“The Commissioners’ findings are based on the ‘Balance of Probabilities’ and not actual fact. Equally, in reviewing the company’s trading activities they took into account many factors and details that the company could not have known or been expected to know at the time they entered into the transaction. Finally some of their ‘facts’ are also incorrect.”
“… in short, goods – commonly computer chips and mobile phones, though other commodities are also used – are imported into the United Kingdom by one trader and change hands, usually within the space of a single day, several times before they are exported again, usually but not always to another Member State of the European Union. The importing trader does not account for the output tax due on a sale, either by “going missing” or by masquerading as an innocent, unconnected trader and “hijacking” that trader’s VAT registration; in either case it is known as a “defaulter”
“It was not disputed that a person who hijacked the identity of another trader was the defaulter, since he did not account for the VAT for which, ostensibly, the victim of the hijack was liable, and that he must be assumed to have had a fraudulent purpose. There was, however, some doubt whether one trader which claimed that its identity had been hijacked was in fact a victim; there was a possibility that he was merely making the claim in order to avoid accounting for the VAT for which it was in truth liable. We can deal with this issue now: it does not seem to us to matter where the truth lies since, in either case, the only possible conclusion is that there was a trader which had engaged in transactions forming part of the chain with a dishonest intention of failing to account for the tax which became due. We are, therefore, satisfied that there was a fraudulent trader in the chain.”
“We would receive and send purchase orders and invoices, but the date on which they were created may depend on when the deal was agreed. … it may be that I created the paperwork in advance.” (This appears in his first witness statement.) It was also suggested that because of the speed of the deal-making, the paperwork might be done later on certain occasions. (x) In March 2003 Sarah Wynne had explained to Richard White how MTIC fraud was conducted. In May 2006 Mr Peters had been told by the Commissioners that fraud had been found in his supply chain. Mr White was present when the defaulting trader was identified as a company called ‘Sapphire’. He discussed this with Mr White whose response was to ask his supplier Rapid about the matter and, on being told by Rapid that they no longer dealt with the defaulter, he did no more about it. It may be asked why Rapid had not themselves informed Mr White of this matter. Mr White had claimed that for reasons of commercial confidentiality. Rapid had refused to identity the defaulter. Mr Peters claimed to believe that, because he had been told by officers of the Commissioners that it was the Commissioners’ practice to inform the broker of any tax loss in the supply chain, that meant that all the supply chains had been, and would continue to be, checked for fraud and he would be notified as soon as a tax los was identified (as per his first witness statement). The fact that both the MBC and Kingston returns were subject to extended verification by the Commissioners in respect of the period 04/06, and the fact that the input tax for that period was subsequently repaid, apparently led Mr Peters to conclude that his supply chains were “clean” and that in future the Commissioners would continue to check them and inform him of any tax losses. The fact that Kingston had not kept records of the stock numbers of the goods, and therefore the Commissioners could not adequately check the supplies, apparently did not occur to Mr Peters, although Mr White in evidence had admitted that that must be the case. (xi) Both Mr Peters and Mr White appeared to believe that, because they were exporting outside the EU, their trade could not be subject to carousel fraud which would have involved a circular trade with the same goods coming back in from the European Union. We find it highly unlikely that either of them genuinely believed that this was the case, given the information they had had from the Commissioners about MTIC fraud, and given their lengthy experience in trade in both mobile phones and CPUs. Mr White’s evidence that he had made thorough checks on all his suppliers but not on his customers because they were outside the European Union shows either naivety or contrivance. In fact Mr White appears not to have carried out any due diligence on Blue Spark, the company to which he claims Kingston sold the goods which are the subject of Deal 1, as described by the Commissioners. He had said in evidence that there was no risk in dealing with people he did not trust and, when that remark was queried, he repeated it. Whilst Mr Peters had carried out due diligence on Rapid, including visiting the offices and meeting its director, he had no form of written agreement with that company. In his witness statement he says that he started trading with Rapid on20 April 2006 , which makes it all the more strange that in July 2006 Kingston was not purchasing direct from Rapid, but from Future Components, thereby reducing its profit. (xii) Mr White’s evidence that the goods were not released until money had been received from the relevant customer was undermined by Mr Peter’s witness statement in which he stated that he had traded on over twenty occasions with Futures Brokerage and by the time of the deals in question in this appeal he was happy to extend 30 days credit to them. It is clear that he is referring to allowing this as a director of Kingston, yet Kingston’s own invoices state that payment is zero days from the date of invoice. There is nothing in writing to indicate that this condition was waived in respect of Futures Brokerage. (xiii) The due diligence produced on Futures Brokerage is of a very basic nature and hardly sufficient to satisfy a diligent trader. The due diligence for Best Buy Computers Pte Ltd (“Best Buy”) was only in Mr Peters’ hands for 14 minutes before he asked them for delivery details and the deal was effectively completed before he received the company’s documentation. In any event the documents provided little useful information. In the case of Abyss referred to above the documents were even less informative and mainly in Arabic. (xiv) Mr White and Mr Peters both claimed to have adequate insurance for the goods, but, given that according to the documents neither company had ownership of the goods until the supplier was paid, and since they did not pay for the goods until after they themselves were paid and the goods shipped out, it is highly unlikely that either company’s policy would cover the goods in the event of loss. Certainly there was a great deal of uncertainty as to the time at which either Kingston or MBC owned the goods in question. Mr Peters had a blanket policy that covered storage and transport for certain freight forwarders. Mr White had a policy which operated on a deal by deal basis, but no documents were produced which showed when specific goods were insured, or who bore the risk. Mr White said he would use the air waybill as proof, together with the invoice date from the supplier. However, he did not as a director of Kingston keep a record of the box numbers of the supplies and there is no evidence to support his claim that he had kept them as a director of Future Components. Kingston’s terms of trade were that goods were released by Future Components to Kingston only when it was paid by Kingston, but \Kingston did not pay Future Components until it was paid by its customers. Future Components invoices say the goods remain its until it is paid, therefore the question arises why would Kingston pay for insurance? A further question arises as to who bears the risk. From an insurance company’s point of view, it might appear that the goods belonged to Rapid. Mr White had said in evidence that as soon as the transactions happened he would already have paid the insurance, and before the goods were released to him he would then go on-line to Freightcover.com, the company he used for insurance. When he was initially asked in cross-examination whether the insurance would pay out if goods were lost in transit, he said that he had an agreement with the supplier that he had to be insured to receive the goods in case the goods went missing, and, if there was a break-in, then he had to make sure that he had adequate insurance to cover the loss. This he said was a verbal agreement between him and his supplier about which he had not told his insurers because he did not need to. However, Mr White did produce evidence in the form of a document entitled “Richard White Insurance” in the sum of£2,256.26 . (xv) The freight forwarders used by both companies were registered with the British International Freight Association. There is no evidence of an open box inspection, but Mr Peters claims that for each transaction he would speak to the warehouse staff and ensure that they had inspected the stock. He claimed not to have bought any goods without that assurance. A waybill showing goods relating to Kingston Deal 4 were imported from Germany was produced by the Commissioners. One freight forwarder, Quest Freight, informed officers of the Commissioners that the CMRs which would show importation from the EU were not retained by it, although goods were imported from the EU. Two reports Mr Peters claimed to have received in respect of the two MBC transactions were said by him to have been misfiled by a junior member of staff. No effort appears to have been made by him to have copies provided by the originator of those reports. He did however produce invoices from the freight forwarder that states that boxes were x-rayed as part of the inspection process. (xvi) Kingston ceased trading when the Commissioners had refused payments to it, despite Mr White’s and Mr Peters’ contention that it was a highly profitable business with ready access to honest suppliers and customers. Their account that the refusal of the VAT repayments (or their alternative and conflicting account that it stopped following the Commissioners’ decision to conduct extended verification on Kingston) made it impossible for Kingston to trade was not credible. The VAT repayment refused totalled£182,851.60 , the original capital put into the company by the Appellants totalled£150,000 , Kingston had made a profit on all of its deals and had very low overheads. If Kingston could not afford to trade it could only be because the directors had withdrawn their capital. The decision to cease trading was consistent with the business deriving profit from MTIC fraud which would no longer be possible, rather than from a viable commercial business. (4) Evidence obtained from FCIB accounts (i) The Commissioners not only relied on the above evidence as showing fraud in MBC’s deal chains, but also produced evidence obtained from the FCIB bank which, it was submitted, shows a flow of funds from a company called Electrade SA in Luxembourg through to MBC and onwards. The Commissioners’ case is that in MBC Deal 1 Electrade is the start of a circle of financial dealings. They relied in part on the evidence of Roderick Stone, an officer with extensive experience of dealing with MTIC fraud and who is currently working in HMRC’s Serious Civil Investigations Directorate. His evidence with regard to MTIC was in part as follows: “ In one version of the fraud, a conduit trader in another EU Member State consigns the goods again to the original missing trader or another missing trader in the UK. Further, from my experience, the same business entity may occur at the beginning and end of the same transaction money flow. Consequently, the money flows are circular in nature. When it can be demonstrated that either the movement of the goods or the money flows are circular in nature, the fraud is known as MTIC ‘carousel’ fraud. It is possible, however, for the fraud to operate without these features being apparent.”
“… we think it is incumbent on the Commissioners to raise a case, not necessarily amounting to proof that to demand an answer, that there were circumstances which support, or at least are consistent with the conclusion that the appellant knew or should have known of fraud in the chain. The mere fact that there was fraud will not be enough; there must be some reason which might lead the tribunal to conclude that the trader knew or could have known of it, or that he should have taken precautions. … But if the commissioners are able to mount a case which demands some explanation, the burden shifts to the appellant to show that he took the precautions which could reasonably have been required of him and that, despite his having done so, he did not know, and could not have known, of the fraudulent purpose of others.”
“52. In the event it does not seem to me necessary for me to decide the incidence of the burden of proof since, as it will become apparent, the tribunal’s conclusions were, as it seems to me, not dependent upon it …”
“ It is also clear from those authorities, in particular, for example, the decision of Moses J, that in this industry or in trading of this type (here essentially in mobile phones) those who take part in it are, or certainly should be, aware that they are at risk of being the subject of an investigation by Customs. Standing back from chains of transactions it can, in some cases, be demonstrated that what is being shared out is the 17½% of tax amongst a number of people, and the only real purpose of the chain of transaction is to enable that money to be extracted unlawfully from the Revenue for the benefit of those involved in the chain.”
“Firstly, the tribunal was entirely correct to approach the market in which the appellants were concerned with a significant degree of suspicion. So much was really beyond rational contest. The MOU (Memo of Understanding) had recognised that fraud in the sector was rife … of course the existence of fraud within a sector, and the entire corruption of a whole sector are different things, but both are powerful reasons for examining with care a claim by a trader to be trading innocently within it.”
“In cases where there was no direct evidence of EU importation, it would be a perfectly permissible and logical inference that where there is fraud in the chain, the fraud operates to create a benefit to fraudsters arising out of the fact that an earlier stage there has been an EU acquisition, and it is perfectly appropriate therefore to infer EU acquisition.”
“I have already pointed out that, in certain cases, the scheme is worked via the simple circulation of invoices, without any actual transfer of goods.”
“Paragraph 51 [of Kittel ] may, in some cases, involve ceasing to trade in specified goods in a particular market, at least in the particular manner in which the trader undertakes that trade. Such a situation may conceivably arise where, from other indications available to the trader, the trader knew or should have known that it is more likely than not that, despite all due diligence checking, any further goods traded in the same way will be implicated in VAT fraud.”
“The taking of all reasonable precautions (acting on the basis of what he discovers as a result of taking those precautions) provides him with an impenetrable shield against any attack by HMRC.”
“… it seems to me that, if the Commissioners seek to deny the taxpayer a right to repayment of input tax paid on taxable supplies on the grounds of the taxpayer’s knowledge (actual or constructive) of a connection to fraud, it is for them to establish that.”
“There are steps taken by individuals in the fraud to try, obviously, to ensure that sort of documentation does not exist in order to frustrate the investigation. You also then are able to follow the money in certain instances, and therefore the inference may be drawn that if the money has been transferred abroad, the reason for the transfer is for the purchase of the commodity.”
“In the circumstances where we find a fraud at the start of the deal chains, but cannot conclude either that that trader was an importer, or that there was an earlier fraudulent importer and where, as a result, the only fraud we identify is in relation to that trader’s margin, it seems to us that to deny the whole of S&I’s input tax rather than just relating to that trader’s margin would be tantamount to a penalty. In such cases, therefore, we find that only the VAT on that trader’s margin should be denied.”
“109. Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and “similar fact” evidence. That is not to alter its character by reference to earlier or later transactions but to discern it. 110. To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands. 111. Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.”
“In cases where there was no direct evidence of EU acquisition, it would be a perfectly permissible and logical inference that where there is fraud in the chain, the fraud operates to create a benefit to the fraudsters arising out of the fact that at an earlier stage there had been an EU acquisition, and it is perfectly appropriate therefore to infer EU acquisition.”