Abbey (Manchester) Ltd v Revenue & Customs [2011] UKFTT 90 (TC)

FTT-Tax
Abbey (Manchester) Ltd v Revenue & Customs
[2011] UKFTT 90 (TC) · 2011-01-28
[1]Mohammed Naeem Ali (Mr Ali), Managing Director, of the Appellant (Abbey) appeals on behalf of Abbey against the decision of the Respondents (HMRC) contained in a letter of 18 April 2007 denying Abbey’s entitlement to a repayment of input tax of £967,802.50 in respect of the period 04/06 arising from the export of mobile phones to Monza Trading in Italy. Mr Ali says that he neither knew nor ought to have known that the transactions were connected with fraud. HMRC say that the Appellant’s due diligence was no more than window dressing and any reasonable businessman would have known or ought to have known that the transactions were connected with fraud or with a fraud in a related chain. As the hearing progressed HMRC suggested that Abbey was party to the fraud.[2]Paul Taylor (Mr Taylor), of counsel, appeared on behalf of HMRC. Mr Taylor produced both a skeleton argument and written submissions by way of summing up. He called the following witnesses, who gave evidence under oath: Roderick Guy Stone Vivien Barbara Parsons The following unchallenged witness statements were produced to the tribunal and treated as evidence in chief. ` Robert Charles Ross, who gave evidence with regard to Only Quality limited. Stewart McCaskell, who gave evidence with regard to Steven Ellison Logistics. Gary Felix Saul, who gave evidence as to the transactions by Kensai. Nigel Humphries, who gave evidence with regard to the similarities in the patterns of trading between Kensai and 5 other contra traders. Terence Mendes, who gave evidence as to the payments made through First Curacao International Bank (FCIB) in relation to the chain involving Abbey. Mr Ian Bridge (Mr Bridge) ,of counsel, appeared on behalf of Abbey, produced a skeleton argument and written submissions by way of summing up and called Mohammed Naeem Ali, who gave evidence under oath We were also provided with 21 lever arch files a large number of which contained details of HMRC’s witnesses’ working papers.[3]We were referred to the following cases: Axel Kittel and another v Belgium [C-439/04], BAILII: [2006] EUECJ C-439/04 Moblix ltd (in administration) v HMRC [2009] EWHC 133 (Ch) Moblix Ltd (in administration); and others v HMRC [2010] EWCA Civ 517 ( Moblix ) Regent Commodities Ltd- v- The Commissioners for HMRC Manchester VIP(Scotland )Ltd- v- The Commissioners for HMRC TC00375, [2010] UKFTT 63 (TC) Pharmaquim Ltd-v- The Commissioners for HMRC TC00568, [2010] UKFTT 279 (TC) Missing Trader Fraud[4]Most readers of this decision may be familiar with the way in which Missing Trader Fraud (MTIC) operates. We think, however, it would assist in understanding the facts if we deal with Mr Stone’s evidence first as it set the scene as to how MTIC fraud operates. Dr John Avery-Jones gave a helpful introduction to a simple MTIC fraud in in Livewire Telecom Ltd; and another v HMRC [2009] EWHC 15 (Ch) :
“In order to demonstrate where the loss arises from MTIC fraud we start with a simple example of an import of goods by X, who sells them to Y, who exports them. The tax on acquisition (import) by X is cancelled by input tax of the same amount, and the output tax charged on the sale by X will be cancelled by the input tax repaid to Y on the export, so that the United Kingdom exchequer receives no net tax. The only gain by the fraud is if HMRC pay the input tax to Y, when the exchequer is left with the loss of the amount of the import tax: The non-payment of the output tax by X is merely the recovery of what Y put in. If the exporter is innocent of that fraud he is entitled to repayment of the input tax that he has actually paid, even though this represents tax never paid by X and the exchequer is left with the same loss of the amount of input tax”
. The case law, as now developed in Moblix , provides that an exporter will not be innocent if he knew or ought to have known that his transaction was connected with the fraudulent avoidance of tax.[5]Mr Stone gave extensive evidence as to the workings of MTIC fraud. He had coined the phrase ‘contra-trader’ in 2005 .He accepted, however, that the industry generally had not known of the phrase until the cases started to come before the Tribunals in June 2006, which occurred after the transactions in this appeal. He also confirmed that, as the contra-trading gave rise to a set off in what appeared to be a clean chain, it was unnecessary for the clean chain to deal in mobile phones, and the clean chain could deal in any commodity, so long as that commodity disguised what was happening. In this particular case the trade has been in mobile phones and Mr Ali, on behalf of Abbey, has accepted that he was aware of MTIC fraud. Carousel fraud was rife from 2003 up to 2007, when the reverse charge was introduced. Any loss to the exchequer only occurred when the input tax was refunded on a repayment claim. HMRC had been repaying substantial sums of money, in many cases well in excess of £10,000,000. The total loss to HMRC during the years 2003 to 2009 amounted to in excess of £29 billion. Mr Stone confirmed that many of the frauds have been financed by third parties outside of the various transaction chains. In a carousel fraud the goods start in Europe, are purchased by the defaulting trader, who sells to a trader (a buffer) in the UK and charges that trader VAT. It is this amount of VAT, which is not returned to HMRC, to set off against the repayment claim by the broker (referred to below) on his sale of the goods back to the same group of people in Europe. The first trader can sell to another trader acting as a buffer charging VAT on that transaction. The first trader can set off his input VAT on his purchase against the output VAT charged to the next trader on his sale, and make a perfectly valid VAT return to the HMRC for the difference, often amounting to a few thousand pounds. There can be several intermediary traders (acting as buffers), the object of which is to distance the defaulting trader from the repayment claim by the broker. The goods are ultimately sold to a trader (known as the broker), at the end of the UK transactions, which exports the goods to the same people, which imported them in the first place, so that the fraudsters can use the same goods again, hence the carousel. The Broker cannot charge VAT on its export to Europe and it has, therefore, to reclaim the VAT it was charged on its purchase (not necessarily the VAT retained by the defaulter), which in most cases will be sufficient not only to fund the fraud, but also to pay the profit to the individuals participating. Mr Stone advised that in his experience of dealing with a substantial number of MTIC frauds, the buffers usually received 3% of the market price of the goods and the broker 6%. The brokers received the larger payment as they stood the risk of not receiving their repayment and therefore not being able to recover any payments they made to complete the transactions.[6]We think it would be helpful to set out how the money flows in such schemes and, in that regard we have been much helped by the evidence given by Mr Stone, who also confirmed that losses only occur when the repayment is made to the exporters (broker) in the transactions. The participants in the chain are all seen to make a small profit, and between the beginning and end, make appropriate VAT payments to the Revenue. However, they do not necessarily pay each other the correct amounts, either under the apparent contracts, or of VAT. They are required, if the transactions are fraudulent, to make an initial contribution to the scheme, so that they carry some of the risk and thereby reduce the risk of the fraudsters receiving nothing. So that the fraudsters can control the cash they insist that all the financial transactions should be carried out through the First Curacao International Bank (FCIB). The FCIB allocates an individual reference number to each transaction, which identifies the customer and the currency. As a result of those numbers it is possible to trace the payments through the various accounts, and, because of the proximity of the various account numbers, to calculate approximately how long each set of transactions take. Surprisingly, there are frequently only 2 to 3 minutes, at most, for the entire cash transactions to take place. All the transactions are carried out in sterling, because the repayments by HMRC are made in sterling. It is also a feature of these transactions that the defaulter often purchases and sells the goods from and to the customers thereby creating an input and output liability which he can contra. This raises the question as to why the parties in Europe do not deal with each other in Europe rather than selling through the UK at a higher price. The answer is that the fraudsters can defraud HMRC of the VAT paid to the broker in its repayment claim. Much of the finance for these schemes comes from third parties, who have nothing to do with the actual transactions. As Mr Stone has said the scheme only reaches fruition when HMRC make the repayment. Up to that point the fraudsters are trading with their own money, which they have introduced at the exporting end of the chain and which filters down to the start of the chain at the import. Mr Stone confirmed that V 5 Solutions at the beginning of the chain in this appeal and Monza at the end of the chain were both owned by Farrukh Shamim and that the entire transaction was funded by the fraudsters using their own money. .[7]Mr Stone conceded that there was a substantial market in mobile phone and that there was a genuine grey market. Whether those markets were legitimate or not depended on the way the transactions were constructed. Mr Bridge, on behalf of the Appellant, asked why HMRC did not warn traders that they might be dealing with a defaulting trader and of the action that traders should take to ensure that they complied with all the requirements of HMRC. Mr Stone replied that HMRC took the view that the traders knew their business better than HMRC. Furthermore, if HMRC provided the traders with a check list, then the fraudsters would redesign their schemes to accommodate the list, so that the compliance and due diligence would merely be window dressing. Mr Stone also confirmed that enquiries of HMRC at Redhill would not only confirm the VAT number existed but to whom it belonged. He conceded, however, that there could be some delay in obtaining the information.[8]HMRC introduced a more robust verification system in 2006, and as a result the fraudsters changed the shape of the fraud. Instead of making repayment claims in excess of £10,000,000 they inserted another chain (an apparent – clean chain), and the broker appeared in the new chain as well as the dirty chain. In that way the broker was able to set off the output tax in supplying the clean chain in the UK against the input tax it had incurred on a transaction from Europe in the fraudulent chain. When HMRC received the repayment application from the exporter in the clean chain it would not be alerted to the fact that the repayment in that chain was financing the fraud in the dirty chain. As a result, a considerable VAT liability could be washed out of the system without alerting HMRC, and the fraudulent repayment claim was reduced to a substantially lower figure. This case relates to Abbey’s clean chain and Kensai’s dirty chain both of which appear to have set off in excess of £8,450,000 by way of contra-trading. The Law .[9]In view of the decision in Moblix and the observations of both counsels as to the appropriate legal test, we think it would be helpful to identify the law as we understand it before considering the evidence,. The right to deduct is contained in sections 24 -29 of the Value Added Tax Act 1994 (the Act). Section 25 requires such a person to account for and pay any VAT on the supplies of goods and services which he makes and entitles him to a credit of so much of his input tax as is allowable under s 26: see s 25(2). Section 26 gives effect to what is now Article 168 of EC Council Directive 2006/112 (the VAT Directive) and allows the taxable person credit in each accounting period for so much of the input tax for that period as is attributable to supplies made by the taxable person in the course or furtherance of his business: see s 26(2). These provisions are in mandatory terms. If a trader has incurred input tax, which is properly allowable, it is entitled, as of right, to set it against its output tax liability or to receive a repayment if the input tax credit due to it exceeds that liability. It is required to hold evidence to support its claim (see article 18 of the Sixth Directive and regulation 29(2) of the Value Added Tax Regulations 1995 [SI 1995/2518]). As a result the right to deduct or the right to a repayment is absolute, and no element of discretion is conferred on the tax authority, save that the authority may accept less evidence than normally required; it has no right to demand more evidence than that prescribed by article 18. The right is also immediate, that is it may be exercised “when the deductible tax becomes chargeable”. The only limitation is the practical one that, although deductibility is determined on a transaction by transaction basis, the mechanical process of deduction or repayment is affected by reference to prescribed accounting periods. The case law[10]The case law has developed from Optigen Ltd and others v HMRC [C-354/03] which decided that a repayment must be made to a trader, who is innocent of the fraud, even though the transaction did not amount to an economic activity. Through Axel Kittel and another v Belgium [C-439/04] the concept of knowledge was extended to include a trader, who ought to have known that there was a fraud, (see Moblix). Moblix has refined the concept of knowledge and the evidence required to prove it. In the light of that decision, we do not think it is necessary to trace the development of the concept through all of the cases, but rather to refer to Lord Justice Moses’ observations in the Court of Appeal. We have been assisted in that by the observations of both Mr Taylor and Mr Bridge in their final submissions. Moses LJ stated; “…The scope of VAT, the transactions to which it applies, and the persons liable to the tax are all defined according to objective criteria of uniform application. The application of those objective criteria are essential to achieve:- (see kittel para 42, citing BLP Group [1995] ECRI/983 para 24) the objectives of the common system of VAT of ensuring legal certainty and facilitating the measures necessary for the application of VAT by having regard, save in exceptional circumstances, to the objective character of the transaction concerned.” [Paragraph 24][11]“ In Kittel after §55 the Court developed its established principles in relation to fraudulent evasion. It extended the principle that the objective criteria are not met where tax is evaded beyond evasion by the taxable person himself to the position of those who knew or should have known that by their purchase they were taking part in a transaction connected with fraudulent evasion of VAT… It extended the category of participants who fall out with the objective criteria to those who knew or should have known of the connection between their purchase and fraudulent evasion. Kittel did represent a development of the law, because it enlarged the category of participants to those who themselves had no intention of committing fraud, but who, by virtue of the fact that they knew or should have known that the transaction was connected with fraud, were to be treated as participants. Once such traders were treated as participants their transactions did not meet the objective criteria determining the scope of the right to deduct…”[paragraph 41][12]“.A person who has no intention of undertaking an economic activity, but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person's VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax § 59 and Kittel § 53). A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct”; [paragraph 43][13]The European Court of Justice in Optigen Ltd and others v HMRC [C-354/03] has made it clear that a trader can recover his output tax even though the transaction is outside the VAT scheme. Both Kittel and Moblix confirm that where a trader meets the objective criteria for compliance with the VAT regime, it is not open to the Authorities to withhold any tax repayment. If, however, a trader does not comply with the objective criteria, because there is a fraud, that trader cannot recover any tax. Moses LJ at paragraph 30 states:
“The Court (The European Court of Justice when considering Optigen ) rejected the United Kingdom’s argument that unlawful transactions fell outside the scope of VAT. Fiscal neutrality prohibits the distinction between lawful and unlawful transactions; such a distinction must be restricted to transactions concerning products which by their very nature may not be marketed, such as narcotic drugs and counterfeit currency (see paragraphs 49 and the Advocate General’s Opinion paragraph 40). By its rejection of the United Kingdom argument, the Court made it clear that the reason why the fraud vitiates a transaction is not because it makes the transaction unlawful but rather because where a person commits fraud he will not be able to establish that the objective criteria, which determine the scope of VAT and the right to deduct, have been met.”
And at paragraph 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”; As the Advocate General stated at paragraph 40: “As becomes clear from the commissioners own description of what they consider to constitute carousel fraud, its characteristic is that it makes use of lawful economic channels in order to facilitate the retention of money paid as VAT”
At paragraph 59 “The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who "should have known". Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation (our emphasis) for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel”; At paragraph 61 “A trader who decides to participate in a transaction connected to fraudulent evasion, despite knowledge of that connection, is making an informed choice; he knows where he stands and knows before he enters into the transaction that if found out, he will not be entitled to deduct input tax. The extension of that principle to a taxable person who has the means of knowledge but chooses not to deploy it, similarly, does not infringe that principle. If he has the means of knowledge available and chooses not to deploy it he knows that, if found out, he will not be entitled to deduct. If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct”;[14]Moses LJ also expressed concern that HMRC have in the past placed too much importance on a traders’ failure to carry out due diligence and not enough on the circumstantial evidence available. At paragraph 75 he stated. “ 75 The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT…..[15]Both counsel agreed that the onus of proof is on HMRC. Mr Taylor suggested that it is not necessary for HMRC to prove that Mr Ali, on behalf of Abbey, knew or had the means of knowing the identity of the defaulter. Mr Bridge submitted that that was incorrect. Moblix has made it clear that HMRC must prove either that Mr Ali, on behalf of Abbey, knew or had the means of knowing that the transaction in which he was taking part was connected with fraud. In contra-trading cases HMRC’s ability to establish a connection between the actual tax losses in the dirty chain to the specific repayment claim in the clean chain is extremely difficult. This is not least because of the timing of the payments, where the Broker, in the clean chain, will be on monthly returns, and the transaction, to which that repayment relates, will be some two or three months later, dependent on the accounting dates in the dirty chain. In Livewire Telecom Ltd; and another v HMRC [2009] EWHC 15 (Ch) Mr Justice Lewison stated: Paragraph 102:
“In my judgement in a case of alleged contra-trading, where the taxable person claiming repayment of input tax is not himself a dishonest conspirator, there are two potential frauds: i) The dishonest failure to account for VAT by the defaulter or missing trader in the dirty chain; and ii) The dishonest cover-up of that fraud by the contra-trader. Thus it must be established that the taxable person knew or should have known of a connection between his own transaction and at least one of these frauds. I do not consider it is necessary that he knew or should have known of a connection between his own transaction and both of those frauds. If he knows or should have known that the contra-trader is engaging in fraudulent conduct and deals with him, he takes the risk of participating in a fraud, the precise details of which he does not and cannot know.”
[16]We have decided that the legal test is that a trader will not be entitled to a repayment if he knew or ought to have known that his transactions were connected with fraud on the basis that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected with such fraudulent evasion. Standard of Proof 17 . These are civil proceedings and the standard of proof is the ordinary civil standard i.e. on the balance of probabilities. The case of Reventhi Shah (Administratrix of the Estate of Naresh Shah Deceased) v Kelly Anne Gale; Kelly Anne Gale v Jason Grant, Mark Young, Paul Hilton, Samantha Easton [2005] EWHC 1087 (QB) (concerning a civil action for unlawful killing) made it quite clear that there is a single civil standard of proof (i.e. on the balance of probabilities) applicable in all civil proceedings regardless of the allegations levied. Lewison J (as he then was) stated:
“In my judgment, it would be wrong to approach this case on any basis other than the balance of probability with appropriate respect paid to the need for cogent evidence to reflect the serious nature of the allegation and the inherent improbability that this 22 year old young lady of good character should involve herself in such conduct as that alleged. I simply do not accept that it is appropriate, as a matter of law, to require a higher standard of proof simply because of the nature of the allegation. If murder, why not allegations of rape or the most serious fraud.”
The Facts 18 . The parties have accepted that there are three issues which need to be satisfied in order to justify HMRC’s refusal to make the repayment of £967,802.50 to Abbey: 1. There must be a loss of tax. 2. The claim for the input tax of £967.802.50 must arise from a transaction ‘connected’ with the fraudulent evasion arising from such tax loss; and 3. It must be established that Abbey, through Mr Ali, knew or should have known that the only reasonable explanation for the circumstances in which the purchases took place was that it was a transaction connected with such a fraudulent evasion. Mr Bridge, on behalf of Abbey, has conceded that there has been a tax loss and that it is connected with a fraud in the transactions carried out by Kensai Trading Ltd (Kensai). As a result, this appeal which was listed for two weeks, was concluded in four days. Much of the evidence relates to the substantial number of transactions in which Kensai was involved. These related to both sales by Kensai from the United Kingdom to customers in Europe and from customers in Europe to the United Kingdom. Therefore it is not necessary for this tribunal to consider all the transactions to come to the conclusion that there was a tax loss arising from fraudulent activities. It is necessary, however, to identify the pattern of the trading leading up to the transactions with Abbey[19]Gary Felix Saul (Mr Saul) has provided a witness statement, which has not been challenged, setting out the transactions giving rise to the fraud. Kensai originally registered for VAT purposes in January 2003 with a business activity of “general trading – eg toiletries/perfumes, dental supplies and plumbing” and suggested that it would have a turnover of £80,000 per annum. Keely Butt was appointed a Director on 4 December 2002, and her husband Saqib Butt was appointed secretary. Kensai was allegedly a trading subsidiary of Tempest Solutions Ltd, which we refer to later. Kensai’s registered office was at Unit 12, Ground Floor, Greenwich Quay, Clarence Road, London, SE8 3EY. It changed its business activities to the wholesale purchasing and selling of mobile telephones and computer chips. Kensai Purchased from the following European companies: · Muggles Consulting (Cyprus). · V 5 Solutions SARL ( based in Franc; and provided the mobile phones to Kensai in this appeal for onward sale to Abbey). · Eurl Corinth (France). · Pochard SP Zoo (Poland). · Europolski Spolka (Poland).; · Trading Ionis (Portugal) Kensai also purchased computer chips from United Kingdom wholesalers and sold, as a broker transaction, to the following European Companies. · Europolski (Poland). · V 5 Solutions (France). · Muggleas Consulting (Cyprus). · Monza Trading (Italy). · Pochard (Poland). · Skala Handel (Poland). · Eurl Corinth (France). · Redsea Solutions (Belgium). The majority of broker transaction from March 2006 to June 2006 involving computer chips have been traced back to a defaulting/ missing trader and resulted in a tax loss. It is significant that Kensai sold computer chips as a broker from the United Kingdom to Monza in the list above.. There could be no benefit in Monza purchasing mobile phones from Abbey at, as will appear later, a substantial margin when it had in the past purchased goods directly from Kensai. Such purchases clearly indicate that the only reason for a trade with the United Kingdom was to benefit from a VAT fraud. All these parties’ tax loss deals, which have been traced to date, start with the same defaulting trader- Steven Ellison Logistics and Only Quality Ltd. We are satisfied from the undisputed evidence of Robert Charles Ross, who gave evidence with regard to Only Quality Limited and Stewart McCaskell, who gave evidence with regard to Steven Ellison Logistics ‘that these tax losses have been established. Only Quality Ltd had a VAT debt of £139,906,628 to the quarter ending May 2006[20]Of the 161 Broker deals by Kensai to European customers, 158 have been traced back to a tax loss and a defaulting trader. As a result there is a negligible difference between the total input and total output tax at the end of the VAT period. Mr Saul has verified all the returns and prepared 20 sample ‘deal packs’ for Kensai transactions. These consist of · Pro froma sales invoices · Customer purchase order · Shipping, allocation and goods release documents · CMRs · Eurotunnel papers · Purchase invoice · Kensai’s purchase order. We do not propose to identify each of these transactions save to say that those that we have checked follow the same pattern. For April 2006 Kensai declared net sales to the European customers of £48,346,672 and net purchases from European suppliers of £48,238,842 and difference of £107,830.[21]As indicated earlier, the officials of Kensai are also officials for buffer/broker trader Tempest Solutions Limited (Tempest). It appears that Kensai acquired goods from Europe and Tempest did not. Saqib Butt was appointed a director of Tempest on 4 /11/ 1997 and Keely Butt appointed its secretary on 1/11/2000, the same operatives as controlled Kensai. The main business of the company appears to have been “computer consultancy”. Tempest’s repayment claim of £8,933,957.31 for periods 02/06, 03/06, 05/06, and 06/06 was the subject of extensive verification. On 28 June 2002 Tempest was advised that one of its customers Tele Gossip was a hijacked company and they needed to take care. On 1 October 2002 Tempest was advised that Kingnet Ltd, with whom they were dealing, had been deregistered for VAT purposes, as had Easy Communications Ltd on 23 July 2003, and Digicom International Ltd on 3 November 2004. HMRC wrote to Tempest on 5 September 2006 advising that they had traced three of Tempest’s deals for the period 02/06, which had commenced with a defaulting trader. In the periods 02/06 and 03/06 Tempest dealt with four suspect United Kingdom contra traders and four United Kingdom broker/buffer traders. Monza was also known to be a customer of Tempest.[22]Mr Saul considered that the transaction chains for Kensai in the months of March, April, May and June 2006 were part of a contra trading scheme and the tax liability in the Abbey chain has been deliberately set off against the acquisitions from six European suppliers and its subsequent sales to United Kingdom traders. All of Kensai sales have been traced back to a defaulting company Only Quality Ltd, which has deliberately gone missing, without paying the tax due on their sales. This has resulted in a tax loss of £139,906,628.[23]Mrs Parsons gave evidence under oath that related to Monza, who bought the mobile phones from Abbey. Monza was registered for VAT in Italy with effect from 24 January 2005. The VAT Information Exchange System declarations submitted by Monza show purchases from the UK exceeding £112,000,000 in the second quarter of 2006, with purchases from Abbey of £6,532,600 and purchases direct from Kensai of £14,788,428. During this second quarter Monza declared purchases from 18 UK based companies. Six of these traders were also customers of Kensai, who purchased goods directly from Kensai, and sold them to Monza. Prior to the 04.06 VAT period, Abbey had never dealt with Monza. Mrs Parsons considered it was not credible that, from the hundreds of thousands of traders in Europe dealing in mobile phones, along with all of Kensai’s other customers, Abbey have found Monza merely by chance. She believes that Abbey are part of a cell of traders, who are involved in an overall scheme to defraud the revenue. The Italian authorities are minded to start criminal proceedings against Monza. The director, Shamin Farrukh appears in several of the companies using variations on that name. She believes that Farook Shamin, a former manager of V5 Solutions SATL , is the same man. V5 Solutions registered for VAT in France from 26 March 2003 had purchases from three UK traders exceeding £110,000,000 in the second quarter of 2006 including purchases from Kensai of £17,112,214. The French authorities have been unable to contact the director of V5 Solutions, which has issued no VAT returns since March 2006.[24]We are satisfied that a substantial amount of VAT has been lost in the various transactions in which Kensai, Tempest and Monza have fraudulently taken part. It is therefore necessary to establish whether Abbey knew or ought to have known that its transactions were connected with fraud, on the basis that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected with such fraudulent evasion.[25]Mrs Parson gave evidence under oath with regard to the transaction with which Abbey was concerned. Abbey Knitwear had originally been formed by Mr Ali’s father, Abdul Sattar, in May 1992 and he remained a director until 1 January 2003. That business’s VAT number was transferred to Abbey, which changed its name from Abbey Knitwear (Manchester) Ltd to Abbey (Manchester) Ltd on 23 December 2005. Mr Ali was appointed a director on 1 January 2003 until June 2003 when his father retired, and was responsible for running the business. Since its inception, Abbey operated as a knitwear manufacturer and, apart from the six transactions in mobile phones, has continued to do so. The annual declared turnover from 1 April 2005 to 31 March 2006 was £475,643. Mr Ali said that he thought the profits were around £20,000. He is married and his wife works but they have no children. He was drawing £10,000 per annum. Neither his father nor his brother took any money out of the business. The business did not provide him with a car and at the time of the transactions he was living with his Father. Mr Ali was made bankrupt in the course of 2004 and as a result he had resigned as a director in June 2003 because he thought he was going to be made bankrupt. In his statement Mr Ali states: “Following my resignation I continued to play as senior management role within Abbey, whilst my brother Mohammed Mr Saleem (Mr Saleem) replaced me as a director. Following the elapse of my period of bankruptcy and given it was I who was predominately concerned with the management of Abbey, I was reinstated as a director and my brother Mr Saleem subsequently resigned I was just generally helping out and directing the business where there was issue and things”.[26]We are in no doubt that Mr Ali effectively ran the company. We suspect that this was in breach of Section 11 of the Company Directors (Disqualification) Act 1986 which provide:
“It is an offence for a person who is an undischarged bankrupt to act as a director of, or directly or indirectly (our emphasis) to take part in or be concerned in the promotion, formation or management of, a company, except with the leave of the court”
. During the period 30 April 2003 to 1 February 2006 Mr Saleem was the only director of the company. According to the Experian Gold Report, Mr Saleem remains a shareholder of Abbey. Mr Saleem was also a director of Ayah International Ltd. We were told by Mrs Parson that that company dealt directly with defaulting companies. It appears that Ayah International Ltd also made third party payments in spite of being warned not to do so. The company was involved with transactions giving rise to significant tax losses. Neither counsel called Mr Saleem although he was in court, to give evidence. Mr Bridge did not deny these allegations on behalf of Abbey. When Mr Saleem resigned as a director he set up The Security People with Nabeel Akhtar. It appears that Mr Ali had also known Mr Akhtar for some time. 27 . Mr Ali told us that he had decided, sometime in 2004/5, that Abbey should expand its activities and that he decided that it should deal in mobile phones. He told us that he carried out some research on the internet. He indicated that these enquiries were made somewhat earlier than the transactions he eventually entered into. We believe that it must have been at the time that his brother Mr Saleem was the sole director of the company. We also believe that his brother must have helped him with the transactions because of his considerable experience in the trade. There appeared to be some confusion as to which internet site Mr Ali had used. In his witness statement he said that he had found Kensai on International Phone Traders. He had also told Mrs Pearson that this was his source when interviewed by her. Mr Bridge has cross-examined Mr Stone in relation to International Phone Traders. When subsequently giving evidence, Mr Ali was adamant that he had used ‘Phone Traders’. This in spite of the fact that he confirmed that he had read his statement and that he had told his solicitor that International Phone Traders was the site he had interrogated. He agreed with Mr Taylor that his solicitors must have recorded the reference incorrectly. We do not know which of the sites Mr Ali used and as a result of the confusion in his evidence, we suspect that he does not remember either. Mr Ali said that he could see that there were prospective customers and suppliers on the site. No evidence has been given as to the emails which he allegedly sent out, nor of the introductions he had met. As a result of his interrogation of the Phone Trader’s site, Mr Ali discovered that Monza required a specific number of mobile phones. Mr Ali had then found Kensai on the Phone Traders site, that had confirmed that it could supply the mobile phones Monza required. He agreed to buy the following mobile phones from Kensai, in two transactions, at the prices indicated: Quantity Price £ VAT payable £ Total £ First deal Table A 2800 1,134,000 198,450 1,332,450 2750 995,500 174,212.50 1,169,712 2100 634,200 110,985 745,185 Total first deals 2,763,700 483,647.50 3,247,347 Second deal 2900 (US specification) 1,160,000 203,000 1,363,000 2800 910,000 159,250 1,069,250 2700 696,600 121,905 818,505 Total second deal 2,766,600 484,155 3,250,755 Totals 5,530,300 967,802.5 6,498,102[28]Kensai had agreed that Abbey need only pay for the mobile phones when it was paid by its customer Monza. The deal was effectively a ‘back to back’ transaction. This in spite of the fact that Abbey was only making £20,000 profit a year and had no prospect of financing a transaction worth £6,498,102. Mr Ali said that he had decided to sell the mobile phones into Europe because he understood the margins were better. Mr Ali was able to place an order with Monza to purchase exactly the same number of mobile phones from Kensai. Mr Ali told us that he had informed Monza that he had recently entered the market and he was hoping to supply their requirements. In his evidence Mr Stone had advised the Tribunal that the usual mark up for a company in Abbey’s position would be 6%. Mr Ali said that he had hoped to squeeze 10% out of Monza but he actually achieved over 18%. Coincidentally, having bought all the mobile phones from Kensai for £ 6,498,102 Mr Ali managed to sell them to Monza for £6,532,600. This meant that when Abbey was paid by Monza it would have enough money to pay Kensai the £967,802.5 VAT due on Abbey’s purchase from Kensai and to cover their expenses. The sales to Monza were as follows: Quantity Price £ First deal 2800 1,338,400 2750 1,177,000 2100 749,700 Total first deal 3,265,100 Second Deal 2900 (US Spec) 1,368,800 2800 1,075,200 2700 823,500 Total second deal 3,267,500 Transactions total 6,532,600 In his witness statement Mr Mendes advised that the profit margin on each transaction was as under: Description Purchase price Abbey from Kensai Sale price Abbey to Monza Profit margin % N8800 £405 £478 18.5% N9300i £362 £428 18.2% N90 £302 £357 18.2% N8801 £400 £472 18% N9500 £325 £384 18.1% N70 £258 £305 18.2% As a result of these transactions Abbey was able to secure sufficient monies in its profit to exactly cover the VAT it owed Kensai and to fund its expenses of £33,076.58 leaving a small balance of £1421.42. Furthermore, when it recovered the repayment of the VAT of £967,802.5 from HMRC, this would amount to its profit on the transactions. Judge Porter expressed some concern as to how Abbey would have been able to fund the expenses of £33,076.58, which he assumed were to be paid as the services were incurred. He noted that Abbey was only making profits of £20,000 and that Mr Ali was drawing a salary of £10,000 from that figure. Mr Ali confirmed that he would have had to ask the various supplies to agree terms. Neither he, nor his counsel, advised the tribunal that the expenses had been built into the profit.[29]The documentation for the first transactions on 27/04/2006 presented to the tribunal by Mrs Parsons consisted of: · Abbey’s sales invoice for 2,800, 2,750 and 2,100 Nokia phones · Kensai invoices for the same phones · Monza purchase orders for the same phones. There are 3 purchase orders for the 3 phones in the first transaction. Abbeys invoice is for the 3 phones on one invoice with a total amount due of £3,265,100. · Copy International Consignment Note (CMR) required for export to Monza. · Abbey purchase order for the phones from Kensai. Again Abbey identified the 3 different phones and a total price of £3,247,347.50. It is unusual that Abbey paid for the phones one at a time rather than in two payments . We suspect this was to ensure that the money was paid and that the payments could, if there was an enquiry, be identified to the individual transactions. · Abbey supplier declaration for the phones from Kensai confirming the status of the phones and that VAT had or would be paid on them and that the mobile phones had not, to Kensai’s knowledge, been supplied by a missing trader. · Fax dated 27/04/2006 from Abbey to Imex Logistics (Imex), Stoke on Trent, (freight forwarders) asking Imex “to ship and insure on hold the above stock from Kensai Trading Limited to Stolz Transport, Hinlehreweg 11, Andestilegebt,77933 LAHR, Germany. The goods were for Monza Trading SRL. The ferry tickets referred to below were dated 1 May 2006, which is presumably when the goods were dispatched to Germany as result of that request. There are three further release notes in relation to the first deal requesting Imex to release the mobile phones to Monza dated 15 May 2006. We do not understand why Imex should be involved at that date as the goods had already been delivered to Stolz Transport in Germany. Surely the fax should have been to Stolz? Mrs Parsons says that there is no evidence that the Imex document has been faxed and given the timing of it, we believe she is correct. · 27/04/2006 invoice from Verify Inspections Ltd (Verify) with regard to the phones. This is the company which was asked by Abbey to inspect the goods. · 2/5/06 Ferry Ticket Eurotunnel · 15/5/2006 Inspection report re phones Verify Inspections Ltd · 15/05/2006 invoice Imex. · FCIB statement Monza to Abbey for first deal referred to below when considering the way the money has been handled. · FCIB statement Abbey to Kensai for first deal referred to below when considering the way the money has been handled. · Abbey Stock offer for 2,800 Nokia 8800 @ £478 per unit; 2,750 Nokia 9300i @£428 per unit; and 2,100 Nokia N90 @ £357 per unit. Mr Ali alleged that he had made up a stock offer so that he could obtain further potential customers. This offer document is undated and appears to be a general notification to the public at large that these phones are available. We were not told how the form was used or whether it was on his web site. We are satisfied that this document was never used as Mr Ali has insisted that all his enquiries and both his customers were sourced though Phone Traders. Similar documents were made available for the second deal save that a copy of a ferry tickets dated 1/5/2006 were produced. These must have resulted from Abbey’s request on 27/04/2006 (3 days earlier) to Imex Logistics for the goods to be delivered to Germany on 1 May. Due diligence.[30]Mr Ali confirmed that he was aware of the difficulties with MTIC fraud and that he needed to make specific enquiries with regard to the parties with whom he was dealing. Mr Stone in his evidence confirmed that enquiries could be made at Redhill to check the VAT registration details of customers or suppliers. Redhill were able to do more than just check the VAT numbers, they were able to confirm whether or not the details were correct. Enquiries could also be made of the National Advice Service but they could only validate the VAT registration number, nothing more. Mr Ali told us that h e had not been able to carry out checks at Redhill before the transaction had been completed because they did not respond in time. Redhill subsequently responded confirming that the VAT registration numbers were valid on 8 May 2006. Mr Ali had, however, checked with Europa whether the numbers existed and they had confirmed that they did. Europa does not confirm to whom the numbers belong.[31]His brother, Mr Saleem had joined the Security People and Mr Ali had asked Mr Akhtar, who he knew well, to carry out appropriate enquiries with regards to Kensai and Monza. Mr Ali produced the two reports to the tribunal. Mr Ali had not mentioned to Mrs Pearson, during his meetings with her, that his brother was also one of the directors of that company. The fact that Mr Saleem was involved with the Security People would not, of itself, give rise to any adverse comments. However, given Mr Saleem’s involvement in Abbey during Mr Ali’s bankruptcy, and his involvement with a company dealing with defaulting companies we consider that it is highly relevant that Mr Ali chose to use the Security People. The report prepared by Nabeel Akhtar in relation to Kensai was dated 26 April 2006 but could not have been released until 8 May 2006, when the detail as to the VAT clearance from Redhill was added. Mr Ali confirmed that he had not seen the report at the time of the transactions but that he had been told by Mr Akhtar that it was in order and that he could proceed with the transactions. The report revealed that Kensai was on monthly returns but no information was provided with regard to the company’s turnover. The report indicated that Kensai checked its customers for due diligence themselves, although later in the same report they indicated that they employed independent companies to carry out due diligence for them. The report also indicated that the company had made third party payments. Mr Ali confirmed that he knew that third party payments should not occur. Kensai provided two company trade references in the report, but these were not taken up by Mr Ali. In the report, Kensai said that it had been a victim of fraud and its photographs had been cloned in the past. However, Kensai was unwilling to provide photographs of the directors and company secretary. We do not believe the lack of photographs to be material. It is unlikely that individuals trading with other companies would necessarily need to identify the directors from photographs. The report indicates that the VAT details were cleared with HMRC on 8 May 2006. The written report could not therefore have been made available to Abbey before that date. There was also attached to the report a credit report, which revealed that Kensai had a credit limit of £500 and that its net worth on 31 December 2004 was £12,234. No details of its turnover were given. Its trading activities given to HMRC on their VAT registration was “cosmetic and toilet articles retailing”. All the above would have put Abbey on notice that further enquiry was needed if it was going to trade with Kensai.[32]A similar report was prepared for Monza by Andy Amarelle, of the Security People, this too appears to have been completed on 8 May 2006 after the transactions had been finalised. The financial details indicated that the company’s turnover was £1.5 billion. The company was incorporated on 10 February 2005 and it had achieved that level of turnover in only 15 months. Its profit appeared to be £200,000. The activities of the company included in the report had not been translated from the Italian. Mr Ali was again informed verbally that that report was in order and he could proceed. Again, all the above would have put Abbey on notice that further enquiry was needed if it was going to trade with Monza. 33 . The UK freight forwarder was Imex based at Longport, Staffordshire. Even though Monza was in Italy, the goods were consigned to a freight forwarder, Stolz Transport in Germany, and were transported to them on 1 May 2006, although the freight forwarders were not paid until 15 May 2006 the date of their invoice. The goods appear to have been released to Monza on 15 May 2006. Furthermore, we note, that the invoice dated 15 May 2009 for £3701.25 in relation to the deals as 2800 x Nokia 9500 indicates in the description “(deal date 1 April)”. The transactions, which Abbey entered into, did not take place until 27/28 April 2006. There are three possibilities for the date. One, it is a typing error; we have heard no evidence to that effect. We believe a typing error would be restricted to one or two words. Two, the invoice relates to a different deal, which cannot be correct as it is addressed to Abbey; and third Imex were told of the transaction earlier as they have dealt with matters for Kensai in the past. This is our preferred explanation. We are advised that Imex is now in liquidation.[34]All mobile phones have a serial number identified as an IMEI number. Mr Stone told us that those numbers appear on each box, as a bar code, which can be readily scanned. HMRC recommend that traders ensure the numbers are checked. If HMRC have the details of the numbers, they can check them against earlier deals and discover whether the mobile phones are stolen or whether they have been sold into Europe previuosly. Abbey failed to check any of the IMEI reference numbers. It is accepted that there were 16,500 mobile phones but a check of the bar codes on the boxes could have been achieved as there were only 59 boxes. Abbey arranged for Verify, who were based in Hayes, Middlesex, to inspect the mobile phones at Imex in Longport, Staffordshire on 27 April 2006. Their inspection appears to have been a box count and only one mobile phone in approximately every 2,800 was taken out of its box and inspected. This amounted to 6 phones out of the 16,500. The inspection reports in the bundle are all dated 27 April 2006. On that basis Verify were able to check a quantity of mobile phones, which were not delivered until the following day. The verification did no more than indicated that the condition of the phones was ‘good’. How that could be achieved with such a small sample is unclear. Even more surprisingly, against the text “Phone Imei matching packaging” they have stated ‘Yes’. Mr Ali has confirmed that none of the Imei numbers were checked. The invoice for the second transaction, which identified the quantity of the mobile phones correctly, is dated 27 April 2006 although Abbey did not enter into the second transaction until 28 April 2006. It is unclear how Verify could have been asked to inspect the mobile phones, before Abbey had agreed to buy and sell them, other than that the mobile phones were already in existence and Kensai gave Imex the details earlier. The two accounts amounted to £719.10 and £789.60 and were allegedly paid for on the 9 June and 24 August 2009 although the amounts paid did not correspond to the invoice amounts.[35]Abbey arranged insurance with Transpacific Insurance Corporation Ltd (Transpacific) in Gibraltar. The sum insured was £2,766,600 to cover the transportation of the mobile phones from Longport (Imex’s business) to Milan, Italy for both transactions, although the delivery was to Stolz in Germany. There were two identical policies. The delivery was for a single journey on each policy with cover for 4 weeks from 28 April 2006. There is no corporate seal on the copy policy produced to the tribunal. The policy states that the certificate is invalid if it does not have a corporate seal. For the policy to be valid it was necessary for there to be compliance with the following: · There was to be an independent inspection report including individual box check from TIC recognised inspector. (We were not told if Verity was so recognised) · There was to be time dated photographic evidence of stock with Abbey’s name attached. · There was to be 100% IMIE numbers check. · All the batch numbers of Stock were to be identified · There was to be documentation confirming that the stock was insured whilst it was warehoused. · Documentary evidence was required confirming that the stock was transported in GPS satellite tracked vehicles with Transpacific specific registered security escort None of these requirements were complied with, and as a result Abbey emailed Transpacific on 26 June 2006 and enquired:
“ We write with reference to the above policy numbers and in particular two queries which have been raised by HMRC in respect of our 04/06 VAT return: · That we must obtain 100% IMEI numbers · Movement must be tracked in GPS satellite tracked vehicles with a TP registered security escort. Can you still confirm our insurance was still valid even if the two above conditions were not met?”
Transpacific replied to say that the policies were still valid. Given that the policies only ran until 26 May 2006, Transpacific could afford to agree as the premium had been paid by 26 June 2006 and they were, in any event, no longer on risk. Transpacific required the premium of £11,060 to be paid within 24 hours, it was not paid until 26 May 2006. A warning had been issued by the Financial Service Commission on 27 February 2007, which stated that the licence under which Transpacific operated had been withdrawn. Whilst the note post dates the events of these transactions, it makes it clear that Transpacific could not carry on an insurance business in or from Gibraltar. In light of the evidence, we cannot accept that there were valid insurance policies. Abbey made no attempt to comply with the required terms.[36]Terence Mendes (Mr Mendes), in his unchallenged witness statement, sets out how the money passed through the FCIB. Abbey used Bankmaster Plus at the FCIB and its account number was 04/801/204986/01. The 04 prefix meant that the account was a sterling account. Mr Stone confirmed that the FCIB was the bank of choice for 90% of the MTIC trade because the bank was offshore, outside the jurisdiction of the United Kingdom and outside our money laundering requirements, although still within the money laundering requirements of the Dutch Antilles. Furthermore all MTIC dealings were in sterling, even though the majority of the parties traded in Euros. This was because the repayments by HMRC were always in sterling to the broker’s sterling account. Abbey applied for an account towards the end of February and received notification as to the accounts operation on 6 April 2006. Surprisingly the details of the account included Mr Saleem’s email address, although we were told he retired from Abbey in February 2006. Mr Ali was the only signatory on the account and he provided Abbey’s enquiry email address. There was no apparent reason for Mr Saleem’s email address to be provided, as Mr Ali has confirmed that he interrogated the internet himself, presumably on his or Abbey’s computer. We can only assume that Mr Saleem’s email address was supplied so that Mr Saleem would be aware of any activity on the account. Mr Ali also told us that he opened the account, so that he could deal in mobile phones, which was a new venture. On his application to FCIB he identified the products and trade as follows:
“For nearly a decade we have been trading in a range of textile and electrical commodities”
. This was untrue as Abbey had not been trading in electrical commodities for nearly a decade. Mr Mendes stated that he was able to trace all the financial dealings in the entire chain because FCIB recorded each individual transaction with a unique EB (electronic banking) number. Mr Mendes indicates that these numbers were allocated sequentially to all customers’ transactions in the bank and the EB reference links a payment from one FCIB account to the receipt of that money in another account. As a result, he is able to conclude that the money started with the fraudsters, who provided the entire funds for Monza to pay Abbey. The funds were eventually returned to the fraudsters through Finasol Limited and Amber telecom LLC. He believes that the funds came from Valssen FZE, who were paid £2,759,810 by V 5 Solutions. As a result it would appear that the fraudsters have financed the entire transaction and that all the payments, including the VAT and expenses, were made with their own money. The payments appear to be as follows: Payments for both transactions made on 12 and 15 May 2006 Finasol Limited to Vanprugh Communication SL £6,545,440 Vanprugh to Monza Trading SL £6,538,060 Monza to Abbey (as above) £6,532,600 ( includes Vat and £34,503) Abbey to Kensai (as above) £6,498,097 (Including VAT received in the price from Monza) Kensai to V5 Solutions SARL £5,523,680 ( No VAT EU Import) V5 Solutions to Valseen FZE £5,517,450 Valseen FZE to Finasol Limited / Ambar Telecom LLC Various amounts at these dates Mr Menses has not been able to specifically identify the payments in relation to the transaction from Valssen FZE to both Ambar Telecom LCC and Finasol Limited other than to allege that there were such payments. However, if the sum of £967,802.5 (the VAT repayment due to Abbey and the amount upon which Kensai intends to default) is added to £5,517,680 (the amount that Valseen FZE received from V5 Solution) the total is £6,485,252 which is only £12,845 short of the amount Kensai was expecting. The difference would account for the profits which Kensai expected the participants to retain. On that basis we believe it is reasonable to conclude that the whole of the payments were funded by the scheme.[37]Mr Mendes has prepared a spreadsheet identifying the payments between all the parties in the chain. We set out the payments and the dates of the payments for the Abbey transactions in the table below: FCIB account for cash transactions 12 and 15 May 2006 Monza paid Abbey Abbey paid Kensai 12/5 2100 phones £749,700 12/5 2100 phones £745,185 15/5 2750 phones £1,177,000 12/05 2750 phones £1,169,712 15/5 2800 phones £1,338,400 15/5 2800 phones £1,332,450 Total £3,265,100 Total £3,247,347 12/5 2700 phones £823,500 12/5 2700 phones £818,505 12/5 2800 phones £1,075,200 12/5 2800 phones £1,069,250 15/5 2900 phones £1,368,800 15/5 2900 phones £1,363,000 Total £3,267,500 Total £3,250,750 Difference in full payment covers expenses £34,498[38]If this had been a straightforward commercial deal then we would have expected two payments to have been made by Monza to Abbey. £3,265,100 on the first transaction as identified on Abbey’s invoice dated 27/04/2006; £3,267,500 on the second transaction as identified on Abbey’s invoice dated 28/04/2006. In the event payments were made for each individual amount as set out in the table. £749,700 due for the 2100 mobile phones on the first deal was paid on 12/05/06. This payment was followed on the same date by a payment of £823,500 for the 2700 mobile phones, and £1,075,200 for the 2800 mobile phones, in the second transaction. We were told that the transactions were to be back- to- back. Mr Ali does not appear to have been concerned that Abbey had not been paid for all the mobile phones in the first deal by 12 May. He could not, at that date, have been sure that he would be paid the balance out of order on 15 May 2006. Even more surprising is that Abbey appears to have paid Kensai the moneys it owed Kensai, again out of order, and almost immediately it received the money from Monza. As we have seen, the EB numbers are sequential for every transaction for every customer using the sterling account in the bank. EB 000000956317 was the payment into the account for £749,700 from Monza to Abbey. EB 000000956803 was the payment out of £745,155 for the same 2100 mobile phones in the first deal with Kensai. There had been 486 transactions in the bank between the two payments. EB000000959695 being the payment of £1,368,800 for the 2900 mobile phones received from Monza on 15 May was paid out under EB000000959777 as £1,363,000 for the same mobile phones acquired from Kensai. There had been only 82 transactions in the bank between these two payments. It would appear that all six payments in and out must have occurred in a very short period of time certainly in minutes rather than hours. The alleged arms length payment from Monza to Abbey effectively covered the exact amount of VAT that Abbey owed to Kensai and all the expenses, which Abbey was to incur on the transaction, leaving a balance of £1421.42 or .02% of the purchase price. The error is so small there is no way that Monza could have known of these figures, unless the whole transaction was contrived. All the expenses were paid on or after May 2006 either from the FCIB account or to Abbey’s Natwest Account for onward transmission as follows: · Insurance to Transpacific; 29/5/06 £11,060.00 (EB 1008814) · Verify Inspection report; 2/6/06 £ 1,508.70 (EB 1029871) · Paid to Natwest account; 16/5/06 £21,000.00 ( Freight Forwarders) · Paid to Natwest account; 09/06/06 £ 434.75 (partial Verify 12/08/06 £ 228.00 payments) . Total £34,231.45 .Mr Mendes concluded that Abbey’s two trades took place within a cell of trading that utilised a scheme of finance which appears to have been contrived. All the participants in the transactions used FCIB as a means of transferring payments. Submissions.[39]Mr Taylor submitted that it is accepted that the transactions in Kensai’s mobile phone chain have been designed or orchestrated to conceal what was happening in the microchip chain and that the off -setting of the VAT liability connects the two chains. It is accepted that the VAT losses were caused by fraud. HMRC have to prove that Abbey, through Mr Ali, knew or should have known that the only reasonable explanation for the circumstances in which the purchases and sales took place was that it was a transaction connected with the fraudulent evasion of VAT. It is not necessary to prove that Mr Ali knew or had the means of knowing the identity of the defaulter. This is not a criminal case and HMRC does not need to prove that Abbey was a “deliberate and knowing party to the fraud”. The test is knowledge of connection with fraud and the usual civil standard of proof applies. The sequence of transactions involving Abbey with Monza and Kensai were designed to defraud HMRC and the beneficiary of that fraud was Abbey. Abbey went from a position of having no experience in the mobile phone industry to making six deals on consecutive days in April 2006, which involved 16,500 mobile phones, a turnover of £6,5 million, with a profit margin of just under £1 million. Abbey managed to source 5 models of mobile phones and match them to a customer’s requirements precisely. Thereafter, they managed to deal with the logistics of inspection and getting the documents together in one day. Abbey also achieved a uniform profit margin of 18% to 18.5% which represents three times the usual profit margin of 6%. Monza provided all the funds for the transactions and Kensai was prepared to wait from 28 April to 12 -15 May to be paid. The costs to Abbey of transporting the goods were about £34,000. If the VAT of 17.5 % payable on the Kensai deal is removed from Abbey’s profit the balance covers those costs. By Monday 1 May the goods were on the move. It is an unlikely juxtaposition. of transactions. Even the date coincides with optimal MTIC trading. Kensai needed to make the books balance and Abbey only had to wait a couple of days before making the VAT return which would be a reclaim. When all the circumstances are added together it is safe to conclude that Abbey knew that the only rationale for its excessive good fortune was that this was an MTIC fraud.[40]Mr Taylor submitted that all the transactions in which Abbey engaged were wholly artificial as evidenced by all the facts in the case. · In spite of a total lack of experience Abbey managed to create a profit of almost £1 million. · A uniformed profit margin of 18% was achieved. · Abbey managed to source 16,500 phones of 5 different models in less than one week having never dealt with such transactions before. · The phones were sold by Kensai on 27/28 April but they did not get paid until 12/15 May even though the phones had been dispatched to Germany on 1 May. Nor were any of the parties concerned that the 14 days credit given to Abbey on £6.5 million would have amounted to £12,000. · The sales were back to back and although back to back sales do not necessarily lead to a conclusion of MTIC fraud trading they are its most invariable concomitant. The more so in this case as there was a 14 day delay between the contract and payment. · The goods were sent to Germany when the contract was with Monza in Italy. This exposed Abbey to further VAT complications and invalidated the insurance. · Abbey’s due diligence was woefully inadequate. The reports from the Security People did not bear close examination. · IMEI numbers were not checked and the 2900 mobile phones were said in the second transaction on the invoice to be a United States specification. The inspection of the phones by Verify was perfunctory and Abbey were not diligent enough to check the ’phones at all even thought the goods were initially with Imex in Stoke and therefore in easy access. Consequently only 6 out of 16,500 phones were inspected. · The insurance of the goods does not bear scrutiny. Payment was only made after the deals were completed and all the transactions were in breach of the terms of the policy.[41]Mr Ali’s evidence was vague, unconvincing and at times contradictory. He departed from his witness statement and blamed his solicitor for what he said were errors even though Mr Ali had confirmed that he had read and signed the statement as being accurate. He produced no documentary evidence to show how the deals were conducted. He also insisted under cross-examination that he had conducted the purchases and sales on Phone Traders, although his witness statement, and the interview with Mrs Parsons, had indicated that the deals were found on the International Phone Traders site. Furthermore, he indicated in his witness statement that he had been responsible for running the business, even though he was bankrupt. In his oral evidence he stated that this statement was incorrect. Mr Ali is a man without any criminal convictions but, if the Tribunal finds as a fact that what he said in his witness statement is true, it will necessarily diminish the weight to be attached to his good character for two reasons: 1. He persistently contravened section 11 of the Company Directors (Disqualification) Act 1982;and 2. His oral evidence to the Tribunal was untrue. 42 It has been submitted by Mr Bridge that there was nothing that Abbey could have done which would have made alerted it to any fraud. It is submitted that “means of knowledge” involves Abbey in assessing the facts objectively and making a decision. If that objective assessment leads to the conclusion that the only reasonable explanation for the circumstances in which the transactions took place was that it was a transaction connected with a fraudulent evasion of VAT, then Abbey has the “means of knowledge”. This is not the same thing as the proposition that “due diligence equals no means of knowledge”. Mr Bridge seeks to establish a mechanistic test to govern the appeal. It is mechanistic in the sense that it suggests that the appropriate approach is to look to a series of steps that Abbey could have taken, which could have led to the discovery that Abbey was involving itself in fraud. This is an incorrect approach because it is not the process of taking of steps which matters, it is the trader’s evaluation of all the facts surrounding the transactions which determines the question of knowledge. Abbey places undue weight on the due diligence process rather than the wider decision making process. 43 During the hearing Mr Bridge cross-examined Mrs Parsons to the effect that HMRC could have warned Abbey not to trade with Kensai. HMRC do not accept that they were at fault in not so doing as it is for the trader to decide whether to trade and what checks to make. Moreover it is not relevant to the issues raised by Abbey in this appeal. For all of the above reasons HMRC submits that the appeal should be dismissed. 44 Mr Bridge submitted that Kensai and Monza needed to find a naïve trader to enable them to set off that trade against improper VAT inputs in several other chains, which were fraudulent. He also suggested that it was essential that the transaction was carried out immediately otherwise Kensai would not be able to benefit from the contra trading. He produced a set of figures that showed that Kensai had for the period 04/06 set £8,451,209 against £8,451,744 thereby leaving it with a repayment claim of only £534. In the following period 05/06 the figures were £20,277,629 against £20,283,879 giving rise to a relatively small repayment claim of £6,249. He suggested that against those sorts of figure the profit of nearly £1 million due to Abbey was not substantial to the fraudsters. Mr Stone had confirmed that the concept of “contra trading” had not been established at the time of these transactions. Furthermore, HMRC were aware of Kensai’s trading and had not themselves thought, at the time of these transactions, that Kensai was fraudulent, He submitted that if HMRC did not know of the fraud, with all the information they had available, it was hardly surprising that Abbey did not know either. There is no evidence of knowledge on the part of Abbey. There is no evidence of money changing hands between the parties outside of the context of the deals. Nor is there evidence that the parties knew each other before the deals were struck. There is the suggestion that Mr Saleem was involved in MTIC fraud, but no evidence had been deduced sufficient to implicate Mr Saleem in such a fraud. No evidence has been given as to the nature of the trading undertaken by Ayah International or as to who was behind the trading. HMRC submission appears to be “your brother was involved in MTIC fraud therefore you must be”. This submission would not be sustainable even if there were some evidence of Mr Saleem being knowingly involved in an entirely unconnected unproven fraud. In order to decline the VAT reclaim it must be proved that Abbey actually knew or ought to have/could have known that the transactions it undertook were connected to VAT fraud. The test is not did Abbey know or should/could it have known that its transaction was likely to be connected with fraud but “was it”. It is submitted that the proper approach on the facts should be to ascertain firstly whether the evidence is sufficient to establish that Abbey’s director, Mr Ali, knew that the trade it was undertaking was connected with fraud. If that is the case then the tribunal need go no further and the appeal fails. If the evidence is insufficient to demonstrate that Mr Ali was a knowing participant in the fraud, the tribunal must go on to ask whether there is evidence sufficient to establish constructive knowledge of the fraud. Should or could Mr Ali have known that the transactions were connected with fraud? 45 Turning to the circumstantial evidence, it is submitted that in order to conclude knowledge the tribunal must exclude all reasonable innocent explanations for the circumstances. In other words knowledge will be found where the only explanation is involvement in fraud. (see Moblix paragraphs 59 and 60). Mr Bridge submits that the circumstances surrounding these transactions are consistent with honest trading. Mr Ali is an honest businessman in his 40s, who has successfully run his business for many years. Why would he risk everything to indulge in serious fraud? Mr Ali dealt in commodities which have, for the last 8 or 9 years, been awash in the market place. HMRC have been aware of the difficulties but appear to have done very little about it by 2006 and over £29 billion has been lost to the Revenue. It was not improper for Mr Ali to rely on the confirmation from Mr Akhtar, a retired metropolitan police officer, that the reports were acceptable. HMRC are suggesting that all the due diligence was a smoke screen designed to cover up the fraud. That submission is inconsistent with the submission, also made, that the reports are substantially defective. If they are defective, they do not provide a smoke screen, rather they would be likely to cause the transactions to become the focus of HMRC’s attention. As Mr Ali used his brother’s company to undertake due diligence, he would have expected that a careful and thorough job would be done. The evidence is that the Security People visited Kensai before the transactions took place. Mr Ali was aware that Kensai had imported the goods and he was informed that Kensai was a legitimate business. That was apparently confirmed on 8 May 2006 when Redhill confirmed that Kensai’s VAT number was in order. There is nothing in either report nor in any of due diligence, which Abbey carried out, which would have alerted them to the fact the transaction could be entirely contrived. It is submitted that it is very important to remember the clear distinction in Moblix between “likely to be” and “were” connected to fraud. It is not sufficient to suspect or conclude that one should have been suspicious (especially with the benefit of hindsight) that the transactions were connected with fraud. 46 Mr Ali is criticised for not making appropriate Redhill checks. All that the evidence on Redhill checks demonstrates is that they were slow to be of assistance and that the information they provided –disclaimer attached – was available elsewhere at the Europa VIES site in any event. The checking of the VAT registration numbers at Redhill would not, in any event, have provided Abbey with the means whereby it could be discovered that the transactions were connected with fraud. Abbey did pay £11,060 for the insurance which demonstrates that Abbey believed it was involved in what it believed to be a genuine commercial transaction. Similarly there is no evidence that Verify was other than a genuine company offering inspection services to traders in goods. The fact that they produced a report involving limited inspection does not assist the tribunal in determining whether Abbey was knowingly involved in fraud. Abbey has not entered into other transactions because it is genuinely concerned about the extended verification process and it was keen to avoid further problems. 47 It is suggested that the fact that Monza specified United State s specification for some of the phones is significant. The important fact, which is not contradicted in evidence, is that Monza approached Abbey looking to purchase specified phones. The nature of the product, absent further evidence, is of no consequence and does not assist in determining whether Abbey knew or should have known of the fraud. Mrs Parsons agreed .in cross-examination that it was not uncommon for IMEI numbers not to be recorded. Abbey was not at risk of buying phones it had already previously acquired since this was the first deal in which it was involved. Nor would a record of IMEI numbers have enabled Abbey to discover that the trading was connected with fraud. Abbey has accepted that both Kensai and Monza were involved in VAT fraud. It does not accept that it had any way of knowing that from the evidence. Monza and Kensai, acting in concert, could achieve their purpose of contra-trading by involving an innocent and unknowing third party. There was no risk given the back- to-back nature of the deal that either the goods or the finance would be lost to the fraudulent cell. Kensai and Monza acting in concert made huge profits from their involvement in other fraudulent chains during the month of April. The profit they passed on to Abbey on these transactions was small when compared with the profits made on other transactions over the whole period of trading. 48 A person may be found to know there is a fraud where the only reasonable explanation for all the facts is fraud. The fact of the transaction is advanced as the real evidence of the knowledge of fraud. In this case there is a clear and credible alternative explanation for the transaction other than Abbey was knowingly involved. The explanation is two fold: 1. The market was completely awash with goods which were being used by fraudsters as a means of VAT fraud. No one buying wholesale mobile telephones in the United Kingdom in 2006 could be confident the goods had not, at some point, been subject to VAT default. 2. Kensai was a company involved in fraud and at the end of April urgently needed a substantial trade to offset the VAT reclaim, which would show on its VAT return if this transaction did not go through and which may have led to closer scrutiny by HMRC of their dealings. It is submitted that HMRC has failed to prove to the requisite standard that Abbey was a knowing participant in fraud. It is further submitted that there is nothing which Abbey did or that it could have done, which would have alerted it to the fraud. In the circumstances the appeal should be allowed. The decision.[49]We have considered the law and the facts and we dismiss the appeal. As stated at the beginning of this decision, we have decided that the legal test is that a trader will not be entitled to a repayment if he knew or ought to have known that his transactions were connected with fraud on the basis that the only reasonable explanation for the circumstances in which the transactions took place was that they were connected with such fraudulent evasion. Judge Colin Bishopp suggested in C alltell TelecomLtd & Another –v- Revenue and Customs [207] UKVAT V2066:
“Much will depend on the facts, but an obvious example might be the offer of an easy purchase and sale generating conspicuously generous profit for no evident reason. A trader receiving an offer would be well advised to ask why it had been made; if he did not he would be likely to fail the test set out in paragraph 51 in the judgement of Kittel. ”
Contra- trading cases do cause some difficulty as it is unlikely that a trader will know of the defaults in the fraudsters’ chain. Furthermore there will, on the face of it, be no apparent fraud in the trader’s chain. In Livewire Telecom Ltd; and another v HMRC [2009] EWHC 15 (Ch) Mr Justice Lewison stated: :
“In my judgement in a case of alleged contra-trading, where the taxable person claiming repayment of input tax is not himself a dishonest conspirator, there are two potential frauds: i) The dishonest failure to account for VAT by the defaulter or missing trader in the dirty chain; and ii) The dishonest cover-up of that fraud by the contra-trader. Thus it must be established that the taxable person knew or should have known of a connection between his own transaction and at least one of these frauds. I do not consider it is necessary that he knew or should have known of a connection between his own transaction and both of those frauds. If he knows or should have known that the contra-trader is engaging in fraudulent conduct and deals with him, he takes the risk of participating in a fraud, the precise details of which he does not and cannot know.”
[50]We are satisfied that Mr Ali knew that the Abbey transactions were orchestrated and that they were therefore connected with fraud. We accept that it is difficult for HMRC to prove that Abbey, through Mr Ali, knew of the contra trading and the actual loss of tax. There is a proven and agreed substantial tax loss in the Kensai chains. There is no doubt, however, that the transactions were such that any reasonable business man would have been put on notice that there was something amiss. It is helpful in these cases to trace what happens to the money. In this case it has been agreed that the funds, namely the £6,532,600 used by Monza to pay Abbey for the mobile phones, came originally from Kensai. This is a substantial sum of money even by Kensai’s standard. Extraordinarily that amount of money was sufficient to cover not only the purchase price for the goods but also the exact amount of VAT £967,802.50 which Abbey, in normal trading circumstances, would have expected to pay to Kensai for mobile phones, along with a further £33,076.58 to cover the expenses that Abbey would need to complete the transactions. Abbey would not have known the exact amount needed for those expenses at the time it entered into the transactions with Monza because it had not, at the time, instructed any of its agents or due diligence people. A round figure of £34,498 was added to the purchase price leaving Abbey with a balance of £1421.42. Abbey did not need any money at all on a back- to- back arrangement to complete the transactions. Mr Ali indicated to Judge Porter that, in view of Abbey’s financial position, if he had had difficulty in funding the expenses, he would have to have negotiated a deal with each of the parties. This was untrue; he knew very well that there was sufficient money in the deal to pay the expenses. He knew that he did not need to pay the expenses until he was paid and that he had negotiated such a good deal that there was no risk of him being in a position of being unable to pay the expenses. Even though we have decided that Abbey is not entitled to the repayment Abbey will still have made £1421.42, the balance of Kensai’s money, for two days work. That amounts to approximately £710 profit per day. This in itself is a substantial improvement on his textile business, which was only producing £83 per day. Abbey was expecting to make and keep a further profit of £967,802.50. It would take Abbey 48 years in its ordinary trading, at £20,000 per annum, to achieve that amount of profit. Mr Ali must have realised that this was a huge sum for his two days of trading, which cost him nothing, and on the face of it involved him in no risk. He must have been put on enquiry as to how he could achieve that. He had admitted to Monza that he had not traded in mobile phones previously. We have been told that he was an experienced businessman. No experienced businessman would have admitted that to a new customer, and certainly not before the price had been negotiated. Monza would have been foolish not to have taken advantage of that knowledge and on a commercial deal would have sort to reduce the price below the 6% margin Mr Stone told us was apparently paid to “brokers” in Abbey’s position. A margin of 18% makes no commercial sense at all. Mr Ali has suggested that he wanted to squeeze 10% out of Monza, to achieve an 18% is extraordinary. The only way in which the figures add up is on the basis that they were all known before hand by the parties.[51]Mr Bridge has suggested that Kensai would have been happy to allow Abbey to keep the £967,802.50, as it represents only a fraction of the money they were making in the contra-deals in their chains. Mr Bridge has not fully understood Mr Stones discourse. Mr Stone has told us that these frauds only reach fruition when the repayments are made. It is no answer to say that setting off £6,498,102 (Kensai’s output tax on its deal with Abbey) against Kensai’s input tax of £8,933,957.31 was sufficient recompense for Kensai. That was a paper exercise, as Mr Stone has said Kensai will only make a profit out of its £6,532,600 investment, and any of the other contra-trades, when it gets the repayments. The evidence of the way the payments have been made reveals that Kensai needs that amount to balance up its payments as it is approximately that amount short in its funding (see the end of paragraph 36 above). There would be no sense in the fraudulent transaction if Kensai were to waive the return of the majority of the VAT repayment. No fraudster would pass up that opportunity. As Mr Stone has indicated that these transactions were on going and the money in the scheme would be recycled on many occasions. Mr Stone has given evidence to the effect that brokers in Abbey’s position might receive up to 6% of the purchase price. It is likely, therefore, that Abbey would expect to receive something for its trouble but we do not believe that it would be allowed to keep the entire amount.[52]Abbey entered into two transactions consisting of three items in each transaction, Abbey’s invoice to Monza combined each of the three amounts in a total account. It is peculiar, therefore, that not only were there six separate payments received but they were paid out of sequence. Mr Ali must have been at his computer to make the appropriate payments, which appear to have been made in an extremely short period of time. He clearly did not understand how the payments were being made as they were not paid sequentially. One payment for the first transaction was paid on 12 May followed by two payments for the second transaction .Two invoices for the first transaction were paid on 15 May and one for the second invoice on 12 May. If this had been a commercial transaction Mr Ali would have to have been concerned that the payments were incorrect. Mr Ali would not have been sure that the second payments would be made. He was not concerned because he knew the second group of payments would be paid. The way the payments were made should have alerted him to the fact that the transaction did not follow a normal commercial pattern. That pattern would be to receive two payments from Monza and to make two payments to Kensai. The only reason the payments were made in this way was to ensure that Kensai got its money back.[53]We have been told that his Brother Mr Saleem had been the principal director of the company, during Mr Ali’s bankruptcy, up to February 2006 when he retired. Mr Ali has told us that he had decided that Abbey needed to branch out into another business sometime in 2005 at a time when his brother was involved with the business. Mr Bridge pointed out that no evidence has been lead as to Mr Saleem’s dealings with defaulting companies other than statements to that effect. It is not disputed that Mr Saleem knew the computer trade. He was an owner of the security People and must therefore have been very familiar with all the necessary documentation needed when selling computer goods to Europe. We do not understand why, if Mr Saleem no longer had any involvement with Abbey, his email address has been provided to the FCIB. It is not unreasonable to suppose that it was done so that he could keep a check on the account. There would have been no reason for him to do that if, as Mr Ali has told us, he no longer had any interest in Abbey. We are therefore of the opinion that he must have been involved in the transaction. Mr Bridge has also submitted that Mr Ali is an honest businessman. We do not agree. We have found his evidence to be unconvincing, lacking in detail and untrue. He told his solicitors, Mrs Parsons and his counsel, Mr Bridge, that he had contacted both Kensai and Monza through the International Phone Traders. In fact, Mr Bridge even cross-examined HMRC’s witnesses on that basis. For him to then say that he had used Phone Traders and that his solicitor, and as a consequence, Mrs Parsons and Mr Bridge, had made a mistakes is not credible. We find it extraordinary that a man, dealing with the most successful transaction of his career, one that would make him a millionaire for two days work, was confused as to where he had found his customers. Any sensible businessman in his position would not only remember every detail but would sensibly have recorded the same for the next transaction. It is no answer for Mr Ali to tell us that, because of the verification problems and the likelihood that he might not receive a repayment, he had decided not to carry out another transaction. When he entered into these transactions he did not know that there might be a difficulty with regard to the repayment. We were unimpressed with Mr Ali’s suggestion that if he could not have paid the expenses he would have had to negotiate a payment regime with his creditors. He knew that the transactions had been so designed that they would cover the expenses. We have no doubt that Mr Ali was effectively running the business throughout and that he was, as a result, in breach of his obligations under The Company Directors (Disqualification) Act 1982. All in all we do not believe, on the evidence, that Mr Ali is an honest businessman.[54]As a result and from the evidence we believe that the documentation was a smoke screen. We do not accept Mr Bridge’s submission that as there were several errors in the documentation they were not a very good smoke screen. We found the following features of the due diligence unsatisfactory: As to the invoices. · Mr Ali should have enquired why Monza needed 2900 mobile phones with a United States specification. He knew the sales were destined for Europe and any reasonable businessman would at least have queried the request. Monza might have provided a perfectly reasonable response. · The invoice from Imex received on 15 May for those 2900 Nokia 8801 mobile phones referred to the deal being dated 1st April. The other invoice of the same date makes no such reference. There appears to have been no reason for this wording to have been included. We believe it should not have been and that it was added mistakenly. It suggests that the deals were set up much earlier than 27 and 28 April, which is consistent with frauds. · The reports from the Security People are woefully in adequate. No reasonable businessman dealing with a transaction worth over £6 million would rely on a telephone call to justify dealing with these traders. Both reports are inaccurate and show both companies have very little credit. The report from Redhill was only cleared after the transaction. It is no answer for Mr Bridge to submit that it was clear anyway and there would have been nothing from that report which would lead Mr Ali to believe that the transactions were fraudulent. The fact of the matter is that Mr Ali did not know either way at the time of the transactions and he was ill advised to proceed until had further information. An enquiry at Europa did no more than advise that the VAT number was in existance. It did not identify to whom it belonged . · The reports from Verify were meaningless. Only six boxes were examined, which is not a large enough sample to be able to report that the condition of the rest of the stock. The inspection reports in the bundle are all dated 27 April 2006. It appears that Verify was able to inspect all the mobile phones on that date, even though half of them had not been purchased by Abbey until the following day. · It was unclear from the evidence how long it would take to check the IMEI numbers. We understand that the numbers are printed on the boxes in the form of a bar code and can be checked by electronically sweeping the bar code. If there were 16,500 mobile phones and 280 mobile phones to a box then there were only 59 boxes. Any prudent businessman dealing with such a large contract for the first time would have asked for the IMEI numbers to be checked. This not least because it was a requirement of the insurance cover · Mr Ali has told us that he was used to dealing with exports. It appears that he is also involved in exporting motor vehicles to Pakistan. Abbey should have been put on enquiry that a delivery of the mobile phones to Germany was not consistent of a transaction with a customer in Italy. Mr Ali must be aware of the consequences of moving goods around Europe and the likelihood that this would involve a further liability to VAT. In addition, as Mr Ali has suggested that he would have had difficulty funding £33,000 of expenses, it is unclear why he was prepared to allow the whole consignment of the goods to be transported to Germany on 1 May, when he had not been paid. The whole essence of a back- to- back arrangement is that the goods are released when payment is made. Abbey had no reason to believe that it would easily recover the goods from Germany. · The insurance arrangements were grossly inadequate. The documentation was completed incorrectly and the policies did not carry a seal, a prerequisite for their validity. The goods were for Monza in Italy but were only delivered to Germany. The policy required specific conditions to be complied with, these did not take place. The later email, from the insurers to say that this failure would not have invalidated the policy is meaningless. By the time the email was sent the risk had passed as no claim had been made. · In completing the application for the FCIB account Mr Ali indicated “For nearly a decade we have been trading in a range of textile and electrical commodities” That was untrue. The application form contains not only Abbey’s email address but that of Mr Saleem. There is no reason for Mr Saleem to have been involved at all. We can only assume that it was so that Mr Saleem could be contacted if there were any problems.[55]What has to be recognised is that the entirety of the transactions were funded by the fraudsters, which makes no commercial sense at all. Mr Ali had no reason to suppose, when he negotiated the contracts with Kenasi and Monza, that Abbey would be at risk. All Abbey had to do was to allow itself to be used as the conduit for the fraud. Mr Bridge has indicated that the transactions must have been of substance because substantial payments had to be made by Abbey for the due diligence enquiries and transportation. That is not so. The entire transactions were funded for Abbey. On the face of it if the repayment is refused Abbey will have lost nothing at all and it still has the £1421.42 profit from the balance of the funds. We are content to refer to Mr Bridge’s submission that the proper approach on the facts should be to ascertain firstly whether the evidence is sufficient to establish that Abbey’s director, Mr Ali, knew that the trade it was undertaking was connected with fraud. If that is the case then the tribunal need go no further and the appeal fails. We are so satisfied and we refuse the appeal.[56]We reserve our decision with regard to costs. We have found that Mr Ali, on behalf of Abbey, knew that the transactions were connected to fraud and as a result the costs of this appeal must be decided under the old Tribunal Rules as Abbey notice of appeal is dated 16 July 2007. On that basis those rules and not the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 apply. We direct that HMRC submit their application for costs, if they intend to do so, to the Tribunal and to Abbey within 56 days from the release of the decision. Abbey shall reply to HMRC and the Tribunal within 56 days from the receipt of the application from the Appellant with HMRC’s right to reply within 21days thereafter. The tribunal will decide the costs on the basis of written representations.[57]This document contains the full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. TRIBUNAL JUDGE RELEASE DATE: 28 January 2011

Cited in 2 later judgments