20634

VAT – INPUT TAX – input tax on an inward supply of mobile phones –     input tax claim originally denied because the disputed supply formed part of a chain of supplies involving a missing trader – following ECJ decision in Optigen Limited and others input tax claim still denied but for an additional reason namely no onward supply of mobile phones took place – Respondents conceded that the Appellant was honest and an unwitting party to a fraud – found that the Appellant intended to make an onward supply but no supply took place because of a fraud committed by others – applying the principles in Optigen satisfied that the input tax on the inward supply was attributable to a taxable supply – Appeal allowed.   

LONDON TRIBUNAL CENTRE

	ROSS PHARMACY LIMITED  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      SHEILA WONG CHONG FRICS (Member)	  

Sitting in public in London on 7, 8, 9 November and 18 December 2007

Andrew Young counsel instructed by Needleman Treon Solicitors for the Appellant 

Nicola Shaw, counsel instructed by the Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant appealed against the Respondents’ decision dated 23 March 2004 disallowing an input tax claim in the sum of £99,750 for the period 06/03.
The Dispute
2.	The claim for input tax related to a supply of 2,500 Nokia 7250 mobile telephones from Ravjani Corporation Limited in the United Kingdom on 23 June 2003. The Appellant purportedly made an onward supply of the same 2,500 Nokia 7250 mobile telephones to YM International BV in the Netherlands.
3.	The Respondents initially refused the Appellant’s repayment claim because they believed that the disputed supplies formed part of a chain of supplies which were circular in nature and contained a missing trader. After the decision of the European Court of Justice in joined cases of C – 354/03, C – 355/03 and C -484/03 Optigen Limited and others v CCE  [2006] STC 419 in January 2006 the Respondents continued to deny the repayment claim citing an additional reason.  The new reason was that when the onward supply of the mobile phones was inspected in the Netherlands, the consignment consisted of old mobile phones which did not correspond with the description of the new mobile phones in the Appellant’s invoice to YM International BV.
4.	The dispute concerned two discrete issues. The first was a factual issue. Essentially the Appellant contended that the consignment of old phones had been sent in error and that the correct consignment of new mobile phones was delivered to YM International BV the following day on 25 June 2003.  In contrast, the Respondents asserted there was no error, only the one consignment was delivered, which was of old mobile phones. The onus was upon the Appellant to prove on the balance of probabilities that the later onward supply of the new mobile phones took place. According to the Respondents the evidence was against the Appellant. If the Appellant, however, discharged the burden on the factual issue, it would be successful with its Appeal.
5.	The second dispute was a legal issue, which from the Appellant’s perspective was not strictly dependent upon resolution of the factual dispute.  The Appellant submitted that its entitlement to input tax arose from the inward supply of new mobile phones by Ravjani Corporation Limited which was made to the Appellant for the purpose of its business. The fact that the onward supply of new mobile phones to YM International BV did not take place was irrelevant to the legal analysis, and did not affect the Appellant’s entitlement to input tax. The Respondents disagreed. They submitted that the Appellant’s claim for input tax depended not only upon whether it received a supply of phones  for the purpose of its business but also that it made or intended to make onward supplies of those phones in the course of its business. The Respondents submitted that the Appellant’s case was that it made an onward supply of new Nokia 7250 phones to YM International BV. This was not a situation of intended supplies. Thus the Appellant’s claim for input tax was dependent upon the onward supply of the same new mobile phones from Ravjani Corporation Limited to YM International BV. 
6.	The Respondents made the following concessions at the beginning of the hearing:
(1)	The Appellant was not dishonest.
(2)	The Appellant was an unwitting participant in a fraud.
(3)	This Appeal was not a means of knowledge case.
(4)	No challenge was made to the authenticity of the documents evidencing the supply of mobile telephones from Ravjani Corporation Limited to the Appellant dated 23 June 2003.  The Respondents did not dispute the Appellant’s claim for input tax on the basis of the documentary evidence. However, they did not accept that the documentary evidence on its own demonstrated that the Appellant purchased 2,500 Nokia 7250 phones, but they did not take the point.
7.	The Respondents had taken no formal steps challenging the zero rated status of  the Appellant’s onward supply of mobile phones to YM International BV.
The Hearing
8.	The Respondents made a preliminary application to adjourn the hearing because one of their witnesses, Officer Birchfield, was unable to attend due to bereavement in his family on 6 November 2007. Also the Appellant’s witness, Mr Dharas, was in Dubai and would not be available to give his evidence until 9 November 2007, the last day fixed for the hearing. The Appellant objected to the application.
9.	We were surprised that the Appellant’s witness, Mr Dharas, was not available until the 9 November 2007. The Tribunal had fixed the hearing date in response to a previous application by the Appellant resisting an earlier Respondents’ request for a listing from January 2008. We directed the Appellant to make enquiries of Mr Dharas about whether he could change his return flight so that he could attend the hearing on 8 November 2007, which he duly did. 
10.	We refused the Respondents’ adjournment application, taking into account the following factors:
(1)	 The events giving rise to the Appeal were over four years old.
(2)	  The history of the proceedings, in particular the Tribunal directions released in May 2007 which ordered an expedited hearing of the Appeal. 
(3)	The Respondents arranged for their crucial witness, Officer Roosen of the Netherlands Tax Authorities, to give evidence on 9 November 2007.  The Tribunal was aware that the Netherlands’ Authorities were reluctant to sanction the attendance of their Officers at overseas civil proceedings, which posed significant difficulties in finding new dates for the hearing.
(4)	The Tribunal was not convinced that Officer Birchfield’s evidence was critical to the Appeal, particularly as two of the investigating Officers were present. In any event it was likely that the Appeal would go part-heard in which case the hearing could be resumed on a date convenient to Officer Birchfield.
11.	The hearing went part-heard after receiving the evidence of Mr Dharas and Officer Roosen, and was completed on 18 December 2007.
12.	Mr Shabbirali Dharas, company secretary of the Appellant gave evidence on behalf of the Appellant about the disputed transaction, and the due diligence tests undertaken by the Appellant. We were conscious that Mr Dharas had caught an overnight flight from Dubai in order to give his evidence. We afforded him breaks during the giving of his evidence and also offered him the opportunity to halt his evidence if he felt tired. He took that opportunity on the afternoon of the 8 November with the result that he resumed his testimony on the morning of the 9 November 2007.
13.	 Mr Ferdinand Roosen, officer of the Netherlands Tax and Customs Administration, Fiscal Intelligence and Investigation Service gave evidence of his investigation into the business affairs of YM International BV, and his inspection of the delivery of old mobile phones on 24 June 2003.  Messrs Peter Birchfield, Fu Sang Lam and Laurence Smith, Officers of HM Revenue and Customs gave evidence of their investigations of the disputed supplies and the involvement of the Appellant. The Tribunal received a bundle of agreed documents.
The Background
14.	 On 23 June 2003 YM International BV contacted the Appellant with a view to purchasing 2,500 Nokia 7250 mobile phones. Following which the Appellant negotiated a supply of the phones from Ravjani Corporation Limited. Before concluding the deal the Appellant purportedly carried out due diligence tests on YM International BV and Ravjani Corporation Limited. After completing due diligence the Appellant arranged with First Issue Limited, the freight forwarder, to collect the mobile phones and perform a stock check and IMEI scans on them.  According to the Appellant, First Issue Limited then delivered the mobile phones to YM International on 25 June 2003.  First Issue Limited supplied the Appellant with a Convention Merchandise Routier (CMR) supported by a Stenna Line Boarding Card which showed that five pallets of electrical goods supposedly departed from the United Kingdom  on 24 June 2003 at 2303 hours and received by YM International BV at All Safe Unit in Amsterdam.
15.	YM International BV paid the purchase price, £595,000, for the mobile phones by CHAPS transfer direct to the Appellant’s bank account on the 24 June 2003. The supply to YM International BV was zero-rated for VAT purposes since it constituted a dispatch of goods to a VAT registered company in another member state.  The Appellant paid Ravjani Corporation Ltd by CHAPS transfer in the sum of £570,000 plus VAT of £99,750 on the 25 June 2003.  The supply by Ravjani Corporation Limited was standard rated for VAT as it took place between two VAT registered companies in the United Kingdom.  The Appellant paid First Issue Limited £425 plus VAT for the stock check and IMEI scans, and £1,400 plus VAT for the freight charge to the Netherlands. The Appellant made a profit of £23,175, a return of four per cent on the deal, on the assumption that it recovered the VAT on the supply from Ravjani Corporation Limited.
16.	The Appellant did not personally inspect the mobile phones. It relied on the documents, the stock check and IMEI scans, the record of payments, and conversations with the parties to prove that the disputed supplies of 2,500 Nokia 7250 mobile phones took place.
The Facts Found
The Appellant’s Business
17.	The Appellant was registered for VAT with effect from 4 June 2001. The Appellant described its business activity as pharmacy, and traded as a dispensing chemist.  The Appellant was run by its director, Mr Hasnain Kanji and the company secretary, Mr Shabbirahi Dharas. The Appellant was a repayment trader and made monthly VAT returns.
18.	The Appellant decided in April 2003 to diversify its trading activities by dealing in mobile phones to reduce its trading debts. Messrs Dharas and Khanji were also directors of Rigcharm Limited which had traded in mobile phones since 2001. The Appellant completed two mobile phone deals in April 2003, on which the Respondents met the Appellant’s VAT repayment claims. The disputed transaction was the Appellant’s third mobile phone transaction. The Appellant’s VAT return for June 2003 showed that the value of its pharmacy sales were £114,078 excluding VAT. 
19.	 The Respondents made no substantive submissions on the nature of the Appellant’s business activities.
20.	We find that the Appellant’s business activities included trading in mobile phones
Due Diligence 
21.	The Appellant had in place a standard procedure for conducting due diligence on prospective customers and suppliers. The procedure included Companies House searches, trade references, and stock and IMEI checks. The Appellant put due diligence procedures in place because Mr Dharas was aware of the widespread VAT fraud in the mobile phone sector, and to reduce the risk of dealing with missing traders. 
22.	The Appellant supplied in evidence a VAT registration certificate, Certificate of Incorporation and bank details for Ravjani Corporation Limited. The two certificates appeared to be faxed on 21 July 2002.  Mr Dharas had been acquainted with Mr Haider Ravjani, director of Ravjani Corporation Limited, since 1980. They worshipped in the same Mosque. Mr Dharas in his capacity as director of Rigcharm Ltd had previously traded with Ravjani Corporation Limited.
23.	The Appellant supplied a copy of a letter of introduction from YM International BV dated December 2002 signed by Nick and addressed To Whom It May Concern. The letter explained that the company specialised in the wholesale of mobile and electrical goods. The company had only been established for a short-while. YM International BV expressed its wish to do business. The letter enclosed an English translation of an extract from the commercial register of the Chamber of Commerce and Industries for Amsterdam which showed that the company had one shareholder, Hernake Singh Mehat with an address in Huddersfield, United Kingdom. Mr Dharas and Mr Kanji as directors of Rigcharm Limited had met Nick at a trade fair in Hanover towards the end of 2002. The Appellant made no enquiries with the Amsterdam Chamber of Commerce about YM International BV. 
24.	The Appellant supplied a copy of a letter to Officer Waterfield of HM Revenue and Customs signed by Mr Kanji and dated 23 June 2003 informing him that the Appellant had completed a new mobile deal with Ravjani Corporation Limited and YM International BV. The Appellant also produced a written note of Mr Kanji verifying the status of the two companies with the Respondents’ Redhill office. The note detailed the name of the Officer contacted and the reference numbers for Ravjani Corporation Limited and YM International BV. The note was dated 23 June 2006.
25.	 The Appellant requested First Issue Limited to carry out IMEI scans and a stock check on the mobile phones from Ravjani Corporation Limited before confirming the deal. The IMEI scan involved scanning the bar codes of a specific sample of the mobile phones. The Appellant paid for a 10 per cent sample of IMEI scans. The Appellant in fact received scans of 2,100 phones which were 400 less than requested. Under the stock check, First Issue Limited performed a 100 per cent stock check by counting the number of boxes. As part of the check First Issue Limited opened 10 per cent of the boxes to confirm the identity of their contents. The stock inspection report provided by First Issue Limited to the Appellant recorded the approximate weight of the mobile phones as 30 kilograms. The CMR relied upon by the Appellant as evidence of the onward supply of the same mobile phones, recorded their weight as, 1,500 kilograms. The stock inspection report indicated that the stock check was carried out at the premises of First Issue Limited in Cheadle Staffordshire, which cast doubt on the collection point of the goods at Wembley London as stated in the CMR. The Respondents contended that it made no sense for the freight forwarder to transport goods from Wembley to Cheadle and back to Harwich. 
26.	Mr Dharas’ witness statement mentioned that a Mr Sven Blees would give a witness statement about the identity of the IMEI numbers.  We disregarded the purported evidence given by Mr Blees because he was not called as a witness, and no witness statement was produced. 
27.	 The Respondents pointed out that Mr Dharas was aware of the need to carry out due diligence checks to minimise the risk that a potential transaction did not form part of a carousel fraud. The Respondents considered that the Appellant’s checks lacked rigour which questioned the Appellant’s reliance on the documents to prove the existence of supplies.  Officer Birchfield in his statement outlined the verification process undertaken by the Respondents when investigating an input tax claim relating to high risk goods. Essentially the Respondents would expect the trader to hold documentation to support the claim, and have in place sound financial arrangements to fund the operations, and established commercial arrangements between the parties.
28.	Mr Dharas when cross-examined could not remember the precise details of the due diligence carried out on the disputed supply. He could not explain the apparent discrepancies between the stock check report and the CMR. Mr Dharas considered that the wrong date of 23 June 2006 on the note of Mr Khanji’s conversation with the HM Revenue and Customs Officer at Redhill was a genuine mistake. 
29.	We recognised that Mr Dharas was talking about events that happened over four years previous. We concluded, however, that Mr Dharas’ inability to recall precise details and explain inconsistencies was that he had minimal involvement with the disputed transactions.  We formed the view that Mr Kanji handled the transactions on behalf of the Appellant, particularly as he signed the letter to Officer Waterfield and answered the questions when Officers Lam and Smith visited the Appellant’s premises on the 4 August 2003. We consider that Mr Dharas in all likelihood pulled out  the documentation in the Appellant’s filing system on the disputed deal, and reconstructed  the events from the documents
30.	We find that the wrong date of 23 June 2006 on the note was a transcription error. It was attached to a letter dated 23 June 03, and in the same handwriting as the letter. Also the date of 23 June 2006 post-dated the sale of the Appellant’s business in 2005. Further Mr Dharas’ witness statement exhibiting the letter and note was dated 2 July 2007 which should have provided the Respondents with sufficient notice to call rebuttal evidence of the correspondence with Officer Waterfield. We were also satisfied with the Appellant’s due diligence checks on Ravjani Corporation Limited which comprised official certificates and a long established personal business relationship. We took no point on the certificates bearing a faxed date of December 2002 which pre-dated the Appellant’s trading in mobile phones. Mr Dharas gave an adequate explanation in that these documents were also used for the dealings of Rigcharm Limited which had been trading in mobile phones since 2001.
31.	We did not consider the due diligence checks performed by the Appellant on YM International BV adequate. The contents of the introductory letter and its enclosures should have put the Appellant on notice to make further enquiries, in particular the short trading history of the company and the presence of one shareholder with an address in Huddersfield. 
32.	We were concerned with the discrepancies in the stock check report and the IMEI scans between what the Appellant received and paid for. We deal with the issue of authenticity of these documents later on in the decision. Mr Dharas could give no explanation for the discrepancies. We conclude that the Appellant did not check the documents for accuracy after they were received from First Issue Limited. 
33.	In summary we find that the due diligence carried out by the Appellant was not rigorous enough in the context of the risks posed by fraudulent trading in mobile phones. 
Ravjani Corporation Limited
34.	Officer Lam confirmed that the Respondents had taken no action against Ravjani Corporation Limited in respect of the supply of mobile phones to the Appellant. Officer Birchfield indicated that the VAT returns of Ravjani Coporation Limited had not been amended or reduced and no VAT assessments had been raised against the company. Officer Lam’s witness statement which was admitted as evidence in chief revealed that the Respondents carried out an extended verification exercise of the transactions of Ravjani Corporation Limited. The current register at Companies’ House had Ravjani Corporation Limited as a live company.
35.	The Appellant produced an estimate and invoice from Ravjani Corporation Limited and a purchase order evidencing the supply of 2,500 Nokia 7250 mobile phones for the purchase price of £570,000 plus VAT of £99,750. The invoice met the requirements of regulation 14 of the Value Added Tax Regulations 1995. The Appellant paid the sum due on the invoice on 25 June 2003 by CHAPS transfer. Ravjani Corporation Limited accounted for the VAT as output tax on its return.
36.	 The Respondents did not challenge the authenticity of the invoice from Ravjani Corporation Limited. Further they did not dispute the Appellant’s input tax claim on the basis of the documentary evidence. The Respondents, however, were not prepared to concede that the invoice on its own demonstrated that the Appellant purchased 2,500 Nokia 7250 mobile phones, but they took no point on it. 
37.	 We consider the Respondents were in a position to form an informed view about whether the supply of Nokia 7250 from Ravjani Corporation Limited to the Appellant took place. They subjected the company to an extended verification exercise. The fact that they did not dispute the authenticity of the invoice meant that there was no effective challenge to the Appellant’s evidence derived from the documentation and record of payment about the existence of the supply. In those circumstances we are satisfied that the Appellant has proved on the balance of probabilities that it received a supply of 2,500 Nokia 7250 phones from Ravjani Corporation Limited on 23 June 2003.
YM International BV
38.	YM International BV was incorporated in the Netherlands on the 18 October 2002 with a registered office in Amsterdam, and one director Hernake Singh Mehat residing at an address in Huddersfield, United Kingdom. Its business was described as wholesale import, export of electrical equipment and holding activities. The company ceased trading in around July 2003.
39.	Officer Roosen, a special investigator with the Netherlands Tax and Customs Administration conducted a criminal investigation into the business affairs of YM International BV. The reasons for the investigations were as follows:
(1)	Requests from HM Revenue and Customs to investigate various consignments of old mobile phones from YM International BV  which had been intercepted by the United Kingdom Authorities.
(2)	Information from the Operations Manager of Allsafe Storage Unit about one of its customers, YM International BV, which was unloading  consignments of old mobile phones on a daily basis from United Kingdom registered vehicles. 
(3)	An audit of the accounting records of YM International BV by officers of the Netherlands Tax and Customs Administration which showed that sales of goods took place before they were purchased, and that third parties rather than the named customer were paying the sales invoices of YM International BV.
40.	Officer Roosen concluded from his enquiries that YM International BV was engaged in a VAT fraud which involved about £17.5 million. The Netherlands prosecuting authorities took no action against YM International BV because they believed that the fraud was taking place in the United Kingdom where Mr Mehat, the director, was resident.  They handed over the results of Officer Roosen’s investigation to the relevant authorities in the United Kingdom to take the necessary action.
41.	 In his extended verification exercise Officer Lam identified YM International BV as a recipient of third party payments for its supplies. 
42.	Officer Birchfield testified that he discussed the contents of Officer Roosen’s report with the Customs Law Specialist Investigation Team. They decided not to commence a criminal investigation of the traders involved in the transaction chains which traded with YM International BV.
43.	Although it would appear that the Respondents have not instigated criminal proceedings against YM International BV or its director, we are satisfied from the findings of Mr Roosen’s report that there were reasonable grounds for believing that YM International BV was involved in VAT fraud.
Appellant’s supply to YM International BV
44.	The Appellant produced an invoice and purchase order dated 23 June 2003 evidencing the supply of 2,500 Nokia 7250 phones to YM International BV. The invoice met the requirements of Regulation 14 of the VAT Act 1994.
45.	The Appellant supplied a CMR, a Stenna Line boarding card in the name of Paul Blundred which recorded a date and time of 24 June 2003 and 2303, and an invoice of the freight charge issued by First Issue Limited as evidence that the Nokia 7250 mobile phones were delivered to YM International BV on 25 June 2003. The CMR described the goods as five pallets of electrical goods with a weight of 1500 kilograms. On the CMR the Appellant was named the sender; YM International BV as the consignee; First Issue Limited as the freight forwarder, and Ravjani Corporation Limited as the place of collection. The CMR also recorded a departure date of 24 June 2003, the driver’s name as Paul Blundred and a vehicle registration number of FM52 EJU. The CMR was signed as received by an undecipherable signature on top of a pre-printed stamp of Allsafe and its address. The CMR was also signed by the signature of the carrier, with a decipherable P and B and stamped by First Issue Limited.  The invoice of First Issue Limited for freight charges was in the sum of £1,400 plus VAT of £245 and recorded that five pallets of electrical goods were supplied to Amsterdam on 24 June 2003 in vehicle registration number FM51 EJU.
46.	Officer Roosen’s evidence was that he visited Unit 45 of Allsafe Mini Storage rented by YM International BV at around 0910 on 24 June 2003 where he found a white van with a United Kingdom registration number, KR02 MRU, parked in front of Unit 45 with a man about to close the van doors. There were ten pallets sealed with black plastic inside Unit 45. The man identified himself as David Parks with an address in Cheadle. Mr Parks was the driver of the white van registration number KR02 MRU. He was accompanied by an Ian Askey with an address in Stoke-on-Trent who was the driver of another white van, registration number FM52 RZB. Messrs Parks and Askey admitted that they transported the ten pallets from the United Kingdom, and unloaded them into Unit 45. 
47.	Officer Roosen inspected the ten pallets. He found that one pallet contained a wooden crate which held a large number of plastic bags and phone holders. A large shipping box containing smaller boxes of various kinds was placed on each of the nine pallets. Officer Roosen opened a number of the small boxes from each of the large shipping boxes. Inside he discovered old mobile phones, some of which were damaged. In some cases two mobile phones were packed in a single box, and in many cases the battery in the box could not be fitted to the associated phone.
48.	The drivers produced two CMRs for the goods. Mr Parks supplied a CMR issued on 23 June 2003 which showed that the sender was the Appellant, the consignee: YM International BV, the place of loading: Ravjani Corporation Limited, description of goods: five pallets of electrical goods, date of departure: 23 June 2003, name of driver: David Parks, vehicle registration number: KR02 MRU, carrier: First Issue Limited.  Mr Parks also supplied a P&O Ferries Dover to Calais ticket dated 23 June 2003, time 2245, and fuel receipts for purchases in Calais and Kruibeke at 0135 and 0328 hours on 24 June 2003 respectively.  Mr Askey supplied a CMR and ferry ticket relating to a supply from Worldwide-UK Corporation Ltd.
49.	Mr Askey telephoned his boss to advise him of the findings of Officer Roosen. Mr Askey then handed the phone to Officer Roosen, the boss informed Officer Roosen that the goods had been switched by mistake in England and the right consignment would be delivered the next day.  The boss promised to fax Officer Roosen information on previous consignments. The information was not sent. Officer Roosen did not visit Allsafe Mini Storage on 25 June 2003.
50.	YM International BV paid £669,773  for the supply from the Appellant on 24 June 2003 by CHAPS bank transfer. The records of YM International BV contained an invoice which indicated that the goods purchased from the Appellant were purportedly sold onto Nisa Corporation Spain SL on 23 June 2003. This invoice was paid by the UK trader, Creston Computer Limited, not Nisa Corporation.
51.	The Appellant contended that it was entitled to rely on the documents, including the invoice, the CMR and boarding pass in the name of Paul Blundred, and the IMEI scans as proof that it supplied 2,500 Nokia mobile phones to YM International BV  which were delivered on 25 June 2003. The Appellant challenged the credibility of Officer Roosen’s evidence pointing out that the report produced to the Tribunal was a copy not the original. Also the Appellant was sceptical of Officer Roosen’s claim that he kept no notes of his search of  Allsafe Mini Storage on 24 June 2003. In any event Officer Roosen did not attend the premises on 25 June 2003, and was not in a position to challenge the Appellant’s assertion that the correct consignment was delivered on 25 June 2003. Further Officer Roosen stated in cross-examination that the freight forwarders would have been stupid if they did not send the correct goods the following day. The Appellant also challenged the reliability of Officer Smith’s evidence. In the Appellant’ view, the Tribunal would have to declare the CMR and boarding pass relied upon the Appellant as forgeries, if the Tribunal decided that the supply as described by the Appellant did not happen on 25 June 2003.
52.	The Respondents submitted that the Appellant had no credible evidence of a delivery of the correct consignment on 25 June 2003. The documents relied upon by the Appellant were flawed. The principal document, CMR, did not name the particular goods in question, referring to them as five pallets of electrical goods.  There were striking inconsistencies between the documents for which the Appellant offered no satisfactory explanations. There was only one supply of goods from the Appellant to YM International BV, and that was the consignment of old mobile phones inspected by Officer Roosen on 24 June 2003. 
53.	The Respondents invited the Tribunal to treat the evidence of Mr Dharas with caution. In their view his evidence was confused, vague and misleading. Despite the Appellant being aware of the Respondents’ investigations since 30 July 2003, it took  no further steps to satisfy itself that the supply to YM International BV happened as it believed. According to the Respondents, the Appellant did not scrutinise the paperwork nor contact any of the persons involved in the supply. Mr Dharas confirmed that he held details of the mobile phone number of Mr Sellars, the director of First Issue Limited, but had not followed it up.
54.	The Respondents submitted that the Tribunal should place no weight on Officer Roosen’s comment that they would have been stupid not to have delivered the correct phones the following day. The Respondents pointed out that Officer Roosen also suggested three other explanations of what happened to the Nokia 7250 phones, namely, the phones were still in the United Kingdom or sold on the United Kingdom market or sold outside the European Union.
55.	We find that the Respondents made a robust and concerted challenge to the documentary evidence relied upon by the Appellant to substantiate its supply of Nokia 7250 phones to YM International MV.  
56.	We find Officer Roosen’s evidence compelling. He was unequivocal that the Appellant’s supply to YM International BV consisted of the old and broken phones discovered on the 24 June 2003. This supply bore all the characteristics of the wider fraud perpetrated by YM International BV uncovered by Officer Roosen which included the use of duplicate documents, the substitution of purported supplies of high value goods with supplies of low value goods, the presence of third party payments and the selling on of goods before they were purchased. The CMR accompanying the supply showed that the Appellant was the sender and YM International BV as the recipient of the old and broken phones. The fact that a CMR and boarding pass was used in this fraudulent supply reinforced Officer Roosen’s evidence on the widespread misuse of boarding passes and forged CMRs throughout the European Union, and gave weight to his view that the CMR and boarding pass relied upon the Appellant were worthless.
57.	Officer Roosen’s comment about the parties’ stupidity had, in our view, no probative value. He made the remark in the context of what he would do if he had just been caught out by a Customs Officer delivering a questionable supply of goods. 
58.	We decided that the Appellant’s challenge to Officer Roosen’s credibility was without substance. Officer Roosen explained that in the Netherlands there was no requirement to keep a notebook. He made up his official report contemporaneously. He was unable to access the original report because it was now the property of the Netherlands Prosecuting Authorities. He produced copies of his official report which were certified as true to the original.  A false certification carried with it severe criminal penalties.
59.	 The Appellant’s case that the correct consignment was delivered on 25 June 2003 rested solely on documentary evidence. The Appellant adduced no additional  evidence to back up the documentary evidence, in particular no testimony from the parties who would have been present, if the delivery took place as believed by the Appellant on 25 June 2003. In January 2005 the Appellant was on notice from the witness statements of Officers Birchfield and Lam that the Respondents were challenging the integrity of the documentary evidence. Despite being on notice the Appellant made no concerted attempt to secure additional evidence to back up its claim that the Nokia 7250 phones were delivered on 25 June 2003. The Tribunal dealing with the Appellant’s application on prejudice under the same Chairmanship as this hearing found that the Appellant’s assertion about the excessive difficulties of obtaining the necessary evidence was based on supposition rather than fact. At the prejudice hearing Mr Dharas stated that Mr Sellars of First Issue Limited was contactable and that he might be able to provide helpful evidence.   
60.	 We find the following inconsistencies in the documents relied upon by the Appellant
(1)	The contrasting figures for the weight of the mobile phones in the stock control report issued by First Issue Limited and the CMR produced by the Appellant for which Mr Dharras offered no explanation. 
(2)	The stock control report and the CMR when taken together portrayed an implausible journey for the goods which involved First Issue Limited collecting the mobile phones at Wembley, carrying them north to Cheadle, Staffordshire to perform the stock check, and then returning south with the mobile phones to Harwich for the trip to Holland. Mr Dharas’ initial response in cross-examination was that the phones were not collected from Wembley but were already with First Issue Limited at their premises in Cheadle. When the contents of his witness statement and the CMR were drawn to his attention, Mr Dharas stated that he believed that the phones were at Cheadle but he could not now be sure 100 per cent.
(3)	First Issue Limited invoiced the Appellant for the IMEI scans of 2,500 mobile phones despite the Appellant only receiving scans for 2,100 phones. Mr Dharas was unable to explain this inconsistency.
(4)	The vehicle registration number recorded in the invoice of First Issue Limited for freight charges was different from the registration number in the CMR. The difference was slight on the face of it: FM51EJU against FM52 EJU which Mr Dharas put down to a typographical error. This inconsistency, however, when taken with the other inconsistencies between the documents formed part of the jigsaw which in our view undermined the reliability of the documentary evidence adduced by the Appellant.
61.	The CMR relied upon by the Appellant did not give an adequate description of the goods, describing them as five pallets of electrical goods. Mr Dharas explained that general descriptions were used on CMRs to reduce the risk of potential hijacking of vehicles by criminal gangs, which had happened to a vehicle owned by one of Mr Dharas’ companies. We, however, considered that the value of the CMR as evidence of a specific supply of Nokia 7250 mobile phones was compromised by describing the supply as five pallets of electrical goods.  Further Officer Roosen’s report revealed that CMRs bearing the description of five pallets of electrical goods had been used in other consignments of old mobile phones to YM International masquerading as supplies of high value mobile phones.  The evidence of Officer Roosen suggested that CMRs bearing general descriptions were a feature of fraudulent VAT trading.
62.	In his second witness statement dated 2 July 2007 Mr Dharas stated that a  customer only paid for the goods after inspecting them and being satisfied that they met the specification in the invoice.  Mr Dharas in cross examination admitted that the payment by YM International BV before the stock was delivered did not comply with normal business practice. He decided to change his witness statement to the effect that YM International BV paid for the Nokia 7250 phones before receiving them because they were with the freight forwarder. We consider Mr Dharas’ retraction of his witness statement damaged the credibility of his evidence. We find his explanation that YM International BV would part with £669,773 before satisfying itself that the goods were in fact Nokia 7250 phones unrealistic. In our view the more likely explanation was that YM International BV’s payment of £669,773 to the Appellant was for the delivery of the old and mobile phones uncovered by Officer Roosen, particularly as both events occurred on the same day. This explanation also fitted in with  the Respondents’ evidence that YM International BV was  financed by a third party to make fictitious supplies of high value mobile phones as part of a widespread VAT fraud.    
63.	We conclude on balance that the supply of 2,500 Nokia 7250 phones from the Appellant to YM International BV did not take place on 25 June 2003 as contended by the Appellant. Our conclusion is based on the following findings of fact: 
(1)	The Appellant adduced no direct evidence that the supply of the 25 June 2003 actually took place.
(2)	The documents relied upon by the Appellant to evidence the supply were unreliable. When looked at together they contained irreconcilable inconsistencies which could not be explained by the Appellant.  
(3)	The timing of the payment of £669,773 by YM International BV which was on the same day as the delivery of the old and broken mobile phones. The Appellant’s explanation for YM International BV purporting to pay for the Nokia 7250 mobile phones before it received  them was unrealistic.
(4)	The compelling evidence of Officer Roosen which demonstrated that YM International BV was involved in the fraudulent trade of old and broken phones masquerading as supplies of high value mobile phones.
Overall Conclusion on the Findings of Fact
64.	We find that the Appellant traded in mobile phones as part of its business activities, and that it received a supply of 2,500 Nokia 7250 phones from Ravjani Corporation Limited on 23 June 2003. We concluded that the onward supply of these Nokia 7250 phones to YM International BV did not take place on 25 June 2003 as contended by the Appellant. The Respondents, however, conceded that the Appellant had not acted dishonestly in its transactions with Ravjani Corporation Limited and YM International BV for the supplies of Nokia 7250 mobile phones, and that it was an unwitting participant in a fraud. 
65.	The wide scope of the Respondents’ concessions and the fact that there was a supply of old and broken mobile phones leads us to the conclusion that the Appellant intended to make an onward supply of the 2,500 Nokia 7250 mobile phones purchased from Ravjani Corporation Limited to YM International BV. The actual making of that supply, however, was thwarted by the fraudulent activities of others, which according to Officer Roosen was committed in the United Kingdom as a result of the interposition of YM International BV, and most likely involved the substitution of old and broken mobile phones for the Nokia 7250 phones.
66.	We consider our conclusion that the Appellant intended  to make an onward supply of the 2,500 Nokia 7250 mobile phones but was prevented from doing so by a fraud committed by others was the only logical outcome from the facts found on the relevant supplies in the context of the Respondents’ wide ranging concessions. 
67.	 The Appellant challenged the credibility of Officer’s Smith evidence suggesting that he was an unreliable witness. The Appellant’s accusation stemmed from Officer Smith’s failure to attend a hearing which did not involve the Appellant. Officer Smith was embarrassed by his failure to attend, which appeared to be a genuine oversight on his part. We had no reason to doubt the honesty of Officer Smith. We considered the Appellant’s challenge disproportionate, particularly as Officer Smith’s evidence was not critical to the Appeal. Officer Smith’s principal involvement in the case was in his capacity as review officer not as a witness of fact. In those circumstances we decided that Officer Smith’s evidence was not relevant to the disputed matters in this Appeal.  
The Legal Argument
68.	The Respondents submitted that the Appeal was principally one of fact. In their view the Appellant’s claim for input tax depended upon whether the onward supply of Nokia 7250 mobile phones to YM International BV took place. 
69.	The Respondents’ submission was based on their construction of sections 24, 25 and 26 of the VAT Act 1994. The Respondents relied on the wording of section 26 which restricted the Appellant’s repayment claim to so much of the input tax that was attributable to taxable supplies made or to be made by it in the course or the furtherance of its business. In the Respondents’ view the Appellant did not make an onward supply of the mobile phones purchased from Ravjani Corporation Limited which meant that it could not recover the VAT on the purchase. 
70.	The Appellant, on the other hand, did not understand the Respondents’ case. The Appellant’s claim for input tax did not depend upon whether it made an onward supply on the Nokia 7250 mobile phones. The Appellant’s entitlement to input tax arose from the supply made to it by Ravjani Corporation Limited. 
71.	The parties in their submissions made passing reference to several decisions of  the European Court of Justice but they did not provide the Tribunal with detailed skeleton arguments on the legal issues. We consider this Appeal raised substantive matters of law particularly in the light of the parties’ striking divergent views on the legal requirements for recovering input tax.  It would have been helpful to the Tribunal if the parties had supplied detailed skeletons covering discussion of the relevant case-law.
72.	 Section 24 of the VAT Act 1994 sets out the legal requirements for what is input tax and enables the making of regulations defining the documentary evidence to support an input tax deduction. We find that the Appellant paid VAT at the correct rate on a taxable supply of 2,500 Nokia 7250 mobile telephones made to it by Ravjani Corporation Limited. The supply took place in the United Kingdom between two taxable persons. The supply was evidenced by a valid VAT invoice. We are satisfied that the Appellant met the requirements of section 24 of the VAT Act 1994.
73.	Under Section 25 of the VAT Act 1994 a trader is entitled at the end of each prescribed accounting period to credit for so much of the input tax as is allowable under section 26. 
74.	Section 26 of the VAT Act 1994 enables a trader to recover in full the input tax on goods supplied that are attributable to taxable supplies made or intended to be made by him in the furtherance of his business. In this respect we find that the Appellant intended to use the Nokia 7250 mobile phones purchased from Ravjani Corporation to make a taxable supply of the same phones to YM International BV. The supply, however, did not take place because of the fraudulent actions of others.
75.	The Respondents contended that the Appellant’s repayment claim did not meet the requirements of section 26 of the VAT 1994 because:
(1)	 The Appellant’s supply of 2,500 Nokia 7250 mobile phones to YM International did not take place.
(2)	 The Appellant did not take every reasonable measure to ensure that the onward supply of Nokia 7250 mobile phones to YM International BV was made.
(3)	The VAT incurred on the inward supply of the Nokia mobile phones from Ravjani Corporation was not attributable to a taxable supply made by the Appellant.
76.	Our finding that the Appellant’s supply of  2,500 Nokia 7250 mobile phones to YM International did not take place because of the fraudulent actions of the others would probably be sufficient on the Respondents’ legal analysis to deny the Appellant its repayment claim of input tax. We, however, disagree with the Respondents’ legal analysis.
77.	The Respondents derived their legal analysis from the principles established by the European Court of Justice in R (on the application of Teleos Plc and others) v Customs and Excise Commissioners (Case C-409/04) - [2007] All ER (D) 160 (Sep). This case dealt with the requirements of article 28a of the Sixth Directive for exempting intra-Community supplies from VAT. The facts concerned United Kingdom traders who had zero-rated supplies of mobile telephones to France and Spain.  Initially the Commissioners of Customs and Excise accepted the documents produced by the traders as evidence that the goods had been exported from the United Kingdom, which enabled the traders to zero rate the supplies. The Commissioners subsequently discovered that the mobile telephones never left the United Kingdom due to a fraud on the part of the freight forwarders and the recipients of the supplies. The Commissioners decided to assess the United Kingdom traders VAT on those supplies, whilst acknowledging that the traders were in no way involved in any fraud.
78.	The European Court of Justice ruled:
(1)	 The first subparagraph of article 28a(3) and the first subparagraph of article 28c(A)(a) of the Sixth Directive, were, having regard to the term 'dispatched' in those two provisions, to be interpreted as meaning that the intra-Community acquisition of goods was effected and the exemption of the intra-Community supply of goods would become applicable only when the right to dispose of the goods as owner had been transferred to the purchaser, and the supplier had established that those goods had been dispatched or transported to another Member State and that, as a result of that dispatch or that transport, they had physically left the territory of the Member State of supply.
(2)	 The first subparagraph of article 28c(A)(a) of Sixth Directive, was to be interpreted as precluding the competent authorities of the Member State of supply from requiring a supplier, who had acted in good faith and submitted evidence establishing, at first sight, his right to the exemption of an intra-Community supply of goods, subsequently to account for value added tax on those goods where that evidence was found to be false, without the supplier's involvement in the tax evasion being established, provided that the supplier took every reasonable measure in his power to ensure that the intra-Community supply he was effecting did not lead to his participation in such evasion.
(3)	The fact that the purchaser had made a declaration concerning intra-Community acquisition, such as that in question in the main proceedings, to the tax authorities of the Member State of destination, might constitute additional evidence tending to establish that the goods had actually left the territory of the Member State of supply, but that did not constitute conclusive proof for the purposes of the exemption from value added tax of an intra-Community supply.
79.	  We are not convinced with the Respondents’ submission that the principles established in the Teleos case applied to this Appeal. Teleos was dealing with a different aspect of Community law, namely the requirements for exempting intra-community supplies of goods from VAT under article 28a of the Sixth Directive. The requirement under article 28a that the goods had to physically leave the territory of the Member State of supply was not applicable to the facts of this Appeal. The Appellant’s claim for input tax was not dependent upon whether the onward supply of the mobile phones actually left the United Kingdom. The question in this Appeal was whether the input tax could be attributable to a taxable supply of the Appellant. 
80.	The Respondents in particular relied on paragraph 65 of the judgement in Teleos as authority for their proposition that the Appellant was required to take every reasonable measure to ensure that its onward supply of the mobile phones was actually made. Paragraph 65 stated that    
“Moreover, according to the Court's settled case-law, which is applicable to the main proceedings by way of analogy, it would not be contrary to Community law to require the supplier to take every step which could reasonably be required of him to satisfy himself that the transaction which he is effecting does not result in his participation in tax evasion (see, as regards 'carousel' type fraud, Federation of Technological Industries and Others, paragraph 33, and Kittel and Recolta Recycling, paragraph 51)”.
81.	We find nothing in paragraph 65 which lent support for the Respondents’ proposition. The object of reasonable steps in paragraph 65 was the avoidance of participation in tax evasion, not, as suggested by the Respondents, to ensure that the onward supply was actually made
82.	We also consider that the Respondents’ proposition about reasonable steps was in effect inviting the Tribunal to evaluate the Appellant’s knowledge or means of knowledge about  its supply to YM International BV, which if correct was going outside the Respondents’ concession at the beginning of the hearing that the Appellant’s knowledge or means of knowledge was not in issue.
83.	We note that on the facts of this case the Respondents may have been entitled to challenge the zero-rated status of the Appellant’s supply to YM International BV, in which case the Teleos judgement would apply. However, we understand that the Respondents were now outside the time limit for raising an assessment for output tax against the Appellant on its supply to YM International BV.
84.	We consider that the decision of the European Court of Justice in Optigen Ltd and others v Customs and Excise Commissioners; [2006] STC 419 was more relevant to the circumstances of this Appeal. The European Court of Justice decided that
“Furthermore, the right to deduct provided for in article 17 et seq of the Sixth Directive was an integral part of the VAT scheme and in principle could not be limited.  It had to be exercised immediately in respect of all the taxes charged on transactions relating to inputs.  The question whether the VAT on the earlier or later sale of the goods concerned to the end-user had or had not been paid to the public purse was irrelevant to the right of the taxable person to deduct input VAT. Accordingly, transactions such as those at issue, which were not themselves vitiated by VAT fraud, constituted supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of articles 2(1), 4 and 5(1) of the Sixth Directive where they fulfilled the objective criteria on which the definitions of those terms were based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge.  Moreover, the right to deduct input VAT of a taxable person who carried out such transactions could not be affected by the fact that in the chain of supply of which those transactions formed part another prior or subsequent transaction was vitiated by VAT fraud, without that taxable person knowing or having any means of knowing.
85.	We find applying the principles established by Optigen to the facts found that the Appellant had an immediate right to deduct the input tax on the supply of 2,500 Nokia 7250 phones from Ravjani Limited. We found that the supply from Ravjani Corporation Limited took place and was made in the course of the Appellant’s business. Further the Appellant intended to make an onward supply of the Nokia 7250 mobile phones to YM International BV but was prevented from doing so because of a fraud perpetrated in the United Kingdom by others. According to Optigen the fraud of which the Appellant did not know or had no means of knowing did not alter the characterisation of the Appellant’s activities on objective grounds as receiving a taxable supply and making an onward taxable supply. We, therefore, hold that the input tax on the supply of Nokia 7250 phones was attributable to the Appellant’s intended taxable supply to YM International BV, in accordance with section 26 of the VAT Act 1994.
Decision
86.	We hold for the reasons above as summarised in paragraph 85 that the Appellant was entitled to the input tax in the sum of £99,750 for the period 06/03. We, therefore, allow the Appeal
87.	We reserve our decision on costs. We observe that whilst the Appellant has been successful with its Appeal, we found against the Appellant in respect of the factual dispute. We direct that the Appellant submit its application for costs to the Tribunal and to the Respondents within 28 days from release of the decision. The Respondents shall reply within 56 days with the Appellant’s right of reply within 70 days. The Tribunal will decide the question of costs on the basis of written representations.
88.	We give either party liberty to apply to the Tribunal to decide the question of interest on the principal sum, in the event of disagreement between the parties.

                                                                

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 31 March 2008

LON 2004/0744