19301
VALUE ADDED TAX — input tax — dealer in mobile telephones — purchase in UK of goods sold to German trader — whether input tax incurred on purchase recoverable — alleged carousel fraud — whether necessary circularity established — evidence of payment by antecedent dealer to Appellant's purchaser — whether inference to be drawn of circular or linear fraud — circularity the only reasonable inference — appeal dismissed on facts but final decision stood over pending outcome of reference of Optigen and others to European Court of Justice.
MANCHESTER TRIBUNAL CENTRE
DELUNI MOBILE LIMITED Appellant
- and -
THE COMMISSIONERS FOR
HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Tribunal: Colin Bishopp (Chairman)
Marjorie Kostick BA FCA CTA
Peter Whitehead
Sitting in public in Manchester on 5, 6 and 7 September 2005
Michael Patchett-Joyce, counsel, instructed by Hassan Khan & Co, for the Appellant
Richard Smith, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2005
DECISION
- This is an appeal against the Respondents' decision to refuse to pay to the Appellant, Deluni Mobile Limited ("Deluni"), a trader in mobile telephones, part of its claim for VAT credit in respect of its one-month prescribed accounting period 12/03. The total credit claimed was £1,401,474.37. The Respondents accept that the greater part of the claim is properly due and, we understand, the appropriate sum has been paid. The remaining £489,102.25 has been withheld because, the Respondents say, the two purchases in respect of which the input tax was, or purportedly was, incurred formed part of what is commonly known as a carousel of transactions devoid of economic substance since their purpose, overall, was to commit a fraud; and they consequently did not constitute a sequence of legitimate sales and purchases. They accept that Deluni itself is not implicated in any way in the supposed fraud but base their decision on the conclusions of this tribunal in Bond House Systems Limited v Customs and Excise Commissioners [2003] V & DR 210 and Optigen and another v Customs and Excise Commissioners (2003) VAT Decision 18113.
- The tests by which non-economic transactions are to be identified, as they were explained in those decisions, were summarised by the tribunal in Aircall Exports Limited v Customs and Excise Commissioners (2005) VAT Decision 19185 in this way:
"(1) there was a missing trader (one who sells goods and incurs a liability to account for VAT on such sales and then disappears without discharging that liability); or a defaulting trader (one who sells goods and incurs a liability to account for VAT on such sales and then does not discharge that liability, otherwise than through insolvency); or a trader with a hijacked VAT number (one who uses the VAT registration number properly belonging to a third party), and
(2) the purchase and sale of goods by the Appellant formed part of a chain of transactions that were circular in nature; and
(3) that the circular chain of transactions were carried out in furtherance of an activity which was not an economic activity as that term is understood for VAT purposes."
- We heard the appeal at a time after the reference by the High Court of the Bond House and Optigen cases to the European Court of Justice (Case C-354/03) and after the Advocate General had given his opinion (disagreeing with the tribunal in those cases), but before delivery of the judgment of the Court, and were required to deal only with the factual issues, that is whether circularity of dealing can be established. Deluni contends that the Respondents are unable to show the circularity on which their case depends and that, irrespective of the outcome of the reference in Bond House and Optigen, it is entitled to payment of the withheld credit. It was agreed that if, instead, we should determine the factual issue in the Respondents' favour, we should stand over the appeal in order that it may be resolved in the light of judgment of the Court of Justice.
- Deluni was represented before us by Michael Patchett-Joyce and the Respondents by Richard Smith, both of counsel. We heard oral evidence from Roseanne Forsyth, Karen McDonald, Alistair Strachan and Richard Saxon, all officers of HM Revenue and Customs, and we had the unchallenged statements of some other witnesses. It became apparent as the hearing proceeded that there was little difference of substance between the parties about the factual background of the case; the real issue related to the interpretation to be placed on the facts. For that reason, we do not intend to set out the evidence at length, but will confine ourselves to an explanation of the facts as they emerged. In summary, Deluni acknowledges that, while there is evidence of improper trading by the traders which immediately preceded it in the chain – indeed, it produced documentary evidence of its own to support the conclusion that there had been wrongdoing at that stage – it contends that, properly interpreted, that evidence can lead only to the conclusion that, if there was a fraud, it was of a linear and not a circular nature. The Respondents, by contrast, say that circularity of trading is the only realistic conclusion to be drawn, and that its fraudulent nature speaks for itself.
- The Respondents accept the tribunal's conclusion in Bond House that the burden of establishing circularity of trading rests on them. In a practical sense, the burden extends to establishing first the sequence on which they rely, and then its circular nature. Sometimes the circularity will be readily established, or self-evident, but sometimes, as in this case, it can be demonstrated only inferentially, for example by showing the movement of money between the participating traders. That is the approach adopted by the Respondents here. The reason why the burden is on the Respondents is that they, exercising statutory powers, can demand access to the relevant documentation while a trader such as Deluni can generally look no further than to its own supplier and customer. Here, and despite some oddities in it, Deluni does not dispute that the documentation obtained by the Respondents, of which we were provided with copies, establishes an unbroken sequence of transactions. However, the sequence shown by tracking only the movement of the goods does not complete a circle. The Respondents say that the circle can be demonstrated by the fact that one trader in the sequence made a payment to another which preceded it in the chain but was not its immediate supplier; that payment, they contend, must lead to the conclusion that the goods were being driven round a circle. Mr Patchett-Joyce's argument was that the payment – which Deluni accepts was made – was not an "upstream" payment, necessary if the Respondents are to succeed, but a "downstream" payment, made for other reasons. The proper conclusion, he says, is that if there was a fraud, it was of a linear character only. At the very least, there is doubt which must be resolved in the Appellant's favour.
- Mr Patchett-Joyce based his argument in part on the, as he contended, inadequate investigations by the Respondents' officers. We think there is some merit (as indeed Mr Smith conceded) in the criticism: as in every case of this kind, sales were made, or purportedly made, to traders in other member states of the European Union yet the enquiries made of the competent authorities in those member states were superficial and were not pursued. For example, an enquiry was made of the German authorities, but it was not answered, save to the extent of showing that the two German companies with which we are concerned are, or were, in common control, and, despite the breach by the German authorities of the requirements of Council Directive 77/799/EEC concerning mutual assistance, the Respondents did not take the matter further, even to the extent of sending a reminder. We agree with Mr Patchett-Joyce that the failure to pursue those enquiries (those made of the authorities in Spain, which also features in the case, appear to have been even more perfunctory) is most regrettable. It is, we think, incumbent on the Respondents to make full enquiries – using the powers conferred on them by the Directive – before taking decisions which, as in this case, have had the consequence of causing a trader to cease trading, or to trade on an attenuated basis, leading in turn to the redundancy of its employees. There is, we think, some merit too in Mr Patchett-Joyce's complaint that the Respondents' officers made up their minds and, having done so, did not trouble to obtain the evidence which might have confirmed or undermined their conclusion. Nevertheless, we cannot determine this case upon perceived inadequacies in the Respondents' investigations, but on the evidence as it was presented to us.
- As we have said, the Respondents were able to establish part of the sequence of transactions by linking documents obtained from some of the traders involved. We are concerned with two sequences, which have similarities although they are not identical. The movement of the goods can be traced only so far; the circles, if such they were, cannot be closed by reference to these documents alone since there is no certainty (or, at least, no available evidence) showing how the goods reached the starting point from the manufacturers (nor identifying the starting point), nor is there any documentation showing what became of the goods after the identified sequences had been completed. As is common in such dealings, in each sequence the goods changed hands several times within the space of a single day, and usually did not move from the secure warehouse in which they were stored despite the change of ownership, although the goods were (as the Respondents accept) removed from the warehouse and shipped to Deluni's customers in Germany. Deluni bought from another UK trader, incurring input tax (or, if the Respondents are right, purported input tax) on the purchase but, since its customer was a registered trader in Germany, made a zero-rated sale; it is that sequence which gives rise to its claim for credit.
- The first series of transactions took place on 8 December 2003. As Deluni accepts, the documentation shows that 1268 Nokia 8910i mobile telephones were sold by Goldenacre Hardware Limited ("Goldenacre") to Sceneclick Limited ("Sceneclick") and then by Sceneclick to Britanniacity UK Limited ("Britannia"). At the same time, 132 similar telephones were sold by Zak's Distributors ("Zak's") to Sceneclick and the same telephones were immediately sold by Sceneclick, in a separate deal even though it was concluded on the same day, to Britannia. Britannia then sold the combined consignment of 1400 telephones, in a single deal, to Starcell UK Limited ("Starcell") which sold them on to Goldex International plc ("Goldex"). On the same day, and in a separate series of deals, a further 953 Sony Ericsson P800 telephones were sold by Goldenacre to Sceneclick, and 97 of the same model by Zak's to Sceneclick. Sceneclick then sold the combined total of 1050 (though again in separate deals) to Britannia which sold them as a single consignment to Goldex. Similarly, Goldenacre also sold 1510 Nokia 9210i telephones to Sceneclick, which at the same time bought 157 of the same model from Zak's. Sceneclick then sold the combined total of 1667 telephones, still in separate parcels of 1510 and 157, to Britannia, which in turn sold them, as a single consignment, to Cell Trading UK Limited ("Cell") which sold them to Goldex. Goldex then sold all of the telephones it had thus acquired to Deluni, in a single transaction, and Deluni sold all of the telephones, again in a single transaction, to Eclipse Technology GmbH ("Eclipse"), a German company.
- The second set of transactions was slightly less complicated. On 9 December 2003 – the day after the first sequence – Goldenacre sold 1808 Nokia 8910i telephones to Sceneclick, while Zak's sold it 192 of the same model. Sceneclick sold the telephones in separate deals to Britannia, which sold them as a single consignment to Starcell, which in turn sold them to Goldex. On the same day, Goldenacre sold 1809 Sony-Ericsson P800 telephones to Sceneclick and Zak's sold it 191 of the same model. Sceneclick sold all the telephones to Britannia, which on this occasion sold the total of 2000 to Vaughan Trading Co Ltd ("Vaughan"). Vaughan sold them to Goldex, which sold them to Deluni. Deluni then sold all of the telephones, as a single consignment, to Danish Telecom Group ("Danish") which, despite its name, is a German company.
- Frenzied dealing of this kind is not unusual in the mobile telephone market, which Moses J described in R (Teleos and Others) v Customs and Excise Commissioners [2004] EWHC 1035 (Admin):
"[80] … it is necessary to outline a description of the trade in mobile telephones. The global market for mobile telephone handsets in 2003 is said to be approximately 500 million pieces a year. This number is increasing. Products are designed to operate in any country. The trade in mobile phones has become similar to that in other commodities such as oil, coffee beans and pork bellies. There is a primary market in which mobile phones are supplied directly by manufacturers to distributors, which service for example retail chains.
[81] There is also a secondary market described … as a "grey wholesale market". It is on that market that the claimants trade. In the primary market there may be delivery delays for up to six months for new models. This results in much speculative ordering, by retailers, distributors and networks. Retailers, distributors and networks may be left with either too few or too many mobile phones of a particular model. The grey market has developed in order to deal with over or under supply and to redistribute products wherever there is an actual retail demand. Manufacturers might also produce, as a matter of speculation, excess stock which, if another model is launched which is more attractive to consumers, will leave that manufacturer with an excess of telephones. The grey market is used also to clear older products. Those retailers or distributors who have ordered too many telephones may sell those, which are excess to their requirements, onto the grey market for immediate cash. If retailers or distributors have under-ordered, because of the delay in production it will be necessary for them to buy from the grey market. Supply and retail demand and accordingly price, fluctuate daily. A trader may buy a batch of telephones one day, for cash, and discover that the price of telephones has fallen by as much as 20% the next day.
[82] The market dictates that transactions have to be completed on the same day. Purchases are usually for cash on delivery and it is uneconomic to purchase for volumes of less than 1000 units. If a trader holds onto a product for more than 24 hours it risks losing substantially. Profit margins are low, in the region of 2 to 4 percent. Success is based on turnover. Traders only hold stock for very short periods and, usually, turn over their working capital between four to six times a week. Thus it is important that transactions are completed within the course of one working day.
[83] Some warehouses are sufficiently secure for goods of small size and value. Stock is often bought and sold by telephone a number of times a day without moving from the secure warehouse. Such secured warehouses are shared by many companies which pay in proportion to their use of that warehouse."
- In the statement of case, the Respondents identify a number of features of the transactions between, particularly, Goldenacre, Zak's, Sceneclick and Britannia, which they say are indicative of fraudulent dealing, but we do not need to dwell on those features since Deluni did not dispute that there were indications that the deals, or some of them, were fraudulent (or, more accurately, had a fraudulent purpose) – indeed, Mr Patchett-Joyce based his case in part on there having been wrongdoing. We should, however, make the comment that there is no apparent reason why Deluni, Starcell, Goldex, Cell and Vaughan should have known or even suspected that there might be anything untoward. The comprehensive documentation relating to Deluni's purchases which was provided to us and which we have considered showed that it carried out prudent checks on its suppliers, ensuring that their VAT registration and corporate identity were as claimed and verifying the existence and identity of the goods before paying for them, and no criticism is to be made of the manner in which it conducted its business; nor do the Respondents advance any.
- The documentation relating to the preceding transactions was, understandably, rather less comprehensive – understandably because, first, the Respondents had to rely on their statutory powers, rather than the willing cooperation of a trader, to obtain it, and partly because, we suspect, few checks, documented or otherwise, were carried out – but it did include some payment instructions. When concluding its sale on 8 December 2003 to Sceneclick, Goldenacre instructed Sceneclick to pay the bulk of the price, £504,000, to Eclipse, £1,400 to Wildon Invest SL ("Wildon"), a Spanish company, and the balance of £1910.95 to itself. The last of those figures, the Respondents say, is Goldenacre's profit on the deal. When the goods were sold on to Britannia, Sceneclick asked Britannia to make separate payments: £504,000 to Eclipse, £1400 to Wildon and £2,655.90 to itself. The latter sum, if the Respondents are correct, represents Sceneclick's profit of as little as £744.95 added to Goldenacre's supposed profit on the preceding sale. Britannia's bank statements, of which copies were provided to us, show that the payments were made. There are similar requests for split payments in the other chains of transactions we have described, and evidence that the payments were in fact made. Mr Patchett-Joyce did not seek to challenge any of that evidence. The available documentation relating to the transactions with Zak's was rather less full, and did not include any instructions to make payments to third parties. It did, however, indicate that payment was required in cash and Sceneclick's director told the officers who interviewed him that Zak's representative did indeed collect payment in cash. It is inherently implausible that honest traders would do business in this way: the amounts involved were substantial, some tens of thousands of pounds; Zak's was, or purportedly was, based in or near Glasgow and Sceneclick in Liverpool; and it seems unlikely that Zak's would grant credit for such sums.
- The Respondents' argument is that there is only one plausible explanation for the payment by Britannia to Eclipse (in the first series) and Danish (in the second): that they, Eclipse and Danish respectively, were the source of the goods used in each set of transactions, and the payments were the consideration for those goods. We were thus invited to infer that Eclipse or Danish (which, as the limited information provided by the German authorities revealed, were under common control) had supplied the goods, passing them into the known chain, that the chain had been orchestrated – though not necessarily by Eclipse or Danish – and that the goods found their way back, by design, to Eclipse or Danish. Quite how the goods found their way from Eclipse or Danish to the beginning of the chain could not be established with any certainty but it seems to us an obvious further inference, if the Respondents' primary case is right, that they passed from Eclipse or Danish to Wildon and thence, in separate parcels, to Goldenacre and Zak's although, in the absence of evidence that Zak's required third party payments, the source of the goods it sold is obscure.
- Mr Patchett-Joyce's skeleton argument made the point, quite forcefully, that it is for the Respondents – since they allege it – to establish that fraud has occurred, and to do so by something more than inference. That proposition, we think, is not only correct but requires no authority to support it. The standard of proof was described in Aircall Export Limited, at paragraph 5(1), as "the balance of probabilities but cogent evidence is required". The issue here, however, is not whether fraud can be established – as we shall explain, Mr Patchett-Joyce's own investigations lead almost inevitably to the conclusion that it occurred – but whether the fraud was circular in nature. We have mentioned already that Eclipse and Danish were under common control. Links through family relationships can be shown also between Wildon, the Spanish company, Britannia and Sceneclick, and (separately) between Goldenacre and Zak's. The evidence in support of the links comes only to a limited extent from the Respondents; most was obtained by Mr Patchett-Joyce from publicly available material (particularly that held by the Companies Registry) and, though not conclusive, it is convincing. It is a matter for some surprise, if not concern, that the Respondents' investigations seem to have been rather limited in scope.
- Mr Patchett-Joyce's contention was that, albeit there is a connection between Eclipse and Danish, there is no apparent connection between those companies and Wildon, Britannia and Sceneclick, nor with Zak's and Goldenacre, nor is there any evident connection between Wildon, Britannia and Sceneclick on the one hand and Zak's and Goldenacre on the other. The Respondents' case assumes that the prime movers behind the supposed carousel were Eclipse and Danish whereas the reality is that the more likely candidates are to be found in the United Kingdom. At the very least, there could be no certainty. The lack of certainty must cast doubt on their assertion of a circular series of transactions designed to perpetrate fraud.
- While we agree with Mr Patchett-Joyce that there can be no certainty about the identify of those of the participants whose activities were fraudulent, and no certainty about which of them was the ringleader, we do not think there can be any real doubt that there was a fraud. It makes no sense at all that companies linked in the manner Mr Patchett-Joyce was able to demonstrate would trade with each other as they did if their trade had been legitimate. Indeed, Mr Patchett-Joyce did not seek to suggest otherwise. But the Respondents' case, as it was put in the statement of case and as it was put before us, does not depend on Eclipse's or Danish's being the ringleader, but upon the fact of the payments to them by Britannia which, they say, close the circles. If circles are established, it seems to us to make little difference where on their circumferences the ringleaders are located. The essence of the carousel fraud is that the goods go round the circle, passing through some traders who are involved in the fraud and at least one, effectively the "fall guy", who is not. Whether the ring leader in this case was located in the UK, Germany or Spain (or companies in more than one country were involved) seems to us immaterial, provided the three criteria described in Aircall Export Limited, and which we have set out above, are satisfied.
- The Appellant does not concede that Goldenacre and Zak's were, or are, missing traders. We had evidence about their attempts to contact both traders from Ms Forsyth and Mr Watt. From that evidence, there does not seem to us to be any reasonable room for doubt that both were seeking to avoid the attentions of the Respondents. Goldenacre appears to have been historically a legitimate hardware business, unconnected with mobile telephones, which was then sold but the trade premises were abandoned; Zak's was run from its owner's flat. It was not disputed that neither had in fact accounted for the output tax due in respect of their sales, or purported sales, to Sceneclick. We are satisfied that they are both properly regarded as missing traders. We are also satisfied, for the reasons we have already given, that, provided circularity can be established, the third of the criteria described in Aircall Export Limited is met. We return, therefore, to the question of circularity.
- Mr Patchett-Joyce's argument was that it could not be inferred merely from the fact of Britannia's payments to Eclipse and Danish that those companies had supplied the goods, directly or indirectly, to Goldenacre and Zak's in order that the subsequent, known, sequence of transactions could take place; it was just as plausible that Goldenacre had instructed Sceneclick to make payments to Eclipse or Danish and to Wildon (and Sceneclick had passed those instructions on to Britannia) because Goldenacre (or Sceneclick) was perpetrating a linear fraud by "drawing through" the goods. We have considered his submissions with care, but our conclusion is that his theory, or alternative explanation, does not make sense.
- There is no reason to suppose that the goods were stolen, or in some other way acquired otherwise than by paying their market value to a legitimate trader. In order to make the fraud possible, therefore, the fraudsters must have paid a substantial sum to a trader not involved, innocently or otherwise, in the fraud in order to obtain the goods. Mr Patchett-Joyce's theory requires us to accept that the goods found their way to Sceneclick, and thence to Britannia, upon the basis that (apart from very modest sums) neither Sceneclick nor Britannia would pay their immediate suppliers for the goods but would instead pay a large sum to another, hitherto unconnected, overseas trader for those goods. Quite why the price of the goods should be diverted in this way, from the true seller to a company which (on Mr Patchett-Joyce's hypothesis) had had no dealing with the goods did not become apparent. If the overseas company had not in fact sold the goods, it would have received a gratuitous payment. After several further transactions, if the hypothesis is right, the goods would be sold by an innocent trader (in this case Deluni) to the overseas trader, which would use the money it had received from Britannia to pay for them. The money would come back, through Deluni and the other honest traders, and ultimately from the overseas company; but the overseas company would have used money provided to it apparently gratuitously in order to acquire the goods, and would have a supply of effectively free telephones. Mr Patchett-Joyce could offer no explanation of the payments to Eclipse or Danish other than that they were the means of "drawing through" the goods; but if his hypothesis is right, the fraudsters would be out of pocket. That result seems to us to be wholly improbable.
- By contrast, the Respondents' explanation is plausible: money was passed up the line as goods passed down it, and the recipients of the money could reasonably be assumed to have played a part in the chain of supply. On that basis, the inference that Eclipse, in the first chain, and Danish, in the second, supplied the goods, directly or indirectly, into the chain is compelling. We are, indeed, satisfied that it is the only reasonable inference to draw. While we cannot altogether rule out other possibilities, none comes to mind and that advanced by Mr Patchett-Joyce is, in our view, to be rejected. We are conscious that there is evidence of payments to Eclipse and Danish only in respect of those goods acquired via Goldenacre, but the connection between Goldenacre and Zak's, the implausibility of its dealing in cash and the fact that the two companies dealt simultaneously in unusual numbers of telephones which, when combined (as they were) came to a round number strongly suggest that these were co-ordinated deals of the same character.
- We accordingly resolve the factual issue in the Respondents' favour – that is, we are satisfied that the three criteria identified in Aircall Export Limited are all met. We give the parties permission to continue the appeal once the outcome of the reference to the European Court in Bond House and Optigen is known, and reserve the costs of the appeal to date to the resumed hearing. If the parties are able to resolve the matter between them, or any other reason presents itself, either party may apply for further directions, whether relating to costs or otherwise.
COLIN BISHOPP
CHAIRMAN
Release Date: 24 October 2005
MAN/04/0465
