some details of a line check by Redhill for Excel. She accepted that in March and April 2006 Redhill was swamped with requests to Redhill to confirm registration numbers. She said that it was never obligatory to check with Redhill.

108. She said that due diligence was a matter for the company not Redhill. She was aware of checks with Companies House and saw documentary evidence of site visits. She said that Mr Constantinides had told her about his performance metrics, maybe in March 2006 but she did not fully understand them; it was an internal system which was not her direct concern.

109. Mrs Bransgrove told Mr Patchett-Joyce that Mr Constantinides asked a lot of questions about the J and S letters. She agreed that the letters named the customer but not the supplier. She agreed that Excel’s immediate suppliers had never been identified as defaulting. She said that there was sometimes a gap of some months between a deal and a J and S letter.

110. She said that by March 2006 she was fully trained and aware that in the vast majority of transaction chains there would be a defaulting company at the start of the chain and that she would not have believed that any system would have helped any exporting company to avoid dealing in defaulting chains. It was outside her responsibility to tell companies how to trade. She could not recall whether she said that there was no system to avoid tax losses. She agreed that Mr Constantinides was seeking to improve his systems and was acting on what she had told him. She agreed that Excel had adopted a very open and co-operative relationship with her and had volunteered quite detailed information about business procedures and reports. She accepted that there was no evidence that she had told Mr Constantinides that he should not carry on this line of business.

111. She agreed that on 23 June 2005 Mr Socratous had asked for details of the defaulter referred to in paragraph 25 above but she said that she would not have been allowed to provide details of the defaulter because of the Data Protection Act. That information was never disclosable.

112. She said that at the time the J and S legislation was not actively being used. It was probably correct that no letters were sent to suppliers.

113. Mrs Bransgrove told Mr Patchett-Joyce that she was sure that Mr Constantinides did not want to fall foul of the J and S regulations and that she believed that he was seeking to comply with the advice from her and the publications. Asked whether it was clear from her perspective that objectively Excel was doing everything it could be avoid the problems identified she said,

“I can confirm that Mr Constantinides was genuinely attempting to avoid falling foul of the joint and several liability regulations, but unfortunately I could not be inside his mind.”

Mrs Beard’s evidence

114. Mrs Beard, who was the officer responsible for Excel from June 2006 and was the case officer in the appeal, made a composite statement of 233 pages exhibiting 4286 pages of documents. Much of her statement summarised documents, reports and correspondence produced by Mrs Bransgrove and other officers. It also contained extensive comments, which are not evidence although some explained why documents were in the bundle. Paragraphs 143 to 238 of her statement covered the period of her involvement. Her first visit on 7 June 2006 was five days before the two final deals on 10 June 2006.

115. She stated at paragraph 210 that by use of the Nemesis system she was able to identify that mobile phones in invoice XL 2084 (Deal 17) had been previously shipped out of the UK. She said that 826 of the 4,000 Nokia 8800 phones in XL 2084 had been identified as having been in one or another of 11 consignments previously examined at Heathrow, Gatwick or Dover between 5 February and 22 April 2006.

116. Cross-examined, Mrs Beard said that she could not identify the party or parties controlling the scheme.

117. She agreed that she had essentially conducted a paper-tracing exercise. Provided the paperwork tied up she did not ask the assurance officers for the other parties supplementary questions.

118. She said that she had nothing to compare Excel with because it was her first MTIC case; she could not compare Excel’s documentation with that of other traders. She said that she had no independent commercial experience but had undertaken VAT assurance work for lots of different types of business.

119. She said that she believed Atomic, one of Excel’s suppliers is still registered and was appealing against the disallowance of input tax. She accepted that based on letters in February 2009 from Cybacomms and Inter Comms those companies were still registered and trading then; she had no basis for suggesting otherwise.

120. She said that the source of paragraph 274 of her statement was Deal Notes with the name “Lee Goulding” and that these were provided in May 2006 in support of the April claim.

The defaulting companies

121. As already stated Mr Patchett-Joyce did not advance a positive case that Excel’s transactions were not connected with fraudulent defaults but put Customs to proof. We have already summarised the undisputed facts as to the defaults in the contra chains involving Atomic in the chain in Excel’s Deal 3 and Top Grade in the chain in Deal 13. There was no challenge to the evidence of the 14 officers that the traders in the 19 direct trades had defaulted in accounting for or paying the output tax on the supplies in Excel’s chains. The cross-examination was directed rather to the fact that no inquiries were made by Customs into the due diligence carried out by the customers of those traders into those traders and that no action had been taken to disallow the input tax of those customers. The cross-examination was primarily directed to the submission that there was an inequality of treatment of Excel compared with the other parties in the chains.

122. The case for Customs that there were fraudulent defaults in all the chains was supported by the FCIB material see paragraphs 86 and 87 above that in twelve deals third party payments were made by intermediate suppliers and thus the relevant VAT never reached the defaulters and that in seven chains the defaulting company made third party payments.

123. Mr Patchett-Joyce did not identify any weaknesses in the evidence as to the fraudulent defaults. In those circumstances we do not consider it necessary to set out further the evidence and facts establishing the fraudulent defaults.

Mr Fletcher’s evidence

124. Mr Fletcher made three witness statements; the first was generic and not directed to the facts of this appeal, the second responded to issues raised in Mr Constantinides’ third statement and the third statement made corrections to the second. He stated that he had complied with Part 35 of the Civil Procedure Rules which covers expert evidence. He had relied on documents, information and explanations provided to him. These included documents shown to him by Nokia which were not exhibited because of a non-disclosure agreement.

125. He stated that 22,500 of the mobiles traded by Excel had been released over 12 months earlier and might have been the subject of dumping by an authorised distributor, however there were no such authorised distributors in the chains. 18 of the mobiles were Central European specification and were thus unlikely to be stocked by UK distributors.

126. He stated that Excel’s trading displayed characteristics which were “not consistent with participation in a rational arbitrage market”, see paragraph 4.1.3 of his second statement. Nokia set identical prices to its wholesale customers in all markets; there were lengthy supply chains; Excel’s market share was unrealistically high; there was insufficient detail on Excel’s invoices and inspection reports and the currency fluctuations were unlikely to be sufficient to support arbitrage opportunities in the relevant period.

127. At paragraph 4.1.5 he said,

“I conclude that the Appellant’s 21 trades in question during April, May and June 2006 were extremely unlikely to be part of a rational dumping or arbitrage or any other rational white or grey mobile phone handset trading market.”

128. Cross-examined, Mr Fletcher said that Dubai was an entrepot supplying the Gulf, Iran, Africa and India. Nokia had their regional headquarters there.

129. He disagreed with the suggestion by Mr Patchett-Joyce that he was looking at how markets ought to behave rationally rather than how they actually do behave in real life.

130. He said that Nokia had a homogenous pricing policy so that its wholesale prices excluding VAT were the same in all markets. Nokia’s wholesale prices were only published to its customers. He said that the non-disclosure agreement with Nokia had been signed by a partner at KPMG. He agreed that discounts, rebates and promotions might result in a reduction of 10-12 per cent in wholesale prices.

131. He did not agree that a rational market depended on total transparency and perfect market information. He used the term rational to indicate profit maximising behaviour. It would take account of volume and knowledge of a trading partner.

132. Mr Fletcher said that an agreement with a manufacturer might preclude authorised distributors from dealing directly with one another, causing the authorised distributor to use a non-authorised distributor as a cloak. He agreed that this created a distortion. He said that authorised distributors use the grey market as an integral part of their trading to which manufacturers turned a blind eye when it suited them. From the websites it appeared that there was a large grey market in 2008 and more transactions in 2006.

133. He said that by arbitrage he meant taking advantage of differentials between markets.

134. He agreed that in his statements he had relied on extensive work by a team of industry specialists, forensic accountants and economists undertaken after the event using in part statistics and data from third party sources. Considerable material was produced after the event.

135. He said that he did not ask any authorised distributor about dumping but relied on comments by Nokia employees.

136. Mr Fletcher said that he had worked back from retail data to calculate the share of the market which could be addressed by distributors and mobile network operators, calculating the market for distributors as 36 per cent of mobiles manufactured; the wholesale market only existed to supply the retail market so it was appropriate to use retail figures to calculate the distributors’ market. He did not accept that the fact that a mobile might go through a number of wholesale sales meant that the wholesale market was correspondingly larger.

137. He said that the nature of the grey market required goods to be adequately specified. If the purchaser did not specify what he wanted, Excel risked rejection of the goods.

Mr Stone’s evidence

138. As already stated this evidence was generic and not specific to this case. He stated that exports of mobiles increased from 1.8 million in January 2005 to 6.6 million in January 2006, over 13 million in each of March, April and May 2006 and 10.5 million in June 2006.

139. He stated that in addition to checking VAT registrations with Redhill, traders could check with the European website which depended on Member States’ databases. This is the Europa website.

140. He stated that information relating to other taxpayers could only lawfully be disclosed under specific circumstances defined in the Commissioners for Revenue and Customs Act 2005, section 18.

141. He stated that Customs’ Nemesis database went live in February 2006 enabling Customs to cross check scanned IMEI numbers against existing data.

142. Cross-examined by Mr Patchett-Joyce, he agreed that about March or April 2006 there was a huge increase in transactions and the system at Redhill became swamped. There were occasions when traders had to wait a few days for a response. Validation was not a requirement for traders to enter into a trade; it was something they were asked to do. They could proceed if they chose to and could validate the registration through the Europa website.

143. He accepted that until September or October 2006 FCIB was to all intents and purposes an apparently well regulated bank in the Dutch Antilles, subject to the regulation of the Dutch authorities.

Evidence of Tony Constantinides

144. Mr Constantinides confirmed three statements. The first dated 8 February 2008 was to evidence the transactions for which input tax had been allowed; this was brief with only 11 paragraphs. The second statement dated 6 October 2008 was in response to Customs’ evidence in support of the allegation that Excel knew or should have known that its transactions were connected to fraudulent evasion; this consisted of 113 pages with 346 paragraphs exhibiting 1814 pages of documents. The third statement dated 16 February 2009 responded to Mr Fletcher’s statement.

145. A considerable part of the content of his statements is not in dispute and is covered in paragraphs 9 to 82 above in so far as it was within his knowledge.

146. In 1985 he graduated from Manchester University with a degree in Electronics and Communications. He worked for Ericsson, then for Nortel Networks from 1989 to 1996 where he was a senior manager and established Excel Resources in 1997 to provide technical staff and training services to the telecoms market. Excel Resources was taken over in 2001 by TMP Worldwide but he stayed as Head of Telecommunications until late 2003. Meanwhile the appellant company had been incorporated to provide training and consultancy services.

147. Mr Constantinides stated at §15 of his second statement that from May to November 2004 he researched the mobile trading industry, including learning the specifics of SIM free handset trading, setting up process and procedures and establishing potential suppliers and customers. He decided to concentrate on the export market. We have recorded Excel’s entry into the mobile market at paragraphs 10 to 16 above.

148. He stated at §21 that he had overall responsibility for the phone trading business. From October 2005 to February 2007 Lee Goulding was employed as trader, being responsible for procuring and noting offers for stock, sending out mailshots and considering market prices. Mr Goulding had authority to agree any deal with a margin of 4 per cent or more; Mr Goulding produced Deal Notes for example those for Deal 1, see paragraph 69 above. Once a deal was negotiated Mr Goulding managed it to its conclusion with the support of Jodie Curl. Mr Constantinides supervised the execution of all deals and he or Jodie Curl signed off the stock requisition form.

149. Mr Constantinides stated at §29 that Excel traded in the grey market, deriving a profit by taking advantage of price differentials between two or more markets, a practice known as arbitrage. Excel actively bought and sold goods by advertising trade websites including International Phone Traders (“IPT”). Although Excel would have preferred to source goods directly from authorised distributors, they required payment up front without ship-on-hold.

150. He stated at §33 that Excel acted as a broker and only entered into a deal if it could source stock which a customer needed and sell it at a profit. It did not retain an inventory. Traders were told to achieve a minimum 4 per cent gross profit, costs being typically 2½ per cent. He stated that there were numerous occasions when Excel was approached for stock which it could not source. Mr Goulding logged offers from suppliers on Traders Record Sheets. Less than 4 per cent of total supplier offers and customer requests resulted in a concluded deal. Brokering a deal involved discussions many days before the deal commenced.

151. Mr Constantinides stated at §36 that until April 2005 Excel traded through HSBC. When trading with high value commodities, such as mobile phones, speed of payment was of the essence. There were delays in international payments and Excel changed to Allied Irish Banks. In June or July 2005 Excel opened an account with FCIB. He stated at §128 that FCIB provided 24 hour 365 days a year international money transfer which allowed payments to be expedited and release of goods to be done within hours not days. Opening the account reduced the impact of delays through Customs’ checks at airports which could be up to 6-7 days.

152. He stated at §41 that Excel put in place specific due diligence measures based on Notice 726 to minimise the risk of involvement in MTIC fraud. Due diligence was ongoing and not a tick box exercise.

153. He stated at §50 that Excel took the additional step of notifying Customs at Redhill by faxing a Notice of Intention to Trade (“NOITT”) before every deal and would generally not complete before clearance from Redhill. The NOITT contained details of suppliers and customers with their banks and VAT numbers, details of the stock to be traded and the location of the stock; it requested Customs to carry out a line check of the supply chain; a letter on 29 March 2005 had set out the offer of such checks, see §107 above. In March and April 2006 Excel experienced extensive delays in receiving responses from Redhill and in the absence of responses from Redhill relied on Europa confirmation of the VAT number. Excel would ship the goods on hold but would not release until Redhill clearance.

154. He stated that in addition to other checks Excel obtained reports from Veracis Ltd on suppliers and customers. The risk of default by a customer was limited to freight and inspection costs because Excel never released goods unless fully paid. Excel did not enter into a deal with a supplier or customer until approved through Excel’s due diligence.

155. He stated at §67 that in March 2006 in response to J and S letters Excel adopted a system of performance metrics (see paragraph 50 above) to track the performance of companies Excel was trading with together with an enhanced supplier declaration. Excel did not operate “a one strike policy”.

156. Mr Constantinides stated at §76 that Customs visited Excel on nine occasions between October 2004 and March 2006. During these visits business activities, due diligence, evidence of transport of the goods and of inspection of stock were discussed. Customs often uplifted documentation at those meetings. At no time were any criticisms made about the way in which Excel conducted its business.

157. Cross-examined, Mr Constantinides said that he did not know of any fraud in the chains of supply or in the contra chains and had no means of knowing of frauds. The disallowance was a shock. Excel’s due diligence went beyond knowing your supplier and customer and ensuring the stock was as described. None of Excel’s suppliers or their suppliers had defaulted.

158. He said that the emphasis of Notice 726 was to give legitimate traders like Excel guidance on how to operate in the sector. Asked about “verified the integrity of your supply chain” in the notice, he said that all Excel could do was to limit its due diligence to its supplier but to ask questions of its supplier as to their supplier; before entering into any transaction Excel sent a NOITT to Redhill with full disclosure and if Customs notified any issue the deal would be cancelled. He said that he thought the words “supply chain” were interchangeable with “supplier”.

159. He agreed that he had received the first J and S letter in May 2005 and that Excel received 12 letters in ten months relating to nine periods. He told Mr Cunningham that on receiving the letters in May and June 2005 he contacted Mrs Bransgrove and was told,

“Nothing to worry about, they’re for information purposes only, we don’t expect you to act on them.”

Letters had not been sent to Excel’s immediate suppliers, so a lot of them took the attitude that this was not their problem. It was impossible to know the companies in the complete supply chain; none of the immediate suppliers were manufacturers. The NOITT asked Redhill to carry out checks which he was unable to do. Asked whether it had crossed his mind that he should not be doing this trade at all, he said that he was never told by Customs to leave the industry.

160. Asked about a Table produced by Customs scheduling J and S letters he said that he understood that in 22 of the chains there was a tax loss. He said that he had asked for information as to who had been the defaulter on many occasions. He agreed that Mrs Bransgrove had not said that a chain was clean. He said that following investigations Excel ceased trading with a number of suppliers including Kinetic and STN but decided to continue trading with companies with which it had established a good relationship and which took the warnings as seriously as did Excel, including Cybacomms, Inter Comms, Elite, North West and TEC. He said that he was never told that there was an issue with Excel’s supplier or its supplier’s supplier.

161. He accepted that one of the suppliers in the deals in the letter of 10 February (see paragraph 35) was Atomic and that Excel dealt with Atomic again in Deal 3 but said that Excel had done many deals with Atomic but had only received one J and S letter. He agreed that Excel traded with Cybacomms again in Deal 17 but said it was “better to work with people that we know”; he denied turning a blind eye. He agreed to trading with North West in Deal 8 saying that Excel did not operate a “one strike and you are out” policy. He agreed that Excel traded again with Inter Comms in Deals 1, 4, 10 and 16 and said that Excel had traded with Inter Comms 7 or 8 times before then and that he had visited Inter Comms in Edinburgh. He said that Atomic and Cybacomms are still trading and have not been de-registered.

162. Mr Constantinides accepted that in 12 out of 21 deals Excel did not receive a report from Veracis until after the deal; he said that Excel used the Veracis report when he personally could not do a site visit; he said that he would have had a verbal update before receiving the report.

163. He was then asked about a Veracis report on Letting, the supplier in Deal 6, which said that Lettings’ premises were a large sparsely but adequately furnished room in an old industrial block and that its turnover was £¼ to £⅓ billion a year. He said that the turnover was substantial but not unusual. He said that Letting’s accounts to July 2005 were not due at the time of the report but that it was a profitable company which is still trading. He was not surprised that there were only four employees including the director. He had checked the VAT number with Redhill and had visited the premises in Birmingham.

164. Mr Constantinides was then asked about paragraph 11 of his third statement when he stated that Excel did not operate in the business of box breaking or volume shortages but took advantage of opportunities presented by arbitrage and dumping. He said that he had no idea what were the largest euro/pound fluctuations in April to June 2006. He said that he was taking advantage of arbitrage opportunities which were the price differences between states: regardless of the variables there were price differentials on the day of trade. Excel researched prices daily. He said that although there were no authorised distributors in Excel’s chain, an authorised distributor would have dumped the stock onto the grey market for whatever reason: by definition an authorised distributor would have purchased the stock from Nokia and dumped it on the grey market. It was Excel’s role to match potential opportunities by working in the grey market. He said,

“The mechanics behind, you know, I can’t comment on, I don’t really need to know.”

He said that he did not research the market share for each model. The stock was physical, he bought it, inspected it, shipped it, was paid for it and released it.

165. Mr Cunningham then cross-examined him on Deal 1 in detail. He accepted that Inter Comms was the supplier of goods referred to in J & S letters dated 22 February and 6 March.

166. Mr Constantinides said that the Deal Notes referred to at paragraph 69 above were internal documents for training and development. Mr Goulding had been made redundant and he believed went travelling; he was not giving evidence. Those were his working documents. The advertisement on the IPT website was not preserved. Asked whether there was a record of the telephone calls he said that Excel made hundreds of calls a day. The working notes from which the Deal Notes were typed would be in Mr Goulding’s files. The Deal Notes were an internal document not relevant to Excel’s VAT records. Mrs Bransgrove would have seen the outcome of the work on her visits. The negotiations were not in the Deal Check List prepared by Jodie Curl because that List was concerned with the documentation which she organised.

167. Mr Constantinides said that he absolutely refuted the suggestion that the purpose of the Deal Notes was to create the impression, without substantiation or calling Mr Goulding, that there were arm’s length negotiations when in fact there were not. Mr Cunningham, then put it to him that the writing of “Lee Goulding” on Deal 13 differed from that on Deal 1 and the other deals and was not in the same hand. He denied the suggestion that somebody other than Mr Goulding had done Deal 13. He denied that the Deal Notes were fabricated after the event. It was then suggested that the Deal Notes for Deal 13 were produced on the Friday before the hearing, although Mr Cunningham accepted that they had been produced previously on disclosure. Mr Constantinides denied that someone else wrote “Lee Goulding” on Deal 13 because the denial letter for Deal 13 was issued after Mr Goulding was made redundant; he denied that he had put the signature on Deal 13 or caused someone else to do so.

168. He was then asked about the inspection for Deal 1 by A1 (see paragraphs 59 and 64 above). He agreed that Excel faxed the instructions at 1338 hrs and that it was completed by 1711 hrs when it was sent by Jodie Curl to the customer. He said that A1 would have been put on notice beforehand and agreed that they were asked to do a 100 per cent scan which they did charging 10 pence per unit for the inspection and 10 pence for the scan of 3,500 mobiles. This involved opening 3,500 boxes to make sure that there was a physical handset inside, taking photographs and scanning the bar codes on the 50 cartons. He accepted that opening, resealing and checking each box would take 30 seconds making a little less than 30 man hours. He said that A1 was the largest inspection company in the country independent of the freight forwarders and had a base at AFI; they had a team of between 16 and 20 plus which did the inspections; he had seen inspections himself. He disagreed that this was totally implausible.

169. He said that the instructions to A1 were incorrect in stating that the stock was “coming direct from the manufacturer via our supplier”, the document had not been updated from the first transaction in November 2004.

170. Mr Constantinides accepted that the purchase order for Deal 1 which was returned signed by Inter Comms at 1357 hrs was the legally binding contract subject to the conditions of sale including the inspection report; it showed the unit price as £370. He said that the price was corrected on the following day to £270 which was the price recorded on the Deal Notes and also that on the supplier confirmation of goods, see paragraph 59 above. The figure of £370 was a genuine mistake which had been corrected.

171. Asked about the words “Awaiting Redhill Reply” on Inter Comms’ supplier declaration, he said that this was not a reason for not proceeding with Inter Comms, because Excel had also sent a NOITT to Redhill.

172. Still on Deal 1, he was asked about the proforma invoice (see paragraph 62) to J Corp specifying a deposit of £100,625 and said that it was standard practice to request a deposit but he was not sure that it was paid on this transaction. He then said that the Deal Check List showed that it was not applicable; it was a simple case of a direct negotiation not to send a deposit and promising full payment on inspection. With hindsight Mr Goulding should have recorded the waiver of the deposit on the Deal Notes.

173. Mr Constantinides agreed that Excel’s customer goods acceptance form was faxed to J Corp at 1007 hrs on 7 April requesting J Corp to arrange inspection and confirm acceptance. He was asked about the signed reply by J Corp also timed at 1007 hrs. He said that he would not expect the customer who had the report to do a full inspection. He denied the suggestion that even if the Deal Check List which showed the acceptance as received at 1115 hours was correct it was clear that J Corp did not bother with a full or indeed probably any inspection; he said that he could not speak for J Corp and denied that it was obvious that it was not a bona fide commercial transaction.

174. He was then asked about the instructions to AFI to ship the goods (see paragraph 63 above). He agreed that the limit of £1 million per vehicle was because of the insurance limit. He said that the sale value being £1,006,250 there would be a commercial risk of £6,250. He said that the policy said that the basis of valuation was “purchase invoice price plus 10%”; Excel’s purchase price was around £950,000 so that the cover would have been 10 per cent more. He denied a suggestion that it did not matter that the goods were not properly insured because it was all pre-orchestrated.

175. He was then asked about the delay between acceptance of the goods by J Corp on 7 April and payment on 10 April, the deal having been done on 5 April. He agreed that with high value goods speed of payment was of the essence and that Excel joined FCIB because of 24 hour 365 days a year service. He accepted that there was a delay in payment in Deal 1 and also in every single deal, particularly Deals 19 to 21. He said that inspection, shipping and Customs clearance typically took two to four days going to Europe and two to three weeks to Dubai because of delays with Customs at Heathrow. He said that normally Excel would have been paid for Deal 1 on 7 April, he did not know why payment was a few days later; he did not know if it was a week-end. Mr Constantinides denied that the obvious reason for joining FCIB was that they were bankers to the fraud.

176. Mr Constantinides said that payment to Excel was recorded by Jodie Curl on the Deal Check List. He did not operate the payments, she did. He denied the suggestion that he orchestrated all ten banking transactions in relation to Deal 1.

177. He denied that Excel’s rise in turnover within 12 to 18 months was too good to be true.

178. When Mr Cunningham said that not once did he make a loss, he replied that he would not expect to make a loss when brokering a deal. There were many deals that were not completed or were cancelled for a number of reasons including wrong specification. Asked about the profit of £1,028,000 on 21 deals in gross terms, he said that the average profit margin was 4 to 5 per cent and in most businesses a higher margin would be expected. He said that as well as capital tie-up, freight, inspection and insurance costs, the profits were larger because of market driven arbitrage. An exporter had a higher cost base than a domestic trader.

179. Mr Cunningham then produced a schedule of Excel’s overhead costs prepared by Counsel based on Excel’s disclosure. This showed for Deal 2 a gross profit of £22,500, an inspection fee of £405, a freight charge of £2,000, insurance of £357 based on a premium of £7,500 a quarter divided by 21 deals and VAT funding cost of £233.33 being the VAT reclaim of £56,000 at 5 per cent for one month, giving identifiable overhead costs of £2,995 and a net profit of 5.7 per cent compared with the gross profit of 6.6 per cent. We observe here that one month seems to us somewhat short and 5 per cent somewhat low. The schedule showed the net profit on the 21 deals as 4.9 per cent. Mr Constantinides said that net profit had to take into account office overheads, staff, PAYE, national insurance, rent, rates, general insurance, marketing initiatives, travel and exhibitions. He said that his profit was market driven. He denied that he was making a huge amount of money because of fraud, saying that he did not know that he was making the most profit in the chain and that his profit was market driven.

180. Re-examined Mr Constantinides said that when unable to obtain a check from Redhill because of delays he carried out a check on the Europa website.

181. He said that the Deal Notes by Mr Goulding were in relation to training and development. After graduating his first job had been as a technical training instructor for Ericssons; he had also been senior training instructor for Nortel Networks and still delivered training courses to BT, Alcatel and Lucent. He gave training to all his staff.

182. In answer to questions from the Tribunal he said that his research before trading showed that UK mobile trading was a very high turnover low margin business which the banks did not like.

183. He said that as a result of due diligence there were a number of companies which Excel did not trade with; the due diligence team would work through a number of checks.

184. He said that Excel’s due diligence had been audited and judged very good by Socvat in early days, by ISO 9001, and by Veracis. It was also reviewed by Ernst and Young.

185. He said that the VAT returns were prepared by external accountants who were given the purchase and sales invoices and purchase and sale ledgers.

186. Mr Constantinides said that he had later purchased the intellectual property rights of Excel’s training business and was carrying on that business through another company also called Excel. During the months covered by the appeal there were no training supplies but there were supplies subsequently.

187. He said that Customs had repaid some VAT claimed in relation to costs of the mobile transactions.

Mr Plowman’s evidence

188. Mr Plowman, director of Veracis Ltd, stated that Veracis Ltd, a specialist tax consultancy firm, was contracted to provide due diligence reports for Excel. He stated that from 1975 to 1992 he was employed by Customs, serving between 1988 and 1991 in the Anti-Dumping Team of the European Commission. He worked for KPMG and then Hambros Bank before forming Veracis.

189. He stated that Excel first requested due diligence reports on parties with whom it intended to trade in March 2005.

190. He stated that he provided reports to Excel on suppliers in the period April to June 2006. These were as follows: Cell Trading, Atomic, Letting, North West, Cybercomms, all reports being sent in March 2006 or earlier; Inter Comms, Fones Centre, TAP, Top Telecomms and Cobra, being sent on dates varying from 20 April to 13 July but all after the deals or initial deals. Apart from the Dubai companies there were reports for all customers, all being after the deals or initial deals.

191. He stated that Veracis carried out a visit on Excel on 9 March 2006 on behalf of Letting. There were no negative indicators for Excel. This was highly unusual. It was unusual to find a company as well organised as Excel.

192. At the outset of Mr Plowman’s cross-examination, Mr Cunningham said that he was not about to criticise him or his company on any of the reports he had submitted.

193. Mr Plowman said that he understood that a report by Veracis would be an ongoing part of Excel’s due diligence. He said that it was quite an administrative nightmare to get visits done on the continent; sometimes a visit had been completed but the report awaited other documentation. It might well be that he spoke to Mr Constantinides and gave him a flavour of what was found before the report was filed.

194. He was then asked about the reports mentioned in paragraph 190 which were received before April 2006 these included a report on Letting where an abbreviated balance sheet to July 2004 had been exhibited showing assets mainly made up of debtors. Mr Plowman said that he presumed that Mr Constantinides did his own financial checks.

195. Mr Cunningham then asked Mr Plowman about the following passage in a Veracis newsletter of 8 December 2005 which was sent to Excel on 14 December:

“Due diligence is an important part of the functions of any company serious about its probity in business and commitment to tax compliance. An attention to detail in this area will enhance the running of the business and reduce the risks of exposure to any chains contaminated by missing/defaulting traders. Although under the present climate, we advise the utmost caution in trading, particularly when you have been informed that in previous trades there were missing or defaulting traders – in those instances it may be prudent to review your supply chain as HMRC will not be sympathetic if it happened again with the same suppliers.”

Mr Plowman agreed that the passage in the Newsletter to “We advise the utmost caution” was the nearest to a red light and that the following words went beyond utmost caution.

196. Mr Plowman told the Tribunal that Veracis did not have a hand in creating or enhancing Excel’s due diligence systems.

197. He said that the average time for Veracis producing a UK report from commissioning was a month.

198. He said that the turnover of Letting of £20-30 million a month was enormous

Submissions for Customs

199. Mr Cunningham said that the primary case for Customs was that the entire trading was part of an overarching contrived scheme or schemes and that this was known to Mr Constantinides. Alternatively he said that Excel should have known that its transactions were connected with fraudulent evasion applying the test laid down by the Court of Appeal in Mobilx. He accepted that Excel was entitled to put Customs to proof of the non-payment of VAT by defaulters, the fact that it was fraudulent, the connection with Excel’s transactions and Excel’s knowledge. The burden of proof was on Customs throughout.

200. He said that Mobilx did not impact on actual knowledge including Nelsonian blindness. There could not be a different standard of proof between actual knowledge and “should have known”. The civil standard applied throughout. The “only reasonable explanation” test for “should have known” was a high test but was not a test of certainty. He agreed that he did not say that when considering actual knowledge the Tribunal should not consider whether that was the only reasonable explanation. The calibration of knowledge between actual knowledge and “should have known” was a matter for the Tribunal. The evidence available was the same. The surrounding circumstances could establish knowledge, see Moblix at [81] et seq; the Tribunal was entitled to look at the totality of the deals effected by the taxpayer, see at [111].

201. Mr Cunningham said that the Tribunal should infer actual knowledge from the totality of surrounding circumstances and should reject Mr Constantinides’ evidence denying knowledge.

202. He said that arguments relying on fiscal neutrality, legal certainty or proportionality based on the disallowance of Excel’s input tax when the buffers were equally at fault were answered in Mobilx as was the argument that Excel had been penalised, see at [64] and [66].

203. Turning to the facts, Mr Cunningham said that the appearance of traders in the same sequence in different chains was striking as was the crossover between different chains, for example Inter Comms was the supplier in Deals 1, 4, 10 and 16. He pointed to trading in deals being on the same day, back to back, through buffers making commission rather than negotiated profit with none making a loss. There were large unbroken consignments passing through up to five buffers with no authorised distributors involved.

204. He said that the evidence based on the FCIB accounts was very significant. The money chains were parallel but not identical to the goods chains. Substantial amounts of money were paid to companies which were not part of the goods chain, for example to Mobile Direct in Deal 1. In Deal 1 there were 10 payments on 10 April; the inference was that the money chains were organised and orchestrated with the knowing connivance of all involved; the payments to and from parties all over the world on the same day all with FCIB accounts must have been synchronised. The international synchronisation was very hard to equate to the existence of ten independent arm’s length commercial entities. The easiest explanation was that one person operated all the FCIB accounts. He said that Mr Constantinides had advanced the reason for using FCIB as being speed since 24-hour 365 days a year international money transfer allowed payments and release of goods to be expedited; however in Deal 1 the deals were on 5 April but the payments were not until 10 April. He said that apart from speed the only other plausible reason for Excel and the other participants using FCIB was that FCIB banked the fraud. He said that it was inherently incredible that the fraudsters would allow an innocent interloper into the deal chains, trusting that innocent interloper to play the game correctly and allowing the interloper to take out a large profit. He asked how the innocent would know how to be part of the synchronised payment.

205. Mr Cunningham relied on Mr Fletcher’s conclusion that there was no credible economic rationale for the trading see paragraph 4.1.5 of his second statement (see paragraph 127 above). Mr Constantinides had accepted that he did not know anything about specific currency fluctuations or tax differentials; as to dumping there was no evidence that authorised distributors were anywhere near the 21 chains. He said that Customs would have difficulty if only relying on Mr Fletcher but said that his evidence added cement to the case. He said that at best Mr Constantinides took accidental advantage of arbitrage opportunities.

206. Mr Cunningham said that Customs’ case was that the story about sitting in offices and looking at screens and all the stuff supposedly recorded by Mr Goulding was all contrived.

207. Examining the evidence on a deal by deal basis, Mr Cunningham pointed to the repeated reception of Veracis reports after deals had been done. Excel had shown apparent indifference to the quite extraordinary story told by the Veracis report into Letting.

208. Turning to Deal 1, Mr Cunningham made a series of points. (1) Inter Comms was the supplier of the goods in two recent J and S letters; (2) it was difficult to conclude that the deal notes were authentic because of the word “Lee Goulding” in Deal 13; (3) it was not feasible that A1 carried out a full inspection in 3 hours; (4) contrary to the instruction to A1 (see paragraph 59 above), the goods did not come direct from the manufacturer; (5) the first purchase order showed £370; (6) the words “Awaiting Redhill reply” on the supplier declaration were apparently irrelevant; (7) the 10 per cent deposit was not paid with no record of negotiation to waive it; (8) there was no apparent inspection by J Corp; (9) the insurance limit of £1 million was exceeded; and (10) the payment to Excel was delayed until 10 April. He said that in every case there was a delay between the transaction and payment; FCIB provided uniformity of payments in the chain rather than speed; the goods were shipped before payment the instruction “On Hold” being superseded by the facts; the goods were accepted at 11.15 hrs on 7 April.

209. Mr Cunningham also relied on the reaction of Excel to the information and to advice about MTIC fraud. Mr Constantinides sought to use Notice 726 as a shield saying that he verified his suppliers. He had been advised by Mr Plowman of Veracis to use “the utmost caution in trading”. Most important were the twelve J and S letters in ten months, covering most periods; these told a cumulative story. He said that a Table produced by Customs showed that out of 74 chains selected for examination, 22 were completed of which 100% were found to be dirty; none of the chains was found to be clean. Every time he was told the result of completed verification the chain was dirty. In spite of the warnings in the J and S letters Mr Constantinides carried on trading with four of the suppliers, Cybercomms, North West, Atomic and Inter Comms. He said that Customs did not accept that Excel’s due diligence was without inadequacies, it was “utterly, utterly hopeless”.

Submissions for Appellant

210. Mr Patchett-Joyce said that, Customs had not disputed the existence of the mobile phones or their export. The burden of proof of knowledge and means of knowledge was on Customs and the test was a high one.

211. He said that the principles of legal certainty, fiscal neutrality, proportionality and equal treatment were fundamental principles of EC law with constitutional status. In Mobilx Moses LJ said at [55] that legal certainty involved a trader being in a position to know before entering into a transaction that the circumstances were such that he would not be entitled to deduct input VAT. He submitted that in relation to the contra trades which had taken place after Excel’s transaction Customs had an insurmountable hurdle without very clear evidence of knowledge or means of knowledge. He said that it was necessary to look at what knowledge was relied on. It was not contended that Excel was the ringmaster. Contra trading involved a conspiracy but it had not been alleged that Excel was involved in a conspiracy. The entire case was based on inference. If Excel did not know the full details of the contra trading arrangement, Customs case as to the contra trades must fail on grounds of legal certainty. Running a risk was not enough. Under legal certainty, the Court of Appeal referred at [61] to an informed choice.

212. He said that in the first sentence of [66] in Mobilx the Court of Appeal was referring to the facts in Kittel which involved the immediate counterparties to the fraudster. The Court of Justice in Kittel depended strongly on the approach in Optigen Ltd v Customs and Excise Commissioners (Case C-354/03) [2006] STC 419, four out of the five judges being the same as in Optigen. At [47] the Court said that each transaction must be “regarded on its own merits” and its character could not be altered by earlier or subsequent events; he also referred to the Advocate General at paragraphs 29-42 in Optigen where he said “each transaction must be considered individually and per se”. He said that Customs’ entire case was flawed in the light of the Advocate General’s analysis. At [51] in Optigen the Court referred to “transactions” not vitiated by fraud, not to chains; in that case there were other deals in the chains which were vitiated by fraud. Excel was not a knowing party. He said that the Kittel test could not be established on the facts of this case.

213. Mr Patchett-Joyce said that it had been accepted that in the straight chains Excel neither knew nor had means of knowing of any of the defaulters; he asked how could Excel know that at the end of their accounting periods those traders would default. In the contra chains Customs had the further hurdle that the defaults were in completely different supply chains.

214. In Magoora Sp z o.o. v Dyrektor (Case C-44/07) [2008] ECR-1 10921, the Court said at [28] that the right to deduct must be exercised immediately and that any limitation on the right must be applied in a similar manner in all Member States. A Tribunal must tread very carefully before concluding that a trader has not acquired the right or has lost it. Here Customs contended that Excel had lost the right of deduction yet allowed other parties in the chains to deduct their input tax. If Excel was outwith the scope of the right to deduct, so also were the others which were in a like position but had not been subject to disallowance. This involved disproportionality and inequality of treatment between Excel and the other parties to the chains. Before Mobilx Customs contended that Excel lost the right to deduct, now they said that it was outwith the scope; the change of stance infringed legal certainty.

215. Mr Patchett-Joyce said that expert evidence should only be admitted in carefully defined circumstances. He cited Aikens J at [19]-[23] in J P Morgan Chase Bank v Springwell Navigation Corpn [2007] 1 All ER (Comm) 549 in relation to Part 35 of the Civil Procedure Rules, and submitted that the Tribunal Rules have the same overriding objective. He said that there is no sufficient recognised body of knowledge as to the grey market. The issues covered by expert evidence should be identified and the relevance and necessity of such evidence established. Mr Fletcher’s evidence did not satisfy those criteria and was irrelevant because he expressly accepted that there was a grey market in mobiles. It was irrelevant whether it was illegitimate. Mr Fletcher was a non-expert gathering together information which he had derived from nameless individuals at Nokia and from reports produced after the event. He went round ex post facto assembling factual data from others where the factual basis was not properly laid. In response to Mr Cunningham’s submission that a closing submission was not the time to submit that Mr Fletcher’s evidence was not admissible, Mr Patchett-Joyce said that his submission went to the weight to be attached to his evidence.

216. Turning to the facts, Mr Patchett-Joyce said that the material evidence of the context in which Excel’s deals took place was that of Mrs Bransgrove and Mr Constantinides.

217. He said that Mrs Bransgrove had remembered phone calls coming in during her visits. She agreed that Excel’s due diligence was as good as most broker companies she had visited and outdid what she might have seen at buffer companies. She had accepted that at every visit the directors were very concerned to ensure that they were complying with HMRC’s regulations and suggestions. The NOITT had been an innovation of Excel as was performance metrics; Mr Constantinides had not been cross-examined on performance metrics.

218. He said that it was commercially unrealistic for a trader to verify his supply chain beyond his immediate supplier. There was extensive evidence of due diligence checks; Customs sought to present a highly selective picture focussing on Veracis. None of the defaulters were Excel’s suppliers. After the J and S letters of May and June 2005, Excel had ceased obtaining supplies from Kinetic, Secure Network and FMS. He said that Mrs Bransgrove saw the due diligence on North West in 2006 and raised no concerns. He said that at each and every stage Excel took the J and S letters wholly seriously and adopted a constructive attitude; Customs had not alerted Excel to the risks and consequences of continuing to trade as was now put. There had been no visit between March and June 2006 but Mr Constantinides had continued to write to Customs.

219. Mr Patchett-Joyce said that there was a clear, transparent means of trading, with which Mrs Bransgrove was fully familiar, and where repayments were made throughout her term as assurance officer. There was no objective criterion to mark these deals out for denial of input tax.

220. He said that Mr Cunningham’s submission that Excel was involved in an overarching scheme was based on full knowledge of the extended verification after the event. Excel only knew who they bought from and who they sold to. Back to back deals were inherent in matching willing buyers and willing sellers; once the deals were matched, a profit was inherent. Release of the goods against payment having been shipped on hold was a normal incident of commercial dealings.

221. Mr Patchett-Joyce said that the FCIB evidence was provided in April 2010 relying on reconstruction from the server after FCIB had been closed down in September 2006. He said that he was minded to agree that a fraud was perpetrated; he had merely put Customs to proof. Synchronisation of deal dates was not surprising with back to back deals, nor was synchronisation of payments. He said that if a fraudster was going to make off with 17½ per cent tax free he could prime the pump introducing goods into the market at a competitive price to meet the demand created. The counterparty to the fraudster may well be in on the arrangement, but Customs never focused on that party. The fraud could easily be perpetrated using market forces with the exporter as an innocent participator. There had been no suggestion that Excel had not bought and sold within the going market price.

222. He said that if all the transactions in question were part of an overall scheme to defraud, the complexity of the scheme was mind boggling. Apart from the allegations of contra-trading, Excel obtained goods from 11 suppliers and sold to 13 different customers. The FCIB evidence looked to establish a money circle with the fraudsters at each end, but by controlling each end the risk was left with the innocent party buying and selling at market prices with nothing to put it on notice of anything untoward. He submitted that this was a much more compelling analysis than the mind boggling overall scheme underpinning the case for Customs.

223. He said that time difference between the deals and payments was inevitable because of the two or three day delay in transporting the goods to Europe and inspecting them; with Dubai the delay could be two to three weeks; J Corp could have paid on the Friday but did so on the Monday. He said that the suggestion that Excel did not itself operate its FCIB account had never been pleaded and was only advanced in closing.

224. As for Deal 1, Mr Patchett-Joyce said that there was no evidential basis for suggesting that the Deal Notes were fabricated; if they had been fabricated it would be expected that all would be signed. The A1 inspection could easily have been carried out with 15 to 20 persons checking the goods. The net result of the insurance was that Deal 1 was underinsured by £6,250; there would have been an extra cost to split the load. In respect of the deposit he asked why include it on the matrix if no deposit was to be taken and the sale was part of a fraud; the notation “N/A” was consistent with negotiation; it was an oddity on the paperwork that no deposits were paid to Excel on any deals. He said that large unbroken consignments were the essence of wholesale trading. Excel had made more profit because as exporter it had more costs. J Corp would have had the A1 inspection report so that a cursory inspection was possible.

225. He said that the test in Mobilx was whether the only reasonable explanation was fraud. He submitted that the most reasonable explanation was that Excel was continuing to seek a commercial profit trading in the goods which it had bought and sold to the knowledge of Customs since 2004. Excel had never been told to get out of the market. It was in a wholly different position from Mobilx where the J and S letters were treated in a cavalier fashion.

Conclusions

226. We consider first the legal submissions of Mr Patchett-Joyce which were primarily based on EC law.

227. We see no reason to depart from the conclusions expressed by the Tribunal in [209] to [213] of the decision in Emblaze Mobility Solutions Ltd v Revenue and Customs Commissioners released on 25 August 2010 and therefore after the closing submissions in this case.

228. We accept the submission of Mr Cunningham that arguments based on fiscal neutrality, legal certainty and proportionality are covered by the decision of the Court of Appeal in Mobilx. The principles laid down by the Court of Justice in Kittel could not be contrary to underlying principles of EC law.

229. In order to be a participator within Kittel there is no need for a trader when entering into a transaction to know the details of a fraud including when the default will occur, and by whom. We see no difference in principle between losing the right to deduct and never acquiring it.

230. It is clear that in the present case Customs could have proceeded against other parties in the chains including the counterparties to the defaulters and that Customs produced little or no evidence as to their due diligence, however that does not protect Excel against disallowance. The ruling in Kittel at [61] was specific that ,

“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 of the right to deduct.”

This is not qualified in any way.

231. Mr Patchett-Joyce also relied on the statement at [47] in Kittel that each transaction must be “regarded on its own merits.” We are satisfied that although in principle each transaction must be considered individually and per se that does not mean that the context is not relevant including most importantly the other deals. Any other approach would be contrary to common sense.

232. Any challenge to the interpretation of Kittel by the Court of Appeal in Mobilx is a matter for a higher tribunal.

233. On that basis we now turn to the evidence before us remembering that it is clearly established by Mobilx that the burden of proof as to the Kittel test is on Customs and that it is to be associated from objective factors. We observe at this point that, if there was an issue as to whether the mobiles existed or whether they were exported, the burden of proof as to those matters would be on the Appellant. However the existence of the phones and their purchase and sale by Excel were not in dispute.

234. The primary submission of Mr Cunningham was that Excel through Mr Constantinides had actual knowledge that its transactions were connected with fraudulent evasion, inferring knowledge from the totality of surrounding circumstances and rejecting Mr Constantinides’ denial of knowledge. The objective factors are not limited to those of which Excel had knowledge or means of knowledge and are thus more extensive than those relevant to whether Excel should have known.

235. The strongest evidence for Customs is the flow charts produced by Mrs Malik from the FCIB records, see paragraphs 77 and 78 above and paragraphs 83 to 91 and also the flow chart for Deal 1 annexed to this decision. We have summarised Mr Cunningham’s contentions on this at paragraph 204 and those of Mr Patchett-Joyce at paragraphs 221 and 222.

236. Analysis of the transaction statements shows that, for the most part, the payments for the mobiles could not have been made without borrowing if the payments for the goods had not been received. J Corp could not have paid Excel but for the money passing through Catseye from Gulf Phones. Almost all the payment Oracle received from Deepend passed through Mobile Direct to Gulf Phones.

237. The market forces explanation by Mr Patchett-Joyce at paragraph 221 above provides no explanation for the flow of funds from Deepend through four companies to J Corp. His explanation involves Deepend, the defaulter in Deal 1, introducing goods which it acquired from MV at a price which was attractive to Bluewire which sold through two more companies to Excel which received a call from J Corp an approved customer (see paragraph 69) which was coincidentally put into funds to buy the goods from Excel. In our judgment put at its lowest this was most improbable. Although Mr Patchett-Joyce said that the complexity of the overall scheme was mind boggling, that description is equally apposite to the money transfers without which the transactions could not have been funded. Indeed the complexity of co-ordinating the money transfers so that the necessary funds reached Excel’s customer in time to pay Excel without the participation of Excel is to our mind far greater.

238. The preceding two paragraphs have been based on Deal 1. We have not analysed the other deals in the same detail, however paragraphs 84 to 91 addresses features of the other deals. We note that Gulf Phones and Catseye appear again in Deal 4 and that Mobile Direct appears in Deal 19. It is to be noted that the only company appearing in all 21 deals in Excel.

239. Mr Cunningham placed considerable reliance on the J and S letters, see paragraph 209 above, producing a schedule. We have compared the letters with the schedule and find that the figure for the number of chains examined should be 67 and that for transactions found by Customs to have commenced with a defaulting trader should be 18. Although none of the letters said that the other chains were clear, the only letter which specifically stated that enquiries were ongoing into the other deals in the month in question was that of 8 December 2005, see paragraph 33 above. However after the letter of 5 May 2005 Mrs Bransgrove did say that the letter did not mean that four other months were not problematical, see paragraph 22. We do regard it as significant that Inter Comms, which was the supplier in four deals including Deal 1, was the supplier of the goods supplied in November 2005 identified in the letter of 22 February 2006 and was also the supplier of the goods supplied in September 2005 identified in a letter of 6 March 2006.

240. We consider that it is significant that Mr Constantinides had on his own evidence considerable experience in the telecoms business acquired over a number of years with different companies. Furthermore he had a university degree in electronics and communications and carried out six months of research into the mobile market before undertaking the first trade in 2004. He was clearly fully aware of the risks. That does not mean that he had actual knowledge of the connection of his deals with fraud but is one of the objective factors in ascertaining whether he did have such knowledge.

241. In relation to Mr Cunningham’s submissions on Deal 1 (paragraph 208) we have already commented on Inter Comms being the supplier. We do not attach any significance to the handwriting “Lee Goulding”: there was no expert evidence, the point was not pleaded and Mrs Beard’s evidence relied on the Deal Notes. The inspection fee for Deal 1 was £700; we do not regard it as realistic to suggest that A1 had 10 to 15 employees working for 3 hours for that fee particularly if the goods were supposed to be coming direct from the manufacturer via Excel’s supplier. We do not regard the error on the initial purchase order and the Redhill notation as significant. The waiver of the deposit in Deal 1 with the “N/A” notation by Jodie Curl on the Deal Check List is more easy to accept than the fact that there was no deposit in any of the deals notwithstanding that the goods were shipped on hold. The level of inspection by J Corp was not Excel’s concern. Whereas the delay in payment in Deal 1 may have been attributable to dilatoriness by J Corp and the weekend, there was a delay in payment in every deal notwithstanding Mr Constantinides’ emphasis on the need for 24 hour service on 365 days and the fact that no deposits were received.

242. We accept the evidence of Mrs Bransgrove as to Excel’s due diligence. On 20 July 2005 she noted “the high quality of due diligence carried out by Excel”, see paragraph 27. Although she did not put it in this way, what she was referring to in her evidence was however clearly the paperwork. As she said at paragraph 113 above she could not be inside the mind of Mr Constantinides. The quality of the due diligence on paper is of very limited value in deciding whether Mr Constantinides was a participant in fraud. If he was participating in complex fraud, it would be no surprise if he made substantial efforts to cover it. The evidence of Mrs Bransgrove was consistent with that of Mr Plowman, see paragraph 191. That evidence however cuts both ways since the better organised Excel was, the more difficult it is to accept that Mr Constantinides was unaware of the overall contrivance.

243. We have considered the evidence of Mr Fletcher with care but do not place any substantial reliance on it. We consider that there is considerable force in the submissions of Mr Patchett-Joyce recorded at paragraph 215. His evidence included factual material which was inevitably nearly all second hand including that on Nokia’s pricing policy; we have no difficulty with that since the Tribunal regularly receives hearsay evidence. However his conclusions seem to us to be a matter for submission by counsel rather than evidence by an expert witness. There is an inherent difficulty in expert evidence as to the grey market, particularly since it did not appear that Mr Fletcher’s researches covered inquiries to any authorised distributors. It does not seem to us that there is any inherent improbability in a trader engaging in broker-like activities, matching deals, carrying no stock and only dealing at a profit. We do not understand why Excel should be expected to have known why its counterparties should have chosen to deal at the prices which they were willing to agree.

244. We have considered the submissions of Mr Patchett-Joyce with care. He said everything which could be said on behalf of Excel. In our judgment he was however unable to provide any credible explanation for the FCIB evidence produced by Mrs Malik. Market forces provide no explanation as to why Excel’s customers were put in funds to pay Excel as part of essentially circular payments. In our judgment the only reasonable explanation is that the payments were part of overall schemes in which Mr Constantinides, and through him Excel, must have been a knowing participant. We find that Excel knew that by its purchases it was participating in transactions connected with fraudulent evasion of VAT.

245. In those circumstances we do not find it necessary to consider Mr Cunningham’s alternative submission that Excel should have known of the connection with fraud applying the Mobilx test. We do however observe that we do not accept Mr Cunningham’s submission that the evidence is the same. The evidence on the Mobilx test must concentrate on the evidence known to Excel or which was reasonably available. The FCIB evidence apart from Excel’s own transactions was not known or available to Excel if it was not a knowing participant. Consideration of the Mobilx test would have added substantially to the length of a decision which is already long.

246. The appeal is dismissed with costs to be assessed on the standard basis under Rule 29(1)(b) of the VAT Tribunals Rules 1986 if not agreed.

247. 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.

THEODORE WALLACE

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT) Respondents

TRIBUNAL JUDGE

RELEASE DATE: 27 October 2010

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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Excel RTI Solutions v Revenue & Customs (Rev 1)[2010] UKFTT 519 (TC) (27 October 2010) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00774.html Cite as: [2010] UKFTT 519 (TC)