20141

Value Added Tax  -  Input recovery claim by “innocent” taxpayer who had bought and exported computer software   -    whether the transactions were a sham  -   whether the claim might have been defective on other grounds   -   Appeal allowed

LONDON TRIBUNAL CENTRE

	NOEL DEMPSTER	           Appellant
(trading as BOULEVARD)

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	HOWARD M NOWLAN (Chairman)
						SHAHWAR SADEQUE MBCS

Sitting in public in London on 12 and 13 February and 16 March 2007

Timothy Brown, counsel, for the Appellant 

Rebecca Haynes, counsel, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Introduction

1.    This was an appeal against the refusal by Her Majesty’s Commissioners for Revenue and Customs (“HMRC”) to concede a claim for an input deduction for £154,000 made by the Appellant. The Appellant, a shoe retailer and wholesaler in the Brixton Road of South London, had made two substantial purchases of computer software from a single supplier, those consignments immediately being exported (strictly in three different supplies) to the same Canadian customer. HMRC denied the input deduction normally available in respect of the purchases either on the ground that the relevant purchases and sales were sham transactions, the Appellant not having satisfied the relevant burden of proof that the transactions reflected in the related invoices had truly happened; or on the alternative ground that the invoices did not adequately identify and conform to the actual transactions.  

2.     We found the case a very difficult and unsatisfactory one and we were both unhappy with the decision that we felt bound to make. We both considered that much of the evidence given by the Appellant was unsatisfactory. This was in two respects; the first being that the Appellant claimed to have forgotten many of the facts such that he exhibited astonishingly little grasp of what had actually happened in relation to his alleged venture into the field of marketing mobile phones, computer chips and computer software. His evidence was also unsatisfactory in that we both disbelieved certain of the facts that the Appellant did give in evidence. 

3.     It followed that if the question posed for us had been whether the Appellant’s contentious transactions had been what we might describe as genuine business transactions, or indeed transactions “in the course of a business” we would have had no hesitation in saying that they were not.  Had we been asked whether the Appellant knew that the transactions were fictitious and that they were part of a wider scheme to defraud HMRC from receiving the VAT properly owing to them, we would certainly have responded that we would have needed far more evidence and the testimony of other witnesses before we could answer that question affirmatively, though we certainly admit that our suspicions were raised. As it was however the only points seriously argued before us were that the transactions of buying and selling two consignments of computer software were shams, or that the related invoices were defective. Our conclusion was that we were satisfied that the Appellant had in fact bought two consignments of computer software and had then immediately exported them, in three deliveries, to Canada. The carrier, DHL, had apparently opened and inspected the contents of the packages so that there was no suggestion that the packages exported simply contained bricks of roughly the correct weight, rather than something looking like packets of CDs and sheets of “bar codes”.  The contentions on behalf of the Respondents that the relevant deliveries were of different CDs and bar codes than the ones that were alleged to be supplied struck us as weak.  In addition we have to say that the Appellant seemed to us to be so ignorant in the field of computers and software that whilst he would have detected that the CDs were of the wrong description, had they been clearly marked as Frank Sinatra CDs, we were not persuaded that the Appellant would have been alerted to any differences between the CDs that he thought he was buying and exporting and those actually delivered, had there been any. In this context, whilst we were handed several authorities relating to the subject of “shams”, knowledge and “Nelsonian blindness”, we were not actually addressed on the legal requirements for demonstrating that the transactions were shams, though we certainly understood that it was a prerequisite of finding that the transactions were shams that the Appellant should have had some form of “knowledge” that something else was being delivered to him and by him, than the alleged computer software. 

4.     In short our conclusions were that the Appellant’s story in relation to how he came to be making the two purchases and three supplies of computer software was startlingly improbable and there were many aspects that we simply did not believe.   The only point that we did believe was that the actual purchases and supplies were in fact made. We were satisfied that the software described in the invoices was that actually dealt in, or that at least if it was not, the Appellant would certainly not have appreciated this fact, or indeed have really been in a position to know that there was some discrepancy. Finally, for reasons that we will give in detail below, we did not consider that our scepticism in relation to much of the Appellant’s evidence led us to conclude that he knew or should have known that the supplies made were in fact of other worthless computer software, or that he was involved in some sort of general fraud. 

The evidence

5.     Oral evidence was given by the Appellant, and by Simon John Vincent, an Officer of HMRC.

The Facts

6.     We will first summarise the facts as they were given in evidence, without at this stage adding our own comments as to how credible we found some of the asserted facts. 

7.    The Appellant had apparently been engaged in the shoe trade for at least 20 years.    He was registered for VAT purposes with effect from 5 July 2001 as sole proprietor of a business trading under the name of Boulevard, being a shoe wholesaler (and presumably also retailer at the premises in the Brixton Road), and his registration for VAT purposes suggested that he also dealt in mobile phones, computer chips and computer software. In fact the Appellant conceded that he had never dealt in either mobile phones or computer chips. 

8.    The Appellant described how he decided in 2002 that it would be a good idea to branch out from the shoe trade and move also into the high tech market. He asserted that he thought that he could usefully exploit his existing shoe distribution channels (presumably the wholesale ones) to educate some of his business contacts in the advantages of using computers for organising stock control. With this thought in mind he started visiting the computer stands at shoe fairs, and in 2002 and  2003 attended approximately half a dozen fairs in each of the years. 

9.      In September 2003, he visited a pure computer exhibition.  At this exhibition he first met Mr. Abrahams of Abacus Business Systems (“Abacus”), and Mr. Abrahams demonstrated some software to him, which he thought was impressive. At this stage the Appellant said that Mr. Abrahams barely mentioned Abacus, and the Appellant did not know whether Mr. Abrahams’ firm manufactured, wrote or brokered software.    In cross-examination the Appellant confirmed that at this stage he barely asked any questions. In other words he did not ask about the sort of licences that Mr. Abrahams’ firm could provide; he did not ask about any terms and conditions, warranty terms, operating instructions or any details about any Helpdesk. Mr. Abrahams did however send the Appellant away with a Demo Disc, some “marketing stuff”, bar codes and “bumph”.  

10.     On leaving Mr. Abrahams’ stand, the Appellant went either directly or indirectly to another stand where he had a cup of coffee and talked to a Canadian lady called Anke Sedmak.  He indicated that he was able to provide computer software, and she said that she was interested in computers and software. They would have exchanged business cards, but the Appellant said that they had little further conversation, and he did not gather at this stage that Anke Sedmak represented a Canadian company called Spectrum Enterprises Corp.(“Spectrum”). They talked mainly about what they had each seen at the exhibition. 

11.    In December 2003 the Appellant again met Mr. Abrahams, by arrangement, in the lobby of a Nottingham hotel. Mr. Abrahams demonstrated some different software which the Appellant said was more impressive, in that Mr. Abrahams was “able to glide about”. In commenting on the new CD, the Appellant said, rather unscientifically, that “That done more than what the previous CD done”. The Appellant was then given half-a-dozen brochures, and some demo CDs of the December software. 

12.    The Appellant could not remember whether he asked much about the software.   He certainly ascertained that it could be purchased for £20, and assumed that this was the net price, exclusive of any element for VAT.  He asked no questions about terms and conditions, other than that payment was to be made before delivery.  He did not discuss any licensing details, or terms about providing sub-licences to end users.  He vaguely understood about the bar keys to which we will refer below, but knew nothing about licensing or distribution to Canada or to other parts of the European Union.    Finally he asked nothing about memory space. 

13.    We will now quote and describe in full the text and other content of the brochure that the Appellant was given at the December meeting.    

•	The first page had a styled large heading “Value Ware”, preceded by a minute heading “ITS Ltd”. Beyond this it merely contained the three sub-headings “Product Information”, “Your Ultimate Source For Added-Value Software (sic), and “Confidential”. 
•	The second and third pages contained the following text.
•	“ITS Ltd has created a suite of software packs specially designed to be practical and easy-to-use. These software packs provide your end-users with a higher level of satisfaction and control from their PCs. These packs were appropriately named ValueWare, given the added value they provide when added to your offering. The ValueWare family of software packs covers different areas of service and utilities, assisting the PC user to benefit more from his PC.  Following is a list of some of the areas covered by ValueWare: Education -  Entertainment  -  Internet  -  Productivity  -  Security.”  
•	“ValueWare is sold in multiple of 1,000 licenses (both errors being in the original). When ordering, please indicate the following; please request the following: - Product: ValueWare product Code and Version. Amount: ValueWare will be sent to you in folders containing 1,000 licenses each.” 
•	“For security and insurance reasons, the Software Licenses Keys and the Master CD are shipped in two separate envelopes.”    
•	“One envelope contains the Master CD which contains 1,000 compressed copies of the SW. Each copy has a unique serial number and needs a unique key to unlock and install.”
•	“The other envelope, contains a folder with 1,000 labels, each with a unique serial number and unlocking key that correspond to one of the SW copies on the master CD”
•	In addition to the above text there were pictures of the delivery packs indicating that the packs would indicate the Licence Range, Content, Legal and “Warning for Stickers”.  There was then a picture of one of the pages of bar codes, containing 40 numbers from which one could deduce that there would be 25 sheets of bar codes, making up 1,000 bar codes in total, matching the 1,000 versions of the software that could be reproduced from each Master CD. 
•	The back page of the brochure again had the Value Ware logo on it in large script and the following text: “Our Mission. To become the leading supplier of utility software to the IT industry by creating marketable value through our constant commitment to reliability, functionality and quality.”

14.     Following the meeting between the Appellant and Mr. Abrahams in the hotel lobby there was some further correspondence between Mr. Abrahams of Abacus and the Appellant.   

•	On 12 December, Mr. Abrahams wrote to the Appellant in the following terms:

“Further to our meeting in Nottingham, we confirm the discussions we had with your colleague in that we are able to supply you with the various educational software we mentioned. 

We would expect to be able to forward some samples of software to you early in January.

We note that you intend to come to Nottingham again after the holidays and we look forward to meeting you again then.”

•	Mr. Abrahams wrote again on 2 January 2004 (from a different Abacus address than the one used in the 12 December letter) in the following terms:

“Please find enclosed copies of our VAT certificate and incorporation certificate.

As you are aware, we are traders in educational software and look forward to meeting you soon to show you some samples and arrange a demonstration for you.”

•	On Friday 9 January, the Appellant wrote to Abacus in these terms:

“Dear Sirs,

Thanks for all the info that you have given, and it was great talking to you.

I will be contacting you soon.”

15.     In answering questions during cross examination the Appellant said that he could not remember the conversations to which this letter referred; and in response to the question of what the “info” was to which he had referred, he said that “he wouldn’t like to say”, though possibly it was the VAT certificate and the certificate of incorporation that had been enclosed with the 2 January letter.  The Appellant made no reference to whether the information would have included Abacus’s price for any software, and indications as to the price at which the Appellant might seek to sell software himself, nor did he make any reference to the fact that the software that was shortly to be delivered was known as “V Ware 01 Licences”, or “Value Ware 01 Licences”, and that it was described in the later Abacus sales invoices as “educational software”.  

16.     During the course of the thin correspondence referred to in paragraph 14 above, the next event that occurred is that on Jan 5 2004 (a Monday) the Appellant received a faxed letter from Anke Sedmak on the notepaper of Spectrum, with an address in Kelona, British Columbia.    This letter read as follows:

“Dear Noel,

I believe we met you at one of the technology tradeshows in the past year.   You had indicated at that time that you offered a number of software products for export. We are now ready to take a closer look at your inventory to perhaps start some activity. Could you please identify what type of software you currently have on the market?

Thank you very much. 

Sincerely, Anke Sedmak”

17.     According to his evidence, the Appellant sent a demo disk to Anke Sedmak, and when asked whether it was the “September exhibition” disc or the “December Hotel lobby” disc he said that it was “probably the latter”.  This disc was apparently sent by express post, but there was no written confirmation of this of any sort.  The Appellant said that he had no further questions from Spectrum following their letter of 5 January and his despatching the demo disk until the Order that he received on Tuesday 13 January, though he accepted that he must have notified Spectrum of the price of £23.10 because that was referred to, along with a description of the goods in Spectrum’s “purchase order” that we will refer to shortly. 

18.     We should now comment on certain gaps in the evidence, without at this stage exploring their possible significance. In the documents and the evidence that we have summarised, there is no reference to whether Abacus did deliver what might have been their third version of Demo Disk, in other words the further software to which they referred in their letter of 12 December quoted above.  There is no reference to Abacus having informed the Appellant of the precise description of the software that the Appellant might order in early January. One might have thought that this information, along perhaps with further Demo Discs was what the Appellant was thanking Abacus for in his letter of 9 January quoted in paragraph 14 above, but the Appellant did not assert that this was the case. Equally, although the Appellant asserts that he sent Anke Sedmak a demo disc in the interval between her fax on Monday 5 January and his receipt of an order from Spectrum eight days later, there was no written evidence of this, and even no assertion that it was the Appellant who made it clear to Anke Sedmak that the software that she might order was known as “V Ware 01 Licences”. The Appellant merely said that he “must have” notified Spectrum of the price. Indeed these gaps in the information are rendered somewhat more confusing by a short letter of 12 January 2004 written by Abacus to the Appellant, which read as follows:

	“Dear Sir

	Further to our recent correspondence, we understand that our stock is arriving 	on Tuesday. As discussed, we shall forward some demonstration equipment 	to you for you to look at.”

It was never made clear what the further demonstration equipment was, but as the following events demonstrate, any further demo discs could not have had any influence on the orders that were imminently to be placed. 

19.     On 13 January the Appellant received a faxed order from Spectrum for 20,000 VWARE 01 Licences, at 23.10. each and thus at a total price of £462,000.  The order spelt out the bare contract terms which were that the price was payable immediately; the goods were to be shipped via DHL to A&A Contract Customs Brokers Ltd in Ontario Canada, some way from Spectrum’s address in British Columbia and there was a reference on the Purchase Order to the goods being despatched “FOB”.

20.    On the same date, 13 January, the Appellant sent Spectrum a Sales Invoice in virtually identical form. There was no copy of any order that the Appellant might have sent to Abacus, and it seems unlikely that the Appellant would have known what stock to order to match the Spectrum order which he did not receive until 13 January, but nevertheless, on Monday 12 January Abacus issued a Sales Invoice to the Appellant, “confirming your order as follows”, then referring to 20,000 Educational Software “V Ware” 01 Licences, at a price of £22 each, or for £440,000 in total with £77,000 VAT then added to the price.   

21.     It follows from the pricing of those two transactions that if the Appellant duly recovered the input VAT, he would make a profit of £22,000. Pending recovery of the VAT, he would have a £55,000 cash deficit. He was expecting to be paid by Spectrum before he would despatch the goods and before he would pay Abacus, but nevertheless he would still have to pay Abacus £55,000 more than be would receive from Spectrum, and this cash flow cost had to be borne until recovery of the VAT. 

22.     In the context of the simple maths summarised in paragraph 21, it is interesting to note that on 13 January the Appellant received a loan of £249,994 from someone called M. Stephen Lamb. The Appellant said in evidence that Mr. Lamb was the father of one of the Appellant’s children’s school friends, and that the loan was apparently made to finance the expansion of the Appellant’s business into new premises in the Whitgift Centre, in St. James’ Street, and at Bluewater.  We were told that the loan was to be repaid in instalments of £15,000 a month, and we were also told that the Appellant’s existing premises were to be taken over by one of the Estate Agency chains. We were finally told that the Bluewater plans came to nothing because of some technical difficulties, and no further information was given about the loan or the business plans. 

23.    Following the receipt of the Spectrum order, and the issue of the two Invoices (by the Appellant and Abacus), the parties duly made payment, Spectrum on 15 January, and the Appellant on 16 January. The Appellant had received an undated request from Abacus that implicitly must have been received before 16 January, asking him to ensure that all payments to Abacus were made to an Alliance and Leicester Commercial Bank account, named “La Ronde (Ref Abacus)”, and it was to that account that the Appellant made his payment on 16 January.  We were not told who or what La Ronde was.   

24.     The facts in relation to the despatch of the goods were somewhat confused.   So far as the Appellant’s testimony was concerned, he said that he received two packages from Abacus fulfilling the January 13 order/invoice, containing 20 CDs (each capable of delivering 1000 versions of the software), and a separate package containing 500 sheets of bar codes.  He opened these packages because they were going to have to be inspected by DHL though the Appellant did say that he did not review the contents sufficiently closely to see that they were VWare 01 Licences, and he also said that he could not definitely remember whether (on either this first or indeed on any other occasion) he was present when the DHL courier came to collect the packages.  What he did say was that having opened the packages, he took the somewhat unhelpful step of re-packaging the contents into one single packet. This had the unfortunate consequence that had the package gone missing and had it fallen into the hands of someone who could market the software, that person would have both the 20,000 versions of the software and the keys or bar codes to unlock the software, so that the “finder” could then market the software. In other words the feature of shipping the software in the separate packages, each of which was useless without the other, was lost.   Nevertheless this is what the Appellant said that he did. 

25.     A number of points were made in relation to the DHL documents dealing with the despatch of the CDs and bar codes to Canada, but since the points covered all three despatches of software, it will be clearest first to summarise the relatively simple facts in relation to the second acquisition of software from Abacus and the despatch of that consignment in two separate deliveries to Spectrum. 

26.     The later transactions were in very similar form to the 12/13 January transactions. They were evidenced by orders from Spectrum, both dated 26 January for 8,000 and 12,000 versions of the software; by corresponding invoices from the Appellant to Spectrum for the 8,000 and 12,000 versions respectively dated 27 January; and finally by one single invoice from Abacus to the Appellant for 20,000 versions of the software dated 27 January. As before, payment was made by Spectrum first, and then by the Appellant; and then Abacus delivered its single consignment in the separate packages of CDs and bar codes, and the Appellant despatched 12,000 versions of the software on 9 February and 8,000 version on 10 February.  Beyond the unexplained, and seemingly irrelevant, detail that the Spectrum order was made in the form of two orders, and then the software similarly despatched in two consignments (the Appellant on these occasions - i.e. on both 9 and 10 February, sending the CDs and the bar codes in separate packages) all the order and invoice wording for these orders was in exactly the same form as for the 12/13 January order. The detail of the DHL despatch forms, to which we will now turn, differed slightly however between the 9 and 10 February despatches, and indeed they differed somewhat from the despatch docket for the 12/13 January order despatched on 26 January.   

27.     One factor that attracted no comment during the case was that the DHL despatch forms were generally completed very badly and in poor writing, so that the photocopies of the originals appeared quite difficult to read and understand. Indeed even the delivery address for the packages was filled in in a poor fashion, and on one form an address in Canada was said to be in the USA. 

28.    A factor that did attract considerable comment is that the forms required a statement of the value of the contents of the packages and on the occasions when this box on the form was filled in, the figure given was of varying amounts but all in the region of £100. It appears that the valuation box was not filled in at all in the case of the first consignment, where the Appellant had inserted CDs and bar codes all into the one package, but it was filled in in the case of the second and third consignments (at least on the DHL as opposed to the Appellant’s retained copy of each form), where the CDs and bar codes were sent in separate packages, and the values given were then the low figures just indicated. When asked why the figures were artificially low the Appellant gave two different explanations. One was the somewhat curious one that in the shoe trade, when a “model shoe” was being sent to a manufacturer, so that the manufacturer could copy it and make thousands of similar shoes, and the shoe was being sent by courier, the general practice was to insert an artificially low value on the courier’s despatch form in order to reduce the risk of the model shoe being stolen.     The other explanation was that at least in the cases (the second and third consignments) where the valuation box was actually completed on one of the copies of the form, there was the argument that either package was of little value without the other so that the low value declarations could be justified on this ground. 

29.    Another factor that was referred to was that the declared weights of the packages varied somewhat. The weights were not particularly great however, and when one package (seemingly containing CDs and bar codes for 20,000 versions of the software) was said to weigh 8 Kg, and another on the occasion of the despatch of the second consignment (that would have contained either 12,000 or 8,000 versions of the software, the weight being of the two packages together on that occasion) was weighed at 6 Kg, the disparities did not seem particularly significant.    

30.     A final feature to which we should refer is that there were variations between the copies of the despatch documents that the Appellant had produced to show that the CDs and bar codes had indeed been despatched, and copies that were later obtained from DHL by HMRC. The variations included the feature that the DHL records did not list the numbered despatch slip that the Appellant produced to illustrate that the first consignment was despatched on 16 January at all.  There were however copies of other despatch slips, where there were periodically variations between the two versions, that retained by the Appellant and that held by DHL.  Some of the variations suggested that some additional box had been completed on the DHL copy  after the two had been separated.  For instance the form, completed on 9.2.04 and carrying the DHL ticket number 378 0672 943 seems to show that both versions were completed in the same handwriting and corrected errors demonstrate that one was a carbon copy of the other.  The DHL version of the form however adds the letters “CDS” to the word “Samples”, where the form is describing the nature of the contents, and the DHL version of the form also adds a valuation of £120 where the valuation box on the Appellant’s version of the same form is not completed at all. In other words it appears that the DHL representative has inserted two additional details onto his version of the form once the two have been separated. 

31.     There are also disparities in the forms completed on 10.2.04.  One of the two forms (there seemingly being a form for each separate package of CDs and bar codes) appears to be a carbon copy of the other, where again the DHL version of the form has added both a weight (3.0) and a valuation of £8, whereas neither detail appears on the Appellant’s version of the form. Both versions, basically being a form and a carbon copy, naturally bear the same DHL number of 378 0673 002.  By contrast the form dealing with the other package also has the same DHL number, namely 378 0673 046, on both versions of the form, but they are completed in different handwriting so that one is not a carbon copy of the other. The Appellant’s version of the form contains no valuation or weight information, and describes the contents of the relevant package as CDs. The DHL version of the same numbered form describes the contents as 8 Barcode Keys (doubtless meaning sheets of bar codes capable of delivering the 8,000 licences delivered with that particular consignment), and it adds a weight of 1.5 and a valuation of £8. Since the two forms mentioned in this paragraph, in other words forms 002 and 046, both dated 10.2.04, presumably contained the CDs in one package and the bar codes in the other, it seems that the DHL representative filled in his version of the form more accurately since it appears that the CDs were covered by form 002 and the bar codes by 046, whereas the Appellant’s version of the two forms wrongly suggests that the CDs were in both packages.   

32.    The subsequent facts however differed for the 12,000 consignment, and the 8,000 consignment. For some reason the consignment of two packages relating to the 12,000 consignment was returned to the UK. They were then sent back to Anke Sedmak, at the same delivery address, by one of the Appellant’s employees on 9 March.   It appears that they were then satisfactorily received by the recipient. 

33.    The fate of the 8,000 consignment was slightly more mysterious. This consignment appeared to go missing, and was said eventually to have been destroyed by DHL. As will be referred to again below, it was probably not until November 2004 that the Appellant realised that this consignment had not been delivered, and it appears that he then sought to re-send the required bar codes. We are not clear whether the CDs had been received, so that only the bar codes had been destroyed, but it was simply the bar codes that the Appellant sought to re-send, on this occasion using the services of UPS. Whilst we had assumed that the bar codes were as individual as keys, the Appellant asserts that amongst the brochures that he had received from Abacus, there were spare bar codes, and therefore without having to refer back to Abacus, he was able to despatch again bar codes that he assumed would satisfactorily unlock the software contained on the related CDs. It never emerged whether the Appellant’s expectations in this regard were justified because it appears, in the rather curious way that will be described below, that Spectrum refused to accept the re-sent package. 

34.    On 3 February the Appellant wrote to HMRC requesting a change to monthly accounting for VAT without explaining the basis of his request. On 23 February he wrote again and referred to his earlier letter about monthly returns, indicating that his existing VAT number would be used to “sell/trade in ValueWare software, the areas covered by ValueWare [being] Education, Entertainment, Internet, Security and Product bar coding.  In the same letter he indicated that his retail outlet business (in shoes) would be sold to his new company, which it was asserted would trade from Bluewater in Kent. 

35.    On 12 March Mr. Vincent sent the Appellant what seemed to be a circular letter, indicating that as he was “a trader who deals in the buying and selling of Mobile Phones, Computer Processing Units or Other Goods from the European Community and from within the United Kingdom”, his attention should be drawn to the fact that Abacus’ VAT registration had been withdrawn and deregistered from 16 December 2003 “as suspected of being an invalid registration”. The letter went on to say that any zero rating in relation to transactions involving Abacus which purport to have taken place after the effective date of cancellation of its registration, may fail to be verified.

36.    On 22 March, the Appellant’s request for monthly accounting for VAT was turned down.

37.    Following a certain amount of correspondence from the Appellant reinforcing his request that his input deduction claims for £156,998.89 in respect of the purchases from Abacus be verified and conceded by HMRC, Mr. Vincent wrote to the Appellant on 9 September, informing him that he was “not satisfied that taxable supplies [had] occurred in accordance with the claimed invoice transactions”. 

39.    Mr. Vincent’s letter went on to spell out the detail of the invoices under which it was claimed that the software had been purchased from Abacus, and the invoices claiming to evidence the supplies to Spectrum, and then continued as follows:

	“It should be noted that the software was described as “Educational Software” 	on the invoices supplied by Abacus.

You sent me a copy disk of the software you claimed to have supplied. Examination of that software shows that it contains the following “Smartsoft” software:-

Disc Info
This shows a bar displaying the level of disk space used;

Font Viewer
This shows a small screen where you can display the fonts used.

Master Mind Game 2.0
This shows a small screen with the Mastermind game. 

Wake Me Up 
This shows a small screen with an alarm clock.

The author of the software would appear to be a company known as MST Limited.

I would describe these programs as utilities/tools with no commercial value and they are inconsistent with the invoice descriptions given. 

I note that in relation to the claimed last shipment, under Air Waybill number 391 369 2285, although exported by DHL to Canada, the software failed to be delivered to the recipient.  It has been recorded on the DHL system as having been destroyed on the 28 June 2004.  This relates to a package within Invoice 01-04, dated 27 January 2004, claiming a value of £277,200.00.  I understand that no queries or questions have arisen in respect of this.

In relation to commercial documentation, by way of the software distribution licence, you have been unable to provide me with a sample or any licence, only sample bar codes.  I understand that the only written contract is a letter of introduction. No other evidence of contract or discussions would appear to be available.

I have been unable to trace Spectrum to an address in Canada.

Given the above circumstances I am unable to verify your March 2004 Return and have therefore made the appropriate VAT adjustment.

I appreciate that this decision is not the decision you had hoped for, but the Commissioners will cooperate fully in obtaining an early hearing of any appeal, which you are minded to make against this decision.

I will of course consider any further representations that you or your legal advisors wish to make with regard to my decision.

Yours sincerely”.

40.    The dispute between the Appellant and HMRC itself occasioned some curious exchanges of correspondence. In an effort to demonstrate that he had made the claimed three supplies, the Appellant wrote to Anke Sedmak on 2 September in the following terms, copying his letter to Mr. Vincent:-

	“Dear Anke,

I refer to various software shipments to Spectrum, can you confirm in writing that you received all the goods that was sent to your shipping company, A & A Contract Customs Brokers Ltd

As this is need for verification in the UK

I look forward to hearing from you. 

Yours sincerely,  Noel Dempster.”  

41.    We are not clear whether the Appellant or his lawyers received a reply to this letter but on 17 November 2004 Mr. Vincent wrote to Spectrum (that he had by then implicitly managed to locate), asking Spectrum to “confirm if you have ever traded or placed orders with [Noel Dempster, trading as “Boulevard”].  If you have, what orders were placed and when, with this business.”  

42.    Mr. Vincent received the following immediate response:

	“We confirm that we have received the following shipments from Boulevard:

Invoice 01-02 462,001 GBP, 20,000 licenses VWARE 01
Invoice 01-04, 277, 201 GBP, 12,000 licences VWARE 01

The following shipment has not yet been received:
Invoice 01-03, 184, 801 GBP, 8000 licenses VWARE 01
	
Sincerely, Anke Sedmak”  

43.      On 18 November, Mr. Vincent sent a letter to Anke Sedmak, asking for considerable clarification in relation to Spectrum’s dealings with the Appellant, the nature of the purchased software and the facts in relation to the missing consignment, and to the fact that its non receipt must have been of great concern to Spectrum.  On 22 November, Anke Sedmak sent the following curt letter to Mr. Vincent:

	“Re Boulevard.

We have no intentions in supporting Boulevard’s issues with your department.  Please advise them that we expect to receive our missing shipment that they have promised to re-send. Until then, we have no further comment. Our communication with them has failed and our demand letters have been returned un-opened.    It is very difficult to handle this from another country.   
Sincerely,   Anke Sedmak”.

44.     The Appellant claimed not to have had any of the demand letters that Anke Sedmak had mentioned in that letter. He did however, and this is the point initially mentioned in paragraph 33 above, seek to re-send bar codes, using UPS to deliver them directly to Spectrum’s BC address. The very full forms completed by UPS indicate, however, that they sought to deliver the package on several occasions in December 2004 but that the recipient refused to accept the consignment. 

45.    The confusion thus in relation to the 8,000 consignment is that either one or both initial packages were destroyed by DHL; the Appellant appeared not to be informed of this rather significant fact until November when Spectrum oddly tried to use HMRC as their messenger to send a complaint to the Appellant, and obtain the missing packages. Whether the Appellant had received complaining letters from Spectrum and returned them unopened remains obscure. In November the Appellant then oddly found spare bar codes amongst the brochures that he had initially received from Abacus, and whether that is all that had gone missing we are unclear, and when these bar codes were despatched, via UPS, to Spectrum, Spectrum refused to accept, and thus even to inspect, the package.  

The Appellant’s contentions

47.    The contentions advanced on behalf of the Appellant were very simple, namely that there was sufficient evidence to demonstrate that the relevant supplies had been received and made; that the supplies were of the appropriate computer software; and that the invoices received from Abacus did accurately refer to the goods in question.  We should mention that we were specifically asked to hear the case altogether ignoring the feature that HMRC had de-registered Abacus and had purportedly done that with retrospective effect, and we took this to imply that we should treat the invoices issued by Abacus as if they were provided by a registered person. This could be of significance in relation to one other matter that was the subject of some debate, namely whether our jurisdiction was a full appellate jurisdiction or whether we only had to decide whether Mr. Vincent’s decision was a reasonable one on the information that he had at the time that he took his decision.  It was contended by the Respondents, and implicitly accepted by the Appellant that our jurisdiction would have been supervisory had there been no valid VAT invoice at all, for then the deductibility of input tax would have depended on the discretion of HMRC to accept other evidence that the Appellant had received taxable supplies. It was contended on behalf of the Appellant however, particularly if we were to disregard everything to do with the de-registration of Abacus, that there was a valid invoice and that questions such as whether it contained the required details and whether the transactions were shams or not were clearly matters where we had a full appellate jurisdiction. 

The Respondents’ contentions

48.    The Respondents’ principal contention was that the input deduction for the purchases was rightly denied because the purchase and sale transactions were shams, or that at least the Appellant had not satisfied the burden of proof to establish that the transactions were genuine. The contention that the transactions were shams was first advanced, with relatively little conviction, on the basis that it was not conceded that the transactions had occurred at all. Far more seriously it was contended that if the software delivered was that illustrated by the Demo Disc sent to HMRC, then the software on that disc was worthless software and the transactions were thus a sham.  When Mr. Vincent received a copy of a demo disc from the Appellant, he noted that it carried the label SmartSoft, and no reference to VWare or Value Ware, and when Mr. Vincent sent it to HMRC’s internal computer expert, Mr. Vincent received a full report as to its contents. One of the items of software on the CD was said to be roughly equivalent to something that could be purchased on the internet for $16.80, while many of the other items were said to be capable of being down-loaded free.   The contentions thus that the actual supplies were shams was based on the contention that the actual deliveries would have been of the same disc and contents as the demo disc, sent to HMRC, with the result that the material was both worth less than £22 a copy, and was known as SmartSoft, not Value Ware, and also on the contention that Value Ware was said and meant to be “educational” while it was suggested that there was nothing educational in the material contained on the SmartSoft demo disc.

49.     A secondary argument was the related but more detailed technical one that the invoices referred to V WARE 01 computer software and to educational software, both of which were misdescriptions of the software if in fact the software delivered was that contained on the Demo Disc that was sent to HMRC, which HMRC’s computer expert examined in the course of reporting to Mr. Vincent and giving Mr. Vincent the summary that he included in his letter of 9 September, largely quoted in paragraph 39 above.   

49.     We will refer below to matters and arguments which we understood the Respondents very specifically not to be advancing. 

Our findings of fact

50.    We have already said at the beginning of this decision that we have found this case difficult, and one where we had considerable difficulty in drawing the dividing line between those aspects where we accepted the evidence, and those where we found it totally unbelievable. 

51.     We found the Appellant a difficult witness.  It was difficult to point to matters where we considered that statements were untrue because on many of the critical questions the Appellant simply asserted that he could not remember anything in response to questions. There were aspects of his evidence that we most certainly did not accept however and those were as follows:

•	We did not accept the proposition that the Appellant decided of his own initiative to branch out from selling shoes, into selling high tech equipment and software, as a coherent expansion of his business. Without trying to be too disparaging to the Appellant (and indeed his apparent total lack of any understanding of computer software is one of the factors that leads us to allow his appeal),  we have to say that  virtually no-one could have had less qualification to persuade existing business colleagues to adopt computers and appropriate software in order to assist in stock control. 
•	We do not accept that when the Appellant attended the computer exhibition in September 2003, he persuaded Mr. Abrahams of Abacus, whom he had not previously met, that he was a serious possible purchaser of computer software.   And we find the proposition that, without meetings having been arranged in advance, the Appellant could have struck Anke Sedmak as someone seriously able to deliver software and capable of being a knowledgeable and worthwhile business contact in the software field, any more than he could have persuaded anyone that he could have described the workings of a space rocket.  
•	It is clear that the correspondence that took place at the very beginning of 2004 was all scripted in advance by someone.  It is farcical to suggest that a Canadian purchaser of computer software writes to the Appellant on 5  January, vaguely remembering him as someone who might deliver software and then 8 days later that Canadian customer is so clear as to what her company might be buying that the company places an order for 20,000 licences, and pays for them in advance. It is admittedly possible that the Appellant might have sent a demo disc to Anke Sedmak, and she may have been stunned by the marketability of the software, but that disc apart, the only description of the software in the ValueWare range was that contained in the brochure which we quoted in full in paragraph 13 above. Our criticism of the content of that brochure is not to do with whether it concentrated on educational or non-educational software. It is that the brochure as such, the demo discs apart, was virtually meaningless. It contained nothing but generalisations and would not have assisted a buyer in deciding what ValueWare software even purported to do or to facilitate, let alone whether it would be as useful as it was claiming.
•	We are at a loss to understand how Spectrum knew on 13 January of the appropriate description of the software to be ordered.  There was no evidence that the Appellant had notified them of the VWare 01 licence designation, albeit that it may have been recorded on the demo disc, always assuming that the Appellant did forward such a demo disc to Spectrum in the short interval between Monday 5 January and Tuesday 13 January. It appears equally possible that some other party indicated the terms on which and the description in which the software might be ordered. 
•	We are equally at a loss to understand how Abacus knew on the day before the Appellant received Spectrum’s order what software and number of licences the Appellant would wish to order to match Spectrum’s order.  We accept that had there been evidence of several telephone calls, indicating that an order was bound to be placed by Spectrum, this could account for how Abacus was able to issue its invoice on 12 January, but it was not indicated in evidence that these phone calls had been made. 
•	We were equally sceptical about the astonishing coincidence whereby a very substantial loan was made to the Appellant by an unconventional lender on the very day when the various invoices were being circulated which would occasion first one and then a second cash flow disadvantage of £55,000 each pending the recovery of VAT. No further evidence was given in relation to this loan, and it was certainly not established or indeed even suggested that the loan was designed to fund the relevant cash outlays, or for instance that the loan might have been a limited recourse loan, repayable as regards at least £110,000 (or possibly £66,000) only out of recoveries from HMRC.   Nevertheless the loan was curious, to say the least. 
•	We are unclear when the Appellant changed the description of his business from being simply a shoe retailer and wholesaler so as to encompass also dealing in mobile phones, computer chips and computer software. The date of this change could be significant since we are entirely unconvinced that the Appellant made a genuine business decision to branch out into these fields in the manner that he suggested, whereupon there must be considerable suspicion that the Appellant made this change at the suggestion of someone who was either cooperating with the Appellant in doubtful transactions designed to defraud HMRC of VAT, or alternatively at the suggestion of someone who was priming and preparing the Appellant for a role that the Appellant was to play, without knowing its full significance. 

 52.         The short summary of the observations on the facts listed above is as follows. The various transactions, the rapidity with which they occurred, the ease with which everything fell into place without any effort and certainly without any expertise or contribution of any sort from the Appellant; the impression that the few critical documents were drafted for the parties by some outsider; the story about the chance meetings at the exhibition, and the few other flimsy bits of correspondence are all so artificial that the key transactions and the whole thin edifice appear to have been pre-planned and scripted by someone else, with the Appellant performing (somewhat badly) a role in a virtual pantomime. The transactions bear none of the ordinary characteristics of genuine business transactions. The Appellant carried no stock; he knew nothing at all about the commodity dealt in; he never sought customers; he dealt on ridiculously artificial terms or no terms at all; he made substantial profit for doing nothing and took no risk (in the sense that he was paid by his customer before he paid his supplier or delivered the goods) other of course than the very material VAT risk.

53.    The summary in paragraph 52 leads us to one or other of two conclusions.  Either the Appellant was a knowing party to transactions that were designed to avoid VAT, or the Appellant was tutored for a small role in a transaction where he should appear to be conducting trading transaction but in fact would be performing a scripted pantomime part. It is possible that the Appellant did not know why he was being offered the marvellous opportunity to make a £44,000 profit for virtually nothing. He might have thought that there was some entirely non-tax-related reason why Abacus had to obscure the fact that they were genuinely selling software to a Canadian client.  There could have been any number of curious non-VAT related reasons why he would need to be a “dummy in the middle”, of other genuine transactions. But the one summary of the facts that we absolutely reject is that the Appellant commenced a new genuine business, or that he thought for a moment that he had commenced a genuine new business.     

54.     It follows from 53 above that if we had been asked to rule on whether the Appellant’s transactions had occurred “in the course of business”, we would unquestionably have said that they did not. They would have seemed to be no more “in the course of business” than would have been the case had the “performer” been a non-businessman who had never made a “supply” or been registered for VAT purposes, and we tentatively assumed that if such a person had performed the same role, it would not have been contended or assumed that the transactions were business transactions, attracting VAT. We entirely accept that we were not addressed on the law in this regard and we are equally aware that the Community definition of economic activities is very wide. Had we been addressed on the law, we might have been persuaded that our expectation that these pantomime transactions were not business transactions was wrong. As it was however, we were told that no argument along these lines was being advanced, and since manifestly the Appellant had no opportunity or occasion to resist any such argument, we could not decide the case on the basis that input recovery was denied because the transactions did not take place in the course of business. 

55.    We should add that in having considered the issue of whether the transactions were to be faulted as not being business transactions, we were not raising this question on the ground that Abacus’ transactions were fraudulent transactions that were thus totally irrelevant for VAT purposes in relation to which no subsequent trader could recover VAT. Nor were we considering a case where a genuine trader had undertaken a number of transactions where the circumstances of the purchases and sales were no different from the trader’s more ordinary transactions. We considered that we were dealing with a case where the facts were extreme and where (on the more charitable of the two possible scenarios) the Appellant simply could not have thought that he was doing anything other than act as a scripted dummy in the middle of other transactions.  And the only alternative to that in our view was that the Appellant would have been a party to the VAT avoidance. 

Our Decision

56     We turn now to our decision on the actual grounds advanced on behalf of the Respondents for supporting their decision, rejecting the claim for an input deduction, and thus their grounds for saying that this Appeal should be dismissed.  

57.     We consider first that this is a case where we have a full appellate jurisdiction.   Once we disregard everything to do with the retrospective de-registration of Abacus, this case relates to actual invoices issued, and the first key question is whether the transactions referred to in those invoices were shams. 

58.     The first basis on which it was asserted that the transactions were shams lay in the contention that the transactions had not occurred at all, or at least that it was not conceded that they had done. 

59.     Our decision on this point is that the Appellant did make supplies of computer software, and that the software was duly despatched, via DHL, to the customer.  No argument was advanced before us in relation to the point that the third or 8,000 licence consignment had never successfully been delivered, and replacement bar codes at the very least were delivered to the customer’s premises, albeit rejected.  Accordingly we decide that all the supplies and deliveries actually took place. 

60.     The more strenuous contention was that the transactions were shams in that whilst the invoices referred to one description of software, which allegedly commanded a high price it was argued that what was in fact supplied and despatched was virtually worthless software. In support of this contention the Respondents contended that the report from their internal computer expert indicated that the software in the demo disc sent to HMRC was not educational software, and that most of the contents could be downloaded without payment from the internet, albeit that one was found to be on sale for $16.80.  In further support of the contention that the transactions were a sham, it was pointed out that it was odd that the Appellant did not insure the packages during the delivery process; odd that he knew nothing about the terms of purchase or sale, or the terms of licences and sub-licences available to end users, and extraordinarily odd that the purchasers seemed to make no complaint, until months after the event, when the first consignment failed to arrive. Since they had paid in advance for the 8,000 licences, and since another consignment ordered at the same time had been received (following a re-sending) it was odd that the purchaser seemed indifferent when the third consignment failed to arrive, and odder still when Spectrum refused to accept delivery of re-sent bar codes. 

61.    In order to sustain the “sham” contention, the Respondents must demonstrate both that the actual transactions were dealings in something merely feigning to be the claimed computer software, and that the Appellant had or must be presumed to have had knowledge of this, or at least have been responsible for Nelsonian blindness.  At this point we are not meaning to suggest that the burden of proof is on the Respondents; merely indicating the necessary two aspects to the contention. 

62.    Prior to testing these two issues, we will first revert to the conclusions that we gave in paragraph 53 above, namely that we had no doubt that:

•	it was inconceivable that the transactions by the Appellant were genuine developments of his business, and regarded as such by him;  so that - 
•	we had to consider whether the Appellant was a knowing party to a VAT fraud, or alternatively someone who was targeted by others who master-minded the transactions, was tutored by them to perform a few artificial steps, kept ignorant of the full import of the transactions, and induced to participate by a potential profit of £44,000 for doing next to nothing. 

The question just posed is a very difficult one.  It is noteworthy however that in three days of hearings, during most of which the Appellant was giving evidence, it was never once suggested that he was a knowing party to a VAT fraud, and indeed never suggested that he would have known that the software delivered was fake, even if in fact it was.  He was never even asked a question that approached that subject. It was only when we asked him whether the supplies that he made were supplies of goods or services and how he knew that they should be zero-rated for VAT purposes that anyone even asked anything remotely relevant to what he knew about the VAT aspects of the transactions. We are accordingly very reluctant to “convict” the Appellant of being a party to a fraud when no-one suggested that he was a knowing party to a sham or a fraud at all, and when as a result he had no occasion to reject that suggestion. 

63.    Addressing now the issue of whether factually (i.e. ignoring knowledge and Nelsonian blindness at this stage) the actual material supplied was the claimed V Ware or Value Ware software, our observations are as follows. 

64.     It is obvious now that, in the absence of evidence from people who are extremely unlikely to give evidence, no-one is ever now going to establish with certainty whether the deliveries were of Value Ware, capable of being reproduced to deliver 20,000 copies, 12,000 and 8,000 copies, of the software, or whether they were of some different software, that might or might not have been capable of being reproduced for the stated number of sub-purchasers or not. One thing that can be said, on account of the nature of the asset, however, is that the software was an asset with a different type of value from the assets that have featured in some of the other similar “sham” cases, like golf clubs and platinum. Golf clubs and platinum are both assets that have an intrinsic value, so that indifference as to how the assets are transported and protected may well suggest that the assets differ from those claimed. Further, golf clubs are an asset where, if more are delivered in one consignment than the manufacturer has produced, manifestly something curious has occurred, and the full claimed transfer can obviously not have occurred. By contrast if Abacus, or an entity behind Abacus, had an unlimited licence to supply as many copies of the software as it chose, the rather curious point emerges that not only would the CDs and bar codes be assets with no significant intrinsic value, but the entity holding the copyright could have implemented the transactions (and more relevantly set others on the path of implementing the transactions) paying no more attention to the value of the software than would have been appropriate if it had all been fake. 

65.    One of the arguments advanced strongly by the Respondents in support of the proposition that the supplies were of valueless software was that Spectrum seemed indifferent to not receiving the third supply of software, and indeed seemed positively not to want whatever was eventually re-delivered in December 2004. Spectrum’s attitude is not however particularly supportive of the proposition that the software was valueless, since Spectrum would equally have complained on receiving valueless software, as on failing to receive anything at all, had its transactions been completely genuine. Its failure to complain about the non receipt, after it had manifestly paid a very substantial sum for the software, is far more obviously explained by the fact that it had in some way recovered its cash outlay. Possibly it might have re-invoiced some entity in the UK for a further supply of the software and been paid either for sending the software that was delivered to it back to the UK, or indeed paid against invoices, even though nothing was delivered at all.  It is in this context that the nature of the asset is significant, in that if Abacus or another entity in the UK had a licence to sell an unlimited number of copies of the software, it would scarcely matter whether genuine original software was lost without trace or whether it was send round the full circle and re-acquired by the originator.  Indeed even if both packages of CDs and bar codes were fraudulently acquired by a third party and marketed, the only detriment to the full licence holder would be that some marketing potential for its own software would be lost. But that apart, these points illustrate that the fictitious transactions in this case could equally easily (with no risk and insurance concerns) have been effected with the real software claimed (and its ability to be re-produced in the claimed numbers) as with some substitute less valuable fakes. 

66.    Even if it is possible that the transactions could equally easily have been planned and scripted by whoever was behind these transaction to operate with genuine software as easily as with fake software, with no additional risk, it is still worth questioning why we consider that genuine software might have been used, when we consider that most of the remaining features of the transactions were fictitious, and that neither the Appellant nor for that matter Spectrum could have considered that they were performing genuine business roles. A factor that would make it preferable for the instigator of these transactions to have used genuine software is that that would at least have rendered the artificiality far less evident to the inserted parties. It might be that the Appellant would have been quite unaware whether the software was genuine or not, but the implementation of the transactions with fake software would nevertheless have elevated the fraud to a different level, and had the various inserted parties been aware of the fake nature of the asset this would have left them with no doubt that they were participating in fraudulent transactions, with no chance of them thinking that they were just doing something artificial and profitable which they did not fully understand. 

67.    The main ground on which the Respondents claimed that the evidence showed that the actual deliveries were of fake software, or at least something different from VWare, as described in its publicity material, was that the demo disc sent to HMRC was of SmartSoft software, produced by a different entity from the alleged producer of VWare, and that the SmartSoft software was valueless and not “educational” in the way that it was claimed that V Ware was educational. It was also said that the Appellant said, in giving his evidence, that the demo disc sent to HMRC was the later of the two demo discs that he received, namely that handed over after the December hotel lobby meeting, and that he thought that that disc contained the same software as was contained on the various master discs in fact supplied in January and February 2004.  It was also noted that, in giving his evidence, the Appellant evinced surprise when the point was put to him that the SmartSoft disc differed from the sort of disc described in the V Ware brochure. 

68.    Our comments on these various contentions are as follows:

•	One obvious conclusion that can be drawn from the points recorded in the previous paragraph is that it must follow that the Appellant could not have looked very carefully at the demo disc and the discs eventually supplied, and at the V Ware brochure or he might have noted that there were discrepancies. 
•	Had the Appellant noted that the demo disc, which he happily sent to HMRC, was the same as the master discs, and that neither were V Ware, it seems odd that he would have been so ready (as he was) to send HMRC a copy of the demo disc, as if that was going to support and prove his case for the recovery of input tax.
•	We are not at all convinced that the Appellant knew whether the disc sent to HMRC was the first or second of the demo discs; and we do not even know whether Abacus sent the further samples that were referred to in their letter of 2 January, which doubtless were more likely to match the material supplied on 13 January than a demo disc given to the Appellant in September or December 2003.
•	We are not particularly expert in relation to software, and demo discs, but it seems possible to us that a demo disc might be produced by a different entity than by the producer of the master disc, or even that an entity might put its own logo on software if it was producing a demo disc that it was not strictly licensed to produce.
•	The SmartSoft disc was apparently not valueless in that HMRC’s own expert said that one item alone could be obtained from the internet for $16.80.
•	Finally reference to software being educational or not educational struck us as most unconvincing.  The VWare brochure that we quoted above was extraordinarily vague and we have already said that no intending purchaser would have found it of any use in deciding whether V Ware would be of any use to it.  The description “educational” is however very broad, and contrary to suggestions made by the Respondents, we do not consider that it merely refers to something that would be suitable for school age children, as a support for their studies. 

69.    Our conclusion thus is that we certainly cannot establish whether the software was genuine or not, and (whilst this point was never mentioned in the hearing) no-one (the instigator apart) knows the crucial fact as to whether the master disc (whether it contained V Ware software or something slightly different) was capable of producing the claimed number of copies, by matching the bar codes to the CDs. What we consider that we do know, however, is that it is logically possible that the transactions could have been effected with the genuine software, without any necessary risk in relation to the loss of valuable assets. We also consider that the instigator would have had clear motivation to plan the transactions whilst using credible and genuine software, rather than bricks of the appropriate weight, Frank Sinatra CDs or CDs with relatively worthless software that might not have been capable of being reproduced. 

70.    We turn now to the somewhat easier question of whether, assuming that the software was fake in some way, the Appellant was aware of this fact or was dishonestly ignoring several clear signs that the software was fake. As we have just observed, the instigator of these transactions would have had obvious motivation to try to make the various inserted participants unaware of the fact that the software was fake if it was, and we consider that in the Appellant the instigator had someone who could very easily have been oblivious to whether the software was fake or not.  The Appellant regularly demonstrated the frame of mind perfectly illustrated by the remark quoted above, when comparing the December “hotel lobby” software with the September “exhibition” software, and observing that “That done more than what the previous CD done”. We consider that the Appellant was totally bemused by computers and software, a fairly common characteristic, and we do not think that he realised that he was dealing with fake or near worthless software, if indeed he was.   We also consider that whilst the Appellant looked on with wonder when Mr. Abrahams demonstrated the two versions of software, we doubt whether he even opened the software on a computer in any meaningful way himself, and whilst he said that the packages received from Abacus and despatched to Spectrum were inspected by the DHL representative, we assume that this meant no more than that one package contained CDs and another sheets of bar codes. 

71.    By way of a very short summary, we consider that numerous aspects of the Appellant’s conduct and indeed his evidence were hopelessly artificial, and if he was not a knowing party to a VAT fraud, for some reason he was not conceding that he had been duped into participating in something that was far more serious than he had appreciated. But he cannot have considered that he was genuinely expanding into a new trade, rather than performing badly a part in a pantomime. The one factor that struck us both was that the Appellant would be unlikely to have known that the software was fake, had it been fake, and we do not think that he was turning a blind eye to obvious factors that indicated that it was fake. His ignorance of computers and software thus was fatal to most of the evidence that the Appellant hoped that we would accept, but it was the one thing that left us very doubtful about the crucial element of knowledge, essential to the Respondents’ sham contention.  In a phrase, “his weakness on most aspects was his strength on the one crucial point”.  To this we add one other very important point.  It was never asserted by the Respondents that the Appellant was a party to a conspiracy to defraud HMRC of VAT, and it was never asserted that he knew that the software was fake or a sham. When we add this to the conclusion that we drew ourselves in this and the preceding paragraph, we have little hesitation in reaching the conclusion on the “sham” point that the Respondents’ sham contention should be rejected. We fully understand that the burden of proof is on the Appellant to establish that it is entitled to an input deduction, but where the Respondents need to establish some form of guilty knowledge and when they have failed to do that, and indeed virtually failed to address the point of the Appellant’s knowledge at all, we are clear that we must dismiss the sham argument. It is also worth observing that the Respondents’ enquiries in relation to the Appellant’s transactions were initiated by problems encountered with Abacus, and the de-registration of Abacus that we were instructed to ignore. Finally, as regards the issues where the Appellant has convinced and satisfied us, whilst the subject of his knowledge was barely raised directly, we did both reach the conclusion that it was indeed likely that the Appellant did not understand that the transactions in relation to the CDs and bar codes were a sham, if indeed they were.  

72.    We turn finally to the Respondent’s alternative contention, namely that for the technical reason that the information on Abacus’ VAT invoice did not accurately describe the nature of the product acquired, the input deduction should be denied.   This contention differs from the “sham” argument in that absence of knowledge on the part of the Appellant would not undermine the Respondent’s contention, and also that the difference between the text of the invoice and the product acquired could well vary from that required to demonstrate the sham point. It could for instance be the case that there might be some technical flaw in the description in the VAT invoice, albeit that the acquired software might have been equally valuable and equally genuine to the software described in the invoice. 

73.    The grounds on which this argument was advanced, very much as a secondary argument, were first that the software was described on the Invoice as being educational, and it was contended that the software that the HMRC computer expert saw was not educational; secondly it was suggested that the software acquired, which must have been the same as the software illustrated on the demo disc that the same expert examined cannot have been V Ware 01 licence software. 

74.    We reject both of these contentions. So far as the educational point is concerned, we consider that the Respondents were advancing too narrow a definition of “educational” software. It seems that the software in question would educate users in various skills that they would be able to use, and in that sense it was educational.  Moreover if something is described in promotional material as educational, and the VAT invoice matches this description, we do not consider that it is then appropriate to fault the VAT invoice, even if someone else considers the description slightly misleading, or over-complimentary. 

75.    The next point that we make is that whatever the names on the demo disc that the HMRC expert was sent, it is far from clear, as we have already said, that that disc was identical to the master disc that was actually supplied. We do not even know whether a further demo disc was furnished by Abacus after 2 January; we do not know whether the Appellant sent Spectrum the September disc or the December one, or indeed whether either was sent; and we are far from convinced that Spectrum defined its order as it did for any reason other than because the instigator of these transactions is likely to have instructed Spectrum precisely how to describe the software required on its order form. Thereafter every description was consistent.    Naturally the Appellant’s invoice to Spectrum matched their order. More significantly, Abacus’s invoice was in identical terms; and when Spectrum was later asked what software it had received, and what had not been received, all the descriptions tallied with the V Ware 01 description. Although it might be suggested that all those descriptions would be bound to be inaccurate in the same fashion once one was wrong and flawed, it seems to us to be exceptionally improbable that whoever instigated these transactions, and Abacus, if it was Abacus that instigated them, would have supplied software on 12 January, and then mis-described the software on the same day, and implicitly instructed all other parties to follow suit and mis-describe it.  In relation to arguments along these lines, the Respondents said that in alleging that the transactions were fraudulent or fictitious, they did not contend that the fraud had been skilfully perpetrated.  It seems obvious to us that if the software to be supplied had in fact been SmartSoft software, and the transactions were wholly fraudulent, it would have been perfectly easy to prepare all the documentation on the basis that the supplies were of SmartSoft software, not something different. And if SmartSoft software had been somewhat less valuable, the transactions could have been effected for the same total values merely by providing double the number of copies of the software.  After all no-one established or even questioned whether the master discs actually supplied were capable of producing 1000 versions of the software, against the same number of bar codes, and whether that was in fact the case, or whether that was also fictitious.  We could see no reason why the same could not have been done, or at least claimed, if the supplies were of SmartSoft software. We consider all this far too speculative, and simply conclude that it is inconceivable that the software supplied by the parties, some or one of whom would have given great consideration to the description, would not have tallied with the software supplied. 

76.    We accordingly allow this appeal, and also allow the Appellant his costs. We repeat the observation that we made at the beginning of this decision, namely that we are unhappy with this conclusion and would have preferred to decide that the input deduction was denied for the reason that we canvassed in paragraphs 54 and 55 above. However we cannot do that, and on the arguments actually advanced we consider that the Respondents were trying to make arguments that have prevailed rightly in other cases fit facts where they were far less convincing. Finally any finding against the Appellant, at the very least on the sham ground, would implicitly have involved our reaching the conclusion that the Appellant was guilty of some degree of fraud. While we accept that in fact he may have indeed been so guilty, we will not reach a conclusion along those lines when the Respondents never contended that he was a knowing party to any fraud, and never asked one questioning cross-examination that broached this subject.    

HOWARD M NOWLAN
CHAIRMAN

RELEASED: 3 May 2007

LON/2004/1487