19880

VAT – Input tax – Goods acquired and sold on to EU traders – Goods situated in haulier’s warehouse – Supplier failed to account for output tax – Whether Appellant has shown that goods existed – No  

Zero-rating – Supplies to EU traders for removal from UK – Whether Appellant has shown that goods removed – No

LONDON TRIBUNAL CENTRE

	HOUSE OF GOODNESS LTD	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	THEODORE WALLACE (Chairman)
						KENNETH GODDARD MBE

Sitting in public in London on 3-5 July 2006

Timothy Brown, counsel, instructed by Grant Thornton LLP, for the Appellant 

Richard Smith, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This appeal concerns input tax claimed by the Appellant in its monthly returns in respect of supplies to the Appellant of confectionery, soft drinks and toiletries, and output tax on the onward sales by the Appellant to EU traders.  Customs disallowed the input tax claimed by the Appellant and in the alternative raised assessments on the onward sales.

2.	The case for Customs before the Tribunal was that the Appellant had not established the existence of the goods, which were invoiced to it by XYZ Imports and Exports Ltd (“XYZ”) and sold by the Appellant to La Red, a Spanish company.  Alternatively, Customs contended that the Appellant had not shown that the goods in question for all of which GT Roadways Ltd (“GT”) was shown as haulier were removed from the UK so as to qualify for zero-rating under section 30(8) of the VAT Act 1994; for convenience we refer to sales to traders in other EU states involving their removal from the UK as exports, although in EU terms this is not strictly correct.

3.	The initial appeal was against decisions on 12 September 2005 disallowing £1,262,780 input tax on invoices from XYZ and also from Sahkey 20Four7 Supplies Ltd (“Sahkey”) in periods 04/05 to 06/05.  In December 2005 Customs allowed the Sahkey inputs but raised output tax assessments in respect of the sales on by the Appellant.  On 24 January 2006 Customs allowed the input tax on £180,834 of the XYZ supplies leaving £911,276 XYZ invoices disallowed and vacated the output tax assessments on the Sahkey transactions.  

4.	On 15 May 2006 Customs disallowed a total of £1,188,592 input tax for periods 01/05 to 03/05 which had previously been repaid.  All of this related to XYZ invoices.  These assessments gave rise to an appeal on 31 May 2006 under reference LON/2006/607.  Also on 15 May 2006 Customs assessed output tax again on goods bought from Sahkey although these had been dropped in January.  The input tax disallowed for 01/05 to 03/05 were altered twice more in June, the total figure assessed for those periods on 27 June 2006 being £1,134,483.

5.	On 9 February 2006 Customs raised output tax assessments for periods 07/05 and 08/05 totalling £815,172 in respect of the goods covered by the 04/05 and 05/05 input tax decisions on the footing that if the supplies by XYZ did take place, the Appellant had not shown that the goods were exported and VAT was therefore due on the sales. On 15 May 2006 Customs raised further assessments for 04/05 to 06/05 in respect of sales to Famtrade not involving XYZ totalling £193,727 on the basis that there was insufficient evidence of export; these last assessments were withdrawn on 27 June 2006.

6.	The Tribunal allowed oral applications by the Appellant to amend the original appeal in 2005 to cover the decisions on 27 June in respect of periods 01/05 to 03/05 and to cover output tax.  We also direct that the appeals be consolidated.  The total input tax now in dispute is £2,045,759.  The output tax assessments which are alternative total £815,172.

7.	It appears that there were no fewer than ten changes in the decisions or assessments by Customs following the original decision which preceded the decisions of 12 September 2005, some involving increases and some reductions.  It is not normal for Customs to increase assessments already under appeal instead of asking the Tribunal to do so under section 84(5).  Technically, each time an assessment was increased, either the notice of appeal should have been amended or a further appeal should have been lodged.  In the event the appeals were treated by both parties as covering all the further or alternative assessments.

8.	Matters were further confused by the fact that the Statement of Case by Customs which was served on 9 March 2006 gave an incorrect figure for the initial decisions under appeal and was not amended to cover the significant changes in the decisions under appeal thereafter.

9.	There were four witnesses all of whom confirmed written statements and were cross-examined: Mrs Hilary Oldham, FCA, finance director of the Appellant, Nicholas Everard, a trading manager, and Jas Seidler, a trader, for the Appellant, and Mrs Susan Bransgrove, a higher officer of Revenue and Customs.

10.	There was a substantial common bundle.

11.	The following facts were not in dispute.

12.	The Appellant was registered for VAT in 1975. Its UK sales are wholesale health and whole foods and agricultural products.  It also has a trading department engaged in bulk trades in the same type of goods as the wholesale department; this expanded in the 1990s to branded goods, including Kit Kat, toothpaste and Red Bull.

13.	The trading department operates on low margins.  The disputed transactions involved goods which are standard rated in the UK but were sold for export to other EU states. The Appellant had therefore to fund the VAT until obtaining repayment.  The Appellant also sold goods to customers outside the EU, including the USA, and made some zero-rated sales of food in the UK as well as standard rated sales.

14.	The Appellant rendered monthly returns.  Before the periods in dispute the sums reclaimed were very much smaller, although no details were produced in evidence.

15.	For the six monthly periods 01/05 to 06/05 the returns showed the following figures:

		      01/05	 02/05	         03/05	    04/05          05/05	    06/05	    
     Box 3	  £  61,235     £   42,583	    £    75,338	£ 48,221     £  58,322	 £ 68,736
     Box 4	  £456,705     £ 673,869     £1,022,284    £716,008     £934,412      £190,271
     Box 5	 £(395,470)   £(631,286)     £(946,946)  £(667,787)  £(876,090)   £(121,534)

Disallowed          £262,833      £415,941       £ 455,708    £292,748    £618,529	       NIL

The last line showing input tax disallowed at the time of the hearing was not of course on the returns.

16.	By the time of the appeal hearing Customs accepted that all the goods invoiced by Sahkey did exist and that they had been despatched to Famtrade in Belgium.

17.	Customs also accepted that goods invoiced by XYZ and sold by the Appellant to Famtrade and other customers did exist and had been despatched abroad, some of them to California.  Some of those goods went to the Appellant’s warehouse and some to London Logistics; none  of those goods went to GT’s warehouse.

18.	The dispute before the Tribunal was solely in respect of goods invoiced to the Appellant by XYZ and sold by the Appellant to La Red in Majorca for delivery to Stuttgart in Germany; according to the documentation, all of those goods were delivered to the premises of GT at Unit 91, 100 Ross Walk, Leicester, and shipped by GT at the expense of La Red to Internationale Weltweit, Augsburger Strasse 421, Stuttgart.

19.	The VAT Return for XYZ for the quarter to March 2005 showed output tax of £57,832 whereas the VAT on the Appellant’s disallowed invoices from XYZ for the same three months was £1,134,482.  XYZ was deregistered with effect from 16 June 2005 when no one was available when an officer called at its offices.  XYZ did not submit a return for the final period.  It did not therefore account for the £911,277 disallowed invoices to the Appellant for April and May 2005 or indeed for any of the invoices to the Appellant totalling £180,835 which were allowed on 24 January 2006.  XYZ declared £57,124 output tax for period 12/04 but nil output tax for the five periods before that, in four of which periods it made small repayment claims.

20.	GT went into voluntary liquidation on 29 July 2005.  At the time of liquidation, the directors’ report by Parminder Dosanjh gave its trading address as Unit 91, 100 Ross Walk, showed the business as haulage and stated that the premises were rented on an informal basis.  The report stated that a refund of £8,000 was due from Customs.  Unsecured creditors included Leicester Express Logistics Ltd £3,525 on an inter-company loan and P&O Ferries Ltd £12,000.  The report stated that, when the company’s bank account was frozen in September/October 2004, the business of the company was transferred to Halemead Corporation Ltd.  The report stated that GT made an estimated loss of £100,627 between 1 March 2003 and the date of winding-up. The documents held by the liquidator of GT included Halemead documents with sales invoices for 07/04 to 01/05 and bank statements to 06/05.  There were GT purchase invoices up to 03/05 and sales invoices up to 12/04.  Many of the GT and Halemead records were mixed up.

21.	Leicester Express Logistics Ltd and Halemead Corporation Ltd had a common director, Jagdish Kaur.  Leicester Express Logistics Ltd was also engaged in freight transport.

22.	There was no evidence of any visits by Customs to GT other than a letter dated 4 March 2004 from Customs making an appointment for a visit to GT at Ross Walk for 17 March 2004 to examine paperwork for a load to Holland.

23.	Payments by the Appellant to XYZ were debited to the Appellant’s bank account in respect of all the disputed supplies.

24.	The Appellant received payments for all the disputed La Red supplies from an intermediary, FX Solutions Ltd.  The Appellant was paid for the goods before it paid for them. Mrs Oldham authorised online transfers to XYZ once payment had been received by the Appellant.

25.	On 22 December 2004 and 22 February 2005 Mick Tate, a Customs officer, visited the Appellant to inspect the VAT records.  At the second visit he approved the 01/05 repayment claim most of which is now in dispute.

26.	The next visit after those by Mr Tate was on 19 May 2005 by John Ward and Mrs Bransgrove: this was unannounced. Further visits by those two officers followed on 2 and 14 June 2005. There were further visits on 23 July and 12 August 2005 at which Mrs Bransgrove was not present. Apart from 23 July Customs produced no notes or visit reports for any of the visits. There was no evidence as to what documents were uplifted.

27.	Documents in relation to invoice 422340 by the Appellant to La Red dated 31 May 2005 for 11,520 packs of 24 Kit Kat Chocolate at a unit price of £3.41 totalling £39,283.20 were produced by the Appellant as a typical example of documentation.  A CMR (or international consignment note) showed GT as the carrier and Internationale Weltwit (misspelt) in Stuttgart as the consignee; the date of taking over the goods was 25 May which was the date of the carrier’s stamp; the cargo was 40 pallets of Kit Kat; the CMR bore a stamp in the name of Internationale Weltweit.  Two certificates of shipment by GT, with the Ross Walk address, telephone and fax numbers dated 25 May showed the Appellant as consignor (as did the CMR), Internationale Weltweit as consignee and “PO” against vessel; one was for 32 packages and the other 40.  An invoice from XYZ dated 26 May to the Appellant for 11,520 Kit Kat Chocolate showed the unit price as £3.33 totalling £38,361.60 plus VAT of £6,713.28.  An order from La Red dated 30 May showed the same quantities and price as the invoice from the Appellant; the order number 2005-0340 and VAT number ES-B57041345 were also on the Appellant’s invoice; the order was ex-works with the cost of carriage to La Red’s account.  There was an invoice dated 16 May 2005 from La Red to Internationale Weltweit for 11,520 Kit Kat at £3.43 per unit totalling £39,513.60. Internal documents of the Appellant recorded receipt of the goods from XYZ with XYZ’s invoice price and a manuscript endorsement by Mr Everard and stock allocation. The CMR and Certificates of Shipment had been provided to the Appellant at the time.  The invoice from XYZ was one of seven on 26 May totalling £320,463 plus VAT all of which were ordered by La Red on 30 May and invoiced by the Appellant to La Red on 31 May.  There were three CMRs to Internationale Weltweit dated 25 May.  The matching invoices from La Red to Internationale Weltweit were dated between 14 April and 16 May.  La Red’s overall margin on those deals was under 1 per cent before the costs of warehousing and transport.

The witnesses

28.	Mrs Oldham, Mr Everard and Mr Seidler were all in our view honest witnesses.  There was no challenge to their honesty. Apart from our observation on the evidence of Mr Seidler at paragraph 37, we accept their evidence of the facts so far as the facts were within their knowledge.

29.	Mrs Oldham said that turnover in 2005 had been around £30 million of which £23 million related to trading transactions and £5 million was wholesale health foods.  Trading and VAT reclaims had increased month on month from January to April 2005.  In the last year EU sales of bulk branded commodities had been very small because the working capital was sitting with Customs pending the appeal.

30.	Mrs Oldham said that it is quite normal for container loads of the Appellant’s type of goods to be delivered to premises specified by the customer rather than to the Appellant’s premises; frequently a customer asks for delivery to its customer.  GT was La Red’s  haulier.

31.	She said that there had been no complaints by customers as to the goods sold to La Red.

32.	She said that at the visit in February 2005 Mr Tate told Mr Everard and herself that the type of paperwork kept was satisfactory evidence.  While at the visit Mr Tate spoke to a colleague on the telephone in her presence and said that he was happy with the January repayment claim.   The repayment claims for 01/05, 02/05 and 03/05 were all paid by Customs.

33.	Mrs Oldham said that she was very conscious of the risk of money laundering.  She was also conscious of the risk of carousel frauds.  There was no trade until an initial risk assessment as to the financial status of suppliers and customers and as to the market status of the goods.  Risk assessment was ongoing.  The directors had had no reason to believe that there was anything to stop them entering into the trades in question. There was no need to visit La Red in Spain since there was no real risk to the Appellant on the basis that it was paid in advance although it was out of pocket for a number of weeks for VAT.  The Appellant was able to engage in the trades with a very small margin because it had the working capital to fund the VAT.  She said that many UK traders or suppliers could not sell to Europe direct because they did not have the cash resources to fund the VAT.

34.	In her statement she said that she had provided Customs with photocopies of every purchase invoice from XYZ and every invoice to La Red with the associated shipping documents and spreadsheets and also a full copy of bank statements.

35.	Mr Seidler stated that part of his responsibility was to identify potential suppliers and purchasers of products in which the Appellant traded.  He received up to 200 enquiries a day by fax, e-mail and telephone, often arising from the Appellant’s website.  In late 2004 he was contacted by La Red in Spain and by XYZ.  XYZ sent a product list which included products in which the Appellant already traded. 

36.	He stated that La Red sent a letter of introduction setting out the products they wanted which included Red Bull which was on XYZ’s list.  XYZ had informed him that their goods were at GT’s warehouse in Leicester and he passed this information to La Red who instructed GT to transport the goods.

37.	He said that he was involved in the Kit Kat transactions described at paragraph 27.  The orders were received by fax following earlier communications; he passed the order to the supplier who came back if there was a problem.  Some of the products La Red wanted were obtained from XYZ which had a lot of European products.  He passed on the orders by e-mail or telephone, mostly speaking to Harry at XYZ.  Generally La Red ordered 1-2 weeks ahead to give time to source the product.  Once the goods were available at GT he invoiced La Red.  He said that he might not contact La Red between order and invoice. XYZ advised him that the goods were at GT either verbally or by invoicing. He told GT that La Red would arrange collection and delivery but that the Appellant needed proof of export on a weekly basis. He received CMRs and Certificates of Shipment weekly by post; he did not remember the name of the person at GT to whom he spoke.  He said that until he received the CMRs he did not know that the goods were going to Germany.  We note that the sequence and timing does not fully accord with the documents described at paragraph 27 above.  We return to this.

38.	Mr Seidler said that after some business with XYZ, Mr Ali from XYZ arranged to meet him at a service station on the M1.  He was short and stocky with a beard.  He did not really remember the conversation.

39.	Cross-examined, he said that he received the details of GT from XYZ. When he received an order from La Red he would put in an order to XYZ.  If there was no problem, XYZ would accept the order perhaps with slightly different quantities. He might have a number of orders in a week but it was not difficult to keep track. He might not contact La Red again until issuing an invoice. The price figured in the orders; he added a margin of at least 3 to 1½ % to XYZ’s price; on the lower rate he had to get approval.

40.	He told the Tribunal that once the Appellant had received payment from La Red he instructed GT to release the goods; GT should not have despatched the goods until then.  

41.	Mr Seidler told Mr Smith that he assumed that XYZ paid GT to handle the goods.  The Appellant had no contractual relations with GT.  He obtained the details of GT from XYZ.  He did not know the size of GT, he assumed it had a warehouse.  He presumed that La Red had had no contact with GT until he told La Red that the goods were stored there.  By the time the transport had been arranged the payments would have been made.  He was unaware of what hold XYZ had on the goods at GT; as far as the Appellant was concerned, the Appellant was taking ownership of the goods and then releasing them.

42.	Mr Everard said that XYZ approached the Appellant towards the end of 2004.  He was instructed by Ed Hunt, the Appellant’s wholesale director, to carry out due diligence checks in accordance with standard procedure. Investigations showed that XYZ was set up in June 2003 and had been supplying Red Bull drinks to some of the Appellant’s other customers.  He obtained a Dun and Bradsheet (“D&B”) report.

43.	La Red also approached the Appellant.  He obtained a D&B report on La Red dated 15 December 2004.  He carried out a risk assessment filling in a four page questionnaire.  The questionnaire was finalised on 27 April for a directors’ meeting but different elements of risk had been ticked off earlier.  A company search on 17 January 2005 confirmed that FX Solutions Ltd was active.  He formed the view that there was no reason not to trade with La Red: the credit risk was acceptable because the Appellant was being paid up front.  As at 27 April sales to La Red had been : January £1.75 million; February £1.85 million; March £3.25 million and April £2.01 million.

44.	He said that Mr Seidler had been told that some goods were to be delivered to GT in April 2005.  He met the supplier, XYZ, at GT’s premises to inspect the goods : this was on 12 April.  He initiated the appointment and spoke to Mr Ali, of XYZ, to confirm it.  He had the address of GT from the Certificates of Shipment and Mr Ali confirmed this.

45.	Mr Everard said that on arrival at the industrial estate where GT was situated he told security that he was there to meet someone from XYZ and called Mr Ali on his mobile.  Mr Ali came to meet him and he followed Mr Ali to a unit which he assumed was 91; it was a smallish unit.  The estate was fairly run down.  Outside the unit there was a 40 foot articulated lorry fully loaded with Colgate toothpaste.  Mr Everard had been informed by Mr Seidler that two mixed trucks of Colgate and one truck of Red Bull had been ordered that week.  He inspected the cartons and took down the batch numbers; Colgate later confirmed those as coming from their stock.  Inside the unit he saw about 60 pallets of Red Bull on the floor.  There were two operatives who went away for lunch; he did not speak to them.  There were two or three trucks in all in the compound, one in GT Roadways livery; he could not recall whether the vehicle outside was in GT livery.  He had a camera with him to take photographs however it did not work.  He did not recall seeing any goods apart from Red Bull and Colgate.  He did not count the quantities.  He confirmed that apart from the visit he did no other checks on GT.

46.	Mr Everard said that Mr Ali was an affable young man in his early thirties and was clean shaven.  They discussed terms of trade; he asked for longer credit than a few days but Mr Ali was unwilling to agree.  Mr Ali said that he was sourcing stock from Asian symbols.  Mr Ali said that GT was not very efficient and mentioned the possibility of changing to Seawheel, a company which Mr Everard knew.

47.	Mr Everard said that there had been unsuccessful attempts to visit FX Solutions.  He did not visit XYZ but had details of the D&B Report.  He had not considered checking on the consignee. The only reason why he might have checked Internationale Weltweit would have been to pinch La Red’s customer.

48.	He said that after business ceased he had been in contact with La Red to ask for help with documents. He had telephoned and e-mailed. Christina at La Red would call him back; he understood her to be the bookkeeper. La Red had provided invoices, an example being an invoice on 16 May 2005 to Internationale Weltweit for Colgate Total; this was faxed on 8 June 2006. When he spoke to her last Christina said that La Red had been deregistered and was still having difficulty over its registration.

49.	The only witness for Customs was Mrs Bransgrove.  Again she was clearly an honest witness.  Nearly all of her evidence was however second hand, much of it being second hand hearsay.  In particular she produced notes of an interview on 30 January 2006 with Permindar Dosanjh, former director of GT, which had not been included in Customs’ List of Documents.  Mr Smith stated that he did not seek to rely on the interview as evidence of the truth of what Mr Dosanjh had said.  Mr Brown did not object to the interview being included as evidence.

50.	Although Mrs Bransgrove had attended three visits with Mr Ward she had no notes of any of them. Mr Ward was unavailable as a witness through ill health.  She stated that the first visit was as a result of a request from another officer to visit the Appellant. They were told at the first visit on 19 May 2005 that trade in wholesale goods which was mainly for other EU countries had expanded in the last six months.  Full listings of purchase invoices with the suppliers’ names were produced at the following visits. The inputs claimed by the Appellant exceeded the outputs declared by the two largest suppliers, XYZ and Sahkey. She produced a letter from another officer to XYZ stating that she had called at its offices on that day (16 June) and that no one was available as a result of which XYZ had been deregistered from that day.  Another letter showed that GT was at Ross Walk in March 2004, a visit having been arranged for 17 March although there was no further evidence of that or any other visits.

51.	She produced an e-mail from National Coordination Unit General Enquiries dated 22 June 2005 stating,

“Checks done on Worldbase for International Weltwit at the address given in Stuttgart.  Although there are many companies in that street I could not find any details of the one you are looking for.  There was no company listed at 421.”

She did not have a copy of the query to which the e-mail replied.  She said that there were several e-mails checking different addresses: first she asked for Warenempfingen then for Internationale Weltweit.

52.	She said that from 27 June 2005 until 5 January 2006 she was not involved with the Appellant’s case, which of course was by the latter date subject to this appeal.

53.	Mrs Bransgrove concluded from the interview with Mr Dosanjh and the directors’ report prior to liquidation (see paragraph 20 above) that GT was not trading at the relevant time.

54.	She stated that Mr Dosanjh was a director of Halemead as well as GT.  There was no record of Halemead being registered for VAT and it went into liquidation on 19 July 2005.  She stated that GT was deregistered on 20 June 2005 when an officer visited Unit 91, 100 Ross Walk and found it abandoned.  The liquidator of GT told other officers that trading ceased by December 2004.

55.	Mrs Bransgrove produced an e-mail from Grant Thornton dated 26 August 2005 stating that the VAT number of La Red’s German client had just been checked and was invalid.  She produced a check on 13 March 2005 from Customs’ departmental database VIES : this gave the registration date of the number given for Internationale Weltweit as 30 June 2004 and the deregistration date as 1 July 2004; it also showed a different address.

56.	She said that there was no evidence of any visit by Customs to XYZ in spite of the pattern of its returns.

57.	She told Mr Brown that no enquiry had been addressed to the German tax authorities about Internationale Weltweit.

58.	She said that she had asked what vehicles had at any time been registered by GT, having been provided by Grant Thornton with the registration numbers of two vehicles seen recently in the Leicester area, but was told that DVLA could not produce that type of information. She did not ask for a check on the numbers provided.

59.	She said that she believed that a fraud had been committed but said that she could not accept that GT must have been involved.  She told Mr Brown that it was not her job to extend enquiries beyond the Appellant’s case.

60.	She said that she had not made enquiries of P&O: it was for the Appellant to keep evidence of removal.

61.	Mrs Bransgrove said that GT was registered for VAT between 2003 and 2005; a colleague had visited the company.  Visits in 2004 confirmed that trade was falling.  She was told by the colleague in Derby that GT tended to do haulage overseas which was zero-rated.

Submissions of the parties

62.	Mr Smith for Customs said that the primary issue was whether the Appellant had proved that the goods in respect of which input tax was claimed existed.  He said that the totality of the evidence pointed to the goods not existing.

63.	He said that the fact that input tax on some XYZ supplies had been allowed did not assist the Appellant since there had been reliable evidence that those goods were warehoused by London Logistics and the existence of the consignee was established.

64.	He said that, although Mr Everard had visited 100 Ross Walk on 12 April 2005 and was told by Mr Ali that the goods seen were his, Mr Everard had not asked anyone apart from Mr Ali.  Mr Ali’s company, XYZ, was underdeclaring VAT and had since disappeared: the reliability of his information must be in question.  He submitted that Mr Seidler’s e-mail of goods ordered showed different quantities to those seen.  Mr Everard had not verified the quantities.

65.	Mr Smith said that the outputs on XYZ’s returns did not cover the inputs claimed by the Appellant and no return had been received from XYZ for 04/05 onwards. There was no one at XYZ’s office when Customs had called. The Appellant had tried without success to locate XYZ on 23 May 2005.

66.	He said that the evidence as to GT was unclear.  He did not rely on the interview with Mr Dosanjh as evidence of its truth however it was in accordance with the directors’ report on liquidation.  GT was put into liquidation in July 2005.  He said that GT was not trading in 2005 and submitted that its CMRs had come into the hands of another company.  The Appellant had had no contact with any director of GT and Mr Everard had not spoken to any manager during his visit on 12 April 2005.

67.	He said that the CMRs showed the old address of GT rather than 100 Ross Walk.  The box for consignee was defective in showing Internationale Weltweit.  There was no evidence of the registration numbers of the vehicles used.

68.	He said that the check by Customs on Worldbase showed that Internationale Weltweit did not exist: there was no company at Augsburger Strasse 421. A VIES check showed a different address for the company and indicated that it had been deregistered without trading. La Red had provided no documents from its German customer.

69.	Mr Smith accepted that it was a necessary inference from the case for Customs that La Red had been party to a fraud, together with XYZ and whoever had produced the CMRs to the Appellant.  If La Red was party to a fraud it would not be surprising that it arranged for payments to the Appellant.

70.	He said that the Appellant had been given advantageous terms in that it did not have to pay XYZ until it was paid, and did not have to arrange warehousing or carriage.  He said that the Appellant’s transactions with La Red and XYZ had been laisser faire.  La Red’s orders were not confirmed until invoices were issued.  The invoices by XYZ did not show the location of the goods. He said that it was surprising that La Red was willing to rely on the goods ordered by it being supplied for up to ten days before receiving confirmation by invoice: La Red was responsible for arranging transport to Germany.

71.	Mr Smith said that the alternative assessments in relation to output tax rested on substantially the same evidence but with the additional hurdle for the Appellant of the need to satisfy the requirements for zero-rating.

72.	He accepted the Appellant’s submission that, if the Tribunal found that the goods did exist but that there was a problem as to whether they left the country, the appeal should be stood over for the decision of the Court of Justice in R v Commissioners of Customs and Excise, ex parte Teleos (C-409/04).

73.	Mr Brown for the Appellant said that there was no allegation either in the Statement of Case or in Mr Smith’s skeleton argument that La Red was involved in a fraud, however he accepted that this was the necessary logic of the case for Customs.  He said that there was no evidence at all of a link between XYZ and La Red.  He said that it was extraordinary if someone had access to GT’s old premises, vehicles and paperwork but did not operate a business there.

74.	He said that Mr Everard had visited Ross Walk, seen goods of the correct type there and a vehicle in GT livery and had been told by Mr Ali that the goods were his.  He said that the address shown for GT on the CMR, although it was not Ross Walk, did exist as an address.

75.	As to the German company, it was unclear when de-registration was effected.  It was equally likely that the German company had traded but had not accounted for the VAT as that it had never traded.  He said that the Appellant was not to blame if it did not have La Red’s documents from Germany.

76.	He submitted that the information provided by Mr Dosanjh on liquidation was not reliable given the inconsistencies with what he said at the interview.

77.	He submitted that the Appellant’s payment arrangements were in no way unusual for international deals.

78.	He submitted that the Appellant had shown on the balance of probabilities that the goods did exist and were removed from the UK from GT’s premises using GT vehicles.

Discussion

79.	We found this case to be most unsatisfactory because of the lack of evidence from each side on matters on which evidence ought to have been obtainable given the large sums involved.

80.	The burden of proof is on the Appellant to satisfy the Tribunal on the balance of probabilities that the goods were supplied to it by XYZ and that they were dispatched to La Red’s customer in Germany.  If the goods did not exist there was no right to input tax and they could not have been removed. 

81.	The necessary inference of the case for Customs that the goods did not exist is that there was a systematic fraud involving XYZ, La Red and someone acting in the name of GT from its premises.

82.	If XYZ raised invoices and received payments for non-existent goods that was in itself fraudulent.  If La Red paid for non-existent goods, the only possible inference is that it must itself have been paid and if it arranged for the goods to be consigned to a non-existent customer there is no explanation consistent with honesty.  Again if GT or someone using its name provided to the Appellant CMRs and Certificates of Shipment for non-existent goods, that was clearly fraudulent.

83.	There was no suggestion at any time that the Appellant or anyone connected with the Appellant was in any way dishonest. We had no hesitation in accepting that all of the witnesses on both sides were honest.

84.	There was no suggestion or evidence that the evidence given by the Appellant’s witnesses conflicted in any way with what they told the Customs officers at the numerous visits in 2005.  The lack of evidence by Customs as to those visits including those by Mr Tate was most unsatisfactory particularly since the appeals involve over £2 million.  

85.	Customs said that the Appellant failed to exercise due diligence in entering into the transactions and was laisser faire in performing them. As Mr Smith said the appeal was not about due diligence but about whether the goods existed.  The relevance of the due diligence inquiries is solely as to the material obtained or otherwise as to the other companies involved.

86.	It is clear that XYZ existed and was trading throughout the relevant period.  It was registered for VAT.  Customs have allowed input tax on other supplies by XYZ to the Appellant, although not on goods warehoused at Ross Walk.  XYZ was registered for VAT until 16 June 2005 when it was de-registered and its business address on Customs’ database was the same as on the disallowed invoices.  Mr Everard had a D&B report on XYZ.  XYZ rendered a return for period 03/05 although there was no evidence as to when it was submitted and it clearly understated its output tax by over £1 million. No further return was received from XYZ although it issued invoices to the Appellant up to 26 May 2005 on which date it issued seven invoices to the Appellant for £320,463 plus £56,081 VAT.

87.	On the evidence before us we find that XYZ was trading in a similar way to the Appellant, in the sense that it was engaging in transactions by e-mail, and fax from its office buying and selling goods which were in a warehouse which was not its own.  A check by the Appellant out of hours on XYZ’s address did not confirm whether XYZ was in the office block.  Although no one was available on 16 June 2005 when a Customs officer called at XYZ’s office, that does not really assist in deciding whether XYZ made the supplies in question to the Appellant.  XYZ would only have needed a small office. What is clear is that the disparity between the output tax declared by XYZ and the VAT on the invoices to the Appellant shows that XYZ did not declare the VAT invoiced to the Appellant.  If XYZ was defrauding Customs, it may well have been defrauding the Appellant also.

88.	We next consider La Red.  Again this company clearly existed.  The address on the invoices accorded with the D&B Report obtained by Mr Everard in December 2004.   Customs have allowed zero-rating on supplies to it delivered to a Belgian customer and dispatched by London Logistics.  There is no dispute that the Appellant received payment of the sums invoiced to La Red both in respect of the supplies not in dispute and the disputed supplies.  The invoices to La Red must have been received by it in Majorca in order for the payments to be made.  FX Solutions clearly made the payments to the Appellant’s bank in response to the invoices.  The Appellant received orders from La Red by fax.  The Appellant did not give instructions to GT as to the destination of the goods nor did the Appellant pay for storage or carriage.  Sales to La Red were ex works.  The Appellant told GT that La Red was arranging dispatch.  La Red did not inform the Appellant that the goods were going to Germany.  The bundle contained a number of onward sales invoices from La Red to Internationale Weltweit obtained by the Appellant from La Red.

89.	La Red ordered all the goods invoiced to it and paid for all of them.  Orders were normally received by Mr  Seidler by fax.

90.	Mr Everard had spoken to a lady called Christina since the business had ceased.  He understood her to be the bookkeeper.  The D&B report showed a lady by that name as “Apoderado”.  He had obtained onward invoices to Internationale Weltweit.  When he last spoke to her she told him that La Red had been deregistered and was still having difficulty over registration.  There was no evidence by Customs as to the date of deregistration or indeed as to any inquiries to the Spanish tax authorities.

91.	We next consider Internationale Weltweit.  The print-out obtained by Customs on the VIES database in March 2006 confirmed that there was a trader with the registration number appearing on the invoices by La Red and the Appellant. The address shown was “Bruelstr 1073207 Plochingen” the postcode on La Red’s invoice is 70327. The date of registration was given as 30.06.04 and deregistration as 01.07.04.  The strong inference must be that it was retrospectively de-registered.  There was no evidence as to why or when.  Mrs Bransgrove told us that no enquiries were made by Customs to the German tax authorities. The enquiry by Mrs Bransgrove via the National Coordination Unit (see paragraph 51 above) showed that on 22 June 2005 there was no company listed at 421 Augsburger Strasse or in that street.  The Appellant produced no evidence of its existence.

92.	The other participant in the transactions indicated by the documents was GT.  The letter from Customs at Derby in March 2004 and the report on winding-up both gave Ross Walk as the address of GT.  It was clearly trading in 2004 as a haulier with overseas business. The director’s report stated that Customs withdrew the claim which gave rise to the freezing of the account in September/October 2004.  It is unclear from that report what GT did thereafter. The documents held by the liquidators were clearly incomplete but included purchase invoices up to 03/05.

93.	We place no reliance on Mrs Bramsgrove’s notes of an interview with Mr Dosanjh, the director, in January 2006.  Mr Dosanjh was clearly a relevant witness.  No reason was given as to why he should not have been called, although Customs might well have had concerns as to his reliability as a witness. If business was carried out in the name of GT from Ross Walk up to May 2005, this was omitted from his director’s report. Mr Smith for Customs disclaimed any reliance on the interview as evidence of the truth of what Mr Dosanjh was recorded as saying. We do not consider that the interview had any other relevance.

94.	Mr Seidler’s evidence which was not challenged was that he received the CMRs and other documents regularly from GT having asked for them to be provided weekly.  He also said that he instructed GT to release the goods once the Appellant was paid.  In order to do this he must have contacted GT regularly.  This must have been at Ross Walk.  In order for the CMRs and Certificates of Shipment to be sent to the Appellant, the person sending the documents must have known of the orders by La Red to the Appellant.  If the goods did not exist that person must have been aware of and complicit in the false documentation. Furthermore there must have been someone for Mr Seidler to contact to give instructions for release.

95.	The sequence of the documents described at paragraph 27 as a typical example of documentation conflicted with Mr Seidler’s evidence recorded at paragraph 37.  We do not find it at all easy to understand the documents recorded at paragraph 27 since the dispatch by GT on 25 May was before they were invoiced to the Appellant and before they were ordered by La Red.  If there were real goods which were only released when the Appellant was paid by La Red the documents do not make sense unless the Appellant was paid before the fax order and before the invoice.  This seems unlikely if there really were goods.

96.	It is clear from the evidence of Mr Everard that on 12 April 2005 there was a vehicle in GT’s livery at Unit 91 and goods corresponding with the order for which he was looking. He did not however speak to any employee of GT.  His only contact was with a Mr Ali who he contacted by mobile telephone having made an appointment by contacting XYZ. His description of Mr Ali did not accord with that of the Mr Ali whom Mr Seidler had met on the M1 unless he had shaved of his beard. 

97.	In normal circumstances, the fact that the Appellant ordered the goods from a company which was trading and which issued invoices for the goods ordered for which the Appellant duly paid coupled with the fact that having sold the goods on the Appellant was regularly and promptly paid for the goods without any complaint would be evidence that the goods existed.  Mr Tate accepted the material in support of the claim for 01/05 and the following two claims were duly paid.

98.	If the Appellant is correct Mr Ali showed Mr Everard goods which had been sold by XYZ to the Appellant and which having been sold on to La Red were despatched by GT to Germany.

99.	If Customs are correct the person whom Mr Everard met was engaged in an elaborate deception which included ensuring that goods corresponding to an order by the Appellant from XYZ were at Unit 91 together with a lorry in GT livery, ensuring that someone at Unit 91 responded to Mr Seidler’s instructions and request and ensuring that false documents were regularly sent to the Appellant; such deception also involved the Appellant being paid the sums invoiced to La Red although the goods did not exist.

100.	If the Appellant is correct a whole series of goods were sold by XYZ with VAT for which it did not account and the same goods were all sold to the same Spanish Company and despatched by GT to an address in Stuttgart which could not be found on Worldbase on 22 June 2005.

101.	The documents described at paragraph 27 show La Red as selling on to Internationale Weltweit at a margin of only 2 pence per unit or 0.5865 per cent out of which it had to pay for transport.  Furthermore the goods were shown as despatched to Germany before La Red was even invoiced by the Appellant.  We do not find this to be credible. This is highly significant since these were typical of the disputed transactions.

102.	The Appellant has not satisfied us on the balance of probabilities that the goods in fact existed.  XYZ was clearly defrauding Customs.  We conclude that it is probable that XYZ was deceiving the Appellant.  The fact that there were no real goods to be released would explain the illogical sequence of documents and invoices for the transaction taken as typical.  The low margin for La Red is more readily understandable if there in fact were no transport or warehousing costs because there were no goods.

103.	The appeal against the assessments disallowing input tax is dismissed. The output tax assessments being alternative should be withdrawn.

THEODORE WALLACE
CHAIRMAN

RELEASED:14 November 2006

LON/05/1034