DECISION
Introduction
1.
The issue in this appeal is whether the respondents are right in their
view that the appellant, Ixes (UK) Limited (“Ixes”), in reality in the person
of its only director, Mr Iajaz Khan, knew or ought to have known that 46
transactions of purchase and sale of electronic goods undertaken by it between
6 March and 31 May 2006 were connected with the fraudulent evasion of VAT.
Relying on that view the respondents have refused to repay to Ixes input tax,
almost £10 million in all, incurred by it on the purchases. All of the relevant
sales were to overseas VAT-registered traders, and therefore zero-rated. This
is, in short, what is commonly if not altogether accurately known as an MTIC
appeal.
2.
Ixes’ case, in summary, is that it undertook comprehensive due diligence
on its suppliers and customers, and in doing so carried out all of the checks and
took all the precautions the respondents recommended, studied their advice and
acted on it, and that Mr Khan did not and could not have known of frauds
committed by traders several steps removed from it in its supply chains. It
maintains it was a serious and careful trader in what it reasonably believed to
be a genuine market, and that it had no reason to think that any of its
transactions was connected with fraud elsewhere.
3.
Before us, Ixes was represented by Mark Lucraft QC and the respondents
by Mark Cunningham QC, leading Andrew Westwood. In accordance with the usual
practice in cases of this kind, the respondents (upon whom the burden of
establishing most of the relevant facts lies) led their evidence first. We had the
statements of a large number of witnesses, which (subject to minor corrections
and updating) stood as their evidence in chief. Some witnesses had made more
than one statement. The witnesses who gave oral evidence were: Dean Foster, the
HMRC officer whose decision it was to refuse the repayment, Russell Hall,
Phyllis Mee, Ian Webster, Archibald McAllister, Timothy Reardon, Matthew
Bycroft, Claire Badminton, Nicola Leak, Smita Parikh, Robert Ross, John McPartlin,
Charlotte-Rebecca Jackson, Ann Bushby, Katie Finn, Jane Humphrey, Susan Okolo,
Gary Saul, Daniel Outram, Ghazalah Shah, Kyle Martin, Michael Stevens, Stewart
Yule, Lee Nevin and Claire Sharkey, all HMRC officers, John Fletcher, a manager
employed by KPMG and called by the respondents as an expert witness, and Mr
Khan. We had also the unchallenged statements of two further HMRC officers,
Kevin Wright and Nigel Humphries. We were presented in addition with a very
large volume of documentation.
4.
It was common ground that the starting point was the obligation posed on
HMRC, if they are to succeed, to show that Ixes’ transactions were “connected
to the fraudulent evasion of VAT”. That requires them to demonstrate three things:
§
that there has been a VAT loss;
§
that the loss resulted from fraudulent evasion; and
§
that the deals which are the subject of the appeal were connected
with that evasion.
5.
After the hearing was concluded the decision of Lewison J, sitting in
the Upper Tribunal, in Revenue and Customs Commissioners v Brayfal Limited
[2011] STC 1338 (“Brayfal”) was released, and the appellant
requested permission to make further submissions in the light of it. Because of
some confusion, it was not until late July 2011 that we received the
respondents’ response to those submissions. We have taken both parties’
submissions into account in what follows, as well as the refusal by the Supreme
Court to Mobilx Limited of permission to appeal against the decision of the
Court of Appeal to which we refer below.
6.
It is now notorious that the grey market in mobile phones is riddled
with fraud, a proposition which Mr Lucraft did not seek to challenge. Indeed,
after the evidence was complete he did not dispute the respondents’ case that,
with a possible exception with which we deal in para 9 below, every one of Ixes’
purchases could be traced back, directly or indirectly, to a fraud, consisting
in most cases of the failure of a trader (a “defaulter”) which had sold the
goods, within the UK, to another trader, and which had in consequence incurred
a liability to account for the VAT due on that sale, to account for and pay
that VAT to the respondents. Usually the defaulter had either disappeared, or
gone into insolvent liquidation owing a very large amount of VAT. There was
evidence that in a large number of those transactions all or most of the
purchase price of the goods had been paid by the purchaser, not to the defaulter,
but to a third party overseas, making it impossible for the defaulter to
discharge its obligation to account for the VAT.
7.
In most cases there was a simple sequence of transactions leading back
to a defaulter. Others traced back to honest traders whose identities had been “hijacked”
by fraudsters. In four, the chains traced back to contra-traders, that is
traders setting off the input tax incurred by them, in a chain of transactions
including one carried out by a defaulter, against the output tax for which they
must account in a defaulter-free chain. It is to these chains that the
additional submissions we have mentioned were directed. As Mr Lucraft did not
challenge the respondents’ case that there was fraud in the chains, at one or
more removes from Ixes itself, and that they had succeeded in demonstrating all
of the three things described at para 4 above, we do not propose to set out systematically
the detail of the chains, though we shall need to describe Ixes’ own
transactions, and some other features of the chains, later.
8.
It is, however, appropriate to make some preliminary
observations. There was overwhelming evidence of fraudulent trading, designed
to do no more than generate output tax liabilities for which no-one would ever
account, as the precursor to input tax repayment claims the respondents would
be expected to meet. The evidence showed defaults, not of moderate sums which
might be the consequence of business misfortune or poor judgment, but of vast
sums, measured in millions of pounds, generated in very short periods of time
by traders which existed for the same short period before their directors
disappeared. That the goods in which it dealt had previously been traded by
defaulters does not, of course, by itself demonstrate that Ixes was a knowing
participant in fraudulent chains, even though it was the trader making the
input tax repayment claims, but as has been said many times, it is the input
tax injected by the taxing authorities when meeting such claims which fuels the
fraud. We add, in case it should be thought otherwise, that we recognise that
Ixes’ having made the repayment claims is not by itself an indication that it
knew or should have known of the frauds.
9.
The exception identified by Mr Lucraft and which we mentioned above was
a trader by the name of K & S Export, regarded by HMRC as a
defaulter but which had rendered a seemingly near-correct VAT return before it,
or more accurately its directors, disappeared without paying the amount shown
to be due. Although the completion by a defaulter or supposed defaulter of a
return is unusual in cases of this kind, and might be taken as an indication of
an intention to meet its obligations, one cannot, in our view, disregard the
fact that K & S Export was, like all the other defaulters in this case, a
company which had traded for a very short time, incurring an enormous (in its
case £8.5 million) VAT debt which remains unpaid. It is conspicuous that it
undertook as many as 86 transactions in the space of two working days. We
cannot, in these circumstances, draw any real distinction between K & S and
the other defaulters, despite the completion of a return. It is noteworthy that
K & S was making third party payments, that is sending the bulk of the
price of the goods to a company other than its own supplier, leaving only a
small amount, insufficient to discharge the VAT debt, to be paid to the
supplier itself and, it appears, asking its customers to do likewise. The only
reasonable inference to be drawn is that K & S put it out of its power to
pay the VAT, and never intended to do so. We consider K & S to be as much a
fraudulent defaulter as the others.
10.
Although he acknowledged that HMRC had correctly traced the chains of
transactions, Mr Lucraft took issue with their contention that there was an “overall
scheme to defraud”, in which Ixes was a knowing participant. While conceding
that fraud was clearly established, he argued that HMRC nevertheless could not
show any such scheme, still less that Ixes knew anything about any scheme which
might have existed. He pointed out that although officers had taken up
considerable quantities of paperwork, including documents left behind by
traders which had disappeared, they had not found a single document which
supported their theory that the transactions were pre-arranged, each trader
being told in advance from whom it should buy and to whom it should sell. In furtherance
of his argument that Ixes could not have known of any scheme he emphasised the
fact that it had at no time dealt directly with any trader which could be shown
to have defaulted. Indeed, he went a little further by claiming that Ixes had
at no time dealt with a fraudulent trader, but that is not so, as at least one
of its suppliers has been found by this tribunal or its predecessor to be a
knowing participant in fraudulent chains, albeit not a defaulter. We will, of
course, deal with the arguments in rather more detail later.
The law
11.
The starting point in cases of this kind is the jurisprudence of the
Court of Justice of the European Union (to use its present title), in Optigen
Ltd and others v Customs and Excise Commissioners (Joined cases C-354/03,
C-355/03 and C-484/03) [2006] STC 419 (“Optigen”) and Axel
Kittel v Belgium; Belgium v Recolta Recycling (Joined Cases C-439/04 and
C-440/04) [2008] STC 1537 (“Kittel”). Those cases show that each transaction
must be considered on its own merits: an overall view is not permissible. In Optigen
the Court said, at [55],
“ … the answer to the first question referred for a
preliminary ruling in each case should be that transactions such as those at
issue in the main proceedings, which are not themselves vitiated by VAT fraud,
constitute supplies of goods or services effected by a taxable person acting as
such and an economic activity within the meaning of Articles 2(1), 4 and 5(1)
of the Sixth Directive, where they fulfil the objective criteria on which the
definitions of those terms are based, regardless of the intention of a trader
other than the taxable person concerned involved in the same chain of supply
and/or the possible fraudulent nature of another transaction in the chain,
prior or subsequent to the transaction carried out by that taxable person, of
which that taxable person had no knowledge and no means of knowledge. The right
to deduct input VAT of a taxable person who carries out such transactions cannot
be affected by the fact that in the chain of supply of which those transactions
form part another prior or subsequent transaction is vitiated by VAT fraud,
without that taxable person knowing or having any means of knowing.”
12.
As that passage shows, however, there are circumstances in which the
right to deduct may be denied, that is where a trader, even though not himself
a party to a fraud, nevertheless knew or should have known of it. This theme
was developed in Kittel. The core of the Court’s reasoning appears in
paras 56 and 57 of its judgment:
“56. … a taxable person who knew or should have known that,
by his purchase, he was taking part in a transaction connected with fraudulent
evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a
participant in that fraud, irrespective of whether or not he profited by the
resale of the goods.
57. That is because in such a situation the taxable person
aids the perpetrators of the fraud and becomes their accomplice.”
13.
The consequence of such participation was spelt out at para 61 of the
judgment:
“… where it is ascertained, having regard to objective
factors, that the supply is to a taxable person who knew or should have known
that, by his purchase, he was participating in a transaction connected with
fraudulent evasion of VAT, it is for the national court to refuse that taxable
person entitlement to the right to deduct.”
14.
How that observation should be applied in practice was considered by the
Court of Appeal in the only United Kingdom case, so far, to reach that court, Mobilx
(in administration) v Revenue and Customs Commissioners and related appeals
[2010] STC 1436 (“Mobilx”). Moses LJ gave the only judgment, with which
the other two Lords Justices agreed. At [52] he said:
“If
a taxpayer has the means at his disposal of knowing that by his purchase he is
participating in a transaction connected with fraudulent evasion of VAT he
loses his right to deduct, not as a penalty for negligence, but because the
objective criteria for the scope of that right are not met .… A trader who
fails to deploy means of knowledge available to him does not satisfy the
objective criteria which must be met before his right to deduct arises.”
15.
Then, at [59] he said:
“The
test in Kittel is simple and should not be over-refined. It embraces not
only those who know of the connection but those who ‘should have known’. Thus
it includes those who should have known from the circumstances which surround
their transactions that they were connected to fraudulent evasion. If a trader
should have known that the only reasonable explanation for the transaction in
which he was involved was that it was connected with fraud and if it turns out
that the transaction was connected with the fraudulent evasion of VAT then he
should have known of that fact. He may properly be regarded as a participant
for the reasons explained in Kittel.”
16.
At [75] he added that:
“The
ultimate question is not whether the trader exercised due diligence but rather
whether he should have known that the only reasonable explanation for the
circumstances in which his transaction took place was that it was connected to
the fraudulent evasion of VAT.”
17.
Moses LJ concluded at [85] by saying that:
“A
trader who chooses to ignore circumstances which can only reasonably be explained
by virtue of the connection between his transactions and fraudulent evasion of
VAT, participates in that fraud and, by his own choice, deprives himself of the
right to deduct input tax.”
18.
It is also worth mentioning the observations of Christopher Clarke J in Red
12 v Revenue and Customs Commissioners [2009] EWHC 2563, adopted by Moses
LJ at [83] in his judgment in Mobilx. Christopher Clarke J said:
“[109] Examining individual transactions on their merits
does not, however, require them to be regarded in isolation without regard to
their attendant circumstances and context. …
[110] To look only at the purchase in respect of which input
tax was sought to be deducted would be wholly artificial …
[111] … in determining what it was that the taxpayer knew or
ought to have known the tribunal is entitled to look at the totality of the
deals effected by the taxpayer (and their characteristics), and at what the
taxpayer did or omitted to do, and what it could have done, together with the
surrounding circumstances in respect of all of them.”
19.
It is convenient to mention at this point a further comment made by
Moses LJ in Mobilx , at [61]:
“If he [the trader] chooses to ignore obvious inferences
from the facts and circumstances in which he has been trading, he will not be
entitled to deduct.”
20.
The principles we draw from those observations are, first, that although
the focus must always be on the transaction in question, one must nevertheless
keep in mind all of the surrounding circumstances. The fact that a trader has undertaken
due diligence enquiries will almost always be a factor, but not a determinative
factor. In particular, a trader cannot protect himself merely by making
enquiries; the enquiries, and the answers he receives (or the fact that does
not receive an answer), merely form part of the body of information which he
must consider before deciding whether or not to enter into any individual
transaction. It is not necessary for the Commissioners to demonstrate that the
trader had knowledge of the detail of the antecedent dealings in the goods, the
identities of the traders, the precise nature of the fraud and other matters of
that kind; they do not feature in the simple test adumbrated by Moses LJ in the
extract from para [59] of his judgment set out above. It is sufficient that
there is no plausible honest explanation of the transactions.
21.
While not disputing those propositions—indeed, there was nothing of
substance between the parties on the law—Mr Lucraft argued that the hurdle HMRC
must surmount if they are to show knowing or “blind eye” participation is high,
and that it is plain from what was said in Mobilx that the Court of
Appeal deliberately put it in a high position. First, it was clearly stated, at
[60] and [77], that HMRC cannot succeed by merely showing that a trader knew or
ought to have known that the transactions into which he entered were more
likely than not to be connected with the fraudulent evasion of VAT. They are
required to show, even if only on the balance of probabilities, that the trader
knew or ought to have known that the transactions were so connected.
Negligence or carelessness are plainly insufficient. He emphasised two further
observations in the judgment of Moses LJ. At [55] he said:
“A trader who knows or could have known no more than that
there was a risk of fraud will find it difficult to gauge the extent of the
risk; nor will he be able to foresee whether the circumstances are such that it
will be asserted against him that the risk of fraud was so great that he should
not have entered into the transaction. In short, he will not be in a position
to know before he enters into the transaction that, if he does so, he will not
be entitled to deduct input VAT. The principle of legal certainty will be
infringed.”
22.
From that background there emerged the paradigm trader
who has forfeited the right to deduct, described by Moses LJ at [61], a
description which, Mr Lucraft was to argue, was far removed from Ixes. The
description is:
“A trader who decides to participate in a transaction
connected to fraudulent evasion, despite knowledge of that connection, is
making an informed choice; he knows where he stands and knows before he enters
into the transaction that, if found out, he will not be entitled to deduct
input tax”.
23.
We acknowledge that the test is an objective one, and that hindsight has
no part to play: the trader must be shown to have known of the connection with
fraud or, instead, to have had, before entering into the transaction, all the
information necessary to demonstrate such a connection, but to have failed to
deploy it. We recognise too the force of Mr Lucraft’s submission that it is
necessary to be especially careful in respect of the four contra-trading chains
in issue in this appeal, as can be seen from the observation made by the Chancellor
in Blue Sphere Global Ltd v Revenue and Customs Commissioners [2009] EWHC 1150 (Ch), in respect of such trading. At [55] he said:
“In my view it is an inescapable consequence of
contra-trading that for HMRC to refuse a reclaim by E [the trader in Ixes’
position] it must be in a position to prove that C [the contra-trader] was
party to a conspiracy also involving A [the defaulter]. Although the fact that
C is party to both the clean chain with E and the dirty chain with A
constitutes a sufficient connection it is not enough to show that E ought to
have known of the fraudulent evasion of VAT involved in the subsequent dirty
chain. At the time he entered into the clean chain there was no such dirty
chain of which he could have known, nor was the occurrence of such dirty chain
inevitable in the sense of being pre-planned.”
24.
Mr Lucraft’s position was that it followed from that comment, which was
approved by the Court of Appeal in Mobilx, that only exceptionally would
HMRC be able to make out their case in respect of a contra-trading chain. This
argument was developed further in the additional submission, which relies
particularly on observations by Lewison J in Brayfal, a case in which
there had been a disagreement in the First-tier Tribunal between the judge, who
found in favour of the Commissioners, and the two members, who found in favour
of the appellant. At [16] he said
“The members began their detailed reasoning by saying that
the clean chain (in which Brayfal found itself) was created before the dirty
chain (para [138]). This was a vitally important point. In order for deduction
of input VAT to be withheld, HMRC must prove, having regard to objective
factors, that the taxable person, at the time of his transaction, knew
or should have known that his transaction was connected with fraud. Where the
impugned transactions are transactions in the clean chain this presents
evidential problems for HMRC. As the Chancellor pertinently asked in Blue
Sphere Global …: how can a trader who is not part of a conspiracy know of a
fraud before it happens? If there is a regular course of conduct in which the
trader knows that his transactions are connected with subsequent transactions
that he knows ex post facto are fraudulent, there may come a time at
which he can be credited with knowledge of the future. But that is not the case
that HMRC advanced in this case. Moreover, in the present case, as the members
pointed out all Brayfal’s transactions were in the clean chain where every
member correctly dealt with its VAT (para [149]). Thus the members’ findings in
paras [138] and [149] were also relevant to, and supportive of, their rejection
of the case based on actual knowledge.” [original emphasis]
25.
These judgments showed, Mr Lucraft argued, that in order to succeed the
Commissioners must prove both the deliberate, dishonest concealment by the
contra-trader of the fact of fraud in the dirty chain, and that the trader in
Ixes’ position knew or had the means of knowing, at the time of entering into
each of its transactions, of either the fraud in the relevant dirty chain, or
of the contra-trader’s dishonest concealment. We observe, parenthetically, that
if Mr Lucraft is right these do not seem to be true alternatives: if the trader
in Ixes’ position knew or should have known of the concealment, he must have
(or, if he deployed the information at his disposal, should have) at least an
inkling of what it is that has been concealed. In this case, Mr Lucraft said,
HMRC failed on the first limb, and the second therefore did not arise. But if
it did, HMRC again failed because they could not show that Ixes knew, or should
have known, either of the supposed dishonest concealment, or of frauds in the
dirty chains. It was impossible for them to do so when, as Mrs Bushby and Ms
Finn said when they gave evidence, they had allocated the tax losses in the
dirty chains to Ixes’ clean chains by an arbitrary, rather than evidence-based,
means. How, he asked, could Ixes have known of frauds, or of the concealment of
frauds, linked to its own transactions in so tenuous a manner?
26.
Mr Cunningham’s response relied upon the further observation of Lewison
J in Revenue and Customs Commissioners v Livewire Telecom Ltd [2009] STC 643 at [103]:
“Thus it must be established that the taxable person knew or
should have known of a connection between his own transaction and at least one
of those frauds [ie the default or the concealment]. I do not consider
that it is necessary that he knew or should have known of a connection between
his own transaction and both of these frauds. If he knows or should have known
that the contra-trader is engaging in fraudulent conduct and deals with him, he
takes the risk of participating in a fraud, the precise details of which he
does not and cannot know.”
27.
That observation was the subject of comment by Briggs J in Megtian
Ltd (in administration) v Revenue and Customs Commissioners [2010] STC 840:
“[34] … I do not read Lewison J’s analysis of the issue as
to what must be shown that the broker knew or ought to have known in a
contra-trading case as amounting to a rigid prescription that, as a matter of
law, such an analysis must be performed in every contra-trading case, such that
it will be defective unless it identifies one or other of the alternative
frauds as being that which the broker knew or ought to have known.
[35] In the first place, Lewison J was, as he made very
clear, addressing the question, what had to be demonstrated against an honest
broker who was not a dishonest co-conspirator in the tax fraud. In the present
case, the tribunal’s conclusion, after hearing oral evidence from and
cross-examination of Mr Andreou, Megtian’s shareholder and principal manager,
was that Megtian knew that the transactions on which it based its claim were
connected with fraud…. Participation in a transaction which the broker knows is
connected with a tax fraud is a dishonest participation in that fraud…..
[36] Secondly, Lewison J acknowledged that in many if not
most cases of contra-trading, the clean chain and the dirty chain were likely
to be part of a single overall scheme to defraud the Revenue. As he put it, at
[109]: ‘Indeed it seems to me that the whole concept of contra-trading (which
is HMRC’s own coinage) necessarily assumes that to be so.’
[37] In my judgment, there are likely to be many cases in
which a participant in a sophisticated fraud is shown to have actual or
blind-eye knowledge that the transaction in which he is participating is
connected with that fraud, without knowing, for example, whether his chain is a
clean or dirty chain, whether contra-trading is necessarily involved at all, or
whether the fraud has at its heart merely a dishonest intention to abscond
without paying tax, or that intention plus one or more multifarious means of
achieving a cover-up while the absconding takes place.
[38] Similarly, I consider that there are likely to be many
cases in which facts about the transaction known to the broker are sufficient
to enable it to be said that the broker ought to have known that his
transaction was connected with a tax fraud, without it having to be, or even
being possible for it to be, demonstrated precisely which aspects of a
sophisticated multifaceted fraud he would have discovered, had he made
reasonable inquiries. In my judgment, sophisticated frauds in the real world
are not invariably susceptible, as a matter of law, to being carved up into
self-contained boxes even though, on the facts of particular cases, including Livewire,
that may be an appropriate basis for analysis.”
28.
We respectfully agree, and we do not think either Lewison J or the
Chancellor intended to say anything else. It may well be that the evidential
problems facing HMRC in a contra-trading case are greater, as Lewison J
indicated, but greater evidential difficulties do not affect the underlying
test, which remains that described by Moses LJ in Mobilx. All that is
required is that the trader knew or should have known that his transaction was
connected with fraud. There is nothing in what Moses LJ said which supports the
proposition that he must know, or have the means of knowing, any of the detail
of the fraud.
Standard of proof
29.
Mr Lucraft accepted that the standard of proof was the civil standard
but, he said, where fraud was alleged, as here, the quality of the evidence
which must be adduced if the burden was to be discharged was high, to the
extent that, as he put it in his skeleton argument, “These proceedings cross
the boundary from civil proceedings to criminal by reason of the identification
of a criminal charge”. He relied upon what was said by Richards LJ in R (N)
v. Mental Health Review Tribunal (Northern Region) [2006] QB 468 at [62]:
“Although there is a single civil standard of proof
on the balance of probabilities, it is flexible in its application. In
particular, the more serious the allegation or the more serious the
consequences if the allegation is proved, the stronger must be the evidence
before a court will find the allegation proved on the balance of probabilities.
Thus the flexibility of the standard lies not in any adjustment to the degree
of probability required for an allegation to be proved (such that a more
serious allegation has to be proved to a higher degree of probability), but in
the strength or quality of the evidence that will in practice be required for
an allegation to be proved on the balance of probabilities.” [original
emphasis]
30.
That observation was approved by Lord Carswell in his speech in re D
[2008] 1 WLR 1499 at [27], where he said “In my opinion this paragraph
effectively states in concise terms the proper state of the law on this topic.”
31.
In our view, what Richards LJ and Lord Carswell said, both in the
extracts from their respective judgment and speech we have set out and
elsewhere—and Mr Lucraft’s skeleton contained a good deal more of Lord
Carswell’s speech—do not make good his contention that the standard to be
applied here is, or verges on, the criminal standard of proof beyond reasonable
doubt. Both Richards LJ and Lord Carswell undertook a detailed analysis of the
recent case-law on the topic, an analysis which we do not need to repeat here.
As Lord Carswell said, at [28],
“It is recognized by these statements [ie the
authorities to which he had previously referred] that a possible source of
confusion is the failure to bear in mind with sufficient clarity the fact that
in some contexts a court or tribunal has to look at the facts more critically
or more anxiously than in others before it can be satisfied to the requisite
standard. The standard itself is, however, finite and unvarying. Situations
which make such heightened examination necessary may be the inherent
unlikelihood of the occurrence taking place …, the seriousness of the
allegation to be proved or, in some cases, the consequences which could follow
from acceptance of proof of the relevant fact. The seriousness of the
allegation requires no elaboration: a tribunal of fact will look closely into
the facts grounding an allegation of fraud before accepting that it has been
established. The seriousness of consequences is another facet of the same
proposition: if it is alleged that a bank manager has committed a minor
peculation, that could entail very serious consequences for his career, so
making it the less likely that he would risk doing such a thing. These are all
matters of ordinary experience, requiring the application of good sense on the
part of those who have to decide such issues. They do not require a different
standard of proof or a specially cogent standard of evidence, merely
appropriately careful consideration by the tribunal before it is satisfied of
the matter which has to be established.”
32.
We proceed, therefore, upon the basis that although the burden of
showing that a trader has forfeited the right to deduct rests on the
Commissioners (Mobilx at [81], a proposition which the Commissioners have
accepted for many years) the standard of proof is the ordinary balance of
probabilities, albeit we must examine the evidence with great care and take
into account such factors as the inherent improbability of an occurrence
wherever such a consideration is relevant.
The relevant decisions
33.
The decisions which are the subject of this appeal were notified by HMRC
to Ixes by letters dated 26 July 2007 and 22 November 2007. The first letter
rejected a claim for the repayment of input tax of £8,395,302.68 incurred in 43
purchases which took place in the 03/06, 04/06 and 05/06 VAT periods. The
second letter rejected a claim for the repayment of input tax of £1,547,875
incurred in three further transactions in the 03/06 and 04/06 VAT periods. The
reasons relied upon, as they were set out in the letters, were, first, that the
transactions formed part of an overall scheme to defraud HMRC and, second, that
Ixes knew or should have known that its transactions were so connected. HMRC’s
primary case was and is that Ixes was knowingly part of that scheme; that Ixes
should have known is put as an alternative or secondary argument.
34.
All but two of the 46 transactions consisted in the purchase by Ixes of
phones from one of six suppliers in the UK, and its immediate sale of the same
goods, with one exception in intact consignments, to one of four customers in
continental Europe. The exception was one case in which Ixes bought two
consignments, and combined them in a single sale. In the remaining two cases,
the goods were iPods, but the remaining features of the transactions were the
same. As we have indicated, four of the deals (two in April and two in May
2006) were in “contra” chains, that is, in chains going back to “contra-traders”
and thereafter, via off-sets, to defaulting traders, while the remaining 42
were in “straight” chains, that is, chains of sales and purchases leading
directly back from Ixes to parties that HMRC allege (and, by the end of the
hearing, Ixes conceded) were defaulters. Of those, 21 took place in March, 8 in
April and 13 in May 2006.
35.
Although Ixes did not at first accept that this was so, by the end of
the hearing Mr Lucraft had acknowledged on its behalf that the Commissioners
had made out this part of their case, that is (as we have recorded above), they
had shown that all three of the limbs of the test of “connected with the
fraudulent evasion of VAT” were satisfied. For these reasons it is unnecessary
for us to set out much of the considerable volume of evidence we heard about
the defaulting traders, with none of which, as Mr Cunningham agreed, had Ixes
ever dealt directly. But as we have mentioned, Mr Lucraft did not go so far as
to concede that the Commissioners had demonstrated the “overall scheme to
defraud” referred to in each of the decision letters. The Commissioners
modified that description in the statement of case, in which the phrase “a
contrived scheme to defraud the revenue” is used. In our view there is no
material difference between the two terms. It is not necessary for HMRC to
demonstrate such a scheme—as the extracts from the judgment of Moses LJ in Mobilx
we have set out show, no more than knowledge or the means of knowledge of a
connection with fraud is required—but we shall nevertheless return to the topic
later.
Ixes and Mr Khan’s background
36.
Mr Khan’s evidence was that he had some experience in electronic goods
before he acquired Ixes and began trading in mobile phones. After he left
school he had studied electrical and electronic engineering, and had then taken
up employment with the well-known retailer Comet, where he remained for about
15 years, starting as a sales assistant and ending as the senior general
manager of a large store. He acquired, he said, experience of retail sales of
mobile phones, which Comet began to sell in about 2000, and he also met Mr Andy
Jennings, at the time a fellow-employee, who later joined him at Ixes. By late
2003, Mr Khan said, he was ready for a new challenge in his own business. After
a short period assisting his brother in the latter’s business, he acquired Ixes
or, as it was then called, Revs (UK) Limited.
37.
Revs (UK) Limited was incorporated on 4 November 2003. Mr Ayaz Ashraf (a
friend of Mr Khan) was a director from incorporation until 3 February 2004, but
from that date on the sole director, and beneficial owner of the shares, of
Ixes has at all times been Mr Khan. The company changed its name to Ixes (UK)
Limited on 6 October 2004.
38.
Despite his experience in retailing domestic electrical goods, Mr Khan’s
evidence was that his initial intention had been to export electricity
generators. In May 2003, Mr Khan said, he had visited a customer of his
brother’s company in the United Arab Emirates, hoping to sell it generators
manufactured in the UK, by-passing and under-cutting the locally based authorised
agents. The customer’s director asked whether he could also supply mobile
phones and this request, Mr Khan said, led him to investigate the feasibility
of entering that market, though it was not altogether clear to us what research
he undertook, beyond attending a trade fair in Germany in March 2004, shortly
after he had acquired Ixes.
39.
Against that background it is in our view rather odd that in Ixes’
application for VAT registration, made almost immediately after Mr Khan acquired
it, its current and intended business activities were (truthfully) described as
“retail general motor factors”. The value of its taxable supplies in the
following twelve months was estimated to be £260,000, and the value of its EC
trade was estimated as “none”. The application was accepted and Ixes became
registered for VAT with effect from 1 March 2004.
40.
The oddity of Ixes’ choice of trade at that time is emphasised by Mr
Khan’s further evidence that he had no experience in what the company was
doing, that is making bulk purchases and retail sales of spare parts for cars.
It is perhaps unsurprising in those circumstances that between its registration
for VAT on 1 March 2004 and 31 March 2005, Ixes’ turnover amounted to only
£17,680. Mr Khan told us that in late 2004, realising he was in the wrong
business, he decided to start afresh, by re-naming the company, moving to other
premises, abandoning, or at least supplementing, trade in car parts and
embarking instead on exports of generators and other goods. He made further
contact with the customer of his brother’s business—which, if Mr Khan’s
evidence is right, was engaged in precisely the same trade—with a view to
arranging sales of generators.
41.
On 7 March 2005 Ixes’ accountants wrote to HMRC requesting a change from
quarterly to monthly VAT returns on the basis that, it was said, the business
of the company was “to change dramatically from just retail motor spares to
include that together with exports of different types of goods”. The letter
said that Ixes had export orders to Dubai, worth in the region of £200,000, for
chemical toilets, petrol generators and spare parts for pick-up trucks and that
such export orders would continue “into the foreseeable future”. The request
was granted with effect from 18 March 2005. However, the claim was untrue: Ixes
did not have any export orders, and indeed never traded in any of the items
referred to by the accountants. Instead, in April 2005 (and, as it accepts,
without any prior indication to HMRC), Ixes started trading in mobile phones.
Since, as we shall explain, Mr Khan by then knew a good deal about HMRC’s
attitude to wholesale dealers in mobile phones, it is an inevitable conclusion
that what was said about Ixes’ intentions was a deliberate deceit, designed to
secure the advantage of making monthly returns which would probably have been
refused had HMRC known the truth.
42.
At about the same time Mr Jennings joined the company as an employee,
and he and Mr Khan undertook all of its trades; there were no other employees.
The intention, Mr Khan said, was to deal in different types of electrical goods
but it appears that all of its trade, from April 2005 on, was in mobile phones,
with the exception of the two transactions in iPods we have mentioned. We
observe in passing, since Mr Cunningham made an adverse comment about it, that
although Mr Jennings attended the hearing he did not give evidence. We do not
ourselves read much into this fact.
43.
Mr Khan’s evidence was that Ixes had become a member of an internet
trading organisation, specifically devoted to wholesalers of mobile phones
dealing in the grey market, and that its doing so had enabled him and Mr
Jennings to establish contacts and build up the business rapidly. He mentioned
its first two deals, in April 2005, both exports, and described them as
“small”. As the first was worth almost £200,000 and the second over £400,000,
and the value of those two deals alone over 30 times Ixes’ turnover for the
entirety of the previous 13 months, that seems a rather strange description. In
fact, Ixes’ turnover increased very rapidly: in the five-month period to 31
August 2005, it amounted to £20,727,072, and for the whole of the year ending
31 March 2006 it was £84,347,895.
The grey market
44.
The principal topic of Mr Fletcher’s evidence was the so-called grey market
in mobile phones, in which Ixes claimed it was trading—“grey” because it does
not, at least directly, include manufacturers and authorised distributors. Mr
Fletcher has, he told us, 15 years’ experience in the telecommunications
industry, in various capacities, and he is well acquainted with the different
means by which mobile phones find their way from the manufacturer to the end
user. He produced a clear and helpful report, on which he enlarged as he gave
oral evidence. We accept Mr Fletcher as a well-informed expert on the topic
although, as he acknowledged himself, the very nature of the market makes it
necessary to treat the statistics and source material on which he relied with
some caution. We also recognise that he has focussed on the European, rather
than the global market, and that his doing so makes it necessary to treat his
estimates of volumes with particular caution.
45.
Mr Fletcher agreed that there is a genuine grey market, by which smaller
retailers acquire handsets, since the manufacturers and network operators will
not deal directly with them. Instead, authorised distributors aggregate smaller
retailers’ requirements and place with the manufacturers orders of a size they
will entertain. Additionally, even large retailers and air-time providers
sometimes make up for shortages of stock by buying in the grey market. Manufacturers
have considerable control over the pricing of their products, so much so that
Nokia sets uniform prices throughout the world. Other manufacturers do not,
indeed they may deliberately set low prices in certain areas in order to build
up market share. As prices for phones other than those manufactured by Nokia
are not uniform in different countries, there is some scope for the making of
profits by cross-border trade, although there are risks because the price of a
particular model falls over time. Advance notice of price reductions is given
by the manufacturers to authorised distributors, but is not disseminated
further; thus dealers further removed from the manufacturer risk buying stock
only to discover that its price has fallen, without warning, before a purchaser
has been found.
46.
Mr Fletcher explained in some detail that there are two main ways of
profiting in the grey market: box-breaking, by acquiring handsets which are
heavily subsidised in one country, modifying them for a different country, and
selling them in that country at the higher price prevailing there; and
arbitrage, by which authorised distributors, prevented by their agreements with
manufacturers from buying and selling directly from and to each other in order
to take advantage of price differentials, instead do so (with the “blind eye”
acquiescence of the manufacturers) through intermediaries. In the case of Nokia
handsets, the wholesale price of which is set once a month, throughout Europe,
in euros, profit from arbitrage is possible in the United Kingdom only when
there are significant movements of the euro against sterling in the period
between one price setting and the next.
47.
He thought it unlikely that Ixes was engaged in box-breaking, since
(with the exception of Nokia handsets) the UK has the highest subsidies in
Europe, while the phones dealt in by Ixes were to a continental specification,
indicating that they had not been manufactured in order to be sold here. In
addition, Ixes did not have sufficient staff to undertake the work of
re-configuring phones, and the brevity of the interval between their
acquisition and sale made re-configuration impossible in any event. As Mr Khan
did not claim that Ixes undertook any re-configuration we do not deal with this
topic further. Mr Fletcher thought it unlikely too that it was engaged in
arbitrage, since over 75% of the phones in which it traded in the relevant
period were of Nokia manufacture, while the movements at that time between
sterling and the euro were too small to make profits possible. In addition, he
thought, the description of the specification of the phones traded which
appeared on Ixes’ and its customers’ and suppliers’ documentation was insufficiently
detailed to be consistent with trade in such a market, where a high level of
detail was the norm. It was also a characteristic of the arbitrage market that
the chains of deals were very short, because of the low level of available
profit, yet Ixes’ deal chains were long.
48.
Mr Khan was asked at some length about his own knowledge of the grey
market in mobile phones. He said, in his statements, that he had undertaken
research and had made extensive enquiries and, to take only one example, he gave
us some statistics of the volume of trading in the grey market, and in the
primary, or white, market in which authorised distributors and large retailers
engage. We recognise, as Mr Lucraft emphasised, that Mr Fletcher, with the
resources of a large firm of accountants behind him, was able to access
material which was beyond the reach of a small trader, for reasons of price or
because circulation was restricted, and that Mr Khan’s knowledge and
understanding of the market is not to be judged by the same standard. However, after
initially seeking to justify them he eventually conceded that the statistics he
gave of the volumes traded were based on nothing more than guesswork. In those
circumstances, and despite the reservations we have mentioned, we prefer Mr
Fletcher’s evidence; no reliance can be placed on what Mr Khan said on this
topic.
The relevant transactions
49.
The 46 transactions we have briefly described above constituted the
entirety of Ixes’ trading during the months of March, April and May 2006; in
other words, all of its transactions in that period led back, directly or
indirectly, to defaulting traders. HMRC rely also on their tracing back of all
of Ixes’ deals in January and February 2006. There were 20 purchases followed
by immediate sales of the same goods, and again all led to defaulting traders.
Repayment of the input tax claimed by Ixes for those two months was made by
HMRC, but on a “without prejudice” basis. Ixes accepts, now, that these
transactions, too, were connected to fraud, as the Commissioners maintain.
50.
The first of the deals in issue in this appeal took place on 6 March
2006, the last on 31 May. The Commissioners’ enquiries show that in most cases
the goods had already changed hands several times on the same day. Occasionally
the earlier trades had occurred over two or, in one case, five days including a
weekend. Those time-scales assume that all the relevant documents are correctly
dated. There was some controversy about whether they were, but as we have no
other evidence about dates we can find no more than that (as Mr Khan accepted)
the deals in each chain took place in very quick succession. That conclusion is
consistent with Mr Fletcher’s evidence about the risk of sudden drops in price.
Ixes’ policy was always to buy only when it had a purchaser—that is, it
invariably exactly matched its purchases to its sales, and did not carry stock.
Thus buying and selling on the same day was, for it, the norm.
51.
We should add at this point that Mr Cunningham drew our attention to a
number of cases in which goods appeared to have been shipped before they were
sold and, in one case, were purportedly inspected at a warehouse in the United Kingdom after they had already left for the continent (we shall deal with
inspections in more detail shortly). Mr Khan suggested that the timing on some
of the documents might have been inaccurate, or the documents might have been
incorrectly matched to Ixes’ deals, and Mr Lucraft pointed out that the timings
assumed by HMRC were dependent on the accurate setting of the fax machines used
to transmit them. If the documents can be taken at face value they do lend
support to Mr Cunningham’s argument that they were generated for the purpose of
preparing an audit trail, and were not documents coming into existence in the
course of legitimate trading, but we recognise the force of Ixes’ arguments,
and treat the timing evidence with caution. All we feel able to find with
confidence is that the goods entered the UK, changed hands several times and
then left the UK within a very short period. In most cases that period probably
did not exceed a single day.
52.
The traders preceding Ixes in the chains all made gross profits measured
in pence per unit; Ixes’ gross profit varied, but was consistently much
greater. With the one exception we have mentioned every trader, including Ixes,
sold exactly what it bought: save for that one example there is no pattern of
splitting or combining of consignments. Most consignments were of round
numbers, the smallest 1,000 and the largest 15,000, but in some cases the
quantity traded was not of a round number of items. There were no consignments
of more than one model of phone. In every case Ixes bought from a UK supplier and sold to a continental customer; there is not a single instance of its having bought
and sold within the UK, nor of its having bought from a continental supplier.
53.
Since Mr Lucraft accepted on Ixes’ behalf that every one of its
purchases was of goods which had been dealt in by a fraudulent trader or a
contra-trader, there is nothing to be gained by our describing each chain, or
even Ixes’ own purchases and sales, since nothing depends on their detail, and
although they were fully documented in the written material produced for the
hearing, we heard comparatively little oral evidence about them as individual
transactions. It is, however, worth mentioning Mr Khan’s evidence about how he
and Mr Jennings managed to identify suppliers and customers, and how they
negotiated deals.
54.
He told us that Ixes relied to a significant extent on the website we
have already mentioned for both purposes, that is in finding suppliers and
customers with which, he said, Ixes traded over the longer term, and in
identifying which traders wanted goods and which had them for sale. Although,
as relationships with suppliers and customers became established, the
identification of demand and availability was increasingly undertaken by
telephone, Ixes continued to “post” its requirements on the website. As it
happens, the length of Ixes’ relationships with its suppliers and customers
could be measured in months, but we recognise that it had been in business for
only a short period and we read little into this fact. What is puzzling, and Mr
Khan could offer no explanation of it, is that so many traders were involved in
chains of deals in goods when availability and demand were published on a
website which could be accessed by any subscriber. Against that background it
is difficult to understand why each of the relevant chains featured so many
dealers, each of whom, by simple interrogation of the website, could as easily
have found a supplier as Ixes.
Inspections
55.
Ixes produced documentary evidence that it had arranged for the phones
it bought to be inspected by a specialist inspection company at the premises of
the freight forwarders in whose warehouse the phones were held while they were
in the United Kingdom. In his first statement Mr Khan said, without
qualification, that the inspection was performed to “confirm they were
physically present and in good condition. This was done by opening the boxes.
Our request was for one hundred percent of the phones to be inspected to ensure
they contained the correct telephones and manuals.” There are four features of
the evidence about inspections with which we must deal.
56.
First, the inspections were undertaken not, as one might perhaps expect,
before Ixes handed over payment and accepted delivery, but immediately before
the goods were shipped to its customer. Mr Khan was quite unable to explain to
us why that was so. He suggested that Ixes’ customer would want to be sure that
the goods were in good condition, and that is no doubt true, but by the same
token Ixes would want to satisfy itself before it handed over the price that it
had received what it ordered, that the right quantity had been delivered, and
that the goods were undamaged. We had no explanation of its practice of
accepting goods without prior inspection.
57.
Second, the documentary evidence did not support Mr Khan’s claim of 100%
open box inspections. The inspection reports provided to Ixes showed that some
of the consignments had not been inspected, as it had requested, by opening
each individual box and inspecting the contents but (as Mr Khan said as he gave
oral evidence) by scanning the bar codes on the boxes, and subjecting them to
x-ray examination to verify that the contents were as they should be. He
explained that one inspection company used by Ixes did not offer open box
inspections, and it had been compelled to accept something else. He was unable
to explain why the assertion in his statement was nevertheless so unequivocal.
58.
Third, Mr Khan was asked about the time required to open a box, inspect
the contents, replace them and close the box, which he estimated at 10 to 15
seconds (Mr Foster told us he had done the exercise himself, and found it took
about 90 seconds). In our view 10 seconds is impossibly short, and
self-evidently so, but if we assume Mr Khan’s higher figure of 15 seconds,
itself difficult to believe even for a practised inspector, a consignment of
1,000 phones (the smallest of those in issue) would take 15,000 seconds or a
little more than four hours, while the largest of Ixes’ consignments,
consisting of 15,000 phones, would take over 60 hours—or more than 15 hours if
undertaken by a team of four. Since Ixes took delivery of goods which had
already passed through several hands on the same day, then shipped them, again
on the same day, to an overseas customer, it is clear to us that there was not
enough time for them to be inspected as Mr Khan claimed.
59.
The fourth point, relied on by Mr Cunningham as a demonstration of Mr
Khan’s casual attitude to the inspections, was illustrated by one case in which
Ixes bought what were described in its purchase order and in the supplier’s
invoice as central European specification phones, and sold the phones using the
same description, yet the inspection report showed them to have 3-pin, UK-style
plugs to their chargers. There was no evidence that Ixes, or its supplier or
customer, had even noticed that the plugs did not match the specification.
There was certainly no evidence that the difference between the specification
and the goods was the subject of discussion or re-negotiation. Mr Khan’s
explanation was that it was unimportant as the chargers could be changed at
minimal cost. We add, parenthetically, that it is a cause for wonder why, in
that case, any of the traders troubled to include the specification on their
documentation, and why, if it was so unimportant, the freight forwarders
undertaking the inspections were asked to check and report on that aspect of
the specification. Moreover, this claim is inconsistent with the assertion in
Mr Khan’s statement that the open box inspections were intended to ascertain
whether the correct (that is, correct language) version of the manual was
included in the box.
60.
Mr Cunningham’s cross-examination of Mr Khan about the inspections was
designed to show that they were carried out for the sake of appearance, rather
than because they afforded Ixes genuine protection against risk. In our view he
succeeded: here as elsewhere we found Mr Khan’s evidence evasive and
unconvincing. The essential question, in our view, is whether inspections were
carried out thoroughly, as a genuine means of obtaining assurance for Ixes that
it had received what it had contracted to buy and that the phones were in good
condition; or inspection reports were obtained for no more substantial purpose
than to complete the paper trail, the bundle of deal documentation sent to HMRC
with each VAT return. In our view Mr Khan’s purpose was revealed by the nature
of his evidence to be the latter.
Ixes’ relations with HMRC
61.
Mr Khan’s evidence, throughout, was that he actively sought HMRC’s
guidance, did what was suggested or recommended, both by visiting officers and
in HMRC publications, particularly Notice 726 (the Public Notice dealing with
the possible imposition of joint and several liability for unpaid VAT, in
accordance with s 77A of the Value Added Tax Act 1994), ceased trading with
anyone about whom he had received any form of adverse information, and did his
best to take every possible practical precaution. He also provided
comprehensive documentation, supporting the repayments claimed, with each of
Ixes’ VAT returns. Conduct of that kind was indicative, Mr Lucraft argued, of
an honest compliant trader. Moreover it was unfair of the Commissioners, having
made no adverse criticisms, and having hitherto met Ixes’ repayment claims
without demur, suddenly and without warning to penalise it by refusing
repayment of input tax incurred in purchases of goods from the same suppliers
as Ixes had used before, and when those same goods were sold to established
customers.
62.
The Commissioners do not take issue with the underlying factual basis of
that argument; they accept that Mr Khan was indeed cooperative, that he or Mr
Jennings was always present when they called, that documentation was produced
readily when requested and that Ixes’ VAT returns were correctly prepared and
supported by the transaction records. They also acknowledge that its repayment
claims, before those with which we are concerned, had been met without adverse
comment (save for the “without prejudice” reservation to which we have
referred), that, as Notice 726 recommended, Ixes checked with their Redhill
office on the VAT registrations of its suppliers and customers, that it did not
deal directly with a defaulter, that it did not make and did not ask its
customers to make third party payments, and that it not been warned by HMRC of
concerns about any of its suppliers or customers. They accept that when Ixes
was warned of a “hijack” in a chain leading to an intended purchase, it
withdrew from that purchase. They acknowledge too that Ixes had not been told
that the facility of making monthly returns, thus accelerating its repayments,
might be withdrawn. Their case nevertheless is that Ixes’ conduct in this
respect was no more than a façade, designed to give the impression of a
respectable trader. We shall return to this point.
Due diligence and record keeping.
63.
Although a number of (in our view rather minor) criticisms of detail
were made, it was accepted by HMRC that Ixes’ due diligence documentation was
complete and in good order. The Commissioners therefore do not criticise the
due diligence undertaken by Ixes on its suppliers and customers in the sense
that it was not done, or adverse results disregarded, but in the sense that it too
was no more than window-dressing, something done for the purpose of showing
that the checks suggested by Notice 726 had been carried out, and in order to
collect pieces of paper designed to impress but with no real purpose to them.
It is, we think, sufficient for us to comment that the due diligence seemed to
us to be somewhat superficial and formulaic, consisting as it did of the
collection of copies of certificates of incorporation and of VAT registration,
together with the completion of some rather rudimentary questionnaires. There
was no evidence that Ixes carried out credit checks on its suppliers or
customers—Mr Khan said that they were unnecessary as Ixes did not extend
credit. Perhaps more importantly, as we shall explain, there was no evidence
that any of its suppliers carried out credit checks on Ixes.
64.
Mr Lucraft made a number of observations about the due diligence and
other records taken up by HMRC officers from traders which preceded Ixes in the
chains. In many cases they were incomplete and in very poor order, sometimes
being left scattered on the floor of abandoned premises. In other cases records
or partial records had been handed over, or shown to the officers, only with
reluctance. Despite clear indications that traders were not complying properly
with their obligations, in many cases clearly undertaking no due diligence at
all, Mr Lucraft complained, HMRC did not de-register them or did so without any
apparent sense of urgency and, in one case, re-registered a trader which had
been de-registered, even though it was perfectly clear from the evidence in
HMRC’s hands that it was non-compliant.
65.
These complaints were accepted to be factually correct. The explanation
we were offered was that as the traders were making, or appeared to be making,
taxable supplies of goods, HMRC had no choice but to register them, or continue
their existing registrations. As a proposition of law that may be right, and we
accept that HMRC have finite resources, but we nevertheless agree with the
thrust of Mr Lucraft’s argument that more effective policing of the traders
might have helped innocent businesses becoming embroiled in it. Whether, as he
argued, Ixes was an innocent trader is of course the issue we must decide.
Mr Khan’s evidence about Ixes’ trading
66.
Mr Khan accepted that he was well aware, before Ixes embarked on trade
in mobile phones, that such trade was commonly used as a vehicle of fraud, and
that he was correspondingly anxious to ensure that Ixes engaged only in
legitimate trade. He informed himself of HMRC’s guidance and requirements,
followed them, and also actively sought further advice and guidance from
visiting officers. It was apparent as he gave his oral evidence that Mr Khan
was very familiar with the contents of Notice 726, though it also became clear,
as Mr Cunningham pointed out, that he was rather more familiar with those parts
of it from which traders might derive comfort than with the warnings. We add in
passing that while the Notice deals with trade in mobile phones, it does so
from the perspective of s 77A, and not by reference to the Mobilx test:
the Notice predates the Court of Appeal’s judgment by several years. It is not
argued that Ixes failed to undertake the checks recommended in Notice 726; the
argument is that they were undertaken for the sake of appearances.
67.
We have already recorded our reservations about the statistical parts of
Mr Fletcher’s evidence, and we attach little weight to the differences, large
though they were, between his estimates of the volumes of goods traded and the
much higher estimates or, as they turned out to be, guesses advanced by Mr
Khan. Though he put those guesses forward by way of explanation of Ixes’
ability to find and deal in very large quantities of goods, in our view that
feature of the case has greater importance from a different perspective, to
which we shall come. What was conspicuous about the evidence relating to the
grey market was that whereas Mr Fletcher gave a clear, reasoned account of the
ways in which profits could be made by dealing in mobile phones, Mr Khan’s
answers to Mr Cunningham’s questions, even though he had had the benefit of
reading Mr Fletcher’s statements and hearing his oral evidence, revealed that
he had almost no understanding of the market and how Ixes’ transactions fitted,
or supposedly fitted, into it.
68.
His evidence of his having undertaken research was at best vague and
superficial, and we consider it implausible that he made any real effort to
understand the market in which Ixes claimed to be engaged—indeed, we are quite
sure Mr Cunningham was right to argue that not only his estimates of the
volumes of goods traded but the remainder of what he said about the market was
little more than guesswork. It was clear from his demeanour that, despite Mr
Fletcher’s explanation of them, he barely understood the concepts of
box-breaking and arbitrage, and he plainly was not familiar with manufacturers’
pricing policies. It is conspicuous too that in none of the chains is there to
be found a manufacturer, authorised distributor, substantial retailer or
air-time provider.
69.
Mr Khan was asked why, almost without exception, the phones in which
Ixes dealt had a continental specification. We have already mentioned his
casual attitude to the inspection report which revealed that supposedly
continental specification phones were in fact accompanied by chargers with UK plugs. We formed the distinct impression that this was a factor which he had not really
considered before, since the explanation he gave did not fully address the
point. As before, he said—and this we can accept, since it accords with Mr
Fletcher’ evidence—that the cost to a dealer of chargers bought in large
quantities would be small. Thus (as Mr Fletcher also agreed) phones
manufactured for retail sale on the continent could be brought to the UK and,
given adequate manpower resources, have their chargers replaced, and become
acceptable for retail sale within the UK. We add parenthetically that it was
not only Ixes which had no staff or facilities for undertaking the
replacements; none of Ixes’ suppliers were capable of doing so either. What is
more important is that the phones had plainly not been brought to the UK for the purpose of conversion. Typically, they entered the country early in the day,
passed rapidly through the hands of several dealers before reaching Ixes which
sold them, unchanged, to a continental customer. Mr Khan agreed that he
realised that the goods in which Ixes was dealing had been manufactured for use
on the continent and then brought to the UK before Ixes exported them again.
70.
It is a complete mystery to us why traders in a genuine market should
incur the transport and insurance costs of transferring such consignments to
and then immediately from the UK, even if the costs were split between two
traders. As the documents secured by the HMRC officers showed, it was
commonplace for the goods to remain in the premises of a single UK freight
forwarder while (assuming the trade was genuine) various dealers negotiated
sales and purchases by telephone and email before the chain of deals was
concluded, the prices were paid, and the goods were released successively from
one trader to the next in the sequence. Since, it seems, none of the traders
personally inspected the goods, and it is perfectly plain that none were ever
converted to a UK specification, it is not clear to us why such phones were
ever brought to the UK, at least until it was known they would find a final
purchaser here; they could as easily have been stored, inspected and released
in their country of origin, travelling to the UK only if an end user was found
here. The only evident explanation of the transfers is that goods need to cross
national borders in order that sales of them can be zero-rated.
71.
Mr Khan was asked to explain how it was that Ixes could enter into
transactions worth millions of pounds, although it had negligible capital—only
two £1 shares had been issued. It is in this context that we consider the size
of Ixes’ deals to be important. He answered that he ploughed back its profits,
and relied on loans. We accept that this is a partial explanation, though it is
a far from adequate answer, even allowing for Mr Khan’s clearly very rudimentary
understanding of capital. His evidence was also that Ixes did not release goods
to its customer until the price was paid in full, and that it did not have to
pay its supplier until it had itself been paid. That practice, if applied
rigorously, would certainly reduce the amount of capital Ixes needed to finance
its trade, but the capital required was still formidable. A single example will
suffice. On 24 April 2006 Ixes bought 15,000 phones (this was, in fact, its
largest transaction) for an aggregate price of £7,920,000 plus VAT of
£1,386,000 and sold them for £8,396,250. As the sale was to an overseas
customer, it charged no VAT. The difference between the gross purchase price
and the proceeds of the sale was £909,750. Ixes expected, of course, to recover
this sum from HMRC but it would not be able to do so until its April 2006
return had been submitted and processed. It had also to bear the costs of
inspecting, insuring and transporting the goods. And this was not an isolated
deal: there were nine others in the month. Although they were smaller the input
tax Ixes incurred was in every case measured in hundreds of thousands of
pounds. Thus the amount of capital needed to fund the payments to its suppliers
while Ixes waited for repayment of its input tax claims was very substantial.
72.
There was very little evidence of terms and conditions of trade between
the various participants in the chains: the stipulation that the agreed price
must be paid before the goods would be released (that is, an instruction given
to the freight forwarder to hand the goods over to the customer), which
appeared on every invoice, was the only condition we saw. This requirement,
which Ixes did seem, as a general rule, to enforce, protected it from the risk
of non-payment in that Ixes would not have parted with the goods if it was not
paid, but did not protect it from the risk that the customer would be unable to
pay for goods Ixes had committed itself to buy. There was nothing before us,
and nothing in Mr Khan’s evidence, to show that Ixes took any steps to protect
itself against this eventuality. It is perhaps a minor point, but we also
cannot help wondering how each trader in a chain which might extend to five or
six was able to release goods to its own customer, which had paid the price and
expected immediate release, before it had paid its own supplier and the goods
had been released to it. It is conspicuous too, though again perhaps a minor
point, that there is no evidence that any consignment of goods in which Ixes
dealt was ever shown on inspection to be short, damaged or, with the one
exception we have mentioned, of the wrong specification (although the model of
phone in that instance was correct).
73.
It appears to be true that Ixes ploughed back most of its profits—and Mr
Khan’s evidence on this point was not challenged—and there was some, though
limited, evidence of loans. There was also evidence that on occasion Ixes had
paid its suppliers only partially, making up the balance of the price later.
This practice—despite the stipulation on the supplier’s invoice that goods
would not be released until the price had been paid in full—clearly did make it
easier for Ixes to finance its transactions. However, one can only wonder what
trader in a genuine market would be willing to extend credit in this way to a
purchaser which was selling goods on (as the supplier must have known) to
another trader—in the event an overseas trader—about whom the supplier knew
nothing. There was no evidence of any agreements between Ixes and its suppliers
by which credit was provided for, and the consequences of default spelt out.
There was similarly no evidence that any supplier made credit checks of Ixes or
took security, even in the shape of a director’s personal guarantee. It was all
done, so Mr Khan said, on the basis of trust.
74.
We make it clear at once that we do not accept Mr Khan’s evidence about
the willingness of Ixes’ suppliers to extend credit to it. However much trust
there might have been between Ixes and its suppliers (with which it had been
dealing for, at most, a year), no rational trader in a legitimate market would
extend credit of hundreds of thousands, if not millions, of pounds to another
without a written agreement recording the arrangement and setting out its
terms. It is conspicuous that, despite the claimed relationships of trust, Ixes
did not seek to introduce any evidence from its suppliers about the topic. The
only reasonable conclusion is that its suppliers were casual about payment
because they knew that the trading was nothing more than a contrivance, that
these were not genuine arm’s-length deals, and that the payments, like the
deals themselves, were pre-arranged between traders who all knew what was to
happen. A similar conclusion follows from Ixes’ failure to protect itself against
the risk that its customer would be unable to pay: that Mr Khan knew there was
no risk that would happen.
Discussion
75.
We begin with the core of Mr Lucraft’s argument, which breaks down into
two components: was there any scheme to defraud?; and, if there was, was Ixes a
knowing participant in that scheme (taking “knowing” to include should have
known)? We have already made the point that the demonstration of a scheme is
not necessary for the Commissioners to succeed, but it is a pleaded element of
their case and it should be dealt with. Of course, the demonstration of a
scheme does not of itself mean that the Commissioners are bound to succeed;
they must in addition show that a trader knew or had the means of knowing some
at least of the relevant facts. Thus the second of the two components is the
central issue in the appeal, with which we shall deal at greater length below.
76.
Mr Lucraft emphasised that Mr Khan was a man of good character, and he
placed particular reliance on his experience in the electronics business,
particularly in his career with Comet. We accept that he had some knowledge of
electronic goods, while making the observation that retail sales by a
high-street trader are some way removed from the wholesale deals in which Ixes
was engaged. We have already accepted that Ixes undertook the checks
recommended by HMRC in Notice 726, carried out some (even if, as we have
indicated, rather superficial) due diligence into its suppliers and customers,
maintained comprehensive records of its deals and its checks, and was
cooperative whenever officers visited it. One can, as Mr Lucraft urged us to
do, regard that evidence as indicative of Mr Khan’s honesty. Ixes’ conduct
could, instead, be seen as precisely what one would expect of a trader hoping
to recover large sums of input tax from HMRC—any deficiency, in record keeping
or in cooperation, would be likely to lead HMRC to refuse, or at least to be
difficult about, the claimed repayments. Mr Khan’s demeanour was such that we
are satisfied that the second of those alternatives is much the more likely.
77.
One feature of the case is that Ixes had a small number of suppliers and
a smaller number of customers. Mr Khan told us that this was a matter of choice.
It dealt with a limited circle of apparently reliable traders, with whom it had
traded for some time before the relevant period, because it believed that by
doing so it was reducing its exposure to risk. Despite numerous visits by HMRC
officers, it had not been warned that any of its suppliers or customers was suspected
of involvement in fraud, and it was not told until after the relevant
transactions had been concluded that any of the goods in which it had dealt
could be traced back to an earlier fraud. Indeed, its claims for repayment of
input tax incurred in transactions with the same suppliers and customers in
earlier months had been met without demur. Mr Lucraft argued that any trader in
that position was entitled to take the view that he was acting in a responsible
manner, and that if he carried on trading in the same way his repayment claims
would continue to be met.
78.
There is at first sight some merit in that argument and we accept, as Mr
Lucraft pointed out, that Ixes was in a different position from Mobilx, which
had been told several times that its deals traced back to defaulters before
HMRC decided to refuse its claims for repayment of input tax. Mr Lucraft made
also the, similarly at first sight forceful, point that HMRC had spent two
years tracing the relevant chains (and had not completely succeeded even after
all that time). How, he asked rhetorically, could Mr Khan, who did not have the
Commissioners’ resources at his disposal, and did not have the benefit of
hindsight, possibly have discovered who had dealt in the goods before Ixes
acquired them, and that those traders, or some of them, had fraudulent
intentions? Whatever might be our view of the quality and depth of Ixes’ due
diligence, we accept Mr Lucraft’s point that it was successful in as much as Ixes
did not itself deal with a defaulter. The fact that there was fraud elsewhere
was not inconsistent with Mr Khan’s argument that he was trying to make a
legitimate profit in what he believed to be a genuine market; it was not
possible to undertake due diligence into a supplier’s supplier, whose identity
was unknown.
79.
However, those arguments beg the question, since they assume for their
validity Mr Lucraft’s intended result, namely that Mr Khan embarked on trade in
mobile phones believing it to be a legitimate business. Were that the case, we
would accept that nothing was said to him by HMRC officers that should have
made him realise that his deals led back to defaulters, or that there were
concerns about his suppliers or customers (although, as he himself accepted,
there were many warnings about the trade as a whole). If, however, Mr Khan was
a knowing participant in fraudulent chains, the absence of warnings and the
difficulty, or apparent difficulty, of finding out for himself that there was a
connection between Ixes’ transactions and frauds elsewhere are irrelevant.
80.
As will be readily apparent from what we have already said, we found Mr
Khan to be a wholly unsatisfactory witness who dealt with what he obviously
perceived to be difficult questions by prevarication and, when pressed, by
evasion. There was very little about what he told us which we considered to be
reliable, not least because his written statements, even though prepared by
Ixes’ solicitors, were internally inconsistent and often inconsistent with his
oral evidence. Several times in cross-examination he changed his evidence when,
as was quite clear, he realised that an earlier answer did not give the
impression he desired, or did not match the documentation, as in the case of
his evidence about inspections, with which we have already dealt. Where his
evidence conflicted with that of another witness, we prefer that of the other
witness. We were left with no impression of a man doing his honest best to
steer away from suspicious transactions; Mr Khan’s whole demeanour was that of
someone who knew very well that the trade in which Ixes engaged was profitable
because, and only because, it was rife with fraud, who knew very well how the
fraud worked, and who set out with the intention of profiting from what, until
HMRC began to refuse traders’ repayment claims, seemed to be a very easy way of
making money. The greatest difficulty which Ixes faces in this appeal is, in a
nutshell, Mr Khan himself.
81.
It is also difficult if not impossible to understand why Mr Khan ever
embarked on wholesale dealing in mobile phones if his own evidence is right. He
has some experience in dealing in phones, but as the manager of a high-street
retail store, dealing in many types of electrical goods, and no experience of
wholesale trade. He had some, but limited, experience of exporting, though not
of mobile phones. Yet he began to make large exports of mobile phones, knowing
that he was entering a market in which fraud was endemic. No honest person
would do such a thing. If he should happen to blunder into such a market, he
would soon ask himself how it was that he, a newcomer, could identify suppliers
and customers with such ease; as we have mentioned, in the space of five months
and from a standing start, Ixes had turned over £20 million. It defies belief
that anyone could consider that a normal phenomenon.
82.
It is true, as Mr Lucraft said, that the trade was in high value goods,
but his and Mr Khan’s claim that mark-ups were low is true only of the buffer
traders (ie those buying from and selling to other UK dealers). As our description of Ixes’ deals mentions, it was constantly making gross profits of a
few pounds on each item. We accept that Ixes had to bear the cost of
transporting the goods to its continental customer, but its ability, as a
newcomer to the trade, to find customers not occasionally, but consistently,
willing to pay a price which left Ixes with a good profit is remarkable. One
can ask rhetorically why it was that Ixes was able to identify its suppliers
and customers without apparent difficulty, while others (as we most assume was
the case, if the trade was genuine) were not, despite the website advertising
of stocks about which Mr Khan told us, and instead were able to make only a few
pence per unit on each deal. The obvious and inevitable conclusion is that Mr
Khan’s claims cannot be true.
83.
Mr Lucraft drew our attention, as we have said (see para 22 above), to
Moses LJ’s description of the paradigm trader who has lost the right to deduct.
We think however it is necessary to consider also the proposition which
immediately followed that description:
“The extension of that principle [of forfeiture of the right
to deduct] to a taxable person who has the means of knowledge but chooses not
to deploy it, similarly, does not infringe that principle [of legal certainty].
If he has the means of knowledge available and chooses not to deploy it he
knows that, if found out, he will not be entitled to deduct. If he chooses to
ignore obvious inferences from the facts and circumstances in which he has been
trading, he will not be entitled to deduct.”
84.
The overall difficulty with Ixes’ arguments, as we see it, is that they
do not address the Mobilx test. The question is not whether the trader
concerned set out with the best of intentions (which we do not accept Ixes did)
nor, as we have said, whether he knew or should have known the detail of any
frauds tainting the goods in which he dealt, but whether there was any
plausible explanation for the transactions into which he entered other than
that they were connected with fraud. It does not require the deployment of
large resources, but merely the application of thought, to recognise that easy
sales and purchases, rapidly generating a huge turnover for a novice in the
market, of goods available within the UK but, apart from the one exception we
have mentioned, with a continental specification, and with no or negligible
risk, are not consistent with the workings of a legitimate market.
85.
When one stands back and views the larger picture, as both Moses LJ and
Christopher Clarke J indicated was the appropriate course, it is in our view
plain that trade of the kind in which Ixes engaged is compatible only with
there being an overall scheme to defraud. There were too many transactions,
with too many similarities, with too many participants dealing in goods worth
millions of pounds but without any contractual protection, for it to be
otherwise. But although that conclusion helps HMRC, it does not, as we have
said, satisfy the Mobilx test. We must ask ourselves whether, when it
entered into each of its transactions Ixes knew that it was connected with
fraud. We recognise that some of the evidence available to us would not have
been available to Ixes at the time it entered into the transactions, and we repeat
that Ixes is not to be judged with the benefit of hindsight.
86.
Mr Khan was, to summarise what we have already said, an evasive witness
who contradicted himself several times and who plainly knew little about the
legitimate grey wholesale market in mobile phones. We are quite satisfied, by
contrast, that he understood perfectly the market in which Ixes was engaged,
and that he knew very well, and intended, when deciding to embark on
transactions in mobile phones, that Ixes would be sharing in the proceeds of
fraud. His demeanour was not that of a man who had unwittingly, and despite his
best efforts, been drawn into frauds committed by others, but of one who
deliberately and knowingly set out to benefit from what appeared at the time to
be an easy way of making a lot of money. It does not matter whether there was
“an overall scheme” or merely a constant repetition of an arrangement which
seemed to succeed in its purpose, and it does not matter whether Mr Khan knew
the details of the other transactions and traders in the chains; it is
sufficient that he knew, as we find he did, that Ixes’ transactions were connected
with fraud.
87.
In reaching that conclusion we have not disregarded Mr Lucraft’s
argument that there was no evidence before us, in the form of emails or other
written communications between the participants, that the transaction chains
were orchestrated, nor have we overlooked his point that it required only one
trader to break ranks for the scheme, if there was a scheme, to collapse.
Although, as we have said, it is not necessary to decide whether was a scheme,
we are satisfied there was, and that Ixes and all the other participants in the
chains almost certainly undertook a pre-arranged sequence of deals. It is quite
possible there is no document detailing the sequences, but one would not
normally expect fraudsters to document their intentions, and then make that
document available to a policing authority; they would do their best to conceal
it. And there would be little incentive for any participant to break ranks
since, as examination of the chains immediately reveals, as long as the scheme
worked there were ample rewards for little work. Even the buffers, who made the
least profit, could earn £1000 or more for simply generating a purchase order and
an invoice, and arranging the transfer of funds: the evidence showed that they
rarely, if ever, handled the goods or even inspected them, arranged for their
transfer or indeed did anything which required more than nominal effort.
Conclusions
88.
There is no doubt in our minds that Mr Khan knew perfectly well, when
Ixes embarked on transactions in mobile phones, that it was involving itself in
a dishonest trade. We reject the claim that Ixes was a serious trader in a
genuine market; we have concluded, instead, that it was the paradigm trader
described by Moses LJ in Mobilx. Mr Lucraft did not suggest any basis on
which we might reach a different conclusion in respect of the two transactions
in iPods, and we see none ourselves.
89.
It follows that the appeal must be dismissed, in respect of all of the
46 transactions. Applying the provisions of para 7 of Sch 3 to the Transfer of
Tribunal Functions and Revenue and Customs Appeals Order 2009, we direct that
Ixes pay the Commissioners’ costs of and incidental to the appeal, to be the
subject of detailed assessment on the standard basis by a costs judge of the
High Court if they cannot be agreed.
90.
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.
91.
Colin Bishopp
Tribunal Judge
Release Date: 8 September 2011
