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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Gillex (UK) Ltd (in liquidation) v Revenue & Customs [2010] UKFTT 517 (TC) (27 October 2010) URL: https://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00772.html Cite as: [2010] UKFTT 517 (TC) |
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[2010] UKFTT 517 (TC)
Appeal number: LON/2007/1079
VAT – input tax – MTIC fraud – conceded that deals connected with fraudulent evasion of VAT – whether trader knew or should have known of such connection – conclusion based on surrounding circumstances including financial information and lack of sufficient enquiries – both elements of test satisfied – appeal dismissed
FIRST-TIER TRIBUNAL
TAX
GILLEX
(
UK
)
LIMITED
(IN LIQUIDATION) Appellant
- and -
TRIBUNAL: JOHN CLARK (TRIBUNAL JUDGE) HARVEY ADAMS FCA
Sitting in public at 45 Bedford Square, London WC1 on 10-11 May, 13-14 May and 2 July 2010
E.C. Wetton FCA, Liquidator, for the Appellant
Miranda Bevan of Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2010
DECISION
1. The
Appellant (“Gillex
”) appeals against a decision of the Respondents (“HMRC”) set
out in a letter dated 5 June 2007 disallowing an input tax repayment claim made
by
Gillex
in the sum of £904,837.50 in respect of two transactions which took
place in the VAT period 04/06. The basis for HMRC’s disallowance was their
conclusion that the transactions concerned were connected with the fraudulent
evasion of VAT and that
Gillex
knew, or at the very least, ought to have known,
that it was participating in transactions of such a character. HMRC’s view was
that the transactions were linked to “missing trader intra-Community fraud”
(commonly referred to as “MTIC fraud”).
2. The
evidence consisted of nine lever-arched files of documents, and a core bundle.
Witness statements on behalf of Gillex
were provided by Mr Amar Gill, the
director of
Gillex
. For HMRC, witness statements were provided by John
McPartlin, a higher officer of HMRC, Fu Sang Lam, an officer of HMRC, Roderick
Stone of HMRC’s Serious Civil Investigations Directorate, and by Louise King,
an officer of HMRC. Oral evidence was given by Mr Gill, Mr McPartlin and Ms
King.
3. From the evidence we find the following background facts. We deal with more detailed facts and matters of disputed evidence later in this decision.
4. Gillex
was incorporated on 2 July 2003. Mr Gill was the sole director, and his wife
was the company secretary.
Gillex
did not employ any other staff, and Mr Gill
dealt with the day to day running of
Gillex
. (The annual accounting for
Gillex
was carried out by an independent accountant.)
Gillex
’s trading was initially
from Mr Gill’s home address, which was referred to as its principal place of
business;
Gillex
took up business premises in February 2006 and then traded
from those premises.
5. Gillex
was registered for VAT purposes with effect from 1 August 2003. The business
activity detailed in the application was “Importer of Watches, Luggage and Gift
Items”. The estimated annual turnover was £60,000 and
Gillex
indicated that it
did not anticipate receiving regular repayments of VAT.
6. From
2003 onwards, Gillex
traded in a range of commodities, including watches,
luggage, soap and perfume. Mr Gill had had extensive experience of wholesale
trading, both through
Gillex
and previously with another family business dating
back to 1972. Details of this company, Fortkirk
Limited
, trading as Gill
Enterprises, could not be checked through HMRC’s VAT databases, although it was
shown to have been dissolved on 12 December 1991. In his second witness
statement made in April 2009, Mr Gill indicated that he had been in business
for 36 years.
7. After
his period working for the family business, Mr Gill had gone to India for eight years, and subsequently to Dubai for four years before returning to the UK
in 2001. His business in India involved dealing solely in that country. There was no
specific evidence as to his activities in Dubai.
8. On
his return to the UK
in 2001, Mr Gill worked for a company called MZB Ltd.
Initially he was an employee, but from 11 March 2002 to 15 March 2004 he was a
director of that company. Thus this period overlapped the start of
Gillex
.
During the period of his directorship, MZB Ltd submitted nine VAT returns, of
which two showed net VAT due, and seven showed net repayments of VAT.
9. In
early 2004, Gillex
was involved in transactions in which it purchased
phonecards from a trader, Hi Profile Ltd, and sold them on to Vispar Ltd. (We
consider the implications of these transactions later in this decision.)
10. During August 2005,
Gillex
became aware, through a website called Alibaba.com, of a company called HKS
Trading
Limited
(“HKS”). On 2 September 2005
Gillex
supplied HKS with some
suitcases, MP3 and CD players. Mr Gill was aware that HKS was trading in iPods
and mobile phones, but at that stage there was no opportunity to put a deal
together involving such goods.
11. Through his
involvement in the family business many years before, Mr Gill had dealt with an
individual whom he named as Mr Paollo of a company called Tessuflex in Vicenza, Italy. (According to the Dun & Bradstreet search made at some time from
mid-2006 onwards by HMRC in the course of their investigations, the actual name
of the chief executive was Pierpaolo Pozzi, and the final statement date shown
for Tessuflex was 31 December 1990; the company was described as “Out of
Business”.) Tessuflex had supplied the previous company in which Mr Gill had
been involved with watch cases to the value of £2 million. At some point during
March 2006 M/S Monza Trading, a company with an address in Milan, Italy, contacted Mr Gill with a view to trading with Gillex
, referring to a recommendation made by
Mr Paollo. Monza Trading wished to purchase mobile phones and iPods but did not
initially state what quantities would be required.
12. On the basis of
the previous contact with HKS, Gillex
was able to inform Monza Trading that it
would be able to supply such goods. The exact quantities were not discussed or
finalised until a later stage.
13. By a purchase
order dated 28 April 2006, Gillex
requested HKS to supply 6000 Nokia 8800
mobile phones at a unit price of £461.75, giving a net value of £2,770,500. The
amount of VAT was shown as £484,837.00. Invoice number INV280406-002 dated 28
April 2006 issued by HKS referred to the supply of the mobile phones at that
unit price and net value. However, the VAT was calculated as £484,837.50,
giving a total VAT inclusive price of £3,255,337.50.
14. Monza Trading’s
purchase order addressed to Gillex
and
Gillex
’s invoice number 674 against
Monza Trading were also dated 28 April 2006. The goods referred to as being
supplied were 6000 Nokia 8800 mobile phones, Central European specification, at
a unit price of 767.04 Euros, converted to sterling at the rate of 1.41,
resulting in a unit price of £544. This gave a net value of £3,264,000 (having
been converted from 4,602,240 Euros), on which there was no VAT chargeable.
15. By another purchase
order dated 28 April 2006, Gillex
requested HKS to supply 6000 Apple iPods 60
GB in black, with Apple remote control iSound Max portable speaker system. The
unit price was £400, giving a net value of £2,400,000. The VAT amounted to
£420,000, giving a total VAT inclusive price of £2,820,000. Invoice number INV280406-001
dated 28 April 2006 issued by HKS showed the corresponding information.
16. Monza Trading’s
purchase order addressed to Gillex
and
Gillex
’s invoice number 675 against
Monza Trading were also dated 28 April 2006. The goods referred to as being
supplied were 6000 Apple 60 GB iPods in black, radio remote, max sound system.
The unit price in Euros was 664.11, converted to sterling at 1.41, resulting in
a unit price of £471. The total Euro price was 3,984,660. This was converted at
1.41, giving a net sterling value of £2,826,000 on which again there was no VAT
chargeable.
17. The total VAT
inclusive amount payable by Gillex
to HKS pursuant to the latter’s invoices
(rather than
Gillex
’s purchase orders) was therefore £6,075,337.50. The total
amount payable by Monza Trading to
Gillex
was £6,090,000. We consider the
mechanics of payment of these amounts at a later point in this decision.
18. In its return
for the period 04/06, Gillex
made a substantial repayment claim. Due to the
size of that claim, HMRC carried out an extended verification process in
respect of the two transactions concerned. A visit to
Gillex
’s business
premises was made by Mr McPartlin and another officer, Kym Richards, on 19 July
2006. Mr Gill agreed to provide various items of information, and
correspondence continued for a number of months, with further meetings taking
place.
19. The eventual result of the extended verification process was that the two transactions were both traced back to the same defaulting trader, West 1 Facilities Management Ltd (“West 1”). Tax due in respect of the relevant deals was included within a manual assessment for the period from 1 April 2006 to 22 June 2006, the date on which HMRC cancelled West 1’s registration. The amount of this assessment was £60,729,310, part of a total of £125,725,923.99 owing by West 1 to HMRC. As confirmed by the statement of Fu Sang Lam, the assessments remain unpaid; there is no evidence of any challenge to these assessments having been made by West 1.
20. West 1’s supplier was United Traders, a Portuguese company, which we refer to as “UT”. HMRC established by means of a request for information from the Portuguese authorities that UT had no premises and that the address of its head office was a private home provided by a Portuguese national who had nothing to do with UT and who had no documents. The address was being used as an accommodation address. The total figure for supplies made by UT to West 1 was 109,603,832.05 Euros; this had been derived from information provided by HMRC.
21. HMRC established
the chain of transactions from Gillex
back to West 1. In relation to the mobile
phones,
Gillex
had purchased from HKS, who had purchased from International
Investment Services (
UK
) Ltd (“IIS”) at a unit price of £461.50. IIS had
purchased from West 1 at a unit price of £461.25.
22. In relation to
the iPods, the chain was the same. Gillex
had purchased from HKS, who had
purchased from IIS at a unit price of £399.75. IIS had purchased from West 1 at
a unit price of £399.50.
23. On 5 June 2007
Mr McPartlin wrote to notify Gillex
of HMRC’s decision to deny entitlement to
the right to deduct input tax in respect of the transactions in mobile phones
and iPods in the month of April 2006 in VAT period 04/06.
Gillex
responded in a
letter dated 17 June 2007, and gave notice of appeal to the Tribunal on 18 June
2007.
24. At the beginning
of the hearing, Mr Wetton on behalf of Gillex
accepted that the deals covered
by
Gillex
’s invoices 674 and 675 to Monza Trading were connected with the
fraudulent evasion of VAT (the “factual element”). He confirmed that
Gillex
was
limiting the grounds on which it was pursuing the appeal to the “mental
element”, ie whether
Gillex
knew or should have known that the deals were so
connected. On the basis of that concession by
Gillex
, the evidence provided by
HMRC as to the factual element was uncontested. We refer to such evidence to the
extent necessary in the context of our consideration of the mental element.
25. Ms Bevan referred to the judgment of the Court of Appeal in Mobilx Ltd (in Administration) and others v Revenue and Customs Commissioners [2010] EWCA Civ 517, (referred to in this decision as “Mobilx and others (CA)” and to earlier authorities. The following questions had been considered and approved (in cases such as Blue Sphere Global Ltd v Revenue and Customs Commissioners [2009] STC 2239) as the correct questions to be addressed by the Tribunal in an appeal of this nature:
(1) Was there a tax loss?
(2) If so, did this loss result from a fraudulent evasion?
(3)
If there was a fraudulent evasion, were the transactions entered into by
Gillex
which were the subject of the present appeal connected with that
evasion?
(4)
If such a connection was established, did Gillex
know or should it have
known that its transactions were connected with a fraudulent evasion of VAT?
26. The first three
questions might usefully be described as the “factual element” of the test, to
which the concession made by Gillex
amounted to positive answers. There was
useful assistance on the issue of privity of contract which derived from Calltel
Telecom Ltd and another v Revenue and Customs Commissioners (No 2) [2009] STC 2164 (referred to below as “Calltel (No 2)”. At [81] Floyd J had
explained how a person not in privity of contract with the fraudster
nevertheless fell foul of the “connected with” requirement set out by the ECJ in
2006 in Kittel v Belgium; Belgium v Recolta Recycling SPRL (reported at
[2008] STC 1537 and referred to in this decision as “Kittel”).
27. In relation to question (4) above, the issue of whether or not the trader “knew or should have known” that its transactions were connected with the fraudulent evasion of VAT was a matter of fact for each case, to be determined having regard to objective facts or factors. Ms Bevan referred to Kittel at [59] and to Revenue and Customs Commissioners v Livewire Telecom Ltd; Revenue and Customs Commissioners v Olympia Technology Ltd [2009] STC 643 at [76(x)]. (We refer to this judgment as “Livewire”.)
28. HMRC derived (inter alia) the following principles from the authorities preceding the Court of Appeal judgment in Mobilx and others (CA) which, Ms Bevan submitted, remained relevant and applicable to that fact finding process in MTIC cases:
(1) The test was not one of dishonesty. In Livewire at [84]-[86] Lewison J had expressly rejected the submission of the respondent traders that the test was one of dishonesty.
(2) The “means of knowledge” test involved considering what the ordinarily competent director would have known (Livewire at [123]-[126]).
(3) A trader had to exercise independent judgment in deciding whether to enter into a particular transaction or transactions and could not delegate its judgment to HMRC (Mobilx Ltd (in Administration) [2009] STC 1107 at [87]).
(4) The Tribunal could (and, one might say in cases of this kind, must) use inference in the fact finding process. Ms Bevan cited (but did not take us to) the unreported case Softwarecore Ltd v Pathan [2005] EWHC 1845 (Ch) at [51]-[52].
29. Ms Bevan referred in detail to the judgment of the Court of Appeal in Mobilx and others (CA). (As we deal in detail with this later in our decision, we do not summarise her comments here.) She submitted that a consideration of the latter case and the preceding authorities led to the following principles (among others):
(1)
It was for HMRC to establish to the civil standard that Gillex
knew or
should have known that its transactions were connected with fraud, and that
they were in fact connected with the fraudulent evasion of VAT. It was not
sufficient to establish that the trader knew or should have known that it was
more likely than not that his transactions were so connected. However, 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 turned out that the transaction was connected with fraudulent evasion of
VAT, then he should have known of that fact.
(2)
It was not necessary to establish that Gillex
knew or should have known
of the nature or mechanism of the fraud, or the identity of the participants.
(3) In considering whether the Kittel test was satisfied, the Tribunal should look at all the circumstances surrounding the transactions, and should not look at a given transaction in isolation. The Tribunal should not unduly focus on the question whether a trader had acted with all due diligence. Even if a trader had asked appropriate questions, he was not entitled to ignore the circumstances in which his transactions took place if the only reasonable explanation for them was that his transactions had been or would be connected to fraud. Where a trader had not asked all appropriate questions, then the Tribunal should consider what the trader omitted to do, and what it could have done.
30. Ms Bevan made detailed submissions on the facts, which we take into consideration later in this decision. In conclusion, she submitted that the evidence heard enabled the Tribunal to be satisfied to the requisite civil standard of proof that:
(1) The relevant deals formed part of a transaction chain connected with fraud, and
(2)
Gillex
knew or ought to have known of that fact.
31. Accordingly, HMRC requested that the appeal be dismissed. In the event that the appeal was dismissed, HMRC requested their reasonable costs in responding to this appeal.
32. In presenting
the case on behalf of Gillex
, Mr Wetton emphasised that he was acting as
liquidator, having been appointed by HMRC in respect of their protective
assessment made against
Gillex
. The estimated liability was £300,000, being
£268,036.43 with accrued interest of £22,001.82. The assessment related to the
corporation tax on the profit under consideration. Given Mr Wetton’s
involvement in this capacity, neither
Gillex
nor Mr Gill could be regarded as
his client.
33. Mr Wetton’s
principal arguments for Gillex
were on the factual matters connected with the
related issues of whether
Gillex
knew or should have known that the
transactions in which it was involved were connected with fraudulent evasion of
VAT. As we review these factual matters later in this decision, we do not set
out these arguments here.
34. He referred to the discussion in Mobilx and others (CA), and in particular to the question set out in the judgment of Moses LJ at [75]:
“75. The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT.”
35. Mr Wetton contended that this paragraph contained the crux of the Court of Appeal’s decision. The focus in MTIC cases should, following this ruling, be less on a trader’s due diligence procedures and more with the overall features of a transaction. Was a transaction too good to be true, and could the only reasonable explanation for this be that there was a fraud?
36. Mr Wetton
submitted that on the facts, Gillex
neither knew nor should have known that the
relevant transactions were connected to fraudulent evasion of VAT, and that
accordingly the appeal should be allowed. If the appeal succeeded,
Gillex
applied for costs.
37. As the parties submitted, the relevant European and domestic law had been reviewed in detail in Mobilx and others (CA). Mr Wetton expressed the view that the Court of Appeal had not substantially changed the approach to the law in MTIC cases; however, Ms Bevan referred to a number of respects in which questions raised in previous cases had been addressed by the Court of Appeal. We regard the judgment as guidance on a number of issues in respect of which there has been uncertainty as to the analysis to be applied by tribunals in MTIC cases, and thus as amounting to a shift in emphasis and approach.
38. In his judgment, agreed by the other members of the Court of Appeal, Moses LJ restated the principle set out in Kittel at [61], then reviewed in detail the authorities and foundation for that principle. At [43] he derived the following conclusions, the final sentence being directly in point in the present appeal:
“A person who has no intention of undertaking an economic activity but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person's VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax § 59 and Kittel § 53). A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct.
39. At [52], in considering the meaning of “should have known”, Moses LJ stated:
“A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.”
40. On the extent of knowledge, Moses LJ commented at [59]-[60]:
“[59] The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who "should have known". Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.
[60] The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”
41. In discussing the matters considered by the Tribunal in one of the conjoined appeals, Blue Sphere Global Ltd (referred to in the judgment as “BSG”), Moses LJ drew attention at [72] to a number of questions set out by the Tribunal; he described these as “important questions”. After considering the findings made by that Tribunal, he stated:
“[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.”
Such questions are therefore pertinent in establishing the extent of the trader’s actual knowledge of the connection with fraud or the extent to which it can be concluded, based on the overall circumstances of which the relevant deals form part, that the trader ought to have known of such connection.
42. In the final sentence of his judgment at [85], Moses LJ referred to warnings given in HMRC’s Public Notice 726, and commented:
“A trader who chooses to ignore circumstances which can only reasonably be explained by virtue of the connection between his transactions and fraudulent evasion of VAT, participates in that fraud and, by his own choice, deprives himself of the right to deduct input tax.”
We see this as a further facet of the Kittel test.
43. On the question of due diligence, Moses LJ emphasised at [74]-[75] that it was inappropriate to focus unduly on whether the trader had exercised due diligence. He continued at [75]:
“The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT.”
Thus the extent of a trader’s enquiries is merely an element of the factual background to be examined in seeking the answer to this ultimate question.
44. Ms Bevan’s list of the four questions to be answered derives from the decision of the Tribunal in Blue Sphere Global Ltd v Revenue and Customs Commissioners ((2008) VAT Decision 20901); on appeal ([2009] STC 2239), the Chancellor stated that it was common ground that these were the correct questions. Accordingly, we conclude that they are appropriate in all cases of this nature.
45. We accept Ms Bevan’s submission, based on the judgment of Floyd J in Calltel (No 2), that a person not in privity of contract with the fraudster could nevertheless fall foul of the “connected with” requirement in Kittel. He stated:
“[81] It will be recalled that the rationale in Kittel for refusing repayment where the purchaser knows that he was taking part in a transaction connected with fraudulent evasion of VAT was that he "aids the perpetrators of the fraud and becomes their accomplice". For my part I have no difficulty in seeing how the purchaser who is not in privity of contract with the importer aids the perpetrators of the fraud. He supplies liquidity into the supply chain, both rewarding the perpetrator of the fraud for the specific chain in question, and ensuring that the supply chains remain in place for future transactions. By being ready, despite knowledge of the evasion of VAT, to make purchases, the purchaser makes himself an accomplice in that evasion.”
46. In that connection, the decision of the Tribunal in Blue Sphere Global Ltd was based at least in part on the question whether the supplier, Infinity, was fraudulent; in the light of Floyd J’s comments in Calltel on the subject of privity, and the more general comments of Moses LJ in Mobilx and others (CA) at [62], the Tribunal in Blue Sphere Global Ltd may not have been correct in concentrating a substantial part of its attention on Infinity’s position in testing whether the trader ought to have known that its transactions were connected with fraud.
47. In relation to Ms Bevan’s submissions (at paragraph 28 above) based on authorities before Mobilx and others (CA), we accept the first three in full, and the fourth as to the use of inference in the fact-finding process. We consider that the latter follows in any event from the Court of Appeal judgment. Our reservation as to the fourth point is the reference to the Softwarecore case; although we have not been able to access the judgment itself, it appears from other tribunal decisions which have cited it that it takes into account dishonesty, which as confirmed by Lewison J in Livewire is not the appropriate test.
48. We accept Ms Bevan’s summary of the principles to be derived from the authorities including Mobilx and others (CA), as set out at paragraph 29 above.
49. Of the three conjoined appeals considered by the Court of Appeal in that case, only one, relating to Calltel and Opto, concerned a finding that the traders knew of a connection between the transactions in which they were involved and VAT fraud. Moses LJ did not specify any difference in approach between cases where it is alleged that the trader knew of such a connection and those where it is alleged that the trader should have known of such a connection. It appears to us that in the light of the House of Lords cases cited by the Tribunal in Blue Sphere Global Ltd at paragraphs 107 to 109 of its decision, there is no difference in the standard of proof; in Re B (Children) [2008] UKHL 35 Lord Hoffman said at [13]:
“I think that the time has come to say, once and for all, that there is only one civil standard of proof and that is proof that the fact in issue more probably occurred than not."
50. It is clear that, in order to arrive at a conclusion that a trader knew of a connection between the transactions in which it was involved and the fraudulent evasion of VAT, additional evidence is required beyond that needed to establish that the trader should have known of such a connection. However, we do not consider that this requires the trader to be aware of the details of the fraud. In considering the appeal to the High Court of Blue Sphere Global Ltd, the Chancellor referred at [36] to the view taken by the Tribunal:
“They adopted the view of the tribunal in Honeyfone
Ltd v Revenue and Customs Comrs (2008) VAT Decision 20667 and Burton J in R
(on the application of Just Fabulous (UK
) Ltd) v Revenue and Customs Comrs
[2007] EWHC 521 (Admin), [2008] STC 2123 that it is sufficient if the trader
should have known that there was some fraud even though he does not have the
means of knowing the details of that fraud but preferred to formulate it, as in
Kittel, as 'participating in a transaction connected with fraudulent
evasion of VAT'.”
51. The question at issue in Blue Sphere Global Ltd was whether the trader should have known of the connection. In the light of the approach taken in Mobilx and others (CA), basing a conclusion on circumstances which could only reasonably be explained by virtue of the connection between the trader’s transactions and fraudulent evasion of VAT, we take the view that it is possible, on the basis of a combination of appropriate circumstances, to arrive at a conclusion of actual knowledge on the trader’s part without specific direct evidence as to the trader’s actual state of mind.
52. In Blue Sphere Global Ltd, the Tribunal referred at paragraph 152 of its decision to consideration of the overall position, and cited the direct tax case Hall (Inspector of Taxes) v Lorimer [1992] STC 599, referring to painting a picture in each individual case. The Tribunal then commented that an accumulation of a whole series of factors which individually might be insufficient to lead to a conclusion as to the trader’s state of knowledge might prove to be of such weight that the only possible conclusion was that the trader should have known of the connection. The Court of Appeal in Mobilx and others (CA) did not specifically comment on the Tribunal’s view, but we consider that the overall approach taken by the Court of Appeal in its various references to the surrounding circumstances supports the “painting a picture” analysis. For the reasons stated in the previous paragraph of this decision, we consider that the same form of analysis is appropriate in cases where the trader is alleged to have had actual knowledge of the connection with VAT fraud.
53. In relation to
the first three of the four questions referred to by Ms Bevan at paragraph 25
above, the concession made on behalf of Gillex
as to the factual element
renders it strictly unnecessary for us to review the evidence submitted by HMRC
in support of their contention that all three questions should be answered in
the affirmative. However, in the course of cross-examination, Mr Gill raised
questions as to the implications of the payment patterns and the diagram
showing the participants in the two identical chains; he did not consider
himself to be party to what was implied by the circularity described in the
diagram and in the other evidence. We therefore think it appropriate to comment
in general terms on that evidence submitted by HMRC, but without reviewing it
in detail in this decision.
54. On the question whether there was a tax loss, we are satisfied that there is clear evidence to demonstrate this, as shown by the evidence of the relevant investigating officer, Fu Sang Lam.
55. There is also
clear evidence provided by the same officer showing that such VAT loss resulted
from a fraudulent evasion. In relation to the two deal chains which are the
subject of the present appeal, there are other features which support this
assertion. The evidence relating to bank payments made through FCIB, the bank
used by all the participants in the chains, showed circularity of funds. Four
of the parties, including Gillex
, obtained references from the same party as
part of the process of opening their respective accounts with FCIB. Each party
paid its respective supplier in seven separate transactions, these appearing
(based on the numbering of the respective transactions and Ms King’s evidence
as to the number of transactions likely to be carried out by FCIB in the course
of a single day) to occur within a very short space of time; these seven
payments combined the amounts payable in respect of the two separate deals for
mobile phones and iPods. In both deals the amounts of the total payments made
by West 1 to United Refrigeration and Industries (“URI”) in India (and not to
the alleged supplier UT in Portugal, which as mentioned above was shown by
HMRC’s subsequent enquiries of the Portuguese authorities to be a company
without premises, using a head office address which was an accommodation
address at a private home) resulted in West 1 being unable to account to HMRC
for the VAT liability of £903,787.50 in respect of the two deals. The same
individual, Ravender Datta, was director, beneficial owner and signatory of URI
and the director and shareholder of UT.
56. In addition, the
chains were identical and the mark-ups for all the parties to the transactions
prior to Gillex
’s stage in the chain were also identical, at 25p per unit,
which appears contrived, particularly having regard to the difference in unit
value between the mobile phones and the iPods. Further, such low mark-ups on
such substantial unit costs are highly implausible from the commerciality point
of view. Another element is the much more substantial mark-up achieved by
Gillex
; as this is relevant to the “mental element”, we do not expand upon it
at this point. The parties did not appear to be put in a position where they
could have made a loss, and this also seems inconsistent with commercial
reality. The amounts of the stock available and supplied were identical for all
in the chain, so that at no stage was any party left with surplus stock; the
deals were entirely on a back to back basis. (Other factors are relevant to
consideration of the mental element, and we cover these later.)
57. On the question whether the transactions which are the subject of this appeal were connected with a fraudulent evasion, the position is free from doubt, following Calltel (No 2); in a simple chain such as those under consideration, not involving contra-trading, there is a clear and obvious connection.
58. Our overall
conclusion on the factual element is that there is sufficient evidence to
establish affirmative answers to all three of the relevant questions, even if
for any reason it were to prove necessary to disregard the concession made on
behalf of Gillex
.
59. HMRC’s case on
the mental element was put on two alternative bases. The first was that Gillex
knew that the relevant transactions were connected with fraud. We refer to this
as the “actual knowledge issue”. The second was whether
Gillex
should have
known that the relevant transactions were connected with fraud. We refer to
this as the “constructive knowledge issue”.
60. In relation to
both issues, the knowledge to be tested is that of the company, Gillex
, as
confirmed by Lewison J in Livewire at [125]. As Mr Gill was the sole
director, and
Gillex
had no other employees (Mr Gill having described himself
in oral evidence as a “one man show”), we are satisfied that Mr Gill’s state of
knowledge is the only relevant knowledge to be tested in establishing whether
Gillex
knew or should have known of the connection with fraud.
61. In his oral
evidence, Mr Gill emphatically denied participating in what he accepted was an
“orchestrated fraud”; he argued that he was not part of the circle, but did not
seek to dispute the evidence which Louise King had given relating to the circle
of funds transfers. In addition he denied that the other parties would have
received any money from Gillex
out of the reclaimed input tax, which he said
would be needed to pay
Gillex
’s tax and its creditors. The tests as to the
mental element must therefore be applied on the basis of the totality of the
remaining evidence, rather than by reference to Mr Gill’s own evidence as to
his state of mind.
62. In order to
consider the mental element, it is necessary to set out further findings as to
the history and development of Gillex
’s business, putting the two deals into
context. (Some of this material has to be covered outside any strict
chronological sequence.)
63. On 12 January
2004 (after Gillex
had been trading for just over five months) Mr Gill had
telephoned HMRC’s National Advice Service Contact Centre to ask whether there
were any restrictions on what he could buy and sell. The HMRC “agent”
established in the course of the conversation that Mr Gill wanted to buy and
sell telephones locally, and advised that he did not need permission from HMRC
to do this.
64. On 30 January
2004 Gillex
issued an invoice addressed to a company called Vispar Ltd for
phonecards of three different types. The price was £38,297.87; the VAT at 17.5
per cent was £6,702.13, giving a total price of £45,000. The supplier to
Gillex
, Hi-Profile Ltd, issued an invoice dated 2 February 2004. It showed that
the face value of the cards was £50,000, and that they were being supplied at a
10 per cent discount. The total price net of VAT was £37,919.49; the VAT was
£6,635.11, giving a total price of £44,550.
65. On 2 February
2004 Gillex
issued a further invoice to Vispar; this related to two types of
phonecards with a face value expressed to be £100,000 in total. The price was
£76,595.75; the VAT was £13,404.26, giving a total price of £90,000.01. Hi-Profile
Ltd issued an invoice on the same date to
Gillex
showing that the cards were
supplied at a 10 per cent discount. The price was £76,595.75; with VAT of
£13,404.25, the total price was £90,000. However, this was expressed to be
“less 1% com” of £900, giving a final figure of £89,100. (There was no
adjustment to the VAT in respect of what we take to be the commission.)
66. The two
phonecard transactions were “back-to-back” deals. In respect of the first,
Vispar Ltd paid £14,020 on 27 January and £30,975 on 28 January, totalling
£44,995; the evidence does not disclose why Vispar did not pay the full amount
of £45,000, although these payments preceded the date of issue shown on the
invoice from Gillex
.
Gillex
paid Hi-Profile on 30 January; the sum paid was the
full £44,550, and
Gillex
was charged £20 by the bank for the “Sameday Pymnt”.
Thus the net profit to
Gillex
on the first deal was £425 on turnover of
£44,995.
67. In respect of
the second deal, Vispar made several payments on different dates. On 3 February
the amount was £18,000. On 4 February the amount was £8,040. On 9 February
there were two payments, £11,460 and £20,000. On 11 February the amount was
£20,000. Meanwhile, on 10 February, Gillex
made a payment of £44,550 to
Hi-Profile Ltd, and on 13 February another of £35,500. (In respect of these
transfers,
Gillex
’s bank made two charges of £20.) The payments to Hi-Profile
Ltd totalled £80,050, leaving a balance outstanding of £9,050. In a letter to
HMRC dated 23 June 2004, Mr Gill confirmed that “£9,050 was paid in cash by
Vispar Ltd to Hi-Profile on our behalf”.
68. It is not clear
from the evidence how the remaining balance due from Vispar to Gillex
of £3,450
was paid. On the assumption that it was,
Gillex
made a profit of £900 less £40,
ie £860 on turnover of £90,000, a similar rate to that on the first of the
phonecard deals (a percentage rate which would have been identical but for the
£5 discrepancy in the amount paid by Vispar in respect of that first deal). HMRC
subsequently established that the supplier, Hi Profile Ltd, did not declare and
did not pay the relevant amount of tax due in respect of these deals. As the
documents relating to these transactions had some similarities to deals tainted
by MTIC fraud, Mr McPartlin on HMRC’s behalf considered it highly likely that
such deals were part of an overall scheme to defraud. However, this has not
been conclusively established by HMRC, despite the strong suspicions to this
effect.
69. In March 2004, HMRC
attempted to contact Gillex
. On 18 March 2004, a seven-day “calling/warning
letter” was left by HMRC at
Gillex
’s principal place of business. This letter
detailed possible action, including cancellation of the VAT registration.
70. On 24 March 2004
HMRC wrote to Gillex
setting out HMRC’s concerns relating to MTIC fraud in
certain trade sectors, with specific reference to computer equipment, mobile
phones, ancillary items and other goods. The letter indicated that with
immediate effect, requests for verification of the VAT status of new customers
and suppliers should be faxed to HMRC’s Redhill office. The letter listed ten
items of information which applicants should supply, if known. The letter gave
no indication of the time which such VAT status verifications would take.
71. Just under a
year later, on 18 March 2005, Narinder Hunjan (an officer of HMRC) visited
Gillex
’s premises. During the two-hour meeting, he discussed with Mr Gill the
business activities of
Gillex
. The main business activity was described as
importing luggage, CD players and watches from China and Hong Kong for sale to
UK
retailers and wholesalers. Mr Gill described the profit margins as “very attractive”.
The officer noted Mr Gill’s comment that he had considered going into the
mobile phone business, but when he had approached his bank for an overdraft or
loan, the bank had insisted that his account would be closed. In his oral
evidence, Mr Gill commented that this statement was incorrect; when he had gone
to open the account (which we conclude to have been in 2003, as the earliest
statement in evidence dated January 2004 shows a balance brought forward),
Barclays had asked him what he wanted to deal in. He had answered that he
wanted to deal in watches and luggage, but when he had also mentioned
telephones, Barclays had said that it would not open the account. Mr Gill had
then asked why not, and said “Forget about telephones”.
72. It is not clear
from the evidence whether Mr Gill would have been aware of the underlying
reasons for this stance taken by Gillex
’s bank, but this must have made him
aware of the caution with which other commercial entities approached such
transactions. In his second witness statement Mr Gill said that he had
mentioned in the course of a discussion with a VAT officer in 2004 that the
bank did not seem to be interested in big financial deals; we do not find this
evidence persuasive, especially in the light of his oral evidence as to the
discussion with Barclays. According to his own oral evidence, he was seeking
mobile phone transactions in 2004 and subsequently in 2005, but nothing was
available at those stages.
73. Mr Gill first became aware of HKS in about August 2005 through its advertisement on a website called Alibaba.com. The advertisement indicated that HKS was dealing in electrical goods; in evidence, Mr Gill thought that this included computers, but he could not recollect whether the advertisement indicated that HKS was dealing in mobile phones. He accepted that it indicated that HKS’s trade was “up and running”. He made contact with them and subsequently met them; Mr Saif, the director of HKS had come to see Mr Gill when on behalf of HKS Mr Saif had bought MP3 players and watches in September 2005. At this meeting, Mr Saif had indicated to Mr Gill that HKS was going to sell or might be dealing in phones. Mr Gill said in evidence that subsequently, in January 2006 or thereabouts, Mr Saif had said that he was selling a few phones, but at that time Mr Gill had no customers for phones. Subsequently he had gone to see Mr Saif “in April some time” and the latter had handed over documentation showing very substantial turnover (considered below). Mr Gill’s evidence was that HKS’ due diligence documents were provided at that stage; we refer to this later.
74. In relation to
the account which Gillex
opened with First Curacao International Bank (“FCIB”),
Mr Gill’s evidence in his second witness statement was that he used FCIB as a
result of noticing from his due diligence check that it was the bank used by
HKS and due to FCIB’s willingness to deal in high value transactions. However, in
oral evidence he stated that Mr Saif of HKS had said, on the occasion when he
bought the luggage, watches and MP3 players, “But if you want to deal in phones
you should open an account with this Bank of Curacao”; Mr Gill had subsequently
contacted FCIB’s agent, whose name was Chris, and whose company (Transworld
Payment Solutions) had given the reference to enable
Gillex
to open the FCIB
account. In cross-examination Mr Gill admitted that his account of the events as
set out in his second witness statement was mistaken. He stated that when he
met Mr Saif, the latter had said that if Mr Gill wanted to open an account, he
could do so with FCIB. He accepted that he had opened the account in September
2005; we find that this was long before he saw the HKS due diligence documents.
In his first witness statement he had stated that FCIB was used as it was able
to facilitate much quicker transfers than
UK
high street banks; we find that
this was not the real reason for opening the account with FCIB, and that the
true reason was to enable
Gillex
to participate in mobile phone and similar
deals if it could succeed in finding such deals. In cross-examination he
explained that although he had opened the account in September 2005, it had not
been used until the present deals.
75. Although Mr Gill
had opened the FCIB account for Gillex
at Mr Saif’s suggestion to enable
Gillex
to deal in phones, the information which Mr Gill provided to FCIB contained no
suggestion that dealing in phones was in contemplation.
Gillex
’s business was
described as “Wholesale trade business
UK
to
UK
, trading in luggage, watches,
CD players (B2B)” [ie “business to business”]. The only additional description
of products offered or traded was “other general items”. The pages headed
“Special VAT Certification” were struck through with the annotation “N/A”;
these pages were for companies “engaged in the computer/telecom business”, and
contained various undertakings including those concerning integrity of supplies
and suppliers, ensuring the commercial viability of transactions, and ensuring
that the goods being purchased/sold did actually exist. We find that Mr Gill
deliberately avoided completing these details despite his intention that
Gillex
should participate in mobile phone deals.
76. Mr Gill stated in cross-examination that Monza Trading had first contacted him by phone about a month before the actual deal date of 28 April. There had been no correspondence at that stage. He could not remember how early Monza Trading had specified the exact quantities of mobile phones and iPods; this had been “a few phone calls later”, but he was unable to say exactly at what stage this had been. The discussion of payment arrangements had been about two weeks before the deal. (We comment below on the nature of Monza Trading’s initial approach.)
77. On 26 April 2004
Gillex
applied by fax for verification of VAT status of HKS Trading. Mr Gill
phoned HMRC’s Redhill office to obtain its fax number, but did not discuss the
application with anyone at Redhill at that stage.
78. The invoices as between the respective parties in the chain were dated 28 April 2006. However, with the exception of the initial bank transfer made by UT, the bank transfers as between the respective FCIB accounts were not made until 5 May 2006. We consider this below.
79. We find the circularity of funds transfers striking. Mr Gill’s evidence was that he was unaware of the other elements in the circle, but he did say that he was involved in the funds transfers. A further notable feature of the funds transfers, as confirmed by Ms King’s evidence, was that the payments for the two deals had been combined. HMRC established the following payment flows from the FCIB accounts of the parties concerned, all being in sterling:
(1) The first FCIB transfer from URI’s account was on 3 May 2006 (which was a Wednesday), in the sum of £1,000,100 made to the FCIB account of Monza Trading. All the other transfers made from URI’s account and the FCIB accounts of the other parties were made on 5 May 2006, the Friday of that week.
(2) On that day, five further transfers of £1,000,100 each from URI’s account were made, and a sixth of £89,560. Thus the total transferred from URI’s account to that of Monza Trading was £6,090,160.
(3)
Seven transfers were made from Monza Trading’s account to that of Gillex
;
the first was of £1,000,100, the following five of £1,000,080 each, and the
final one of £89,540. The total transferred from Monza Trading’s account to that
of
Gillex
was therefore £6,090,040.
(4)
Seven transfers were made from Gillex
’s account to that of HKS; six were
of £1,000,060 each, and the final one £74,977.50. The total transferred from
Gillex
’s account to that of HKS was therefore £6,075,337.50.
(5) Seven transfers were made from the account of HKS to that of IIS; six were of £1,000,040 each, and the final one of £71,572.50. Thus the total transferred from the account of HKS to that of IIS was £6,071,812.50.
(6) Seven transfers were made from the account of IIS to that of West 1. The first two were of £1,000,040 each. The following four were of £1,000,020 each. The final one was of £68,187.50. The total transferred from the account of IIS to that of West 1 was accordingly £6,068,327.50.
(7) Seven transfers were made from the account of West 1 to that of URI. The first was of £1,000,020, the following five of £1,000,000 each, and the final one of £64,762.50. The total transferred from the account of West 1 to that of URI was therefore £6,064,782.50.
80. The results of these transfers were:
(1) URI paid out £6,090,160 and received £6,064,782.50, thus making a loss of £25,377.50;
(2) Monza Trading paid out £6,090,040 and received £6,090,160, thus gaining £120;
(3)
Gillex
paid out £6,075,337.50 and received £6,090,040, thus gaining
£14,702.50;
(4) HKS paid out £6,071,812.50 and received £6,075,337.50, thus gaining £3,525;
(5) IIS paid out £6,068,327.50 and received £6,071,812.50, thus gaining £3,485 (which should have been £3,525: see below);
(6) West 1 paid out £6,064,782.50 and received £6,068,327.50, thus being left with £3,545 and no other funds out of which to pay its VAT liability of £903,787.50 in respect of the two deals. (The gross amount, ie including VAT, which should have been paid by IIS to West 1 was £6,068,287.50, ie £40 less than the amount paid);
(7) The total of gains made by all the other parties was exactly equal to the loss made by URI.
81. We find it to be
a feature lacking in commerciality that all these transactions, including in
particular those relating to non-UK
parties, were in sterling.
82. The information discovered by HMRC in relation to invoices was incomplete, in that details of invoices from UT to West 1 were not available and there were no invoices from Monza Trading in respect of any onward supply, but analysis of the remaining invoices shows the following totals:
(1) Invoices from West 1 to IIS; £6,068,287.50. In the absence of invoices from UT, it is not possible to calculate the gross profit made by West 1 on these deals. The amount invoiced was (as indicated above) £40 less than the amount transferred from the FCIB account of IIS to that of West 1;
(2) Invoices from IIS to HKS; £6,071,812.50. The gross profit on these invoices was £3,525;
(3)
Invoices from HKS to Gillex
; £6,075,337.50. The gross profit on these
invoices was £3,525;
(4)
Invoices from Gillex
to Monza Trading; £6,090,000. The gross profit on
these invoices was £14,662.50. The amount invoiced was £40 less than the amount
transferred from Monza Trading’s FCIB account to that of
Gillex
.
On the basis that the supplies had (allegedly) been made by UT, there was no apparent contractual foundation for the payments being made by West 1 to URI rather than to UT.
83. Mr Gill’s
evidence was that he was unaware of the other elements in the circle, but he
did say that he was involved in the funds transfers. We found his evidence as
to such involvement unconvincing; he indicated that he had been following the
receipts on the internet and had expected all the money to come together rather
than in instalments. He did not explain why he had not expected the money in
respect of the two deals to come in separately, even though the same parties
were involved. He suggested in oral evidence that the explanation for not
transferring the full amount of the first instalment to come in was that the
difference might have been due to bank charges. Given the size and importance
to Gillex
of the amounts due in respect of these two deals, we would have
expected him to remember more clearly the process of making the payments and
the basis on which they had been calculated.
84. We accept that there are various relatively minor debits shown on the account which could be attributed to bank charges, but the amounts of those debits vary and thus do not amount to a satisfactory explanation for the equal downward adjustments made to the second to fifth amounts paid out as compared with the corresponding amounts paid in, or for the slightly greater difference between the first payment and the first receipt. His explanation for not waiting until all the money had come in from Monza Trading before paying HKS was that Mr Saif of HKS had trusted Mr Gill with the goods so Mr Gill felt that he had to give HKS the money as soon as it came. In the light of the commercial risks involved, we do not find this a satisfactory explanation for falling in with the payment patterns dictated by the other parties’ arrangements with FCIB. We find that Mr Gill was familiar with such payment patterns, given the similar payment pattern in the Vispar phonecard deals.
85. Turning to
Gillex
’s general VAT history, the turnover for its first year of registration
commencing on 1 August 2003, which included the transactions with Vispar, was
£204,524; for the second it was £221,817, for the third, which included the
transactions with Monza, it was £6,343,610, and for the next, to 30 July 2007,
it was £5,312,953.
86. In relation to
Gillex
’s VAT compliance history, HMRC’s VAT records relating to
Gillex
show
that of the 16 VAT returns submitted, five showed net tax due to HMRC, and the
remaining 11 showed claims. Of the five showing net tax due, the only one
rendered and paid by the due date was that for period 01/04. Its submission of
EC sales lists showed no declared EC sales for the period from 1 August 2003 to
31 March 2006, £6,090,000 for the quarter ending 30 June 2006, and a total of
£4,231 for the whole of the following calendar year.
87. Analysis of
Gillex
’s financial position over the three years to 31 July 2006 shows the
following. In the first year, it made a gross profit of 4 per cent on sales of
£207,979 (after taking account of other income of £2,977). In the second year
it made a gross profit of 15 per cent on sales of £248,614. In the third year
to 31 July 2006, which included the two deals which are the subject of this
appeal, it made a gross profit of 11 per cent on sales of £6,319,335. However,
if the two deals are excluded from the calculations, the sales within
Gillex
’s
“usual” trading activity amounted to £229,335; the opening stock was £35,241,
purchases were £549,688 and the closing stock was £92,196. Taking these figures
into account, the cost of sales was £457,492, resulting in a “gross profit”
figure of minus £228,157, representing a loss on sales of 99 per cent. As we
put this to Mr Gill in our questions to him, this suggested that for every £1 worth
of goods which
Gillex
sold in that year, it actually cost
Gillex
£2.
88. Mr Gill was
able to explain £78,000 of the additional cost. His supplier had over-shipped
ten containers of luggage, but would not release them to Gillex
until each was
paid for out of sales proceeds from the preceding one. The additional cost was
attributable to demurrage, ie storage charges pending release of each container.
In addition,
Gillex
had had to clear some of the stock at below cost, and the
supplier had insisted on
Gillex
taking a lease of a warehouse from the supplier
(or possibly an associate of the supplier) and investing in that company.
However, Mr Gill was not able to provide an explanation for the majority of the
additional cost giving rise to the loss. Mr Wetton informed us that there was a
creditor shown in the accounts that had not been paid but had been included in
the purchases; as at the date of liquidation,
Gillex
had owed approximately
£230,000 to creditors, mainly the one supplier. Mr Gill explained in oral
evidence that
Gillex
had paid £36,000 rent for its premises to its landlord; it
was not clear to us whether this was Marketmakers Investments Ltd or
Marketmakers International, nor was the timing in respect of the liability to
these additional amounts clear. We find that a substantial part of the
additional costs incurred by
Gillex
during the relevant period remains
unexplained.
89. The accounts
also showed a bad debt figure of £633,203. Mr Gill was unable to explain why
this was the amount shown, rather than the amount of the input VAT denied by
HMRC in respect of the two deals, namely £904,837.50; he had relied upon the
firm which prepared the accounts to produce what was required for Companies
House. He accepted, in answer to Mr Wetton’s question, that he was not very
good with accounts. He had had to put about £120,000 into Gillex
from 2005 to
2006, and some in 2007.
90. Mr Gill denied
in cross-examination that the financial pressure on Gillex
following the
arrival of the containers from the supplier and the need to pay demurrage costs
was the reason for entering into the deals involving Monza Trading and HKS. He
maintained that he had been in touch with “these people” long before the date
in March when the demurrage costs began to be incurred. We do not accept the
latter statement; although he had had contact with Mr Saif of HKS in August and
September 2005, he accepted that at the time there had been no prospect of a
deal. Similarly, his evidence was that he had been contacted by Monza Trading
about a month before the deal and that he had subsequently (about two week
before the deals) had telephone conversations with Monza in which it had
finalised the amounts of goods required. We find that the financial pressure on
Gillex
in March 2006 was a relevant factor in Mr Gill’s decision to participate
in the deals.
91. By way of
background to that finding, although Mr Gill was described as an experienced
businessman, the basis on which Gillex
had been managed since commencement of
its trade could not be described as resulting in financial success. The first
year produced an operating loss of one per cent, the second an operating profit
of four per cent, and the third less than one per cent despite the substantial sales
of over £6.3 million net of VAT, including the deals with Monza Trading. Mr
Gill accepted in oral evidence that he was not a very good (ie successful) businessman;
he said that he tried his best, but accepted that
Gillex
had not made much
money, although he pointed out that it had made the money in question in the
appeal.
92. We are satisfied
that Gillex
, through Mr Gill, was aware of the existence of MTIC fraud and the
risks to any party involved in any way in deals which proved to be connected to
such fraud. Following its participation in the phonecard deals purchased from
Hi-Profile Ltd, HMRC had approached
Gillex
and set out the concerns in the
letter of 24 March 2004. Mr Gill indicated in his oral evidence that he was
aware that the need for verification of VAT numbers arose because of the fraud
concerns referred to in that letter. When HMRC visited
Gillex
on 18 March 2005,
Mr Gill referred to the concerns which had been expressed by Barclays Bank
about involvement in mobile phone trading.
93. Mr Gill agreed
in cross-examination that he would be particularly cautious when dealing with
new customers. However, in relation to these deals involving products in which
Gillex
had not previously dealt, with high values out of all proportion to
Gillex
’s previous trading pattern, Mr Gill did not exercise that degree of
caution. His evidence was that he had been contacted by Monza Trading about a
month before the deal date of 28 April. Thus there was adequate time for
Gillex
to carry out extensive and rigorous checks on Monza Trading in advance of the
actual deals. However, he received nothing on paper until immediately before
the deal date. Mr Gill admitted in evidence that he contemplated going out to Italy to meet Mr Mensan, the director of Monza Trading, but that he had not gone. The fax
headers on some of the documents relating to the due diligence on Monza Trading
give the date as “27 Apr 06”, the day immediately before the invoice date and
the shipping of the phones and the subsequent shipping of the iPods on the
Sunday. Various other (largely) similar documents carry the fax date “26 May
06”, long after the deals had gone through; we find that the only purpose of
such subsequent documentation was a “box ticking exercise”, designed to
demonstrate to HMRC that the relevant formalities had been carried through, rather
than providing
Gillex
with the necessary commercial assurances in advance of
the deals.
94. The nature of
the approach by Monza Trading to Gillex
should have put Mr Gill on further
enquiry. The last dealings between Tessuflex and Mr Gill’s family must have
been at least 15 years before the beginning of 2006, as Tessuflex had ceased
business in 1990. Mr Gill was not contacted by Mr Paollo, nor did Mr Gill
attempt to contact Mr Paollo to verify the recommendation or even to thank Mr
Paollo for it. The commercial context in which there had been dealings between
Tessuflex and Mr Gill’s family business had been that of watches, very
different from that of mobile phones and iPods; why would Mr Paollo have been
recommending
Gillex
to Monza Trading? In particular, if Monza Trading was claiming
in its introductory documentation that it was a large and well-established
trader in that sector, why would it be going outside its usual contacts and
marketplace to obtain Nokia phones and iPods? An ordinarily competent director
in Mr Gill’s position could have been expected to raise detailed enquiries as
to Monza Trading’s approach, but he did not.
95. A further
question which arises is why, if no information about Monza Trading had been
received until the day before the deals even though Mr Gill’s evidence was that
there had been telephone calls a month before and about two weeks before the
deal date, Mr Gill did not seek further information about Monza Trading before
getting to the stage of being committed to the deals. The introductory
documentation appears to have been received too late for any commercial
decision to be made by Gillex
to withdraw from the deals on the basis that it
had received insufficient commercial assurances as to Monza Trading’s status.
We consider that an ordinarily competent director would have made efforts well
in advance of that stage to find out more about a party which was seeking goods
of such substantial value from
Gillex
, and would have become anxious that
nothing on paper had been provided to satisfy
Gillex
that it was dealing with a
genuine trader.
96. Gillex
did not
verify the VAT registration number of its supplier HKS before the deals were
carried out.
Gillex
made a Europa website check on 19 May 2006, about three
weeks after the deal date. The response to this was dated 1 August 2006. Mr
Gill maintained that he had made an earlier check, but that he had lost it and
therefore he had made another to keep
Gillex
’s records in order. As Mr Gill did
manage to keep most of
Gillex
’s due diligence materials, we find this evidence
unconvincing; we find that he did not make an earlier check, and that, to the
extent that he relied on anything, he relied on other information as to the VAT
position of HKS.
97. Mr Gill
acknowledged that he had been aware of the contents of HMRC’s letter to Gillex
dated 24 March 2004. This had stated that the information to be provided to
HMRC when requesting verification of a trader’s VAT number should, if known,
include the following:
(1) The name of the new or potential customer/supplier;
(2) Their VAT registration number;
(3) Their contact numbers (including telephone number, fax number, e-mail address and mobile numbers if known);
(4) The Directors and/or responsible members;
(5) Whether they are buying or selling goods;
(6) The nature of the goods;
(7) The quantities of the goods;
(8) The value of the goods;
(9) Their bank sort code and account number;
(10) HMRC indicated that it would also ask the applicant trader to continue forwarding, on a monthly basis, a purchase and sales listing with the identifying VAT registration numbers against the suppliers/customers to Redhill VAT Office.
98. In Gillex
’s
letter faxed to HMRC’s Redhill office on 26 April 2006 requesting VAT
verification of HKS, the only details which Mr Gill provided about that company
were its VAT registration number and its company number. HMRC did not respond
immediately, so
Gillex
did not have a VAT verification of HKS before the deals
had taken place. For some unexplained reason, (which we presume to have been to
make sure that
Gillex
’s due diligence documentation would appear to be in order
in the event of a subsequent inspection)
Gillex
sent a further copy of this fax
on 23 May 2006. HMRC’s Redhill office did not respond until very much later, 25
September 2006, when a copy of the May version of the fax was returned with an
official stamp showing that date, and an annotation:
“Please provide copy of:
Letter of introduction
VAT Certificate
Certificate of Incorporation
This response relates to document received in April 2006 and May 2006.”
99. Mr Wetton
argued that HMRC’s request for the additional information (in its annotation on
the returned copy of Gillex
’s faxed letter) amounted to a change in the rules;
however, the information provided in
Gillex
’s original request fell very far
short of that suggested in HMRC’s letter of 24 March 2004, so we find Mr Wetton’s
criticism of HMRC unjustified. It is clear that Mr Gill went ahead without
obtaining verification from HMRC. If he had genuinely been anxious from the
point of view of providing commercial protection to
Gillex
by obtaining the verification
before it was committed to the deals, he might have been expected to “chase”
HMRC for a response. However, his evidence was that he did not telephone the
Redhill office other than to obtain its fax number (which had been set out in
HMRC’s letter of 24 March 2004, so that he does not appear to have looked at
the requirements in that letter before sending in the verification request). We
find that his only purpose in seeking this VAT verification from HMRC was to
include it in
Gillex
’s due diligence records to be shown to HMRC if required,
rather than looking for commercial reassurance that
Gillex
would be dealing
with a company with a valid VAT registration.
100. It is clear that the points set out in HMRC’s letter of 24 March 2004 relate only to VAT verification and do not amount to a recommended checklist for traders in evaluating potential deals, and that it was up to the trader concerned to satisfy itself in all relevant respects both as to the commercial desirability of dealing with that other party and as to the security of the commercial position. As confirmed in Mobilx and others (CA) at [87], a trader must exercise its own independent judgment in deciding whether to enter into a particular transaction, and cannot delegate that judgment to HMRC. We accept Mr Gill’s evidence that he had not received a copy of VAT Notice 726 until after the deals, as the note of Mr McPartlin’s visit on 19 July 2006 indicated that a copy was given to him during that visit, so at the time of the deals he had not been aware of the points set out in that Notice.
101. Mr Gill was unable to remember whether HKS had handed to him or faxed to him the due diligence documentation relating to HKS. He confirmed that he had received them at about the time when he was considering entering into the transaction with HKS. As this could not have been before the approach from Monza, we find that this was within the last month before the deals took place. There is no fax header on the copy documents to assist in verifying the date, nor are the documents dated. The documents showed that HKS had been incorporated in 2004, but had not been VAT registered until 13 January 2006, three and a half months before the deals. Thus HKS had not been registered for VAT at the time when Mr Gill had first met Mr Saif and supplied him with a small quantity of goods, although Mr Saif had told Mr Gill at that stage in September 2005 that HKS was dealing in mobile phones. Mr Gill did not enquire into this apparent discrepancy. Nor did he appear to be concerned by HKS’ different descriptions of itself as “a well established company dealing in a variety of different commodities” (in an introductory letter dated 27 April 2006, the day before the deals) and as “a new and very unique company specialising in communications” (in a different and undated introductory letter contained in the otherwise identical set of due diligence documentation relating to HKS as exhibited to Mr Gill’s witness statement).
102. Mr Gill
accepted in cross-examination that he was “amazed” by the scale of HKS’
turnover (£60 million for the relevant quarter) as shown on the copy VAT return
supplied to him by HKS. Despite this, he did not make any further enquiries
before proceeding with the deals. Mr Gill indicated that he saw this as a basis
for confidence in HKS. He did not ask why such a level of turnover had been
achieved so soon after HKS’ recent registration, nor why, on a turnover of such
a high level, the net VAT due had been as low as £6,021. We find that his
failure to enquire further shows an uncommercial lack of concern in the context
of the largest deals in which Gillex
had ever considered participating.
103. Although
Gillex
sought a report on HKS’ credit rating from creditsafe.com (the report
carries no date to indicate when it was obtained, so we assume in
Gillex
’s
favour that it was obtained before the deals took place), no such rating was
available as financial statements had not been filed. This should have raised
concerns in Mr Gill’s mind, as the recent high turnover, coupled with the absence
of any financial information, called into question how a company which had only
recently started to trade sufficiently to become VAT registered could have
financed itself in order to achieve that turnover and to participate in the
deals with
Gillex
amounting to over £6 million. Again, his reliance on the VAT
return turnover figure as some form of reassurance ignored the commercial
concerns which an ordinarily competent director should have been expected to
display.
104. Mr Gill did visit the premises of HKS. However, he appears to have ignored a number of factors which ought to have been seen as warning signs. The premises, of which he took photographs, did not look like those of a company with a turnover of £60 million in one quarter. There were no employees at the company at the time of the visit other than Mr Saif. Mr Gill assumed from the presence of a number of computers that the rest of the staff were simply not there. He was unable to remember what day of the week his visit had taken place, or the time of day. Other than the photographs (as to which there was no evidence of the date when they had been taken), he had kept no records of his visit, as might have been expected to be the case as a matter of ordinary commercial prudence. Mr Saif of HKS was presenting his company as a wholesaler, yet Mr Gill did not ask to see HKS’ warehouse, nor did Mr Saif invite him to do so.
105. The due
diligence carried out by HKS on Gillex
was very
limited
. Mr Gill provided Mr
Saif with
Gillex
’s certificate of incorporation and VAT number. Mr Gill
indicated in oral evidence that he also gave Mr Saif “some trade references”;
he was able to remember only one, a local firm, in respect of
Gillex
’s trade in
watches and luggage, but this did not relate to trading in mobile phones and
iPods. He pointed out that Mr Saif knew that
Gillex
was dealing with MP3
players, but acknowledged that Mr Saif would have been aware that
Gillex
was
not dealing in such items on a large scale, although Mr Gill stressed his
connections in business. He accepted that such connections did not extend to
the mobile phone industry.
106. Mr Gill did
not find it surprising that Mr Saif of HKS was prepared to provide Gillex
with
goods worth £6 million without some much firmer indication that it was “good
for the money”; his explanation was that Mr Saif trusted him. Mr Gill did not
accept that in effect HKS had granted
Gillex
£6 million worth of credit. We
consider the contractual implications below, so do not comment on his view at
this stage. We find that the absence of any significant due diligence carried
out by HKS should itself have raised questions in Mr Gill’s mind as to the
reasons why he was being invited to commit
Gillex
to participate in
transactions on such advantageous terms, and why Mr Saif should have been
putting such a degree of trust in him.
107. The due diligence which Mr Gill carried out in respect of Monza Trading was comparable in the degree of its inadequacy to that in respect of HKS. The version of Monza Trading’s introductory letter attached to Mr Gill’s statement carried no date. Mr Gill indicated in evidence that the due diligence documentation from Monza Trading was only faxed to him two days before the deal. He said that he had been telling Monza Trading to send it to him as soon as possible. Another of the versions of that letter contained in the trial bundle (which, as we consider below, had certain differences) was also undated but carried the fax header date 27 April 2006, the day before the deals rather than two days before. A further point arising from the letter is that the bank details set out at the foot of the letter (in a box which should not have been difficult to understand even if the reader did not speak Italian) showed that value was to be dealt with in Sterling. There is no evidence that Mr Gill did anything to enquire why an Italian company, trading within the Euro zone, would be expecting to be paid in sterling rather than in Euros.
108. There is no
evidence that Gillex
carried out anything by way of due diligence on Monza Trading other than to rely on the materials which that company provided. A
significant part of that documentation was in Italian. Mr Gill confirmed that
he did not speak Italian, and that a particular document had meant nothing to
him when he received it. His evidence was that he had phoned Monza Trading when
he received it to ask them what it was and that he had written it down on the
document as “Memorandum of Association”. However, the only copy in the trial
bundle of that document carrying that annotation carries the fax header “26 May
06”; the version exhibited to his statement and the other copies in the trial
bundle carry no such annotation, so we find that Mr Gill cannot have had that
conversation with Monza in advance of the deal date. A similar annotation was
made on another document, “Certificate of Incorporation and V.A.T.”, and again
the relevant version carries the fax header date of 26 May 06. Other versions
of this document appeared respectively in the trial bundle and as an exhibit to
Mr Gill’s statement, but his identification leading to the annotation must have
been after the deal date. Apart from being in Italian without an accompanying
translation, the copies of each document are of poor quality and not easily
legible even to a speaker of Italian. We find that the absence of any further
enquiry in advance of the deals shows a complete lack of commercial concern
despite their size and the nature of the commitments which
Gillex
was about to
enter into (if it had not already bound itself to the transactions by oral
agreement in advance).
109. The version of Monza Trading’s “Due Diligence Questionnaire” carrying the header date 27 April 06 contained a trade reference, being a company in Poland. Mr Gill indicated in evidence that he did not normally take trade references, but acknowledged that this might be appropriate in circumstances where credit was being offered to a trader, in order to know more about who the trader was and whether it could pay, particularly where there was a danger of fraud. He did not take up the reference offered by Monza Trading, although by the stage he received this questionnaire, it may have been too late for him to attempt to do so. His evidence was that “I just did not think of it at the time”. Mr Gill believed that he was protected by means of the goods being released on “ship and hold” terms, but was unable to give a satisfactory explanation of what would have happened if, for example, the goods had been destroyed by fire or if Monza Trading had taken possession of the goods and refused to make payment.
110. Although
HMRC (in its former persona HM Customs and Excise) had referred in its letter
dated 24 March 2004 to the need to verify the VAT status of customers as well
as suppliers, there is no evidence that Gillex
took any steps to do so in
relation to Monza. At minimum, a Europa website check could have been carried
out, but was not. Even though Mr Gill did not receive the papers until 27
April, there would have been time to access that website before the deals were
finally carried out.
111. The
information included in the questionnaire provided to Gillex
on 27 April 2006
showed that Monza Trading had been incorporated on 24 January 2005 and
registered for VAT from 10 February 2005, not much more than a year before the
date of the two deals. In evidence, Mr Gill said that he had the documents and
knew that Monza Trading had a turnover of 415 million Euros. His explanation
for this level of turnover so soon after first registration was that for a
company dealing in mobile phones the turnover could increase drastically. He
agreed that this level was “astronomical”, but could not satisfactorily explain
why a company with this apparent level of turnover would be approaching a
company of
Gillex
’s size.
112. Despite the
alleged recommendation by Mr Paollo of Tessuflex, in respect of which there was
no documentary evidence, the lack of any contact between Mr Paollo and Gillex
meant
that Mr Gill received no form of assurance as to Monza Trading’s standing in
the market in which it claimed to be engaged or as to whether it was a bona
fide company.
113. In the
version of its “due diligence questionnaire” faxed to Gillex
on 27 April 2006,
Monza Trading listed, under the heading “due diligence undertaken”, the
following: “Site visits, meetings with Directors, EC VAT number verification,
creditcheck and cross-referencing introductory company documentation”. Mr
Gill’s evidence was that he sent Monza Trading “my documents”; he explained that
these were
Gillex
’s certificate of incorporation and his VAT number, and nothing
more. He did not state at what stage he had provided these details. However, we
find that the
limited
scope of Monza Trading’s checking of
Gillex
’s status
should have raised concerns in the mind of an ordinarily competent director in
the light of the value of the proposed deals. Mr Gill thought that Monza
Trading was satisfied with Mr Paollo telling it that “reliable people” were
involved in
Gillex
.
114. Even though
three versions of Monza Trading’s introductory letter were included in the
evidence, it is not clear when Gillex
first received a copy of this letter. If
the first occasion was 27 April 2006, as indicated by the fax header on one
version, this would have given Mr Gill very little time to act on it. In
particular, he would not have had time to visit Monza Trading, despite his
evidence that he had contemplated doing so. If he had made such a visit, the
cost of which would have been justifiable in the context of such a large deal,
he would have been able to discover what HMRC established from their subsequent
enquiries of the Italian authorities, namely that the director was merely a
“frontman” and that in February 2006 (before these deals were in contemplation)
he had made a declaration to the authorities that his involvement in the
activities of the company was as a figurehead, that he had no transport or
similar documents, that the company did not have a real operating office, and
its correspondence was dealt with through an accommodation address. Thus Mr
Gill would have been able to establish that Monza Trading’s purported
operations were a sham.
115. Mr Gill
confirmed in evidence that he had not carried out any due diligence on Stolz
Transport, which he confirmed was acting as agent for Monza Trading and not for
Gillex
. His contention was that the goods had been sent on a ship and hold
basis, relying on a letter to ASC Worldwide Ltd (“ASC”, the freight forwarding
company referred to below) dated 28 April 2006 relating to both consignments. However,
two copy letters of that date from
Gillex
which were obtained by HMRC from ASC
showed that
Gillex
had issued simple instructions to ASC to release,
respectively, the iPods and the Nokia phones to Monza Trading c/o Stolz
Transport, without any reference to a “hold” basis. Thus
Gillex
was relying on
Stolz Transport to safeguard
Gillex
’s interests despite the lack of any
contractual link and the total absence of any check by
Gillex
of the standing
of Stolz Transport. We find that the omission of such a check displayed a
complete lack of the commercial concern which could be expected from a party
which was at risk to the tune of £6 million.
116. Mr Gill admitted
in evidence that he did not carry out any due diligence either in respect of
ASC, the company which was to act as freight forwarders for Gillex
(as well as for
HKS,
Gillex
’s supplier) and which was also to carry out the inspection of the
mobile phones and the iPods, or in respect of DMC Express Ltd (“DMC”), which
was to take responsibility for movement of the goods, actually through
sub-contractors. He stated that according to Mr Saif of HKS, the goods were in
ASC’s warehouse a week before the deal date of 28 April. Although Mr Gill
described ASC as being based in Hounslow, the address shown on its letterhead
is at Heathrow. The address for DMC is in Feltham, Middlesex, close to
Heathrow. Mr Gill admitted that the premises were not far from those of
Gillex
,
so that it would have been possible for him to go down and look at the goods,
but that he had not done so. As ASC and DMC were to take responsibility for their
respective functions in respect of goods to the total value of over £6 million,
we would have expected an ordinarily competent director in the circumstances to
have made appropriate checks on both these companies.
117. If Mr Gill had attempted to visit ASC’s premises, he would have discovered (as subsequently shown by HMRC’s officer Fu Sang Lam, the “broker officer” for West 1, the defaulter) that ASC had no premises of its own and no vehicles, so it used DMC as a sub-contractor, which in turn subcontracted the work to other hauliers.
118. ASC was
appointed to carry out inspections of the goods following a recommendation by
HKS. The use of the same company as that being used by HKS, Gillex
’s supplier,
should have raised in Mr Gill’s mind the question whether the inspection on
behalf of
Gillex
would be impartial and independent, and in particular would
form an appropriate basis for
Gillex
to feel justified in proceeding with the
transactions.
119. The inspection reports themselves raise a series of questions. The first is why there were two versions of each report for, respectively, the mobile phone inspection and the iPods inspection; although broadly the same, it is clear from the signatures that there were separate versions. The second, broader question is how ASC would have been in a position to carry out a full inspection of the goods in the time available.
120. The
description of the inspections indicates that they involved a manual full
count, full inspection; no check was carried out on IMEI numbers (which was a
serious omission, especially as Gillex
kept no record of such numbers), but a
check was said to have been carried out on the contents of each box. The outer
seal was described as “new”, and the condition of box “unmarked”. Although Mr
Gill said that the goods were in ASC’s warehouse (whereas in fact they could
only have been at DMC’s premises) about a week before the 28 April deal date,
there would have been no contractual basis to entitle
Gillex
to arrange for
inspection before the goods were in
Gillex
’s possession. At most, ignoring the
mechanics of payment for the goods, they can only be regarded as having been
available to
Gillex
on the invoice date of 28 April. We do not accept that it
would have been physically possible for ASC to carry out full manual inspections
of all the 12,000 boxes in the course of a single day, whether or not the whole
of that day was available for that purpose (and leaving aside the fact that ASC
was also supposed to be carrying out an inspection on behalf of HKS once the
goods were available to it through the invoicing arrangements between it and
its own supplier). Further, the results of the inspection, if they had been
adverse, would have come through much too late for the purposes of any decision
by
Gillex
to withdraw from the deals.
121. To sum up,
Gillex
’s due diligence was, at best, perfunctory. We find that it was
completely inadequate and could not be described as providing
Gillex
with the
necessary commercial assurances required when entering into high value
transactions. Much of it was carried out after the event and thus too late to
assist any decision whether
Gillex
should become involved in these deals. Despite
the
limited
nature of this due diligence, Mr Gill did discover a number of negative
indicators, yet he chose to go ahead with the deals without making any further
enquiries. It was clear from his oral evidence that he did not view the purpose
of due diligence as being to establish whether participation in the deal was an
appropriate commercial course to follow, but instead saw it as some form of
formal record-keeping process, probably purely for the purpose of showing such
records to HMRC after the event. This approach to due diligence is part of the “bigger
picture” which we consider below.
122. Despite the
very substantial values involved, Gillex
did not take out any insurance on
either consignment of goods. Mr Gill accepted that he had not paid adequate
attention to the question of insurance and had relied on the agent, namely ASC
Worldwide, and its subcontractors. Following commencement of HMRC’s
verification process, he obtained insurance details relating to DMC, one of the
two sub-contractor transport companies used by ASC. He did not obtain details
relating to the other sub-contractor. The insurance confirmation relating to
DMC indicated that there were overall indemnity limits of £500,000 for any one
claim in respect of warehousing and £250,000 in respect of haulage. In the
light of the values of the consignments, approximately £3 million each, and the
risks involved if the goods had been stolen or destroyed while in
Gillex
’s
ownership, we consider that Mr Gill’s attitude to the question of insurance
demonstrates a complete lack of commerciality. (We comment below on the
comparison with the approach taken in respect of
Gillex
’s other trading.) Given
the substantial risks involved, the absence of insurance is a persuasive
indication that Mr Gill did not consider his company really to be at risk,
because the orchestrated nature of the deals meant that the normal commercial
risks had been eliminated.
123. The absence of any formal contractual documentation to cover these two deals is another factor indicating lack of commerciality. The values were very substantial. We accept that in various commercial contexts substantial transactions are carried out with comparatively little contractual documentation, but in those contexts trading and contractual conventions have generally been evolved to govern the basis on which the transactions proceed. In relation to these two deals, there were specific questions needing to be resolved. When would title pass? On what basis could the goods be released? On which party did liability rest at any particular stage in the sequence of transactions, and therefore what insurance cover was required to protect against such liability? On what basis were the goods to be held pending payment as between the respective parties in the chain?
124. On the
question just posed, there was an element of conflict in the evidence. Mr Gill
referred to a letter from Gillex
dated 28 April 2006 and addressed to ASC
Worldwide. This instructed ASC to ship to Stolz Transport in Lahr, Germany, and to ship and hold the goods (both consignments), to be released to Monza Trading,
release date to be advised. However, there was also a letter of the same date
from
Gillex
to ASC instructing it to ship the iPods to Monza Trading, agents
Stolz Transport, which made no mention of ship and hold. Another letter from
Gillex
to ASC, also referring only to the iPods, instructed ASC to ship the
goods to Monza Trading, setting out the latter’s address in Italy; the standard
of English used in that letter, which differed from that in the earlier “non
ship and hold” one, was poor. The text was as follows:
“With reference to the 6000pcs Apple I Pod 60GB in black, Apple Remote control I sound Max speaker system. With you held for us.
Please ship to M/S Monza Trading SRL Via Monte Di Pieta 21, 21021 Milano, Italy. You can contact them regarding there clearing agents contract.”
125. A further
letter from Gillex
to ASC, also dated 28 April 2006, referred to an earlier
telephone conversation and instructed ASC to release the 6000 Nokia mobile
phones to Monza Trading, care of Stolz Transport, referring to the latter’s
address in Germany. On 5 May 2006,
Gillex
sent instructions to Stolz Transport
requesting it to release the goods, ie both consignments, to Monza Trading.
126. We find that
this documentation makes no commercial sense. Even if, as Mr Gill contended,
the goods were sent on a ship and hold basis, the reason would have been to
delay release of the goods to Monza Trading until Gillex
was satisfied that
full payment for both consignments had been received. As we have already
indicated, the payments made through the chain of parties involved in these
deals started with a single payment made by URI on 3 May 2006, and the rest of
the payments were not made until 5 May 2006. Although
Gillex
’s letter to Stolz
Transport was dated 5 May, there is no basis to justify a conclusion that
Gillex
was in any contractual relationship with Stolz Transport, which was
described as Monza Trading’s agent rather than an agent acting on behalf of
Gillex
. In the same way as
Gillex
’s release letters, those from all the other parties
in the chain were dated 28 April 2006, a week before the payments were made as
between the respective parties’ accounts with FCIB.
127. Another matter left unexplained as a result of the lack of contractual documentation is the basis, or “trigger”, for payment. The invoice date, 28 April 2006, was a Friday. The documentation relating to the movement of one of the consignments of goods, namely the iPods, was dated 30 April, which was a Sunday. The explanation for the delay in transporting this consignment was that there were restrictions on movements of lorries through Germany over the weekend. However, for the Nokia phones, the Eurotunnel documentation shows the travel time as 23.26 on 28 April. Whatever the reason for the discrepancy between these two consignments, there is no indication of the reason for the payment flows to have been delayed until a week after the invoice date, by which stage both consignments could have been expected to have been received and retained by Stolz Transport for at least a couple of days if not more.
128. Such small amount of documentation as existed was produced to a poor standard in terms of presentation and English, as in the extract set out above. Some other examples of this are:
(1)
Gillex
’s own letters showed its address as “Cumberland Bussines Park”, and referred to its “Company Reigistration Number”.
(2)
Previously Gillex
had produced handwritten invoices, with a properly
spelt address; as an example, the invoice to HKS for the MP3 players and other
items showed the printed home address from which
Gillex
had been operating at
that time, but all the other details were handwritten. In his oral evidence,
Mr Gill said that the reason for using typed invoices was that as the goods
were being exported, the typed invoices could be more easily read.
(3)
There is a close resemblance between the font size and appearance used
in Gillex
’s letters and that appearing in some of the correspondence from HKS.
(4)
In Gillex
’s introduction letter to Monza Trading dated 27 April 2006,
the third paragraph begins: “Please let us know when you will be visiting the England.” On the basis of Mr Gill’s oral evidence, we do not consider it at all likely that
he would have expressed himself in this way.
(5)
Gillex
’s invoices to Monza Trading numbered 674 and 770 give the
latter’s address split up inappropriately.
(6) One version of the introduction letter from Monza Trading carries a fax header of “27 Apr 06” There is also a copy without a fax header; neither is dated by the sender. The email address as shown in the plain copy does not precisely match that in the faxed copy, as the former shows it as “monzamaxF tiscali.it” with a space and no “@” symbol. The faxed copy gives no separate email address for the company, but the plain version shows this as “monzatradingF tiscali.it”. A further copy, with fax header 26 May 2006, largely matches the details in the plain copy, but does not include the company’s email address. In all the copies Mr Djoussu Kossi Mensan (whom Mr Gill knew as “Max”) was shown as “Dirretor” rather than “Dirretore”.
(7)
By its letter dated 2 May 2006 Gillex
requested purchase orders from Monza as
Gillex
had misplaced the previous orders. In these purchase orders the word given
for England is “Inglaterra” and not “Inghilterra”.
(8) It is notable that few if any of the letters were signed by the relevant parties (although this may possibly be explained by the use of fax transmission).
We consider these defects, taken together with the existence of a range of conflicting documentation, such as the shipping letters referring either to a simple shipping arrangement or to a ship on hold basis, to be a factor consistent with a conclusion that the transactions were orchestrated by one party. As the payment cycle commenced with URI, and Ravender Datta was the individual controlling both URI and UT, we consider it more likely than not that he was the orchestrator and controller of both these deals.
129. We accept Ms
Bevan’s submission that there was a marked difference between the way in which
Gillex
carried out its other business activities and the operation of its
business in relation to these two deals:
(1)
Banking for these deals was through FCIB, but for all other trading
Gillex
used its Barclays account, and Mr Gill was aware of the concerns which
Barclays had expressed in relation to phone transactions;
(2)
Other than for the goods covered by these deals, storage of goods was in
Gillex
’s own warehouse. In Mr McPartlin’s view, based on his visit on 19 July
2006, there would have been sufficient space for the mobile phones and iPods to
be stored in that warehouse rather than that of ASC Worldwide, the freight
forwarders (or in fact that of DMC, ASC’s sub-contractor);
(3)
Gillex
did pay insurance premiums to cover the goods in its own
warehouse, ie watches and luggage. As explained above, Mr Gill did not consider
insuring the mobile phones or the iPods. He did explain in oral evidence that
he relied on the insurance of the hauliers in relation to goods delivered by
container, but the value involved per container was much lower, at £12,000;
(4)
Other than the Vispar deal, Gillex
’s transactions were not carried out
on a back to back basis, whereas the two deals with Monza Trading were. Invoicing
details for
Gillex
’s other business demonstrated that invoices for sales and
purchases were dealt with separately, and that same day invoicing of sales and
purchases did not occur in that other business. Stocks were maintained, and
purchases frequently made without any particular customer in mind for the whole
consignment;
(5)
Payment patterns within that other business were far more variable, with
debts outstanding, in contrast to the payment arrangements for the deals under
appeal. Mr Gill indicated in cross-examination that he had expected the whole
sum due from HKS to come in one instalment, but had transferred funds as they
came in (subject to minor adjustments) because HKS had trusted him with the
goods so he had to give HKS the money as soon as it came. We accept Ms Bevan’s
submission that this was somewhat out of character with the basis on which the
rest of Gillex
’s trade was carried on;
(6)
As demonstrated by Mr McPartlin’s calculations, mark-ups and margins
appear to have been far more varied across Gillex
’s other business than in
relation to the two deals.
130. There were
various elements of the mobile phone and iPod deals which, if Mr Gill had
tested them in the light of what he maintained to be a long experience in
business, could not have made commercial sense to him. Thus, as Ms Bevan
submitted, there were various factors which ought to have driven Gillex
to the
conclusion that the transactions were connected to fraud, being “too good to be
true”:
(1)
HKS had agreed to forward the goods to Gillex
prior to payment, thus in
effect granting it credit amounting to £6 million, even though
Gillex
had no
credit rating and had no previous substantial trading history with HKS, and
even though HKS had not carried out any major due diligence checks on
Gillex
.
It could not have been commercially justifiable for Mr Gill to consider these
terms as capable of explanation by the back to back nature of the deals or an
existing business relationship founded on a single small value earlier trading
transaction;
(2)
Against the background of Gillex
’s other business, the absence of any
commercial risk, and the absence of any need for funding to be provided by
Gillex
, must have appeared completely extraordinary to Mr Gill;
(3)
We find that the opportunity to achieve such a substantial profit in a
short time, without Gillex
being required to do anything to add any value to
the transactions, would have led an ordinarily competent director to the
conclusion that those transactions must be connected to fraud. As already
indicated, Mr Gill had accepted that
Gillex
had not been a particularly
profitable operation. He also agreed in cross-examination that the making of
substantial profit would generally involve the addition of some kind of
substantial value, as had been done in the family business in the 1980s when it
imported £2 million pounds worth of watch cases from Tessuflex and put watches
together.
131. In
evidence, Mr Gill accepted that the deals under appeal, intended to produce a
profit of about £900,000 without any risk to Gillex
, were “utterly extraordinary”.
The only explanation which he could offer for deriving such a substantial
profit was that it was as a result of his contacts; he acknowledged that he did
not have that much knowledge about mobile phones, but knew more about iPods.
(He commented that all Nokia phones had been in demand at the time, in
particular the 8800.) As Ms Bevan submitted, the only contacts which
Gillex
had, having been approached by Monza on the alleged recommendation by Mr Paollo
of Tessuflex, were HKS, found by
Gillex
through Alibaba.com, and Vispar. As Monza could equally have found HKS through that website, this does not amount to a
sensible commercial explanation for the enormous financial advantage conferred
on
Gillex
simply for its participation in the deal chains. There is no apparent
commercial justification for the conferring of this level of profit on
Gillex
,
particularly when the profit margins of all other participants in the chains
are examined and compared with that derived by
Gillex
.
132. In
cross-examination, Mr Gill stated that the deal “was too good to be true but
could have been true”. Ms Bevan contended that this concession was made “rather
contradictorily”. We consider below this statement by Mr Gill in the context of
the tests of Gillex
’s knowledge or constructive knowledge.
133. A further way of testing the improbable features of the deals is to adapt the questions considered by the Tribunal in Blue Sphere Global which were approved by the Court of Appeal in Mobilx and others (CA);
(1)
Why was Gillex
, a relatively small company with comparatively little
history of dealing with mobile phones, approached with offers to buy and sell
very substantial quantities of such phones?
(2)
How likely in ordinary commercial circumstances would it be for a
company in Gillex
’s position to be requested to supply large quantities of a
particular type of mobile phone and identical quantities of iPods with speakers
and be able to find without difficulty a supplier able to provide exactly the
respective types and quantities of such goods?
(3)
Was HKS already making supplies to other EC countries (and if not, why
not?) If it was, Gillex
could have asked why HKS was not making supplies
direct, rather than selling to traders who in turn would sell to such other
countries. A further connected question is why HKS, a
UK
supplier, was supplying to
Gillex
, another
UK
trader, mobile phones of Central European
specification which in the light of safety regulations were not suited to use
in the
UK
without an appropriate fitted adapter and must therefore be expected
to be exported at some stage.
(4)
Why were Monza and HKS encouraging Gillex
to become involved in these
transactions? What benefit might they be deriving by persuading
Gillex
to do
so? Why should they be inviting
Gillex
to join in when they could have done so
instead and taken for themselves the substantial profit which
Gillex
was
expecting to derive from the two deals?
134. On the last
of these questions, Mr Gill stated in cross-examination that it had occurred to
him that Monza Trading could have gone on to the Alibaba website to source the
goods which it was seeking, and he accepted that he had met Gillex
’s own
supplier, HKS, through that site. His explanation for Monza Trading coming to
Gillex
was that Monza had wanted somebody of trust. We do not consider this to
be a satisfactory or adequate explanation, and we find that an ordinarily
competent director would have made further enquiries and would have sought a
great deal of further information before considering further such a
proposition. Mr Gill accepted in cross-examination that the deal was “utterly
extraordinary”. At a subsequent stage he defended putting his supplier and
customer in the Vispar deal in touch with each other in order for the latter to
make a direct (“third party”) payment to the former on the basis that the
amount of profit involved in that deal was very small, but did not explain why
he did not consider it risky from the commercial point of view for a trader to
put a supplier and a customer directly in touch with one another.
135. We find that
no satisfactory answers can be given to the above four questions which would be
sufficient to persuade us that an ordinarily competent director acting on
behalf of Gillex
could have accepted them at face value without concluding that
Gillex
’s involvement in the proposed deals must be connected to fraud. We
consider this further in the context of our general conclusions below.
136. There are
two separate and specific questions which need to be considered in the light of
the facts found in the present case. The first is: if Gillex
was an unknowing
party to the underlying objective of the deals, why would the other parties
have taken part in the chains in circumstances where their profit margins were
so minimal, yet enabled
Gillex
to take such a large share of the profit? Can it
have been a pure coincidence that the profit elements for all parties in the
chain, measured purely on the basis of the amounts transferred rather than on
the mark-ups, were minimal (or, in one case, negative) for all parties in the
chains, including
Gillex
(although we acknowledge that
Gillex
’s net benefit on
the transfers was greater than that of the other parties), and that significant
profit could only be achieved if
Gillex
’s input tax claim were to be successful
in order to provide
Gillex
with the mark-up that had been agreed? As fraud was clearly
involved within the deal chains, how could the parties expecting to benefit
from the fraud be sure that
Gillex
would act in the way necessary to enable the
fraudulent objective to be attained if
Gillex
was a truly innocent and
unknowing party?
137. The second
question is: why did Gillex
follow the pattern of seven split instalments
combining the two deals? Mr Gill’s evidence was that he had “thought all the
money would come together”. It is not clear why he should have expected the proceeds
from two deals to come together in one sum, but the important question is why
he did not appear to be concerned that the money did not all come through at
once but was coming through in instalments. A possible explanation is his
familiarity with such payment patterns as a result of
Gillex
having
participated in the Vispar deals. A party in
Gillex
’s position would normally,
as a matter of commercial prudence, wait until the whole of the purchase price
had been received from Monza Trading before being prepared to release any funds
to HKS, yet Mr Gill was prepared to engage in the payment arrangements on the
basis of paying out almost the whole of each amount received without any
assurance that the whole of the remaining sales proceeds would come through to
Gillex
’s FCIB account.
138. The payment
pattern appears to have been carefully orchestrated, and suggests direction by
a single individual, whether or not in collusion with FCIB. There is not
sufficient evidence to establish such collusion. We find that the payment
patterns were dictated by URI, the originator of the funds, through its
director, beneficial owner and signatory Ravender Datta (who was also the
shareholder and manager of United Traders Portugal), but that there is not
sufficient evidence to establish whether he controlled all the payment flows
through the other parties’ FCIB accounts. We find unconvincing Mr Gill’s
evidence that he was following the payments on the internet and then making
transfers to HKS’ account, particularly in the light of the adjustments made as
between the amounts of each instalment received and each instalment transferred
to the account of HKS; the pattern of payments is such that the person
organising them must have been aware of the precise amounts to be,
respectively, retained and passed on by Gillex
, in the same way as for the
other participants in the two chains for which the payments were being combined.
It is not clear why the first transfer made by URI was on 3 May 2006, but all
the other transfers by URI and the other parties were made on 5 May 2006.
139.In Mobilx and others (CA) at [82] Moses LJ emphasised that Tribunals should not unduly focus on the question whether a trader has acted with due diligence. He continued:
“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.”
140. As we have indicated, we are not satisfied that Mr Gill did ask all the questions which would have been appropriate, nor did he follow up matters which would have been expected to raise further questions in the mind of an ordinarily competent director. We consider this relevant both to the actual knowledge issue and to the constructive knowledge issue, as part of the “bigger picture”.
141. We have
expressed above our conclusion that in the context of actual knowledge it is
not necessary for the trader to know the details of the fraud, if the only reasonable
explanation of the deal is that it relates back to fraud of some nature
involving evasion of VAT. We are led by the combination of the following
factors to the conclusion that Gillex
did, on that basis, have actual knowledge
of the fraud:
(1)
the improbable nature of the deals, appearing to be at no risk to Gillex
and producing a profit in excess of £900,000 for a trading exercise carried out
within one day and paid for within a week, with
Gillex
adding nothing to the
deals other than its mere participation, yet appearing to take the “lion’s
share” of the profit produced by the deal chains when the benefit to each of
the other parties seems to have been minimal;
(2) the experience which Mr Gill had had of deals of this general nature through his experience with Vispar and Hi-Profile Ltd;
(3)
the carefully choreographed payment arrangements combining the payments
in respect of the two deals and meaning that the real profit to be derived from
the fraud could only be realised through Gillex
’s input tax claim;
(4)
the adverse financial circumstances of Gillex
in March 2006 at the point
when the deals were being put together, providing an incentive to
Gillex
to
participate without taking appropriate precautions against participating in
deals explicable only on the basis that fraud was involved in the deal chains.
142. On the basis
of our finding as to actual knowledge, a finding in respect of constructive
knowledge is not strictly necessary to determine the appeal. However, in case
our finding that Gillex
had actual knowledge is not upheld, we find that
Gillex
did have constructive knowledge. We are satisfied for the following reasons
that if
Gillex
did not know, it should have known that by these two deals it
was participating in a fraud:
(1) in particular, the four reasons set out above in the context of actual knowledge, and especially the first of those reasons;
(2) the questionable basis for the initial approach from Monza Trading;
(3) the questions as to HKS and its history which were “staring Mr Gill in the face”, but which he ignored;
(4)
Gillex
’s failure to use due diligence for its commercial protection,
with Mr Gill disregarding a range of negative indicators and thus failing to
follow up matters which should have raised questions in the mind of an
ordinarily competent director;
(5) the lack of insurance in respect of high value goods, indicating that all the parties involved saw the deals as risk-free;
(6)
the limited
and poor documentation, the effect of at least some of which
was unclear;
(7)
the very distinct differences between the way in which Gillex
’s other
trade was carried out and the way in which these deals were to be effected.
143. Accordingly
we dismiss Gillex
’s appeal against HMRC’s refusal of its input tax claim in
respect of £904,837.50 for the period 04/06 on the grounds that
Gillex
knew or
should have known that the transactions concerned were connected with the
fraudulent evasion of VAT.
144. Some of the
evidence leads us to question whether the goods actually existed and therefore
whether any export actually took place. First, as we have indicated, there are
multiple versions of various documents relating to the deals. Secondly, the
alleged telephone conversations between Gillex
and Mr “Max” Djoussu Kossi
Mensan were said to have taken place at a time when Mr Mensan had already given
a statement to the Italian authorities that he was merely the figurehead for
Monza Trading. This casts considerable doubt on whether conversations about
further potential deals were likely to have occurred after he had given that
statement. Taken together with the general picture painted by the rest of the
evidence, these parts of the evidence suggest to us that the documentation was
simply a “paper trail” designed to give the impression that deals had been
carried through and goods had been exported in a way enabling an input tax
recovery claim to be made.
145. Although at
one stage of their investigations HMRC suggested that the goods might not have
been exported, they subsequently decided not to pursue this; Mr McPartlin wrote
to Gillex
on 25 September 2006 to confirm that, based on currently available
information, he would “exceptionally” not be pursuing the matter of the removal
of the goods from the
UK
at present. If HMRC had so argued and had proved the
case, there would have been no supplies and therefore no basis for input tax
deductions, and the questions as to actual or constructive knowledge would not
have been relevant. We think that in appropriate circumstances, HMRC should
consider whether to challenge input tax claims on the basis of non-supply
rather than on the basis of actual or constructive knowledge.
146. Ms Bevan
applied for costs in the event that Gillex’s appeal was unsuccessful. As the
appeal was lodged before 1 April 2009, the position is governed by paragraph
7(7) of Schedule 3 to The Transfer of Tribunal Functions and Revenue and
Customs Appeals Order 2009 (SI 2009 No. 56). As this is a case where (on the
assumptions set out in paragraph 7(7)) an order for costs could have been made
before the commencement date, it is open to us to make such an award. We grant
an order for HMRC’s costs on the standard basis, to be agreed between the
parties, or in default of such agreement to be determined by a Costs Judge.
147. We would like to thank Mr Wetton and his firm for supplying us at the end of the hearing with USB drives containing, within a searchable database, scanned copies of most of the documentation produced for this appeal. He explained to us that his firm is a “paperless office”, and that all documents are scanned. Together with the hard copy version of the documentation, it has been a substantial benefit to us to be able to refer to and search the documentation in electronic form. We consider that this approach could be useful in future Tribunal cases, particularly where, as here, it is necessary to consider substantial amounts of documentation.
148. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.