"Indeed it seems to me that the whole concept of contra-trading (which is HMRC's own coinage) necessarily assumes that to be so."
"Stuart Hill obviously knows the mobile phone trade inside out. Can't really refuse application this time." 34. In fact, Mr Hill had worked in the telecommunications sector since 1999. He had previously worked selling mobile phones in telesales, working for a company called Euro Cellular. Thereafter, he was employed by Stardex buying and selling mobile phones. 35. After the Appellant’s business had been set up in 2002 and Mr Hill became its director, Mr Hill continued to sell mobile phones for Stardex on a commission basis. 36. From the date of the Appellant's registration for VAT in 2002 until the periods in 2006 which are under appeal, the Appellant submitted VAT returns which in most periods of significant activity claimed VAT repayments. Mr Hall, the HMRC officer who gave evidence in respect of the Appellant, summarised the Appellant's VAT returns (most of which was signed by Mr Hill), the repayment claims, made. For convenience these summaries are set out in the Appendix to this decision (omitting EC acquisitions, which were nil in every period). 37. The Appellant made an application on24 October 2005 to open an e-banking account with FCIB. FCIB was a bank based in the Netherlands Antilles.. In 2006 FCIB was investigated in relation to alleged money-laundering. Its banking licence was subsequently revoked. 38. The Appellant's application to open an FCIB account gave the signatory as Mr Hill, his passport number and the telephone number for his Stanmore home. The e-mail address given was that of Mr Hill's business e-mail account. The application also gave the Finchley address of the Appellant's accountant. The deals under appeal 39. The VAT return for 06/06 was received by HMRC on5 July 2006 . It related to the purchase of the mobile phones on an invoice dated30 June 2006 . The return for 07/06 was received by HMRC on3 August 2006 . It related to the purchase of mobile phones on an invoice dated28 July 2006 . 40. In the return for 06/06 the Appellant claimed an input tax deduction of£900,952.45 . Of this,£898,537.50 related to two transactions involving the purchase of 18,000 mobile phones (11,000 and 7,000 units respectively). The two transactions were contained on the same invoice issued by Stardex to the Appellant. 41. In the return for 07/06 the Appellant claimed an input tax deduction of£529,840.19 . Of this,£512,400 related to three transactions involving the purchase of 10,000 mobile phones (2,000, 3000 and 5,000 units respectively). All three transactions were contained on the same invoice issued by Stardex to the Appellant. 42. Thus, there are five deals under appeal which relate to two invoices. The two deals on the first invoice in 06/06 and three deals on the second invoice in 07/06. In each deal Stardex, Mr Hill's former employer, was the Appellant's immediate supplier. 43. In all five deals the Appellant exported the mobile phones to a company based in Marbella, Spain called Complementos De Exportacion Multifunctionales SA ("
"it was a very good bank, it was secure."
"Further to our telephone conversation I take this opportunity to introduce my company and I look forward to commencing a commercial relationship with your company which I have no doubt will be fruitful to both our companies." 136. The fax later gave details of CEMSA's two bank accounts - the first in the Isle of Man and the second with FCIB. 137. In cross-examination, Mr Hill said that the date on the fax was incorrect and that CEMSA had contacted him in November. 138. At the top of the fax there were fax markings dated29 December 2005 and15 November 2005 . It seemed to us neither of these markings could correctly record the date on which the fax was prepared (even if may have been sent later). Since the fax was effectively CEMSA's introduction to the Appellant it made no sense for this to have been prepared on the date on which CEMSA and the Appellant entered into their first deal nor for it to have been sent five or six weeks later. In any event, Mr Hill's evidence was that he had been in communication with Mr Russell of CEMSA for some time ("a couple of weeks") prior to the first deal taking place. We therefore conclude that the date on the fax was correct and that contact between the Appellant CEMSA had first been established around the middle of October 2005 at approximately the same time or shortly before the Appellant applied to open its FCIB account. 139. The internal FCIB document recording the details of the Appellant's application to open an FCIB account recorded a Mr Abid Ahmed Mirza as being the "
"… I was being paid - prior to me opening my FCIB account, I was being paid from FCIB accounts and it was taking too long for the money to reach my supplier. So if the payment came from my FCIB account into my Abbey National, it would take two days that the money to actually physically come to me. Then if I was paying another FCIB account, it would take another two days for the money to go the other way. So I thought if I have a FCIB account as well, it will eliminate that process and the transactions can be completed within one or two days." 153. In cross-examination, Mr Hill accepted that there was no documentary evidence to show that the payments went to Stardex because, he said, the cheques had not been returned. He said that the reason that two accounts had been used was because there was not enough money in one account to cover the total invoice and that is why he had paid Stardex from two accounts. 154. Mr Patterson put it to Mr Hill that in the Far Consulting report (see below under heading "
"I think the first time I dealt with 1st Freight, off the top of my head, would have been February, March or April, I don't know. Without looking, I don't know." 161. We consider that it is more likely that Mr Hill started to deal with 1st Freight at the beginning of May 2006 when he verified 1st Freight's VRN number. 162. Mr Morehead's evidence was that an analysis of the outbound international consignment notes (the Convention Merchandises Routiers or “CMRs” for short) provided by 1st Freight indicated that more pallets were being shipped out of 1st Freight's warehouse than it had capacity to handle. Mr Morehead had analysed approximately 500 CMRs issued by 1st Freight in the period over9/02/2006 to29/09/2006 (in respect of which that the consignee was CEMSA, with deliveries being made on its behalf to GR Distribution in St Folquin, outside Calais). 163. Mr Morehead referred to a meeting that HMRC officers had with a Mr Brandon Burrha of 1 st Freight on29 November 2006 when Mr Burrha estimated the storage capacity of 1st Freight's warehouse to be 100 pallets (if double stacked). The CMRs dated30 June 2006 amounted to 410 pallets. These included pallets in respect of 06/06 Deals 1 and 2. The same point was true for the number of pallets included on CMRs for other days. Thus, for example, on27 April 2006 the CMRs record 314 pallets being shipped, 401 pallets on28 April 2006 , 388 pallets on25 May 2006 , 458 pallets on26 May 2006 , 652 pallets on31 May 2006 and 321 pallets on29 June 2006 . 164. Moreover, the Appellant's goods were transported by a haulier called K. Elsey. In relation to the CMRs dated30 June 2006 K. Elsey's vehicle (registration Y54FVX) is shown as having transported 62 pallets. Mr Morehead's evidence was that industry standards required a trailer to carry a maximum of 33 pallets (European size) or 26 pallets (UK size). The pallets were delivered to G R Distribution in St Folquin in France (just outside Calais) on behalf of CEMSA. (We note that G R Distribution also received goods on behalf of Vundera). Indeed, the vast majority of goods in the period09/02/2006 -29/09/2006 were delivered to G R Distribution on behalf of CEMSA. Information obtained by HMRC from the French authorities stated that GR Distribution was a buffer company which never undertook actual business activities. 165. Mr Ahmed argued that it was possible that a vehicle may have made two trips within the day. Although possible, we consider this to be unlikely. The fastest journey time from Chadwell Heath to St Folquin is approximately 2 1/2 hours via the Channel Tunnel so that the journey time for two trips would be a minimum of 10 hours, leaving out of account traffic delays, queues at the Channel Tunnel, Customs checks, meal breaks and loading and unloading times. 166. In addition, during a visit in February 2007 HMRC had attempted to obtain from K. Elsey the relevant vehicle tachographs that corresponded with the CMRs but the haulier claimed that its tachographs had been taken by the Vehicle and Operators Service Agency (“VOSA”) - a claim that had previously been made by other hauliers used by 1st Freight. 167. When cross-examined by Mr Ahmed, Mr Morehead's attention was drawn to the exhibits attached to Mr Hall's witness statement which included various CMRs, Eurotunnel tickets and Certificates of Shipment completed by 1st Freight. Mr Morehead acknowledged that the CMR in respect of 06/06 Deal 1 contained a date of30 June 2006 but bore a receipt stamp of GR Distribution dated10 July 2006 in respect of 5500 Nokia N 80 mobile phones and another receipt stamp dated13 July 2006 in respect of another consignment of 5500 Nokia N 80 mobile phones (obviously the total number of 11,000 mobile phones had been split into two consignments). These were accompanied by Certificates of Shipment in respect of each consignment both showing a date of shipment as30 June 2006 but issued by 1st Freight at Chadwell Heath on18 July 2006 . In addition, there were Eurotunnel tickets dated 10 July and12 July 2006 in respect of the respective vehicle registration numbers shown on the Certificates of Shipment. It will be noted that the12 July 2006 date on the Eurotunnel ticket appears to be a day earlier than the GR Distribution receipt stamp of13 July 2006 on the second CMR. 168. In respect of 06/06 Deal 2 the CMR was dated30 June 2006 but bore a GR Distribution receipt of 12 July. There was a Eurotunnel ticket dated12 July 2006 and a Certificate of Shipment showing a shipment date of30 June 2006 issued by 1st Freight on18 July 2006 . 169. Mr Ahmed's basic point was that the date on which the goods were actually transported to France was not the same as that shown on the CMR. Thus, Mr Ahmed submitted that Mr Morehead's calculation of the number of pallets which were carried on a single vehicle was of doubtful accuracy. Whilst we accept the difference in dates of the CMRs and the date of shipment, it does not, in our view, detract from the substance of the point made by Mr Morehead, viz that the CMRs consistently recorded shipments in excess of the capacity of 1st Freight's warehouse when the position was viewed over an extended period of time. 170. Moreover, the discrepancies between the date of receipt by GR Distribution, the Eurotunnel tickets, the date of the CMRs and the dates on the Certificates of Shipment indicated to us that 1st Freight consistently falsified its CMRs and Certificates of Shipment. 171. This point is reinforced by the evidence of Mr Hall in relation to a CMR which, according to Mr Hall’s evidence, was produced by the Appellant at a meeting between the Appellant and HMRC (attended by Mr Hill and his accountant, Mr Price) held in September 2006. In relation to 06/06 Deal 1, the Appellant provided HMRC with an inspection report from 1st Freight for 11,000 Nokia N80s dated30 June 2006 indicating that a full inspection took place. In addition, the CMR in question indicated that these mobile phones were transported by an Irish haulier called Daytona Transport Ltd, based in Donegal, from Donegal on22 June 2006 for delivery on behalf of Jag-Tec to 1st Freight in Chadwell Heath, Essex. 172. This CMR bore a number of stamps and had a manuscript annotation "42 A"
"Under Deal 1 period 06/06, 3G has provided an inspection report from 1st Freight for 11,000 Nokia N 80s dated13 June 2006 indicating that a full inspection took place. A CMR is held which indicates that these phones were collected by Daytona transport from Donegal Town on22 June 2006 for delivery on the half of Jag Tec to 1st Freight in Chadwell Heath, Essex." (Emphasis added)
"I have added 3600 Nokia N 91 to your database and no duplicates were found." 194. One of the e-mails from the Appellant dated16 October 2006 requested IMEI numbers from A1 Inspection in respect of the deals under appeal. This enclosed a reply (the date of which was not recorded) from A1 Inspection to Mr Hill stating: "
"extremely uncertain as a direct result of the withholding of our client’s funds. In the light of these circumstances, our client has deliberately chosen not to renew the insurance policy on the grounds of expense." 202. The note of the meeting of5 September 2006 and HMRC's letter of17 November 2006 indicated, however, that the policy of insurance which expired in June 2006 had been provided amongst other documents at that meeting. 203. We did not, however, find Mr Hill's evidence on this point credible. The note of meeting refers to Mr Hill at various points. It therefore seems more likely to us that Mr Hill was present when the insurance issue was discussed. At no point in this meeting (or in his witness statements) did Mr Hill explain that the 06/06 deals were not insured by virtue of an oversight or (although this was mentioned in his first witness statement) that a deliberate decision had been taken not to insure the 07/06 deals. The various explanations given about failure by Mr Hill to mention the insurance issue at the September 2006 meeting suggests strongly to us that the Appellant's evidence on this point was unreliable. We accept that Mr Price included the expired insurance policy in the papers which HMRC took away from the meeting but the failure by Mr Hill to mention its expiration was nonetheless misleading. In any event, the explanation tendered by Mr Price in his22 November 2006 letter could not, in terms of timing, explain the deliberate decision taken not to insure the goods in the 07/06 deals. Passing title to the goods 204. The invoices issued by Stardex to the Appellant in respect of the deals under appeal all stated: "
"They came to me from Stardex - on behalf of Stardex…."
"We can confirm that Stardex (UK) Limited is a client of Halliwells LLP and has fully completed our client acceptance procedures for anti-money-laundering purposes. The main shareholder of Stardex, Maria Prouost, is a client of Halliwells and formally was a client of mine [the head of indirect tax at Halliwells] at Ernst & Young LLP. Halliwells LLP are engaged to conduct on-going reviews of the Stardex (UK) Limited supply chain for both suppliers and customers. In our view this client has conducted the most extensive due diligence of any trader in this sector. It is legal opinion of Halliwells LLP that Stardex (UK) Limited is fully compliant as regards to the joint and several liability provisions ins 77A VAT Act 1994 . Every Stardex transaction is individually verified and all suppliers have been independently visited by Halliwells LLP for the purposes of reviewing the supplier's processes and bona fides. Halliwells LLP provides Stardex (UK) Limited with written reports of their reviews to provide a risk rating on each trading company of either low, medium or high. Trading partners are rejected if they do not get the appropriate approval rating. Stardex (UK) Limited has a good relationship with HM Revenue & Customs and suffers no undue delay in its monthly VAT claim. The level of business can be evidenced by company reporting in annual accounts filed with Companies House, a copy of the latest filed accounts for year ended31 May 2005 are attached. Stardex (UK) Limited is [sic] well-established business dealing in both mobile telephones and computer processing units. Stardex (UK) Limited trades both within the United Kingdom and internationally. The company has been in business for over 10 years. We enclose a certified copy of the passport of Mr J McGeechan the company secretary and a registered solicitor in Scotland with SJ Hamilton & Co. For security purposes our client does not allow us to divulge either personal photographs, sample signatures of directors or shareholders, or visits to trading premises." 223. The letter concluded with further information about Stardex including its Company Number, its address and enclosed a copy of its certificate of incorporation. Finally, the letter provided confirmation that Stardex banked with the Royal Bank of Scotland and FCIB. 224. We note that in the footer to the letter the file is described as: "correspondence/letter to Mobile Express"
"Although some checks could not be undertaken during our visit (because Mr Russell had forgotten that it was a local public holiday when we agreed the date of our visit), CEMSA seems a well-founded and established business which is happy to have a good local profile. It has been in business for a number of years, Mr Russell presents himself as an experienced businessman with a long track record in this business sector. We would rate this business as low risk." 234. As noted above, CEMSA was run by Stephen Russell, an Irish national. The report states that Mr Russell declined to offer any proof of personal identity, although he proffered a business card and was happy for an identification photograph to be taken. Mr Hill accepted that this failure to provide personal ID had not been mentioned to him by Halliwells over the telephone. Mr Hill never met Mr Russell and never visited CEMSA's premises personally. 235. The report noted that CEMSA had two bank accounts, one in the Isle of Man and the other with FCIB. No query seems to have been raised over the fact that an established business with a substantial turnover (see below) based in Marbella in Spain had, apparently, no Spanish bank account. 236. The report noted that creditworthiness details about CEMSA were held with a company called e-informa, a Spanish associate of Dun & Bradstreet. Halliwells obtained a copy of the e-informa report. They did not provide a formal translation, but included the following information concerning CEMSA’s turnover for 2002 to 2004 as follows: 2002 Euros 85.3million 2003 Euros 109.3 million 2004 Euros 9.8 million Remarkably, the report related that Mr Russell had estimated the sales revenue for 2005 as Euros 500 million (approximately£300 million at the then exchange rates) and that that figure would be substantially exceeded for the current (2006) financial year. The report noted: “No explanation was given for the substantial fluctuation in sales turnover in recent years.” 237. This very substantial increase in gross income arose in the context of other comments in the report to the effect that CEMSA did not have a functional web-site and operated “largely by word of mouth and by personal recommendation.” 238. When asked in cross-examination whether the increase in turnover was remarkable, Mr Hill replied: "
"Mr Russell says that he uses the VIES websites to validate the VAT numbers of the traders involved in each deal CEMSA is involved in. He has met most of his customers and suppliers face-to-face. He ensures that he obtains a Certificate of Incorporation, VAT certificate and a trade application from each trading partner (see CEMSA's documents at Appendix K). He pointed out that there is no obligation under Spanish law to carry out formal due diligence on suppliers or customers. He says he is comfortable with his own commercial risk analysis, particularly as he does not offer credit and retains title to goods until he receives payment." 241. In some respects, this is one of the most critical paragraphs of the report. A trader in the position of the Appellant would be concerned to know what steps CEMSA took to ensure that its customers and suppliers were bona fide traders. The Appellant, however, could have obtained very little comfort from this paragraph. Obtaining certificates of incorporation and VAT certificates etc., although necessary, would tell a trader very little about the bona fides of a trading partner. Also, simply meeting "most" customers and suppliers face-to-face would reveal very little useful information unless accompanied by probing enquiries. When asked whether CEMSA's statement that it had no obligation to perform due diligence on its customers and suppliers rang any "alarm bells", Mr Hill replied: "
"The most important thing I needed to know was: was this guy loaded, okay, was he telling me what was [sic] - was it correct and was he a risk." 245. It was hard to avoid the impression that by focusing on whether Mr Russell was "loaded", Mr Hill was not applying his mind to the appropriate question, viz whether CEMSA was a bona fide trader. Halliwells report in relation to the Appellant 246. Halliwells also prepared a report on the Appellant which Mr Hill described as being for his own purposes and not for the purposes of being shown to third parties. This report was dated June 2006. 247. It is not necessary for us to dwell at length on this report since it does not bear directly on the Appellant's state of knowledge in relation to its trading partners. However, at paragraph 10 of the report ("
"10.3 Halliwells LLP are satisfied with the attention to detail displayed within the company around the issued due diligence and also with the generally efficient and clearly profitable way that the business is run. 10.4 This report contains the caveat that Halliwells LLP is in the process of completing the supply chain review, so comment cannot be made on the risks contained within the actual chain, although it is clear that the company has done much to its processes to minimise any VAT risks. 10.5 Halliwells make the following recommendations: · Complete a full supply chain review to ascertain any risks inherent in the supply chain; · Complete due diligence visits to complement the existing internal processes; · Maintain a fully documented rejected business file; and · Verify that [the Appellant] have their own dedicated file on the A1 Inspection file. 10.6 Subject to the above recommendations, Halliwells LLP are happy to rate [the Appellant] as being in the low risk category in this industry sector." 248. No evidence was produced to indicate that Halliwells ever completed their supply chain review. The recommended rejected business files were likewise not produced in evidence and it is not clear whether they were ever brought into existence. 249. The report contained an appendix headed "
"… I didn't feel it was necessary because, as far as I was concerned, all my due diligence in relation to everything was then done by Halliwells. You're talking about stuff going back into 2005. I wasn't aware that I was going to have to be having to give evidence on stuff in 2005. I thought we were here to discuss the fact that my repayment was denied the 2006." 255. It must have been clear to Mr Hill from an early stage after the denial of his claim for repayment of input tax that his due diligence in relation to his trading partners was an important issue and we found his reaction to the question of duplicate Dun & Bradstreet reports less than credible. 256. In any event, as far as we are aware, there was no evidence of any Dun & Bradstreet report having been obtained in respect of CEMSA or any other trading partner prior to March 2006. Reliability of Mr Hill's evidence 257. The reliability of Mr Hill's evidence was repeatedly challenged in cross-examination. We have considered Mr Hill's evidence in considerable detail and we have concluded that he was an unreliable witness. On a number of occasions his replies seemed to us to be evasive or lacking credibility. 258. We set out below examples where we considered Mr Hill's evidence was unreliable. 259. Mr Hill claimed that his accountant, Mr Price, had not informed him of concerns raised by an HMRC officer at a meeting at the accountant's offices in August 2004 in which the officer expressed concern about evidence of "circularity" in the March 2004 return. This related to a period shortly after the Appellant had resumed trading after the period of inactivity following the Budget 2003. It seems to us highly unlikely that any responsible professional adviser would fail to mention such a matter particularly in circumstances where his client had taken a break in trading as a result of his concerns about fraud in his industry. 260. In December 2004 the Appellant had sold a consignment of mobile phones worth more than£300,000 to IBO. On11 January 2005 HMRC wrote to the Appellant notifying it that IBO Sarl had been deregistered for VAT purposes with effect from that date. Mr Hill was asked about his reaction to the deregistration of a company that he had dealt with so recently. Mr Hill said that his reaction was to ask himself whether this was a mistake. Also, he noted that this was a general letter that was not specifically related to the transactions he had just undertaken with IBO Sarl. He said that HMRC's letter did not tell him what had happened. When asked whether he had contacted any of the HMRC officers with whom he regularly had contact for clarification, Mr Hill replied that if there had been a problem he assumed HMRC would contact him. We found Mr Hill's responses unconvincing and evasive. 261. On13 January 2005 HMRC sent to the Appellant another letter, this time about Ashcor Associates, informing the Appellant that Ashcor Associates had been deregistered. The Appellant had bought mobile phones worth over£200,000 from Ashcor Associates in May 2004 and almost£300,000 worth of mobile phones in October 2004. Mr Hill said that he didn't know what deregistration letters, such as the one in respect of Ashcor Associates, meant: "
"Maybe he asked us in a way that I didn't understand, but he did not specifically turn around and say to me, "
"A. There were loans made, I am not disputing that fact at all. Q. Spell it out. A. I lent Unique Distribution money. Q. Right. Go on. A. What else is there to say, I let them money? Q. Why were you lending money to Unique? A. Because they asked me to lend the money. … Q. So why did Unique want to borrow these sums? A. Because they didn't have enough money at the time to conduct their business. So they were looking to source money for short periods of time, like short-term loans." 269. In the event, nothing seemed to turn on this curious arrangement with Unique Distribution. However, Mr Hill's reluctance fully to explain the arrangement seemed to us to indicate a degree of evasiveness. 270. We concluded that Mr Hill's evidence had to be treated with considerable caution. Discussion General 271. As already discussed, the question in this appeal is whether the Appellant knew or should have known that its five deals under appeal were connected to the fraudulent evasion of VAT. 272. It is clear from the FCIB evidence that the fraudulent contra-trading scheme of which these deals were pre-arranged by a mastermind. The conspiracy required that deals in the “clean” and “dirty” chains were coordinated so that the supplies made by the fraudulent contra-trader in the "clean" chains roughly approximated, and thereby disguised, the exports made in the "dirty" chains. None of this necessarily indicates that the Appellant knew of this, but as a fact it cannot be in dispute. 273. We should make it clear that we have applied the principles of law set out in an earlier part of this decision, particularly the judgments of Lewison J in Brayfal Ltd v HMRC[2011] UKUT 99 (TCC) , Moses LJ in Mobilx Ltd v HMRC[2010] EWCA Civ 517 (including, especially, Moses LJ's approval of the comments of Christopher Clarke J in Red 12 Trading Ltd v Revenue and Customs Comrs[2009] EWHC 2563 (Ch) at [109]–[111]) and the decision of Briggs J in Megtian Limited v HMRC[2010] EWHC 18 (Ch) . 274. Our decision also proceeds on the basis that, as the director and sole shareholder of the Appellant, the actions and knowledge of Mr Hill should be attributed to the Appellant. No argument to the contrary was put to us on behalf of the Appellant. 275. We have reached the conclusion after carefully considering all the evidence cumulatively that the Appellant knew that its five deals were connected to the fraudulent evasion of VAT. 276. We set out below our reasons for reaching these conclusions. The Appellant's knowledge of the high level of MTIC fraud 277. The Appellant accepted that Mr Hill was aware that there was fraud in the mobile phone industry as a whole - his knowledge was described as a general awareness. For the reasons given earlier in this decision, we consider that Mr Hill had considerable knowledge of MTIC fraud and that this fraud was rife in the mobile phone industry. Relationship with Stardex and Maria Prouost 278. The Appellant accepted that Stardex and Maria Prouost were part of the conspiracy to defraud HMRC. 279. Mr Hill had a close business relationship with Maria Prouost for over five years. At her invitation, he originally worked for Stardex (although there was no evidence that at that time Mr Hill was aware of any fraudulent trading by Stardex). In addition, when he subsequently set up his own business, he continued to trade on behalf Stardex on a commission basis even though he was competing with Stardex on a principal basis. Futhermore, Maria Prouost confided matters of a personal nature to Mr Hill. Mr Hill opened up an FCIB account on the recommendation of Maria Prouost and she assisted the process by providing a reference for the Appellant. The account was opened at around the time when the Appellant first traded with the fraudster CEMSA. Maria Prouost also recommended the freight-forwarder 1st Freight, which the Appellant now accepts was part of the fraud and in respect of which he carried out no significant checks. It also appears that Halliwells came to the Appellant via Maria Prouost. Mr Hill repeatedly traded with Stardex and his evidence was that he was in frequent, almost daily, telephone contact with Maria Prouost and often met her in London. 280. Both the business of Appellant and Stardex's businesses showed a significant reduction in the level of activity in the period 04/03 to 09/04 i.e. in the period after the introduction of the joint and several liability counteraction provisions in the Budget 2003. We infer from this that the business of the Appellant and that of Stardex were closely linked. 281. Moreover, Mr Hill's evidence in relation to Maria Prouost seemed to be inconsistent. On the one hand he presented her as an aggressive and hard-nosed businesswoman but on the other hand she was, according to Mr Hill, so relaxed that she was content for the Appellant to ship outside the UK valuable consignments of mobile telephones, for which the Appellant had paid nothing. This did not ring true and we considered that this undermined Mr Hill's claims that he had no knowledge of Maria Prouost's fraudulent activities. 282. Furthermore, Mr Hill's evidence in relation to his knowledge of Stardex's suppliers was inconsistent. At one point he claimed that he did not know the identity of Stardex's suppliers (save those with whom he had dealt while employed by Stardex), but subsequently (when seeking to explain why he did not by-pass Stardex and deal directly with their suppliers) he appeared to know who they were. This was another aspect where we regarded Mr Hill's evidence is unsatisfactory. 283. Apart from routine verifications of VAT registration and corporate documents, the Appellant carried out no due diligence on its trading partner Stardex until May 2006. Even then the Appellant's due diligence consisted of obtaining a letter from Halliwells which was by no means independent since the firm already acted for Stardex. As we have already said, in the period immediately after Mr Hill left Stardex's employment we could understand that he may have considered that he knew Stardex well enough not to undertake extensive due diligence. That excuse, however, could not be an indefinite one. We consider that the reason why Mr Hill did not undertake more extensive due diligence on Stardex at an earlier stage than May 2006 (e.g. 2004) was because his relationship with Maria Prouost and Stardex was much closer than he has admitted. Relationship with CEMSA 284. The Appellant did not undertake substantive (i.e. apart from routine verification of VAT registration and corporate documents) due diligence in relation to CEMSA until June 2006, having undertaken its first transaction with CEMSA in November 2005. It is, however, possible that a Dun & Bradstreet report was obtained in or after March 2006, although we treated Mr Hill’s evidence on this point with some caution. 285. We consider that undertaking due diligence with CEMSA at the same time as or immediately before entering into transactions which were connected with fraud (i.e. the transactions under appeal) was a remarkable coincidence. 286. A similar coincidence, which we have already noted, was that the Appellant opened a bank account with FCIB at or around the time of its first transaction with CEMSA in November 2005. As the Appellant's application form to FCIB indicated, the Appellant already had an existing bank account with Bank of Scotland. We did not consider Mr Hill's explanation that he opened an account with FCIB because UK banks were closing the accounts of mobile phone traders to be convincing. There was no evidence that Bank of Scotland were threatening to close the Appellant's account and, although invited to produce the relevant correspondence and agreeing to search for the relevant correspondence, Mr Hill failed to produce any further documentation. 287. In the context of the evidence as a whole, we considered that the two coincidences (of the Appellant's suddenly undertaking substantive due diligence on CEMSA by means of a Halliwells report at the same time as or immediately prior to entering into the deals under appeal and the coincidence of the Appellant opening in FCIB account at or around the time when it first began trading with CEMSA) can most readily be explained by the Appellant being aware that CEMSA was involved in fraudulent activity. 288. Mr Ahmed submitted that on the first three occasions that the Appellant dealt with CEMSA the Appellant paid a deposit and that it was inconceivable that those controlling the fraud would have wanted the Appellant to be paid in advance. Mr Ahmed submitted that if Mr Hill was not knowingly involved in the earlier Stardex/CEMSA transactions, it was unlikely that he knew that the later deals under appeal were also connected with fraud. It seems to us that even if (which we doubt) earlier deals may not have been entered into by the Appellant knowing that they were connected with fraud, it does not follow that later deals were innocent. Those later deals must be looked at in the light of all the circumstances surrounding them and those circumstances indicate to us that the Appellant did have knowledge that the five deals under appeal were connected with fraud. FCIB evidence 289. The FCIB evidence, particularly the circularity of payments and the common IP addresses used by some participants (not including the Appellant), indicated that the five appealed deals were part of a complex and carefully organised fraud which must have had an organiser or mastermind. All the parties banked with FCIB - a fact which, on itself, is a strange coincidence. Surely, if UK banks were closing down the accounts of mobile phone traders those traders would open accounts in a variety of different jurisdictions. Instead, they all opened accounts with FCIB in the Caribbean. 290. In the five transactions under appeal, the Appellant received payments from CEMSA and paid Stardex through their FCIB accounts. The on-payments were made by the Appellant within 18 minutes (06/06 Deal 1), 30 minutes (06/06 Deal 2), 24 minutes (07/06 Deal 1), 1 hour and 15 minutes (07/06 Deal 2) and 4 hours 9minutes and 1 hour 24 minutes (07/06 Deal 3). In 07/06 Deal 3 the Appellant's on-payment to Stardex was made at 1:39 AM. In summary, the rapidity of the on-payments by the Appellant in the context of rapid payments in the circular chain suggests to us that the Appellant was well aware of the need to play its role in a pre-arranged series of payments. 291. Moreover, in the light of this evidence, it seems to us more likely than not that the organiser of the fraud would have needed to be certain that the chain of transactions and payments would proceed as planned. It seems to us highly unlikely that the mastermind behind the fraud would have allowed an innocent party to take part in the transaction chains. It would have been necessary to ensure that the goods were bought from and sold to and the payments made by and to the correct (pre-planned) parties. The five appealed deals were part of an elaborate larger contra-trading fraud of considerable sophistication where the contra-trader was seeking to disguise its transactions in the corresponding "dirty" chain. HMRC’s evidence to this effect was not challenged. Organising and balancing the "clean" and "dirty" chains, with the consequent need to organise paperwork, transport, inspections and payments was complicated enough in itself without introducing into the equation unwitting parties whose behaviour, because of their lack of knowledge, could not be easily predicted. Furthermore, introducing an innocent party to act as broker would always run the risk that the innocent trader might "smell a rat" and take its concerns to HMRC. 292. Mr Ahmed argued that introducing an "innocent dupe" to act as broker in a transaction may have benefits to the organising fraudster in that the fraudster's money was not at risk in relation to the VAT repayment claim. Whilst this is true, and it is possible that in some cases this attraction may conceivably have led to innocent parties becoming involved in MTIC transactions, we very much doubt whether this advantage would outweigh the disadvantages outlined in the preceding paragraph. 293. Furthermore, there seemed no good reason why the Appellant opened an FCIB account in November 2005. We have already remarked upon their coincidence in the timing of the opening of this account with the Appellant's first deal with CEMSA. The Appellant argued that it opened an FCIB account largely because UK banks were withdrawing from the mobile phone trading sector. Nonetheless, the Appellant's FCIB application made clear that the Appellant had an account with the Bank of Scotland and, accordingly, there seemed no pressing need to open another bank account. We consider that it is more likely than not that the Appellant opened the FCIB account in order to participate in transactions which it knew would in some manner be connected with fraudulent evasion of VAT. As Briggs J pointed out in Megtian it is not necessary for HMRC to show that a trader was aware of the particular type of fraud or whether the fraud occurred in its supply chain or another chain. Insurance 294. The evidence was that until the five deals under appeal the Appellant always insured its goods. In these five deals five consignments of valuable mobile phones were shipped from the warehouse of 1st Freight to the warehouse of GR Distribution near Calais which received the goods on behalf of CEMSA. 295. Mr Hill's evidence was that he had overlooked the fact that the contract of insurance had expired shortly before the deals in 06/06 and that when he entered into the deals and authorised the shipment of goods he was unaware that he was not covered by insurance. As regards the deals in 07/06, Mr Hill said that he had taken a commercial decision not to insure the goods. His evidence was that the cost of insurance in the period June 2005 to June 2006 had been approximately£25,000 . Because the level of business and increased throughout the year the renewal premium was likely to be greater. Mr Hill said that he decided not to insure the 07/06 goods and also decided to wait until September to decide whether to renew the policy. 296. We did not find Mr Hill's evidence credible. We note that at no stage in the investigation of the transactions by HMRC or in any of Mr Hill's three witness statements was it claimed that the failure to insure the goods comprised in the 06/06 deals was the result of an oversight. This claim was only made when Mr Hill gave oral evidence. We did not find this "oversight" claim to be credible - it seemed to us to be a last-minute invention. Moreover, whilst taking a commercial decision not to insure the goods in the 07/06 deals saved Mr Hill from paying the premium, we could not understand why he would take this risk on this deal when in all previous deals he had made sure that his goods were insured. Indeed, the use of the "
"Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel , namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was." 307. It is clear from the context that Moses LJ was considering due diligence in the context of the claim that a trader should have known that its deals were connected with fraud. 308. In this case, we have to consider whether the due diligence carried out by the Appellant had any bearing on the initial question whether the Appellant knew that its transactions was so connected. 309. It will be apparent that what we have referred to as "standard" due diligence such as checking VAT registration numbers, company details, references, directors’ ID etc. - all of which the Appellant carried out - is unlikely in most cases to be of much assistance to a trader in determining whether fraud has occurred (either the contra- trader's fraudulent concealment or the missing or defaulting trader in the "dirty" chain) higher up the chain i.e. beyond its immediate supplier. We quote the words of this Tribunal in Mayfair Executive Ltd v HMRC[2011] UKFTT 148 (TC) (Judge Nowlan and Ms Bridge): "