20903
INPUT
TAX – MTIC fraud – whether the
Appellant knew or ought to have known about the fraud – no – appeal allowed
LONDON TRIBUNAL CENTRE
OUR COMMUNICATIONS
LIMITED Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND
CUSTOMS Respondents
Tribunal:
John Brown CBE FCA CTA
Sandi O’Neill
Sitting in public in
22-23 January 2008
Michael Patchett Joyce and Saba
Naqshbandi instructed by Hassan Kahn & Co for the
Appellant
Philippa Whipple and Robert
Wastell instructed by the General Counsel and Solicitor
for HM Revenue and Customs, for
the Respondents
© CROWN COPYRIGHT
2008
DECISION
Introduction
1
This
decision concerns the appeals by the Appellant, Our Communications Limited
("OCL"), against four decisions by the Respondents ("HMRC")
refusing OCL's claims for repayment of input tax totalling some £9.7m.
2
The
four appeals are:
(a)
Appeal LON/2006/0830 which is against HMRC's
decision dated 28 July 2006 refusing OCL's claim for input tax of £3,100,690.25
for the period 01/06;
(b)
Appeal LON/2006/0983 which is against HMRC's
decision dated 7 September 2006 refusing OCL's claim for input tax of £105,175
for the period 01/06. This was in respect of three deals not dealt with in the
first decision concerning the first period;
(c)
Appeal LON/2006/1069 which is against HMRC's
decision dated 3 October 2006 refusing OCL's claim for input tax of
£4,828,250.00 for the periods 02/06 and 03/06;
(d)
Appeal LON/2007/0295 which is against HMRC's
decision dated 5 January 2007 refusing OCL's claim for input tax of £1,665,125
for the period 02/06.
3 Counsel for HMRC confirmed that there is no
allegation of actual fraud against OCL or Mr Dar. She confirmed that HMRC are “not saying that
[Mr Dar] is the one who defaulted, who failed to pay the tax over to the
Commissioners, who was fraudulent in a domestic law sense”. It was not argued
that the transactions involving OCL were shams.
4
It was
accepted that the four Decision Letters concerned four groups of chains of
transactions. In each of them OCL was the exporter or as HMRC described it, the
"Broker". OCL claimed input tax in respect of the last export
transaction in each chain but was refused repayment of the related input tax.
5
It was
accepted by Mr Smallbone in respect of each of these chains that the paperwork
between OCL and its immediate
6
Mr
Smallbone asserted that there was a tax loss in respect of each chain and that
these tax losses were due to fraud.
7
This case is solely concerned with the denial
of repayment of input tax to OCL. We have no jurisdiction to consider the VAT
treatment of other traders as they are not the subject of the appeal before us.
The Appellant has raised issues as to apparent differences in treatment between
different traders. These are interesting but are not a matter for us.
Accordingly, we do not deal with them.
Structure
of this decision
8
The
structure of this decision is as follows:
|
(1)
Introduction |
Paragraphs 1-7 |
|
(2)
Structure of this decision |
Paragraph 8 |
|
(3)
Abbreviations, Definitions and Dramatis
Personae |
Paragraphs 9-10 |
|
(4)
The Issues |
Paragraph 11-13 |
|
(5)
Procedural Matters |
Paragraphs 14-23 |
|
(6)
The Law |
Paragraphs 24-30 |
|
(7)
The Evidence |
Paragraphs 31-36 |
|
(8)
Findings of Fact |
Paragraphs 37-356 |
|
(9)
Submissions of the Parties |
Paragraphs
357-385 |
|
(10)
Discussion |
Paragraphs
386-481 |
|
(11)
Conclusion |
Paragraphs
482-484 |
|
Appendix 1 Direction with Reasons |
|
|
Appendix 2 Table of Transactions and
Information |
|
|
Appendix 3 List of Alleged Defaulters
|
|
Abbreviations,
Definitions and Dramatis Personae
9
The following describes the abbreviations and
phrases used and persons concerned in this decision:
21st Century
Trading 21st
Century Trading Limited, a company incorporated in the
Activmind [sic] Activmind
Limited, a company incorporated in the
Alpha Trade Zone Alpha
Trade Zone Limited, a company
incorporated
in the
the Appeals the
appeals listed in paragraph 2
Assurance Officer an
HMRC Officer particularly concerned with assuring that a particular taxpayer
fulfils their VAT obligations
Ms Barker Sarah
Jane Barker, Higher Officer, HMRC who at the relevant time had recently joined
the MTIC team and who carried out the task of trying to trace the chains. She
produced three witness statements which were admitted in evidence. She was
cross examined. She dealt principally with the February 2006 deals.
Blue Star Trading Blue
Star Trading Limited, a company
incorporated in the
Broker the
word used by HMRC to described the
Buffer the
word used by HMRC to described a
Butt Butt
Limited, a company
incorporated
in the
Callender/TCG The Callender Group Limited, a
company
incorporated
in the
CCT HMRC’s
Central Coordination Team which deals (inter alia) with MTIC enquiries
Chain a
particular series of transactions involving the same goods (in whole or in
part)
CHP Distributors CHP
Distributors Limited, a company
incorporated
in the
CK Communications CK
Communications Limited, a company incorporated in the
Com4U Com4U
Limited, a company incorporated in the
Deal Log A
log of deals produced (usually) by a
trader
Deal Sheet Summary
sheet in respect of the information collected produced by HMRC
Deal Summary A
summary of the transactions in question
Decision Letters the
HMC Letters setting out the Decisions
The Decisions the
decisions appealed against described in the Introduction and all or any of them
as appropriate
Defaulter a
person who has defaulted on payment of VAT, usually fraudulently
Destonia Destonia
General Trading Limited, a Cypriot company
Diarolla Sia
Diarolla, a Latvian company
Directive The
Sixth Directive or Directive 2006/112/EC as appropriate.
Due Diligence/DD the
checks made on customers, suppliers and others particularly as regards the
chains in question
Electronic Folder the
computer based way HMRC records information that it has collected which allows
information to be shared within HMRC
Emmen Communications Emmen
Communications Limited, a company incorporated in the
Essential Trading SARL a
European customer of OCL
Evolution Trading Evolution
Trading Limited, a company
incorporated
in the
Extra Letter An
extra letter produced in respect of
third party payments on occasions giving further payment instructions
usually for part which often reflects the VAT element
Financial Alpha Computer International An
Italian incorporated company
/FACI with
a French telephone number
First Call / Steven Philips a
trader, alleged to be a defaulter
First Curacao First
Curacao International Bank, a bank in
Faroukh & Suhail a
HMRC Her
Majesty’s Revenue and Customs, the Respondents
IMEI No International
Mobile Equipment Identity Number - unique electronic designation for a mobile
phone that can be scanned
Interken the
freight forwarder used in most of the transactions
K&S K&S
Limited, a company
incorporated
in the
Kingfisher Traders Kingfisher
Traders Limited, a company incorporated in the
Lauriel Reid Lauriel
Reid Limited, a company
incorporated
in the
Maura Enterprises Maura
Enterprises Limited, a company
incorporated
in the
Maximila Solutions a
trader
Means of Knowledge includes
knew, ought to have known and had the means of knowledge, as the context
requires
Menard Consulting SIA a
Latvian company
Midcom a
MTIC Missing
Trader Intra Community Fraud
Myco Myco
Telecoms Limited, a company
incorporated
in the
NAST National
Assets [&} Security Team
NEMESIS a
database of IMEI Nos maintained by
HMRC.
We were told it is not an acronym
Notice 726 HM
C&E Notice concerning joint and several liability which is not in issue
here. It contains an Appendix setting out suggestions as to what traders might
do to avoid joint and several liability (which is not in point here). It does
not have the force of law
OCL Our
Communications Limited, the
Appellant.
Oracle Oracle
(UK) Limited, a company
incorporated
in the
Orange and Green
incorporated
in the
Oxhey Oxhey
Construction Services Limited, a company incorporated in the
Pale Pale
Limited, a company
incorporated
in the
Parkacre Parkacre
Contractors Limited, a company incorporated in the
Phone City Phone
City Leytonstone UK Limited, a company incorporated in the
Rakha SARL a
European customer of OCL
Rajesh [Kumar] supplier
of jeans who introduced Mr Dar to the mobile phones market. Mr Dar could not
easily recall his surname or address in cross examination but it seems his
surname was Kumar
Mr Ratoo a
sole trader
Redhill a
part of HMRC which can be contacted to check VAT registrations etc.
Red Rose Consultancy Red
Rose Consultancy Limited, a company incorporated in the
Regulation 25 a
regulation allowing notice to be given shortening an accounting period for VAT
Rezaco Trading Limited a
Cypriot company
Retro Jeans A
company involved in Third Party Payment requests
Right of Deduction the
right of a trader to set input tax against his output tax liability or to
receive a repayment if the input tax credit due to him exceeds that liability
Mr Smallbone James
Smallbone, Higher Officer, HMRC who carried out the task of trying to trace the
chains. He produced five witness statements all bar the fourth were admitted in
evidence. He was cross examined. He dealt principally with the January and
March deals
St Aimie St
Aimie Limited, a company
incorporated
in the
Steven Phillips a
sole trader trading as First Call, an alleged defaulter
Storm 90 Storm
90 Limited, a company
incorporated
in the
TEC The
Export Company Limited, a company
incorporated in the
Third Party
Payment a
payment requested by one party to a deal to be made to a person other than to
the counterparty said by HMRC to be an indication of fraud in the context of
MTIC
Transworld Transworld
Brokerage, OCL’s agent in
Umbria Equitazione an
Italian entity
Unibrand a
trader
VATA Value
Added Tax Act 1994
Mr Vaufrouard Mark Vaufrouard,
OCL’s Assurance Officer till mid February 2006 who told us he “specialised
in looking at only traders who had a possible interest or were trading in high
value goods electrical goods, missing trader intra-community goods; in other
words MTIC goods, mobile phones, and the whole idea of it was to identify
possible fraud and just to receive information, as much as information as [he]
possibly could from the brokers or the traders”
Veracis Veracis
Limited, a consultancy involved in advice on and the carrying out of DD
Vibetec Solutions Vibetec
Solutions Limited, a company
incorporated
in the
Vision An HMRC electronic Database
V2(UK) V2(UK)
Limited, a company
incorporated
in the
(Not all these persons are referred to in the
Decision but they are included for the sake of completeness particularly when
considering the Deal Summaries in the Core Bundle).
10 Reference
should be made to the Core Bundle for the Deal Sheets. They are too bulky to
include here. Appendix 2 provides some of the relevant information as to the
relevant issues in tabular form and Appendix 3 sets out a list of Deals and
Defaulters. The Appendices form part of this decision.
The Issues
11 In simple
terms, the principal issue is whether HMRC's decision to refuse the input
claims in issue was correct in law.
12 This raises a
number of questions including the following:
a.
Has the particular chain of transactions in
question been established?
b.
Were the transactions in question part of a
chain in which there was a
tax loss?
c.
Was that tax loss attributable to fraud?
d.
Did OCL/Mr Dar have the Means of Knowledge of
their participation
in
transactions connected with fraudulent evasion of VAT. In particular were all
available proportionate steps taken to ensure on the balance of probabilities
that there was no connection with persons or transactions involved in VAT
fraud?
13
The Appellant suggested that an extra component
should be added, effectively: whether the relevant tax loss has been suffered
at the time when OCL entered into its transactions (see para 13 Appellant’s
Skeleton Argument). The Commissioners did not accept that there was this extra
component. They considered the Kittel
test is in essence a factual one, namely, whether the Appellant’s transactions
were connected with the fraudulent evasion of VAT in the chain relating to the
goods, and the timing of the fraud has no relevance to it.
14
These matters will be considered further below.
Procedural
Matters
15
Notices of Appeal were lodged by OCL against the
Decisions on 7 August 2006, 19 September 2006, 13 October 2006 and 2 February
2007, respectively.
16
By Directions of the Tribunal made on 17 November
2006 and 12 March 2007, it was ordered (inter alia) that all of those Appeals
be heard together.
17
Directions as to various other procedural
matters relating to documents, skeleton arguments etc. had been given in this
case but unfortunately these were not complied with on time. We are grateful
for the assistance of Counsel and those instructing them for allowing this
matter to proceed by ensuring copies of documents etc. were produced and read.
18
A hearing took place on 26 September 2007
before the Chairman at which the availability of documents, exchange of
skeleton arguments and the admissibility of certain evidence were dealt with.
19
Consideration was given to adjourning the
hearing but the parties considered it desirable that the hearing should go
ahead starting on 1 October 2007. It did.
20
The September hearing also considered the order
in which matters should proceed. It was agreed that there should be some time
set aside for reading after short introductions.
21 The running
order proposed and agreed by Counsel was adopted. It was as follows:
|
Openings: |
|
|
|
Respondent’s opening |
|
|
Appellant’s opening |
|
|
|
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Respondent’s case: |
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|
|
James Smallbone |
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Sarah Jane Barker |
|
|
Christopher Williams |
|
|
Matthew Bycroft |
|
|
Susan Okolo |
|
|
Daniel Outram |
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|
Peter Cameron-Watson Oracle |
|
|
Julian Cook |
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|
Stewart Yule |
|
|
Guy Craddock |
|
|
Mark Vaufrouard |
|
|
Barry Johnson |
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|
Jill Evans |
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Appellant’s case: |
|
|
|
Riswan Dar |
|
|
Stephen Ploughman |
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|
Mohammed Iqbal |
|
Submissions: |
|
|
|
Appellant’s closing submissions |
|
|
Respondent’s closing submissions |
|
|
Appellant’s reply |
22 This running
order recognised that (as the parties agreed) it was for HMRC to establish the
integrity of the chains, the tax loss in them and that it was attributable to
fraud in the chain and for OCL to show if that had been established that OCL
fell outside the area of “Means of Knowledge”.
23 On the ninth
day of a hearing originally listed for ten days the Respondent sought again to
introduce some 48 UK to UK further chains not the subject of the Appeals. This
was again refused. The Direction with Reasons dealing with this is set out in
Appendix 1[1].
The Law
24 There is much
law on this area. The relevant law includes the following.
The legislation
25 The principal relevant legislative provision
in force at the time at which the transactions in question took place was
Article 17(1) of the Sixth VAT Directive (77/388/EC) since replaced by Article
167 of Council Directive 2006/112/EC.
26 As part of the fiscal neutrality of VAT
taxable persons may set against the output tax for which they must account the
input tax they have incurred on the cost components of their taxable supplies.
Article 17(1) provided that:
“The right to deduct shall
arise at the time when the deductible tax becomes chargeable.”
27 Sections 24 to 26 VATA seeks to implement
this in domestic law. So far as relevant, those provisions are as follows:
“24 Input tax and output tax
(1) Subject
to the following provisions of this section, ‘input tax’, in relation to a
taxable person, means the following tax, that is to say—
(a) VAT on the supply to him
of any goods or services;
(b) VAT on the acquisition by
him from another
(c) VAT paid or payable by him
on the importation of any goods from a place outside the member States,
being
(in each case) goods or services used or to be used for the purpose of any
business carried on or to be carried on by him.
(2) Subject
to the following provisions of this section, ‘output tax’, in relation to a
taxable person, means VAT on supplies which he makes or on the acquisition by
him from another member State of goods (including VAT which is also to be
counted as input tax by virtue of subsection (1)(b) above) …”
“25 Payment by reference to accounting periods
and credit for input tax against output tax
(1) A
taxable person shall—
(a) in respect of supplies
made by him, and
(b) in respect of the
acquisition by him from other member States of any goods,
account for and pay VAT by reference to such periods (in this Act
referred to as ‘prescribed periods’) at such time and in such manner as may be
determined …
(2) Subject
to the provisions of this section, he is entitled at the end of each prescribed
accounting period to credit for so much of his input tax as is allowable under
section 26, and then to deduct that amount from any output tax that is due from
him.
(3) If
either no output tax is due at the end of the period, or the amount of the
credit exceeds that of the output tax then … the amount of the credit or, as
the case may be, the amount of the excess shall be paid to the taxable person
by the Commissioners; and an amount which is due under this subsection is
referred to in this Act as a ‘VAT credit’ …”
“26 Input tax allowable under section 25
(1) The
amount of input tax for which a taxable person is entitled to credit at the end
of any period shall be so much of the input tax for the period (that is input
tax on supplies, acquisitions and importations for the period) as is …
attributable to supplies within subsection (2) below.
(2) The
supplies within this subsection are the following supplies made or to be made
by the taxable person in the course or furtherance of his business—
(a) taxable supplies;
(b) supplies outside the
28 These provisions are mandatory. If a trader
has incurred input tax which is properly allowable, he is entitled to the Right
of Deduction. He is required to hold the evidence to support his claim (see
article 18 of the Sixth Directive and regulation 29(2) of the Value Added Tax
Regulations 1995 (SI 1995/2518) and the observations of Lightman J in UK Tradecorp, at [28] to [34]) but,
provided he does so, the right to deduct or to a repayment is absolute, and no
element of discretion is conferred on the tax authority, save that the
authority may accept lesser evidence than that normally required. HMRC has no
right to demand more evidence than that prescribed by article 18. The right is
also immediate, that is it may be exercised, as article 17 puts it, “when the
deductible tax becomes chargeable.” The only limitation is the practical one
that, although deductibility (at least, in the present context) is determined
on a transaction-by-transaction basis, the mechanical process of deduction or
repayment is effected by reference to prescribed accounting periods.
29 Accordingly, there must be a good reason for
denying input tax recovery to a taxable person. This could be Abuse or fraud.
Case Law
30 We were provided with copies of the decisions
in a number of cases which we have read. These included the following.
R (Teleos PLC) v HMRC C - 409/04
Gararge Moleneide BVBA v
Belgium C-286/9 4
CallTell Telecom Limited v HMRC 20 July 2007
21st Century Majestic Solutions Limited v Madysen Limited [2004].Ll R 92
Optigen Limited, Fulcrum Electronics Limited and Bond House Systems v
CCE [2006) STC 419
Barclays bank PLC, Tribunal Decision number 19302
Axel Kittel v
Dragons Futures Limited v CCE [2006]. V&DR 348
Photo Production Limited v Securicor Limited [1980] AC 827
Stichting UItvoering Financiele Acties [1989] ECR 1737
R (Just Fabulous (UK) Ltd) v HMRC [2007] EWHC 521
Webber's Wine World Handels-GmbH C-147/01
Intersplay v
Tynewydd Labour Working Men's Club v CCE [1979] STC 570
Mobile 365 v HMRC [2007] EWHC 1737
McGann Services Limited v HMRC [2006] EWHC 3232
Synergy (
The Evidence
31 We were
provided with some thirty odd Volumes of documents.
32 We heard oral evidence from:
a. James Smallbone OCL’s
assurance officer from mid February
who
tried to trace back the January and March
chains
b. Sarah Jane Barker HMRC officer who tried to trace back the
February
2006 chains
d. Christopher Williams HMRC
Assessing Officer for Steven Phillips
trading
as First Call
e. Matthew Bycroft HMRC Assurance for Oxhey
f. Susan Okolo HMRC
Lead Officer for MyCo
g. Daniel Outram HMRC
Assurance Officer for Callender
h. Peter Cameron-Watson HMRC Assurance Officer for Oracle
i.
Julian
Cook HMRC Assurance
Officer for Coms4U
j.
Stewart
Yule HMRC Assurance
Officer for Activmind
k. Guy
Craddock HMRC Assurance
Officer for CHP
Distributors
l. Mark Vaufrouard OCL’s assurance officer till mid February
2006
m. Jill Evans, an HMRC accountant
n. Riswan Dar, OCL’s principal shareholder and director who
was mainly responsible for OCL’s trading
o. Stephen Ploughman Principal of Veracis
p. Mohammed Iqbal a trader
33 Witness
statements were provided for all of them and they were cross examined.
34
Counsel for HMRC did very well in marshalling
and presenting the vast amount of documentation collected by HMRC as did
Counsel for the Appellant in being completely on top of it. We are grateful to
both of them.
35
The
approach of HMRC (excluding their Counsel) was very much on the basis of
assertion rather than seeking to prove by cogent evidence those matters which
they had the onus to prove by evidence.
We recognise that HMRC's witnesses tried their best according to their
lights and abilities but they were not as focused on what had to be proved as
on what they thought was the case. In future, it is to be hoped that they would
be clearer in their objectives. This is not to suggest that there would
necessarily have been any difference in the outcome of the present case nor to
downplay the difficulty of the task for HMRC.
Evidence is vital though in a case such as this notwithstanding the difficulties
in collecting it.
36
HMRC
should also recognise that directions are not there to be complied with at
their convenience. They are to be
complied with. Whilst the Appellant's
compliance may not have been perfect had HMRC complied with directions in a
timely and proper manner the case would have been less diffuse and the hearing
speedier. HMRC should also learn the
lesson that documents needed for a hearing before the Tribunal should be made
available to the Tribunal and not retained by them for their own convenience
(see below). It is not only discourteous but could potentially inhibit the
fairness of the trial.
Findings of Fact
37 From the evidence we make the following
findings and do so as findings of fact.
OCL
38
OCL is a company
incorporated in
39
A reorganisation took place later
seemingly to allow profits to be extracted from OCL at a reduced rate of direct
tax[3].
We draw no inference either way from this but note it for completeness.
40
Mr Dar purchased OCL in July 2000. It was
already an established company. He did so after taking advice from one of his
suppliers in
41
Mr Dar said the company had had no
problems in the past and that the accountant had looked into that. Mr Dar put
himself in the hands of the accountant.
42
OCL ceased trading in March 2006.
Accounts
43
The
first relevant accounts are those for February 2001.
44
Mr Dar
accepted OCL made about half a million pounds worth of net profit in the first six months of trading. He said it
also paid substantial tax on it as well.
45 He accepted that the Accounts showed that OCL dealt in large quantities of mobile phones. In reply to the suggestion that this was extraordinary Mr Dar said he considered it was but continued “From the start I worked very closely with my insurance [sic] officers and to me, the commodity that I was trading in, this is normal in commodity trading”.
OCL’s Principal,
Mr Dar
46
We make the findings in this section
mainly from what Mr Dar told us in oral evidence which was not refuted.
47
We found Mr Dar a thoughtful, shrewd and
intelligent witness and accepted his evidence. He appeared to us to be a
natural trader pursuing profit where and how legally he could. We also remind
ourselves that he was dealing in a new business and in a new country and wanted
to do what was necessary to allow him to trade peacefully. To that end he put
various procedures (including DD) in place so that he would have the right
documentation etc.
48
Mr Dar came to the
49
A second retail outlet was opened in
1995. This sold higher value goods, including air-conditioning units and mobile
telephones. Mobile phones were a very new commodity at that time in
50
He set up in the clothing retail
business when he came to the
Mr Dar and the
Mobile Phone Business
51
Mr Dar started to move into the
wholesale mobile phone business in October 2002. This was a new area of
business in which he only had retail experience in
52
Mr Dar told us he got into the wholesale
mobile phone business because he had a contact in the retail clothing business
who told him about it. He was called
Rajesh. Mr Dar could not immediately remember his surname or address.
53
He used to supply Mr Dar with
jeans. He also traded in mobile phones.
He used to come and see Mr Dar about twice a month. Rajesh used to live in
54
Rajesh told Mr Dar he brought jeans over
from
55
Mr Dar was not doing too well in the
clothing business and he wanted to explore other opportunities. He said the
mobile phone market seemed an exciting market to get into.
56
Mr Dar decided to look into that market. He
became aware of “The buoyant mobile telephone trading sector operating within
the
57
Mr Dar discovered that mobile phones
were handled by specialist freight forwarders. The phones were kept at a small
number of warehouses by the specialist freight forwarders handling phones. Mr
Dar started by visiting their premises. Interken and Paul’s Freight were the
freight forwarders Mr Dar particularly referred to.
58
Mr Dar told them that he was setting up
a business and that he wanted to know how the business worked from the freight
forwarders’ side. He was a potential client.
59
He said he met other traders operating
within the sector, often meeting such traders at the premises of freight
forwarders with whom he became acquainted. When he went to visit Interken and
Paul’s Freight, there were other individuals there that he talked to. By
talking to those individuals he considered he got a good picture of the
potential volume of trade, et cetera, involved. The other traders at the
premises of the freight forwarders were potential suppliers as well as
potential customers. They were thus mutually valuable contacts.
60
The freight forwarders took Mr Dar around
to show him what they did and how they operated their business and what
services they provided.
61
Mr Dar said that he rapidly became
aware, through his researches, that this was a market in which there was a lot
of fraud. More specifically he said “I had been made aware, through my
discussions with freight forwarders, that the UK Revenue Authorities required
mobile telephone traders to produce more documentation supporting VAT returns
than was required of traders in other areas. It was different because it was a
high value commodity and there was a certain procedure when it comes to dealing
with it, so, as far as I was concerned, there were certain procedures that you
have to follow when you deal with this sort of commodity”. Mr Dar made sure he
followed the procedures and had the requisite documentation so that he could
trade to make money.
62
Mr Dar’s evidence was that the first
supplier was introduced to him by his contact Rajesh and the first customer, Mr
Iqbal, was one of Mr Dar’s clothing wholesalers who had been introduced to him
by Rajesh.
63
Mr Dar took a reference for Mr Iqbal. He
was an established businessman and had a good reference. Mr Mir trading as
Uniform Networks was the first supplier. Mr Mir knew that Mr Dar was selling
goods back-to-back as was also Mr Mir.
The initial funding etc. of the business
64
The
initial investment came from Mr Dar’s personal funds. It was about £10,000. It
was used to pay for the company, some computer equipment and a few other
assets.
65
Mr Dar
traded from his home to start with. He had an office there. Later he took an
office away from home at
66
He did
not take out any loans or have any borrowings. He said he was not going to be
paying for the goods until he was paid.
67
The
first staff member was taken on shortly after the move to
68 The back to back structure also reduced the cost of funds.
Extent of
Research
69
Mr Dar looked at various magazines such as
Mobile News, vMobile Phone, What Cellphone?, and a few others. He later looked
at websites mainly IPT (International Phone Traders).
70
The IPT website is essentially for
traders in mobile phones. Mr Dar said that it was later that OCL started using
the IPT website By becoming a
member, one got the right to advertise on that website, a
“passport” and the facility to post stock that the member requires or wants to
sell.
Method of Trading
71
The
stock is kept by the owner at the premises of the freight forwarder. Stock may
be allocated by the owner to a trader who will try to sell the stock and if he
has a customer, he has a deal. If not there is no deal. The stock first gets
allocated to someone who is interested in buying the stock. At that point, there is no paper work, there
is no commitment to taking the stock.
The trader is simply just trying to sell it. Once there is an interested customer the
trader thinks he has a deal at that point, the trader goes back to his supplier
and says, “Yes, I will take that stock”. That is when the parties commit to
that deal. Before that the trader has no
commitment to the stock. The stock is kept at the freight
forwarders so there is no security issue.
Mr Dar told us “…if the customer does not pay the stock can be taken
back or it is just not released to him. There would be no deal and the contact
lost”.
72
It was a
high value commodity business working on very small profit margins. It was
totally different from what Mr Dar was doing before. He was expecting to
achieve a high turnover as he was expecting to make profits.
73
Mr Dar/OCL started to undertake export trades
in January 2003. The trade then became one involving both domestic and export
deals.
74
Mr Dar
accepted that the turnover in the first two months of such trading using his
figures was in excess of £97 million and that it was extraordinary in general
terms but added this is normal in commodity trading.
75
From the
start of the business Mr Dar worked very closely with the assurance officers.
76
Mr Dar
requested Mr Iqbal, his first customer, to make a third party payment to his
supplier. At that point Mr Dar explained that OCL did not have a bank account
“so there was no other way of doing it”. This related to a period some time
before those which are the subject of the Appeals.
77
Like Mr
Dar we do not accept that, on its own, this demonstrates that there was not a
real trade at all especially when considering a later time. It was not argued
by the Respondents that any of the transactions involving OCL was a sham. We
find as a fact that none of the transactions in question involving OCL was a
sham.
78
OCL
stopped trading for a period in 2003 because it was concerned that new measures
were to be introduced aimed at MTIC fraud.
79
However,
the new measures did not make much difference to OCL’s business. This was
because OCL was already doing Due Diligence. OCL thought its DD was sufficient
to comply with the new measures. Mr Vaufrouard, OCL’s assurance officer at the
time, also seems to have been of the opinion that OCL’s DD more than met the
new measures.
80
Mr Dar
told us that “The freight forwarders basically told OCL what additional
paperwork was required”.
81
Mr Dar
said he became aware that there was fraud in the industry in 2003 or possibly
earlier.
82
He said
in his witness statement:
“OCL has never knowingly been involved in MTIC fraud or any
transaction which to its knowledge was tainted by fraud. OCL has at all times taken reasonable steps
to ensure that it doesn’t become involved in such fraud…”.
83
He also
said “OCL has at all times taken reasonable steps to ensure it does not become
involved in such fraud”.
84
Mr
Vaufrouard, OCL’s assurance officer, had told OCL that it needed to verify the
supplier before it commenced a deal. OCL was already doing so. OCL did get to
know the supplier, it did inspect the stock, etc. All the elements were in place at that point
as Mr Vaufrouard acknowledged.
85
OCL
accordingly provided the requisite paperwork. OCL and Mr Dar, we consider,
wished to trade to make money and would do what was necessary to continue to
trade legally. They would provide the authorities with the requisite documentation
and do what was necessary to be able to trade. This is not surprising when the
person in question started his career outside the
86
OCL had an agent in Dubai Dubai
87
Transworld
would find the customers, Transworld would carry out due diligence and once
they were satisfied with those customers they would recommend those customers
to OCL. On the sales to those customers OCL would pay a commission to
Transworld. Transworld recommended companies.
OCL took their recommendation as well as doing its own due
diligence. Mr Dar went to see those
companies personally and met with them and assessed how to go forward. More than
half the trade went to the
88
Transworld’s
director was Mr Atik Ahmed, whom Mr Dar knew from
Payment and Title
89
Mr Dar
agreed that most of the time OCL paid its supplier when OCL received the money.
He rejected (as do we) the suggestion that the supplier was extending OCL very
substantial amounts of credit to enable OCL to complete the export deal. The
supplier was not extending credit because although the stock was allocated to
OCL, OCL’s supplier kept control of that stock[4]. The
freight forwarder would keep that stock in OCL’s supplier’s name and normally
it would not be released until payment[5]. It would be available to the customer
overseas to inspect but it would not normally leave the freight forwarder’s premises
until the supplier has released the stock on receiving the payment. This was so
notwithstanding that it may take a few days for the stock to be transported
abroad, inspected, etc.
90
Mr Dar understood this to mean that title did
not pass until payment (cf the Sale of Goods Act position). There was a
retention of title till payment. The documents provided “All goods remain the
property of OCL until paid in full.” We
find that there was retention of title till payment and in these circumstances
no extension of credit by the seller. Title passed on payment.
91
In other words, it was made it quite clear
that the goods were OCL’s/the supplier’s property until the customer had paid
in full.
92
If the customer was not happy with the stock
and terminated the contract OCL would not be paid.
93
The
stock could then be abroad but OCL would not be in funds to pay its supplier.
Mr Dar told us that would only happen if the stock was not as described or it
was damaged. The stock would be
inspected before it was shipped so it would be as described and the customer
would know what language, what manual, what chargers, what software, what
colour the stock was. Upon arrival the
customer would inspect it. Once the customer was happy with the stock, the
customer would make payment and the stock would be released to the customer at
the destination. OCL’s agent in
94
Mr Dar
accepted that the risk varies from local to export deals. When OCL exported stock to
95
Mr Dar
said in his witness statement:
“I
was OCL’s main sales negotiator and negotiated the majority of its
transactions. There were some occasions
when transactions were negotiated by other members of staff, such as the
business development officer. However,
on
such occasions, I was fully informed of all aspects of the
transactions and retained final approval.”
96
That was
true in relation to all of the trades January, February, and March 2006 and we
so find.
97
Mr Dar
accepted that :
(a)
OCL
tried not to maintain stock because of the risk that the stock would depreciate and go down in value- hence OCL
wanting to do back-to-back trades;
(b)
OCL did
not release its stock until it had been paid by the customer.
98
These
deals would come about through “calls from suppliers or customers offering or
wanting stock. It could start either way. OCL had trading partners who would
buy and sell phones. There could be a
day when OCL had the stock they were looking for or there could be a time it is
the other way around”. Sometimes the customer would ask for stock and OCL would
source it and sometimes the supplier would offer stock and OCL would try to
sell it.
99
There
could be many contacts a day. Somebody in OCL’s office would answer the
telephone. Usually the receptionist would take and direct the call. OCL had staff assisting Mr Dar with sales and
purchases so there would be someone sitting on the sales desk. There were also administrative staff at the
purchase desk. Contact would be by faxes and telephone not by e-mail.
100It did not mean all the calls were from
people OCL was interested in trading with.
A lot of the customers or suppliers were not on OCL’s database. If
someone not on the database called their details would then be noted down as
would information such as who is offering what. This was done to assess the
market price of the goods etc...
101The OCL team used to make notes of all goods
offered or required. Each member of the OCL team would have a notepad to write
down the details of each offer or request. OCL would have a staff meeting at
least once or twice a day. OCL would have a good idea of what the stock price
was from its records. If a company
called that was not one of OCL’s accredited customers or suppliers Mr Dar would
say “Yes, we will look into it” and exchange details of that company and get
them approved and put them on OCL’s database”.
102The next step if the trader or company was on
the database would be to see what position OCL was in and if it had enough
funds to undertake an export. OCL would obviously prefer to export stock and so
it would check with its overseas customers whether they were interested. In the periods in question there were about
ten such customers. OCL added a margin to the offer price of the stock to OCL.
103OCL would have a shrewd idea of the market price
from the previous day’s notes and the website. If the stock was offered at what
seemed a reasonable price, OCL would take that price and offer the stock to
their customers. If OCL’s customers wanted that stock but at a price where
OCL’s margin was not covered OCL would ask the supplier to reduce the price.
104Procedures were in place intended to make
sure the prices were right and OCL’s margin was preserved. This included the
notes of all offers and requests not just exports.
105Prices did fluctuate. This depended on the
handset in question, its availability and the demand for it. The price on the
day obviously reflects this.
106Sometimes OCL would intentionally split the
invoice because it knew the whole shipment was not going on the same aeroplane.
For example, this might be done if the freight forwarder could not put all of
those shipments on one flight.
107There would be a telephone call log of this.
108OCL’s supplier and customer would very often
use First Curacao as the bank for the transaction. All the parties would then
be using the same bank.
“Ship on hold”
109If OCL were
exporting the goods, it might ask Shelford, or whoever the supplier was at that
time, to allow it to ship the goods on hold. If the supplier agreed to that
then OCL would ship those goods to its customer. If OCL had funds available and
was able to pay early, OCL would do so.
110Mr Dar agreed
“ship on hold” means that the buyer (e.g. OCL) is entitled to ship the goods
even though title has not passed. The original contractual terms remained that
the purchaser had undertaken to pay 100 per cent of the price after inspection.
However, the parties later agreed to those goods being shipped on hold
notwithstanding that payment had not been made.
111Practical control as to whether these goods
could be taken for shipment abroad, notwithstanding title in them had not
passed as payment had not been made, would rest with the freight
forwarder. The freight forwarder
controlled the stock and it would not release goods without agreement from the
supplier for the buyer to ship the goods abroad.
112Thus goods were always under the control of
the freight forwarder and the freight forwarder would take instructions from
the supplier. The supplier if it was comfortable with the freight forwarder
controlling those goods on their behalf until payment in full would agree.
113Mr Dar said “It is a very normal practice in
this industry and we have been operating in this industry for over four years
with assistance of the insurance [sic] officer and commissioners and everybody
was aware of the trading practice and there was no issues raised before that
and I can’t see why is it not commercial?
They had their peace of mind. The
stock was in the freight forwarder’s possession and he will not release it
until they are paid on their instruction”.
114Other suppliers were not so keen on this
procedure and other suppliers on occasion declined to let OCL ship goods out of
the jurisdiction before they had been paid. It depended on the relationship
with the supplier and if the supplier trusted the customer.
115Deals
did go wrong. Mr Dar gave an example of
a case the other way round i.e. where OCL was the supplier and was not paid.,
Mr Dar said if deals went wrong “basically OCL did honour its commitment [to
its supplier] and took the loss”.
NEMESIS
116Mr Smallbone told us that the NEMESIS
database was not actually up and running until mid February 2006 or later. Any scans that had taken place prior to the
NEMESIS database being up and running and made available were retained, either
on the electronic gun that carried out the scan or on a disk, until such time
as they could be uploaded on to the database.
117The batch date, we understand, is generated
electronically by the computer system itself when the information is
“inputted”. The rest of the information
is inputted on to the NEMESIS system manually.
We were told it is taken from an officer’s notebook which is completed
at the time of the scan.
118Mr Smallbone said “if the information is put
in manually then, obviously I can only assume that the occasional human error
may occur, yes”.
119Mr Smallbone did not know where the scan date
came from. He did not know how the technical aspects worked. His understanding was that there are two
separate dates that are entered. One is
the date when the phones are scanned, and the second is the batch date although
this seems to be computer generated.
120Mr Smallbone accepted that Invoice 1384 is in
respect of the export of 1,500 phones, yet over 2,000 were scanned and that
there was something very wrong with the system. On the evidence we are not
convinced as to the reliability of NEMESIS at the time in question.
Accordingly, we do not consider that great reliance can be put on it in respect
of the transactions in question nor as to how useful scanning was at any rate.
We find this as a primary fact there being no evidence before us to the
contrary.
121Ms Barker accepted that the “…some
phones appear to have been scanned in both batches as the details in both
batches are exactly the same.”. This is further support that NEMESIS is not
always reliable.
122She also said in cross examination:
“Q. So, therefore, if someone else
other than Our Communications has been exporting goods, there is no practical
way that Our Communications can find that out because they don’t have access to
the NEMESIS database or any other database which records exports by other
traders, do they?
A. That’s true. When we do identify instances of double exports, for want of a better way of putting it, we will always inform the traders concerned so they’re aware of that information.
Q. After the event?
A. When the information comes to our attention because it’s on the same day and within minutes of each other. Yes, that’s right”.
Assurance
Visits - Mr Vaufrouard’s visits etc.
123Mr Vaufrouard
made nine assurance visits to OCL. He was the assurance officer for OCL and OCL’s main contact with
HMRC till mid February 2006. Various conversations took place during those
visits some of which were recorded.
124He said in
evidence “The purpose of the visits—I was …
[the] assurance officer but actually specialised in
looking at only traders who had a possible interest or were trading in high value goods electrical
goods, missing trader intra-community goods; in other words MTIC goods, mobile
phones, and the whole idea of it was to identify possible fraud and just to
receive information, as much as information as I possibly could from the
brokers or the traders, whether they were at the bottom end of the chain or the
top end of the chain, and glean as much information to get it back to make a
bigger picture”.
125He also said “it was my job to advise and direct people and not just Our
Communications but any MTIC trader upon what we required as a department as a bare minimum and what we required and what we were looking for in prevention of any civil fraud”.
126He also said “… there is no criticism of the documents that Mr Dar has produced to the Commissioners in support of his purchases for those periods or in support of his sales”.
127He said to Mr Dar about OCL’s DD “You always get it spot on, so, so just make sure, make sure that it’s all there.” He also said “You’re a good person to do business with, you see, you’ve got a good established business”. He confirmed that “there were other people you dealt with who weren’t nearly as nice to deal with”.
128At every visit he was able to “uplift” the documents. Mr Dar provided Mr Vaufrouard with a deal log and every document that he required in its original format. He confirmed that there is no criticism of the documents that Mr Dar has produced to HMRC in support of his purchases for those periods or in support of his sales.
129He confirmed that Mr Dar told him that Mr Dar did not keep IMEI numbers and he requested him to keep them in future but that there was no follow-up in relation to IMEI numbers. He did not request OCL to nor did he follow the issue up at any subsequent visits.
130He confirmed
that in relation to OCL“… you have got to go three, four, five steps down the
line before you find the questionable due diligence”.
131He also confirmed that Mr Dar did not
deal with a defaulting trader.
132He said of Mr Dar “I actually advised
him that his checks were good. However,
he needed to ensure that his supplier was carrying out those checks and his
supplier’s supplier was carrying out those checks”.
133For completeness we record that Mr Dar did do this (see below). Mr Vaufrouard confirmed “ insofar as he raised any particular points with Mr Dar, it was actioned appropriately, and as far as he were concerned, if he raised a point he [Mr Dar] dealt with it”
134In response to the Chairman’s question “what do you think they ought to have done more than they did do?” Mr Vaufrouard replied:
“A. There wasn’t really much that they could do which I think is why you are seeing the referrals, that I did say that his due diligence was fine. However, I think for the amount of money that the deals were worth and the threat to the loss of that money dependant upon joint and several liability, NEA [Non Economic Activity], or whatever type of action that the Revenue could have taken at the time, probably would be more robust if his supplier—to ensure that his supplier was carrying out the checks. Obviously his supplier is not going to want to divulge his supplier’s name because obviously it is going to be economically unsound”.
135In response to the Chairman’s question “how could OCL have forced it down the chain?” He replied “To be honest, I couldn’t see much more that they could physically do at that stage”.
136We understood this to mean that was there nothing more that Mr Dar/OCL could reasonably or proportionately do and we so find as a primary fact.
Patterns of Trade
137HMRC sought to
rely on what they called artificial patterns of trade which they claimed to be
revealed in the chains of transactions as showing the transactions were connected
with fraud. There was no evidence that OCL and/or Mr Dar knew of these patterns
at the relevant time. Indeed, HMRC did not seem to know either at the relevant
times notwithstanding their greater knowledge, resources and powers.
138HMRC also wished
to rely on UK to UK transactions in this context. It is not clear how UK to UK
transactions could show fraud in a particular
139If the
Respondents wished to rely on UK to UK trade they should have provided the
evidence on a timely basis in accordance with the Tribunal’s Directions and not
sought to have it admitted two normal working days before the hearing or on day
nine of a hearing listed originally for ten days.
140As regards the
141No evidence,
expert or otherwise, was led to show that it was such a pattern (i.e. connected
with fraud). Two of HMRC’s witnesses asserted[6] that
it was but it was accepted that they did not have the necessary experience to
give expert evidence and they had not been called as such. Their experience of
investigating MTIC fraud was concerned with collecting and collating documents[7].
They were not concerned with investigating fraud as Mr Smallbone repeatedly
told us. Accordingly, their experience, such as it was, does not allow us to
give any particular weight to their assertions[8].
142The fact that a
trader may appear in a different position in various chains of transactions is
not of itself suspicious or of itself indicative of fraud or a connection to
fraud. It is not necessarily indicative of “a cartel organized amongst those
traders to reap the benefit of the arrangements” as was suggested by HMRC.
Evidence is needed. The evidence led in this case we find did not substantiate
this directly or in a way that would allow inferences to drawn in respect of
other chains.
143Evidence as to
UK to UK trades would not have been evidence as to the position as regards the
particular chains before us which were
144HMRC led no
evidence to show that the prices at which OCL bought or sold were not the
market or legitimate prices for the particular phones at the time of the
transactions.
145We do not find
it suspicious that the trades to persons outside the
146Mr Dar said it was correct that OCL would not
export goods unless it was able to achieve the sort of percentage mark-up
needed to cover additional costs etc.
147Export percentage mark-ups were generally at
the higher level say around about the 5 per cent mark, some higher, some lower.
148Margins on domestic trades were generally
lower than export trades although some were higher and some were lower. In
February 2006 for some of the export trades 8 and 9 per cent was achieved. It was a fluctuating market. The prices did go up and down on a daily
basis and, simply, OCL got the best price that it could get on the day. OCL was
able to bargain the best possible price that it could. It was a busy time in the industry, there
were certain desirable handsets and OCL was
able to secure the stock.
149This was
suggested to be an indication of an uncommercial market. We do not accept that.
It reflects what one would expect from Mr Dar’s policy of seeking to export
first and then sell domestically if OCL could not export at the desired price.
The domestic costs were less as were the margins so a profit could still be
made.
150In reply to
the suggestion that multiple deals on the same day were uncommercial Mr Dar
said “If we had a deal one day and we didn’t have another day, we obviously
were in a money-making business and we tried to do the deals as best we
can. Everybody can have a quiet day”. He
said later “It is not necessary that the deals happened on the same day. The deals could have started on a day and the
date you see on the deal is the date that paperwork was done. It doesn’t mean the deal was done on that
day”.
151We do not find
it strange of itself that the deals were back to back and all took place on the
same day. This seems a commercially sensible way of proceeding to minimize risk
and reduce financing costs. It was the way The London Stock Exchange operated
before “Big Bang” with settlement taking place at the last day of the Contango
Period. It was never suggested that this was indicative of fraud. It is still
the way many markets operate. We do not consider the back–to-back trading
arrangements of themselves to be uncommercial and indicative of fraud in the
circumstances of this case and we so find.
152We find as a
fact that from the perspective of a business person in the position of Mr Dar,
at the relevant times, the arrangements and patterns of trade were not
uncommercial and would not would not of themselves have given rise without more
to a suspicion of fraud.
153What more would
be needed would be something such as a third party payment request relating to
the goods in question. Mr Dar and OCL received and requested no such third
party payments in the three months in question. No evidence was led to show
otherwise nor that OCL and/or Mr Dar knew or had the Means of Knowledge of any
third party payments elsewhere in the chain and we so find as a primary fact.
We find that there was no evidence from which we could infer such Means of
Knowledge.
154HMRC did not
show anything more to suggest that the trading patterns were indicative of
fraud as far as OCL was concerned or that OCL could have known of it. We reject
the assertion that it did and find that it did not and to the extent possible
we do so as a finding of primary fact.
The Grey Market
155HMRC led no
evidence concerning the grey market. Their only evidence related to listed
companies who were network providers and (inter alia) retail sellers of phones[9].
Accordingly, we have to rely on what relevant evidence is available to us in
this case.
156Mr Dar said
that:
“Such a market typically emerges where there is a significant
price differential for goods in different countries, or where an authorised
distributor of the goods releases its surplus stock at a reduced price thereby
enabling purchasers of the surplus stock to on sell goods outside of the normal
authorised distribution channels. So the first source of the grey market, if I
can call it that, is the notion of a price differential for the goods in
different countries so what you will be saying is that in country A, a
particular telephone is more expensive than in country B…”
157He was asked:
“Q. It
doesn’t take a very clever person to realise that if a particular phone is more
expensive in country A than country B, there is obviously a potential of
arbitrage, a potential of trade, in importing that phone from country B into
country A, isn’t there?
A. Yes, there are distributors who buy directly
from the manufacturers. Sometimes they
over commit to the stock and they have a surplus stock to clear. If someone is aware of someone having that
stock in a certain country and the price suits them, yes”.
158Mr Ploughman
gave the following unchallenged evidence:
“Q.
But you know very well that MTIC fraud often has more links in the chain
and there may well be other
A. That is, of course, as most people who know the industry, is how it is
perceived.
Q. Exactly, so the point that I put to you is this, if a party, an exporter, does due
diligence on its counterparties, that is never going to be a guarantee of not
getting involved in MTIC fraud?
A. We have discussed this many times with
Customs officers who we have met
all over the country, and we have tried to
ascertain to be helpful to our clients what is the extent of this MTIC fraud;
what are we dealing with? We have never
been given a definitive answer as to what the extent is, but we got some
indication last year—or earlier this year anyway—from the House of Lords
committee when an officer from Customs said 10 per cent of the trade was
bent. Now, if that is true—but we have never
seen any statistics to substantiate the alleged amounts of losses that have
been notified, like 1.9 billion, we have never seen the evidence. But if only 10 per cent of the trade is bent,
then it was my view—and perhaps I was being over generous, but it was my view
that 90 per cent of the trade was not bent, and that was from a senior Customs
officer”.
159This is helpful as indicating that not every
trade in this market is fraudulent. However, it does emphasise that this was a
market in which there was fraud which had to be guarded against as Mr Dar
accepted.
160Neither the
grey market aspect nor the alleged patterns of trade of themselves or in
combination of themselves indicate fraud in the transactions in question.
161We make our
specific findings as to fraud in the chains further on in this decision.
DD
- Suppliers and Customers
Overview
162OCL carried out considerable due diligence on
both its suppliers and customers. It visited them. It had continuous checks
made by Veracis[10], Transworld and others. Stephen Ploughman
said “Yes, I think with Mr Dar, he wanted to keep checking up on his suppliers,
and redoing the due diligence reports to bring them up to date”. OCL had Dunn & Bradstreet monitoring on the
suppliers and customers. It took supplier declarations. It made Redhill checks.
It did what was suggested by Notice 726. However, it should be noted that
Notice 726 was directed to something else i.e. Joint and Several Liability and
so is of limited relevance. Even that only said that HMRC expected rather than required
the trader to consider the integrity of the chain. It was whether there was
fraud in the chain that the due diligence was aimed at. We find as a primary
fact that OCL did all that could reasonable be expected of it in considering
the integrity of the supply chains and fraud at the time of entering into a
deal. We find that to require more would be disproportionate and unreasonable.
163It was suggested that this was just a paper
gathering exercise and that there was a lot of irrelevant information. The same
could be said of HMRC’s “verification exercise”. However, that does not mean
that OCL has not taken all reasonable and proportionate steps as to the
integrity of the chain. OCL is not HMRC’s insurer as to the payment of VAT by
someone far away in the chain. Otherwise why would joint and several liability
provisions be needed? OCL only needs
to act reasonably and proportionately in considering the integrity of the
chain. It has done so and we so find.
164Mr Vaufrouard was satisfied with the due
diligence. Mr Smallbone and Ms Barker were happy with OCL’s paperwork with its
immediate counterparties Like Mr Vaufrouard we do not see what else OCL could
reasonable do[11]. OCL has provided satisfactory responses
showing why it was reasonable for OCL not to do things suggested by HMRC
Officers with the benefit of hindsight and based on an overview of the chain
who by their own admission have not been involved in the mobile phone business
and were not acting as expert witnesses[12].
165We have born in mind Ms Whipple’s suggestion
that there was a cavalier attitude towards regulation and compliance in
considering the evidence. She referred (inter alia) to the approach to
obtaining or not obtaining the consent of visitors to OCL to be filmed in
accordance with the relevant provisions.
166At the start of proceedings the Chairman
raised the impact of the Data Protection Act in respect of the filming of three
of the visits by Mr Vaufrouard. The parties were of the view that the Data
Protection Act does not go to admissibility in this Tribunal. Rule 28 of the
Tribunal Rules specifically provides that evidence shall not be excluded on the
grounds it would be excluded in a court of law. Accordingly, the evidence was
admitted. We make no findings as to signature or not of the Visitors’ book by
Mr Vaufrouard and/or his awareness of the notice or filming.
Specifics
167Mr Dar accepted that the point of the due
diligence was (inter alia) for OCL to be able to check out and verify its
suppliers and customers. The reason for doing that was good commercial sense to
ensure that OCL was trading with bona fide companies that are of substance and
creditworthy, and so on. There was a particular need in the context of mobile
phone trading because OCL knew from Notice 726, from budget statements, from
the joint and several liability provisions that the Commissioners expected it
to check out its counterparties. He
added that he “did more than what they expected me to do”.
168Stephen
Ploughman of Veracis who carried out much of the DD reporting said “… the objective
of due diligence is to establish if [the trader is a] bona fide company, and
that entails quite a few checks … like the security of tenure and their
business premises, their company registration and the VAT details, bank
details, et cetera, et cetera. It includes the ID of the directors, their
personal details, and initially this was done to make sure they were not
actually going to be a missing trader, that they were established”
169Mr Dar said he could only do due diligence on
his immediate counterparties. We agree as do seemingly the authors of Notice
726. Mr Dar accepted that all due diligence achieves is checking out your
suppliers, your customers and if the fraud is at a remove, such due diligence
is not really going to help.
170HMRC’s advice is set out in Notice 726 at
paragraph 4.5 which reads:
“We advise you to carry out checks to
establish the legitimacy of your supplier to avoid being caught up in a supply
chain where VAT would go unpaid. There
are a number of checks that you probably already undertake in line with good
commercial practice such as credit checks. We do not expect you to go beyond what is
reasonable. You are not necessarily
expected to know your supplier’s supplier or the full range of selling prices
throughout your supply chain. However,
we would expect you to make a judgment on the integrity of your supply chain.”
(emphasis supplied)
171We note that this refers to checking the
legitimacy of your supplier. A later part of the notice deals with checks on
customers. The notice does not advise but merely expects a judgment on the
integrity of the trader’s supply chain. This is also in the context of a
provision not in point here. This is not a joint and several liability case.
172As Mr Dar said (and we accept) OCL worked
very closely with its assurance officers and always took guidance from them and
there was no criticism ever made by them of the way it traded.
173He also said “We have tried to speak to
Redhill and ask them if they can assist us and if we tell them the deal we are
doing and if they can then go on because they would have access to the
information and check the supply chain.
We were refused that service and there was nothing else we could do”.
OCL did Redhill checks.
174It was put to him that OCL needed to be very
careful to pick up signs that perhaps it was being swept up in an unlawful and
fraudulent sequence of transactions.
175We have sympathy with his reply given what
OCL did “How could I have done that? I
can’t see how I could have”. We find as a primary fact that to require more
would be unreasonable and disproportionate.
Defaulters much further down the chain in
2005 and later
176Ms Barker accepted that in all the deals “The
fraudster was well removed up the supply chain” from OCL.
177Much was made in cross examination that in
2005 (not the periods in questions) OCL had been told that chains had been
traced back to defaulters many deals back along the chain. Mr Dar replied that
“… we asked our assurance officer what steps we can take and we were told,
“There is nothing more you can do but to go back to your supplier and ask them,
they will do similar checks on their supplier and they should ask their
supplier to do the same on theirs.”
Which he did. “You should speak to your supplier and make sure who he is
dealing with is correct and he does the fraud checks”. He did.
178The transcript of the meeting with Mr
Vaufrouard (see above) when this occurred continued
“Question:
Okay, so you need to be forcing it down the chain.”
179Mr Dar said “Again, I did everything that I
thought was expected of me and more. If
I knew I was going to end up in this position, things might have been
different, but at the time, the information I had and the decisions I took, I
thought I was doing all I can”. We have found he and OCL had.
180It was suggested to him in cross examination
“what you ought to have done, is to stop trading with those companies. You reassessed your business with those
companies, perhaps you should have specifically gone to each of those companies
and said to them, “Do you realise that all the stuff I bought off you in August
2005 in fact was infected with fraud”. This arose from something which did not
relate to the periods with which the Appeals are concerned nor the transactions
in question.
181Mr Dar told us he did that. He said OCL spoke
to every single one of its suppliers. Mr Dar met them regularly. He raised those concerns and they assured him
that they did all the checks that OCL was doing. There was no evidence to the
contrary.
Supplier Declarations
182These were standard form documents sent out
by OCL to its suppliers for the
suppliers to complete.
They read:
“We confirm we have carried out reasonable due diligence checks
on our supplier of these goods including a review of [various listed matters]”
and they were signed on behalf of the supplier. It was one of a number of
measures undertaken by OCL. It was reasonable to do so. OCL would doubtless
have been criticised if it had not done so.
183OCL could not be sure that the supplier was
telling the truth but OCL had raised the question with its counterparty, the
one person with whom it could raise the question with any relevance and without
jeopardising commercial relationships. OCL did not have information powers
similar to those of HMRC. Even when they did HMRC do not seem to have known of
fraud at the time the deals in question were entered into.
184We were not taken to any deals where there was not a supplier declaration for the
relevant deals OCL undertook It
instructed another independent company to carry out further due diligence.
Veracis did an ongoing due diligence on OCL’s suppliers as well. Due diligence was an evolving procedure and
OCL took whatever steps it could.
185Mr Dar was asked “Why didn’t you get Security
Unlimited to ask specifically Globcom about the August [2005] deals?” He
replied that “I had spoken to the director of Globcom myself. If you see that when the visit was carried
out, Mr Iqbal was not present at that visit but I had spoken to Mr Iqbal about
concerns raised by the Commissioners”. This was not seriously challenged and we
accept it and find it was reasonable and proportionate. The matters arose
before the periods with which the Appeals are concerned.
186Mr Dar said of Elite “I had visited them, I
have seen the warehouse, I have met the directors, I have done credit searches
on them. I have done Veracis searches
and I knew it was a long established company. Let me make clear on that Veracis
point. We did not rely on Veracis to
assist us carrying out trade. That was
just an additional step we took in due diligence. We were carrying trades with our established
suppliers before we started using Veracis so that was just an additional
measure. You look at the positive, you
look at negatives and you make your decisions. We had a monitoring with Dunn
& Bradstreet we had visited the company, we constantly met the directors
and we did whatever we could and Elite is still a long established company and
is still trading. Veracis was not a sort of green light for us to carry out
trade. That was just an additional
measure we took to carry out due diligence on—and existing due diligence
enhanced it by doing that. We were
already doing business with this company for a couple of years with the
directors of this company”. We accept this and find it was reasonable and
proportionate. Mr Dar could only go to his counterparties.
The
187Certain boxes of
phones which were to fulfill an export order were detained by HMRC at
188We disagree with
HMRC’s suggestion. OCL’s action seems to be the natural reaction of a trader at
minimum cost and delay. HMRC’s suggestion that they should not have completed
the order but cancelled it and returned the phones seems unrealistic and
uncommercial. It would also be unreasonable and disproportionate.
189We find as a
fact that:
a.
OCL’s action seems to be the natural
reaction of a trader at minimum cost and delay;
b.
is not an indication of the artificial
nature of the arrangements and their connection with fraud. We find as a fact
this was not the case as regards these transactions; and
c.
when the phones were returned and not
kept by HMRC after seizure it was perfectly natural, reasonable and
proportionate for OCL to assume that they had been cleared.
190There had been a
dispute as to what had been removed from the outside of the cartons and what
this showed. However, this was not pursued. We do not think it could have
assisted us.
191Mr Dar accepted
that the goods in question were eventually traced back to fraudulent traders
although this was unknown to OCL at the time and seemingly to HMRC.
192He made the point that when the shipment was
cleared by Customs, he was under the impression that those concerns were not
there anymore. He said he could have pulled out of the deal but that could have
jeopardised the relationship with the supplier. He chose to carry on with the
deals after the Commissioners were satisfied with their checks. We accept this
evidence and find it reasonable and proportionate to have continued with the
deal. He did cancel deals in the period with suppliers. This incident concerned
customers not suppliers as in the cases of cancellation.
193In the period after the
194The whole point of changing the route, taking
the goods out via
195OCL gave deliveries in
196It was suggested to Mr Dar that this was a
completely uncommercial way of transporting goods designed to minimise Customs
interference with goods going abroad and that OCL ought to have known that. He
disagreed. We accept his unrefuted evidence.
Other Jurisdictions
197In reply to the question “If you knew that
your Dubai customers were on-selling to other jurisdictions and plainly making
money in so doing, why didn’t you investigate direct sales to those other
jurisdictions?” He replied “We did…
wherever we could find business, we explored those opportunities and wherever
we were satisfied selling, we did explore other jurisdictions”.
198He accepted that there were not any onward
trades in OCL’s business profile to places such as
199Mr Dar said
The Issue of Insurance and Exports
200OCL had an insurance arrangement with Norwich
Union. It also had insurance arrangements through the freight forwarders,
Interken. The Interken policy was effective from 1 February 2006.
201Mr Dar accepted that the
202They were due to all go on the same
aircraft. OCL was not aware of
that. OCL did take it up with Interken
at that time and that is when the possibility of using their insurance was
discussed.
203The freight forwarders had instructions to
stay within OCL’s cover. The freight
forwarders sometimes did go out of the cover.
When the freight forwarders did go outside the cover OCL were
unhappy. OCL did take it up with them.
204Mr Dar said the freight forwarders assured
OCL, if anything were to go wrong, their policy would cover any
discrepancies. We accept this evidence which
was not refuted.
205Mr Dar told us that the goods were only
exposed to risk when they were on the road. When the goods got to the airport,
on the aircraft OCL’s insurance was £2.5 million and the rest was covered by
Interken’s insurance if anything were to go wrong.
206The Norwich Union policy did not expire. The consignments that were covered by
Interken were not covered by Norwich Union. We accept this unrefuted evidence
and so find.
207Things changed quite substantially in
February 2006 because, whereas before OCL had previously exported mainly
outside the EC, it now started quite a considerable EU export trade. OCL were
closely in touch with the EU market. It
had done some deals, Mr Dar thought two or three months prior to that, but mainly
OCL dealt with
208Essential Trading, Olympic and Rakha, all
relatively recently formed European companies, approached OCL for stock
in early 2006. OCL were in contact with
them for a couple of months and having checked them out decided to trade with
them. The reason for the change of policy was what was said in the Bondhouse decision of 12 January
2006. OCL traded in Europe because there was a demand in
209Mr Dar visited all three of these European companies just before doing business with them. Copies of hotel bills and the ferry ticket (Dover-Calais) were produced as corroborative evidence. Mr Dar wrote a note for the file on each of these companies. The note follows the Veracis report paragraph headings. There is no evidence in the bundles that Mr Dar obtained independent verification of the limited financial information he gleaned at these meetings though some DD enquiries were made through references from freight forwarding agents and customers and suppliers etc. References were seemingly also obtained as were confirmation of VAT registrations.
210As far as Olympic Europe was concerned OCL
took references and sold goods, controlled by the freight forwarder so that
they had control and title till payment.
At the time of the trade with them, they were verified by Redhill. OCL
got paid for those goods. Olympic BV in fact ended up being the subject of a
veto letter but that was many months later.
211Similar visits
and DD were made in respect of Essential Trading SARL and Rakha SARL
212It should be noted that in all the deals with Essential Trading, Rakha and all but the last two deals with Olympic Europe BV, OCL were paid by these customers before the goods were shipped overseas. OCL, therefore, took no financial risk (save the cost of freighting goods back). This differs from the normal pattern.
Alleged Deficiencies
213Mr Smallbone and Mr Burchfield wrote letters
after the periods in question in the Appeals suggesting alleged deficiencies in
the Due Diligence for those periods. These suggestions were not made out and/or
were dealt with at the Hearing. We find this as a primary fact.
214These letters were written four or five
months after the periods in question here and notwithstanding that Mr
Vaufrouard, OCL’s assurance officer, checked OCL’s due diligence virtually on a
monthly basis. Mr Vaufrouard was satisfied with the due diligence on every single
one of OCL’s suppliers and customers. Mr
Vaufrouard was OCL’s only real contact with HMRC. OCL took everything he said
very seriously and relied on his comments. We find this as a fact.
215Mr Birchfield, for example, asserted that
there were no copy Redhill checks for Shelford Trading Limited. This was wrong
as can be seen from the documents annexed to Mr Dar’s witness statement. There
were numerous checks on that company. We find this as a fact. There were also
the Veracis reports in the bundles.
216Various comments on the due diligence were
also made by Ms Barker.
She suggested OCL should
have been keeping a database of IMEI numbers. Mr Dar accepted it was possible
to keep such numbers.
217He said in cross examination “…If it assists
us and makes us any better position or give us any comfort and security, we
would do that but there was no way we could—we used to keep IMEI numbers, we
used a keep on a record of IMEI numbers and there was no system for us to check
those IMEI numbers with. The only thing
we can do is just to see if we have had that stock before. It didn’t give us any comfort that stock is
not seen by other traders in the UK.
There was no database available to us to refer. Nokia didn’t assist and
the NEMESIS, I don’t know when it came in, and there was no availability of
that to the traders so they can take those IMEI numbers, give it to the
Commissioners and make sure the stock they were buying hasn’t been in
circularity before. …When we used to scan IMEI numbers there are bound to be
errors and there were errors at the time of scanning of IMEI numbers. There was inspection teams, all my own staff
scanning IMEI numbers. There were
occasions when they mix up the consignments from one to another. Sometimes they will double scan the numbers
and we took advice from our lawyers and our VAT consultants about IMEI
numbers. There was no legal
requirement. Even though we still used
to take IMEI numbers, they were never taken away by the Commissioners from us
and we thought that exercise to be not in any help at all”.
218We accept this unrefuted evidence. We find
this was reasonable and proportionate.
219Stephen
Ploughman said in cross examination “…it has proved to be the case that there
are a lot of flaws in recording IMEI numbers”. This accords with Mr Smallbone’s
evidence on NEMESIS.
220Mr Dar
also said “When he requested us to keep those IMEI numbers, we did keep
the numbers but Mr Vaufrouard never took the numbers with him….We assisted, and
very helpfully assisted, in any single way we could and we did the best we
could. The numbers, like I said, we had
no way of checking those numbers. What should we check them against? We could only offer to give them to the
Commissioners so they can check in the database, if they had NEMESIS, they
could check from their database. We were
willing to give them shipment-to-shipment, consignment-to-consignment,
deal-to-deal, they could have checked it for us and told us, “This stock has
been in circulation” or not, but they didn’t offer those services to us”.
221We also accept this evidence. We reject the
suggestion that OCL missed an obvious opportunity and a step that could have
been taken to extend its due diligence procedures. We find OCL’s action was
reasonable and proportionate.
The Issue of Inspections.
222Mr Dar said that:
“OCL instructs an independent inspection team to conduct 100
per cent external box checks and 10 per cent internal box checks on delivery.”
223He said in his witness statement:
“The independent
inspections team ensure that the correct number of boxes are delivered and also
check the model number and condition of the boxes to ensure there is no damage
to the boxes. The seals haven’t been
broken and that the model numbers accord with the delivery notes.”
224There was a conflict of evidence as to what
was meant by this. Mr Vaufrouard understood OCL carried out a close inspection,
an internal inspection of 100 per cent of its goods. This was not what Mr Dar
said he said. If Mr Vaufrouard
understood it in any other way he never mentioned it to OCL or Mr Dar. We do
not consider this to be of great significance but we prefer Mr Dar’s version
and so find.
Suitability and source of phones etc
225The issue was raised at the hearing as to the
suitability of the phones as to language, accessories, chargers etc. and that
the phones came from abroad. It was suggested to Mr Dar in cross examination
“that many of these phones were not suitable, were they, for those sorts of
places [ie where they were going]”.
226He replied “They are suitable European
spec. The phones are GSM phones, they
can be used worldwide so there is no problem with the specification, European
specification being used anywhere in the world.
The only thing that some people take into account is what languages it
has so if they are happy with that language mostly English is an acceptable
language worldwide, then there is no problem”. We accept his unrefuted
evidence.
227Mr Dar was aware the phones are not made in
the UK so they would have to come into the UK.
228It was suggested to him that there was “… no
reason for those phones to be in the UK, is there? He replied “There is. I know for a fact there are a lot of
distributors who are actually Nokia distributors and they source stock from the
grey market and it is consumed in the UK”.
229Not all the deals OCL did in January,
February and March 2006 were exports.
There were some UK to UK deals. Mr Dar said that the phones they dealt
in could be exported and continued
“…those phones could be consumed here in the UK. We used to supply to customers who supplied
to distributors”. We find the phones were suitable for both UK and export
trades.
230The question also arose as to why OCL did not
buy the phones in the country of manufacture. Mr Dar was asked:
“Q … Why didn’t you just buy the phones from wherever they
were manufactured …? Why not cut out
these intermediate chains? Why not go
straight to where they were coming from?
A. We did try that a
bit later on when we were established. The manufacturers do not supply to
everybody that approaches them. There is
a lot of red tape and they are fussy and selective as to who they give
distributors’ dealerships to”.
231We find OCL did try to buy direct but was
generally unable to. Mr Dar told us that most of the time the only source of
phones for OCL, in practice, was suppliers in the UK. We accept this and so
find.
232Ms Barker was asked in cross examination:
“Q. What is the point that you are making by the fact that the phones originated from outside the UK?
A. The point I am making is they originated from outside the UK. Our Communications knew that they were exporting the phones, so the phones were not actually designed for the UK market”.
233She accepted English was included as a phone language on the phone but did not think this was an indication that they were designed for the UK market. She accepted English was an international language and that there was a global market in mobile phones.
234She considered that someone who is buying in bulk and selling on to someone in another member state or outside the EU was not necessarily an indication of the global market operating. She accepted there is no reason why it should not be.
235We find that the phones themselves were
suitable for use in the UK (even if not designed[13] for the UK market) as the phone languages
included English. We do not consider that there is anything necessarily
untoward in mobile phones manufactured abroad being imported into the UK even
if subsequently exported. We have also already found that OCL could generally
only source phones from within the UK. Accordingly, if OCL were exporting the
phones they might well have to come into and go out of the UK especially if OCL
could only source them from the UK.
236Much was made of two-pin chargers and
three-pin chargers and the time and cost of changing them. However, Mr Dar’s
unrefuted evidence was that it was the retailer who would do this. He said it
was normal in this industry for the retailer to do that if it was considered
necessary. OCL offered the stock to
customers as it was as to language, colour, model, charger etc. Any modifications
were for the customer to do. We accept this and so find.
The Deals
Chains
Methodology
237HMRC sought to
piece together the chains of transactions and to show the integrity of the
chains.
238Mr Smallbone
described the methodology as follows:
“Basically, we look to trace back the transactions in the UK,
back to either perhaps a manufacturer of the goods or a trader that has failed
to pay the output tax and gone missing.
It simply involves looking at the supplier, which is information
provided to us by the company requesting the repayment claim. We would then go to the electronic folder
which is a database we have on our systems for that supplier to find out, in
turn, where they purchased the goods from.
If that information is not available electronically we would then turn
to the officer responsible for that company and ask them for that
information. So and so down the chain
until we eventually come to a stopping point”.
239This information
was put on a Deal Sheet.
240Ms Barker was
also involved in this “verification” particularly in respect of the February
2006 deals. She was relatively new to this[14].
241A vast amount
of paper work was produced. From that the following relevant information has
been extracted. We consider that all
the chains in the deal sheets have ‘integrity’ in that sale invoices and
generally purchase orders were exhibited which ultimately led to the OCL
transaction in question. Had HMRC complied with Directions they could have been
agreed with the Appellant prior to the hearing – a year is not too short a
period to do this. This would have saved much time, expense and effort.
242We find that
in general the chains have been established. There are some that cannot be
traced back to the source of the phones from outside the UK. We consider that the Northwest and Storm 90
chains (as detailed below) have not been established. The integrity of the
chains and tax loss in them caused by fraud are matters considered in detail
below.
Illustrative
Transactions
243 It may help to illustrate how these transactions worked if three consignments of phones are considered. We have chosen Deal Chains 1366 -1370, 1412.and 1437 – 1441.
Transactions
1366 -1370
Introductory
244 The phones in this chain come from single batch of 23,000 units. The source was (seemingly) FACI although no sales, purchase or payment documents were available. The original batch of 23,000 was broken down into four consignments of 5,000 units and one of 3,000. We were not told why this was done.
245 The transactions all took place on 23 January 2006.
Transaction 1366
246 The chain consists of a number of deals.
It involved:
i. Sale by FACI to Oxhey;
ii. Sale by Oxhey to Pale;
iii. Sale by Pale to TCG;
iv. Sale by TCG to TEC;
v. Sale by TEC to Globcom;
vi. Sale by Globcom to OCL;
vii. Sale by OCL to Midcom.
247 The documentation is not perfect. For example:
i. In the Oxhey – Pale limb the payment instructions dated 23 January only
mentions 3000 phones, We presume this is a typing error as the amount tallies with the invoice value for 23,000 phones.
ii. In the TCG to TEC limb there is only a pro forma invoice and no VAT invoice.
iii. In the TEC to Globcom limb the invoice date is 30 January 2006 and not 23
January 2006. The invoice is marked as paid but no date of payment is given.
iv. No payment instructions were produced.
v. The payment instructions further along the chain are dated 30 January 2006
rather than 23 January.
248 There were third party instructions in the chain. They included:
a. Oxhey – Pale (total value £,3,771,339)
There were Third Party Payment instructions of £3,197,000 to CK Communication, and £3,450 to FACI.
b. Pale to TCG (total value £3,755,393)
There were Third Party Payment instructions of £3,766,478 to CK Communications, £3,450 to FACI, and £1,410 to Oxhey Construction
249 None of the third party payments involved OCL and all were some way away
from OCL. However, it shows that there were indicia of fraud in the chain.
250 This may be shown diagrammatically as follows.
Transaction 1367
251 Essentially the same sales along the chain took place as in transaction 1366. It also concerned 5000 units.
252 For this deal the payment dates TEC to Globcom and Globcom – OCL were 31 January 2006 while the payment date by OCL to Midcom was 30 January 2006.
Transaction 1368
253 Essentially the same sales along the chain took place as in transaction 1366. It also concerned 5000 units.
254 The TEC – Globcom sales invoice is dated 30 January 2006 not 23 January.2006 and stamped as “paid 31.1.06”although there no payment details. The Globcom – OCL payment was made 31 January 2006 while the payment date OCL – Midcom was 30 January 2006.
Transaction 1369
255 Essentially the same sales along the chain took place as in transaction 1366. It also concerned 5000 units.
256 The TEC – Globcom sales invoice is dated 30 January 2006 not 23 January 2006 and stamped as “paid 31.1.06” . The pro forma invoice is dated 23.1.06. There are no payment details. The Globcom – OCL payment date is 31 January 2006 while the payment date OCL – Midcom was 30.January 2006.The Inspection is stamped by Midcom as 28 January 2006
Transaction 1370
257 Essentially the same sales along the chain took place as in transaction 1366. However, it only concerned 3000 units.
Transaction 1412[15]
258 The chain consists of a number of deals. It involved:
- Sale by a third party to Storm 90;
- Sale by Storm 90 to Wildtower;
- Sale by Wildtower to Elecron Global;
- Sale by Elecron Global to Mena;
- Sale by Mena to Shelford;
- Sale by Shelford to OCL;
- Sale by OCL to Essential Trading.
259 Again the documentation is incomplete. Shipment was allowed before full payment. No evidence was led as to third party payments.
Transactions1437 – 1441
260 The chain consists of a sale by OCL to Midcom which was split into five separate invoices from a single purchase from 21st Century Traders initially originating from FACI.
261 The chain involved a number of deals. The documentation shows Third Party Payments and Extra Letter payment instructions within the chain.
262 The transactions in the chain were as follows:
i.Sale by FACI to Red Rose – the payment instruction was to pay Evolution
Trading SIA;
ii.Sale by Red Rose to Lauriel Reid – the payment instructions were to pay
£1,500, 500 to Evolution Trading SIA and £268,462.50 to Red Rose Consultancy. There was an additional payment instruction called an Extra Letter which instructed that £262,587.50 should be paid to Evolution Trading and £5,875.00 should be paid to Red Rose Consulting;
iii.Sale by Lauriel Reid to Phone City Leytonstone – the payment instruction
was to pay £1,763,087.50 to Evolution Trading SIA and £8,225.00 to Lauriel Reid. There was a letter from Lauriel Reid to Phone City Leytonstone which said “the above stock will be releast (sic) to you by CK Communications Ltd”;
iv.Sale by Phone City Leytonstone to Euroquest Traders – no payee was noted on the payment instructions but payments were made in two tranches by Retro Jeans;
v.Sale by Euroquest Traders to Globcom – payment was made to Retro Jeans
vi.Sale by Globcom to 21st Century Traders – there were no payment instructions or details evidenced;
vii.Sale by 21st Century Traders to OCL;
viii.Sale by OCL to Midcom International
263 This may be shown diagrammatically as follows.
LAURIEL REID
Extra Letter,
only £5875 to Red Rose
Extra Letter, only £8,225 to Lauriel Reid
RETRO JEANS
Two Tranches
No
payment instructions
Summary Table
264 A summary of some relevant information is set out in Appendix 2.
265 We note that we did not always have full paperwork for the earlier stages of the chains but the sales invoices and most of the purchase orders had been produced.
Chains Established?
266
The purpose of this section is to consider what
chains of transactions have been established by HMRC.
267
We take
OCL’s acceptance that the substantial majority of defaulters were parties
acting fraudulently to means that OCL accepts that there were tax losses in
those chains and the chains in question had been established[16] other than those dispute such as Storm 90
and Northwest.
268
We
consider each of the chains by reference to the trader HMRC allege is the
defaulter.
269
We note (as we have seen above) that some of
these chains have limited information at their early stages.
(a)
Steven Phillips
t/a First Call
Deals 1375, 1377, 1378,1379,1380,1381,1382,1383,1391
270 On the evidence
produced we consider that HMRC
has done enough for us to conclude that these chains have been established and
we so find as a matter of fact.
(b)
Oxhey Construction
Services Ltd
Deals
1364,1365,1366,1367,1368,1369,1370,1372,1373,1374
271 On the evidence
produced we consider that HMRC
has done enough for us to conclude that these chains have been established and
we so find as a matter of fact.
(c) Myco
Telecom Ltd
Deals 1376, 1385
272 On the evidence
produced we consider that HMRC
has done enough for us to conclude that these chains have been established and
we so find as a matter of fact.
(d)
The Callender Group
Deals 1470, 1471
273 On the evidence
produced we consider that HMRC
has done enough for us to conclude that these chains have been established and
we so find as a matter of fact.
(e)
Oracle UK Ltd
Deal 1472
274 On the evidence
produced we consider that HMRC
has done enough for us to conclude that these chains have been established and
we so find as a matter of fact.
(f)
Com4U Ltd
Deals 1414, 1415
275On the evidence
produced we consider that HMRC
has done enough for us to conclude that these chains have been established and
we so find as a matter of fact.
(g)
Red Rose
Consultancy Ltd
Deals
1416, 1417, 1418, 1419, 1420, 1431-35, 1437 -41, 1453-57, 1458 –68
276 On the evidence
produced we consider that HMRC
has done enough for us to conclude that these chains have been established and
we so find as a matter of fact.
(h)
Activmind Ltd;
Deals 1444-1445,1446-1447, 1451-52
277On the evidence
produced we consider that HMRC
has done enough for us to conclude that these chains have been established and
we so find as a matter of fact.
(i)
CHP Distribution
Deals 1448, 1449,
1450
278On the evidence
produced we consider that HMRC
has done enough for us to conclude that these chains have been established and
we so find as a matter of fact.
(j) St
Aimie Ltd
Deals 1350,
1351,1361,1362,1363
279On the evidence
produced we consider that, on
the balance of probabilities, HMRC has done enough for us to conclude that
these chains have been established and we so find as a matter of fact.
(k) Others
280As regards Northwest Deal 1384 we find that
the chain below Northwest has been established. However, the supplier to
Northwest has not been established nor any chain above it. We note that this is
a short chain.
281As regards Storm 90 Deals 1412, 1413, 1423-1430
we
find that the chains below Storm have been established. However, the supplier(s) to Storm has not been
established nor any chains above it.
282There is no evidence to establish the higher
parts of the chain and no evidence of sufficient cogency to allow us to make
inferences as to who the parties (if any) were in the higher parts of the chain
yet alone tax loss and fraud.
Summary
283We consider that the integrity of all the
chains has been established with the exception of the Northwest and Storm 90
chains
Tax Loss and
Defaulters
General
284The purpose of this section is to consider
what tax loss has been established by HMRC.
285We take OCL’s acceptance that the substantial majority of defaulters
were parties acting fraudulently to mean that OCL accepts that there were tax
losses in those chains and the chains in question had been established[17].
Tax Loss -
Specific
286We consider each of the
chains by reference to the trader HMRC allege is the defaulter.
(a)
Steven Phillips
t/a First Call
Deals 1375, 1377,
1378,1379,1380,1381,1382,1383,1391
287. The trader was on monthly VAT periods.
Before the period 08/05 very little trading was undertaken. The Returns for the
periods 08/05, 09/05 and 10/05 show large input tax claims. These claims were
disallowed as they related to trading with deregistered traders. No further VAT
Returns seem to have been made. A Bankruptcy order was made against the trader.
288. The input tax claim was in respect of the
purported export of calling cards to the EU bought in UK. The purported
purchase was from deregistered traders. The trader continued to trade in ‘vast
quantities’ of mobile phones
289.Christopher
Williams evidence dealt with an assessment
that was made against Steven Phillips, trading as First Call concerning five
sales invoice issued by Steven Phillips. Mr Williams simply raised an
assessment. He did not ever visit Steven
Phillips, the trader. He had nothing to do with verifying the deal chains.
290. The
letter to the trader said
"2.
The £37.875 million input tax claimed in relation to the purchase of
international calling cards from Stephen Wayne Ali trading as SWA Systems has
failed verification. [Mr Ali's] VAT
registration was cancelled with effect from 1st March 2004. The supplies in question took place, on or
about 1st September 2005 to 30th September 2005."
291
Mr
Williams accepted that it seemed not only did Mr Phillips procure supplies from
a deregistered trader in August 2005, Mr Phillips then procured a further
£37.875 million worth of supplies from the same deregistered trader the following
month.
292
The
input tax was disallowed. The letter to Mr Philips also said
"A
net amount of £37.607 million is thus considered to be properly payable by you
in respect of this period and this amount is hereby assessed as tax due. I must
point out that the return in question is still the subject of an ongoing
verification exercise. As such, further adjustments may be made if appropriate.
293
Mr
Williams was not aware whether Mr Phillips did pay £37.607 million he was being
invited to do on 8th November 2005, which was
a clear two months before the first of the trades in question in this
case.
294
Mr
Williams was not able to shed any light at all on what happened, so far as HMRC
are concerned in response to that letter.
295
Mr
Williams could not assist us with the visits. Unfortunately, HMRC decided not
to call Ms Wride who attended them and made notes.
296
On the
evidence produced we find HMRC has not established a tax loss in these deals
because the tax loss (if any) was caused by the disallowance of input tax[18]. Further the input tax disallowed appears to
relate to periods other than those with which we are concerned.
(b)
Oxhey Construction
Services Ltd
Deals
1364,1365,1366,1367,1368,1369,1370,1372,1373,1374
297
Oxhey
was registered as a supplier of construction services and was on quarterly VAT
returns. The relevant return period here is period 01/06.
298
A VAT
liability of about. £2.8m remains unpaid. The Company deregistered and shut
down. The evidence shows that supplies by Oxhey to Pale Ltd gave rise to an
output tax liability that is still outstanding.
299
There
were third party payments in the chains. Those payments did not involve
OCL.
300
On the
evidence produced we find HMRC has established that there was a tax loss in the
chains relating to these specific trades.
(c) Myco Telecom Ltd
Deals 1376, 1385
301.
On the
evidence produced we find HMRC has sufficiently established that there was a
tax loss in the chains relating to these specific trades particularly n the
light of there being third party payments. The evidence included that from
Officer Okolo as to the £20m assessment and its disposition.
(d)
The Callender
Group
Deals 1470, 1471
302.
Daniel
Outram gave evidence as to The Callender Group to this to the best of his
ability given that another part of HMRC had taken away the relevant documents
and had not and did not provide copies. This did not accord with the directions
that the Chairman had made over a year before as to documents. It was extremely
inconvenient and could have caused great difficulty. We do not mention the
discourtesy to the Tribunal.
303.
It is to
be hoped that the HMRC’s Internal Instructions will be amended to deal with
this type of situation where evidence is required for a hearing. It was not
satisfactory.
304.
Mr
Outram told us that initially, the assessment on The Callender Group was for
about £52 million, but when further information came in the assessment was
increased, and he “believed at the moment … now stands at around £79 million”.
305.
Mr Yule
told us part of the earlier assessment was based on best judgment because there
was a number of missing invoices. The assessment was subsequently updated when
further information was to hand.
306.
On the
evidence produced we find HMRC has established that there was a tax loss in the
chains relating to these specific trades.
(e) <