DECISION
The Appeal
1. The
Appellant appeals against two decisions by HMRC. The first decision sent on 30
January 2009 (but incorrectly dated 30 January 2008) disallowed the Appellant’s
input VAT repayment claim in the sum of £206,696.00 in respect of four
transactions in VAT period 07/06. The second decision was an assessment in the
sum of £1,501.57 in respect of VAT period 07/06. Thus the total amount of VAT
now in issue was £208,197.57.
2. HMRC
contended that each of the disputed transactions was connected with the
fraudulent evasion of VAT and that the Appellant knew or in the alternative
should have known that the transactions were so connected. The Appellant
disputed that it had the required state of knowledge.
3. The
Tribunal is required to determine the following matters in respect of the
disputed transactions:
(1) Was there a VAT loss?
(2) If so, was it occasioned by
fraud?
(3) If so, were the Appellant’s
transactions connected with such a fraudulent VAT loss?
(4) If so, did the Appellant
know or should it have known of such a connection?
4. HMRC
had the burden of proving on the balance of probabilities all the four above
matters in relation to the Appellant’s transactions. The Appellant denied
knowledge of the supply chains relied on by HMRC to prove that its transactions
were part of an overall fraudulent scheme. The Appellant’s knowledge was
limited to the parties from whom it bought, and to whom it sold. Although the
Appellant was unable to advance a positive contrary case in respect of the
first three issues, it was entitled to put HMRC to proof of its case. The
principal dispute related to the fourth issue of knowledge. The Appellant
agreed that it was the knowledge of its director Dr Dilwyn Williams which was
determinative of the fourth issue.
Overview of MTIC Fraud
5. The words
of Moses LJ in Mobilx Limited & Others v The Commissioners for Her
Majesty’s Revenue & Customs [2010] EWCA Civ 517 at para.1 provide a
succinct overview of the scale of missing trader intra-community (MTIC) fraud:
“For many years, Her Majesty’s Revenue and Customs
(HMRC) have attempted to combat “missing trader intra-Community” VAT fraud. It
is notorious that the trades in bulk mobile phone and computer chips are especially
susceptible to that type of fraud. Latest published estimates (Measuring
Tax Gaps, December 2009) disclose potential losses in 2005-2006 of up to
£5.5 billion and in 2008-2009 of up to £2.5 billion. Lord Hope described the
fraud as a “sophisticated attack on the VAT system”, a “pernicious stratagem”
and was of the view that Member States were justified in making use of “every
means at their disposal within the scope of the Sixth Directive to eradicate
it” (Total Network SL v HMRC [2008] UKHL 19 [2008] STC 644 § 6).”
6. MTIC fraud
exists in two main versions, the so called “classic” variety and the
“contra-trading” variety. The judgment of Christopher Clarke J in Red 12
Trading Ltd v The Commissioners for Her Majesty’s Revenue & Customs [2009] EWHC 2563 (Ch) at paras. 2-7 sets out a useful exposition of the way the fraud
works:
“2. The classic way in which the fraud works
is as follows. Trader A imports goods, commonly computer chips and mobile
telephones, into the United Kingdom from the European Union (“EU”). Such an
importation does not require the importer to pay any VAT on the goods. A then
sells the goods to B, charging VAT on the transaction. B pays the VAT to A, for
which A is bound to account to HMRC. There are then a series of sales from B to
C to D to E (or more). These sales are accounted for in the ordinary way. Thus
C will pay B an amount which includes VAT. B will account to HMRC for the VAT
it has received from C, but will claim to deduct (as an input tax) the output
tax that A has charged to B. The same will happen, mutatis mutandis, as between
C and D. The company at the end of the chain – E – will then export the goods
to a purchaser in the EU. Exports are zero-rated for tax purposes, so Trader E
will receive no VAT. He will have paid input tax but because the goods have
been exported he is entitled to claim it back from HMRC. The chains in question
may be quite long. The deals giving rise to them may be effected within a
single day. Often none of the traders themselves take delivery of the goods
which are held by freight forwarders.
3. The way that the fraud works is that A,
the importer, goes missing. It does not account to HMRC for the tax paid to it
by B. When HMRC tries to obtain the tax from A it can neither find A nor any of
A’s documents. In an alternative version of the fraud (which can take several
forms) the fraudster uses the VAT registration details of a genuine and
innocent trader, who never sees the tax on the sale to B, with which the
fraudster makes off. The effect of A not accounting for the tax to HMRC means
that HMRC does not receive the tax that it should. The effect of the
exportation at the end of the chain is that HMRC pays out a sum, which
represents the total sum of the VAT payable down the chain, without having
received the major part of the overall VAT due, namely the amount due on the
first intra-UK transaction between A and B. This amount is a profit to the
fraudsters and a loss to the Revenue....
5. A jargon has developed to describe the
participants in the fraud. The importer is known as “the defaulter”. The
intermediate traders between the defaulter and the exporter are known as
“buffers” because they serve to hide the link between the importer and the
exporter, and are often numbered “buffer 1, buffer 2” etc. The company which
exports the goods is known as the “broker”.
6. The manner in which the proceeds of the
fraud are shared (if they are) is known only by those who are parties to it. It
may be that A takes all the profit or shares it with one or more of those in
the chain, typically the broker. Alternatively the others in the chain may only
earn a modest profit from a mark up on the intervening transactions. The fact
that there are a series of sales in a chain does not necessarily mean that
everyone in the chain is party to the fraud. Some of the members of the chain
may be innocent traders.
7. HMRC
alleged that the Appellant operated as a broker in a classic MTIC fraud. The
Appellant contended that it was an innocent trader even if the disputed
transactions could be traced back to a defaulting trader.
Overview of the Law
8. Articles
167 and 168 of Council Directive 2006/112/EC provide:
“167 – A right of deduction shall arise at the time
the deductible tax becomes charged.
168. Insofar as the goods and services are
used for the purposes of the taxed transactions of a taxable person, the
taxable person shall be entitled, in the Member State in which he carries out
these transactions, to deduct the following from the VAT which he is liable to
pay: The VAT due or paid in that Member State in respect of supplies to him of
goods or services, carried out or to be carried out by another taxable person”.
9. Sections
24 to 26 of the VAT Act 1994 enact into UK legislation the right to deduct tax
paid on goods and services used for the purposes of business. Thus a trader is
entitled to the deduction of input tax it claims.
10. The European Court of
Justice (“the ECJ”) in the joint cases of Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C-439/04 and C-440/04) established an exception
to the right to deduct when the trader knew its transactions were connected
with fraud. The Court stated:
“51. In the light of the foregoing, it is apparent
that traders who take every precaution which could reasonably be required of
them to ensure that their transactions are not connected with fraud, be it the
fraudulent evasion of VAT or other fraud, must be able to rely on the legality
of those transactions without the risk of losing their right to deduct the
input VAT (see, to that effect, Case C‑384/04 Federation of
Technological Industries and Others [2006] ECR I-0000, paragraph 33).
52. It follows that, where a recipient of
a supply of goods is a taxable person who did not and could not know that the
transaction concerned was connected with a fraud committed by the seller,
Article 17 of the Sixth Directive must be interpreted as meaning that it
precludes a rule of national law under which the fact that the contract of sale
is void, by reason of a civil law provision which renders that contract
incurably void as contrary to public policy for unlawful basis of the contract
attributable to the seller, causes that taxable person to lose the right to
deduct the VAT he has paid. It is irrelevant in this respect whether the fact
that the contract is void is due to fraudulent evasion of VAT or to other
fraud.
53. By contrast, the objective
criteria which form the basis of the concepts of ‘supply of goods effected by a
taxable person acting as such’ and ‘economic activity’ are not met where tax is
evaded by the taxable person himself (see Case C‑255/02 Halifax and
Others [2006] ECR I‑0000, paragraph 59).
54. As the Court has already observed,
preventing tax evasion, avoidance and abuse is an objective recognised and
encouraged by the Sixth Directive (see Joined Cases C-487/01 and C-7/02 Gemeente
Leusden and Holin Groep [2004] ECR I-5337, paragraph 76). Community law
cannot be relied on for abusive or fraudulent ends (see, inter alia, Case C‑367/96
Kefalas and Others [1998] ECR I-2843, paragraph 20; Case C‑373/97 Diamantis
[2000] ECR I-1705, paragraph 33; and Case C‑32/03 Fini H [2005] ECR I-1599, paragraph 32).
55. Where the tax authorities find that
the right to deduct has been exercised fraudulently, they are permitted to
claim repayment of the deducted sums retroactively (see, inter alia, Case
268/83 Rompelman [1985] ECR 655, paragraph 24; Case C‑110/94 INZO
[1996] ECR I-857, paragraph 24; and Gabalfrisa, paragraph 46). It is a
matter for the national court to refuse to allow the right to deduct where it
is established, on the basis of objective evidence, that that right is being
relied on for fraudulent ends (see Fini H, paragraph 34).
56. In the same way, a taxable person
who knew or should have known that, by his purchase, he was taking part in a
transaction connected with fraudulent evasion of VAT must, for the purposes of
the Sixth Directive, be regarded as a participant in that fraud, irrespective
of whether or not he profited by the resale of the goods.
57. That is because in such a
situation the taxable person aids the perpetrators of the fraud and becomes
their accomplice.
58. In addition, such an
interpretation, by making it more difficult to carry out fraudulent
transactions, is apt to prevent them.
59. Therefore, it is for the referring
court to refuse entitlement to the right to deduct where it is ascertained,
having regard to objective factors, that the taxable person knew or should have
known that, by his purchase, he was participating in a transaction connected
with fraudulent evasion of VAT, and to do so even where the transaction in
question meets the objective criteria which form the basis of the concepts of
‘supply of goods effected by a taxable person acting as such’ and ‘economic
activity’.
60. It follows from the foregoing
that the answer to the questions must be that where a recipient of a supply of
goods is a taxable person who did not and could not know that the transaction
concerned was connected with a fraud committed by the seller, Article 17 of the
Sixth Directive must be interpreted as meaning that it precludes a rule of
national law under which the fact that the contract of sale is void – by reason
of a civil law provision which renders that contract incurably void as contrary
to public policy for unlawful basis of the contract attributable to the
seller – causes that taxable person to lose the right to deduct the VAT he
has paid. It is irrelevant in this respect whether the fact that the contract
is void is due to fraudulent evasion of VAT or to other fraud.
61. By contrast, 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.
11. The Court of Appeal in Mobilx
Limited & Others v The Commissioners for Her Majesty’s Revenue &
Customs [2010] EWCA Civ 517 clarified the test in Kittel
“59. The test in Kittel is simple and
should not be over-refined. It embraces not only those who know of the
connection but those who “should have known”. Thus it includes those who
should have known from the circumstances which surround their transactions that
they were connected to fraudulent evasion. If a trader should have known that
the only reasonable explanation for the transaction in which he was involved
was that it was connected with fraud and if it turns out that the transaction was
connected with fraudulent evasion of VAT then he should have known of that
fact. He may properly be regarded as a participant for the reasons explained
in Kittel.
60. The true principle to be derived from Kittel
does not extend to circumstances in which a taxable person should have known
that by his purchase it was more likely than not that his transaction was
connected with fraudulent evasion. But a trader may be regarded as a
participant where he should have known that the only reasonable explanation for
the circumstances in which his purchase took place was that it was a
transaction connected with such fraudulent evasion.”
The Evidence
12. The Tribunal
heard evidence for HMRC from the following witnesses:
(1)
Officer David Phillips who carried out the extended verification of the
disputed transactions.
(2)
Officer Lisa Margaret Wride gave evidence on her dealings with the
Appellant prior to the extended verification exercise undertaken by Officer
Phillips.
(3)
Officer Tatjana Harris who was a member of the Association of Chartered
Certified Accountants, and gave her expert opinion on the loan advanced by the
Appellant to Sceptre Services Limited.
(4)
Allan Coughlin held a Batchelor of Science in Pure Mathematics and was
employed by Cardiff University from 1980 until his retirement in 2008. His area
of expertise was in electronic engineering. Mr Coughlin was called as an expert
witness on semi-conductors and the technical specification of the goods
purportedly traded.
13. The Tribunal
admitted in evidence for HMRC the following witness statements which were not
disputed by the Appellant:
(1)
Officer Gerard Paul Marecaux was a VAT assurance officer responsible for
the VAT affairs of E Management Solution (Europe) Limited, the alleged
defaulting trader for the disputed transactions.
(2)
Officer Ghazalah Shah gave evidence on her dealings with E Management
Solution (Europe) Limited.
(3)
Officer Susan Elizabeth Payiatis gave evidence on her visits to E
Management Solution (Europe) Limited.
(4)
Officer Ian Webster gave evidence on the background activities of E
Management Solution (Europe) Limited.
(5)
Roderick Guy Stone had extensive experience of MTIC fraud and gave a
statement to provide an explanation of the nature and features of the fraud.
14. Dr Dilwyn
Williams and Mr Bleddyn Lewis testified for the Appellant. Dr Williams was a
director, shareholder and the controlling mind of the Appellant. Mr Lewis was a
friend of Dr Williams. Mr Lewis held a degree in electrical and electronic
engineering from Cardiff University. He gave evidence on his enquiries into the
semi-conductors which he was asked to carry out by Dr Williams before the
disputed deals took place.
15. The Tribunal
received seven bundles of documents in evidence. The Tribunal heard the Appeal
over eight days starting on 31 May 2011 and ending on 9 June 2011. The Tribunal
reserved its decision at the conclusion of the hearing.
The Appellant
Background
16. In 2001 Dr Williams set up an IT
consultancy, PL Ventures Limited, after completing his doctorate in mechanical
engineering from Cardiff University and working for several years in the IT
sector as a sole trader. Dr Richard Griffiths, also a reader at Cardiff University, joined PL Ventures as a co-director in 2003. Dr Griffiths focused on
the website and software side of the business and Dr. Williams concentrated on
the networking and hardware side. Initially PL Ventures was too small to have
trade accounts with big IT hardware distributors, instead it sourced hardware from Sceptre Services Limited.
Dr Williams was a close friend of Mr Rayer, the owner of Sceptre Services. Subsequently
PL Ventures was able to support its own trade accounts and traded successfully.
17. The Appellant
was incorporated on 13 September 2002. Dr Williams was appointed director with
Dr Griffiths as company secretary, with each of them having 50 ₤1 ordinary
shares in the company. The Appellant was set up initially to host servers in
support of PL Ventures' operations but this did not develop and the company was
made dormant.
18. After doing
business through PL Ventures, making contacts in the industry and his searches
of the International Computer Brokers’ (ICB) website
Dr. Williams sensed business opportunities in trading CPUs. He and Dr Griffiths
decided to start up in this area of trade using the Appellant as the corporate
vehicle, which enabled them to keep the trading side of the business separate
from the website and software business carried out by PL Ventures. Dr Williams
considered that these were two different businesses. PL Ventures was adding
value to its services, whereas the Appellant was simply trading a product. Dr
Williams acknowledged that the Appellant was operating in a trading sector
which carried more risk with a high incidence of fraud than the market in which
PL Ventures operated. Dr Williams, however, denied that the high risk of the
Appellant’s market was the sole reason for keeping the two businesses apart.
Registration and Trading Activities
19. On 29 April 2005
Dr Williams registered the Appellant for VAT with an intended business activity
of general computer hardware and software sales including volume sales to
the UK and overseas clients. Dr Williams, in a questionnaire on the
Appellant dated 6 June 2005, described its business activity as the retail
of computer software and hardware to business users as well as
wholesale sales of hardware. At the time of completing the questionnaire,
Dr Williams was not fully aware of the distinction between retail and wholesale
sales. As far as he was concerned the Appellant sold software and hardware to
business users.
20. Dr Williams
accepted that in the VAT 1 the expected taxable turnover was recorded as nil
but that he estimated a value of ₤500,000 for sales to other EC Member
States. Dr Williams stated that the nil value for taxable supplies was an
oversight, and that he could not recall now the determination of the
₤500,000 value. Officer Phillips accepted that in the VAT 1 Dr Williams
was specific from the outset about the Appellant trading overseas in IT
products. There was no attempt by Dr Williams to disguise the Appellant’s
intention to sell overseas. Officer Wride acknowledged that the figure of
₤500,000 was an attempt by the Appellant to estimate the anticipated
turnover for the next 12 months. The mere fact that the actual turnover
exceeded this figure was not, in Officer Wride’s view, an indicator of
fraudulent activity.
21. The
questionnaire dated 6 June 2005 stipulated that the Appellant expected to
achieve a mark up of five per cent and that it had four potential suppliers and
two customers. Dr Williams, however, acknowledged that the Appellant from the
outset intended to source the computer chips and components from one supplier,
Sceptre Services. Dr Williams had first met Mr Rayer, the owner of Sceptre
Services, when he was studying for his doctorate. They became close friends
through their mutual interest in sailing. The Appellant’s first customer,
Square Trading, was obtained via Sceptre Services.
22. Dr Williams
indicated in the questionnaire that the Appellant’s start up capital consisted
of ₤110,000 of personal investment, and ₤250,000 bank overdraft.
23. Around 2006 the
Appellant started to trade as well in Apple iPods selling them into Europe,
particularly Austria, Germany and Holland.
24. The Appellant
submitted VAT returns on a monthly basis, and was a repayment trader until VAT
period 08/06. HMRC had agreed to the Appellant making monthly returns. The
Appellant’s net turnover for the period 06/05 to 12/05 was ₤1,918,741
with a nil output for period 12/05, and a high of ₤617,860 for 09/05
period. The net turnover for the following period was ₤12,334,970 with
nil outputs for periods 01/06 and 04/06 and a high of ₤3,373,380 for
08/06 period.
25. The Appellant’s
draft accounts for the year ended 31 March 2006 showed that from a standing
start it achieved a turnover of in excess of ₤3.2 million with a gross
profit of ₤142,593,
distribution costs of ₤1,253, which related to payments made to freight
forwarders, and administration costs of ₤8,581. The administration costs
for 2006, however, were subsequently increased to include ₤123,505 representing
part of the VAT repayment claim which was the subject of this Appeal.
26. The Appellant’s
accounts for the year ended 31 March 2007 reported a turnover of ₤11,015
million, a gross profit of ₤168,136 and administrative expenses of
₤126,265, which included ₤83,000 of the disputed VAT repayment
claim. Dr Williams was unable to explain why the VAT repayment had been written
out of the accounts rather than being recorded as a bad debt in the balance
sheet.
27. Dr Williams
accepted that a gross profit of ₤168,136 was a healthy one for a small
business. Dr Williams, however, pointed out that the dividend taken from the
business by Dr Griffiths and him was ₤39,000 over two years. In Dr
William’s view, the Appellant’s venture represented a high risk for him for a
modest return. According to Dr Williams his life savings were at risk with the
large money movements associated with the Appellant’s business.
28. Dr Williams said
that he gave some thought to the Appellant’s rapid and substantial increase in
turnover and did find it surprising but he was doing his very best to make the
business a success.
29. After viewing a
BBC Panorama programme on MTIC fraud in August 2006, Dr Williams said
that he became fully aware of the extent of fraudulent activity in the wholesale
CPU market and decided to cease trading in those products. The BBC Panorama was
broadcast on 16 July 2006 when Dr Williams was in Malta. Dr Williams insisted
that he viewed the Panorama programme sometime after the first broadcast
on a form of media player. Officer Phillips expressed doubts about Dr Williams’
explanation for the Appellant’s cessation of trading activities, pointing out
that on 29 August 2006 HMRC informed Dr Williams of the extended verification
of the 07/06 period. According to Officer Phillips, it was also noteworthy
that the Appellant did not trade in this sector once HMRC introduced the
reverse charge mechanism on specified goods.
30. As a result of
Dr Williams’ decision not to trade further in CPU goods, the Appellant’s
turnover was negligible from period 09/06 until 1 February 2008 when it was
de-registered for VAT. Officer Phillips subsequently agreed to the VAT
registration of Dr Williams’ new company (Williams and Gwilliam).
Appellant’s General Awareness of MTIC Fraud and contact with HMRC
31. Dr Williams
accepted that, from the Appellant’s incorporation, he was made aware by HMRC of
the risks of fraud in the Appellant’s trade sector. Officer Tromans provided Dr
Williams with a letter dated 27 June 2005 including VAT Notice 726 – Joint
and Several Liability. The letter stated that
“HMRC are still experiencing certain problems with
businesses in your trade sector offering commodities regularly involved in MTIC
VAT fraud. MTIC fraud may involve all types of VAT standard related goods and
services including computer equipment, mobile phones and ancillary items. The
current estimate of the VAT loss from this type of fraud in the UK alone is between ₤1.06 and ₤1.73 billion per annum.”
32. Dr Williams’
interpretation of the massive numbers in respect of the losses was that it was
due to criminal gangs running dodgy goods. Dr Williams believed that if the
Appellant did clean business with trusted customers and suppliers it could
avoid the risk of fraudulent transactions.
33. On 6 July 2005
Officer Wride visited the Appellant with a colleague. The purpose of the visit
was to obtain a duplicate VAT return for the period ending 06/05. At the visit
Dr Williams confirmed that the Appellant was dealing in the buying and selling
of boxed units and computer chips. Dr Williams stated that the Appellant would
be buying from one supplier, Sceptre Services. At the time Sceptre Services was
suspected by HMRC of involvement in MTIC fraud. Officer Wride did not advise Dr
Williams of this suspicion. On 26 September 2005 Officer Wride conducted
another visit to the Appellant where she explored in more detail the
Appellant’s business relationship with Sceptre Services.
34. On 7 December
2005 Officer Wride and a colleague again saw the Appellant where they asked
about the Appellant’s due diligence checks to which Dr Williams replied: “the
usual, Redhill Checks, VRN (VAT registration number) checks online, credit
searches and inspection reports”. Dr Williams acknowledged that he knew
about the need to carry out commercial checks and contacting Redhill.
According to Dr Williams, the Appellant did everything in its powers to find
out whether its customers and suppliers were trustworthy. The Appellant was
able to get an idea of the open market value of the components it traded by
conducting searches on the internet.
35. At the meeting
on 7 December 2005 Officer Wride advised Dr Williams that she had identified
tax losses in the Appellant’s deal chains in various periods from June 2005. As
a consequence the repayment claim of ₤68,084 for 11/05 period would not be
authorised until she had conducted an extended verification of a selected
number of the Appellant’s deals. On the 22 December 2005 Officer Wride advised
Dr Williams that she had uncovered tax losses exceeding ₤103,000 in various
deals undertaken in the period June to September 2005. Officer Wride reminded
Dr Williams of the requirements of VAT Notice 726. On 18 January 2006 Officer
Wride authorised a discretionary without prejudice payment of ₤68,084.29
to the Appellant in respect of its 11/05 claim.
36. Officer Wride
confirmed that Dr Williams had been co-operative during her enquiries. Officer
Wride indicated that she was satisfied with the due diligence carried out by Dr
Williams and that she had no concerns with the Appellant’s relationship with
Sceptre Services at the time of her enquiries into the Appellant’s VAT
affairs.
37. Dr Williams
agreed that parts of the Appellant’s supplies were caught by the requirements
of Notice 726. He, however, expressed doubts about whether a semi-conductor
would fall within the definition of specified goods in Notice 726, arguing that
a semi-conductor was used in electronics and did not meet the description of a
computer chip.
Sceptre Services
38. The Appellant
traded almost exclusively with Sceptre Services as its supplier from June 2005.
On 22 December 2005 HMRC advised the Appellant by letter that some of its
trades with Sceptre Services had been traced back to a tax loss exceeding
₤103,090. On 9 January 2006 Dr Williams emailed Mr Rayer of Sceptre
Services advising him that HMRC had identified tax losses in some of the
Appellant’s trades with Sceptre Services. Dr Williams urged Mr Rayer to ensure
that the procedures for Sceptre Services were sufficiently thorough to remove
any such losses in the supply chain in the future. The Appellant did not trade
with Sceptre Services in January but resumed trading in February and March 2006,
completing business with Sceptre Services to the value of ₤1,498,390.
39. Dr Williams said
he got assurances from Mr Rayer that he was sorting out the problems with the
suppliers for Sceptre Services. Also according to Dr Williams it took several
months before the Appellant could secure new suppliers in place of Sceptre
Services. Officer Phillips accepted that the trades in February and March 2006
were not traced back to defaulting traders. After March 2006 the Appellant did
not purchase goods from Sceptre Services but on occasions sold goods to it. In
April 2006 Dr Williams required Sceptre Services to return a trade application
form, part of the due diligence process undertaken by the Appellant. He did
this to get a complete set of forms filled in by all the Appellant’s customers
and suppliers. Dr Williams was aware from Mr Rayer that Sceptre Services had
outstanding disputes with HMRC but was told at the time that Mr Rayer was
addressing the issues.
40. Dr Williams
stated that he trusted Mr Rayer and believed he was not the sort of person to
betray a friend. Dr Williams accepted that the Appellant shared a fax machine
with Sceptre Services in a managed office run by Mr Rayer. Dr Williams did not
perceive the sharing of a fax machine as a risk. He could not recall seeing faxes
containing commercial sensitive information belonging to Sceptre Services, such
as the identities of customers and suppliers and the prices agreed. Dr Williams
did most of his deals by MSN or by phone, and would not steal the customers and
suppliers of Sceptre Services.
41. Dr Williams accepted
that Mr Rayer was a signatory on the Appellant’s bank mandate for a period of
one year to a date in the middle of 2006. Dr Williams stated that he had
forgotten that Mr Rayer was still on the mandate. Mr Rayer had been put on the
mandate to assist Dr Williams when he was spending the majority of his time on setting
up the Appellant’s business. Mr Rayer had only exercised the mandate on two
occasions.
42. Dr Williams on 3
May 2005 loaned ₤100,000 to Sceptre Services at the request of Mr Rayer
because the company was experiencing cash flow difficulties. The loan was
repaid in June 2005, for which Dr Williams received an additional
₤12,660. At the time Dr Williams did not see anything wrong in lending
the money as he believed he was helping out a friend. Dr Williams accepted with
hindsight that the loan could be perceived as suspect, particularly as Sceptre
Services could be described as a competitor of the Appellant. Officer Phillips
accepted that the loan had no relevance to the Appellant’s state of knowledge
in respect of the four disputed transactions. In his view the circumstances of
the loan demonstrated the closeness between Appellant and Sceptre Services and
indicative of the Appellant’s method of trading.
43. In July and
October 2005 the Appellant paid commission of one per cent to the value of
₤2,447 to Sceptre Services. The commissions related to trades for which
the Appellant stood in for Sceptre Services, which was unable to fulfil its
commitments. Dr Williams acknowledged that this arrangement enabled the
Appellant to have direct contact with the customers and suppliers of Sceptre
Services. Dr Williams insisted that he did not abuse the trust placed in him by
Mr Rayer of Sceptre Services despite the fact that the Appellant in its own
right conducted subsequent transactions with the same suppliers involved in the
commission transactions.
The Disputed Transactions
Overview
44. The disputed
transactions took place in the 07/06 period when the Appellant made 13 deals,
nine deals as a buffer, involving sales to the value of ₤1,837,019 to
other UK traders, and four deals as a broker, despatching goods of a value of
₤1,214,337 to VAT registered companies in other EU Member States. The
four broker deals constituted the disputed transactions.
45. The disputed
deals involved supplies of Astra semi-conductors on 14 July 2006, 18
July 2006 and 19 July 2006 which the Appellant acquired from the same company,
Culmain Limited, and made onward sales to ASAP Trading GMBH in Austria (deals
7, 8 and 9), and to TK Components Limited in Malta (deal 10). The goods were
held at freight forwarders, Tech Freight Limited. In deal 7 the goods were
shipped to Rotterdam in the Netherlands. In deals 8 and 9 they were shipped to Innsbruck, Austria, and to Germany in deal 10. Evidence from the Austrian authorities
showed that ASAP in deals 7, 8 and 9 sold the goods onto TK Components.
Evidence from the Maltese Authorities showed that in deal 10 TK Components sold
the goods onto Nexdata SRL in Italy
46. Officer Phillips
traced from the documentation the chain for each deal. He discovered that each
deal was connected with a tax loss occasioned by a defaulting trader. The
Appellant did not challenge the composition of the deal chains. The details of
the deal chains are set out below including the prices charged and the mark up
achieved by each trader.
|
Deals
|
7
|
8
|
9
|
10
|
|
Date
|
14.07.06
|
18.07.06
|
18.07.06
|
19.07.06
|
|
Goods (per Coracle’s sales invoice)
|
Astra Semiconductor ASI124775-BGA
|
Astra Semiconductor ASI124775-BGA
|
Astra Semiconductor ADC500A819
|
Astra Semiconductor ASI124775-BGA
|
|
Quantity
|
3,200
|
1,600
|
2,080
|
4,800
|
|
-5
|
Papoose
£89.35
|
Papoose
£89.35
|
Papoose
£126.35
|
Papoose
£89.35
|
|
-4
|
EMS
£89.60
+25p
|
EMS
£89.60
+25p
|
EMS
£126.60
+25p
|
EMS
£89.60
+25p
|
|
-3
|
Connect
£89.80
+20p
|
Connect
£89.80
+20p
|
Connect
£126.80
+20p
|
Connect
£126.80
+20p
|
|
-2
|
Maximize
£90.00
+20p
|
Maximize
£90.00
+20p
|
Maximize
£127.00
+20p
|
Maximize
£90.00
+20p
|
|
-1 (Supplier)
|
Culmain
£94.00
+£4.00
|
Culmain
£94.00
+£4.00
|
Culmain
£134.00
+£7.00
|
Culmain
£94.00
+£4.00
|
|
Broker
|
Coracle
£96.35
+£2.35
|
Coracle
£96.56
+£2.56
|
Coracle
£137.97
+£3.97
|
Coracle
£96.78
+£2.78
|
|
+1 (Customer)
|
ASAP
€141.10
|
ASAP
€141.60
|
ASAP
€202.60
|
TK
|
|
+2
|
TK
|
TK
|
TK
|
-
|
47. The deal chain
analysis identified E Management Solution (Europe) Limited (EMS) as the UK acquirer of the goods for the Appellant’s disputed transactions. EMS was incorporated on
29 January 2002 and registered for VAT on 6 March 2002. A Mr Bhutta acquired
the company in February 2006. On 10 August 2006 Mr Bhutta advised HMRC Officers
that EMS only dealt in semi-conductors, and had one supplier Papoose based in
Slovakia and one customer, Connect Communications Limited (Connect), based in
Birmingham UK. Mr Bhutta, however, failed to produce the business records for EMS despite frequent requests from HMRC. On 19 October 2006 Officer Marescaux assumed
control of the investigation into EMS. He found that, since Mr Bhutta took over
as director, EMS’ turnover increased to a figure of ₤10.5 million. EMS supplied just one VAT return showing output tax of ₤179.79 due to HMRC. Officer
Marescaux decided that EMS had incurred tax losses of ₤1.9 million for
which assessments were raised to recover the unpaid VAT. The assessment of 4
September 2007 in the sum of ₤459,292.83 included the tax losses
occasioned by the four disputed deals, which amounted to ₤200,536. EMS has not paid the assessments or appealed against them. EMS also traded with SMS Ireland
in high energy drinks after being de-registered for VAT.
48. The records
obtained by HMRC from Tech Freight, the freight forwarder, highlighted another
participant in the deal chains, Tamlex Trading Limited in Cyprus, which authorised the release of the goods to Papoose in the disputed deals. The e
mail from Tamlex releasing the goods to Papoose was timed after Papoose had
already released the goods to EMS.
49. HMRC adduced
evidence of third party payments in the deals which consisted of payment
instructions from Papoose to EMS in the four deals, requiring EMS to pay the
majority of purchase monies to Tamlex with a small amount to OPM based in Dubai. EMS in turn issued payment instructions to Connect to make its payments to Tamlex and
OPM with a residual amount of about ₤1,000 to EMS.
50. The analysis of
the mark-ups for each trader in the deal chains showed that EMS achieved a mark
up of 0.28 per cent in deals 7, 8, and 10, and a mark up 0.18 per cent in deal
9; Connect: 0.22 per cent mark up for deals 7, 8, 10 and 0.16 per cent for deal
9; Maximize: 0.22 per cent mark up for deals 7, 8, 10 and 0.16 for deal 9. The
mark up for Culmain was 4.4 per cent for deals 7, 8, and 10, and 5.51 per cent
for deal 9. The Appellant’s mark up was 2.50 per cent (deal 7), 2.72 per cent
(deal 8), 2.96 per cent (deal 9) and 2.96 per cent (deal 10). Officer Phillips
speculated that the higher mark up for Culmain, the Appellant’s supplier, was
because Culmain wanted to avoid extended verification of its repayment claims.
51. The purchase and
sales orders issued by the Appellant, its supplier and customers and Maximise in
the disputed deals contained detailed specifications for the goods. The
corresponding documents for Connect, EMS and Papoose did not incorporate the
same level of specification for the semi-conductors.
52. The goods for
each deal were held at Tech Freight, the freight forwarder. The traders issued
instructions to the freight forwarder to release the goods to the next trader
in the chain. The individual deals transferring the goods in each chain were
concluded on the same day.
53. The bundle did
not include a complete record of the payments made between the parties. The
Appellant released the goods to ASAP and TK components before it received payment
from them. The Appellant did not pay its supplier until it had received payment
from its customer.
54. The Appellant
did not operate arrangements to retain title on the goods until payment, which
meant that it ran a significant commercial risk in passing title to the goods
to its customers before receipt of payment.
55. Dr Williams
considered that he was fortunate not to lose money on the deals but the
Appellant’s customers honoured their side of the bargain which he thought they
would do following his contact with them. Dr Williams acknowledged that it
would have made more commercial sense to protect the Appellant’s position by
making sure that title did not pass before payment was made for the goods. Dr
Williams asserted he was entitled to make that decision at the time and he
lived by it. Dr Williams indicated that Culmain was prepared to await payment
because at the time it was having problems with its bank account with First
Curacao International Bank NV (FCIB) in the Netherland Antilles.
56. The Appellant’s
record of its payments and receipts in respect of each deal was recorded in its
bank statements with Lloyds TSB. The details are set out below:
|
Deal
|
Receipt from customer and date
|
Payment out to supplier and date
|
Balance in Appellant’s bank account at date of deal
|
Net Margin on each deal
|
|
7: 14 July 2006
|
₤308,313
(18 July)
|
₤353,.440
(18 July)
|
₤245,950
|
₤7,513
|
|
8/9: 18 July 2006
|
₤441,446
(19 July)
|
₤504,216
(19 July)
|
₤199,038
|
₤12,326
|
|
10: 19 July 2006
|
₤464,538
(21 July )
|
₤530,160
(24 July)
|
₤312,635
|
₤13,338
|
57. The bundle
contained records of payment between Maximize and Connect for the disputed
deals in the form of intra account transfers with FCIB which showed that
funds were transferred on the same day as the goods were released. The
Appellant’s supplier, Culmain, held an account with FCIB. The Appellant’s bank
account was with Lloyds TSB.
58. The Appellant’s
nine buffer deals in period 07/06, which involved trades in iPods, CPUs and
Astra semi-conductors were all traced back to a defaulting trader, and in seven
of those deals the Appellant’s customer was Sceptre Services.
Deal 7
59. The deal took
place on the 14 July 2006 and was for a supply of 3,200 Astra semi-conductors
(ASI 124775-BGA).
60. The deal was
evidenced by the following documentation produced by the Appellant:
(1)
The Appellant’s Redhill confirmation of the VAT registration numbers of
Culmain and ASAP dated 14 July 2006.
(2)
ASAP’s purchase order dated 14 July 2006 for 3,200 Astra semi-conductors
(ASI 124775-BGA) with the following specification: Enhanced DMA: 64 channels;
Timers: 3; I/0: 3.3 V; MIPS: 4,800, Frequency: 600MHz; Full device power: 1.06W.
The order also contained additional information: Goods on C-Status//new
condition//sealed in original foil//price FOB Tech Freight London
Heathrow//goods will be picked up by MITT NL// MITT will provide you with
driver/truck details//freight and insurance costs on ASAP Trading GMBH.
(3)
Appellant’s purchase order dated 14 July 2006 to Culmain 2006 for 3,200
Astra semi-conductors (ASI 124775-BGA), which had an additional specification
of an operating voltage of 1.4V. The Appellant’s e mail to ASAP dated 14 July
2006 mentioned the operating voltage of 1.4V.
(4)
Culmain’s sales invoice dated 14 July 2006 to the Appellant was for
3,200 Astra semi-conductors with a reference of AS/124775-BGA instead of ASI
124775-BGA. The sales invoice stated that the goods came with full
manufacturer’s warranty and were held at Tech Freight Ltd. The sales invoice
was accompanied by a supplier’s confirmation of due diligence which stated that
Culmain had a valid VAT number and was trading under the guidelines laid out by
HMCE. Culmain confirmed that it had carried out extensive due diligence of its
suppliers and that it had no reason to suspect that there was anything wrong
with the supply chain.
(5)
Appellant’s invoice to ASAP dated 14 July 2006 for 3,200 Astra
semi-conductors (ASI 124775-BGA).
(6)
Culmain’s fax dated 14 July 2006 to Tech Freight releasing 8 boxes of 400
units Astra semi-conductors with a reference of AS/124775-BGA to Dilwyn @
Coracle Ventures Limited.
(7)
Appellant’s notice dated 14 July 2006 to Tech Freight releasing 3,200
Astra semi-conductors (ASI 124775-BGA) to ASAP Trading giving the freight
company as Brinkman with truck details BR-TZ-72.
61. Dr Williams
first met Wolfgang Seher of ASAP in 2005 in Cardiff. Their next meeting was at
ASAP offices in Kufstein Austria on 26 April 2006 when Mr Eugene Tuninga was
also present. In July 2006 Mr Seher invited Dr Williams to attend the football
World Cup semi-final match at Munich on 5 July 2006 between Portugal and France. On the following day Dr Williams met Messrs Seher and Tuninga at their offices,
where they asked Dr Williams to source semi-conductors for them. Dr Williams
contacted the Appellant’s usual suppliers, Culmain, Maximize and Leisure Communications,
to enquire whether they could provide the semi-conductors. Culmain was the only
supplier which was able to meet Dr William’s request.
62. Dr Williams concluded
deal 7 on his mobile phone whilst he was in Malta discussing a prospective
trade with TK Components. Dr Williams explained that he was able to e mail from
Malta the necessary documentation to the Appellant’s supplier and the freight
forwarder to progress the sale. Dr Williams was in flight from the UK to Malta from 06:50 to 10:00. Redhill confirmed the VAT registration numbers of Culmain and ASAP in
a fax which was timed at 09:36 on 14 July 2006. Dr Williams pointed out that he
had contacted Redhill prior to the 14 July 2006 in anticipation that a deal
would be struck.
63. Dr Williams
produced a series of e mails between himself and Mr Seher evidencing the
discussions on deal 7:
(1)
E mail dated 14 July 2006 14.55 from Dr Williams to Mr Seher:
“Following our telephone conversation earlier this
week I have managed to source some semi-conductors that you might be interested
in purchasing.
The specification of the semi-conductors is as
follows:
Astra-Semiconductors – part number – AS/124775 – BGA
Enhanced DMA (channels) 64 – Timers 3
Operating voltage (V) core 1.4V – 1/0 3.3 – MIPS
4800
Frequency 600 MHZ – Full device power 1.06W
I have eight boxes (400 pcs) per box available today
if you are interested. Please call me on my mobile to discuss costs”.
(2)
E mail dated 14 July 2006 15:39 from Mr Seher to Dr Williams:
“ Perfect I had a request exactly on this mentioned
items during the week, I was reading your mail before and passed on these
specs as well to the requester from last week. They were in first sight a bit
different but it showed up that it was follow up spec on the same basis. So
everything is looking fine. Only disadvantage is that I had a request on 9500
units of this and 4800 units of a lower spec of this ASTRA brand …………….
I will get a final confirmation in a few minutes. In
case the deal is up, what price would u offer them to us? Is the condition new?
Which warehouse are they stored in the moment or are they in your office? ……
(3)
E mail dated 17 July 2006 08:17 from Mr Seher to Dr Williams:
“Goods are on the way to our office in Austria now after the Saturday in Netherlands. We expect them to be in around 1200. From this time
on I will update you on the payment situation but it looks like the money will
hit your account by tomorrow regarding the cut off time in GBP …….”
64. Dr Williams
disagreed that the contents of the emails on 14 July 2006 suggested that he was
still discussing the deal with ASAP well into the afternoon. Dr Williams
asserted that the deal had been struck by the time of the emails, and that they
were just a formal record of what was going on. The Appellant’s note releasing
the goods to ASAP was timed at 15:18 GMT (16:18 BST). Dr Williams acknowledged
that he had a busy day on 14 July 2006, describing it as manic and a nightmare.
65. Tech Freight
supplied an inspection report for the goods of deal 7 dated 14 July 2006. Dr
Williams issued instructions for the report over the phone. The report stated
that Tech Freight had carried out a 100 per cent physical inspection which Dr
Williams understood to be looking at the boxes, making sure they were not
damaged and taking a note of the box numbers. The inspection report also
recorded the name of the manufacturer, the model type and specification, and
the country of origin, which was Malta.
Deals 8 & 9
66. These deals took
place on 18 July 2006 and were for the supply of 1,600 Astra semi-conductors
(ASI 124775-BGA) (deal 8), and 2,080 Astra semi-conductors (ADC500A819) (deal
9).
67. Deals 8 and 9
were evidenced by the following documentation produced by the Appellant:
(1)
The Appellant’s Redhill confirmation of the VAT registration numbers of Culmain,
ASAP and TK Components Ltd dated 19 July 2006.
(2)
ASAP’s purchase order dated 18 July 2006 which requested the Appellant to
supply it with two different devices. The first device involved 1,600 Astra
semi-conductors (ASI 124775-BGA) with the following specification Enhanced DMA:
64 channels; Timers: 3; I/0: 3.3 V; MIPS: 4,800, Frequency: 600MHz; Full device
power: 1.06W. The second device involved 2,080 Astra semi-conductors ADC500A819
Analogue to Digital Converter with the following specification ADC Single 16
Bit. The order also contained additional information: Goods on C-Status, new
condition, sealed in original foil, clean and dust free, 1 year warranty,
delivery location Kuehne & Nagel Worgl price exw Techfreight. Goods will be
sent with UPS account number 1Z29902Y. Freight and insurance costs to ASAP.
(3)
Appellant’s purchase order dated 18 July 2006 to Culmain 2006 for 1,600
Astra semi-conductors (ASI 124775-BGA), which had an additional specification
of an operating voltage of 1.4V, and 2,080 Astra semi conductors ADC500A819,
Analogue to Digital Converter ADC single 16 bit.
(4)
Culmain’s sales invoice dated 18 July 2006 to the Appellant for 1,600
Astra semi-conductors with a reference of AS/124775-BGA instead of ASI
124775-BGA and for 2,080 Astra semi-conductors ADC500A819 Analogue to Digital
Converter ADC single 16 bit in 3 boxes of 600 units and 1 box of 280 units. The
sales invoice stated that the goods came with full manufacturer’s warranty and
were held at Tech Freight Ltd. The sales invoice was accompanied by a supplier’s
confirmation of due diligence dated 18 July 2006 which stated that Culmain had
a valid VAT number and was trading under the guidelines laid out by HMCE.
Culmain confirmed that it had carried out extensive due diligence of its
suppliers and that it had no reason to suspect that there was anything wrong
with the supply chain.
(5)
Appellant’s invoice to ASAP dated 18 July 2006 for 1,600 Astra
semi-conductors (ASI 124775-BGA), and 2,080 Astra semi-conductors ADC500A819.
(6)
Culmain’s fax dated 18 July 2006 to Tech Freight releasing 4 boxes of
400 units Astra semi-conductors (AS/124775-BGA) and 3 boxes, 600 units and 1
box, 280 units of Astra semi-conductors ADC500A819 to Dilwyn @ Coracle Ventures
Limited.
(7)
Appellant’s notice dated 18 July 2006 to Tech Freight releasing 1,600
Astra semi-conductors (ASI 124775-BGA), and 2,080 Astra semi-conductors (ADC500A819)
to ASAP Trading giving the freight company as De Wilde/Van Dongen with truck
details BN-DX-05 and driver as Marien van Staalduinen..
68. Tech Freight
supplied an inspection report for the goods of deals 8 and 9 dated 18 July 2006
recording that it had carried out a 100 per cent physical inspection. The
inspection report also recorded the number of boxes (8), name of the manufacturer,
the model types and specification, and the country of origin, which was Malta.
69. Dr Williams’ and
Mr Seher’s discussions in respect of deals 8 and 9 were recorded on e mail
exchanges:
(1)
E mail dated 18 July 2006 12:54 from Mr Seher to Dr Williams:
“We have an open order on hand with following
quantities and specs:
13000 pcs of AS/124775-BGA (second version)
DMA 64 – Timers 3 Operating voltage (V) core 1.4V –
1/0 3.3 – MIPS 4812 Frequency 600 MHZ - Power 1.06W
4900pcs astra adc500a819
Our target prices – 137.70 GBP and 96.35 GBP
(2)
E mail dated 18 July 2006 14.48 from Dr Williams to Mr Seher:
“Ok –thanks for the enquiry.
I’ve just come off the phone from my supplier and
the quantities that you are asking might be a problem at such short notice.
The best I can come up with for today is 1600 pcs of
ASI 124775 –BGA @ ₤96.75 and 2080 pcs of ADC500A819 @ ₤138.25
–sorry
Please let me know if you are interested (via my
mobile ……”
(3)
E mail dated 18 July 2006 15:16 from Mr Seher to Dr Williams:
“I think we have worked out a good compromise in
pricing today. Thanks for your understanding – but as you can see yourself the
rate for eg from EU to GBP has really changed a lot”.
70. Dr Williams was
unable to source the second version of the semi-conductor AS/124775-BGA.
According to Dr Williams, ASAP accepted the original version of the
semi-conductor sold in the 14 July 2006 deal. The difference between the two
versions was marginal and related to the speed of operation 4,800 million
instructions per second (MIPS) as opposed to 4812.
Deal 10
71. This deal took
place on 19 July 2006 and was for the supply of 4,800 Astra semi-conductors
(ASI 124775-BGA).
72. The deal was
evidenced by the following documentation produced by the Appellant:
(1)
The Appellant’s Redhill confirmation of the VAT registration numbers of
Culmain, ASAP and TK Components Ltd dated 19 July 2006.
(2)
TK Components purchase order dated 19 July 2006 which requested the
Appellant to supply it with 4,800 Astra semi-conductors (ASI 124775-BGA) with
the following specification Enhanced DMA: 64 channels; Timers: 3; I/0: 3.3 V;
MIPS: 4,800, Frequency: 600MHz; Full device power: 1.06W. The order also
contained additional information: currency:GBP; delivery terms EGL Global
Logistic c/o TK Comp. Munich; payment terms 100% same day TT inspection.
(3)
Appellant’s purchase order dated 19 July 2006 to Culmain for 4,800 Astra
semi-conductors (ASI 124775-BGA), which had an additional specification of an
operating voltage of 1.4V.
(4)
Culmain’s sales invoice dated 19 July 2006 to the Appellant for 4,800
Astra semi-conductors with a reference of AS/124775-BGA instead of ASI
124775-BGA. The sales invoice stated that the goods came with full
manufacturer’s warranty and were held at Tech Freight Ltd. The sales invoice
was accompanied by a supplier’s confirmation of due diligence dated 19 July 2006
which stated that Culmain had a valid VAT number and was trading under the
guidelines laid out by HMCE. Culmain confirmed that it had carried out
extensive due diligence of its suppliers and that it had no reason to suspect
that there was anything wrong with the supply chain.
(5)
Appellant’s invoice to TK Components dated 19 July 2006 for 4,800 Astra
semi-conductors (ASI 124775-BGA).
(6)
Culmain’s fax dated 19 July 2006 to Tech Freight releasing 12 boxes of
400 units Astra semi-conductors (AS/124775-BGA) to Dilwyn @ Coracle Ventures
Limited.
(7)
Appellant’s notice dated 19 July 2006 to Tech Freight releasing 4,600
Astra semi-conductors (ASI 124775-BGA) to TK Components requesting the shipment
of goods to EGL Eagle Global Logisitics c/o TK Components Lohstrasse 28a 85445
Schwaig/Germany, Thomas Kuhn plus contact numbers.
73. Tech Freight
supplied an inspection report for the goods of deal 10 dated 19 July 2006
recording that it had carried out a 100 per cent physical inspection. The
inspection report also recorded the number of boxes (12), name of the manufacturer,
the model types and specification, and the country of origin which was Malta.
74. On 29 May 2006
TK Components Limited sent a formal introduction by email to the Appellant. Dr
Williams, however, pointed out that he had earlier contact with Tom (surname
unknown) of TK Components, which led to the email of 29 May 2006.
75. Dr Williams and
Ms Sammut of TK Components Ltd concluded the details of deal 10 by e mail:
(1)
E mail dated 19 July 2006 13.09 from Dr Williams to Ms Sammut:
“Following our conversation this morning and our
meetings over the weekend I’m very pleased to let you know that I have managed
to source some of the semiconductors that you require.
I have approximately 5,000 pieces of Astra
semi-conductor – ASI124775-BGA available to me if you are interested.
Would you please call me on my mobile to discuss
prices?”
(2)
E mail dated 19 July 2006 16:23 from Ms Sammut to Dr Williams:
“ As well thanks for being reachable all the time
and your researches on the BGY spec of ASI. Because the semi-conductors have to
reach the factory in dust free condition it is not possible to open them during
an inspection – therefore we ask you kindly that we might pay after receiving
them with our client.
……. In order to complete our first deal, the
purchase document is attached to you within this mail. Normally we send goods
as well to Malta but in this case wants them urgent in south Europe. That is
why we choose Munich as delivery location. The worldwide known Forwarder EGL
will receive them and couriers them on for us”.
76. The TK
Components’ purchase order was for 4,800 semi-conductors, not the approximate
5,000 mentioned in Dr Williams’ e mail dated 19 July 2006. Officer Phillips
expressed his surprise that the Appellant had not corrected the anomaly between
the purchase orders of the Appellant and its customers regarding the additional
specification of 1.4V.
Due Diligence
77. Dr Williams
emphasised that the Appellant did not do business with anybody unless he was
satisfied that they were genuine business people. Dr Williams considered that
the due diligence was first and foremost an information collecting exercise,
the purpose of which was to protect his investment in the business.
78. Dr Williams said
that the Appellant’s due diligence procedures for goods included:
(1)
Check the marked price of the goods via discussions with various
suppliers and customers.
(2)
Ask the freight forwarder if the goods existed.
(3)
Obtain copies of inspection reports for the goods.
(4)
If possible, check if the goods had been previously supplied.
79. Dr Williams
stated that the Appellant’s due diligence procedures for suppliers and
customers included:
(1)
Visit and meet them at their premises.
(2)
Complete trading applications forms.
(3)
Obtain a formal letter of introduction and copies of company registration
and VAT certificates.
(4)
Contact trade referees to check trading history
(5)
Perform credit checks using credit safe
(6)
Check their VAT number with HMRC
(7)
Obtain a signed supplier’s declaration
80. On or around
March 2006 Dr Williams introduced trade application forms for his customers and
suppliers as part of the due diligence procedures and devised written terms and
conditions for the Appellant’s dealings. He intended to draft separate
conditions for the Appellant’s sales from its purchases but did not get round
to it. Dr Williams accepted that the written terms and conditions did not apply
to his purchases and sales in the disputed deals. The Appellant’s customers and
suppliers did not signify in the trade application form their agreement to the
terms and conditions. Dr Williams said that he had an understanding with the
Appellant’s supplier, Culmain, that it would handle problems with defective
goods.
81. The Appellant
had a process by which it would keep a list of the box numbers of the products
(including the semi-conductors) it bought, and check those numbers against
those recorded in the inspection reports. This process was introduced to ensure
that the Appellant was not dealing in circular trades of the same goods. Dr
Williams also mentioned that Mr Sehr of ASAP also put a mark on the boxes of
the goods traded by his company. Dr Williams stated that he received
confirmation from Mr Sehr that there no such marks on the boxes of the
semi-conductors in deals 7, 8 and 9.
Culmain
82. Dr Williams
could not recall how he made initial contact with Culmain, which did not
advertise on the ICB website. The Appellant’s first trade with Culmain was on
15 May 2006, and the customer for the goods was ASAP Trading. Dr Williams
denied that ASAP trading put the Appellant in touch with Culmain. According to
Dr Williams, Mr Malik from Culmain visited him in Cardiff as part of its due
diligence on the Appellant before they did their first trade. On 30 June 2006
Dr Williams conducted his own visit of Culmain’s premises where he met its
directors.
83. The completed
trading application form for Culmain Limited was dated 10 April 2006. Mr Malik,
the company secretary, declared that the annual turnover for Culmain was
₤50 million with a date of incorporation of 6 August 2003. Mr Malik gave
a hotmail address for his email. The form in the bundle included copies of the
VAT registration certificate, certificate of incorporation, and bank details
for Culmain but did not have copies of audited accounts, VAT returns, utilities
bills and various other documents said to be with the trading application form.
84. Dr Williams
insisted that at the date of the trade application form he was given the
missing documents by Culmain but they had been subsequently lost when he moved
his office from the upstairs of his house in Cardiff to the garage below. He
did not consider the e mail address for Mr Malik unusual even though Culmain
was a company with a ₤50 million annual turnover.
85. Dr Williams
asserted that he carried out on-line Credit Safe checks on Culmain at
the time of entering into the transactions. He supplied one undated hard copy
of a Credit Safe report which did not give a turnover figure for the
years ended 31 March 2004 and 2005 and indicated that the company was dormant
during those years. The report showed that Culmain’s shareholder funds
increased from ₤100 to ₤92,000, it had a recommended credit limit
of ₤12,000 and a credit rating of 73 per cent. Dr Williams did not
consider that it was necessary to have undertaken further financial enquiries
about Culmain, despite the apparent inconsistency between a declared turnover
of ₤50m in the trade application form and a credit limit of ₤12,000.
In Dr William’s opinion he considered Culmain’s credit rating reasonable, and
his satisfactory meetings with its directors were sufficient for him to
conduct trades with Culmain.
86. Dr Williams said
that at the first meeting with Mr Malik they discussed the background to
Culmain’s business, and filled out various due diligence forms. Dr Williams
accepted that he did not ask why Culmain turned over ₤50 million in such
a short period of time because it was not a nice question to ask. The
information that he got from the meeting was that Mr Malik was prepared to
travel down from Manchester, and that he presented himself in a good light,
which in Dr William’s view reflected well on the company. Dr Williams formed
from the meeting a good opinion of Culmain, which has proved correct as the
company was still in existence and trading today. Dr Williams also pointed out
that Culmain had been reliable suppliers, with its product arriving on time at
the freight forwarders and with no problems over release notes.
87. Dr Williams
acknowledged that Culmain would not agree to the Appellant’s terms and
conditions because, according to Culmain, they did not reflect the correct
relationship with a supplier.
88. Dr Williams
believed he could do nothing more to check the bona fides of Culmain. He
considered that the most important thing was to develop relationships with his
suppliers, which enabled better pricing.
ASAP Trading GMBH
89. ASAP Trading
provided the Appellant with a trade application form dated 4 April (no year
given). At page 2 of the form ASAP omitted to declare its annual turnover. At
page 4 the names of two trade referees were supplied. They were both freight
forwarders, Mitt Warehouse BV in Rotterdam and Forward Logistics in Ashford.
The pack contained information in the German language apparently relating to company
and VAT registration.
90. Dr Williams
accepted that he did not ask ASAP for copies of its management accounts.
Further the trade application form did not include all the documents requested,
and that he was unable to translate the documents written in the German
language. In Dr William’s view, the company was a collection of people, and if
the people who represented the company were genuine and straight that was a
strong indication of a bona fide company. Dr Williams spent money to meet the
personnel of ASAP. He based everything that he did on trusting people and
developing relationships.
TK Components Limited
91. TK Components
provided the Appellant with a trade application form dated 23 June 2006. On
page 2 of the form the address given by TK was incomplete and the section for
annual turnover was left blank. At page 4 only one trade reference (Mitt Warehouse BV in Rotterdam) had been supplied and there was no information in respect of
the bank account.
92. Dr Williams
considered the website of TK Components decent, having eight to ten pages and
clearly stating that they were trading in CPUs and iPods. Dr Williams was not
concerned about the failure of TK Components to declare its turnover on the
form. In his view, turnover was not a critical decision-making point. Dr
Williams did not notice that the date of incorporation declared on page 2 was
inconsistent with the date given in the documentation evidencing incorporation.
93. Dr Williams
denied that he had not exercised proper care in respect of the information
given by TK Components. Dr Williams asserted that he had looked at the
information. He checked that TK Components was a registered company and held a
valid VAT number. Dr Williams had spoken and met its directors and contacted
the trade reference given to confirm that TK Components had an account with it.
94. Dr Williams
could not perform a credit check on TK Components as it was based in Malta. He considered that the granting of credit to the company was a personal thing which
had nothing to do with HMRC. Dr Williams formed his view on the
creditworthiness of the company from his personal meetings with the directors
of TK Components. He could not remember whether he was given information on the
financial position of TK Components by the directors.
The Freight Forwarders
95. Dr Williams
visited the freight forwarders, Tech Freight and Forward Logistics, used by the
Appellant. He also carried out a Credit Safe check on Tech Freight. The
purposes of the visits were to assess their operations and security. He could
not recall the insurance arrangements for the freight forwarders.
Insurance
96. On 24 March 2006
the Appellant set up facilities with Iain Brown of Risk Protection for instant
cargo insurance if required for the transport of goods. The Appellant, however,
did not use the facility because the goods were on risk for a short period of
time. The Appellant transferred title to the goods when it released them to
its customers. In the disputed transactions the Appellant’s customers took on
the responsibility for insuring goods.
The Semi-Conductors
97. Semi-conductors
are miniature integrated circuits which are used in the manufacture of
virtually all electronic products. They are not High Street products sold to
individual consumers but are purchased in large quantities by manufacturers. The
size of the individual semi-conductor exhibited in a photograph equated to that
of the current one pence piece.
98. On 27 November
2006 Officer Phillips discussed Astra semi-conductors with Dr Williams who
stated that he never found out the manufacturer of the semi-conductors and that
his research on the products was based on the Appellant’s customer’s
requirements. Dr Williams believed that the semi-conductors were used in smoke
detectors or pacemakers, and destined for medical use in Switzerland. Dr Williams expressed his view that the semi-conductors were manufactured in China and repackaged in Malta. Dr Williams promised to provide Officer Phillips with information on
the conductors which he did the same afternoon.
99. The information
consisted of five photographs which showed the product in various packaging
states. The outer package was a cardboard box, inside which the product was
sealed in a silver foil wrapper. The box and the silver foil were labelled
Astra semi-conductor with a type number and a trace barcode. The label
indicated that the product was manufactured in Malta. The packaging gave no
contact details for the manufacturer. One photograph showed an individual
semi-conductor which had the name of Astra semi-conductor with product number
ADC500A819-R1, the subject of deal 9. Mr Coughlin believed that the photograph
showed a Texas Instruments TMS320320C6412 Fixed Point Digital Signal Processor
Integrated Circuit which was incompatible with the type of the product, an
analogue to digital converter, identified by the Astra product number,
ADC500A819-R1, affixed to the device in the photograph.
100.The other
information supplied comprised a brochure entitled Intelligent and Powerful and
a document entitled Guidelines for handling and processing Moisture
Sensitive Surface Mount Devices (SMDs), which was a generic document. The
latter mentioned that the reader of the document should check with Intersil
about the suitability of the product for a particular soldering process.
Intersil was a manufacturer of semi-conductors of high repute. Mr Coughlin knew
of no connection between Intersil and Astra
101.The brochure
gave details of the Astra semi conductor and stated that Astra had over 30
years of experience in the design and manufacturing of semi-conductor solutions
for the medical market place. The brochure on its back page stated that Astra
had sales offices and technical service centres throughout the USA, Europe and Asia. Further Astra had a production, sort and test facility in Malta. The brochure showed a photograph of a factory in Shenzhen China. The brochure gave
no contact details for Astra.
102.On the 3
August 2007 Officer Phillips requested further technical information on the
semi-conductors. Officer Phillips pointed out that the brochures provided on
the 27 November 2006 were generic in nature and did not refer to the specified
product. Also the printed information supplied no contact details for Astra. Dr
Williams responded by reminding Officer Phillips of his belief that the
semi-conductors were re-branded and repackaged versions of another
manufacturer’s devices. Dr Williams had discovered that semi-conductor, ASI
124775-BGA, was a re-branded version of Texas Instrument part number
TMS320C6412-600, for which he provided the technical specifications. Dr
Williams also supplied a copy of a brochure for the AMI semi-conductor, which appeared
to be the document plagiarised by persons unknown to produce the Astra
semi-conductor brochure provided by Dr Williams to Officer Phillips in November
2006.
103.Dr Williams
was unable to recall in evidence his source for the information given to Officer
Phillips about the semi-conductors being destined to an end user of medical
equipment in Switzerland. Dr Williams believed his statement regarding use of
semi-conductors in smoke alarms and pace-makers was derived from him simply
picking out those uses from the list given in the plagiarised brochures.
104.According to
Dr Williams, he asked Culmain to provide him with information on the
semi-conductors, which consisted of the two documents and the five photographs
supplied to Officer Phillips on 27 November 2006. Dr Williams gave conflicting
accounts of the date when he requested the information from Culmain. During the
cross examination of Mr Coughlin, Dr Williams’ counsel on instruction informed
the Tribunal Dr Williams’ request was made in May 2006, which conflicted with
Dr William’s later evidence that he first heard of the semi-conductors at his
meeting with ASAP in July 2006.
105.Dr Williams requested
the information from Culmain to validate the existence of the Astra
semi-conductors. Dr Williams accepted that Culmain did not provide him with a
catalogue or list of products, which in his view was unnecessary as his
customer had provided him with a part number. Dr Williams explained that the
photographs were of examples of the product not the actual semi-conductors
traded in the disputed deals. The photograph of the cardboard box, however,
corresponded with a box which Dr Williams saw at the premises of Tech Freight
on 17 July 2006. Dr Williams and the freight forwarders were not able to inspect
the semi-conductors as they were wrapped in sealed foil to protect them from
contamination. Mr Coughlin confirmed that semi-conductor devices had to be
handled with care. The devices were very susceptible to damage by electrostatic
discharge. Ideally semi-conductors should only be inspected in laboratory conditions.
106.Dr Williams
asserted that it was Mr Sehr of ASAP who first raised the subject of the Astra
semi-conductors at their meeting on 6 July 2006 following the World Cup
semi-final. According to Dr Williams, Mr Sehr was very excited about securing a
new customer for a new product. Mr Sehr did not divulge to Dr Williams the
detail of the end product for which the semi-conductors were required and the
name of the customer. Mr Sehr did not have a great understanding of Astra
semi-conductors.
107.When Dr
Williams returned to the United Kingdom he asked his friend, Mr Lewis, to find
out about the semi-conductors. Mr Lewis confirmed that he received a phone call
from Dr Williams regarding the semi-conductors. He originally said in evidence
that the phone call took place on the 6 July 2006, however, this date was taken
from notes used to refresh his memory during his testimony. The notes had
various dates crossed out. Mr Lewis could not explain how he arrived at the date
of the 6 July. Dr Williams equally had no explanation for Mr Lewis’ jottings
of various dates. Dr Williams denied that he had discussed the case with Mr
Lewis.
108.Dr Williams
did not investigate Astra semi-conductors online. He considered that Mr Lewis was
good at this sort of stuff. Dr Williams stated that it was a waste of
his time to do the enquiries about the semi-conductors because he did not know
what they were. Dr Williams asked Mr Lewis to check the correctness of the
specification and the price of the semi-conductors. The purpose of the
enquiries was to ensure that the specifications were realistic, not to confirm
the existence of the product. Dr Williams considered that, as his customer had
requested a supply of the semi-conductors, the product must exist.
109.According to
Mr Lewis, Dr Williams told him the brand name for the products, the
specification of one of the semi-conductors, and a description of the other semi-conductor.
Mr Lewis could not now recall whether Dr Williams gave the specification as ASI
or AS/ part number. Following the telephone conversation, Mr Lewis researched
the product online. He did not find the Astra semi-conductor but a Texas
Instrument product with the same specification for the first semi-conductor. Mr
Lewis did not find any information on the internet in relation to the second
semi-conductor. He, however, believed from his experience that such a product
(analogue to digital converter) would be readily available on the open market. Mr
Lewis agreed that it was decidedly odd that he could not find a manufacturer’s
website for the Astra semi conductors
110.Mr Lewis found
on-line a United Kingdom supplier of the first semi-conductor against which he
could check the price of that supplier against the indicative price given to
him from Dr Williams. According to Mr Lewis, the price for the first conductor
in the supplier’s website was compatible with the indicative price from Dr
Williams. Mr Lewis, however, considered the indicative price of the second semi-conductor
to be on the high side but the high figure might be justified if it met the
needs of a specific customer.
111.Mr Lewis
advised Dr Williams that he did not find a manufacturer’s website for the Astra
semi-conductors but instead had discovered a link for one of the semi-conductors
to the Texas Instruments website. Mr Lewis also advised on his findings on the
indicative prices for the conductors. Dr Williams was not concerned about the
non-existence of the manufacturer’s website. He believed that Mr Lewis’
enquiries had confirmed that the semi-conductors were real products which could
be sourced from other manufacturers. Dr Williams considered that the
semi-conductors were a clean product. He had a customer who had a demand for a
product. He saw it as a viable business opportunity. Dr Williams’ view was
that the semi-conductors existed, their specification was valid, the prices
were in the area it should be, and that the semi-conductors had been
re-branded.
112.Dr Williams
contacted his usual suppliers, Culmain, Maximize and Leisure Communication, to
enquire if they could supply the semi-conductors. Culmain was the only one of
the Appellant’s suppliers which could deliver the product. Dr Williams did not
find it surprising that one of his suppliers could provide a product of which
there was no trace on the internet, no website for the manufacturer, and not
manufactured by a major global brand such as Intel and Apple.
113.Dr Williams
had no idea until Officer Phillip’s investigation that Maximize had supplied
Culmain with the semi-conductors. Dr Williams was surprised by this revelation,
as Maximize had told him categorically that it could not supply the Appellant
with the semi-conductors. Dr Williams was also surprised that ASAP was making
onward sales of the semi-conductors purchased from the Appellant to TK
Components which happened on the day that Dr Williams was meeting with TK
Components in Malta.
114. Dr Williams
accepted that the packaging for the semi-conductors showed Malta as their place of manufacture. He believed that the products traded in the disputed
deals had been re-packaged in Malta. Dr Williams did not give thought to why
these products were brought into the United Kingdom. His overriding
considerations were that Culmain had access to semi-conductors with a
specification which was in demand by prospective customers.
115.Mr Coughlin
considered the products described on the Appellant’s invoices lacked credibility.
There was no website for Astra products. The packaging for the product gave no
contact details which meant that the ultimate purchaser of the product had no
means of checking whether its technical specification was suitable for its
intended use. In Mr Coughlin’s view, the use of these devices would be
impossible without detailed instructions on how to connect the semi-conductor
into a circuit. Mr Coughlin would have expected to have seen a data sheet with
the product which explained how the semi-conductor worked and provided the
pin-out details. The absence of a data sheet with the semi-conductors in the
disputed deals was in Mr Coughlin’s view unusual.
116. When Mr
Coughlin undertook an internet search for the bare technical details of the
semi-conductor ASI 124775-BGA it immediately linked the details to a product on
the website of Texas Instruments. Mr Coughlin found no link between Texas
Instruments and Astra. Mr Coughlin was of the opinion that the technical
details given on the Appellant’s invoices were of no value because they related
to a product manufactured by a different company from that named in the
invoices.
117.Mr Coughlin
acknowledged that a wholesaler dealing in semi-conductors would only need the
product number, particularly if it was being sourced from a reputable
manufacturer of semi-conductors. Also Mr Coughlin conceded that it was
plausible for a wholesaler to refer queries about the product to its supplier
rather than the manufacturer of the product. Mr Coughlin, however, was adamant
that it was critical for parties in the chain to be able to contact the
manufacturer to ensure the viability and reliability of the semi-conductor,
particularly as it was not possible to inspect the goods.
118. HMRC
produced in evidence an email from a Mr Cowles of Texas Instruments dated 7
December 2007 which stated:
“We do not recognize the device name ADC500A819.
We do recognize the
product named in your email as TMS320C6412 is a current Texas Instruments DSP
IC (Digital Signal Processor Integrated Circuit) with world-wide sales to our
direct customers of 141,765 units of which 42,357 units were sold to direct
customers in Europe and Israel.
As explained to you on
the telephone in addition to large equipment manufacturers to whom we sell
chips direct we do sell devices to a number of semi-conductor distributors who
in turn sell to smaller end user companies.
On the question of
re-labelling, Texas Instruments do not allow re-labelling of our products but
we do manufacture custom devices with customer specific symbolisation. Such
custom devices would have a different device name to the standard item which
they are based upon.
We do not believe that
Astra semiconductor or AMI semiconductor are direct customers of Texas
Instruments in Europe but AMI semi-conductor is a Texas Instrument competitor
that specialises in automotive, medical and aerospace applications.
We are not aware of any
counterfeiting activity relating specifically to TMS 320C6412 but in general we
are aware that our parts are subject to counterfeiting activities and we are
often asked to verify whether parts claiming to be manufactured by us are
genuine. We are also aware that unscrupulous dealers may take low specification
devices and change the markings to make them appear to be higher specification
devices”.
119. Mr Coughlin
accepted the possibility that the goods described in the invoices might be
counterfeit goods manufactured in China. Mr Coughlin, however, pointed out that
the counterfeit goods would not be treated seriously unless there was
supporting documentation. The plagiarised brochure for the Astra
semi-conductors, however, was deficient in that it contained no contact
details. In Mr Coughlin’s opinion, a trader would be acting rashly if he
accepted such documentation because he would not be able to confirm the
specification of the product. Mr Coughlin pointed out that licensed products
from Texas Instruments still retained the Texas Instruments product number on
the component package which enabled the product to be traced back to the
manufacturer so that its function could be determined.
120.Mr Coughlin
considered the prices paid by the Appellant for the semi-conductors plausible.
Mr Coughlin, however, thought that the price for the analogue to digital
converter was high which suggested it was a bespoke device. Mr Coughlin opined
that a quantity of 2,080 for a bespoke device was unusual.
Consideration
121.The Tribunal
is required to determine the following matters in respect of the disputed
transactions:
(1) Was there a VAT loss?
(2) If so, was it occasioned by
fraud?
(3) If so, were the Appellant’s
transactions connected with such a fraudulent VAT loss?
(4) If so, did the Appellant
know or should it have known of such a connection?
Was there a VAT loss?
122. The
Appellant asserted that it had no knowledge of the transactions outside its
dealings with its supplier and customers and in those circumstances was unable
to agree that there was a VAT loss in respect of the disputed deals. The
Appellant, however, did not challenge HMRC’s evidence on the tax loss which was
to the effect that HMRC suffered a tax loss at the level of EMS. The evidence
showed that since February 2006 EMS’ turnover had increased to ₤10.6
million and it had submitted just one VAT return showing output tax in the sum
of ₤179.79. EMS sourced the purported semi-conductors in the disputed
deals from Papoose in Slovakia. EMS did not account for VAT on those deals. On
4 September 2007 HMRC assessed EMS for unpaid VAT in the sum of
₤459,292.83 which included the VAT (₤200,536.00) incurred on the
disputed deals. EMS has not paid the assessment nor challenged it on Appeal. The
Tribunal is satisfied on the evidence that there was a VAT loss in each of the
four disputed transactions, which can be attributed to a defaulting trader, EMS.
Were the VAT losses fraudulent?
123. The
Appellant did not agree that any tax loss was occasioned by fraud but the
Appellant did not challenge HMRC’s evidence on the activities of EMS which appeared to be fraudulent. The Tribunal finds in relation to the evidence on EMS:
(1) An excessive high turnover
of ₤10.5 million which was achieved in a short period of time, and bore
no relationship with the trader’s business infrastructure.
(2) EMS’ failure to submit VAT
returns and keep adequate business records for the period during which the
transactions occurred.
(3) The use of third party
payments, which had the effect of depriving EMS of the necessary funds to meet
its VAT liabilities.
(4) EMS’ director’s deliberate
obstruction of HMRC’s enquiries into its VAT affairs.
(5) Non payment of the assessments
issued against it.
(6) EMS trading with SMS Ireland
in high energy drinks after being de-registered for VAT.
124.The Tribunal
is satisfied on the above findings taken together that the tax losses incurred
by EMS were occasioned by fraud.
Were the Appellant’s disputed transactions connected with fraudulent VAT
losses?
125.The Appellant
did not challenge HMRC’s evidence on the tracing of the Appellant’s disputed
transactions back to the fraudulent deals of EMS. The Tribunal is satisfied
that the traced chains of invoices, purchase orders and release notes for the
Appellant’s four disputed transactions as set out in Annex 5 to HMRC’s skeleton
demonstrated that each of the Appellant’s transactions was connected to a
fraudulent VAT loss.
126.The Tribunal
considers that its findings on the first three issues were not disturbed by the
evidence of HMRC on the role of Tamlex Trading Limited in the disputed
transactions. The records obtained from Tech Freight, the freight forwarder,
highlighted that Tamlex Trading Limited from Cyprus, authorised the release of
the goods to Papoose in the disputed deals, the timing of which was recorded as
being after Papoose had already released the goods to EMS. The documents also
showed that Tamlex was the recipient of the third party payments from Connect.
127. HMRC argued that
it did not have to identify precisely who was liable for the fraudulent loss of
tax, provided it was clear that there was such a loss in the chain, and the
Appellant’s deals could be shown to be connected to the fraudulent loss through
the documents chain. The Appellant made no submissions on Tamlex’s perceived
role in the fraud.
128.The Tribunal
agrees with HMRC’s submissions. The Tribunal disregards the disparity in the
timings between the release notes of Tamlex and those of Papoose. In the
Tribunal’s view there was clear evidence of fraudulent activity on the part of
Tamlex, Papoose and EMS in the disputed transactions which cast doubt on the
accuracy of the timings on the release notes. Further the evidence of third
party payments from Connect to Tamlex showed that both EMS and Papoose were
bypassed, which suggested that Tamlex was the head of the fraudulent deal
chain. If that is so, the fact that under this reconfiguration of the deal
chain EMS may not be the acquirer of the semi-conductors into the United
Kingdom was irrelevant for the purpose of establishing a tax loss ( see the
judgment of Christopher Clarke J in Red 12 v HMRC [2009] EWHC 2563 at
paras. 83-4). The Tribunal only has to be satisfied that there was a fraudulent
tax loss in the disputed deals and that the Appellant’s transactions were
connected to the loss. In this case the Tribunal finds that the Appellant’s
four transactions were connected through the document trail to the fraudulent
tax losses occasioned by EMS.
Did the Appellant know or should have known?
Introduction
129.The Court of
Appeal in Mobilx emphasised that the knowledge test was simple and
should not be over-refined. The question before the Tribunal is, having regard
to objective factors, did the Appellant knew or should have known at the time
of entering the disputed transactions that they were connected with fraud. The
question is essentially one of fact to be determined having regard to objective
facts or factors. In this respect HMRC argued that the Tribunal should have
regard to the big picture, a phrase coined from the Tribunal decision in Eyedial
Ltd [2011] UKFTT 47 (TC), which meant all the circumstances surrounding the
transactions in question.
130. HMRC’s
primary case was that the Appellant knew that its four transactions were
connected with fraud, but in the alternative the Appellant should have known of
the connection. The burden was upon HMRC to prove on the balance of
probabilities that the Appellant was not an innocent dupe and that it knew or
should have known at the time of entering the disputed transactions that they
were connected with the fraudulent evasion of VAT. The evidential burden in
relation to the Appellant’s knowledge, however, is likely to be a shifting one
with HMRC proving a set of facts demonstrating the requisite state of knowledge
which demanded an explanation from the Appellant. If the explanation is
plausible the evidential burden shifts back to HMRC.
The Facts Found
131.HMRC’s final
submissions set out a range of factual propositions which in its view
demonstrated that the Appellant had the requisite state of knowledge. The
Tribunal will consider each of the factual propositions in turn.
132. HMRC alleged
that the Appellant had appropriate knowledge of the risks involved in the trade
sector dealing with computers and telephones. In those circumstances HMRC
contended that it was difficult to comprehend how the Appellant armed with that
knowledge would wander into a contrived set of transactions without being aware
of their contrived nature.
133.Appropriate
knowledge in HMRC’s terms meant familiarity with what was said in Notice 726,
familiarity with what the Officers told the Appellant on their visits regarding
the prevalence of fraud in the sector, and the billions of pounds lost in
fraudulent transactions, and a general awareness of widespread fraud in the
trade sector.
134. Dr Williams
in his evidence accepted that he was aware of Notice 726, and of the risks of
fraud in the sector in which the Appellant was trading. Dr Williams did not directly
challenge the accounts of the Officers who visited the Appellant from its date
of registration but gave a nuanced account of his understanding of the
information given to him by HMRC.
135. Dr William’s
interpretation of the billions of pounds lost by MTIC fraud in the letter of
Officer Tromans dated 27 June 2005 was that it was due to criminal gangs
running dodgy goods. Dr Williams believed that if the Appellant did clean
business with trusted customers and suppliers it could avoid the risk of fraudulent
transactions. According to Dr Williams, he did not appreciate the full extent
of the fraud until he saw the BBC Panorama programme in August 2006
after which he decided immediately to cease trading in the sector.
136. HMRC
considered Dr William’s claim regarding the Panorama programme
astonishing, particularly in view of the visit from Officer Wride in December
2005 when he was told about the tax losses on the Appellant’s earlier deals.
HMRC, however, has failed to give an alternative reason for why the Appellant
suddenly ceased trading if it was not as a result of the Panorama programme.
137.Officer
Phillips suggested two possibilities. The first was the notification of HMRC’s
extended verification of the Appellant’s 07/06 claim, but this was not until 29
August 2006 some time after the Appellant’s last deal on 8 August 2006. The
second was the introduction of the reverse charge mechanism on supplies of mobile
phones and computer chips which rendered MTIC fraud impossible in this sector.
According to Officer Stone, the reverse charge mechanism did not take effect
until 1 June 2007, some considerable time after the Appellant ceased trading.
138. Dr Williams’
response to Officer Wride’s discovery of tax losses was, in the Tribunal’s
view, constructive but not effective. He alerted Sceptre Services of his
concerns about the discovery of tax losses and requested that Sceptre Services
review its due diligence. Dr Williams set about finding new suppliers so that
the Appellant could move away from Sceptre Services as its sole supplier.
Further Dr Williams revisited the Appellant’s due diligence procedures and
introduced written terms and conditions.
139. Dr Williams,
however, continued to use Sceptre Services as its supplier in the February and
March 2006 deals. Although HMRC acknowledged that there was no tax losses
associated with those deals, the Tribunal considers that Dr Williams was taking
unnecessary risks by continuing with Sceptre Services during the interim period
whilst new suppliers were found. Also Dr Williams was prepared to trade with
companies which would not agree to the Appellant’s new written terms and
conditions.
140.The Tribunal is
satisfied that at the time of entering the disputed transactions Dr Williams
understood that fraud was widespread in the Appellant’s trade sector. The
Tribunal, however, considers that Dr Williams believed erroneously that he
could manage the risks of fraud by dealing with customers and suppliers whom he
perceived to be trustworthy based on his personal dealings with them. The Tribunal
concludes that when Dr Williams saw the Panorama programme he realised
that his way of doing business was not suited to the Appellant’s trade sector
resulting in his decision to wind up the Appellant’s business.
141.The Tribunal
does not accept Dr William’s assertions that the semi-conductors did not fall
within the definition of specified goods in Notice 712. The Tribunal agrees
with Dr Williams that he was taking a pedantic point which in the Tribunal’s
view was very much an after thought in an attempt to divert attention away from
the difficult cross-examination he was facing.
142.HMRC
submitted that the circumstances surrounding the Appellant’s trade in
semi-conductors was wholly questionable and indicative of the contrived nature
of the transactions. HMRC’s position was that the goods identified as Astra
semi-conductors were not manufactured by Astra, and that there was no evidence
that the manufacturer Astra existed. The evidence showed that Dr Williams knew
at the time of entering the transactions that the goods as described by his customer
did not exist but nevertheless went ahead with the deals without standing back
and questioning whether the non-existence of the manufacturer challenged the
propriety of the deal.
143. Dr Williams
took a robust stance on the non-existence of the manufacturer. Dr Williams was
concerned about whether he could source a product which met the specifications
for the product laid down by the Appellant’s customer. As far as he was
concerned if there was a demand for a product it must exist in some form. It
did not matter to Dr Williams whether the product was made by a particular
manufacturer. In this case Dr Williams believed that the semi-conductors were
re-branded by a company in China.
144.The
Tribunal’s starting point on the issue of the Astra semi-conductors was the
evidence of Mr Coughlin, which in the Tribunal’s view was explicit and
unambiguous. The Tribunal adopts Mr Coughlin’s evidence that the products named
in the invoices of the disputed transactions lacked all credibility. No
evidence of a manufacturer with the name of Astra could be traced. The
specification for the Astra semi-conductor ASI124775-BGA was in fact a
specification for a Texas Instrument device. The brochures and the packaging
for the Astra semi-conductors had no contact details for the manufacturer,
which in Mr Coughlin’s view was critical for determining whether the product
was fit for use in its ultimate application.
145.The Appellant
took a different perspective on the evidence of Mr Coughlin. The Appellant believed
that Mr Coughlin supported his proposition that the goods may have been
re-branded in China. In this respect Mr Coughlin answered that such an
eventuality was plausible. Further Mr Coughlin accepted that it was reasonable
for a wholesaler in these products to refer queries about the goods from its
customer to its supplier. In the Tribunal’s view, it was necessary to view
those answers to individual questions in the overall context of Mr Coughlin’s
evidence. Regardless of the arrangements of individual wholesalers Mr Coughlin
was adamant that each trader should know the manufacturer’s identity, which was
critical for the integrity of the traded goods. Likewise the possibility of counterfeit
goods did not, in Mr Coughlin’s, view, generate confidence in the product named
in the Appellant’s invoices. The Tribunal concludes that the clear implication
of Mr Coughlin’s evidence was that the Appellant should not have proceeded with
the purchase and sale of the semi-conductors given the serious concerns posed by
the non-identity of the manufacturer.
146. The Tribunal
was not impressed with Dr Williams’ stance on the existence of the Astra semi-conductors,
which did not inspire confidence in his judgment. Dr Williams admitted that he
and Mr Sehr of ASAP knew next to nothing about semi-conductors. Dr Williams
decided to ask his friend, Mr Lewis, to make enquiries about the product. Mr
Lewis, as with Mr Coughlin, was unable to find a website for Astra, but found a
match of the specification with a Texas Instrument device. Crucially Mr Lewis
conveyed this information to Dr Williams before the prospective deal on 14 July
2006. Dr Williams was not bothered about the non-existence of the Astra
semi-conductor. He reasoned that he had a real product because the
specification for the semi-conductor given by Mr Sehr matched that of a device
produced by another manufacturer, and he was able to source it from one of his
suppliers.
147.HMRC embarked
on a detailed analysis of what Dr Williams meant by a real product, suggesting
that he must have had concerns about the semi-conductors. In the Tribunal’s
view such detailed analysis was unnecessary, as the facts spoke for themselves.
Dr Williams knew that the Astra semi-conductors did not exist but he still
proceeded with the deal, and apparently did not advise his customer of the
non-existence of a critical part of its specification, the name of the
manufacturer.
148.Equally Dr
Williams adopted the same uncritical approach to his supplier, Culmain.
Apparently Culmain was able to supply Astra semi-conductors packaged in
cardboard boxes and silver foil bearing the Astra name but no contact details.
According to Dr Williams, his other principal suppliers, Maximise and Leisure
Communications, had never heard of the product. Dr Williams did not find it
strange that one of his suppliers could source the Astra brand when he knew
that it did not exist and that his other two suppliers had not heard of the
brand.
149.Dr Williams stated
that he requested Culmain to provide some documentary information about the
semi-conductors before he went ahead with the deal. The documents provided were
photographs of the analogue to digital semi-conductor and the packaging of the
other semi-conductor, a brochure, and generic information about handling
sensitive goods (SMDS document). The Tribunal is not convinced that Dr
Williams obtained this information when he said he did. Dr Williams gave
conflicting accounts of when he made the request of Culmain. His counsel on
instruction advised the Tribunal that it was in May 2006, which was at odds
with his evidence that he approached Culmain for the semi-conductors after
being given the specification by Mr Sehr on the 6 July 2006. The request for
information was also inconsistent with Dr Williams’ explanation for going ahead
with the deal, namely, that he could source a product for which there was a
demand from his customer. The more likely timing of his request was sometime
after HMRC launched its extended verification of the Appellant’s 07/06 deals.
150. Even if the
Tribunal is wrong about when the Appellant received the documents from Culmain,
the Tribunal does not understand how they would have assisted Dr Williams’
stated purpose for them of validating the existence of the Astra
semi-conductors. The documents and the photographs displayed no contact details
for the manufacturer, Astra. The brochure contents indicated that Astra was a
substantial manufacturer with sales offices and technical service centres
throughout the USA, Europe and Asia and a large plant in China, which was wholly incompatible with Astra not having a website. Finally the SMDS document
introduced the name of another manufacturer, Intersil. The documents and
photographs gave no assurance of the existence of the manufacturer, Astra. The
documents were self evidently plagiarised which should have raised questions
with Dr Williams about the bona fides of the product and the supplier of the
documents, Culmain.
151.Dr Williams’
stance on the issue of the Astra semi-conductors was that it did not matter if
they existed. He could source a product with the specifications required by his
customer. The inspection reports of the freight forwarder and the travel
documents demonstrated that a product existed which was despatched to his
customers in the European Community. The Tribunal disagrees with Dr Williams’
rationale. His confidence that the product met his customer’s specification was
misplaced. Dr Williams was unable to inspect the semi-conductors to check if
they met the specification. He had no idea what was in the cardboard box. What
he knew at the time of entering the transactions was that the Astra
semi-conductors did not exist, in which case the information provided by his
customer and supplier was wrong in a material respect. His belief that the
semi-conductors were some form of counterfeit goods indicated that the
transaction was tainted with illegality.
152.The Tribunal
concludes that the product, Astra semi conductors, had no credibility, which
was known by Dr Williams at the time of entering the transactions. The warning signs
in respect of Astra semi conductors should have raised questions in Dr
Williams’ mind about the bona fides of the product and his trading partners and
whether he should have proceeded with the deals. Dr Williams chose to ignore
the warning signs and went ahead regardless with the disputed deals.
153.Given the
ostensible doubts with Astra semi conductors, HMRC contended that Dr Williams’
decision to go ahead with the transactions without effective terms and
conditions and insurance arrangements was not the action of a business person
engaged in arms length commercial dealings.
154.The evidence
was that Dr Williams introduced written terms and conditions for the
Appellant’s trades in April 2006 following Officer Wride’s visit in December
2005 informing him of the tax losses in earlier deals. Dr Williams downloaded
from the internet model terms and conditions and adapted them to produce the
Appellant’s written terms and conditions. He did not seek legal advice. Dr
Williams pointed out that PL Ventures had managed its business affairs
successfully for several years without the need for written terms. The
Appellant’s trading parties in the disputed deals, however, rejected its terms
and conditions, which did not prevent Dr Williams from proceeding with the
deals.
155.The terms on
which the disputed deals went ahead were that
(1)
Culmain transferred title to goods to the Appellant without prior
payment on the issue of a release notice to the freight forwarder.
(2)
The Appellant in turn likewise transferred title to its customers
without payment.
(3)
ASAP indicated on its purchase orders that it was responsible for
insurance and freight costs. The Tribunal understood the same insurance and
freight arrangements applied to the Appellant’s sales to TK Components.
(4)
The purchase order of TK Components stated that payment in full would be
made on inspection of the goods.
(5)
The Appellant agreed with its supplier, Culmain, it would not pay for
the goods until it received payment from its customers. According to Dr
Williams, Culmain agreed to this arrangement because its bank, FCIB, was at the
time experiencing difficulties with bank transfers.
(6)
Dr Williams stated that the Appellant had an insurance facility but did
not need to call on it for the disputed deals. The duration of the Appellant’s
ownership of the goods was very short which meant that its risk exposure was
virtually non-existent.
156. HMRC
contended that the Appellant’s arrangements were so divorced from what happened
in the real commercial world. In HMRC’s view it was fantasy to assume that bona
fide commercial traders would release title to high value goods and allow them
to be transported overseas without payment and the protection of adequate terms
and conditions. Dr Williams’ retort was that he was entitled to take commercial
risks, and he would suffer the consequences if his customers did not pay. In Dr
William’s view, his assessment of the risk was correct because his customers
met their obligations.
157.The
conditions under which the Appellant’s deals were transacted departed from the
normal situation for MTIC traders, which HMRC conceded during the hearing.
Officer Stone in his witness statement at paragraph 44 testified that
“Neither buffers nor brokers normally offer credit
terms and they normally retain ownership of the goods until their customers pay
them in full”.
158.In this case
both Culmain and the Appellant did not retain ownership of the goods until they
were paid in full. Also the email exchanges between the Appellant and its
customers indicated that the price and payment terms had been a matter of
negotiation. TK components included payment on inspection as an express
condition of the deal. Also the Appellant passed the insurable risks to its
customers who took on responsibility for insurance of the goods once title had
been transferred. The Tribunal considers that the circumstances of the
Appellant’s deals with its customers indicated that they were influenced by
negotiations and not bereft of commercial considerations. This finding gives
some credence to Dr Williams’ evidence that his decision to await payment from
his customers was a commercial one and not pre-arranged. The Tribunal’s finding
is however, subject to the caveat that Dr Williams was only able to do this
because his supplier was prepared to do the same in respect of the Appellant,
which begged the question Why? which did not appear to cross Dr
Williams’ mind.
159.The Tribunal,
however, is less sanguine with the decision taken by Culmain to defer payment
from the Appellant. According to Dr Williams, the reason given by Culmain for
deferring payment was that it had problems with FCIB. The Tribunal finds this
reason convenient and unconvincing. According to Officer Stone in his witness
statement at paragraph 57, Culmain’s bank, FCIB, was first visited on 5
September 2006 as part of the Dutch authorities’ investigation into the bank
which was sometime after the date of these deals. Further Culmain’s decision to
defer payment was not corroborated by documentary evidence and was not an
explicit term of the deals with the Appellant.
160.On the evidence
there were no valid reasons for why Culmain, which was also a competitor of the
Appellant, was prepared to take the risk of releasing goods without payment and
no reservation of title unless it knew that the Appellant’s customers would
meet its obligations. The Tribunal finds that Dr Williams in fear of losing the
deal closed his eyes to the commercial irrationality of Culmain’s conduct in acquiescing
with these arrangements.
161. HMRC
submitted that the Appellant’s due diligence on its trading partners in the
disputed deals was so deficient that no prudent business person would have
proceeded with the deals.
162.Dr Williams
saw due diligence as an information collecting exercise, the purpose of which
was to protect his investment in the business. In this respect Dr Williams misunderstood
a critical role of due diligence which was to establish the legitimacy of the
Appellant’s suppliers, to avoid the Appellant being caught up in a supply chain
where VAT would go unpaid.
163.Dr William’s
approach was determined by his concerns about securing his investment without
giving proper regard to the bona fides of his trading partners. In this respect
he was easy prey for inscrutable traders which could inveigle him in their
fraudulent plans with the promise of payment. In the Tribunal’s view, Dr
Williams’ misunderstanding of due diligence led him to give undue weight to his
personal assessment of the trustworthiness of his trading partners, and
neglecting the hard information which may have given him a different insight
into their legitimacy.
164.The Appellant
required Culmain, ASAP and TK Components to complete trade application forms,
and provide supporting documentation. In each case documentation was missing or
in a foreign language which Dr Williams had not translated. The Tribunal was
unconvinced with Dr Williams’ explanation for the missing documentation which
he said occurred when he moved his office to the downstairs garage.
165.The trade
references given by ASAP and TK Components were those of freight forwarders.
Culmain also gave a freight forwarder as a reference, as well as one of the
Appellant’s existing suppliers.
166.Dr Williams
in evidence displayed a total disregard of the financial information and the
lack of such information in the trade application forms. He did not see the
relevance of questioning Culmain about the rapid increase in its turnover or
the inconsistency of ₤50 million turnover with a credit rating of
₤12,000. Dr Williams had no information on the respective financial
positions of ASAP and TK Components which failed to complete the turnover
sections in the trade application forms. In the case of TK Components the
position was further exacerbated by the inability of the Appellant to secure Credit
Safe reports because it was registered in Malta. Deal 10 was the first
occasion that the Appellant traded with TK Components, which posed questions
about the wisdom of Dr William’s decision to allow TK Components to pay on
inspection.
167.Dr Williams
did not explore the financial positions of his trading partners at his meetings
with their directors. He considered it was not a nice question to ask about
turnover. Dr Williams’ description of the meetings and the topics discussed did
not appear to enhance the value of the information about the companies. In the
Tribunal’s view, the meetings were about how well Dr Williams got on with the
other directors which had an undue influence on his judgment of whether to do
business or not.
168. The Tribunal
finds that Dr Williams paid scant regard to information and the lack of it
gained from the due diligence conducted on the Appellant’s trading partners in
the disputed deals. He saw the meetings with the directors of the trading
partners as an opportunity to assess their personal chemistry and to strike
deals and in so doing neglected the chance to confirm the bona fides of the
companies involved. Dr Williams’ disregard of the financial status of the
partners in the deals was incomprehensible in commercial terms. Equally the
Appellant’s decision to proceed with the disputed deals on such scant
information of its partners was a high risk strategy not justified on sound
commercial principles.
169.Dr Williams
could not recall how he first made contact with Culmain. He stated that he did
not find Culmain on a website. The Appellant’s first deal with Culmain was on
15 May 2006 which co-incidentally involved ASAP as the customer. Dr Williams
denied that ASAP introduced Culmain to the Appellant. The Tribunal finds Dr
Williams’ memory failure convenient.
170.There were
other features of the disputed transactions which merited the attention of the
Tribunal. The email exchanges between the Appellant and its customers indicated
an intention on the part of the parties to enter into genuine negotiations on
price and quantities required, which were not features normally associated with
transactions vitiated by fraud. Also the email exchanges undermined HMRC’s
assertion that the Appellant was able to supply the exact quantities of the
goods required by the customers.
171.The value of
the email exchanges for the Appellant’s case was somewhat undermined by their
late disclosure with Officer Phillips having had no opportunity to consider
them prior to the hearing. Also Dr Williams in his cross-examination
compromised the evidential strength of the email exchanges with ASAP on 14 July
2006 when he said that the deal had already been struck by the time of the
emails which were simply a formal record of their discussions. Dr Williams by
his admission robbed the emails of their real time quality, and in so doing eroded
the genuineness of the reported negotiations.
172.The Appellant
did not use the services of an off-shore bank in its dealings but instead used a
UK bank, Lloyds TSB. This was uncharacteristic of MTIC traders according to
paragraph 55 of Officer Stone’s witness statement. On the other hand, Dr
Williams believed that the apparent place of manufacture for the Astra semi
connectors was Malta. Dr Williams gave no thought to the reasons for importing
goods allegedly manufactured in Malta into the United Kingdom, only for them to
be exported out.
173.Turning to
the circumstances of the wider fraudulent scheme with which the disputed
transactions were connected. HMRC contended that the four deals had striking
patterns in respect of the composition of the chains, the identities of the
traders involved, and mark ups. The striking patterns were enhanced when the
four disputed deals were seen in the context of the Appellant’s buffer deals in
the same VAT period. The striking patterns demonstrated the contrived nature of
the disputed deals which, according to HMRC, made it difficult for the
Appellant to deny that it did not know about the fraud.
174.The
evidential purpose of setting the disputed transactions in the context of the
overall fraudulent scheme is to assist the Tribunal’s understanding of the true
nature of the Appellant’s deals. The evidence of the overall scheme does not
alter the character of the individual transaction but to discern it. This is
made clear in the judgment of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563:
“109 Examining individual transactions on their
merits does not, however, require them to be regarded in isolation without
regard to their attendant circumstances and context. Nor does it require the
tribunal to ignore compelling similarities between one transaction and another
or preclude the drawing of inferences, where appropriate, from a pattern of
transactions of which the individual transaction in question forms part, as to
its true nature e.g. that it is part of a fraudulent scheme. The character of
an individual transaction may be discerned from material other than the bare
facts of the transaction itself, including circumstantial and “similar fact”
evidence. That is not to alter its character by reference to earlier or later
transactions but to discern it.
110 To look only at the purchase in respect of which input tax was sought to be
deducted would be wholly artificial. A sale of 1,000 mobile telephones may be
entirely regular, or entirely regular so far as the taxpayer is (or ought to
be) aware. If so, the fact that there is fraud somewhere else in the chain
cannot disentitle the taxpayer to a return of input tax. The same transaction
may be viewed differently if it is the fourth in line of a chain of
transactions all of which have identical percentage mark ups, made by a trader
who has practically no capital as part of a huge and unexplained turnover with
no left over stock, and mirrored by over 40 other similar chains in all of
which the taxpayer has participated and in each of which there has been a
defaulting trader. A tribunal could legitimately think it unlikely that the
fact that all 46 of the transactions in issue can be traced to tax losses to
HMRC is a result of innocent coincidence. Similarly, three suspicious
involvements may pale into insignificance if the trader has been obviously
honest in thousands.
111 Further in determining what it was that the taxpayer knew or ought to have
known the tribunal is entitled to look at the totality of the deals effected by
the taxpayer (and their characteristics), and at what the taxpayer did or
omitted to do, and what it could have done, together with the surrounding
circumstances in respect of all of them.”
175. In one sense
HMRC’s assertion about the contrived nature of the deal chains involving the
disputed deals was stating the obvious. The Tribunal has already decided on the
existence of a fraudulent scheme to which the Appellant’s transactions were
connected. The contrived nature of the deal chains was a necessary part of that
finding. The question, therefore, posed by the examination of the attendant
circumstances is how does it inform the Tribunal’s understanding of the
Appellant’s state of knowledge at the time it entered the disputed transactions.
176.The Tribunal
finds in relation to the deal chains that
(1)
Each chain involved seven participants and characterised by the same
parties in the same sequence except that deal 10 involved a different customer
in TK components. The enquiries of overseas authorities revealed that the
customer in deals 7, 8 and 9, ASAP, made onward sales to TK components, which
suggested a degree of collusion between the Appellant’s customers.
(2)
In each deal Maximize was the supplier of the Astra semi-conductors to
Culmain. Maximize had informed the Appellant that it was unable to source the
semi-conductors.
(3)
The transactions involving the transfer of goods to the Appellant
occurred on the same day.
(4)
The buffers, Papoose, EMS, Connect and Maximise, charged in each deal
chain the same unit mark up of 20 pence or 25 pence in the case of Papoose. The
Appellant’s supplier, Culmain’s unit mark up was expressed in whole pound (₤)
sums of ₤4 for deals 7, 8 and 10, and ₤7 for deal 9.
(5)
Culmain achieved a higher mark up on the deals than the Appellant. This
was not characteristic of normal MTIC trades where the broker usually charges
the highest mark up to reflect its greater risk exposure to HMRC’s
investigation of its repayment claims. HMRC accepted that this was an odd and
unexplained feature of the case.
(6)
The Appellant’s unit mark up in monetary terms was different for each
deal, and not expressed as whole sums rounded to the nearest pound (₤).
(7)
The consequence of the Appellant’s low mark up relative to that achieved
by its supplier, Culmain, was that the gross profit made by the Appellant on
the four deals was modest, totalling about ₤33,000. This figure did not
meet HMRC’s description of the Appellant making relative substantial profit in
the transactions.
The deals from the Appellant’s perspective were not too good to be true.
(8)
The limited evidence on money flows compromised HMRC’s depiction of back
to back transactions which are normally characterised by a flow of goods going
in one direction and the flow of money going in the other direction. The
records of payment between Maximize and Connect for the disputed deals showed
that funds were transferred on the same day as the goods were released, prior
to the dates of the money payments from the Appellant to its supplier, Culmain,
and from the Appellant’s customers to the Appellant.
(9)
There was a marked contrast in the amount of detail on the goods
specification in the invoices of Papoose, EMS and Connect from that on the
invoices of the other traders, including the Appellant. The invoices for the
first three traders simply gave the name of the semi-conductor, and its product
number, whereas the invoices for the other traders incorporated the
specification for the semi-conductors.
177.The Tribunal
concludes from the facts found on the wider fraudulent scheme that the picture
painted by HMRC of striking similarities, contrivance and pre-ordination was
too simplistic. The Tribunal’s analysis revealed that the features of
contrivance, collusion and pre-ordination were predominant in the transactions
outside the Appellant’s deals. Aspects of the Appellant’s transactions with its
customers had the semblance of commercial arms length dealings and appeared to
be influenced by the Appellant’s negotiations with the parties. The Appellant’s
mark up was not formulaic and resulted in a modest gross profit.
178.The Tribunal
did not hear detailed evidence regarding the buffer deals conducted by the
Appellant in 07/06 period. Officer Phillips supplied an overview of the buffer
deals in his witness statement supported by the deal documentation. Officer
Phillips’ analysis showed that the buffer deal chains were of similar length
and involved many of the parties to the disputed deals. All the buffer deals
were traced back to a tax loss and a defaulting trader. The Tribunal was not
persuaded by HMRC’s reliance on the buffer deals. The analysis of those deals
was superficial and the purported striking similarities did not go beyond the
involvement of some of the same parties identified in the disputed deals which
could equally be explained by the Appellant having settled trading
relationships.
179.The other key
feature of the buffer transactions was the participation of Sceptre Services
which acted as the broker in seven of the nine buffer deals, and in six of
those as the direct customer of the Appellant. HMRC argued that under the big
picture the Appellant’s dealings with Sceptre Services and its early trades
were relevant to the Tribunal’s determination of the Appellant’s state of
knowledge in the disputed transactions, even though Sceptre Services was not a
party in those transactions. HMRC argued that the evidence regarding Sceptre
Services and the Appellant’s early trade was part of the penumbra of the big
picture. HMRC’s purpose for introducing this evidence was to demonstrate
the non-commercial nature of Appellant’s whole operations in the market sector.
180.The Tribunal
considers that HMRC’s submission strained the limits of the big picture
approach in respect of the scope of the evidence relevant to the question of
knowledge, and compromised the principle of VAT law that each transaction
should be viewed on its merits. Christopher Clarke J in Red12 indicated
that the true nature of individual transactions may be discerned from the pattern
of transactions of which the individual transaction in question formed part.
Judge Bishopp in Eyedial described the big picture as meaning all
of the circumstances surrounding the transactions in question.
The Appellant’s dealings with Sceptre Services did not form part of the
disputed deal chains. The circumstances of these dealings were complicated by
the personal relationship between Dr Williams and Mr Rayer, the owner of
Sceptre Services, which in the Tribunal’s view limited the value of any
conclusions drawn from them for the Appellant’s state of knowledge in the
disputed transactions. Thus the Tribunal decides that the evidence relating to
Sceptre Services was too remote, and, if not, the conclusions to be drawn were
restricted to the particular circumstances of the Appellant’s relationship with
Sceptre Services. In similar vein the Tribunal places no weight on the
Appellant’s early dealings in the market.
181.The Appellant
placed some weight on Officer Wride’s description of Dr Williams as a
reasonable and proper business person with the implication that Dr Williams did
everything properly. The Tribunal is required to form its view on the
Appellant’s state of knowledge, having regard to the objective factors relating
to the disputed transactions. In this respect Officer Wride’s perception was
not an objective factor, and in any event her dealings with the Appellant
pre-dated the transactions in question.
182.Finally HMRC
submitted that the Appellant’s instant success in the trade sector with minimal
market research was not what a reasonable business person would expect to
happen when he starts in a new field. In response Dr Williams stated that he
gave some thought to the Appellant’s rapid and substantial increase in turnover
and found it surprising but he was doing his very best to make the business a
success. In Dr Williams’ view, the venture represented a high risk for him for
a modest return. According to Dr Williams his life savings were at risk with
the large money movements associated with the Appellant’s business.
183.In the
Tribunal’s view, the circumstances surrounding the Appellant’s entry in the
trade sector did not shed light on the Appellant’s state of knowledge in
relation to the disputed transactions. The events surrounding the Appellant’s
entry were strongly connected with its links with Sceptre Services, which the
Tribunal has decided to disregard. Also Dr Williams’s entry into the wholesale
marketing of CPUs was conceivably a rational move having regard to his prior
work and trade experience in the IT sector.
Evaluation of the Facts Found
184.The Tribunal
now stands back and evaluates the facts found against the question: Did the
Appellant knew or should have known at the time of entering the disputed
transactions that they were connected with fraud?
185. The Tribunal
summarises the principal facts found starting with those relating specifically
to the circumstances of the disputed transactions:
(1)
Dr Williams understood at the time of entering the disputed transactions
that fraud was widespread in the Appellant’s trade sector. Dr Williams held an
erroneous belief that he could manage the risks of fraud by dealing with
customers and suppliers whom he perceived to be trustworthy based on his personal
dealings with them. When Dr Williams saw the Panorama programme he
realised that his way of doing business was not suited to the Appellant’s trade
sector resulting in his decision to wind up the Appellant’s business.
(2)
Dr Williams knew at the time of entering the transactions that the Astra
semi-conductors did not exist. He had no idea what was in the cardboard box. The
goods described as Astra semi-conductors in the documentation had no
credibility. Dr Williams also knew that the information on the semi-conductors
provided by his customer and supplier was wrong in a material respect in
respect of the manufacturer’s identity. Dr Williams’ belief that the
semi-conductors were some form of counterfeit goods indicated that the
transaction was tainted with illegality. The warning signs in respect of Astra
semi-conductors should have raised questions in Dr Williams’ mind about the
bona fides of the product and his trading partners and whether he should have
proceeded with the deals. Dr Williams chose to ignore the warning signs and
went ahead regardless with the disputed deals.
(3)
The circumstances of the Appellant’s deals with its customers indicated
that they were influenced by negotiations and not bereft of commercial
considerations. This finding gives some credence to Dr William’s evidence that
his decision to await payment from his customers was a commercial one and not
pre-arranged. The Tribunal’s finding is, however, subject to the caveat that Dr
Williams was only able to do this because his supplier was prepared to do the
same in respect of the Appellant, which begged the question Why? which
did not appear to cross Dr Williams’ mind.
(4)
There were no valid reasons for why Culmain, which was also a competitor
of the Appellant, was prepared to take the risk of releasing goods without
payment and no reservation of title to the Appellant unless it knew that the
Appellant’s customers would meet its obligations. The Tribunal finds that Dr
Williams in fear of losing the deal closed his eyes to the commercial irrationality
of Culmain’s conduct in acquiescing with these arrangements.
(5)
Dr Williams misunderstood the critical role of due diligence which was
to establish the legitimacy of the Appellant’s suppliers to avoid the Appellant
being caught up in a supply chain where VAT would go unpaid. His misunderstanding
of due diligence led him to give undue weight to his personal assessment of the
trustworthiness of his trading partners, and neglected the hard information
which would have given him a different insight into their legitimacy.
(6)
Dr Williams paid scant regard to the information and the lack of it
gained from the due diligence conducted on the Appellant’s trading partners in
the disputed deals. He saw the meetings with the directors of the trading
partners as an opportunity to assess their personal chemistry and to strike
deals and in so doing ignored the chance to confirm the bona fides of the
companies involved. Dr William’s disregard of the financial status of the
partners in the deals was incomprehensible in commercial terms. Equally the
Appellant’s decision to proceed with the disputed deals on such scant
information about its partners was a high risk strategy not justified on sound
commercial principles
(7)
The email exchanges between the Appellant and its customers indicated an
intention on the part of the parties to enter into genuine negotiations on
price and quantities required, which were not features normally associated with
transactions vitiated by fraud. The value of the email exchanges for the Appellant’s
case was somewhat undermined by their late disclosure with Officer Phillips and
by Dr Williams’ testimony which robbed the emails with ASAP of their real time
quality, and in so doing eroded the genuineness of the reported negotiations.
(8)
The Appellant did not use the services of an off-shore bank in its
dealings but instead used a UK bank, Lloyds TSB.
(9)
Dr Williams believed that the apparent place of manufacture for the
Astra semi-connectors was Malta. Dr Williams gave no thought to the reasons for
importing goods allegedly manufactured in Malta into the United Kingdom, only for them to be exported out.
186. The
Tribunal’s analysis of the Appellant’s transactions within the context of the
fraudulent deal chains revealed that the features of contrivance, collusion and
pre-ordination were predominant in the transactions outside the Appellant’s
deals. Aspects of the Appellant’s transactions with its customers had the
semblance of commercial arms length dealings and appeared to be influenced by
the Appellant’s negotiations with the parties. The Appellant’s mark up was not
formulaic and resulted in a modest gross profit.
187.The purposes of
the Tribunal standing back are to attach weight to the findings of fact and
build an overall picture upon which the Tribunal can determine the Appellant’s
state of knowledge at the time of entering the disputed transactions. The
backdrop is that the disputed transactions were connected with the fraudulent
evasion of VAT, and that Dr Williams was aware of the widespread risk of fraud in
the Appellant’s trade sector. The dominant colours of the overall picture were
Dr Williams’ knowledge that the product, Astra semi-conductors, did not exist,
and his uncritical stance in respect of his trading partners. Those dominant
colours, had shades of commercial arms length dealings on the part of the
Appellant in respect of its negotiations with its customers, the variable mark
ups on the deals and the modest gross profit achieved. Given that picture the
Tribunal is satisfied that this was not a case of the Appellant knowing that
its transactions were connected with fraudulent tax losses.
188.The issue in
this case was whether at the time of entering the transactions the Appellant
should have known of their fraudulent connection. The ECJ in Kittel on the
should have known test, said at paragraph 51:
“In the light of the foregoing, it is apparent that
traders who take every precaution which could reasonably be required of them to
ensure that their transactions are not connected with fraud, be it the fraudulent
evasion of VAT or other fraud, must be able to rely on the legality of those
transactions without the risk of losing their right to deduct the input VAT ….”
189.The Court of
Appeal in Mobilx provided the following analysis of Kittel :
“ 51 If a taxpayer
has the means at his disposal of knowing that by his purchase he is
participating in a transaction connected with fraudulent evasion of VAT he
loses his right to deduct, not as a penalty for negligence, but because the
objective criteria for the scope of that right are not met. It profits nothing
to contend that, in domestic law, complicity in fraud denotes a more culpable
state of mind than carelessness, in the light of the principle in Kittel. 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”.
190. Then at
paragraph 59 the Court said:
“59. The test in Kittel is simple and
should not be over-refined. It embraces not only those who know of the connection
but those who “should have known”. Thus it includes those who should have
known from the circumstances which surround their transactions that they were
connected to fraudulent evasion. If a trader should have known that the only
reasonable explanation for the transaction in which he was involved was that it
was connected with fraud and if it turns out that the transaction was connected
with fraudulent evasion of VAT then he should have known of that fact. He may
properly be regarded as a participant for the reasons explained in Kittel.
191.At paragraphs
75, and 85 the Court of Appeal provided further elaboration:
“75 The ultimate question
is not whether the trader exercised due diligence but rather whether he should
have known that the only reasonable explanation for the circumstances in which
his transaction took place was that it was connected to fraudulent evasion of
VAT”.
“ 85 …..A trader who
chooses to ignore circumstances which can only reasonably be explained by
virtue of the connection between his transactions and fraudulent evasion of
VAT, participates in that fraud and, by his own choice, deprives himself of the
right to deduct input tax”.
192.Given that
the Appellant’s transactions were connected with fraud the question the
Tribunal must determine is whether the Appellant should have known that the
only reasonable explanation for its transactions were that they were connected
with fraud. The Appellant cannot escape the consequences by choosing to ignore
circumstances which can only be reasonably explained by virtue of the
connection between its transactions and the fraud.
193. The Tribunal
returns to the facts found. The nature of the product was pivotal to the case
and the reason for the transactions taking place. The Tribunal’s findings on
the product symbolised the Appellant’s overall approach to the disputed
transactions. Dr Williams knew that the product, Astra semi-conductors, did not
exist but he carried on regardless with the deals. Dr Williams did not stand
back and challenge his customer about the wrong information given or ask his
supplier on how it could source non-existent products. He just assumed that the
semi-conductors were counterfeit goods, which in itself questioned the bona
fides of the deal.
194.Dr Williams
believed that he could proceed with the transactions because his trading
partners were trustworthy. Dr Williams, however, assessed their trustworthiness
from judgments made on the personal qualities of their directors. In so doing
Dr Williams chose to ignore hard information or the absence of information on
the companies’ finances and trading operations, and avoided asking the
directors awkward questions. If he had done so, he would have come to a
different conclusion about whether to do business with his trading partners.
195.Dr Williams’
uncritical stance was the recurrent theme underpinning the facts found. He did
not question the irrational decision taken by the Appellant’s supplier to
release the goods without payment and no reservation of title. He did not
consider it strange that goods made in Malta should be brought to United Kingdom for despatch to Member countries. In short, Dr Williams was so intent on
doing the deals that he closed his eyes to the surrounding circumstances which
were shouting fraudulent deals.
196.Dr Williams’ response
to HMRC’s case was that he was an honest trader and would not get involved in
fraudulent trades. The Tribunal accepts that Dr Williams held sincere
intentions which were demonstrated by those aspects of the Appellant’s
transactions that had Dr Williams’ handprint of commercial arms length trading,
and reflected in the Tribunal’s decision that the Appellant did not know of the
connection with the fraudulent trades. The issue for the Tribunal is whether
at the time of entering the disputed transactions Dr Williams should have known
that the only reasonable explanation for them was that they were connected with
fraud. The Tribunal’s findings revealed that the connection of the disputed
transactions with fraud was obvious from the moment when Dr Williams discovered
the non-existence of Astra semi-conductors. Following his discovery Dr Williams
chose to carry on with the transactions regardless and at the same time closed
his eyes to the shortcomings of his trading partners in the mistaken belief
that he could trust them. Dr Williams was fully aware of the widespread risk of
fraud in the Appellant’s trade sector, and had he opened his eyes to the
circumstances of the deals and his trading partners he would have realised that
the only reasonable explanation for the transactions was their connection with
fraud. The Tribunal decides on the facts found that the only reasonable
explanation for the transactions was their connection with fraud, and that Dr
Williams should have known this.
Decision
197. The
Tribunal decides that
(1) There was a VAT loss in each
of the four disputed transactions, which can be attributed to a defaulting
trader, EMS.
(2) The tax losses incurred by EMS were occasioned by fraud.
(3) The Appellant’s four
transactions were connected to the fraudulent tax losses occasioned by EMS.
(4) The Appellant should have
known at the time of entering the disputed transactions that the only
reasonable explanation for them was their connection with fraud.
198.The Tribunal,
therefore, dismisses the Appeal and upholds HMRC’s decisions denying the
Appellant’s repayment claim of £206,696.00 in respect of four transactions in
VAT period 07/06.and the assessment in the sum of £1,501.57.
199.The Tribunal
reserves its position on costs. If a party wishes to apply for costs it must
submit an application to the Tribunal within 28 days of release of this
decision with a copy to the other party. If an application is submitted either
party may apply for a determination if costs cannot be agreed.
200.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.
TRIBUNAL JUDGE
RELEASE DATE: 27 September 2011
