My Digi Ltd v Revenue & Customs [2015] UKFTT 184 (TC)

“[1] This is yet a further case of so-called missing trader or “MTIC” fraud on the system of VAT. The decision of the First-tier Tribunal (“FTT”) conveniently describes the nature of a typical MTIC fraud as follows: “5 … goods (almost always small but valuable items such as mobile phones and computer chips) are acquired by a registered trader in the United Kingdom from a trader in another member State, and sold to a second UK-registered trader. The goods then usually change hands several times within the UK before they are sold to an overseas trader which, if it is located in a member State of the European Union, is registered for VAT in that member State. Commonly the transactions all occur within a few days of the entry of the goods into the UK, sometimes even on the same day, so that goods enter the UK in the morning, pass through the hands of several UK traders during the day, and are exported again in the afternoon. 6. The first UK vendor, the acquirer from overseas, charges VAT on the consideration paid by his purchaser, but fails to account to the respondent Commissioners for that tax, and disappears. Such documentation as he may have had—if any—relating to his acquisition is never produced to the Commissioners. For the scheme to work he must be a VAT-registered trader who provides the purchaser with a genuine VAT invoice, on the strength of which the purchaser claims an input tax credit. The purchaser’s own sale, and those of the other UK traders save the last in the sequence, usually generate a small profit and, consequently, a small net VAT liability, for which those traders account. The last trader, selling overseas, claims credit for the input tax he has incurred, but has no output tax liability since the sale is zero-rated. Usually this trader makes a significant profit, though that is not invariably the case; occasionally one of the antecedent traders can be shown to have made the greatest profit of all those in the chain. All of these sales and purchases, including the sale to the overseas buyer, are almost always properly documented. [2] In the jargon that has developed to describe the various participants in such chains, the initial importer of the goods who fails to account for the output tax he has charged to his purchaser and disappears, is known as the “defaulter” or “missing trader.”

“I t is plain that if HMRC wishes to assert that a trader ’s state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion. ” 87. Our approach to the appeals was to recognise that, while we must consider the merits of the individual transactions, we should not view the transactions in isolation as to do so would be an artificial exercise and we were careful to only consider the knowledge of the Appellant, through the Company officers by what was known to them during the relevant period. We disregarded opinions provided by HMRC officers and we did not attach any weight to evidence established with the benefit of hindsight. Issues 88. The issues to be determined in this appeal are: (a) Was there a tax loss; (b) If so, did this loss result from a fraudulent evasion; (c) If so, were the Appellant’s transactions which are the subject of appeal connected with that fraudulent evasion; and (d) If so, did the Appellant know or should it have known that its transactions were so connected. 89. Mr Ginniff on behalf of the Appellant did not challenge the evidence adduced by HMRC in respect of (a), (b) and (c). However, on behalf of the Appellant it was submitted that although a connection existed the test is not satisfied as the fraudulent evasion of VAT had not been planned at the relevant time, namely at the time of the Appellant’s purchase, more about which we will say in due course. Preliminary Point 90. We should note at this stage that following our reading of the evidence but prior to any witnesses being called we were asked on behalf of the Appellant whether we would provide an indication as to the likelihood of success in this case. Whilst we were sympathetic to the financial implications of running an appeal we did not consider it appropriate to do so on the basis that we had not heard the case fully argued nor had we heard evidence from any witnesses. Undisputed Background Facts 91. The Appellant was incorporated on 17 August 2010. The company officers are: · Mr Andrew James Bluffield: appointed at incorporation and has a 23% shareholding; · Mr Brian Philip Draper: appointed on 23 November 2010 and has a 25% shareholding; · Mr Matthew Edward Jackson: appointed on 23 November 2010 and has a 23% shareholding; and · Mr Brant Marcus: appointed on 14 March 2011 and has a 28% shareholding. · Mr Neil Alan Hart has a 1% shareholding. 92. The Appellant was registered for VAT on 8 September 2010; its VAT registration application declared the intended trade as “buying electrical products from main UK distributor (Apple) for overseas export” with a trading category of “wholesale of electronic and telecommunications.” 93. The VAT 1 completed by Mr Bluffield showed the principal place of business as 93 Kerscott Road, Manchester, M23 0GD which was Mr Bluffield’s residential address. 94. On 1 November 2010 HMRC received a request from the Appellant’s accountants for HMRC to reconsider its earlier refusal to change the VAT returns to monthly. The letter indicated that the turnover for the following 12 months was now expected to reach £4,000,000 or £5,000,000 as opposed to the £250,000 estimated on the VAT 1 submitted 7 weeks earlier. HMRC upheld its earlier refusal to allow monthly returns. 95. On 15 December 2010 HMRC was notified of a change of registered office and trading address to Unit 17, Birch Court, Grosvenor Grange, Warrington. The premises consisted of a rented warehouse with internal office. 96. At a visit to the company by HMRC on 21 March 2011, officer Shorrock had noted the roles of the four directors as follows: Mr Draper was responsible for book keeping and due diligence, Mr Marcus was responsible for sales, Mr Bluffield dealt with purchases and Mr Jackson married up the deals. It was also ascertained at that meeting that the Appellant had not secured any distribution agreement or contract with Apple directly although the company had traded in Apple I-Pods since becoming VAT registered. The principal trading activity of the Appellant (by sales value) was the wholesale distribution of Jacob & Co watches. The subsidiary trading activity was the wholesale distribution of electronic consumer goods such as Apple I-Pods and electronic games consoles. 97. On 1 April 2011 the Appellant submitted a VAT return for period 03/11 and claimed input tax of £122,937. On 20 April 2011 the Appellant was notified by HMRC that the return was being subjected to extended verification. 98. On 11 April 2012 the Appellant was notified that the input tax claimed had been refused on the basis that the transactions which form the subject of this appeal had been traced back to a defaulting trader via a contra-trader (Master UK Limited) and that the Appellant either knew or should have known of the connection. Associated Company 99. The four directors of the Appellant are also directors of My Digi Retail Limited (“MDRL”) which was a distributor of electronic goods and which shared premises with the Appellant. 100. MDRL was incorporated on 13 September 2010 and became registered for VAT on 13 September 2010. The VAT 1 completed by Mr Bluffield declared the current/intended trading activity as “online web trading of electrical products” with a trade category of “retail sale via mail order houses or via Internet (main activity).” 101. MDRL was de-registered for VAT with effect from 16 March 2012. Deal chains and the transactions under appeal 102. The four transactions which form the subject of this appeal were sub-divided by reference to purchase invoice numbers to separately reflect each watch model traded. By way of example, the four separate watch models purchased on supplier invoice number 31 are referenced on deal sheets as 31-1, 31-2, 31-3 and 31-4. 103. The supply chains for all four transaction supply chains are: Miniteh Treyding (“Miniteh”) – Master UK Limited (“Master”) – Mistral Marketing Limited (“Mistral”) – Jacob & Co – My Digi Limited – Ferenergy 104. The four transactions took place on 16 March 2011 (deals 31-1 to 31-4), 21 March 2011 (deals 32-1 and 32-2), 28 March 2011 (deals 33-1 to 33-3) and 29 March 2011 (deals 34-1 to 34-3). Master UK Limited 105. HMRC officer Edmead gave evidence relating to alleged contra-trader Master. 106. Master was incorporated on 14 May 2007 as a private limited company. Companies House details show the nature of the business as “wholesale of other household goods.”

“All of the directors were to some extent aware of the MTIC although some knew more than others.”

“…that this was related to exportation of goods out of the UK for purposes of a VAT refund, but that the goods never actually leave the country and are then sold again in the same way.”

“You cannot recall. Have you forgotten about Celltec? A. Yes, well, that’s how I got to know Mr Marcus. Page 457 shows that these are the statements of the administrators’ proposals in respect of Celltec. Do you have that? A. Yes. Q. If you look at page 463, that is headed “Circumstances giving rise to the appointment of administrators.” …A business restructure was required after a review of the running of the company. John Byrne was brought in to review and organise the structure and implement changes in an effort to turn round the company. Phil Draper was brought in as financial director.”

“On 15 th June 2009 the director of the above company, Brant Marcus, together with Phil Draper and John Byrne, who were also running the company at the time, met with Paul Stanley and Jason Denalsh(?) to discuss the future of the company.”

“…who were running the company at the time.”

“Everything looked very well organised, very well disciplined…So I have to say I was fairly impressed with the set up of Anovo UK Ltd.” 155. During the meeting Mr Stout asked Mr Draper if trade in high value fashion watches had been considered; Mr Marcus and Mr Draper both agreed that this was not an avenue the Appellant intended to pursue as they knew nothing about the products and preferred to focus on IT hardware and consumer electronics. 156. Mr Stout repeated the query regarding trade in watches to Mr Marcus later in the same month. At that point the directors agreed to concentrate on the company’s core activities. 157. A letter dated 25 July 2011 from the Appellant to HMRC advised that Mr Stout had verbally advised the Appellant that the watches were sourced from an authorised UK distributor for Jacob & Co Watches Inc, USA. The trading opportunity was said to be a way in which the UK distribution agreement could be circumvented as under the agreement a UK distributor could not sell directly to Europe but it could sell to UK companies. It was said that Anovo had advised the Appellant that it knew of companies within Europe that could wholesale such products. The Appellant explained that it told Anovo that it would consider trading in watches subject to the products being sourced from the UK distributor and there being no credit risk involved. 158. On 27 October 2010 Mr Stout (on behalf of Anovo) emailed Mr Bluffield with a list of watches available to trade for Jacob & Co. Mr Draper’s written evidence describes that circumventing commercial agreements is common practice within the grey market in IT and electrical goods. The Appellant agreed to conduct a limited level of business and Mr Marcus contacted his European contacts by telephone and email for interest. Mr Bluffield confirmed in his written evidence that his main role within the company was dealing with the sale and supply of refurbished consumer electronics and his involvement in the watch trading was limited after Mr Stout’s approach. 159. Towards the end of November 2010 Mr Marcus received an enquiry from Mr Fermor at Ferenergy, a Paris based broker. The enquiry related to electronic products and also watches. 160. In cross-examination Mr Draper was questioned about the efforts made to find customers for the watch trading: “I am talking about October 2010. Do you have any emails that you have sent to anybody in October 2010 saying, "Would you like to buy some Jacob watches"? A. I am aware that emails were sent but --- Q. No, please answer the question. I asked did you send any emails. A. No, and it's been said by your own witness that I was very little to do with the sales operation. Q. I am asking perfectly simple questions and you can answer these questions simply. So, you did not send any. Did Mr Marcus send --- A. Not until 11 March. Q. Yes, that is five months later. Did Mr Marcus send any? A. Yes. Q. Where are they? A. The laptop that was used by Mr Marcus had to be reformatted and unfortunately all correspondence from Mr Marcus, the only -- within the witness bundle there are some emails that have been submitted by either Mr Jackson or by me and they were only available because they had been forwarded to me by Mr Marcus. So, unfortunately -- and this happens with laptops; they don't last for ever -- his laptop required reformatting. Whether it was a virus or what -- I do not know whether it was a hardware problem. Q. Mr Draper, there are four directors in MDL and no doubt you talked about this case over many, many hours and you have talked about Ferenergy and the Jacob watch deal for hour after hour but you don't seem to know whether Mr Bluffield tried to sell the watches in October 2010. Is that the position? A. I don't believe -- as I have just said, I don't believe he felt he had contacts that would be interested in that type of product. … Q. Yes. What about Mr Jackson? What was his input in terms of finding buyers? A. I believe he assisted -- and he will be taking the stand at some point this week. I believe he assisted Mr Marcus in the email campaign. Q. There was an email campaign. So, how many emails were sent out then? … A. I don't know the quantity… Q…So you know you are getting the right product, an authorised product, and yet MDL, according to your evidence, did not contact any other authorised suppliers to find out whether you could buy the watches more cheaply. A. We did not. Q. That’s the position, isn’t it? A. That is correct. Q. All right. Did you try and find any other customers? A. Yes. Q. Which other customers did you approach? A. The only customer that I approached, or potential customer, was a company based in the north west who were opening a Chinese office, which I thought was something worth considering. I think the other companies, I don’t know who we approached. Wycom and Keki I have mentioned. The other directors are best to answer that. Q. Mr Draper, you know perfectly well that I am cross-examining you about the period between 27 October and following 29 November, a few days thereafter. You are telling us yet again about something you did in March 2011. That’s when the Chinese email was sent, isn’t it? A. That’s correct. Q. So in the time period, let’s say the week following 29 November 2010, did you try and find any other customers? A. I did not. Q. Did Mr Marcus? A. I do not know. Q. Did he try? A. I do not know. Q. Did Mr Bluffield try? A. I do not know. Q. Did Mr Jackson try? A. I know he has – I do not know the date of his attempts for customers.” (Transcript 30/4/14 page 7,16 & 53 – 54) 161. In oral evidence Mr Jackson explained that a pamphlet was made and emailed to various customers, although it was not a: “blanket kind of million strong email campaign… obviously Richard Baldwin didn't want the watches going out all over the show. I think it was more regarding his distribution agreement in the UK. He wanted to select where he sold the watches. He said we could sell one or two to individuals in the UK but not kind of in bulk in the UK. So, I think I sent this out to a couple of individuals I knew within the UK and the main people we sent it to were companies in Europe that Brant knew of in the past who he knew and the directors who would be interested but it was a test in the water kind of thing to get feedback. Q. Do you remember the sort of numbers? … A. I would probably say initially maybe 10.” (Transcript 7/5/14 page 14) 162. In cross-examination Mr Jackson subsequently confirmed that no other suppliers were ever sought for Jacob watches once Ferenergy had approached the company and that he did not believe that any customers were sought at the time of the first transaction in December 2011; the emails that were sent were in or around March 2011. 163. Mr Bluffield explained in oral evidence that as his role mainly involved the purchase of electronics he had only emailed a couple of contacts based in Germany regarding potential watch trades. Trading model 164. The Appellant conducted its first sale of watches on sales invoice dated 9 December 2010. A visit report dated 21 March 2011 of HMRC officer Shorrock noted that the Appellant became aware of its customer Ferenergy through Anovo UK Ltd (“Anovo”). Officer Shorrock’s visit note recorded that the directors were asked how a typical deal was put together. He noted that: “the reply was somewhat vague. Initially it was stated that they ‘put the deal out.’ AS asked what they meant by this…they stated it was a process of ringing around contacts and establishing who had what stock and who wanted what stock” 165. At a meeting with HMRC on 3 May 2011 Mr Draper explained how the watch transactions were conducted. He stated that Ferenergy made a stock enquiry which would prompt an availability and pricing enquiry from the Appellant to Jacob & Co. Once an answer was received, Ferenergy would be given a quote and, if accepted, an invoice raised. Ferenergy would make payment for the goods and when the funds cleared the Appellant arranged delivery of the watches in Warrington. When the goods arrived the Appellant paid Jacob & Co at which point title passed to the Appellant. A brief inspection was carried out (a box count) and the goods were sent to a freight forwarder in either France or Holland. Malca Amit was used to transport the watches. 166. In cross-examination Mr Draper stated that the email from Ferenergy on 29 November 2010 was an “unsolicited” email: “Did you ever ask yourself why is Fermor, why is Ferenergy coming to MDL? Did you ever ask yourself that question? A. If I hadn’t, it wouldn't have been a surprise, which I’ve already said it was a surprise when that email came through. Q. Did you think it was fishy – yes or no? A. At the time, I said: “Are we putting our family funds at risk? Are we at risk of MTIC fraud? Are we getting rich out of this deal? Are we defrauding HM Treasury? Are we in control of the goods? Have we established, are we satisfied that we’re buying from an authorised UK distributor?”

“What can we do to mitigate our position in the event of this not being a good deal,” which is why we all discussed the source of the product, the control of the product, the pricing of the product Q. Did you say to your brother directors: “It seems like a bit of a coincidence to me that we get an email on 27 October 2010 from Anovo, and then on 29 November 2010 we get an email from Ferenergy about precisely the same goods?”

“MR GINNIFF: Earlier in your evidence you noted about the 18 limited edition Quentin Tourbillon watches, do you remember that? A. Yes. Q. They had a recommended retail price of £270,000. I can take you to these if you want. A. Yes, it is familiar. Q. Would you accept that if Jacob & Co had sold those direct to the public, all 18 of those, that their turnover would have been 4.8 million in pounds not in dollars and, therefore, that would have far exceeded the 4.3 million that was recorded on the report. Would that not have encouraged you to question whether, not that it is wrong but there is something more to the information that you do not have or you are not appreciating? A. I didn’t do any further research than the report I have in front of me. Q. You see, even if they sold them at a 50 per cent discount, those watches, and the exchange rate was 1.5 dollars to the pound, that would be 85 per cent of the turnover that is declared on this Orbis report. Therefore, if one was to look particularly at information that one had available at the time, which is the Orbis report, would one not objectively come to the view, “I see that, but something is wrong about that”? A. Well that was the information that I used to prepare my evidence. The question really that came from looking at this was that what did My Digi do as far as checking with the manufacturer as to whether it was capable of providing the goods which appear on the projection. I’ve had nothing in evidence to suggest that the directors had any view on the Orbis report or any other evidence which helps to, if you like, support their projections which have some relationship between what they were intending to do and what Jacob & Co (US) could produce. (Transcript 25/4/14 page 69 – 70) 176. Mr Draper’s witness statement stated that the spreadsheet did not consider any constraint of demand or supply and market size; “it assumed a fixed margin with fixed monthly overheads being incurred. The only constraint was “cash” or working capital available. It was compiled and presented to HMRC to demonstrate that if trade continued, the level of repayment due to MDL could escalate to substantial levels.” 177. In cross-examination Mr Draper clarified that he did not believe the figures in the document “because they were purely an arithmetic linear progression” (Transcript 30/4/14 page 72) and was adamant that he had told Officer Shorrock that the figures were based on various assumptions, although we must note that this was not put to Officer Shorrock in evidence. Due diligence 178. It was noted by Officer Saxon that HMRC’s first visit to the Appellant was carried out on 2 February 2011 by Officer Simpson in order to verify the first VAT return submitted in respect of the period ended 31 December 2010. The return, which showed a repayment due to the Appellant of £20,828.50 was not subject to extended verification and was subsequently repaid. The Appellant’s customer: Ferenergy 179. Ferenergy was registered for VAT in France between 6 May 2009 and 7 September 2011. The trading address was recorded as 30 Av George V, 75008, Paris 08. In response to an enquiry from HMRC, the French Authority stated that the company had failed to cooperate with it and it had not been possible to obtain any records relating to business transactions, including those involving the Appellant. The French Authority strongly suspected that the company was involved in VAT fraud and acted as a conduit company involving electronic components. 180. The French Authority stated that the company had been registered by UK national Gareth Gamble on 1 May 2009 under the name International Carbon Trading. On 8 January 2010 Edward Fermor became the sole shareholder and “gerant” (manager) and the business activities were expanded to include energy and commodities trading. The trading address was an accommodation address used by entities implicated in carbon quota fraud. No returns had been submitted since the company was set up. 181. Enquiries with Prologic, the freight forwarder in France to whom the Appellant purportedly shipped the goods revealed that no documentation relating to the Appellant could be found. Information obtained from the Dutch tax authorities included an Incoming Hardware Inspection sheet dated 14 December 2010 from Geo warehousing and Logistics at Rotterdam Airport which showed 10 Jacob & Co watches from the Appellant to Ferenergy. Officer Saxon noted that the Appellant’s first deal involving Jacob & Co watches which it sold to Ferenergy was dated on the sales invoice as being on 9 December 2010 which led Officer Saxon to conclude that these were the same goods shown on the Incoming Hardware Inspection sheet and therefore were subsequently shipped to Geo Warehousing. 182. Mr Fermor was also the director of I.T. Fast Track Ltd which was incorporated on 15 July 2004 and dissolved on 11 May 2010. In a decision dated 14 April 2008 HMRC denied I.T. Fast Track the right to recover input tax in excess of £9,000,000 in respect of purchases in March and April 2006 on the grounds that the transactions were connected to fraud and that the company either knew or should have known of the fact. The company’s appeal against this decision was struck out because the company had been formally dissolved. 183. Mr Fermor was also the director and company secretary of The Big Store Limited which was incorporated on 2 November 1999. Mr Fermor was appointed company secretary on 10 April 2000 and director from 17 August 2000 to 5 February 2001. The company was registered for VAT from 1 September 2000 to 10 March 2004. The company traded in mobile phones, computer chips, phone cards, software and electronic goods, carrying out UK to UK deals which were connected to tax losses. A notice of assessment was issued in the sum of £143,591 in period 11/03 on invalid supplier invoices where the supplier’s identity had been hijacked. In the relevant transactions The Big Store had made third party payments. The company went into Creditors Voluntary Liquidation on 30 September 2004 and was dissolved on 13 May 2008. 184. At a meeting with HMRC on 21 March 2011 the directors of the Appellant told officers that Ferenergy had advised that it sold the stock to French jewellery shops. Officer Saxon noted that this appeared to contradict Mr Draper’s later comment to HMRC officers on 3 May 2011 that he had been told by Mr Fermor that one of Ferenergy’s customers was a German company which had retail outlets and another was a company run by a Polish national who sold to Germany and Italy. 185. In a telephone conversation with Officer Shorrock on 25 March 2011, it was recorded that clarification had been sought as to how initial contact was arranged with Ferenergy and Jacob & Co. Officer Shorrock’s note recorded: “PD was unsure. He stated that Anovo had provided the contact for Jacob and Co and PD thought that Ferenergy might have come from the old Celltec contact list.” 186. At the meeting with Officer Shorrock on 3 May 2011 the visit note recorded: “CS clarified how they had met FC. PD advised that Brant Marcus had exchanged business cards with Fermor when he had been involved in Celltec at the Cebit fair. (NB as far as I know Celltec ceased in 2008 and FC started in 2009 so how is this possible?)” 187. On 19 April 2011 Mr Draper telephoned HMRC officer Shorrock to advise that he was flying to France to meet with Mr Fermor. Officer Saxon noted that this visit post-dated all of the Appellant’s transactions with Ferenergy. On 3 May 2011 Mr Draper told officer Shorrock that he had visited the private residence of Mr Fermor in Montpellier, he had been told by Mr Fermor that business was not going well and he was intending to vacate the Paris office which was chosen for its prestigious address. Mr Fermor was also reported to have stated that he had a current income tax debt to HMRC of £500,000. 188. In a letter dated 16 June 2011 the Appellant stated that Ferenergy approached the company via email on 29 November 2010 asking if the Appellant was able to trade in various products including Jacob watches. The Appellant stated that this approach was unlikely to be coincidence; from which Officer Saxon inferred that it followed an introduction by Anovo although there he noted that there was no evidence to show that Mr Stout passed the Appellant’s details to Ferenergy. 189. In the same letter of 16 June 2011 it was stated that the principal of Ferenergy, Mr Edward Fermor believed he had previously met Mr Marcus at a trade fair. The letter also stated that the Appellant had queried why Anovo did not trade directly with Jacob & Co and had been told by Anovo that the watch trade was outside of the company’s core activities and would not be permitted by the head office in France. 190. Mr Marcus stated in evidence that when approached by Ferenergy he had “obviously asked around to see if people knew who Ferenergy were. I could not recollect that I knew them. I may well have heard of Ed Fermor previously but I didn’t know Ferenergy at the time” (transcript 9/5/14 page 15). 191. Mr Draper’s witness statement set out what he described as “our standard due diligence checks” which included: · Proof of identity (copy of passport accepted); · Signed terms and conditions of purchase or sale; · Company registration (Certificate of Incorporation); · VAT registration (verified); · Main bank details; and · 2 trade references. 192. Mr Draper also confirmed in his oral evidence that he was predominantly responsible for carrying out due diligence although Mr Marcus spoke to a number of trade referees. 193. The following documents were produced by the Appellant in respect of its due diligence on Ferenergy: · Copy of Mr Fermor’s passport; · Europa validation of VAT registration dated 15 March 2011; · Introduction letter from Ferenergy; · Trade Account Application form completed by Ferenergy for the Appellant; · A company extract form for Ferenergy headed “Extrait Du Registre Du Commerce Et Des Societes” dated 3 March 2010; · A document in French dated 24 February 2010 providing registration and contact information; · A Creditsafe report dated 9 December 2010. 194. In cross-examination Mr Draper accepted that the French documents had not been translated due to cost, although he had made no enquiries as to how much a translation service would charge. He explained that his French was not good enough for a full translation but he believed the key words had been picked out “to make sure that we knew what the titles were” : “Q: What was the view taken? Why did you not think it was worth getting translated? Was it because you did not think it was important? A. Not ... our normal due diligence tick box, and sadly tick boxes are very often abused, as I have said, certificate of incorporation, VAT registration, ideally certificate of registration, proof of identity and our terms and conditions. JUDGE BLEWITT: So you did not think this document was important. A. Not ... no, we ‑‑‑ MR TAYLOR: Even though you did not know what it said. A. Yes.” (Transcript 30/4/14 page 93 & 95) 195. It was accepted by Mr Draper that the company trading information provided on one of the documents made no mention of watches but referred to metals and electronics. Mr Draper stated that he believed Mr Marcus had attempted to telephone one of the trade references provided, a firm of accountants/management consultants called THB, but he was not aware of the outcome. He agreed that the firm had no link to trading products but stated that this was not uncommon: “I considered the THB would be a professional firm. God forbid we had professionals that conducted fraud” (Transcript 30/4/14 page 120). 196. Mr Marcus explained that his research on Jacob and Co involved checking the company’s website and speaking to the references given. He could not recall speaking to THB and explained that the purpose of the trade was as follows: “A. No, because trade references were there for one reason only, that we would independently confirm the details, call them, and if they could confirm that they knew of them then that was trade reference for us. It could have been a freight forwarder, it could have been a solicitors’ firm, it could have been accountants. As long as there was a trade reference, that was enough. Q. So as long as a crook has an accountant he gets through your due diligence, is that right? A. We weren’t aware of him being a crook at the time Q. No, just answer the question. As long as a crook has an accountant or a lawyer, he gets through your due diligence. A. Yes, then, if you want to put it like that. Q. Not very robust, is it? A. It’s not perfect, no.” (Transcript 12/5/14 page 37) 197. Mr Draper’s second witness statement dated 10 January 2014 added that in early January 2011 Mr Fermor contacted Mr Marcus regarding the availability of watches. It transpired that Mr Fermor was due to be in the UK the week of the Appellant’s visit to Jacob & Co and a meeting was therefore arranged with Mr Fermor at a London hotel. In oral evidence Mr Draper stated: “Q. You met Mr Fermor of Ferenergy in London, that is correct, isn’t it? A. Yes. Q. What were the circumstances of that meeting? A. This is – I’m probably not the best witness, but I can vouch for having been there. I think he was advised that we were in London on business and he said: “I can make – there’s an opportunity that we can meet up,” which we did, we met him at a hotel the name of which I forget – all I remember is the cost of the coffee per cup, which was exorbitant, but I would remember that.” (Transcript 29/4/14 page 99) “A. … We met with Edward Fermor in a hotel, the name of which I forget. Mr Marcus and Mr Jackson may remember the name of the hotel. They were present, yes. Q. I asked you whereabouts it was. A. In London. Q. Yes, a big place, whereabouts? (Pause). A. It was about five miles from Euston, I think. Q. In which direction? A. I don't know. I don't recall. Q. And how did you get there? A. By cab. Q. From where? A. From Jacob and Co (UK). Q. Oh, so it was the same day as the Jacob and Co meeting, was it? A. Yes, and we ‑‑‑ Q. That is the first time I have heard that, you see, Mr Draper. A. It has never been denied. Q. It has never been offered before, Mr Draper. So it is about five miles from Portland Square…. A. Jacob and Co. Q. So you went to Jacob and Co and when did you travel down? A. By train on the same day. Q. From where? A. Runcorn I think we ‑‑‑ Q. Which train did you catch? Roughly what time? A. Eight or 9 o'clock I would think. No, I would think we probably got the 10 o'clock so as to make it a cheaper train ticket…. Q. Who went down on the visit? A. Mr Marcus, Mr Jackson and myself.” (Transcript 1/5/14 page 31 – 33) 198. At a visit to the Appellant on 21 March 2011 HMRC officer Shorrock expressed a number of concerns regarding Ferenergy. By way of example he noted that the company was new, no company accounts were held by the Appellant, the Creditsafe report warned “caution - credit at your discretion” and the original company name indicated carbon credit trading. It was noted that none of the documentation relied upon by the Appellant referred to watches and there were no signed terms and conditions between the parties. The concerns were reiterated by officer Shorrock in a telephone call with Mr Draper on 25 March 2011. 199. In oral evidence Mr Jackson recalled that they met Mr Fermor a week or two before Mr Baldwin. Mr Marcus recalled an occasion when Mr Fermor was met on the same day as a visit was carried out to Jacob & Co. In cross-examination he could not recall who went on the visit, stating that it was either himself and Mr Jackson or himself and Mr Draper or himself, Mr Draper and Mr Jackson. A second visit to Jacob and Co was carried out by himself and Mr Jackson. Mr Marcus could not recall if they went to London by car or train. 200. Mr Bluffield stated he had never met anyone from Ferenergy but was aware that Mr Jackson and Mr Draper had flown out to meet Mr Fermor. He stated in oral evidence that he was with his co-directors when they visited Mr Baldwin at his office in London. In cross-examination he stated: “Q. Okay. You went with your colleagues to see Mr Baldwin in London. A. Yes. Q. It wouldn't be fair of me to ask you for the date. I am not going to do that. A. Okay. Q. But can you recall what time of year it was? A. No. Q. Can you remember how you got back? A. By car. Q. So, did you travel down by car? A. Yes. Q. You travelled down -- just remind me; I am sorry that I can't remember. Can you just remind me who was on that visit? A. I think all four of us were there. Q. So, whose car did you drive down in, can you remember? A. I think Mr Marcus's. Q. What sort of car was it? A. It was an Audi… Q. If you can't remember, just say. A. Yes, I honestly can't remember, even four years back. Q. Can you remember whether you were there for 10 minutes or an hour or two hours or was it half a day? Can you help us with that? A. Maybe, like, an hour. … JUDGE BLEWITT: I think you said you met Mr Baldwin once at his office, was that right? A. Yes. JUDGE BLEWITT: That was the day you had all travelled down together in the car. A. Yes. JUDGE BLEWITT: Then did you all travel back together in the same car? A. Yes.” (Transcript 8/5/14 page 98 – 99, 193) 201. In an email dated 24 March 2011 to Officer Marsh and Officer Shorrock, Mr Draper referred to the Appellant’s “trading and due diligence processes” as “robust”. 202. In a note of a telephone call on 25 March 2011 with Mr Draper, Officer Shorrock recorded that he had advised Mr Draper that it was for the directors of the Appellant to decide what deal to conduct and that HMRC could not red light or green light a transaction. Officer Shorrock also noted that he told Mr Draper that he “did not consider that the due diligence was robust as he had indicated in his email” and that a number of features of the Ferenergy due diligence caused him concern “and I had pointed them out at the visit.”

“Q. So, you've got Stout in effect introducing the possibility of trade with Jacob and you've got a company closely connected to Stout standing as the trade reference. Did that not at the time strike you as being quite a coincidence? A. It was a coincidence for trade reference in relatively all industries, companies know other companies and yes, it is a coincidence, but --- … Q. Did you discuss this with your fellow board directors? Here we are, we have Phil Stout introducing the potential trading and we have Phil Stout vouching for the company which out of the blue sent it an email a few days ago. Did you talk -- did you discuss that with your fellow directors? A. Yes, we did and the words, "That's very cosy, isn't it?" were used and I don't know whether it was by me -- I just remember the words, "That's very cosy".” (Transcript 1/5/14 page 18 & 20) 204. In cross-examination Mr Marcus was unable to recall whether the email from Ferenergy addressed to him was unsolicited. He stated that it did not strike him as odd that the email from Ferenergy on 29 November 2010 followed that of Mr Stout on 27 October 2010 in which the possibility of trading watches had been mooted by Mr Stout, although with hindsight he accepted it was quite a coincidence. He could not recall Mr Draper raising the issue or his view that it was “cosy”. 205. In his written evidence Mr Jackson stated that: “Prior to any business transactions, our company performed what I saw as thorough due diligence on buyer and seller. This due diligence consisted of phone conversations, ID verification, reference follow up and meetings with the parties face to face. This included two visits to Richard Baldwin’s offices in London…”

“His office had a Jacob clock on the wall as its centrepiece and Jacob marketing material was festooned throughout the various desks and cabinets. There was no doubt in anyone’s mind that RB appeared to be a legitimate distributor for Jacob and to a lesser extent, other watches. A big hint was in the trading name of his company, Jacob & Co UK Ltd…RB came across as a very credible individual as I now believe do most “con-men”.” 215. On 1 April 2011 HMRC officer Shorrock wrote to the Appellant expressing concern that the Creditsafe report showed that Jacob & Co had been trading at a loss since 2009, the address on the report was different to that held by the Appellant, no trade references had been taken up and the terms and conditions contained in the Trade Account Application referred to “My Digi” rather than the full company name. 216. On 25 July 2011 the Appellant responded by letter stating that the checks carried out had included a Companies House check, credit agency check, VAT validation and at least one verbal trade reference. 217. Officer Saxon’s written evidence also highlighted the following concerns: · The Creditsafe report indicated creditworthiness as at 7 December 2010 however the previous credit ratings had fluctuated dramatically dating back to 2 April 2008 which appeared not to have been questioned by the Appellant; · The Creditsafe report indicated that Jacob & Co was running at a loss in 2009 and the company’s net worth had declined from £196,690 in 2007 to a negative worth of £7,988 in 2010 yet the Appellant had not sought up to date information; · There was no evidence to show that the Appellant had obtained written confirmation that Jacob & Co was an authorised distributor at the time of the transactions or that it had had sight of the distribution agreement; · The two aspects emphasised by the Appellant for entering into transactions with Jacob and Co were that the product was sourced from an authorised distributor and that there had been no reason to doubt the veracity of Mr Stout who introduced the deals. However, Officer Saxon noted that there was no evidence that the Appellant verified that the supplier was an authorised distributor for the manufacturer nor was documentary evidence obtained to confirm that the watches came to Jacob & Co from the manufacturer. 218. In oral evidence Officer Saxon accepted that the Appellant had visited the offices of Jacob & Co to satisfy themselves as to the company’s status and standing. However he noted: “…but what was important was that, the evidence I have, is that that visit took place in January 2011, which was after trading had started.” (Transcript 24/4/14 page 69 – 70) 219. In cross-examination Mr Draper stated that he believed the Appellant had received the trade reference documents prior to the first transaction and that they were considered at the same time as the first deal took place. He did not agree that it would have been prudent given that the companies had never traded with each other before to wait and consider the documents prior to concluding the deal, explaining that the Appellant’s main consideration was the correct incorporation and VAT registration verification. Mr Draper agreed that he was aware prior to the first transaction that a VAT fraudster would have a valid VAT registration number in order to participate in fraud. Mr Draper went on to say: “The bottom line is that the directors at that time were satisfied that the introduction had been made by, at the time we thought was a senior, respectable individual. We had no reason to doubt the authenticity of Jacob & Co. However, irrespective of that, we ensured that his company registration and his VAT number were valid, and it was important for our personal – the company protection, that the terms and conditions were in place. Q. In the context of this case why did you need trade references? A. It was a standard form. Q. Window dressing is another word for standard form, Mr Draper, isn’t it? A. Not at all… Q. But in the context of this case, they were absolutely irrelevant to you because Jacob hand you the watches before you pay them, and they are prepared to wait until Ferenergy pay you, so according to the financial model that you are presenting to this Tribunal you do not actually need trade references, do you? A. No, we don’t.” (Transcript 1/5/14 page 88 - 89) 220. In cross-examination Mr Marcus stated that he was unaware of the Appellant’s credit score in December 2010 but stated the company did not receive or give credit: “Q. But you did in effect get credit, didn’t you, because what happens here is: Baldwin sends you the watch, so it leaves his possession. It could be something worth £120,000. A. Mm-hm. Q. He does not know you. It is not like you have been doing business for two or three years and there is a build up of: “Well, they pay us within four days of us sending the goods out.”

“Records are reasonably were maintained and organised. The trader appears to take all due diligence checks on customers. No reason to doubt the credibility of this business at this stage” (Transcript 24/4/14 page 13). Officer Simpson’s visit report refers to the Appellant having conducted all due diligence checks on customers, although Officer Saxon noted that the report did not indicate what checks those may have been. 222. The Appellant relied on Officer Simpson’s visit as evidence that HMRC had approved the company’s due diligence and trading. 223. Officer Simpson gave the following oral evidence regarding her meeting with the Appellant on 2 February 2011: “Q. Did you give them any sort of steer as to HMRC, as it were, "green lighting" any exports they made? Do you know what I mean by that? A. Not really, no, I don't. Q. All right. I will try and rephrase it. If we look at paragraph 12 of your witness statement, "Mr Jackson states among other things, 'I spoke with all directors present and gave assurance that from HMRC's perspective all transactions and all the companies involved in the supply and sale of goods satisfied HMRC". Did you tell them, "As far as I am concerned, Jacob (UK) are a fantastic company, you can do business with them"? A. Absolutely not. Q. Did you tell them that, "Ferenergy are a fantastic outfit. You've got nothing to worry about with them"? A. Absolutely not. Q. Would it ever be appropriate for you to give traders HMRC's stamp of approval of another trader? A. No, it would not”. (Transcript 28/4/14 page 18) 224. Officer Simpson also confirmed in oral evidence that although due diligence was mentioned by Mr Draper who produced a file containing various documents, she did not review the documents in any depth and her conclusion that the Appellant carried out due diligence was based on what Officer Simpson was told by Mr Draper. The issue of due diligence was not a priority to Officer Simpson nor was it within her remit to check the Appellant’s due diligence. 225. Mr Draper explained in his written evidence that following Officer Simpson’s visit the Appellant’s December 2010 repayment claim was released within a couple of days and HMRC granted the company’s request for monthly returns. As a result the Appellant believed that everything was in order. He also confirmed that the credit worthiness of Jacob & Co was reviewed and the Appellant concluded that as there was no credit risk to the Appellant the status of Jacob & Co did not cause concern. Inspections, serial numbers and certification 226. Officer Shorrock’s visit report dated 21 March 2011 recorded Mr Draper having been asked if the watches had serial numbers, to which Mr Draper responded “no, just model numbers.”

“Well, if the explanation given by Mr Baldwin held water -- and we are not suggesting he hasn't retained something; it's just it's never been seen -- the practical example would then be that a customer in, say, France, would be asking a retailer in France if it wasn't the customer of Mr Baldwin to then go back to his supplier who may not necessarily be Mr Fermor, but we assume it may be, and for then Mr Fermor to go to My Digi and ask to see certificates and have them produced and then My Digi then go to Mr Baldwin and ask for those certificates. Now, in a practical sense how would that work when the customer is standing in a shop waiting to be satisfied that the goods he is being shown have genuine documents behind them? Q. We have seen and indeed you have commented on the speed in which transactions have taken place between the parties. It would seem that it wouldn't be of great difficulty for such communication to take place at the same sort of speed that the transactions took place. A. … As a customer I would be expecting to see certificates and documents available with the watch that was being presented to me. MR GINNIFF: It is not likely to be a purchase that one goes in and just buys over the counter straight there and then is it though? A. I am not sure. I am just suggesting that if I was spending that sort of money, which these are expensive watches, I would expect that documents would be there, and one of the other issues that comes from this is how would My Digi know that the watch which was being requested for certificates was the same watch that was being presented to a customer in a retail shop in France? Q. Because it will have the serial numbers on the lugs? A. But My Digi didn't have those serial numbers….I'm not suggesting that Mr Baldwin did not say what he told My Digi. What I am basically saying is that My Digi ought to question it in respect of the certificates and satisfy themselves. (Transcript 25/4/14 page 91) 228. In addition to the contradicting information above provided by the Appellant, Officer Saxon also noted that there was no explanation as to why the Appellant chose not to obtain the serial numbers from Mr Baldwin. In contrast, Officer Saxon noted, the Appellant recorded the serial numbers of electronic goods it traded showing an awareness of the significance of such information. A letter from the Appellant to HMRC dated 25 July 2011 stated that serial numbers were requested from Mr Baldwin on a number of occasions but never received. Correspondence with Jacob & Co was attached in support of this assertion dated 13 May 2011, 7 June 2011 and 26 May 2011 which Officer Saxon noted post dated HMRC’s enquiries regarding serial numbers. 229. At no time did the Appellant obtain certificates of authenticity which were said to be retained by Mr Baldwin. 230. Mr Draper was asked at a meeting on 3 May 2011 about the research undertaken about the products. Mr Draper stated that he had visited a jewellers shop in Southport, although that particular branch did not deal in Jacob watches. Mr Draper was advised by the jeweller that the Blackburn store held Jacob watches but he did not visit the shop. 231. In his written evidence Mr Draper stated that HMRC had confused two visits made by him; one to the Southport Watch Shop which took place prior to any of the watch transactions and where he was told that “he would not trade in such watches as the residual value in Jacob watches weren’t as strong as Rolex etc”

“personally called in to a small retail outlet at Southport called The Old Watch Shop and…just asked him for his opinion on Jacob watches. They were not a product for him, he felt that at some point the bubble would burst with the Jacob brand…” (Transcript 29/4/14 page 93) 233. In cross-examination Mr Draper explained that he happened to be walking past The Watch Shop in Southport when consideration was being given to trading in watches and attempts had been made to market Jacob watches. The jeweller had never traded in such watches but Mr Draper explained that he was “getting an expert’s opinion of the state of the high value watch market across a number of brands” (transcript 1/5/14 page 136). The other shop in Southport was called Jacksons, which Mr Draper made a point of calling into as Mr Baldwin had stated it was one of his customers. He was told by Jackson’s that the branch in Blackburn dealt in Jacob watches but he did not visit: “You could have gone to Blackburn, could you not? A. I could. Q. You could have actually seen a real Jacob's watch yourself, could you not? A. I had already seen them because this was after the first shipment. Q. So you went to the Blackburn shop after. A. No, I didn't go to the Blackburn shop. Q. I am terribly, terribly sorry. You went to the Southport shop after the first shipment. A. Correct.” (Transcript 1/5/14 page 139) 234. It was also stated that the Appellant carried out internet research on the watches however Officer Saxon noted there was no evidence to support this assertion. In oral evidence Mr Draper stated: “Quite extensive internet research, because we wanted to satisfy ourselves, not having had any dealings with watches: was Jacob involved or were there any examples of Jacob watches, or indeed watches, being used in respect of MTIC fraud. We couldn’t find any evidence.” (Transcript 29/4/14 page 94) 235. Mr Jackson explained in his oral evidence that initially he had little involvement in the watch deals although he had carried out internet research by Googling the brand and Jacob & Co. Mr Jackson explained that this was his first ever involvement in due diligence checks and his understanding was that it involved checks on trading counterparties and obtaining certificates of incorporation and VAT registration. Mr Jackson explained that serial numbers were not an issue for the Appellant as they believed they were dealing with an authorised distributor. He could not explain why serial numbers were recorded by the Appellant in respect of some electronic products traded and not for watches. 236. In oral evidence Mr Marcus stated that when the Appellant was approached by Jacob &Co “we identified that they were the authorised distributor” (transcript 9/5/14 page 11). The research carried out by Mr Marcus involved getting a “feel for the size of the market and…in which countries we would be able to sell the product without disrupting the…or bringing attention, too much attention, to the distributor” (transcript 9/5/14 page 14) 237. Mr Bluffield stated in oral evidence that he researched Jacobs watches by looking into the market valuation. He also stated that he had looked online to find out more information about Jacob & Co. Mr Bluffield confirmed that he did not carry out any research on Ferenergy. He stated that he had no real involvement in the watch transactions as he was busy on other work. He believed the final transaction took place while he was away with his family. 238. At a meeting on 3 May 2011 with Officer Shorrock, Mr Draper confirmed that the only inspection of watches carried out by the Appellant related to the first transaction on 9 December 2010. The watches in subsequent transactions were not examined. Photographs were supplied by the Appellant to HMRC on 16 June 2011 which purported to relate to the first transaction. Officer Saxon noted that the protective film had been removed from the watch surface in two photographs although there was no evidence as to when and by whom this had been done. Officer Saxon further noted that despite examining the watches in the first transaction, no record of the serial numbers was made. 239. In his written evidence Mr Draper confirmed that the Appellant had removed the protective film for the initial shipment “as part of the visual inspection of the goods.”

“because in our zeal to establish what we were shipping and ensuring that we had what we said we had bought, I was advised by one of my colleagues that one of us had left fingerprints on it and that had devalued the product.” (Transcript 29/4/14 page 102) 240. In cross-examination Mr Draper was questioned about the fingerprint. He agreed that it would be easy to rub off a fingerprint mark and stated he and his co-directors had discussed the issue because legal advice was sought regarding the request that further consignments not be opened by the Appellant, although Mr Draper was unable to recall when this had taken place. Mr Draper could not explain why he and his co-directors had made no mention of the fingerprint in their witness statements although he explained that the Appellant did not have the benefit of the manpower that HMRC had in preparing the case. Mr Draper could also not explain how a fingerprint came to be on the watch when the pictures exhibited by the Appellant which Mr Draper had confirmed related to the first transaction appeared to show the goods being handled in gloved hands: “All I can say is it wasn’t my fingerprint. I don’t know how it got on there. I thought we were being careful and we specifically went out and bought white linen gloves.” (Transcript 2/5/14 page 92) 241. Mr Marcus stated in his witness statement that: “Although we were asked to not open future shipments from our customer due to the high value of the goods and the fact that finger marks were left on the first shipment. We still opened at least one of the boxes but handled the watches with gloves.” 242. In evidence-in-chief Mr Marcus added (referring to its customer Ferenergy): “He’d obviously been aware that the heat sealed bags had been cut open and some of the plastic covering on the facing had been removed and he’d indicated that there were fingerprints on the watches. It didn’t occur to us to wipe them down, if you will, or wear any protective gloves. We did have a conversation with Jacob and Co about how they handle watches and he indicated that he always handled watches with gloves, at which point we went out and purchased a pair of gloves.” (Transcript 9/5/14 page 21) 243. In cross-examination Mr Marcus could not recall when the Appellant had been advised by Mr Baldwin to use gloves to handle the watches; it may have been from the outset or at the meeting in January 2011. He confirmed that Mr Fermor had complained about fingerprints on the watches after the first transaction but was unsure whether the photographs exhibited by the Appellant showing watches being handled with gloves related to the first consignment but stated that the fingerprints may well have come from the warehouseman or one of his co-directors as he had used gloves. Mr Marcus confirmed that this incident had been omitted from his witness statement and stated that at the time of writing the statement he had recalled events as accurately as possible. 244. Mr Marcus was asked why the Appellant believed that it was an agreed term of sale that the watches would not be opened or the contract would be invalidated; a factor which was not included in his witness statement nor set out in writing between the parties. Mr Marcus was unsure but believed that the condition was contained on Ferenergy’s purchase orders at his request. The purchase order contained the following: “Damaged/substandard/incomplete goods may be rejected on inspection”

“The initial deal was arranged by myself and Brant Marcus…When the watches arrived by secure courier to our offices in Warrington, we immediately opened up the package, and using white jewellery gloves bought specifically to handle such products unwrapped each timepiece individually and took pictures of each. We then securely wrapped them back up and arranged for shipment to our customer.” 246. In oral evidence Mr Jackson added that gloves were used so that the watches weren’t scratched or marked. Many of the cellophane sleeves on the front and back were removed and would not stick back on and he believed this had led to Ferenergy requesting that the following shipments were not opened. When it was put to Mr Jackson that he had not mentioned fingerprints in his witness statement nor in evidence-in-chief Mr Jackson explained that it had not stuck in his mind when he write the statement but denied fabricating the evidence to explain why the goods were not inspected thoroughly. It was put to Mr Jackson that if the packages were not opened, they could contain anything to which he responded that there was a certain element of trust when dealing with a distributor. 247. On the issue of wearing gloves Mr Bluffield recalled in oral evidence that the Appellant was told by Mr Baldwin in a telephone call to use them to handle the watches to ensure that no fingerprints were left. Visit by HMRC on 23 March 2011 248. HMRC officers Kent and Marsh visited the Appellant on 23 March 2011 at the request of Mr Draper earlier that day. The purpose of the visit was said to be to witness a consignment of watches arrive at the Appellant’s premises. What took place at the meeting was a contentious issue between the parties. 249. Officer Marsh completed a visit note which formed part of the exhibits in this case. The report states that the officers were not given the opportunity to examine the watches. Officer Marsh described a sealed outer box which contained two packages wrapped in bubble wrap. She recalled the directors expressing concern that they had expected three watches and therefore three packages but it was then explained that one of the packages contained two watches. Officer Marsh’s visit note recorded: “The packages appeared to be two plastic type round boxes that were sealed in transparent bags. The boxes were dark in colour and were opaque. I could not actually confirm that these boxes contained watches…a vague bulbous shape could be made out but as the packages could not be opened or taken out of their plastic bags that was all that could be confirmed. The directors stated that they could not open the bags or boxes as it would invalidate their contract with the buyer.” 250. In oral evidence Officer Marsh stated: “There was one box, an outer box, that contained two packages inside, two boxes, plastic boxes, and they were wrapped in bubble wrap. But they were encased in like a plastic bag and then they were wrapped in bubble wrap. …Q. When the boxes were opened was there general bubble wrap in the box? A. Yes. Q. And you are saying within that bubble wrap ‑‑‑ A. Yes. Q. ‑‑‑ there were two packages. A. Yes. Q. Now trying to cut through the layers of the packages, was there bubble wrap round those packages? A. Yes, I would say that they were wrapped. Because that is what I have said: "The outer box contained two packages wrapped in bubble wrap." Q. Was the bubble wrap round some plastic boxes, are you saying? A. The plastic boxes, yes. The plastic boxes were in a plastic bag in ‑‑‑ Q. How do you know that if the bubble wrap was round them? A. The bubble wrap was opened. …Q. Then you are saying the next layer would be a plastic bag. A. The next, yes, there is a plastic bag, a sealed plastic bag. Q. Then the next layer that is vacuum packed is you get down to a box, you are saying… And you are saying that box was dark in colour. A. Yes. Q. How big was that box? A. A small box, like that. Q. And were they both small boxes? A. That’s what I recall, yes…. Q. Did you ever say, “I can’t even tell if these are watches”? A. No. Q. Do you accept that you had been asked to witness the delivery of watches as Mr Draper was doing that because he wanted to satisfy you they were taking a delivery of goods of watches? You realised that is why you were there? A. Yes, that was the reason why I was there, yes. Q. And yet you never asked or said, “I am sorry, but I can’t tell if those are watches”? A. No. Q. Why was that? A. Primarily because Mr Draper had asked us to pose as customers and I didn’t feel that ... I felt that that precluded us from sort of asking too many questions.” (transcript 25/4/14 page 124 - 130) 251. Officer Kent’s written evidence explained that he accompanied Officer Marsh on the visit as Officer Shorrock was unavailable. Officer Kent had no prior knowledge or dealings with the Appellant. Officer Kent agreed the contents of the visit report prepared by Officer Marsh and endorsed the notes as follows: “Contents agreed – we both made the observation that the “business premises” consisting of a warehouse with small office at the front were totally bereft of any day to day goods in/out activity apart from the watch delivery.” 252. Officer Kent described how two packages were opened which contained items “encased in opaque bubble wrap”

“I don’t recall anybody, not myself anyway, taking hold of it or anything like that. We did ask, I did ask to confirm what was in there if the packaging could be peeled back, or whatever, so that we could confirm what we were looking at but we were told that to do that, even to tamper with the packaging, would invalidate the transaction...As I say, I didn’t pay a great deal of attention to how it was packaged, if you like. I was more interested in what it contained….From where I was looking from, I couldn’t say yes or no as to whether they – the actual form of what was in those plastic wrappings, other than the fact that they were plastic wrappings and there was something inside them” (Transcript 25/4/14 page 140, 154, 159) 254. All four of the directors disputed the evidence of officers Kent and Marsh. Mr Draper stated that there were initial concerns that a watch was missing and it was only on further examination witnesses by the officers that the directors were satisfied as to the contents. 255. Mr Draper’s evidence was that HMRC was invited to witness the Appellant’s procedures as a result of the continued delay in relation to its February repayment claim. In his witness statement Mr Draper described the goods as follows: “The couriers handed over 1 box that was sealed with security packing tape. This was removed and the contents checked. Inside the box were 2 items that were “vacuum packed” in clear film. On initial observation we did not immediately identify the highest value item, £141k Tourbillion and my first thought was that this may have been the concern for HMRC and for us all. Were we involved in shipping “fresh air”? On closer examination we identified the consignment in full and it is fair to say there was a sigh of relief. I can confirm that this was witnesses by all parties including SM and her colleague which is contrary to what is implied by Richard Saxon in his witness statement…” 256. In oral evidence Mr Draper reiterated the point: “With respect to the officers, I am dumbfounded by ... I was dumbfounded when I read their witness statements, and they have stood by what they have submitted and I can't comment on that. What I can comment on is the fact that at no point certainly was I and the other directors, well, you can ask them, but I am pretty sure I am speaking on their behalf, none of the directors were advised that they couldn't see any watches. I just, I am staggered by that, and, if they couldn't, why didn't they tell somebody?” 257. During his oral evidence Mr Draper produced packaging said to be that which the watches were wrapped in. The evidence had not been formally served and was not put to officers Marsh or Kent during their evidence. Mr Draper stated that he had come across the packaging when clearing out boxes in his kitchen two or three weeks earlier 258. Mr Marcus also stated in his written evidence that: “HMRC witnessed the watches as we opened all the packaging as we first thought there was one missing against the manifest...we took comfort in the fact that HMRC had witnessed the watches and the paper trail for this shipment.” 259. In oral evidence Mr Marcus added that Mr Jackson had identified that a watch was missing which caused initial concern. As a result the bubble wrap and packaging was opened to the heat sealed bags whereupon it was identified that two watches were back to back. The HMRC officers witnessed this but made no comment. 260. Mr Bluffield confirmed in his written evidence that he: “was there and saw everything that everyone else saw which was a complete consignment. There was initially some concern as the packages did not clearly show all the goods so we had to examine the goods fully to satisfy ourselves that we were not shipping “fresh air”.” 261. In cross-examination Mr Bluffield stated: “Q. How far away was Officer Kent from you when he was looking at the watches? A. About 15 feet behind a closed door. Q. So you left the inspection, did you, and went and sat behind ... you opened the door, sat down, or whatever, and closed it. Is that what you are saying? A. Yes, I have already said that earlier. Q. Have a look at your witness statement again, please, at page 124, paragraph 8. …In fact you spend seven lines talking about the VAT officer's badge and you spend about two and a half lines on the vital bit of this case, which is the inspection itself: "I have been told that HMRC claim not to have seen the goods. This is not the case." Pausing there, you are now making your case plain that the officers are lying. …Your evidence today is different from that, is it not? Do you agree? A. Slightly. Q. So you are now saying you were not present throughout the inspection. So if that is true, Mr Bluffield, why did you not put it in your witness statement? A. Um ... possibly because the witness statement was written some time after the events. Having to think back on my exact movements is, probably for anybody several years after an event, it is quite difficult to do. What I probably meant was I was there present when they have arrived, when the watches arrived. I saw parts of the consignment. I was not privy to the whole consignment. I was not stood in side by side to your officers, but I was certainly present and witnessed the delivery coming in and going again.” (Transcript 8/5/14 page 30) 262. Mr Jackson’s evidence in respect of officers Marsh and Kent was: “HMRC then witnessed us opening up the newly delivered consignment of watches. They witnessed us unwrap the timepieces as we checked against our paperwork that the correct number and models were present. They acknowledged this and then witnessed us repackage them…” 263. In oral evidence Mr Jackson clarified that initially Mr Draper and Mr Marcus took the officers to see the packages while he and Mr Bluffield remained at their desks. Mr Draper then took Mr Jackson to see them while Mr Bluffield was still at his desk. He stated that Officer Kent had confirmed seeing the watches, although clarified that this had not been a verbal acknowledgement but Mr Jackson said he “could see by his face” (transcript 7/5/14 page 14). 264. On 23 March 2011 the Appellant was notified that its February 2011 repayment claim would be released on a “without prejudice” basis. The Appellant took comfort from the fact that it believed it had satisfied HMRC regarding its watch trades and further transactions were carried out. In oral evidence Mr Draper explained that he believed “without prejudice” was a general caveat used by HMRC and did not believe it reflected any undue concern. Officer Shorrock’s visit on 21 March 2011 265. It was the Appellant’s case that its trade in watches was predicated on 2 bases: i) That the goods were sourced directly from the authorised distributor Jacob & Co; and ii) That HMRC approved the trading. 266. Officer Shorrock’s visit report of 21 March 2011 noted: “AS concentrated on Due Diligence produced in respect of Ferenergy…AS stated that the due diligence gave cause for concern or at the very least further enquiry by My Digi. I stated the reasons why I did not feel that the due diligence provided them with any assurances… Mr Draper seemed to have the impression that HMRC had given the green light to My Digi’s trading activities because the previous precred had been released and the company had been granted monthly returns. AS explained that this was not the case. Repayment returns were frequently verified dependent upon size, frequency and risk. HMRC did not provide the green light for transactions. Who the company traded with and the types of trade it undertook were for the company to determine…” 267. Mr Draper did not recall Officer Shorrock specifically stating that HMRC did not give the Appellant a green light in its trading, although he did recall the officer saying that it was not for HMRC to tell the Appellant who to trade with. Subsequently Mr Draper stated: “Q. So, none of the four of you were saying something along the lines of, "Well, that Andy Shorrock, he seemed to be saying to me that we don't have a green light to do these transactions"? Not one of the four of you came out with anything like that? A. We were aware that there were outstanding queries. … JUDGE BLEWITT: So, at the point that you were waiting for the email you knew that there were concerns? A. Yes. JUDGE BLEWITT: So, at that point do I understand that you and your fellow directors understood there was essentially something wrong or you weren't, to use the phrase, getting the green light at that point? A. We knew we had to satisfy HMRC with further queries, yes, we did. We knew that.” (Transcript 2 May 2014 page 16) 268. In cross-examination Mr Jackson initially stated that Officer Shorrock did not tell the Appellant at the meeting that it did not have the green light to trade. He subsequently stated that he did not hear this being said and added that he was not present for the entirety of the meeting, or could not recall if he had been there 100% of the time as he may have gone to the bathroom. 269. Mr Marcus’ evidence was that he could not recall Officer Shorrock telling the Appellant that HMRC did not give the green light to transactions but he recalled Mr Draper suggesting to him after the meeting that “everything was okay” (transcript 12/5/14 page 30). Mr Marcus stated that if Officer Shorrock had advised the Appellant that there was no green light, he either wasn’t listening or was not present. Mr Marcus subsequently stated in cross-examination that he was “fairly confident” (transcript 12/5/14 page 48) that Officer Shorrock did not indicate that the transactions were not approved as “otherwise it would have been discussed there and then ” (transcript 12/5/14 page 49). 270. Mr Bluffield’s evidence on the issue of what the Appellant was told by Officer Shorrock was that he could not recall what was said: “Q. Well, that would fit in with him saying that, "We don't green light trading". Do you agree? A. Partially. Q. What do you mean, "partially"? Either you do or you don't agree. A. Well, I remember the talk of a type of green light moving forward. I can't remember the type of -- the way the conversation went. I think I remember it talking about the size and frequency, but I don't know what that meant. I don't know if that was something that was done, if there were any green lights given after that. I don't know, I can't remember, looking, what, three years back.” (Transcript 8/5/11 page 136) 271. At the visit on 21 March 2011 Officer Shorrock had highlighted that Ferenergy was registered to trade carbon credits – commodities commonly found in MTIC frauds. Officer Shorrock’s record of a telephone call with Mr Draper on 25 March 2011 noted that Mr Draper said he had googled carbon credit fraud after it had been suggested by Officer Shorrock. In cross-examination Mr Draper accepted that prior to the first transaction with Ferenergy he had not been aware that the company’s business had been carbon trading and that he only became aware of this fact at the meeting with Officer Shorrock on 21 March 2011. 272. In oral evidence Officer Shorrock confirmed that he had not informed the Appellant prior to the relevant transactions that watches had previously been used in MTIC fraud. Officer Shorrock also accepted that he had not given the Appellant an explanation of contra-trading during the meeting. Officer Shorrock noted that although the Appellant took steps such as visiting Ferenergy: “My Digi were taking these steps but they were taking them retrospectively, so they were happening after the deals had actually occurred…” (Transcript 29/4/14 page 21) 273. In oral evidence Officer Saxon noted that the Appellant had continue to trade following the visit on 21 March 2011 despite the concerns he had raised. 274. Mr Draper stated that Officer Shorrock touched on three areas of the company’s watch trade at the meeting, none of which caused him concern: (a) Funds received from outside France via Malmo-based bank; (b) Shipments to fright forwarders and not direct to customer; and (c) Some goods shipped at buyer’s risk. 275. A letter was received by the Appellant from Officer Shorrock on 1 April 2011. Mr Draper took the view that the letter was deliberately compiled in a manner which implied that more advice and concerns had been aired by Officer Shorrock at the visit than had been the case. 276. Mr Draper confirmed that he asked himself if the deal was too good to be true. His witness statement explained that he discussed the following issues with his co-directors: “Were we physically exporting the goods under our control? Yes Were we physically shipping goods and not fresh air? Yes – although not all consignments visually checked we reserved the right to do so at will Were we involved in money laundering? No – full audit trail of who paid what and from where Was a margin of around 4% too good to be true? No – a fairly thin margin but no credit risk and only VAT exposure to fund”

“Q. Let me just go to that. Thank you. So it is CNA, effective ….. An insured value of £50,000 for new and refurbished consumer electronics. Yes? A. Yes. Q. Not watches. A. Watches aren’t mentioned, no, and I did pose the question in my evidence: were watches covered?, and I think in the directors’ evidence they actually confirmed that watches weren’t included in the insurance policy. Q. If we go to your paragraph 212 again, the policy itself is dated 14 December, yes? A. Yes. Q. So if the watches were shipped on 9 December, at that time they were not covered. A. If they were shipped on 9 th , yes. Q. The February deal, what is the position there? A. I understand that the same policy was in force in February as well. The change appeared to be when, from March, Malca Amit provided insurance cover, but that appears to have only commenced, according to paragraph 213 of my evidence, on 17 March 2011. I have no evidence prior to that date of any other policy which would cover watches. So that would include February as well.”

“Q. The March deals, you had no insurance cover either, did you? A. Yes, we did. Our Malca Amit --- Q. No, they have their policy which will cover them in case of loss; but you are not privy to that insurance contract. You cannot claim on that insurance policy, can you? A. My understanding was that we could. I wouldn’t have entered into the arrangement if we couldn’t. Q. You are not a stupid man, Mr Draper. A. Clearly I must be if I paid --- Q. Do you think that paying nothing you can ... nothing or very, very little, you can claim the benefit of an insurance policy that somebody else has? A. I think I must be a stupid man because, I forget the quote, something in the order of .8 per cent which we felt was reasonable and it covered us from us signing over for the goods, for the goods being signed over by the ultimate customer or freight forwarder. Q. But Malca Amit -- sorry to interrupt you -- are not an insurance company, are they? They are a firm which moves goods around. A. Specialist courier. Q. Thank you, courier. They are a courier not an insurance policy. Is there any document you can point to which is a contact between you and Malca Amit to underwrite any loss to your products? I am not talking about emails; I am talking about a contract which sets that out? A. I will need to find the contract. I haven’t got it in front of me.” (Transcript 2/5/14 page 43) Negotiation, profits margins and patterns 283. The Appellant produced evidence of negotiation in the form of emails provided to HMRC on 21 March 2011 showing stock enquiries and price negotiations. 284. In his written evidence Mr Jackson stated that he was responsible for negotiating on margin with Jacob & Co which led to an extra 0.5% margin after the first deal. 285. Officer Saxon undertook a profit analysis within the watch transaction chains connected to the Appellant covering watch deals undertaken from 9 December 2010 to 29 March 2011. In period 03/11 Officer Saxon noted that 58 watches were sold on four separate invoices between 16 March 2011 and 29 March 2011. The individual cost price excluding VAT varied depending on the model between £5,750, £6,497.50, £12,497.50, £29,050 and £135,00. In all deals save for three the mark up on cost was 4.71%. The remaining three deals had a mark up of 10.47% (the same model sold together in a single deal). Officer Saxon concluded that 10.47% was a transposition error in the price charged on the sales invoice. According to the sales invoice the three watches sold for £13,806 each. Two of the same model sold 13 days later for £13,086 each and in that deal the mark up was 4.71%. In both deals the same cost price of £12,497.50 was paid. 286. In period 02/11 29 watches were sold on three invoices between 16 February 2011 and 21 February 2011. Again the individual cost price varied depending on model and the mark up on 24 of the watches was 4.71% and 4.69% on the remaining five. 287. In period 10/10 ten watches were sold on a single invoice dated 9 December 2010. Again the individual cost price varied depending on model and the mark up on six of the watches was 4% and 4.02% on the remaining four. 288. Officer Saxon highlighted that the mark ups were in essence identical despite the variation in cost price and there was no evidence of competitive and open market price negotiation between the Appellants and its supplier or customer. Officer Saxon also noted that a consistent profit achievement and profit division was made between the participants of the transaction chains irrespective of model traded or value of the watch and that all four parties in the chains achieved an aggregate profit which was a fixed percentage of the price paid for the goods by the UK acquirer. Distribution Agreement 289. Officer Saxon obtained a copy of a document entitled “Exclusive Wholesale Distribution Agreement” between Jacob & Co Watches Inc (the US manufacturer) and Jacob & Co (UK) from the FCA which in turn obtained the document in the course of a criminal investigation “Operation Tabernula”

“Distributor shall only sell Products to Authorized Retailers in the Territory” 291. “Authorized Retailer” is defined as “a retail store selling to ultimate consumers in the territory who has been approved by Manufacturer as an approved seller of products.” “Territory” is defined as the UK, Ireland and the Channel Islands. Officer Saxon noted that the Appellant is not an authorised retailer. 292. It was the case for the Appellant that it understood that it was involved in circumventing the distribution agreement. Mr Marcus accepted in cross-examination that he had not read the distribution agreement before and agreed that Jacob & Co were breaching the agreement by selling to the Appellant. 293. In oral evidence Mr Draper agreed also that Jacob & Co was deceiving Jacob & Co Watches Inc (USA) by attempting to breach the distribution agreement but stated that “that’s the nature of business in the commercial world” (Transcript 1/5/14 page 90) and he did not agree that such practice was dishonest. 294. In cross-examination Mr Draper was questioned about the Appellant’s view that the purported circumvention of the distribution agreement went some way to explain the transactions: “Q. So, you were not an authorised retailer were you? A. No. Q. So, by Jacob selling to you, they were breaching the fundamental term of their agreement, namely that they should sell only to authorised retailers. So, if this is a way of trying to get around the terms of a distribution agreement, it was completely ineffectual. Do you agree? A. Yes, looking at this document … Q. But they didn't need you did they? They are breaching the agreement anyway by selling to you -- let me finish. So, why not just sell the product straight to Edward Fermor? A. I think, to use your term, this was window dressing in terms of their agreement, but I don't know what was in the mind of Richard Baldwin at the time. Q. Well, it is pretty rubbish window dressing isn't it because if Jacob USA were provided with information by Jacob UK that they had sold to My Digi Ltd, Jacob USA would know straightaway that My Digi was not an authorised retailer and therefore Jacob (UK) had broken their agreement. So, it is not going to camouflage the problem for Jacob (UK) is it? A. Jacob (UK) may have felt that he didn't realise that we weren't an authorised reseller. … Q. It is a simple point here which again, with respect, I suggest you are trying to obfuscate, but if Jacob (UK) are going to break their agreement, they may as well just export straight to Ferenergy mightn't they? A. It seems as though they could have done, yes. … Q. Let's try and keep our eye on the ball for a moment, here, Mr Draper. There are some simple facts here. Jacob (UK) are going to break their distribution agreement and they can do it in two ways. They can either sell outside the territory, because if you look at definition (b), "territory" means, the UK, which is Great Britain, Scotland, Ireland, the Channel Islands, so that is one way they can breach their agreement by selling outside the UK. Another way they can breach the agreement is by selling to an authorised retailer. If they choose to breach (b), territory, they can save themselves your profit can't they? A. Yes. Q. So, looking at the facts now do you accept that these deals had nothing to do with breaking a distribution agreement? A. Notwithstanding that that was our heartfelt belief at the time of our transactions, in the light of the evidence presented, there must be another reason why they did it, yes. … I agree that in respect of Jacob & Co the sale to us was nothing to do with the circumvention -- circumventing a distribution agreement.” (Transcript 1/5/14 page 99 – 105) Skype 295. Mr Cook, a forensic investigator employed by the FCA, had conduct of the financial enquiries in relation to Operation Tabernula. Mr Cook’s unchallenged evidence was that during the course of searches of premises associated with Mr Hind and Mr Baldwin on 23 March 2010 and 7 April 2011 respectively various digital devices were seized. Forensic review of the seized items of Mr Baldwin recovered a number of Skype messages which were produced within a report by the FCA. Tables within the report showed chats and messages recorded in the Skype data extracted from computers and mobile phones of Mr Baldwin. The report focussed on communication between three characters: A) watchtrader; B) frogmanbob; and C) inspain2011. 296. It was agreed by the parties that watchtrader was Mr Baldwin. The identities of frogmanbob, inspain2011 and other characters referred to including “The Big Man” and “The European” remain unknown although many of the witnesses speculated. Officer Saxon for instance believed “The European” was Mr Fermor. In oral evidence Officer Saxon explained: “If you look at the round of the nature of the conversations, it would appear that Frogmanbob and Inspain2011 are taking the position of a fixer, if you like, the arranger of the deals, the go-between, so in the context of that the fact that they haven’t used names which may potentially reveal any identity may well be the reason why they’ve used those screen names…but I’ve no evidence to say that was the…” (Transcript 25/4/14 page 41) 297. By way of example the data extracted showed the following communication between Mr Baldwin and Frogmanbob: Date/Time Author Message 29/11/2010 16:30 Frogmanbob Brant.marcus@mydigi.co.uk 29/11/2010 16:30 Frogmanbob Mob fone…07980****** 29/11/2010 16:30 Frogmanbob ok? 29/11/2010 16:31 Watchtrader Cool 30/11/2010 11:00 Frogmanbob morning 30/11/2010 11:03 Frogmanbob The big fella said you want to start Thursday…have you sent your intro into the customer yet? 30/11/2010 13:37 Frogmanbob I just spoke to the customer and he said he hasn’t received anything from you mate 30/11/2010 17:33 Watchtrader Hi 30/11/2010 17:34 Watchtrader What do I exactly need to send to him? It was the case for HMRC that not only does the Skype evidence demonstrate the contrived nature of the transactions but that it can also be properly inferred that someone from the Appellant was communicating with a third party regarding the deals and was thereby a knowing participant in the fraud. 298. In oral evidence Officer Saxon agreed that the Appellant was referred to in the third person in the Skype conversations and there is no evidence that the Appellant was a direct party to any of the conversations. He stated: “There are some messages which suggest that there may be contact between Inspain and Digi and Frogmanbob and Digi based on the comments that have been made” (Transcript 25/4/14 page 64) 299. Officer Saxon was unable to explain why the records appear to contain entries which were repeated in identical terms but in different months. 300. In cross-examination Mr Draper speculated that Frogmanbob was Mr Stout. The reasoning behind this was that there were emails contained within the Skype data which indicated that Frogmanbob received information from the Appellant, for example regarding a payment instruction Frogmanbob is recorded as messaging Watchtrader “he said he just sent it”

“Q….how did Mr Stout find out that MDL had just sent it? A. It is quite possible that he rang somebody at My Digi. Q. And why would anybody at My Digi be telling Mr Stout about the movement of money between My Digi and Jacob (UK)? A. Because Philip Stout was the individual who made the introduction and it may have been a case of Mr Stout wanting to know if we had paid, because he may be due commission, or I would expect him to be due commission from Jacob (UK). Q. … So you think this may all be about a commission? A. That particular conversation, yes. If I was Mr Stout, I would want to know when my contact was being paid so I can get my cut of whatever the commission or introductory commission was, yes. And as I have said, and I have no reason to lie about this, there were ... as Stout was the main contact at Anovo, we did speak to him regularly. Q. You see, I asked you with great particularity right at the start of the cross-examination, after Mr Stout made the introduction, was he in any way involved in the later transactions ---You said, “No, he wasn’t.”

“Purchase order from Digi should come to you this morning as they have had the order from their client.”