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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Spearmint Blue Ltd v Revenue & Customs [2012] UKFTT 103 (TC) (07 February 2012) URL: https://www.bailii.org/uk/cases/UKFTT/TC/2012/TC01799.html Cite as: [2012] UKFTT 103 (TC) |
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[2012] UKFTT 103 (TC)
TC01799
Appeal number: MAN/2007/1135
|
FIRST-TIER TRIBUNAL
TAX
|
SPEARMINT BLUE LIMITED |
Appellant |
-and-
|
THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS |
Respondents |
TRIBUNAL: |
KEVIN POOLE (TRIBUNAL JUDGE) ALBAN HOLDEN |
Sitting in public in Manchester on 21 February to 2 March 2011 with subsequent written submissions
Alexander Martyn Chester, Director for the Appellant
Vinesh
Mandalia of counsel
instructed by Howes Percival for the Respondents
© CROWN COPYRIGHT 2012
DECISION
1.
This is an MTIC appeal. It arises from the refusal of the Respondents
(“HMRC”, which will be used in this decision to refer also to Her Majesty’s
Customs & Excise, the predecessor body to the Respondents) to repay the sum
of £1,012,011.18 claimed by the Appellant (“SB”) as input VAT
incurred by it in
four purchases of iPods and four purchases of Satellite Navigation units from a
UK supplier during its three month
VAT
accounting period ended on 31 July
2006. The goods in question were sold on by SB to a purchaser in Portugal in a sale which was zero rated for
VAT
purposes.
2.
HMRC claim to be entitled to refuse the repayment because they say SB’s
purchases giving rise to the relevant input VAT
were connected to the
fraudulent evasion of
VAT
and SB either knew or should have known of that fact.
4.
We were supplied with a large amount of documentary evidence, mostly in
the form of witness statements and exhibits from various
HMRC witnesses. We
also heard oral testimony from Alexander Martyn Chester (“Mr Chester”), the
sole current director of SB, and the following HMRC officers:
(1) Michael McBrine (in relation to the alleged defaulting trader DTM Provisions Limited)
(2) Sandeep Pabari (in relation to the alleged defaulting trader Wood Works (Sheffield) Limited)
(3) Graham Taylor (in relation to the alleged contra-trader 4A Developments Limited)
(4) Nigel Humphries (in relation to the alleged “cell” of contra-traders involving 4A Developments Limited)
(5) Lesley Camm (in relation to the First Curaçao International Bank (“FCIB”) evidence)
(6) Lynne Casey (formerly Lynne Cullen) (HMRC control officer for SB in late 2003)
(7) Christina Quinn (control officer for SB from January 2004 to January 2005)
(8)
Jane Carr (officer in charge of the extended verification
of SB’s
VAT
return for the
VAT
accounting period ended 31 July 2006)
(9) Roderick Stone (in relation to MTIC generally).
6.
The leading authority in this area of law is the decision of the ECJ in
the joined cases of Axel Kittel v
Belgium and Belgium
v
Recolta Recycling C-439/04 and C-440/04 [2006] ECR 1 – 6161. The ECJ ruled
(at [59]) that the right to deduct input tax may be refused if:
“it is ascertained, having regard to objective
factors, that the taxable person knew or should have known that, by his
purchase, he was participating in a transaction connected with fraudulent
evasion of VAT”
7.
In the Court of Appeal judgment in the joined cases of Mobilx v
HMRC;
HMRC
v
Blue Sphere Global Limited; and Calltell Telecom Limited
v
HMRC [2010]
EWCA 517 at [49] it was made clear that this refusal of the right to deduct
does not depend on any specific UK legislation:
“It is the obligation of domestic courts to interpret the
VATA
1994 in the light of the wording and purpose of the Sixth Directive as
understood by the ECJ (Marleasing SA 1990 ECR 1-4135 [1992] 1 CMLR 305)
(see, for a full discussion of this obligation, the judgment of Arden LJ in Revenue
and Customs Commissioners
v
IDT Card Services Ireland Limited [2006] EWCA Civ 29 [2006] STC 1252, §§ 69-83). Arden LJ acknowledges, as the ECJ has
itself recognised, that the application of the Marleasing principle may result
in the imposition of a civil liability where such a liability would not
otherwise have been imposed under domestic law (see IDT § 111). The
denial of the right to deduct in this case stems from principles which apply
throughout the Community in respect of what is said to be reliance on Community
law for fraudulent ends. It can be no objection to that approach to Community
law that in purely domestic circumstances a trader might not be regarded as an
accessory to fraud. In a sense, the dichotomy between domestic and Community
law, in the circumstances of these appeals, is false. In relation to the right
to deduct input tax, Community and domestic law are one and the same.”
8.
The substance of the Axel Kittel test is generally broken down
into its constituent parts in order to apply it, and we find it helpful to do so.
For the denial of a right to deduction of input VAT
to be justified, each of
the following elements must be present (having regard to “objective factors”):
(1)
A fraudulent evasion of VAT
must be shown to have taken place (“the
fraud element”),
(2) A connection between that fraudulent evasion and the trader’s purchase must be established (“the connection element”), and
(3)
It must be shown that the trader knew or should have known that by its
purchase it was participating in a transaction which was connected with
fraudulent evasion of VAT
(“the knowledge element”).
The correct formulation of the knowledge element has attracted much discussion and argument in earlier cases, but in the leading case of Mobilx at [56] the Court of Appeal has effectively approved the above formulation of it. It is clear that the knowledge element must be assessed by reference to the trader’s state of knowledge at the time of its purchase.
9.
In seeking to establish that SB had (or should have had) actual
knowledge of the fraud, HMRC do not have to establish that it knew (or should
have known) the precise details of the particular fraud. As Briggs J said in Megtian
Limited v
HMRC [2010] EWHC 18 (Ch):
“[37] In my judgment, there are likely to be many cases in which a participant in a sophisticated fraud is shown to have actual or blind-eye knowledge that the transaction in which he is participating is connected with that fraud, without knowing, for example, whether his chain is a clean or dirty chain, whether contra-trading is necessarily involved at all, or whether the fraud has at its heart merely a dishonest intention to abscond without paying tax, or that intention plus one or more multifarious means of achieving a cover-up while the absconding takes place.
[38] Similarly, I consider that there are likely to be many cases in which facts about the transaction known to the broker are sufficient to enable it to be said that the broker ought to have known that his transaction was connected with a tax fraud, without it having to be, or even being possible for it to be, demonstrated precisely which aspects of a sophisticated multifaceted fraud he would have discovered, had he made reasonable inquiries. In my judgment, sophisticated frauds in the real world are not invariably susceptible, as a matter of law, to being carved up into self-contained boxes even though, on the facts of particular cases, including Livewire, that may be an appropriate basis for analysis.”
10. Or, as Moses LJ said at [59] in Mobilx:
“If a trader should have known that the only reasonable
explanation for the transaction in which he was involved was that it was
connected with fraud and if it turns out that the transaction was connected
with fraudulent evasion of VAT
then he should have known of that fact.”
11.
For HMRC to establish the knowledge element without proving actual
knowledge of the fraud on SB’s part, it is not sufficient for them to show that
SB should have appreciated there was a risk, or even a likelihood, that its
purchases were connected with VAT
fraud; they must establish that it should
have known that the only reasonable explanation for those purchases was that
they were connected with
VAT
fraud:
“The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.” [per Moses LJ in Mobilx at [60]]
14.
The essence of the concept of contra trading (which is HMRC’s own
coinage) is that it comprises an extra step inserted into what might be called
a “classic VAT
fraud” in order to conceal that fraud and in order to make it
harder for HMRC to recover the lost
VAT
if and when they do detect it.
15.
A classic VAT
fraud for these purposes arises when a UK trader acquires goods from another EU country, effectively free of
VAT.
He then
supplies them to another UK trader, charging
VAT.
He then disappears with that
VAT
without paying it over to HMRC. That is where the actual fraud is perpetrated.
The goods are then supplied to another overseas customer without having to
charge
VAT
(but reclaiming the
VAT
paid to the missing trader as input tax
under the normal rules), either directly by the first purchaser from the
missing trader or (more usually, in the interests of concealment) after a chain
of supplies through other UK traders (all of whom will charge output
VAT
and
suffer input
VAT
under the normal rules, usually each generating a
very
small
profit and corresponding net output
VAT
liability). Each of the UK traders will ensure that he receives the
VAT
on his onward sale in order to pay the
VAT
due to his own supplier. At some point, however, the goods must be sold
overseas in order to generate the
VAT
repayment claim from HMRC which repays to
the last UK trader in the chain the
VAT
which he has paid to his supplier. In
practice that last trader in the chain is the party mainly at risk in the whole
structure, as HMRC can withhold his
VAT
repayment until they are satisfied that
it is untainted by fraud.
16.
As HMRC became more careful about investigating chains of transactions
before releasing VAT
repayments, the fraudsters developed the concept of contra
trading as a counter measure. A trader with a potentially large (and therefore
suspect and
vulnerable)
repayment claim (“Trader 1”) would enter into a
separate transaction or series of transactions designed to substantially reduce
or eliminate that repayment claim. The means of doing so would be to acquire
goods from overseas (to an appropriate
value)
in a
VAT
free purchase and then
generate an output
VAT
liability by selling them on to a UK trader (“Trader 2”)
who would then sell the goods overseas again in a zero rated sale. The
repayment claim of Trader 1 (which could be traced back directly to fraudulent
VAT
defaults by traders who had supplied goods to him, directly or through
other UK traders) would be cancelled out by his output tax liability to Trader
2, so HMRC would be less likely to investigate Trader 1’s dealings in detail
and would not have the leverage of an outstanding
VAT
repayment claim while
doing so; and if they investigated Trader 2’s large
VAT
repayment claim, they
would find no fraudulent
VAT
default in the chain of UK purchases and sales of
the goods leading up to Trader 2.
17.
The chain of transactions leading from Trader 1 to Trader 2 (there may
be other UK traders between them, all accounting properly for input and output
VAT)
is known by HMRC as the “clean chain”. In contrast, the chain of
transactions leading from the original fraudulent trader to Trader 1 (usually
involving other UK traders, called “buffers” by HMRC, all accounting properly
for input and output
VAT)
is known as the “dirty chain”. The shifting of the
VAT
repayment claim by Trader 1 from the dirty chain to the clean chain means
that effectively a “cut-out” has been inserted between the original fraud and
the trader (Trader 2) which is ultimately claiming the repayment that actually
crystallises the loss flowing from that fraud. Trader 2 will of course claim
that it neither had nor could have had knowledge of any fraud. This gives HMRC
another hurdle to overcome if they try to recover their loss by refusing to
satisfy the repayment claim of Trader 2, the ultimate dispatcher/exporter.
18.
From HMRC’s perspective, Trader 1 has simply transferred the repayment
claim to Trader 2, another participant in the overall fraud. Given the sheer
volume
and complexity of MTIC fraud with which HMRC have to deal, this is
perhaps an understandable perspective. However, it is not necessarily
correct. It is inherent in the whole
system
of
VAT
that large amounts of input
VAT
and output
VAT
will cancel each other out and this can happen perfectly
innocently. HMRC are not entitled to assume that all such situations are
necessarily tainted by fraud. The challenge is to distinguish between innocent
transactions and those which have been purposely generated as part of a larger
attempt to defraud HMRC. It is only transactions in the latter circumstances
that can truly be regarded as contra trading.
20.
It must be acknowledged however that there are some obvious
complications in applying the test in contra-trading cases, especially where it
is found that an appellant did not have actual knowledge of VAT
fraud connected
with his purchase.
21.
The first potential complication is how to interpret the “connection”
requirement in a case of contra-trading. It now appears to be settled however
that such a connection exists (for the purposes of the Kittell test)
between Trader 2 and both Trader 1 and the original defaulter in the chain
leading up to Trader 1 (see the comments of Sir Andrew Morritt at [44] to [45]
in Blue Sphere Global v
HMRC [2009] EWHC 1150 (Ch), which were not
disagreed with on appeal by the Court of Appeal).
23.
Lewison J in HMRC v
Livewire Telecom Limited; HMRC
v
Olympia
Technology Limited [2009] EWHC 15 (Ch) made it clear that he considered
there were two potential frauds involved. He repeated this
view
in HMRC
v
Brayfal Limited [2011] STC 1338 where he said (at [19]):
“The essence of contra-trading is that transactions in the clean chain are used to mask transactions in the dirty chain. There is no fraud in the clean chain. The dirty chain is where the fraud takes place. Accordingly in order for a trader in the clean chain to know or have the means of knowledge that his transactions are connected with fraud, he must either know or have the means of knowledge that the contra-trader is a fraudster; or he must know or have the means of knowledge of the fraud in the dirty chain”.
30.
The essence of the submission is that, properly interpreted, the
decisions of the ECJ in Kittel and the subsequent case of Criminal
Proceedings against R [2010] (Case C-285/09) ECJ mean that denial of input
VAT
may only be permitted in cases where the particular transaction giving rise
to the
VAT
in question is “aimed at evading
VAT”.
This is clearly a narrower
test than the traditional
view
of the Kittel rule, where the phrase
“connected with fraudulent evasion of
VAT”
is used. SB submits that it
“would simply be perverse to find that, by any of its
purchases April to July 2006, was Spearmint Blue participating in a transaction
aimed at evading VAT.
And, of course, no
VAT
was avoided by any of those
purchases.”
31. The reasoning underpinning this submission can be summarised as follows.
32.
The language of the Kittel case before the ECJ was French. In
the original judgment, the key phrase was “il participait à une operation
impliquée dans une fraude à la TVA”, and this was rendered in the English
version
of the judgment as “he was taking part in a transaction connected with
fraudulent evasion of
VAT”.
33.
SB seeks to persuade us that the phrase “impliquée dans” connotes a much
more proximate involvement in the fraud than the English translation of that
phrase, “connected with”. It submits that a more accurate translation of the
phrase “impliquée dans” would be “aimed at”. It prays in aid the case of R,
in which the French version
of the ECJ’s judgment uses the phrase “impliquée
dans” but the English
version
uses the phrase “aimed at”. It says this is
clear evidence that the ECJ has “had second thoughts about the accuracy of the
way in which it rendered in English the phrase ‘il participait à une
operation impliquée dans une fraude à la TVA’ in Kittel” and the meaning
“aimed at” should be preferred to the meaning “connected with”.
34.
The language of the R case was German. It was dealing with a
situation in which the party to the case had clearly acted fraudulently in
selling cars to Portugal without charging VAT,
fraudulently arranging the
invoicing so that the acquisition
VAT
that should have been charged in Portugal was lost. The question was whether the German authorities had the right to
recover German
VAT
from him (on the basis that the normal
VAT
exemption should
not apply where the sales themselves were carried out on a fraudulent basis to
evade Portuguese
VAT).
35.
It is true that the French translation of the question put to the ECJ by
the German courts contained the phrase “il participait à une operation impliquée
dans une fraude à la TVA” and it is also true that the English translation
of that question given in the English version
of the ECJ judgment was “he was
participating in a transaction aimed at evading
VAT”.
However, we do not
consider that this amounts, as SB claims, to an express endorsement by the ECJ
of the “aimed at” formulation. It is merely a reflection of the fact
that the R case involved a situation in which the taxpayer in question
was indeed entering into a transaction by which he clearly “aimed” at the
fraudulent evasion of
VAT.
40.
We found Mr Chester to be a very
intelligent man of some charm. He did
however have a tendency to avoid or skate over awkward questions or questions
of detail and on one occasion he changed his evidence on the order in which
things had happened only when it became apparent from the documentary evidence
that his first
version
of events must be incorrect. In short, we do not
consider his account of the history to be entirely reliable. We therefore
approach his evidence with some caution and are more ready than we would
otherwise have been to draw adverse inferences from some of the unexplained
gaps in his evidence or from conflicts with the documentary evidence.
MDS Telecommunications Limited
Blue Telecommunications Limited
45.
Mr Chester said he did not know much of the detail about MDS’s mobile
phone trading (which he said had been started by Mr Thomas and Mr Ward without
his involvement), but he became aware that problems had been experienced
because they had bought goods from a missing trader. He said he became
involved with the discussions with HMRC and through that involvement he became
aware of the risks and existence of MTIC fraud. He also saw a copy of HMRC’s
VAT
Notice 726 (concerning joint and several liability in MTIC situations) at
that time.
46.
HMRC records show a slightly different picture, which we accept as
accurate. In particular, they show that Mr Chester called them on behalf of
MDS on 30 May 2002. That call followed an earlier telephone conversation on 28
May 2002 when HMRC had contacted him as a result of discovering from a freight
forwarder that MDS had bought mobile phones from a suspected VAT
defaulter,
with Mr Chester’s name being given by the freight forwarder as their contact at
MDS. He was clearly closely involved with the mobile phone deal, indeed during
that conversation he gave HMRC information about what payments MDS had made in
relation to the deal – which included a “third party payment” of the bulk of
the purchase price to an entity other than the supplier of the phones.
47.
Very
shortly after this telephone conversation, on 8 June 2002, Mr
Chester became a director of Blue.
48.
The next event recorded in the documentary evidence before us was a note
of a visit
to Blue on 29 October 2002 by HMRC Officer D’Rozario. The
visit
was
initiated by HMRC because they had realised that Blue had common directors with
MDS, which had dealt with two missing traders (HMRC’s term for the situation
where a trader disappears without properly accounting to them for
VAT
which it
has charged to customers) and a hijack trader (HMRC’s term for the situation
when a fraudulent trader illicitly uses the
VAT
registration details of a
legitimate trader for the purposes of
VAT
fraud).
50.
Clearly matters moved on rapidly after that meeting. Within a month, SB
had been incorporated and had applied for VAT
registration.
56.
SB applied to register for VAT
very
quickly. Mr Henry signed the
application on 21 November 2002, the day SB was incorporated. In that form
(which was actually submitted to HMRC by SB’s accountants, Murphy Salisbury of
Stratford upon Avon, with a letter dated 25 November 2002), the principal place
of business of SB was given as the address of Murphy Salisbury and the intended
business activities were described as “General Trading”. The words “Buys
excess stock i.e. computers” were later added in reply to this question on the
form, though we accept this was done by HMRC by way of amendment to the form
after discussions with SB to clarify its intended business, and after being
told on 13 December 2002 that SB had bought £150,000 worth of computers in
early December 2002.
57.
In the form, SB indicated that it did not expect to receive regular
repayments of VAT,
it gave an estimated
value
of £150,000 for its taxable
supplies over the following 12 months and it stated that it was not likely to
buy from or sell to other EC member states over the next 12 months. It also
said that it had made its first taxable supplies on 21 November 2002 (though
nothing further was heard of those supplies).
58.
When asked about the apparent inconsistency between these replies and
the intended business of SB as he outlined it, Mr Chester believed Mr Henry
must have misunderstood the form, and made mistakes in filling it out. We do
not accept this. We consider that the form was very
carefully filled out in a
way which was intended, so far as possible, to avoid ringing any alarm bells at
HMRC, whilst being
vague
enough to deflect any later allegations that it was
intended deliberately to mislead them. We find that Mr Henry wanted to press
on with the mobile phone trading and he was trying his best to obtain the
necessary
VAT
registration for that purpose.
59.
In the VAT
registration application, Mr Henry mentioned his existing
personal
VAT
registration under the trading name “Hicomms”. Officer Quinn’s
statement included reference to this. She said that Mr Henry had been
registered in his own right for
VAT
from 16 September 2002 until 1 April 2005,
when he was compulsorily deregistered as a missing trader. He only ever
submitted one
VAT
return, for his first accounting period. In the absence of
any returns, HMRC issued central estimated assessments but their attempts to
trace Mr Henry were unsuccessful and when they eventually cancelled his
VAT
registration they wrote off the small outstanding amount of those assessments.
60.
Following the submission of SB’s VAT
registration application, Officer Helen Harris of HMRC called at Murphy
Salisbury (the supposed principal place of business) on 21 January 2003 for a
pre-registration check
visit.
She made the point that it would not be
acceptable to HMRC for SB’s accountants’ office to be regarded as SB’s
principal place of business. She was told SB was currently looking for
business premises in the Manchester area but that in the meantime “Michael
Ward the major shareholder may be willing to become company secretary and the
application could be made from his home address” in Stratford upon Avon. Thus it is clear that SB’s accountants thought Mr Ward was well aware of SB by
January 2003, and expected to be involved in it. Mr Ward, we must remember,
was the owner of MDS (Mr Chester’s then employer).
62.
This was followed up by Mr Chester himself, who called his local VAT
office in Chester that same day. He introduced himself as a director of SB
(which he was not) and gave his mobile phone number so that someone from HMRC
could contact him about a pre-registration meeting.
63.
Included in the documents before us was a copy of a report by Officer
Colin Wardle of his pre-registration visit
to Mr Chester at his home just over
a week later, on 29 January 2003. Mr Chester apparently identified himself as
the company secretary of SB – which was not correct (it was apparently intended
that he should take up that post, but never actually did so). As noted by
Officer Wardle, Mr Chester identified SB’s “main business activity” as:
“General trading company – buying & selling any goods on which a profit can be made, intending to be wholesale only at this stage.
Trader has stated that he intends to enter the mobile phone market (wholesaling) immediately”
64.
At that meeting, Mr Chester’s involvement in MDS and Blue and also Mr
Henry’s business Hicomms were noted. It was recorded that MDS’s last VAT
return (for the period ended 30 November 2002) was outstanding, and HMRC had
issued it with a central assessment of its estimated liability.
“Trader is trying to set up as a phone buffer – but needs the
VAT
number before he can obtain any goods.
Trader has already been in contact with Sabbatier, France, as his main supplier of Nokia mobile phones
- Sabbatier are willing to supply trader but need to
exchange details (including VAT
certificates) before they are willing to trade.
Trader was introduced to Sabbatier by Advantage Telecommunications, who will invoice Sabbatier for a commission on the deals. Advantage will not be invoicing or supplying Spearmint Blue in any way.
...
Trader states sales will be mainly UK based at the start of the business, but intends to source other customers both in the EC and outside the EC ie Africa”
69.
We find that Mr Chester was clearly holding himself out by 29 January
2003 as authorised to speak on behalf of SB, and in attempting to persuade HMRC
to issue a VAT
registration to SB he did tell them it was proposing to acquire
mobile phones from a supplier in France with a
view
to the wholesale trading of
those phones to UK customers. We also find that he made no mention at the meeting
of the “export finance” business model (which loomed so large in his evidence
at the hearing). See [107] for an explanation of the “export finance” business
model. Mr Chester’s explanation of this omission is that until SB had
sufficient funding, it would not be in a position to carry out its intended
business. Nonetheless, we would have expected him to have explained its
intended business (as described at the hearing) to HMRC and he did not.
70.
SB was eventually registered for VAT
with effect from 20 March 2003,
though we were not provided with details as to exactly when the registration
was completed.
71.
After the pre-registration visit
by Officer Wardle to Mr Chester at SB
on 29 January 2003 (and entirely independently of that
visit),
officer
D’Rozario followed up his earlier
visit
of October 2002 (see [49]) to Mr
Chester wearing his “Blue” hat. This activity was prompted as a result of the known
connection between Blue and MDS, and the fact that MDS (both Mr Thomas the
finance director and its accountants) were becoming difficult to contact having
done a large number of mobile phone deals in its
VAT
accounting period ended 31
August 2002. Those deals included the receipt of goods from missing traders
and hijacked
VAT
registrations and the making of third party payments (ie
payments to parties other than its actual suppliers). Finally, another known
mobile phone trader had applied to HMRC for confirmation of Blue’s
VAT
registration, presumably as a preliminary step before dealing in mobile phones
with it.
72.
Officer D’Rozario called at Blue’s premises in Chester on 13 February
2003. He was informed by a secretary there that Mr Chester was still running
the business. He left a letter following up outstanding points from the
meeting in October 2002. In reply, Mr Chester telephoned him later that day.
He was “very
very
confused” because he thought all the outstanding points from
the October meeting had been resolved by Blue’s accountant. He said he would
follow this up with Mr Thomas and the accountant.
73.
During the conversation, Officer D’Rozario asked about the plans for the
business and Mr Chester said Blue were now considering trading in mobile
phones. Primarily this was because MDS had not traded since August 2002 and
Blue wanted to try it as they thought they could make “decent money” from it.
He referred to contacts with Sabatier (“a large distributor of mobile phones
based in Paris”), through which Blue hoped to enter the market. Blue had
already given Sabatier a “forecast” of an order for 5,500 Nokia 7250 phones to
a value
of £1.3 million, hoping to make a profit of £55,000 to £110,000 from
selling on the phones. The purchase price was to be funded by “prepayments
from customers”. He hoped to sell about 500 of the phones to small independent
phone retailers in the UK, with the remaining 5,000 being sold to about 7
larger UK customers (which he had already cleared and
verified).
78.
This is clearly odd. Mr Chester did not address the issue at the
hearing, as he was not specifically asked about it. All we can infer is that
he had simply not yet decided at the time which company he would put the
trading through. At that stage, if Mr Ward and Mr Thomas were (as we find was
the case) both aware of SB and expecting to be involved in it, one can
understand why the distinction between the two companies might be a little
blurred. Put simply, it did not matter greatly to Mr Chester which company he
used to trade with Sabatier, as his employers were involved in both companies
with him. If a VAT
registration could be obtained for SB, then it would
probably be preferable to operate through that company as it would not become
mixed up with Blue’s other business; but if it could not, then it would be better
to trade through Blue than not at all.
79.
Another odd feature of the overlap between Blue and SB is that Mr
Chester was a director of Blue but had made a conscious decision not to
become a director of SB. When asked why this was, he said there had been a
“time of awkwardness” between him and Mr Ward about him leaving MDS and Blue.
He was seeking to give us the impression that by refraining from becoming a
director in SB, he was trying to conceal his involvement in it from Mr Ward and
Mr Thomas (whom he referred to as “my partners”, which indicates something a
little more than a mere employment relationship). But it is apparent from the
documents that Mr Ward and Mr Thomas were heavily involved in SB from its very
early stages.
“Having had discussions with the principle shareholder it was suggested and agreed that I join the board of directors in an operational role. Since then the decision has been made by me not to accept the position...”
82.
From these letters, it appears that Mr Thomas was expecting to take an
active part in SB’s business right up until June 2003 (indeed, he applied in
April 2003 for its VAT
accounting to be changed to monthly). Therefore, whatever
the reason for Mr Chester not being a director of SB until June 2003, it was
clearly not because he was trying to conceal his involvement in SB from Mr
Thomas and Mr Ward.
84.
We can only infer that Mr Chester initially avoided any obvious
connection with SB on incorporation in the hope that its VAT
registration
application would be processed without his connection with it becoming apparent
to HMRC. It was only when it became clear this was not going to happen that he
felt nothing would be lost by making his involvement as the guiding force
behind SB known to HMRC.
85.
Mr Chester, in his witness statement, set out his version
of the
background to his setting up SB:
“2. In 2002-2003 Alexander Chester one of the
appellants directors worked for a telecommunications company MDS
Telecommunications Ltd.
His job for MDS was to manage and direct the
objectives of a national sales force responsible for the sale of
voice
and data
services through fixed line network technology. Having worked in the industry
for some years Alexander selected and employed a team to secure revenue for MDS
in his full time capacity of National Sales Manager. During his time with MDS
the company started without the involvement of Mr Chester to trade in mobile
phones buying and selling within the United Kingdom. The company enjoyed
through these activities a significant increase of revenue enabling the support
of its sister company Blue Telecommunications. Blue Telecommunications was a
switchless resellers of
voice
and data services with approx 250 customers
struggling to operate in a competitive market place. At this time Alexander
when questioned brought to the attention of HMCE officers that the company,
Blue Telecommunications intended to start buying and selling mobile telephones
and that it hoped to give the company the revenue it required to assist in its
objectives. Mr Chester explained that this activity was handled by his
partners Darren Thomas and Michael Ward while he focused his efforts on
building the
voice
and data service side of the business. Through
visits
and
communication with HMCE Mr Chester learned that the company purchased goods
from a missing trader and became aware of the risks and existence of MTIC
fraud.
3. At this time Mr Chester understood that the
industry was facing a national shut down as HMCE clamped down on fraudulent
activity. Exporters would not export as they were left in a vulnerable
position claiming back
VAT
from export sales that may have been involved in
MTIC fraud without their knowledge. While this caused a shut down on trade it
also provided opportunity.
4. Mr Chester saw that there was an obvious need for
a strong, well funded, process driven exporter to take advantage of the good
business that existed among the occasion fraudulent activity. If an exporter
could position itself through due diligence and close communication with HMCE
staying away from troubled areas highlighted by HMCE and being selective with
its trading partners there was a great need and business opportunity. Mr
Chester approached the owners of MDS and Blue Telecommunications suggesting
this business idea and its benefits. While at first Michael Ward showed
interest in the venture
he decided that he wished to continue only with Blue
Telecommunications and MDS. The owners of MDS and Blue did not want to look
towards that model and Mr Chester decided to go alone. A long time friend Robert
Morton through an association in the Church of Jesus Christ of Latter-day
Saints (LDS Church) approached Mr Chester interested in what he was doing and
finally joined with Mr Chester working and owning together Spearmint Blue
Limited. Mr Morton was a Police Office for West Midlands Police and had a
particular eye for detail while possessing experience in law enforcement.”
86.
There are clearly inconsistencies between this account and that which
emerges from the documentary evidence. We find that Mr Chester was closely
involved in the mobile phone trading of MDS on at least one occasion in May
2002 (see [46]); and his new venture
was initially focused on mobile phone
trading, only changing over to the “export finance” structure referred to at
the start of his paragraph 4 when the mobile phone trading opportunities were
severely restricted by the April 2003 Budget changes. By being
vague
about the
chronology and blurring or glossing over some of the facts, Mr Chester has
conveyed a general impression of events which is significantly different from
what we find actually happened, and we found this to be a characteristic of
much of his oral testimony at the hearing as well.
87.
SB was finally registered for VAT
with effect from 20 March 2003. As
mentioned above, Mr Thomas quickly applied on its behalf to be placed on
monthly
VAT
returns (clearly in anticipation of SB making
VAT
repayment claims).
However, in cross examination Mr Chester agreed that SB’s
VAT
returns to the
end of April, May and June 2003 were all nil returns. It was not clear what
had happened to the £150,000 of computers that HMRC were told in December 2003
had been bought by SB. Nor did the proposed purchase of mobile phones from
Sabatier in France materialise; we were not informed what had become of that
relationship. We can only infer that Sabatier lost interest because of SB’s
lack of a
VAT
registration until late March 2003.
89.
There were various
mentions made about SB’s funding, both in the
documents and in oral testimony. The picture that emerges is not clear. This
is illustrated by the following summary of the evidence before us in relation
to
various
sources of funding.
Funding from directors and secretary
Funding from Roger Payne
Funding from Property Gains Management Limited (“PGM”)
“Re shareholders trader advised me he had replied to an advert in an “in flight mag” for someone looking for investors. He maintains he had approached the company but couldn’t remember it’s name they put him in touch with potential investors. These people came to talk to him at “Blue Telecom” around Mar ’03. Same people called at his prev address in Malpas in June/Jul ’03 and offered to invest to £350k, he could not show me contracts or any meaningful paperwork.
Business bank a/c shows substantial deposits.
Jul ’03 £55.5K from PGM Ltd
(thought to be Property Gains
Management
Ltd
director Paul Waghorn – name given to me, individual lives in
Spain Arroyo de la Miel, Benalmedena Malaga.
June ’03 £43,980 depost made by Roger Lawford Payne – Director
27/8/03 depost £90K from PGM Ltd
8/10/03 depost £100K PGM Ltd
Further investments (min £40K) made by a Mr Deep Singh, [Milton Keynes address]”
(Mr Singh was identified to us by Mr Chester as the UK representative or agent of PGM.)
95.
Mr Chester said he had initially approached an individual called Michael
Smallwood, an expatriate living in southern Spain. He had contacted him
because he had seen an advertisement placed by him or his company in an
in-flight magazine, seeking investors looking for advice on investing their
money. Mr Chester must have reasoned that if Mr Smallwood was advising
potential investors, he may have access to finance for investment in SB. Mr
Smallwood invited Mr Chester to visit
him in southern Spain but when he got there he told him that he had recently lost his money through some involvement
with a horse racing trader from north eastern England, so he had no cash to
invest. He suggested Mr Chester get in touch with Mr Waghorn, who lived in
Torremolinos in southern Spain. Mr Waghorn, it appeared, came from Southend,
had originally worked in Chase Manhattan Bank in New York and now had his own
business providing investment advice to wealthy individuals.
Summary of position on funding of SB
104.
A number of significant events seem to have happened to SB in June and
July 2003. Up to that time, it had not traded at all, in spite of the contacts
with Sabatier and Mr Henry’s list of traders that he wished to buy telephones
from. It had been much slower to obtain a VAT
registration than it might have
hoped. Its contacts with Sabatier had come to nothing. It had finally managed
to obtain a
VAT
registration in late March 2003 and Mr Thomas had written to
HMRC on its behalf to obtain monthly (rather than quarterly)
VAT
accounting
periods. That application appears to have been successful, as SB was placed on
monthly returns from April 2003.
105.
Then the Budget announcement was made in early April 2003 about the
introduction of joint and several liability for traders in mobile phones and
computer parts. This was HMRC’s attempt to reduce the volumes
of MTIC fraud it
was seeing. We have no doubt it caused what Mr Chester described as “a
national shut down” in the mobile phone trading sector, at least for a while.
It clearly did nothing to advance SB’s plans to trade in mobile phones, and we
have no doubt it caused Mr Chester to reconsider the strategy for developing
SB’s business. Whilst wheels had certainly been put in motion by then to
obtain significant funding through PGM, the scope for its intended activities was
severely curtailed. At the end of April 2003, Mr Henry resigned as a director
and his investment was paid out at around the same time. We infer that he
regarded the Budget announcement as the “writing on the wall” for his list of
50 potential mobile phone suppliers.
106.
SB made no supplies at all during April, May and June 2003 (it submitted
nil VAT
returns, as Mr Chester confirmed in cross examination). But then in
June 2003 things clearly changed. The link with Mr Thomas and Mr Ward was
severed, Mr Thomas writing his letter to HMRC on 11 June 2003 to inform them
that he had decided not to get involved with SB, and Mr Chester resigning as a
director of Blue on the same date. Mr Chester finally became a director of SB
on 25 June 2003. Mr Payne became a director of SB on 27 June 2003 and invested
his £44,000 during the month. On 16 June 2003, Mr Chester also became a
director of another company called Yes Business Solutions plc (referred to at [109]
below).
107.
We infer that it was during this period that Mr Chester, in conjunction
with PGM, decided to change SB’s original business plan. Instead of dealing in
mobile phones (which had become much more risky since the Budget changes), he
settled on the “export finance” business model, in which SB would act as
exporter/despatcher of any goods other than those falling within the new “joint
and several liability” provisions, on behalf of traders who were unable
themselves to finance the VAT
cost of exporting/despatching domestically bought
goods. Mr Henry had already fallen by the wayside and now Mr Chester parted
company with his former colleagues at Blue and MDS, who did not wish to get
involved with the new proposal. Mr Morton’s friend Mr Payne was brought in as
an investor and director.
109.
Given that two trading activities were now in prospect (used car sales
and export finance), Mr Chester said he agreed with Mr Waghorn that it would be
appropriate to use a different company to operate the export finance business.
Through an introduction from Mr Smallwood, he bought the share capital of a
company called “Yes Business Solutions plc”, which was not trading, but had a
VAT
registration. It was intended that this company would be used as the
vehicle
for the export finance business – Mr Chester said that being a plc, it
would be easier to use it to raise investment through a private placement or,
potentially, a public offer of shares or securities. The intention was that
Yes would operate under the “Spearmint Blue” name or brand. Its name was
changed to “Presiding Brethren plc” (“PB”) in what Mr Chester considered an
amusingly irreverent reference to the senior members of his church.
110.
Public records show that Mr Chester and Mr Morton became directors of PB
on 16 June 2003, and its name was changed on 3 July 2003. This was clearly
almost exactly contemporaneous with the various
other events which happened in midsummer
2003, as summarised above.
111.
PB had been registered for VAT
on 21 August 2002, with a business
activity described as “design and print marketing and sales, publishing and
business finance”. Its last trading activity (in terms of amounts showing in
its
VAT
returns) was in its
VAT
period ended 31 December 2002. Mr Chester did
not explain (nor was he asked) why he had felt it appropriate to acquire an
existing plc which was effectively dormant (apart from holding a
VAT
registration) rather than form his own brand new company, where he could be
certain there were no historical liabilities. There was no explanation as to
the circumstances in which a financial intermediary in southern Spain was regarded as a reliable source of introduction for the purchase of a UK public limited company. Mr Chester did not refer to any other benefits or advantages in
acquiring PB or how much was paid for it, and we infer that its existing
VAT
registration was an important (if not the only) advantage in the acquisition.
113.
We have only sparse information about SB’s VAT
returns for its first two
and a half years of trading. In cross examination, Mr Chester agreed that SB
had submitted nil returns for April, May and June 2003. Thereafter, it appears
returns were not submitted as required – the next documented contact between SB
and HMRC was a telephone call on 7 October 2003 from a Mrs Sheila White (or Shelagh
Whyte), who described herself as the newly employed bookkeeper of SB. She
asked if she could wait until the end of the month to submit all outstanding
returns but she was told that the overdue returns for July, August and
September 2003 should be submitted immediately. SB was still on monthly
VAT
returns at that time.
114.
When Officer Lynne Cullen visited
SB on 31 October 2003, she took away
with her its
VAT
returns for July, August and September 2003, along with a
cheque for £1,134.83.
115.
At that visit
(when Officer Cullen met Mr Chester and Mr Morton, the
directors of SB), she was told that the business of SB had commenced in June
2003, and it was dealing in second hand cars, having rented a garage forecourt
in Malpas. They had also taken a 7 year lease of some office premises. They
told her that they had been attempting to raise funds to get back into
wholesaling mobile phones, that they aimed to become a broker (i.e. exporter or
dispatcher) and that they were trying to raise the funds needed to do so. We
note that SB had already received £245,000 of funding from PGM and a further
£44,000 from Mr Payne by that time, so it is unclear why they felt they needed
to raise more funds before they could commence business. Officer Cullen asked
them to notify her as soon as they started to deal in phones.
116.
The next material contact between SB and HMRC took the form of a meeting
on 6 January 2004. Officer Christine Quinn of HMRC (SB’s new control officer)
visited
to carry out a check on SB’s
VAT
return for November 2003, which
claimed a significant
VAT
repayment. She met Mr Chester and Mr Morton.
117.
At the meeting, she noticed only 6 cars on the forecourt, and regarded
that business as “minimal”. Mr Chester informed her that they had acquired PB,
which had not yet started trading as its address needed to be changed. Mr
Chester said that as soon as the revised VAT
certificate came through, PB
intended to start wholesale trading, with SB’s business limited to car sales.
118.
He said that PB intended to trade in anything that fell outside the
“Budget 2003” legislation (i.e. anything except mobile phones, computers and
parts). Officer Quinn’s perspective on this in her note of the meeting was
that SB was proposing to “circumvent” that legislation, whereas Mr Chester’s
perspective at the hearing was that PB would simply be avoiding the known
problem areas. Officer Quinn remarked that Mr Chester appeared to be “the main
spokesman for the business”. He was well versed
in carousel fraud and the
associated jargon. He told her that Hacker Young were being instructed to
carry out checks on their prospective customers (though the nature of those
checks appeared somewhat limited to her). He was aware of the Redhill check
procedure, but said (to her surprise) that Hacker Young had told him not to use
it as it would “get them a bad name” with other traders. She told him this was
not correct.
119.
Officer Quinn then turned to the main purpose of her visit,
namely a
“pre-cred” check of the November
VAT
repayment return.
120.
She established that most or all of the repayment related to one
transaction, an acquisition of some swimming pool covers from a UK trader
called Norfolk & Suffolk Windows and Conservatories Limited (“N&S”),
and the sale of those goods by way of export to a customer in Hong Kong (but
with delivery to Dubai). The value
of this deal was £466,750 plus
VAT,
hence
the input
VAT
being reclaimed was £81,681.25. It was explained to her that
N&S had approached SB to finance the
VAT
cost of the export for them. At
the hearing, Mr Chester said that SB had a website which would come quite high
on the list of results for any search for “export finance”.
122.
When Officer Quinn returned to SB the following week on 14 January 2004,
she was still not satisfied by the evidence supplied to her. The only new
information was a copy of a bill of lading from Stanza Freight which described
the goods as swimming pool covers but they were in sealed containers. SB had
still not received or made any payments for them. In the meantime, Mr Chester
said that SB had done two further deals in December 2003 involving the UK purchase and subsequent despatch to Germany and Spain of razors and razor blades. He had
submitted the December 2003 VAT
return claiming repayment of the input tax. It
was pointed out to him that the invoices he held from the UK supplier were only proforma invoices, not proper
VAT
invoices.
123.
Two weeks later on 28 January 2004 Officer Quinn reviewed a repayment
return received from SB for January 2004. It was obvious that the return
should have been in relation to December 2003. She telephoned Mr Chester to
discuss it and agreed to visit
on 5 February 2004. Mr Chester was to complete
the December 2003 return correctly and also have the details ready for the
proper January 2004 return. He confirmed that he had now “cancelled” the
swimming pool covers deal as he had received and made no payment. He said he
was in dispute with Stanza about it.
124.
When Officer Quinn visited
as agreed on 5 February 2004, Mr Chester
could not tell her where the pool covers were and confirmed that the deal was
effectively cancelled. He produced a sales invoice for the covers which
appeared to be identical to the one she had been shown on 6 January 2004,
except that, on closer inspection, it referred to the purchaser as a company
called Hillcraft, rather than SB and it had a typing error in the
VAT
amount.
Mr Chester did not explain (either at the time or at the hearing) why this
other invoice was in his possession. At the hearing, he said was not even sure
whether he had been aware at the time that he held the second invoice, or
whether he just passed over to HMRC everything which he had in relation to that
deal. By then, it was apparent that SB were not going to get their
VAT
repayment,
so he said he had just provided everything he had in order to help HMRC with
their enquiries. SB have not challenged HMRC’s refusal to repay the relevant
VAT.
127.
When HMRC subsequently received SB’s VAT
return for December 2003, it
included no reference to the razor and razor blade deals which had been
mentioned at the meeting on 14 January 2004. When HMRC contacted it about this
return on 16 February 2004, SB maintained it had “pulled out” of those deals.
129. SB’s return for January 2004 was a smaller repayment return, and was paid without problem.
130.
The February 2004 return was received on 3 March 2004 and contained a
repayment claim of some £185,000. A further visit
was arranged to discuss this
return, which took place on 11 March 2004. Mr Chester and Mr Morton were both
present. SB was reclaiming input
VAT
totalling £183,225 on three despatch
deals it had carried out in February, which accounted for the bulk of the
repayment claim. The goods involved were Philips DVD players and Sony Mini
Disk players. All were bought from Global Enterprise Trading Limited in the UK and sold to SSA Enterprise GmbH in Europe.
131.
Once again, HMRC were not satisfied with the documents produced to them
in support of this repayment claim. A follow up visit
was arranged for 30
March 2004. Some of the problems were resolved at that
visit,
but HMRC
remained unsatisfied as to the standard of the CMR documents, leaving a letter
dated 30 March 2004 with SB to specify what they required of such documents.
There does not appear to have been any further correspondence on this repayment
claim and we do not know whether it was eventually paid. The relevant comment
in Officer Quinn’s note says:
“I was satisfied that paperwork seen enabled me to verify
the
repayment. However as mentioned on previous
visit
I was not wholly satisfied
with the quality of the CMR docs seen and I left letter dated 30/3/2004
explaining precisely what was expected by the dept.”
132.
During the visit
on 30 March 2004, Officer Quinn spoke to an employee at
SB (Mr Chester and Mr Morton were both away) and established that there was a
further deal going through that day, involving a purchase and sale between SB
and the same parties as the February deals. The goods involved were Sony
digital cameras, and the
VAT
repayment claim arising would be £67,375.
133.
In due course the VAT
return for March 2004 was submitted, and on 29
April 2004 HMRC wrote to SB to tell it that it had suspended £67,375 of the
repayment claim (allowing the remaining £2,213.20). We presume that this
related to the Sony digital camera sale referred to above.
134.
On 13 May 2004, Officer Quinn asked Mr Chester about the business of PB
(in the context of discussions about the ongoing checks into SB’s repayment
claims). Mr Chester replied that until the claimed VAT
repayment had been
received by SB, PB would not be in a position to start its business.
135.
In due course the VAT
return for April 2004 was submitted, and on 8 June
2004 HMRC wrote to SB to inform it that they were suspending payment of
£179,812.50 of the
VAT
repayment claim it included. They were making
arrangements for the remaining £2,774.97 to be repaid. No details of the goods
involved were included in our documents, but we infer the suspended
VAT
related
to another export/despatch transaction arranged by SB.
136.
After some correspondence between the parties, HMRC confirmed in their
letter dated 7 July 2004 that the two repayment claims for March and April 2004
would be released “without prejudice to any post payment verification
activity
undertaken” by HMRC. That letter referred to iPAQ PDA’s and Olympus digital
cameras as having been involved in the April transactions.
137.
Also on 7 July 2004, HMRC wrote to PB. They said it had not made any
taxable supplies since 1 January 2003 according to its returns and therefore they
were proposing to cancel its VAT
registration unless it provided evidence that
it intended to resume trading.
138.
A meeting took place between Officer Quinn and Mr Chester and Mr Morton
on 15 July 2004. The continuing verification
of the March and April 2004
repayment claims was discussed, and it was made clear that SB may still have to
pay back the
VAT
it had received if the outcome was not satisfactory. Mr
Chester told her that PB was ready to take on SB’s exporting business; SB would
continue as a used car sales business only. Officer Quinn asked for evidence
of trading for PB. She followed that up with a letter date 16 July 2004 to PB
in which she confirmed that PB would have four weeks in which to supply
evidence of its intention to resume trading, now that SB had received its
VAT
repayments.
139.
Officer Quinn spoke to Mr Morton at PB on 23 August 2004 and he agreed
that deregistration of PB was “inevitable”, as no evidence of intention to
trade had been provided. At his request, she then spoke to Mr Chester, who did
not want deregistration to happen. He said he had been “all over Europe last
week making contacts” but when pressed he admitted he had in fact been visiting
SB’s investor in Spain (presumably PGM). Following this call, Officer Quinn
made arrangements for PB to be de-registered for
VAT,
which happened on 24
August 2004.
140.
There is some confusion in the evidence between SB’s May, June and July
2004 returns. Two of them (either May and June or June and July) were small
repayment claims and Officer Quinn wrote to SB on 21 September 2004 asking for
some supporting information. She followed this up with a letter dated 7
October 2004, in which she said she would visit
on 21 October to resolve the
outstanding issues. When she arrived at the premises on 21 October, she found
neither Mr Morton nor Mr Chester was there. The car showroom premises were
undergoing a “revamp”, including some landscaping and she formed the impression
the business was moving away from export finance to use car sales. She spoke
to “Bruce”, who introduced himself as the “car sales manager”. We infer that
this must be Bruce Harris (“Mr Harris”), about whom Mr Chester gave us some
information (see [152] below).
142.
Both Mr Morton and Mr Chester were present at the meeting with Officer
Quinn on 11 November 2004. Officer Quinn wished to establish whether SB had
dropped its export finance dealings, as she was considering putting it back
onto quarterly VAT
returns. Mr Chester said he was still pursuing that
business line. They went over the cancellation of PB’s registration once
again. Mr Chester said there had been deals “on the table” for PB which had
been cancelled when it had been deregistered. He said he had lost some
credibility in “the trade” as a result.
144.
It also came to light at the meeting that SB had used its blank October
2004 VAT
return form to make its September 2004 return. This was seemingly
corrected, but a similar error occurred when two November 2004
VAT
returns were
received. All the amounts of
VAT
involved appeared to be small, so it appears
that no further export finance deals were carried out during the latter part of
2004.
146.
On 26 January 2005, Officer Quinn wrote to SB to inform it that she had
put it back on quarterly VAT
returns. The precise timing of the change was
unclear, but in her letter she appeared to be suggesting that it would take
effect after the monthly return for February 2005 had been dealt with.
149.
Officer Bayliss’s notes and correspondence were in the bundles provided
to us. From those papers, we are satisfied that Officer Bayliss first became
involved when SB’s January 2005 VAT
return was received. It was a small
repayment claim (just over £1,000). Officer Bayliss was asked to check it with
SB and also establish their present intentions in relation to re-entering
“wholesale trade”.
150.
Officer Bayliss met Mr Chester on 21 March 2005. Mr Harris was also
there (introduced as company accountant for SB and PB, as well as secretary of another
business called “Swollen Horse” which had recently been set up to buy in and
sell on excess stock from companies such as Argos).
151.
Mr Chester confirmed that SB was intended to continue in business
largely as a used car dealer. He also sought to persuade Officer Bayliss that
PB’s business was to be “revitalised to deal with world wide imports and
exports of initially Coca Cola, out of Holland, Egypt, Philippines for re export.” Officer asked for evidence of PB’s intention to trade, and Mr
Chester said that without a VAT
registration it could not secure deals. The
question of PB’s
VAT
registration moved no further forward following this clear
“catch 22” impasse.
152.
Mr Chester gave oral evidence about his dealings with Mr Harris. He
said he had first met him in early 2004 when he had come into the car showroom
with a friend. He was Zimbabwean and very
tall. He had asked for a job and Mr
Chester agreed to take him on. He
very
quickly ended up running the car sales
operation. He also became involved in the “Swollen Horse” business. Mr
Chester saw him as a general manager in the making. He was allowed to have
some shares in SB towards the end of 2004. He was appointed as a director of
SB on 23 June 2005, the same day that Mr Morton resigned (see [155]).
153.
SB’s VAT
returns up until the summer of 2005 contained repayment claims
of just under £2,000 (for the month of February 2005), just under £7,500 (for
the months of March and April 2005) and the return for the quarter from May to
July showed a liability of just over £4,500. These were all small amounts,
clearly relating largely if not exclusively to the used car business.
154.
In mid-2005, SB was to undergo another structural change. Mr Chester
told us that he planned to move to the USA in the summer of 2005 for family
reasons (his wife is American and he wished their children to have the next
stage of their education there). He had been struggling to get SB’s export
finance business off the ground, but had only been able to do a very
few
deals. He said there had been many potential deals but nearly all of them had
not proceeded, either because he did not like the feel of the prospective
customers or because they were put off by SB’s extensive investigation of them.
Much of the business which SB had managed to do had run into problems with HMRC
withholding repayments, as summarised above.
155. This unsatisfactory state of affairs resulted, he said, in Mr Morton coming to him and saying he did not wish to continue in the business. He said this was in April 2005. Mr Morton did not wish to be left running the business in the UK with what Mr Chester described as “a relatively small share” and an absentee senior partner. This culminated in Mr Morton resigning as a director of SB on 23 June 2005. Clearly Mr Chester was looking to the future, as he appointed Mr Harris as a director of SB on that same day. Mr Morton’s shareholding also went to Mr Harris, who now held 24% of the shares (Mr Chester holding the other 76%).
156.
Mr Chester said he also had conversations with SB’s investor PGM that
summer. He said he was trying to reduce SB’s level of debt to PGM. This
resulted in a reorganisation of the shareholdings. £500,000 of debt was, he
said, converted to shares amounting to 25% of the business. He said that a
group structure was put together with PB as the parent company of SB, Swollen
Horse Limited and another company called Red Bull Developments Limited (which
does not appear to be relevant to this appeal). Whilst Mr Chester said this
group was put together during 2005, an annual return of SB was included in the
evidence before us which shows that the various
transfers of SB shares to
effect the restructuring were largely done in October 2006. Nothing
significant hinges on this discrepancy, but it does illustrate once again that
Mr Chester’s recollection cannot be totally relied upon.
158.
Mr Morton resigned as a director of SB on 23 June 2005. On that same
day, he generated some self-billing invoices in respect of the purchase of four
motor vehicles
from a motor
vehicle
auction business (a BMW M3 Convertible for
£37,000, a Renault Espace for £6,940, a
Vauxhall
Astra for £2,150 and a Ford Focus
for £4,010).
159.
He then incorporated 4A Developments Limited (“4A”) on 22 July 2005 and
applied online for VAT
registration on 27 July 2005. He described the intended
business of 4A as follows:
“Building development
Ebay sales
Wholesale
Wholesale and retail sale of used motor vehicles
Alterations and extensions of domestic buildings
Other wholesale”
“The business will have three main revenue generating activities listed below in order of anticipated growth and financial return:
Trade wholesale of goods via
e-bay and directly to market
traders
Property renovation & improvements on behalf of clients
Used car sales to trade and private buyers
The forecast turnover in year one is 400k, anticipated to be generated mainly from market traders, wholesale and e-commerce (e-bay). Any property developments will be done on behalf of private clients or commercial maintenance agreements. Given the broad spectrum of the business activities I would describe the business as a general trade rather than one in specific.”
“I am very
pleased to provide this reference on behalf of
Robert James Morton who is a director of 4A Developments Limited. I have been
involved with Robert mainly through business transactions during the last 36
months however, I would go so far as to say, I class him as a friend also.”
165.
The other interesting document is headed “Robert Morton Curriculum
Vitae”.
It outlines Mr Morton’s work career from 1992 (when he would have been
approximately 24 years old).
“Responsible for raising funds to enable Spearmint Blue Limited to fund large wholesale export transactions to Europe, mainly within the import/export industry, and establishing terms and conditions, due diligence checks and relevant company procedures with Customs and Excise.”
168.
Pausing here for a moment, this account conflicts directly with what Mr
Chester told us – namely that it was he who had arranged the financing for SB from
PGM. So either Mr Chester was misrepresenting the true position to the
Tribunal or Mr Morton was misrepresenting it to FCIB. We have no way of
knowing which is the true version
of events, we merely observe that the
accounts of the two main participants are diametrically different.
169. Finally, when summarising his role at 4A, the CV says:
“Director & Shareholder of newly incorporated Limited
Company formed to conduct trade on a wholesale scale with companies based both
within the U.K. and Europe. Both white goods and cellular products will be
traded, with a view
to exporting when a strong financial position is
established.”
170.
Mr Chester told us that Mr Morton had approached Mr Harris to ask for SB’s
help in financing his export/despatch deals. Mr Harris had reported the
approach to Mr Chester, who met with Mr Morton on his next visit
to the UK. It appears to have been this
visit
that resulted in a short written agreement between
4A and SB. A copy of that agreement, headed “Preferred Supplier Agreement” was
included in the documentary evidence. It was signed by Mr Harris on behalf of
SB and by Mr Morton on behalf of 4A. It was dated 7 September 2005 next to Mr
Morton’s signature. The full text of this agreement was as follows:
“The following is a commercial agreement between the “companies” namely Spearmint Blue Limited, and 4A Developments Limited, outlining basic terms of business and codes of practise governing all business transaction between the “companies”.
Any alterations or additional terms or codes must be agreed, drafted and signed prior to implication in business transactions.
1. Spearmint Blue Limited will be provided with 4A Developments supplier details for due diligence checks prior to any transaction being finalised.
2. Spearmint Blue Limited will not approach, contact or transact with any of 4A Developments suppliers without 4A Developments prior consent.
3. Spearmint Blue Limited will assume all costs for any insurance transportation, inspections and any claims in respect of product warranty.
4. 4A Developments will not transact or propose to trade with Spearmint Blue Limited, if the commodity is mobile phone or cellular products.
5. 4A Developments will check all clients status
with Customs and Excise verification
offices in Southend-on-Sea prior to every
transaction.”
171.
Mr Chester’s evidence was that for SB the opportunity to act as export
financier for 4A was “the perfect solution”. He had struggled to get the
business off the ground but this was largely due to his inability to find
trading partners whom he really trusted. Now here was a marvellous opportunity.
He knew Mr Morton well (or thought he did), trusted him implicitly and was
confident that he would never become a missing trader – his ties to the local
community were too strong, he considered. This meant that he could be
confident in exporting on 4A’s behalf without any fear of becoming embroiled in
VAT
fraud.
173.
In response to a “new business telephone questionnaire” from HMRC on 15
September 2005, Mr Morton told them that he was “a builder by trade” (though
this did not appear on his CV to FCIB). It appears that on or shortly before
that date, 4A had been registered for VAT.
On the same day, he contacted HMRC
to
verify
a Spanish
VAT
number, and over the following weeks he contacted them
numerous times to
verify
other
VAT
numbers (mainly overseas ones). He had
clearly been less than open in his dealings with HMRC.
175.
It seems that Mr Morton was impatient to get started in his trading. Almost
as soon as 4A was VAT
registered, other traders were contacting HMRC’s Redhill
office to
verify
its
VAT
number. In line with policy at that time, the Redhill
office refused to
verify
4A’s
VAT
details to other traders until 4A had
received its first post-registration
visit
from HMRC.
176.
This did not appear to stop 4A from carrying out its first deal at the
end of September 2005, however. In that deal 4A bought a batch of unspecified electronic
goods from a UK trader called In2Digital (split between five invoices) and sold
them on to SB. In fact (as was recorded by HMRC in a note of a visit
made on 9
November 2005) 4A issued its sale invoice to SB on 28 September 2005, though
the invoices to 4A from its supplier were dated 30 September, two days later.
When asked about this timing point, Mr Morton could not explain it and believed
the sales invoice to SB might have been issued when payment was received from
it. Thus he believed that SB might have paid 4A before 4A had even received
the goods from its supplier, or been invoiced for them.
177.
The value
of this deal was not expressly set out in the evidence before
us, but we were told it was the only deal done by 4A during its first
VAT
accounting period (to the end of September 2005) and its
VAT
return for that
period showed total sales of £1,222,518 and output
VAT
of £213,647.59. Its
total purchases were shown as £1,218,671 plus input
VAT
of £213,262.13. The
net
VAT
liability was therefore just £385.46. Although the
VAT
figures are
very
slightly out from the expected amounts, given the reported net input and
output figures, we infer that these amounts are a reasonably precise reflection
of the size of the transaction done with SB. We note that SB’s
VAT
return for
the three months ended 31 October 2005 show input tax of £319,799.21 with total
output tax of just £527.83. We were not told how SB incurred the balance of
approximately £106,000 of input
VAT
during its
VAT
quarter up to October 2005.
178.
We accept HMRC’s evidence that Mr Morton told Officers Tinker and Owens
at the meeting on 9 November 2005 (see [180]) that 4A’s supplier In2digital was
known to both 4A and SB. There was even, he told them, a special arrangement
between 4A and SB which allowed SB to deal with In2digital direct on paying a
commission to 4A (a relaxation of the usual arrangement, under which SB had
agreed not to deal direct with 4A’s suppliers). The terms of the arrangement
between SB and 4A were such that 4A had to give SB details of their supplier.
Thus we find that Mr Chester was well aware 4A were buying from another UK
trader; therefore he cannot have been satisfied that the transaction chain
could not be tainted by VAT
fraud – his trust in Mr Morton could only have
extended to the situation where, as he said at the hearing, 4A was the importer
and therefore there simply could not be a fraudulent
VAT
default in the
transaction chain.
180.
Mr Morton found out about HMRC’s policy of not clearing VAT
numbers
until the post-registration
visit
had taken place when he called Redhill
(several times) to find out why they were refusing to
verify
4A to other
traders. He therefore knew to expect a
visit,
which was duly made by Officers
Steven Owens and Emma Tinker of HMRC on 9 November 2005.
181.
At that meeting, it was confirmed that 4A had only done one deal so far,
the purchase from In2digital and sale to SB in September. The main business
activity was described to HMRC by Mr Morton as “Wholesale supplies of various
items, principally mobile phones, clothes/sports footwear and electronic goods
and also tools and clocks.” The subsidiary business activities were described
as follows:
“Building work (none conducted to date)
E-bay sales of phones, TV’s and antiques (no immediate intention to start this trade just yet as the traders have no storage space nor will they at Regus House, Chester)
Car sales now discontinued”
“Wholesale deals are financed by receiving payment from the
customer and then using the money to pay the supplier. It was not known why
suppliers would effectively extend credit to 4A except to say that this is the
way things are done in the wholesale trade and the one supplier used to date
(In2digital Ltd
– 841 2205 68) were said to be known to both 4A and Spearmint
Blue”.
183.
No explanation was given as to the £50,000 or so that had supposedly
been spent on buying cars for 4A’s business, either as to the supposed origin
of those funds or as to what had happened to the cars themselves. We find on a
balance of probabilities that Mr Morton had simply fabricated the self-billing
invoices for most or all of the cars in order to obtain a VAT
registration and
he had never actually bought them.
184.
Mr Morton said 4A did not have a UK bank account. They banked with
FCIB, which they had found out about “online” (and not through a contact with a
business associate, as he had stated in the FCIB account application – see [162].
It is interesting to note that Mr Morton’s account changed over the following
year: he informed Officers Sharrock and Flint of HMRC on 13 September 2006 that
he had found out about FCIB when visiting
a company in Leeds while he was still
with SB). 4A’s accountants were named as UHY Hacker Young of Chester, and the bookkeeper
was identified as Sheila White (i.e. the same as SB’s bookkeeper). She also
compiled the
VAT
returns.
185.
Although Mr Morton told the officers that present plans included only UK sales, he did not discount dealing with overseas customers and suppliers in the near
future. The officers saw a board on the wall with details of two Portuguese
traders, a number of UK traders known to them to be involved in what they
regarded as MTIC trading, and details of various
types of goods which they saw
commonly traded in MTIC deals. Mr Morton said he had contacted the traders in
question (rather than being contacted by them) and, crucially, that the contact
details for them had been obtained from SB. No deals had yet been concluded
with them (apart from the one deal with In2digital) because of Redhill’s
refusal to clear 4A’s
VAT
number.
October to December 2005
186.
4A started to trade in increasing volumes.
In its
VAT
return for the
VAT
quarter to 31 December 2005, it reported total sales of £7.3 million,
generating output
VAT
of just over £812,000. This implies that 4A was starting
to do its own export/despatch deals as the £812,000 of output
VAT
would have
been generated by standard rated sales of approximately £4.6 million, leaving
£2.7 million of exempt or zero rated sales. There is no indication that 4A may
have been making exempt or zero-rated supplies within the UK and we find that the £2.7 million figure most probably represented export or despatch
deals by 4A.
187.
Included in 4A’s December return was a set of three deals in which on 20
December 2005 it purchased various
items of clothing from Andrevias SRL
(“Andrevias”), a Romanian company, to a
value
of approximately £2.6 million
without paying
VAT
and then sold them on at a small profit to SB, generating
£455,054 of output
VAT.
That output
VAT
represented all but about £2,000 of
SB’s input
VAT
for its quarter ended 31 January 2006, all of which it reclaimed
from HMRC (having generated no output tax during that quarter). This reflects
the fact that SB’s only material transaction during that quarter was its
purchase of this clothing from 4A and, we infer, its sale overseas. We were
not told to whom this clothing was sold by SB. We do know, however, that 4A
made a total profit of just £13,001.55 on this £2.6 million sale – almost
exactly 0.5%. SB received payment of its
VAT
repayment claim (of £457,004.71)
for the period ended 31 January 2006 on 26 May 2006.
188.
4A’s VAT
return for the quarter to 31 December 2005 claimed a net
overall
VAT
repayment of £210.76 on total sales of over £7.3 million. Given
that 4A had clearly made a high level (some £2.7 million) of its own
export/despatch sales, this close matching between input and output
VAT
cannot
have simply been a reflection of 4A’s fine profit margins. Nor do we consider
it was an accident. On a balance of probabilities, we find that 4A was
intentionally balancing its export/despatch sales (which, on their own, would
have generated a large repayment claim) with its standard rated UK sales of imported/acquired goods with the purpose of avoiding any problems in reclaiming
the
VAT
repayment which would otherwise have arisen. In doing so, it was using
SB’s services (and indeed its money). We note that the set of trades with SB
which eliminated 4A’s repayment claim took place on 20 December 2005,
very
close to the end of 4A’s
VAT
accounting period – by which time Mr Morton would
have had a clear picture of the
value
of export/despatch sales 4A would need to
achieve in order to eliminate its
VAT
repayment claim.
January to March 2006
189.
In 4A’s VAT
return for the quarter ended 31 March 2006, it reported
£86.8 million of sales and £85.4 million of purchases. Its output
VAT
was
£14,268,019 and its input
VAT
was £14,264,700. Its net
VAT
liability was
therefore £3,318.88 on sales of £86.7 million. Once again, we find this
situation (of near balancing of input and output
VAT
on such a large turnover)
did not happen by accident. If all of 4A’s reported outputs had been standard
rated, it would have incurred an output
VAT
liability of £15,184,051.92. Its
reported output liability was £916,032.82 less than this, implying zero rated
export/despatch sales of £5,234,473. Clearly 4A entered into a similar
value
of acquisition purchases which were sold on in standard rated UK sales to balance out these export/despatch sales. We have
very
little specific
information about 4A’s dealing during this period beyond these amounts, and
nothing to indicate that 4A traded with SB during the period. We therefore
draw no significant conclusions in relation to it, except that it shows a clear
continuation of the pattern of the previous three months in closely matching
input and output
VAT
amounts on
very
large
volumes
of sales and purchases involving
both UK and overseas elements.
192.
On 28 April 2006, 4A bought a consignment of laptops from Mighty Mobile
SL (“Mighty Mobile”) in Spain for £2,558,951.50 free of VAT
and sold them
to SB in a standard rated supply for £2,571,270 plus
VAT.
The input
VAT
generated for SB by this sale was £449,972.25, which represented all but about
£2,300 of SB’s total input
VAT
in its
VAT
quarter ending on 30 April 2006. SB
sold these laptops to Pateo Iberico LDA in Portugal (“Pateo”) free of
VAT,
thus
generating a
VAT
repayment claim of £452,323.89 for that
VAT
quarter. This is
consistent with Mr Chester’s statement that SB’s only export finance deal
during that
VAT
quarter was this deal with 4A. SB received payment of its
VAT
repayment claim on 11 July 2006.
193.
This deal fell into 4A’s VAT
quarter ended 30 June 2006. It is fair to
say that the evidence presented to us as to the picture of 4A’s overall trading
in that quarter was unclear. After several attempts to clarify the picture for
us, Officer Graham Taylor (the officer in charge of 4A’s dealings at HMRC) was
unable to do so and Mr Mandalia was forced to abandon his evidence insofar as
it related to that period.
194.
Some basic details however do emerge from 4A’s VAT
return for the period
April to June 2006, which showed £256.5 million of purchases and £254.7 million
of sales. Its total input tax claimed was £44.9 million and its total output
tax declared was £44.6 million. The amount of output tax declared is exactly
17.5% of the sales declared, which would imply that 4A made no export/despatch
sales during the period. The amount of input tax claimed matches almost
exactly (to within £500) the amount of purchases reported, which would imply it
made no significant import/acquisition purchases (notwithstanding its known
purchase of computers to a
value
of £2.6 million from Spain referred to at [192]). The net result was a
VAT
repayment claim of £313,830.45.
195.
Whilst Officer Taylor’s evidence as to the details of 4A’s trading
during the quarter in question was unclear, it did include an attempt at a
listing of 4A’s deals by reference to material supplied to HMRC by 4A and
(possibly) from other sources also. From that listing, it is clear that
whatever the true picture, 4A had told him that it did in fact carry out large
numbers of acquisition and despatch deals during April, May and June 2006
(including the acquisition of laptops that were sold to SB). The picture that
emerges overall is that 4A was carrying out such a massive volume
of deals
during this period that it had no full and accurate record of what it had
purportedly done – in effect its
volume
of trading completely outpaced its
ability to keep control of its accounting and administration.
196.
The final result of HMRC’s verification
of 4A’s return for April to June
2006 was (in a decision issued on 15 October 2009) to deny 4A’s £313,830.45
repayment claim and replace it with a £12,647,357.30
VAT
liability. There were
numerous adjustments to the return figures as submitted, but the existence of
an overall
VAT
liability resulted entirely from the fact that HMRC denied £14.8
million of input tax claimed by 4A, on the grounds that the relevant supplies
could be traced back to fraudulent evasion of
VAT,
of which they considered 4A
should have been aware. The other main adjustments made to the return by HMRC
(which would, on their own, have converted the £313,830.45 repayment claimed to
the much higher repayment amount of £2,128,374.48) were as follows:
197.
We are satisfied that the above adjustments made by HMRC are
substantially correct (based as they are largely or wholly on information
supplied by 4A). 4A has certainly not disputed them (though it is now
insolvent). Whether or not the denial of £14.8 million of input VAT
of 4A can
be justified, we are satisfied that the other inaccuracies in 4A’s
VAT
return
for the relevant period are of such a scale and character that they can only be
explained by either fraud or complete incompetence (or both).
198.
From the copies of SB’s bank statements supplied to us, it is apparent
that SB paid 4A for the computers sold on 28 April 2006 in instalments up to
the end of May 2006. SB’s FCIB bank statement shows five different payments
made by it which all refer, in slightly different ways, to that deal. Four of
those payments were made by it on 17 May 2006, immediately following (in each
case) the receipt by SB of the same or slightly larger payments to its FCIB
account from an unidentified payer. The payments made by it on that date
totalled £2,339,700. A fifth payment (of £372,672.50) was made by SB on 26 May
2006 immediately following its receipt of that amount from an unidentified
payer on the same day. Thus by 26 May 2006, SB had received and paid on to 4A
a total of £2,712,372.50. It made a further payment to 4A on 31 May 2006 out
of its RBS bank account for £308,595. This brought its total payments to 4A up
to £3,020,967.50 (just £274.75 short of the total of £3,021,242.25 payable in
respect of the laptops deal of 28 April 2006). We therefore infer that the 31
May 2006 payment was effectively the final significant payment for the 28 April
2006 deal. Mr Chester was not asked why the payments were made in instalments
over such an extended period. We note however that SB would not have been in a
position to make any of the payments except out of the payments received from
the third party (in relation to the bulk of the payments) or out of the VAT
repayment received from HMRC on 26 May 2006 (in relation to the final
instalment). Thus 4A was clearly content to extend significant credit to SB,
both in amount and in time.
199.
After the dealings at the end of April 2006, SB had funded some £900,000
of VAT
by paying that amount to 4A and claiming it back from HMRC. As
mentioned above, the first half of this amount was received by SB from HMRC on
26 May 2006 and the second half was received on 11 July 2006.
200.
We heard almost no evidence as to the events leading up to the
transactions which occurred on 4 and 17 July 2006, which are the subject of
this appeal. Mr Chester said these transactions were entered into as part of
SB’s “export financing” business, just as the previous transactions with 4A had
been. He said that the receipt of a £450,000 VAT
repayment from HMRC which all
arose from SB’s previous export financing deals with 4A seemed to him to
“complete the puzzle”, provide reassurance that the business model was sound
and give comfort that HMRC regarded 4A as a safe partner to deal with. This
must have been referring to the refund for the 01/06 quarter which was received
by SB on 26 May 2006.
201. The deals in question were all purchases from 4A and sales to Pateo as follows:
Deal number and Date |
Goods |
SB’s purchase
price (+ ![]() |
SB’s sale price |
SB’s input
![]() |
1 - 4 July 2006 |
4850 iPod Nano 4 GB (black) |
£654,750 |
£690,640 |
£114,581.25 |
2 - 4 July 2006 |
4500 iPod 30GB |
£787,500 |
£830,700 |
£137,812.50 |
3 - 4 July 2006 |
4800 iPod Nano 4 GB (white) |
£648,000 |
£683,760 |
£113,400 |
4 - 4 July 2006 |
2475 iPod Nano 1 GB (white) |
£195,525 |
£206,291.25 |
£34,216.88 |
5 - 17 July 2006 |
2750 TomTom Go 910 SatNavs |
£943,250 |
£995,087.50 |
£165,068.75 |
6 - 17 July 2006 |
3000 TomTom Go 710 SatNavs |
£960,000 |
£1,012,800 |
£168,000 |
7 - 17 July 2006 |
3200 TomTom Go 510 SatNavs |
£777,600 |
£820,320 |
£136,080 |
8 - 17 July 2006 |
4342 TomTom Go 300 SatNavs |
£816,296 |
£861,235 |
£142,851.80 |
|
Totals |
£5,782,921 |
£6,100,833.75 |
£1,012,011.18 |
202. It is worth mentioning that some of the dates and item descriptions set out in the above table are not totally consistent in the transaction documents supplied to HMRC (which themselves contain a number of internal contradictions). What is clear and consistent, however, is that SB made a steady 5.5% mark up on every transaction, in line with the margin agreed with 4A.
204.
All the deals involved a VAT-free
intra-EU acquisition by 4A from Mighty
Mobile (in Spain), a standard-rated intra-UK sale from 4A to SB and a
zero-rated intra-EU despatch by SB to Pateo in Portugal. Both SB and 4A knew
this to be the case. 4A would have had no
VAT
funding requirement if it had
sold direct to Pateo rather than through SB. The effect of 4A’s sale to SB was
to generate a
VAT
output liability that would not otherwise have arisen. No
information was available to us about how and when the goods were brought into
the UK as part of the process.
205.
Mr Chester told us he was living in the USA by the summer of 2006, and the
various
documents in both deals are all signed on behalf of SB by Mr Harris.
Mr Chester said that he was nonetheless able to give all the necessary evidence
in relation to those transactions, and he explained that Mr Harris was mentally
incapable of giving evidence due to the effect that the whole experience had
had on him. Mr Chester said he was physically in the USA while the 17 July deals were taking place. He accepted he was at SB’s office in the UK
at the time of the 4 July deals (when he logged onto SB’s bank account using a
computer with the same IP address as that used by Mr Harris). If he was indeed
in the USA on 17 July, it appears that he had returned to the UK by 19 July
2006 (when payment was made for the 17 July deals) as the FCIB bank records
show that he again logged onto SB’s bank account on that date using a computer
with the same IP address as that used by Mr Harris.
206.
In line with SB’s business model, he said that none of the deals had
been originated by SB. All except one had been originated by 4A and the last
deal had been originated by SB’s customer Pateo. He said the reason for this
was that Pateo had become disenchanted with 4A’s level of service and so they
had approached SB direct with a request for stock, which SB had been able to
source through 4A. The documentary evidence does not accord with this
assertion, and whilst we accept Pateo may have voiced
some irritation to SB
about 4A, we find that all eight deals were effectively agreed between Pateo
and 4A and SB were then involved in order to deal with the dispatch of the
goods to Pateo.
(1)
His supplier (4A) was well known to him. He knew and trusted Mr
Morton. He was aware that 4A was acquiring the goods from an overseas supplier
(Mighty Mobile) and therefore he knew there would be no UK VAT
default in the
supply chain.
(2)
He would not be supplying or paying for the goods until SB had been paid
for them. There was accordingly no credit risk. Therefore extensive financial
checks would not provide any further assurance than he already had. There was
no need to carry out such checks from the “general due diligence” point of view
because of his knowledge as set out at (1) above.
208.
In any event, SB checked the validity
of 4A’s and Pateo’s
VAT
numbers by
carrying out Redhill checks on them. Whilst SB had clearly checked 4A’s
VAT
number before, there is no evidence that it tried to check Pateo’s Portuguese
VAT
number until 5 July 2006, the day after the first four deals (when it sent
a fax to HMRC’s Redhill office, receiving a reply on 7 July 2006 which
confirmed Pateo’s
VAT
registration). It sent a further check request on 18
July 2006 (the day after the SatNav deals), receiving a reply on 24 July 2006.
To the extent relevant (which Mr Chester considered small) SB relied on the
commercial checks on Mighty Mobile carried out by 4A. SB also instructed UHY
Hacker Young to carry out basic Companies House checks on 4A.
209.
In addition, SB received from Pateo a fax dated and timed 4 July 2006 at
13.40 which included a “Model: Letter of Introduction” dated February 2006,
some translated company information and a copy of Pateo’s VAT
registration
certificate in Portugal. Mr Harris forwarded this pack to UHY Hacker Young on
the same date, with the following fax:
“Dear Christian
Please see attached copies of Patio Iberico LDA, a company based in Portugal who we will be trading with. Please complete the due diligence checks as fast as possible.”
210.
In response to this fax, it seems that UHY Hacker Young sent a further
fax to HMRC’s Redhill office asking for confirmation of Pateo’s Portuguese VAT
number, but there was no evidence before us that they had done anything else.
211.
In short, beyond establishing at some time around the commencement of
trading that its supplier and customer both existed and had VAT
numbers, SB
took no significant steps to establish any further detail about them.
According to Mr Chester, this was on the basis that the supplier was well known
to SB and the customer was not really SB’s customer due to the fact that SB was
simply financing the
VAT
cost of what it saw as 4A’s sale to Pateo. Mr
Chester’s argument was that if the transactions had been fraudulent, SB would
have made
very
sure that “all HMRC’s boxes were ticked” and the paperwork would
not have been dealt with as lackadaisically as it was.
212.
Mr Chester was somewhat vague
about this, presumably because he was not
closely personally involved. He asserted that the negotiations for the trading
may well have been going on for some time before it actually took place. Mr
Harris (who dealt with the detail) did not give any evidence.
“Re: New Stock offer
Dear Jeff
Please find additional stock for your consideration.
4500 x Ipod-30GB Black/Video
with 2.5
Colour display @ £184.60 each
4850 x Ipod-4GB Black/Video
@ £142.40
each
4800 x Ipod Nano 4GB White @ £142.45 each
2475 x Ipod Nano 1 GB White @ £83.35 each
We would need an urgent response on this stock to secure it.
Many thanks and look forward to your reply
Best Regards
Regards
[Signature]
Bruce Harris
Director”
214.
This fax has a number of oddities. First, it misspells the name of its
intended recipient (who was Geoff, not Jeff Cook at Pateo). Second (and most
crucially) its wording is entirely inconsistent with what Mr Chester described
as SB’s business model. If SB was simply providing export finance by funding
the VAT
cost on a sale that was already arranged between Pateo and 4A, it would
be expected that this first contact would refer to the deal between Pateo and
4A in some way; it would certainly not have been headed “New Stock offer”; it
would not have been offering “additional stock for your consideration” and it
would not have required “an urgent response on this stock to secure it”. It
should be remembered that, on Mr Chester’s evidence before us, SB’s sole
business model was export finance and therefore this could not have been some
inappropriately used template stock offer from SB’s separate “trading”
business. We find unconvincing Mr Chester’s explanation that the stock offer
was simply part of a required “process” in order to document the relationship.
216.
On 2 October 2006, Officers Jane Carr and Jayne Meek visited
SB. Mr
Chester, Mr Harris and Mr Grant Counsell (“Mr Counsell”, who had been appointed
as company secretary of SB on 17 July 2006) were at the meeting, along with
representatives of UHY Hacker Young. At that meeting, Mr Chester explained
that SB’s involvement in the transactions was simply to finance the outstanding
VAT
on export sales. The suppliers and customers were seen as belonging to 4A
(which was why SB had signed the contractual undertaking not to deal with them
without 4A’s agreement). It follows from this that SB would simply have been
dealing with Pateo at the direction of 4A.
217. In SB’s letter dated 16 February 2007, however, Mr Counsell said:
“In this case we set up the export trade to Portugal, 4A Developments had no knowledge of where the goods would eventually be shipped to and we had no knowledge of where the goods had come from, or how long they had been in the UK.”
218. And again, in an email from Mr Harris of SB to HMRC on 19 March 2007, he said:
“... in fact Spearmint Blue trades on its own behalf, as clearly seen is in this case. Patio in Portugal approached us for goods which we were able to secure from 4A Developments.
This was clearly a buy and sell transaction and nothing to do with financing 4A Developments.”
219.
Thus there are clearly a number of differing accounts emanating from SB
as to how the dealings between SB and Pateo originated. Mr Chester told us
they originated through 4A requesting SB’s services as “export financier” for
overseas trades which 4A had already lined up. The contemporaneous fax seems
to suggest that SB obtained some kind of offer of the stock from 4A and then
originated the sale itself by approaching Pateo as a potential customer. In
SB’s letter of 16 February 2007, Mr Counsell appeared to back this view
up, but
in Mr Harris’s email of 19 March 2007, he said Pateo had approached SB for the
goods.
222. As mentioned above, there is some contradiction in the evidence.
223.
Mr Chester gave evidence before us that SB knew the identity of both
customer (Pateo) and supplier (Mighty Mobile) of 4A for whom SB was being asked
to provide the “export finance”. This was necessary in order to satisfy SB
that 4A was the importer and therefore there would be no VAT
default in the
chain of supplies leading up to SB. This tallied with what he told HMRC in the
verification
meeting on 2 October 2006. However, in his letter dated 16
February 2007 Mr Counsell told Officer Carr that:
“In this case 4A Developments supplier was overseas and therefore there could be no MTIC fraud, this meant that the name of the supplier was not disclosed.”
225. We also find that 4A knew SB were selling to Pateo, indeed they were requesting them to do so.
228.
In “Deal 1” (the sale of 4,850 iPod Nano 4GB on 4 July 2006), there was
some confusion about the model of iPod being sold. It appears to have been
partially clarified, but SB’s invoice to Pateo includes an incorrect
identification of the iPod model being sold. We find it strange that SB should
have been so slack about such matters in the context of a transaction to a
value
of £690,640. It is clear that the error was noticed in earlier documents
but it seems the invoice was issued the day before the deal took place with the
incorrect specification in it and both parties were content to let the
incorrect invoice stand as it did not have any great significance to either
party from the commercial point of
view.
That invoice was actually dated 3
June 2006 (Mr Chester said this was clearly a typo and the correct date should
have been 3 July 2006). In its instructions to the freight forwarders to
inspect the goods (on 5 July 2006) and to release them for shipping to France (on 6 July 2006), SB continued to refer to the incorrect description for these
goods.
229.
In “Deal 2” (the sale of 4,500 iPod 30GB Video
units) the purchase order
to SB from Pateo and the sales invoice to SB from 4A were both dated 4 July
2006, but SB’s invoice to Pateo was dated 3 June 2006 (presumably a typing
error for 3 July 2006). This error was repeated in “Deal 3” (the sale of 4,800
white iPod Nano 4GB units) and in “Deal 4” (the sale of 2,475 black Ipod Nano
1GB units).
230.
In Deal 3, there were again two versions
of SB’s purchase order to 4A,
one of which had an incomplete description of the products (omitting the word
“Nano”) and the inspection report given to SB by the freight forwarder referred
to the goods as being “iPod 4GB White
Video”
(rather than Nano) – which does
not appear to have been questioned by SB.
232.
Mr Chester gave evidence that the various
purchase orders, proforma
invoices and invoices were not necessarily delivered in any particular order.
It was simply felt necessary to have all the pieces of paper in place at some
point in order to be able to tick the necessary boxes in SB’s process. Because
of the close relationship of trust with 4A, he was not unduly concerned about
getting all the documents issued rigidly in the correct order at the right
times.
233.
Mr Chester said that SB had simply used the freight forwarders who held
the goods when SB bought them from 4A. He said he had made one attempt to
inspect their premises, but had not been able to gain access and had left again
without seeing anyone. This strikes us as surprising, considering that he
relied on them to store and transport SB’s goods to the value
of approximately
£6 million.
235.
He explained his attitude to these issues by explaining that he saw SB’s
role as taking ownership of the goods for only a very
short time, and
effectively having no risk because it would not be paying for the goods until
it had received payment (and if it did not receive payment, it would be able to
cancel the transaction without difficulty). This does not fit comfortably with
SB’s obligations under its “Preferred Supplier” Agreement with 4A, under which
it expressly assumed responsibility for costs of insurance, transport and any
inspections (as well as product warranty claims).
236.
HMRC had obtained extensive evidence as to the payments made for the
various
transactions, mainly from the records of FCIB itself which had been
seized by the Dutch authorities. From this, it emerged that:
(1)
Apart from SB’s payment to 4A of part of the VAT
element of 4A’s
invoices (which was dealt with through SB’s Royal Bank of Scotland bank account), all payments were made by direct transfer between the accounts of
the
various
participants held at FCIB.
(2) Payment for all eight transactions started with a company called Andrevias in Romania and circulated in the order Andrevias – Pateo – SB – 4A – Mighty Mobile – Andrevias.
(3) In many of the transactions, the payment was circulated in instalments, therefore needing to circulate two or three times before the related invoices were paid off.
(4) All the payments for deals 1 to 4 (which took place on 4 July 2006) were made on 4 July.
(5) All the payments for deals 5 to 8 (which took place on 17 July 2006) were made on 19 July 2006.
(6)
The money received by SB through FCIB was insufficient to pay its
liability to 4A (because although SB received money including its 5.5% profit
margin over what it owed to 4A, it also had to pay 4A the 17.5% VAT
which it
was funding). SB therefore simply paid on to 4A through FCIB all the money
that it received from Pateo, leaving the balance of the
VAT
outstanding, to be
settled separately.
(7)
SB made two payments to 4A from its Royal Bank of Scotland account. The first (£267,384.11) was made on 5 July 2006. For reasons which are
unclear, it was £7,010.27 less than the outstanding VAT
balance of
£274,394.38. The second (£385,997.49) was made on 20 July 2006. For reasons
which are unclear, it was £33,705.86 less than the outstanding
VAT
balance of
£419,703.35.
(8) On the 8 deals in question, 4A’s gross profit was £29,692, yet SB apparently underpaid 4A by £40,716.13. Mr Chester was not asked why this should be, nor is it apparent from any of the documents before us.
(9)
SB also paid freight forwarders’ costs (mainly transport but also
inspection) totalling £12,000 plus VAT.
The costs of £3,000 plus
VAT
for the
first four deals were paid on 21 July 2006 and the costs of £9,000 plus
VAT
for
the last four deals were paid on 7 August 2006.
(10) The payments which have been evidenced by the FCIB material reflect exactly the known invoice prices between Mighty Mobile and 4A, between 4A and SB and between SB and Pateo. We see no reason to suppose that the payments from Andrevias to Pateo and from Mighty Mobile to Andrevias will not also reflect the invoice prices between them respectively.
Deal 1
238.
In deal 1, Andrevias transferred a first instalment of £210,000 to Pateo
at 16:36:06 (it is not clear what time zone the server clock was set to, but it
is the comparative times, rather than the actual times, that are important).
That same amount was transferred to SB at 16:48:17. At 17:03:37, Mr Chester
logged onto the system
and he then logged off again at 17:10:35. He presumably
saw that the money had arrived and needed to be transferred on, but it is not
clear why he did not do so himself. Instead, Mr Harris logged onto the
system
(from a computer with the same IP address as Mr Chester) at 17:10:57 (some
twenty seconds after Mr Chester logged off); he transferred the money on to 4A
at 17:12:19 and then logged off at 17:13:09. Mr Morton, in the meantime, had
logged onto the
system
at a different computer at 17:04:08 (some thirty seconds
after Mr Chester had first logged on) and the money had been in 4A’s account
for about thirty minutes before he transferred it on to Mighty Mobile at
17:45:26. A Mr Gromer of Mighty Mobile logged onto the
system
at 17:45:30
(four seconds after Mr Morton had sent the money to Mighty Mobile) and sent it
back to Andrevias at 17:51:19 (within six minutes of receipt).
239.
Within another six minutes, Andrevias (a Mr Iascov, who had logged onto
the system
at 17:48:41, three minutes after Mr Gromer of Mighty Mobile had done
so) transferred a second payment of £481,610 to Pateo at 17:57:10. Just over
six minutes later (at 18:03:14) Mr Cook of Pateo had transferred it (less his
profit margin) to SB. Mr Chester logged onto his
system
at 18:25:21 (some 22
minutes later) and transferred the amount he had received to 4A at 18:27:08.
Mr Morton logged onto his
system
at 19:25:36 (nearly an hour later) and less
than eight minutes afterwards (at 19:33:06) he transferred the relevant balance
to Mighty Mobile. Mr Gromer, who had been logged on since 18:52:46 (some forty
minutes) transferred the relevant balance back to Andrevias at 19:42:04 within
nine minutes of receiving it.
240.
In the money flows related to deal 1, Andrevias paid out £691,610 and it
received back £650,385. The difference of £41,225 represents the profits made
(and retained) by the various
participants in the circle of transactions.
Those profits accrued as follows:
(1)
SB: £35,890 (but if SB’s VAT
repayment were to be denied, this apparent
profit would turn into a loss of more than double that amount)
(2) 4A: £3,395
(3) Pateo: £970
(4) Mighty Mobile: £970.
Deal 4
242.
When asked how it happened that Mr Morton logged onto 4A’s account from
the same IP address as Mr Chester had used to log onto SB’s account, Mr Chester
said Mr Morton was on site at the time by coincidence – his wife stored
furniture for her shop at SB’s premises and they were probably sharing a glass
of wine. He thought that either he or Mr Harris had told Mr Morton verbally
that the money had arrived.
243.
In the money flows related to deal 4, Andrevias paid out £207,157.50 and
it received back £193,545. The difference of £13,612.50 represents the profits
made (and retained) by the various
participants in the circle of transactions.
Those profits accrued as follows:
(1)
SB: £10,766.25 (but if SB’s VAT
repayment were to be denied, this
apparent profit would turn into a loss of more than double that amount)
(2) 4A: £990
(3) Pateo: £866.25
(4) Mighty Mobile: £990.
Deal 6
248.
In the money flows related to deal 6, Andrevias paid out £1,014,000 and
it received back £954,000. The difference of £60,000 represents the profits
made (and retained) by the various
participants in the circle of transactions.
Those profits accrued as follows:
(1)
SB: £52,800 (but if SB’s VAT
repayment were to be denied, this apparent
profit would turn into a loss of more than double that amount)
(2) 4A: £4,800
(3) Pateo: £1,200
(4) Mighty Mobile: £1,200.
Deal 8
250.
In the money flows related to deal 8, Andrevias paid out £862,321.20 and
it received back £811,085.60. The difference of £51,235.60 represents the
profits made (and retained) by the various
participants in the circle of
transactions. Those profits accrued as follows:
(1)
SB: £44,939.70 (but if SB’s VAT
repayment were to be denied, this
apparent profit would turn into a loss of more than double that amount)
(2) 4A: £4,342
(3) Pateo: £1,085.5
(4) Mighty Mobile: £868.40.
253.
The goods in the first four transactions (which were completed on 4 July
2006) were paid for by all parties in the circle on that day, except for the
balance of the VAT
due from SB to 4A (which was largely, but not totally, paid
on 5 July). It is accepted that the goods were not actually shipped to Pateo
at a warehouse in France until 13 July 2006 (they left Dover on an 8pm
departure on that day). We find this surprising, especially given that the
purchase orders from Pateo stated that delivery was “URGENT”. Mr Chester
confirmed that SB had never been chased by Pateo for delivery.
254.
The goods in the last four transactions (which were completed on 17 July
2006) were paid for by all parties in the circle on 19 July 2006, except for
the balance of the VAT
due from SB to 4A (which was largely, but not totally,
paid on 20 July 2006). The goods appear to have been shipped to Pateo at a
warehouse in France on 19 July 2006.
255.
HMRC say that the present case is a contra trading situation. They argue
that they can therefore establish a connection to VAT
fraud either:
(1)
By looking through the contra trader 4A to the original VAT
frauds of
the suppliers in the “dirty chains” leading up to 4A, or
(2)
directly to what they say is the VAT
fraud of 4A itself in carrying out
its contra trading scheme in order to conceal the original
VAT
fraud of the fraudulent
defaulters in the “dirty chains” of supply leading up to 4A.
Was there VAT
fraud by the traders in the supply chains
leading up to 4A?
256.
HMRC provided evidence of a number of fraudulent evasions of VAT
by
traders in chains of supplies of
various
goods leading up to 4A. HMRC’s task
was rendered difficult by the poor state of the records produced to it by 4A
and others involved, but the relevant parts of the picture given by HMRC were
not seriously challenged by SB. They did not address the point at all in their
closing submissions (i.e. they did not indicate that it was still in dispute)
and Mr Chester accepted in cross examination that there was clearly “an
attempt” at tax fraud in the dirty chains leading up to 4A. We find fraudulent
evasion to have been established, as follows.
257.
During its accounting period July to September 2006, 4A carried out 3
deals in which it bought from a UK supplier and sold to an EU customer. These
three deals would, on their own, have generated a net VAT
repayment claim of
£1,012,391.45. (Originally, 4A claimed to have carried out a further five such
deals, generating a
VAT
repayment of a further £4,162,375, but it was
established by HMRC that these deals had in fact not gone ahead.)
258.
During the same accounting period, 4A carried out 11 deals in which it
bought from an EU supplier and sold to a UK customer. Eight of those sales are
those involved in this appeal. Those eight sales to SB generated £1,012,011.18
of output VAT
and the other three sales (to a company called Chatterbox UK
Limited) generated £251,152.66 of output
VAT.
259.
4A should therefore have been paying a net VAT
amount for the three
months to 30 September 2006 of £250,772.37 in respect of these transactions,
but its
VAT
return claimed a repayment of £2,497,225.45. It has not been
possible to reconcile the
VAT
return made by 4A with the other information
supplied to HMRC by it and by other traders.
260. In the three deals in which 4A purchased from a UK supplier, the supplier in question was a company called Woodworks (Sheffield) Limited. The deals, all of which were invoiced to 4A on 4 July 2006, were as follows:
Goods |
Price ex ![]() |
![]() |
1520 x Hewlett Packard NW8240 PG818ET |
£2,287,600 |
£400,330 |
1512 x Sony |
£1,903,608 |
£333,131.40 |
![]() |
£1,593,886 |
£278,930.05 |
Totals |
£5,785,094 |
£1,012,391.45 |
261.
HMRC were able to trace the chain of supply for the first two of these
deals back to a company called DTM Provisions Limited (“DTM”). This company
was registered for VAT
with effect from 1 March 2006. It had described its
business as “supply of catering supplies”. There were four
verbal
contacts
between HMRC and an individual who called himself Dax Leroy James Robateau
around the time of DTM’s
VAT
registration. HMRC
visited
DTM’s supposed
principal place of business on 27 and 28 June 2006 but were unable to speak to
anyone. They left a calling card or letter, in reply to which a telephone call
was received from an individual who called herself Natalie Edwards. She
claimed not to be an employee of DTM, but was
visiting
the premises to check
the post on behalf of its Director, a Mr Pearce, who was supposedly away on
holiday. An appointment was made to meet Mr Pearce, but an individual using
that name called to cancel the appointment, saying he had nothing to do with
DTM.
262.
DTM never submitted any VAT
returns. It was compulsorily de-registered
for
VAT
in June 2006 and assessments were raised against it by HMRC totalling
some £23.5 million, based on the information obtained about DTM’s supplies from
other traders. An amount of £732,398.80 was included in those assessments in
respect of the two supplies purportedly made by DTM to a company called Alartec
Limited (“Alartec”). Alartec had supplied the goods to Woodworks.
263.
We find that DTM fraudulently evaded payment of the VAT
totalling
£732,398.80 due on its supplies of the goods to Alartec, which goods were ultimately
supplied to 4A and then sold overseas by it in a zero rated sale which would,
in the absence of any other transactions by it, have generated a net input tax
repayment claim for 4A of £733,461.40.
265.
Woodworks was incorporated on 23 May 2003. In its application for VAT
registration dated 20 January 2004 its principal business was described as
“flooring distributor”. It was registered for
VAT
with effect from 1 February
2004. Its
VAT
returns for the three month periods ended 30 April and 30 July
2004 reflected, respectively, a £248.77
VAT
repayment claim (with no taxable
supplies made) and nil. It then rendered no returns until it rendered a return
for the 15 month period from 1 August 2004 to 31 October 2005. That return
reflected a net
VAT
liability of £200.17, but made up of output tax of
£58,991.10 set off by input tax of £58,790.93. It transpired that Woodworks
had recently changed hands and the new directors had started to carry out
wholesale trading with a first deal taking place on 18 October 2005. In that
deal, they had bought and sold some diabetic testing strips – both supplier and
customer being UK traders. It was established at a
visit
in November 2005 that
Woodworks knew nothing about the products, or even whether they were licensed
for use in the UK.
266.
The volumes
of Woodworks’ trading increased rapidly. In its
VAT
return
for the three months to the end of January 2006, Woodworks reported that it had
made £50.7 million of sales and £44.5 million of purchases. Large
volumes
of
trade with EU traders were involved, the net result being a
VAT
repayment claim
of £141,781.30. In its April 2006 return, the reported sales and purchases had
grown to £96.8 million and £94.9 million respectively, though the result was a
net
VAT
liability of just £10,309.63; EU trade was £14.8 million and £13
million (sales and purchases respectively). In its July 2006 return, the sales
and purchases had grown again to roughly £100.9 million each, with EU trade
more than £10 million in each direction; the end result was a net
VAT
repayment
claim of £8,039.42.
267.
Woodworks identified 111 deals done by it during its VAT
period for May,
June and July 2006. In eight of them (“acquisition deals”), it bought from EU
suppliers and sold to UK customers. In seven of them (“broker deals”), it
bought from UK customers and sold to EU suppliers. In the other 96 (“buffer
deals”), it bought from and sold to UK traders.
269.
Clearly in the eight acquisition deals reported by Woodworks, HMRC did
not trace the supply chains back to any UK VAT
loss. In the seven broker
deals, they traced all the supply chains back to a fraudulent
VAT
loss incurred
through the use of a hijacked trader
VAT
registration. Of the 96 buffer deals,
the majority traced back to fraudulent
VAT
defaults.
270.
In the circumstances, we are satisfied on a balance of probabilities
that the third deal referred to in the table at [260] above is connected either
with a fraudulent default by a trader earlier in the chain of supply to
Woodworks or with the fraudulent contra-trading activities of Woodworks itself
(which almost exactly matched its reported VAT
input and output liabilities for
both its 04/06 and 07/06 periods notwithstanding total reported sales of £197.6
million and purchases of £195.8 million in those two periods, including sales
to the EU of £25.6 million and purchases from the EU of £24.1 million).
271.
We therefore conclude that, on a balance of probabilities, all three
purchases of 4A listed in the table at [260] were connected with VAT
fraud
committed by traders in the supply chains leading up to 4A.
Was there VAT
fraud by 4A?
273.
The question also arises as to whether 4A itself was acting as a
fraudulent contra trader. If it was, then SB’s purchase would clearly be
connected to 4A’s fraud (see [21] above) and HMRC would be entitled to deny SB
its input VAT
if they can show that SB knew or should have known of 4A’s
fraudulent activities. This entitlement would arise irrespective of any
difficulties over showing that SB knew or should have known of the original
fraudulent defaults.
276.
We do not find it credible that the circular transactions were put
together simply to allow profits to be generated in various
amounts by all
participants in the circle apart from Andrevias, at the expense of Andrevias
(which itself initiated the circle and provided the funds for it). There must
have been another purpose.
277.
We can see no other purpose to the transactions apart from the creation
of an output VAT
liability for 4A and a corresponding
VAT
repayment claim for
SB, coupled with small profits for 4A, Mighty Mobile and Pateo and a much
larger profit for SB (subject to the risk of losing that profit in proceedings
such as this appeal). The only motive for such a purpose which we can see
would be the enabling of a
VAT
fraud and the sharing of the rewards arising
from it.
281.
At least one of SB and 4A would have to be involved in that agreement
with Andrevias, but not necessarily both of them. It may well be that in the
context of a circular scheme which realises in total a fraudulent profit of say
15% of the original investment (funded by a 17.5% VAT
refund from HMRC),
Andrevias would be prepared to see 5.5% go to an innocent “stooge” (SB) if that
had the effect of converting Andrevias’s risky 15% profit into a much safer
9.5% profit.
282.
Thus the circular structure of the scheme does not on its own
necessarily imply that 4A (or indeed SB) must have been a knowing participant
in the overall scheme (although other factors may point to such a conclusion).
It does however, in our view,
mean that at least one of SB and 4A must have
been such a knowing participant. Thus if SB was not a knowing participant in
fraud, we consider that the nature of the structure itself implies that 4A must
have been.
285.
Mr Morton had a prior conviction for dishonesty. He told some people
(but not others) that he had been a special branch police officer. He did not
appear before us to give evidence, or even provide a written statement. He
clearly misled HMRC when applying for VAT
registration for 4A and afterwards.
He managed 4A’s trading (at least until it seems to have become simply too
large for him to manage properly) in a way which, incredibly, brought its input
and output
VAT
into near perfect equilibrium on sales measured in tens of
millions of pounds. He described himself to HMRC as having been responsible
for arranging SB’s financing while he was still with them. Having been
attempting and largely failing for nearly three years to arrange wholesale
trading/export finance whilst at SB, within a matter of weeks of starting 4A he
was dealing in massive and quickly growing amounts. 4A’s
VAT
return for its
quarter to June 2006 was wildly inaccurate (as indeed was its return for the
quarter to September 2006, in which it failed to declare £5.9 million of EU
sales and £10 million of EU purchases). The nature and extent of 4A’s trading
is simply incredible for a legitimate business from a standing start.
286.
Viewing
in the round all of the evidence of his activities, we find as a
fact that Mr Morton (and, through him, 4A) was a knowing participant with
Andrevias in the overall fraudulent scheme. It follows that we consider on a
balance of probabilities that 4A was a fraudulent contra trader.
Introduction
“...[i]n determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.”
And then again:
“The object of the exercise is to paint a picture from the
accumulation of detail. The overall effect can only be appreciated by standing
back from the detailed picture which has been painted, by viewing
it from a
distance and by making an informed, considered, qualitative appreciation of the
whole. It is a matter of evaluation of the overall effect of the detail, which
is not necessarily the same as the sum total of the individual details. The
details may also
vary
in importance from one situation to another. The process
involves painting a picture in each individual case.”
Did SB know of either fraud?
“The Commissioners have not pleaded a case against the Appellant in conspiracy, nor was any such case advanced by the Commissioners at the hearing, nor was any such case put to the Appellant, nor was there any evidential base on which such a case could be put forward (and, for the avoidance of doubt, any such case would need to have been pleaded, advanced and put “fairly and squarely” on the basis of sound evidence).”
294. In HMRC’s original decision letter dated 28 August 2007, they said:
“The Commissioners are satisfied that the transactions set
out in the attached appendix form part of an overall scheme to defraud the
revenue. The Commissioners are also satisfied that there are features of those
transactions, and conducted on the part of Spearmint Blue Ltd,
which
demonstrate that you knew or should have known that this was the case.”
295. At paragraph 1 of the statement of case, HMRC said:
“...The Commissioners grounds for this decision [i.e. the
decision to deny entitlement to input tax] are that the input tax incurred
by the Appellant was done so in a transaction or transactions connected with
the fraudulent evasion of VAT
and that the Appellant knew or should have known
of this fact.”
296. In paragraph 3 of HMRC’s skeleton argument, they said:
“... The transactions are therefore connected to a fraudulent
tax loss and the Appellant knew or should have known that the transactions were
connected with fraudulent evasion of VAT.”
(1) Mr Chester initially insisted that mobile phone trading was no part of SB’s planned activities, but the evidence quite clearly demonstrates that it was (as he was forced to admit).
(2) He downplayed the true level of his involvement in mobile phone trading activities while he was at MDS.
(3)
He initially distanced himself from SB’s incorporation and VAT
registration application, which was done in a way which we found to be
intentionally misleading.
(4) The financing for SB came through a source, in amounts and on terms which are all highly suspicious.
(5)
Mr Chester was very
well aware of the prevalence of fraud in export
transactions generally (and not just in relation to mobile phones and computer
parts) through SB’s own experience and yet he continued to be involved in it.
(6) SB’s approach to research on its trading partners and proper attention to its terms of trading and the practical details of its trading was lackadaisical in the extreme.
(7) Specifications of the goods being sold appeared to be changeable and unresolved mismatches between what was specified, what was sold and what was inspected do not appear to have caused any concern.
(8) Mr Chester was entirely confident that any problems that arose from SB’s trading could be managed by the simple expedient of “cancelling” deals (which appears inconsistent with the concept of true arm’s length trading).
(9) The documentation surrounding the eight deals under appeal was worded in a way which was entirely inconsistent with the way in which Mr Chester said SB did business.
(10)
SB did not take any steps to check that the goods were insured, even
though that was one of the very
few responsibilities that it actually undertook
in its agreement with 4A.
(11) There was obvious close coordination with Mr Morton and others in the payments that were made for the deals under appeal, with a number of suspicious features in relation to timing and shared use of an IP address.
(12) SB closed its eyes to the fact that it had only been able to put together a handful of “export finance” deals during its long period of operating in that market (due, Mr Chester said, to its discriminating and careful approach to finding trading partners) and yet Mr Morton seemed to have been able to generate a large number of such deals for it as soon as he started business through 4A.
(13)
SB did not question the fact that the deals under appeal did not even
require SB’s export finance support (as 4A was acquiring the goods, as SB well
knew, on a VAT
free basis and therefore had no need of export finance to cover
the
VAT
cost).
302.
On the other hand, however, there are certain facts which tend to
suggest that SB was not a knowing participant. Most significantly, there was a
significant length of time when SB had large amounts of funding in place and
would have been financially well able to carry out a large volume
of “export
finance” deals but did not do so. Mr Chester said this was because he was
unable to get comfortable with most of the prospective trading partners he
spoke to. Whatever the actual reason, the fact remains that SB had the ability
to carry out many more deals than it actually did. If it had been a knowing
participant in a
VAT
fraud scheme, we would have expected it to have carried
out much greater levels of exporting activity while it had the ability to do so.
Additionally, a certain degree of inattention to the normal commercial details
might perhaps be understandable (though not excusable) in a situation where a
trader acts as little more than a middleman in a pre-arranged transaction
between two other parties in order to provide bridging finance for the
VAT
cost
of that transaction.
Should SB have known of either fraud?
“Where the impugned transactions are transactions in the clean chain, this presents evidential problems for HMRC. As the Chancellor pertinently asked in [Blue Sphere]: how can a trader who is not part of a conspiracy know of a fraud before it happens? If there is a regular course of conduct in which the trader knows that his transactions are connected with subsequent transactions that he knows ex post facto are fraudulent, there may come a time at which he can be credited with knowledge of the future. But that is not the case that HMRC advanced in this case.”
307.
The first point to make about these submissions is that in the Court of
Appeal in Blue Sphere (where the contra trader was not acting
fraudulently), Moses LJ came close to overturning the Chancellor’s view
that
the Tribunal’s findings were insufficient to establish “means of knowledge” of
connection with fraud. He pointed out that the Tribunal came “
very
close” to
making a finding that “the only reasonable explanation for the circumstances in
which it entered into the impugned transactions was that those transactions
were connected with fraud”, and he said that the only reason he stepped back
from reaching that conclusion himself was because the findings of the Tribunal
included references to the “risk” of connection to fraud and because of the
Tribunal’s:
“undue focus on whether Mr Peters [Brayfal’s Managing Director] had exercised due diligence or done ‘enough to protect himself’. That is not the only question.”
Moses LJ went on to say (at [76]):
“Accordingly, the importance of BSG may be in the Tribunal’s recognition of the surrounding uncommercial circumstances which it identified in the questions I have set out above.”
308.
The questions to which Moses LJ was referring related to the wider
commercial context of the deals, rather than the standing of BSG’s counterparties
in those deals. In other words, Moses LJ was giving a very
clear indication
that in assessing “means of knowledge” in contra trading cases, it is
appropriate to look at the overall circumstances of the trading (in particular,
“surrounding uncommercial circumstances”) and not just focus on the question of
“due diligence” in relation to trading counterparties. To the extent these
comments of Moses LJ conflict with the observations of Lewison J in Brayfal,
we should clearly follow the higher authority.
“But that is far from saying that the surrounding
circumstances cannot establish sufficient knowledge to treat the trader as a
participant. As I indicated in relation to the BSG appeal, Tribunals should
not unduly focus on the question whether a trader has acted with due
diligence. Even if a trader has asked appropriate questions, he is not
entitled to ignore the circumstances in which his transactions take place if
the only reasonable explanation for them is that his transactions have been or
will be connected to fraud. The danger in focussing on the question of due
diligence is that it may deflect a Tribunal from asking the essential question
posed in Kittel, namely, whether the trader should have known that by
his purchase he was taking part in a transaction connected with fraudulent
evasion of VAT.
The circumstances may well establish that he was.”
“The principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader’s purchase. If the circumstances of that purchase are such that a person knows or should know that his purchase is or will be connected with fraudulent evasion, it cannot matter a jot that that evasion precedes or follows that purchase. That trader’s knowledge brings him within the category of participant. He is a participant whatever the stage at which the evasion occurs.”
316.
It is axiomatic that for SB to have a legitimate export finance role,
there must be a VAT
liability which required to be financed. In fact, because
4A had itself acquired the goods free of
VAT
from another EU trader (Mighty
Mobile), there was no
VAT
liability requiring to be financed on 4A’s sale of
the goods back to Pateo in Portugal.
317.
SB was well aware that 4A had acquired the goods from Spain free of VAT.
Mr Chester gave evidence that although he had been aware that 4A had
acquired the goods from Spain, he had not understood that this meant 4A had no
VAT
liability to finance. If this evidence was not true, then SB clearly had
actual knowledge of the commercial and financial pointlessness of its
involvement in the transaction. But if this evidence was true, then we still
find that SB should have been aware that its involvement was
commercially and financially unnecessary. SB’s business had after all been
specifically established (according to Mr Chester’s evidence) in order to
provide a financing facility for the
VAT
cost involved in such transactions and
as such SB should have had a good working knowledge of the
VAT
system
and how
it worked in practice in connection with overseas trade.
318. Given this fact and the other circumstances surrounding the transactions:
(1) the removal of the goods to the UK from a seller in Spain and immediately out again to a buyer in Portugal at significant cost to no obvious advantage,
(2)
the fact that SB’s customer (with whom there was no long established course
of dealing) was prepared to make payments of millions of pounds to SB (a
company which had made losses since its incorporation and could not, on any
view,
be regarded as a sound credit risk) without any real certainty that the
goods for which it was paying would indeed be supplied to it,
(3) the fact that (at least in relation to deals 1 to 4) Pateo was prepared to pay in full for the goods before they had even been inspected,
(4) the fact that lack of clarity or actual changes in the specifications of the goods supplied did not seem to concern Pateo,
(5) the fact that (in relation to deals 1 to 4) the required “urgent” delivery was not in fact actioned until nine days after the deal (and payment in full) and yet Pateo appeared unconcerned,
(6)
the fact that 4A was apparently achieving major success in generating significant
volumes
of business in a matter of months operating out of Mr Morton’s home,
while SB had been trying to generate such activity working from a much more
businesslike operation for three years without any real success,
(7)
the fact that Mr Chester was well aware from his own experience that VAT
fraud was rife, not just in the area of mobile phones and computer parts,
we find that SB should have been well aware that the only
explanation for these transactions was that they were connected to VAT
fraud,
either on the part of 4A itself or on the part of some other person in its
chain of supply.
319.
We have found that the eight purchases by SB the subject of this appeal
were connected with fraudulent evasion of VAT
(see [287] above).
320.
We do not consider that HMRC have discharged the evidential burden that
lies upon them to show that SB knew of any connection between its purchases and
VAT
fraud (see [303] above).
321.
We are however satisfied that SB should have known of the connection of
its purchases to VAT fraud (see [318] above).