DECISION
The Appeal
1.
The Appellants, Libra Tech Limited (“Libra Tech”) and Libra Graphics
International Limited (“Libra Graphics”) appealed against HMRC decisions
denying entitlement to the right to deduct input tax in the total sum of
£6,715,314.73 claimed in the VAT quarterly accounting periods 04/06, 05/06 and
06/06.
2.
Libra Tech was denied entitlement to the right to deduct £1,822,356.38
in the VAT quarterly accounting period 05/06. Libra Graphics was denied
entitlement to the right to deduct £1,338,942.50 in the VAT quarterly
accounting period 04/06, £3,250,576.00 in the period 05/06 and £303,439.85 in
the period 06/06.
3.
The denied input tax related to 26 transactions involving the purchase
and sale of mobile telephones. Mr Christian Souter was the sole director of
Libra Tech and Libra Graphics at the time of the making of the 26 transactions.
For the purposes of this Appeal there were 29 deals, the 12th transaction of
Libra Graphics in 05/06 period was broken down into four deals.
4.
HMRC’s overarching submission was that the disputed transactions of
Libra Tech and Libra Graphics were part of an overall MTIC fraud scheme
involving a web of companies and chains of transactions where the sole aim was
to defraud the public revenue of VAT due to it. The transactions were
orchestrated and contrived for such a purpose and had no ordinary commerciality
to them.
5.
HMRC’s primary contention was that Libra Tech and Libra Graphics knew
that their transactions were connected with a VAT fraud and they must have
known of that connection to have played such an integral role in the fraud. In
the alternative Libra Tech and Libra Graphics should have known of the
connection of their transactions with a VAT fraud by virtue of the cumulative
circumstances presented to each Appellant.
6. The
Tribunal is obliged to consider four questions in determining this Appeal, and
answer them all in the affirmative if the Appellants are to be denied their
right to repayment. The questions were approved in the High Court decision of Blue
Sphere Global Limited v HMRC [2009] EWHC 1150. The four questions are:
(1) Was there a VAT loss?
(2) If so was it occasioned by
fraud?
(3) If so were the Appellant’s
transactions connected with such a fraudulent VAT loss?
(4) If so did the Appellant know
or should it have known of such a connection?
7. HMRC
has the burden of proving on the balance of probabilities its assertion that
the disputed transactions were connected with the fraudulent evasion of VAT and
the Appellants knew or should have known of their connection. For the purposes
of determining the Appellants’ state of knowledge at the relevant time, the
Tribunal must examine that of their director, Christian Souter, the controlling
mind for the companies.
8.
The Appellants’ case was that
(1)
They accepted that 24 deals can be traced to a tax loss.
(2)
HMRC had not proved that in deals 25, 26 and 27 the taxable person
purporting to be Teknic was a defaulter as alleged, in which case the
Appellant’s transactions in these deals were not connected to a tax loss.
(3)
HMRC had not proved in deal 29 the alleged contra-trader, ORIL, was not
a contra-trader, and, therefore, there was no connection of the Appellant’s
transaction to a tax loss and a fraud.
(4)
They denied that they knew or ought to have known their transactions
were connected to fraud.
(5)
HMRC’s policy of singling out certain parties in a transactions chain
tainted by fraud was contrary to the EU law principle of non-discrimination.
Alternatively, the Appellants suffered discrimination in the particular
circumstances of this Appeal.
9.
HMRC pointed out that the Appellants’ admissions comprised a
typographical error in that they accepted that 25 deals (1-24 & 28) rather
the 24 in its final submissions dated 9 November 2012 were traced to a tax loss.
The Appellants did not challenge this in their response of 15 November 2012.
Overview of the Deals
10.
In VAT period 04/06 Libra Graphics entered into six deals, all of which
involved the purchase and sale of mobile telephones. Of the six deals:
(1)
Two were “broker” deals where the Appellant purchased from a UK based company and sold to a company based in Europe. These deals traced directly to a fraudulent
tax loss (Deals 1 and 5). The defaulting traders were the taxable person
purporting to be Lewis Davis Productions Limited (Deal 1) and Lewis Davis
Productions Limited (Deal 5); and
(2)
Four were further “broker” deals traced to one of two contra-traders.
(Deals 2-4, & 6). There was no tax loss in the immediate chain in which the
Appellant appeared as a broker. However, there were tax losses in a related set
of transaction chains in which the contra-traders appeared as brokers. The
contra traders were Kwality Trading International PLC (Deals 2-4) and
Morganrise Limited (Deal 6).
11.
In VAT period 05/06 Libra Graphics entered into 15 deals, all of which
involved the purchase and sale of mobile telephones. Of the 15 transactions:
(1)
Eight were “broker” deals where the Appellant purchased from a UK based company and sold to a company based in Europe. These deals traced directly to a fraudulent
tax loss (deals 8 – 13, 19 and 20). The defaulting trader was Mediawatch 360
Limited; and
(2)
Seven were further “broker” deals traced to one of four contra-traders
(deals 7, and 14 – 18 and 21). There was no tax loss in the immediate chain in
which the Appellant appeared as a broker. However there were tax losses in a
related set of transaction chains in which the contra-traders appeared as
brokers. The contra-traders were Kwality Trading International PLC (deals 7 14
and 16), Epinx Limited (deals 15 and 17), Jag Tec Limited (deal 18) and A-Z
Mobile Accessories Limited (deal 21).
12.
Also in VAT period 05/06 Libra Tech entered into six deals, all of which
involved the purchase and sale of mobile telephones. Of the six transactions,
all were traced back to a defaulting trader. The defaulting traders were the
taxable person purporting to be AAA Multilink Limited (deals 22), Mediawatch
360 Limited (deals 23 and 24) and the taxable person purporting to be Teknic
Limited (deals 25– 27).
13.
In VAT period 06/06 Libra Graphics entered into two transactions, each
of which involved the purchase and sale of mobile telephones. Both of the
transactions were traced to one of two contra-traders. There was no tax loss in
the immediate chains in which the Appellant appeared as broker. However there
were tax losses in a related set of transaction chains in which the
contra-traders appeared as brokers. The contra-traders were Kwality Trading
International PLC (deal 28) and ORIL (deal 29).
14.
The Appellants’ supplier in every deal chain was Grange Computers. The
Appellants’ customers were Nova 2000 (deals 1,5, 8-10, 19,20 and 27), Elandour
Development (deals 2-4, 7), Spabel Marketing (deal 6), Eurotronics (deals 11-17
and 22-26), CEMSA (deals 18, 21 and 29), and Fremont Europe (deal 28).
The Evidence
15.
The Tribunal heard evidence (including reading the witness statements)
over a period of eight days starting 22 October 2012 and ending 2 November
2012. The parties agreed to make their final submissions in writing due to the
incapacity of the Judge who suffered an injury during the course of the
proceedings. The Tribunal reconvened on 19 November 2012 in the absence of the
parties to consider the final submissions.
16.
The Tribunal received evidence in person from the following witnesses
for HMRC:
(1)
Mrs Heather Ann Arnold who gave evidence on the extended verification
exercise undertaken by HMRC on the Appellants’ disputed deals.
(2)
Mr Andrew Letherby who gave evidence on the integrity of the processes for
extracting the data from First Curacao International Bank’s (FCIB)
servers, and on IP addresses.
(3)
Mr Roderick Guy Stone who gave evidence on the nature and features of
missing trader intra-Community (MTIC) fraud, and the steps taken by HMRC to
combat it. Officer Stone also provided evidence on the business affairs of Mr
Souter, the Appellants’ director, and Joakim Peter Broburg and his associates.
(4)
Mr Terence Mendes who gave evidence on his visits to the Appellants in
2003 and 2004.
(5)
Mr John Fletcher, a Principal Adviser in KPMG LLP, who was instructed
by HMRC to assess the development and structure of the mobile handset industry
generally and to analyse the grey market for mobile phone handsets during 2006.
(6)
Mr Ian Henderson who gave evidence on his analysis of the FCIB data
relating to the disputed deals.
(7)
Mrs Melanie Hamilton, Operational Accountant for HMRC, who gave evidence
on specific loan agreements entered into by the Appellants.
(8)
Mr Nigel Humphries, who gave evidence on the contra-trading schemes
associated with the Appellants’ deals.
17.
Mr Christian Souter gave evidence for the Appellants. Mr Souter was the
director of Libra Graphics incorporated in July 2001 and of Libra Technology
incorporated in March 2002.
18.
The witness statements of Ms Katrina Wheatcroft, Mr Ian Clifford White,
Mr Matthew Elms, Mr Ian Michael Simmons, Mr Olabode Ayoola, Ms Deborah Janet
Toynbee, Mr Stephen Doyle, Ms Vivien Barbara Parsons, Ms Kym Marna Nevelle
Richards, Ms Rebecca Riley, Mr Alan John Ruler, Mr Andrew Siddle, Mr Jason
Graham McGuiness, Mr Jonathan Ian Read, Mr David George Maud, Ms Susan Okolo,
Mr David Bryan Hancox, Mr Colin Needs, Ms Susan Margaret Tressler, Mr John
Patrick Foy, Mr Daniel O’Neill, Ms Susan Elizabeth Hirons, Ms Sarah Jane Allen,
Mr Malcolm Orr, Mr Laurence Peter Patay Smith, Mr Peter Alan Cameron-Watson, Mr
Dean Maurice Walton, Mr Nikolas Jatin Mody, Ms Lydia Ndoinjeh, Mr Barry Michael
Patterson, Mr Michael James Downer, Mr Graham Price and Mr Paul Johnson were
admitted in evidence. The witnesses were Officers of HMRC who with the
exception of Mr Downer gave evidence on the trading activities of the contra
traders and the defaulting traders connected with the Appellants’ disputed
deals. Mr Downer gave evidence on Operation Ghast, and the freight forwarder,
Worldwide Logistics. The bundle of documents admitted in evidence comprised 149
files.
Applications in the hearing
Officer Humphries Second Witness Statement
19.
HMRC requested leave to file and serve the second witness statement of
Officer Humphries. According to HMRC, the second witness statement corrected
errors made by Officer Humphries in his first witness statement, and updated the
information on the various contra-trading schemes, particularly the second one.
HMRC submitted that the evidence was highly relevant to the Appeal as it
demonstrated the orchestrated nature of the fraud perpetrated in the disputed
deals, HMRC argued that the evidence was capable of being easily understood,
and the timing of the service of the evidence did not occasion prejudice to
the Appellants. HMRC accepted that Officer Humphries’ second witness statement could
have been served earlier. A version of it was available in 2011.
20.
The Appellants’ principal objection to the admission of Officer
Humphries’ second statement was one of time so that they could give proper
consideration to the volume of information which accompanied the second
statement. The Appellants acknowledged the validity of HMRC’s reasons for
requesting leave. The Appellants also accepted that the Officer Humphries’
evidence was not critical to the case that they have put forward. The
Appellants, however, pointed out that they were entitled to knock down the
basis of HMRC’s case.
21.
The Tribunal admitted Officer Humphries’ second witness statement. The
Tribunal considered that the admission was justified on the grounds of
relevance, and that the prejudice to the Appellants’ case as stated in their
skeleton was marginal. The Tribunal, however, formed the view that the late
service of the statement on the Appellants was unfair particularly as a version
of the statement was available in 2011. Given those circumstances the Tribunal decided
to permit the Appellants time to examine the new evidence, and ordered HMRC to
pay the costs incurred by the Appellants in carrying out this exercise.
Following the Tribunal’s announcement, the parties agreed to delay the calling
of Officer Humphries evidence until 31 October 2012, a period of seven days.
HMRC did not object to the costs order under rule 10(1)(b) of Tribunal
Procedure Rules 2009.
Mr Fletcher
22.
The Appellants applied for the Tribunal to exclude the evidence of Mr
Fletcher on the ground that it would otherwise be unfair to admit it pursuant
to rule 15(2)(b)(iii) of the Tribunal rules 2009. The Appellants referred to a
recent decision of the Tribunal in JDI Trading Ltd v HMRC [2012] UKFTT 642 (TC) which excluded Mr Fletcher’s evidence on what appeared to be three grounds:
(1)
The conclusions reached by Mr Fletcher were matters for
submission by counsel rather than evidence by an expert witness, and as such
did not materially assist the Tribunal in the determination of the appeal
(paragraph 63).
(2)
KPMG’s membership of the Anti-Gray Market
Alliance was sufficient to affect the perception of the impartiality of Mr
Fletcher’s evidence. KPMG being Mr Fletcher’s employer (paragraph 80).
(3)
The Tribunal was not satisfied in the absence of a
statement that Mr Fletcher understands and has complied
with Part 35 CPR, that he was aware of his primary duty to the Tribunal as an
expert witness (paragraph 85).
23.
The Appellants also alluded to the evidence in proceedings before the
High Court where KPMG was sued by Arrowhead Capital Finance for breach of its
duty of care. The evidence revealed that KPMG had given advice to a company
(Dragon Futures) trading in mobile phones on the implementation of a due
diligence strategy to combat the threat posed by HMCE. The Appellants pointed
out that Dragon Futures had sold mobile phones to a company called Sunico,
which had played a role in this Appeal
24.
The Appellants argued the involvement of Mr Fletcher’s employer, KPMG,
in the anti-grey market alliance and in giving advice to a trader who had been
engaged in MTIC deals posed serious questions about inherent conflicts of
interest with Mr Fletcher’s evidence and its impartiality. On the latter issue
the Appellants observed that KPMG was the eleventh largest supplier of service
to HM Government. Finally the Appellants agreed with the reasoning of the
Tribunal in JDI Trading Ltd that Mr Fletcher’s evidence was generic and
not a proper matter for expert evidence. The Appellants did not pursue Mr
Fletcher’s compliance with CPR Practice Direction 35 because they believed that
this could be overcome by Mr Fletcher making a subsequent statement to that
effect. Also the Appellants did not dispute Mr Fletcher’s expert status.
25.
HMRC made four points on impartiality. The first was that the
Appellants’ complaints were not about Mr Fletcher personally but about the
global organisation for which he worked. In HMRC’s view, the Appellants had an
uphill struggle to establish that KPMG would be conflicted. Its involvement
with Dragon Futures demonstrated that KPMG was capable of acting on both
sides of the equation. Next the Appellants adduced no evidence about whether Mr
Fletcher was involved with KPMG’s preparation of the anti-grey market report.
HMRC referred to a hearing involving Amnico where Mr Fletcher gave evidence
that he had no personal involvement with KPMG’s activities with the Anti-Grey
Market Alliance. Further the fact that KPMG was a large supplier of services to
HM Government added nothing to the Appellants’ arguments on impartiality.
Finally even if the impartiality of Mr Fletcher’s evidence was problematical
the authorities cited by the Tribunal in JDI Trading Ltd were against
the Appellants on this point.
26.
At paragraph 83 the Tribunal in JDI Trading Ltd cited from Armchair Passenger Transport Ltd v Helical Bar Plc & Anor [2003] EWHC 367 (QB), where Mr Justice Nelson summarised the
current legal position regarding the status of expert evidence:
“The
following principles emerge from these authorities: -
(i) It is always
desirable that an expert should have no actual or
apparent interest
in the outcome of the proceedings.
(ii) The existence
of such an interest, whether as an employee of one of the parties or otherwise,
does not automatically render the evidence of the proposed expert inadmissible.
It is the nature and extent of the interest or connection which matters, not
the mere fact of the interest or connection.
(iii) Where the
expert has an interest of one kind or another in the
outcome of the
case, the question of whether he should be permitted to give evidence should be
determined as soon as possible in the course of case management.
(iv) The decision
as to whether an expert should be permitted to give evidence in such
circumstances is a matter of fact and degree. The test of apparent bias is not
relevant to the question of whether or not an expert witness should be
permitted to give evidence.
(v) The questions
which have to be determined are whether (i) the
person has
relevant expertise and (ii) he or she is aware of their
primary duty to
the Court if they give expert evidence, and willing and able, despite the
interest or connection with the litigation or a party thereto, to carry out
that duty.
(vi) The Judge
will have to weigh the alternative choices open if the expert's evidence is
excluded, having regard to the overriding objective of the Civil Procedure
Rules.
(vii) If the
expert has an interest which is not sufficient to preclude him from giving
evidence the interest may nevertheless affect the weight of his evidence.”
27.
HMRC moved on to make submissions on the other matters
raised in the Appellants’ application. HMRC relied on the decision of Sir
Andrew Park in Mobile Export Ltd v Revenue and Customs Commissioners [2009] EWHC 797(Ch) as authority for the view that HMRC was not required to have Mr
Fletcher certify his evidence under CPR Practice Direction 35. In HMRC’s view,
Sir Andrew Park made it clear that there was an element of relaxation in the
rules that applied to the Tribunal, and it would be inappropriate to require a
party before a Tribunal to meet certain technical arguments about
admissibility.
28.
HMRC’s final point was that Mr Fletcher’s evidence
dealt with the existence of a grey market in mobile phones which the Appellants
positively relied upon in its Appeal. In those circumstances HMRC wished to
meet the Appellants’ evidence on this point and in this regard Mr Fletcher’s
evidence was highly relevant, and contrary to what was said by the Tribunal in JDI
Trading Limited about the generic nature of his evidence. HMRC
referred to the First Tier Tribunal decision in Atlantic Electronics Ltd [2011] UKFTT 314 (TC) which was given by Judge Wallace, who had been the Judge in the
earlier decision of Emblaze. Judge Wallace said in Atlantic at
paragraph 48:
“However notwithstanding my own reservations of the
value of Mr Fletcher’s evidence, I recognise that others may take a different
view. This is an important and complex appeal. It is inevitable that the
Tribunal will have to consider the grey market if only because the Appellant
relies on it. Mr Fletcher’s evidence was served in 2009 without any objection
until this year. I do not grant the application that it be excluded”.
29.
The Tribunal refused the Appellants’ application to
exclude Mr Fletcher’s evidence. The Tribunal’s starting point was that all
relevant evidence should be admitted unless there were compelling reasons to
the contrary (Mobile Export 365 Ltd and another v HMRC [2007] STC 1794). In this Appeal, Mr Fletcher’s evidence was
relevant because it dealt with the grey market in mobile phones which the
parties agreed was a salient issue.
30.
The Tribunal is a creature of statute and governed by
its own procedure rules, which give the Tribunal a margin of flexibility in organising
its proceedings provided the overall objective of dealing with cases fairly and
justly is met. In this respect, Tribunals offer a distinctive form of doing
justice from the courts and not
as rule bound. It follows that the Tribunal was not persuaded that the
provisions of CPR Practice Direction 35 applied to Mr Fletcher’s evidence, and agreed with Sir Andrew Park’s view that the rules enable the
Tribunal to admit his evidence without having to meet technical arguments about
the expert status of the witness.
31.
The Tribunal disagrees with the view expressed in JDI
Trading Ltd that rule 15(1)(c) of Tribunal Rules
envisaged that a direction should be sought for permission to adduce expert
evidence before serving a statement of an expert witness. The use of the words,
may give a direction in rule 15(1) go against a construction of a
mandatory requirement to seek the Tribunal’s leave to adduce expert evidence.
The Tribunal considers that the purpose of rule 15(1)(c) is primarily directed
at controlling the proliferation of expert witness evidence.
32.
The Tribunal also considers that it should be cautious
about interfering with a party’s choice on the conduct of its case on a salient
issue. HMRC have decided in this Appeal to deal with the question of the grey
market by calling evidence from Mr Fletcher. The Tribunal’s eventual
determination on the merits of the evidence may indicate whether HMRC has made
the right choice but it is not the Tribunal’s role to conduct HMRC’s case.
33.
The Tribunal doubts the validity of the ruling in JDI
Trading Ltd that it could not be satisfied that Mr Fletcher was aware of
his primary duty to the Tribunal. The ruling was based on Mr Fletcher’s failure
to comply with CPR 35 Practice Statement. This Tribunal has already questioned
the application of that Practice Statement to these proceedings. Further the
Tribunal considers it unwise to reach such a conclusion without first giving Mr
Fletcher an opportunity to respond. Finally it would appear that the Tribunal
in JDI Trading Ltd overlooked Mr Fletcher’s letter of instruction from
HMRC which was referred to in the preface to his witness statement. HMRC’s
letter of instruction in this Appeal was dated 5 February 2009 and incorporated
the following statement addressed to Mr Fletcher:
“The Civil Procedure Rules, which
apply to all civil litigation proceedings in the County Court and High Court do
not apply to proceedings before the VAT and Duties Tribunal. That said, it
remains the case your overriding obligation is to provide impartial and
independent evidence which is uninfluenced by the fact that you are instructed
by HMRC to provide evidence for use in the context of litigation”.
34.
This Tribunal is satisfied that the contents of the
letter of instruction dated 5 February 2009 established in the absence of
evidence to the contrary that Mr Fletcher was aware of his primary duty to the
Tribunal.
35.
The Tribunal was not persuaded that Mr Fletcher’s
evidence was conflicted by the involvement of his employer KPMG with Dragon
Futures and the Anti-Grey Market Alliance. The Tribunal noted that KPMG was
a global organization with about 145,000 employees worldwide. The Tribunal
concluded that the Appellant had failed to establish a connection between
KPMG’s involvement in these activities and Mr Fletcher’s report, and the mere
fact of an employer/employee nexus was too remote.
36.
The Tribunal, therefore, decided as a preliminary
matter that Mr Fletcher’s evidence was relevant to the disputed issues in this
Appeal and there were no compelling reasons to exclude it. The Tribunal added
the caveat that the Appellants were entitled to ask Mr Fletcher questions on
conflict of interest, which may alter its preliminary view.
37.
After hearing from Mr Fletcher the Tribunal saw no
reason to depart from its preliminary decision, in particular the Tribunal
placed weight on the following aspects of his evidence:
(1)
Mr Fletcher confirmed his understanding of his
duty to Tribunal stating
“To provide a report in line with
the instructions received from HMRC and in preparing that report not only to be
mindful of those instructions but to prepare a report which is independent and
objective and to prepare that report in a way that presents all of the
information that is within my knowledge and obviously relevant to my
instruction, even where that information could be seen as being unhelpful or
running contrary to the case of those instructing me, and where that
information changes, such as new information coming to light, to bring that to
the attention of the Tribunal as well”.
(2)
Mr Fletcher stated that he had no involvement
with the work done by KPMG for the Anti-Grey Market Alliance. Also he pointed
out that the Alliance was concerned with the grey market for, and
counterfeiting of, IT equipment, peripherals and software. This grey market was
separate to the grey market for mobile phone handsets.
(3)
Mr Fletcher did not give advice to Dragon
Futures, and was unaware that Dragon Futures had been a client of
KPMG until his testimony before this Tribunal.
(4)
Mr Fletcher’s witness statement contained
nothing that could be interpreted as an opinion on whether the grey market in
mobile handsets was good or bad. Further he made no comments that were capable
of being interpreted as being pro or anti the grey market or its participants.
In fact Mr Fletcher confirmed in evidence the existence of a legal grey market
in mobile phones, which was vibrant with many traders.
38.
The Appellants challenged the weight to be attached to
Mr Fletcher’s evidence. The Tribunal will deal with this challenge in the body
of the decision.
Applications for Exclusion of Evidence in Final
Submissions
39.
The Appellants in their final submission requested the
Tribunal to exclude HMRC officers’ witness statements which included opinion
evidence, or things stated as facts which were actually opinion or otherwise
irrelevant. In particular the Appellants referred to the following witnesses:
(1)
Officer Stone: in Chandanmal v HMRC [2012] UKFTT 188 (TC) the Tribunal excluded significant parts of Officer Stone’s
generic witness statement on the grey market on the basis that it was opinion.
(2)
Officer Arnold’s witness statements were
littered with matters stated as fact which when examined were no more than her
opinions and, therefore, irrelevant.
(3)
Officer Downer’s evidence had no relevance to
the Appellants or any of the parties named in the transactions, alleged
contra-transactions or alleged FCIB money chains.
40.
HMRC pointed out that the Appellants were not seeking
to strike out the entire evidence of those named officers but parts of it which
the Appellants have not identified. HMRC contended there was no basis for
excluding any of its evidence, particularly after the evidence had now been
adduced. In HMRC’s view, the questions for the Tribunal in respect of the
evidence were relevance and weight.
41.
The starting point for the Tribunal’s consideration is
the status of opinion evidence in law which is covered by section 3 of the
Civil Evidence Act 1972 and provides as follows:
“Admissibility of expert opinion and
certain expressions of non-expert opinion.E+W
(1) Subject to any rules of court made
in pursuance of this Act, where a person is called as a witness in any civil
proceedings, his opinion on any relevant matter on which he is qualified to
give expert evidence shall be admissible in evidence.
(2) It is hereby declared that where a
person is called as a witness in any civil proceedings, a statement of opinion
by him on any relevant matter on which he is not qualified to give expert
evidence, if made as a way of conveying relevant facts personally perceived by
him, is admissible as evidence of what he perceived.
(3)
In this section “relevant matter” includes an issue in the proceedings in
question”.
42.
Section 5 of the 1972 Act defines civil proceedings as
including proceedings before any Tribunal in relation to which the strict rules
of evidence apply.
43.
The Tribunal makes the following observations on
section 3 and the Chandanmal decision:
(1)
There is a category of non-expert opinion
evidence which is admissible in law, and covers opinions which are a
compendious way of stating the cumulative effect of a number of observations
that may have not registered in the witness’s mind individually.
(2)
The First Tier Tribunal (Tax Chamber) is not a
Tribunal to which the strict rules of evidence apply. Rule 15(2)(a) permits the
Tribunal to admit evidence whether or not the evidence would be admissible in a
civil trial in the United Kingdom.
(3)
The context of the applications in Chandanmal
was different from that made in this Appeal. Chandanmal was a case
management hearing where the likelihood of a substantive hearing was at least
12 months in the future. The powers available to the Tribunal in Chandanmal were
wider than those open to this Tribunal in dealing with post hearing
applications for exclusion. Those powers related to the control of the evidence
to be presented at the substantive hearing as given under rule 15(1)(a-e) of
the Tribunal Rules 2009. Thus, although this Tribunal might disagree with Chandanmal
regarding the characterisation of specific types of evidence as
inadmissible, this Tribunal acknowledges that the decisions reached in Chandanmal
were justified in accordance with its wider powers and the overall objective of
dealing with cases fairly and justly.
44.
The Tribunal considers the Appellant’s application was
inherently contradictory in requesting the exclusion of evidence, which had
already been admitted. The argument that evidence is opinion was not a show
stopper on the issue of admissibility. Such evidence may be admitted either
under section 3 of the 1972 Act or under Tribunal powers in rule 15(2)(a). The
Tribunal agrees with HMRC that the evidence complained of by the Appellants was
a matter of an assessment of its probative worth rather than its admissibility.
45.
The Tribunal’s assessment of the probative worth of the
statements of Officers Stone, Arnold and Downer is hampered somewhat by the
generalized nature of the Appellants’ application. The Tribunal makes the
following observations in respect of the three witnesses named by the
Appellants.
(1)
Officer Stone made three witness statements. The
Appellants’ objection was restricted to his first witness statement which was
described as generic. The first witness statement has five sections:
Background and Experience, How MTIC Fraud Works, Typical Features of MTIC
Fraud, HMRC’s Measures against MTIC Fraud, The Effect and Extent of MTIC Fraud.
The statement was factual on HMRC’s dealings with MTIC fraud and derived from
Officer Stone’s extensive experience in this area. Officer Stone was
cross-examined on his first witness statement on HMRC’s policy on assessing traders
caught up in MTIC trades, defaulting traders and the nature of contra-trading.
The Tribunal’s assessment of Officer Stone’s first witness statement was that
it was relevant and had some probative worth to the issues in this Appeal by
providing an overall background to the nature of MTIC fraud and HMRC’s policy
in this area. The Appellants’ cross examination supported the Tribunal’s
assessment. The Tribunal, however, acknowledges that the value of the first
statement in establishing whether or not the Appellants had the required
knowledge or their transactions were connected to fraud was at the margins.
(2)
Officer Arnold supplied four witness statements,
one statement for each Appellant on the outcomes of the extended verification
exercise, and two statements in response to those made by the Appellants’
director, Mr Souter. Officer Arnold’s evidence carried high probative worth to
the issues in this Appeal, in particular, the tracing of the Appellants’
disputed deals, and the manner in which the Appellants conducted their
business. The Tribunal is in difficulty in answering the Appellants’ objections
which were phrased in general terms. The Tribunal disregarded those individual
comments of Officer Arnold which
fell within the Tribunal’s remit of making conclusions on the facts.
(3)
Officer Downer’s evidence concerned Operation
Ghast which was an ongoing HMRC criminal investigation of traders engaged in
MTIC fraud. The investigation was prompted by the discovery of two CDs which
contained details of the contrived nature of the fraud, including the deal
chains, and pro-forma documentation and has resulted in the conviction of the
ring leaders who have been sentenced to terms of imprisonment. Officer Downer
also provided a statement on Worldwide Logistics, a freight forwarder in Holland, whose director Mr Monster has admitted taking care of fictitious consignments. Officer
Downer’s evidence showed a connection of FAF International, KOM Team SARL and
A-Z Mobile Accessories (suppliers and contra trader in the Appellants’ deals)
to Worldwide Logistics, and Morganrise (a contra-trader) to Operation Ghast. In
this respect Officer Downer’s evidence went to HMRC’s proposition of an overall
scheme to defraud public revenue. The Tribunal, however, accepts that Officer Downer’s
evidence was of minimal probative worth to the issues in this Appeal.
Amended Statement of Case
46.
The Appellants contended that they were confused by
HMRC’s case. They referred to Mr Souter’s cross examination, where according to
the Appellants, HMRC put forward different persons as potential perpetrators of
the fraud; T3K, The Broburgs, and the person behind Bulat and Biscay.
47.
The Appellants contended that none of the above was
pleaded by HMRC in its amended statement of case. The Appellants, therefore,
invited the Tribunal to limit consideration of what Mr Souter knew to those
matters set out in the statement of case. In support of its invitation the
Appellants cited from the judgment of Lord Millett in Three Rivers District
Council v Governor and Company of the Bank of England (No.3) [2003] 2 AC 1,
HL.:
“183 The rules which govern both
pleading and proving a case of fraud are very strict. In Jonesco v
Beard [1930] AC 298 Lord Buckmaster, with whom the other members of the
House concurred, said, at p 300:
"It
has long been the settled practice of the court that the proper method of
impeaching a completed judgment on the ground of fraud is by action in which, as
in any other action based on fraud, the particulars of the fraud must be
exactly given and the allegation established by the strict proof such a charge
requires".
184. It is well established that
fraud or dishonesty (and the same must go for the present tort) must be
distinctly alleged and as distinctly proved; that it must be sufficiently particularised;
and that it is not sufficiently particularised if the facts pleaded are
consistent with innocence: see Kerr on Fraud and Mistake 7th ed (1952),
p 644; Davy v Garrett (1878) 7 Ch 473, 489; Bullivant v Attorney
Genera; for Victoria [1901] AC196; Armitage v Nurse [1998] Ch 241,
256. This means that a plaintiff who alleges dishonesty must
plead the facts, matters and circumstances relied on to show that the defendant
was dishonest and not merely negligent, and that facts, matters and
circumstances which are consistent with negligence do not do so.
185. It is important to appreciate
that there are two principles in play. The first is a matter of pleading. The
function of pleadings is to give the party opposite sufficient notice of the
case which is being made against him. If the pleader means
"dishonestly" or "fraudulently", it may not be enough to
say "wilfully" or "recklessly". Such language is equivocal.
A similar requirement applies, in my opinion, in a case like the present, but
the requirement is satisfied by the present pleadings. It is perfectly clear
that the depositors are alleging an intentional tort.
186. The second principle, which is
quite distinct, is that an allegation of fraud or dishonesty must be
sufficiently particularised, and that particulars of facts which are consistent
with honesty are not sufficient. This is only partly a matter of pleading. It
is also a matter of substance. As I have said, the defendant is entitled to
know the case he has to meet. But since dishonesty is usually a matter of
inference from primary facts, this involves knowing not only that he is alleged
to have acted dishonestly, but also the primary facts which will be relied upon
at trial to justify the inference. At trial the court will not normally allow
proof of primary facts which have not been pleaded, and will not do so in a
case of fraud. It is not open to the court to infer dishonesty from facts which
have not been pleaded, or from facts which have been pleaded but are consistent
with honesty. There must be some
fact which tilts the balance and justifies an inference
of dishonesty, and this fact must be both pleaded and proved”.
48.
HMRC disputed that it was required to plead precisely
what the Appellants knew or did not know. HMRC submitted that the Tribunal
should consider all relevant evidence. HMRC could not be expected to know
precisely how any fraud worked. In HMRC’s view, the Appellants have had
sufficient opportunity to understand and meet the evidence called by it. HMRC
relied on the decision of Mr Justice Briggs in Megtian Limited v The
Commissioners for HM Revenue & Customs [2010] EWHC 18 (Ch) who stated that there were likely to be many
cases where a participant in a sophisticated fraud was shown to have knowledge
that his transaction was connected with a fraud without knowing the precise details
of the fraud being perpetrated.
49.
The Tribunal considers that HMRC has misunderstood the
scope of the Appellants’ representations. The Tribunal understands the
Appellants’ submission to be that the Tribunal should limit its consideration
to those matters set out in the amended statement of case. By way of
illustration the Appellant has cited three matters raised in HMRC’s cross
examination which they say painted a more embellished fraud than that portrayed
in the statement of case. HMRC have regarded the three matters as the limit of
the Appellants’ submission and argued that it could not be expected to know
precisely how the fraud was instigated.
50.
The Tribunal agrees with the thrust of the Appellants’ submission that
HMRC was required to particularise its case against them. The Tribunal,
however, differs from the Appellants about the detail that should be included
in the statement of case, In the Tribunal’s view, a statement of case is of
necessity a summary of the evidence and sets out the essential propositions
upon which HMRC relies to establish its case. The Tribunal considers that HMRC
is entitled to expand on its case by the exchange of witness statements and
opening submissions. In this respect the Tribunal relies on the judgment of Lord
Woolf MR in McPhilemy v. Times Newspapers Ltd [1999] 3 All ER 775 at
792-3:
“The need for extensive pleadings including
particulars should be reduced by the requirement that witness statements are
now exchanged. In the majority of proceedings identification of the documents
upon which a party relies, together with copies of that party’s witness
statements, will make the detail of the nature of the case the other side has
to meet obvious. This reduces the need for particulars in order to avoid being
taken by surprise. This does not mean that pleadings are now superfluous.
Pleadings are still required to mark out the parameters of the case that is
being advanced by each party. In particular they are still critical to identify
the issues and the extent of the dispute between the parties. What is
important is that the pleadings should make clear the general nature of the
case of the pleader. This is true both under the old rules and the new rules.
As well as their expense, excessive particulars can
achieve directly the opposite result from that which is intended. They can
obscure the issues rather than providing clarification. In addition, after
disclosure and the exchange of witness statements pleadings frequently become
of only historic interest.”
51.
HMRC’s amended statement of case included the following contentions:
(1)
The actions of the Appellants formed part of an overall scheme to
defraud (paragraph 53).
(2)
…. the true nature of the deals can be seen as part of a contrived
scheme to defraud the revenue (paragraph 58).
(3)
…..it is possible properly for there to be differences in the treatment
of traders in the supply chain (paragraph 59).
(4)
The transactions formed part of transaction chains in which one or more
of the transactions were connected with fraudulent evasion of VAT, and both
Appellants …. knew or should have known of that fact.(paragraph 75).
52.
HMRC did not depart from the above contentions at the hearing. The
amended statement of case was supplemented by 79 witness statements served on
various dates between February 2009 and October 2012, with the overwhelming
majority served by the middle of 2011. The three matters complained of (T3K, The Broburgs, and the person behind Bulat and Biscay) were
covered in the witness statements of Officers Arnold, Stone and Henderson.
53.
The Tribunal is satisfied that HMRC had fairly and squarely pleaded its
case and the Appellants were clearly aware of the case against them. The
Tribunal sees no reason to restrict their consideration to what was set out in
the amended statement of case, and agrees with HMRC that it should base its
decision on all relevant evidence.
Consideration
The Law
54.
A taxable person is entitled to deduct VAT paid in respect of supplies
of goods made to him used for the purposes of his business (art. 168 Council
Directive 2006/112/EC (formerly art. 17 Sixth VAT Directive)).
55. The Court of Justice in the
joint cases of Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C-439/04
and C-440/04) established an exception to the right to deduct when the trader
knew its transactions were connected to fraud. The Court stated at paragraph 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.”
56.
The Court of Justice concluded at paragraph 59:
“... it is for the referring court to refuse
entitlement to the right to deduct where it is ascertained, having regard to
objective factors, that the taxable person knew or should have known that, by
his purchase, he was participating in a transaction connected with fraudulent
evasion of VAT, and to do so even where the transaction in question meets the
objective criteria which form the basis of the concepts of ‘supply of goods
effected by a taxable person acting as such’ and ‘economic activity.”
57. The Court of Appeal in Mobilx
Limited & Others v The Commissioners for Her Majesty’s Revenue &
Customs [2010] EWCA Civ 517 clarified the test in Kittel
“59.The test in Kittel is simple and should
not be over-refined. It embraces not only those who know of the connection but
those who “should have known”. Thus it includes those who should have known
from the circumstances which surround their transactions that they were
connected to fraudulent evasion. If a trader should have known that the only
reasonable explanation for the transaction in which he was involved was that it
was connected with fraud and if it turns out that the transaction was connected
with fraudulent evasion of VAT then he should have known of that fact. He may
properly be regarded as a participant for the reasons explained in Kittel.
60. The true principle to be derived from Kittel
does not extend to circumstances in which a taxable person should have known
that by his purchase it was more likely than not that his transaction was
connected with fraudulent evasion. But a trader may be regarded as a
participant where he should have known that the only reasonable explanation for
the circumstances in which his purchase took place was that it was a
transaction connected with such fraudulent evasion.”
58. Under the test in Kittel the
requisite state of knowledge is that which existed at the time the Appellants
entered into the disputed transactions. Further HMRC has to establish the
requisite state of knowledge for each of the disputed transactions. This,
however, does not mean that the Tribunal must look at each transaction in
isolation. The Tribunal is entitled to examine all the available and relevant
evidence when determining the Appellant’s state of knowledge, otherwise termed
as the big picture approach. The authority for this proposition is derived from
Lord Justice Moses’ endorsement
of Mr Justice Christopher Clarke’s dicta in Red12 v HMRC [2009] EWHC 2563:
“109 Examining individual transactions on their
merits do not, however, require them to be regarded in isolation without regard
to their attendant circumstances and context. Nor does it require the tribunal
to ignore compelling similarities between one transaction and another or
preclude the drawing of inferences, where appropriate, from a pattern of
transactions of which the individual transaction in question forms part, as to
its true nature e.g. that it is part of a fraudulent scheme. The character of
an individual transaction may be discerned from material other than the bare
facts of the transaction itself, including circumstantial and “similar fact”
evidence. That is not to alter its character by reference to earlier or later
transactions but to discern it.
110 To look only at the purchase in respect of which input tax was sought to be
deducted would be wholly artificial. A sale of 1,000 mobile telephones may be
entirely regular, or entirely regular so far as the taxpayer is (or ought to
be) aware. If so, the fact that there is fraud somewhere else in the chain
cannot disentitle the taxpayer to a return of input tax. The same transaction
may be viewed differently if it is the fourth in line of a chain of
transactions all of which have identical percentage mark ups, made by a trader
who has practically no capital as part of a huge and unexplained turnover with
no left over stock, and mirrored by over 40 other similar chains in all of
which the taxpayer has participated and in each of which there has been a
defaulting trader. A tribunal could legitimately think it unlikely that the
fact that all 46 of the transactions in issue can be traced to tax losses to
HMRC is a result of innocent coincidence. Similarly, three suspicious
involvements may pale into insignificance if the trader has been obviously
honest in thousands.
111 Further 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.”
59.
The Appellants in their Closing Submissions raised two
legal arguments. The first was that the refusal of their right to deduct was
contrary to the EU law principles of non discrimination/equal treatment.
The Tribunal will consider this argument at the end of its deliberation.
60.
The second argument was that the decision of the Court of Appeal in Mobilx
failed to address the issue raised by Lewison J in Revenue
and Customs Commissioners v Livewire Telecom Ltd [2009] STC 643 in respect of Kittel v. Belgian State [2008] STC 1537, that the
English translation did not accurately convey the decision of the ECJ with
regard to the relationship between the taxpayer claiming input tax on his
purchases and the defaulting trader. Lewison J stated at paragraph 61:
“Overall, it is arguable that these
nuances in the English translation convey the impression of a rather less
intimate involvement in the fraud than the French text seems to require.
However this was not fully argued, so I proceed on the basis that the
translation is accurate”.
61.
The Appellants submitted that the French version supplied the correct
interpretation of Kittel, namely, the relationship between the taxpayer
and defaulter had to be one of counterparties. Thus HMRC was not entitled to
deny the Appellants’ input tax claim because they did not purchase the mobile
phones direct from the defaulting trader. The Appellants stated that the
European Commission in its written representations to the ECJ in Bonik
C-285/11 gave support to their understanding of the French translation of
the Kittel judgment. Finally the Appellant suggested that the Upper
Tribunal in POWA v HMRC [2012] UKUT 50, did not consider the amended
French legislation which had been enacted purely as a result of the Kittel
decision when it rejected the apparent differences between the English and
French versions of the Kittel judgment.
62.
HMRC argued that the Tribunal was bound by the decision
of the Court of Appeal in Mobilx which at paragraph 62 stated that
“The principle of legal certainty provides no
warrant for restricting the connection, which must be established, to a
fraudulent evasion which immediately precedes a trader's purchase. If the
circumstances of that purchase are such that a person knows or should know that
his purchase is or will be connected with fraudulent evasion, it cannot matter
a jot that that evasion precedes or follows that purchase. That trader's
knowledge brings him within the category of participant. He is a participant
whatever the stage at which the evasion occurs.”
63.
In Powa (Jersey) Ltd v The Commissioners for Her
Majesty's Revenue & Customs [2012] UKUT 50 (TCC) Mr Justice Roth
concluded at paragraph 39:
“…the judgment of the Court of
Appeal is clear authority, binding on the Upper Tribunal, that the fact that
the trader claiming credit for input tax did not deal directly with a
fraudulent trader but was more remote in the chain does not preclude his being
denied repayment under the rationale of Kittel .”
64.
Mr Justice Newey followed Mr Justice Roth’s conclusion
on this point in S & I Electronics PLC v The Commissioners for Her
Majesty's Revenue & Customs [2012] KUT 87 (TCC) at paragraphs 20–30.
65.
HMRC also referred to two recent judgments of the Court
of Justice which showed that the application of the Kittel principle was
not confined to transactions immediately connected to the fraud. The first
concerned the combined cases of Mahageben kft (C80/11) and Peter
David (C142/ 11). the Court of Justice said at paragraph 45:
“ In those circumstances a taxable
person can be refused the benefit of the right to deduct only on the basis of
the case law resulting from paragraphs 56 – 61 of Kittel and Rocalta Recycling
according to which it must be established, on the basis of objective factors,
that the taxable person to whom were supplied the goods or services which
served as the basis on which to substantiate his right to deduct knew or ought
to have known that the transaction was connected with fraud previously
committed by the supplier or another trader at an earlier stage in the
transaction”.
66.
At paragraph 49 The Court of Justice repeated the same formulation
that “the transaction was connected with fraud previously committed by the
supplier or another trader at an earlier stage in the transaction”..
67.
The second judgment was in Gabor Toth (C324/11).
The Court of Justice said at paragraph 53:
“Having regard to the foregoing
considerations, the answer to the fourth question is that, where the tax
authority provides specific evidence of the existence of fraud, Directive
2006/112 and the principle of tax neutrality do not preclude the national court
from verifying, on the basis of an overall examination of the circumstances of
the case, whether the issuer of the invoice carried out the transaction in
question himself. However, in a situation such as that at issue in the main
proceedings, the right to deduct may be refused only where it is established by
the tax authority, on the basis of objective evidence, that the addressee of
the invoice knew or should have known that the transaction relied on as a basis
for the right to deduct was connected with a fraud committed by the issuer or
another operator supplying inputs in the chain of supply”.
68.
The Tribunal agrees with HMRC’s submission that it was bound by both
the Court of Appeal judgment in Mobilx and the Upper Tribunal decisions
in Powa (Jersey ) Ltd and S & I Electronics PLC in
that the Kittel judgment was not confined to perpetrator of a fraud and
the witting counterparty of such a perpetrator. The Tribunal considers that the
recent decisions of the Court of Justice in Mahageben kft and Gabor Toth removed any doubt in this matter that may have arisen by the
different language translations of the Kittel decision.
The Facts
69.
The Appellants’ principal case was that they did not know or ought to
have known their transactions were connected to fraud. The Appellants
questioned whether HMRC had proved the existence of a tax loss in deals 25-27,
and the connection of a Libra Graphics transaction in deal 29 with a tax loss.
70.
The Tribunal intends to consider the merits of the Appellant’s specific
issues on tax loss after it has examined HMRC’s proposition that the
Appellants’ transactions were the product of orchestration by fraudsters as
part of an overall scheme to defraud the public revenue as opposed to
transactions that occurred in an ordinary commercial market.
Overall Scheme to Defraud
Direct Tax Loss Chains
71.
Officer Arnold traced 16 of the disputed deals to a direct tax loss. The
Appellant accepted the outcomes of the tracing exercise except for deals 25-27
which will be considered later.
72.
The tax loss in the remaining deals (1,5, 8-13, 19, 20, 22-24) was
occasioned by The Taxable Person Purporting to be Lewis Davis Productions,
Lewis Davis Productions, MediaWatch 360 and The Taxable Person Purporting to
be AAA Multilink. The Tribunal is satisfied that the actions of these traders
resulting in the tax loss were fraudulent.
73.
In April 2006 Lewis Davis Productions started trading in the mobile
phone sector which was entirely different from that declared in its
registration documents in February 2006. In a space of two months Lewis Davis
Productions purported to conduct deals in the region of ₤10 million. The
company submitted no VAT returns and company accounts. Lewis Davis Productions
was now in liquidation with a tax loss of £1,770,978.
74.
In relation to deal 1 HMRC was satisfied that the tax loss was
occasioned by a Taxable Person Purporting to be Lewis Davis Productions. The
invoice for this deal was in a different type font, having a different layout
and detailing a different registered address from the invoices for Lewis David
Productions. The fact that the VAT registration of Lewis Davis Productions, a
defaulting trader, had been hijacked by another trader supported the fraudulent
nature of the deal. The Appellants criticised HMRC for accepting the word of an
alleged fraudster from Lewis Davis Productions in deciding that the
registration number had been hijacked. The Appellants, however, did not challenge
Officer Arnold’s tracing of deal one to a fraudulent tax loss.
75.
HMRC discovered that Mediawatch 360 had been engaged in a very large
level of trading for a newly registered company. HMRC’s database showed that
Mediawatch incurred output tax in excess of ₤10 million in the period of
3 April 2006 to 30 May 2006. Despite a number of visits and repeated
correspondence, Mediawatch’s first and only VAT return was submitted in August
2007. Mediawatch had provided no documents to support the trading it purported
to have conducted. Rather HMRC’s assessments have been raised on the basis of
the material obtained from other traders. Mediawatch was also involved in
third party payments. Finally the director of Mediawatch 360 had been
disqualified as a director for a period of 14 years because he caused or
allowed Mediawatch to be involved in MTIC fraud.
76.
Assessments in excess of ₤8 million have been raised against the
Taxable Person Purporting to be AAA Multilink which have not been paid. The use
of a hijacked VAT registration number was fraudulent.
77.
The Tribunal is satisfied that the length and composition of the direct
tax deal chains reinforced HMRC’s proposition of an overall scheme to defraud
the public revenue. All the chains had at least three traders between the
Appellants and the defaulting trader with three deals having five intervening
traders. In each deal Grange Computers was the supplier of mobile phones to the
Appellants. Xchange Communications (12 times), Starmill UK (10 times) and Headcom (7 times) appeared regularly in the chains. Finally traders
played specific roles in the chains. Xchange Communications was the purchaser
from a defaulting or hijacked trader. Stardex, Starmill and Headcom were the
suppliers to Grange Computers.
78.
The buffer traders prior to Grange Computers applied consistent mark ups
with round number amounts (generally ₤0.50, ₤1, ₤1.50 &
₤2). The traders that appeared early in the three deal chains of five
members had even smaller mark ups of ₤0.15 and ₤0.20. The mark ups
for Grange Computers and the Appellants were considerably larger than the other
traders in the chains. In the direct tax chains the mark ups for Grange Computer
ranged from ₤1 to ₤8, whilst that for the Appellants was
₤6.80 to ₤14. Finally in deals 1, and 8 to 13 the freight
forwarders released the goods without written instructions which was contrary
to the purported business terms for the traders in those deal chains.
79.
Mr Fletcher found it hard to understand the rational commercial activity
behind longer deal chains. The longer the chain, the smaller the available
margins for each individual trader. Mr Fletcher considered there were two
circumstances in which a longer deal chain might be justified. The
intermediaries were demonstrably adding value to the transaction or that a
trader may find itself in a long deal chain on the first occasion that a deal
was entered into. The Appellants did not assert that the two justifications
identified by Mr Fletcher for the long deal chains applied to the direct tax
chains in this Appeal. The Appellants offered no explanation for the length and
composition for these chains. The Appellants simply stated that they were unaware
of the existence of them. The Appellants only knew of the identity of their
supplier and customer.
80.
The Tribunal agrees with Mr Fletcher’s conclusion. The presence of a
large number of parties suggested that the structure of long deal chains was in
place for another reason unconnected with profit maximisation. Mr Stone’s
evidence on this point provides in the Tribunal’s view the most probable
explanation for the long deal chains, namely that, buffer traders acted as conduits
in holding and transferring title to the consignments concerned, which served
to disguise the overall nature of the fraud by putting distance between the
missing and broker traders.
81.
The Tribunal is satisfied that the fraudulent nature of the direct
chains was demonstrated by its findings on the following matters:
(1)
The chains for deals 1, 5, 8-13, 19, 20, 22-24 were all traced to a
direct tax loss. The position regarding deals 25-27 will be considered later.
(2)
Each loss was occasioned by the fraudulent activities of a missing
trader.
(3)
The contrived nature of each chain including deals 25 – 27 in respect of
length and composition.
(4)
The use of consistent mark ups in small rounded numbers by the buffer
traders, and the flouting of business terms in deals 1, and 8 to 13.
(5)
The structure of long deal chains served to disguise the overall nature
of the fraud by putting distance between the missing and broker trader.
The Contra Trades
82.
The Appellants’ deals 2, 3, 4, 6, 7, 14-18, 21 and 28-29 were traced to
six contra traders (Kwality Trading International, Morganrise, Epinx (also
known as Libra Fair Trades), Jag Tec, A-Z Mobile Accessories and ORIL). The
Appellants did not challenge HMRC’s tracing exercise in respect of the
contra-traders except ORIL in deal 29. In this instance the Appellants argued
that ORIL did not have the characteristics of a contra-trader, a point which
will be examined later by the Tribunal.
83.
HMRC established that the six contra traders were involved in three
schemes of contra-trading:
(1)
Scheme 1 involving contra-trading by A – Z Mobile Accessories, ORIL, Jag
Tec and two additional contra-traders (Red House International Limited and
Starmill International Limited).
(2)
Scheme 2 involving A – Z Mobile Accessories, Epinx, Kwality and other
contra-traders (including BTS Specialised Equipment Limited, Highfield
Distribution International Limited, Intertrade Worldwide Limited, Prime Telecom
Limited, S & R International Limited and Waterfire Limited);
(3)
Scheme 3 involving Morganrise.
84.
In scheme 1 the mobile phones originated with Kom Team, a French trader,
which had been the subject of investigations by French authorities. The
authorities established that Kom Team did not have operational, storage
facilities, assets and staff and had been unable to justify sales transactions
made with traders including A – Z, Red House and Starmill. Kom Team sold the
goods to the five contra-traders. After which the goods went to a group of nine
buffer traders and then onto a group of 32 UK broker traders.
85.
The 32 broker traders exported the goods to five EU traders. With the
exception of three transactions (Communications World selling to Emisfer, and
Stardex selling to Navigo and Mobile Express), all deals involved goods sold to
just two EU traders. Those traders were CEMSA (a Spanish company) and Evolution
(a French company). This outcome was maintained regardless of which UK traders the goods passed through.
86.
HMRC further traced the goods from CEMSA and Evolution to a common
customer of both, Vundera SA of Latvia which had no business establishment in Latvia. Its director from 3 February 2006 was a resident of Spain.
87.
The outcomes of this scheme were that most of the goods originating with
a single French supplier, Kom Team, were sold to a single Latvian customer, Vundera,
via more than 40 different traders both inside and outside the UK. HMRC identified that the EU customers paid more than £8
million by purchasing goods from the UK brokers rather than direct from Kom
Team.
88.
HMRC adduced evidence that A – Z Mobile Accessories and Jag-Tec operated
as dishonest contra-traders, which the Appellants did not dispute. Essentially
A – Z Mobile Accessories was found to have conducted 167 broker transactions in
periods 05/06 and 08/06, of which all but two were traced to a fraudulent tax
loss. A – Z Mobile Accessories disguised the tax losses by offsetting the input
tax claim in the broker transactions against the output tax purportedly payable
on its sales in scheme 1. The net effect was that despite having outputs of
₤425 million in periods 05/06 and 08/06, A – Z Mobile Accessories
remitted a total of ₤83,000 in VAT to HMRC. Likewise in respect of Jag
Tec, its 37 broker deals in period 06/06 were all traced to a fraudulent tax
loss. The amount payable in VAT for period 06/06 was ₤4,000 despite outputs
of ₤110 million.
89.
HMRC also demonstrated that the Cypriot trader RCCI High Tech acted as
both a supplier to Kom Team and a customer of the majority of the goods from
the contra traders in their broker chains which emphasised the connection
between the acquisition and broker transactions of the contra traders and the
overall fraudulent nature of the transactions in scheme 1.
90.
The tax losses connected with the fraudulent activities of A – Z Mobile
Accessories and Jag-Tec were those incurred by Okeda Limited, Eutex Limited, UK
Communications Ltd, D9 Connections Limited, Phone City and The Taxable Person
Purporting to be Wade Tech Ltd.
91.
The Appellant, Libra Graphics, operated as a UK broker in scheme 1 in
three of the disputed deals 18, 21 and 29, which were the only deals in periods
04/06 to 06/06 in which goods were supplied by the Appellants to CEMSA.
92.
Scheme 2 involved 11 contra traders. The mobile phones started with the
trader Chugwater which were then passed through a small set of Tier 2 EU suppliers
to Tier 1 EU suppliers who sold the phones to the contra traders in the UK. The phones then went through nine UK buffers and 36 UK brokers before being sold to an
almost identical set of Tier 1 EU customers (nine of the traders identified as
Tier 1 suppliers were also Tier 1 customers) and then to an identical set of
Tier 2 EU customers (all six traders identified as Tier 2 suppliers were also
Tier 2 customers). The mobile phones finally ended up being sold to a single
customer, Quay SRO, a trader operated, in common with Chugwater, by Vladimir
Karlinsky. In short there was circularity of mobile phones under scheme 2. Also
the increased cost to the EU customers was in excess of ₤2.4 million by purchasing the goods from UK brokers rather than going direct to the EU supplier.
93.
A – Z Mobile Accessories, Epinx, and Kwality were the three contra
traders which had dealings with the Appellants under scheme 2. The Tribunal has
already dealt with the evidence on A – Z mobile Accessories as a dishonest
contra-trader. Epinx transacted 77 broker deals in periods 03/06 and 06/06, 70
of which have been traced directly to fraudulent tax losses. Epinx disguised
the tax losses by offsetting the input tax claim in the broker transactions
against the output tax purportedly payable on its sales in scheme 2. The net
effect was that despite having outputs of ₤290 million in periods 03/06
and 06/06, Epinx remitted a total ₤7,670 in VAT to HMRC in 03/06 and
submitted a repayment claim of almost ₤19,000 in 06/06. Similarly
Kwaility undertook 64 broker transactions in 04/06 and 07/06 periods, of which
63 have been traced directly to tax losses. Kwaility’s VAT liability for these
two periods was just ₤4,000 for total outputs of ₤137 million.
94.
The tax losses connected with the fraudulent activities of Epinx, and
Kwality were those incurred by The Taxable Person Purporting to be Eutex
Limited, The Taxable Person Purporting to be R & M Electrical Wholesalers
Ltd, The Taxable Person Purporting to be the Export Company Limited, Prestige
29 UK limited, Zenith Sports UK Limited and The Taxable Person Purporting to be
1st 4 Reports .
95.
The Appellant, Libra Graphics operated as a UK broker in scheme 2 in
nine of the disputed deals, 2, 3, 4, 7, 14, 15, 16, 17, and 28. These deals
represented the only deals in the periods 04/06 to 06/06 in which Libra
Graphics supplied Elandour and Fremont.
96.
Scheme 3 involved the acquisition of mobile phones by Morganrise from Nordic
SR. Morganrise then sold the mobile phones through a series of buffers to
broker traders which then retailed the mobile phones to three EU traders,
Taglemeer, Derastec, and Spabel Marketing.
97.
The contrived nature of scheme 3 was demonstrated from the decision of
EU traders to purchase goods from UK suppliers at a higher price rather than
from EU suppliers at a cheaper price. HMRC also identified circularity of goods
in certain transactions. Bulat 16 paid £118,170.00 to re-purchase goods which
they had originally sold to Morganrise. The fraudulent character of the scheme
was reinforced by the fact that three key players have now gone missing, Derastec
and Spabel Marketing in Spain, and Nordic SRL in Italy.
98.
The Appellants did not challenge the description of Morganrise as a
dishonest contra-trader. In periods 03/06 and 05/06 Morganrise entered into 114
broker transactions, all of which have been traced back direct to fraudulent
tax losses. The input tax claim of ₤60 million on these broker deals was
partly offset by the output tax liability of ₤42 million on the
acquisition deals.
99.
The tax losses connected with the fraudulent activities of Morganrise were
those incurred by The Taxable Person Purporting to be Wildtower Limited, The
Taxable Person Purporting to be N & M Traders Limited and Premiere
Insurance Services Limited.
100. The Appellant,
Libra Graphics operated as a UK broker in scheme 3 in disputed deal 6. This
deal represented the only deal in the periods 04/06 to 06/06 in which Libra
Graphics supplied Spabel Marketing.
101. The Appellant’s
mark ups in the three contra-trade schemes were considerably higher than that
achieved by the contra-traders whose mark ups were in small amounts and round
numbers. The freight forwarders in deals 7, 15,16 and 17 released goods for
export even though their clients further down the chains had not provided the
requisite instructions in writing.
In common with the direct tax loss chains Grange Computers was the supplier of
mobile phones to the Appellants in each of the disputed deals connected with
the three contra-trading schemes.
102. The Tribunal
finds in relation to the three schemes that
(1)
Overall each scheme showed the same pattern with the mobile phones
passing from a distinct small group of EU suppliers to a distinct small group
of EU customers. In scheme 2 the two groups were almost identical. The
destinations in each scheme were maintained even after the mobile phones had
passed through a larger number of different UK traders.
(2)
There was no commercial reason for the mobile phones to be imported into
the UK. The EU customers consistently paid unnecessarily high prices to UK suppliers for mobile phones which were available more cheaply in mainland Europe.
(3)
Circularity of goods was a prevalent feature throughout the three
schemes.
(4)
The schemes were associated with substantial tax losses
(5)
The tax losses were disguised by the dishonest activities of the
contra-traders which offset the input tax claims in their broker transactions
with the output tax liability in their acquisition transactions.
Money Flows
103. Officer
Henderson gave evidence on the money flows for the Appellants’ disputed deals.
His analysis involved the tracing of the movement of monies in the Appellants’
chains of purchases and sales identified by Officer Arnold from the deal documentation.
Officer Henderson’s analysis was derived from his examination of the First
Curacao International Bank’s (FCIB) records which were called Bankmaster
Plus and the Datastore.
104. Bankmaster Plus
gave a print out of the customer account for each trader banking with FCIB.
During the course of his investigation Officer Henderson was given access to
the information held on the Paris FCIB server which supplemented the data
provided by the trader’s customer account. The narrative on the Paris server
identified the payer of the funds, the date of the payment, the timing of the
payment, the address of the payee, in which country the payee was located, the
account holder’s secret password and from 1 May 2006 the IP address from which
the payment was made.
105. Datastore gave
details of the documents presented by the account holder in support of its
application to open a FCIB current account.
106. HMRC also
adduced evidence from Officer Letherby in respect of the methodology of the
data capture from the FCIB servers. The Appellants did not challenge the
methodology and the integrity of the data captured.
107. HMRC relied on
Officer Henderson’s analysis to demonstrate the highly contrived and
orchestrated nature of the Appellants’ deal chains which reinforced its primary
contention that the disputed transactions were part of an overall scheme to
defraud public revenue.
108. The Appellants
pointed out that certain deals did not show circularity of funds, and that, in
any event, Mr Souter knew nothing of the movements of monies outside the
Appellants’ immediate transactions. The Appellants contended that the Tribunal
should be wary of Officer Henderson’s evidence which purported to show
circularity of monies because:
(1)
It was not possible to reconcile invoice amounts.
(2)
Officer Henderson just followed the money with no regard to dates on
which the transactions took place.
(3)
Even where circularity was alleged, the chains were broken by money being
transferred out of date sequence.
109. The Tribunal at
this juncture is not concerned with what Mr Souter knew about the movements of
money but about whether Officer Henderson’s evidence supported the primary
contention of an overall scheme to defraud public revenue. In this respect the
Tribunal observes that the Appellants’ challenge was limited to the issue of
circularity. The Appellants did not dispute equally important aspects of
Officer Henderson’s evidence which demonstrated the fraudulent nature of the
deal chains.
110. The Tribunal
finds that Officer Henderson’s analysis revealed that there were 21 traders
from outside the UK which were involved in the money movements and not present
in the invoice chains.
The participation of these 21 traders from outside the UK appeared to serve no commercial purpose, particularly as their monies were funding the
acquisition of mobile phones in and their rapid despatch from the UK.
111. Officer
Henderson’s analysis also showed that these 21 traders were organised into distinct
cells in relation to the Appellant’s direct tax loss chains, and the three
contra-schemes identified by Officer Humphries. Thus:
(1)
Bulat 16V, Poland (12),
Biscay Business , Spain (13), Euro Councel et Development, France (7), Arta
Network, France (10), Derastec, Spain (7), Acquired Solutions, Portugal (2),
MultiMode Marketing, Spain (3), Quebec Inc, Canada (4), and Ixcel SA,
Luxembourg, (4) formed the distinct cell of traders in the direct tax loss
chains.
(2)
Bulat 16V, Biscay Business, and Euro Councel et Development, France
appeared in the money movements connected with Libra Graphics single deal (6)
in contra-trading scheme 3 involving Morganrise.
(3)
Zorba SRO, Slovakia (7), Scorpion Electronics, Portugal (4), Sino Time
Finance Ltd, Hong Kong (4), Global Financial Services Management, British
Virgin Islands (Address in Hong Kong) (8), Avoset, Estonia (3), and Regent,
Poland (3) formed the cell of traders in contra-trading scheme 2 to which nine
of the Appellants’ disputed deals were connected.
(4)
RCCI High Tec, Cyprus, SNV Nationwide, Cyprus, Sia Vundura, Lativia, and
Liban Trust Communications, Lebanon were all involved in the three Appellant’s
transactions connected with contra- trading scheme 1.
112. The analysis of
the Datastore information demonstrated connections between the traders in each
of the cells identified above. Bulat 16V and Biscay Business, key participants
in the direct tax loss chains and contra-trading scheme 3 shared the same
director, a Mr Atanas Goranov, a Bulgarian National living in Spain. In contra-trading scheme 1 SNV Worldwide (a Cypriot registered company) and Sia
Vundera (a Latvian registered company) both had a British director and
beneficial owner. Global Financial Services Management and Sino Time Finance
Limited, participants in contra-trading scheme 2 shared the same address in Hong
Kong at Suite 811, Tsimshatsui Centre, East Wing, 66 Mody Road, Hong Kong. Both companies also had British directors and beneficial owners.
113. Of the remaining
four companies in scheme 2,
Zorba and Regent shared the same beneficial owner, Sebastian Davalos, a native
Swede but living in Marbella, Spain. All four, Zorba SRO, Scorpion Electronics,
Avoset and Regent, however, were linked together through their connection with
Joakim Broburg. Mr Broburg provided references for Mr Davalos and Mr Neuvonen,
the beneficial owner of Avoset, to open FCIB accounts. The company, Scorpion
Electronics, had the same address as Coberg Trading, which was one of Mr Joakim
Broburg’s companies.
114. Joakim Broburg
was recorded in the Spanish Companies Register as the director of Total Telecom
Espana SL from 20 September 1999 to at least 17 April 2002, when the company
was transferred to Dome International in Gibraltar. According to Officer Stone,
all the transactions involving Total Telecom were vitiated by MTIC fraud,
resulting in tax losses exceeding ₤17 million. On 5 September 2003
Officer Stone assessed Total Telecom for unpaid VAT in the sum of
₤1,027,941. The period covered by the assessment was 23 February 2002 to
5 July 2002. Officer Stone stated that it was within his knowledge that during
2005 and 2006 Joakim Broburg continued to feature in subsequent MTIC frauds and
that he administered a number of conduit companies in other EU Member States.
115. Mr Souter
asserted that Frederik Broburg, the brother of Joakim Broburg, was the director
of Total Networks at the time of its involvement in MTIC fraud. Officer Stone
was unaware of the separate existence of Frederik until Mr Souter’s fourth
witness statement dated 20 June 2011, when Mr Souter produced copies of the
respective identification cards for Frederik and Joakim. Up to that point
Officer Stone believed that Joakim and Frederik were one and the same person.
Despite the separate existence of Joakim and Frederik, Officer Stone still
maintained that Joakim was the brother in charge of Total Telecom in 2002 and
the principal protagonist in the fraud.
Mr Souter disagreed, stating that Joakim Broburg informed him that he sold his
interest in Total Telecom to his brother, Frederik in 1999. The Tribunal
prefers Officer Stone’s evidence regarding Joakim Broburg’s involvement with
Total Telecom which was substantiated by records of the Companies’ Register in Spain. In contrast Mr Souter’s assertions were based on uncorroborated conversations with
Joakim Broburg.
116. Zorba SRO,
Scorpion Electronics, Avoset and Regent were four of the Tier 2 EU customers
and suppliers in contra-trading scheme 2. Officer Humphries identified. two
other Tier 2 traders, Valdemara Electronics and Estocom Distribution which were
not involved in the money flows associated with the Appellants’ transactions.
The director and beneficial owner of Valdemara and Estocom was a Mr Alex Leroy
who held the position of Vice President of Sales with Total Telecom and was,
therefore, also, connected with Joakim Broburg. Finally the trader, FAF
International which featured prominently in the deals conducted by Libra
Graphics in scheme 2 was linked to Joakim Broburg through a Mr Tommi Neuvonen.
117. The final aspect
of Officer Henderson’s analysis which was not challenged by the Appellants was
the use of third party payments in the direct tax loss chains which had the
effect of ensuring that the defaulting traders did not have the monies to pay
for the consignments of mobile phones supplied to them.
118. Turning now to
circularity of funds Officer Henderson identified circularity in 25 of the 29
deals entered into by the Appellants,
taking into account companies which were linked. For example Bulat 16V and
Biscay Business which had the same beneficial owner, and Sino Time and Global
Financial Services Management which were both British owned companies based at
the same address in Hong Kong.
119. The Appellants
criticised the analysis, arguing that Officer Henderson just followed the money
and ignored contrary indications in respect of invoice amounts and transaction
dates.
120. The Appellants’
assertion that Officer Henderson just followed the monies was simplistic. In
re-examination Officer Henderson was asked to explain his methodology. He
stated that he would start with the Appellants’ customer to trace the money to
the UK acquirer, and back from the customer. Officer Henderson placed reliance
upon the narrative of the transactions provided by the Paris Server rather than
the timings of the transactions. This meant that he would prefer the
transaction identified by the narrative rather than the one which was closer in
time. Where there was no narrative Officer Henderson identified the best match
on the information he had before him. Officer Henderson also stated that there
were three extracts of the Paris Server. He had found that payments made late
on a night were recorded in another extract as being made on the following day.
121. The Tribunal
considers that Officer Henderson was correct to place reliance on the narrative,
and that his analysis can be followed through primary documentation. The
Appellants in their cross-examination put no tracing error to Officer
Henderson. On balance the Tribunal is satisfied that there was a circularity of
monies in 25 of the 29 disputed transactions.
122. The Tribunal’s
conclusion on circularity is supported by Officer Humphries’ findings on
circularity of goods in contra trading schemes 2 and 3 which were ascertained
from the examination of the records held by the freight forwarder. Officer
Henderson found circularity of monies in all the Appellants’ deals connected to
contra trading schemes 2 and 3,
123. The Tribunal is
satisfied that HMRC analysis of the data retrieved from the FCIB servers
demonstrated the fraudulent and orchestrated nature of the transactions to
which the Appellants’ deals were connected. The findings on the involvement of
21 traders outside the UK in these transactions, their organisation into cells
and their connections with each other, the use of third party payments, and the
circularity of monies supported the existence of an overall scheme to defraud
public revenue.
IP Addresses
124. In respect of each payment made between FCIB accounts after 1 May
2006, the data uplifted showed which authorised signatories’ account (denoted
by an account number) was used for each payment (denoted by its EB number), and
which IP address the payment instruction was made from. HMRC exhibited its analysis
of IP addresses used at Schedule L to its closing submissions.
125. Most accounts have only one authorised signatory account, for
example. Libra Tech and Graphics each have a single authorised signatory on
their account (for Libra Tech, Christian Souter with a reference of 22806685;
and for Libra Graphics, Christian Souter with a reference of 64631711). From
that evidence HMRC accepted it was not possible to identify the physical person
using the account in the name of the authorised signatory because the account
name and password could be provided to another person.
126. Officer Henderson
identified the use of same IP addresses by different traders in 12 of the 13
money chains analysed. For example in deal 25 the same IP address 207.195.242.16 was used on 6
June 2006 by Biscay Business for a payment at 18:27:06, by Bulat 16V for a
payment at 18:36:05, by Derastec for a payment at 18:54:07, by Eurotronics at
19:15:14 and by Libra Tech at 19:18:04.
127. HMRC accepted that the evidence did not show that all IP addresses
were identical and was, therefore, not consistent with a single mastermind sitting
at a single computer controlling all the various payments. In HMRC’s view this
was unsurprising because a scheme of this nature was likely to have required
more than a single individual. Further HMRC did not attempt to explain why
certain IP addresses were common and not others (for example, Grange Computers,
the Appellants’ supplier never had a common IP address with any other traders).
HMRC, however, relied on the consistencies in the use of IP addresses as
further evidence of coordination and contrivance. In this respect HMRC relied
on the evidence of Officer Letherby who explained that the use by traders of
the same IP addresses indicated a greater level of contrivance than would be
expected from an otherwise unrelated business.
128. HMRC pointed out that further support for coordination was found in
the use of the same portoloco email addresses in account opening forms
by two customers of the Appellants: Nova 2000 and Spabel Marketing.
129. The Appellants
argued that the evidence on IP addresses was inconclusive about whether there
was some sort of collusion between several parties. The Appellants pointed out
that Officer Letherby had identified six possible explanations for the
recording of the same IP addresses on the FCIB banking system. Mr Souter identified
two more possibilities, namely that, the FCIB information was corrupted due to
it being a copy of a copy. Next, the IP addresses were those of FCIB’s own
servers which account holders log on before connecting to the transactions
server. In respect of the latter, the Appellants pointed out that Officer
Letherby had accepted there were other servers in several locations (London, Paris, Kuala Lumper) linked to the FCIB system, which allowed them to connect to
Dutch and Paris servers. According to the Appellants it was a possibility that
the IP addresses recorded were those of FCIB’s own remote servers through which
the traders have accessed their accounts, or that the same Internet Service
Provider had been used.
130. The Appellants also
identified that the IP address for Eurotronics, the Appellants’ customer, had
switched between two addresses for which Officer Henderson could offer no
explanation. Further the evidence showed that in those deals which were
characterised by the use of common IP addresses, there were also other IP
addresses logged into by different traders, which went against the proposition
of a single controlling mind.
131. The Tribunal
starts with the possible explanations for the use of common IP addresses by
different traders. Mr Souter’s two additional explanations were not put to
Officer Letherby. The Tribunal notes that the Appellants made no challenge to
the integrity of the data capture from the FCIB servers, which undermined Mr
Souter’s potential explanation of data corruption. In respect of Mr Souter’s
second explanation it appeared to be a variant of Officer Letherby’s potential
explanations d) and e).
132. On explanation
d) which concerned the use of common proxy servers, Officer Letherby said in
re-examination:
“It would require some degree of coincidence or some
considerable collaboration between the parties for them to use the same server
for the same transaction chain at the same time, effectively or within close
proximity to each other. It stretches the realms of possibility of random
choice”.
133. On explanation
e) which concerned the use of a common mobile data connection from a common
provider:
“…it is unlikely that someone overseas would choose
to use, particularly for a business transaction where financial cost of
initiating the transaction actually is a direct concern, that they would use an
exponentially expensive service in favour of local internet provision or mobile
phone internet provision”.
134. The Tribunal
considers that the common thread throughout Officer Letherby’s explanations was
that the pre-requisite for a shared use of IP addresses was that there must
have been some degree of co-operation, discussion or commonality between the
various parties so using. It follows that such co-operation was inconsistent
with a portrayal of a market of individual traders competing with each other to
secure the best deal. Thus the use of common IP addresses was strong evidence
that the traders concerned were not trading at arms length.
135. The Tribunal is
entitled to look at the evidence on IP addresses in context of the other
evidence on the overall fraudulent scheme. The findings on the connections
between the parties as disclosed in the contra-trading schemes and the FCIB
Datastore replicated those found in the analysis of IP addresses. Thus Bulat
1.6V and Biscay used the same IP addresses, whilst the tier 2 EU customers and
suppliers of contra-trading scheme 2 were shown to be sharing IP addresses
(Zorba &Avoset; Regent & Avoset).
136. Schedule L
showed that the Appellants used the same IP address as its principal customer,
Eurotronics, and with a number of other companies involved in the deals
(Kwality Trading, Bulat 16V, Avoset, and Headcom) of which the Appellants
asserted they had no knowledge.
137. The Tribunal finds
that the Appellants’ attempts to undermine the specifics of Officer Henderson’s
evidence on common IP addresses were unsuccessful. The Appellants did not
explain the significance of their observation that Officer Henderson was unable
to offer an explanation for Eurotronics switching its IP addresses. The
Appellants’ submission about the non-existence of a controlling mind did not
weaken HMRC’s case on the significance of the shared used of IP addresses. HMRC
relied on shared IP addresses to demonstrate an uncommon degree of co-operation
between supposedly independent traders as opposed to proving the presence of a
single controlling mind behind the fraud.
138. The Tribunal
decides that the use of common IP addresses by a disparate set of traders
purportedly trading at arms length was powerful evidence of contrivance,
particularly when examined in the context of the other evidence on overall
scheme of the Appellants’ deals.
The Appellants’ Customers
139. The Appellants’ customers
in the disputed deals were known to their domestic authorities for involvement
in fraud, except CEMSA. HMRC provided no evidence of the Spanish authorities’
view of CEMSA’s trading activities. Instead HMRC relied on Officer Humphries’
evidence of CEMSA’s involvement in contra-trading.
140. Eurotronics
although registered in Denmark, the Danish authorities have identified no known
bank accounts or sales of goods in that country. Having been registered on 31
January 2006, the trader was deregistered by the trustee on 12 February 2007.
141. Nova 2000 was
registered in Spain for VAT on 13 January 2005 and has been deregistered as a
missing trader on 25 September 2006.
142. Elandour
Development was registered in France. The trader failed to comply with an audit
to cover the period 25 October 2005 to 31 August 2006. The director was a Dutch
national with no obvious links to France. The French authorities considered
Elandour to be a missing trader.
143. Fremont Europe
Associates was registered in Spain for VAT on 20 December 2004. This trader was
deregistered on 10 October 2006 on the basis that it did not have business
premises at the declared domicile. A partner in Fremont, Jean Michel Francois
Hochart, was also a director of the UK company, Iibizco Components Limited,
which has been deregistered as a missing trader.
144. Spabel Marketing
was registered in Spain. This trader was deregistered on 27 April 2006 on the
basis that the company was not located at its declared domicile.
145. CEMSA was
registered in Spain. Officer Humphries identified the role of CEMSA in
contra-trading scheme 1. According to Officer Humphries the cost to CEMSA (in
Spain) and Evolution (in France) of buying goods from UK traders in this
period, rather than purchasing them from the originating French trader, was
£8.3million which made no commercial sense.
146. The Tribunal
finds that all but one of the Appellants’ customers was deregistered for VAT by
their respective domestic tax authorities in the period of April to June 2006
when the disputed deals took place. The Tribunal agrees with HMRC that the deregistration
and its timing were further proof of a fraudulent scheme to defraud public
revenue.
Deals 25-27 (Teknic Limited)
147. The Appellants
argued there was no tax loss in deals 25 - 27.
148. Deals 25 and 26
concerned Libra Tech and took place on 30 and 31 May 2006. Deals 25 and 26 involved
the separate purchase and sale of 5,000 Nokia 8800 mobile phones, whilst deal
27 involved a consignment of three different models of mobile phones (2000
Nokia N91, 2250 Nokia 9300i and 2259 Nokia N80. The supply chains leading to
Libra Tech in these three deals comprised the same traders: Profiteksas (Lithuania) – The Taxable Person Purporting to be Teknic Ltd – Infotel Communications –
Fonedealers –Caz Distribution – Headcom – Grange Computers – Libra Tech.
149. Officer Arnold traced
the connections between the various parties identified in paragraph 148 above
and Libra Tech’s exports from documentation seized from the freight forwarder
(Pallet Network UK) which was used by Libra Tech in deals 25-27. Mrs Arnold had
requested a visit of the freight forwarders because Infotel had been
deregistered from VAT in April 2006. The documents seized included:
(1)
Release notes dated 30 May 2006 from Profiteksas which recorded for
deals 25 & 26
a consignment of 10,000 Nokia 8800 mobile phones with the supplier being
Multimode Marketing SLC, and Teknic as the customer. In respect of deal 27
there were separate release notes, one for 2250 Nokia 9300i mobile phones,
another for 2259 Nokia N80 mobile phones, and the final one for 2000 Nokia N91
mobile phones. Each of the release notes specified Multimode Marketing as the
supplier and Teknic as the customer.
(2)
Release notes dated 30 May 2006 from Teknic Ltd which recorded for deals
25 & 26 a consignment of 10,000 Nokia 8800 mobile phones with the supplier
being Profiteksas , and Infotek Communications Ltd as the customer. In respect
of deal 27 there were separate release notes, one for 2250 Nokia 9300i mobile
phones, another for 2259 Nokia N80 mobile phones, and the final one for 2000
Nokia N91 mobile phones. Each of the release notes specified Profiteksas as the
supplier and Infotek Communications Ltd as the customer. The Appellants did not
take issue at the hearing with the misspelling of Infotel as Infotek in the
Teknic’s release notes.
(3)
Release notes dated 30 May 2006 from Infotel Communications Limited
which recorded for deals 25 & 26 a consignment of 10,000 Nokia 8800 mobile
phones allocated to Fonedealers Ltd. In respect of deal 27 there were separate
release notes, one for 2250 Nokia 9300i mobile phones, another for 2259 Nokia
N80 mobile phones, and the final one for 2000 Nokia N91 mobile phones. Each of
the release notes allocated the mobile phones to Fonedealers Limited.
150. The money flows
for deals 25 and 26 comprised the same parties and started with Biscay Business
SL in Spain passing through various traders to Eurotronics which then paid
Libra Tech. After which, the money flow followed the invoice supply chain as
far as Fonedealers which then paid a Spanish company, Multimode Marketing SL
(the supplier named in the Profiteksas’ release notes). The flows were
completed with a payment of Multimode to Biscay. The money flow for deal 27
followed a similar pattern to those of the previous two deals except that
Fonedealers paid a Portuguese company, Acquired Solutions, which in turn
completed the flow with a payment to Biscay Business SL. The Tribunal finds
that the key features of the money flows were that they were circular, and that
there was no record of a payment being made to Infotel, Teknic and Profiteksas.
151.
HMRC concluded that Teknic’s VAT registration number had been hijacked
because:
(1)
The trading in mobile telephones was inconsistent with the trading
patterns of Teknic.
(2)
The documentation relating to the importation of mobile telephones was
inconsistent with genuine Teknic documentation, with contact details particularly
not being for Teknic.
(3)
The director of Teknic was cooperative with HMRC Officers and willing to
allow them to look at his trading records and compare them with his claims to
have undertaken only minimal sales of clothing in the relevant period.
(4)
A subsequent visit to the premises of Teknic on 22 August 2006 by
Officer Grunwell did not uncover any evidence that acquisitions or sales of
mobile telephones had been conducted by Teknic.
152. On 30 November
2007 Officer Arnold issued an assessment in the sum of £959,670.11 against “The
Taxable Person Purporting to be Teknic Limited”, with a registration number of
963 8666 65. The assessment related to the VAT lost on deals 25 -27. HMRC
maintained that such a hijack would be conducted only for fraudulent purposes.
A hijacked trader was not registered for VAT and therefore did not complete or
submit a VAT return. Thus the tax loss in deals 25 -27 was, therefore,
fraudulent.
153. The Appellants
primary submission was that the release notes were not sufficient evidence to
support acquisitions by Teknic because:
(1)
There were no sales invoices by Profiteksas to Teknic, or by Teknic to
its alleged customer, Infotel.
(2)
There was no other commercial documentation to support the supply by
Profiteksas to Teknic (for example, purchase orders, CMRs, stock offers,
contracts).
(3)
Officer Arnold did not know herself who had acquired the goods.
(4)
Officer Arnold stated that blockers operated to disguise the true
acquirer of the goods.
(5)
Officer Arnold did not believe that Teknic’s alleged customer, Infotel,
had supplied the goods because it either had been de-registered for VAT or its
VAT number had been hijacked.
(6)
There was no evidence of payment either to Teknic from its alleged
customer or payment by Teknic to Profiteksas. Further there was no evidence of
third party payments by Infotel.
154. The Appellants
asserted that as Teknic did not receive any consideration, there was no supply
for VAT purposes, which rendered Officer Arnold’s assessment against TTPPB
Teknic flawed. The Appellants contended that HMRC was required to set out its
allegations of fraud clearly and with particulars. In deals 25-27 HMRC had
pleaded that TTPPB Teknic was the defaulter causing the fraudulent loss of VAT
which on the evidence was not substantiated. Thus HMRC has failed to establish
that the Appellants’ transactions in deals 25-27 were connected with a
fraudulent tax loss.
155. In the
alternative, the Appellants argued that if the release notes were evidence of
the true position, the goods were in the UK when the supply was made, and,
therefore, subject to UK VAT. In that case Teknic did not acquire the mobile
phones as an intra-community supply which also rendered Officer Arnold’s
assessment against TTPPB Teknic flawed.
156. HMRC submitted that, on the balance of probabilities, the chains
described for deals 25-27 in Annex A to Core Bundle B were correct. Accordingly,
TTPPB Teknic Limited had been correctly identified as the defaulting trader in
these deals. Further even on the alternative factual analysis advanced by the
Appellants a tax loss would still have been fraudulently incurred in each deal
chain.
157. HMRC pointed out that the Appellants did not challenge the evidence
in relation to TTPPB Teknic which was set out in the witness statement of
Officer Orr. According to HMRC it was notable that the deal
documentation obtained by Officer Orr demonstrated the acquisition by the
hijacked Teknic of telephones from Premisten (rather than Profiteksas, as in the
Appellants’ deal chains) which indicated that the involvement of the hijacked
Teknic in the phone deals such as those connected to the Appellants’
transactions was not an isolated event.
158. HMRC relied on the uplifted release notes to demonstrate that TTPPB
Teknic acquired the goods from an EU trader. HMRC submitted that it was a
reasonable inference to draw from the freight forwarder documents that TTPPB
Teknic purchased the goods in question and sold them on to Infotel. While the
Appellants relied on the FCIB evidence as showing no payments to TTPPB Teknic,
this was unsurprising given that the defaulting trader in all direct tax loss
deal chains traced by Officer Henderson received no payment.
159. HMRC contended that even if the Tribunal was not satisfied that
TTPPB Teknic had acquired the goods HMRC was entitled to rely on two
alternative scenarios to prove the tax loss. The first was that TTPPB Teknic had
failed to account for tax through its operation as a buffer trader. The
second was that the evidence showed that the goods were subject to intra UK supply by Infotel which was a hijacked trader and did not account for tax. A fraudulent
tax loss was therefore established through the actions of the hijackers of
Infotel.
160. HMRC contended
that the decision of Christopher Clarke J in Red 12 Trading Limited v HMRC [2009] EWHC 2563 (Ch) was authority for its view that alternative scenarios based on
the evidence were available to it, if it failed to establish that TTPPB Teknic was the original importer. Further the Appellants’
insistence that HMRC was bound by its pleading that TTPPB Teknic was
responsible for the tax loss was contrary to the overriding objective of
dealing with cases fairly and justly, in particular avoiding unnecessary
formality and seeking flexibility in the proceedings. Finally the
Appellants would suffer no prejudice, if the Tribunal found a fraudulent tax
loss to have been incurred on the basis of one of the alternatives advanced. HMRC
was clear in its opening submissions that a tax loss would equally be incurred
were Profiteksas to have acquired the goods in the UK. HMRC contended that on any
scenario, there was a fraudulent tax loss which was connected to the
Appellants’ transactions in deals 25-27.
161. The Appellants argued that HMRC had misunderstood the law. Teknic
made no taxable supplies and therefore had no obligation to account for VAT.
Further HMRC was not entitled to rely on the overall objective to get round its
obligation to prove what it asserted. Finally unlike other transactions
involving other alleged defaulters, there were no third party payment
instructions or sales invoices issued by Teknic.
162. The Tribunal at
this stage in the deliberation is examining whether HMRC has established a
connection between the Appellants’ transactions in deals 25 -27 with the
fraudulent evasion of VAT. The Appellants by objecting to the designation of
TTPPB as the defaulting trader was raising issues about the nature of fraud and
its proof in alleged MTIC transactions.
163. Mr Justice
Burton in R (on the Application of Just Fabulous (UK) Ltd v Revenue &
Customs Commissioners [2008] STC 213 at paragraph 7 explained the nature of
fraud in alleged MTIC deals:
“The fraud is plainly committed, if
the participants in such chains are dishonest, at the stage of the missing
trader, although the loss may not crystallise until the Revenue has to pay out
in full in respect of the return filed by the exporter”.
164. The Advocate General in Kittel at paragraph 35 said that in
every case in MTICs the bottom line was that an amount received in respect of
VAT was not declared. Thus Mr Justice Lewison in HMRC v Livewire Telecom
Limited [2009] EWHC 15 at paragraph 91 stated that “Unless there is a
missing trader somewhere further down the chain (or in a parallel chain) there
is no fraud”. A missing trader may use a hijacked VAT number or it may
register itself for VAT and simply disappear before the tax authorities take action
(see Advocate General in Optigen [2006] STC 419 at paragraph 8).
165. The Tribunal has to be satisfied on the balance of probabilities
that deals 25-27 involved a defaulting trader which failed to account for VAT.
HMRC asserted this was met because the evidence showed that a trader hijacked
the VAT number of Teknic Ltd and failed to account for VAT on its transactions
with Infotel. The Appellant deployed four arguments challenging the existence
of a tax loss in deals 25-27.
166. The first argument, namely Teknic made no taxable supplies, was
based on the FCIB evidence showing that Teknic gave no consideration for the
purported supplies of mobile phones. The Tribunal was not persuaded by this
argument. The Tribunal in this Appeal is concerned with the Appellants’ right
to deduct and whether there has been a fraud in the deal chain to which the
Appellants’ transactions were connected. HMRC’s evidence of the use of a
hijacked VAT registration number and a failure to account for VAT was
sufficient on the face of it to establish fraud in the deal chains for 25-27.
167. The fact that TTPPB Teknic did not actually give consideration was
not conclusive of the proper characterization of its supplies for VAT purposes.
The Tribunal is satisfied on the evidence that the reason for making no
consideration related directly to the fraud perpetrated on the VAT system. The
analysis of the money flows showed that in every deal no monies were paid to or
by the defaulting trader, which meant that any action taken by HMRC to recover
the outstanding tax would be frustrated by the trader’s lack of resources.
168. The common
system of VAT requires each transaction to be
considered individually, per se and on objective criteria, without regard to
its purpose or results. On objective criteria TTPPB Teknic was
a taxable person engaged in the economic activity of selling and buying mobile
phones. A fraudulent intention not to pay the consideration for its supplies
was not relevant to the objective analysis of TTPPB Teknic’s trades for VAT
purposes. In this respect the VAT position of TTPPB Teknic’s trades was no
different from that of the Appellants if their transactions were showed to be
vitiated by fraud. Thus in that case the Appellants’ trades would still retain
its character of taxable supplies. The Appellants, however, would be denied
their right to deduct VAT. Likewise, Teknic’s trades remained taxable supplies
but HMRC would be entitled to take action to recover the VAT fraudulently
evaded. The
Tribunal is, therefore, satisfied that Officer Arnold’s assessment on TTPPB
Teknic was validly made.
169. The Appellants’ second argument concerned the strength of the
evidence adduced by HMRC to prove that TTPPB Teknic was the defaulting trader. The
Tribunal finds that HMRC adduced documentation in the form of release notes
which showed that Teknic limited had purchased mobile phones from
Profiteksas and sold them to Infotel. The provenance of the release notices
being from the freight forwarder responsible for the movement of goods in deals
25-27 reinforced the involvement of Teknic in the deals, and their connection
with the Appellants’ transactions. The Appellants supplied no contrary
evidence to challenge the tracing exercise conducted by Officer Arnold. The
Appellants engaged Credit Risk Management to carry out extended verification of
the deals but was unable to obtain any documentation relating to deals 25-27. The
fact that there was no record of payment by Teknic for its purchases was
unsurprising for the reasons given in paragraphs 167 and 168 above. Likewise
the absence of invoices and other commercial documentation did not in
themselves undermine the inference of Teknic’s involvement from the release
notes, particularly when having regard to the wider circumstances which showed
that in all probability the hijacking of Teknic’s VAT registration number.
170. Mr Justice Christopher
Clarke’s judgment in Red 12 gives support to a wider examination of
individual transactions which includes their attendant circumstances and
context. Officer Orr’s evidence was relevant in demonstrating that Teknic’s VAT
registration number had been hijacked and that the involvement of the hijacked
Teknic in phone deals was not an isolated event. The wider evidence on deals
25-27 in respect of the composition and length of the transaction chains, the
shared membership (Headcom and Grange Computers) with other direct tax loss
chains, and the circular money flows demonstrated their fraudulent nature, and
the existence of a defaulting trader.
171. The Tribunal
is satisfied on balance that HMRC has correctly identified TTPPB Teknic Ltd as
the defaulting trader in the Appellants’ deals 25-27.
172. The Appellants
argued that if the release notes were evidence of the true position, Teknic did
not acquire the mobile phones as an intra-community supply which rendered
Officer Arnold’s assessment against TTPPB Teknic flawed. Mr Justice Christopher
Clarke in Red Trading 12 at paragraphs 83 and 84 gave the argument that
the defaulter had to be the original importer short shrift:
83. The fact that descriptions of
the classic or simplest form of MTIC fraud habitually refer to the defaulter as
the importer (or vice versa) does not mean that a right to deduct input tax on
the ground of MTIC fraud can only be denied if HMRC establishes that the
defaulter was the original importer. No domestic or EU authority establishes
that that is so, and such a requirement would, in my judgment, be contrary to
principle. …….
84. In many cases of MTIC fraud the
defaulter, i.e. the company which fails to account for VAT and beyond which
HMRC will not have been able to trace the chain, will be the actual importer.
But it need not be so. ……. What is needed for an MTIC fraud to work is an importation
without payment of VAT, a trader who disappears without accounting to HMRC for
the output tax it has received, and an export which generates an entitlement to
claim back input tax….. In order to justify denial of the right to deduct input
tax there must be knowing participation in a transaction connected with
fraudulent evasion of the tax. If that is established, the right is lost. It
would be inconsistent with that principle, and an unmerited boon to fraudsters,
to require the authorities to prove that the defaulter was the original
importer”.
173. The Tribunal’s principal finding is that TTBBP Teknic was the
defaulting trader which acquired the mobile phones from Profiteksas (a
Lithuanian company). If, however, the Appellant’s legal analysis on intra-community
supplies is correct, the Tribunal maintains that its finding of TTBBP Teknic as
the defaulting trader was unaffected by incurring a tax loss as a buffer trader
in deals 25-27.
174. The Appellants’ final argument concerned the possibility of HMRC
relying on Infotel as the defaulting trader if HMRC failed to convince the
Tribunal on its principal proposition on Teknic. In view of the Tribunal’s
findings on TTPPB Teknic, the arguments on Infotel were academic. Having said
that, the Tribunal is satisfied on the evidence of Officer Arnold that Infotel
was a hijacked trader which failed to account for tax on its supplies to Fone
Dealers in deals 25-27.
175. The Tribunal considers that HMRC would have been entitled to rely on
Infotel as the defaulting trader if its principal proposition had been
unsuccessful. The Appellants’ objection to the possibility of an alternative
finding stemmed from its reliance upon the established principle that HMRC must
prove the fraud or dishonesty particularised in the pleadings. In the
Tribunal’s view, the identification of a different defaulter from the one
pleaded did not offend the established principle because the nature of the
fraud remained the same as that pleaded, namely the connection of the disputed
transactions to a defaulting trader.
176. The Tribunal concludes that there was a tax loss in each of the
deals 25, 26 and 27, which was occasioned by the fraudulent activities of the
TTPPB Teknic. Libra Technology’s transactions were connected to these fraudulent
tax losses.
Opportunities Recruitment International Limited (ORIL)
Deal 29
177. The Appellants argued that the alleged contra-trader ORIL in deal 29
did not act as a typical contra-trader which usually disguised its transactions
to avoid interventions from HMRC. The Appellants pointed out that ORIL
submitted a repayment claim for over ₤5 million in period 03/06 with HMRC
interviewing its director on 31 March 2006. According to the Appellants, HMRC
was demonstrating significant interest in ORIL’s activities at the time of the
Appellants’ disputed transactions.
178. HMRC maintained that ORIL’s role in the disputed transactions
was manifestly fraudulent. The fact that ORIL was subject to investigation by
HMRC in respect of its earlier claim for period 03/06 did not prove that ORIL’s
role in acquiring goods in period 06/06 for onward sale to UK traders (in order
to artificially balance its repayment claim for this period) was other than
fraudulent.
179. The Tribunal makes the following findings of fact in respect of
ORIL:
(1)
ORIL was incorporated on 23 October 2001 and registered for VAT with
effect from 19 January 2004. ORIL declared its principal business as the sale
of bespoke birthday and greetings cards. No greetings cards were ever sold. On
15 March 2004, ORIL notified HMRC it intended to commence trading mobile
telephones.
(2)
The period 06/06 was the first period in which ORIL had declared any EC
acquisitions. No acquisitions from the EC had been declared in the periods
03/04 to 05/06.
(3)
In period 06/06 ORIL entered into six broker deals which involved the
despatch of consignments of cameras purchased from RCCI Hi-Tech (in Cyprus) to
EU traders. Each of the six deals have been traced directly to a tax loss
incurred by a hijacked trader known as Taxable Person Purporting to be Grange
Solutions/ Wade Tech Limited.
(4)
After the six broker deals ORIL undertook six acquisition deals which
concerned the purchase of mobile telephones from Kom Team Sarl (in France). These mobile phones were sold onto EU traders through a series of UK broker traders which included Libra Graphics and Nex Trading.
(5)
In 06/06 the respective values of ORIL’s outputs and inputs were
₤8,853,125 and ₤8,832,071 which meant that its claim for input tax
on the broker deals was effectively matched by the output tax claim on the
acquisition deals resulting in a small repayment of ₤579.52.
(6)
Across all broker chains ORIL achieved a consistent £2.00 per unit
mark-up whatever the price of the product. All of its deals in period 06/06
were conducted on a back-to-back basis with many happening on the same day.
ORIL has supplied no evidence of insurance for its acquisition deals. Further
no evidence of written contracts has been provided. HMRC also identified
discrepancies in the CMRs supplied by ORIL Finally the due diligence undertaken
by ORIL on its suppliers and customers in the 06/06 deals was virtually
non-existent.
(7)
ORIL was a member of the contra trading scheme 1 involving the
contra-traders A – Z Mobile Accessories, Jag Tec, Red House International
Limited and Starmill International Limited. Under scheme 1 the mobile phones
originated with Kom Team, a French trader, which had been the subject of
investigations by French authorities. Kom Team sold the goods to the five
contra-traders. After which the goods went to a group of nine buffer traders
and then onto a group of 32 UK broker traders.
(8)
Deal 29 of the Appellants’ disputed transactions has been traced back
from Libra Graphics to ORIL through two buffer traders, Stardex and Tradex
Corporation. Deal 29 involved a circular flow of money from and to Kom Team
Sarl.
180. The Tribunal is
satisfied on the above facts that ORIL was operating as a dishonest
contra-trader in period 06/06. All its broker transactions have been traced
back to a tax loss. ORIL’s entered into the acquisition deals just after the
broker transactions. ORIL attempted to disguise the tax losses in its broker
transactions by matching its input tax claim against the output tax claim on
the acquisition ones. ORIL’s high turnover in 06/06 and the manner in which it
conducted its business supported the conclusion that it was engaged in
fraudulent trading. The fact that HMRC was investigating ORIL at the material
time did not displace the overwhelming evidence of ORIL’s dishonesty.
181. Deal 29 which
involved the sale and purchase of 3,500 Nokia 9300i mobile phones by Libra
Graphics was traced back to ORIL.
Summary of Findings on an Orchestrated Scheme to Defraud
182. The fraudulent
nature of the direct chains was demonstrated by the following findings
(paragraph 89):
(1)
The chains for deals 1,5, 8-13, 19, 20, 22-27 were all traced to a
direct tax loss.
(2)
Each loss was occasioned by the fraudulent activities of a missing or
hijacked trader.
(3)
The contrived nature of each chain in respect of length and composition.
(4)
The use of consistent mark ups in small rounded numbers by the buffer
traders, and the flouting of business terms in deals 1, and 8 to 13.
(5)
The structure of long deal chains served to disguise the overall nature
of the fraud by putting distance between the missing trader and the broker
trader.
183. The Appellants’
deals 2, 3, 4, 6, 7, 14-18, 21 and 28-29 were traced to six contra traders (Kwality
Trading International, Morganrise, Epinx (also known as Libra Fair Trades), Jag
Tec, A-Z Mobile Accessories and ORIL) organised in three distinct schemes. The
Tribunal’s findings in relation to the contra-traders were as follows
(paragraph 102):
(1)
Overall each scheme showed a distinct pattern with the mobile phones
passing from a distinct small group of EU suppliers to a distinct small group
of EU customers. In scheme 2 the two groups were almost identical. The
destinations in each scheme were maintained even after the mobile phones have
passed through a larger number of different UK traders.
(2)
There was no commercial reason for the mobile phones to be imported into
the UK. The EU customers consistently paid unnecessarily high prices to UK suppliers for mobile phones which were available more cheaply in mainland Europe.
(3)
Circularity of goods was a prevalent feature throughout the three
schemes.
(4)
The schemes were associated with substantial tax losses which were
disguised by the dishonest activities of the contra-traders which offset the
input tax claims in their broker transactions with the output tax liability in
their acquisition transactions.
184. HMRC’s analysis
of the data retrieved from the FCIB servers demonstrated the fraudulent and
orchestrated nature of the transactions to which the Appellants’ deals were
connected. The findings on the involvement of 21 traders outside the UK in these transactions, their organisation into cells and their connections with each
other, the use of third party payments, and the circularity of monies supported
the existence of an overall scheme to defraud public revenue (paragraph 123).
185. The use of
common IP addresses by a disparate set of traders purportedly trading at arms
length was powerful evidence of contrivance, particularly when examined in the
context of the other evidence on overall scheme of the Appellants’ deals
(paragraph 138).
186. All but one of
the Appellants’ customers was deregistered for VAT by their respective domestic
tax authorities in the period of April to June 2006 when the disputed deals
took place. The Tribunal agrees with HMRC that the deregistration and its
timing were further proof of a fraudulent scheme to defraud public revenue
(paragraph 146).
187. The Tribunal,
therefore, makes the following findings for each of the disputed transactions
on the first three issues, VAT loss, occasioned by fraud, and connection of the
Appellants’ transactions with such a fraudulent VAT loss:
(1)
Each of the Appellants’ deals 1,5, 8-13, 19, 20, 22-27 was connected to
a fraudulent tax loss. The losses were occasioned by TTPPB Lewis Davis
Productions, Lewis Davis Productions, MediaWatch 360, TTPPB AAA Multilink, and
TTPPB Teknic Ltd
(2)
Each of the Appellant’s deals 2, 3, 4, 6, 7, 14-18, 21 and 28-29 was
connected to a fraudulent tax loss via the dishonest actions of six contra-traders
(Kwality Trading International, Morganrise, Epinx (also known as Libra Fair
Trades), Jag Tec, A-Z Mobile Accessories and ORIL).
188. The Tribunal is
also satisfied that the Appellants’ transaction chains 1 – 29 were the product
of orchestration by fraudsters as part of an overall scheme to defraud the
public revenue. All the transaction chains led to fraudulent tax losses, which
were disguised by either the length of the chains or the actions of dishonest
contra- traders. The orchestration of the scheme was manifest from the regular
appearance of specific traders in the invoice chains and money flows, the
connections between them, and their organisation into distinct cells. The
circularity of both monies and goods and the use of common IP addresses
confirmed the fraudulent nature of the transaction chains.
189. The existence of
an overall scheme to defraud implied that the success of the scheme depended
upon each participant buying from and selling to persons designated by those
orchestrating the scheme. HMRC argued that as
the Appellants were involved in such a scheme and played the key role of broker
they were knowing parties to the fraud.
190. The Appellants, on the other hand, asserted they were
innocent parties and victims of the alleged fraudulent practices of others. The
Appellants contended that it would be wholly inequitable to bear all the
losses. The Appellants rejected HMRC’s assertion that they knew or should have
known their transactions were tainted by fraud. The Appellants were adamant
that the processes adopted at the time they entered into the disputed
transactions were reasonable and proportionate. The Appellants pointed out that
there was no evidence that the Appellants dealt directly with the
contra-traders and the defaulting traders occasioning the tax losses.
191. HMRC suggested
that the existence of an orchestrated overall scheme to defraud posed two
questions in the alternative:
(1)
Why the Appellants were involved unless they were knowing parties to the
scheme? or
(2)
In the alternative, were the Appellants innocent dupes?
192. The Tribunal now
deals with the outstanding issue of whether the Appellants knew or should have
known at the time of entering the disputed transactions that they were connected
with the fraudulent evasion of VAT.
The Appellants’ Knowledge
193. HMRC argued that
there was no plausible explanation for Mr Souter being manipulated without his
knowledge or acquiescence. HMRC relied on the high degree of co-ordination and
connections between the Appellants and their immediate traders and of other
traders which featured in the overall fraudulent scheme to demonstrate the
implausibility of the Appellants being innocent dupes.
Grange Computers, Notebook Express, Nex Trading and T3K
194. The Tribunal
starts with Grange Computers which was the Appellants’ sole supplier in the
periods at issue in this appeal. The director of Grange Computers was Anthony
Rose. Mr Souter had known Mr Rose and his family for many years. They worked
together brokering transactions on behalf of the Appellant, Libra Technology.
Mr Souter originally stated that Mr Rose was an employee of Libra Technology
which was later changed to a consultant because Mr Rose was not subject to
PAYE/NIC regulations. Mr Rose set up Grange Computers in 2005 after having a
break of about six months from Libra Technology
195. In the same VAT
periods as in this Appeal Grange Computers was also the supplier of mobile
phones to Notebook Express and Nex Trading. In the first contra trading scheme
Libra Graphics, Nex Trading, Notebook Express and Grange Computers all acted as
broker traders, exporting goods to EU customers. In May 2006 Notebook Express
brokered five deals which had identical transaction chains to those in deals
25, 26 and 27 involving Libra Technology. On 30 and 31 May 2006 Notebook
Express and Libra Technology (deal 27) respectively sold the same models of
phones to the same customer (Nova 2000). The differences between them were the
actual number of units, the price and that the goods were invoiced one day
apart. Mr Souter accepted that he knew that Grange Computers supplied Nex
Trading and Notebook Express at the same time it supplied the Appellants. Mr
Souter denied that he had any knowledge of the supply chains involving Notebook
Express and Nex Trading.
196. Mr Souter’s
commercial rationale for dealing exclusively with Grange Computers was that he
wanted to purchase stock from a company he trusted and one which would perform
tough diligence on its suppliers. According to Mr Souter, Mr Rose fitted the
bill. Mr Rose knew the business inside out and would do the right thing in
finding those types of suppliers with which to do business. Further Mr Souter
had worked with Mr Rose for two years and trusted him.
197. The sole
shareholder of Notebook Express was Libra Holdings, a company beneficially
owned by Mr Souter. The director of Notebook Express was Russell Williams. When
Mr Souter was first asked by Officer Arnold on 20 February 2007 if he had any
knowledge of Notebook Express. Mr Souter replied that he knew of the company,
had never traded with it but had bought personal items from Notebook Express. Mr
Souter later acknowledged he was an employee of Notebook Express in the UK, and owned the beneficial interest in it. Mr Souter also set up a branch of Notebook
Express in Spain of which he was sole director. Mr Souter denied that he was
involved in buying and selling mobile phones for Notebook Express. According to
Mr Souter he had little involvement with the day to day activities of Notebook
Express. His role was to source products from the Far East which would be
retailed under the brand name of Nex.
198. Russell
Williams, the director of Notebook Express, was also director of Nex Trading.
Mr Souter denied that he had any interest in Nex Trading stating that Mr
Williams set it up as his own company. Mr Souter, however, accepted that Mr
Williams approached him in 2005/2006 about whether it was appropriate for Nex
Trading to source mobile phones from Grange Computers. Also Mr Souter was
unable to give a plausible explanation for why a document signed by him had an
email address of [email protected].
199. Mr Rose, the
director of Grange Computers, was also the director of Platinum Base
Enterprises Limited. Officer Arnold when examining the 2004/05 audited accounts
for Libra Technology noticed an entry of ₤35,410 in the cost of sales
which was described as a profit share. Officer Arnold requested an explanation
from Mr Souter on several occasions but never received a response. On 7 June
2007 the Appellants’ accountant wrote to Officer Arnold stating that the profit
had been shared with Platinum Base Enterprise Limited. Officer Arnold’s
requests for further information on 6 September 2007 and 12 March 2008 on
Platinum Base Enterprises went unanswered. Eventually Officer Arnold undertook
a Dun & Bradstreet enquiry on Platinum Base Enterprises which revealed the
directorship of Mr Rose.
200. Mr Souter later
explained that he understood Platinum Base Enterprises to be an investment
vehicle owned entirely by Mr Rose in which he raised funds from family and
friends. Platinum Base Enterprises injected ₤300,000 into Libra
Technology which was mainly used to pay for VAT exports. Mr Souter believed
that the funds were injected around 2001/2002. He, however, did not give a convincing
answer for why the profit share entry appeared in the 2005 accounts if the
investment was in 2001/02. Mr Souter suggested it was an accounting error and
that it should have been on the balance sheet and carried forward.
201. Mr Rose along
with Steve Moran and Marc Kimsey were directors of T3K which was a company set
up to conduct due diligence on behalf of its customers. Three of whom were the
Appellants and Grange Computers. T3K assisted the Appellants with drafting the templates
of its commercial documents with the result that they shared the same format as
those for Grange Computers.
202. The Tribunal is satisfied that Marc Kimsey of T3K and Grange
Computers took a
role in assisting Libra Technology to apply for an FCIB account, in that his email
address appeared on Libra Technology’s FCIB account opening form of 9 February
2005. Mr Souter offered various explanations for the presence of Mr Kimsey’s e
mail address ranging from bafflement to Mr Kimsey setting up the computer
systems for Libra Technology. The Tribunal agrees with HMRC that Mr Souter’s
answers failed to explain why the accounts opening form did not show Mr
Souter’s own email address.
203. The use of Marc Kimsey’s email address suggested that the Appellants
were not solely in control of their FCIB accounts. Further proof of this fact
was found in Officer Arnold’s visit report of 26 July 2006 where she contemporaneously
recorded that Mr Souter was unable to operate his own FCIB account when asked. She
also recorded Mr Souter saying that his accountant would need to be present to
open the account. Mr Souter denied that he had said this. He stated that it was
a misunderstanding on the part of Officer Arnold whom he believed was asking
for copy bank statements. FCIB, unlike many online banking facilities, did not
offer online statements to the account holder. Officer Arnold thought the
purported misunderstanding was nonsense. She had already seen copies of the
bank statements on 25 July 2006, and had already asked for more detailed
accounts which she was told could not be obtained after three months had elapsed.
204. The Appellants’ accountant produced a signed and dated board resolution
for Libra Graphics authorizing Mr Souter to open and operate its bank account.
Mr Souter, however, was unable to provide the corresponding mandate for him to
operate the Libra Technology’s bank account. Mr Souter considered that such
formalities were unnecessary for relatively small undertakings, such as Libra
Technology.
Eurotronics (Polina Petrova)
205. Polina Petrova
was the director of the trader Eurotronics APS which was the Appellants’
customer in 12 of the disputed deals. Ms Petrova was the partner of Mr Souter
and the mother of his daughter.
206. Eurotronics
registered for VAT in Denmark and began trading in January 2006 purchasing
nearly ₤90 million worth of goods from UK traders in the space of five
months. Mr Souter stated that Eurotronics was based in Denmark because of the price differential between the UK and the Scandinavian markets. Also the
competition was not as fierce as in the UK because of the relatively small
number of traders operating the secondary market in Denmark. HMRC, however,
pointed out there was no evidence that Eurotronics sold any phones to Danish
companies. The information obtained from the Danish Authorities showed that
Eurotronics’ customers were from outside the UK but not from Denmark. In which case Ms Petrova would have made much larger profits if she had set up
business in the UK and operated as a broker.
207. Eurotronics
customers included companies controlled by the Broburg circle, OUAvoset (Valdemara/Leroy), Estocom (J.Neuvonen,/Leroy),
Scorpion (J. Broburg).
Other customers were Nova 2000 which was also a customer of the Appellants, and
Bulat 16V and Euro Councel et Development which appeared regularly in the money
flows in the Appellants’ direct tax loss chains, and in contra-scheme 2.
208. During periods
04/06, 05/06 and 06/06 Notebook Express also supplied mobile phones to
Eurotronics. The Appellants in some deals sold to Eurotronics at a lower prince
than other customers. On 26 May 2006 Libra Technology sold 1,500 Nokia N80’s
for ₤358 per unit, whilst the same make and model of phones were sold to
CEMSA at ₤374 per unit. Also on 26 May 2006, Nokia 9500s were sold to
Eurotronics by Libra Technology for ₤241 per unit, while the same make
and model of phones were sold to CEMSA at ₤249 per unit.
209. Mr Souter did
not disclose to Officer Arnold that Ms Petrova was his partner when she was
investigating the Appellants’ due diligence. Mr Souter said that he would have
told Officer Arnold if she had asked. Officer Arnold pointed out that this was
not a question she would automatically have asked. Mr Souter did not see the
significance of Ms Petrova being his partner. His response in cross examination
was “Why should I, What has that got to do with anything”.
210. Mr Souter first
met Ms. Petrova in late 2004/early 2005. She had been living in the UK for six to seven years and was working at a restaurant as a manageress. Mr Souter was
unable to give any explanation as to why his partner, Ms Petrova with whom he
was living as a couple at the time was commuting to and from Denmark to run a company which did not trade in Denmark. He was defensive in evidence as to the day
to day details of his relationship. Also there was evidence that the faxes from
Eurotronics bearing the May 2005 stamp originated from the Appellants’ fax
machine. Mr Souter when asked to explain why the Appellants’ and Eurotronics’
shared the same fax number: “I don’t know, maybe we had the same fax
machine. I don’t know” before revising his answer “I meant the same make
and model fax machine”. Mr Souter also assisted Ms. Petrova in setting up
Eurotronics’ documentation. Eurotronics’ letter of introduction was in near
identical terms to that for Grange Computers.
211. Mr Souter’s
explanation for trading with Eurotronics was that he wished to help Ms Petrova
create her own business. Also he did not want to see the products that he had
just sold re-entering the UK as could happen by selling to other purchasers. Mr
Souter decided commercially it would make sense to sell to someone that he
trusted abroad and who would not re-export the product back into the UK.
212. Mr Souter stated
that the Appellants were unable to sell to Eurotronics’ customers because he
did not have Ms Petrova’s contacts which arose through Eurotronics’ independent
marketing. Mr Souter’s explanation, if true, suggested that Ms. Petrova, who
was new to the trade, not only found the Broburg circle by coincidence but also
had better contacts and knowledge than Mr Souter. His explanation, however, was
contradicted by the fact that the Appellants were trading in 2006 with companies
from the Broburg circle, namely, Coburg (J Broburg) and Proinserco (Leroy). Also Mr Souter
later in his cross-examination said that he probably mentioned to Ms Petrova
the companies he dealt with to in order to help her to find leads for selling
and buying stock. Mr Souter acknowledged that he had been in the business for a
long time and that a lot of people knew his companies.
213. Mr Souter in
cross examination stated that the probable explanation for selling the same products
to Eurotronics at a lower price than that to CEMSA was that Eurotronics had a lower
target price as a result of pressures from its customers. Mr Souter argued that
doing deals with Eurotronics at a reduced price made good business sense
because the Appellants were still achieving a mark up, albeit lower than that
secured with the CEMSA sales.
214. Mr Souter in his
witness statement asserted after examining the deal chains for the sales to
CEMSA and Eurotronics that the stock had been acquired by Grange Computers from
different suppliers at different prices. According to Mr Souter, although the
transactions were completed on the same day, the price may have been agreed
verbally between those further up the chain prior to completion. Officer Arnold
considered Mr Souter’s reasoning was inconsistent with other parts of his
witness statement about prices fluctuating daily which meant that transactions
were usually completed within a day, and that the prices offered by suppliers were
reviewed to ensure they were in line with prevailing market conditions.
The Appellants’ Loan Agreements and Funding
215. In July 2006 Mr
Souter informed Officer Arnold that the input VAT on the Appellants’
transactions was funded by personal finance. He made no mention of any loans or
private investors, and the existence of any associated companies, apart from
the Appellants.
216. Officer Arnold
was, however, unable to reconcile the Appellants’ bank statements to the tune
of ₤7.5 million which prompted requests for information dated 12
September 2006 and 13 October 2006 from Mr Souter on the discrepancies in the
statements. On 18 October 2006 the Appellants’ solicitor stated that the discrepancies
were made up of loans to the Appellants to cover the shortfall whilst the VAT
returns were being verified. Officer Arnold requested copies of the loan
agreements. On 9 November 2006 the Appellants’ solicitor stated that she had
clarified the matter with Mr Souter and that the monies should have been
described as an injection of capital by the holding company rather than as
loans. The Appellants eventually advised Officer Arnold of the name of the
holding company (Libra Holdings) and in addition provided copies of the loan
agreements transacted with Quebec Inc of Canada and the Libantrust
Communication.
217. The Tribunal
makes the following findings of fact on the loan agreements:
(1)
There were five separate loan agreements between the Appellants and
Quebec Inc and Libantrust Communication involving a total sum of £2,738,000 borrowed
by the Appellants in the period May to July 2006.
(2)
The loan agreements did not refer to the other outstanding loans. Also
there was no indication of the order in which the separate loans would be
repaid.
(3)
No security was given for the loans from Quebec, which was considered
unusual by Mrs Hamilton, an HMRC accountant, having regard to the size of the
loans and the risk to the lenders. The Libantrust agreements mentioned that the
loans were secured against trading activities, which, according to Mrs Hamilton
was vague and unenforceable.
(4)
There were no penalties if the loans were not repaid.
(5)
The repayment terms in the Libantrust agreements were not clear. The
terms obliged the Appellants to repay only as much as possible.
(6)
The loans did not appear to have been drawn up professionally with only
one agreement having a wet signature coupled with errors in the registered address
of Libra Graphics and the spelling of Montreal.
(7)
Mr Souter in cross examination was unable to explain plausibly how the
loans came about, stating that he was contacted out of the blue.
(8)
Mr Souter had never met the lenders.
(9)
The Appellants had not repaid the loans. Quebec and Libantrust had not taken any action to recover the sums lent under the
agreements.
(10)
Mr Souter gave unsatisfactory and contradictory answers about why the Appellants
took out the loans. Mr Souter stated at first that he was cash starved and very
short of cash, which conflicted with the evidence of an injection of
₤337.000 from Libra Holdings on 15 July 2006. Mr Souter then acknowledged
that he had personal finance at the time of the transactions but he had other
uses for it and did not want to tie up his finances in the Appellants’
business. In Mr Souter’s view, he preferred to borrow money from companies,
such as Quebec and Libantrust even though he had to pay exorbitant interest..
218. The FCIB analysis
revealed that the payments from Quebec to the Appellants were preceded by
payments from the trader Ixcel into the FCIB account of Quebec Inc. The Ixcel
payment had been traced back to the traders Biscay/Bulat16V., EU traders with a
common director, which had a significant presence in the money chains for the
Appellants’ direct tax loss deals and also in the contra-trading scheme 3.
Thus there was a direct connection between the monies given by Quebec to fund the VAT on the Appellants’ disputed transactions and the financiers of the
direct tax loss chains and contra trading scheme 3.
219. When faced with
the connection of Quebec and Biscay/Bulat Mr Souter accepted that the
Appellants’ lender was involved with the setting up of the fraudulent scheme.
Mr Souter, however, denied that he had any knowledge of such a relationship,
suggesting that he had been conned and manipulated in a clever way.
220. Mr Souter was
reluctant to supply details of the injection of funds from his holding company,
Libra Holdings, which was registered in the British Virgin Islands. On 20
February 2007 the Appellants informed Officer Arnold that the only information
that could be supplied under confidentiality rules was the name and address of
the director. The Appellants’ bank accounts revealed that Libra Holdings had
transferred funds to the Appellants of ₤110,900 in 2005 and
₤337,000 on July 2006. Mr Souter was not prepared to disclose which
companies had invested their funds with Libra Holdings.
221. Finally on the
issue of the Appellants’ funding, the Tribunal has already found that Libra
Technology was the subject of a profit sharing arrangement with the company Platinum
Base Enterprises Limited of which Mr Rose was a director.
Appellants’ Knowledge of the Prevalence of MTIC Fraud
222. Mr Souter
accepted that the Appellants were aware of the incidence of VAT fraud in the
mobile phone sector. Mr Souter in his cross examination stated that he knew his
companies were swimming with sharks in the mobile phone sector, and that he had
to be extremely careful with the transacting of deals.
223. Officer Mendes
had responsibility for Libra Technology prior to the involvement of Officer
Arnold in 2006. Officer Mendes had frequent contact with the directors of Libra
Technology in 2003 and 2004. Nine visits had been recorded from July 2003.
HMRC had supplied the Appellants on several occasions with copies of Notice
726 dealing with joint and several liability of traders.
224. HMRC had denied
previous repayment claims by Libra Technology which involved sales to an
European Trader on 30 May 2002 and 26 June 2002. The denied deals had been
traced to Total Telecom, a company under the control of Joakim Broburg.
225. Libra Technology
and Total Telecom were parties in the High Court proceedings of Teleos PLC
& Others, R (on the application of) v Customs and Excise [2004] EWHC 1035 and the European Court of Justice case of Teleos and Others [2007]
C-409/04. The European Court rejected HMRC’s argument that it was entitled to
deny input tax simply because the goods had not been removed (non-economic
activity). The outcome of the decision was that HMRC assessed Total Telecom for
the full amount of VAT due, ₤17.5 million and repaid VAT to other
participants including Libra Technology involved in the proceedings.
226. Mr Souter
pointed out that HMRC accepted at the time of the Teleos case that Libra
Technology did not know that its transactions with Total Telecom were
fraudulent, which was why HMRC repaid the input tax to Libra Technology. Having
read the Teleos decisions Mr Souter conceded the existence of a fraud in
the Total Telecom deals. He was not sure whether the fraud had perpetrated by
Total Telecom or someone behind it. Mr Souter said he was furious with Frederik
Broburg
for involving Libra Technology in these deals and never spoke to him
afterwards.
The Broburg Connection
227. The Tribunal
finds the following facts on the connection between Mr Souter and the
Appellants with Joakim and Fredrik Broburg and the Broburg companies:
(1)
The parents of Joakim and Frederik Broburg were senior political figures
in Spain. Their father was a large property developer in Costa del Sol and held
many other business interests there.
(2)
Mr Souter met Joakim and Frederik Broburg when he was at University at Malaga in Spain. He used to go to Marbella and play tennis with Joakim and Frederik Broburg.
Mr Souter was half Swedish and had something in common with Joakim and Frederik
Broburg through their Swedish Nationalities.
(3)
Mr Souter had continued to remain in contact with Joakim Broburg. Mr
Souter accepted that he had spoken to Joakim Broburg about these appeals, and
that Joakim Broburg provided the information contained in his fourth witness
statement dated 20 June 2011. Mr Souter has had no recent contact with Frederik
Broburg. Mr Souter believed that Frederik Broburg lived in the USA.
(4)
Ms. Petrova had met Joakim Broburg when Mr Souter was playing tennis.
(5)
Mr Souter and Joakim Broburg were company secretary and director
respectively of Jill Miro UK which according to Mr Souter was involved in the
wholesaling of reading glasses in the UK. The company ceased trading in 1998.
(6)
In 1997 and 1999 Mr Souter and Frederik Broburg formed three companies,
Europallet (UK) Ltd (marketing of pallets), Planet Telecom (UK) and Nepture
Telecom Ltd (both companies involved in the wholesaling of mobile phones).
(7)
Joakim Broburg was the director of Total Telecom Espana SL from 20
September 1999 to at least 17 April 2002, when the company was transferred to
Dome International in Gibraltar. Total Telecom was involved in MTIC fraud with
tax losses exceeding ₤17 million. The Tribunal preferred Officer Stone’s
evidence that Joakim Broburg not Frederik Broburg was the person behind Total
Telecom (see paragraphs 114 and 115 above).
(8)
Joakim Broburg controlled the following companies: Powertec Computer
LDA, Mundinri Ltd, Bulgarian Electronics Ltd, Planet Telecom, Global Gateways
Iberia SL, Global Communications Ltd, Coburg Ltd.
(9)
Joakim Broburg was associated with Alexis Leroy, a French National
residing in Spain. The Tribunal prefers the evidence of Mr Stone who has
established links between these two individuals, namely, Alex Leroy’s position
as Vice President Sales of Total Telecom, and the common business address of
Calle Las Medranas 31, 29670 Me San Pedro de Alcantra, Malaga, Spain 29670.
Alex Leroy was director of Proinserco, Estocom Distribution, Valdemara
Electronics, Peoria, and UAB Uzupio Distribution. Mr Souter accepted that he
had visited the business premises at Calle Las Medranas
(10)
Joakim Broburg was associated with Tommi Neuvonen, a Finnish National
but with a contact number in Spain. Mr Tommi Neuvonen was director of FAF
International. Joakim Broburg provided a reference to FCIB on behalf of FAF
International which stated that he had been in a business relationship for the
better part of ten years. Mr Tommi Neuvonen also worked for Coburg, one of
Joakim Broburg’s companies.
(11)
Joakim Broburg was associated with Sebastion Davalos, a Swedish National
with an address in Marbella Spain. Mr Davalos was the beneficial owner of
various companies including Regent, Zorba, Con Animo and Nano Infinity. Joakim Broburg
provided various references to FCIB for some of Mr Davalos’ companies. Mr
Broburg’s reference for Con Animo stated that he knew Mr Davalos and that Con
Animo was an honourable company.
(12)
Joakim Broburg was associated with Jussi Neuvonen, a Finnish National,
and the beneficial owner of Avoset. Joakim Broburg provided a reference to FCIB
for Avoset stating that he knew Mr Jussi Neuvonen and that Avoset was an
honourable company.
(13)
Mr Souter sought to downplay Joakim Broburg’s connections with Tommi
and Jussi Neuvonen, and Sebastion Davalos by stating that Joakim Broburg was a
FCIB sub agent for which he received commission for introducing persons to
FCIB. The Tribunal considers that the content of the references, their shared
Scandinavian origins, and the Spanish address/contact for Mr Davalos and Mr
Tommi Neuvonen suggested that the relationships between Joakim Broburg and the
three named persons were established ones.
(14)
Mr Souter stated that Joakim Broburg had no connection with Scorpion
Electronics LDA. The Tribunal is satisfied that there was a connection as
demonstrated by the facts that Joakim Broburg provided Scorpion with a
reference to FCIB, Scorpion had traded with Coberg, one of Mr Broburg’s
companies, and Scorpion had the same address as Powertec (another of Mr Broburg’s
companies).
(15)
Zorba SRO (Mr Davalos), Scorpion Electronics, (Joakim Broburg) Avoset
(Jussi Neuvonen) and Regent (Mr Davalos) formed the cell of traders as
identified by the FCIB analysis in contra-trading scheme 2 to which nine of the
Appellants’ disputed deals were connected.
(16)
Zorba SRO, Scorpion Electronics, Avoset, Regent, Valdemara Electronics
(Alexis Leroy) and Estocom Distribution (Alexis Leroy) were the six Tier 2 EU
customers and suppliers identified in contra-trading scheme 2.
(17)
FAF International (Tommi Neuvonen) featured prominently in the deals
conducted by Libra Graphics in contra-trading scheme 2.
(18)
Eurotronics (Mr Petrova’s company and the Appellants’ customer) traded
with Avoset (Alexis Leroy), Estocom (J.Neuvonen), and Scorpion (J. Broburg.
(19)
Officer Stone stated that it was within his knowledge that during 2005
and 2006 Joakim Broburg continued to feature in subsequent MTIC frauds and that
he administered a number of conduit companies in other EU Member States.
Officer Stone also identified that companies controlled by Joakim Broburg and
Alexis Leroy had featured in published decisions of the FTT Tribunal dealing
with Appeals against the refusal of repayment claims because of their
connection with MTIC fraud.
(20)
In February 2006 Libra Graphics sold Nokia N70 mobile phones to the value
of almost ₤1 million to Proinserco (Alexis Leroy). In March 2006 Libra
Graphics also sold Samsung mobile phones to the value of ₤400,000 and
Nokia N70 mobile phones to the value of ₤1 million to Proinserco.
(21)
On 1 March 2006 the Appellant, Libra Graphics attempted to validate with
HMRC at Redhill the VAT registration numbers of Proinserco and Coberg Trading
(Joakim Broburg). On 4 April 2006 and 10 April 2006 Libra Graphics attempted
again to validate the registration numbers of Proinserco and Coburg Trading.
HMRC refused to validate the registration numbers.
(22)
After the trades with Total Telecom in 2002 the Appellants continued to do
business with companies controlled by Alexis Leroy and Joakim Broburg into
2006.
Due Diligence
228. There was no
evidence of due diligence undertaken by the Appellants on the their customers,
Fremont Europe Associates SL and Spabel Marketing, and on Quebec and
Libantrust, the companies which loaned monies to the Appellants. Mr Souter
accepted that with hindsight the Appellants should have carried out due
diligence on Quebec and Libantrust.
229. The due
diligence on its customers Nova 2000, Elandour Development and CEMSA were
cursory and generally after the event. The Appellants ignored the
creditworthiness checks on these three companies, which indicated that the
Appellants should have been wary of doing business with them.
230. The Appellants
engaged the company T3K to conduct their due diligence procedures on Grange
Computers and Eurotronics, which in the Tribunal’s view, was a meaningless
exercise given the conflict of interest posed by the directorships of Mr Rose
in T3K and Grange Computers, and Mr Souter’s declaration that he traded with
Grange Computers because of his lengthy and close association with the
individuals running them. Essentially Grange Computers was doing the due
diligence on itself.
231. Despite the
Tribunal’s reservation about the meaningfulness of the due diligence carried
out on Grange Computers and Eurotronics, the actual due diligence completed was
not in accordance with the written procedures of T3K. Also the Appellants
ignored the negative indicators identified.
232. In respect of
Grange Computers, the letter of introduction was undated, the trade application
form signed by Mr Rose was dated 19 July 2006 after the dates of the disputed
trades and the trade reference for Grange Computers was given by Notebook
Express which was beneficially owned by Mr Souter. The Experian credit check
for Grange Computers put the company in the highest risk category.
233. Eurotronics’
letter of introduction was undated and largely identical to the Grange
Computers letter of introduction. The letter stated that “our experience has
been built up over a combined period of 15 years”. Given that Ms Petrova would
have been 27 in 2006, it was not clear to whom this reference to 15 years of
experience related. The accountant’s reference provided for Eurotronics was
dated 9 June 2006, after trading had commenced. Reference was made in a letter
from T3K to Eurotronics dated 18 May 2006 to a request for due diligence from
Christian/ Anthony at Grange Computers, which
suggested that Mr Souter was also involved in the affairs of Grange Computers. The
trade reference for Eurotronics was provided by Bryan Spiller at Libra
Graphics, dated both 24 January 2006 and 7 June 2006. This stated that Libra Graphics had traded with Eurotronics for
12 months. Given that Eurotronics commenced trading in January 2006, the
Appellant, Libra Graphics has provided on the face of it a false trade
reference to bolster its own due diligence checks into a customer.
234. Mr Souter was
unable in cross examination to give a satisfactory explanation for the
inconsistencies in the due diligence on Grange Computers and Eurotronics. He
accepted that a T3K report on Grange Computers did not have much validity. Mr
Souter also agreed that it seemed a bit ridiculous to pay for the due diligence
report on Eurotronics, particularly as Libra Graphics had been a trade referee
for Eurotronics.
235. Mr Souter
insisted that the Appellants had instructed Veracis to conduct due diligence on
their behalf. Mr Souter, however, produced no evidence of this except a 2005
Veracis report on Grange Computers, which indicated Mr Rose’s intention to move
steadily away from the higher risk activities. HMRC have interpreted Mr Rose’s
intention as referring to trade in high value mobile telephones. It would
appear that the Appellants paid little attention to the contents of the Veracis
Report, as the disputed deals were conducted in April and June 2006.
236. The Appellants
also relied on the fact that Libra Technology was visited by Officer Mendes on
nine occasions to verify VAT returns and inspect the deal documentation.
Officer Mendes, however, did not examine Libra Technology’s due diligence
informing Mr Souter that it was his responsibility to be satisfied about the
integrity of the deal chains.
Insurance
237. There was no evidence that the goods were adequately insured. Mr
Souter produced no insurance documents which referred expressly to the
Appellants by name, or to the specific goods consigned by the Appellants. Further Mr Souter
adduced no evidence of being invoiced for insurance.
238. Instead Mr Souter relied on a Standard Insurance Policy document of
Willis Limited Marine Insurance entered into on 23 March 2006 for a term of 12
months and which provided cover for consignments of up to ₤1 million
carried on one vehicle. The covering letter with the insurance policy document
was not specifically addressed to the Appellants. Even if this insurance policy
applied to the Appellants’ transactions, their reliance on it was misplaced.
HMRC carried out an analysis of the value of each deals, and the number of
trailers used to carry the consignments which was incorporated in Schedule
J to the
core bundle. The analysis revealed that in all but six of the transactions,
the Appellants were under insured for the consignments carried.
IMEI Scanning
239. The documents produced by the Appellants regarding IMEI scanning
did not demonstrate that the scans actually took place, except a single
Ontime Logistics invoice which referred to quantities and models corresponding
with the phones in core deal 17
Formal Contracts
240. Mr Souter
insisted that the Appellants had formal written contracts for its transactions,
which comprised a customer contract note as read with the standard terms and
conditions. The Appellants, however, did not produce details of the standard
terms and conditions.
241. Mr Souter
accepted in cross examination that the standard terms and conditions of the
Appellants and Grange Computers applied simultaneously. This would have been
the case in all the disputed deals. In each deal, the Appellants’ supplier
contract note to Grange Computers, provided that the Appellants’ standard terms
and conditions applied to the transaction. Conversely the customer contract
note provided to the Appellants by Grange Computers stipulated that the deal
was subject to its standard terms and conditions. Mr Souter did not consider it
unusual for one commercial deal between distinct trading entities to have two
sets of terms and conditions.
Commercial Documentation
242. The Appellants’
customer contract notes required the customer to return and sign a document
entitled Confirmation of Received Goods within five days. HMRC’s
analysis of the Confirmation documents revealed that in 23 deals,
the document was either missing or had a material defect or not returned within
five days. Mr Souter was not concerned about the flaws in the Confirmation
documentation arguing they were irrelevant and supplementary to CMRs
and other evidence of export of goods.
Legal Ownership
243. Mr Souter accepted that title did not pass to the Appellants until
they had paid for them. Further he acknowledged in cross-examination that did
not know who owned the goods at any one time. In core deal 1, the goods were
shipped by Libra Graphics on 13 April 2012, even though no payment was made to
Grange Computers until 11 May 2006. Shipment was made by the Appellants before
payment to its supplier also in deals 3, 4, 7, 9, 10, 11, 12, 13, 14, 15, 16,
17, 18, 19 20, 21, 22, 23, 24, 25, 26, 28.
Manuals
244. Mr Souter stated in cross examination that attention was paid to the
type of manual included with the mobile phone. The Appellants’ purchase orders
and invoices, however, did not specify the type of manuals required. HMRC’s
analysis at Schedule K to the Core Bundle shown that virtually all the manuals
provided with the mobile phones were in English, which was inconsistent with
the first language of the countries to which the consignments were dispatched.
Grey Market
245. Mr Souter accepted in his witness statement that his understanding
of the grey market, which he called the secondary market, largely coincided
with that of Mr Fletcher. Mr Souter argued that the Appellants had to move
quickly in this market where supply, demand and price fluctuated daily. He
stated that the Appellants did not speculatively acquire stock but relied on
established trading partnerships to meet the product requirements of its
customers. Mr Souter explained that in such a market where there was price
volatility and the margins were small the Appellants looked to complete the
transactions quickly because they would not be the only supplier looking for
specific stock.
246. Mr Souter’s depiction of the Appellants engaging in bona fide trades
trying to make a profit in a highly competitive market was undermined by his
evidence in cross-examination:
(1)
The Appellants did not try and improve its
profit margins by approaching tier one distributors, such as the Sol Group,
which was specifically mentioned by Mr Souter. Mr Souter assumed that Grange
Computers was obtaining its stock from large wholesalers.
(2)
Mr Souter was not concerned about the close
relationships and arrangements between the Appellants, Grange Computers, T3K,
Notebook Express, Nex Trading and Eurotronics, even though such arrangements
ran counter to his perception of a highly competitive market where the
participants did not disclose details of their suppliers and customers. The
fact that T3K did due diligence for the Appellants meant that Mr Rose, and,
thereby, Grange Computers, had access to the Appellants’ customer lists.
(3)
The admission of an unnamed individual on behalf
of Libra Technology that the company carried out an export for a Spanish
company. In evidence, Mr Souter was unable to explain the record of the admission
in HMRC’s visit report and give a commercial explanation for so acting for the
Spanish company. Mr Souter also stated that a UK company might legitimately ask
him to carry out an export if that company did not have the funds to do so.
(4)
Mr Souter’s explanation that CEMSA, a customer
of the Appellants, would pay more than necessary by virtue of having a higher
target price. This sort of behaviour was inconsistent with normal market
behaviour, particularly as Mr Souter confirmed it was possible to check the
current market price by phoning dealers advertising their wares on the
International Phone Traders (IPT) website.
(5)
Mr Souter offered no persuasive explanation for
why Grange Computers passed up the possibility of making greater margins by exporting
the mobile phones rather than selling them to the Appellants. Equally it made
more commercial sense for the Appellants to sell direct to Eurotronics’
customers, particularly as it would appear the majority of those customers were
known to Mr Souter..
247. The evidence
showed that the Appellants did not engage in the four grey market opportunities
identified by Mr Fletcher. They were box breaking, arbitrage, volume shortages
and dumping.
248. The Appellants
were not involved in box breaking (“handset unlocking” or “SIM unlocking”).
Such trading required access to large labour resources and facilities and was
inconsistent with the scale of operation ran by the Appellants. They employed
two members of staff who worked the telephones from an office.
249. The Appellants
were not involved in arbitrage in which mobile telephones were bought in one
country and exported to another for the purpose of taking advantage of
differential handset pricing in those countries. In the Appellants’ trading,
goods were purchased in the EU by one trader, introduced into the UK briefly, and then exported to EU traders. In some instances the eventual EU customer was
in the same country as the original EU supplier. This trading pattern was not
consistent with an attempt to take advantage of any differentials in pricing
policy. The Appellants also largely traded in Nokia mobile telephones. Nokia
had an homogenous pricing policy across Europe which meant that the only
potential arbitrage opportunity would arise from fluctuations in currency
values. Given that the Appellants’ deals were conducted on a back-to-back basis
there was no evidence that the Appellants sought to take advantage of currency
fluctuations. Indeed, all transactions took place in Sterling.
250. The Appellants
argued that Mr Fletcher undermined his own evidence about Nokia’s homogenous
rigid pricing policy, by accepting the existence of volume discounts and the
availability of marketing support payments. The Tribunal disagrees with the
Appellants’ assertion. The Tribunal’s understanding of Mr Fletcher’s evidence
was that the homogenous policy applied equally to volume discounts, namely, the
same discount was applied across the EU. The Tribunal was not convinced of the
relevance of marketing support payments to pricing, particularly as they were
made from a separate budget, and had to be applied to advertising.
251. The Appellants adduced
no evidence that their trade in mobile phones arose from spot failures or
volume shortages in the market. They did not retain stock and were not engaged
in the trade of specific types of mobile telephone. The Appellants used generic
product descriptions on their invoices.
252. Finally there
was no evidence that the Appellants were engaged in dumping opportunities The
Appellants bought their stock from companies other than authorised distributors
or manufacturers. Further Mr Souter admitted in evidence that the consignments
of Nokia N70 N90s N91s and 9300 phones were all high end and would not have
been dumped.
253. The Appellants
submitted that Mr Fletcher’s evidence carried little weight. They argued that
he had minimal experience of the mobile phone wholesale market in the relevant
period. In the Tribunal’s view Mr Fletcher held the necessary
credentials for giving his evidence. He was a chartered accountant with a Masters
in Business Administration from the London Business School. He had over 15
years experience in the telecoms industry, holding positions in audit,
accounting, corporate finance and international business development. More
recently he had worked as a strategic adviser to participants and investors in
the industry. He also had the assistance of two colleagues who had direct
experience of the wholesale grey market in mobile phones.
254. The Appellants
suggested that the research relied upon by Mr Fletcher did not include data
involving business to business sales. The Appellants overlooked Mr Fletcher’s
response in cross examination when he stated that the possibility of grey
market goods getting into business to business channels did not affect the
conclusions in his report.
255. Finally the
Appellants contended that M Fletcher’s evidence that authorised distributors
did not over purchase to gain advantage of volume discounts had been
contradicted by the contents of the report prepared by KPMG for the Anti
Gray Market Alliance. The Tribunal notes that this report did not deal with
the grey market in mobile phones.
256. The Tribunal
considers the Appellants’ challenge to the weight to be attached to Mr
Fletcher’s contradictory. The Appellants acknowledged that Mr Fletcher’s
evidence supported many of their assertions about the existence of a buoyant
grey market and its operation
which in the Tribunal’s view enhanced the accuracy and the relevance of Mr
Fletcher’s report.
The Findings on Knowledge
257. The Tribunal finds
as follows:
(1)
Mr Souter has not conducted his dealings with Officer’s Arnold in a straightforward manner. He failed to disclose until later the true status of Ms
Petrova as his wife and mother of his child. He did not tell Officer Arnold
about the involvement of Mr Rose’s investment vehicle, Platinum Base
Enterprises, in Libra Technology until confronted with the profit-share entry
in the audited accounts. He deliberately downplayed his role in Notebook
Express until he was found out by Officer Arnold’s enquiries. He gave
misleading information on the funding arrangements for the Appellants by
denying the existence of loans. He has refused to give details of the companies
investing in Libra Holdings which has provided finance for the Appellant’s
trading activities.
(2)
Mr Souter was fully aware at the time of entering the disputed
transactions of the high incidence of fraud in the mobile phone trade sector.
(3)
The Appellants did not have an arms length relationship with its
supplier, Grange Computers. At the heart of this relationship was the
longstanding friendship between their two directors, Mr Souter and Mr Rose. The
latter had also worked with Mr Souter as a director/consultant in setting up
deals for Libra Technology from 2002 to 2004. Mr Rose also had invested monies
in Libra Technology through Platinum Base Enterprise, and presumably benefited
from the profit share agreement which appeared in the 2004/05 accounts for
Libra Technology. Mr Rose’s knowledge of the Appellants’ business continued
after he set up Grange Computers through his directorship of T3K which
conducted the Appellants’ due diligence. Mr Souter, on the other hand, was held
out in the letter from T3K dated 18 May 2006 as having some involvement in the
business affairs of Grange Computers.
(4)
This blurring of the commercial boundaries between the Appellants and
their supplier, Grange Computers, was emphasised by the sharing of commercial
documentation templates and the help given by Marc Kimsey, of T3K and Grange
Computers, with the setting up of Libra Technology’s FCIB account. The
Tribunal is also satisfied that Mr Souter could not on his own operate the
Appellants’ FCIB accounts, which suggested that Mr Kimsey had a more active
role in the Appellants’ banking arrangements.
(5)
Mr Souter’s justification for dealing exclusively with Grange
Computers was not based on commercial considerations. The Appellants could
have made considerably more profit if they had sourced from suppliers further
down the chain. Grange Computer’s mark up on the deals was significantly more
than other buffer traders. The evidence of the higher price charged to CEMSA
indicated that the Appellants knew that Grange Computers was not securing the
best market price for the telephones. Mr Souter’s trust in Mr Rose for
delivering clean chains proved to be misplaced considering that all the
disputed deals were traced back to a fraudulent tax loss. Mr Souter knew that
the best way to secure a clean chain was to cut out the intermediate traders
and trade with tier one distributors such as Sol Trading but he made no effort
to do this.
(6)
Equally there was no commercial rationale for Grange Computers to
sell its mobile phones to the Appellants. Grange Computers had knowledge of the
Appellants’ customers through the involvement of Mr Rose, Mr Kimsey and T3K in
the Appellants’ business affairs. Grange Computers gave up the opportunity to
make more money by not exporting direct to the Appellants’ customers.
(7)
Ms Petrova’s instant success in the wholesaling
of mobile phones was incomprehensible on normal business grounds given her lack
of experience in this trade sector, and her decision to set up operations in Denmark where she had no connections.
(8)
Likewise Mr Souter’s reasons for trading with Ms
Petrova (Eurotronics) had no business logic. Mr Souter stated that he wanted to
help Ms Petrova to set up a business, and to ensure that the goods did not
return to the UK. By doing so Mr Souter gave up the chance to make more profit
by not selling direct to Ms Petrova’s customers. Further Mr Souter had no
guarantee that the goods would not return to the UK because on his account he
had no control over the actions of Eurotronics’ customers.
(9)
Mr Souter’s rationale of helping Ms Petrova
suggested a more plausible explanation for Ms Petrova’s instant success with
the wholesaling of mobile phones, namely, that in effect he was running Ms
Petrova’s business. This conclusion was supported by the evidence on the nature
of their relationship, the improbability of Ms Petrova’s commute to Denmark, the
use of the same fax machine for transmitting the respective companies’ business
documentation, the provision of a false trade reference and the drafting of
documentation exaggerating Ms Petrova’s experience, Mr Souter’s extensive
knowledge of the wholesale mobile phone market and finally Mr Souter’s connections
with Eurotronics’ customers.
(10) Eurotronics’ Customers included companies from the Broburg circle of
companies, the findings on which are set out in paragraph 227 above. The
Tribunal is satisfied that Mr Souter found these customers for Eurotronics
through his longstanding association with Joakim Broburg
(11)
Mr Souter’s links with Mr Williams and his interest
in Mr Williams’ companies, Notebook Express and Nex Trading, which had trading
relationships with Grange Computers and Eurotronics supported the existence of
a coherent and an orchestrated group of traders engaged in mobile phone
trading. Mr Souter was the common denominator in this trading group (the
Appellants, Grange Computers, Eurotronics, Notebook Express and Nex Trading).
(12)
The Appellants’ loans with Quebec Inc and Libantrust
Communication had no features of commercial loans: vague repayment terms, no
penalties, and no security given. The wider circumstances surrounding the loans
added further doubt on their commercial authenticity. The offer of the loans to
Mr Souter apparently came out of the blue. The Appellants have not repaid the
loans. Quebec Inc and Libantrust have taken no steps to recover the monies due
from the Appellants.
(13)
The discovery that Bulat/Biscay financed the purported
loans to the Appellants shed light on the true nature of the loans.
Bulat/Biscay featured prominently in the money movements associated with the
Appellants’ direct tax loss deals and with contra-trading scheme 3. The
involvement of Bulat/Biscay provided a plausible explanation for the commercial
unreality of the money advances from Quebec Inc and Libantrust. They were not
loans but monies given to the Appellants to facilitate the fraud on the
revenue.
(14)
The role of Bulat/Biscay in the purported loans and
Eurotronics’ trades with the Broburg companies that formed part of the Tier 2
EU customers and suppliers in contra-trading scheme 2 undermined Mr Souter’s
assertions that he was unaware of the overall fraudulent scheme to defraud
public revenue.
(15)
The Appellants carried out no effective due diligence
on its supplier and customers. Mr Souter was forced to admit the absurdity of
engaging T3K to report on Grange Computers. He also accepted that it was
ridiculous to pay for due diligence on Eurotronics, particularly as Libra
Graphics acted as Eurotronics’ trade referee. There was no evidence that the
Appellants had engaged Veracis to conduct due diligence on their behalf.
(16)
The Appellants did not have insurance in place for
their transactions. The Tribunal was not convinced that the Willis Limited
Marine Insurance Policy applied to the Appellants’ transactions.
(17)
There was no evidence that the Appellants performed
IMEI scans on the consignments purchased.
(18)
Mr Souter’s assertion that there was nothing unusual in
having two sets of terms and conditions governing the Appellants’ transactions
with Grange Computers confirmed the commercial unreality of the trading
relationship with Grange Computers.
(19)
Mr Souter’s indifference about the flaws with the Confirmation of
Received Goods documentation, the shipment of goods before legal title had
passed to the Appellant and the inclusion of incorrect manuals demonstrated his
disregard of the Appellants’ stated business practices.
(20)
There was no evidence that the Appellants availed themselves of one of
the four grey market opportunities identified by Mr Fletcher. The Appellants’
practices ran contrary to Mr Souter’s depiction of the grey market as fast
moving and highly competitive. The Appellants made no attempt to improve its
profit margins, and had no arms length relationships with their trading
partners.
Tribunal’s Conclusion on Knowledge
258.The Court of
Appeal in Mobilx emphasised that the knowledge test was simple and
should not be over-refined. The question before the Tribunal is, having regard
to objective factors, did the Appellants knew or should have known at the time
of entering the disputed transactions that they were connected with fraud. The
question is essentially one of fact to be determined having regard to objective
facts or factors. The Tribunal in approaching this question should have
regard to the big picture, meaning all the circumstances surrounding the
transactions in question.
259. The test in
relation to the Appellants’ state of knowledge remains the same whether the
transaction chain involved contra-trading or a simple tax loss chain. Mr
Justice Briggs in Megtian Limited (in Administration) v The Commissioners
for HMRC [2010] EWHC 18 (Ch) said at paragraphs 37 and 38:
“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 took place.
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 multi-faceted 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 might be an appropriate basis for analysis”.
260. Mr Justice Roth in
Powa (Jersey) Ltd agreed with Mr Justice Briggs concluding at paragraph
53:
“In any event, it is clear from the Court of
Appeal judgment in Mobilx, where one of the three cases under appeal was Blue
Sphere Global, that no special approach is required in a case involved in
contra-trading. The correct test as regards knowledge is always the same. It is
the test derived from Kittel as set out in para [59] of Moses LJs judgment:…”
261. The Appellants
contended that there was no direct evidence that they were knowing
participants in MTIC fraud. The Appellants argued that the HMRC’s case was
based upon inference from a wide range of factors; no single set of facts was
put forward as demonstrating that the Appellants must have known of the
connection to fraud.
262. The Appellants submitted that the Tribunal should take care in
analysing such a range of factors to avoid imputing the trader with knowledge
of matters that were only appreciable with the benefit of hindsight. The
Appellants referred to the FTT decision in Hira v HMRC [2011] UKFTT 450:
“115. When
considering “a wide range of factors” it is difficult to be
forensically
analytical about when a trader’s “suspicion” of a
connection with
fraud actually hardened into “knowledge” of that
connection; and
only marginally less difficult to say when that
hardening should
have taken place.
116. A very convincing picture will need to be
painted before a tribunal can make an inferential finding of actual knowledge
of a connection to fraud”.
263. The Appellants’ maintained that there was insufficient evidence to
prove that they knew or ought to have known that the only reason for their
transactions were that they were connected to fraud.
264. The Tribunal does not find the citation from Hira helpful.
The Tribunal has to be satisfied that the Appellants knew or should have been
known of the connection to the fraud at the time they entered each transaction.
HMRC has to prove on the balance of probabilities that the Appellants had the
requisite state of knowledge at the relevant time
265. In this Appeal the Tribunal has found that each of the Appellants’
disputed transactions was connected to a fraudulent tax loss and that the
transactions were part of an overall scheme to defraud. It follows from
this finding that the Appellants were involved in an overall scheme to defraud,
and that they performed a critical role in the fraud by operating as a broker
trader responsible for the claim of the VAT repayment. The question then is did
the Appellants know or should have known of the fraud when they entered the
transactions or were they innocent dupes manipulated by the fraudsters.
266. HMRC argued that
the only plausible explanation for the Appellants’ involvement in the scheme was
that they were knowing parties to the fraud. Mr Souter insisted that the
Appellants were manipulated by fraudsters.
267. The Tribunal’s
findings on the Appellants’ knowledge portrayed a compelling picture that the
Appellants knew at the time of entering the transactions that they were
connected with fraud.
268. The Tribunal found a high degree of co-ordination and co-operation
between the Appellants, its supplier, principal customer and associated
companies which went significantly beyond what would be expected in commercial relationships
and extended to the Appellants’ bank account and details of their customers. Behind
this web of corporate harmony sat a group of individuals bound together by
their relationships with Mr Souter.
269. The Appellants’ way of doing business with its partners dominated by
a high degree of co-ordination and strong personal relationships replicated
features found in the overall fraudulent scheme of trading involving connected
companies and the co-ordination of activities as represented in the overall
scheme by the use of common IP addresses and the circularity of monies and
goods.
270. The findings on the Appellant’s funding arrangements in particular
the “loans” and the involvement of Bulat/Biscay in those “loans” indicated that
the Appellants’ activities were being co-ordinated by persons close the fraud. The
funding role of Bulat/Biscay and Ms Petrova’s trades with Broburg companies undermined
Mr Souter’s assertion that he was unaware of the overall fraudulent scheme to
defraud public revenue.
271. The Appellants’
trades with Eurotronics and Grange Computers were bereft of a commercial
rationale. The Appellants forwent the opportunity to maximise their profits by
not cutting out Grange Computers from their supply line and by not selling
direct to the customers of Eurotronics, which were on the Tribunal’s findings
introduced by Mr Souter. Equally Grange Computers missed their chance to sell
direct to the Appellants’ customers, of which it had full knowledge.
272. The Appellants’
conduct of their business did not conform to the demands of a highly
competitive and fast moving secondary market as described by Mr Souter. The
Appellants made no attempt to get close to the first tier distributors. They
bought and sold goods above market price. Their relationships with their
trading partners were not arms length. There was no evidence of the Appellants exploiting
a grey market opportunity.
273. The fact that the Appellants carried on trading despite meaningless
due diligence, the absence of insurance and title to the goods, and the
disregard of commercial practices purportedly agreed between the parties
demonstrated the contrived nature of their transactions. The Appellants knew
whatever happened they would get paid.
274. The Appellants argued that Mr Souter was of good character with a
long history of working in the mobile phone sector. The Tribunal found that Mr
Souter’s credibility as a witness was undermined by the manner in which he
dealt with Officer Arnold’s enquiries. Overall Mr Souter’s evidence was
unconvincing when confronted with the strength of HMRC’s case against the
Appellants. Apart from Mr Souter, no witnesses were called on behalf of the
Appellants.
275. The Appellants relied on the frequent visits made by Officer Mendes
to verify their VAT returns. The Tribunal placed no weight on Officer Mendes’
evidence. The visits happened before the dates of the disputed transactions,
and at a time when HMRC’s knowledge of the complexities of MTIC fraud was in
its infancy. Officer Mendes’ evidence, in any event, did not assist the
Appellants’ case. Essentially Officer Mendes said it was the Appellants’ choice
with whom they traded, and their responsibility to ensure the soundness of
their due diligence. The Tribunal has dealt with the other points raised by the
Appellants in the body of decision.
276. The Tribunal is satisfied from its findings at paragraph 257 and
discussed above that the Appellants knew at the time of entering the
disputed transactions that each of those transactions was connected with the
fraudulent evasion of VAT.
Discrimination Argument
277. The Appellants’ argued that HMRC’s policy of selecting one class of
traders namely exporters on the basis of resources available was discriminatory
and contrary to the EU law principle of non-discrimination.
278. The Appellants’
further argued that in Libra Graphic’s case there was
specific discrimination by allowing Mediawatch over £1 million input tax credit
on transactions on the basis that it relied on invoices allegedly issued by the
defaulting trader, a Taxable Person Purporting to be Lewis Davis Productions.
The Appellants pointed out that Mediawatch was the defaulting trader in deals 8-13,
19, 20, 22 and 23. Also according to the Appellants. Officer Stone had no
explanation for why Mediawatch had received the tax repayment of over £1
million.
279. The Tribunal considers that the discrimination point has been
comprehensively rejected by the Upper Tribunal on two occasions in S
& I v HMRC [2012] UKUT 87 (TCC) and Powa (Jersey) Ltd v HMRC [2012] UKUT 50 (TCC). Mr Justice Newey
stated in S& I at paragraphs 33-37
“ [33] Another ground of appeal
relies on the principle of nondiscrimination. One implication of the principle,
Mr Patchett Joyce argued, is that EU law needs to be applied uniformly. That
was not the case, it is said, in the present context: HMRC denied input tax to
S&I and exporters (referred to as “brokers”) but not to “buffers” in the
chains who bought and sold phones within the United Kingdom.
[34] It was similarly submitted to
the FTT that HMRC should be barred from contesting input tax entitlement if
their approach was tainted by a discriminatory policy for which there was no
objective justification. The FTT, however, decided that HMRC’s conduct was not
relevant. Among other things, it concluded that “the effect of the Kittel
principle is to limit a trader’s right to repayment of VAT” rather than to
confer a discretion on HMRC (paragraph 82), with the result that “HMRC’s action
cannot affect the proper amount of tax in this case” and “the actions of the
administration in applying that law and in selecting the cases in which they
seek to apply it are irrelevant to us” (paragraph 84). If, the FTT went on,
“S&I say that HMRC’s actions are, in this case, or more generally, contrary
to EU law, then that cannot be a matter for this tribunal for we have no
general jurisdiction to review their actions: S&I must seek relief in a
different forum” (paragraph 84).
[35] A nondiscrimination argument
was also rejected in 4 Distribution Ltd v Commissioners for Her Majesty’s
Revenue and Customs [2009] UKFTT 242 (TC). In that case, the FTT (Judge
Walters QC and Ms O’Neill) took the view that “circumstances which demonstrate
that the Appellant has abused its right to repayment of input tax also
demonstrate that it has abused any right not to be discriminated against as a
trader supplying to an entity in another Member State” (paragraph 133). The FTT
continued as follows:
“134.
The ECJ said in Kittel at [54] that ‘Community law cannot be relied on for
abusive or fraudulent ends’ and cited Kefalas and Others (Case C367/96) [1998] ECR I2843 at [20], Diamantis (Case C373/97) [2000] ECR I1705 at [33] and Fini H
(Case C32/03) [2005] ECR I1599 at [32] in support of that proposition.
135. In
any event, we are not satisfied that the circumstances of this appeal do, or
even could, give rise to any right in the Appellant's favour not to be
discriminated against as a trader supplying to an entity in another Member
State.
136. It
seems to us that the Appellant's point that where a Tribunal has found
objective knowledge sufficient to deny repayment of input tax as a matter of
law, nevertheless that result can, as a matter of law, be reversed by reliance
on another Community law principle (equal treatment) is clearly misconceived.”
280. Mr Justice Roth
J in POWA stated at paragraph 60:
“As to non-discrimination, this Appeal concerns the
decision by HMRC that the objective criteria determining the right to deduct
input tax were not met as regards these claims for repayment by PJL. If that is
the case, PJL were not entitled to such repayments, irrespective of the
position of anyone else. ………Furthermore whether HMRC could have applied a
similar approach to the traders who served as buffers in the chains (who would
generally not be making a repayment claim to HMRC but simply crediting the
input tax against the output tax received) does not affect that conclusion; and
whether HMRC should have pursued those traders for an account of the output tax
received is a question of policy regarding the effective enforcement of the VAT
regime, with no doubt limited resources. Accordingly, I consider that the
principle of non-discrimination is not engaged”.
281. The Tribunal has found that the Appellants knew that their
transactions were connected to fraud. Given that finding the Tribunal is bound
by the decisions of the Upper Tribunal which effectively states that such
traders are not entitled to rely on another Community Principle to reverse the
finding that they have abused their rights to repayment of input tax. The
Tribunal considers this principle applied equally to the specific
discrimination relied upon by the Appellants in respect of HMRC’s treatment of
Mediawatch.
282. The Tribunal, however, questions the factual basis of the
Appellant’s specific allegation of discrimination in the case of the
Mediawatch. The facts were that Mediawatch was originally assessed for ₤10.8
million which was reduced to ₤8.9 million following the discovery of
purchase invoices from Lewis Davis Productions for transactions from 3 April
2006 to 4 May 2006. HMRC’s rationale was that Lewis Davis Productions not
Mediawatch was the missing trader for these transactions, in which case the tax
loss should be re-allocated to the correct missing trader. Given those
circumstances HMRC’s treatment of Mediawatch was consistent with its policy of
raising assessments against missing traders and denying the input tax claimed
by the broker traders. Thus there was nothing distinctive about the Appellants’
allegation of specific discrimination. HMRC’s decision in respect of Mediawatch
was a direct application of its policy which was considered by the Upper Tribunal
in S & I and POWA.
Decision
283. The Tribunal finds the following:
(1) There was a VAT loss
in each of the Appellants’ disputed transactions.
(2) The loss in each of
the Appellants’ disputed transactions was occasioned by fraud.
(3) Each of the disputed
transactions was connected with the fraudulent evasion of VAT.
(4)
The Appellants knew at the time of entering the disputed transactions
that each of those transactions was connected with the fraudulent evasion of
VAT.
284. The Tribunal, therefore, dismisses the Appeal and confirms HMRC denial
of input tax in the total sum of £6,715,314.73 claimed in the VAT quarterly
accounting periods 04/06, 05/06 and 06/06. in respect of 26 transactions
(29deals).
285. The Tribunal
invites the parties’ representations on the question of costs within 56 days
from the date of the decision. According to the Appellants no directions have
been made about whether the 1986 or 2009 Rules apply to this Appeal.
286. In the absence
of agreement leave is given to parties within 56 days of release to apply for a
determination of the amount of the costs order under rule 10(1)(b) of the 2009
Rules and referred to in paragraph 21.
287. 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.
MICHAEL
TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 12 March 2013
