“50. The traders contend that mere failure to take reasonable care should not lead to the conclusion that a trader is a participant in the fraud. In particular, counsel on behalf of Mobilx contends that Floyd J and the Tribunal misconstrue § 51 of Kittel . Whilst traders who take every precaution reasonably required of them to ensure that their transactions are not connected with fraud cannot be deprived of their right to deduct input tax, it is contended that the converse does not follow. It does not follow, they argue, that a trader who does not take every reasonable precaution must be regarded as a participant in fraud. 51. Once it is appreciated how closely Kittel follows the approach the court had taken six months before in Optigen , it is not difficult to understand what it meant when it said that a taxable person “knew or should have known” that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT. In Optigen the Court ruled that despite the fact that another prior or subsequent transaction was vitiated by VAT fraud in the chain of supply, of which the impugned transaction formed part, the objective criteria, which determined the scope of VAT and of the right to deduct, were met. But they limited that principle to circumstances where the taxable person had “no knowledge and no means of knowledge” (§ 55). The Court must have intended Kittel to be a development of the principle in Optigen . Kittel is the obverse of Optigen . The Court must have intended the phrase “knew or should have known” which it employs in §§ 59 and 61 in Kittel to have the same meaning as the phrase “knowing or having any means of knowing” which it used in Optigen (§ 55). 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.”
“There is only one rule of law, namely that the occurrence of the fact in issue must be proved to have been more probable than not. Common sense, not law, requires that in deciding this question, regard should be had, to whatever extent appropriate, to inherent probabilities. If a child alleges sexual abuse by a parent, it is common sense to start with the assumption that most parents do not abuse their children. But this assumption may be swiftly dispelled by other compelling evidence of the relationship between parent and child or parent and other children. It would be absurd to suggest that the tribunal must in all cases assume that serious conduct is unlikely to have occurred. In many cases, the other evidence will show that it was all too likely. If, for example, it is clear that a child was assaulted by one or other of two people, it would make no sense to start one’s reasoning by saying that assaulting children is a serious matter and therefore neither of them is likely to have done so. The fact is that one of them did and the question for the tribunal is simply whether it is more probable that one rather than the other was the perpetrator.”
“70…Neither the seriousness of the allegation nor the seriousness of the consequences should make any difference to the standard of proof to be applied in determining the facts. The inherent probabilities are simply something to be taken into account, where relevant, in deciding where the truth lies. 72. As to the seriousness of the allegation, there is no logical or necessary connection between seriousness and probability. Some seriously harmful behaviour, such as murder, is sufficiently rare to be inherently improbable in most circumstances. Even then there are circumstances, such as a body with its throat cut and no weapon to hand, where it is not at all improbable. Other seriously harmful behaviour, such as alcohol or drug abuse, is regrettably all too common and not at all improbable. Nor are serious allegations made in a vacuum. Consider the famous example of the animal seen in Regent’s Park. If it is seen outside the zoo on a stretch of greensward regularly used for walking dogs, then of course it is more likely to be a dog than a lion. If it is seen in the zoo next to the lions’ enclosure when the door is open, then it may well be more likely to be a lion than a dog.” 9. Our understanding is that the dangers of the old formulation were first, that it could be misunderstood to be increasing the civil standard of proof to something above the balance of probability; and secondly, that it was illogical to start with considering the seriousness of the allegation in a vacuum and assume that all serious allegations were unlikely and therefore needed cogent proof. Now one starts with determining the likelihood of the allegation having regard to the surrounding circumstances and not in a vacuum. Having done so the only question is whether the allegation is proved to the balance of probabilities. In other words, the inherent probability itself includes the particular circumstances. Contentions of the parties 10. We have listed in paragraphs 12 and 14 below the factors principally relied on by Mr Baker as showing that the Appellant either knew or ought to have known of the connection of the Transaction with fraud. Where relevant we have included Mr Livingstone’s answers to them and our own views. There was no obvious disagreement between them on the law. 11. In relation to the In re B standard for determining the balance of probabilities we have accepted Mr Stone’s evidence that a trader in mobile phones at the time of the Transaction would have been aware that the danger of fraud was a significant one. It follows that in a transaction contains features that are out of the ordinary the trader is on notice that the likely explanation is that there may be a connection to fraud which needs to be investigated. Mr Baker contended that the issue was not whether the trader knew that other people were being fraudulent but rather whether he actually was being fraudulent. In assessing the inherent probability of that, the appropriate context and circumstances must therefore not merely be the extent to which fraud was known about, but rather the extent to which fraud was actually perpetrated and common-place. We do not accept this since it is illogical to test whether knowledge is proved to the balance of probabilities by taking into account probabilities that were not known about at the time. Actual knowledge 12. The following factors were relied on by Mr Baker as indicating that the Appellant was aware that the Transaction was connected with fraud: (1) The inadequacy of checks and due diligence undertaken by the Appellant. In particular no credit or other commercial checks were carried out on Crotek and the Redhill check was made on3 April 2006 after the Transaction (and after shipping the phones to France on1 April 2006 , although they were still held to the Appellant’s order in the French warehouse). The use by Crotek of an FCIB account was not questioned by the Appellant as Mr Opacic assumed that it was because Crotek’s suppler was overseas. However, we do not think that FCIB was under any suspicion at the time and the use of an offshore account does not of itself indicate fraud. Nor were any credit references taken up for LPDC. No trader references were given. No Redhill check was made. (2) The inference to be drawn by the seeming fabrication of evidence. Mr Baker relies on the dating of Crotek’s trade credit application form on “1-11-06” as suggesting that Mr Opacic completed the document later than the transaction and dated it without thinking. The fact that the form is the same layout as the one completed by LPDC for the Appellant is suspicious. (3) Lies about Telement’s involvement in the mobile phone market. We have concluded that these were short of being deliberate lies but were probably intended to reduce HMRC’s interest in the Appellant’s business. (4) Inferences from the lack of Insurance. We have found that there was no insurance and that Mr Opacic must have known this, which is commercially stupid, but is it more than this? Mr Baker contends that this indicates that the Appellant knew it was not taking any risk and therefore knew that the Transaction was fraudulent. This might be because Mr Opacic had been told that he would incur no loss, which would indicate that he knew that the Transaction was connected to fraud. On the other hand, assuming that someone was masterminding a fraud in relation to the VAT on the Transaction (£71,487.50 ) for which he needed to purchase phones worth£433,200 at the Appellant’s selling price (which is within Mr Fletcher’s range of what an authorised distributor would need to pay) we do not understand why the fraudster would not want to insure the phones since their loss would be far greater than the VAT evaded and if lost they could not be used for future fraudulent transactions. It would surely have been in the fraudster’s interest to ensure that AFI (if it was party to the fraud) would help to ensure that the phones were insured not only to protect the fraudster but also to make the Appellant’s transaction look more genuine. We could understand the lack of insurance if the phones did not exist, but we have no evidence which would enable us to make any such finding. We are there unable to come to any firm conclusion about the significance of the lack of insurance but given the Appellant’s experience in the export market we consider that it is suspicious. (5) The relationship with AFI. The fax to AFI of31 March 2006 stated to be following a telephone conversation including “Agreed rate £tba, Insurance £tba (required) is strange because the Appellant in fact paid the freight rate on AFI’s price list and AFI knew that they could not provide insurance as agent but needed to tell the Appellant who to contact, which as a frequent exporter Mr Opacic must have known. (6) IMEI inspections and the role of A1. There does not seem to have been time for A1’s inspection report it to have taken place between the fax to AFI in Southall requiring it at 1813 hours on Friday31 March 2006 and the phones being checked in at Dover at 0958 next morning, in order for the Appellant to act on the contents of it. In any case the Appellant was not sent the report, which is dated31 March 2006 , until5 April 2006 . One would have thought that the report was needed in order for the Appellant to be satisfied about what it was buying. It is difficult to see what purpose the report served if the Appellant did not receive it in time to do anything about it. At the time it seems that A1 did not check for stolen phones (or if it did the Appellant did not pay for the service). We consider that the Appellant’s lack of interest in the inspection report is suspicious. We deal with IMEI numbers in paragraph 14 below. (7) Non-commerciality of the transactions. Mr Baker relies on the Appellant making a greater mark-up than others in the chain, that there is no commercial sense in the Transaction in non-UK specification phones which had been imported into the UK, the absence of international pricing differences in Nokia phones, the absence of currency differences at the time, the Transaction not being typical of grey market stock shortages or dumping transactions, long chains, back to back transactions and the timing of the transactions and payments under which the phones were released by the Appellant on7 April 2006 but Crotek was not paid until11 April 2006 . We would expect the Appellant to make a greater mark-up than others in the chain as it had to finance the VAT. We are not particularly concerned with the phones not being UK specification. We agree that the chain was not a normal grey market one but we must concentrate on what was known by the Appellant. On that basis it might have been suspicious of the price offered by Crotek of£215 which is below what Mr Fletcher said an authorised distributor with the maximum discount would have paid. Mr Opacic used the www.ipt.cc website and could have found the prices being offered at the time. Although Crotek did authorise AFI to release the phones to the Appellant on31 March 2006 before being paid this can be analysed as parting with possession of the phones while they were still subject to a title retention provision. (8) The deliberate keeping of legitimate trading partners separate from the fraudulent deals. Mr Baker relies on the fact that the trade references given to AFI were Unique Distribution and European Telecom, and those given to Crotek were Unique Distribution and Elite Mobile. He contends that it would have been more normal to give AFI a reference of another freight forwarder, DMS, that they used frequently. He suggested that when doing a transaction that it knew was fraudulent the Appellant did not want to use names of its normal business partners. Mr Opacic said that they always used these companies as references as they were known in the trade and they had dealt with them over a long period. In the light of this we are not prepared to find that the names given as references is indicative of knowledge of fraud. (9) Circumstances of the other fraudulent traders in the chain. Mr Baker relies on the fact that we now know that every party in the chain has been involved in MTIC fraud and therefore “The sheer implausibility of [the Appellant] being the sole ‘innocent’ trader in the chain is so great that the possibility can safely be discounted.”