“2. … The classic way in which the fraud works is as follows. Trader A imports goods, commonly computer chips and mobile telephones, into the United Kingdom from the European Union (‘EU’). Such an importation does not require the importer to pay any VAT on the goods. A then sells the goods to B, charging VAT on the transaction. B pays the VAT to A, for which A is bound to account to HMRC. There are then a series of sales from B to C to E (or more). These sales are accounted for in the ordinary way. Thus C will pay B an amount which includes VAT. B will account to HMRC for the VAT it has received from C, but will claim to deduct (as input tax) the output tax that A has charged to B. The same will happen, mutatis mutandis, as between C and D. The company at the end of the chain – E – will then export the goods to a purchaser in the EU. Exports are zero-rated for tax purposes, so trader E will receive no VAT. He will have paid input tax but because the goods have been exported he is entitled to claim it back from HMRC. The chains in question may be quite long. The deals giving rise to them may be effected within a single day. Often none of the traders themselves take delivery of the goods which are held by freight forwarders.
“167 – A right of deduction shall arise at the time the deductible tax becomes charged.
“29.-(1) Subject to paragraph (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.
“56. … a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.
“59. The test in Kittel is simple and should not be over-refined. It embraces not only those who knew of the connection [with fraudulent evasion of VAT] 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 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 .”
“56. It must be remembered that the approach of the Court in Kittel was to enlarge the category of participants. A trader who should have known that he was running the risk that by his purchase he might be taking part in a transaction connected with fraudulent evasion of VAT cannot be regarded as a participant in that fraud. The highest it could be put is that he was running the risk that he might be a participant. That is not the approach of the Court in Kittel. In those circumstances I am of the view that it must be established that the trader knew or should have known that by his purchase he was taking part in such a transaction.
“62. The principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader’s purchase. If the circumstances of that purchase are such that a person knows or should have known that his purchase is or will be connected with fraudulent evasion it cannot matter a jot that that evasion precedes or follows the purchase. That trader’s knowledge brings him within the category of participant. He is a participant whatever the stage at which the evasion occurs.”
“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 I which his transaction took place was that it was connected to fraudulent evasion of VAT,
“83. The questions posed in BSG by the Tribunal were important questions which may often need to be asked in relation to the issue of the trader’s state of knowledge. I can do no better than repeat the words of Christopher Clarke J in Red 12 v HMRC(2009) EWHC 2563 :
‘109. Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and "similar fact" evidence. That is not to alter its character by reference to earlier or later transactions but to discern it.
“51 …it is apparent that traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud , must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT …
“The submission that there was no VAT loss, if the transactions fell out with the scope of VAT for input deduction purposes is untenable. I accept the Commissioners’ argument that the fact that a defaulting trader’s transaction is outside the scope of VAT does not mean that he has not charged and received an amount of tax due to HM Treasury: there was still a tax loss created by the defaulting traders whether or not their own transactions were within the scope of VAT.”
“C. Where is the evidence to support this? Where are your jottings? Where are the suppliers and customers who would testify to this description of your trading?
“C. Can you think of any reason why a successful and clever fraudster would allow a free agent into his fraud?
“Taking the [Cell 5] … transactions into account, almost all the transactions which can be further traced involve Parasail, Comica and Forex. The remainder involved BRD which is known to buy from Parasail and Comica, and to sell to Parasail.”
“41. Overall, the transactions involving Parasail, Comica and Forex must be contrived. They occur within a closed cell of traders which appear to be operating in concert. The goods originate within a very small group of EU suppliers, and end up with the same group of companies at the end of the transaction chains. Where both ends of the chains have been further traced and with one exception, [notwithstanding that goods remained within the same small group of suppliers] none of the companies involved received, as customers, goods which they had originally supplied as suppliers. This has happened no matter which combination of UK traders the goods passed through on the way.
“Furthermore, although it is not necessary for [HMRC] to prove that these 9 deals form part of an overall scheme to defraud the revenue, it is averred that in fact the deals did form part of such a scheme, which was separate [from] Cell 5 and which was necessarily the product of contrivance and orchestration and which operated with the knowing participation of all involved, including BTS.”
“Overall, each series of transactions shows a distinct pattern with the EU destination of the goods being dependent on their origin. In each separate series, the goods pass from a distinct, very small group of EU suppliers, to a distinct, very small group of EU customers – the first group often being linked to the second, or even containing the same companies. The correct destinations are maintained even after the goods have passed through a large number of different UK traders in various combinations, with the goods effectively remaining under the same control throughout.
“Scorpion is a knowing participant in a scheme which involves purchases from Ascomp [of Denmark], East Telecom [of Estonia] and Pol Comm [of Poland], and [the goods in] which end up with Ascomp, East Telecom and Pol Comm. The goods all start and end in the same places. It is nothing to do with Comica, Parasail or Forex [the base members of Cell 5] but some of the same traders appear in both schemes. The different schemes concern different final destinations and are perhaps controlled by different people: it’s to do with the money.”
“18. I have not made a detailed examination of the chains containing defaulting traders, but I have identified 19 defaulting traders in the broker deals of 4 of the contra-traders. Ten of them are common to 2 or 3. The EU customers in these transaction chains fall broadly into two main groups. With the exception of 5 mobile phone deals, the group of customers used appears to depend on the identity of the defaulter. One of these groups contains the same EU customers as those of the brokers which source goods from these contra-traders. This provides a link between the acquisition deals and the tax loss deals undertaken by the contras. I have prepared a chart summarising this which I produce as NH023”.
“78. In respect of the remaining 4 deals in the VAT period 04/06 [NTS deals 2-5] … [HMRC] have traced the chain of transactions via a contra-trader, First Touch which acted fraudulently, to fraudulent tax losses. The 4 transaction chains featured the same participants in the same order and, in each case, there was a circular flow of goods, the original supplier Pol Comm… purchasing the goods back a few days later for a price higher than that for which it had sold the goods.”
“In my judgment, the primary facts found by the tribunal relevant to @tomic’s [the contra-trader] knowledge were, in the aggregate, sufficient to permit the tribunal, if it thought fit, to make a finding of dishonest knowledge on the part of @tomic . It is in this context important for an appeal court to have regard to the need to appraise the overall effect of primary facts, rather than merely their individual effect viewed separately. This was dealt with by Lewison J in Arif v Revenue and Customs Commrs[2006] EWHC 1262 (Ch) at para 22. He said:
‘There is one other general comment that is appropriate at this stage. It relates to the evaluation of circumstantial evidence. Pollock CB famously likened circumstantial evidence to strands in a cord, one of which might be quite insufficient to sustain the weight, but three stranded together might be quite sufficient ( R v Exall (1866) 4 F&F 922). Thus there can be no valid criticism of a tribunal which considers that one piece of evidence, while raising a suspicion, is not enough on its own to find dishonesty; but that several such pieces of evidence, taken cumulatively, leads to that conclusion.’”
“I intend to show you that not only was the movement of goods controlled and orchestrated; so also was the movement of money, including Mr. Tomlinson’s money. Again we say, and this touches on knowledge, that he could not have been and was not an innocent victim in relation to the movement of money, but must have been a knowing participant in the orchestrated movement of money.”
“The money seems to start from either one account or a limited number of accounts through if you like in a diamond shape: it spreads out as it comes down to the middle and then it comes back together at the bottom.”
“Sir, the notion that the story told by the money chains is a sequence of accidents or coincidences is, in our submission, preposterous. Everybody on that money chain sheet had their part to play …”
“You cannot accidentally log in in the middle of a money circle, a multi-handed money circle that operates around the world, through a number of different IP addresses. You cannot log in by accident. Somebody has said to Mr Tomlinson: log in at time X and log out at time Y and accept the money and transfer it. Sir, that is contrivance and organisation and orchestration and the person orchestrated, Mr Tomlinson, cannot have been an innocent intruder into that exercise.”
“These exchanges summarise neatly the difficulty faced by Miss Parikh and the limitations of the charts that she is able to produce. Whilst for the UK element of the transaction chain she is able to cross-reference from the FCIB account statements to the paperwork made available by the VAT officers for the relevant traders, the same cannot be said for the EU links in the chain. She exercises best judgment (which is no more than informed guesswork) on the basis of the narrative on the Paris server data and the amount transferred from one trading entity to another. This is inherently unreliable since she is dependent upon narratives which on her own admission she has found to be from time to time in error. They may be in error as to the quantity of phones traded, whether the payment is a part payment or full payment and whether the payment is indeed as she suggests a combination payment, for example in respect of deals 7 and 8. In many cases as here the payments are not contemporaneous and occur some days later. It can be shown by reference to the statements of account that the payments are made from monies received into the account from other traders in respect of other transactions. These traders and these transactions do not relate to the particular transaction chain for which her chart is drawn.”
“You have title to those goods having paid for them in full”.
“You have a signed declaration from your supplier confirming they have title, can supply 25% of the IMEI/Box numbers and are VAT registered and that they have done a similar check on their suppliers.”
“Please can you allocate and release to CIDP the goods referred to.”
“Do not release; do not let them go.”
“Whilst Notice 726 made it clear that NTS was not expected to go beyond what was ‘reasonable’, that word was not defined. NCT [Mr Tomlinson] and I took the view that BTS could not be expected to know its suppliers’ supplier or the full range of selling prices throughout the supply chain. This would be neither commercial nor practical. If NCT knew from whom his customer was sourcing the goods, we felt that this might suggest to HMRC collusion, price and margin fixing and contrivance. NCT could not be expected to make a judgment on the integrity of the whole supply chain when only his counterparties were known to him. Essentially, if NCT considered his customer/supplier to be bona fide, he had to believe that these counterparties would conduct their own reasonable due diligence and that this would be repeated by each supplier/customer throughout the chain”.
“From this line of authority I derive the following principles in the context of the present case:
“Although an apparent profit has been made in the first accounting period [to31 December 2003 ]. The shareholders equity is low. In view of the foregoing, it is recommended that unsecured dealings should be limited to amounts below£500 and kept under supervision. Suppliers may wish to request a director’s guarantee for more significant dealings.”
“In view of the size of the business and the nature of the information available, it has been considered prudent to place the company in an above average risk category.”
“The Balance Sheet indicates a deficit in both capital employed and shareholders funds. In these circumstances, it is considered inadvisable to proceed with unsecured dealings.”
“In view of the size of the business and the nature of the information available, it has been considered prudent to place the company in the highest risk category.”
“9. The Equipment shall remain the sole and absolute property of the Company as legal and beneficial owner until it has been paid for in full and such payment has been cleared to the Company’s bankers’ satisfaction whereupon title shall pass to the Customer.
“The shareholders funds figure is very low. In view of the foregoing, it is suggested that a director’s guarantee is sought for unsecured dealings of significance.”
“Despite the high value of the goods involved, BTS has not provided any evidence that it insured any of the goods – if the goods were to be lost, stolen or damaged, there would be no way for BTS to recoup any loss. One reason for BTS not taking out adequate insurance would be that BTS knew that the transactions were contrived for the purposes of MTIC fraud and, therefore, no matter what happened to the goods, it would be paid.”
“No, not at all, no. The negotiation that will have taken place the days before, maybe a week before the stock was going to be made available towards the end of the month, which Nokia’s own distribution system, the way that they manufactured products and delivered them at the end of the month and other products became available into the grey market, the negotiations will have been taking place over a period of time.”
“I disagree with you, Mr Cunningham. There’s negotiation, there’s counter-parties outside the UK, there’s trading partners in the UK that we are negotiating price on to get the best we can for that particular product.”
“No, that was the trading pattern that we had followed. That was the liquidity coming back into the market of NTS. We had been repaid our reclaim for the 01/06 period. We had been repaid by HMRC for our 02/04 period in that time.”
“These are colossal sums of money. They are sums of money made with no commercial risk. They are by many factors more than the amounts of money that anyone else in the chain is able to make, and you [the tribunal] are asked to believe that this is the product of genuine trading, arm’s length, bona fide commercial trading. We say that this is an incredible proposition.”
“ … Chains can be intersecting or have branches, as in chains of mountains. So there is no reason why the chain of supply should not be connected through a branch. It is the existence of the requisite connection between the transactions involved which makes the relationship between the transactions a chain.”
“… There is no doubt but that [knowing involvement in contra-trading] is an abuse of the VAT provisions. There is no doubt that the CJEU was aware of the breadth and complexity of these VAT frauds. In both Kittel and the case on which it is based [ Optigen ], the Opinions of the Advocate General stressed that the chains could be very complex. It is sufficient to set out the following paragraph from paragraph 35 of the Opinion of Advocate General Colomer in Kittel :
‘In reality the methods used are as fanciful and complicated as the imaginations of the people who think them up. I therefore agree with Advocate General Pioares Maduro who, in point 8 of his Opinion in Optigen …, finds that in every case the bottom line is that an amount received in respect of VAT is not declared’.”
“22. The argument that a trader in a clean chain cannot be affected by anything which happens in a dirty chain is in my judgment wholly misconceived. Mr Young [counsel for the taxpayer] argued that there is nothing inherently wrong with contra-trading, a statement which, put in that way, is true: a trader who both imports and exports may legitimately organise his sales and purchases so that, at the end of a VAT period, he has little to pay, or a repayment claim. If he does so for reasons of cash flow, his conduct is unexceptionable. But that is not the reason for the contra-trading seen in cases of this kind. As has been said many times, not least by the then Chancellor in Blue Sphere Global Ltd v Revenue and Customs Commissioners[2009] STC 2239 , its purpose is to conceal the fraud in the dirty chain and to make it harder to combat. The appellants’ argument necessarily treats ‘clean’ as synonymous with ‘innocent’, but a clean chain in cases of this kind – that is, one in which each of the traders accounts correctly for VAT – is not innocent; it is an integral part of the fraudulent scheme. Even if I entertained any doubt (which I do not) that as a matter of EU law there is sufficient connection between a trader in the clean chain and the default in the dirty chain, there remains an insuperable connection with the fraudulent purpose of the clean chain.”
“51. However, in my judgment, the holding of Moses LJ does not mean that the trader has to have the means of knowing how the fraud that actually took place occurred. He has simply to know, or have the means of knowing, that fraud has occurred, or will occur, at some point in some transaction to which his transaction is connected. The participant does not need to know how the fraud was carried out in order to have this knowledge. This is apparent from [56] and [61] of Kittel cited above. Paragraph 61 of Kittel formulates the requirement of knowledge as knowledge on the part of the trader that ‘by his purchase he was participating in a transaction connected with fraudulent evasion of VAT’. It follows that the trader does not need to know the specific details of the fraud.”