DECISION

1. Network Euro Limited (“the Company”) appeals against the refusal of HMRC to repay to it input tax referable to April - July 2006. In detail, on 30 April 2007 HMRC denied Network Euro its claim to recover £1,955,450 VAT for period 04/06 and its claim of £2,351,701.19 for period 05/06. On 11 May 2007, HMRC denied the Company its claim for £2,989,322.50 for the period 06/06, and on 2 October 2007 denied its claim for £1,580,255.50 for the period 07/06. The total amount denied and therefore at stake in this appeal is £8,876,709.

2. All this input tax relates to 62 transactions conducted by the Company during these four months in which it purchased mobile phones in the UK and despatched them to purchasers outside the United Kingdom. The Company conducted no other trade during this time.

3. HMRC allege that all these 62 transactions were connected to fraudulent evasion of VAT and that the Appellant knew this or in the alternative ought to have known this and that therefore under Kittel the Company has no right to recover the input tax relating to these transactions.

Background

4. The Company was incorporated in August 2004 with Mr Sandeep Virdee as its Director. Mr Virdee had wanted to establish his own business and so he conducted research to identify possible business opportunities. He decided to set up the Company to exploit what he saw as an opportunity to refurbish and sell second-hand computers. Mr Virdee funded it by juggling loans on some nine credit cards. The Company sold the computer units by advertising them in Loot (a free newspaper) and on ebay (an internet bidding site). Mr Virdee planned to expand the business by selling refurbished electronics into Eastern Europe and the Middle East.

5. Mr Gurpreet Taggar joined the Company in 2004 and was appointed Director in early 2005. He paid off Mr Virdee’s credit card debts of about £25,000 in return for which the unwritten agreement between the two men was that Mr G Taggar would be entitled to 50% of the Company’s profits. Later shares in the Company were transferred to Mr G Taggar’s father, Mr S S Gurpreet. In May 2006 Mr G Taggar resigned as Director and became Company secretary although it was not suggested that his role within the Company changed at his point.

6. Mr Virdee registered the Company for VAT on 1 September 2004. Mr G Taggar (not yet a director) was stated in the application to be a “manager”.

7. We find that the business started in a small way with a very low turnover. Its first three returns were quarterly and showed outputs of £2,945, £15,259 and £23,189.

8. HMRC officers visited Network Euro on 26 April 2005 and discussed issues including MTIC fraud. At the meeting, Mr Virdee asked the HMRC officers about the process for verifying VAT numbers and successfully requested that the Company be put on monthly VAT returns. Its first monthly return was for June 2005 and in this month the Company’s outputs leapt to £2,773,000. In July 2005 its outputs were £5,152,000, and in August its outputs exceeded £9million. Thereafter its VAT returns each month vary from about £3million to over £18million in outputs. The approximate net turnover of its last 11 months of trading (to end July 2006) was £128million. After that date its turnover dropped to nil and the Company later went into liquidation. The Company’s transfer to monthly returns coincided with its first despatches outside the United Kingdom and its first substantial repayment claims.

9. No accounts have ever been filed by the Company, although one set of draft accounts (for year ending 31 August 2005) were produced to HMRC by Mr Virdee on 23 August 2006. Its profit after tax in its first year was estimated in its draft accounts to be £1.127million.

Appendix

10. There were a very large number of companies mentioned in this appeal. We have referred to them by an abbreviated name in this Decision Notice. Their full legal title is set out in an appendix to this decision notice.

Terms and expressions and description of MTIC

11. This case is one of many in which HMRC allege that the transactions were connected to MTIC fraud. Many previous tribunals and higher Courts have given a description of MTIC fraud which we cannot better. We rely on the descriptions given by Burton J in R (Just Fabulous (UK) Ltd) v HMRC [2007] EWHC 521 at paragraphs 5-7; by Lewison J in HMRC v Livewire Telecom Ltd [2009] EWHC 15 (Ch) at paragraph 1 and by Floyd J in Mobilx Ltd (In Administration) v HMRC [2009] EWHC 133 at paragraphs 2-3. We repeat Lewison J’s paragraph 1 from Livewire as it is a short description of a ‘normal’ MTIC defaulter chain and also of what is known as contra-trading as both are relevant in this appeal:

“1. VAT fraud is a serious problem for national taxing authorities throughout the European Union. VAT fraud can take a number of forms. The particular form of fraud with which these appeals is concerned is known generically as missing trader intra-community fraud or MTIC fraud. This is a description coined by HMRC, but is generally used by those who specialise in this area. Even this generic type of fraud can itself take different forms:

i) In its simplest form it is known as an acquisition fraud. A trader imports goods from another Member State. No VAT is payable on the import. He then sells on those goods to a domestic buyer and charges VAT. He dishonestly fails to account for the VAT to HMRC and disappears. The importer is labelled a "missing trader" or "defaulter".

ii) The next level of sophistication involves both an import and an export. A trader once again imports goods from another Member State. No VAT is payable on the import. Typically the goods are high value low volume goods, such as computer chips or mobile phones. He then sells on those goods to a domestic buyer and charges VAT. He dishonestly fails to account for the VAT to HMRC and disappears. The domestic buyer sells on to an exporter at a price which includes VAT. The exporter exports the goods to another Member State. The export is zero-rated. So the exporter is, in theory, entitled to deduct the VAT that he paid from what would otherwise be his liability to account to HMRC for VAT on his turnover. If he has no output tax to offset against his entitlement to deduct, he is, in theory, entitled to a payment from HMRC. Thus HMRC directly parts with money. Sometimes the exported goods are re-imported and the process begins again. In this variant the fraud is known as a carousel fraud. There may be many intermediaries between the original importer and the ultimate exporter. These intermediaries are known as "buffers". The ultimate exporter is labelled a "broker". A chain of transactions in which one or more of the transactions is dishonest has conveniently been labelled a "dirty chain". Where HMRC investigate and find a dirty chain they refuse to repay the amount reclaimed by the ultimate exporter.

iii) In order to disguise the existence of a dirty chain, fraudsters have become more sophisticated. They have conducted what HMRC call "contra-trading". The trader who would have been the exporter or broker at the end of a dirty chain, with a claim to repayment of input tax, himself imports goods (which may be different kinds of goods) from another Member State. Because this is an import he acquires the goods without having to pay VAT. This is the contra-trade. He sells on the newly acquired goods, charging VAT but this output tax is offset against his input tax, resulting in no payment (or only a small payment) to HMRC. The buyer of the newly acquired goods exports them and reclaims his own input tax from HMRC. Again there may be intermediaries or buffers between the contra-trader and the ultimate exporter. The fraudsters' hope is that if HMRC investigate the chain of transactions culminating in the export, they will find that all VAT has been properly accounted for. This chain of transactions has conveniently been called the "clean chain". Thus the theory is that an investigation of the clean chain will not find out about the dirty chain, with the result that HMRC will pay the reclaim of VAT on the export of the goods which have progressed through the clean chain. I should add that HMRC do not agree with the label "clean chain" because they say that both chains are part of an overall fraudulent scheme.”

Law

12. The European Court of Justice (“ECJ”) ruled in Axel Kittel v Etat Belge (C-439/04) and Etat Belge v Recolta Recyling SPRL (C-440/04) in July 2006 that (paragraph 61):

“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.”

13. The Court of Appeal considered this in Mobilx Ltd (In Administration) [2010] EWCA Civ 517. At paragraph 47 Moses LJ (giving the leading judgment) said:

“…. 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 fraudulent evasion of VAT.

14. Moses LJ went on to say at paragraph 60:

“The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

15. The Appellant’s contention is that, following Mobilx, in order to deny the right to input tax based on Kittel HMRC has to prove on the balance of probabilities that the appellant knew or should have known that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected to fraud.

16. This summary of the judgment in Mobilx is an over-simplification, although nothing turns on this for the purposes of this Decision Notice. Firstly, the reference by Moses LJ to “only reasonable explanation” was in the context of “means of knowledge” and not actual knowledge. Nevertheless, if HMRC could show that the trader knew that the only reasonable explanation for the transaction was that it was connected to fraud, then we would regard this as sufficient to fulfil the Kittel test for actual knowledge. Nothing turns on this point in this case.

17. It is also an over simplification in that Mr Brown’s formulation suggests HMRC are limited to showing means of knowledge by showing the trader should have known that “the only reasonable explanation” was connection to fraud. However, Moses LJ only used this expression in the context of explaining that although it was not enough for HMRC to show that the trader ought to have known that his transaction was probably connected to fraud, it would be enough to show that the trader ought to have known that his transaction was connected to fraud because this was the only reasonable explanation for it. There is nothing in what Moses LJ says which would limit HMRC to showing means of knowledge (or knowledge) by reference to what was the only reasonable explanation for the transaction. However, as we have said, nothing turns on this formulation of Mobilx in this appeal.

Burden of proof

18. HMRC did not dispute Mr Brown’s formulation of the Mobilx decision as stating that the burden of proof for the Kittel test is entirely on HMRC. HMRC accept it is for them to show (if they can) that the transactions on which they deny the Appellant input tax recovery are connected with fraudulent evasion of tax and that the Appellant knew or ought to have known this.

19. If HMRC cannot show this then the Appellant is entitled - with one significant exception which we address in paragraph 402 - to recover the input tax at stake in this appeal.

20. Mr Brown referred to In re B [2009]1 AC 11 and In re H [1996] AC 563, 586 D-H where Lord Nicholls said:

“The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence.”

21. We see this as a requirement, when assessing whether something is proved on the balance of probabilities, to consider all relevant matters, including as Lord Nicholls said, that fraud is usually less likely than negligence. As far as proof on the balance of probabilities of the Company’s alleged actual knowledge of connection to fraud (through its controlling officers, Mr Virdee and Mr G Taggar) we consider this in detail in the main part of this Decision Notice.

22. Mr Brown points out that there were over 40 companies involved in the chains of transactions connected with the Appellant’s transactions and not a single one of these companies has admitted fraud. HMRC’s retort was that based on Mr Stone’s undisputed evidence, fraud in the wholesale mobile phone industry at this period was considerably more likely than not. As explained in paragraph 155 below nothing turns on this point in this appeal.

23. It is beyond dispute of course that in considering questions of knowledge and means of knowledge (indeed in considerating any question in front of the Tribunal) the Tribunal must consider all evidence in front of it including circumstantial evidence. As Moses LJ said in Mobilx at paragraph 81-82

“[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 is 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. …”

Means of knowledge

24. What did the ECJ mean when it said in Kittel at paragraphs 56 & 59 that it is clear that a taxpayer who “should have known” his purchase was connected with the fraudulent evasion of VAT “must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud” and in these circumstances lose his right to deduct his input tax on that purchase?

25. This was considered by Moses LJ in the Court of Appeal decision Mobilx. He said at paragraph 52 that a

“taxpayer [who] 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…”

and also that

“A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises”.

26. At paragraph 61 Moses LJ said:

“If he [the taxable person] has the means of knowledge available and chooses not to deploy it he knows that, if found out he will not be entitled to deduct. If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct.”

27. Although as can be seen from below it is not necessary to our decision, we find that “means of knowledge” means that the ECJ does expect a taxpayer to take reasonable precautions and to make further enquiries where there are negative indicators. We think the right to recover input tax is matched by an objective duty to take reasonable precautions, and that where there is a failure to take reasonable precautions which would have revealed the connection to fraud, input tax is properly denied.

Summary

28. HMRC must show in respect of each of the 62 reclaims of input tax made by the Company that the transaction in which the Company incurred that VAT was (a) connected to (b) a loss of tax that was (c) fraudulent and (d) that the Company knew or ought to have known this.

Connection with fraudulent tax loss

29. The Appellant does not dispute that its 62 transactions are connected, by a chain of transactions, with tax loss. We find that each of the 62 transactions was connected to tax loss.

30. The undisputed evidence from HMRC was that deals (numbered for ease of reference) 1-15, 21-23 and 28-30 were in a chain that connected back through a number of purchases and sales to a trader (a “defaulter”) who did not account for VAT on the sale made at the start of the chain. It was also not disputed that the remaining deals were connected to tax loss incurred by a defaulter in a contra-trade chain connected to Network Euro’s transaction.

31. Mr Brown’s original position was that the Appellant accepted that there was a tax loss in its chains, but it did not accept that that tax loss was fraudulent. Its position was that it did not know and could not have known whether VAT would be fraudulently evaded by a party earlier in the chain of transactions and it is for HMRC to prove that the tax loss was fraudulent. In other words the Company accepted the connection to tax loss, but not that that tax loss was fraudulent.

32. At the hearing, however, Mr Brown conceded that the only issue before this Tribunal was the Appellant’s knowledge or means of knowledge of an accepted connection to fraud. The Company no longer took issue with the allegation that the losses were fraudulent, although of course disputed what inferences could be drawn from the fact each chain was connected to a fraudulent defaulter and in particular denied that the Tribunal could infer from this that the Appellant had knowledge (or means of knowledge) of the fraud.

33. In any event, this Tribunal had a great deal of evidence before it from witnesses (much from undisputed witness statements) and the exhibits to their statements from we which we find that the defaulters in the straight MTIC chains and the defaulters in the “dirty” contra-trade chains were registered for VAT, made sales of goods for which they issued VAT invoices, and then failed to declare or pay the resultant VAT liability. We consider that whereas a failure to pay tax that is due can occur for many reasons other than an intention to defraud the revenue, where a person issues VAT invoices and then fails to both pay or even declare its resultant VAT liability, such failure is more likely than not to be fraudulent as it is unlikely that there is an innocent explanation for such conduct.

34. A very brief summary of the evidence that the tax loss was fraudulent is as follows:

35. The defaulters were CT Co UK; Worldwide, Swindon Star, Computec, IT Recycling, Stockmart and 3D Animations.

36. C T Co UK (deals 1-8): this company was the defaulter on deals 1-8 inclusive. Its VAT returns since 2002 have shown no VAT liability yet it entered into sales in excess of £27million and issued VAT invoices. In these circumstances failing both to declare and pay the VAT due is we find more likely than not to be fraudulent.

37. Worldwide (deal 9): this company only submitted four VAT returns, the first two showing a small repayment to the company and the last two showing no trading. After the company was deregistered in May 2006 (after Deal 9) it continued to use its old VAT number to issue invoices. In total it issued invoices showing a VAT liability of over £36million. We find issuing invoices but failing to pay or declare the resultant VAT liability is fraudulent.

38. Swindon Star (deal 10): the director of this company claimed that all dealings were carried out by a different person forging her signature. It issued VAT invoices and owes HMRC over £14million in unpaid VAT. Either the person carrying on the activity was forging the director’s signature or the director was being untruthful about the extent of her involvement: either way it is more likely than not that the tax loss was incurred fraudulently.

39. Computec (deal 11): this company submitted 6 VAT returns which all returned a nil VAT liability. Nevertheless, it issued VAT invoices and has been assessed for VAT in excess of £12million on undeclared transactions, including the one at issue in this appeal. We find issuing invoices but failing to declare the resultant VAT liability on returns is fraudulent.

40. Stockmart (deals 14 & 15): Stockmart was an old company that had had a genuine business in the past. Some 15 of the company’s 20 VAT returns were payment returns. However, from 2006 its returns showed no trading or were simply not submitted. Yet it issued a number of VAT invoices (including the ones at the top of chains 14 & 15 in this appeal) on which it did not account for VAT and now owes some £60million to HMRC. We find issuing invoices but failing to declare the resultant VAT liability on returns is fraudulent.

41. IT Recycling (deals 21-23 & 28): this company was the defaulter on deals 12-13, 21-23 and 28. It was deregistered for not trading and had submitted only one VAT return showing a small repayment owing to it. Nevertheless, it issued VAT invoices without accounting for the VAT and has been assessed to £4million unpaid VAT. Failing both to declare and pay VAT due is fraudulent.

42. 3D Animations (deals 29 & 30): this company was the defaulter on deals 29 & 30. It never submitted any VAT returns. Nevertheless, it issued VAT invoices which led to it being assessed to VAT in excess of £100million for unpaid VAT. We find issuing invoices but failing to declare the resultant VAT liability on returns is fraudulent.

43. The contra-traders were Topnotch, Crestview, Lagan, Smartphone and Jos.

44. Topnotch (deals 16-20, 24-27): In the quarter ending 06/06 Topnotch commenced large value EU supplies and acquisitions. It also carried out buffer transactions. From this contra trading, its VAT liability in this quarter resulted in a very small repayment claim. The officers of the company were uncooperative with providing information to HMRC. This changed after the return for the next quarter (09/06) in which the company asked for a VAT repayment of very large sum (due to the cancellation of an acquisition for over £500,000). There were tax losses on all the company’s broker deals. Almost all goods which Topnotch acquired from the EU were sold back into the EU and all were sold out of the UK. The company achieved regularity in its mark ups. It did not take possession of the goods in which it traded. It did not insure them. It did not inspect them. There were many repeat patterns in its chains. Topnotch by its officers was well aware of risks of MTIC fraud and had received veto letters before the deals in issue, yet its due diligence ineffective and often after the event.

45. We find that Topnotch’s offsetting of VAT was more likely than not to be fraudulent. The defaulters in its offsetting chains were Computec; 3D Animations; Prompt Info Ltd; Puwar UK Ltd; and Worldwide. We have already found that the tax losses associated with defaults by 3D Animations, Computec and Worldwide were more likely than not to be fraudulent.

46. Puwar was registered for VAT in 2002 but declared no taxable supplies after 2002 and made no returns after 2005 yet after this date it sold mobile phones wholesale in the UK and issued invoices on which it did not account for VAT. It has not appealed the resulting VAT assessments. We find making supplies but not making a return in respect of them is more likely than not to be fraudulent.

47. Prompt Info Ltd was registered for VAT in 2005. What returns it made showed no tax liability, yet it made taxable supplies in the UK which has led to an assessment of over £13million. In these circumstances we find its failure to pay its VAT liability was more likely than not to be fraudulent.

48. Crestview (deals 31-32): Crestview had a rapid and phenomenal increase in its turnover to £51million on entering the wholesale mobile phone market. Its deals were grouped and back to back: no stock was held. The tax it owed HMRC was always offset by tax owed to it which is not a normal pattern of trading. It produced false CMRs to HMRC. Its officers were made aware of the risks of MTIC trading long before its trades with Network Euro took place. The due diligence it carried out was inadequate and either carried out after the deals took place or negative indicators were ignored. It made third party payments despite being warned by HMRC not to do this. It claimed to have traded in a commodity in a greater quantity that was actually manufactured. It held no insurance. Whenever a supplier was deregistered Crestview switched to another supplier but without otherwise changing its trading pattern. All its deals have been connected to tax loss. It had no written contractual terms. Sometimes the deal paperwork was put together after the deal had taken place. It was partly financed by another mobile phone wholesaler. Ultimately it switched from mobile phones to other commodities but continued to trade in the same manner.

49. We find from this that Crestview’s offsetting of VAT was more likely than not to be fraudulent.

50. The defaulter in the offsetting chain was Red Rose which went from a standing start to a turnover of about £9million in two days of trading. It was VAT registered and issued VAT invoices but it has not declared its liability on a VAT return nor paid the VAT due on its transactions. It is insolvent owing over £1million in VAT. We find that Red Rose’s default was more likely than not to be fraudulent.

51. Lagan (deals 33-38, 43): Lagan traded wholesale in mobile phones for May-July 2006. Prior to this the business had struggled to pay a quarterly VAT liability of about £3,000, with an annual turnover of about £114,000. At this date its turnover jumps for those two-and-a-half months of mobile phone wholesaling to £38million. The Director of the company admitted to HMRC that he knew of the risks of MTIC fraud yet nevertheless allowed the back-to back wholesale phone business to be conducted on behalf of the Company by a “friend” a Mr Dalbir Gul Singh, and without any real due diligence. It produced no bank statements to evidence the turnover shown on the invoices. It made at least one third party payment. It did not fully disclose all the deals it had conducted to HMRC on request. The contra-deals were evidenced by a paper trail without any other evidence that the goods had really existed. The company owes over £1.5million in VAT and has not appealed against the decision to deny its input VAT recovery. We find that the tax default by Lagan was more likely than not to be fraudulent.

52. The defaulters in the defaulting chains supplying Lagan were Red Rose and Digitalk. We have already found that Red Rose’s default was more likely than not to be fraudulent. Digitalk was registered for VAT in the UK and made supplies within the UK in excess of £2million without declaring or paying its VAT liability. It requested some customers to make third party payments. In these circumstances we find it more likely than not that the tax loss from Digitalk’s transactions was fraudulent.

53. Smartphone (39, 44-47, 51-58): A Mr Minhas became a director of this company on 22 June 2006 after purchasing it. It carried out its first mobile phone supplies a few days later. In that first month of trading it declared net sales of over £14m (this would have included a small amount of retail trading). In the next quarter it declared supplies of over £20m in wholesale trading. It used no capital to make these supplies. It did not pay until it was paid. Its EU acquisitions were almost entirely offset by EU despatches resulting in minimal declared VAT liability. It bought from only 2 EU suppliers and from only 2 UK suppliers (both UK suppliers being in the same serviced building). All its UK purchases for its wholesale trade traced back to tax defaults. Its mark up was consistently £1 per unit in 30 out of 36 transactions despite great variation in quantity of each supply (the mark up in one was £2 per unit and in 5 50p per unit). It was never left with unsold stock. Although there was no record that Mr Minhas met with HMRC at time of deals, the company was aware of the risk of MTIC as it did carry out due diligence and obtained supplier declarations. This due diligence, however, was sometimes completed after the deal in question and negative indicators were ignored.

54. We find that Smartphone’s offsetting of VAT was more likely than not to be fraudulent. The defaulter in the chains which offset the chains with Network Euro were Red Rose, Park General Store, Phone City, and Jewel. We have already found that Red Rose’s default was more likely than not to have been fraudulent. We find Jewel traded as a jewellers, making VAT returns from 2003 but in May changed its business activity to wholesaling of electrical items. At this point its returns showed nil net sales. This was despite issuing VAT invoices in June. It was assessed for VAT of over £800,000 which it has not paid. We find it is more likely than not that the default was fraudulent.

55. Phone City commenced wholesale mobile phones sales in July 2005 and went from a standing start to sales of £72million over a few days. It acted as a contra trader and HMRC traced all its UK purchases back to a defaulter. The director was a “shadow” director who did what he was told without knowing what business was being conducted. We find it was more likely than not that the default by Phone City was fraudulent.

56. Park General Store was registered on 12 July 2006 and deregistered on 29 September of the same year when it was apparent that the business had never carried on its intended trade as a newsagent. It made one VAT return showing sales of less than £5,000. Yet in that period it issued VAT invoices well in excess of this amount and made sales of mobile phones with a VAT liability of nearly £2million. As it did not declare nor pay its VAT liability its default was more likely than not fraudulent.

57. Jos (40-42, 48-50, 59-62): This company acted as a buffer in 2005 and continued to do so in 2006. In June 2006 it was a buffer in 148 transactions of which 99 are confirmed to trace back to defaulters and remainder were not confirmed either way. Ten tansactions in this month were broker deals (UK purchase and EU customer) and 12 were acquisition deals (EU supplier and UK customer). All of the broker deals trace back to tax loss with the same defaulter - Cybersol UK Ltd. The supplier of all the acquisition deals was BRD and the customer for half of them was Network Euro.

58. The 10 broker deals all took place on 19 June 2006: the 12 off setting acquisitions all took place in the last 3 days of June and reduced Jos’ repayment claim to approx £471,000 (from £2million). Jos never inspected goods nor kept unique reference numbers for goods traded; it had no written contracts with customers or suppliers; some of its due diligence was carried out after the deals took place, the director ceased doing credit checks due to negative results being received, and in general the due diligence was inadequate for its purpose and was window dressing. Discrepancies in documents were not queried. The director was advised on many occasions of risks of MTIC and making third party payments and in fact the director had involvement in another business (now defaulting owing £2.6m) which was also given MTIC warnings. The company had 45 veto letters and had been notified in January 2006 that a default was discovered in one of its chains but it carried on trading in the same manner and making third party payments. It often bought direct from defaulting traders. It never made or received any payments on its broker deals in June 2006. It made a profit of £1 on all the phones in its 12 broker transactions regardless of specification or quantities traded. Jos has not appealed the decision to refuse input tax reclaims on the basis it knew or ought to have known purchases connected to fraud and its director has a criminal record for involvement in fraud.

59. We find that Jos’ offsetting of VAT was more likely than not to be fraudulent.

60. Cybersol was registered for VAT in 2004 and declared VAT from its trade as an internet café of between £20,000 and £65,000 per quarter. Its last return was to 31 May 2006. It did not declare its transactions which traced to Jos in period 06/06 nor pay the VAT on them and has not appealed the resulting VAT assessment. We find that its default was more likely than not to be fraudulent.

61. In any event from the findings made in the following section of this decision notice on orchestration, we find that the evidence is overwhelming that the transaction chains involving all Network Euro’s 62 purchases at issue in this appeal were organised for the purposes of MTIC fraud. For this reason alone, we find it more likely than not that the tax losses with which the Appellant’s transactions are connected were fraudulent.

Orchestration

62. The Appellant did not admit was that its transactions or the chains of transactions in which they formed part were orchestrated. It was HMRC’s case that the entirety of all the chains were engineered by the fraudsters with the purpose of facilitating MTIC fraud.

63. A simple missing trader fraud relies on a genuine sale of goods into an open market. The fraud is that the missing trader (or “defaulter”) has charged VAT to its customer and intentionally fails to account for this VAT to HMRC. The more sophisticated type of missing trader fraud is where the fraudster does not have a genuine market into which he can sell goods at the volume and price necessary to achieve the sorts of illegal profits he wants to make by failing to account for the VAT due.

64. To commit this kind of sophisticated, organised missing trader fraud, the fraudster has to establish an artificial market. In this artificial market, the goods are bought and sold but there is no real market for the goods. For this type of fraud it is not even necessary for the goods to actually exist. It is likely but not essential for this fraud to work for the goods (if they exist) physically to go round in a circle as it is obviously more efficient and makes more money if the defaulter re-uses the goods in artificial chains as often as possible.

65. To create the necessary artificial market, the fraudster must organise a buyer at every step of the way: there is no genuine market. Third parties will not enter into the chain if they do not see a profit in it, so the fraudster must organise a sale at a profit for everyone who is to be a buyer in the chain. Logically it follows that the defaulter must ensure that the buffers and brokers do realise their profit: they will act as rationale people and if they make a loss, they will not participate again. So if the fraudster wants to commit the fraud a second time with the same people, he must continue to organise every step of the transaction because there is no genuine market. As organising an artificial market must take effort, it is likely (but not essential) that the fraudster would use the same brokers and buffers again and again.

66. It is also not essential for this sort of fraud to be successful that the buffers and brokers necessarily understand that they are not operating in a genuine market. Nevertheless, we consider that, whether the fraud to which the transactions in this appeal are connected was a simple kind of MTIC or, on the contrary, an organised MTIC is likely to be relevant to the question of knowledge or means of knowledge of the Appellant. This is because if the defaulter committed only simple MTIC fraud he would have been concerned only with his sale to a genuine buyer. Any subsequent sales of the goods would have been irrelevant to his ability to commit the fraud. He would not have needed to organise the subsequent sales and purchases. Whereas if this was an organised MTIC the reverse is true. If the 62 purchases on which the Company seeks to recover its input tax in this appeal were part of an organised MTIC fraud, then the fraudster would have organised Network Euro’s purchases and sales in the same way it would have organised all the other purchases and sales in the chains. If we find that the frauds were of the organised MTIC type, then when we assess Network Euro’s knowledge, or means of knowledge of the fraud, we assess this against our knowledge that its transactions were transactions in an artificial chain of transactions organised to facilitate fraud and did not in fact arise through the operation of an open and genuine market.

67. So we consider whether the 62 transactions were connected to simple or organised MTIC fraud.

Circularity in phones

68. The Company paid the inspection companies it used to give it a record of the IMEI numbers of 10% of the phones in which it traded. Comparing these numbers for its deals in April and May 2006 to HMRC’s NEMESIS database, the evidence was and we find that 3 of the phones traded in by Network Euro were traded again: one was traded before it went through Network Euro’s hands and two were traded in after they had been through Network Euro’s hands. A further 6 phones traded in by Network Euro were reported lost or stolen and a further 29 phones traded by the Company were locked by the manufacturer although it is not clear on what date.

69. HMRC say that we should infer from this that there was circularity in the chains and the phones were not going to end users but being endlessly carouselled. Mr Brown’s point is that this evidence exists for only a tiny proportion of the phones traded in by the Company (even if one multiplied by 10 to make up for the fact the Company only kept records for 10% of its phones). We agree with Mr Brown that we cannot infer that the goods as a whole were being carouselled from this evidence as it is such a small proportion of the many thousands of phones Network Europe sold.

70. Indeed the reverse is true in that the fact that there is no evidence that the vast majority of Network Euro’s phones were sold in the UK either before or after Network Euro dealt in them would suggest they were not part of a carousel.

71. However, we were given no evidence on how complete HMRC’s NEMESIS database was as a record of all mobile phones traded in the UK nor do we know how accurate Network Euro’s records of its own IMEI numbers were, so although we find no evidence the phones were carouselled, we do not consider this conclusively informs the Tribunal whether or not the fraud to which Network Euros sales were connected was organised or not. This is particularly the case as we find from the evidence given that none of the phones in the chains at issue in this appeal trace back to a supply from a manufacturer or authorised distributor which one would expect if they were sold on a genuine market even if simple MTIC fraud was involved.

72. Finding this evidence inconclusive either way, we go on to consider other evidence.

Existence of Goods

73. Mr Jarrold gave evidence (which we accept) that for Deals 33-35 and Deal 49 the goods the subject to the deal were not shipped as per the shipping notes. For deals 33-35 he and his team searched the vehicle which was supposed to contain the goods despatched by Network Euro while it was on board the 23:15 ferry on 19 June 2006. He found that the lorry only contained rolls of bowling green.

74. For deal 49 his team searched the vehicle which was supposed to contain the goods despatched by Network Euro while it was on board the ferry on 3 July 2006. His team found that the lorry only contained powdered industrial resin. Mr Jarrold was on board this ferry but personally searched a different vehicle. We accept his evidence in relation to both searches.

75. For deals 33-35, we find that as Network Euro’s shipping note was faxed at 17:03 asking for the goods to be shipped that day, it was not possible for the lorry to have gone to the continent and returned to the UK in time to be on the ferry at 23.15. Therefore the lorry should have been but was not carrying the mobile phones that Network Euro had sold to Fone Link. For Deal 49 there was a Statement of Agreed Facts that there was no evidence that the ship had left the UK earlier that day and we find that the lorry in question should have been but was not carrying the mobile phones that Network Euro had sold to Proxi.

76. Mr Virdee for Network Euro says that the Company always got confirmation that the buyer was happy with the goods and that in any event they paid for them. However, we are not addressing at this point whether the Company knew or ought to have known that the goods were not transported, but whether the deals were orchestrated for the purposes of fraud.

77. From the fact that the goods were not transported and delivered to them yet the buyer did not complain and further actually paid for them, we infer it more likely than not that the goods did not exist and that the buyers (Fone Link and Proxi) were well aware of this. We find on the basis of this evidence that these transactions at least were part of organised MTIC fraud.

78. It puts into question any other deals in this appeal in which these two companies were involved (over half of the deals in the appeal). The freight forwarder, Sam Logistics, must also have known the goods did not exist yet was content to be involved. It puts in question all the deals in which Sam Logistics was the freight forwarder (approximately half of the deals in this appeal). However, this is not relevant to our decision as there is other and overwhelming evidence as set out below that all of the transactions the subject of this appeal were part of an organised MTIC fraud and none of them took place on the open market and we explain this below.

Circularity of money flows

79. Mr Nevin, an officer of HMRC, gave evidence about First Curacao International Bank (“FCIB”) account information which he had examined. This comprised the bank’s internal records of banking transactions undertaken by its account holders. Virtually all of the traders in the chains at issue in this appeal held accounts with FCIB making it possible for Mr Nevin to follow the money.

80. Mr Nevin analysed 21 of the Company’s transactions chosen at random. He did not have time to analyse more. In tracing the money from one account to another he looked at the date and amount shown by the invoice trail. However, he found that although payments up and down the chain normally took place on the same day, payment was always (and sometimes several weeks) later than the date of the invoice. He also found that in some cases the amount of the payment was more or less than the amount shown on the invoice. He also found that in many deals the parties to the chain of transactions as shown by the invoices did not entirely match the deal chain.

81. He also looked at the “EB” number against each payment or receipt. This was a unique number allocated by FCIB to each transaction so the EB number on a payment from one FCIB account would be the same on the receipt of that money into another FCIB account. They were also issued sequentially so Mr Nevin was able to determine which was the first movement of money (ie where the money originated) by looking at the EB numbers in a chain of money transfers.

82. Relying on the invoices, the EB numbers and the fact that the money tended to move from one account to another fairly quickly once the first money movement took place, Mr Nevin gave evidence that in 15 of these 21 deals, the money ended up with the person with whom it originated.

83. For instance, for Deal 5 Mr Nevin produced evidence which showed that Network Euro raised an invoice on 7 April 2006 to its customer Belltrask. It was paid on 20 April. On the same day Belltrask was paid by Sigma Sixty, and Sigma Sixty was paid by SL Computer. The first money movement was from S L Computer showing that the money originated with that company: the evidence shows it also terminated with that company as Network Euro bought the goods which it sold in Deal 5 from Cell Trading. Network Euro paid Cell Trading the majority of the money on 20 April and the balance a day later (after receiving a payment of £110,000 from Amira). Cell Trading paid Trade Smart, Trade Smart paid City Phones Ltd, City Phones paid a Mr Shaun Venables, Mr Venables paid SL Computer.

84. Mr Brown submitted the Tribunal treat Mr Nevin’s evidence with caution as he was not an accountant, did not have accountancy experience, and this was the first time he had done this sort of exercise. We find, from looking at the bank’s printouts of the money movements undertaken by its customers (which we’ll refer to as bank statements) that, on the contrary, Mr Nevin’s evidence was reliable.

85. We note that Mr Nevin accepted that he had made a mistake in his flow chart for Deal 29. He omitted Belltrask from the flow charts. Nevertheless, it is clear from his witness statement and exhibited documents that Bell Trask was in the loop. We find this was just an error in the flow chart for this deal and that the flow charts were no more than a convenient method of summarising Mr Nevin’s conclusions. The error did not affect the underlying evidence that the flow of funds in Deal 29 was circular nor did it affect the overall credibility of Mr Nevin’s evidence.

86. Mr Brown also doubted that on deal 16 the first money movement commenced with SL Computers because the EB number for that deal was later than the EB number for Sigma Sixty’s money movement. The explanation for this might be that Sigma Sixty pre-booked the transaction. In any event we find it does not affect our view of Mr Nevin’s evidence: Mr Nevin did not claim that first money movement originated with SL Computers in this chain and it was one of the ones which was not shown to be circular.

87. Mr Brown challenged the evidence on the basis that in some cases the payments which Mr Nevin relied on as relating to the invoiced deals were not single payments but in batches of two or three payments. He said there would be no reason for split payments in a contrived fraud. For instance, on Deal 11 Global Access’ invoice was for £1,758,387.50. West Point paid Global Access three amounts on the same day: £1,000,000 plus £743,700 and £14,687.50. However, these payments totalled £1,758,387.50 which was the sum due on the invoice and we find more likely than not that Mr Nevin was correct to identify them as relating to this deal.

88. In any event we note that Mr G Taggar stated that Network Euro did sometimes split its payment into more than one lot, and Mr Nevin’s evidence shows that this is true. Mr Taggar’s explanation for this (which the Tribunal does not understand) was that Network Euro split the money so that it did not get lost in transit. Nevertheless, whatever the reason for the split was, it is clear that it was a feature of these chains and we do not agree with Mr Brown that the split amounts of money suggest Mr Nevin is mistaken in his evidence.

89. We bear in mind (1) the identity or similarity in the total sums paid to the invoice amount; (2) that the movements of money all took place on the same day, in most cases starting an ending with the same company; (3) there being no other payments between these companies on that day that could relate to the outstanding invoices; (4) Mr Taggar’s evidence it was usual for Network Euro to split its payments. We conclude that although we do not know why the payments were split, nevertheless in all cases of split payments shown in Mr Nevin’s evidence, the split payments do relate to the invoice chain as he alleges.

90. Mr Brown doubts that Mr Nevin showed circularity in those deals where he alleged the money flow included Leriant (deals 14, 15, 24, 25 and 29). This is because Mr Nevin did not exhibit Leriant’s bank statements. However, (with the exception of deal 29) he did exhibit the bank statements for the other parties which show the number of the source/destination account. In any event in all but deal 14 there is identity in the amount paid (to the invoice amount) and similarity in amount for those payments beyond the invoice chain. There is also identity in the date of payment (eg in deal 25 all payments were made on 14 June 2006). We find it more likely than not that the flow of funds in deals 15, 24 and 25 was circular. On deal 14 we find the payment by Leriant was £1.4m whereas further down the chain the payment was £1.8m. We bear in mind that in other “Leriant” chains - bar 29 - we have found a circular flow of money and so it is more likely than not that there was such a flow in deal 14 too.

91. Mr Brown doubted that circularity was proved in deal 29. Putting aside the issue of the mistake in the flow chart, Mr Brown also pointed out that Mr Nevin relied on a payment by Leriant to Sigma on 14 June for nearly £4.5m whereas on this transaction chain only some £800,000 was due. He further doubts circularity because of the dates. The deal took place on 31 May and all invoices carried this date. Sigma Sixty paid Bell Trask on 5 June; Belltrask paid Network Euro on same day; Network Euro paid Cell Trading on 6 June; but Cell Trading did not pay its supplier Selectafone Ltd until 14 June. All other payments back up chain - Selectafone to Mobile Memory to Mr Farook, Leriant to Sigma took place on 14 June.

92. Another defect is that not only is Leriant’s bank statement not exhibited neither is Mr Farook’s. So although it is Mr Nevin’s evidence that he saw Lerient’s bank statements and it was merely a mistake that they were not included in the exhibits, we cannot know (without the exhibits) whether the conclusions Mr Nevin has drawn on Deal 29 are accurate. Mobile Memory’s statement shows the payment out to Mr Farook on 14 June: Sigma’s shows a receipt from Leriant on the same date. But we consider it is for HMRC to prove their case which includes exhibiting the evidence on which they relied and we conclude that HMRC have not proved that Mr Farook paid Leriant in this deal chain. It is proved, however, that Mobile Memory paid Mr Farook rather than its supplier, 3D Animations.

93. Mr Brown also questioned the evidence on Deal 31 because HMRC did not produce the bank statements for TFAS. We accept Mr Nevin’s evidence that this omission was a mistake. However, the other parties’ statements were produced and from the other statements it can be seen that Negresso made payment to TFAS and Yayha received payment from TFAS. Mr Brown’s criticism is that without the TFAS statement we cannot be certain that there were no other payments which broke the chain. However we consider the fact that all the payments in the entire chain took place on 26 July 2006 and that the payments made by Negresso to TFAS, and from TFAS to Yayha were in approximately the right sums. We find it proved on the balance of probabilities that there was a circular flow of money in this chain.

94. In summary, we find it proved on the balance of probabilities on the basis of Mr Nevin’s evidence that there was a circular flow of money in 14 out of the 21 deal chains analysed. And in those 14 transactions where circularity has been shown, the money started and ended with either SL Computers, Leriant, or Yayha.

95. Mr Nevin did not find evidence of circularity of funds in 7 cases. Yet even in these cases it seems more likely than not to us that either the flow of funds was circular or at least that they were as likely to be involved in MTIC fraud as the chains where circularity was proved. This is because we find that in all 7, most of the companies involved in the money flows were also involved in the circular flow of funds in the 14 proved circular flows of funds. For instance in Deal 8, Stylez Ltd instead of paying its supplier, C T Co UK (the defaulter), pays Mr Shaun Venables. Mr Shaun Venables was frequently a party in a proved circular flow of funds. A similar point could be made in respect of his payee in Deal 8, Flash Tech, which was part of a circular flow of funds in other deals (eg 2 & 3).

96. The evidence of Mr Nevin’s analysis of the money flows showed other relevant matters. In particular we find it showed:

· The money paid did not always exactly match the invoiced amount;

· The money was not always paid to the person who issued the invoice;

· The money was often not paid until some time after (sometimes weeks after) the deal took place on paper but when it was paid was normally paid all on the same day across the whole chain.

Invoice chain does not match money flow chain

97. We find that the invoice chain did not normally entirely match the money flow chain at the defaulter/buffer 1 level or sometimes at buffer 2 level. For instance, in Deal 1 the invoice chain shows that City Phones Ltd (buffer 1) purchased from C T Co UK Ltd (the defaulter). However City Phones actually paid a Mr S Venables. Mr Venables then paid S L Computer. In Deal 2 Cell Trading did not pay Tradesmart, it paid Symbolix SARL, who paid Flash Tech who paid SL Computer. In both cases the first money movement was from SL Computer: in other words the money paid to Network Euro originated with SL Computer as well as terminating with SL Computer.

98. We find that the companies who paid a third party rather than their supplier were: Cell Trading, Topnotch, West Point, Global Access, Stylez, City Phones, Mobile Memory, Crestview, and Lagan.

99. We found that the companies which made supplies for which they were not paid: were: C T Co UK Ltd, Tradesmart, Stylex, Computec, Stockmart, Global Access, Senbetel, 3D Animations and Phonedeal.

100.And we found that the companies or persons who accepted payment for a supply even though they had made no supply were: Tradesmart, Trade Eazy, Cell Trading, Jos, BRD Werburg, Label, and Red Rose.

Amount paid does not always match invoice

101.We also find that the amounts paid by Network Euro and others in the chain did not always match the invoiced amounts. For instance, in Deal 3 City Phones invoiced Tradesmart £895,358. Tradesmart only paid £841,000. Tradesmart invoiced Topnotch £897,112.50. Topnotch only paid £841,000. In half of the chains Mr Nevin analysed we find that one or more of the parties in the chain did not pay the invoiced amount.

102.The companies which did not always pay and/or receive the invoiced amount include Cell Trading, Tradesmart, City Phones, Topnotch, West Point, A-Z Mobile, and Senbetel

103.We can see no reason why this would happen in a commercial world. In a genuine market, traders pay what they have agreed to pay, no more and no less.

Conclusions on FCIB evidence

104.In summary, we find it very likely that the 14 chains in which circularity was proved were likely to involve MTIC fraud because we can see no commercial reasons for Yayha, Leriant or SL Computers to send money round in a circle, but it makes every sense in the artificial world of MTIC where the organisers of the fraud need to put everyone in funds to create the appearance of genuine trading using companies with no assets. If we had doubts on this, they would be laid to rest by the fact that the money flows do not match the invoice flows, and from the fact that the amounts paid do not always match the invoiced amount neither of which makes any sense in the commercial world.

105.We also find that for the 7 chains in which circularity was not proved that they also were more likely than not to be involved in MTIC fraud. We find this because many of the companies to which payments were made were companies involved in the circular movement of funds in other chains: Mr Venables, Flash Tech, Sigma Sixty, Senbetel, Leriant, Belltrask and that all 7 of the chains involved some of these companies. We also note that the 5 of the 7 chains did not involve contra trading and all therefore involved a company which did not pay its supplier (its supplier being the defaulter). We note that the 2 remaining chains included companies which did not pay/receive the invoiced amount. In conclusion, taking these factors into account even in these 7 cases where circularity was not proved, it seems on the FCIB evidence more likely than not that these chains were also orchestrated transactions as they involved companies whose behaviour does not appear to be commercial and who have been shown to be involved in other deals which we have found to be organised for the purpose of MTIC fraud based on the evidence of circular movement of funds.

Discrepancies in deal chains

106.Moving away from Mr Nevin’s evidence, HMRC gave evidence of timing discrepancies in some of the documents. This evidence relied largely on the fax headers on the documents which showed the time at which the document was faxed. Mr Brown challenged the evidence on the basis we could not know if the internal fax machine clocks were accurate. However, we find that this point is not a good one when more likely than not it is the same fax machine printing both fax headers. It is also not a good point when the times are significantly different as we think it is more likely than not a clock would not be more than a few minutes out.

107.From the evidence of the faxed headers, we find that in deal 2, Trade Smart offers stock to Cell Trading at 11:24 but had already faxed allocation and release notes in favour of Cell Trading to Humber Freight at 11:06. In this case we find it was more likely than not that it was the same fax machine printing the headers.

108.We find in deal 3, Trade Smart faxed to the freight forwarder a release of the goods to Topnotch at 10.12 and then two minutes later faxed a stock offer to Topnotch. Topnotch sent a purchase order to Trade Smart at 13:56. We find that not only is it more likely than not that the same fax machine printed the header on the first two mentioned faxes, but that neither Trade Smart’s nor Topnotch’s fax machine was likely to be nearly four hours wrong. This means Trade Smart had released the goods to Topnotch nearly 4 hours before Topnotch had sent its purchase order.

109.We find in deal 5, Cell Trading sent a stock offer (dated 6 April) to Network Euro on 7 April at 15:06. The Company sent a purchase order back to Cell Trading some 20 minutes later. But Cell Trading’s invoice to Network Euro was dated 6 April (and faxed at 18:33 on that date). The release note from Cell Trading to the freight forwarder in favour of Network Euro was also dated 6 April.

110.We find in deal 6, Cell Trading faxed its stock offer to Network Euro on 6 April at 17:44. Network Euro returned it to Cell Trading on 7 April at 13:35 and faxed over a purchase order timed at 15:26 (this was in fact sent with the purchase order for deal 5). Yet as with Deal 5, Cell Trading’s invoice and release note were both dated 6 April.

111.Mr Virdee’s explanation in cross-examination was that Network Euro did its deals on the phone and the paperwork was only produced after the event and he would infer this might well be true for other mobile phone wholesalers in the chain.

112.Both sides therefore seem agreed that at least in some of the deals some of the paperwork was produced after the event. HMRC’s interpretation is that this is because the deals were all orchestrated and the paperwork was a smokescreen. Mr Virdee’s explanation is that the deals were genuine but negotiated entirely on the phone and the documents only produced later as they were required for the deal pack.

113.We find producing paperwork such as purchase orders after the deal was concluded makes no sense in a commercial world. Either (more likely) the vendor would insist on a purchase orders before proceeding with the transaction, or if it did not, would have no need of them after the deal had been concluded. Mr Virdee’s explanation that they were needed for deal packs is, we find, the likely explanation why they were produced: the documents had no commercial relevance but were produced to give the appearance that they had formed part of the negotiations. This begs the question: if the purchase order was produced after the event because the vendor did not require a purchase order before proceeding but wanted one to make it appear that he did, does this indicate the deals were contrived? We find that it does indicate that the vendor was relying on something other than a purchase order to give it certainty the deal would be progressing. By itself we might not find this conclusive that the deals were organised and not in a genuine market, but is indicative that that is the case.

Patterns in chains

114.As mentioned above of the 62 deals in issue in this appeal, some 21 were straight chains that connected back to a defaulting trader. The remaining 41 deals were contra-trades, so the chain of goods did not connect back to a defaulting trader (although we find the transaction as a whole was connected to fraudulent tax loss as explained in paragraphs 32 above). Of the 21 straight chains, apart from 6 chains, these had 3 or more buffer companies between Network Euro and the UK acquirer. The remaining 6 were where Network Euro purchased directly from the defaulting trader IT Recycling.

115. In contrast to the majority of the straight chains, the contra trade chains are very short. In all but 3 of the contra deals (33, 34, & 35) the chain comprised UK acquirer - Network Euro - non-UK acquirer. There were no buffers. And in those 3 excepted chains, there was only one buffer.

116.We find that there is no logical reason why in an open and free market or even in a simple MTIC, chains would be short where was no defaulter in the chain of goods but very long where there was a defaulter. We do find that there is a good reason for the difference if the chains were organised. That reason is that a long chain would be harder to organise and involved paying the buffers: the fraudster would only do this if he thought it necessary to facilitate the fraud. As explained above in paragraph 65, it was in the interests of the fraudster to protect the position of its brokers (so it could use them again). A long chain would be put a “safe” distance between defaulter and broker making it harder for HMRC to prove connection. However, the “safe” distance in contra-trades was created by having the default occur in a different chain. So the fraudsters would probably perceive that there would be no point in having a long chain of buffers on the “clean” chain (ie the one that did not originate with the defaulter.)

117.Another pattern in the 62 deals is that we find Network Euro traded in blocks. Deals 1-15 inclusive were all straight chains connecting back to a defaulter. Deals 16-30 inclusive were a mixture of straight and contra-trades. Deals 31-62 inclusive were all contra-trades.

118.The chains are very repetitious. Many deals are in pairs. There were identical chains for Deals 1& 2; a separate (but identical) chain for deals 5&6 and so on for deals7& 8; 12&13; 14&16; 16&17; 18-20; 21-23; 24-27; 31-32; 33-35; 36-37;40-42; 44-47; 48-50; 51-55; 56-58; 59-62. In the other chains, the chains were all very similar to other chains with often only one company being different.

119.There were other repetitions, examples of which we include in the next few following paragraphs. Parasail supplied all the contra-trade chains apart from those supplied by Phonedeal mentioned in the above paragraph. In deals 40-42, 44-62 (ie slightly over one third of all the deals in this appeal) the chain was

Parasail

BRD (acquirer)

Contra-trader

Network Euro

EU Acquirer

120.The contra-trader was always one of two companies: either Jos or Smart Phone. The EU Acquirer was always one of 3 companies: Fonelink, Proxi Partners or Bijou.

121.We find that Jos acted as UK acquirer on 12 deals in June, 6 of them the subject of this appeal as Network Euro was Jos’ customer. The customer in 4 of them was New Order Trading Ltd, the customer in one was New Order Exports Ltd, and in the remaining deal the customer was Talk 2 Us Ltd. New Order Trading supplied Haroon Younas in the UK who then supplied Proxi Partners in Belgium; New Order Exports supplied Fone Link. Network Euro supplied Fone Link on 3 of the deals, and Proxi on the other three. So in these 12 chains, there was a single acquirer, four brokers but only 2 EU acquirers.

122.There was evidence which we accept of 27 chains in June 2006 in which Lagan or Jos were buffers. In these the EU supplier is always either BRD or Phonedeal. The EU acquirer is always either Proxi or Fone Link. Network Euro is the broker in 14 of the chains. The other brokers are New Order Exports, Lagan, or Mr Younas.

123.In the 06/06 period Smart Phone made 6 UK supplies, 1 to St Annes and 5 to Network Euro. One purchase was from Phone Dealers and the other five from BRD. St Anne’s sold its batch to Fone Link SL as did Network Euro. All of these 5 sales by BRD were of goods purchased by them from Parasail in Spain.

124.There were patterns in the freight forwarder used. In deals 1-8 the Company had four customers (all in different EU countries) and three suppliers. Yet all the goods were sent to the same freight forwarder in Holland (Interaction Logistics) using the same export freight company (Humber Freight). Where Point of Logistics was used as the export freight company (deals 9,11,20,24,25,26,27,29,30) the goods were always sent to Interaction Logistics although 4 different EU acquirers were involved.

125.We do not find it likely that such repetition in chains would arise by accident in a genuinely open market

Interposition of new traders

126. We find that Top Notch had a pre-existing relationship with Belltrask to whom it sold goods on 3 May. Yet late in the same month TopNotch sold to Network Euro who sold to Belltrask (deals 24-27). Lagan sold goods to Proxi Partners in June 2006, including a transaction only a few days before Network Euro’s deal 43. In deal 43 Network Euro bought from Lagan and sold to Proxi Partners. Indeed, Lagan actually gives Network Euro the name of Proxi Partners as its trade reference. Smart Phone systems had a pre-existing relationship with Proxi Partners too: there were sales by Smart Phone Systems to Proxi Partners in June 2006. Yet in July Network Euro buy from Smart Phone and sell to Proxi Partners. In all cases Network Euro made a substantial profit. There are other instances where Network buys from one company and sells to another where HMRC have demonstrated that the two parties had a pre-existing relationship.

127.We consider this would be unlikely to have happened in a genuine market: why would Belltrask or Proxi buy from Network Euro when they could buy more cheaply from a vendor with whom they had a pre-existing relationship?

Profits of buffers and broker

128.We find that the Company’s profit in a chain vastly exceeded the profits made by the buffers. Of the total profit made by all buffers and brokers in a chain, in most chains Network Euro’s profit would be about 80-90%. It was never lower than 61%.

129.We find this makes no sense in a commercial world. Why would by far the majority of the profit arise on the cross-channel sale? Although the broker would have costs a buffer would not (principally freight) Network Euro’s profits far outweighed these costs and this cannot be the explanation.

130.Mr Virdee’s explanation was that buffers could not make the profits because they did not have the capital to be a broker: a broker had to be able to “block” the VAT. We find he meant that, because cross border sales were zero rated, that a broker had to be in a financial position to pay more to its vendor than it would receive from its European buyer. It would recoup the position only when HMRC refunded the VAT it paid to its vendor. Mr Virdee explained (and on the other evidence we accept this) that Network Euro had the funds to do this because it borrowed the money.

131.We do not find that Mr Virdee’s explanation makes sense. Although it is true that a broker had to be in a financial position which enabled it to “block” or fund the VAT for a month or so, this cannot explain why EU acquirers would be prepared to pay so very much more for the stock than the UK brokers. The profit was well in excess of any normal commercial rate of interest on the capital that would have been needed to block the VAT. At the sort of price differential evidenced in this case between what a buffer and broker charged their customer, we find a commercial market would have come up with another solution (such as the EU acquirer purchasing the goods in the UK from a buffer or the buffer borrowing funds to become a broker and undercutting the other brokers).

132.However, this price differential does make sense in the world of MTIC where only the broker is taking a risk: the risk HMRC will not refund the VAT .

Identity in mark-ups

133.There was unchallenged evidence which we accept that Lagan, Crestview, Jos and Smartphones all achieved a mark-up of 0.33% on a certain specification of phone when they sold it to Network Euro. Of Network Euro’s 20 deals in June 2006 with 4 different suppliers, the Company’s four suppliers always made £1 per phone and always at a mark-up of 0.33% or 0.34%.

134. We find that these profits made by the Company’s suppliers are inexplicably consistent in a commercial environment and also a very small proportion of the value of the goods and do not appear to commercially viable assuming that the businesses had normal overheads.

Use of FCIB

135.Forty companies appeared in the chains at issue in this appeal. HMRC’s undisputed evidence which we accept was that 33 of these companies had accounts with FCIB. The directors of 2 of the remaining 7 companies (though not the companies) had accounts with FCIB. Of the remaining 5 companies, 1 directed payments to be made to a third party who had an FCIB account and two did not receive any payments. When FCIB closed down many moved to the same Swedish bank UMBS.

136.HMRC’s view was that using FCIB facilitated the fraud and the buffers and brokers were effectively instructed by the organisers of the fraud to have FCIB accounts. Mr Virdee put the view that it was known in the trade that FCIB was an efficient bank and many of the companies in that sector had no choice other than to use FCIB as their UK bank accounts were closed down without explanation. He said suppliers would be more ready to deal with them if they banked with FCIB.

137.We do not find this evidence by itself persuades us that the 40 companies were acting in concert: Mr Virdee’s explanation, that FCIB was the bank known in the trade sector which would take their business when UK banks would not, is, we find, at least as likely as HMRC’s explanation.

Back to back trading

138. We find that the buffers in these chains, like Network Euro, did not take possession of the stock. The stock was traded while it sat at a freight forwarder’s premises. We find that the deals in an entire chain were normally completed on the same day.

139.We find no one “added value” to the transaction chains. No one took any risk. No one split or combined the stock. The only thing which the buffers appeared to do was raise an invoice. For this they were rewarded with very small profits.

140.On the other hand, as can be seen from Mr Nevin’s evidence above, the deals were often not paid on the day they were completed. Sometimes payment could be weeks after the day of the deal. Mr Brown suggested that this was strong evidence that the deals were not contrived, because, he said if contrived no one would have agreed a delay. We think the contrary is true. In a commercial situation there is no reason why the ultimate seller would be prepared to let go of control of the goods sometimes for weeks before they were paid, as happened on many of the deals in this appeal. Further, there is no evidence (apart from the oral evidence of the Company’s officers which we reject for reasons given below) that the date of the payment was arranged on the date of the deal. It was not recorded in the deal documentation so if these were commercial deals payment would have been expected immediately. Yet payments were normally delayed by days or weeks. We think, contrary to what Mr Brown says, this is evidence that the deal chains were contrived as it seems no one in the chain had any concerns about the date of payment.

Illogical trading patterns

141.We find that in many of these deal chains the goods were shown to originate on the continent. That was also their destination after Network Euro purchased and sold them. This begs the question why Network Euro’s customers did not buy direct from the European company which sold the goods to the defaulter. It makes no sense in a commercial world for the goods to be acquired and traded in the UK if there was such a ready market for the goods on the continent that Network Euro were (on its own evidence) able to sell the goods for a much higher price there than in the UK, and when (on the evidence of the deal chains) the goods actually originated from a dealer on the Continent.

142.Mr Brown’s point is that (he says) there is no evidence that NE knew that the phones originated in Europe. But that is not the point: the point is that the phones originated in Continental Europe whether or not Network Euro knew this and this makes no commercial sense and is therefore, we find, evidence that the chains were artificial and orchestrated.

Conclusions on orchestration

143.Mr Brown says that HMRC did not lead any evidence which showed that Appellant’s supplier knew what stock the Appellant’s customer required and on what date and vice versa. However, although it is true there is no direct evidence of this, the circumstantial evidence that Network Euro’s transactions were orchestrated and that someone - the shadowy figure who organised the frauds - did know what stock Appellant’s customer required and on what date and what they would pay and what stock the Company’s supplier would be selling on what date and for how much, is we find overwhelming.

144.We find as follows: a commercially driven market would be most unlikely to operate in a manner that would bring these types of chains into existence, which regularly involved goods being acquired in the UK from the Continent and then sold and transported back to the Continent at a very high profit; the buffers were all dealing back to back without risk or adding value to the transaction or stock nor taking possession of the stock; the buffers’ profits were very small and predictable, the broker’s profit was inexplicably much higher although no extra input in the transaction was involved (apart from increased freight costs); the trading took place in blocks that would be unlikely to arise by chance and for which we could find no commercial explanation; the chains showed much repetition and patterns in their structure which again we find would be unlikely to arise by chance and for which we could see no commercial explanation; Network Euro dealt with trading partners who already had a pre-existing relationship making Network Euro superfluous in the chain; and we also found in that in some cases the paperwork was being generated after the event indicating that the vendors did not require purchase orders to be certain the deal was going ahead. From all this we conclude the chains and the transactions comprising the chains would be far more likely to have been orchestrated for the purposes of MTIC fraud than not.

145.When combined with the FCIB evidence we find HMRC’s case to be overwhelming. From this evidence we see that the money moved in circular flows for which there can be no commercial explanation, we find in many cases that the money paid by many of the participants was not the same as the amounts invoiced, and we find that the chain of payments does not match the chain of invoices. We find that the only credible explanation for all this is that all the transactions at issue in this appeal were part of an orchestrated MTIC fraud where there was no genuine market for the goods.

146.We find that every purchase and every sale made by the Company which is at issue in the appeal (whether or not the Directors of the company knew or ought to have known) was organised as part of this fraud and did not take place in a genuine market.

General evidence on MTIC fraud

147.Mr Stone, an officer of HMRC had no direct involvement with Network Euro’s input tax reclaim and he gave evidence about MTIC fraud in mobile phones in general.

148.Mr Stone has been employed by HMRC to apply their MTIC strategy since 2001. Since 2004 he has been MTIC Deputy National Coordinator and senior policy adviser.

149.He gave evidence that despatches and exports of mobile phones from the UK significantly decreased after May 2006 and points out that this decrease coincided with the implementation of HMRC’s full programme of extended verification on 1 May 2006 and with the ECJ judgment on joint and several liability on 11 May 2006 (HMRC v Federation of Technological Industries C-384/04). Figures for January and February 2005 show cross-border trade in mobile phones of about £250m per month. It steadily increases to over £1billion by November 2005. By March- May 2006 it is over £4b each month. There was a slight fall off to £3b in June 2006 and a dramatic decrease to under £1billion by July 2006. The trade continued to fall to under £100m/month by November 2006. It was Mr Stone’s evidence that for the six months from July to December 2006 total trade was down from £21bn in previous six months to £2.1bn, and about the same for the period January 2007 to October 2007.

150.It is also Mr Stone’s evidence that since introduction of the reverse charge on mobile phones on 1 June 2007 of the 179,000 traders registered for VAT with mobile phone and computer trade classifications (which in any event is likely to be an under-representation of the traders in the market as many (such as Network Euro) did not have this classification) only 179 traders have registered for the reverse charge.

151.It was not suggested to us that the increase in sales was due to the increase in popularity of mobile phones and indeed the dramatic fall off in trade in July 2006 onwards is not consistent with such an explanation.

152.Mr Brown put the view that the dramatic fall in mobile phone trading in July - December 2006 was the result of HMRC’s extended verification resulting in businesses being unable to trade as their input tax reclaims were withheld. We were not given figures of how many of these traders ultimately were repaid and of those which were not, how many appealed, nor of how successful the appeals were. So we agree with Mr Brown that this figure alone does not tell us whether the fall-off was due largely to businesses trading in a genuine market being caught up in extended verification or businesses trading in artificial markets being caught up in extended verification.

153.If the mobile phone frauds were of the simple type, each sale by the defaulter would be into a genuine market. That market would continue to exist despite the introduction of the reverse charge. We take into account that one of the effects of the reverse charge is to ensure that traders have no need to fear extended verification as there is no VAT to reclaim. So that if in April - July 2006 the fraud either was non-existent or was of the simple variety, it is likely after the reverse charge came into effect that business would return to its high level of mid-2006.

154.However, from the evidence in respect of the vastly decreased number of traders actually registering for the reverse charge, and the fact that since the introduction of the reverse charge business has not returned to anything like the early 2006 levels, we conclude that it is considerably more likely than not that the bubble in wholesaling mobile phones described by Mr Stone in 2005 and early 2006 was due to transactions in mobile phones being orchestrated to facilitate MTIC fraud and that there was only a very small genuine market for the wholesale of mobile phones.

155.From this we find most of the £billion trade in wholesale mobiles April - July 2006 were orchestrated for the purpose of fraud. Returning to paragraph 20 above and the citation from In re H, although in general fraud is less likely than negligence, in the wholesale mobile phone market in late 2005-mid 2006, we find it more likely a transaction was orchestrated for the purposes of fraud than not. But that does not tell us if the transactions in this case were orchestrated for the purposes of fraud. However, nothing turns on this in this appeal: entirely ignoring Mr Stone’s evidence, it is very clear from the evidence in paragraphs 62-142 above that the 62 chains at issue in this appeal were orchestrated for the purposes of fraud.

Knowledge

156.We turn to the question of whether the Company knew that any or all of its 62 purchases at issue in this appeal were connected to MTIC fraud. When we consider this we will look at circumstantial evidence. Clark J at paragraph 110 in Red 12 (cited with approval by Moses LJ in Mobilx):

“to look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. The sale of 1,000 mobile telephones may be entirely regular or entirely regular so far as the taxpayer is or ought to be aware. If so, the fact there was fraud somewhere else in the chain cannot disentitle the taxpayer to return of input tax. The same transaction may be viewed differently if it is 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 leftover stock and mirrored by over 40 other similar chains, in all of which the taxpayer 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 at issue can be traced to tax losses to HMRC is the result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has obviously been innocent in thousands.”

Knowledge - fact

157.The Appellant’s case was that its business was at all times bona fide. It carried out transactions with a view to making profit in what its director and company secretary believed was a genuine market. It says that the level of due diligence it carried out on both customers and suppliers was sufficient for it to be assured that it was not participating in fraudulent transaction chains. It said in addition:

· The lack of business documents was not incredible;

· The visit by the HMRC officers was not stage-managed;

· Its suppliers did not always hold the exact quantity of stock required by the appellant’s customers: it was just the Appellant only bought what its customer required;

· It freely negotiated its selling price with its customers.

158.Mr Brown maintained that its witnesses were credible.

159.Mr Virdee’s and Mr Taggar’s evidence is that they had overall responsibility for the day to day business of the company and we find this to be so. It follows that when considering the knowledge or means of knowledge of the Appellant company we consider what Network Euro by its principal officers (Mr Virdee and Mr Taggar) knew or ought to have known.

The witness evidence

Mr Scanlon

160.Mr Scanlon is an officer with HMRC. He joined HM C&E in 2000 and started to work on MTIC matters in 2003. His first contact with NE was on 13 July 2006 and soon after that date he became the officer allocated to deal with its affairs.

161.The veracity of Mr Scanlon’s evidence was put in some question by the Appellant as it was its case that he misrepresented a conversation which took place between himself and Mr Virdee in January 2007. For the reasons set out in the sub-section immediately below we accept the veracity of Mr Scanlon’s account.

162.Mr Brown also said Mr Scanlon’s letter of 1 September 2006 to the Company was misleading. It said that certain specified deals had commenced with a defaulting trader when in fact the evidence is that they were contra deals. We find that Mr Scanlon merely meant in this letter that the deals were connected to fraud and he was not intending to draw a distinction between normal MTIC chains and contra trades: he was just explaining why HMRC were withholding the VAT. He was not being intentionally misleading.

163.MrBrown suggested to Mr Scanlon that he had not written his own statement as at one place the report is written in the third person. Mr Scanlon’s evidence was that he had written it entirely by himself and had chosen to refer to himself as “officer Jeremiah Scanlon”. We accept Mr Scanlon’s evidence on this - we think it was a lapse into unnecessary formality by him.

164.His evidence was also challenged in that it contained numerous mathematical errors. We note other careless errors (eg in his second witness statement he refers to the Appellant’s last deal being on 26 July when it entered into 4 deals on 31^st July).

165.It was also the case that his evidence contained opinions as well as facts and in particular it was clear that it was his opinion that Network Euro knowingly participated in the fraudulent deal chains at issue in this appeal and that Network Euro had “stage managed” his visit to them on 31^st July.

166.In conclusion, we find that Mr Scanlon’s maths was not reliable but that he immediately accepted his errors when they were pointed out to him. We find he was quick to draw adverse conclusions (eg he gave it as his opinion that the payroll showing 13 employees could have been fabricated but he had no direct evidence of this.) We pay no attention to his opinions. We accept him as a reliable (if occasionally careless) witness of fact.

167.The conversation Mr Scanlon accompanied by another HMRC officer, Mr Johal, went to the Company’s business premises which Mr Scanlon had visited in July 2006 and found the Company no longer occupied them. They then went to its registered office to drop off a copy of the same letter. They did not plan to speak to anyone but the secretary at the premises called Mr Virdee and he came over immediately. Mr Virdee and Mr Scanlon are agreed that they then had a brief informal conversation. Their accounts of that conversation cannot be reconciled.

168.They did not even agree on who was present. Mr Scanlon and Mr Johal (both officers of HMRC) thought that only themselves and Mr Virdee were present. Mr Virdee and Mr Macdonald (an employee) assert that Mr Macdonald was also there although Mr Macdonald says he was only in the room and did not hear the conversation. His absence or presence does not seem particularly relevant as he does not claim to have heard the conversation, although, in view of our later findings about the reliability of the witnesses, we find he was not present.

169. Mr Virdee’s account of the conversation is that Mr Scanlon had said to him that Mr Blair (prime minister at the time) and the Chancellor’s “right hand woman” had visited Uxbridge VAT office and told the staff that under no circumstances were any monies to be released to any traders and they were to delay the appeals process for as long as possible. He said that Mr Scanlon then went on to say that, if it was up to him (ie Mr Scanlon) he would repay Network Euro. Mr Virdee also claims that Mr Johal corroborated that the decisions refusing the VAT repayments had been made months before. Mr Virdee also said that Mr Scanlon said that he was speaking off the record and that if it came to court he would deny the conversation.

170.Mr Scanlon’s version of the story is that he had told Mr Virdee that Ms Primarolo had visited Uxbridge VAT office (on this their stories agree). He says that he said that Ms Primarolo had visited to explain the importance the Government attached to the work of MTIC officers and that MTIC fraudsters would be pursued. Mr Blair did not visit. Mr Scanlon denies that he said that the decision to deny the Company the input tax had been made months before or at all: at the time (January 2007) he was still undertaking extended verification checks. He denies he said he was speaking off the record and that it would have been foolish to do so as Mr Johal was present as well.

171.Mr Johal’s version of the story is was that it was an “informal conversation” that he does not really remember. His recollection is that they gave stock answers of the type they gave to any trader enquiring about their withheld VAT repayment. He denies that Mr Scanlon said what Mr Virdee alleges he said and he denies that he corroborated it.

172.Neither officer produced a note of the conversation. Mr Scanlon was the visiting officer but, he says, they had not been expecting to meet Mr Virdee and had not been intending to speak to him formally about his claim and the conversation was just general and not the sort he would record.

173.We find that a conversation took place in which Miss Primarolo’s visit to Uxbridge VAT office was mentioned. We find the entire story as related by Mr Virdee improbable: it seems highly unlikely that a very senior minister would tell junior HMRC officers to behave in an unlawful manner (ie to withhold repayments without good cause) and highly improbable that Mr Scanlon would have said he thought Network Euro should be repaid. As he wrote the first denial letter less than 3 months later it is not likely in January 2007 he was convinced the company should be repaid.

174. Apart from the improbability of Mr Virdee’s account of the conversation, the story was not backed up by Mr Johal. In conclusion, in so far as the stories differ, we accept Mr Scanlon and Mr Johal’s version of the conversation.

Mr Virdee

175.Mr Virdee was the director of the Company and his evidence was that he oversaw all deals exceeding £5,000 in value. Indeed there was no dispute that Mr Virdee or Mr G Taggar personally authorised all the 62 deals at issue in this appeal.

176.It was HMRC’s view that Mr Virdee was an “utterly unreliable” witness and it was put to him in cross-examination that he was not being truthful.

177.We do not find his account of his conversation in January 2007 with Mr Scanlon to be reliable. More significantly, he gave evidence which we do not accept as truthful in relation to due diligence and inspection of the goods. We explain below.

178.Inspection of goods: The Company paid an inspection company to inspect the goods at the freight forwarder. Late introduced evidence from HMRC (already discussed above in paragraphs 73-78) indicated that in respect of deals 33-35 & 49, the goods did not exist. Mr Virdee’s oral evidence at the hearing was that in addition to paying for an inspection report, he and/or Mr G Taggar would, in about 60% of the deals, travel to the freight forwarders and physically inspect the goods.

179.There is no mention of this in his or Mr G Taggar’s witness statements. Indeed, Mr Virdee’s witness statement (made in late 2007) contains a paragraph of his day to day activities. In his description he was entirely office bound. He says he would discuss pending deals and due diligence issues with staff, and that throughout the day he would be available to assist staff with any queries. He makes no mention of travelling to freight forwarders.

180.Yet most the freight forwarders used were some distance from the Company’s offices: Humber Freight was in Hull yet Mr Virdee claimed he visited there to carry out inspections. We find in most cases he would have had to be absent half to a whole day in order to carry out the claimed physical inspections. It seems inexplicable to us that if he was to invest this sort of time in carrying out an extra inspection procedure, he would not have mentioned this prior to the hearing in 2010.

181.Further, in his description (and the description given by other members of the staff) of how a deal was put together, there was no time allowed for Mr Virdee and/or Mr G Taggar to travel to inspect the goods before giving the go-ahead to the deal. It was also clear from their evidence that they gave the go-ahead when physically present in the office - yet if they were satisfied with their inspection why would they travel back before giving the go-ahead?

182.Further, there seemed no point to the alleged visits. Mr Virdee agreed that he could not produce any notes that he had made and that he did not know how to carry out an inspection. Further, the Company was paying an inspection company to carry out a formal inspection and deliver an inspection report. We could see no purpose in an additional inspection.

183.We took into account the manner in which Mr Virdee gave his evidence, the improbable nature of it and the fact he had failed to mention it before. We took into account that nevertheless Mr G Taggar corroborated it but (for reasons given below) we do not consider his evidence reliable and note that as he sat through the hearing he had heard Mr Virdee’s evidence. We concluded that Mr Virdee was untruthful in saying that in some of the deals he and/or Mr G Taggar personally inspected the goods at the freight forwarders. We find he gave this evidence because he wished to combat the possible implication from Mr Jarrold’s evidence (given first in March 2010) that the goods had not existed.

184.Due diligence: The Company said it put a great deal of emphasis on having “strict” due diligence procedures. Its stance on this was shown in contemporaneous letters to HMRC and in its witness statements and evidence at the Tribunal. For instance, a staff member Mr Rubani wrote to HMRC in March 2006 asking HMRC for a thorough due diligence questionnaire to use. In it he said “…I have recently taken over the due diligence department…I need to make my reports ‘watertight’…..” In June 2006 Mr Virdee delivered a long letter to HMRC in which he said “….At present we have had the opinion of Tax Council (sic) to say that our due diligence is sufficient and very informative but we will go to further lengths to improve it. At this present time network euro is in a transition period where our current due diligence is being updated with more stringent checks and verifications….If you feel that there is anything else we can do to intensify our check please do not hesitate to get in touch as your advice will be much appreciated…”

185.After Mr Rubani, the company employed a Miss J Virdee (no relation of Mr S Virdee) to carry out due diligence and this was her full time role. She gave evidence she would go to the premises of the company being checked and complete a due diligence questionnaire with them. Further checks would be carried out back at the office.

186.In his witness statement, Mr Virdee put a lot of emphasis on the Company’s due diligence. He said Miss Virdee’s due diligence report “would be forwarded to the directors for them to make a decision whether or not to trade with the company in question.” He said that their due diligence was “vital” and that a deal would only be completed once the due diligence checks had been carried out.

187.At the hearing the timing of the due diligence checks was challenged as well as their thoroughness. It emerged that many due diligence reports were not completed until after the deal had been entered into.

188.In cross examination, Mr Virdee said that the most important part of the due diligence checks were when he or Mr G Taggar met with the director and secretaries of the company with whom they were considering trading and took a commercial judgment. He said that the due diligence report created by Miss Virdee was mainly a cross-reference tool.

189.No records of these “pre-due diligence” meetings were produced and Mr Virdee said he did not take notes. Mr Virdee was vague as to where or when they might have taken place, other than to say that they would definitely have been before the first deal with that company took place and would have been at that company’s office, or Network Euro’s offices or over lunch or dinner. He went on to say that they were constantly meeting with their suppliers and customers as part of an on-going due diligence. It was put to him that these meetings did not take place or that if they did the purpose of them was not due diligence. He denied this.

190.We take into account the manner in which this evidence was given and that it appeared to us to be in response to the criticisms HMRC made of the timing of their due diligence reports. We taken into account the fact that this evidence was not foreshadowed in any of the correspondence with HMRC or any witness statement made. We take into account that it is not consistent with the evidence in their witness statements that they relied on the due diligence reports produced by Miss Virdee. We take into account that the evidence was corroborated by Mr G Taggar but note that we did not find his evidence reliable (see below) and that he had heard Mr Virdee given evidence. In conclusion, we do not believe that Mr Virdee was being truthful when he said that he met the directors of the company before deals in order to make a commercial judgment on whether to trade with the company.

191.We also note that from the fact that so many due diligence reports post-dated the first deals with a new supplier or customer that Mr Virdee was misleading HMRC in 2006 when he wrote to say how effective their due diligence was. When he wrote this he was well aware that Network Euro did not rely on these reports.

192.Other inconsistencies: Mr McGuiness put it to Mr Virdee that at the meeting with Officer Patterson on 26 April, Network Euro was already intending to deal wholesale in mobile phones and this is why Mr Virdee asked to go onto monthly returns but that (based on the officer’s notebook) Mr Virdee had failed to mention this to the HMRC officer. Mr Virdee said, on the contrary, that he had discussed mobile phone wholesaling with Officer Patterson. HMRC did not call the officer to give evidence and we find that HMRC have not made out their case on this.

193.It was HMRC’s case that at the end of July 2006 Mr Virdee informed them that the Company had no loans but by November of the same year admitted to loans of £900,000. Mr Scanlon completed an Aide Memoir with Mr Virdee at their meeting on 31 July 2006. The questionnaire asked about bank loans and Mr Virdee’s answer was that NE had “no bank loans”. It also asked if there were other loans or overdraft facilities available to the company. Mr Virdee’s reply was “no overdraft facility”. It asked if NE had private investors. Mr Virdee’s reply was that they did not.

194.At the hearing it was agreed that the Company had £900,000 in loans from friends and family. When questioned about the truthfulness of his answer to the Aide memoire, Mr Virdee’s point was that he had been strictly truthful, in that the Company had no bank loans, no overdraft facility and he understood investors to mean shareholders and not lenders.

195.Mr Brown says that Mr Virdee was clearly not trying to conceal anything as he had already informed Mr Scanlon in his letter of 16 June 2006 that the company did have loans from friends and family. In fact what Mr Virdee had actually said was:

“in regards to any monies borrowed we have borrowed money from friends and family on a few occasions, this has had no effect or change in allocated shares and profits in the company. There is no other party that has any financial or other beneficial interest in Network Euro Limited.”

196.This did not give HMRC much information. We find that Mr Virdee’s reply in July was misleading: he was asked if there were other loans and he gave an incomplete answer. Subsequently he continued to be reluctant to provide the information. Details of 4 loans were produced at a meeting with Mr Scanlon on 23 August 2006. However in a letter of 21 August 2006 (two days earlier) he had failed to disclose the requested information. Mr Scanlon required more information in his letter of 1 September and the letter in reply ignored the request. Information was requested again in Mr Scanlon’s letter of 3 October 2006. There was a holding reply on 9 October 2006. Mr Scanlon wrote again on 18 October. No reply was ever received. A chaser was sent by Mr Scanlon on 7 November 2006 and details (comprising the name of the lender and amount) were provided in Mr Virdee’s reply of 8 November. We find that Mr Virdee was less than cooperative with HMRC on this and initially gave less then full answers.

197.It was Mr Scanlon’s evidence that the Company produced no release notes when asked for the documentation while HMRC were carrying out extended verification. Mr Virdee claims that they were produced. Release notes were disclosed on the Appellant’s list of documents for this hearing. It was put to Mr Virdee in cross examination that he had created the release notes for the purpose of the hearing (which he denied). We have not found Mr Virdee to be truthful and we accept Mr Scanlon’s evidence that no release notes were produced in extended verification so we consider whether Mr Virdee merely made a mistake and forgot to give them to HMRC or whether they were (as alleged) created after the event to bolster the Company’s claim. We take into account the evidence that Network Euro often had more than one version of a document (see below) and that its problem (to put it at its best) was disorganisation leading to the production of multiple versions of the same document. We take into account its evidence that it had deal packs for each deal into the documents for each deal would be placed. While we find that some release notes might well be overlooked, the absence of an entire class of documents, when they would have been held separately in relation to each deal, indicates to us that they did not exist contemporaneously with the deals and that Mr Virdee knew this and so we find.

198.In conclusion, we found Mr Virdee to be a most unsatisfactory witness. We consider that the evidence he gave as explained above was untruthful. Any other evidence he gave we treated with caution and in many cases we found it to be unreliable as explained below.

Mr Gurpreet Taggar

199. As mentioned, Mr Taggar was originally an investor and director. Shares were issued to his father and in 2006 he became Company Secretary rather than director. His position within the company structure did not appear to change. With Mr Virdee he was one of the two persons who could authorise the deals at issue in this appeal. He told us it was his responsibility to ensure that the Company had the funds to go ahead with the deals: he did not negotiate the deals himself. He said he attended with Mr Virdee on the “due diligence” visits made before deals took place and occasionally attended with Mr Virdee on physical inspection of the goods.

200.As explained in respect of Mr Virdee we did not find his and Mr G Taggar’s evidence of the pre-deal “due diligence” visits with new customers and suppliers, or the claimed visits to inspect the stock, to be credible and we consider that his evidence on this was not truthful.

201.When it was put to him in cross-examination that the deals were not credible because the documents did not record the detailed specifications of the phone, his evidence was that the detailed specification was negotiated just not recorded. He went on to say he faxed through a copy of the inspection report to customers so they were assured of the phones’ specification. We do not find this credible. Other evidence was that the inspection report was normally not available until the day after the deal was negotiated, and there is nothing in the witness statements about the provision of the inspection report at any stage to the customer. None of the evidence about the negotiation process included a gap to cover a wait for the inspection company to carry out the inspection and provide a report before the deal was finalised. We consider this evidence was fabricated by him to cover up the absence of a physical record of the specification of the phones in the deal documentation.

202.In conclusion, we found Mr G Taggar to be an unsatisfactory witness. We consider that the evidence he gave as explained above was untruthful. Any other evidence he gave we treated with caution.

Mr Charanpreet Taggar

203.Mr Charanpreet Taggar was the brother to Mr G Taggar and son to Mr SS Taggar who loaned money to company. Mr C Taggar was employed by Network Euro full time from November 2005 until late 2006 and earned approx £1,300 per month gross.

204.It was his evidence corroborated by others that his job on the wholesale side was to negotiate the deals. For reasons given below, we do not accept Network Euro’s initial claim to HMRC that its deals were freely negotiated or that (as stated in evidence at the hearing) its purchase price was freely negotiated but its sale price was always at a mark up of 8% (later 4%) on this. In his witness statement, Mr C Taggar said he negotiated the prices and found the buyers to buy the stock at that price. He made no mention of applying a fixed mark up which in later oral evidence he said he did. It was put to him that his oral evidence made no sense in what was the purpose of negotiating a purchase price downwards if standing orders were (as he said) always to add 8% to the price? He said that this was so buyers knew Network Euro gave them a good price: we do not accept this. If Network Euro was concerned about giving its buyers a good price and retaining their custom as Mr C Taggar claimed, they would not have had (as he said they had) a fixed rule of an 8% mark up on purchase price. We conclude that his recollection on negotiation was flawed.

205.We also note that he also said in oral evidence that when he negotiated deals, he found the customers’ main concerns were specification, price and date of delivery. Yet we find that the deal paperwork only recorded the price: it did not record the full specification of the phone. If buyers were truly concerned with this we find it would have been recorded in their purchase order and Network Euro would have ensured that its own purchase order reflected their buyers’ requirements. We conclude that his recollection that buyers were concerned with specification was not credible and must be flawed. Overall we did not find him to be a reliable witness.

Mr Lee Macdonald

206.Mr Lee Macdonald was the Company’s longest serving employee, originally joining in May 2005 as an apprentice under a training contract with Sandra Robinson Group. He was taken on to work in the retail side of the business, refurbishing second-hand computers. He moved to the wholesale side of the business in February 2006 after the retail side had disappeared. He worked on finding customers and suppliers on the IPT website and designed an improved electronic version of the daily stock log. He remained employed by another of Mr Virdee’s companies until at least January 2007.

207.Mr Macdonald confirms that Mr Virdee would have met the suppliers and customers before due diligence was carried out. We have rejected Mr Virdee’s and Mr G Taggar’s evidence on this for the reasons given which calls into question the reliability of Mr Macdonald’s.

208.We also note he confirmed in oral evidence Mr Virdee’s claim that he travelled to check the condition of the stock in many of the deals at issue in this appeal. We have already dealt with why we reject that evidence and consider the reliability of Mr Macdonald’s evidence.

209.We note that Mr Macdonald was present throughout most of the earlier evidence being given and that on the question of whether or not the staff were instructed to insist on a margin of 8% he gave inconsistent oral evidence to the Tribunal (at first he said they did not have to stick to 8% and then he said that they did). We conclude that for whatever reason his evidence was not entirely reliable and we put no weight on his confirmation of Mr Virdee’s story of the pre-due diligence checks or the personal stock check.

Miss Jasdeep Virdee

210.Miss J Virdee was employed as the Company’s due diligence officer. The panel asked what factors Ms Virdee took into account when giving the directors her view on whether to trade with a company on which she had conducted due diligence. Her answer was “The size of the warehouse….” She elaborated on this to explain the majority of suppliers and buyers would have warehouses and that “it can’t be trading from a one room office” and “Where are you supposed to actually store the stock. That was one thing. Things like [security] cameras as well….”

211.We find, however, that not only do none of her due diligence reports ask about or deal with warehousing (or security cameras), that no one else mentioned at any point in their evidence that their supplier’s and customer’s warehousing was of interest, and that Mr Virdee would have been uninterested in this matter. Whether the Company’s transactions were (as we have found them to be) part of an orchestrated MTIC fraud or whether genuine trading on the open market (as Mr Virdee tells us he believed it to be), the Company would have had no interest in their buyers’ or sellers’ warehousing capabilities as the stock was invariably held at a freight forwarders when purchased and transported to a freight forwarders on the continent when sold. We find that Ms Virdee demonstrated in her oral evidence a very flawed recollection of her due diligence role and we have to treat anything she said with caution.

212.We note that Mr Virdee, who finished giving his evidence after Ms Virdee, did confirm that he had sometimes asked her to check the warehousing if the customer said they had it. We find this quite improbable for the reasons given above and bearing in mind that he had already misled the Tribunal (as set out above) we find that this statement was untruthful and an attempt by Mr Virdee to make Ms Virdee’s evidence appear more reliable.

213.We note that Ms Virdee confirmed Mr Virdee’s statement that he undertook pre-due diligence checks. She said “there were times where they [ie Mr Virdee and Mr G Taggar] did meet the directors beforehand and they had a better relationship with them….” Firstly, this stops short of being a confirmation that this happened in every case or indeed that the purpose of any meeting was due diligence. Secondly, we have to treat what Ms Virdee said with caution as her recollection was shown to be flawed and she had just heard Mr Virdee give evidence. Thirdly, it was clear to us (as explained above) that these pre-due diligence meetings did not take place. So we do not accept this evidence from Ms Virdee.

General knowledge of MTIC fraud

214.According to evidence from the officer’s notebook and from Mr Virdee, we find HMRC officers visited Network Euro on 26 April 2005 and discussed issues including MTIC fraud. At the meeting NE officers asked HMRC officers about the process for verifying VAT numbers and asked to be put on monthly returns. Following the meeting Network Euro was sent Notice 726. This was immediately before Network Euro started exporting mobile phones to Europe: HMRC’s evidence was that it was prompted because the visiting officers noted that Network Euro had traded with a company HMRC suspected to be involved in MTIC fraud.

215.We find that Notice 726 was issued by HMRC to traders to specifically warn them of the dangers of MTIC fraud and the risk that they might be caught up in it. Although it explains the risk of joint and several liability and not Kittel nevertheless it warns traders in clear terms of the dangers of trading in a chain in which MTIC fraud has occurred. It contains practical advice on how to avoid such chains although to a large extent the recommended checks are only checks on immediate suppliers and buyers:

(paragraph 4.5) “We advise you to carry out steps to establish the legitimacy of your supplier to avoid being caught up in a supply chain where VAT would go unpaid. There are a number of checks that you could probably already undertake in line with good commercial practice, such as credit checks. We don’t expect you to go beyond what is reasonable. You are not necessarily expected to know your supplier’s supplier or the full range of selling prices throughout your supply chain, however, we would expect you to make a judgement on the integrity of your supplier chain….”

216.It was HMRC’s case that NE knew the scale of MTIC fraud in early 2006 and knew the steps it should take to avoid being caught up in it.

217.Network Euro were visited next by Ms Carter, an HMRC officer, on 18 July 2005. This was prompted by receipt by HMRC of Network Euro’s large input tax reclaim. Ms Carter records that she was shown the company’s due diligence and that she then authorised release of the repayment.

218.There was some dispute about what happened at Mr Scanlon’s visit to Network Euro on 31 July 2006 and as this was on the day of the last deals the subject of this appeal, it does not really take any further the question of the Company’s background knowledge of MTIC fraud.

219.As mentioned above, Mr Virdee wrote to HMRC about its due diligence procedures on 16 June 2006. In his letter Mr Virdee said:

“As you are aware that the due diligence procedure is an ongoing process, we at Network Euro are committed to obtaining and implementing the highest level of vigilance and informative groundwork to insure (sic) we are safeguarded against any type of fraud. ….We are constantly requesting more information from these companies to make sure our due diligence is to it best capabilities…..At present we have had the opinion of Tax Council (sic) to say that our due diligence is sufficient and very informative but we will go to further lengths to improve it. At this present time network euro is in a transition period where our current due diligence is being updated with more stringent checks and verifications….If you feel that there is anything else we can do to intensify our check please do not hesitate to get in touch as your advice will be much appreciated…”

220.In his evidence at the hearing Mr G Taggar said that although he read Notice 726 he only took from it that there was fraud in the industry and that he had to be wary of stock offered below market price. However, he went on to say that Network Euro did take legal advice as well as consult HMRC, that he knew they should not be involved in a chain where people knew each other, and that he and Mr Virdee did spend some time discussing fraud in the industry.

221.Although we find Mr G Taggar did try to play down in the hearing his awareness of fraud in the mobile phone industry at the time of the deals in question, it is clear to us and we find that the Company was well aware of the risks of MTIC fraud at the time of the deals in question

· HMRC officers had visited in 2005 and discussed it with them;

· The Company had been given a copy of Notice 726;

· The Company had consulted tax counsel over their due diligence - at least before mid-June 2006;

· The Company wrote to HMRC to ask for advice in March and June 2006 on how to improve their due diligence (we have referred to this above in para 184);

· Mr Virdee described the Company’s due diligence as “vital” and told HMRC that it had developed a comprehensive due diligence product “to make the deal as secure as possible”;

· The Company appointed due diligence officers before the deals in question (Mr Rubani followed by Miss J Virdee). Miss Virdee’s only role at the company was due diligence and she held this role throughout the time of the deals in question;

· The Company in fact carried out due diligence on most of its trading partners.

222.It is HMRC’s case that much of this was “talking the talk” and window-dressing to hide that the Company was knowingly involved in facilitating MTIC fraud, but either way we find it is clear that the Company was well aware of the existence of MTIC fraud in the market in which they traded and the necessity of ensuring (or, as HMRC allege, at least appearing to ensure) that they were taking steps to avoid being caught up in fraud.

Due Diligence

223.We have covered this topic in brief in discussing the reliability of the witnesses. It was not disputed that many (but not all) of the due diligence reports produced to HMRC were dated after the date of the first deal with the company to whom the report referred.

224.Crestview: There was a letter of introduction from them dated 14 June and the Company carried out £1million worth of trading with them on 15 June. The due diligence was dated 16 June.

225.CEMSA: The due diligence on this customer is dated 16 June: the first transaction was on 27 April (Deal 10).

226.IT Recycling: The Company was given a letter of introduction dated 15 May and their first deals (Deals 12 & 13) took place the day after. Deals 21-23 with this company were completed on 23 May, and Deal 28 on 31 May. The site visit for due diligence took place two weeks after the first deal, on 1 June, and the form was signed on 2 June.

227.TopNotch: The site visit for due diligence took place on 24 May 2006 which was over a month after the first deals with it had taken place on 6 April (Deals 3&4). Deals 16, 17 & 18 took place on 18 May and deal 20 took place on 22 May.

228.A-Z Mobiles: Network Euro traded with this company on 10, 12 and 16 April 2006 (deals 7,8,9,14 &15. The due diligence site visit was carried out on 15 June 2006 and about half completed and signed on 16 June.

229. The due diligence report and site visit post-dated the first deals with Bijou by a few days and the due diligence report and site visit post-dated the first deals with Fonelink by nearly four weeks. In fact, we find that in the clear majority of cases, the due diligence post-dated the first deals with the company the subject of it (in some cases it post dated all the deals with the company) and sometimes by a matter of weeks.

230. Mr Virdee admitted that the company did not rely on these reports in order to decide whether to trade with the company. As we have already reported, he said that the most important part of the Company’s due diligence was when he or Mr G Taggar met with the directors and secretary of the new supplier or customer in advance of the first deal and made a commercial judgement on whether the Company should trade that new supplier or customer. He said the due diligence reports were “mainly a cross-reference method” and in answers to questions from the panel he described them as a “back-up”.

231.Mr Brown made the point that in many cases the due diligence visits and reports were completed before the goods were paid for and released. As we find in some cases payment took place weeks after the transaction, this is indeed the case. Mr Virdee’s evidence was that if the due diligence was not satisfactory “we could always recall the stock.” We do not find this a probable explanation of why they obtained due diligence after the deals took place. Once the deal was negotiated the Company was committed to the purchase, sale and transportation of the goods even if the Company did not actually release possession of the goods until they were paid. We consider that no company in a genuine market without foreknowledge that the deals were all pre-arranged, which had decided to carry out due diligence on its supplier and customers in advance, would regularly take the risk of committing themselves in this manner before that due diligence was completed. And in any event what is the point of ‘recalling’ stock from a customer if it turns out the supplier looks risky? It makes no sense. Mr Virdee’s explanation is extremely improbable and (bearing in mind we find he misled the Tribunal on quite a number of points) we find that this too was a fabrication, made up to explain why the Company entered into deals before the due diligence was undertaken.

232.For the reasons given above where we discuss Mr Virdee’s credibility as a witness, we not accept that Mr Virdee’s alleged pre-due diligence meetings took place. So we find in many cases the Company chose to go ahead with a deal without having undertaken any due diligence on it at all.

233.In any event we note, even had these alleged pre-due diligence meetings taken place, it seems they did not amount to much of a check on the likelihood of the company being involved in fraud. Mr Virdee said the Company would turn down a new contact if it turned out that they were trading from a residential address, or it seemed the directors of it did not know how to conduct a deal, or had just set up business overnight. The Company would also turn them down if the VAT number was invalid or Companies house registration did not match their letterhead.

234.However, even this evidence was not consistent. Mr Virdee said it was an important part of their due diligence to check that the company had a genuine trading address yet he also said these pre-diligence meetings might take place at the new contact’s offices, or at Network Euro’s offices or be over lunch. So these meetings (had they taken place and we find they did not) would not all have confirmed what Mr Virdee said was vital which was that they had genuine trading premises.

235.On their own evidence, we find that in many cases they failed to check in advance of the first deal with a new trading partner the financial standing of that new trading partner or conduct any other due diligence on them.

236.The due diligence reports: At least up to the hearing, the Appellant maintained that Miss Virdee’s due diligence reports were very important to it in its decision making on whether to enter into the deals.

237.From the evidence we saw the reports took quite some time to complete as they involved a site visit, photographs of the building and staff, interviewing the director and completing a lengthy form. In her witness statement, Miss Virdee implied the form was completed at the site visit but in oral evidence given by her and in oral evidence by Mr Virdee (and in his second witness statement) they said often only the main parts of the form were completed and the form signed at the meeting. Miss Virdee would then chase the new contact for the information after the site visit and complete the rest of the form herself.

238.Mr Virdee stated that this practice of part-completing the due diligence at the meeting and chasing up the remaining information led to a number of copies of the same document (in various stages of completion) existing as his staff would photocopy and file even the part-completed versions. Miss Virdee implied however that only the completed due diligence form would be copied although both the copy and original would be retained.

239.We are wary of Miss Virdee’s evidence as her recollection was shown to be unreliable and in any event this does not entirely reflect her witness statement. We find it unwise to accept anything Mr Virdee said as we have found he misled the Tribunal on a number of matters as mentioned above. We consider whether this explanation is a likely one or one given to explain how copies of supposedly the same due diligence report produced to HMRC in extended verification and then in disclosure for the appeal were different.

240. The two versions of the A-Z Mobile due diligence report have some 11 differences. Mr Virdee’s evidence was that he accepted that he made changes to the due diligence report after he had submitted it to Mr Scanlon in extended verification in order to update the form with information already held by the Company but which they had failed to collate onto the report. This was of course after the Company had ceased trading (its last deal was on 31 July 2006 subject to one qualification mentioned below). This is effectively an admission that some at least of the due diligence reports were changed after extended verification. We can see no honest reason for Mr Virdee to do this: the Company had effectively ceased trading and there was no longer a need to use the due diligence reports. Mr Virdee says that the Company already held the information and he did no more than collate it: we do not believe this.

Trading history & financial standing of trading partners

241.Mr Virdee agreed that Network Euro did not have an interest in the financial standing of their trading partners: he said it did not matter to the Company because it was not extending them credit. The Company was more concerned, he said, with the physical stock. In cross-examination, he said that they never performed credit checks to find out if a company was credit worthy but in order to cross-reference the details with those obtained from Companies House.

242.IT Recycling: This was a company which like Network Euro had started by selling refurbished second hand computers. It only dealt in wholesale mobile phones in May and June 2006 and in those 2 months had a turnover of some £20million. It provided Ms Virdee with an overdue utilities bill and a bank statement which showed no substantial trading.

243.Top Notch: This company was incorporated in 1997 and VAT registered since 2000. Its credit report dated 13 June 2006 shows a credit limit of £6,000. Before it even obtained a copy of this report, the Company had conducted deals with it in April 2006 to value of over £2m and in May to the value of nearly £5million.

244. Crestview The Company was faxed a letter of introduction on 14 June 2006. The first deals took place the next day. We find it was a rather ridiculous letter that should have raised doubts in any reasonable person’s mind about the company as it included specious statements such as “We are a general UK company that prides itself in trading in all commodities” and fails to give any specific information whatsoever. The credit report (date is not visible) gives a credit limit of £500. The accounting information is also very odd: no turnover is shown but the assets and liabilities are each stated to be over £12million, with profits of £3,000 and wages of £5,000. The due diligence report update was completed facetiously with comments like “82%” and “well done” and “B+” and “Could do better” and “See me after class”.

245.Jos: This company was given no credit rating in its credit report (dated 11 May 2006) as the company was only 18 months old. In its replies to Network Euro’s due diligence report it refused to declare its turnover as “confidential”. The following month Network Euro completed over £10million worth of business with it.

246.Lagan: Its business was stated to be as a pizza takeaway on its VAT 1 (application for VAT registration) and the business proffered a utility bill addressed to Perfect Pizzas as part of the due diligence. Its credit report carried out on 20 June 2006 gave it a nil credit rating.

247.The report also showed its turnover to August 2005 was £290K but its answers on the due diligence report said its turnover for the previous year was £6million and its expected turnover for the current year was £12m. And indeed the value of the Network Euro’s first two deals with this company were nearly £4million.

248.A-Z Mobile: Network Euro traded with this company on 10, 12 and 16 April 2006 (deals 7,8,9,14 &15). Their trade class for the purpose of VAT registration was the retail of mobile phones. This was known to Network Euro as the Certificate of Registration was one of the documents it obtained for due diligence. The utility bill which it produced to Network Euro was an overdue phone bill for approximately £200. Network Euro did not obtain a credit report on this company until 11 May 2006. This showed that the company’s credit rating was “0” and it had not filed any accounts since September 2004 (so one set of accounts was overdue.) Yet Network Euro chose to trade with this company in values excess of £3m before it obtained the unfavourable credit report.

249.Power Communications: HMRC’s evidence was that a credit report was obtained by Network Euro for this company on 15 June 2006 and this date was not challenged by the Appellant although it is not apparent on the document produced to the Tribunal. It gave a credit limit of €6,000. The company had not filed accounts In its due diligence report for Network Euro it showed its turnover for the previous year to be £65million and its estimated turnover for the then current year to be £80million.

250.Opal 53: This company stated in its due diligence replies that it commenced trading in January 2006. This is also clear from one trade reference which was provided. On 6 and 8 April Network Euro sold it goods with a net value of £817,000, then on 12 April sold it goods with a value of £851,000, and then on 10 May sold it goods with the value of £3.3million. Opal 53’s credit report gave it a credit limit of €1. HMRC’s evidence was that the credit report was obtained by Network Euro for this company on 15 June 2006 and as this date was not challenged by the Appellant we find it to be correct although it is not apparent on the document produced to the Tribunal. It had one employee.

251. No directors’ identification was provided apart from a bank statement. The due diligence report has two dates 20 April (the day of Miss Virdee’s site visit) and a later date of 30 May. It does seem to be the case that this is one of the continually updated due diligences referred to by Mr Virdee as two further trade references were obtained, one on 12 May 2006 and one dated not earlier than 5 May 2006.

252. Bijou: Network Euro did not obtain a credit report for this company.

253. Cell Trading (supplier): Network Euro traded with this company on 6 & 7 April (deals 1,2,5 &6) and on 31 May (deals 29 & 30). The due diligence site visit was conducted a month later on 9 May. The Company obtained a credit report on 11 May 2006. This gave Cell Trading a credit limit of £750 but showed a turnover of between £11million and £25million for each of the three preceding years. In the due diligence report it estimated its own turnover would be £80-90million in 2006.

254.CEMSA (customer): Network traded with this company on 27 April (deal 10). It conducted a site visit on 12 May. HMRC’s evidence was that the credit report was obtained by Network Euro for this company on 16 June 2006 and as this date was not challenged by the Appellant we find it to be correct although it is not apparent on the document produced to the Tribunal. It was shown as operating in the pharmaceutical sector and given a credit limit of 0 euros and a high risk credit score. Its turnover was shown €85 million in 2002, €109 million in 2003, and nearly €10 million in 2004.

255.Fonelink (customer): Network Euro completed deals 12 & 13 on 16 May 2006 and 21, 22 & 23 on 23 May 2006 with this company. Company information was sent by Fonelink in Spanish to Network Euro on 26 May and the due diligence site visit was on 12 June 2006. HMRC’s evidence was that the credit report was obtained by Network Euro for this company on 15 June 2006 and as this date was not challenged by the Appellant we find it to be correct although it is not apparent on the document produced to the Tribunal. It gave a credit limit of €1,202.

256.Globalfone: (customer): It faxed its introductory letter to NE on 31 July 2006. Network Euro completed deals with them on 10 April, 18 May and 22 May. Its credit report dated 15 June 2006 gave credit limit of €5,000. It had one employee. In its due diligence report it estimated its turnover would be €100m and said that its turnover the previous year had been €50m.

257.Proxi Partners (customer): The first deal by Network Euro with Proxi Partners was on 28 June (deal 43) and was for £1.9m. The due diligence questionnaire is dated the following day and shows the company was incorporated January 2006. It also estimates their turnover for the year to be £12million. It gives trade references from Crestview and Lagan, who were both suppliers to Network Euro. In any event the companies say that they have only traded with Proxi for one month. HMRC’s evidence was that the credit report was obtained by Network Euro for this company on 28 July 2006 and as this date was not challenged by the Appellant we find it to be correct although it is not apparent on the document produced to the Tribunal. The credit rating is a score of nil and is shown as high risk.

258.Sigma Sixty (customer): Network Euro was faxed a letter of introduction on 31 July. Its only deal with this company was deal 30 and this took place on 31 May 2006. In its due diligence the company stated it had been trading 6 months - its VAT one shows that this was exactly correct as it was registered on 31 January 2006 so at the time of the first deal with Network Euro it had been trading 4 months. It said its expected turnover was £3million for the year and its previous turnover was half a million. Its deal with Network Euro was for £1m. The due diligence report was undated. HMRC’s evidence was that the credit report was obtained by Network Euro for this company on 15 June 2006 and as this date was not challenged by the Appellant we find it to be correct although it is not apparent on the document produced to the Tribunal. Its rating was “caution - high risk potential.”

259.Smart Phone (supplier): Its VAT registration certificate records its trade sector as the retail of mobile phones. A credit report was obtained on 29 June 2006 but by then NE had already completed £2.5m worth of trade. Its credit limit was £4,500.

260.Glasgow Data (supplier): A credit check carried out on 13 June showed a credit limit of £3,500. It also showed its trade sector as electrical parts and equipment. Network Euro bought phones to value of nearly £1m from them in April 2006 (deal 10).

261.IT Global: Network Euro made sales to this company in October 2006 after the Company had effectively ceased trading. The goods for deals 56 & 57 had been sold to Bijou at a profit and shipped on July 26. As explained in paragraphs 266 they were largely re-sold to IT Global as Bijou failed to pay. The Company has never produced any due diligence in respect of IT Global. Network Euro says this is because HMRC did not ask for the due diligence on companies after July 2006. However, we note that HMRC’s first comment on the absence of this due diligence was in Mr Scanlon’s witness statement dated 12 June 2008 which gave the Appellant plenty of time to produce it and the fact they have not means we infer that it does not exist.

Conclusions

262.We find that credit reports were in most cases obtained by Network Euro after the date it first started to trade with the subject of the report. And where the reports were obtained before a deal took place, it is clear that Network Euro (as it admits) was not concerned about the contents of the report. In most cases, the customer or supplier was given a very low (or no) credit rating and in all cases the credit rating was several orders of magnitude below the value of the trade Network Euro carried out with the company. The credit reports combined with the due diligence also showed that many of the companies had very substantial turnovers but were without much substance: they had few assets and few employees. In summary, we find that Network Euro had no interest in the financial standing of its trading partners nor how they achieved such high turnovers with so little financial substance.

263.Mr Virdee admits that Network Euro had no interest in the financial standing of its trading partners as, he says, they were not offering them credit. We do not find this a credible explanation for why they failed to obtain timely reports or ignored them when they had them. Firstly, Mr Virdee admitted that Network Euro was never paid at the time it completed the deals and indeed in many cases was not paid for several days or weeks later. So Network Euro was clearly granting credit to its customers often in deals worth several million pounds. It is no answer that Network Euro was itself granted credit by its suppliers and did not pay until it was paid: it still remained liable to pay. It was not suggested, and it was certainly not apparent, that it was one of the terms that if the buyer reneged then Network Euro itself could renege. Indeed in the one case where the buyer reneged -deals 57 & 58 - Network Euro did not renege but found a new buyer but ended up out of pocket on the deal. So Network Euro (if these were genuine transactions) was taking a very real financial risk and was effectively granting its customers credit.

264.Secondly, we have found that Network Euro by its officers was very well aware of the risk of MTIC fraud and aware that HMRC recommended that companies take care with whom they trade. Even if Network Euro granted no credit, they should have been concerned to ensure that they were not dealing with companies which were involved with fraud. Knowledge that a company, proposing to trade in millions of pounds’ worth of phones was new (or newly in the business) and without substantial assets would be relevant to this (even if not conclusive). Yet, we find, Network Euro did not care.

265.Thirdly, why, if Network Euro had no interest in the financial standing of its trading partners, did it obtain credit reports at all? Mr Virdee said it was to cross-reference the information available from Companies House. We do not find this credible: there was no suggestion that there was any doubt about the information available from Companies House. We find it was Mr Virdee’s stock and untrue explanation for carrying out redundant processes (due diligence reports and credit checks) that they were for cross referencing other information. We bear in mind that he gave untruthful evidence on other matters in this Tribunal. We consider that Network Euro carried out credit checks for no other reason than because they wished to be seen to carrying out the due diligence and other checks on suppliers and customers recommended by HMRC.

266.This lack of curiosity about their trading partners was also, we find, demonstrated in relation to the aborted deal with Bijou. Bijou failed to pay Network Euro on deals 57 & 58 to the value of just over £2million. Mr G Taggar was questioned why Bijou did not pay and he said that they had financial problems but he had not enquired any further as this would be “personal”, implying that it was none of Network Euro’s business to know why a customer was unable to pay for goods which Network Euro had had delivered to the customer’s freight forwarders on the continent (albeit not released to them). He said they did not take legal proceedings as it would not be cost effective and although he had asked for reimbursement of their costs over the phone, he had been refused and he had not pursued it any further. Network was able to re-sell the goods to another buyer in October 2006 at cost price (see below). Network Euro was unable to produce any documentation which related to the cancellation of the deal.

267.Network Euro’s lack of curiosity about its partners’ financial standing and its failure to pursue them when they did not pay indicates to us that they did not have a normal commercial relationship with them.

Business in blocks

268.We find Network Euro conducted its business in blocks. The first eight deals in this appeal were we find a block. Cell Trading supplied the goods in deals 1&2, and 5&6. Topnotch supplied the goods in deals 3&4 and A-Z Mobile supplied goods in deals 7&8. The buyer for deals 1&2 was Opal 53; Power Communications for deals 3&4; Belltrask for 5&6 and Globalfone for 7&8. Deals 1-4 took place on 6 April, deals 5&6 took place on 7 April and deals 7&8 took place on 10 April. All the goods were shipped out on 12 April on 3 lorries: the evidence from HMRC which we accept was that the combined load from deals 1-8 was just sufficient to fill 3 lorries. All the goods were held (on behalf of the 3 suppliers) by the same freight forwarder in the UK (Humber Freight) and the destination of all of the goods was the same freight forwarder (for the 4 purchasers) in Holland (Interaction Logistics BV).

269.It was put to Mr Virdee that this was fortuitous. He denied it. We find that the incidence of 4 separate purchasers wanting the goods taken to the same warehouse, combined with the incidence that the 3 suppliers happened to have the goods in the same warehouse in the UK, combined with the fact that the 4 customers were all prepared to wait until the transport was available combined with the fact that the total load happened to just fill the available transport is not a coincidence but means that it was organised. Indeed, this is entirely consistent with our finding that all the deals at issue in this appeal were masterminded.

270.The question is whether the officers of Network Euro knew this. Mr Virdee said that he would not have known at the time when the lorries were going out. He agreed that his customers would have wanted the goods as soon as possible and denied that in reality none of the Company’s customers minded being kept waiting as it was all artificially contrived trading (which he denied).

271.We do not accept that he would not have known when the lorries were leaving if his customers were pressing him for delivery: one of the negotiated terms in a commercial deal would have been the date of delivery and in a commercial deal Mr Virdee would have known when the goods were to be transported.

272.It was also Mr Virdee’s case that all the 62 deals in which the Company was involved were negotiated individually. We find, on the contrary, that it was clear that these 8 deals were all part of a single arrangement and that in particular each deal would not have been negotiated (or agreed upon) separately to the other 7.

Profit

273.The Appellant’s profit on the 62 deals over the 4-month period amounted to £3.5million. The proportion of the Company’s share in the profits made by all the buffers and itself in the deals is also very high (for instance in Deal 1 97% of the profit went to the Company). In the same deal the Company’s profit as a proportion of the VAT defaulted upon is 46.5%. It remains at this level from Deal 1 to Deal 50. After that, when the Company reduced its mark-up as explained in paragraph 280 below, its profit share fell to a consistent 22-23% of the VAT defaulted upon.

274.HMRC allege that it must have been knowingly involved in the fraud to have been allowed by the organisers of the fraud to participate in such a large share of the profit. We reach our conclusion on this in paragraph 394.

No negotiation

275.It was Network Euro’s case that it negotiated the deals in a free market. Yet we find from the evidence the stock offers from the suppliers (of which 56 were provided out of a total of 62 deals) that in 53 out of 56 Network Euro bought the stock at the stipulated price.

276.Mr Virdee’s explanation was that the price was negotiated on the phone in advance and the stock offer merely recorded what had been agreed. It was put to him that in such a case the stock offer was redundant so why have one? Mr Virdee denied it was redundant as it was required for the deal pack.

277.We do not accept this evidence. The contract paperwork fails to record important matters such as the full specification of the phone and the due date of payment which Mr Virdee, Mr C Taggar and Mr Macdonald claim was negotiated. We find it was their stock answer to a failure in the paperwork to say the matter was negotiated on the phone and not recorded in the paperwork. We do not find this credible. A genuine commercial business which had negotiated terms at arms length with independent suppliers and customers would ensure that those terms were reduced to writing and enforceable.

278.For reasons given below with relation to the fixed mark up and Daily Stock Log as well as the incredible nature of this evidence on the stock offers, we do not accept that the prices were negotiated as they say they were. Further we also note we have found that the deals were orchestrated for the purposes of fraud and there would be no scope for genuine negotiation of prices within this artificial chain of transactions. For all these reasons we do not accept that the prices were negotiated at all.

Fixed mark-ups

279.The Company’s original evidence was its prices were freely negotiated. In a letter dated 21 August 2006 to Mr Scanlon Mr Virdee said :

“As I explained to you at our meeting on 31^st July 2006, Network Euro operates by obtaining goods at what it believes is a good price for a particular product on a particular day. It then sells the goods on to a customer at the best price it can achieve. Therefore there are no pricelists and no discounts as such. However, in attempting to sell the goods there are obviously negotiations as to the price.

280.We find that Network Euro made a consistent mark-up of approximately 8% (it varied from 7.85% to 8.19%) on all the transactions in this appeal up to Deal 50 (end of June 2006) and thereafter a consistent mark-up of approximately 4% (it varied from 3.81% to 4.11%) on all transactions after that date. The prices paid and charged by Network Euro were subject to variation (For instance it sold N91 phones on 16 June for £322, on 21 June for 317.50 and on 29 June for £319.75.) We find it is highly unlikely that freely negotiated prices would result by coincidence in virtually identical mark-ups of sale price over purchase price.

281.Indeed, at the hearing Network Euro Mr Virdee and Mr G Taggar claimed that it was not chance but design: a deliberate choice by Network Euro to instruct staff to add 8% (later 4%) to the purchase price. This evidence first emerged at the hearing and is not presaged in any witness statement. It contradicts Mr Virdee’s earlier statement.

282.Mr Virdee’s explanation at the hearing of why the Company chose to do business like this was that they had experimented with different (higher) prices and found that 8% on top of the purchase price was what the market would bear and they missed out on deals if they charged more. Mr G Taggar said he used 8% as Mr Virdee had told him that this was the industry norm.

283.We find this makes no sense in a commercial world. The Company’s customers ought to be entirely unaware of what the Company was paying its suppliers and therefore they could not possibly decide to pay 8% above that price. They would not know what that price was. Nor does it make any sense in a commercial world that Network Euro would stick to 8% and refuse what was a very large profit for doing very little if the customer was prepared to pay a slightly lower figure than that asked for.

284.Mr Virdee’s explanation for why the mark up dropped overnight to 4% from 8% was that many traders had their VAT withheld and European customers exploited this. Mr Taggar said it became a buyer’s market. These explanations make no sense. The withholding of the VAT leading to a reduction in brokers would lead to a reduction in supply: it would not create a buyer’s market but a seller’s market. And even though were the market genuine (which we have found it was not), a reduction in price would make sense (we have already commented the cross border price differential makes no commercial sense), we would not expect the price to drop overnight and then settle at a new norm. We would expect to see fluctuations: we don’t. We reject this explanation.

285.We note that it was confirmed by Mr C Taggar that he was told to add 8% to purchase prices. We have already noted that Mr Macdonald gave inconsistent oral evidence at first suggesting the sale price by the Company was open to negotiation and then later agreeing with what was in effect the oral evidence of Mr Virdee and Mr G Taggar that the sale price was achieved by adding 8% to the purchase price. Mr G Taggar went so far as to say this was a take it or leave it price for the buyer.

286.We do not accept Network Euro’s evidence at the hearing on its mark up as reliable. It makes no sense and is improbable: it is also inconsistent with Mr Virdee’s earlier statements to Mr Scanlon as set out above. We also bear in mind that we found Mr Virdee and Mr G Taggar’s evidence to be untruthful on other points and Mr Macdonald’s evidence to be unreliable.

287.We do not find Mr C Taggar’s evidence on this reliable because it was improbable for the reasons given above. We also note he said that he negotiated prices downwards which for reasons given below we also don’t accept.

288.In conclusion, we find Network Euro knew that its sale price would be approximately 8% above the purchase price and that this was not negotiated or even chosen by Network Euro.

289.At the hearing it was suggested that although the sale price was not negotiated, but a take or leave it price for the buyer, the purchase price was negotiated. Mr C Taggar said he would negotiate purchase prices and Mr Macdonald gave evidence he would negotiate a price reduction in slightly under half of the cases of up to about 25p per phone.

290.We do not accept this evidence. It is improbable. As is apparent from the prices actually paid, and as Network Euro’s witnesses agreed at the hearing, the mark up was fixed at 8% (later 4%): a reduction in purchase price would not increase Network Euro’s profits as it would be passed on to the customer. Further, we know that the buffers selling to Network Euro often had a very low profit margin often of about £1 per phone. A small and pointless reduction in price for Network Euro would in many cases diminish the buffer’s small profits by 25%. Further, we have already found that the transactions were organised. Buffers received regular if small profits. It is to the highest degree unlikely that they would have agreed to reduce these small profits when it is apparent the deals were arranged and the buffers had no need to capture Network Euro’s goodwill. It is also the case there is no evidence the sale prices were reduced: the buffers’ profits were fairly consistent.

291.We note that not only is Mr Macdonald’s evidence improbable but we have found his recollection of events to be unreliable as explained above. We do not accept his evidence that the purchase price was negotiated. Similarly, we do not accept Mr C Taggar’s evidence on this either due to its improbability and the fact that he heard the evidence given by Mr Virdee before giving his own evidence which may have influenced his recollections and conclude that he was not a reliable witness.

292.As we reject Network Euro’s evidence on how its prices came to be fixed, the question is how did they arrive at their prices? We find they were not negotiated. We have already found that these transactions were arranged by the fraudsters for the purpose of MTIC fraud. So “take it or leave it prices” purchase and sale prices are what we would expect to see and in fact are what we see here.

293.We find it considerably more likely than not that Network Euro was instructed at what price to buy and sell.

294. We note that Mr Virdee denied that the prices were contrived and he knew from whom to buy and to whom to sell. For the reasons set out above, we do not accept this denial.

Daily Stock Log

295.It was the Appellant’s case that it freely located its buyers and sellers and freely negotiated the deals.

296.Mr Virdee says that Network Euro “soon” had a network of customers to whom they would offer stock on a regular basis. We find this makes little sense: there was no suggestion that the identities of buyers and sellers were secret. On the contrary, it was the Appellant’s case that it found the deals by searching daily the IPT website where sellers would advertise mobile phone stock for sale and buyers would advertise for what they wanted to acquire. Mr Virdee said some 300-700 companies might advertise on IPT each day and that Network Euro’s staff would call up to 25-150 companies a day to try to put a deal together.

297.We find the daily stock log was an electronic spreadsheet kept by Network Euro and it showed the date, company name, the first name of contact, the company’s telephone number and the type of phone (if any) on offer to buy or sell, and sometimes the quantity and “target price”. Notes were added and these were often something like “nothing” (ie nothing to sell/buy today) or “call back later” or the name of the freight forwarders where stock was held.

298.We have noted that it was the job of junior members of staff (in particular a Miss N Ahmed) to compile each day’s entries. The evidence from Mr Macdonald and Mr C Taggar was that it was their job to use the entries from the Daily Stock Log to put deals together. These deals would then be authorised by Mr Virdee or Mr G Taggar.

299.We find however that of the 62 deals in the 4 month period covered by this appeal, not a single one of those buy-sell deals was presaged in the daily stock log. We find that 4 of the purchases made by Network Euro were foreshadowed in the Daily Stock Log but that none of the sales were. For instance in deal 7, A-Z offered 5,000 9300Is for sale at £314 and this is what Network Euro bought and paid for. Again for deals 21-23 Network Euro bought the quantity of phones offered and at the price offered on the Daily Stock Log.

300.We also find that in some cases Network Euro bought stock from a supplier not recorded on that day in the Daily Stock Log when a different supplier was offering the same stock at a lower price. For instance, in deal 55 the daily stock log shows 1,000 9300Is at £213 but Network Euro bought 1,000 9300Is from a different supplier at £289 each.

301.We also note that on 30 June, a day on which Network Euro bought 9,100 mobile phones from Jos that there is an entry for Jos in the Stock Log which says “nothing”. For all other days (apart from those 4 instances mentioned) the seller does not appear on that day.

302.When asked in cross examination what relevance the Daily Stock Log had to the 62 transactions in this appeal, Mr Virdee agreed it had no relevance. It was HMRC’s case that the Daily Stock Log was a sham. The Appellant’s reply was that Mr Macdonald and Mr C Taggar would put a deal together making notes on pieces of paper and not necessarily recording the negotiations in the daily stock log, which was in fact compiled by more junior members of staff.

303.We find that the Daily Stock Log had no relevance to the deals that were undertaken by Network Euro and Mr Virdee and Mr Taggar, Mr Macdonald and Mr C Taggar were well aware of this at the time. It was not apparent to us that the junior staff (excluding Mr Macdonald and Mr C Taggar) would necessarily have known that the Daily Stock Log was not used to put deals together.

304.The question for the Tribunal is why would Mr Virdee instruct staff to undertake what he knew to be the redundant exercise of compiling a Daily Stock Log? We find the most likely reason for this was that he wished to give the appearance that the company was operating in a commercial market, but that he knew this was not the case.

Uncommercial terms of trading - delayed payment

305.Network Euro was often not paid until a month after the date of its invoice and a long time after it had shipped the goods to its buyer’s nominated freight forwarder. Its case was that it shipped the goods on hold and would not release them until it was paid.

306.As we have already said it makes no sense that the Company or the Company’s suppliers would enter into deals which left the Company’s buyer at liberty to chose when to pay for them. Network Euro’s answer to this was that at the time of the deal, they would negotiate the due payment date with the buyer and seller. We note that the due payment date is not recorded in any of the documents yet it is inconceivable that something as important as a date for payment in contracts for hundreds of thousands of pounds would be negotiated but not recorded. We note that we have found Mr Virdee’s and Mr G Taggar’s evidence on other matters to be untruthful and we do not find their evidence on this to be reliable. We reject it.

307.We also find that in practice Network Euro did release goods before they were paid for them. Mr G Taggar effectively accepts this in his second witness statement. There were some 20 deals between 16 June and 31 July for which Network Euro has never been paid. It was not suggested that Network Euro still had possession of the goods.

Funding of Network Euro

308.Even though Network Euro did not pay its suppliers until it had been paid, it still needed very substantial capital to conduct these deals as the gross price paid to its suppliers would exceed the net price paid by its buyers: the difference was VAT. No VAT was payable by its EU buyers but Network Euro had to pay VAT to its suppliers and then reclaim it from HMRC. As it was on monthly returns it could be without refund of the VAT element of its purchase from anything from one to two months (or of course indefinitely if HMRC refused the refund as it did in respect of the transactions at issue in this appeal).

309.We find that Network Euro was funded by loans. No written documentation for any of the loans was produced, and the consistent evidence from the Appellant was that these loans were within the community of friends and family to which Mr Virdee and Mr Taggar belonged and traditionally everything would be done on a handshake without a written agreement. The parties were not specific whether the loans were to the Company or to its officers: we find it makes no difference to this appeal. The loans were for the purpose of the Company’s trading.

310.We find there were two kinds of loans. Loans (often from close family members) on very favourable terms to the Company or those from friends on very unfavourable terms.

311.Both Mr Virdee and Mr G Taggar were agreed that a Mr Collar (a family friend) had lent £74,000 when the Company started trading in mobile phones. Mr Virdee said the Company needed the money to “block” the VAT. Mr Virdee’s evidence was that Mr Collar’s initial loan of £74,000 would have been on basis that the Company was about to make profit, and the loan would be repaid with a % share of the profit. Mr Collar was repaid and Mr Virdee can no longer remember the details: he thinks the loan was outstanding for only a month or two and cannot remember the rate of interest.

312.Mr G Taggar’s evidence was not consistent. He insists that the arrangement was that Mr Collar gave the Company £74,000 in return for Mr G Taggar’s father’s car worth £7,000. As Mr Taggar’s evidence was somewhat confused on this, and bearing in mind the improbability of Mr Taggar’s story, and also bearing in mind he agreed Mr Collar was repaid out of Network Euro’s first VAT repayment, we find that the arrangement was that Mr Collar only loaned the £74,000 and that this was repaid after about two months. The “interest” was the car with a value of about £7,000.

313.We find on the evidence that a company called Amira Group International Limited made 5 payments totalling £412,000 between 10/4/6 and 2/7/6 (even Network Euro accepted that the figure was £592,000). Network Euro made 4 payments back to Amira totalling approximately £821,000 not later than 6 August 2006.

314.The evidence of Mr Virdee and Mr Taggar was that the directors of Amira (in particular Mr Imran Memon) were friends of theirs and that the Company had borrowed money from Amira before the loans at issue in this appeal.

315.Mr Virdee’s and Mr Taggar’s evidence was also that a company called Desert Wing Trading had loaned £20,000 at this time and been repaid £35,000. Mr Virdee’s evidence was that this company was also associated with Mr Imran Memon.

316.At the time of the deals at issue in this appeal the company had outstanding loans of about £900,000.

317.Westlake Estates Ltd made a loan of £150,000 on 5 May 2006 at 15% per annum. This has not been repaid. Originally Mr Virdee said to HMRC that the loan was really from a Mr Gurdeep Sethi (a friend of Mr Virdee’s) through his company Westlake Estates. However, we find that Mr Sethi had ceased to be a director of Westlake a year before the loan was made, and further at the hearing Mr Virdee’s evidence was that he had approached a Mr Kutaria for the loan and that he had arranged for it to be paid via Mr Sethi and his company. We find that Mr Virdee gave the Tribunal a confused account of this loan and in particular which friend had made it.

318. A loan of £300,000 was made by Galway Bay Ltd on 24 April 2006. This company was owned by a Mr Kuldeep Singh Gozra who Mr Virdee said was a personal friend of his for the last 5 years. The loan was at 10% per annum interest.

319.A loan of £60,000 was made by Mitcom International on 1 June 2006. This lender was recommended to the Company by a friend working with the firm of accountants acting for Network Euro (although it was not clear from Mr Virdee’s and Mr Taggar’s evidence whether this friend made the recommendation during the course of his employment). There is nothing in writing. The loan carries 15% per annum and is still outstanding.

320. A loan of £100,000 was made on 30 March 2006 by a Mr Jassi, who was a long-standing friend of Mr Virdee’s. Mr Virdee’s evidence was that the loan carried no interest and that he had promised to repay it within 12 months. It has not been repaid. There is nothing in writing. Mr G Taggar gave contradictory evidence that the terms of the loan were 15% after 12 months, but then agreed that Mr Virdee was right and no interest is due. He stated that they will repay Mr Jassi after they win this case and then will pay something extra to reflect interest but said the amount is not agreed.

321.Mr SS Taggar (Mr G & Mr C Taggars’ father) loaned £195,000 on 22 Nov 2005. He funded this loan by re-mortgaging his home. The arrangement was that the Company would pay the monthly instalments on the mortgage until the loan was repaid.

322.We find, and as Mr Virdee agreed, that commercial bodies would not lend such large sums to businesses with no assets (for security) and no accounts.

323.We find, as the Company said, the purpose of loans was to enable them to accept deals: the Company could not enter into export deals unless they could, as Mr Virdee put it, block the VAT. As an example of this, we note in deal 5 that Network Euro owed Cell Trading (its supplier) £1,385,325 but only sold the goods for £1,273,500 (the difference being the VAT). It paid £1,273,500 to Cell Trading on 20 April, the day it received the money from Bell Trask (its customer). The following day Amira paid Network Euro £110,000 and Network Euro then paid this to Cell Trading being the balance owing.

324.We find that Mr Virdee and Mr Taggar were vague on the terms of the loans and who had made them. They claimed the loans were made by close family and friends yet, with the exception of Mr Jassi and Mr SS Taggar, the loans were made by companies, and that in the case of Westlake Estates, their evidence was confused as to which friend was behind the loan made by the company, and in the case of Mitcom it was not suggested that the loan was in fact made by a friend. We accept that loans by friends and family might not be reduced to writing, but it makes no sense in a commercial context that the loan from Mitcom, which was not from a friend, would be without any written contract.

325.Some of the loans, and in particular those from Amira and Desert Wing (the companies associated with Mr Imran Memon) carried uncommercially high rates of interest. The loans from Amira were repaid with approximately 40-50% on top of the loaned capital. The loans were outstanding some 2-4 months, equating to an annual interest rate of about 150-300%. It was the Company’s case that it had to agree to these terms because an ordinary bank would not lend to them: we find that the Company only agreed to such terms because they knew that they would shortly be in position to repay out of the VAT repayment made by HMRC.

326.It was HMRC’s case that Network Euro must have known about the deals before they took place in order to get the funds in place: we find however, that the deals often took place before, and often weeks before, they were paid for. On the evidence it seems at least as likely to us that the loans were arranged to fund the VAT on deals which had already been completed but not paid for, as to fund VAT on deals which had not yet taken place. Although it was Mr Muddar’s evidence that he would note loans on the deal sheets, this does not tell us whether Network Euro organised the loans before the day of the deal or merely before the day the deals were paid.

327. It was we find clear that the Company depended to some extent on loans to have the capital to fund the VAT in these 62 transactions (although it appears also to have used profits generated from earlier transactions to fund some of the deals). We do not find on the evidence on the loans that HMRC have made out their case that Network Euro necessarily knew about the deals in advance in order that they could arrange the finance. They may have arranged loans in the hope deals would materialise or arranged them afterwards.

328.We have already stated that we find that the deals at issue in this appeal were part of an organised chain of deals put in place for the purpose of MTIC fraud. It would have been important to the person organising the fraud that the company in the pivotal role of broker, Network Euro, would be in a position to fund the deals that were being organised. Although we accept that some at least of the loans were funded by family or friends and often it seems on fairly benign terms, we also find that some of the loans were on usurious rates of returns. It seems more likely than not that these were funded, directly or indirectly, by the fraudsters themselves. The question is whether Network Euro by its officers knew or should have known this.

329.Mr G Taggar denied that he thought it suspicious that the Company was given loans at such high rates of return but we think accepting such terms might indicate that he did know that the deals were not ordinary commercial deals and we come to a conclusion on this in paragraph 394 when considering the totality of the evidence.

Large staff

330.The Company had a staff (including cleaners) of 13 people in the middle of 2006. We have already mentioned Miss Virdee, Mr C Taggar and Mr L Macdonald.

331.Claire Wells was a young employee taken on as an apprentice via the Sandra Robinson group. She worked on the retail side of the business (refurbishing second hand electronics equipment) and only came to work full time on the wholesaling of mobile phones when the retail side disappeared early in 2006. Early in 2006, she would help with compiling the daily stock log, which she saw as sourcing stock, although she agrees she was not involved in pricing stock or putting a deal together. Later her role was to assist Miss Virdee. It appears she worked full time obtaining credit check reports, checking VAT numbers with Redhill and VIES and chasing trade references from due diligence reports.

332.We agree with HMRC that her time seems to have been wasted with making frequently repeated triple checking of VAT numbers with 3 different sources (Redhill, VAT helpline and VIES).

333.Nabila Ahmed (who did not give evidence) had a job described as general office admin. We find her job was to help compile the daily stock log. We have already noted that this was a redundant exercise and Mr Virdee knew this.

334.Mr Assad Rubani had a history in sales with other employers and joined in October 2005 as a sales manager. We find, as he said, that his job was to source computer hardware, increase the customer base, find new products, build relationships with suppliers, and manage sales team, all on the refurbished computer side of business. This business died out in late 2005/early 2006 and Mr Rubani temporarily became the Company’s due diligence officer. It was his evidence that Network Euro had strict due diligence criteria and he would tell Mr Virdee if any prospective customer or supplier did not meet it. He re-joined the sales team in April 2006, looking for new business opportunities and having nothing further to do with the mobile phone side of the business. He left the Company in August 2006.

335.Mr Hardeep Muddar was a bookkeeper and considered himself to be self-employed although it seems it worked at Network Euro’s premises and largely on Network Euro’s affairs. He kept ledgers, did the VAT returns, EC Sales lists, intrastate returns, paid bills, and controlled petty cash. He did not have authority to operate the Company’s FCIB account and according to his evidence (which we accept) he did not even see the statements on the FCIB trading accounts.

336.HMRC say that NE employed this large staff to give the impression of a thriving business whereas the reality was that very little work was done and all of the significant decisions were taken by Mr Virdee and Mr G Taggar.

337.An analysis of the wages over 16 months showed the Company paid total salaries of £166,000 of which £113,500 was paid to Mr Virdee and Mr Taggar. The rest of the staff shared the remaining £52,500 - which meant that most of them were on low salaries. This is we find explained in part because the Company took on apprentices from the Sandra Robinson group which meant the Company only had to pay expenses in return for giving young people work experience.

338.We also find that while it is true that staff did increase over time, Mr Virdee was clearly keen to employ as many as possible right from the start and before the Company moved into wholesaling mobile phones.

339.Nevertheless, we do agree with HMRC that all the important decisions were made by Mr Virdee and Mr Taggar (this was not denied in any event) and similarly that only Mr Virdee and Mr Taggar controlled the money movements and saw the FCIB accounts. Most of the junior staff either did not work on the wholesale of mobile phones, or if they did, were employed to carry out redundant exercises such as repetitively checking VAT numbers or compiling the daily stock log or due diligence reports neither of which would be relied on in putting together deals.

340.We have already concluded that the due diligence had no relevance to the decisions taken by the officers of the Company whether or not to trade. We have also concluded that the daily stock log had no relevance to trades entered into by the company. We find that the Company by its officers was aware that the company relied on neither the due diligence nor the daily stock log. Were these superfluous employees a smokescreen? We find that the large staff employed by the Company might as likely be explained by an apparent desire by Mr Virdee to have a thriving business with large numbers of employees. But we also find that the only reason for the Company setting its employees to work on the redundant due diligence and daily stock log was to give the appearance that the deals were negotiated and proper due diligence undertaken. It was, as HMRC allege, window dressing.

341.Officers of HMRC visited Network Euro on 31 July. The last deal took place on this day. All employees were present and apparently actively working. HMRC claim Mr Virdee stage managed this visit to give the impression of a thriving business with many members of staff whereas the reality was that very little was happening.

342.We do not find that HMRC has made out its case on this: although we find the due diligence and daily stock log were redundant, nevertheless it is far from clear to us that all members of staff (rather than just Mr Virdee and Mr G Taggar) would have been aware of this nor that the junior members of staff would have pretended to be busy when they were not. It was certainly not put to those of them who gave evidence.

No insurance

343.Network Euro agrees that it held no insurance on the goods it purchased neither while they were in store nor while they were in transit. The Company informed HMRC of this at a meeting on 23 August 2006 . At this point, Mr Virdee said he was “shocked” on checking with the freight forwarders to discover the goods were not insured and that in future the Company would insure.

344.Mr Virdee’s explanation was that the Company had held insurance until December 2005 but then gave it up as found it too expensive and too limited in cover. It was also his case that the Company did not need insurance as Network Euro only owned the goods fleetingly. Title did not pass until goods were released. Goods were not released until paid for. As soon as Network was paid, it paid its supplier. Therefore the goods were released to the Company and almost immediately released by the Company to its buyer. Further, he said he had believed (until August 2006) the goods to be insured by the freight forwarders and transport companies. Mr Brown also made the point that even if the Company had known that the goods were not insured, that does not mean that it was knowingly involved in the fraud as surely whether or not it had known of the fraud he would have insured the goods?

345.HMRC’s case was that Network Euro knew the goods were uninsured and were unconcerned by this as its officers were aware that all the deals were part of a MTIC fraud the objective of which was to steal money and not to supply phones.

346.We do not accept Mr Virdee’s explanation. It is improbable and we bear in mind that we find very little of what he said at Tribunal to be reliable. We think that a business transporting and selling goods worth millions of pounds would be concerned to ensure that it protected itself from liability if something went wrong. We don’t think a genuine business would give up its insurance in reliance on a vague assumption that it would not have liability because it considered (but had not checked) that despite agreeing to buy them and having the right to transport them out of the country, it only owned the goods fleetingly or because it believed (but had not checked) it could rely on a third party’s insurance policy. Mr Virdee does not even claim to have asked for a copy of the freight forwarder’s insurance policy at the time he says the Company was relying on it. The story is ridiculous and we do not accept it.

347.This leaves the question of the true reason why the Company chose not to insure the goods the subject of this appeal. It must be that it did not consider itself at risk and (we agree with HMRC) that this is because Mr Virdee knew that the transactions were part of an orchestrated MTIC fraud the object of which was to defraud the exchequer of this country and not genuinely to deal in mobile phones.

Risk

348.We find (and Network Euro did not suggest otherwise) that for all its deals it arranged to buy and sell the stock on the same day. Indeed it would not enter into a contract to buy (or sell) unless it had also secured a contract to sell (or buy) the same stock. It never had any left over stock.

349.The Company maintains that it was agreed with its supplier that it was not liable to pay for the stock until its customer had paid it. That this was a term of the agreement in practice is evidenced by the fact that Network Euro never did pay a supplier before it was paid by its customer. For Deals 56 & 57 Bijou failed in large part to pay and the goods were ultimately sold to IT Recycling on 18 October 2006. Only then did the Company pay its supplier.

350.It was also the case it would sell goods to a purchaser (eg Proxi) before that customer had paid for earlier consignments.

351.HMRC’s view was that this was an exceptionally favourable credit arrangement granted to the Company by its suppliers (and by the Company to its customers) without a commercial agreement and was too good to be true.

352.We find Network Euro acted as if it was free from risk. It was not concerned with the credit status of its trading partners and it did not agree a due payment date and was often paid late. Even when it did go wrong (in deal 57 & 58) at the end of the day it was able to re-sell the goods at cost price. So the Company was right to consider itself free from risk.

353.But we infer from this it must have been because it knew it was all pre-arranged and not on open market.

Inspection of goods

354.Network Euro paid A1 Inspections Limited to carry out inspections of the goods. It was Mr Macdonald’s evidence that an inspection report would normally be received the day after it was requested. This would be the day after the deal as we find Network Euro only requested an inspection report after it had received its purchase order from the customer.

355.We have already dealt with and rejected Mr Virdee and Mr G Taggar’s evidence that they carried out personal inspections of the goods on the day of the deal.

356.We therefore find that Network Euro was prepared to and did enter into deals to buy and sell mobile phones without checking beforehand that the goods physically met the description required or that they were in good condition or even that they existed.

Specification of phones

357.We find that Network Euro was aware that each mobile phone has a fairly complex specification that differentiates one type of phone from another. This is apparent from their due diligence questionnaire which lists 12 points of specification. However, the Company’s purchase orders and invoices, and the purchase orders and invoices which the Company received, do not contain much detail on the specification. The information is normally limited to the make and model of the phone. It sometimes included colour. The language of the keypad, the manual, and whether the charger is 2 or 3 pin, was not recorded.

358.Nevertheless, it was the evidence of Mr Macdonald and Mr C Taggar that they did negotiate the detailed specification of the phones with the Company’s customers and suppliers and were simply in too much of a rush to record it on the documents. Mr Virdee also said this. We note that we consider much of Mr Virdee’s evidence to be untruthful and have found Mr Macdonald’s and Mr C Taggar’s to be unreliable.

359.Mr G Taggar elaborated on the evidence given to say that although the specification was not recorded, nevertheless it was part of the negotiated deal because he would fax through the first page of the inspection report (which showed the specification) to the Company’s customer so they would know what they were buying. It was put to Mr G Taggar that he was not being truthful on this. No mention of this was made in any witness statement. Further, from other evidence given (including by Mr G Taggar himself) it was clear that the inspection report was not available until the following day and indeed not even commissioned until after the deal had been completed on the phone and the customer’s purchase order sent to Network Euro. We do not accept that the customer ever saw the inspection report and certainly they were not sent it on the day of the deal.

360.We find that if the detailed specification had been negotiated, it would have been recorded. Apart from the question of legal enforceability of agreed terms of the contract, the agreed specification would have needed to be written down so all parties remembered what had been agreed. The fact that it was not reduced to writing, means we find that it was not negotiated and was not important to the parties. We also note that we have already found as a matter of fact that the deals in this appeal were orchestrated for the purpose of MTIC fraud, which means in practice Network Euro’s customers would not have been interested in the specification of the phones. For this reason also we find that the specification was not negotiated with its customers by Network Euro.

361.We find that this was a chain of transactions in which the buyers and sellers were uninterested in the specification of the goods purchased and sold because they had no commercial interest in the goods as they were simply a vehicle for fraud.

Retention of IMEI numbers

362.Network Euro made no complete record of IMEI numbers of each individual phone in which it traded. It paid its inspection company to make a record of the IMEI numbers of 10% of the phones inspected. Mr Virdee’s explanation is that they were acting on the advice of their VAT officer Miss Jenny Carter who (they said) had said a 100% check was unnecessary and 10% would be fine. Miss Carter also said that HMRC would not check the numbers on behalf of the Company.

363.Why did the Company keep a 10% list? It could not know if it had traded in that phone before (in order to avoid MTIC fraud) nor (if this were genuine trading) know if it had sold a particular phone to a customer should there be a complaint about it. Yet it required its customers to certify that they did carry out a 100% inspection.

364.Mr L Macdonald’s evidence is that he checked randomly 5 or 10 numbers from the 10% list against a database on the internet (Numberingplans) which could tell him if it was a valid IMEI number and to what specification phone it belonged. This evidence is consistent with his witness statement from late 2007 and we accept it.

365.As we have already noted in paragraphs 68, using Network Euro’s 10% lists and HMRC’s NEMISIS database only a very small proportion of the phones sold by Network Euro appear to have been carouselled.

366.It is HMRC’s case that the First Freight Ltd 10% inspection report for deal 10 is false. This is because, if the last digit of the 15 digit number for each phone is ignored, the numbers run sequentially. It is HMRC’s case that this sequential numbering could never have happened on genuine inspection (particularly a 10% inspection) but rather all that someone has done is taken a sequential list of numbers with 14 digits and added a random 15^th digit to disguise this. The reason for this, HMRC implies, is that First Freight did not actually undertake the inspection at all.

367.Although we take into account Mr Stone’s evidence that the 15^th digit of an IMEI number would always be a random check digit, we think on the balance of probability the list is false because it would be very unlikely that the boxes could have been scanned sequentially. However, that tells the Tribunal very little. It tells us that Network Euro were defrauded in that they paid for an inspection that was not carried out. But the question is whether Network Euro knew or ought to have known this. It is most unlikely they knew the report was false, else they would not have kept it. Should they have known it was false? If they had looked at it more closely, then they should have realised it was odd: but that by itself would not have told them the entire transaction was fraudulent.

Deal documentation

368.Date discrepancies

369.On Deal 17 there is a stock offer by Top Notch to Network Euro dated 17 May. Network Euro accepts this on 19 May and sends a purchase order the same day. Top Notch sends an invoice to Network Euro on 18 May. Top Notch also sends allocation and release notes in favour of Network Euro to the freight company dated 18 May and faxes confirmation of this to Network Euro on 18 May. Network Euro’s explanation of this is that it was all done on 18 May but all happened so fast Network Euro did not manage to produce the purchase order until the following day.

370.On deal 4 there is a purchase order from Network Euro to Topnotch dated 6 April 2006, but Top Notch’s stock offer is not faxed until 7 April. Mr Virdee’s explanation is that Network Euro would have put a deal pack together on the day after the deal, realise they had lost the stock offer and ask for it to be faxed over again. This is an incorrect explanation as the stock offer is actually dated 7 April as well as faxed on that date. The supplier declaration is also dated 7 April.

371.Differing copies

372.Deal 4: There is a supplier declaration from Top Notch. There are two versions of it, one produced for extended verification and one which was disclosed for the purpose of the appeal. Although they clearly relate to the same deal as they have the same purchase order number the first is signed by a “Mr R S Johal” on 7 April and the second is signed by a “Mr R Johal” in very different handwriting on 11 May. The PO number is 20234 on both of them.

373.Deal 10 also has 2 different supplier declarations. The later one has boxes ticked that were not ticked on the first one.

374.Deal 11 has two different invoices: they have the same number and details but the date changes from 27 April to 28 April. Mr Virdee’s explanation is that the deal was negotiated on 27 April but for shipment on 28 April. An invoice was raised on 27 April and due to clerical error another invoice was raised on 28 April.

375.Deal 12 has 2 different supplier declarations. There are quite substantial differences and although they were (purportedly) signed by same person on same day- one is clearly not an updated version of the other as on one “Director” was written in small handwriting and on the other one in large handwriting.

376.For Deal 17 Network Euro produced two different purchase orders. They clearly relate to the same deal but differ in format and carry different dates.

377.Deal 18 and 19. Again Network Euro produced two different purchase orders for these two deals. The format of, and information on, each varies. Mr Virdee’s explanation is that this was during a transition period when the Company changed from one format of purchase order to another (which included the vendors’ VAT number). There are also two different supplier declarations: they are identical except one includes an extra line. Mr Virdee’s explanation is that a staff member must have spotted that a line was missing and asked for it to be completed but nevertheless filed the incomplete version as well. There are differences between the invoices on these deals as well.

378.For deal 26, there are two invoices from Network Euro and the price is not identical. Mr Virdee says that this was a clerical error or reflects the fact the price was renegotiated.

379.Deal 29: Cell Trading’s invoice as produced by Network Euro originally had no signature or company stamp but version produced in disclosure for this appeal does.

380.Deal 45: Network produced in extended verification a purchase order which it sent to its supplier and then produced a different purchase order during disclosure. The one given to HMRC for extended verification quotes the correct VAT number for the supplier but the one disclosed for the purposes of the appeal quotes an incorrect VAT number for the supplier. Mr Virdee’s explanation is that the one with an incorrect number was a mistake.

381.In two deals there is a frequently repeated spelling mistake “sliver” for “silver” in both the Jos and Network Euro paperwork. HMRC say this shows the same person produced the documents for both companies. Mr Virdee’s explanation is that the staff just repeated an error they saw in the other company’s paperwork.

382.Due diligence on A-Z Mobile: The first copy was produced to HMRC as part of the extended verification. The second copy was produced with a witness statement. The answers given on the first one are more complete than on the second. The explanation by Network Euro is that they had more than one copy of the same document. A-Z must have provided incomplete answers and been asked to fill it in again.

383.HMRC’s allegation is where more than one copy of the same document has been produced to them that at least one copy was not genuine and was produced for the purposes of the appeal. Further, they say the poor quality of the paperwork indicates that Network Euro was not really concerned with creating accurate paperwork as they knew that the deals were all orchestrated and were not genuine.

384.It was the Appellant’s case that the mistakes in the documents were just due to human error and that the Appellant’s officers believed that transactions were genuine even though some careless mistakes were made in the documents. Further and as mentioned above, when documents were out of timing sequence, the Company’s explanation was that the deal was done on the phone and the superfluous documents (such as purchase orders) were just created for deal packs. Mr Virdee’s evidence was also that Network Euro often had more than one copy of the same document and that this explains discrepancies between the documents produced in extended verification and those produced in evidence in this appeal. This was because staff would ask for new copies of documents (eg when the original was not complete) and then file both copies. Due diligence was updated but the old copies were not discarded. Spelling mistakes were often repeated as the word processing package automatically stored previously used phrases in a drop down menu to make completing the document another time quicker. So a mis-spelling could be stored and repeated in the same or even a different type of document.

385.We do not think it makes sense for Mr Virdee to produce false versions of documents which he had already produced in extended verification (as the change is obvious to HMRC), but balanced against this is his admission in his witness statement that he did so in respect of A-Z’s due diligence report (see paragraph 240). We also note that the explanations given by the Company for many of the errors and duplications are likely to be true: the impression we have is that the staff were junior and inexperienced. We also note that we find that the release notes were manufactured by Mr Virdee after extended verification and were not genuine, for the reasons explained above. We also note that we have not found Mr Virdee to be an truthful witness.

386. In conclusion we find that HMRC have not made out its case that all the discrepancies listed above indicate that the Company was knowingly involved in fraud. We do find that some documents, represented by the company contemporaneous with the deal (such as some purchase orders and all release notes) were in fact produced after the deal was negotiated. We do find that as some of the documents were altered or created by Mr Virdee after the event this means they were not required for the deals. This is an indication that Mr Virdee knew the deals would take place even without the normal commercial documentation being in place and bolsters our final conclusion on knowledge reached in paragraph 394.

Exponential increase in business

387.Mr Virdee had little previous business experience. He set up business buying and selling second-hand computer equipment on eBay. From a standing start in 2004, there was a sudden exponential increase in turnover for the Company in 2005. In its first 9 months of trading had a turnover of approximately £41,000. Outputs for the quarter to May 2005 were approximately £23,000. Then in the next month, the Company, now on monthly returns and now selling mobile phones wholesale, has outputs of nearly £3million. Turnover was over £17million to year ended 31 August 2005, and over £100m to end of following financial year (it only traded 11 months of this year).

Business records

388.Network Euro has virtually no business records. The only accounts produced were for one year and were only in draft as their Accountants would not finalise the accounts until their bill was paid. No management reports, profit and loss accounts, cash flow forecasts, aged debtors reports, aged creditor report or business plans have ever been produced. Mr Virdee’s response was that such reports were unnecessary. We accept Mr Muddar’s evidence that Network Euro had electronic ledgers for which he was responsible and on which the monthly deal logs sent to HMRC were based even thought the Company is now nevertheless unable to produce copies of these ledgers.

389.HMRC’s case is that this lack of business records is because there was no genuine business. By itself we do not think this necessarily indicates more than that Mr Virdee and Mr G Taggar were inexperienced in business, which is not surprising in that their business increased exponentially over such a short time.

Standard terms and conditions

390.Network Euro’s standard terms and conditions were, we find, intended for and suitable to its retail business and not suitable for its wholesale business. For instance, the conditions refer to collecting unpaid balances by credit card: at term suitable for retail sales (where it would typically sell a unit for £99) but unenforceable in a contract for hundreds of thousands of pounds.

391. Again the explanation for this might well be that the business increased exponentially in a short time and its directors were very inexperienced in dealing with multi-million pound deals and we find HMRC have not made out its case on this point.

Conclusion on knowledge

392.Mr Brown says that even if we conclude this was orchestrated MTIC it is not necessary for the broker to have known of the fraud. We agree that it is theoretically possible for a broker to an innocent dupe of the fraudster but it is a question of fact whether they were in this case for the Tribunal to decide.

393.Mr Brown says that we should take into account that HMRC have not taken criminal proceedings against officers of Network Euro so we should assume HMRC did not think that they had sufficient evidence of their participation in fraud. We do not know why HMRC have not done this nor would it make any difference if we did: the question is what this Tribunal finds as fact and not what HMRC thinks.

394.We find for all the reasons given in this Decision Notice that Mr Virdee and Mr G Taggar both

· Knew that the Company did not negotiate the prices nor the specifications of the phones in which it dealt. We found they were not interested in the physical condition or existence of the goods as they did not inspect them before the deals took place. As we have also found that the deals at issue in this appeal were orchestrated for the purposes of fraud, the only possible conclusion that we can reach and which we do reach is that the company was presented with and accepted pre-arranged deals: it was told with whom to trade and at what prices. Mr G Taggar denied this but we do not believe him;

· acted as if the deals were free of risk (eg the Company did not insure the goods) and did not negotiate due dates for payment and we find that in practice we find the deals were virtually free of risk. Even when the Company has not been paid there is no suggestion that its sellers are pursuing it for payment;

· had no interest in the status of the Company’s trading partners even though they were well aware that fraud was a risk in wholesale transactions in mobile phone and even though the Company was selling and transporting millions of pounds worth of goods without payment while the Company itself was on the hook to pay its buyer. This lack of concern shows that they were confident they would be paid and that must mean they knew the deals were pre-arranged and also that they had no real interest in ensuring their deals were not tainted with MTIC fraud;

· instructed staff to undertake exercises which Mr Virdee and Mr G Taggar knew were redundant and pointless such as the creation of the daily stock log and due diligence reports. We find that the Company’s reason for giving these instructions was to create a false impression that the deals were negotiated when they knew they were not, and that they cared about the financial status of the companies with which it traded when they did not. We see no reason why the Company would have wanted to create a false impression other than it knew it had something to hide;

· the Company made a great deal of money from transactions for which it did virtually nothing other than issue a few documents and “block” the VAT; the deals were far too good to be true and they knew it (Mr Virdee denied that this made him suspicious but we do not believe him);

· the Company accepted loans at exorbitant rates of interest and traded in a very amateur fashion all the while dealing in millions of pounds;

· its profit was (up to 24 July 2006) over 40% of the value of the VAT defaulted upon which means the person who orchestrated the fraud was allowing the Company to share nearly 50:50 in the proceeds it would make from the fraud. We do not consider that the fraudsters would be so generous other than that it was necessary to secure knowing participation in unlawful activity;

· that all of its 62 transactions were connected to fraudulent tax loss which is stretching coincidence.

395.We reach the inevitable conclusion based on these findings that Mr Virdee and Mr G Taggar did know at the time of them that all the Company’s transactions were connected to a tax fraud and that they willingly participated in these transactions for the illegal profits they would achieve.

396.We find as a matter of law that because it (by its principal officers) knowingly participated in fraud, as well as having actual knowledge under the Kittel test that its transactions were all connected to fraudulent tax loss, the Company is not entitled to recover the input tax it has claimed and the appeal is dismissed.

Conclusion on means of knowledge

397.It was Mr Virdee’s evidence that Officer J Carter of HMRC checked all their paperwork and told Network Euro that what it was doing was more than sufficient and to keep up the good work. However, Mr Virdee also said another officer visited and criticised their due diligence but when asked what was wrong with it, said it was not for HMRC to tell Network Euro how to do its due diligence. Mr Virdee complains that Network Euro was constantly hitting a brick wall with no help from HMRC.

398.We do not accept that on the basis of this, even if they did not actual knowledge of the fraud (contrary to our finding that they did), that this very limited reassurance from HMRC could have reasonably assured them that there was no problem in the light of everything else that Network Euro did know.

399.From the fact the deals did not need to be negotiated, from the fact they made very large profits for very little input or risk, the fact that their trading partners had poor financial standing and that Mr Virdee and Mr G Taggar were well aware of the risks of MTIC, they should have concluded that MTIC fraud was the only explanation for the “business” opportunity they were offered on these 62 deals.

400.For much the same reasons as above in relation to actual knowledge, had it been necessary to consider the Company’s “means of knowledge” of connection to fraudulent tax loss, we find that the Company by its Directors did have means of knowledge before the transactions were entered into that the transactions were all connected to fraudulent tax loss.

401.For this reason too, we dismiss the appeal in its entirety.

Unpaid invoices

402. It was agreed by both parties that to the extent that the invoices were unpaid by Network Euro the company has no entitlement to reclaim the VAT on those invoices in any event. This is because of s26A Value Added Tax Act 1994 which provides as follows:

“26A(1) Where-

(a) a person has become entitled to credit for any input tax, and

(b) the consideration for the supply who which that input tax relates, or any part of it, is unpaid at the end of the period of six months following the relevant date,

he shall be taken, as from the end of that period, not to have been entitled to credit for input tax in respect of the VAT that is referable to the unpaid consideration or part.”

403.The parties, however, have not agreed which invoices were unpaid.

404.Whereas for the rest of this case the burden is very much on HMRC to prove their case, on this aspect it is for the Appellant company to show to the Tribunal that it paid the invoices on which it is claiming VAT recovery.

405. The parties agreed to resolve the quantum after the hearing and inform the Tribunal. There was an inconclusive exchange of letters between them. HMRC allege some £11,830,769.15 worth of invoices at issue in this appeal were unpaid by Network Euro. Network Euro has neither confirmed nor denied this. But it is for them to show that HMRC’s figure is wrong and they have chosen not to do this.

406.This is of course superfluous to our findings as we have already dismissed the appeal but we note that even apart from their actual knowledge of the connection to fraudulent tax loss, the Company is not entitled to recover the VAT on these unpaid invoices. We therefore find that in any event they are not entitled to recover the VAT in respect of these unpaid invoices in the figure given by HMRC.

Costs

407.At the close of the hearing HMRC asked, should they be successful, for costs in the case to be awarded in their favour against the liquidators of the Appellant in their personal capacity.

408.On 31 March 2009 I directed that unless HMRC objected within 2 weeks, the new costs regime would be dis-applied and the old costs rule in Rule 29 apply. HMRC did not object. So on costs matters this case is governed by Rule 29. The power of the Tribunal to make a costs order under Rule 29 is:

“(1) A tribunal may direct that a party or applicant shall pay to the other party to the appeal or application - …..”

409. We find that the history of this matter is that at a hearing before Mr M Tildesley on 18 December 2008 the Chairman gave a direction:

“the liquidators of the Appellant shall, if so advised, give written consent to being substituted in these proceedings in place of the Appellant by 18 February 2009, and in the event that no such written consent is received by the Tribunal, the appeal shall be dismissed pursuant to rule 13(2) of the Value Added Tax Tribunals Rules 1986 as amended. The liquidators are Neil Charles Money and Neil Richard Gibson of CBA, 39 Castle Street, Leicester LE1 5WN.”

410.On 18 February 2009 the two liquidators wrote to the Tribunal saying:

“TAKE NOTICE that Neil Charles Money and Neil Richard Gibson as Liquidators of the Network Euro Limited (“the Company”) consent to being substituted as the Appellant in the proceedings in place of the Company.”

411.However, it does not appear that the Tribunal ever made a direction under the then Rule 13(2) substituting the liquidators as the Appellant in the case. And even if HMRC were now to apply for such a direction, in our view, it is too late after the hearing of the case. Therefore, the liquidators are not the Appellants: Network Euro remained as the Appellant. As they are not parties to this appeal, it is therefore not necessary for us even to consider whether it is appropriate to make an award of costs against the liquidators personally.

412. We order the Appellant (being Network Euro Ltd) to be pay the Respondents its costs of and incidental to and consequent upon this appeal to be assessed by a Costs Judge if not agreed.

413.This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

Barbara Mosedale

TRIBUNAL JUDGE

RELEASE DATE: 19 April 2011

APPENDIX

Names of Companies in this Decision Notice

Abbreviation used in Decision Notice	Full Name of company
3D Animations	3D Animations Limited
A-Z Mobile	A-Z Mobile Accessories Ltd
Amira	Amira Group International
Belltrask	Belltrask SA
Bijou	Bijou Medinacelli SL
BRD	BRD Werbrung-und Handels GmbH
Cell Trading	Cell Trading UK Ltd
CEMSA	CEM SA
City Phones	City Phones Ltd
Computec	Computec Solutions Ltd
Crestview	Crestview Enterprises Ltd
C T Co UK	C T Co UK Ltd
Cybersol	Cybersol UK Ltd
Digitalk	Digitalk Communications Ltd
Flash Tech	Flash Tech
Fonelink	Fone Link SL
Glasgow Data	Glasgow Data Ltd
Global Access	Global Access International Ltd
Globalfone	Globalfone Communications GmbH
Humber Freight
Interaction Logistics
IT Reclycling	IT Recycling Services Ltd
Jewel	Jewel Collection Ltd
Jos	Jos (UK) Ltd
JSA Logistics
Label	Label Clothing Ltd
Lagan	Lagan (UK) Ltd
Leriant	Leriant Trading Ltd
Luxembourg Logistics
Mobile Memory
Network Euro	Network Euro Limited
New Order Exports	New Order Exports Ltd
New Order Trading	New Order Trading Ltd
Opal 53	Opal 53 GmbH
Parasail	Parasail Distribution Spain SL
Paul’s Freight
Phone City	Phone City Limited
Phone Dealers
Phonedeal	Phone Deal World Ltd
Point of Logistics
Power Communication	Power Communication Trading BV
Proxi Partners
Red Rose	Red Rose Consultancy Ltd
Senbetel	Senbetel Telecommunications SL
Sigma Sixty	Sigma (Sixty) BV
S L Computer	S L Computer Electronics Ltd
St Anne’s	St Anne’s Distribution Ltd
Stylex	Stylex Ltd
Sam Logistics
Smart Phone	Smart Phone Systems Ltd
Stockmart	Stockmart Ltd
Stylez	Stylez Ltd
Swindon Star	Swindon Star Ltd
Symbolix	Symbolix SARL
Topnotch	Topnotch Corporation Ltd
Total Logistics
Trade Eazy	Trade Eazy Ltd
Trade Smart	Trade Smart Ltd
West Point	West Point One Ltd
Worldwide	Worldwide Enterprises Ltd
Yayha	Yayha International

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	First-tier Tribunal (Tax)
You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Network Euro Ltd (in liquidation) v Revenue & Customs [2011] UKFTT 255 (TC) (19 April 2011) URL: http://www.bailii.org/uk/cases/UKFTT/TC/2011/TC01119.html Cite as: [2011] UKFTT 255 (TC)

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents