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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Westone Wholesale Ltd v Revenue & Customs [2009] UKFTT 218 (TC) (24 August 2009) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2009/TC00168.html Cite as: [2009] UKFTT 218 (TC)

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[2009] UKFTT 218 (TC)

TC00168

VAT – preferred and alternative assessments –MTIC fraud – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

WESTONE WHOLESALE LIMITED Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS VAT

Respondents

Tribunal: DAVID S PORTER (Judge)

SUSAN STOTT (Member)

Sitting in public in Manchester on 1,2,3,4 and 5 June

Michael Patchett-Joyce, counsel, and Katherine Edwards instructed by Ernst & Young LLP appeared for the Appellant

James Puzey, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009


 


DECISION

1. Westone Wholesale Limited (the Appellant) appeals against two mutually exclusive assessments: A preferred assessment in the sum of £1,067,787.36 and interest raised in a letter dated 5 July 2005 (reduced by a letter dated 6 October 2006) arising from a disallowance of the Appellant's claim to input tax in respect of goods alleged to have been purchased from International Trading. The Respondents say that the goods never existed: An alternative assessment in the sum of £892,141 and interest in relation to disallowed output tax on the basis that the goods existed but that they were never exported to Spain. The Respondents say (and it is not disputed) that International Trading has disappeared without paying any VAT and, as International Trading has acted fraudulently, the Appellant must suffer the loss of the VAT. The Appellant say that, although they knew there might be fraudulent circumstances, they took all necessary precautions.
2. The validity of two mutually exclusive assessments was brought before the tribunal on 19 March 2007 as a preliminary issue. That tribunal decided that the Respondents were able to raise preferred and alternative assessments. The Appellant appealed that decision to the High Court of Justice on 26 November 2007. Patten J upheld the tribunal's decision see Westone Wholesale Limited –v- The Commissioners of her Majesty's Revenue and Customs [2007] EWHC 2676 (Ch) and the matter is no longer in dispute.

The Facts

3. There were 55 transactions in relation to confectionery and razor blades of which, it is alleged 34 were fraudulent. We intend to deal with the evidence and undisputed facts by following the chronology of the 34 invoices. Some of the facts are agreed, whereas others were contentious. Where there is dispute we set out the evidence in detail. Where the evidence is agreed we say so.
4. The parties have exchanged witnesses' statements and we read them. The following witnesses did not give oral evidence and we agreed to accept their statements as evidence. They were:

•    Philip Wade Harrington, a Warehouse Manager for the Appellant who confirmed the movement of the razor blades specifically ordered by the Appellant

•    Malcolm Dennis Talbot, a delivery driver for the Appellant who confirmed the movement of the razor blades specifically ordered by the Appellant

•    David John Williams, a Warehouse Manager for the Appellant who confirmed the movement of the razor blades specifically ordered by the Appellant

•    Michael Terence Williams, a delivery driver for the Appellant who confirmed the movement of the razor blades specifically ordered by the Appellant

•    Joanne Louise Edwards, an Officer of Customs and Excise who confirmed the dates of registration and de-registration of the defaulting companies

•    Evelyn Wallace, the Manager of Arc Business Centre from which International Trading operated.

•    Colin Martin Isaac, a sales manager for Anderson Harvey Lake hauliers who gave evidence as to the movement of the razor blades specifically ordered by Mr Stone on behalf of the Appellant

•    Lee Neal, an Operations Supervisor with Mini International Hauliers who gave evidence as to the destination for the razors checked by Mr Stone

•    Stephen David Berridge Director of Applecroft Limited, who gave evidence as to the production of Convention Marchandises Routiers (CMRs)

5. Mr Patchett-Joyce counsel for the Appellant called William Edgar Stone (Mr Stone) the Managing Director of the Appellant who confirmed his witness statement and gave oral evidence under oath.
6. Mr J Puzey counsel for the Respondents called the following witnesses:

Christine Quinn (Mrs Quinn), the assessing officer

Kenneth MacLeod (Mr MacLeod), an investigating officer based in Paisley in Scotland

Debbie Lofthus (Mrs Lofthus), an investigating officer based in Paisley in Scotland

Jonathan Hall (Mr Hall), a Higher VAT Officer based in Shrewsbury, who undertook assurance audits of VAT registered traders

George Sanders (Mr Sanders), Managing Director of Trialout Limited (Trialout) the hauliers.

7. The events giving rise to the assessment took place in the years 2002 and 2003, over 6 years before the hearing and it is necessary to approach the evidence as it would have been perceived at that time by the witnesses and parties. It is agreed between the parties that the Appellant was registered for VAT from 1 August 1982 having taken over the business of William Edgar Stone (its Managing Director) as a going concern on 21 October 1982. The Appellant traded from Bradley Road, Donnington Wood Telford Shropshire TF2 7PY. During the entirety of its trading the Appellant carried on business as a wholesaler of confectionery, soft drinks, tobacco and other goods. The Appellant maintained its own warehouse at Telford, from which it distributed its goods to retailers and others in the United Kingdom. It also exported goods to Australia, Gibraltar, Spain, Greece, Eire and Switzerland. Mr Stone conceded that the goods exported to those countries were usually collected from his warehouse and that it was unusual for his buyer to require the goods to be delivered directly to an haulier's warehouse, as was the requirement for Icespana which, on the suggestion from Mr Stone, agreed that the goods be delivered to Trialout their ostensible hauliers. We were not shown any accounts for the Appellant's business but it appears that the company's annual turnover at the time in question was about £11,000,000. We were told that the monthly turnover for exports to the Spanish company called Icespana (to which we refer later) in March 2003 was between 5 to 10% of the turnover for the entire business. The turnover of the goods to Icespana at the beginning of March 2003 was approximately £900,000. If £900,000 represented say 7.5% (halfway between 5% and 10%) then the turnover would have been £12,000,000.
8. There had been a VAT assurance audit of the Appellant in January, February and March of 2001 when we were told the turnover was £5,000,000. That visit had been satisfactory, but the Appellant had been advised that their export information was a little weak. There had been a further visit by Mr Hall on 19 February 2002 a visit complained about by Messrs D E Ball & Co Accountants to the Appellant as it had followed fairly quickly after the earlier visit. As a result the visit had been shortened, but Mr Hall confirmed that the business was the same as the previous visit and he established that sales were being made to Spain, Greece, Eire and Australia. Mr Hall had examined all the zero-rated invoices relating to exports and dispatches for the VAT period 12/01. He commented in his report;

"Since the last cv – company gone to town on export evidence – if no shipping bill - make certain, got plenty of other evidence"

Mrs Quinn suggested that the Appellant had gone out of its way to dress up its records. We do not accept that. It appears to us that the Appellant had merely done what it had been asked to do following the earlier visit, when it had been suggested that their export information was a little weak.

9. It would be helpful at this point to understand how the exporting to Icespana was evidenced by the CMRs. Mr Sanders produced to the tribunal a pack of CMRs consisting of a front sheet and 3 attached carbonated copies. Mr Sanders told us that all his CMRs were embossed with his company's name and address in box 5 at the top of the form.

Box 1 should have the name, address and country of the sender of the goods – in this case The Appellant

Box 2/3 should have the address of the appropriate agent for the sender. This did not need to be completed in this case

Box 4 should have the name address and country of the recipient of the goods - in this case Icespana in Spain. Mr Sanders said that it was essential that all this information was provided otherwise there was a danger that the goods would be stopped as soon as the lorries reached the continent.

Box 5 should have the name of the carrier/haulier – in this case Trialout.

Box 6 should have the address of the place of collection of the goods- -in this case St Helens where Trialout was based.

Box 7 usually contained the registration of the vehicle carrying the goods.

Box 8 should have the place and country of the delivery of the goods – in this case Malaga Spain.

Box 9 identifies the goods - in this case mars bars; crunchies; other sweets and latterly Mach3 razor blades.

Box 10 should identify the weight of the goods and Box 11 the volume- in none of the many examples of CMRs we were shown were these columns filled in.

Box 12 should have details of the carriage charge; Box 13 the sender's instructions to Customs; Box 14 reservations (we were not advised as to the meaning of this); Box 15 Documents attached. Again in none of the many examples of CMRs we were shown were these columns filled in.

Box 16 Special agreements. We were told that all the CMRs supplied by Trialout carried the words:-

"ARTICLE 8 CMR CONVENTION No reasonable means afforded to carrier for the purpose of checking apparent conditions of goods or the number of packages and their marks and numbers on taking over the goods."

Box 17 Goods received – in this case signed by an Icespana representative.

Box 18 Signature of the carrier – in this case the driver for Trialout or the driver of the vehicle carrying the goods sub-contracted by Trialout

Box 19 the signature of the company completing the CMR- in this case Trialout

Box 20 Place and Date of the company completing the CRM –in this case St Helens and 2003

10. Mr Sanders explained that when goods are to be delivered abroad the driver of the delivery vehicle would fill in all the details as above. He would give the top copy of the form to the administration department at Trialout; he would then drive to the continent, and when he arrived at the customers, he would give the last two pages of the CMRs to the representative at the customers and retain the second copy in his lorry as evidence of the goods he had handed over. The representative at the customers would then sign the fourth copy and post it back to the Appellant. We were shown the bundles of paper work for each transaction completed by the Appellant which together with the CMRs, the details of the invoice and payments identified the entire transaction. In that way the Appellant could identify that the goods had been delivered. Whilst we do not doubt that the CMRs were to be used as stated above, we were not convinced that in reality that was what actually took place from the evidence produced to us by the two hauliers of which we were given details, as we shall show later in this decision.
11. During the course of the business in September 2002, Mr Stone received a telephone call from Mr Amar Hussain who worked for Koban International and offered to sell a variety of goods, mainly chocolate to the Appellant, for onward sale in the United Kingdom. The prices were competitive and two deliveries were made to the Appellant's Telford warehouse and then paid for by bank transfer from the Appellant's bank account on the day of delivery. Mr Stone conceded that he had indicated in his statement to Mrs Lofthus that there had been at least 20 dealings with Koban before Mr Hay contacted him. This was not correct there had only been two. At the end of September, Mr Hussain telephoned to say that he had left Koban International and that he was working for International Trading. It is agreed by the parties that throughout the period of the trading with International Trading, until June 2003, there had been on-going dealings with Mr Hussain of actual sales into the United Kingdom. Of the 55 transactions investigated 21 were sales following a normal business pattern into the United Kingdom.
12. In November of 2002 Mr Stone received a telephone call from a man who identified himself as Neil Hay. Mr Hay was enquiring about purchasing chocolate for dispatch to Spain. He had apparently located the Appellant from its website and subsequently he visited the Appellant to discuss the business activities. Mr Hay explained that he had previously worked for Iceland Frozen Foods and a subsidiary company called Itex Limited (an export subsidiary of Iceland based in Deeside) in Spain setting up shops on their behalf. He was now operating in the 'grey market', and effectively acquired goods at a discount from various sources. He agreed that he would pay for the goods on receipt of a pro-forma invoice prior to the goods being delivered. It is agreed that Mr Stone carried out the appropriate checks on Mr Hay. He also checked the VAT details for Icespana and followed up the references for Itex Ltd and Mr Hay's referee, Mr Hassall, who gave a glowing reference. Mr Puzey said that Mr Stone, when checking Mr Hassall and Vernon Murray Limited, the company from which Mr Hassall operated, should have made enquiries about Sandfield Securities Limited, which appeared in the list of the other companies that Mr Hassall was interested in. We do not agree with Mr Puzey's comments. There was no reason for Mr Stone to make further enquiries as to Mr Hassall's business interests other than those of which he was aware. (It appears from the subsequent enquiries by the Respondents into International Trading and Mr Hay that Sandfield Securities processed the monies for Mr Hay. Mr Hay provided funds to Sandfield , who then credited the Appellant's Bank account at HSBC, for onward transmission to the Bank of Scotland, bankers to International Trading). Mr Stone did not make any enquiries of Koban International, International Trading nor Trialout Limited, all of which operated in the United Kingdom. At the time of the enquiry by Mr Hay International Trading had been supplying goods for the inward sale to the United Kingdom. Both parties agree that there were such sales and that those goods existed. We do not think it matters that Mr Stone did not make those enquiries, not because they would have revealed that all the participants were registered for VAT and that they existed, but because he asked the Respondents in February 2003 to examine his documentation to satisfy himself that the transactions were in order as we set out later.
13. The Appellant began trading with Mr Hay in December 2002 in its normal confectionery lines. The Respondents say that the goods never existed and it is necessary to examine the evidence to decide whether they did or did not exist, and to decide whether Mr Stone, on behalf of the Appellant, had any reason to suppose that the goods did not exist and whether he ought to have known that the transactions were fraudulent. As a result of the first order for Icespana, Mr Stone, although he had dealt with Australia, Gibraltar etc and must have been familiar with the use of CMRs and exporting procedures, asked George Johnson, a VAT Consultant, on 22 January 2003, to examine his documentation. Mr Johnson confirmed that it was in order. The value of the orders was not dissimilar to those that the Appellant had been entering into with Koban International and International Trading and were as follows up to 24 January 2003:

Date Product Amount Monthly

£ plus vat Total

19 December 2002 Aero Mints 61,245.60

Total December 61,245.60

16 January 2003 Cream Eggs 111,020.00

16 January 2003 Aero Mints 79,963.00

24 January 2003 Cream Eggs 130,456.00

24 January 2003 Cadbury Flakes 102,717.00

24 January 2003 Cadbury Crunchies 87,250.00

Mr Stone telephoned Trialout on the 24 January 2003 advising them that the CMR for 16 pallets of Kit Kat for Malaga and 10 Pallets of Kit Kat for Fuengiro should have read Aero Mint. The note on the CMR written we believe by Mr Stone, states

"Mrs Quinn HMCE stated that Trialout held their hand up to this one therefore not assessed"

We are satisfied that these goods were delivered to Trialout for onward transmission to Icespana and that the CMR faxed to the Appellant by Mr Hay was sufficient evidence for Mr Stone to believe that the goods had been delivered to Spain. The sales continued as follows:-

Total for January 511,406.00

4 February 2003 Snickers/Mars Bars 55,099.00

(see comments below)

4 February 2003 Mars 55,099.00

13 February 2003 Cadbury Flakes 102,717.00

13 February 2003 Smarties 51,259.00

13 February 2003 Munchies/Aero Mint 87,607.00

20 February 2003 Mars 106,900.00

20 February 2003 Mars 106,900.00

21 February 2003 Mars 106,900.00

21 February 2003 Mars 106,900.00

21 February 2003 Mars 106,900.00

Total for February 886,281.00

5 March 2003 Cream Eggs 126,973.00

5 March 2003 Cream Eggs 108,062.00

14. Following a number of telephone conversations between the Respondents and D E Ball & Co Ltd (the Appellant's accountants) the accountants wrote to H M Customs and Excise in the following terms:

".. …we write to confirm that a Mr Hall will be visiting the above company on Wednesday 26 February 2003.

The above company has requested this visit as the volume of sales to a customer in Spain is increasing considerably and they want to be sure that:-

They are complying with all VAT regulations and requirements with respect to the sales to Spain and the associated purchase of the goods being sold on to Spain

Customs and Excise have no reservations in the company continuing to trade with the customer in Spain, and

That nothing further needs to be done by/is required to be done by the company with respect to these transactions involved with the customer in Spain……"

Mr Hall duly attended at the company and his note of the visit reads:

"misc visit following information from ex-officer, plus request from trader. Briefly,Westones have recently begun doing business with Icespana – a Spanish company based in Malaga, following an approach by Neil Hay –an employee? of Icespana. The volume of trade has increased rapidly, to now c £1 million + per quarter, and Westones are becoming suspicious of being caught in a scam. Goods are bought from a company in Glasgow – International Trading (Kamran Ahmed), delivered to an exporter-Trialout Ltd, at St Helens for shipment to Spain. Payment for the goods is received before shipment and Westones pay their suppliers. Freight is paid by Icespana. As far as Westone are aware Hay does not know Ahmed, but, coincidentally, if Icespana wants 10 Truck Loads , then International have them, just at the right time. Another person who may be involved is Amar Hussain t/a Koban International;

Westones believe Koban/International are one and the same person – possible – both businesses are based in Glasgow. Other than a copy IC Note, Westones have no proof of dispatch – though there is E-mail correspondence. Profit margins are low, c£2000 on a £100,000 shipment.

Current level of trade is £2.1 million for January and February 2003 and the next order is £463320……"

Mr Hall confirmed at the hearing that all the above information had been given quite freely by Mr Stone to Mr MacPhee, who attended with Mr Hall. Mr Hall confirmed that the visit had been co-ordinated as an investigation into intra-community fraud and that Mr Stone was unaware of that. At the hearing Mr Hall was asked whether he had advised Mr Stone that the Appellant should stop trading with Icespana. He replied:

"No, we can't do that. We can't tell a company as to who to trade with and who they shouldn't. That was a commercial decision to be made by themselves, not by us."

Under pressure from Mr Patchett-Joyce to the effect that the visit was some 6 years ago and Mr Hall could not remember what he and/or Mr MacPhee had said to Mr Stone, Mr Hall repeated that they had told Mr Stone that the decision was a commercial one for the Appellant. We are satisfied from the evidence that Mr Stone was not told to stop trading with Icespana and that he understood that that was a commercial decision which he would have to make. We are satisfied that the Appellant's documentation at that time was in order. Mr Stone's note of the meeting (which has not been challenged by the Respondents) also states:-

" ..They examined our records and stated that they were ok - MacPhee said that the faxed copies of the CMRs were a bit weak but with the other evidence of payment and correspondence he could see that they were genuine."

During this period the Appellants were still arranging purchases from International Trading for inward sale to businesses in the United Kingdom. Those goods undoubtedly existed and the invoiced prices were very similar to those originally being sold on to Icespana. Mr Stone had, however, identified that he was anxious about those transactions to Spain and was undoubtedly on notice from February 2003 that there might be something untoward taking place and he had been told that the CMRs were a 'little weak'. The orders continued to Icespana:

10 March 2003 2900 cases Mach3/4 96,261.88

18 March 2003 5000 cases Mach3/4 165,968.00

18 March 2003 Cadbury Flakes 102,717.00

18 March 2003 Crunchies 87,250.00

27 March 2003 5000 cases Mach3/4 165,968.00

31 March 2003 7500 cases Mach3/4/8 315,781.00

Total for March 1,168,980.88

10 April 2003 8500 cases Mach3/4/8 375,706.00

15 April 2003 8500 cases Mach3/4/8 375,706.00

15. On 10 March 2003 the first order for razor blades was delivered. Throughout the negotiations with Mr Hay, e-mails had been exchanged. A large number of e-mails were produced to us and we are satisfied that those e-mails identified a varied selection of confectioneries which were sold to Icespana. We are satisfied that at least a percentage of those goods existed on the basis that confectionery was being satisfactorily sold in the United Kingdom and Mr Hay ,in his statement, indicated that approximately 30% of the goods he handled in Spain were delivered. At the beginning of February Mr Hay approached the Appellant to see if they could source 'grey' toiletries of various sorts, including razor blades. Mr Stone gave evidence, which was not challenged, to the effect that he contacted his usual suppliers (Cosco Leeds; Parmjitt Sood; Turnball Trading; DCS Commodities; Frank Brynes; Liam Linden and Amar Hussain) in order to check the price of the required items. Amar Hussain offered the best Price. The first delivery of Mach3 razor blades was made on 10 March and was at a similar price level to the invoices for confectioneries previously ordered. On 16 March 2003 the Appellant provided Mr Gough, a VAT officer, with sufficient evidence of earlier transactions of sales of confectionery to Icespana to validate the Appellant's claim for input tax - which was paid.

As the Appellant was still operating on quarterly VAT returns, D E Ball & Co, the Appellant's accountants, wrote to the Respondents on 4 March 2003 to ask that the Appellant might change to monthly accounting. The Respondents asked for full details of the business activity and confirmation as to why the Appellant thought it would be in a repayment position. The accountants replied, advising that the Appellant's business was principally the wholesale of confectionery, and that the sales to Spain, at that time, represented 5% to 10% of turnover. Mrs Quinn, in evidence, stated that the Appellant had not alerted the VAT office that it was selling razor blades. We find that her assertion was untrue. The Appellant had followed up the accountants' letter on 4 April 2003 and stated:

"….Recently we have sold to other EU member states substantial quantities of confectionery and razor blades. Custom officers at Shrewsbury have checked out these details."

Mr Stone was checking the sales from the end of March, not least, we suspect, because the invoice for the 31 March 2003 was all but double the previous invoices and amounted to £315,781. There had been two invoices for chocolate on 18 March 2003 at the previous level of £102,717 and £87,250. By 15 April apparently he had become concerned at the level of the exports of razor blades and decided to check whether the sales were genuine. At the beginning of May he arranged for a delivery of the razor blades to the Appellant's warehouse. Evidence was given by his two warehousemen, David John Williams and Philip Wade Harrington that they received a pallet of razor blades, which they loaded on to a vehicle belonging to Mike Williams, which was driven by Malcolm Dennis Talbot. This evidence has not been challenged. He had subsequently received the CMRs in respect of those razor blades and payment for them. There is no doubt that the razor blades existed although the weekly invoices had escalated by the time of his test purchase. The sales had continued:-

23 April 2003 8500 cases Mach3/4/8 375,706.00

30 April 2003 2900 cases Mach3/4/8 133,685.00

Total for April 1,260,803.00

14 May 2003 10000 cases Mach3/4/8 465,593.00

16. This is an appropriate juncture to consider the evidence of the Respondents that the goods did not exist. All parties accept that the only real evidence of any delivery is the CMR. We accept, however, that the existence of the CMRs coupled with the invoices and payment details would in ordinary circumstances be sufficient evidence of delivery. The Respondents say that Mr Hay completed the CMRs and that Mr Sander's evidence suggests that the CMRs were not completed by Trialout. Mr Puzey referred the tribunal to a letter from Mr Hay and suggested that the writing on the CMRs was very like Mr Hays. He also wondered why it had taken so long for some of the CMRs to reach Mr Stone. In looking at the first set of CMRs, on which the Appellant relies, it appears to us that they have been signed by different drivers in Box 18. It may be that Mr Hay copied some of the CMRs but we are satisfied that CMRs related to goods purportedly delivered by Trialout to Icespana. We found Mr Sander's evidenced to be very unsatisfactory. Two sets of CMRs were produced in evidence. The first set consist of those produced by Mr Stone and are identified by being addressed to Westone and a signature from Icespana. The CMRs produced to the tribunal ran from January 2003 through to June 2003. The second set were sent by Mr Hay from Spain to Mr Stone in May 2004 as a result of the enquiries being raised by the Respondents into the activities of International Trading ,Icespana, Mr Hay and others. In his statement to the Spanish Police, when Mr McLeod was present, Mr Hay's lawyer said :

"It is also true that he received an e-mail informing him that Scottish Customs had ordered him to provide documentation about Sky and that in response to that order, he sent the documentation '

These CMRs are not the CMRs relevant to the Appellant as the designated Customer is identified as Sky Trading, the CMRs were incomplete and both the Respondents and Mr Stone did not believe that they were genuine. Further the Respondents rely on a statement given by Mr Hay in Mr Mcleod's presence in Spain, in relation to those CMRs. Mr Hay stated that he had been buying goods from the Appellant and selling them on to Sky, who would then sell to their customers in the United Kingdom. Mr Hay had been asked why he had provided CMRs from Icespana to Sky in response to the request from the Appellant. He stated that :-

"these were all he had as the goods never left the United Kingdom."

He stated that approximately 30% of all goods shown on CMRs relating to Icespana were actually imported to Spain. As his evidence related principally to the second set of CMRs it cannot be relevant to the goods that are the subject of this hearing. It is entirely possible that the 30% of the goods he says were actually imported to Spain, were those in the CMRs relied on by the Appellant. Either way it appears that at least some of the goods existed, principally the confectionery.

Mr Sanders confirmed that he had been transferring goods to Supersaver Limited (the holding company for Icespana) for upwards of 14 years. He knew both Mr Hasall and Mr Hay as he had been doing business with them for several years. His was an export only hauliers and he subcontracted work to local hauliers if deliveries were required in the United Kingdom. He produced to the tribunal the printed set of CMRs referred to above and explained how they worked. He was adamant that he would have sacked any of his employees if they had completed CMRs in the way that those produced by Mr Stone had been completed. He had checked the CMRs and confirmed that none of them were his, save perhaps for one. He agreed that the numbering of 171 was the prefix to his CMRs. Under cross examination he conceded that the amendment to the CMR relating to the Kit Kat had occurred in January and that the razor blades must have been delivered to him in May. He also conceded that he did not handle the CMRs himself, but left that to his administration department. He confirmed that many of his drivers had a stock of CMRs in their cabs in case they needed them when abroad. It was unclear why that would have been necessary not least because he also confirmed that Supersaver Ltd would have had a stock of his CMRs as well. Under cross examination he confirmed that the goods would arrive at his warehouse covered in black shrink – wrap plastic. He would never examine the goods as this would have been impossible with over 1000 consignments of goods coming into his warehouse each day. He agreed that he was often asked by Icespana (and others) to remove the labelling and re-label the goods for another destination. Even though he knew that the goods had been purchased by Icespana for export, he was quite prepared to change the label and arrange for the goods to be delivered wherever he had been directed to send them. This had occurred on two occasions once one of which was with Marsams from London. On one occasion, in spite of the instructions asking for the goods to be transported to Spain, Trialout had removed the labels and transported them via another haulier who had been asked to deliver the razor blades to Basildon. The driver had arrived too late and had said he would drop the goods off at a depot on his way back to Glasgow. Mr Hay had been very upset and had been able to persuade the driver to return the goods to Basildon the next day. In fact it transpired that the sample of three pallets of razors checked by Mr Stone had come from M & S Toiletries in Wakefield; been re-labelled and sent as 2 pallets, over to Paris and one to Limerick, with a direction that they were then to be returned to Westones Wholesale Limited in Telford. Those razors had been delivered to Paris by Mini International Limited on 6 May having been picked up from Wakefield. Interestingly the CMR completed by Mini International Limited is almost identical in content to those relied on by the Appellant in relation to their exports to Spain. When Mr Sanders was asked whether he was concerned about the movement of goods ostensibly for export only Mr Sanders replied:-

"Can I say, if you make £100 for a phone call to just put a contractor on a back load that is my company. I am out to make a profit, sorry."

It would appear from the evidence that all the hauliers involved in this case were content to behave in a similar manner. It is also surprising that Mr Sanders agreed that he was contacted in January 2003 when Mr Stone checked the type of goods and that he handled the razor blades in May, but he denied any knowledge of any of the goods in between. This is in spite of the fact that most of the CMRs bore his series of numbers; that he conceded that the company's CMRs were spread liberally around the world; and that in any event he did not deal with any of them personally but left it to his administrative staff. On a balance of probabilities we believe that the CMRs produced by Mr Stone existed and belonged to Trialout. Further we are satisfied in the light of the evidence that as goods appear to move with ease from the United Kingdom and back again that the goods are likely to have existed. Even though the later sales dealt with a large number of razor blades, we believe that these probably existed. If the goods had not existed there would have been no need for the transactions carried out by Mini International Limited and others.

17. Mr Stone was still concerned at the level of activity towards the end of May 2003 as the sales had continued from 14 May when the figure was £465,593 :-

22 May 2003 10000 cases Mach3/4/8 465,593.00

29 May 2003 10000 cases Mach3/4/8 492,325.00

Total for May 1,423,511.00

4 June 2003 10000 cases Mach3/4/8 545,787.00

11 June 2003 10000 cases Mach/3/4/8 545,787.00

Total for June 1,091,574.00

The Appellant ceased trading in razor blades with Icespana after 11 June 2003.Mr Stone had asked his accountants to write to the Respondents again and a letter was sent on the 29 May 2003 in the following terms:-

"We have already had a number of meetings and discussions regarding our client's need for confirmation that they are correctly dealing with the increased level of exports to Europe that they are now making.

We have read the details of the recent case of Bond House Systems Limited which basically requires a trader to obtain details about all the transactions involving a product they buy/sell, so that they can be sure that the transactions represent an economic activity and therefore subject to VAT and enabling the recovery of any input vat on the transaction.

We would be grateful for your guidance as to what information the client should reasonably be expected to obtain and how it might be obtained?

The Appellant had ceased its trade with Icespana in razor blades on 11 June 2003 before a reply was received. Mr MacPhee and Mr Hall called at the Appellant's premises to copy some documents. They confirmed that the records were in order but refused to advise Mr Stone whether he should continue trading or not. Mr Stone's note 2 on 18 June 03 states:-

"He (Mr MacPhee) said that he had taken on board our concerns relating to VAT liability on possible fraudulent transactions and stated that if he was concerned he would have had three to four VAT people present to "turn us over". He expressed the opinion that we were obviously not involved in any known fraud and that he would impart that detail to Glasgow. He did not suggest that we stop supply and did ask that we continue for another week pending advice/phone call from him. …..When asked if he knew of the VAT implications if fraud were proved he said that if he went to a VAT tribunal he would say

1. That our VAT records were in order

2. We had approached the VAT office for advice."

On 20 June Mr MacPhee visited the Appellant again and said that the Respondents could not support any zero rating from that date. He handed Mr Stone a letter indicating that the Respondents were unable to release £242,568.63 input tax as International Trading had failed to render a VAT return. The amount would be released as soon as the outstanding VAT return was received from International Trading. Mr Stone telephoned International Trading in Mr MacPhee's presence and on the strength of that call Mr MacPhee said that he would arrange for the VAT to be released. He said that the Glasgow office thought that there was a problem with International Trading and they needed their VAT return to prove it. He did not know if the Spanish customer was legitimate or not but insisted that he would not support any further zero rating.

On 23 June 2003 Mr MacPhee rang Mr Stone and apologised for his high handedness on the 20th June and confirmed that there was nothing to stop the Appellant continuing trading with Icespana or Mr Hay. Mr Stone asked for that to be put in writing and a letter was received dated 23 June 2003 in the following terms:-

"Further to our meeting and conversation of 20^th I would confirm the following:-

H M Customs & Excise have no reason to prevent you trading with your suppliers in Glasgow.

H M Customs & Excise have no reason to prevent your trading with your Spanish customer

Yours sincerely

Neil MacPhee "

Mr Stone must have decided to stop trading with International Trading sometime around 11 June 2003 and before that correspondence. Looking at the series of invoices they appear to occur every 7 days. The next order would have been received on 18/19 June just before the visit by Mr MacPhee. By June the sales were running at £545,787 and must have given rise to the belief that there was something amiss in spite of the comments by the Respondents.

18. An investigation by the Respondents was on going with regard to International Trading, Sky Trading and others in Scotland under the code name "Operation Bud". Although Mr MacPhee and Mr Hall were aware of the investigation as early as February 2003, it is unclear at what stage Mr Stone became aware of it. Mrs Quinn, the assessing officer, was instructed in September 2004 to assess the Appellant and she issued an assessment on 29 November 2004 in the sum of £892,141 and advised that as there was an ongoing investigation the assessment might be amended. The tax due was calculated as 7/47ths of the sales purported to have been made to Icespana for which there did not appear to be satisfactory evidence of the removal of the goods from the United Kingdom. She had not included the invoice dated 19 December 2002 as Trialout had conceded that it might have been one of theirs. This was the invoice over which Mr Stone had made a telephone call to Trialout as Trialout's CMR had identified the goods as Kit Kat and they should have been Aero mints. On 5 April 2005 as a result of that further investigation, she issued a preferred assessment on the basis that there never were any goods at all either purchased or sold on to Spain. This assessment was in the sum of £1,067,787.36, which the Appellant has paid. The earlier assessment became the alternative assessment. Mrs Quinn had arrived at the assessments by comparing the various invoices and cash details with the CMRs. This was a difficult task but we consider that there was nothing wrong with her methodology. Mr Patchet -Joyce submitted that the invoice for Snickers dated 4 February 2003 could not be a sale to Icespana as none of the other invoices for Snickers refer to Icespana and as far as he could see the Appellant had never sold Snickers to Icespana. He noted that International Trading had supplied Snickers to the Appellant for sales within the United Kingdom on 28 February 2003, which consignment had been refused by the purchaser. He thought that the invoice on 4 February 2003 represented a sale within the United Kingdom and that it should therefore be excluded from both assessments. We believe that Mr Patchett-Joyce may be correct as Mrs Quinn has compared the invoice with a payment, which was for Mars Bars. The Appellants are not alleging that the assessments are not to best judgment nor had they pleaded any grounds to that effect as required by C & E Commissioners –v- Pegasus Birds [2004]STC 509 The tribunal is required to find the correct amount of tax so far as possible on the material properly available to it.
19. Mrs Loftus and Mr McCleod gave evidence as to the investigations by the Glasgow authorities. Mrs Loftus said that the Respondents had been alerted to a potential fraud as a result of a report from the Bank of Scotland identifying a substantial movement of funds in the account of Ale Khan t/a Sky. Since early 2003 she had been involved in enquiries relating to Ali Khurshid trading as Sky Trading, Koban International, Kamran Ahmed trading as International Trading and Jameel Ahmed trading as J A Trading. Intelligence was received in May 2003 that Sky Trading and International Trading were one and the same. On 10 June 2003 further information was received from the Bank of Scotland that the Appellant was paying large sums of money into the account of International Trading. She contacted Neil MacPhee who confirmed the dealings that the Appellant had been having with International Trading and Icespana and she was sent copies of the business records of the Appellant for the transactions on 18 June 2003. A formal criminal investigation with regard to Sky Trading and International Trading was commenced on 2 July 2003. This was after the Appellant had ceased trading with International Trading. As part of those investigations she had taken a statement from Mr Stone in March 2004 concerning the facts as set out above. Mr Stone was not cross-examined as to what had prompted him to ask the Respondents to check his records in February 2003. In the statement made to Mrs Loftus he said:

"I noticed an increasing turnover in relation to the goods being sold to Icespana Trading therefore I contacted H M Customs and Excise and invited them to examine my records to ensure that I was fully complying with the necessary VAT regulations and I could be sure I was not being implicated in a fraud."

In fact the invoices at that time showed that on a like for like basis the invoices doubled in the month from £50,000 approximately to £100,000 -. a pattern that emerges during the six months cycle.

20. Mr McLeod had taken over the investigation from Mrs Loftus. He had taken a statement from Mr Sanders and had confirmed the movement of the razor blades referred to by Mr Stone. He had decided that the second set of CMRs was not genuine and he had inspected the set that Mr Stone was relying on for this hearing. One example was of 5 sales invoices for 52 pallets of Mars but the two versions provided both show only 26 Pallets. Similarly on a number of the CMRs relating to Gillette Mach 3 razors there are differences in the number of pallets involved between the first and second versions of CMRs. He had been to Spain and he had spoken to Mr Hay at Malaga Police Station. Mr Hay confirmed that he was a director and shareholder of Icespana Trading SL and that it traded as a wholesaler of supermarket products. He stated that the company had on average three employees whilst it traded and used 3 hauliers to move goods from the United Kingdom to Spain, namely Trialout, T Jackson, and ASW. When asked about his purchase from United Kingdom companies, including the Appellant he confirmed that he bought from them and then sold the goods to United Kingdom companies (Ali Khan – Sky Trading). He confirmed that he had sent the second set of CMRs because they were all he had and he confirmed that the goods never left the United Kingdom. Mr Mcleod confirmed at the hearing that the Appellants were not involved in the fraud and that Mr Stone had been a willing helper to HMRC. Mr Mcleod confirmed at the hearing that there were other companies in the same position as the Appellant with whom International Trading and Sky Trading had done business. He also confirmed that no prosecutions had resulted from their enquiries and that the operation had been terminated. We are satisfied from Mr McLeod's evidence that the confectionery goods must have existed. Mr Hay confirmed that he had transferred the goods to Sky Trading for resale in the United Kingdom. We think on the balance of probabilities that some of the razors existed but may well have been used for all of the frauds. It is likely that they were dealt with in much the same way as many of the other goods handled by Trialout and Anderson Harvey Lake, that is that they went in and out of the country.
21. Evelyn Wallace confirmed that Kamran Ahmed and Jaleel Amjad rented business suite 111 at Arc Business Centres Ltd Aspect Court 116 West Regent Street Glasgow from 26 September 2002 until February/ March 2003 when they used the "Virtual Office Services". By September 2003 International Trading was overdue with its rental payments and it made its last payment on 10 September 2003. There was no subsequent contact. Ms Wallace produced a list of International Trading's telephone calls from Arc Business Centre. Mr Puzey pointed out that there were no telephone calls from October 2002 to Trialout from International Trading this date being prior to any business done with the Appellant. Mr Patchett-Joyce suggested that there is evidence of the use of mobile phones; that there are no incoming calls; and from his checking of the 62 pages of calls there are 63 References of calls to Anderson Harvey Lake. It is quite possible, he suggests, that International Trading telephoned Anderson Harvey Lake who made the calls to Trialout. It is known that Anderson Harvey Lake made a delivery for the Appellant with regard to the razor blades. On a balance of probabilities the lack of telephone calls from the Business Centre to Trialout from International Trading does not necessarily lead to the conclusion that there may not have been any goods, as there were several other ways for them to communicate with Trialout.

The Law

22. The payment of VAT by a taxable person is governed by ss 24 -29 of the Value Added Tax Act 1994 (the Act). Section 25 requires such a person to account for and pay any VAT on the supplies of goods and services which he makes and entitles him to a credit of so much of his input tax as is allowable under s 26: see s25(2). Section 26 gives effect to what is now Article 168 of EC Council Directive 2006/112 (the VAT Directive) and allows the taxable person credit in each accounting period for so much of the input tax for that period as is attributable to supplies made by the taxable person in the course or furtherance of his business: see s 26(2). Part 11 of the Act sets out various reliefs and exemptions. The taxpayer is required to hold evidence to support his claim (see articles 17 and 18 of the Sixth Directive and regulation 2992) and so long as he does so no element of discretion is conferred on the tax authority to refuse the repayment. The Commissioners contend that the requirements of the legislation are excluded, or able to be set aside, where those requirements are relied on for abusive or fraudulent ends, and the trader concerned is party to, or knew or had the means of knowledge of, those abusive or fraudulent ends. There has been some considerable case law in relation to knowing or the means of knowledge since 2003 .
23. In Optigen Ltd, Fulcrum Ltd and Bond House Systems Ltd -v-CCE C354/03,C355/03 and C3484/03 the ECJ said that a right to input tax could not be denied where the trader had "no knowledge and no means of knowledge" of the VAT fraud. The ECJ in Axel Kittel v Belgium c-440/04 drew on Optigen to formulate the conclusion in paragraphs 51 and 61:

"51. In the light of the foregoing, it is apparent those traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud…. must be able to rely on the legality of those transactions without the risk of losing their right to deduct input tax…

612. By contrast [to the case where a person did not know and could not have known of fraud] where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct."

In Dragon Futures Ltd –v- HMRC VATD 19831 the tribunal formulated the test as follows:

" Has the taxable person, at the time of entering [into] a transaction involving payment of value added tax by or to that person, and taking into account the actual knowledge of the taxable person at that time (including knowledge acquired from any enquiry or investigation), taken all proportional steps available to it to ensure that, on the balance of probabilities, no aspect of the transaction is connected with any other party involved in, or any other transaction involving, fraud on the public revenue through the value added tax system?"

We see nothing in these cases which requires the taxpayer to be dishonest before he "ought to have known". It seems to us that if he participates in the venture in such a way that he knew or ought to have known that he was facilitating a fraud that would be sufficient to prevent his entitlement to a repayment of VAT. In Olympia Technology Ltd VATD [2057D] the tribunal said:

"We consider that on its ordinary wording "ought to have known" is a factual test with two limbs. First, one should start with all the facts (a) actually known to the person and ask whether in the light of those facts a reasonable businessman would have known the transaction in question was connected with fraud. Secondly, it would include (b) those facts that would have been known to the person if he had taken some action to discover them that a reasonable business man would have taken in the circumstances (which is not necessarily the same as every precaution reasonably required), but which the person did not."

As suggested in Dragon Futures Ltd (at paragraph 75) the knowledge of the fraud has to be on a balance of probabilities, not beyond reasonable doubt. As the tribunal acknowledged in Olympia Technology Ltd, the test they adopted leaves open a further question. That is whether the reasonable businessman is either (a) one having the skill and experience of the taxpayer or (b) one having the general knowledge skill and experience that may be reasonable expected of a person carrying on the taxpayers' functions. We share the chairman's view in Honeyfone Ltd –v- Revenue and Customs [2008] UKVAT V20667:

"The prevention of fraud is not compromised by addressing actual knowledge. The objective required is satisfied by ignoring what the trader actualy thought but considering what he was aware of and his actual knowledge and skill"

Further as the learned chairman Colin Bishopp said in Calltell TelecomLtd & Another –v- Revenue and Customs [207] UKVAT V2066:

"Much will depend on the facts, but an obvious example might be the offer of an easy purchase and sale generating conspicuously generous profit for no evident reason. A trader receiving an offer would be well advised to ask why it had been made; if he did not he would be likely to fail the test set out in paragraph 51 in the judgement of Kittel."

24. We have been specifically referred to two cases: Mr Patchett-Joyce referred to Regina (Teleos PLC and other)-v- Customs and Excise Commissioners [2008] QB 600; and Mr Puzey to Genius Holding BV –v- Staatssecretaris van Financien Case 342/86 EJC. Teleos concerned United Kingdom Traders who had zero rated supplies of mobile phones to France and Spain. Initially the Commissioners accepted the documents (CMRs) produced by the trader as evidence that the goods had been exported from the United Kingdom, which enabled the traders to zero-rate the supplies. The Commissioners subsequently discovered that the mobile phones never left the United Kingdom due to a fraud on the part of the freight forwarders and the recipients of the supplies. The Commissioners decided to assess the United Kingdom traders VAT on those supplies, whilst acknowledging that the traders were in no way involved in any fraud.

Questions were referred to the ECJ to determine whether the goods physically had to be exported in order for the traders to reclaim their input tax or whether a contractual intention to do so was sufficient for the traders to be able exercise their right to deduction. The Advocate General decided in respect of the first two questions that the first sub-paragraph of article 28 a(3) of the Sixth Directive required the acquirer to have obtained the power to dispose as owner of the goods, which are dispatched or transported to another member state and thus have physically left the state of origin. The third question was whether the proper completion of CMRs as required by the member state would be sufficient evidence of the goods leaving the country, whether they had or had not. The Advocate General opinioned:

"83. I am aware that the interpretation I am suggesting here carries a certain risk. It could lead the supplier into carelessness if he did not have to reckon with liability for VAT in the event of the acquirer merely feigning transport over the frontier. For that reason, I reiterate that the supplier can escape retrospective liability for VAT only if there is no indication that he was involved in the deceptions, or knew anything about them, and if he did everything in his power to ensure the proper levying of the VAT.

25. The answer to the third question should therefore be: if the supplier, acting in good faith, presents objective proofs that the goods supplied by him have left the state of origin and the authorities of that state thereupon exempt the supply from tax in accordance with article 28c(a) of the Sixth Directive, payment of the tax cannot be retrospectively demanded from the supplier…… if it turns out that the proofs presented contained false information, but the supplier neither knew nor could have known of anything of it. That does, however, apply only where the supplier has done everything in his power to ensure the proper application of the provisions for VAT.

Mr Patchett-Joyce submitted that it is clear from paragraphs 45-63of the opinion that the fundamental EC principles of (1) legal certainty, (2) proportionality, (3) fiscal neutrality, and (4) free movement of goods must be respected. If the Appellant is denied its right to deduct input tax, or is assessed to output tax, those fundamental principles will be infringed. Teleos has not yet gone to the full court so that it is possible that the Advocate General's decision may not be followed.

26. Mr Puzey contended that if the goods never existed then the Appellant could not recover its VAT in any event. He relied on the decision of the Court of Justice in the case of Genius Holding BV. The tax payer company, Genius Holding BV, carried out assembly and machine tool work using subcontractors to fulfil its orders on a regular basis. It received an assessment in respect of the period 1 July to 31 December 1982 on the grounds that, contrary to national legislative provisions in force, it had deducted from the VAT for which it was liable, VAT invoiced to its customer, GM, by two subcontractors. Genius appealed and the assessment was confirmed. On appeal, the Hoge Raad took the view that the deduction was permitted only where the tax mentioned on the invoice was due. Under the Netherlands rules, enacted pursuant to a derogation by the Council under article 27(120 of EC Council Directive 77/388, the subcontractors were not liable to pay VAT in respect of the supplies made to the customer GM, that tax being due only from Genius on the amount invoiced to the customer. It followed that Genius could not deduct the VAT because it had been invoiced by the subcontractors to the customer GM contrary to the Netherlands rules. The parties in the case submitted that the decision meant that any tax mentioned on the invoice could be deducted. The Advocate General agreed that the tax mentioned on the invoice, whether or not it was due, could be deducted. The Court disagreed it stated at paragraph 15 that "According to Article 18 (1)(a), to exercise his right to deduct, the taxable person must hold an invoice, drawn up in accordance with 22(3), which requires the invoice to state clearly the price exclusive of tax and the corresponding tax at each rate as well as any other exemptions. In accordance with that provision, mention of the tax corresponding to the supply of goods and services is an element in the invoice on which the exercise of the right to deduct depends. It follows that that right cannot be exercised in respect of tax that does not correspond to a given transaction, either because the tax is higher than that legally due, or because the transaction in question is not subject to tax. Finally, with regard to the argument put forward by the taxpayer company and the Commission to the effect that the fact of limiting the exercise of the right to deduct taxes corresponding to the supply of goods and services calls into question the neutrality of VAT, it should be pointed out that, in order to ensure that application of that principle, it is for the Member States to provide in their internal legal systems for the possibility of correcting any tax improperly invoiced where the person who issued the invoice shows that he acted in good faith. Mr Puzey suggests that as the invoices were issued by International Trading other than in good faith and as there were no goods, no VAT can be repaid. Mr Patchett- Joyce says that the transactions under consideration in this case are not ones that are "not subject to tax". The Appellant paid International Trading the correct amount of tax in relation to that given transaction, and that tax was neither higher nor lower, and it certainly was a taxable transaction, so the first limb of the judgment is satisfied. The second limb does not apply because the transactions were subject to tax. In relation to the second transaction, the sale was properly zero rated, and the Appellant raised an invoice properly zero rating it. The facts in Genius are quite different from the facts in this case. Further in the case of Reemtsma Cigarettenfabriken GmbH –v- Ministero delle Finanze Advocate General Sharpston said that Reemtsma's view … that VAT, which must be accounted for by the supplier by virtue of 21(1)(c), should also be regarded as tax which is 'due or paid ' within the meaning of 17 (2) was correct. The VAT should therefore be deductible by a trade customer (provided that fraud is ruled out by excluding cases where it can be shown that the amount in question was not actually paid) .. seems to be preferable, in terms of coherence and simplicity of system, to the approach finally adopted by the Court in the judgment in Genius Holdings

For our part, we have decided that some goods did exist, although the full allocation may not have been exported to Spain, and in those circumstances the case of Genius does not apply. If we are incorrect in that it would appear that if a trader can show good faith then the VAT rules would apply. This appears to be in accordance with the ECJ decision in Optigen where the court held that so long as the trader did not know nor have the means of knowing that the transaction was fraudulent, and its part of the transaction appeared to be an economic activity, that trader could not be deprived of its right to recover the VAT. We need to decide whether the Appellant, suspecting that there might be a fraud, took reasonable and proportionate steps to discover whether there was a fraud or not.

Summing Up

27. Mr Puzey submitted that this is a case about reality. The Commissioners case is that this was a circular or carousel fraud, that money and paper moved in circles from International Trading to the Appellant to Icespana and back to Sky/International. There were no goods or if there were any goods they never left the United Kingdom. This type of fraud was not possible unless each of the parties was a willing participant, or at least turning blind eye to the obvious. He submitted that the Appellant accepts that International Trading and Neil Hay were conducting fraudulent activities but was itself oblivious to the fraud. Under cross-examination Mr Sanders was not asked if his firm had moved the goods or if they existed. He questioned why International Trading would have goods taken to St Helens only to have them taken back to International Trading and Sky? Although the Appellant was able to identify the movement of some goods there was only one example out of the 34 of the existence of any goods in the Appellant's dealings with Icespana. The Appellant suggested that Mr Sanders must have 'weeded out' the CMRs but if Trialout had transported the goods they would have confirmed this. If they had been involved in the fraud they would have wanted the Respondents to think the goods had gone to Spain, thus avoiding any further investigation. For the fraud to operate successfully the Appellant had to be relied on to buy from International Trading and sell to Icespana, which it did. The tribunal knew that International Trading not only spoke to the Appellant but to Mr Hay as well. The tribunal knew that Trialout did deliver goods for International Trading to Mr Hay, so it was not the Respondents' case that Mr Hay and International Trading never dealt in some real goods. However, Mr Puzey submitted that in relation to the dealings of the Appellant with Mr Hay there never were any goods at all. The only documents that existed between International Trading and the Appellant were the invoices. There were no faxed communications, no copy delivery notes, no discussion of price, no faxed purchase orders and no negotiation by e-mail. International Trading, he maintained, did not telephone Trialout after 31 October 2002. There were no calls because Trialout was not involved. It had been suggested that as there appeared to be other companies involved with International Trading, in a similar position to the Appellant, that they were also innocent. This tribunal could not be aware of that and it could be relevant to the facts in this case.
28. Mr Puzey accepted that the Respondents had to prove on the balance of probabilities that the Appellant knew or ought to have known what was taking place in terms of the fraudulent activity. He submitted that if the goods did not exist then on the authority of Genius a trader could not claim the VAT back. (This matter was discussed above at paragraph 25). Telios has similarly been discussed (see paragraph 24 above). Mr Puzey submitted that the Court in the Telios case made it clear that the Appellant could not have the goods delivered to the customer's nominated haulier, claim zero rating and then abdicate any responsibility for ensuring that the goods leave the country. The Court went on to say that the Commissioners could refuse to repay the VAT unless the seller had taken all reasonable steps to ensure that the transaction he was entering into did not result in him participating in tax evasion. Mr Puzey pointed out that Mr Patchett-Joyce emphasised in his consideration of this authority principles of proportionality, legal certainty, effectiveness and fiscal neutrality. Nobody doubted the importance of those principles, but the present case was an example of a case where the Court of Justice would have concluded that the seller would be liable for the tax. A taxpayer must know how the law is going to treat him when he enters a transaction, but the law was and is that if he knew or should have known his transaction was connected with fraud, he could not claim the zero rating. Paragraph 75 of Telios states:

"Certainly the supplier is under an obligation to do all in his power to ensure that the inter-Community supply is properly carried out."

It was also submitted by Mr Patchett-Joyce that the Respondents had to show what efforts there had been to recover the outstanding VAT from International Trading. That has no relevance to this case. The preferred assessment was raised because there were no goods. One cannot recover input tax if there are no goods. What International Trading had done or had not done to account for the tax has no relevance in this case. The alternative assessment was for output tax because zero rating had been denied due to there being no evidence of export. In any event the evidence that International Trading had 'gone missing' has not been challenged. It has been agreed that "best judgment" has not been challenged as Lord Justice Carnwarth's requirements of "dishonesty or vindictiveness or capriciousness etc" in Pegasus Birds had not been pleaded by the Appellant.

29. Mr Patchett-Joyce referred to the phrase "abuse of process" on more than one occasion. Mr Puzey was not sure whether that was actually a ground of appeal, but the Appellant relied on several factors concerned with how the Commissioners approached this case to suggest that the Commissioners had acted improperly in raising the assessments. He referred to the visits of Messrs Hall and MacPhee in February 2003. Mr Patchett-Joyce points to the fact that invoices were sent to the Respondents in April of 2003; to Mr MacPhee's dealings with Mr Stone in June 2003 and the fact that contradictory advice was given; to Mr Stones assistance to the Respondents' in the investigation in June of 2004; to the help in getting evidence from Mr Hay; and his witness statement to Mrs Loftus. The Respondents maintained that the Appellant knew from the visits in 2001 and 2002 what was needed to establish the export of the goods. The officers were not in a position to tell the Appellant what it should or should not do in its business dealings: that was a commercial decision for the Appellant to make. The invoices were sent to prove the entitlement to reclaim VAT: they did not establish that the Respondents would not need to check the position again with the Appellant. The dealings in June were carried out after the Appellant had withdrawn from trading with International Trading. If the Appellant had wished to allege that the Commissioners had acted in abuse of power, or in breach of a legitimate expectation then an application could have been made to the administrative court for a judicial review.
30. Mr Puzey then reviewed the evidence. Mr Stone admitted that he was familiar with CMRs as he used them extensively when goods were delivered to his warehouse for export. He was not familiar with the procedure when the goods were delivered to a separate warehouse. He said that he was familiar with the content of VAT Notice 703 which explained what was needed by way of evidence when exporting goods. He had agreed that Mr Hay should not be completing the CMRs and said:

"I have no idea who has the consignor's copy, the sender's copy. I never asked for it. I could have asked Trialout for it, and it would have been relevant in this case to know if they had it."

Mr Stone said he had not carried out any due diligence in relation to Koban International as it did not represent a financial risk, but he had some difficulty in saying how he knew the goods came from a legitimate source if he had not carried out due diligence. He had not verified International Trading's VAT number until 21 January 2003. He suggested that he might have verified it earlier on the Europa website but he produced no evidence to the tribunal and had not raised this before the hearing. He had not carried out any checks on Trialout but confirmed that he would have been potentially liable for VAT if the goods did not leave the United Kingdom. He had agreed to the goods being delivered to Trialout to save Mr Hay paying two sums for haulage. He agreed, however, that Mr Hay was paying for the haulage in any event. Mr Stone also agreed that he should have had the original fourth copy of the CMRs. In an e-mail on 12 May 2004 to Mr Hay he had said:

"Hi Neil,……… The issue with the CMRs is we only have faxed copies. Under normal circumstances an original CMR is good enough."

The CMR numbers were not sequential and some had no date or signature in the right hand corner. Nor had he noticed that the name of the carrier was missing on some of them. He also failed to spot that whereas the invoice was for 52 pallets on five occasions the CMR was only for 26. He had been asking Mr Hay for CMRs in May and June and conceded that he could have obtained the top copy from Trialout. Even though he had never dealt in razor blades previously, he had shown no surprise or concern when International Trading were able to supply all that he required whenever he required them. It should be recalled that this is against the background of him calling in the VAT officers in February because he thought there might be a scam operating. When he arranged for the razor blades to be delivered to his warehouse he had not checked them otherwise he would have seen the reference to Paris. On the one hand the tribunal was told that he was an experienced businessman, and yet time and again he did not raise basic questions, obvious matters, or take obvious steps or precautions that one would have expected of a man of his experience.

a. Mr Hall had said in February 2003, when Mr Stone had indicated that he was concerned that there might be a scam that it was for Mr Stone to decide on a commercial basis whether to continue trading with International Trading and Mr Hay. Mrs Quinn's assessments were to best judgment and, even if it were argued that some of the invoices should not be allowed, it made no difference to the preferred assessments as the goods did not exist. If they had existed it made no difference to the alternative assessment it was on the goods not leaving the country and the Appellant had to rely on the same CMRs in both cases, not the invoices.

31. In conclusion, Mr Puzey submitted that the Commissioners had proved their case on the evidence that there were no goods and there was no right to deduct input tax. If the tribunal did not accept that view, it still appeared to be common ground that the goods did not go to Spain. It therefore depended on whether Mr Stone took all reasonable steps to ensure that the Appellant was not involved in fraud and whether he knew or had the knowledge of fraud.
32. Mr Patchett-Joyce submitted that Mr Stone was a well established and experienced businessman. He had experience in the exporting business and was familiar with the use of CMRs. The Appellant had paid the preferred assessment. The tribunal must judge the calibre of the man, the evidence he has given in relation to the deals and how they came about. He actively sought the guidance of the Respondents, brought matters to their attention, and sought their help. His accountants wrote to the Respondents in February 2003 and the Respondents attended at the Appellant's premises and confirmed that the documentation was in order. Mr Stone provided invoices to Mr Gough in April 2003. The Respondents attended again in June and confirmed in writing on the 23 June after their visit that they had no problem with the Appellant continuing to do business with either International Trading and Icespana. During the enquiry period he willingly assisted the Respondents both in writing letters to Mr Hay and giving a statement to Mrs Loftus. As a result of correspondence during the subsequent investigation Mr Stone received the second set of CMRs. He said that he did not believe those CMRs to be genuine. He had willingly made them available to the Respondents having arranged for his solicitor to retain them until the Respondents asked for them. He had not relied on those CMRs for the purposes of this hearing. Mr Stone had built a thriving and successful business: why would someone in his position knowingly get involved in a fraud? Mr Stone was able to produce details of his telephone calls to Trialout on the occasion of his query in relation to the supply of Aero Mints. There was no doubt that the call was made and that Trialout had the originalCRM. Mr Puzey suggested that Mr Stone was consulting the Respondents to "extract a guarantee" from them and to cover his position. If Mr Stone had wanted to 'window dress', why would he have consulted an independent adviser and of his own volition contacted the Respondents? In June 2003 Mr Kerrigan from Glasgow returned the call to Mr Macphee to state;

" …we couldn't withhold Westone as they have bona fide proof, but he wondered if you could use them to flush out the supplier as he has gone missing"

The CMRs are the evidence that the goods have been exported and they need a stamp and signature of the recipient. Mr Sanders confirmed that the stamps were those of Icespana and Supersaver Ltd. The Respondents had accepted that up to the end of June the CMRs were valid. Mr Sanders evidence was far from clear. His CMRs appeared to be available to a large number of people. He admitted that he did not check the CMRs but left that to his administrative staff. There was ample evidence that goods were moved around the United Kingdom even when the labelling clearly identified that they should go abroad. If the goods did not exist, Icespana would not have asked for them to be sent back to Sky: they would send them to some far-flung corner of the EU, because virtual goods can just be jettisoned, and more virtual goods can be brought in.

After extensive investigation and the use of hindsight it was clear that there was a fraud. In order to make the market economics work, market economics being the law of supply and demand in a free market, it was necessary to create the demand and provide the means whereby that demand is satisfied by offering to pay a good price to the party in between, and making sure the fraudster's counterparty offered that party in between a good price on the goods which were being simply sucked through the process by means of the law of supply and demand. In this particular case the sense of false security was enhanced by the straight forward transactions which the Appellant was entering into with International Trading in relation to the goods sold to the domestic market. Those sales and the sales to Icespana were extensively dealt with in the e-mails between Mr Stone and Mr Hay. Mr Stone could not be said to be a willing participant or to be turning 'a blind eye'. It was suggested that Mr Stone should have checked International Trading's VAT number before he did so in January 2003. If he had checked earlier, he would have received the same answer. He carried out all the other checks. In the commercial world you do not look for fraud round every corner or under every piece of paper. Mr Patchett-Joyce accepted that in the light of the subsequent investigations it would appear that the goods were not exported. There was no doubt that there was a contractual intention on Mr Stone's part to export the goods as evidenced by the CMRs. Those CMRs were correct on the face of them as agreed by the Respondents throughout this case. As a result, and relying on Teleos, the Respondents were excluded from retrospectively reassessing the VAT liability. As observed by the Advocate General, a trader needed to know the extent of his obligations before he enters into a transaction. The United Kingdom had accepted that CMRs in the form used in this case were an acceptable way of proving that the goods had been exported and the Respondents had accepted that the CMRs were valid. In those circumstances the Respondents could not refuse to repay the input tax

The decision

33. We have considered the evidence and the law and have decided that a proportion of the goods existed but some were not exported. The CMRs appeared to be valid and were therefore satisfactory evidence of export within the terms of the Teleos decision. It therefore remains to decide whether Mr Stone knew or ought to have known that there was a fraud being perpetrated and whether he participated in the fraud to enable International Trading to disappear without paying its VAT? We were surprised at the apparent simplicity and ability to create CMRs. We are satisfied that Trialout had some if not all of the CMRs in question. Mr Sanders accepted, as he had to, that there must have been a CMR when Mr Stone queried the change from Kit Kat to Aero Mints in January 2003. He also accepted that Trialout must have taken delivery of the razor blades in April because Mr Stone asked to see them. It is perplexing that all the CMRs in between those that were confirmed are unaccounted for, even if the CMRs started with Trialout, one would expect that they must have gone through to Spain for Mr Hay to have been able to send copies to the Appellant, which would be evidence that the goods had been received. Some goods undoubtedly were delivered. Mr Hay confirmed that 30% of the goods requested by Icespana were delivered to Spain. Mr Sanders and Anderson Harvey Lake demonstrated that labels could be removed with impunity and goods transported to Paris, Limerick, Paisley and any destination the customer requested- this in spite of the fact that the initial label stated the goods were to be delivered to Spain or elsewhere. It appears and we find that that International Trading and Mr Hay were working in co-operation so that International Trading could have identified the quantities and otherwise for Mr Hay to be able to complete the CMRs. It would appear from the CMRs before us that some of them might have been completed by Mr Hay. Others appear to have been signed by the drivers who were involved in the haulage. From Mr Sander's evidence he did subcontract some of the work. For the purposes of this decision it does not matter whether the goods existed or were not exported: what matters is whether Mr Stone knew or ought to have known something untoward was taking place. He certainly had his suspicions.
34. Mr Pachett-Joyce asks what more Mr Stone could have done. All the documentation was in order; it had been checked earlier by Mr Johnson; it had been examined on several occasions by the Respondents, who, even after Mr Stone ceased trading with Icespana, confirmed that they had no objection to his continuing to trade with International Trading; Mr Stone had run a test order in April and the razor blades appeared to exist. It is the nature of these frauds that in all probability the documentation will be in order. It is not sufficient for the Appellant to rely on telling the Commissioners about his concerns. As was pointed out on several occasions it was not for the Respondents to advise the Appellant whether it should continue to trade or not; that was a commercial decision for it to take. Mr Stone admits to being a long established and experienced trader. He is familiar with the use of CMRs and almost exclusively transports goods from his own warehouse. We accepted that he had been lulled into false senses of security because he was dealing with International Trading for his domestic sales, those sales undoubtedly were proceeding satisfactorily. He accepted that it was unusual for his goods to be transported to a different warehouse and, although the first 18 deliveries from 19 December 2002 to 5 March 2003 to Icespana were confectionery, he was concerned enough to ask an independent consultant to advise on the documentation and to contact the Respondents in February. He was quite open with Mr Hall saying that he thought there might be a scam taking place and that Koban and International Trading could be one and the same company, his concern was allayed by the response from the Respondents. He was undoubtedly put on notice from February 2003 that he needed to monitor matters carefully. He must have been alerted to changes taking place because at the beginning of March he, and his accountants, wrote to the Respondents requesting a change to a monthly VAT accounting periods. By then Mr Stone had had his first delivery of razor blades on 10 March 2003. We also accept that he enquired around his usual suppliers on that first occasion to obtain a competitive price and it was reasonable for him to contact International Trading, as he was dealing with it at the time. We think, however, that he should have been uneasy with the situation by this point in time. His sales for January 2003 to Icespana had been £511,406 and he knew by the time he asked for monthly accounts that the sales represented 5 to 10% of his entire turnover. By the end of February they had almost doubled to £ 886,281. It is to be remembered that he had been concerned in February when the trade doubled from £61,000 to £110,000. He should have been even more concerned by the end of February. The sales in March and April continued as follows:

10 March 2003 2900 cases Mach3/4 96,261.88

18 March 2003 5000 cases Mach3/4 165,968.00

18 March 2003 Cadbury Flakes 102,717.00

18 March 2003 Crunchies 87,250.00

27 March 2003 5000 cases Mach3/4 165,968.00

31 March 2003 7500 cases Mach3/4/8 315,781.00

Total for March 1,168,980.88

10 April 2003 8500 cases Mach3/4/8 375,706.00

15 April 2003 8500 cases Mach3/4/8 375,706.00

23 April 2003 8500 cases Mach3/4/8 375,706.00

30 April 2003 2900 cases Mach3/4/8 133,685.00

Total for April 1,260,803.00

14 May 2003 10000 cases Mach3/4/8 465,593.00

By the 31 March, when the invoices doubled to £315,718, he must have known something was amiss. As an experienced businessman he will be aware of a normal pattern of trading with a relatively new customer and be aware that an increase in orders from £61,245.60 to £315,781 is an abnormal pattern in 3 months. Any reasonable businessman would have been put on enquiry. Mr Stone asks to go onto monthly accounting and ignores the warning signs. It is not until the beginning of May, when the invoices are running at £375,706 per month that he insists on a delivery of the razors to his warehouse, but he failed to have the goods checked carefully. It appears that he might have been able to see that the goods had come from Paris. He does not contact Mr Hay to say there is a delivery en route, nor does he suggest that a delivery should be made by one of his own hauliers, which presumably would not have been too difficult to arrange since he was already exporting to Europe in any event. It would have been sensible for him to have contacted one of his other suppliers before he made the order on 10 April to check the price of razor blades, and, more importantly to discover whether they could be so readily obtained. He did none of those things: he merely arranged for a test purchase in May by which time he knew the orders were running at £465,593. By then the Appellant was receiving nearly £38,000 profit each month from a potential monthly turnover of £1,862,372 or nearly 1/5 of the total turnover. This, from a new customer in Spain, selling a product in which the Appellant had no previous dealings. By June the sales were as follows:

22 May 2003 10000 cases Mach3/4/8 465,593.00

29 May 2003 10000 cases Mach3/4/8 492,325.00

Total for May 1,423,511.00

4 June 2003 10000 cases Mach3/4/8 545,787.00

11 June 2003 10000 cases Mach/3/4/8 545,787.00

Total for June 1,091,574.00

The last delivery to the Company was on 11 June, which presumably arose from an order some time earlier in June. Mr Stone had decided that matters were getting out of hand as he did not arrange another shipment. He had decided to stop trading before Mr MacPhee attended to say that he could not support a repayment claim on 11 June. Perhaps Mr Stone felt that a turnover of £6,403,800 for half a year, representing 50 % of his total turnover for the year was unacceptable. He was correct, but he should have stopped trading when the invoices reached £315,781 at the end of March. It is no answer to say that the Respondents wrote on 23 June confirming that he could continue to trade. He had already decided to stop trading by that date. VAT officers are not commercial traders. They may be able to confirm that the documentation appears to be in order. They do not know, as Mr Stone does, the monthly turnover figures and their relationship to the total turnover. Nor do they know the products dealt with by a trader and their relative importance one to the other. Only the trader knows that. Only Mr Stone knew the relationship between these sales and the rest of his business. Any help or otherwise that Mr Stone gave thereafter to the Respondents during their investigation of International Trading had no bearing on his decision to stop trading with Mr Hay at the beginning of June. As Mr Bishopp said in Calltell

"Much will depend on the facts, but an obvious example might be the offer of an easy purchase and sale generating conspicuously generous profit for no evident reason. A trader receiving an offer would be well advised to ask why it had been made; if he did not he would be likely to fail the test set out in paragraph 51 in the judgement of Kittel."

As we have decided at least some of the goods existed and that it is unlikely that the razor blades were exported, although many of the confectionery goods may have been, we confirm the alternative assessment in the sum of £892,141 and interest. We do not accept that there needs to be any amendment to that assessment. We consider that Mrs Quinn's methodology is a reasonable one and that she must have had difficulty aligning the CMRs, to the invoices, and to the transfer of the money. Some she will be incorrect to the benefit of the Appellant and others incorrect to the benefit of the Respondents. It is not possible to identify which. Her assessment was to best judgment. We therefore dismiss the Appellant's appeal

We reserve our decision with regard to costs. We consider that costs must be decided under the earlier rules as the Appellant entered into this appeal on the basis of those rules and not the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. We direct that the Respondents submit their application for costs, if they intend to do so, to the Tribunal and to the Appellant within 28 days from the release of the decision. The Appellant shall reply within 56 days with the Respondents right to reply within 70 days. The tribunal will decide the costs on the basis of written representations.

JUDGE
Release Date: 24 August 2009

MAN/04/0799

MAN/05/0497