[2011] UKFTT 825 (TC)
TC01661
Appeal number: MAN/08/0876
VAT –
MTIC FRAUD – clean chain broker in a contra trading case – knew or should have
known of the fraud? – yes – appeal dismissed.
FIRST-TIER TRIBUNAL
TAX
DI
& GI ELECTRONICS LTD Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
Judge Richard Barlow
Mrs
Beverley Tanner
Sitting in public in Manchester on 10-14, 17-21 January and 21 and 22 March 2011 (further written submissions
completed 19 May 2011).
Gulam Ahmed of counsel
instructed by Salhan & Co for the Appellant
Lucy Wilson-Barnes and Tina
Ranales-Cotos of counsel, instructed by Howes Percival & Co for the
Respondents
© CROWN COPYRIGHT
2011
DECISION
1. This
is an appeal by DI & GI Electronics Ltd against the respondents’ refusal, by
a letter dated 13 June 2008, to allow a claim for credit of and repayment of
input tax totalling £1,125,425 in respect of the appellant’s three month tax
period ending 31 July 2006 (07/06).
2. By
way of introduction only, we mention that the appeal is what is called, in the
jargon that has become well known through other appeals, an MTIC case and the
appellant’s transactions are what are known as clean chain broker transactions
in which recovery of input tax is denied on the basis that those transactions
are connected with fraudulent transactions through a contra-trader and the
appellant either knew or should have known of that connection. In using the
terms clean and dirty chains and broker, contra-trader or defaulter we do so
only for convenience and, as has been pointed out before by the Tribunal (see
the Decision in Totel Distribution Ltd), use of those terms, although
now well understood, cannot be allowed to prejudge or influence the Tribunal’s
decision one way or the other as to the correct legal and factual position.
3. In
this case the allegation is that the appellant dealt with a company called
Trimax Trading International Ltd (Trimax) as its supplier and with Agrupacion
de Alimentos Mediterraneos SA T/A Alimed (Alimed), a Spanish company, as its
customer. The alleged contra-trader is Famecraft Ltd T/A Bristol Cash and
Carry (Famecraft) which had sold the relevant goods to Trimax. Famecraft’s
supplier was Sinderby Enterprises Ltd (Sinderby).
4. Each
of the five relevant transactions fell within a chain which consisted of a
dispatch from Cyprus by Sinderby to the UK acquirer Famecraft which sold the
goods in the UK to Trimax which sold the goods in the UK to the appellant which
dispatched them to Alimed in Spain (though the appellant only sent the goods as
far as France where Alimed took possession of them).
5. The
Commissioners allege that Famecraft was a contra-trader which dishonestly
engaged in these transactions (amongst many other such transactions) in order
to cover up or disguise the fact that its VAT return for the period 08/06
contained very large input tax claims which were fraudulent claims because they
fell within chains of transactions in which a company called Barato had dishonestly
defaulted in respect of very large amounts of output tax. The Commissioners
also rely upon an allegation that these clean chain transactions were apt to
help Famecraft to pretend that it was a legitimate trader. They also allege
that the money introduced into the clean chains through the appellant was apt
to assist Famecraft to finance the dirty chain transactions and that the source
of that additional finance was or would be ultimately, in part at least, the
input tax claims made by the appellant. The appellant, as a dispatcher of
goods to an overseas buyer was making supplies on which positive rate VAT was
not payable but it had claimed input tax on its purchases, as they were
supplies between UK based traders, and the appellant would therefore be in a
repayment position; provided the Commissioners credited the input tax or if the
Tribunal allows the appeal.
The legal issues.
6. In
Kittel –v- Belgium [2008] STC 1537 the ECJ held, at paragraph [60], that
on the one hand where a recipient of a supply buys goods and “did not and could
not know that the transaction concerned was connected with fraud” then the
Member State in which the recipient is registered for VAT cannot provide, by
its domestic law, that such a transaction is void and cannot provide that input
tax is not claimable on the transaction. On the other hand, at [61], the ECJ
held that “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 person entitlement
to the right to deduct”.
7. At
[51] the ECJ had also held that a trader who has taken every precaution to
ensure that his transaction is not connected with fraud, must be allowed to
claim input tax. At [52] the Court held that a person who “did not and could
not” know that his transaction was connected with fraud would be entitled to
claim input tax despite a connection between his transaction and a VAT fraud.
8. The
Court did not explain specifically what it meant by “should have known” but
[51] and [52] of the judgment suggest that a trader should take, at least,
reasonable precautions to avoid being involved in a transaction connected with
fraud. Taken literally “every precaution” and “could not know” might suggest
that the test is a very strict one. But bearing in mind [56] to [58] of the
judgment we do not read it in that way. The Court used the word “should” for the
first time in paragraph [56] and explained the rationale of the rule it then
set out at [61]. It said that the rationale was that a person who either knew
or should have known of the connection with fraud is to be “regarded as a
participant” and that he “aids the perpetrators”; which appears to suggest a
degree of blame that would not have attached to a person simply for overlooking
a precaution that he might have taken or who could have known of a connection,
but only in some obscure way.
9. The
Court also explained the underlying rationale of the rule in terms of its being
for the better prevention of fraud.
10. It is well
established that the right to deduct input tax is exercisable immediately when
a transaction occurs and the ECJ emphasised this in Kittel. One
consequence of that is that the applicable circumstances known to the appellant
at the time of a transaction and the actions taken by the appellant at or
before the transaction occurred are the relevant facts and that information
acquired by the appellant subsequently will be irrelevant. Actions taken by
the appellant after a transaction will also be irrelevant as such but, of
course, they may shed light on what the appellant knew at the time if, for
example, they appear to amount to attempts to cover up the true circumstances
applying at the time of the transaction.
11. The Court of
Appeal judgment in Mobilx and others –v- Revenue and Customs Commissioners
[2010] STC 1436 considered in detail the issues raised in cases of this sort
and Moses LJ elaborated on the meaning of the “should have known” concept. He
held that it is not enough for HMRC to prove that the circumstances were such
that it was more likely than not that a transaction in question was connected
with fraud and that what they must prove is that the transaction was connected
with fraud.
12. The Mobilx litigation
included some decisions relating to contra-trading. Moses LJ specifically held
that it matters not if the input transaction in question precedes the
transaction which gives effect to the fraud. He held that if the taxable
person is proved to have entered into a transaction that he knew or should have
known, at the time of entering into it, was at that time connected with
fraudulent evasion or would be so connected later; that is sufficient to deny
recovery of input tax.
13. Moses LJ also
held that, where an issue arises about what a person should have know, it is
relevant to consider whether the only reasonable explanation for the
circumstances surrounding the transaction is that it is connected with fraud.
He also stressed the relevance of circumstantial evidence generally.
14. Mr Ahmed made
submissions concerning the relevance of the remarks made by Lewison J in Livewire
–v- HMRC [2009] STC 643 at [102] and [103] to the effect that in a contra-trading
case there are two frauds namely the dirty chain default and its cover up by
the contra-trader and that the clean chain broker must be shown to have known
or to be a person who should have known of one or both of those frauds. The
learned judge added: “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”. At [105] the learned judge said: “In other words, if the taxable person
knew of the fraudulent purpose of the contra-trader, whether he had knowledge
of the dirty chain does not matter”.
15. In HMRC –v-
Brayfal [2011] STC 1338 at [19] Lewison J, after noting that there is no
fraud in the clean chain, said that the clean chain broker must be shown to
have known or to have had the means of knowledge that his transaction was
connected with fraud and “he must either know or have the means of knowledge
that the contra-trader is a fraudster”. We assume the judge’s reference to the
means of knowledge is shorthand for the “should have known” concept as
understood in the authorities because having the means of knowledge by itself
is not sufficient to disallow input tax. But the relevance of the passage is
that the reference to the contra-trader is to him as a fraudster without any
specific type of fraud being specified. The judge then added that the
taxpayer’s input tax claim would also be disallowed if he had knowledge or the
means of knowledge of the dirty chain.
16. We interpret
Lewison J’s remarks as meaning that the taxpayer must know or be a person who
should have known of a fraud before input tax will be disallowed and the fraud
in question will in fact be either the dirty chain fraud or the cover up by the
contra-trader. But he need not know or be a person who should have known what
precise form the fraud takes as long as he knew or should have known there was
a fraud of some type being committed by the contra-trader or alternatively that
he actually knew or should have known about the dirty chain fraud, the latter
being less likely to be capable of proof where the claimant is in the clean
chain because he will have dealt only with the contra-trader.
17. In this case the
question arises whether it is possible for the Commissioners to establish their
case that the appellant should have known of the fraud where the appellant did
not deal with the contra-trader itself but rather with what the Commissioners
allege was a buffer trader interposed between the appellant and the
contra-trader.
18. In that context the
judgment of Briggs J in Megtian –v- HMRC [2010] STC 840 at [35] to[39]
(especially [37] and [38]) is particularly relevant. Briggs J referred to the
facts of Livewire and made it clear that he thought Lewison J’s remarks
should be seen in the context of the facts of that case. Paragraphs [37] and [38]
of the judgment make it clear that the connection with fraud can take many
forms and we interpret the concept of connection as not being limited to any
particular type of connection. Clearly some connection which is only
incidental would not be sufficient but any connection which furthers the aims
of the fraud or assists in its being covered up or hinders its detection is in
principle sufficient. That interpretation is consistent with the principles
set out in Mobilx and Kittel itself.
19. Once a
connection is established the real limiting factor is whether the appellant
knew or should have known of it. In a case like the present one it may be more
difficult for the Commissioners to prove their case but we do not regard it as
fatal to their case that the appellant did not deal directly with the
contra-trader.
20. The Tribunal was
urged by Moses LJ not to over elaborate the tests set out in Kittel and,
if we have here done so, it is only to make it clear that we have addressed Mr Ahmed’s
detailed submissions.
The basic facts.
21. There were five
transactions in the chains already referred to. Each transaction concerned the
purchase of mobile phones by the appellant from Trimax and the sale of the same
phones by the appellant to Alimed. The first transaction occurred on 28 July
2006 and the other four occurred on 31 July 2006. Each transaction concerned a
different type of phone. Sinderby’s sale to Famecraft in the first transaction
occurred on 26 July and the other steps in that chain occurred on 28 July. In
respect of the other four transactions all the steps including Sinderby’s sale
to Famecraft occurred on 31 July. Sinderby undoubtedly acted as a dispatcher
of goods and Famecraft as an acquirer as is shown by the fact that Sinderby did
not charge VAT on the sale to Famecraft. The goods arrived and departed from
the UK within a very short time on any view and possibly within the same day in
respect of the 31 July transactions.
22. The unit prices
of the phones, when the appellant sold them, varied between £331.70 and
£460.10. The quantities of phones in the transactions varied between 2,500 and
5,000 units. The values of the appellant’s transactions varied between
£882,750 and £1,702,370.
23. Despite those
variations, Famecraft’s mark up on the phones (ie the difference in the price
at which it bought from Sinderby and the price at which it sold to Trimax) was
£1.50 for all 19,200 phones. The mark up achieved by Trimax was £1.00 per
phone.
24. The appellant’s
mark up per phone was respectively £30.10, £21.70, £21.70, £23.10 and £21.35 for
the five deals. The appellant’s mark up was precisely 7% of its tax exclusive
purchase price for each of the five deals.
25. In each
transaction the price at which the appellant sold the goods to its Spanish
customer was less than the tax inclusive price it had agreed to pay Trimax.
However if the input tax claimed by the appellant is payable then it will have
achieved the 7% mark up when that is paid and will presumably make a profit as
its overheads are likely to be less than the difference.
26. We were told at
the outset of the hearing that Alimed paid the appellant £6,881,170 on 14
August 2006. That was the full price for the goods in all five transactions. Later
in evidence it appeared that full payment may not have been made by Alimed
until 1 September. The appellant paid Trimax £5,178,715 on 14 August 2006 and
£1,702,225 on 1 September 2006. Those amounts total virtually exactly what
Alimed had paid the appellant but the appellant still owed Trimax £675,485.
The appellant paid Trimax a further £452,625 on 28 September 2006 but at the
hearing it was said that the outstanding amount had been reduced to £148,340 so
another payment must have been made after 28 September 2006.
Evidence relating to Famecraft (alleged
contra-trader).
27. Famecraft traded
as Bristol Cash and Carry. Mr Cameron Watson, officer of HMRC, gave evidence
and was cross examined about the company. Most of his evidence was accepted
and the cross examination was directed at confirming that Famecraft did not
deal directly with the appellant. Mr Humphries, officer, also gave evidence in
the form of an unchallenged witness statement.
28. Famecraft
registered for VAT from 14 June 2004 as a property owning company on the basis
that it had opted to tax a commercial property but its first three returns were
nil returns and then returns for 05/05, 08/05 and 11/05 were all repayment
returns relating to setting up and stocking a business of selling wholesale
goods. The 11/05 return declared sales of £484,640.
29. The return for
02/06 declared sales of £4,400,178 and purchases of £4,125,997. Sales of
£1,261,958 to the EU turned out to be sales of razor blades to a Spanish company
called CEMSA. Famecraft had paid its supplier only after receiving payment
from its customer. HMRC informed the director of the risks of MTIC fraud in
April 2006 but a repayment for 02/06 was authorised.
30. The company’s
VAT return for 05/06 declared sales of £75,666,852 and purchases of
£73,656,683. Sales to the EU were £18,267,501. Purchases worth £71,466,172
had been supplied to Famecraft by a single supplier and it had sold the goods,
which were razor blades, to several customers but principally to CEMSA.
31. Officer Okolo
gave evidence about Famecraft’s transactions in the period relevant to this
appeal which was its 08/06 period.
32. In that period
outputs were declared worth £319,199,291 and inputs were £309,748,499 and tax
due to HMRC was declared as £4,145. Had a VAT return been made as at the end
of July, Famecraft would have owed £27,041,787. Five of its transactions were
sales to Trimax which were sales of mobile phones which Trimax sold to the
appellant. In August 2006 Famecraft entered into 149 transactions in which it
sold goods to a single Spanish customer which, because they were zero rated
sales, enabled it to reverse the liability it had incurred by the end of July
because it had large input tax claims to make for the August deals which were
not offset by any output tax liability.
33. All the deal
chains in August 2006 traced back to Barato which the appellant admits was a
dishonest defaulter.
34. When HMRC
attempted to inquire into Famecraft’s activities post was returned marked gone
away and the persons behind the company have in effect disappeared.
35. We have no
hesitation in finding that the respondents have proved that Famecraft entered
into transactions in period 08/06 for the purpose of obtaining repayment of
input tax in order to further the fraud in which Barato were the defaulting
trader. The immense increase in Famecraft’s turnover in a short period is
itself an indication of its being involved in fraud as the undisputed evidence
is that the transactions were all back to back risk free transactions in the
sense that Famecraft only paid for the goods when it was itself paid by its
customers. The distinctly different pattern of trading at different times
within the period in question is itself indicative that Famecraft had acted
deliberately in putting itself in a position to make large input tax claims in
the dirty chains leading to Barato and then making those claims.
36. We find that
Famecraft acted dishonestly in engineering its trade in that way.
37. We find as a
fact that there was a connexion between the appellant’s transactions and the
fraud because the output tax liability which Famecraft’s sales to Trimax
generated was used by Famecraft to set itself up in a position to make the
input tax claims in August which themselves were related to the defaults of
Barato. It is true that the appellant did not deal directly with Famecraft and
that its transactions pre-dated the input tax claims that company made that
were the final step in the dirty chain fraud. But as we have explained, on examination
of the authorities, the type of connection with fraud that can give rise to a
denial of input tax does not have to be directly with the contra-trader or to
be in the dirty chain. The money introduced into the clean chain by the
appellant’s payments to Trimax for the goods which were then passed on to
Famecraft assisted that company to trade in the dirty chains by providing
liquidity. Had HMRC paid the appellant’s repayment claim that liquidity would
in part at least have been supplied by HMRC. The transaction also helped to
reduce the risk of an inquiry from HMRC that a large input tax claim would have
been likely to generate.
Evidence relating to the appellant and its transactions.
38. The evidence
given on behalf of the appellant was that of Mr Talesh Patel, director, the
only person actively concerned in the company at the relevant times. He stated
that he had been involved in the computer and phone industry for some time
before the appellant company was set up. In fact his involvement had been mainly
with the installation of phones in cars and in retail sales rather than in
wholesale or large scale transactions, though his previous involvement had
given him a knowledge of mobile phone models and their functions.
39. The appellant
company had been set up by a man called Lord Uppal, though he was not a member
of the peerage, who was a family friend of Mr Patel and Mr Patel had been appointed
as the company secretary on 16 November 2002. There was another director, a Mr
Dilbag, whom the appellant had not met. Mr Uppal had originally run the
company as a supplier of white goods but had decided to begin to deal with
phones and brought Mr Patel in to assist with that as he had knowledge of
phones. From 1 July 2003 Mr Uppal became the company secretary and Mr Patel
became a director. Mr Uppal resigned on 29 July 2005 leaving Mr Patel in sole
charge.
40. At first, Mr
Patel conducted sporadic deals in mobile phones in which the company bought
from a UK trader and sold to a UK trader. The transactions were what Mr Patel
termed ‘back to back’ by which he meant the same goods were bought and sold
without being taken into stock by the appellant and the appellant received
payment from its customer before making a payment to its supplier. He
explained that the benefit of this method of trading was that the stock can
devalue very quickly if taken into the physical possession of a trader so that
matching suppliers and customers was a safer method of trading.
41. However, Mr
Patel also knew that better profit margins could be achieved by buying in the UK and then exporting goods in what he termed the grey market.
42. Mr Patel said
that the company had conducted 33 domestic deals in 2004 but that in 2005 it
had managed to do 10 deals in computer equipment in which goods were purchased
from a UK supplier and sold to an overseas buyer. He said that export deals in
computer equipment gave a profit margin of “roughly at least 10%” but that
figure later tumbled because of competition from China.
43. In 2006 there
were no domestic deals and Mr Patel said he thought there were 7 exports in
period 01/06 (three months ending 31 January 2006) which were back to back
mobile phone deals on which the company made “between 6 and 7%”. He said he
thought the company did four deals in 04/06.
44. In the period
07/06 Mr Patel had conducted the five transactions already referred to and,
although his evidence was somewhat confused and difficult to follow, he
described the sequence of events relating to the deals as involving the following
steps. Alimed, the customer, had contacted him having seen the appellant’s
details on a website set up for mobile phone traders. A man called Antonio
spoke to Mr Patel and asked about stock which he followed up with a stock
request form in an email or fax. Mr Patel then set about finding the stock by
contacting various suppliers he had previously dealt with, though in each of
the relevant cases the supplier turned out to be Trimax.
45. Initially, Mr
Patel suggested that once he had sourced the stock there would be negotiations
about price. He said in respect of a deal that was discussed in June “The
negotiations would come down to price and terms. It would come down to the
price we got the stock for as well”. In respect of that proposed deal he said
that Antonio (ie Alimed) had a fixed price and there was no margin so the deal
did not go ahead.
46. The first deal
that did go ahead had begun with a request from Alimed in an email dated 28
July 2006 and timed at 14.22 GMT for “around 4,000 black Nokia 8800s”. Mr Patel
said Antonio had probably phoned him earlier in the day with the same request.
He said he called Trimax and they had 3,700 available. He said that he would
have looked on the websites traders used to see who had such stock. By 16.34
Mr Patel was able to obtain an offer of 3,700 phones from Trimax at £430 each
which he sold to Alimed for £460.10 at some time on the same day. By 16.55 Mr.
Patel had sent instructions to 1st Freight so the sale to Alimed
must have been agreed between 14.22 and 16.55 if not sooner. Mr Patel’s
evidence in chief was that Trimax would have quoted a price but that he would
have negotiated with Alimed “if there was movement in it – there might be
movement of 10 or 50 pence I cannot remember”.
47. The other four
deals all occurred on 31 July. At 12.38 on that day Alimed sent an email in
the following terms “We would like to know which stock you have available
today. We are especially interested in the following goods: -2500 Nokia 9300i –
5000 Nokia N91 – 5000 Nokia N80- - 3000 Sony Ericson W810i”. At 13.33 Trimax
sent the appellant a stock offer for exactly those goods. Mr Patel’s evidence
was that the stock offer would have followed a telephone enquiry to Trimax. By
14.22 Alimed had sent a purchase order for some of the goods. When he was
cross examined he said that the deals followed “… some form of negotiation. If
I was trying to sell the stock I would reduce my price to get the deal”. It
seems therefore that he was asserting that Trimax presented a non-negotiable
price but that he adjusted the price he charged Alimed slightly in order to
secure the deals. At other points in his evidence Mr Patel said that there was
some movement on price by Trimax in some cases but that he always negotiated
with the buyer.
48. It is an
uncontrovertible fact that in each deal the appellant’s mark up was exactly
7%.
49. The rest of the
deal paperwork consists, for each deal, of a purchase order from Alimed to the
appellant, a pro-forma invoice from Trimax to the appellant, a purchase order
from the appellant to Trimax, an invoice and supplier declaration from Trimax
to the appellant, an invoice from the appellant to Alimed, an allocation form
from Trimax to 1st Freight Limited, instructions from the appellant to 1st
Freight Limited, an inspection report from 1st Freight Limited to
the appellant, a release note from the appellant to 1st Freight
Limited; and shipping documents.
50. The paperwork
and the giving of instructions to the freight forwarder, their examination of
the goods and the arrangement of transport all appears to have occurred in a
very short time on any view and in effect within a single day.
51. Trimax’s pro
forma invoices and the invoices themselves contain “terms and conditions” which
include the following: “Ownership of goods/services remains the property of
Trimax Trading Int’l Ltd until full settlement has been made”. “UK sales – payment must be made in full and at point of allocation or on
pro-forma”. The invoices also made the transaction subject to Trimax’s
standard terms and conditions which Mr Patel said he had received only after
the transactions had taken place. Those terms make time for payment of the
essence and provide for interest on late payment. They also provide for
retention of title until full payment and that any unpaid for goods will be
held by the customer as bailee and that they must be stored and marked so as to
be identifiable as Trimax’s property. Trimax retained the right to re-possess
the goods at any time before payment. Trimax also required that any proceeds of
sale of the goods were to be held on trust for Trimax until property passed to
the customer.
52. Trimax issued
allocation forms addressed to the freight forwarder directing it to allocate
goods to the appellant to be released on final written instructions only.
53. The appellant’s
invoices to Alimed required payment on receipt of invoice. The appellant’s
terms and conditions included the following. “All goods remain the property of
DI&GI Electronics Ltd/supplier until goods are payed for in full. Title is
pasted their after”. “Goods will not be released untill payed for in full”.
54. Assuming the
reference to the supplier in the appellant’s invoice means that the goods
remained the property of Trimax, though Alimed would not have known of the
identity of the supplier at least from the documents issued between the
parties, the terms between the parties are compatible with the appellant’s case
which was that the goods would be sent to the foreign buyer on terms that the
buyer would not become the owner until it had paid for the goods. There is
still a contradiction in the terms of the various parties because although the
buyer should receive title on payment the appellant would not obtain title to
the goods until it had paid Trimax.
55. In fact what
happened was quite different from what was required by the documents because
Trimax was not paid before the goods were sent to Alimed in France.
56. Mr Patel’s
evidence was that what happened was that once it became clear the appellant
could not pay Trimax in full that company transferred the goods to it despite
their terms of business because a credit agreement was entered into between
Trimax and the appellant. Alimed had paid in full by 1 September but the
credit agreement was not entered into until 9 September. Mr Patel was asked
why Alimed would be prepared to wait for the transfer of the goods after it had
paid in full and he said they would expect to receive the goods on payment “in
the ideal world but when you trade you are in the real world”. Mr Patel’s
evidence about this was not entirely clear but it seemed he was asserting that
the delay in payment only affected one of the transactions because the part
payment of the sums due had enabled the first four to be dealt with in the way
intended by the documents.
57. Mr Patel’s
evidence was that he had first learnt what ship on hold terms meant, which were
applicable to the transactions in question, some time before these transactions
and that it had been explained to him by a freight forwarder when he had
entered into an export transaction. He did not claim to have clarified with
any of the parties involved in these deals that their understanding of those
terms was the same as his.
58. The role of 1st
Freight, the freight forwarder to which the goods had been sent on their arrival
in the UK, involved storing the goods, inspecting them and then forwarding them
to Alimed’s nominated destination in France.
59. The appellant
had not previously dealt with 1st Freight.
60. The appellant’s
directions to 1st Freight were contained in an order form which
ordered the following services. Freight tickets, invoice, CMR, confirmation of
delivery, 100% IMEI scan report and full inspection of goods report (type 4).
The terms and conditions of shipment were stated to be “Ship on hold (terms),
goods shipped after full inspection only” and “GR Distribution must hold goods
until orthrisaction for release is sent by 1st Freight limited”.
61. GR Distribution
was Alimed’s freight forwarder or warehouse keeper and the appellant had not
previously dealt with that company.
62. Mr Patel was
questioned about the sequence of events in respect of the sales, the
inspections, the report from 1st Freight and his own checks to
ensure that the IMEI numbers supplied by 1st Freight did not show
that he had dealt with the same phones before; which was why he wanted the
numbers. Comparing those details and the time the checks would have taken,
even on Mr Patel’s own estimates, with the times the goods arrived at the
Channel Tunnel for export it was obvious that, in some cases at least, the
goods had left 1st Freight before Mr Patel could have been satisfied
that all was in order.
63. Mr Patel had not
made specific enquiries about whether the goods were insured for travel to France or whether insurance remained in place until the risk passed to Alimed. He produced
a report on 1st Freight that had been prepared by a consultancy firm
called CTM which said that 1st Freight had insurance for premises,
contents and goods in transit but he admitted that he was not given that report
until after the deals in question had occurred. At first he claimed that he
had been satisfied that there would be insurance in place because other freight
forwarders he had dealt with had had insurance. He said he assumed 1st
Freight would have insurance for the price of the goods he had paid. He later claimed
that he had been told on the telephone by CTM that 1st Freight had
insurance before he received the written due diligence report.
64. Mr Patel
produced an email from Antonio (of Alimed) which had been sent on 27 July and
in which Antonio asserted that GR “has commercial insurance in place and Alimed
will independently insure all stock sold by DI & GI Electronics Ltd to
Alimed”.
65. Mr Patel said
that he had met a Mr Shah whom he described as the owner of Trimax at a Temple they both attended. He had visited Trimax’s premises and had been told that Trimax
dealt in commodity trading and other ventures including import and export on a
large scale. The formal due diligence enquiries that he had made about Trimax
were quite extensive but they included a company credit report which suggested
putting a limit of £20,000 on any credit that might be allowed. Mr Patel said
he was not worried by that as he was not proposing to allow Trimax to have
credit. He also said that Mr Shah drove a car that was “worth more than my
home” which we took it to mean that Mr Patel had good reason to think that Mr
Shah was a man of substance. It is also clear that Mr Shah had other
businesses beside Trimax.
66. Mr Patel produced
due diligence enquiries about Alimed. Some of the documents were in Spanish
which Mr Patel admitted he could not read and, unless those documents referred
to credit limits, no enquiries had been made about Alimed’s creditworthiness
and, if they did deal with that; they were not of any value to Mr Patel.
Again, he said that as the goods were being sent on ship on hold terms he did
not regard the absence of evidence about Alimed’s financial standing as a
matter for concern.
Discussion of the evidence and the Tribunal’s
findings.
67. Most of the
basic facts in this appeal are not in dispute.
68. We find that in
his evidence Mr Patel exaggerated the extent of his knowledge of mobile phone
trading before he entered into the transactions in phones. It was clear that
his work involving installing phones in cars and selling at retail level had no
real bearing on his involvement in wholesale transactions of the sort involved
in this appeal.
69. Mr Patel was
unable to offer any convincing explanation of how he was able to develop the
level of business he had achieved through the appellant company by the time the
transactions involved in this appeal occurred. From the initial sporadic
trading in UK to UK deals he had been able to achieve sales in 2005 and 2006
involving exports of goods beginning with computer equipment and then changing
to mobile phones with values amounting to millions of pounds.
70. In the few days
relevant to this appeal deals worth £6,881,170 were carried out with very
little effort on the part of the appellant. Although Mr Patel said that he put
a lot of effort into developing contacts and keeping a close watch on what was
happening in the industry; it is a fact that the first deal was first envisaged
when Alimed asked about “around 4,000” phones and was completed in respect of
3,700 phones within just over two and a half hours at most. The other deals
involved even less effort. Alimed requested specific numbers of four different
types of phones which Mr Patel sourced within the hour and less than an hour
later the appellant had received a purchase order from Alimed which we find
shows that the deals had been concluded.
71. The respondents
rely on the evidence of the ease with which the deals appear to have been
conducted as evidence of contrivance such as to indicate that these deals fell
outside of any normal trading pattern. Whilst we might consider that piece of
evidence by itself does not prove that allegation, after all the appellant
might just have been very lucky to have found the goods it wanted to supply as
quickly as it did, we certainly agree that it is circumstantial evidence
suggestive of possible contrivance.
72. We find that the
fact that Trimax was prepared to deal with the appellant on terms much more
favourable than its standard terms and to do so without specifying any
variation in its terms and the fact that the appellant was prepared to deal
with Alimed in a similar fashion are both significant facts. Trimax released
goods worth millions of pounds to the appellant, knowing that it was making an
onward sale, which was apparent from the fact that Trimax had to authorise the
freight forwarder to release the goods, but without knowledge of the
destination and contrary to its terms of business which required payment before
release. It should have been obvious to Mr Patel that Trimax, as a large scale
trader which was owned by a person whose other companies were involved in
import and export, would have been very likely to have been able to find an
overseas buyer for itself; just as easily as he had. Even if Mr Patel did not
realise that, a directing mind of any reasonably competently run company would
have been able to observe that that was the case and as the appellant is a
company that is the correct test to apply.
73. Similarly it
should have been obvious to Mr Patel, or it would have been obvious to the
appellant if it was being run reasonably competently that, in the fast moving
market with the risk of rapid declines in stock value claimed by Mr Patel as a
reason for not holding stock; there were risks in dealing with Alimed without
assessing its creditworthiness and that his explanation that ship on hold terms
would avoid such risks is simply not credible. Had Alimed failed to pay for
the goods and had they needed to have been repatriated, then the appellant
would have incurred expense in shipping costs and the risk of a fall in the
market price. The appellant would also then not have been able to pay Trimax
in accordance with the terms that Mr Patel says had been agreed.
74. We also regard
the ease with which the deals were conducted as being highly indicative of
fraud which anyone presented with these opportunities ought to have realised; given
the fact, of which Mr Patel was fully aware even on his own admission, that fraud
was a significant feature of the wholesale market in phones being dealt with on
back to back and on ship on hold terms. To be asked to supply four million
pounds worth of goods in one day (ie the four deals which occurred on 31 July)
and then finding a supplier able to supply exactly those goods within an hour
is so exceptionally fortunate as to raise a strong case for saying that the
deals were contrived and that Mr Patel knew that or at the very least the
company should be taken to have known it.
75. Mr Patel had
said that there were negotiations about the prices of the deals. It appeared
that he was claiming that the supplier had sometimes, or he may have meant
always, presented a non-negotiable price but he claimed to have negotiated, at
least, with the buyer. We have asked ourselves what plausible explanations there
might be for the fact that each of the deals in question in this appeal
achieved a mark up of exactly 7% for the appellant despite the different types
and values of goods and the different quantities involved. Only two have come
to mind. Firstly, Mr Patel may have been presented with a fait accompli by
both supplier and customer who were acting in conjunction with each other.
That should have raised suspicions in Mr Patel’s mind. It could possibly be explained
by an implausibly high degree of naïveté on his part but for the fact that he
asserted he had in fact always negotiated the price of the goods, so that if he
did in fact just accept a price offered by both counterparties he was lying
when he gave evidence of negotiation. The second possible explanation that
might apply would be that Mr Patel had been told to apply a formula to the
purchase price but that was not something he claimed to have occurred and it
would in any case be so obviously indicative of fraud that had such an
explanation been given it would have been fatal to the appellant’s case.
76. We hold that the
circumstantial evidence surrounding these transactions proves to the requisite
degree (the balance of probability applicable to civil cases), that the
appellant did know that those transactions were connected with fraud. We hold that
the evidence of the 7% mark up, which is additional to the purely
circumstantial evidence, adds certainty to a finding that we would have made
even without that evidence. For the avoidance of doubt we find that Mr Patel
himself knew that these transactions were connected with fraud. Our finding is
not based only on what a reasonably competently run company would have known or
should be taken to have know.
Conclusion.
77. The appeal is
dismissed. The appellant is not entitled to the input tax in question. Any
application for costs is directed to be made within 42 days of the release of
this decision. At the time of making any such application the amount claimed
need not be stated or set out. Assessment will be made after an award is made
in principle but any application should specify what method of assessment the
applicant seeks.
78. 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.
RICHARD BARLOW
TRIBUNAL JUDGE
RELEASE DATE: 14 December 2011
