20883
INPUT TAX – MTIC – Mobile
phones – Appellant claiming input tax on phones sold to
-
and –
Tribunal: THEODORE WALLACE (Chairman)
MRS SHAHWAR SADEQUE (Member)
Sitting in public in
Kieron Beal, Counsel, instructed by BDO Stoy Hayward, chartered
accountants, for the Appellant
Mark
Cunningham QC and Daniel Margolin, instructed by Howes Percival LLP, for the
Respondents
© CROWN
COPYRIGHT 2008
1. This
was an appeal against a decision dated 24 April 2007 denying £1,256,675 input
tax for period 07/06 on the acquisition in the
2. There
were five purchases, two on 14 June 2006, and one on each of 16 June, 20 June
and 31 July 2006. In each case the
phones were bought from Trade 247 Ltd (“247”) being warehoused at the Feltham
premises of Edge Logistics (“Edge”) and were sold to 3G Trade SA (“3G”) in
Luxembourg. There was no dispute as to
the existence of the goods, as to their removal to
3. The
decision by Customs was based on the decision of the Court of Justice Kittel
v Belgium and Belgium v Recolta Recycling SPRL (Joined cases C-439/04 and C-440/04)
[2008] STC 1537, decided on 6 July 2006, to which we refer as Kittel, on
the footing that the acquisitions formed part of chains connected with the
fraudulent evasion of VAT and that the Appellant knew or should have known of
that fact. This type of fraud is known
as “MTIC fraud”, MTIC standing for missing trader intra-community. The missing trader in the first four chains
was Astra Central Ltd, its name being wrongly spelt as Astar on some documents;
the missing trader in the fifth chain purported to be Pearl Cosmetics Ltd but
its VAT number had been hijacked. Both
missing traders had acquired the goods from EU traders. Customs’ case was that these were direct
chains: this was not a case of contra-trading.
4. There
were over 3000 pages of exhibits. There
were four witnesses for Customs: Mrs Mia Stevenson, who made the decision under
appeal; Andy Monk and Kirsty Jolliffe, Customs officers, and Roderick Guy
Stone, a Grade 7 officer, who is a senior policy adviser with operational
oversight for MTIC fraud. A statement by
Christopher Alan Solway was agreed with some exhibits being excluded. Terek Meghrabi, managing director and sole shareholder,
was the only witness for the Appellant.
5. Mr.
Cunningham opened the case and called his witnesses first. This was on the basis that the burden was on
Customs to establish the various chains, that there was a default at the top of
each chain and that the purpose of the default was fraudulent and also that
there was also an initial burden on Customs to establish that the Appellant
knew or ought to have known of these matters.
Mr Cunningham accepted that although the standard of proof is the civil
standard the nature of the allegations required a degree of cogency, see per
Lord Hoffman at [55] in Home Secretary v Rehman [2003] 1 AC 153. The allegations were serious. In fact his
case was that the Appellant had actual knowledge.
6. Mr Cunningham concluded his opening by saying that the transaction chains were 90 per cent weighted in favour of the Appellant; that it was obvious that the chains were contrived and orchestrated; that there must have been compliant connivance certainly at the buffer level; that no orchestrator of a fraud would have permitted an unwitting interloper to come in and take 90 per cent; and that the only inference must be that the role of the Appellant and Mr Meghrabi went beyond “should have known” to “knew”.
7. At the conclusion of Mr Cunningham’s opening Mr Beal said that the allegation that the entire transaction chain was contrived and pre-arranged was not in the Statement of Case served by Customs, apart from paragraph 30(viii) and (x). There was no distinct allegation against the Appellant of actual knowledge of matters in a transaction chain beyond his immediate customer or supplier. There was no allegation in the Statement of Case against the Appellant that it was all a pre-arranged scheme and that the Appellant knew of this or that it was masterminded by a puppet-master off stage. The opening thus differed substantially from the Statement of Case. The allegations of actual knowledge in the opening had not been properly pleaded and it was too late to raise them. He said that nowhere in Mrs Stevenson’s evidence did she allege that the Appellant was party to a pre-arranged scheme. He asked for a direction that the case against the Appellant be limited to the allegations contained either in the Statement of Case or in Mrs Stevenson’s statement and that Customs should not be allowed to allege knowing participation in a pre-arranged series of transactions.
8. He referred to Revenue and Customs Commissioners v Dempster [2008] STC 2079 where Briggs J said at [26],
“It is a cardinal principal of litigation that if serious allegations, in particular allegations of dishonesty, are to be made against a party who is called as a witness they must be both fairly and seriously pleaded and fairly and squarely put to that witness in cross-examination.”
9. Mr Beal said that if the Statement of Case had been clearly pleaded the Appellant might have sought evidence from Edge Logistics Ltd.
10. Mr Cunningham replied that it had always been clear on the Statement of Case and Mrs Stevenson’s evidence that one of the possible conclusions was that Mr Meghrabi was a knowing participant in the chains. In paragraph 33 it was pleaded that the Appellant knew or should have known that the assessed transactions formed part of chains in which one or more transactions was connected with fraudulent evasion of VAT. Actual knowledge was always in play. The words “in the premises” in paragraph 33 invoked the earlier matters pleaded, including paragraph 30. The contention that there were contrived chains was not new, it was in the Statement of Case.
11. After a short recess we dismissed Mr Beal’s application. The allegation of knowledge was clearly contained in the Statement of Case albeit in an omnibus form. The Statement of Case alleged artificial contrivance in a context which was not limited to the Appellant’s immediate transactions. It was clear at the directions hearing that dishonesty was alleged, see Decision No.20796.
12. In the event Mr Cunningham put the allegation squarely to Mr Meghrabi in cross-examination that he was the ringmaster.
Facts not in dispute
13. Although
there was no agreed statement of facts, many of the underlying facts were not
in issue. The Appellant was incorporated
on 9 October 2001 and registered for VAT from 15 October 2001.
14. Mr
Meghrabi had previously operated a chauffeur driven car hire business as sole
trader and transferred this to the Appellant in October 2001. The Appellant’s business on registration was
described as “performance and executive car hire”. On 21 November 2002 the Appellant notified
Customs that it would in addition be trading wholesale in mobile phones “on an
export import and inland trading basis”.
The Appellant was visited on 3 December 2002 when the visiting officer
was told that the Appellant had made sales of mobile phones to
15. On 16
November 2005 Mr Meghrabi wrote to Customs’ Variation Unit at Newry, “The
business have been approached by an overseas customer to export mobile
phones. This trade will be an ancillary
trade to our main business of car hire”.
16. At
some time before 2 February 2006 the Appellant took a tenancy of an office at
17. Repayment
returns had been made for six successive quarterly periods from 07/03 to 10/04,
the largest being £29,127 for 10/03, and for 07/05. On 2 December 2005 the Appellant asked to
change from quarterly to monthly returns.
On 2 February 2006 writing from
18. On 28
July 2006 Customs wrote to the Appellant refusing the request to change to
monthly returns.
19. On 2
August 2006 the Appellant submitted its VAT Return for 07/06 reclaiming
£1,247,162; output tax was shown as £45,925 and input tax as £1,293,047; total
sales were shown as £7.80 million of which £7.54 million was to other EU Member
States. The output tax related to the
car hire business.
20. On 1
August the Appellant had sent by e-mail to Gary Saul deal sheets for the five
transactions in dispute. These were summarised. The first transaction showed
4400 Nokia 8800 silver supplied by 247 on 14 June at £360 per unit at a cost of
£1,861,200 including £277,200 VAT with payments in two tranches on 15 June at
the First Curacao International Bank NV (“FCIB”); the same quantity of the same
type of phones were shown as sold to 3G also on 14 June at a unit price of £378
for £1,663,200 without any VAT, payment being made at the same bank on 15 June,
the freight forwarder being Edge and the delivery address as Warehouse 3G
Trade, Luxembourg; invoices with VAT numbers were provided. Similar details were provided for the other
four deals.
21. On 31
August the Appellant was informed that a period of time would be required for
Customs to undertake verification before repayment could be authorised and that
enquiries had started. This process is
described as extended verification. On 6
September Mr Archibald, Higher Officer, wrote that he was the case officer
responsible for conducting the verification.
On 27 September Customs wrote to the Appellant stating that the first
transaction which we have described in the preceding paragraph commenced with a
defaulting trader and that the joint and several liability explained in Notice
726 could be applied if the Appellant knew or had reasonable grounds to suspect
that VAT would go unpaid. On 5 October
Mr Archibald wrote to the Appellant stating that it was Customs’ view that the
22. Before the meeting the Appellant had already given to Customs the original deal material for deal 1 including invoices, declarations by the Appellant to 247, purchase order to 247, order confirmation, inspection report by 4G UK Ltd (“4G UK”) to the Appellant with IMEI numbers, Companies House details on 247, VAT validation responses from Europa, purchase order from 3G, Intra Account Transfer notifications from FCIB and instructions to Edge to ship on hold and release the goods to 3G. Similar material was provided for the other four deals. At some point which appears to have been after 5 October the Appellant provided due diligence material to which we return later. We also return later to the visit on 5 October.
23. Subsequently Customs
obtained from Edge successive release notes for deal 1 from Marubo
International SL (“Marubo”), a Spanish company, to Astra, from Astra to RX Tech
Solutions Ltd (“RX Tech”) and thence to RK Brothers Ltd (“RK”), thence to JD
Group (“JD”), and from Team Mobile Int (“Team”) to 247 and from 247 to the
Appellant; the only release note missing in the sequence was one from JD to
Team or, alternatively, a release from RK direct to Team. They were all dated 14 June and were for 4400
Nokia 8800 models. There were further
release notes for deal 2 also on 14 June covering 3300 Nokia 8800 (black)
following the same sequence to JD, from JD to The Export Company UK Ltd (“TEC”)
and then to 247 and to the Appellant.
There were similar sequential release notes for the other deals
involving 6600 Nokia 9300 on June 16 and 3400 Motorola V3X R on
June 20. The release notes for
the deal on 31 July involving 5000 Nokia 9300i started with a release from
Koornmarkt in
24. A diagram was produced by Mrs Stevenson showing the chains on which Customs relied. This is annexed to this decision.
25. Mr
Beal accepted that Astra Central Ltd and the trader purporting to be Pearl
Cosmetics Ltd had not accounted for the VAT on the onward sale following
acquisition.
Witnesses for Respondents
26. Mrs
Stevenson confirmed witness statements dated 24 October 2007 and 9 January
2008. She has been a Customs officer
since 1997 and since July 2006 has been attached to the MTIC team at Redhill,
which collects, collates, monitors and verifies repayment claims.
27. On 24
April 2007 she notified the Appellant that the claim for period 06/07 was
denied. She wrote that “the transactions
form part of an overall scheme to defraud the Revenue” and that:
“there are features of those transactions, and conduct on your part,
which demonstrate that you knew or should have known that this was the case, in
that you either deliberately, or recklessly, ignored factors which indicated
that those transactions may have formed part of such an overall scheme.”
28. On 5
October 2006 Mr Archibald and Mrs Stevenson visited the Appellant’s premises at
“Supplier
Trade 247 – see K.C. Cico – Director MD
Deals
- looked for customers first negotiated
the prices then contact 247 for stocks
- £10-20 margin depending
- confirmed the stocks and got paid by
the customer within hours, by fax, check on line of the bank a/c to ensure the
payment received.
- insurance policy hold by 247. Europeans has not insurance policy. Paid 247 directly on line.
- how to see the stock. Eur instruct independent A1 as good agents in
scanning everything or 10%, send by email and sent a hard copy.”
She noted the address of A1 at Feltham,
Middlesex. She recorded that no goods
had been returned but 247 would be liable.
She noted,
“- Contract for freight forwarder to store
goods : a copy of the Edge Logistics Ltd.
Europeans would
use the same freight forwarder as 247 depending on the location of the goods.”
Under “Customers” she noted
“You
meet once year Mr Bulent in the
- checked with Redhill by
phone. Noted a call reference No of the
call with before the deal
completed. Check Europa.
- it took too long to check
Redhill for the commercial process because the line is too busy.
Confirmed the Europa’s
verification is not enough.”
Later she noted
“English
Bank took too long.
Barclay
Bank
- car hire overheads
Overseas bank mobile.
- Tax adviser asked when i/t
to be paid, but will inform you.”
29. Mrs
Stevenson produced a typed summary of the visit from an electronic folder which
was much more extensive than her notes.
She said that she had telephoned Mr Meghrabi on 9 October; the notes
included material from the telephone conversation and other material from
Customs’ records; it may have taken more than a day to write it up; she asked
Mr Archibald to look at the report before she finalised it. She was not sure whether Mr Archibald had
taken notes but she did not look at any other notes. We observe at this point that apart from the
manuscript notes we derive little help from the visit on the issue of what the
Appellant knew or ought to have known.
30. She
produced Job-pack records provided by Edge for the five deal chains showing
either Astar Central Ltd (sic) or
31. On 20
November 2006 Mr Archibald wrote asking for extensive documentation including
the original CMRs, relevant business records, additional inspection reports,
due diligence records, bank statements, proof of payments to freight forwarders
and inspection agents and a copy of the insurance policy.
32. Mrs
Stevenson produced a letter from Mr Meghrabi dated 29 November 2006 in response
to the request by Mr Archibald for the insurance policy in which he stated,
“With regard to insurance, we
were under the impression that the goods were insured through our freight
forwarders (Edge Logistics) in light of the size of their charges; however it
appears that this is capped by limited liability. We therefore cannot provide insurance
certificates.”
33. Mrs
Stevenson produced deal logs provided by 247 which showed 247 as making
supplies to 3G Trade on 27 January 2006 and 19 April 2006. 247 was also shown as making supplies to the
Appellant on the first of those dates.
34. Cross-examined
as to whether the Appellant was the target of the enforcement activity rather
than the buffers, she said that she was only responsible for the
Appellant. She would not be in a
position to say whether the buffers were more likely to know about the
defaulting trader. She said that there
were instructions for third party payments elsewhere in the chains.
35. Asked
about a progress log, she said that “MS” was herself and “IA” was Mr
Archibald. She was involved at the same
time as Mr Archibald, being his working partner to take over the case. Mr Archibald had been in court all week but
was not giving evidence.
36. She
said that Mr Meghrabi had produced the Edge contract at the meeting on 5
October but they did not go through the contract at the meeting. Asked about a note in the visit summary
“supplier declaration by Trade 247 Ltd (not signed)”, she said that some deal
pack documents were signed and some not; she said that she did not know who
“Jay Roach” (whose name appeared on the declaration under a signature) was and she
neither interviewed him nor contacted 247.
She did not ask Mr Meghrabi about it at the meeting. They did not go to specific documents during
the interview which was simply to assess the company’s background and get a
picture of the business.
37. Mrs Stevenson
agreed that the Appellant had carried out a verification with Redhill as to 247
in January 2006, the request being on 19 January and the response on 23
January. She said that Redhill was
overwhelmed with enquiries and had to conduct a certain kind of verification
before sending confirmation backup; they had four, five, six faxes operating at
the same time. Asked about a Europa
validation response from the European Commission she said that she did not
think this was the VIES system; when it was pointed out by Mr Beal that “VIES”
appeared on the response, she agreed that Redhill uses the VIES system but said
that Redhill had far more details in VIES, but she did not know to what
extent. She said that she was not
familiar with the VIES system, She said
that the Appellant had been specifically required in writing to verify with
Redhill and should do so even if it made no difference.
38. She
agreed that a fax verification request by the Appellant as to VIP (
39. She
agreed that 247 and 3G Trade were still registered for VAT when her statement
was made and that she had no information to suggest that either was not an existing
company.
40. Mrs
Stevenson said that her witness statement was closely related back to the visit
report. Asked about paragraph 41.12
where she stated that Mr Meghrabi said that Europeans had no uniform terms of
business, she said that he did say that although it was not in the visit
report; she remembered because it was the first time she had visited the
business and she could still remember.
The supplier’s declaration by 247 “this purchase order is only valid
once the attached supplier declaration is signed” did not say “contract”. She said that they had asked about terms of
business at the interview; sometimes she asked a question when Mr Archibald had
not done so; possibly she forgot to make a note. After the interview she wrote asking for a contract.
41. She
said that Mr Meghrabi said that Edge was the freight forwarder but did not say
“who also acted as the exclusive freight forwarder for all the transactions in
the deal chains carried out in the
42. Mrs
Stevenson said that the price she had included on a spreadsheet for Deal 1 for the sale by Marubo to Astra was not
derived from an invoice but was her best judgment, assuming a margin of 35
pence from later deals; RK had produced invoices from RX Tech. She accepted that the documents preceding
those between 247 and the Appellant were not obtained from the Appellant. She agreed that the Nemesis batch report
which she had exhibited as produced by the Appellant was Customs’ document; she
accepted that Nemesis reports are not available to traders. She said that traders could check with the
Home Office database of stolen numbers.
43. She
said that Edge had sent the release notes to David Maud, at
44. Asked
by Mr Beal whether it was possible for the Appellant to know that Astra was
deregistered before she deregistered it on 15 December 2006, she said that she
did not know.
45. She
said that, although it was not in her notes, Mr Meghrabi had said that the
inspection agency and the freight forwarders were the same people; this was in
the subsequent telephone conversation which was more than half an hour
long. She had telephoned him when she
was typing. When Mr Beal put it to her
that the telephone conversation was about 10 minutes, she said that it would
not be a surprise.
46. Mrs
Stevenson said that the first indication Customs had of concern about trade
with 3G was in an intelligence report from
47. She
said that Edge had told Mr Maud that the goods had come in on the same day as
they went out again although the CMR had been lost by Edge. Mr Maud had told her this over the telephone.
48. She
accepted that the Appellant was paid by 3G before the goods were supplied to
49. Mr
Monk, Higher Officer, who had been doing full-time MTIC work since 2003, gave
evidence of a visit to the Appellant on 21 February 2006 to verify the large
repayment claim for 01/06. He produced a
page from the Appellant’s electronic folder.
He did not have his notebook but it was produced later during the
hearing.
50. He
said that he was shown the CMR evidence and was satisfied that the goods had
been despatched. He discussed due
diligence but did not go into great depths.
He saw the invoices. He had no
reason to believe that he was not shown the supplier’s declaration. It would be normal practice to take copies of
documents but he did not know if he had done so. The due diligence appeared to be adequate on
the basis of the discussions. He said
that it appeared that they were ticking the adequate boxes to protect
themselves from the joint and several liability provisions. It was just a cursory interview. Normally two officers would go to discuss the
activities in greater depth at a later date.
At the time, which was shortly after the decision in the ECJ Optigen
v Customs and Excise Commissioners (Case C-354/03) [2006] STC 419, Customs
were flooded with large repayment claims and simply did not have the resources.
51. He was
asked about a passage in his report stating,
“Discussed due diligence at
meeting which, on basis of initial interview, appears adequate. Checked VAT numbers of customers and
suppliers, all valid. Checked export
evidence all satisfactory … will subsequently line check deals and advise
trader if any defaulters identified.”
He said that it was one of his last visits before
leaving Dorset House in March 2006. The
case was passed to another officer. He
had no idea what the Appellant’s future reclaims might be. He said that everything he saw and heard was
consistent with the trading activities of the Appellant facilitating MTIC
fraud. Asked why he did not include this in his report, he said that Customs
had established a VAT user interest; when resources were available they would
be checked thoroughly, as was the case.
From April and May 2006 a large number of assurance officers were
seconded to MTIC. He had recorded “No
departmental delay. No grounds to delay
repayment further.” This was because of
the guidelines at the time : in MTIC terms £290,000 was a very small amount.
52. He
said that he had passed the paperwork to Mr Saul who passed it to Mrs
Stevenson.
53. Kirsty
Jolliffe stated that
54. Subsequently,
following a meeting with Mr Saeed, Customs concluded that the VAT number of
55. Mr
Stone stated that data on HMRC’s trade statistical website showed the value of
mobile phones exported to the EU and to non-EU countries was approximately £21
billion for the period January to June 2006.
In July 2006 a reverse charge was announced in a Business Brief: the
value of mobile exports fell back to £2.1 billion in the next 6 months. He said that approximately 34,000 transaction
chains verified by Customs in 2006 were found to be connected to MTIC
fraud. Approximately 5 per cent of those
verified were not connected to fraud.
56. He
accepted that it is possible for a trader in the
57. Mr
Stone said that the joint and several liability powers have only been used on a
very limited basis. The decision of the
Court of Justice in Customs and Excise Commissioners v Federation of
Technological Industries (Case C-384/04) [2006] STC 1483 was only given in
May 2006. There was no enforcement until
then. As to the number of MTIC appeals
outstanding, he suspected that 700 accounting periods were involved with in the
region of 350 to 500 traders.
Approximately 1500 firms had been subject to extended verification.
58. He
said that he was aware that the Federation of Technological Industries had
complained at pressure by Customs on banks to refuse to give new accounts to
mobile phone traders. He did not find it
strange that the Federation had suggested to traders that they use FCIB. He agreed that traders were given no warning
of joint action against FCIB before September 2006.
59. He
said that currently there are not long waiting times for Redhill
verification. After the ECJ decision in Optigen
and Bond House in January 2006 the nature of the trade
exploded. He said that Customs at Redhill
largely got its details of EU traders from VIES (the VAT Information Exchange
System). Traders could conduct checks
through the Europa website, entering the number of the trader they are looking
at and getting an answer whether it was valid or not. Customs get the name and address of the
trader and the date of registration or deregistration, and thus get more
information on the VIES system than traders do; this was why traders were told
to do their verification with Redhill.
The Europa website can also be used to check
Mr Meghrabi’s evidence
60. Mr
Terek Meghrabi confirmed his witness statement dated 31 October 2007 with two
amendments. He became a director in
January 2003. He said that paragraph 5
which stated that his father runs a successful money services bureau should be
in the past tense.
61. He
said that he looked for a minimum mark-up of 5 per cent, there being a lot of
overheads such as transportation and office expenditure; the mark-up on
62. He
identified documents in the Bundle onwards as being from the Appellant’s due
diligence file, starting with a VAT Validation Response from Europa for 247
dated 23 January 2006 and Companies House material for 247, including accounts
to April 2004. He met the director Mr
Cicopalus when he visited 247; on the site visit which was around 25 January he
was quite impressed by the company which had 10 or 11 traders. The Appellant never actually gave 247 any
credit. He produced a check list showing
the due diligence required by the Appellant from suppliers; he had obtained
every single item on the check list but did not know where they were; they were
all given to Chiltern. He said that Mr
Monk had been shown the due diligence folder on his visit, it was the first
thing he had asked for. The reply to a
verification request to Redhill for 247 faxed on 19 January was on 23
January. Payments to 247 were online to
FCIB where both the Appellant and 247 had accounts; this was quicker and charges
were lower. The Appellant had received a
letter of introduction from 247 on 16 January.
On 24 January Giovanni Leon obtained a report on 247 from Equifax. The Appellant provided information to 247 for
a site visit by 247 to the Appellant on 29 March. Mr Meghrabi produced some other due diligence
material in relation to 247.
63. Mr
Meghrabi said that 3G contacted the Appellant through the IPT website and Mr
Bulent came to the Appellant’s office.
The Appellant sent an introduction letter to 3G on 19 January 2006 and
obtained a Validation Response from Europa on 20 April. He produced a certificate of incorporation
and a VAT certificate for 3G.
64. He
produced due diligence material for various other companies, saying that it was
standard to check any companies interested to work with the Appellant and to
verify them with Redhill. Sometimes
enquiries to Redhill took days, sometimes months. One enquiry as to Goldex International Ltd on
26 April was validated by Redhill on 25 May.
An enquiry on 15 March as to VIP (Scotland) Ltd was validated on 8 May;
an enquiry as to the same company by telephone was verified on 15 March.
65. Mr
Meghrabi next produced documents relating to Edge: an introductory letter from
the Appellant dated 15 March, a credit application form to Edge filled in by Mr
Meghrabi, an Edge document headed “General Lien”, a certificate of
incorporation showing Edge as incorporated on 1 December 2005 and a letter
setting out various requirements by Edge.
The letter stated that Edge required a deposit of £1000; it gave the
address of the warehouse at Feltham, Middlesex (adjoining London Airport). It
set out warehousing charges, including Warehousing 20p, Allocation/Releases
£10, Inspection 10p, Check-counting 10p and Scanning 10p. Quotations for transport and freight were on
request. As to insurance, the letter
read,
“We are not regulated by
FSA. As such we are unable to offer ‘all
risk’ marine cargo insurance for your stock.
Should you require cover in excess of our limited liability you will
need to arrange adequate insurance cover …”
Mr Meghrabi said that no officer had asked him to do
due diligence on freight forwarders.
66. He
produced some documents relating to 4G UK.
The Appellant had a few problems with A1 Inspection and 4G UK was
recommended by Edge. He produced a list
of 4G UK’s standard charges carrying an address at Weybridge. These included 10 pence per unit plus VAT for
scanning.
67. He
said that 4G UK inspected phones, scanning 10 per cent of the phones to obtain the
IMEI numbers and counting the number of boxes.
He produced an inspection report for deal two dated 14 June 2006 showing
825 boxes of four as counted. Usually 4G UK telephoned that the inspection was
satisfactory, sent the IMEI numbers by e-mail and sent the hard copy of the
report by post. He produced IMEI numbers
for deal one. He said that the first
five IMEI numbers show the model, the rest identify the phone. The Appellant
usually tried to check these against previous numbers to see whether any were
repeated. He said that checking was a
tedious job; the Appellant never had a database to tell whether a number had
been repeated. Giovanni used to do this. In answer to a question by the Tribunal
whether this was manual, not using computer data, he said that it was tedious;
he had asked Customs many times if they had a system they could help with but
they said no. 4G UK gave the data by
e-mail. He said that it was not in digitised
form. It was necessary to check the
columns manually, working down the columns.
68. Mr
Meghrabi said that the telephone conversation with Mrs Stevenson on 9 October
was around 10 minutes.
69. In his
statement Mr Meghrabi said that Customs officers visited the Appellant on
several occasions and they established a good rapport. They discussed problems in their trade
sector. He was advised: “Know your customer, know your supplier and
do not make third party payments.” At no
time did HMRC ever express any concerns with the Appellant’s trading partners,
or methods of trading.
70. He
said that the Appellant is in constant contact with its suppliers and
customers, enquiring about availability and demand, in an attempt to identify
matches in supply and demand to provide a reasonable profit. The profit from arbitrage is only realised if
the supplier and customer cannot deal directly, otherwise they would cut the
Appellant out.
71. He
produced the files for the transactions in dispute. He stated that once an opportunity was
identified the Appellant negotiated prices with both the supplier and customer
to maximise the profit; once prices were agreed the Appellant asked the
supplier to complete and return a supplier’s declaration. The supplier’s declaration for deal 1 was
apparently faxed to 247 at 1213 hours and returned at 1239 hours signed by Jay
Roach. The declaration stated that the
goods were brand new with full manufacture warranty, that 247 had full title
and that the goods had been inspected by 247 or the freight forwarder and IMEI
numbers were available on request.
72. He
stated that once the prices were agreed, the Appellant checked the VAT numbers
of 247 and 3G on the Europa website.
This was a provisional go ahead.
He stated at paragraph 50 of his statement,
“I can categorically state
that no transaction is completed until the full verification is received from
HMRC.”
Presumably, although, it is not clear from the
statement, the supplier’s declaration already described came next.
73. The
Appellant then contacted Edge to confirm that the goods were at the warehouse
and that 247 had title. Next the
Appellant faxed an inspection request to 4G at Weybridge asking for 10% to be
scanned. He stated that the Appellant
was provided with an inspection report for 4400 Nokia 8800 silver phones. The
IMEI numbers were also produced.
74. He
stated that having received a satisfactory inspection report the Appellant
decided to ship the goods and issued the purchase orders. The purchase order for deal 1 to 247 was
dated 14 June and was for 4400 Nokia 8800 Silver SIM free handset (euro) at
£360 per unit making £1,584,000 plus VAT.
An order confirmation to 247 containing specifications was signed by
Giovanni also on 14 June; at the bottom of the form appeared “Edge Logistics”;
this appears to be timed 1004 hours. The purchase order from 3G was dated 14
June at a unit price of £378 and a total cost of £1,663,200; it provided for
delivery on 15 June to Warehouse 3G Trade, “Transport Intra-communitarian” and
stated “full payment after inspection of the goods”. The invoice by 247 dated 14 June bears the
specific time “12:10”.
75. Fax
instructions by the Appellant to Edge were to “Ship on hold” to 3G and then to
release; both dated 14 June. On 15 June
3G paid the Appellant and the Appellant paid 247, the payments being at FCIB. The invoices were stamped as paid on 15 June.
76. The
CMR gave the sender as the Appellant, the consignee as Warehouse 3G Trade SA,
Luxembourg, the place and date of taking over the goods as “Feltham
16/06/2006”. The carrier was Edge and
the vehicle number and drivers were given.
The cargo was 4 pallets of mobile telephones, weighing 1115kgs.
77. Documents
produced to Customs by Edge included a stock release instruction from 247 to
the Appellant on 15 June at 1314 hours, an illegible CMR, an export invoice
from Edge to the Appellant for £1250 freight and £55 packing plus VAT.
78. The
preceding paragraphs were for deal 1.
Similar documentation was exhibited for the other four deals.
79. Mr
Meghrabi was cross-examined for six hours.
He said that he was aged 37 having been born in Damascus. His mother tongue is Arabic but he has a
clear command of English, having come to the UK aged twelve. He started
Eurostyle in 1998, hiring out top of the range cars with his father’s
help. He had helped his father with
various businesses. His father’s
conviction of four offences relating to the business and sentence to 10 years
imprisonment was a matter of grave disappointment. His statement that his father “runs” a
successful Money Service Bureau should have been in the past tense. He accepted that “runs” gave a completely
wrong impression.
80. He
said that he was a conscientious businessman who did everything possible to
avoid being involved in fraud or anything dishonest. He was unaware of any fraud in the chains of
the transactions in which the Appellant was involved. He knew that there was fraud in the secondary
or grey mobile phone market. He had
received various letters from Customs and had been given a clear and explicit
instruction to check before every deal.
He knew that the problem was “all around”, it was talked about by
everybody. He knew about Customs’ Notice
726 introduced in 2003 and was familiar with it : it was on the Appellant’s due
diligence check list for customers. He
said that the Notice did not tell him not to be involved in the sector, just to
be careful. He agreed that one of the
options open was to have nothing to do with it.
He said that he believed that he was vigilant.
81. He
said that he knew that Customs were under resourced and were taking a long time
to reply to verification requests. He
was aware of the possibility of joint and several liability or disallowance of
input tax.
82. Mr
Meghrabi said that he knew that he was dealing in the grey market and that the
Appellant was not an authorised dealer.
The Appellant was dealing with its supplier and customer. He did not know how many transactions were in
the chains. He knew in 2006 and before
from paragraphs 2.4 and 3.3 of Notice 726 that the stated requirement was to
verify the integrity of all the components in the chain. He understood that
this referred to the whole chain and that he had to make a judgment as to the
whole chain. However he knew that it was
not possible to check the integrity of the whole chain. He said that Bond House Systems Ltd v
Customs and Excise Commissioners [2003] V&DR 210 made everybody nervous
but when Notice 726 came out with clear rules and guidance he was happy to get
back in. Before Notice 726 there was a
lot of mayhem in the industry. It was a
good business to be in with high profits; mobile phones were a commodity that
everyone used. He spoke to Customs
officers about Notice 726 and they agreed that there was no way of knowing up
the chain.
83. Mr
Meghrabi said that his due diligence as to 247 was 100 per cent. He said that not all the due diligence
material was in the bundle, although it was all in the file which he had given
to Chiltern. When making his statement he thought all the documents were there;
the exhibits were prepared by Chiltern. He said that there were lots of missing
documents : he did not know they were missing until the hearing started. He disagreed when Mr Cunningham put it to him
that he could not care less about due diligence. He denied that it was woeful or completely
useless. The Appellant’s first trade with 247 had been on 27 January 2006. It did not mean anything that the accounts of
247 were overdue; the Appellant was not giving credit to 247. He had looked at the balance sheet of 247 but
had not expected 247 to be making a large profit in its first year to April
2004. On the site visit he had seen how
large they were; their name in the market was quite huge. Although the
reference from Interken Freighters (UK) Ltd as to 247 was dated 20 February
2006, he had a verbal conversation with them in the January. He did not consider a performance bond from
247 to be necessary as recommended by Equifax because 247 was not being given
credit. He felt comfortable with
247. He had asked about one of the
directors of 247 having been a director of a company which was struck off the
Register of Companies but had been given a valid answer although he could not
remember what.
84. Mr
Meghrabi was then asked about the due diligence for 3G. He said that Mr Bulent came to the Appellant’s
office and gave him the documents on the check list. There was a file which had been misplaced by
Chiltern. He said that Mr Monk and Mr
Gary Saul had definitely seen it and were happy with the due diligence. He believed that he obtained a bank reference
for 3G. Asked about a Redhill check, he
said that he was under the impression that Redhill could not verify traders
outside the UK. He did check with the
Europa site. He said that it was
impossible trying to do a deal, waiting for Redhill to verify.
85. He
said the Appellant asked around about Edge and got a positive reply. The Appellant had Edge’s certificate of
incorporation and looked at its website.
The check list was not sent to freight forwarders. He was told that Edge was a reputable company
and had been in the market since 1999.
86. He
said that 4G UK had been critically vetted.
The Appellant was provided with its certificate of incorporation and VAT
registration. 4G UK was in the market;
he did not realise fraud was coming from inspectors or freight forwarders. He had obtained verbal references by
telephone. The Appellant was happy with the inspection reports provided by 4G
UK; the Appellant received verbal confirmation, the numbers were e-mailed and
the report came by post afterwards. He
agreed that he asked 4G UK to include the following matters: make and model,
quantity, colour, country of manufacture, language of manuals, software
language, type of charger, warranty and a ten per cent scan. He agreed that the inspection report on deal
1 indicated that the boxes were not counted and “Other comments – quantity
inspected” was blank. The page before
showed stock as 4400 and packing as 1100 boxes of four. “Charger” was left blank. Mr Meghrabi said that the Appellant used to
speak to 4G UK all the time and they confirmed the type of charger; there was
no note of the call. He said that when
4G UK inspected they checked that all the contents of the boxes were there
including phone, charger and manual. He
agreed that the bill dated 20 June 2006 only charged for a 10% scan at 10 pence
a unit, with no charge for inspection and box count. Mr Meghrabi said that he was under the
impression that 4G UK always did the box count.
He agreed that the report on the second deal gave the wrong colour.
87. Mr
Meghrabi said that the most important aspect of the whole exercise was to look
at the IMEI numbers. He said that the order to ship was given when the
Appellant received a completed report verbally on the telephone. The Appellant got the telephone confirmation;
they got the stock numbers by e-mail and checked them; then they got the full
inspection report by post. He denied
that this was a pack of lies. He said
that previously the Appellant did obtain a 100% scan but it was expensive and
time consuming.
88. He
said that they tried to do a trade every day but it was not possible. The market was volatile but they always made
substantial net sales : there were overheads.
Edge and 4G UK’s costs came to some £1,600; there was office rent, employees,
telephone packs and many other expenses.
He agreed that the gross profit in June was nearly £300,000; he said
that 25 per cent should be deducted for expenses. There was no loss because he always sourced
what was asked for.
89. He
denied a suggestion that there was never a loss because it was all pre-arranged
and that he was the ringmaster.
90. He
agreed that the negotiation, inspection, reports and payments were all in one
or two days. Asked whether he needed to
look beyond one supplier, he said they had numerous calls every day from
different people and called them. They
felt comfortable with 247 but, although 247 was the only supplier in 07/06, it
was not the only supplier the Appellant deal with. He was not surprised looking back that there
was only one supplier and one customer in the quarter. He said that the Appellant never broke down
larger consignments. The Appellant’s
phone records would show that they called many people. They used 247 because 247 had a lot of
stock. Customers would ring up and ask
for 4400 Nokia 8800s; all were SIM free with European specification. Most of the time 247 had the stock.
91. Asked
about paragraph 4 of Mrs Stevenson’s second statement where she said that
analysis of deal logs provided by 247 showed that 247 was in direct contact
with 3G in January 2006, Mr Meghrabi said that he was surprised. He said that maybe 247 did not want to export
itself. He denied that it was all
orchestrated and contrived and he was “in on it”.
92. Mr
Cunningham then went through with Mr Meghrabi his evidence as to 14 June 2006
as a typical day.
93. Mr
Meghrabi said that Stage 1 was an enquiry from 3G as to whether the Appellant
had 4,400 Nokia 8800 mobile phones.
94. Stage
2 was to try to source them. 247 stated
on the telephone that they had them and would sell at £360 each.
95. Stage
3 was to go back to 3G and quote £378 including the Appellant’s 5 per cent
margin. He did not know that 247 and 3G
knew each other.
96. Stage
4 was to check the files to ensure that due diligence was up to date and in
order. After knowing them for some time,
this was not necessarily done each time.
He could not remember every detail from two and a half years ago; he had
another employee and did not do everything himself.
97. Stage
5 was to check the VAT numbers of 247 and 3G on Europa.
98. Stage
6 was to try to check with Redhill. He
tried to send a fax. He could not
remember if the line was busy. If
unsuccessful he called the national helpline.
99. Stage
7 was to contact Edge to confirm that the goods were there. The Appellant knew the goods were there from
the order confirmation issued by 247. These came after the purchase order from
3G. 247 also told them verbally that the
goods were at Edge. Giovanni Leon signed
the order confirmation and returned it to 247.
100. Stage 8
was the supplier’s declaration in which 247 confirmed that it had legal
title. The declaration was faxed by Mr
Meghrabi to 247 at 1213 hours and returned by 247 at 1239 hours.
101. Stage 9
was that the Appellant instructed 4G by telephone and then by fax to do their
inspection. The instruction was to their office at Weybridge. Most of the time 4G UK had a wide range of
staff. He did not know where Edge’s
warehouse was, having never visited it. 4G UK may have had staff at Edge’s
premises at Feltham; usually staff were there checking other stock. It would take 4G UK about an hour to do the
10 per cent scan. 4G UK telephoned to
say that everything was all right and e-mailed the IMEI numbers.
102. Stage
10 was to check the numbers. He said
that Giovanni had told him over the weekend that he did this using an Excel
spreadsheet; Giovanni sorted the sequence of numbers numerically first and then
copied and pasted them onto the old numbers before printing them off and
checking manually whether there were any repetitive numbers. Mr Meghrabi said that he himself was not an
IT person. Giovanni checked manually
against the old numbers : this was tedious for him. Mr Meghrabi could not remember how long this
took. Giovanni might get Denise to do
it. It could take half an hour, it could
be an hour. He agreed that it had to be
done twice on 14 June because there was a second deal.
103. Stage
11 was for the Appellant then to issue a purchase order to 247. Mr Cunningham asked him about the fax header
on the purchase order giving the time at 1232 hours saying that it could not
have been before 1339 hours (an hour after the supplier’s declaration was
returned). Mr Meghrabi said that he
could not really comment on the paperwork, Giovanni, his trader, did that. He denied that this was a pack of lies. He agreed that 247 could not know the number
of the purchase order, 200600012, before the order was sent. Mr Cunningham
pointed out that 247’s invoice bearing the number of the purchase order, gave a
time of 1210 hours in the body of the invoice.
104. Mr
Meghrabi said that the payment from 3G was on 15 June to the Appellant’s FCIB
account. The payment to 247 was also on
15 June.
105. Re-examined,
Mr Meghrabi said that the Appellant always tried to get verification from
Redhill by fax but it was always busy; they did not succeed they telephoned the
national advice number. They also did a
Europa check.
106. He said
that he spoke to Gary Saul numerous times on the telephone. Mr Saul asked for all the documents when the
04/06 return was put in. The Appellant
had sent the whole deal pack to Mr Saul’s office and Mr Saul had confirmed
receiving them.
107. He said
that he knew nothing about Marubo, Astra or Astar, RX Tech Solutions, RX
Brothers or TM Global.
108. He said
that once the Appellant was paid for the goods Edge were instructed to release
them. The CMR was stamped as received by
Warehouse 3G Trade on 19 June, the same day as the Norfolk Line ticket.
109. He said
that the fax header on the order confirmation from 247 was timed at 1004 hours.
110. Mr
Meghrabi said that the time on the 247 invoice for deal 2 was shown as 1201
hours, whereas the fax header time was 1504 hours. The supplier’s declaration for deal 2 was
sent at 1214 hours and returned at 1416 hours; the purchase order by the
Appellant also had a fax time of 1214 hours, being sent with the supplier’s
declaration.
Submissions
111. Mr
Cunningham said that it was not credible that six or seven conniving fraudsters
in the chains would allow Mr Meghrabi having nothing to do with the fraud to
walk away with much the largest part of the cake.
112. The
test under Kittel at [61] gives rise to two issues: whether the five
transactions by the Appellant were connected with the fraudulent evasion of VAT
having regard to objective factors, the factual element; and whether the
Appellant knew or should have known, the mental element.
113. As to
the first issue, there had been no serious challenge to the tax loss in the
chain; Pearl had been hijacked and Astra was missing and the balance of
probabilities was that the defaults were fraudulent; it was clear from the deal
chains that there was an unbreakable connection between each of the various
transactions in each chain.
114. As to
the mental element, it is necessary to ask whether it was or should have been
apparent to Mr Meghrabi that the Appellant’s transactions were “more likely
than not to be connected with fraud,” see Mobilx Ltd v Revenue and Customs
Commissioners (2008) Decision 20687 at [108]. If a trader fails the Kittel test then he is
an accomplice, see Calltell v Customs and Excise Commissioners (2007) Decision at [63] and (64). He said that at the lowest Mr Meghrabi should
have known; Customs put it higher and submitted that he was the ring leader, or
had actual knowledge or was guilty of Nelsonian blindness. The lowest threshold would however suffice.
115. Mr
Cunningham said that in some ways Mr Meghrabi was an attractive witness, being
unfailingly polite, giving considered answered and, despite provocation, not
being in the least aggressive. However
his words belied the reality. His
description of his father’s business as successful was thoroughly
misleading. He blamed Chiltern for
misplacing documents. He invented telephone calls as to inspections by 4G. He did not check the language of his witness
statement or his exhibits.
116. He said
that Mr Meghrabi knew that there was fraud all around the sector, that Customs
were trying to tackle it, that his suppliers were not manufacturers or
authorised dealers so that there were chains, that under Notice 726 he had to
verify the integrity of the whole chains and that he could not verify the whole
chains. He said that there was no human
right to embark on this trade.
117. Mr
Cunningham said that it is quite difficult and probably impossible for an
honest trader to operate in this sphere, namely the grey market.
118. He said
that 247 and 3G had traded with each other.
The chains were contrived. If they
were contrived, by definition there were no Chinese walls. All of the participants were knowingly,
contrivingly playing the game, including Mr Meghrabi. He asked whether it was likely that Mr
Meghrabi alone was a beacon of rectitude, but that the orchestrators let him
take £18 a phone. He submitted that at
best he was catastrophically stupid; an honest bona fide trader who knew that
he could not do the Notice 726 checks would not have taken the risk.
119. He said
that the Appellant’s due diligence was a perfunctory, box ticking, window
dressing exercise to try to keep Customs at bay. The searches by 4G UK had all been described
as satisfactory but the reports were cursory or perfunctory. The Appellant went through the motions of due
diligence because Mr Meghrabi knew exactly what was going on.
120. Turning
to the actual trading, Mr Cunningham
said that there were only five deals in the whole quarter, four of them
in eight days; it was a volatile business but was always profitable for the
Appellant; on every occasion complicated deals were completed in one day; in a
highly populated sector all deals were with one supplier and one customer; 247
always had what was required; 247 and 3G did not deal with each other directly. On any view the Appellant knew of these
matters, apart from 247 and 3G knowing each other. He said that the eleven stages in deal 1
described by Mr Meghrabi were not sustained by the documents. He submitted that Mr Meghrabi’s initial
evidence as to tedious time consuming manual checks on the IMEI numbers was not
credible and that his later evidence was not correct.
121. He said
that the time shown on the purchase order by the Appellant to 247 was not
consistent with the searches which were said to have been carried out by 4G UK and
the time consuming search when the IMEI numbers were received. Stage 11 could not have been at the time
stated because some earlier stages were carried out after that time.
122. Once it
was shown that the transactions were connected to fraudulent chains a
substantial explanation was called for.
He adopted the observations of Pumfrey J in Softwarecore Ltd v Pathan
[2005] EWHC 1845 (Ch) at [52] where he said,
“The factors are to be viewed
as a whole. They reveal at best a
pattern of trading from which, without substantial explanation, a judge could
draw an inference of dishonesty.”
123. Mr
Cunningham said that arguments by the Appellant based on legal certainty are
trumped by the objective of preventing tax evasion, avoidance and abuse, see
per Burton J at [45] in R (Just Fabulous (UK) Ltd) v Revenue and Customs
Commissioners [2007] EWHC 521 (Admin).
124. In
opening Mr Beal said that Customs targeted traders removing goods to another
Member State, who they called brokers, because they were the traders making
repayment claims as the Appellant was here.
A joint and several liability approach could have been adopted against
the co-called buffers in the transaction chain under section 77A of the VAT Act
1994 but this had not been done although they were closer to the defaulting
traders.
125. Paragraph
2.4 of Notice 726 refers to reasonable checks to verify the supply chain,
however none of the specific checks recommended went to the supply chain
itself. In Mobilx at [287] it was
recognised that in practice none of the checks could go beyond the immediate
suppliers and customers. At paragraph
3.3 of Notice 726 it is said that the measure is aimed at those who know of the
fraud or choose to turn a blind eye.
None of the specific checks recommended were directed to the
customers. Paragraph 4.8 is significant
because Customs accept the burden of establishing on the balance of
probabilities knowledge or reasonable grounds to suspect that the VAT would go
unpaid. This was the regime considered
in Customs and Excise Commissioners v Federation of Technological Industries
(Case 384/04) [2006] STC 1483 where section 77A was considered. In that case the Court of Justice said at
[29] that when Member States exercise the powers conferred upon them by
Community directives they must comply with general principles of Community law
including legal certainty and proportionality, see also Teleos v Revenue and
Customs Commissioners (Case C-409/04) [2007] ECR I-7797 at [45],
[48] and [50].
126. In Garage
Molenheide BVBA v Belgium (Case C-286/94) [1998] STC 126 the Court said
that measures to ensure the proper collection of VAT must not “have the effect
of systematically undermining the right to deduct VAT”. Measures must be proportionate. He said that in Kittel the Court did
not say that if a trader does not take every reasonable precaution he is
complicit in fraud : that would be completely at odds with the UK concept of
complicity in fraud. He submitted that
Customs must show that Mr Meghrabi was complicit in fraud. The phrase “should have known” in Kittel
is to be interpreted in the light of equivalent UK domestic law and
practice. Customs must show something
that put Mr Meghrabi on notice of the fraud to which he turned a blind
eye. Negligence is not enough. He cited a number of decisions of the Court
of Justice.
127. In
closing Mr Beal said that the evidence
was a far cry from the best evidence for a very serious allegation. Mr Archibald was not called as a witness
although he was the front line officer for much of the time. Mrs Stevenson on a number of occasions relied
on documents which Mr Archibald had written, being only a signpost. Key documents had been produced very late. The paper folder referred to by Mr Monk had
not been produced and Mr Saul had not been called although he must have had the
deal documents for 04/06. Fax headers
had been omitted from the trial bundles.
It was inappropriate for a panoply of new points to be raised which were
not either in the Statement of Case or witness statements.
128. He said
that, if indicia of fraud were staring the Appellant in the face, they must
have stared Mr Monk in the face and that it was inconceivable that he would
have sanctioned repayment.
129. Mr Beal
said that the allegations against Edge and 4G UK had not been specifically set
out. If the Appellant had understood how
the case for Customs would be put, evidence from Edge could have been called.
130. He said
that Notice 726 contains no requirement to undertake any specific checks. The principles of proportionately, legal
certainty and fiscal neutrality are relevant to the means by which Customs
establish fraud on the part of a trader.
If Customs were correct, Notice 726 could close the whole grey market.
131. He said
that Customs must prove the underlying fraud.
The tax loss should be capable of being particularised. Customs must show that the same goods were
involved : the only evidence here was the release notes.
132. Mr Beal
said that 247 and 3G are still VAT registered and trading. Edge is still in business as is 4G UK. He said that if these freight forwarders and
inspection agents were effectively a conduit to an organised fraud it was
inconceivable that Customs would not have stepped in.
133. He said
that in his evidence Mr Meghrabi had dealt with the points of criticism insofar
as they were of substance in a measured way.
Conclusions
134. We
start by considering whether Customs have established that the transactions
giving rise to the disallowed input tax were connected with the fraudulent
evasion of VAT having regard to objective factors. Mr Cunningham accepted that he must show a
loss in each chain, that this was the result of fraud and that the acquisition
by the Appellant was factually connected with the chain. We then consider whether
the Appellant in the person of Mr Meghrabi knew or should have known of the
above matters.
135. It was
common ground that the standard of proof is the balance of probabilities but
that cogent evidence was required commensurate with the serious nature of the
allegations, see Home Secretary v Rehman. Although these are not criminal proceedings,
knowing participation in fraud is an allegation of the utmost gravity.
136. Our
decision was rendered much more difficult because of the nature of the evidence,
most of which was purely circumstantial being based on documents a large number
of which were obtained by Customs from sources other than the Appellant. The most important documents relied on by
Customs were the release notes and the third party payment instructions. There was no direct evidence as to how these
were obtained. There was no evidence of
visits at the relevant time to Edge, RK, Venus or Easy MSI Ltd.
137. The
main direct evidence in relation to Mr Meghrabi’s knowledge was the meeting on
5 October 2006. Although most of the
questions were put by Mr Archibald he was not called as a witness although
present at the hearing. Although the
meeting was part of the extended verification process it appears that he asked
remarkedly few questions about the actual transactions although he had the
original deal material provided by the Appellant, see paragraph 22 above. The notes taken by Mrs Stevenson were very
brief for a meeting of over two hours.
We would have expected Mr Archibald to have had a check list of matters
to be covered at the visit and for this to have been produced. Mrs Stevenson’s note contained no mention of
4G UK, referring only to A1, although criticisms of the inspection were an
important part of the case for Customs.
Mrs Stevenson was relatively inexperienced, this being her first MTIC
verification and for the most part she acted as a signpost for the documents.
138. There
were also shortcomings in the evidence for the Appellant. In particular Giovanni Leon who played an important
part in the transactions was clearly available as a witness because Mr Meghrabi
asked him during the hearing about the IMEI numbers, however he was not called.
139. The
task of the Tribunal is, however, not to decide the appeal on evidence which
was not given, but on the material before us although in doing that we are
entitled to draw inferences in relation to evidence which was or ought to have
been available.
140. We
return now to the initial factual issue.
Mr Beal put Customs to proof of the underlying fraud in the chains and
the connection through to the Appellant.
He pointed to the lack of invoices for many transactions in the chains
and said that the release notes contained no values.
141. We
accept the submission by Mr Cunningham that Customs do not have to dot every
“i” and cross every “t”. The Tribunal
Rules provide expressly for evidence which would be inadmissible in a Court of
law. The weight to be given to hearsay
evidence is another matter and Mr Beal pointed out that much of Mr Stevenson’s
evidence was second or third hand hearsay and was often far from best evidence.
142. The
evidence of the chains consisted mainly of the release notes provided to
Customs by Edge. There was no evidence
of a visit by Customs to Edge after January 2006 and no correspondence was exhibited by Mrs Stevenson as to the
production of the deal logs. We do
however accept that the release notes were provided by Edge to Customs with the
covering lists. Apart from the absence
of any release to Team in deal 1, the release notes show successive
instructions to Edge to release the relevant models and quantities to the
successive traders shown on the diagram annexed to this decision. The release notes are all dated and the dates
coincide with the Appellant’s invoices.
It would be an extraordinary coincidence if any of the release notes
related to other identical models and quantities on the same days.
143. In each
chain instructions were exhibited for payments by traders further down the
chain from the UK importer direct to the EC supplier, Marubo in the case of
deals 1, 2 and 4, Universal Systems SCS in deal 3 and BVBA Koornmarkt in deal
5. In deal 1 RX Tech invoiced RK for
£1,577,400 plus £276,045 VAT, making £1,853,445 and instructed RK to pay
£1,853,186.50 to Marubo and £285.50 to RX Tech.
Deals 2, 3 and 5 involved similar instructions by RX Tech to RK,
although in deals 3 and 5 the third party payments were to Universal Systems
SCS and BVBA Koornmarkt respectively. In
deal 4 Astra instructed Venus Computers Ltd (“Venus”) to make payments of
£971,783.75 to Marubo and £199.75 to Astra and Venus instructed Easy MSI Ltd to
pay £971,983.50 to Marubo and £199.75 to Venus; the invoice by Astra to Venus
was for £827,220 plus VAT making £971,983.50.
144. In deal
1 the invoice from 247 to the Appellant was for £1,584,000 plus £277,200 VAT
making £1,861,200, settled in two debits at FCIB on 15 June 2006. The invoice from the Appellant to 3G was for
£1,663,200, also settled in two payments on 15 June.
145. There
was no proper evidence as to how Customs obtained those documents. Mrs Stevenson’s evidence was that RX Tech was
a missing trader. There was however no dispute as to the authenticity of the
third party payment instructions, which we accept, observing that they are
consistent with the release notes.
146. The
instructions for payments to Marubo and the other two EC suppliers involved
small payments to the immediate suppliers, RX Tech in four deals, and
successive split payment instructions in deal 4. In each case the combined payments equalled
the sums due to the immediate supplier inclusive of VAT. The amount payable to Marubo and the other
two EC Suppliers was substantially greater than the amount excluding VAT
payable to the immediate supplier. The
clear inference must be that the £1,853,186.50 which RX Tech instructed RK to
pay Marubo was the amount which Marubo charged Astra on deal 1 and that since
RX Tech invoiced RK in the sum of £1,584,000 excluding VAT, Astra sustained a
substantial paper loss on selling to RX Tech.
Similarly, in the other three deals where Astra was the UK acquirer, the
payment to the EC Supplier substantially exceeded the tax exclusive amount for
which the goods were sold on. The same
goes for deal 5 where the hijacked Pearl was the UK acquirer.
147. In each
of the chains the onward sales to 247 were at a nominal profit.
148. In view
of the pattern of release notes in deals 2 to 5, and that in deal 3 RK released
to TM, and that RK made a third party payment in deal 1, we conclude that the
release in deal 1 to JD was an error for TM.
149 We
regard the release notes and third party payment instructions as clear and
cogent evidence that in respect of each deal the acquisition by the Appellant
was causally connected with the fraudulent evasion of VAT and we find
accordingly.
150. This
brings us to the issue whether it has been established by objective factors
that the Appellant knew or should have known that the transactions into which
it entered formed part of chains connected to the fraudulent evasion of VAT.
151. We do
not accept the submission by Mr Cunningham that the Appellant took or would
have taken 90 per cent of the proceeds and must therefore have been the
ringmaster. That submission failed to
take account of the third party payments to the EC suppliers all of which were
substantially greater than the sums obtained by the Appellant from 3G. In deal 1, if the Appellant recovered its
input tax, its gross profit would be £79,200 before other expenses. Marubo on the other hand received £189,986.50
more than the Appellant obtained from 3G.
Far from being 90 per cent, the Appellant’s share was under 30 per cent
before taking account of the time taken to reclaim VAT and the Appellant’s
other expenses. Until and unless the Appellant recovered its input tax it made
a loss. The obvious inference is that Marubo and the other EC suppliers were
the ringmasters or that they were acting for a common ringmaster.
152. The
next question is whether it has been shown that the Appellant albeit not the
ringmaster was a knowing participant with actual knowledge. On this aspect the fact that the Appellant
would potentially make a substantial profit is clearly a factor, however a
share of under 30 per cent is much less compelling than one of 90 per cent.
153. Mr
Cunningham placed substantial reliance on the inadequacy of the due diligence
carried out by the Appellant which he described as woeful. In particular he said that Notice 726
required the Appellant to verify the integrity of the entire transaction
chains, which Mr Meghrabi said was not possible. He also stressed the failure to verify with
Redhill before the deals.
154. It is
important to note that there is no legal obligation to verify the entire
transaction chain, indeed any such an obligation would appear to contravene
Community law since it is impractical for a trader to comply. Similarly, verification with Redhill was
unrealistic because of the time in obtaining a reply.
155. We
accept that there were material weaknesses in the Appellant’s due diligence,
but we do not consider that they are more than a factor in deciding whether the
Appellant had actual knowledge. We note
that the weaknesses were not so apparent to Mr Monk as to cause him to delay
repayment of the 01/06 reclaim. We
consider however that the Appellant’s due diligence was not strong enough to
assist in countering the allegation of actual knowledge.
156. This
brings us to the actual trading transactions in issue.
157. During
his evidence in chief Mr Meghrabi said that the 4G UK e-mailed the IMEI numbers
to the Appellant and that Giovanni checked them against previous numbers, a
tedious job which had to be done manually working down the columns since there
was no database, see paragraph 67 above.
158. In cross-examination
he said that Giovanni had told him over the week-end that he did this using an
Excel spreadsheet and that he sorted the numbers numerically before pasting
them onto the old numbers and printing them off to check manually whether there
was any repetition; Mr Meghrabi said that this might take half an hour or an
hour, see paragraph 102 above.
159. We have
real difficulty with the evidence of Mr Meghrabi as to this. The Appellant’s office in Hanover Square
consisted of one room in which there were three large desks. Mr Meghrabi must have known what Giovanni was
doing. His evidence in chief contained
no suggestion that Giovanni sorted the numbers on the computer and married them
with the old numbers before printing them off and checking manually for
repetition. Since there had been a
series of earlier deals, in particular in the preceding two quarters, this
would have been an incredibly time-consuming task particularly since 4G UK did
not provide the numbers in numerical order.
If the whole process apart from checking for repetition was carried out
on the computer, it seems to us inconceivable that Mr Meghrabi would not have
realised what Giovanni was doing until he asked him over the weekend. We do accept that checking manually for
repetition even after the numbers had been sorted and pasted would have taken a
considerable time. It is clear that the
Appellant did not have a computer programme similar to Nemesis which is used by
Customs; Nemesis does not involve sorting into numerical sequences. Although Mr Meghrabi’s witness statement said
at paragraph 52 that the 10% can was “to guard against repeat buying of the
same phones”, the statement contained no mention of a tedious and time
consuming check by the Appellant. We
note that Giovanni Leon was not called as a witness and no print out was
produced to confirm that the check described had taken place.
160. A
further difficulty arises in relation to Mr Meghrabi’s evidence as to receipt
of inspection reports. At paragraphs 53
and 54 of his statement he said this,
“53. We were then provided with an inspection report which we found
to be satisfactory.
54. Having
received the completed inspection reports, we took the decision to ship the goods.”
This contained no mention of a confirmatory telephone
call before receipt of the actual report in the post. We do not see how an oral report on the
telephone could be found to be satisfactory unless it covered all items which
4G UK had been asked to cover, see paragraph 86 above. The completed reports could not have been
received by post before the Appellant instructed Edge to ship the goods on 14
June. We do not find Mr Meghrabi’s
answer in cross-examination that the Appellant got a completed report on the telephone
to be credible. Even if 4G UK had said
that everything was in order, that would only have been possible if 4G UK had
been told what to look for.
161. Mr
Cunningham also relied on the timings shown on the fax headers. These however involve the difficulty that the
fax headers did not appear on a number of documents in the bundles for the
hearing and that we do not know which documents had no header or on which the
header was not on the copy in the bundle because of misalignment in
photocopying. Further some dates and
times were not clearly legible.
162. In
those circumstances we can only draw limited conclusions from the fax
headers. The first is that deals 1 and 2
were dealt with concurrently, since faxes emanating from the Appellant in
relation to both deals show times very close together. Another conclusion is that the Appellant
faxed the purchase order to 247 19 minutes after sending the supplier’s
declaration to 247 for signature. This
latter conclusion does not square with Mr Meghrabi’s evidence in
cross-examination that 4G UK were instructed after the receipt from 247 of the
signed supplier’s declaration, that 4G UK took about an hour to do the 10 per
cent scan and that the purchase order was issued by the Appellant after
checking the IMEI numbers (see paragraphs 100 to 103 above). We note however that the time shown on the
fax header on 247’s order confirmation sent to the Appellant was some two hours
earlier. If the Appellant was confident
as to 247 making the supply, it would not be surprising if the instructions to
4G UK were in fact given before receipt of the supplier’s declaration. This was not however what the Appellant said.
163. We do
not find the dates of the deals significant. Although there were only five
deals in period 07/06, the Appellant did not receive the £747,104 repayment for
04/06 until 8 June; prior to that there would no doubt have been a problem in
financing the VAT element in the deals.
The fifth deal was on the last day of the accounting period and the Appellant
no doubt hoped for an early repayment.
Given that the Appellant dealt back to back, it is hardly surprising
that the deals were always profitable.
164. We do
not consider the fact that all five deals were profitable to be
significant. Given that the Appellant
sourced the goods to meet the customer’s requirements dealing back to back it
is hardly surprising that the deals were profitable. We find nothing inherently improbable in such
deals of themselves.
165. We do
however regard it as significant that in all five deals the specific mobile
telephones in the specific quantities which 3G requested were always available
from 247 without a single consignment having to be broken down or amalgamated
since each consignment had been acquired in the same quantities by 247. There was no suggestion that 3G asked for
different models or quantities and that any deal was adjusted to what 247 could
supply. Nor was there any suggestion
that 247 sourced goods to meet the Appellant’s requirements. Given the chains of release notes any such
suggestion would not have been credible.
We are satisfied that 3G knew of the prior chains and that the Appellant
would acquire the goods from 247.
166. Although
Mr Cunningham did not take this point, we consider the fact that the IMEI
numbers, while all appropriate to the models in question, were random numbers
bearing no apparent relationship to each other to be significant. We would have expected consignments being
sold on the grey market as surplus to requirements to be in batches of
adjoining numbers. Deal 1 consisted of
1100 boxes of 4 according to the report, of which 440 phones were scanned. The scatter of numbers suggests that they
must have come from a very large number of different batches possibly
hundreds. We can think of no
satisfactory reason why goods should have been circulating in the grey market
in this way. A sample of 10 per cent
could not be representative of a whole of such consignment. Every single box would have to be checked for
the matters referred to in paragraph 86.
It may be that this goes primarily to the chains being fraudulent,
however it is also relevant to the Appellant’s knowledge.
167. We have
already recorded our concerns as to Mr Meghrabi’s evidence as to checking the
IMEI numbers and the receipt of the inspection reports. We do not accept his evidence that missing
due diligence papers had been given by him to Chiltern; he suggested that there
might have been lost when Chiltern became part of BDO Stoy Hayward, however he
had already signed his witness statement omitting those papers while Chiltern
was still independent. We accept Mr
Cunningham’s submission that Mr Meghrabi’s reference to his father’s business
in the present tense was thoroughly misleading; in our judgment this was not
accidental.
168. We do
not find it credible that Mr Meghrabi was an innocent dupe. He is both articulate and intelligent. His
reference to the initial Bond House decision in the Tribunal shows that
he was aware of the problems in the sector as far back as 2003.
169. We have
concluded that on the central matters in this case, Mr Meghrabi did not give
truthful evidence. In particular we find
that he did know when entering into the five transactions that they were part
of a fraudulent chain.
170. In view
of this finding the question of whether the Appellant should have known is not
relevant. The submissions by Mr Beal as to legal certainty, proportionality and
fiscal neutrality depended on the premise that the Appellant did not have
actual knowledge. A trader who
participates in fraud cannot in our judgment rely on the principles of legal
certainty, proportionality and fiscal neutrality in avoiding the consequences
laid down by the Court of Justice in Kittel.
THEODORE WALLACE
CHAIRMAN
RELEASED: 26 November 2008
LON2007/811
The following additional cases were cited in argument
or in written submissions.
(A) ECJ
Elliniki Radiophonia Tileorassi AF v Dimotiki Etairia
Pliroforissis and Sotirios Kouvelas (Case
C-260/89) [1991] ECR I-2925
Gabalfrisa SL and Others v Agencia Estatal de
Administración Tributaria (Joined Cases C-110/98 to C-147/98) [2000] ECR I-1577
Grundstückgemeinschaft Schloßstraße GbR v Finanzamt
Paderborn (Case
C-396/98) [2002] ECR I-4279
Finanzamt Goslar
v Breitsohl (Case C-400/98) [2000] ECR I-4321
Schmeink & Cofreth AG & Co KG v Finanzamt
Borken (C-454/98)
[2000] ECR I-6973
Ampafrance SA v Directeur des Services Fiscaux de
Maine-et-Loire (Joined Cases C-177/99 and C-181/99) [2000] ECR I-7013
EC Commission v Italy (Case C-78/00) [2001] ECR
I-8195
Marks & Spencer plc v Customs and Excise
Commissioners (Case
C-62/00) [2002] STC 1036
Booker Aquaculture (Joined Cases C-20/00 and C-64/00) [2003] ECR I-7411
Christoph-Dornier-Stiftung für Klinische Psychologie
v Finanzamt Giessen (Case C-45/01) [2003] ECR I-12991
Karageorgou and Others (Joined Cases C-78/02 to
C-80/02) [2003] ECR I-13295
Finanzamt Gummersbach v Brockemühl (Case C-90/02) [2004] ECR
I-3303
Halifax v Customs and Excise Commissioners (Case C-255/02) [2006] STC 919
Collée v Finanzamt Limburg an der Lahn (Case C-146/05) [2007] ECR
I-7861
Netto Supermarket GmbH v Finanzamt Malchin (Case C-271/06) (2008)
Ecotrade SpA v Agenzia delle Entrate (Joined Cases C-95/07 and
C-96/07) (2008)
Sosnowksa v Dyrektor Izby Skarbowej (Case C-25/07) (2008)
(B) ECHR
Hentrich v France (1994) 18 EHRR 40
Spacek v Czech Republic (2000) 30 EHRR 1010
(C) House
of Lords and Privy Council
Re H [1996] AC 563
Manifest Shipping Co Ltd v Uni-Polaris Insurance Co
Ltd (The Star Sea) [2003] 1 AC 469
Twinsectra Ltd v Yardley [2002] 2 AC 164
Bastion Holdings Ltd v Jorril Financial Inc [2007] UKPC 60, PC
Fleming t/a Bodycraft v Revenue and Customs
Commissioners [2008]
STC 324
Re V (Children) [2008] UKHL 35, [2008] 2 WLR 1
(D) Court
of Appeal
R (Federation of Technological Industries and Others)
v Customs and Excise Commissioners [2004] STC 1424
Khan v Revenue and Customs Commissioners [2006] STC 1167
Attorney General of Zambia v Meer Care & Desai [2008] EWCA Civ 1007
(E) High
Court
Mohammed Siddiq Khan v Customs and Excise
Commissioners [2005]
EWHC 653 (Ch)
New Fashions (London) Ltd v Revenue and Customs
Commissioners [2005]
EWHC 1628 (Ch)
Mullarkey v Broad [2007] EWHC 3400 (Ch) 3 July 2007
Berezovsky v Abramovich [2008] EWHC 1138 (Comm)
(F) VAT
Tribunal
Aircall Export Ltd v Revenue and Customs
Commissioners (2005)
Decision No.19185
Deluni Mobile Ltd v Revenue and Customs Commissioners
(2005)
Decision No.19301
Plasma Trading v Revenue and Customs Commissioners (2006) Decision No. 19499
Dragon Futures Ltd v Revenue and Customs
Commissioners [2006] V&DR 348
Livewire Telecom Ltd v Revenue and Customs
Commissioners (2008)
Decision No. 20533
Olympia Technology Ltd v Revenue and Customs
Commissioners (2008)
Decision No. 20570
Honeyfone Ltd v Revenue and Customs Commissioners (2008) Decision No. 20667
Blue Sphere Global Limited v Revenue and Customs
Commissioners (2008)
Decision No. 20694
Brayfal Ltd v Revenue and Customs Commissioners (2008) Decision No.20781