Davis & Dann Ltd & Anor v HM Revenue and Customs [2016] EWCA Civ 142

Case No A3/2014/1295[2016] EWCA Civ 142
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
UT (Tax and Chancery Chamber)
JUDGE MALCOLM GAMMIE CBE QC AND JUDGE EDWARD SADLER
[2013] UKUT 374 (TCC) (6 AUGUST 2013)
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 15/03/2016
Before
LADY JUSTICE ARDENLORD JUSTICE TOMLINSONLORD JUSTICE LINDBLOM
Between
Davis & Dann Limited & AnrRespondentsThe Commissioners for Her Majesty’s Revenue and CustomsAppellant
Jonathan Kinnear QC and Howard Watkinson (instructed by HMRC Solicitors’ Office) for AppellantsDavid Scorey QC and Edward Brown (instructed by Cobleys LLP) for RespondentsHearing Hearing dates: 24-25 November 2015
JudgmentLADY JUSTICE ARDEN :Issue on this appeal
[1]The principal issue on this appeal is whether the Upper Tribunal (“the UT”) (Judge Malcolm Gammie and Judge Edward Sadler) were wrong in their decision dated 6 August 2013 to allow an appeal from the decision of the First-tier Tribunal (“the FTT”) (Judge Guy Brannan and Shahwar Sadeque) dated 17 January 2012. The FTT had found that HMRC had correctly decided that the respondent taxpayers had forfeited any right to the repayment of VAT amounting to £4,150,641.04 (being £2,138,108.86 in the case of the first respondent (“DDL”) and £2,212,532.23 in the case of the second respondent (“Precis”) paid on the purchase of razor blades (“the Goods”), which they subsequently exported. The sole issue was whether the respondents ought to have known that their purchases were connected with the fraudulent evasion of VAT in the chain of transactions leading to their purchases (“the Transactions”). The FTT held that the only reasonable explanation which the respondents could have drawn from their prior knowledge and the circumstances in which they were offered the chance to buy the Goods were that the Transactions were connected, as they indeed were, with a fraud by a previous buyer, Leeming Distribution Limited (“Leeming”). Leeming imported the Goods intending not to account to HMRC for VAT received on the onwards sale by it. Section 72 of Value Added Tax Act 1994 (“VATA 1994”) expressly makes this activity criminal.[2]It is common ground that the respondents were not entitled to repayment of these sums of VAT if, as HMRC contended, the respondents ought to have known that their purchases were connected with this fraud, which is a species of VAT fraud, known as “MTIC” (or missing trader intra-Community) fraud, because it involved the import and export of the Goods, which under EU rules is VAT-free.[3]HMRC did not make any allegation of fraud against any person other than Leeming. The fraud in issue was an “acquisition” fraud involving the deliberate failure by an earlier or “upstream” buyer to account for VAT received. It was not a “carousel” fraud, as it is sometimes called, which involves intermediate dealers and the export and import of the same goods time and time again. There was no dispute as to Leeming’s fraud or as to the connection between the respondents’ purchases and its fraud.[4]It was common ground that in order to show that the respondents ought to have known of the connection between their purchases and Leeming’s fraud, HMRC had to reach a high hurdle under EU law of showing that they ought to have known that the only reasonable explanation for the transactions was that they were connected to a VAT fraud: see Mobilx Ltd v HMRC [2010] STC 1537 per Moses LJ at [59]. I will refer to this level of knowledge as knowledge meeting “the no other reasonable explanation standard”.[5]It is common ground that HMRC did not have to show that the respondents knew the identity of Leeming, or Leeming’s place in the chain, simply the fact that there had been a fraud.[6]In my judgment, for the detailed reasons given below, the UT were wrong to set aside the decision by the FTT on the ground stated and the FTT’s decision is not shown to have contained any error of law.[7]The facts summarised in this judgment are unless otherwise stated taken from the findings of the FTT (which were not the subject of any challenge in this court or the UT) or documents to which the FTT referred in their decision. I refer to the respondents to this appeal as such throughout this judgment even though they were the appellants before the FTT. Respondents’ prior knowledge Nature of respondents’ business

Respondents’ prior knowledge

[8]The respondents were traders in“fast-moving consumer goods”in the grey market, that is on the respondents’ case, the unofficial market in manufactured goods, which is sometimes fed by manufacturers or others offloading large quantities of excess stock. In the nature of their trade, the respondents would receive unsolicited goods, as they did in the transactions in issue in this case.

Prior warnings by HMRC

[9]Crucially, before they purchased the Goods, the respondents had previously been advised by HMRC of the risks of becoming involved in MTIC fraud and what to look out for.[10]This was in 2003, some three years before the purchases of the Goods, following the purchase (“the 2003 transactions”) of large quantities of razor blades and onwards sale to a buyer in another member state. HMRC paid a visit to the respondents’ offices and warned them of the risk of MTIC in small valuable items such as mobile phones and razor blades. The respondents clearly understood the risks to them as they told HMRC that if there was a missing trader in the chain they would not do the deal.[11]HMRC followed up this visit by telephone conversation the next day from an official of HMRC, Mr Gordon Young, who was an officer of HMRC at the time of the appeal to the FTT. He telephoned a director of the respondents, Mr Satish Chatwani. The FTT accepted Mr Young’s evidence in preference to that of Mr Chatwani. Mr Young warned the respondents of the risk that their repayment position would be affected. Mr Chatwani told Mr Young that he had not previously dealt in razor blades. He confirmed to Mr Young that he had that day been approached out of the blue by the source of supply and by the proposed purchaser.[12]Importantly, Mr Young warned Mr Chatwani that fraudulent transactions would generally have the same characteristics as the 2003 transactions in terms of large quantities, large values and in the manner of approach of the supplier and customer, commonly unsolicited and in quick succession. Moreover, it should be relatively straightforward for him to differentiate normal trades (that is trades in the normal course of business) from those trades that he should continue to verify. Mr Young said that he would trace the deals that Mr Chatwani was proposing to carry out as a result of the offer that day in order to ascertain whether there was a tax loss (because of a missing trader), and that he had no doubt that there was a tax loss. He did not in fact trace the deals because Mr Chatwani rang him back to say that he was not going to proceed with that offer.

July 2003 letter from DDL to HMRC

[13]On 1 July 2003, DDL wrote to HMRC a letter (“the July 2003 letter”) stating that “since the date of your visit and our subsequent discussions we have to date not entered into any further large back-to-back transactions, particularly where the exports are to Europe.”[14]The respondents acquired this knowledge before they were offered any of the Goods. They knew that MTIC fraud could be conducted through razor blade deals (FTT Decision, para 278). They were on notice that large back-to-back razor blade deals where goods were to be exported to Europe called for particular care in respect of MTIC fraud (FTT Decision, para.79). They had been warned of certain characteristics of MTIC fraud – “quantity, value, the manner of approach by supplier and customer etc” which in the view of the FTT “should have helped them to identify transactions of which they needed to be wary” (FTT Decision, para 279).

Circumstances in which the respondents were offered the goods

[15]I now turn to the Transactions. DDL entered into 24 separate transactions and Precis entered into 12 transactions. These all took place between 6 April and 31 May 2006 and were for the purchase by the respondents of 23,184,000 Gillette Mach 3 (“MP3”) razor blades costing £24,860,766. The respondents had not purchased such a large quantity of razor blades (still less a particular type of razor blades) in a similar period of time before or after the Transactions.[16]In 2006, the respondents received an unsolicited introductory fax from Bristol Cash & Carry (“Bristol”). This made it clear that Bristol was a wholesaler in drinks. Mr Tailor, an experienced manager of the respondents, contacted Bristol and spoke to their managing director to discuss the possibility of doing business together.[17]In accordance with the respondents’ standard practice, Mr Tailor ran a credit check using facilities offered by “Risk Disk”, an online credit agency. The report provided by Risk Disk showed that Bristol was a non-trading company and recommended that further enquiries be made before offering the company credit, that Bristol was the trading name of a company called Famecraft Limited and that the last return date for Famecraft was 2 April 2005 and that the last accounting date was 30 April 2005. The FTT held that from this information it was clear that Bristol had only been in business for a maximum period of less than 12 months and that Bristol’s business was as a wholesaler of drinks. There was no mention of toiletries or razor blades.[18]Mr Tailor also knew that Bristol was not an authorised distributor of the Gillette products.[19]Subsequently to its unsolicited introductory fax, Bristol telephoned the respondents and offered a large consignment of Gillette razor blades.[20]Three days later, a Spanish company (“CEMSA”), telephoned the respondents and said that they were willing to buy the exact quantity of razor blades.[21]Mr Tailor went to inspect the razor blades which were held by the freight forwarder. He counted every single pack of razor blades and was satisfied that they existed and conformed to the description given by Bristol. HMRC made no positive case that the razor blades which were the subject of the Transactions did not exist.[22]Once the respondents had sold the goods to CEMSA, the goods were on CEMSA’s instructions in each case shipped to GR Distributions Ltd (“GR Distributions”) in Calais. We have seen consignment notes stating that the Goods were sent to CEMSA care of GR Distributions.[23]Under terms of credit extended by Bristol, the respondents did not have to pay for any consignment until after CEMSA had paid them.[24]GR Distributions’ objects were to carry on businessas wholesalers of wood, construction materials and sanitary equipment.[25]The FTT found in July 2003 the respondents carried out trades in “Platinum XXX cards” (which gave access to pornographic websites) (FTT Decision, para 85). HMRC had traced these to tax losses but did not inform the respondents. HMRC paid their repayment claim on a without prejudice basis.[26]The repayment claims to which the 2003 transactions, the Platinum XXX cards and the Transactions gave rise were unusually large for the respondents by comparison with the other claims which the respondents made between 2003 and 2006. The Transactions gave rise to repayment claims about three times as large as those in 2003.

Decision of the FTT

[27]Totality of evidence: The FTT concluded that the only reasonable explanation test had to be applied to the totality of the evidence. The FTT added: 273…if it were otherwise, and it was possible to give a potentially reasonable explanation for each allegedly suspicious circumstance viewed in isolation, it would then not be possible to consider the cumulative improbability of all those circumstances combining in relation to the disputed transactions.[28]Intermediate traders: The FTT took into account circumstances which made the activities of Bristol or CEMSA suspicious even though HMRC did not contend that any intermediate party was a party to the fraud. It accepted HMRC’s submission that the fact that HMRC only alleged fraud in respect of Leeming did not entitle the respondents to disregard the totality of the circumstances, viewed objectively, in which the Transactions took place (FTT Decision, para 274).[29]Inability to make inquiries not conclusive: The FTT also held that in considering the factual context and circumstances surrounding the Transactions, it was necessary to ask not just what more the respondents could have done. It was also necessary to ask what conclusions the respondents should have drawn from the facts already known or which they ought to have been aware (FTT Decision, para 275).[30]Prior knowledge: The FTT held that the respondents should have been alerted to the fact that their deals were unusual or at least having unusual results which were similar (but even larger in terms of VAT repayments) to those in respect of deals of which they had been warned in 2003.[31]Size of respondents’ repayment position: Moreover the repayment position in which they were left as a result of the Transactions was far greater than it had been in any previous period. In the opinion of the FTT, “[t]his of itself should have alerted [the respondents] that their deals…[had] results …similar to those ..of which they had been warned in 2003, albeit that they were not told that those deals had not actually been traced back to fraudulent evasion” (FTT Decision para.280).[32]Unsolicited approaches: CEMSA had made an unsolicited approach to the respondents to buy the relevant number of razor blades within four days of the first (unsolicited) approach by Bristol to source Gillette razor blades.[33]Bristol warning signals: The respondents had failed to read the warning signals in respect of Bristol as a drinks wholesaler, not an authorised distributor of Gillette products and lack of trading history, and unsolicited approach (FTT Decision, para 281 to 284). The FTT, rejecting the respondents’ submissions, held that it was not possible to dismiss the cumulative effect of all these warning signals on the basis that unsolicited offers were common in the grey market (FTT Decision, para 285).[34]Extended credit given by Bristol: This was not a normal extension of credit terms because the sums were very large, Bristol had only recently commenced business and the respondents made no enquiries into how it was able to extend such generous credit (FTT Decision, para.286).[35]Exceptional quantity and value: The quantity and value of the deals made them exceptional for the respondents. The FTT went on to deal with the quantities in relation to global supply of these blades but it is not necessary for me to deal with that evidence.[36]Explanations for exceptional volume rejected: The FTT went on to reject two further explanations given by the respondents for the number of razor blades, first that this was due to a special promotion in relation to the World Cup and, second, that this was due to the fact that Gillette had recently introduced a new Fusion razor blade.

Conclusion

[37]The FTT concluded that, despite the skilful argument of counsel for the respondents (Mr David Scorey QC), the respondents should have known that the Transactions were connected with the fraudulent evasion of VAT. The FTT accordingly dismissed the respondents’ appeals from the decision of HMRC to reject their repayment claims.

Decision of the UT

[38]Following the decision of the FTT, the respondents appealed to the UT.[39]Rejection of grounds of appeal: After the FTT gave its decision on 17 January 2012 the respondents applied for permission to appeal on 11 grounds. The UT refused permission on three grounds, including ground 10 which challenged the finding of knowledge to the requisite standard. The respondents wished to contend that they could not have had that knowledge because HMRC had not challenged earlier transactions in February and March 2006. Contrary to HMRC’s submission, I read ground 10 as limited to an argument based on failure to challenge the earlier transactions, not as a rejection of the challenge to the findings of fact as a whole.[40]In its decision on the appeal, the UT treated the eight grounds for which it gave permission as a single ground, namely that the FTT had erred in law “by going beyond HMRC’s pleaded case and arriving at findings of fact and a conclusion on the facts which was not supported by the evidence” (UT Decision, para 20).[41]The UT directed itself that, if it considered that there was a reasonable explanation for concluding that the Transactions were unconnected with a fraud, it would in general be bound to conclude that the HMRC had not shown that the only reasonable explanation for the Transactions was that they were connected with fraud.[42]Prior knowledge: As regards the telephone conversation with Mr Young, the UT noted the discussion with Mr Young in 2003 but queried whether what Mr Young had told the respondents achieved the necessary connection to fraud or was merely grounds for suspicion (UT Decision, para 49).[43]The UT held that little turned on the fact that the Goods were to be exported because export sales was one of the ordinary incidents of the respondents’ business (UT Decision, para. 50).[44]Size of respondents’ repayment position: The UT dismissed the size of the respondents’ repayment position, stating that that was simply an ordinary consequence of the transaction size and the fact that the goods were being exported (UT Decision, paragraph 50). The UT noted that export was in the ordinary course of the respondents’ business.[45]The UT held that, to the extent that different conclusions should be drawn, the investigating authority in these cases is HMRC and it will usually be better placed than any taxpayer to suggest some explanation and to produce the evidence to support (UT Decision, paragraph 53).[46]Totality of evidence: The UT held that the question whether the respondents’ knowledge met the no other reasonable explanation standard depends on “the circumstances of the transactions” (UT Decision, para 7). The UT noted without comment that the FTT had held that all the circumstances must be considered when applying the no other reasonable explanation standard (UT Decision, para 10(b)).[47]Intermediate traders: Mr Scorey argued before the UT that the FTT had to assume that the intermediate parties such as Bristol had to be treated as innocent parties entering into bona fide transactions because HMRC had not alleged that they were parties to the fraud. The UT only dealt with this argument in part by holding that HMRC had to plead and produce evidence if its case was that the FTT should draw an inference adverse to the respondents from the fact that Bristol had offered extended credit terms. By implication HMRC had failed to do this.[48]Inability to make inquiries: The Upper Tribunal did not deal with any argument that the respondents would not have obtained any relevant assistance by making inquiries and that therefore the respondents could not be bound to make such inquiries.[49]Unsolicited approaches: The UT held that the unsolicited and simultaneous approaches of Bristol and CEMSA were in the absence of evidence to the contrary to be treated simply as co-incidences (UT Decision, para 52).[50]Bristol warning signals: The UT considered that these did not amount to much. A drinks wholesaler could deal in toiletries. The UT considered that the fact Mr Tailor checked the existence of the Goods helped rebut any inference of knowledge to the requisite standard from the Bristol warning signals (UT Decision, para 51).[51]Extended credit given by Bristol: The UT held that it fell to HMRC to plead its case and produce the evidence to support its case. The UT held that HMRC pleaded no wrongdoing in respect of Bristol and CEMSA and had made no disclosure in respect of them (UT Decision, para 48). The proximity of the unsolicited approaches from Bristol and CEMSA could, in the absence of evidence to the contrary, have been a co-incidence (UT Decision, para 52). Suspicion was not enough to meet the no other reasonable explanation standard (see Mobilx, para 4 above). The UT did not consider that an adverse inference should be drawn from the extended terms given by Bristol “in the absence of evidence to suggest an answer”.[52]The UT had asserted that there was a lack of findings or evidence about the financial standing of Bristol. In doing so it overlooked the fact that the FTT found that the respondents obtained a non-committal Risk Disk Report on Bristol before they did any business with it (see para 17 above). The UT also held that there was a lack of evidence or findings about the respondents’ ordinary terms of trade, but the FTT had noted that there was no such evidence (FTT Decision, para 258).[53]Exceptional quantity and value: The UT considered that the weight of these factors was diminished by the fact that the respondents had verified the physical existence of the Goods. The respondents had satisfactorily explained why the Goods were stored with a freight forwarder not known to them (UT Decision, para 54). The FTT had not explained why these features pointed to a connection with fraud.

Conclusion

[54]Legitimate grey market transactions: The respondents essentially succeeded before the UT on the argument that the circumstances surrounding the Transactions occurred in the normal course of business and that therefore they could reasonably conclude that the transactions were unconnected with fraud. The UT held crucially as follows:55. The impression is that the quantity of razor blades purchased and sold by the Appellants was a more compelling factor and, possibly, a conclusive factor. It appears to us, however, having regard to the Tribunal's description of the Appellants' business and the grey market in which they operated, that the transactions were entirely explicable as ordinary market transactions. In the absence of any evidence to demonstrate why they were not and without any explanation by the Tribunal as to why the factors to which they refer necessarily point to a connection with fraud, it seems to us that the Tribunal erred in concluding that the only reasonable explanation for the circumstances in which the Appellants' purchases took place was that they were connected to fraud. That is so, in our judgment, whether the various factors identified as relevant to their decision by the First-tier Tribunal are examined individually or as a cumulative whole.56. This appears to us to be consistent with the overriding right of a taxpayer to recover input tax and the requirement for legal certainty for traders dealing in a market such as this. If the terms of dealing are broadly consistent with the way in which transactions in the market are ordinarily conducted, it can hardly be said that the only reasonable explanation for the circumstances in which the transactions took place is that the transactions are connected with fraud, even if some facets of the transactions might raise a suspicion of fraud. That is the case with regard to the Appellants in this appeal. HMRC may not be appreciative of the existence of a market that enables those who are intent on fraud to trade goods to that end. On the other hand there is no reason to penalise innocent traders in that market merely because it offers that facility.[55]In paragraph 56 of its decision, the UT made it clear that its conclusion was that the no other reasonable explanation standard was not met because the terms of dealing under the Transactions were broadly consistent with the way in which transactions in the market were ordinarily conducted.

Submissions and discussion

[56]Both parties spent a considerable amount of time in written and oral submissions on questions such as the scope of the appeal, whether the UT had gone beyond dealing with points of law (which was its proper appellate function) and whether points had or had not been pleaded, and on explaining the tortuous procedural history in this case. With no disrespect to counsel, I have concluded that these points (which I will call “supplementary issues”), while important and relevant, are secondary on this appeal. I explain why I take this view after I have dealt with the critical points. I will first deal with what I regard as the critical issues.

Totality of the evidence

[57]Mr Jonathan Kinnear QC, for HMRC, submits that the UT did not stand back and look at the cumulative effect of the circumstances which the FTT took into account. Indeed the UT did not address the point made by the FTT that it was necessary to look at the totality of the evidence. Instead, the UT looked at the factors individually, rather than collectively, as the FTT had done.[58]Mr David Scorey QC, for the respondents, submits that only relevant circumstances can be taken into account. If the factors which are prayed in aid of participation would simply have involved futile enquiries, they cannot be relied on. Accordingly, the taxpayer will not lose the important and fundamental right that he has to repayment of VAT that he has paid if there was an inquiry which he could have made but which was a futile enquiry. The Court of Justice of the European Union has stressed that it follows from the fundamental principles of legal certainty and fiscal neutrality and that there must be objective factors for determining whether the trader had the requisite knowledge (see Mobilx at [21]). So, if there had been a good reason for CEMSA requiring delivery to France, that inquiry would have been futile. On Mr Scorey’s submission, that was equally so if the taxpayer had a misplaced concern. Therefore HMRC has to show that the inquiry would have revealed that there was no good reason or that a concern was not misplaced. In short, if a matter called for some explanation or enquiry, Mr Scorey, citing the last sentence of paragraph 52 of the judgment of Moses LJ in Mobilx, submits that the relevant test is: if there had been an inquiry what would the inquiry have shown? He contends that commercial people have to be able to make enquiries and that they cannot otherwise have knowledge.[59]A further reason on Mr Scorey’s submission why many of the factors could not properly be taken into account was that the FTT embraced a case which was shut out. At an earlier hearing, HMRC had had to accept that on its pleaded case it was limited to alleging that only Leeming was party to the fraud. What happened before the FTT, according to Mr Scorey, was that HMRC had tried to put its wider case again and failed.[60]I accept the substance of Mr Kinnear’s submission. In my judgment, the UT’s treatment of the respondents’ repayment position provides a clear example of over compartmentalisation of the factors rather than a consideration of the totality of the evidence. The UT accepted Mr Scorey’s submission, also made to us on this appeal, that the respondents’ abnormally large repayment position was just a consequence of the Transactions (UT decision, para 50). But that is to leave out of consideration the role of this factor as a factor which is capable of supporting knowledge to the no other reasonable explanation standard. The UT did not consider its relevance in this way and its failure to do so was an error of law. When a factor is considered in that way it may be that there is an explanation which means that the knowledge does not meet the required standard. At that stage, the factor, while relevant, ceases to be probative. The example which I have given is repeated in relation to the other factors which the UT considered. Moreover, although, in paragraph 55 of its decision, the UT stated that the no other reasonable explanation standard was not met “whether the factors were looked at individually or as a whole”, it did not elucidate why that was so. I give that statement little weight in the light of the general tenor of the decision, which was to look at factors in isolation.[61]Mr Scorey develops his submission on relevance to include a submission that the intermediate traders, such as Bristol, must be treated as innocent and that accordingly no adverse inference could be drawn from any characteristic of those traders or of transaction with them. By way of further example, as regards GR Distributions, Mr Scorey submits that the FTT was wrong to place any weight on the fact that GR Distributions’ business had nothing to do with razor blades (see FTT Decision, para 294). This was an irrelevant matter because HMRC did not allege that GR Distributions was a party to the fraud.[62]I agree that a trader’s right to repayment of input tax is a fundamental right and that therefore courts must not too readily disenfranchise the taxpayers of it, but I do not accept Mr Scorey’s submission on relevance. The FTT were not restricted by any rule of law or statute from relying on any circumstance which was capable of being probative of knowledge to the no other reasonable explanation standard. It is not correct to argue that, simply because there was no allegation that Bristol was a party to the scheme, no circumstance surrounding Bristol could be a circumstance, which, when added together with other circumstances (in particular the prior warning in 2003) should have led the respondents to conclude there was a connection with upstream fraud.[63]As Moses LJ held in Mobilx: [52] If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.[64]Contrary to Mr Scorey’s submission, the last sentence does not say that a taxpayer who fails to make inquiries does not have the knowledge which meets the no other reasonable explanation standard. On the contrary he holds that he may have knowledge to that standard if he fails to make those inquiries.[65]In my judgment, the consequence of HMRC’s decision not to allege fraud against Bristol, CEMSA and GR Distributions was that it was no part of their case that those parties were fraudulent. However, in assessing whether the respondents’ knowledge met the no other reasonable explanation standard, the FTT still had to go on to consider all the circumstances. The question is whether or not a reasonable person mindful of those circumstances ought to have concluded that the Transactions were connected with fraud. What matters is the perspective of the person alleged to have such knowledge. A finding of knowledge to the no other reasonable explanation standard can accordingly be reached irrespective of whether the other parties to the Transactions were in fact fraudulent.

Prior knowledge - the missed issue

[66]I have set out above the FTT’s finding about the warning which Mr Young gave to the respondents. As the FTT said at paragraph 279 of its decision, Mr Young warned the respondents of certain characteristics of connection with MTIC fraud, namely “quantity, value, the manner of approach by supplier and customer etc”, which should have “helped them identify transactions of which they needed to be wary.” The conversation with Mr Young played an important part in the FTT’s decision.[67]Mr Kinnear submits that the UT scarcely considered the implications of the respondents’ prior knowledge. The answer raised by the respondents is that knowledge of the 2003 warning should be dismissed because it was an improper attempt by HMRC to suggest that Bristol, CEMSA and GC Distribution were fraudulent.[68]But that was not the role of the allegation of prior knowledge. The fact that the respondents had prior knowledge was one of the factors which had to be taken into account when the FTT assessed what a reasonable person ought to have known about any connection with fraud.[69]I therefore agree with Mr Kinnear’s submission. The UT effectively does not deal with Mr Young’s warning at all. At one stage in its reasoning, the UT appeared to limit relevant factors to circumstances of the Transactions. By querying the FTT’s findings about this conversation (see para 42 above), the UT missed the real point, which was that the characteristics which the respondents had been told were hallmarks of MTIC fraud were present in this case. This error on the part of the UT was itself an error of law.[70]Mr Scorey also made a submission, which I can conveniently interpose here, that the warnings given by Mr Young, particularly about being wary of the approach by a trader if it was unsolicited, did not apply to the Transactions because Bristol and CEMSA were not alleged to be parties to the fraud and the warning was only about being manoeuvred. However, the FTT did not consider that the warnings given by Mr Young were to be interpreted as applying only where intermediate traders were fraudulent or where there was a circularity of goods being traded as in a carousel fraud. Rather they applied wherever there was an upstream tax loss, ie to an acquisition fraud as well.

Bristol’s financial standing

[71]I have rejected the argument that no characteristic of Bristol could be treated as relevant to whether the respondents’ knowledge met the no other reasonable explanation standard. That leaves the UT’s refusal to take Bristol’s financial standing into account as relevant to the question whether the Transactions were in the ordinary course of business.[72]Mr Kinnear submits that the UT was wrong to hold that the FTT made no findings as to Bristol’s financial standing. I agree. The FTT did so at para. 95 of its decision in the following terms: The Risk Disk report showed that Bristol was a non-trading company and recommended that further enquiries be made before offering the company credit. The version of the Risk Disk report in our papers contain the legends:
“Reported printed: 16 February 2006” and “05.05.06:19/01/2006”
. The report noted that the last return date for Famecraft Limited as being 2 April 2005 and the last accounting date as being 30 April 2005. From this information it was clear that Bristol had only been in business for a maximum period of less than 12 months. The description of Bristol’s business in the report was “wholesale of alcohol and other beverages”. There was no mention of toiletries or razor blades.[73]Mr Scorey’s approach is to say that there were other countervailing factors which diminish the significance of this point. I will deal with the other countervailing factors under the next heading.

Countervailing factors

[74]Mr Scorey submits that, even if the characteristics of the intermediate traders were relevant, there were countervailing factors which displaced any inference of knowledge to the no other reasonable explanation standard. In particular, in relation to Bristol, while the respondents had the Risk Disk Report, they also knew from their contact with Bristol that it had an active business. So the respondents were not to be affected by (for instance) their knowledge that Bristol was a new company.[75]Mr Scorey further submits that there were a number of other factors which were inconsistent with knowledge on the part of the respondents to the no other reasonable explanation standard. In particular, the price payable under the Transactions was not inflated, Mr Tailor had physically verified the existence of the stock and Mr Rashmi Chatwani had assuaged any concern about using an unfamiliar freight forwarder by an inspection of their lorry park, which he found behind a police station.[76]Mr Scorey submits that the significance of the value of the Goods is counterbalanced as a factor showing knowledge to the requisite standard by the fact that the respondents had done deals in other goods to a similar high value and by the fact that they had physically verified that the Goods existed. Furthermore, on Mr Scorey’s submission the explanations which the FTT rejected were possible explanations. Branding for the World Cup promotion meant that the goods had a limited shelf life. This was a possible explanation. Likewise the introduction of Fusion. These were rejected as an explanation but the FTT did not say that there was no reasonable explanation. The first point is in fact that there is a reasonable explanation. The FTT seems to reject the explanation tendered but it does not reject the possibility that it would account for some of them. That could be an explanation.[77]In my judgment, this submission goes to the weight to be attached by the primary decision-maker to certain matters in relation to others. While the categorisation of a fact as probative of a particular issue is a question of law, the question whether it is so probative is a question of fact. On an appeal on a question of law, it is well established that an appellate tribunal whose function is restricted to questions of law cannot revisit questions of fact unless no reasonable judge could have come to that conclusion. Mr Scorey has not contended that that test applied in relation to any of these countervailing factors: there is no cross appeal in this Court. Therefore, the existence of these countervailing factors cannot determine the outcome of this appeal.

Normal course of business

[78]The deciding issue for the UT was that the Transactions were conducted in the ordinary course of business. It specifically considered that this was an answer to the quantity of razor blades involved in the Transactions.[79]The reasoning on this issue is contained in paragraphs 55 and 56 of the UT’s decision, which I have set out in paragraph 54 above. At the start of paragraph 55, the UT took the view that the FTT had considered that “thequantity of razor blades was ..possibly…a conclusive factor.”[80]Mr Kinnear submits that in saying this the UT misinterpreted the weight the FTT attached to the quantity of razor blades. I accept Mr Kinnear’s submission on this point. The FTT had held that(1) that was one of the characteristics of transactions connected with MTIC identified by Mr Young which the FTT held should have made the respondents more wary (FTT Decision, para 279), and(2) that the quantity was exceptional for the respondents (FTT Decision, para 287).[81]Moreover, submits Mr Kinnear, the UT was quite wrong to say that there was no evidence to demonstrate that the Transactions were not ordinary market transactions because that had to be assessed in the light of the respondents’ business.[82]As a matter of law, I accept that the course of the respondents’ business is also relevant. The function of the UT’s finding as to normal course of business is to rebut knowledge on the part of the respondents to the no other reasonable explanation standard. To serve that purpose, it had not only to be a finding as to what was in the normal course of business among grey market traders but also, in general, a finding as to what was in the normal course of the respondents’ business. The two are not necessarily the same thing. The ordinary course of a business of a trader in the grey market may for instance be with particular kinds of dealer only or in particular kinds of goods only.[83]In this case, the FTT found that the Transactions were not in the ordinary course of business of the respondents and findings of primary fact are not challenged. The respondents had previously only bought from authorised distributors, and the respondents knew that Bristol was an unauthorised distributor.[84]I need not base my conclusion on this issue solely on this point. I turn to the ordinary course of business in the grey market in general, as opposed to these respondents’ businesses.[85]Mr Scorey submits that the Transactions appeared to be normal market transactions and so objectively there was nothing to put the respondents on notice. He points to a number of factors: the existence of the Goods, the location of the freight forwarder’s lorry park, the fact that the quantity of the Goods was not unusual for grey market transactions, the fact that the price of the Goods was not inflated and so on.[86]The burden of proof of knowledge to the no other reasonable explanation standard is on HMRC. Did HMRC discharge its burden of proof that the transactions were not in the ordinary course of business of the respondents by the evidence as to the terms of credit given by Bristol?[87]In my judgment it did. The UT held that the terms of dealing were the terms on which transactions were ordinarily conducted (UT Decision, para 56) but that holding was unsupported by any evidence. As the UT recognised (Decision, para 53), the true position was that there was no finding as to Bristol’s usual terms of business. The FTT noted that there was no evidence on this (FTT Decision, para 258).[88]In my judgment, as a matter of commercial common sense, it is inherently improbable that Bristol’s extended credit terms given to the respondents were in the ordinary course of business. If CEMSA had failed to pay the respondents, Bristol might have been unable to recover the sum due from the respondents. In those circumstances, the burden of adducing evidence in my judgment moved to the respondents to show that the Transactions were normal market transactions. They did not adduce any evidence to show that. In the circumstances, the respondents could not in this case succeed on an ordinary course of business defence.[89]The respondents told the FTT that by reason of their established status as grey market dealers, “they typically benefited from credit terms.”(FTT Decision, para 258).However, the FTT did not go on to find that these or any other credit terms were typical for the respondents (or any other grey market dealer).[90]The respondents essentially submit that the warning given by Mr Young of HMRC in 2003 was of no significance because the Transactions were all conducted in the normal course of trade. Therefore the respondents should not be taken to have had knowledge to the requisite standard of a connection with fraud. In answer to this point HMRC have relied on a large number of matters. In my judgment it is sufficient to refer to two.[91]The first is the question of volume. I have already stated the number of razor blades in question. It was a far larger quantity than the taxpayers had ever dealt: the FTT stated at paragraph 147 of their decision– According to the evidence before us, the Appellants had not purchased such a large quantity of razor blades (still less a particular type of razor blade) in a similar period of time either before or after the transactions under appeal.[92]The respondents say that the answer to this is that they checked that the razor blades existed and they did exist. The fact that the razor blades existed is not an answer to the allegations in this case. What HMRC contended was the size of the quantities involved in the Transactions was of itself a circumstance relevant to the question whether the respondents had knowledge of the requisite standard. This point was open to HMRC whether or not the razor blades existed. Moreover the FTT could draw adverse inferences from the size of the Transactions. Quantity after all was one of the factors which Mr Young had regarded as a particular characteristic of MTIC fraud.[93]The second matter to which I would refer is the extended credit which Bristol gave to the respondents. I have already set out the Risk Disk Report which they had on Bristol. This did not show a company of any substance. The extended credit was clearly capable of being found to be designed to encourage the respondents to enter into the Transactions with Bristol. It was clearly a factor which the FTT was entitled to hold was unusual and contributed to the finding to the requisite standard of knowledge. The respondents’ case is that the extended credit terms could not prove that Bristol was a party to the fraud because that had not been alleged or proved. But, for the reasons given in this judgment, that argument entirely misses the point.[94]In reaching its conclusion, the FTT relied on a large number of matters: prior knowledge, unusually high repayment position, warning signs by Bristol including the fact it was a drinks retailer, was not an authorised distributor, had been trading less than 12 months and the fact that the respondents made no enquiries as to how it was able to provide substantial credit to the respondents, the coincidence of the approaches by Bristol and CEMSA and the quantity and value of razor blades which it described as both exceptional and extraordinary. There was also the nature of GC Distributions’ business. Its registered objects were as “wholesalers of wood, construction materials and sanitary equipment”. Mr Scorey challenges the significance of this when dealing in the grey market with an unauthorised distributor. I am prepared to accept that he is correct in his submission but, in my judgment, that makes no difference having regard to the other factors. supplementary issues Question of law?

supplementary issues

[95]Appeals from the First-tier Tribunal to the Upper Tribunal and from the Upper Tribunal to the Court of Appeal are restricted to points of law (sections 11 and 13 of the Tribunal Courts and Enforcement Act 2007 (“the 2007 Act”)). There was a certain amount of discussion in the skeleton arguments of whether the Upper Tribunal had in fact dealt with a point of law or a point of fact. However, since this appeal was launched, the Supreme Court have handed down their judgments in Revenue and Customs Commissioners v Pendragon PLC [2015] 1WLR 2838. This contains an important judgment by Lord Carnwath, with whom the other members of the Supreme Court agreed, on the meaning of point of law in this context.[96]Lord Carnwath points out that the 2007 Act gave the Upper Tribunal power where it finds an error of law to make the decision itself rather than to remit the matter to the First-tier Tribunal. Lord Carnwath explained that the White Paper which preceded the 2007 Act stated that the intention of the new tribunals system was that the Upper Tribunal should have a role in achieving consistency in the application of the law, and that law for this purpose should be widely interpreted to include issues of general principle affecting the jurisdiction in question.[97]Lord Carnwath further points out a more flexible approach was supported by recent statements in the House of Lords, in cases such as Moyna v Secretary of State for Work and Pensions [2003] I WLR 1929 and Lawson v Serco Ltd [2006] ICR 250. In the latter case (at [34]), Lord Hoffmann had contrasted findings of primary facts with the “an evaluation of those facts” to decide a question posed by the interpretation of the legislation in question:
“Whether one characterises this as a question of fact depends…upon whether as a matter of policy one thinks that it is a decision which an appellant body with jurisdiction limited to errors of law should be able to review” …”
[98]Lord Carnwath, therefore, warned appellate courts against spending too much time in identifying what was or was not a question of law: …, given the difficulties of drawing a clear division between fact and law, discussed by Lord Hoffmann, it may not be productive for the higher courts to spend time inquiring whether a difference between the two tribunals was one of law or fact, or a mixture of the two. There may in theory be a case, where it can be shown that the sole disagreement between the two tribunals related to an issue of pure fact, but such a case is likely to be exceptional. In the present case, as Lord Sumption has shown, there were no significant issues of primary fact. The differences between the two tribunals related to the understanding of the “abuse of law” principle, and their evaluation of the facts in the light of that understanding. The Upper Tribunal reached a carefully reasoned conclusion on law and fact. The task of the Court of Appeal was to determine whether that conclusion disclosed any error of law.”[99]In the present case, the Upper Tribunal had to decide whether the facts as found by the FTT justified the findings of knowledge to the no other reasonable knowledge standard. In other words, they had to consider whether the facts found by the FTT would have led a reasonable person to conclude that there was a fraud. This therefore involved a categorisation of the facts and thus involved potentially a question of law (see per Lord Hoffmann in the citation from Lawson v Serco Ltd).[100]A similar point was made in helpful terms by the Supreme Court of the United States in Bose Corp v Consumers Union of U.S. 466 U.S. 485 (1984), whereit held: A finding of fact in some cases is inseparable from the principles through which it was deduced. At some point the reasoning by which a fact is “found” crosses the line between application of those ordinary principles of logic and common experience which are ordinarily entrusted to the finder of fact into the realm of a legal rule upon which the reviewing court must exercise its own independent judgment. Where the line is drawn varies according to the nature of the substantive law at issue. Regarding certain largely factual questions in some areas of the law, the stakes – in terms of impact on future cases and future conduct – are too great to entrust them finally to the judgment of the trier of fact.[101]I have no doubt that the categorisation of fact in the present case constitutes a question of law which founds this Court’s jurisdiction and that of the UT (see paragraph 77 above). (Moreover, if the UT found an error of law, it had jurisdiction to substitute its own decision: see Pendragon). There are, however, as appears from paragraph 77 above, limits to this: how the tribunal applies any categorisation of the fact to the circumstances of a particular case is likely to be a question of fact and not of law. For the reasons given in this paragraph, this Court is entitled to ask whether the UT was correct to evaluate the facts in the way that it did, namely as indicating normal market transactions, or whether, as HMRC contend, that conclusion was itself in error.

Pleadings points taken by the respondents and the UT

[102]The respondents emphasised the importance of proper pleadings in a case in involving the no other reasonable explanation standard. Proper pleadings are indeed needed in a case such as this but there is no doubt that the matters to which I refer in this judgment were before the FTT without objection and therefore must have been sufficiently pleaded. Mr Scorey used the absence of any pleaded allegation of fraud against Bristol, CEMSA and GR Distributors as another way of putting his argument that any of their characteristics or any circumstance relating to the transactions with them was “irrelevant.” I have already dealt with that argument in para 62 and 65 above.[103]In particular, the UT was wrong to hold that HMRC did not rely on the beneficial payment terms when it did so in paragraph 24(e) of its re-amended statement of case.[104]The respondents accept that the UT did not say that the extended credit which Bristol gave the respondents was not pleaded. Their contention is that Bristol had to be assumed to be bona fide. I have dealt with that point.[105]The UT treated the respondents as appealing on the basis that the FTT had made findings of fact or reached conclusions of fact which it was not entitled to make. I understand the respondents’ challenge to the facts as found by the FTT to be its argument that the FTT should have found that the Transactions were in the normal course of business and that Bristol, CEMSA and GC Distributions were all bona fide parties so that the respondents’ knowledge did not meet the no other reasonable explanation standard. The respondents have not challenged the FTT’s findings of primary fact.

Conclusion

[106]In my judgment, for the reasons given above, although HMRC decided to confine its case to a very narrow allegation that the respondents had knowledge to the no other reasonable explanation standard of Leeming’s fraud, the FTT was entitled to come to its evaluation of the facts and the UT erred in setting its evaluation aside. In those circumstances, in my judgment, the right course is for the findings of the FTT to stand. Having reached the conclusion that the Upper Tribunal was wrong in its conclusions, I see no basis on which it can properly be said that the FTT’s decision should be varied in any way. As I have said, there is no cross-appeal. Moreover, the FTT’s decision was meticulous in detail and moved logically from point to point. It discloses no error. Lord Justice Tomlinson[107]I agree. Lord Justice Lindblom[108]I also agree.

Cited in 52 later judgments

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