[2011] UKFTT 250 (TC)

TC01114

Appeal number: LON/2008/0361

VAT – alleged MTIC fraud – whether the Appellant knew or ought to have known that its transactions were connected with the fraudulent evasion of VAT- appeal dismissed on basis that whilst the Appellant did not know that its transactions were connected with fraud the Appellant ought to have known

FIRST-TIER TRIBUNAL

TAX 

	DEANDRAKE LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	S.M.G.RADFORD (TRIBUNAL JUDGE)							DR C SMALL		

Sitting in public at 45 Bedford Square, London WC1 on 10 December to 17 December 2010

Miss Vivienne Tanchel for the Appellant

Mr Jonathan Kinnear, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal against the HMRC decision to withhold from the Appellant the sum of £181,125.88 of input tax paid on the purchase of mobile phones. The decision to deny input tax was notified to the Appellant’s accountants by letter dated 7 February 2008 signed by Mr Bokor of HMRC.
2.	The HMRC decision relates to four deals made by the Appellant in the October 2006 (10/06) VAT quarter.
3.	The input tax was claimed by the Appellant who submitted that at the material time it was a wholesale trader in mobile phones. It is HMRC’s case that each of the Appellant’s four deals can be traced back to a loss which was connected with the fraudulent evasion of VAT and the Appellant either knew or should have known that they were so connected.
4.	The Appellant denied any knowledge of such a fraud and denied that it should have known of the same.
5.	The Appellant relied on the evidence of Mr Gurtata, managing director of the Appellant and HMRC relied on the evidence of Mr Bokor, an HMRC officer.
Background and Facts
6.	The Appellant was incorporated on 5 August 2005. The sole director and shareholder of the Appellant is Mr Gurtata. The Appellant first made an application to be registered for VAT on 31 August 2005.
7.	Mr Gurtata was encouraged to commence trading in mobile phones by his brother-in-law, David Chopra, who introduced him to Zulfi Khan who had experience in this market.
8.	On 23 September 2005 the Appellant’s accountants Sayers Butterworths wrote to HMRC attaching a copy of the application for VAT registration and requesting an expeditious response to the application as an order had been received from a potential customer.
9.	On 10 October 2005 HMRC wrote to the Appellant acknowledging receipt of the application and requesting further information. On 18 October 2005 HMRC again wrote to the Appellant informing them that due to an increase in bogus applications there was now an enhanced registration process which would take some time.
10.	By letter dated 30 November 2005 the Appellant was informed by HMRC that its application for VAT registration had been unsuccessful because HMRC was not satisfied that the Appellant had any intention of trading. 
11.	Sayers Butterworths wrote to HMRC on 1 December 2005 asking that the decision be reconsidered and the Appellant’s VAT registration was finally granted on 16 January 2006 and back dated to be effective from 13 October 2005.
12.	Upon registration the business activity of the Appellant was given as import and export of computer components and the estimated value of taxable supplies for the next twelve months was given as £30million and it was stated that goods worth £3 million were likely to be bought and sold from the European Union (“EU”).
13.	The Appellant received a visit from an HMRC officer on 11 November 2005 and in a letter dated 7 February 2006 addressed to Sayers Butterworth HMRC explained that due to the nature of the problems they were experiencing with businesses in the Appellant’s sector which involved Missing Trader Intra-community fraud (“MITC”) the application had been referred for in-depth checks. 
14.	HMRC wrote again on 7 February 2006, this time to Mr Gurtata enclosing Notice 726 which explained the joint and several liability which could attach for unpaid VAT by other parties in the supply chain and again emphasising that MITC fraud might involve all types of VAT on goods including computer equipment, mobile phones and ancillary items.
15.	On 8 February 2006 Emma Bailey of HMRC called Mr Gurtata on his mobile telephone and he confirmed that the registered office of the Appellant was his home address. Emma Bailey told him that they had called at his home the previous day and left him a letter. 
16.	Mr Gurtata explained to Emma Bailey that currently he was working mainly in the hotel business and that the Appellant had not yet commenced trading as their potential customer; Forward Logistics, had not been able to verify the Appellant through the Redhill VAT office. Ms Bailey then explained to Mr Gurtata that in order for HMRC to verify him they would need to arrange a meeting at his earliest convenience in order to gather further information on his business and to explain to him the problems HMRC were experiencing in the Appellant’s proposed business sector.
17.	The meeting took place on 10 February 2006 and lasted for some hour and a half. It took place at the offices of Sayers Butterworths and two HMRC officers were present together with Mr Gurtata and his accountant, Martin Dunne.
18.	HMRC produced a copy of the visit report to the Tribunal. At the visit it was confirmed by Mr Gurtata that the main business activity of the Appellant was still to be computers and computer components and no deals had been done to date because they were waiting to be verified by Forward Logistics, the freight forwarders and therefore could not yet purchase any stock.
19.	During that visit Mr Gurtata also told HMRC that he had sought advice from Chris Chipperton of Ernst & Young; PricewaterhouseCoopers and BDO. In addition to this he had also attended an HMRC seminar and researched the industry.
20.	Further to the visit the HMRC officer sent a letter dated 13 February 2006 to the Appellant at Mr Gurtata’s home address outlining again the importance of running checks on potential customers and suppliers. The letter informed the Appellant that all potential deals should be verified through the Redhill VAT office.
21.	On 5 September 2006 HMRC wrote to the directors of the Appellant to warn them that a company called Mobiles Instore Limited had been deregistered for VAT. For the Appellant to have received this notification it must have checked Mobiles Instore Limited or they must have checked the Appellant.
22.	Mr Gurtata gave evidence concerning the hotel business which had been left to his brother and himself by his father. He said that following the death of their father the relationship between himself and his brother soon broke down and their bank advised them that the best solution was for one of them to buy the other out. The buy out took place in the second week of October 2006 and his brother bought Mr Gurtata’s shares in the hotel company for £10.825 million.
23.	Mr Gurtata confirmed that in August 2006 there was an arson attack on his house which turned out to have been committed by gangsters known to his ex wife and her brother David Chopra. He said that David lived in London and had a history of gambling although he pretended to be a businessman. Mr Gurtata suspected that the arson attack was an attempt to force David to pay his gambling debts.
24.	At the beginning of 2007 divorce proceedings began between Mr Gurtata and his wife. The proceedings were bitterly contested and the divorce was finally granted in September 2009.
25.	Mr Gurtata explained that his ex-wife’s other brother was Parvinder Choprah who lived in Singapore. To the best of Mr Gurtata’s knowledge Parvinder was in the computer business.
26.	 Parvinder introduced him to Zulfi Khan, a computer consultant, when he brought him to Mr Gurtata’s home at the time that Mr Gurtata was just starting the Appellant in August 2005. Mr Gurtata explained that he had formed the company to work “on the back of my then brother-in-law’s knowledge and experience of the computer business in Singapore”. Parvinder needed someone with whom to work in the UK and so the Appellant was set up with some of Mr Gurtata’s personal funds.
27.	Mr Gurtata agreed that he knew nothing about the computer business but engaged Zulfi Khan to act as a consultant to source deals in computers and their components and to make the deals happen. Mr Gurtata said that some time in 2006 Zulfi suggested that he should consider trading in mobile phones. Mr Gurtata agreed that he had no knowledge of mobile phones but was relying very heavily on Zulfi.
28.	He had no formal contract or written agreement with Zulfi because he had been introduced to him by his ex-wife and her brother whom he trusted at that time. He had stated on the VAT registration form that the projected turnover of the business of the Appellant was £30 million because that was what he had been advised by Zulfi and Parvinder Choprah. He said that a forecast had been prepared by Zulfi and Parvinder and given to his bank, Barclays who had endorsed the business on the back of these projections.
29.	Parvinder had also taken him to see Chris Chipperton at Ernst & Young. According to Mr Kinnear Mr Chipperton was known for advising on MTIC fraud.
The Tax Loss Chains
30.	On 31 October 2006 the Appellant entered into four transactions to supply mobile phones to Nordisk Trader Asp (“Nordisk”).
31.	In the first transaction the Appellant purchased 1100 Nokia N93 mobile phones from Exhibit Enterprise Limited (“EE”); in the second transaction it purchased 1000 Nokia N73 mobile phones from EE; in the third transaction it purchased 100 Nokia N91 mobile phones from IT Players (UK) Limited (“IT Players”); and in the fourth transaction it purchased 900 Nokia N80 mobile phones from IT Players.
32.	These four deals in the 10/06 VAT period have been traced directly back through a chain of buffer traders to a defaulting trader. The evidence indicated that in each of the deals the defaulting trader imported the mobile phones into the UK from a company based elsewhere in the EU. Their apparent purchase was therefore zero rated for VAT. The defaulting trader then apparently sold the mobile phones to another UK based trader until they were purchased by the Appellant who exported them to Nordisk, an EU based trader. This sale was to be zero rated for VAT and the Appellant sought to reclaim the input tax paid on their purchase.
33.	All four deals carried out by the Appellant in the 10/06 period have been traced back to a fraudulent tax loss and the trader Keycomp Limited (“Keycomp”). Keycomp was incorporated on 3 October 2005 and registered for VAT with effect from 24 March 2006. 
34.	At the beginning of November 2006 HMRC obtained information from a freight forwarder that Keycomp was importing mobile phones from Portugal. Officer Mistry of HMRC visited Keycomp on 6 November 2006 and was told by the director Saeed Shah that he had started trading a week earlier and that he was importing goods, including mobile phones, from Silverpound Trading LDA in Portugal. Mr Shah said that he was unable to access his bank accounts which were held by Barclays and Pacific Western Technologies. He confirmed that Keycomp had not been paid for the phones and he had not paid his supplier. Keycomp was therefore not in a position to pay the VAT charged on its invoices.
35.	Officer Mistry returned on 7 November 2006 and issued a Regulation 25 notice so that the VAT return became due the next day. Mr Shah was not present. On 8 November 2006 when Officer Mistry returned to collect the return Mr Shah was again absent although the receptionist confirmed that he had been given the Regulation 25 notice. Keycomp was then deregistered for VAT.
36.	On 30 November 2006 Keycomp sent a letter to HMRC stating that no VAT was due as all of the deals had been cancelled. Included with the letter were letters to their supplier Silverpound and their customer PCB2 Limited apparently cancelling a total of twenty-six deals.
37.	Thereafter Officer Mistry sent a number of letters to Keycomp with additional queries and requesting evidence that the deals had actually been cancelled. Keycomp has now gone missing and no replies to the letters have ever been received.
38.	Keycomp’s trading records showed that on 31 October 2006 Keycomp had apparently carried out £5,378,502 worth of sales of mobile phones although they had no capital and Mr Shah had no experience in the trade.
39.	Two VAT assessments for £941,238 and £178,885 were issued to Keycomp on 20 February 2007 and 11 February 2008 respectively. Keycomp did not reply and those debts remain unpaid. The four deals which are the subject of this appeal were included in the second assessment.
40.	In each of the four deals which are the subject of this appeal Keycomp apparently sold the phones to PCB2 Limited who apparently sold the phones, subject of the first two deals to EE who sold them to the Appellant and the phones, subject of the second two deals, to IT Players who sold them to the Appellant.
41.	The Appellant’s then representatives, Aegis Tax LLP, wrote to HMRC on 28 October 2010 stating that the Appellant accepted that its four transactions were connected with a VAT loss attributable to fraud.
42.	Prior to 31 October 2006 the Appellant had carried out no trade in mobile phones. Its sales for the quarters 04/06 and 07/06 were recorded on its VAT returns as £7,649 and £96,495 respectively.
43.	On 31 October 2006 the Appellant bought and sold some £1 million worth of mobile phones and recorded gross profits of £51,750. An examination of the distribution of the profits in the Appellant’s deal chains prepared by Officer Bokor of HMRC showed that the Appellant appeared to have received some 79% of the profits in each deal.
44.	No payment was made on the deals until the end of November. The Appellant was unable to pay the majority of the money due to its supplier until it had been paid by its customer.
45.	On 24 November 2006 Mr Gurtata authorised payments from the Appellant’s Barclays Bank account to EE and IT Players in sums which represented the difference between the amounts owed to the Appellant by its customer Nordisk and the amounts owed to its two suppliers.
46.	On 30 November the Appellant received payment for the four deals from Nordisk’s Perpetual Bank and Wealth Trust (“PBWT”) account into its PBWT account although on its invoices the Appellant had requested payment into its Barclays account.
47.	On the same day the Appellant paid the balance owed to EE and IT Players from its PBWT account but it is not known why this bill was only settled a month after the deals took place on paper.
48.	The Appellant claimed to deduct VAT input tax in respect of the sale of the phones to an EU customer and HMRC began an extended verification exercise.
49.	Following the commencement of the extended verification exercise officers of HMRC visited the Appellant on 23 January 2007 to gather further information concerning the four transactions.
50.	They met with Mr Gurtata and his accountant. Mr Gurtata confirmed that he was the sole director and that Parvinder Choprah had persuaded him to enter this type of business.
51.	He said that the Appellant provided credit facilities only if he knew the customer and that the credit terms were fourteen days from the date of the invoice. He relied on the freight forwarder to insure the goods but was unsure as to the level of that insurance.
52.	He told HMRC that the Appellant had two major suppliers EE and IT Players and all their business was conducted by email, fax or telephone. The Appellant did not have any written contracts with customers or suppliers because he was new to the business. He had only done the four deals and the Appellant had supplied the goods on a ship on hold basis.
53.	He said that he had visited the premises of the suppliers and photographs had been taken. He told HMRC that he had done credit checks, inspections and due diligence but was unaware of the level of credit checks he had undertaken, He had little knowledge of prices and market conditions.
54.	The goods were stored by the freight forwarders, AFI Logistics and Forward Logistics and title to the goods changed hands once payment had been made. The goods were given a 100% scan and an inspection report was obtained.
55.	He told HMRC that he did not verify the VAT details for this deal but in relation to Nordisk he did the usual credit check and checked Europa to see if the VRN was still valid. The Tribunal noted that this check was done on 9 November 2006 after the deal was done.
56.	After 31 October 2006, the day that the transactions apparently took place, it is unclear what had happened to the mobile phones. Nordisk did not ask for the phones to be delivered to Denmark but to a warehouse in France belonging to AFI Logisitics, the UK freight forwarder. The Appellant produced an invoice from AFI Logistics and a single CMR but no documentation to indicate what happened to the phones when they arrived in France.
57.	The Appellant claimed that AFI Logistics refused to release the documentation relating to the export because their invoice had not been settled. AFI Logistics have been deregistered for VAT following a number of visits to their premises in early 2007 when no-one was present.
58.	In his examination-in-chief by Miss Tanchel Mr Gurtata stated that in his meeting with HMRC on 23 January 2007 he had relied on information given to him by Zulfi Khan. He had been told by Zulfi that the Appellant should rely on the freight forwarder for insurance and did not need written contracts with the customers or suppliers.
59.	Zulfi had taken him to two suppliers and Zulfi had taken pictures of him with the suppliers at their offices. He said that at the 23 January 2007 meeting it had not occurred to him to mention Zulfi. Even although the HMRC officers had asked him whether the Appellant had any staff, self-employed consultants or specialist buyers he confirmed that he had not mentioned Zulfi or his assistant Jay.
60.	Mr Gurtata confirmed that at a Gothenburg travel industry fair prior to the incorporation of the Appellant he had met a representative of Nordisk and exchanged business cards. Subsequently he gave the card to Zulfi to do some market research on Nordisk.
61.	He confirmed that he had signed a number of forms relating to the transactions but that they had been left with his wife for him at his home by Jay or Zulfi. At the time he was still trying to make the hotel business work and whilst Zulfi and Jay worked at his home he rarely saw them. He was told that they wanted to do a deal and in order to do so various forms required his signature as director.
62.	He said that the due diligence files of the Appellant were kept at his home by Zulfi and Jay and confirmed that whilst he had signed various forms they had not been completed by him and that the handwriting doing so was not his.
63.	He said that although the Appellant had its bank account with Barclays Bank he had been advised by Parvinder and Zulfi to open an account with PBWT because all the relevant traders worked with this bank. The payment for the goods, some money from Barclays and some from PBWT, was done in the way in which Zulfi had asked him..
64.	He confirmed that on 12 February 2007 he had transferred £180,000 from one of his bank accounts to the Appellant’s bank account.
65.	He confirmed that on 17 May 2006 the Appellant received £82,250 from Lagpat, Parvinder’s company in Singapore. It was a loan from Parvinder as he wanted to use the Appellant’s services and at the time the Appellant had no money. Parvinder wanted the Appellant to establish itself in London so that he would have a good partner with which to work.
66.	Finally he stated that he, Zulfi and Jay had worked as a team. Zulfi put the deals together matching potential suppliers and customers and would bring them to him for final approval.
67.	In cross-examination Mr Gurtata accepted that the Appellant had become involved in a fraud but claimed that he did not know what was being done on behalf of the Appellant by Zulfi and Parvinder and that he had entered the business as a result of his wife who was involved in various parts of the business. He was distracted by the hotel business and trusted them all.
68.	He was not experienced in the business and signed whatever was given to him.
69.	On questioning he was not able to produce any evidence relating to work done by Zulfi and was unclear as to exactly where he lived or the other work in which he was involved. He believed that he lived in Croydon and had an office in Mayfair but had no contact telephone numbers or addresses. He was unable to produce an email address or any emails generated by either Zulfi or his assistant Jay.
HMRC’s Submissions
70.	Mr Kinnear submitted  that there were four questions for the Tribunal to answer when determining the appeal:
•	Were the Appellant’s transactions connected with a VAT loss?
•	Was the VAT loss attributable to fraud?
•	Did the Appellant know that its transactions were connected to fraud?
•	Alternatively should the Appellant have known that its transactions were connected to fraud?
71.	Mr Kinnear confirmed that as the Appellant’s representatives had notified HMRC that the Appellant accepted that the first two questions could be answered in the affirmative, the issues for the Tribunal were confined to whether the Appellant knew its transactions were connected with fraud or alternatively should it have known.
72.	Mr Kinnear submitted that as well as the Appellant’s links to the fraudulent transactions there were a number of other global points which indicated that the whole scheme of trade involving the Appellant was contrived and fraudulent.
73.	There was a consistency of mark-ups through the chains. The companies at the start of the chain received very small mark-ups, some fifteen pence per unit. The level of mark-up remained consistent despite the fact that the different transactions involved different models at considerably different prices.
74.	The phones were sold back to back. In each transaction the trader apparently purchased a number of phones and then sold exactly the same number of phones to the next trader in the chain.
75.	The phones apparently passed through the hands of six traders based in three different EU countries in a single day. Mr Kinnear submitted that this made no practical or economic sense and could only happen when the trade was contrived and pre-ordained. He contended that none of these transactions added any value to the phones. In all four transactions the goods had apparently travelled from Portugal to the UK then through another three UK companies and then to Denmark while apparently first being delivered to France.
76.	None of the traders in the chains were manufacturers or authorised distributors. The phones appeared to have been sold again and again without ever reaching an end user or consumer. There appeared to be no commercial hierarchy which would normally involve wholesalers selling a large number of phones to their customers who would sell them in smaller numbers to the retailers.
77.	Every chain could be traced to a tax loss. The Appellant had two different suppliers but behind that the chains were identical. Mr Kinnear submitted that it was beyond coincidence that the phones could split to two different traders but then converge again with the Appellant.
78.	The majority of the traders in the chains held bank accounts at an obscure bank, PWBT.
79.	The traders in the chains could have maximised their profits by purchasing the phones from higher up the chain. If the Appellant had purchased the phones from an EU trader at the beginning of the chain and then exported them as it did, then the Appellant would have retained all the profits and would have been in a VAT position where both the transactions were zero-rated and would have had no VAT to pay or reclaim. Mr Kinnear submitted that this would not of course have facilitated the fraud.
80.	He contended that as the phones traded all appeared to be of EU specification with two pin chargers it was unclear why they would be imported into the UK only to be exported again.
81.	He submitted that there was evidence that both the suppliers EE and IT Players had a long involvement in MTIC fraud. Both had had substantial sums of output tax denied due to their transactions being connected to fraud.
82.	He submitted that the Appellant and its director Mr Gurtata had a good knowledge of MTIC fraud and the steps to be taken to avoid becoming involved in chains connected to such fraud.
83.	The Appellant had received letters from HMRC highlighting the problems they were experiencing with MTIC fraud. Mr Gurtata and his accountant had had a visit from HMRC officer Emma Bailey to discuss these in some detail. Emma Bailey followed this meeting with a letter including a long checklist of the type of records requiring to be kept.
84.	Mr Kinnear submitted that the value of the trade carried out by the Appellant was simply too good to be true. Prior to 31 October 2006 the Appellant had carried out no trade in mobile phones. Its sales for the VAT quarters 04/06 and 07/06 were recorded as £7,649 and £96,495 respectively. 
85.	On 31 October it bought and sold in excess of £1 million worth of mobile phones, a commodity in which it had never previously traded and achieved gross profits of £51,750. Mr Kinnear submitted that this was totally unrealistic and could only be due to the knowing connection with fraud.
86.	The deals were carried out on just one day. There was no risk, no value was added to the phones and all the Appellant actually had to do was to make a few phone calls and produce a few purchase orders, invoices and release notes.
87.	These were the “large and unpredictable rewards” alluded to by the Court of Appeal in Mobilix
88.	Mr Kinnear submitted that the fact that the Appellant waited until the last day of the VAT period to complete all the transactions was in itself an indicator of contrivance in order to shorten to the minimum the length of time between completing the transactions and obtaining the VAT repayment.
89.	Mr Kinnear submitted that evidence of the Appellant receiving some 79% of the profits in every deal despite the fact that the phones purportedly passed through the hands of some six traders was powerful evidence that the Appellant knew of and participated in the fraud. The rest of the traders had shared out the meagre remainder of the profits.
90.	He said that the fact that the trading chains appear to be contrived and therefore part of a scheme to defraud HMRC led to the inference that all the participants in the chain were part of the plan and had actual knowledge of it. He alleged that the fraudsters could not trust an innocent to the key role of obtaining the repayment without them knowing how the scheme worked.
91.	The Appellant’s mark-up was always 5%. Mr Kinnear submitted that the mark-ups were indicative of imposed and contrived profit margins as opposed to the fluctuating profit margins seen in legitimate and competitive trade.
92.	There was no proof that the phones were actually exported. Nordisk did not ask for the phones to be delivered to Denmark but to a warehouse in France belonging to AFI Logistics, the UK freight forwarder. The Appellant only produced an invoice from the freight forwarder and a single CMR which was almost unreadable. There were no release documents or any other similar documents. The Appellant claimed that this was because the freight forwarder refused to release these documents until it had been paid.
93.	Mr Kinnear submitted that if the Appellant had been acting honestly it would have carried out rigorous due diligence and if it was concluded that the Appellant had paid only lip service to due diligence that would be a powerful indicator that they knew of the fraud.
94.	In respect of IT Players the Appellant had a generic letter of introduction dated 30 October 2006, a company intro pack with a fax header of 31 October 2006, copies of the VAT and company incorporation certificates, an undated accountant’s reference, copies of the director’s passports, a trade reference from Mitek dated 25 October 2006 with very similar wording to the reference from the accountant, bank details and a Redhill check carried out by Mitek around 22 September 2006 but with a fax header dated 16 November 2006.
95.	In respect of EE the Appellant retained an “enhanced due diligence form” dated 11 October 2006 which Mr Kinnear thought may have been altered. The form provided basic background details about EE and its directors and two potential trade references. There were copies of the VAT and company incorporation certificates, bank details and copies of one of the director’s bank statements, various bills and passports. The copies were signed and dated 11 October 2006 but the Thames Water bill, a copy of which was provided, was not issued until 14 November 2006. There was a confirmation of a Redhill check carried out by a company called Optronix circa 13 November 2006. This would have been worthless to the Appellant as it was carried out by another trader after the deals were completed. Likewise a Europa check carried out on 9 November 2006 was, in Mr Kinnear’s submission, useless. There were also letters of introduction, generic and undated, a fax header dated 31 October 2006 and attached documentation.
96.	In respect of Nordisk the 	Appellant retained a document dated 26 October 2006 but with a fax header dated 9 November 2006 stating that Nordisk had changed its name; an introduction letter and various company documentation, all with a fax header dated 9 November and much of it in Danish; and an “enhanced due diligence form” dated 27 November 2006 and supporting documentation.
97.	Mr Kinnear contended that it would appear that when the Appellant apparently carried out over £1 million worth of sales to Nordisk it was not in possession of any paperwork which allowed it to assess the bona fides of Nordisk.
98.	Zulfi Khan was central to the Appellant’s case but Mr Kinnear submitted that the evidence did not support the assertion that Zulfi did everything in relation to the transactions but rather supported the proposition that it was Mr Gurtata who substantially completed the deals.
99.	Mr Gurtata accepted that he had full control over the Appellant but stated that final approval meant nothing more than providing a signature.  Mr Kinnear submitted that Mr Gurtata’s account of the Chopras and how they involved him in the business did not stand up to scrutiny. Mr Gurtata knew nothing about mobile phones but did not need to as the transactions were contrived and pre-ordained.
100.	Zulfi’s name did not appear on any of the due diligence or deal paperwork relating to the transactions. The sole reference to Zulfi within all the documentation produced to the Tribunal was a single mention of the word “Zulpi” in an email from the IPT website. Mr Gurtata signed all the papers including those signed at meetings with EE and IT Players on the 16 and 20 October respectively.
101.	Mr Gurtata was unable to provide any details about Zulfi and appeared to have done little to track him down. Mr Kinnear submitted that this was because Zulfi played little or no role in the completion of the transactions. No evidence was produced to the Tribunal that anybody else ever met Zulfi or his assistant Jay. Their involvement was not mentioned at Mr Gurtata’s meetings with HMRC and according to Mr Gurtata, Zulfi was either out of the country or unavailable when key meetings with HMRC or the suppliers took place.
102.	Mr Kinnear submitted that Mr Gurtata had tried to deflect the Tribunal’s attention away from himself and onto Zulfi in an attempt to hide his true state of knowledge and by extension the Appellant’s knowledge.
103.	 Mr Kinnear submitted that the Tribunal need only consider whether the knowledge of Zulfi Khan could be attributed to the Appellant if they were not satisfied that there was actual knowledge on the part of the Appellant.
104.	 Mr Kinnear asserted that Mr Gurtata’s evidence was that he gave Zulfi free rein to find customers and suppliers, to negotiate transactions on behalf of the Appellant and to carry out due diligence. Although it appeared that there was no formal contract of employment between the Appellant and Zulfi, Mr Kinnear contended that Zulfi was at least a senior agent of the Appellant who was authorised to carry out activities on the part of the Appellant by its sole shareholder and director, Mr Gurtata.
105.	 Mr Kinnear submitted that the policy behind the Sixth VAT Directive and the case of Kittel discouraging and preventing tax evasion required a special rule of attribution to be fashioned so that the knowledge of the agent who has caused the company to enter into the transactions should be attributed to the company.
106.	Mr Kinnear referred to the case of Bank of India v Morris & Ors [2005] EWCA Civ 693 where an employee of the bank had knowingly entered into fraudulent transactions. The Court of Appeal found that a combination of the employee’s level of responsibility, the policy of the substantive rule, justice and common sense combined to justify the treatment of the employee’s knowledge as the knowledge of the company. 
107.	The Court of Appeal found that failure to attribute the knowledge of the employee to the company would risk emasculating the relevant substantive rule. The Court then noted that it would be wrong to attribute to a company the knowledge of any agent without reference to the facts. The Court then laid down factors to be considered in relation to the relevant rule which were the seniority of the agent; the significance of the agent and his freedom to act in the context of the transactions; the degree to which the board of the company was put on enquiry; and whether questions were not raised or answers too easily accepted by the board.
108.	 The Court concluded at paragraph of its judgement:
“When one considers these factors in the present case, we are of the clear opinion, for the reasons we have given, that it is plainly an appropriate case for attribution. Mr Samant had a very senior position in BoI, he was given a free hand to negotiate them, they were plainly suspicious, there was no questioning, save in relation to the first transaction, and Mr Samant’s unconvincing answer was too readily accepted by the board. Further the fact that it was not a “one-off” transaction but a series serves to underline the point”.
109.	 Mr Kinnear submitted that the factual similarities that led to attribution in the Bank of India case and those that arose in relation to the Appellant were noteworthy. On the evidence Zulfi had a very senior position with the Appellant; he brought the transactions to the Appellant and was given a free hand with them although they were plainly suspicious; there was no questioning by Mr Gurtata and he was ready to accept Zulfi’s word that he was doing everything correctly. Accordingly Mr Kinnear submitted that it was right to attribute Zulfi’s knowledge to the Appellant.
110.	 Mr Kinnear considered whether the Re Hampshire Land exception availed the Appellant. This was whether the Appellant itself was a victim of a fraud practised on it or suffered a breach of the duty owed to it such that the attribution of Zulfi’s knowledge would be unfair. He submitted that the principle must in the context of Kittel be treated as subservient to the policy behind the substantive rule in Kittel and limited to exceptional circumstances.
111.	 Re Hampshire Land Company [1896] 2 Ch.743 established the rule that the knowledge of an officer of a company of his own fraud or breach of trust directed at third parties will not necessarily be imputed to that company. In that case where the knowledge in question was the officer’s knowledge of his own fraud or breach of duty Vaughan Williams J declined to hold that the knowledge was to be attributed to the company.
112.	 Mr Kinnear said that the clear policy behind the Kittel decision as stated by the ECJ was to prevent tax evasion, avoidance and abuse:
“In the same way, a taxable person who knew or should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.
That is because in such a situation the taxable person aids the perpretators of the fraud and becomes their accomplice.
In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions is apt to prevent them”
113.	 Mr Kinnear submitted that for the Hampshire Land principle to come into consideration in the context of Kittel, where it would completely undermine the purpose of the policy behind Kittel, the Appellant would have to be the true victim of a fraud perpetrated on it as opposed to it simply being used as a vehicle for the commission of a fraud on the Revenue.
114.	 In McNicholas Construction Co Ltd v Commissioners of HMCE [2000] STC 553 Dyson J stated at paragraph 56 of his judgement:
“The Hampshire Land principle or exception is founded in common sense and justice. It is obviously good sense and justice that the act of an employee should not be attributed to the employer company if in truth the act is directed at and harmful to the interests of the company. In the present case the fraud was not aimed at MC. It was not intended by the participants in the fraud that the interests of MC should be harmed by their conduct. In judging whether the fraud was harmful to the interests of MC, one should not be too ready to find such harm. In my view the cash flow point made by Mr Purle comes nowhere near being serious enough to trigger the principle. Looking at the facts of this case from a common sense point of view, there was no VAT fraud or harm to the interests of MC. The Tribunal were entitled to reach this conclusion. It was the correct conclusion to reach.”
115.	 Mr Kinnear submitted that the facts of the present case came nowhere near displacing the policy behind Kittel by reference to a fraud being perpetrated against the Appellant by Zulfi. The fraud was not aimed at the Appellant but at the Revenue. It could not have been intended by Zulfi that the Appellant should be caught and denied its input tax claim. If all had gone well the Appellant would have made a profit and Zulfi would have benefited.
116.	 Mr Kinnear submitted that if HMRC had not made out their case in the above submissions the Tribunal had to consider whether the Appellant through Mr Gurtata should have known of the connections between the transactions and the fraudulent evasion of VAT. He submitted that the test to be applied was whether, having regard to the totality of the circumstances presented to Mr Gurtata at the time, a director of ordinary competence would have concluded that a connection with fraud was the only reasonable explanation for the transactions.
117.	 Mr Kinnear submitted that a director of ordinary competence having been provided with a copy of Notice 726 and enjoined to read it several times by HMRC, and having had set out for him on more than one occasion the problems with MTIC fraud and the checks he would have to do, would have been fully aware of the scale of the MTIC fraud problem in the computer component and mobile telephone wholesale markets, the hallmarks of such fraud and what he should be doing to avoid becoming caught up in it.
118.	 Mr Gurtata stated in his second witness statement that David Chopra asked him to become involved in the mobile phone business explaining that he could make a “substantial profit” and provided the services of Zulfi to assist him. Mr Gurtata stated that Parvinder Chopra was looking for someone to work with in the UK; introduced him to the freight forwarders Forward Logistics and AFI Logistics; recommended the PWBT and assisted him in developing a system of due diligence.
119.	 Mr Kinnear submitted that on his own evidence Mr Gurtata, a man who knew nothing about mobile phones or computer chips, was pressurised by the Chopras, Zulfi and his wife to go into trade sectors that were rife with fraud. The Chopras provided evidence to trade to Mr Gurtata for a transaction that was never carried out. They introduced him to the trading websites. They funded his company without written agreement. They told him to open a bank account at an obscure Caribbean bank, PWBT. They used Mr Gurtata’s company to purchase goods which they could have purchased themselves and used the Appellant’s bank account in a way that was indicative of money laundering.
120.	 Mr Kinnear submitted that a director of ordinary competence with Mr Gurtata’s knowledge should have asked himself why the Chopras were so keen for the Appellant to become involved in these transactions.
121.	 Mr Kinnear submitted that Mr Gurtata didn’t appear to have asked himself why Zulfi and Jay were so willing to work for the Appellant for more than a year without payment or agreement as to the payment to be made to them.
122.	 Mr Kinnear questioned why an account had been set up at an obscure Caribbean bank to be paid through an intermediary bank in the Kyrgz Republic when the Appellant had an existing bank account at Barclays with whom Mr Gurtata had worked for years and whom he described as “excellent Bankers”.
123.	 Evidence had been produced to the Tribunal that Mr Gurtata had signed incomplete and sometimes blank documents which, Mr Kinnear submitted, a director of ordinary competence would not have done.
124.	 Mr Kinnear submitted that no evidence had been produced to show that Mr Gurtata had checked that Zulfi and Jay were carrying out the appropriate checks and due diligence that were required to be done. If Mr Gurtata had done so he would have seen that the much of the paperwork produced was false.
125.	 Mr Gurtata accepted that a projected income of £30 million was “amazing “ and that looking back on the profit made from the deals it was too good to be true. There was an absence of evidence that the transactions had been negotiated and such absence of commerciality in a trade sector rife with fraud could only be because they were part of a fraud.
126.	 In the light of the many warnings from HMRC Mr Kinnear submitted that any competent director would have taken extreme care when entering into any transactions involving the wholesale of mobile phones.
127.	 Mr Kinnear submitted that there could be no doubt that at the very least the Appellant should have known that its transactions were connected with fraud.
128.	 Mr Kinnear contended that the test for the Tribunal, therefore, was “have HMRC proved that it is more probable than not that the Appellant knew or should have known that it was participating in transactions which were connected with fraudulent evasion of VAT?” 
Appellant’s Submissions
129.	 Miss Tanchel submitted that it was the Appellant’s case that Zulfi Khan, who was a consultant for the Appellant and who was assisted by Jay Mukerjee, was responsible for the relevant trades. She submitted that extreme care must be exercised in ensuring that the admitted existence of a scheme to defraud HMRC did not amount to proof of knowledge or assumed knowledge. HMRC had used substantial resources unavailable to the Appellant to demonstrate the existence of a number of circumstances which it was alleged should have been within the knowledge of the Appellant.
130.	 She submitted that there was no direct evidence of the Appellant’s knowledge of or involvement in the case and that HMRC was asking the Tribunal to come to its conclusion by drawing inferences from the material produced to it.
131.	 She submitted that the Tribunal had also to ascertain whether or not if certain steps had been taken the Appellant would have been alerted to the connection between its own transactions and fraud. She referred to the words of Lewison J in HMRC v Livewire Telecom Limited [2009] STC 643 at paragraph 87
“the taking of every reasonable precaution has sometimes been referred to as a positive duty. This I think is potentially misleading. The taxable person does not owe a duty to take precautions…..The taking of all reasonable precautions (and acting on the basis of what he discovers as a result of taking those precautions) provides him with an impenetrable shield against an attack by HMRC.
132.	 Miss Tanchel submitted that Mr Gurtata was a man without any history of involvement in anything untoward. He had worked in the hotel industry all his life. The death of his father had led to difficulties in his working relationship with his brother which resulted in the sale of his shares in the family hotel business for over £10 million. It was submitted that Mr Gurtata’s evidence had displayed his naivety.
133.	 During the course of 2006 Mr Gurtata had suffered other difficulties including an arson attack on his house and difficulties in his relationship with his wife. The other matters on which Mr Gurtata was forced to focus was powerful evidence that it was not he who was conducting the transactions or engaged in the Appellant’s business. During 2006 he was still involved in the hotel business and working in central London.
134.	 HMRC had asserted that Mr Gurtata had significant warnings as to the fraud in the sector in which the Appellant operated. HMRC relied on the letter sent to Mr Gurtata dated 7 February 2006 which included Notice 726 but Miss Tanchel submitted that it was incumbent on HMRC to prove that the Appellant had the requisite knowledge of the fraud at the time at which the deals concluded. The deals however were concluded more than six months after the letter was sent during the course of which Mr Gurtata was dealing with the sale of his shares in the hotel business as well as the aftermath of the arson attack on his home. Mr Gurtata informed Emma Bailey at a meeting on 10 February 2010 that he had not had an opportunity to read the letter.
135.	 There was very little contact between the Appellant and HMRC between February 2006 and October 2006 and prior to the start of the extended verification there was only one veto letter from HMRC dated 5 September 2006.
136.	Miss Tanchel submitted that there was no evidence before the Tribunal to support the assertion that further and more extensive enquiries being made prior to the deals being concluded would have alerted the Appellant to fraud in the chain of supply.
137.	 Keycomp, the defaulting trader was not deregistered until November 2006. IT Players had been registered as a company since June 2005 and for VAT in August 2005. EE was registered as a company from January 2004 and was registered for VAT in February 2004. Nordisk had been registered since February 2005 both as a company and for VAT and remained so on 27 April 2007.
138.	 Mr Bokor of HMRC accepted that all the information he was relying on was obtained after the event. Miss Tanchel submitted that the HMRC case relied on facts which were not known and could not have been known to the Appellant at the time of the transaction. HMRC had not made a decision to deny the input tax claimed until February 2008. It therefore took HMRC fourteen months to make their enquiries.
139.	Miss Tanchel submitted that there was no evidence before the Tribunal that the margins made by the other parties in the chain were inconsistent with commercial profitability. Mr Bokor had stated in evidence that the overheads in business varied and that he was unaware of what the overheads of the parties to the transactions might have been. HMRC had not adduced any evidence that the margins made by others in the chain were commercially unsustainable and there was no direct evidence that the Appellant was aware of the pricing of others in the deal chains.
140.	 She noted that transactions carried out on the same day were described as “perfectly normal” in the case of Regina (Teleos plc and others v Customs and Excise Commissioners ECJ [2008] QB. Also that there was nothing sinister in the fact that the Appellant was paid by its customer before it paid its suppliers although no doubt the Appellant was fortunate to be able to trade on such terms.
141.	 It had been asserted by HMRC that the Appellant’s turnover in the relevant period was disproportionate to that in other trading months and that it carried out no significant trade either before or after the disputed deals but Miss Tanchel contended that the Appellant had been unable to deal until it was registered for VAT in January 2006. She submitted that it was realistic that it may then have taken a number of months to establish itself in the industry. Once the Appellant became the subject of extended verification then Mr Khan was no longer in a position to execute further transactions.
142.	 Miss Tanchel referred to the Mobilix judgement at paragraphs 55 and 56 in which the Court of Appeal stated that there was no general principle that any transaction connected with fraud is vitiated and that a trader who is simply aware that he was running a risk that his purchase is connected with fraud should not be denied his right to deduct tax. She said that throughout the judgement of Lord Moses in Mobilix he stated that the test as to extent of knowledge was based on whether there was any other reasonable explanation for the relevant transaction.
143.	 HMRC had relied on various indicators of fraud when asking the Tribunal to draw the inference that the Appellant should have known that the transactions were contrived. It had been submitted that the consistency of the mark-ups indicated that the transactions were not genuine commercial transactions. Miss Tanchel submitted however that all the deals were done on the same day and it was therefore consistent that all the mark-ups were the same.
144.	 She submitted that there was no “pattern” of transactions on which HMRC could rely. It could not be said that any of the phones had not been sold on to an end user. Mr Bokor had accepted that the enquiries made by HMRC ended with Nordisk and there was no information before the Tribunal as to what happened to the phones after that. Again this information could not reasonably be expected to be in the knowledge of the Appellant.
145.	 HMRC had stated that both EE and IT Players had a long involvement with MTIC fraud but this could not have been known to the Appellant at the time the transactions were entered into. Mr Bokor’s statement was dated some two years after the transactions had been done and in his statement he said that it was “believed that IT Players was believed to be involved in MTIC fraud and was subject to MTIC extended verification.” Of EE he stated that “This company is believed to be involved in MTIC fraud and is subject to extended verification. Thus, Miss Tanchel submitted, two years after the transactions, nothing certain had been proven against the Appellant’s suppliers.
146.	 Miss Tanchel submitted that if it was found that Zulfi Khan had knowledge of the fraud the question to be answered was whether that fraud could be attributed to the Appellant such that the Appellant then had knowledge of the fraud. She conceded that acts of an employee may be attributed to a company even where the employee was doing something illegal or deliberately concealing information from the company.
147.	 She contended however that the Re Hampshire Land exception applied to this matter. She said that the rule in Re Hampshire Land had been considered at length by the House of Lords in Stone and Rolls v Moore Stephens [2009] UKHL 39 and submitted that it could be concluded from their Lordships’ observations that the principle in Re Hampshire Land was applicable to all areas of the law to prevent the knowledge of an agent in breach of his obligations to a company being attributed to the company in circumstances where the company itself is the victim of the fraud.
148.	 She contended that the Appellant was the victim of fraud on the facts of this case. She referred to the judgement of Lord Phillips who described the principle as:
“The rationale for Hampshire Land has been said to be that it is contrary to common sense and justice to attribute to a principal knowledge of something that his agent would be anxious to conceal from him”.
149.	 Mr Khan was engaged by the Appellant as a consultant to advise and execute transactions on behalf of the Appellant in trading in mobile phones. He had been introduced to the Appellant by his brothers-in-law as a person who had expertise in this area. Miss Tanchel submitted that Mr Gurtata had known his brothers-in-law for almost twenty years. He believed them to be successful businessmen and trusted their judgement.
150.	 Miss Tanchel submitted that if the Tribunal found that Mr Khan knew or should have known that he was connected to a fraud against HMRC with the consequence that no VAT was repaid to the Appellant then Mr Khan had caused a significant loss to the Appellant. She submitted that if Mr Gurtata had known of the connection to the fraud he would not have completed the transaction.
151.	 She submitted that this was supported by the evidence that notwithstanding that the Appellant received £180,000 from Mr Gurtata on 12 February 2007 and was therefore in a position to continue trading, it did not do so. Once Mr Khan’s fraud was exposed the Appellant ceased trading.
152.	 Mr Khan owed a duty to the Appellant to enter into genuine commercial transactions. Miss Tanchel submitted that it was clear from the evidence given by Mr Gurtata that he had no understanding of the nature of the fraud. Whilst he accepted that his signature appeared on the documentation she contended that this was consistent with him having relied on Zulfi Khan to carry out all due diligence and his duties to the Appellant correctly.
153.	Finally she contended that in all the circumstances of the case HMRC had failed to prove that there was no reasonable explanation for the Appellant’s trades. 
The Law
154.	 The Court of Appeal’s judgment in Mobilx (in Administration) v. HMRC, HMRC v. Blue Sphere Global Limited, Calltel Telecom Ltd and Anr v. HMRC [2010] EWCA Civ 517 (hereinafter “Mobilx”) was handed down on 12 May 2010. The Mobilx appeal was concerned with the domestic application of the test set out in the leading European Court of Justice Case, Axel Kittel v. Belgium; Belgium v. Recolta Recycling [2006] ECR 1-6161. 
155.	 Kittel was concerned with the application of the Sixth Council Directive (77/388/EEC of 17/5/77) concerning the treatment of VAT in member states and, specifically, the right to deduct VAT payments from VAT liability. The Kittel test stated that “...where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.”
156.	 Moses LJ, giving the judgement of the Court of Appeal in Mobilx, approved the Kittel test and rejected the proposition that it required domestic legislation or further elaboration. Moses LJ stated at paragraph 47 of the judgement
 “the objective criteria which form the basis of concepts used in the Sixth Directive form the basis of the concepts which limit the scope of VAT and the right to deduct under ss 1, 4 and 24 of the 1994 Act. Applying the principle in Kittel, the objective criteria are not met where a taxable person knew or should have known that by his purchase he was participating in a transaction connected with the fraudulent evasion of VAT. That principle merely requires consideration of whether the objective criteria relevant to those provisions of the VAT Act 1994 are met. It does not require the introduction of any further domestic legislation.”
157.	 The objective criteria, set out in the Sixth directive and in the VAT Act 1994, determine the scope of the right to deduct.
 “...Kittel did represent a development of the law because it enlarged the category of those who themselves had no intention of committing fraud but who, by virtue of the fact that they knew or should have known that the transaction was connected with fraud, were to be treated as participants. Once such traders were treated as participants their transactions did not meet the objective criteria determining the scope of the right to deduct.” (paragraph 41 of Mobilx) “By the concluding words of paragraph 59 [of Kittel] the Court must be taken to mean that even where the transaction in question would otherwise meet the objective criteria which the Court identified, it will not do so in a case where a person is to be regarded, by reason of his state of knowledge, as a participant.” (para 42 of Mobilx.)
158.	 At paragraph 43 of Mobilx  the  parameters of the test for those who do not meet the objective criteria were set out as follows by Moses LJ:
 “A person who has no intention of undertaking an economic activity but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person’s VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct......A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct.”
159.	 The Court of Appeal in Mobilx gave guidance on the “should have known” test. The test was defined by Moses LJ at paragraph 52 of the judgement not in terms of negligence, but in terms of reference to the objective criteria for the test. 
“If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met.” 
160.	 The Mobilx judgement provided elucidation of the “should have known” test: At paragraph 51 of the judgment it was stated:
“The [ECJ] must have intended the phrase “knew or should have known” which it employs in paras 59 and 61 of Kittel to have the same meaning as the phrase “knowing or having the means of knowing” which it used in Optigen (para 55)”.
At paragraph 59 of the judgement it was stated:
If a trader should have known that the only reasonable explanation for the transaction was that it was connected with fraud and it turns out that the transaction was connected with fraudulent of evasion of VAT then he should have known of that fact.” 
At paragraph 60 it was stated:
“The trader is a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was connected to fraud.”
Further at paragraph 64 of the judgement:
 “If it is established that a trader should have known that by his purchase there was no reasonable explanation for the circumstances in which the transaction was undertaken other than that it was connected with fraud then such a trader was directly and knowingly involved in fraudulent evasion of VAT.”
161.	 At paragraph 55 of the judgement the Court stated:
If HMRC was right and it was sufficient to show that the trader should have known that he was running a risk that his purchase was connected with fraud, the principle of legal certainty would, in my view, be infringed. A trader who knows or could have known no more than that there was a risk of fraud will find it difficult to gauge the extent of the risk; nor will he be able to foresee whether the circumstances are such that it will be asserted against him that the risk of fraud was so great that he should not have entered into the transaction. In short, he will not be in a position to know before he enters into the transaction that, if he does so, he will not be entitled to deduct input VAT. The principle of legal certainty will be infringed.
162. At paragraph 56 the Court stated
It must be remembered that the approach of the court in Kittel was to enlarge the category of participants. A trader who should have known that he was running the risk that by his purchase he might be taking part in a transaction connected with fraudulent evasion of VAT, cannot be regarded as a participant in that fraud. The highest it could be put is that he was running the risk that he might be a participant. That is not the approach of the Court in Kittel, nor is it the language it used. In those circumstances, I am of the view that it must be established that the trader knew or should have known that by his purchase he was taking part in such a transaction.
163. At paragraph 75 Moses LJ stated:
“The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT.”
164. In assessing the evidence as to whether an appellant “should have known”, in paragraph 82 of the judgement Moses LJ warned against an undue focus on the question of whether a trader had acted with due diligence.
165. The Court of Appeal cited with approval the approach of Christopher Clarke J in Red 12 Ltd v. HMRC [2009] EWHC 2563. Paragraphs 81 to 85 of the Mobilx judgment set out guidance  in approaching the “should have known” issue.
“81. HMRC raised in writing the question as to where the burden of proof lies. It is plain that if HMRC wishes to assert that a trader’s state of knowledge was such that his purchase it outwith the scope of the right to deduct it must prove that assertion. No sensible argument was advanced to the contrary.

82. But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the Blue Sphere Global appeal, Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.

83. The questions posed in BSG by the Tribunal were important questions which may often need to be asked in relation to the issue of the trader’s state of knowledge The questions posed in BSG were, (1) Why was BSG, a relatively small company with comparatively little history of dealing in mobile phones, approached with offers to buy and sell very substantial quantities of such phones> (2) How likely in ordinary commercial circumstances would it be for a company in BSG’s position to be requested to supply large quantities of particular types of mobile phone and to be able to find without difficulty a supplier able to provide exactly that type and quantity of phone? (3) Was Infinity already making supplies direct to other EC countries? If so, he could have asked why Infinity was not making supplies direct, rather than selling to UK traders who in turn would sell to such other countries. (4) Why are various people encouraging BSG to become involved in these transactions? What benefit might they be deriving by persuading BSG to do so? Why should they be inviting BSG to join in when they could do so instead and take the profit for themselves? I can do no better than repeat the words of Christopher Clarke J in Red 12 v HMRC [2009] EWHC 2563:-

“109. Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and “similar fact” evidence. That is not to alter its character by reference to earlier or later transactions but to discern it.”

110. To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile phones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, these suspicions may pale into insignificance if the trader has been obviously honest in thousands.

111. Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it should have done, together with the surrounding circumstances in respect of all of them.”

84. Such circumstantial evidence......will often indicate that a trader has chosen to ignore the obvious explanation as to why he was presented with the opportunity to reap a large and predictable reward over a short space of time......
85. In so saying I am doing no more than echoing the warning given in HMRC’s Public Notice 726 in relation to the introduction of joint and several liability. In that Notice traders were warned that the imposition of joint and several liability was aimed at businesses who “know who is carrying out the frauds, or choose to turn a blind eye. (3.3) They were warned to take heed of any indications that VAT may go unpaid (4.9). A trader who chooses to ignore circumstances which can only reasonably be explained by virtue of the connection between his transactions and fraudulent evasion of VAT, participates in that fraud and, by his own choice, deprives himself of the right to deduct input tax.”

Findings
166.	 We find that the Appellant did not know that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected with fraud but find that the Appellant ought to have known.
167.	 All the deals were conducted on the same day. It was hard to see how all the parties could have had time to contact each other, agree terms, arrange for the release of the goods, make payments and negotiate ancillary contracts such as inspection, insurance and transportation. It would be reasonable to expect that in legitimate business transactions involving such large sums of money the parties would be extremely cautious especially when dealing with new customers. In legitimate deals the parties would take time to make sure that all the proper safeguards due diligence and ancillary contracts were in place before the deal was concluded.
168.	 On 31 October the Appellant bought and sold in excess of £1 million worth of mobile phones, a commodity in which the Appellant had never previously traded and achieved gross profits of £51,750 in a single day. 
169.	 We found the evidence of Mr Gurtata to be honest but naïve. Mr Gurtata had considerable business experience but was operating in a new area of which he knew nothing. He believed that he had found a trustworthy business associate in Zulfi Khan and he relied on him to do all the necessary checks and due diligence. 
170.	  As the Court of Appeal stated in Mobilx it is not possible to ignore the circumstances in which the transactions took place if the only reasonable explanation for them is that they have been or will be connected to fraud. At paragraphs 82 and 83:
82	But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the Blue Sphere Global appeal, Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.

83. The questions posed in BSG by the Tribunal were important questions which may often need to be asked in relation to the issue of the trader’s state of knowledge The questions posed in BSG were, (1) Why was BSG, a relatively small company with comparatively little history of dealing in mobile phones, approached with offers to buy and sell very substantial quantities of such phones> (2) How likely in ordinary commercial circumstances would it be for a company in BSG’s position to be requested to supply large quantities of particular types of mobile phone and to be able to find without difficulty a supplier able to provide exactly that type and quantity of phone? (3) Was Infinity already making supplies direct to other EC countries? If so, he could have asked why Infinity was not making supplies direct, rather than selling to UK traders who in turn would sell to such other countries. (4) Why are various people encouraging BSG to become involved in these transactions? What benefit might they be deriving by persuading BSG to do so? Why should they be inviting BSG to join in when they could do so instead and take the profit for themselves? 

171.	 We found that Mr Gurtata did not even appear to consider asking himself these four vital questions as set out above in paragraph 83 of the Mobilx judgment. When we ask these questions in relation to the Appellant’s state of knowledge we find that Mr Gurtata appeared to ignore the circumstances in which the transactions took place and that it was his responsibility to look at them carefully in the light of the adequate warnings of potential fraud he had received from HMRC.
172.	 He did not think to question why phones of European specification were in the UK and to be exported back to the EU.
173.	 We found that Mr Gurtata ought to have realised that there was no reasonable explanation for Nordisk, a representative of whom he had met at a travel fair some time ago, contacting the Appellant apparently unsolicited to order precisely the models of mobile phones which EE and IT Players were able to supply. This was simply too good to be true and Mr Gurtata ought to have realised this. 
174.	 We found that the fact that four transactions took place in one day towards the end of the month should have caused concern and set alarm bells ringing. The phones apparently passed through the hands of six traders based in three different EU countries in a single day. None of these transactions appeared to have added any value to the phones. We found that a reasonable person in the Appellant’s position would not have regarded this as genuine arm’s length trading.
175.	 We found that the Appellant never questioned what economic value it was adding to the deal for the percentage mark up achieved. There was no commercial reason for either EE or IT Players to give up the chance of making that profit themselves by exporting the goods abroad.
176.	 Mr Gurtata  did not appear to question the suggestion that the Appellant should open a bank account at PWBT, an obscure Caribbean bank although he stated in evidence that he had banked with Barclays for years and found them “excellent bankers”.
177.	 On the basis of the Court of Appeal’s judgement in Mobilx that it was important to focus not on the due diligence but on the circumstances surrounding the transactions we make no detailed findings in respect of the Appellant’s attempts at due diligence. We found that Mr Gurtata appeared to believe that they had done what was necessary.
178.	 We found that it was unlikely in any event that further and more extensive due diligence being done prior to the transactions being done would have alerted the Appellant to fraud in the chain of supply.
179.	We concur with Mr Kinnear’s submission that the test to be applied was whether having regard to the totality of the circumstances presented to Mr Gurtata at the time, a director of reasonable competence would have concluded that a connection with fraud was the only reasonable explanation for the transactions.
180.	 We found that a director of ordinary competence with Mr Gurtata’s knowledge should have asked himself why the Chopras were so keen for the Appellant to become involved in these transactions given that Mr Gurtata knew nothing about mobile phones.
181.	We found that considering all the features of the transactions as a whole they should not have been regarded by a reasonable person in the Appellant’s position as compatible with legitimate arm’s length trading.
182.	 We found that the problem was that Mr Gurtata was distracted by his other problems and relied too heavily on Zulfi Khan. However he did sign all the relevant documents and we are required to assess him by the standards of a reasonable director with Mr Gurtata’s knowledge. We find that a reasonable director with Mr Gurtata’s knowledge would not have simply signed whatever documents he was handed to sign. In some cases he signed incomplete or blank documents which a reasonable director of ordinary competence would certainly not have done.
183.	 We found it surprising that Mr Gurtata was unable to produce a single document, email, memo or even a message from Zulfi and we found that a competent director would have questioned this apparent reluctance of Zulfi to commit his name to paper. Mr Gurtata was unable to provide any details about Zulfi and appeared to have done little to track him down. 
184.	 There was no evidence that anybody else ever met Zulfi or his assistant Jay. Their involvement was not mentioned at Mr Gurtata’s meetings with HMRC and according to Mr Gurtata, Zulfi was either out of the country or unavailable when key meetings with HMRC or the suppliers took place. We find that Zulfi was at least a senior agent of the Appellant who was authorised to carry out activities on the part of the Appellant by its sole shareholder and director. It would have been reasonable to inform HMRC at these meetings of the central role that Zulfi played in the Appellant’s business and of the responsibilities given to Zulfi.
185.	 We find that the Re Hampshire Land principle does not help the Appellant. The apparent wrongful acts of Zulfi were not directed at the Appellant but at HMRC. It could not have been intended by Zulfi that the Appellant would be denied its input claim. 
186.	We were unable however to find conclusively or even on the balance of probabilities that Zulfi Khan knew of the fraud such that his knowledge could be attributed to the Appellant. There was simply no evidence of Zulfi Khan’s knowledge other than that provided by Mr Gurtata.
187.	Mr Gurtata was operating in a business sector of which he knew nothing. This should have made him more vigilant and careful. It was no excuse to state that he was distracted. He went to all the meetings with the suppliers and HMRC. He instructed the accountants and met with experts in the field. He signed all the documents. After his meetings with and letters from HMRC he ought to have known that it was too good to be true to have four such lucrative transactions in mobile phones all on the same day on the last day of the VAT period.
188.	 We find that there was no reasonable explanation in respect of the four questions posed by the Tribunal in BSG. 
189.	 We find that the Appellant “chose to ignore the obvious explanation as to why it was presented with the opportunity to reap a large and predictable reward over such a short period of time”.
190.	 We reject Miss Tanchel’s submission that the Appellant was a trader who although aware that he was running a risk that his purchase was connected with fraud should nevertheless not be denied his right to deduct tax. We found that there was no other reasonable explanation for the relevant transactions.
191.	 The Appellant had the means of knowing. He had the HMRC letters and Notice 726. He had had a meeting with Chris Chipperton and been to a seminar. We accept that once Mr Gurtata knew of the connection to the fraud he stopped trading but he should have known at the time if he had acted as a competent director. The Appellant had the means of knowing that there was no other reasonable explanation for the transactions other than a connection to a fraud.
192.	 We find that HMRC has proved that it is more probable than not that the Appellant should have known the only reasonable explanation for the transactions it was involved with was that they were connected with fraud.
Decision
193.	 The appeal is dismissed.
194.	 We make no order as to costs. If the appeal had been filed and concluded before 1 April 2009, the VAT Tribunal Rules 1986 (“the Old Rules”) would have applied both in relation to procedure and costs.
195.	 However under the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the New Rules”) which came into force on 1 April 2009 costs are governed by rule 10 which provides that the Tribunal may only make an award in respect of costs if, inter alia, the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting of proceedings.
196.	 Paragraph 7 of Schedule 3 of the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 (“the TTF Order”) deals with the application of the New Rules to transitional proceedings that commenced prior to 1 April 2009 (but were not concluded before that date).
197.	 The position was clearly stated by Sir Stephen Oliver in Surestone Limited v The Commissioners for HMRC (Costs) [2009] UKFIT 352 (TC) (at para 13): 
	“the starting point is that the 2009 Rules apply unless and to the extent that the Tribunal exercises its power in paragraph 7(3) of Schedule 3 to the TTF Order and applies the 1986 Rules.”

198.	 The Tribunal is of course mindful of the overriding objective, namely to deal with the case “fairly and justly” (Rule 2 of the New Rules). We further note that the starting point is the New Rules, as stated by Sir Stephen Oliver in Surestone Limited. Given this starting point we have decided not to exercise our discretion and apply the Old Rules. 
199.	 This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

S.M.G. RADFORD

TRIBUNAL JUDGE
RELEASE DATE: 14 April2011