Butt v Revenue & Customs (VAT - PENALTIES : Evasion) [2015] UKFTT 0510 (TC)

“ …The nature of any particular necessary connection depends on its context, for example electrical, familial, physical or logical. The relevant context in this case is the scheme for charging and recovering VAT in the member states of the EU. The process of off-setting inputs against outputs in a particular period and accounting for the difference to the relevant revenue authority can connect two or more transactions or chains of transaction in which there is one common party whether or not the commodity sold is the same. If there is a connection in that sense it matters not which transaction or chain came first. Such a connection is entirely consistent with the dicta in Optigen and Kittel because such connection does not alter the nature of the individual transactions. Nor does it offend against any principle of legal certainty, fiscal neutrality, proportionality or freedom of movement because, by itself, it has no effect. Given that the clean and dirty chains can be regarded as connected with one another, by the same token the clean chain is connected with any fraudulent evasion of VAT in the dirty chain because, in a case of contra-trading, the right to reclaim enjoyed by C (Infinity) in the dirty chain, which is the counterpart of the obligation of A to account for input tax paid by B, is transferred to E (BSG) in the clean chain. Such a transfer is apt…to conceal the fraud committed by A in the dirty chain in its failure to account for the input tax received from B.” 16. The cases of Kittel v Belgium, Belgium v Recolta Recycling [2008] STC 1537 (“Kittel”) and Mobilx Ltd (in administration) v HMRC [2009] STC 1107 made clear that there is no discretion on the part of the Authorities to withhold any tax repayment where the objective criteria for compliance with the VAT regime are met. At paragraph 61 the Court stated: " Where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct." 17. The test was further clarified by Moses LJ in Mobilx & Others v The Commissioners for HM Revenue and Customs [2010] EWCA Civ 517 at paragraph 24: “The scope of VAT is identified in Art. 2 of the Sixth Directive. It applies, in addition to importation, to the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such. A taxable person is defined in Art. 4.1 as a person who carries out any of the economic activities specified in Art. 4.2. Art. 5 defines the supply of goods and Art. 6 the supply of services. The scope of VAT, the transactions to which it applies and the persons liable to the tax are all defined according to objective criteria of uniform application. The application of those objective criteria are essential to achieve:- “the objectives of the common system of VAT of ensuring legal certainty and facilitating the measures necessary for the application of VAT by having regard, save in exceptional circumstances, to the objective character of the transaction concerned.” (Kittel para 42, citing BLP Group [1995] ECR1/983 para 24.) And at paragraph 30: “...the Court made clear that the reason why fraud vitiates a transaction is not because it makes the transaction unlawful but rather because where a person commits fraud he will not be able to establish that the objective criteria which determine the scope of VAT and the right to deduct have been met.”

“The trade sector in which Waterfire intend to trade is rife with fraud.” 39. Furthermore during a pre-registration visit in August 20-4 Mr Butt and Mr Tahir acknowledged their awareness of MTIC fraud stating that they had been informed of the fraud risks associated with trading in mobile phones and electrical goods whilst employed at Square 1. During that same visit HMRC had also issued to the directors Notices 726 (“Joint and Several Liability in the Supply of Specified Goods”), Notice 700/52 (“Security as a Condition of releasing a VAT Credit”) and the Input Tax Statement of Practice with a verbal explanation of each. 40. Mr Mody also noted that Mr Butt and Mr Tahir had been told of the problems associated with the mobile phone trading sector while employed at Square1. 41. HMRC continued to draw the risks and tax losses associated with MTIC fraud to Waterfire’s attention throughout its trading period. By way of example Mr Mody noted that discussions on the issue took place at a visit on 21 September 2005. Thereafter the company was notified on a number of occasions when its transactions were traced back to tax losses, for instance by letters dated 21 November 2005, 10 February 2006, 29 June 2006, 7 July 2006 and 21 July 2006. Mr Mody noted that despite HMRC letter of 21 November 2005 in which Waterfire was notified that 6 of its 11 transactions in July 2005 had been traced back to tax losses and that third party payments had been identified, it nevertheless continued to trade with one of the immediate suppliers in those 6 transactions, Gee-Tec Ltd. On 6 December 2005 Mr Tahir told HMRC that the company no longer dealt with companies which had supplied it in tax loss chains. Mr Mody highlighted the inconsistency of this comment with the fact that Waterfire continued to deal directly with Gee-Tec Ltd. 42. Mr Mody set out in detail the transactions undertaken by Waterfire in periods 04/06 and 07/06. 43. Waterfire’s VAT return for 04/06 was received by HMRC on 16 May 2006. It showed a net claim for VAT repayment amounting to £1,262,625.13. On 23 May 2006 Mr Mody commenced his verification of the claim. He subsequently concluded that the transactions undertaken during 04/06 formed part of an overall scheme to defraud and that Waterfire’s principal officers were aware that this was the case. As a result by letter dated 4 July 2007 HMRC denied Waterfire its right to recover input tax amounting to £6,972,184.53 on its 32 transactions in 04/06. Waterfire’s appeal to the VAT and Duties Tribunal was withdrawn on 31 March 2008. 44. During verification of the 04/06 transactions Mr Mody established that Waterfire’s trading activity during that period included: · 47 transactions in which Waterfire purchased goods from a supplier in the EU and sold them to a company in the UK, thereby acting as an “acquiring trader” in the chain of supply; · 6 transactions in which Waterfire purchased from a supplier in the UK and sold to a supplier in the UK, thereby acting as a “buffer” trader in the supply chain; · 32 transactions in which Waterfire purchased goods from a supplier in the UK and sold them to a customer in the EU, thereby acting as a “broker trader” in the supply chain. 45. Waterfire’s VAT return for the period showed the following: · Total Net Sales: £79,287,295 · Total Net Purchases: £77,753,554 · Net EU Supplies: £40,968,612 · Net EU Purchases: £32,219,877 · Total Output Tax (including acquisition tax): £12,344,248.07 · Total Input Tax (including acquisition tax): £13,606,873.20 · Net Repayment Claimed: £1,262,625.13 Broker Deals 46. Of the 32 broker deals Mr Mody traced 27 back to a missing, hijacked or otherwise defaulting trader. The total tax loss arising from those 27 transactions is £5,430,747.75. Waterfire had purchased from the following 6 suppliers: · International Electrical Distributors Ltd; · Epinx Ltd; · Gee-Tec Ltd; · Prime Commodities (UK) Ltd; · Prime Telecom (UK) Ltd; · H and O Trading Ltd. 47. The defaulters were: · A Taxable Person Purporting to be The Export Company (UK) Ltd; · A Taxable Person Purporting to be R&M Electrical Wholesalers Ltd; · A Taxable Person Purporting to be Eutex Ltd; · PM Wholesale Electrical Ltd; · LTH Ltd; · Prestige 29 UK Ltd. Defaulters 48. Although there was no challenge to HMRC’s tracing of Waterfire’s supply chains to fraudulent tax losses, it may assist to provide a brief summary of the defaulting traders involved. A Taxable Person Purporting to be Eutex Ltd (“ATPPTB Eutex”): 49. ATPPTB Eutex featured in 12 of the transactions in 04/06. HMRC also concluded that on the balance of probabilities a further transaction which was traced back to Dialhouse Electrics Limited (“Dialhouse”) would also have featured ATPPTB Eutex however Dialhouse failed to provide any records to HMRC in respect of the relevant transaction thereby blocking HMRC’s attempts to trace the chain of supply beyond it. 50. The relevant tax liability on the transactions involving ATPPTB Eutex has never been remitted to HMRC and consequently the total tax loss arising from these transactions is £2,547,970.21. HMRC established that the VAT registration number contained on ATPPTB Eutex’s sales invoices held by its customers is not valid and was not issued by HMRC. The invoices also show a different company logo to the legitimately registered Eutex Ltd. Assessments covering these losses were issued to ATPPTB Eutex on 10 April 2007 and 19 September 2007. ATPPTB R&M Electrical Wholesalers Limited (“ATPPTB R&M”): 51. ATPPTB R&M featured in 3 of Waterfire’s transactions in 04/06. HMRC established that the VAT registration number contained on ATPPTB R&M’s sales invoices was not valid and the relevant tax liability on the transactions involving ATPPTB R&M has never been remitted to HMRC. Consequently the total tax loss arising from these transactions is £594,582.71. An assessment covering these losses was issued to ATPPTB R&M on 26 September 2007. ATPPTB The Export Company (UK) Ltd (“ATPPTB TEC”) 52. ATPPTB TEC featured in 6 of Waterfire’s transactions in 04/06. The relevant tax liability on the transactions involving ATPPTB TEC has never been remitted to HMRC and consequently the total tax loss arising from these transactions is £1,338,151.42. Assessments were issued to ATPPTB TEC on 3 July 2007 and 3 November 2008. 53. HMRC established that the address quoted on ATPPTB TEC’s invoices was not that of the VAT registered company The Export Company (UK) Ltd. The invoices also contained a different logo, telephone and fax number than those of the genuine company. HMRC also found third party payment instructions from ATPPTB TEC’s customers meaning that the customers received at most a commission payment for the supply rather than the invoice amount. Prestige 29 UK Limited (“Prestige”) 54. Prestige featured in 2 of Waterfire’s transactions in 04/06. The relevant tax liability on the transactions involving Prestige has never been remitted to HMRC and consequently the total tax loss arising from these transactions is £281,255.82 Assessments were issued to Prestige in October 2007. 55. HMRC established that Prestige declared its trading activity on the VAT1 as “kitchen and bathroom supplies.”

“ I haven't taken that from the point of view of the individuals' state of mind regarding that. I think the point I'm making here is in connection with the value of the goods, which in this case that I've quoted here is £79 million in this particular VAT period, and it just seemed surprising to me in respect of the value of the goods that insurance wasn't in place. So that's the inference I have drawn.” (Transcript day 4 page 73) 108. Mr Mody also exhibited a visit report dated 21 June 2006 which recorded Mr Butt as stating that Waterfire’s supplier took out insurance and that Waterfire “takes a gamble but weighs up pros and cons.” 109. In periods 04/06 and 07/06 Waterfire’s goods in the UK were handled by six freight forwarders: · Tec Smart UK Limited (“Tec Smart”); · Casa Freight and Removals Limited (“Casa Freight”); · Ontime Logistics (Kent) Limited (“Ontime Logistics”); · Marathon Services (Freight Division) Limited (“Marathon”); · JSA Logistics Limited (“JSA”); · Timothy Graham Fowler t/a Advance Solutions (“Advance Solutions”). 110. Tec Smart was only used by Waterfire in June 2006. Of Waterfire’s 14 transactions in that month, Tec Smart was the fright forwarder used on 11 occasions. On each occasion the goods were despatched to Entrepots Surete SARL in France. At a visit to Tec Smart by HMRC on 14 July 2006 the visiting officer overheard a telephone call being answered by a driver at Tec Smart’s premises as “Waterfire”

“…The company does not own trucks and realizes no transports. The heads of the company are Mr Steven Bradshaw and Mr Jamie Buxton, who are also the owners of the UK-based company JSA Logistics.” 120. MSG Freight featured in seven of Waterfire’s transactions. Waterfire’s customers used MSG Freight on a further four occasions. The Belgian Tax Authorities reported that MSG Freight was used in carousel fraud and that the local VAT registration number was not known. The only VAT registration number identified was in the UK. 121. Two of Waterfire’s direct tax loss deals involved Magic Transport in Holland. In both cases the UK supply chains were identical and featured the same defaulting trader at the foot of the chain. Magic and its director were subject to criminal investigation by the Dutch tax authorities in connection with MTIC fraud. The Dutch investigation revealed that over a period of time Magic falsely receipted a number of CMR documents in order to try to substantiate the movement of MTIC goods from the UK to their premises when the goods did not exist. It was also confirmed that where Magic had raised false documents purporting to show the onward movement of goods from their premises to other Member States, the premises of Magic was in fact a residential property. 122. ML & Co featured in 30 of Waterfire’s deals. ML and its director are subject to criminal investigation by the Dutch tax authorities in connection with MTIC fraud. The Dutch authorities identified that over a period of time ML & Co falsely receipted a number of CMR documents to try to substantiate the movement of MTIC goods from the UK to its premises when the goods did not exist. Summary of trading 123. Mr Mody highlighted the following aspects of Waterfire’s trading in 04/06 and 07/06 as demonstrating the contrived nature of the deals and the lack of genuine commercial substance: (a) the direct tax losses which featured in all of its broker transactions and which amounted to approximately £7,426,136.97; (b) the repeated presence of missing and/or hijacked traders at the foot of the supply chains; (c) the failure of Waterfire’s due diligence to safeguard the company from chains tainted with MTIC fraud; (d) the near-perfect balancing of its VAT liabilities over a six month period, despite a turnover of approximately £102,000,000; (e) the construction of five transactions (the Epinx deals) on a single day at the end of period 04/06 which resulted in gross profit for Waterfire that day of £127,936 and which led to the submission of its net claim to input tax of £1,262,625.13; (f) the closed group of EU participants featuring in Waterfire’s supply chains, including freight forwarders, irrespective of the company’s position in those chains as either acquirer, buffer or broker; (g) the common principals and features connecting a number of those EU companies; (h) the information obtained from tax authorities in other Member States; (i) the identification of circular trading in at least two of the transactions whereby the goods originated from and were returned to the same Danish company in one day; (j) the presence of third party payments in the chains; (k) the flow of monies in the supply chains; (l) the recurrence of traders and repeated patterns in the supply chains; (m) the absence of any evidence to suggest that Waterfire had insured the goods; and (n) the astonishing levels of turnover achieved by Waterfire from a standing start despite being a brand new company with minimal staff, achieving in excess of £186,000,000 in a period of trading lasting less than 22 months. 124. In cross-examination Mr Mody agreed that he has no direct commercial experience nor had he taken advice on how markets might generally operate. 125. It was put to Mr Mody in cross-examination that traders were expected to verify the existence of goods and one way to do so would be to take control of the goods and their transportation. Whilst Mr Mody agreed with the comment to a degree, he emphasised that in the case of Waterfire it had not personally taken control of the goods but rather a third party had been engaged to store and transport them. He clarified that the point he was making in his written evidence was that bringing goods into the UK was not consistent with trying to maximise profits due to the unnecessary storage and transport costs. 126. On the issue of due diligence Mr Mody clarified that whilst Waterfire had carried out the type of checks HMRC would expect to see, the suggestions made in the public notices issued did not contain a definitive list of checks and ultimately the matter was one for each individual trader, not merely a means by which to satisfy HMRC. He also noted that in this particular case HMRC contends that Waterfire was knowingly part of an overall scheme to defraud the Revenue and as such the checks conducted by the company were irrelevant and superficial. 127. Mr Mody accepted that the figure contained on Waterfire’s VAT return for 04/06 reflected the tax on supplies to the company and was arithmetically correct. He went on to say that HMRC contend that Waterfire’s transactions were contrived as part of an overall scheme and, that being the case, Mr Butt was dishonest in submitting the 04/06 VAT return and in declaring the figures contained in the return which stated that he was entitled to the input tax. He summarised the role of Waterfire as a contra trader engaged in an overall scheme to defraud as follows: “Well, in this particular case with Waterfire, it's quite odd. It's not a classic, if that's the term, contra-trader. We don't have a series of acquisition clean chains being offset by dirty chains, and we have an evened out net liability for this particular period, for period 04/06. We do have that in 07/06, but not in 04/06. In 04/06 we had the extra element of the five transactions with Epinx to which I've referred. The benefit to the contra-trader, if it can be described as such, if it was a classic contra-trader, it's not the contra-trader that is effectively trying to seek a benefit, if it can be put that way, it is the broker trader that is the recipient of the clean supply chain goods, if you can follow that, because that particular trader, the broker trader, would submit a net claim for repayment, which would prompt Revenue & Customs to initiate the verification process. In that situation we would trace the goods back through the contra-trader and, on the face of it, it would appear that those chains were clean and that there were no tax losses. So the benefit of contra-trading is not necessarily to the contra-trader, it's to the broker trader that is serviced by that contra-trader. Sorry, can I just qualify one more point? I do apologise. I suppose one other benefit is that the overall net liability for that company would be kind of set off and evened out. If there were only acquisition chains that were undertaken by the company, we would have a large VAT debt to HMRC to be paid. If it was only the dirty chains that the company undertook, there would be a large claim for repayment. So in a way, a benefit to the contra-trader is that it's offset its VAT liabilities.” (Transcript day 4 page 51) Mr Lyon 128. Mr Lyon was responsible for making the decision to issue the penalty under Section 60 VATA 1994 against Waterfire for 04/06 that was subsequently transferred to Mr Butt and Mr Tahir under Section 61 VATA 1994. 129. Mr Lyon’s written evidence set out the following factors that he took into consideration in reaching his decision to impose the penalties on Mr Butt and Mr Tahir. (i) Pre-registration visit and Waterfire’s application for VAT 130. It was noted by Mr Lyon that at a pre-registration visit on 11 August 2004 Waterfire was not making taxable supplies and was unable to provide evidence of an intention to do so. HMRC advised that evidence of taxable supplies was required before the application could be considered further. On 12 August Mr Butt telephoned HMRC and notified Mr Mody that he had lined up a purchase of DVD players. A fax dated 13 August 2004 contained the deal information and pro forma invoices for 2000 DVD players from JCP International in Hong Kong with Waterfire selling the goods to Demravale Limited in the UK. Based on this information Mr Mody allowed the registration to proceed. However during a visit to Waterfire on 28 September 2004 it was established that the intended purchase and onward sale did not take place and the first VAT declaration submitted was a nil return. Mr Lyon concluded that the documentation was provided as a means of obtaining VAT registration and did not reflect a genuine intended supply. 131. At an interview with Mr Lyon in 2010 both Mr Butt and Mr Tahir separately accepted that Waterfire did not trade in white goods nor did it retail any goods despite those activities having been declared on the VAT1 signed by Mr Butt. Mr Butt stated that the company had been set up with the intention of trading in mobile phones. When asked why this was not declared on the VAT1 he responded “no reason.”

“The mobile phone handset industry is international in nature and this presents further opportunities for distributors to take advantage of international market failures in what is commonly referred to generically as “the grey market”

“I think this comes back to the start of my involvement. I'm aware that CPR35 does contain those statements. I would characterise this evidence as being consistent with the general provisions of, I think it's paragraph 4 of CPR35, that is that I am an independent expert, I have provided all the information that's within my knowledge and relevant to the tribunal. I have offered and will continue to offer that evidence independently, even if my evidence could be construed as being unhelpful to the case of HMRC. And where new information has come to light, I have on a number of occasions issued supplementary statements, gone back to the tribunal and told them of this, and provided where I believe to be a consistent presentation of the best of my knowledge and belief… As I say, I was guided by partners at KPMG and indeed by the solicitors office at HMRC as to the format of the wording.” 180. Mr Fletcher confirmed that he is a Chartered Accountant and that he has never traded in the grey market. Mr Fletcher’s conclusions were based on his knowledge of the market for the distribution of handsets. 181. Mr Fletcher agreed that maximising profits was a paramount consideration, but not the only consideration for traders in the grey market: “Q. For example, I think a lot of your conclusions are based on the assumption that humans are rational and rationality means maximising profit? A. They are based on the fact that it's rational to maximise profit. I'm not sufficiently expert to go along with the statement that humans are rational. Q. Fine. That's exactly the point, humans aren't rational, are they? A. I don't know. Q. People very often act for reasons other than simply to maximise profit? A. They may, although I'm of the view, and it's a non-expert view, that people generally act out of self-interest, particularly in commerce..” (Transcript day 6 page 34) 182. Mr Fletcher agreed that in January 2012 he was aware of delays in HMRC making repayments but stated that this did not impact on the conclusions he had reached. He accepted that a delayed VAT repayment claim may impact on a trader’s cash flow and as a consequence the trader’s trading patterns. As to whether offsetting could assist with cash flow problems, Mr Fletcher said the following: “That would, to my mind, be an imprudent means of trying to deal with the cash flow issue. Just importing goods because it gives you an offset by itself doesn't help. There has to be a demand for those goods. If one considers that VAT is only, I think in 2006 it was 20 per cent, but it is only 20 per cent of the value. If you've imported goods on even perhaps quite generous trade credit terms, you still have to pay for them, so you're left with something that cost you four times the VAT that you're trying to save, and I would argue that if you're facing cash flow difficulties, the most sensible thing to do would be to look for conventional commercial finance, either through an overdraft or through invoice factoring to try and improve your cash flow. But importing goods to offset them when you're then left holding these goods -- and it need not be mobile phones, it could be anything that simply generates the VAT on input, I think would not be a prudent course of action.” (Transcript day 6 page 40) 183. Mr Fletcher was asked how a trader would know that the grey market was international. He explained: “As I've said, because there is information in the public domain that explains how these trading opportunities exist, and that information would have been available to the participants in the grey market, irrespective of their size, and I would submit when there are articles in trade publications like Mobile News explaining how grey market trading opportunities have arisen, explaining that OEMs are taking action against authorised distributors that appear to be in breach of agreements with them, that it's clear where these opportunities exist, that in the United Kingdom on every high street there was a ready source of highly subsidised prepaid phones and that many people in the grey market knew that these phones were being exported to countries with little or no subsidy. I think it would be quite clear to any participant, irrespective of their size, that this market had a very, very large international administration to it.” (Transcript day 6 page 48) 184. Mr Fletcher clarified his use of the phrase “adding value” by which he did not mean something done to the mobile phone but rather that the middlemen add value to their counterparties by their presence and from that, derive a profit. 185. In cross-examination Mr Fletcher agreed that he had not considered the impact of VAT administration and how it could potentially have affected trade, he was therefore unable to comment as to whether such a factor would undermine his conclusions or not. Mr Humphries 186. Mr Humphries is an employee of HMRC who reviewed deal sheets detailing the transaction chains of Waterfire in periods 04/06 and 07/06. He analysed the information on the deal sheets to determine the overall nature of the transactions undertaken by the various traders involved. Mr Humphries concluded that the trading pattern indicates that the transactions were contrived. He noted that in the acquisition deals, 6 of Waterfire’s 8 EU suppliers also feature at the other end of the transaction chains as customers of the brokers. The goods acquired by the UK contra traders and passed though the UK were mostly purchased from the UK brokers by the same group of EU traders who had supplied them to the contra traders in the first place. The goods appear to have been deliberately kept within a small group of traders with their destination being dependent on their origin. 187. Mr Humphries noted that there are 10 customers in Waterfire’s despatch or broker transactions, 8 of which also feature as suppliers or customers in its acquisition transactions. He queried why Waterfire found it necessary to physically import the goods in its acquisition deals into the UK to sell to UK customers when the goods could have been sold to EU customers already known to Waterfire at a greater profit. 188. Waterfire’s transactions in 07/06 had similar features to those in 04/06 in that most of the same traders are involved. Mr Humphries outlined two distinct patterns of trade; first, the May acquisitions are offset by the June broker transactions. Second, the June acquisitions were offset by the July broker transactions. In each set of transactions the values of input tax and output tax were closely matched and the customers in Waterfire’s broker transactions matched those of the brokers in its acquisitions. Mr Humphries concluded that this is not consistent with genuine arm’s length commercial trading. 189. It was the case for HMRC that Waterfire’s transactions formed part of a larger overall contra trading scheme involving 11 contra traders who operated in concert. The goods traded were kept with the same small group of EU traders and appear to have been coordinated under a single direction. Mr Humphries reviewed the deal sheets of the other 10 contra traders in April, May and June 2006 and found that their transactions followed the same pattern as those of Waterfire. The transactions were arranged so that the output tax due on the acquisitions was balanced by the input tax claimable on despatches (the overall input tax figure is almost 99% of the output tax). The despatches all feature tax losses almost identical to the input tax amounts, they all have common EU suppliers and customers, and the same EU customers feature in both acquisitions and despatches. 190. In cross-examination Mr Humphries explained that by the term “contra-trader” he meant a trader which undertakes two types of transactions; goods purchased from overseas which are generally sold in the UK and upon which there is no input tax to claim but output tax on the onward sale, and goods purchased in the UK and sold out of the country upon which there is input tax to claim from HMRC but no output tax to pay because the sale is zero-rated for VAT. The liabilities on those two types of transactions are netted off on the trader’s VAT return. He added that it is the defaulter rather than the contra trader who fails to pay tax but the connection to that loss exists via the tax loss in the direct chain of supply leading to it. Mr Humphries clarified that the fact that Waterfire was a contra trader was not the basis for his conclusion that it was involved in an overall scheme to defraud but the fact of its transactions, what it did and what the other contra traders did: “…it’s hard to separate them because Waterfire has bought goods from a series of EU traders. The goods themselves filter through the UK and, in large part, go back to those same EU traders. That appears, to me, to be contrived trading.” (Transcript day 6 page 157) 191. Mr Humphries explained that he had considered whether there might be a commercial reason for the pattern of trading: “…I looked at the prices, the goods coming into the UK and the goods going back out to the UK, and the fact that the EU traders always seemed to be selling low into the UK and buying high out of the UK, the same goods in a relatively short time, it didn’t seem commercial to me.” (Transcript day 6 page 165) 192. Mr Humphries clarified that he could not comment on the dishonesty of the Appellant and accepted that they had never met. He did not know who controlled the scheme and could not go so far as to say it was Waterfire although he concluded that every trader in the scheme must have known that it was being controlled, i.e. who to buy from and who to sell to. Mr Stone 193. Mr Stone clarified in oral evidence that his witness statement makes no specific reference to matters relating to Waterfire. He explained that there was no requirement to send a notice to taxpayers regarding HMRC’s use of abuse arguments to deny refunds. 194. Mr Stone explained the beneficiaries of MTIC fraud as follows: Q. So who are you saying are the primary beneficiaries? A. The other parties in the transaction chain, the buffers and the exporters… And those that are the conduits and those that introduced the capital into the fraud. Q. How did those who introduced the capital profit? A. They take a slice of the stolen VAT as well. Q. Where did they take that from? A. It's paid back to them as part of their profit. Q. Profit from? A. The -- supposedly buying and selling. Q. Okay. So -- A. The first trader in the chain is an overseas company that introduces the capital, that capital passes down the chain until it arrives to the UK exporter. The UK exporter adds the VAT, it goes down the chain, doesn't go to the missing trader, gets paid off the third party, the money goes back to the original investor, the original investor takes his original capital plus his profit, which is a share of the stolen VAT.” (Transcript day 7 page 52) 195. It was put to Mr Stone in cross-examination that traders may not have been aware of the type of enquiries expected of them by HMRC. Mr Stone responded: “…You’ve already made the point that the appellant is in business and apparently an experienced businessman. You would expect him to know what checks to make.” (Transcript day 7 page 65) Mr Butt 196. Mr Butt did not give oral evidence, an issue that we address in more detail in due course. However there were two witness statements signed by Mr Butt and these are summarised below. Summary of Mr Butt’s witness statements 197. Waterfire was an off the shelf company purchased with the intention to trade in white goods, consumer electronics (including mobile phones) and to retail its products. Mr Butt had been involved in the telecommunications sector of wholesale consumer electronics since graduating and he had met and befriended Mr Tahir at his place of employment at 20:20 Logistics. Initially the plan was to trade locally within the UK but as the company became more confident and streamlined, it grew to export and import markets. HMRC’s case is based on the assumption that everyone who traded in the mobile phone sector knew or should have known of the fraud in the industry. Mr Butt was aware of the prevalence of fraud and as a result he adopted particular practices in his trading style to safeguard against fraud and which followed the guidance given by HMRC in its public notices. 198. Waterfire did not deal directly with any missing traders nor did Mr Butt act dishonestly. Intense due diligence procedures were carried out in order to mitigate the risk of involvement with fraud. Mr Mody had agreed that the company was doing all that it could to avoid connection with fraud. If Waterfire was notified of tax losses in its chains, it avoided trading with the respective supplier in the chain. 199. As a consequence of HMRC’s policy of delaying or denying input tax on mobile phone transactions and the information imparted by HMRC to traders generally Waterfire preferred to by from the EU and sell into the UK to minimise the risk of not being paid by HMRC. Waterfire tried to roughly match imports and exports to avoid cash flow disadvantages. 200. Waterfire made a commercial decision to import stock after consultation with Mr Mody. The due diligence carried out on all trading partners comprised an exhaustive and lengthy criterion of checking the companies. Mr Butt cannot comment on information regarding other traders who are outside of his knowledge or reach. Documentary evidence demonstrating the due diligence cannot be produced as the company records were in a vehicle that was stolen (crime reference 115277b/09). It is accepted that the crime report makes no reference to the documents but just because the detail of what was inside the vehicle was not mentioned does not mean the assertion is incorrect. Additionally Mr Butt’s former representatives have refused to release documents to him as a result of a dispute over fees. 201. Waterfire was wound up in 2010/2011 as a result of complaints made by other businesses relating to credit purchases. These complaints had nothing to do with the Appellant or Mr Tahir as a new owner and director had taken over in 2009. 202. HMRC’s case is based upon the opinion of witnesses who have had limited or no contact with Mr Butt. Mr Butt is not aware of the term “contra trader”; every transaction undertaken received the same due diligence practices that were incorporated by Waterfire from the time it started trading. Waterfire did not make or accept third party payments and always had freight companies inspect and verify its stock. Every deal had an inspection report and a copy of the CMR freight record. 203. Mr Butt denied that he had any actual knowledge that fraud was taking place; there is no direct evidence of this such as an email, letter or other document. The evidence is circumstantial and does not demonstrate Mr Butt’s actual knowledge of or involvement in a fraudulent scheme. Submissions The Appellant’s submissions (i) HMRC’s misconstruction of relevant legal provisions 204. It was submitted by the Appellant that HMRC’s case is misconceived as a matter of both law and evidence. HMRC have attempted to use sections 60 and 61 VATA 1994 in a manner which was entirely outside Parliament’s contemplation when the provisions were enacted; the sections were not intended to penalise a person for claiming input tax actually incurred. 205. The Appellant is subject to a penalty in the sum of £3,137,483.04 as a result of submitting a VAT return on behalf of Waterfire that included a claim for VAT in the sum of £6,972,184 on supplies made to Waterfire. There is no dispute that the supplies were made and VAT incurred by Waterfire in acquiring the supplies or that the supplies were for the purposes of Waterfire’s business. 206. The suggestion that there was any case law to suggest that entitlement to input tax could be refused in circumstances where it was incurred for the purposes of a business is erroneous. HMRC are wrong to suggest that Optigen made the legal situation clear such that the Appellant could have known on 15 May 2006 when the return was submitted that Waterfire was not entitled to deduct input tax. 207. At the date on which the return was submitted the only authoritative statement on the issue was the opinion of Advocate General Ruiz-Jarabo Colomer in Kittel , when applied to this case it stated that providing Waterfire did not participate or derive any benefit from the transaction, as a matter of law it was entitled to claim input tax. Knowledge of any such fraud did not amount to participation. 208. It was submitted that only if the Appellant was dishonest in making a claim for input tax on behalf of Waterfire can he be penalised for making that claim. (ii) Right to a fair trial 209. The overriding objective for the Tribunal is to ensure that the hearing is dealt with in a manner that is fair and just. The appeal involves a criminal matter for the purposes of the ECHR and EU Charter. 210. Article 6 of the ECHR applies to the appeal. The Upper Tribunal refused leave to appeal Judge Blewitt’s summary judgment issued on 20 may 2014 but held that “the merits of the respective arguments should be properly considered by the FTT at the substantive hearing.”

“ If the Court were to accept the interpretation advocated by the United Kingdom, that would give rise to considerable uncertainty concerning the application of the Sixth Directive. Such an interpretation would mean that, if traders wanted to be sure at the time of a transaction that they were incurring rights and obligations under the VAT system, they would have to predict whether the specific goods which were the subject of the transaction would at some point fall back into the hands of a trader who had already played a part in the supply chain. If that were to be the case, they would also need to know about any subsequent ‘disappearance' on the part of that trader. (35) Meanwhile, account should be taken of the possibility that one and the same consignment may contain goods that are used in the fraud and goods that are not - only the latter would be subject to VAT, if the United Kingdom's argument were accepted. This interpretation of the notion of ‘economic activity' runs counter to the principle of legal certainty, which is a general principle of Community law that must be observed by Member States when implementing the Sixth Directive. (36) As Optigen, Fulcrum and Bond House moreover correctly submit, the United Kingdom's approach might act as a deterrent to legitimate trade.” 217. The decision in Optigen was not given until 12 January 2006. On 14 March 2006 Advocate General Ruiz-Jarabo Colomer gave his opinion in Kittel (at [41] – [44]): “… an activity does not become financially unlawful because the person exercising it knows that the businessman with whom he is trading has an unlawful purpose, since that transaction, subject to VAT, gives rise to the subsequent right to deduct. The neutrality which governs this tax precludes the exclusion from the scope of its rules of business transactions which are part of its subject-matter. The judgment in Optigen and Others reiterated that the right to deduct is exercised regardless of whether the VAT on other previous or subsequent transactions has been paid or not (paragraph 54). The conduct of the ‘disloyal’ taxpayer, who does not inform the Treasury of the stratagem, has various consequences (16) but it never causes the setting aside of a fundamental rule of the VAT scheme, which is that at each stage of the production or distribution process the tax is levied and the VAT paid at the previous stages is deducted.” 218. Thus when Waterfire submitted its return on 15 May 2006 the most recent pronouncement on the area was that of Advocate General Ruiz-Jarabo Colomer. It cannot therefore be correct to state that the law at that time was sufficiently clear that a penalty could be imposed on a knowing purchaser. 219. The decision of the CJEU in Kittel which was given on 6 July 2006 departed from that of Advocate General Ruiz-Jarabo Colomer. The Appellant could not have been expected to know the position under EU law at the date of the relevant claim. 220. As regards UK persons such as the Appellant or Waterfire the relevant legislation is contained in VATA 1994. In order to rely on Kittel jurisprudence it is necessary to construe the right to reclaim input tax in section 26 VATA 1994 as limited in circumstances where a supply is connected with fraud. However the clear wording of section 26 does not suggest that such a limitation can be read in. 221. One of the grounds of challenge in Mobilx was that the principles enunciated by the CJEU in Kittel could not be applied as part of UK domestic law without specific legislation. This was rejected by the Court of Appeal at [49]: “ It is the obligation of domestic courts to interpret the VATA 1994 in the light of the wording and purpose of the Sixth Directive as understood by the ECJ (Marleasing SA 1990 ECR 1-4135 [1992] 1 CMLR 305 ) (see, for a full discussion of this obligation, the judgment of Arden LJ in Revenue and Customs Commissioners v IDT Card Services Ireland Limited [2006] EWCA Civ 29 [2006] STC 1252 , §§ 69-83). Arden LJ acknowledges, as the ECJ has itself recognised, that the application of the Marleasing principle may result in the imposition of a civil liability where such a liability would not otherwise have been imposed under domestic law (see IDT § 111). The denial of the right to deduct in this case stems from principles which apply throughout the Community in respect of what is said to be reliance on Community law for fraudulent ends. It can be no objection to that approach to Community law that in purely domestic circumstances a trader might not be regarded as an accessory to fraud. In a sense, the dichotomy between domestic and Community law, in the circumstances of these appeals, is false. In relation to the right to deduct input tax, Community and domestic law are one and the same.” 222. The Appellant submitted that the conforming interpretation adopted by the Court of Appeal in Mobilx cannot extend to a penalty which is classified as criminal for the purposes of the ECHR and EU Charter. Nor is it a justification for the attempted extension of the penalty regime by reference to case law that the penalty under Section 61 VATA 1994 is classified as civil under UK law; it is clearly criminal for the purposes of the ECHR and EU Charter. (vii) Reliance on the ECHR and EU Charter 223. Article 7 of the ECHR provides as follows: “ No one shall be held guilty of any criminal offence on account of any act or omission which did not constitute a criminal offence under national or international law at the time when it was committed. Nor shall a heavier penalty be imposed than the one that was applicable at the time the criminal offence was committed.” 224. Article 7 also requires that criminal law should be clearly set out and understandable and should not be widely construed to the disadvantage of the person being penalised. 225. Article 49 of the EU Charter is in similar terms and expressly includes an obligation that penalties must not be disproportionate: “No one shall be held guilty of any criminal offence on account of any act or omission which did not constitute a criminal offence under national law or international law at the time when it was committed. Nor shall a heavier penalty be imposed than that which was applicable at the time the criminal offence was committed. If, subsequent to the commission of a criminal offence, the law provides for a lighter penalty, that penalty shall be applicable. This Article shall not prejudice the trial and punishment of any person for any act or omission which, at the time when it was committed, was criminal according to the general principles recognised by the community of nations. The severity of penalties must not be disproportionate to the criminal offence.” 226. The only basis for HMRC’s case, that Waterfire evaded tax by making a claim for input tax to which it was not entitled, is Mobilx . It is overly simplistic to state that there can be no retroactive penalisation because section 61 VATA 1994 was in force at the relevant time. That section does not apply in a vacuum and relies on a denial of input tax based on more recent case law. 227. The Kittel decision represented a novel development of the law on the interpretation of the Sixth Directive as recognised by Moses J in Mobilx at [41]: “ In Kittel after § 55 the Court developed its established principles in relation to fraudulent evasion. It extended the principle, that the objective criteria are not met where tax is evaded, beyond evasion by the taxable person himself to the position of those who knew or should have known that by their purchase they were taking part in a transaction connected with fraudulent evasion of VAT…” 228. It expanded upon the decision in Optigen and provided a new ground upon which a right of deduction could be refused. The impact of those decisions as a matter of UK law was only established in Mobilx . Any penalty based on this case law cannot, consistently with Article 7 of the ECHR, relate to activities predating the Court of Appeal’s decision. 229. The Appellant submitted that the imposition of a penalty in the current circumstances involves a clear breach of Article 7 of the ECHR and Article 49 of the EU Charter. If the Tribunal has any doubt on this issue the matter should be referred to the CJEU. 230. Article 50 of the EU Charter provides: “ No one shall be liable to be tried or punished again in criminal proceedings for an offence for which he or she has already been finally acquitted or convicted within the Union in accordance with the law.” 231. The penalty imposed on Waterfire breached this provision as the refusal to a right to deduct was also a penalty, as recognised by the CJEU in a number of cases such as Mahageban : “By contrast, it is incompatible with the rules governing the right to deduct under that directive, as noted in paragraphs 37 to 40 of the present judgment, to impose a penalty, in the form of refusing that right to a taxable person who did not know, and could not have known, that the transaction concerned was connected with fraud committed by the supplier, or that another transaction forming part of the chain of supply prior or subsequent to that transaction carried out by the taxable person was vitiated by VAT fraud (see, to that effect, Optigen and Others, paragraphs 52 and 55, and Kittel and Recolta Recycling, paragraphs 45, 46 and 60).” 232. It is not open to the Tribunal to prefer the approach of the Court of Appeal in Mobilx in interpreting the CJEU’s case law to that of the CJEU. The Tribunal must either accept that the denial of input tax is a penalty and a breach of Article 50 or make a reference to the CJEU. (viii) The penalty is disproportionate 233. Article 49 of the EU Charter imposes a directly enforceable right that a penalty must not be disproportionate to the offence. The penalty imposed on the Appellant is manifestly disproportionate to the conduct complained of and vastly exceeds the amount by which Waterfire could have profited from the transaction or the amount of VAT jeopardised by Waterfire having made a claim for input tax on the supplies. (ix) Construction of Sections 60 and 61 VATA 1994 234. In order for section 60 VATA 1994 to apply, tax must be evaded. It was submitted on behalf of the Appellant that at the very least the use of the word “evading” imports a requirement of dishonesty in the attempt to obtain an undeserved VAT credit. Where, it was submitted, as here there was a genuine and reasonable belief in the entitlement to the VAT credit there cannot have been VAT evasion. 235. The Appellant submitted that the definition must be even more narrowly construed so that it cannot include the claiming of input tax that was genuinely incurred and which there was a prima facie right to claim under section 26 VATA 1994. The following definition from R v Dealy [1995] STC 215 has been applied by the Tribunal in a number of cases involving section 60 and 61 VATA 1994: “ We look next at the judge's direction to the jury on law: 'Well, what does “evasion” mean? Evasion is an English word that means to get out of something. If you evade something, you get out of its way, you dodge it, and that, of course, is what this case is about. Was Mr. Dealy trying to dodge paying the VAT that his company, the limited company, Yorkshire Clothing Company Limited, owed to the Customs and Excise. Well, what that word means, basically, is dishonesty, and here we come to it. What is dishonesty in English Law? It is a common English word and it carries its ordinary English meaning. The twelve of you must, first, look at what he did. You must decide for yourselves, first of all, whether ordinary, right-thinking people would describe what Mr. Dealy did as dishonest. If the answer is “No, ordinary, sensible people would not regard what he did as being dishonest” then he is not guilty. However, if you decide that ordinary, reasonable people would see his conduct as dishonest, you must then go on to decide what he thought about it. If you come to the conclusion that Mr. Dealy might have thought, quite honestly, that he had a perfect right to do as he did, and that no one would regard it as dishonest, then he is not guilty. If he was convinced, throughout, that he was doing the right thing, and that other people would agree with him, that is not dishonesty.'” 236. The term “evasion” even as expanded by section 60 (2) VATA 1994 must be more limited in scope and read consistently with the basis meaning set out in Dealy. As such, although it covers a claim to input tax which is made knowing that there is no basis for such claim, it cannot apply to a claim which is made in the genuine and honest belief that the person is entitled to the tax. The extension of the meaning in subsection (2) is required because a claim for input tax which is falsely made would not fall within the natural meaning of “evasion”

“The test for dishonesty in civil penalty cases is the same as that in criminal cases. The test was established by Lord Lane in R v Ghosh [1982] 2 QB 1053. In Ghosh, Lord Lane held that the test was a two-stage test: the first stage an objective test and the second stage a subjective test. Lord Lane stated at page 1064: “In determining whether the prosecution has proved that the defendant was acting dishonestly, a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest. If it was not dishonest by those standards, this is the end of the matter and the prosecution fails. If it was dishonest by those standards, then the jury must consider whether the defendant himself must have realised that what he was doing was by those standards dishonest. In most cases, where the actions are obviously dishonest by ordinary standards, there will be no doubt about it. It will be obvious that the defendant himself knew that he was acting dishonestly.” (xi) Amount of the penalty 240. HMRC are required to prove that there was an amount falsely claimed by way of credit for input tax. However there was nothing in the VAT return or accompanying leaflets which indicated any limitation on the right to reclaim VAT. It was a requirement that VAT be incurred but no limitation beyond that. In those circumstance a claim to input tax genuinely incurred cannot properly be regarded as false unless the term “false” is given an untenably wide interpretation which is at odds with R v Rimmington [2005] UKHL 63 per Lord Bingham at [33]: “ There are two guiding principles: no one should be punished under a law unless it is sufficiently clear and certain to enable him to know what conduct is forbidden before he does it; and no one should be punished for any act which was not clearly and ascertainably punishable when the act was done. If the ambit of a common law offence is to be enlarged, it "must be done step by step on a case by case basis and not with one large leap": R v Clark (Mark) [2003] EWCA Crim 991 , [2003] 2 Cr App R 363 , para 13.” (xi) Refusal of right to deduct 241. The Appellant submitted that the CJEU authorities do not support the proposition that no right to deduct arises where there is a connection with fraud; rather there is a prima facie right to deduct, which can be refused. Therefore, it cannot be said that in making a claim that was liable to be refused, Waterfire made a false claim; a false claim is one that has no legitimate basis. 242. It is not accepted that the evidence shows that the transactions took place in the context of a wider scheme to defraud the Revenue. However even if this were the case, it would not be sufficient to deny Waterfire the right to recover VAT prior to Kittel and, even after Kittel , it would not deny such a right ab initio so as to make the claim false or dishonest. 243. Bearing in mind the objective nature of VAT, to assess the objective character of a transaction one must look to its physical attributes and economic effect. Why any of the parties entered into the transactions or their intentions in so doing is irrelevant. From the VAT perspective it means little to say that the transactions entered into by Waterfire were fraudulent in nature, especially as the principle of fiscal neutrality prevents any general distinction between lawful and unlawful transactions (see Kittel at [50]). If the transactions gave rise to taxable supplies then the taxable person would not evade tax. As Waterfire incurred input tax for the purpose of itself making taxable supplies, then the input tax would prima facie be deductible, notwithstanding any supposed wider fraudulent intent behind the transactions. 244. The Appellant accepted that a taxpayer cannot rely on any right under the VAT Directive for fraudulent ends because “preventing tax evasion, avoidance and abuse is an objective recognised and encouraged” by the Directive and “Community law cannot be relied on for abusive or fraudulent ends” ( Kittel at [54]). However it submitted that pre- Kittel the circumstances in which a taxpayer could be denied his right to deduct for fraud related reasons were limited to the situation whereby the exercise of the right resulted in itself in the fraudulent evasion of VAT. The four situations in which this could occur are: · A supply is made, output tax is payable but not declared; · No output tax is payable but the taxpayer charges it and keeps it; · No VAT is incurred but the taxpayer deducts an amount purporting to be input tax; or · VAT is incurred which is not deductible input tax but the taxpayer treats it as such. 245. Where the objective criteria for engaging the right to deduct are satisfied, the right to deduct crystallises and even in circumstances where fraud is established, and it becomes permissible for a tax authority to refuse the taxpayer his right to deduct, the ECJ does not refer to the taxpayer ceasing to have the right, or the right ceasing to exist. Rather, at [55] of Kittel : “ Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively (see, inter alia, Case 268/83 Rompelman [1985] ECR 655, paragraph 24; Case C-110/94 INZO [1996] ECR I-857 , paragraph 24; and Gabalfrisa, paragraph 46). It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends (see Fini H, paragraph 34)." 246. This suggests that the right remains capable of being exercised even in cases of fraud and remains in effect until such time as either the tax authorities or a Court refuses it. As such, even if Kittel had retrospective effect, Waterfire would still have been entitled to deduct the VAT in question at the relevant time. 247. The Appellant submitted, relying on Halifax and Others [2006] EUECJ C-255/02 (21 February 2006) in support, that abuse of right cannot be relied upon to justify the imposition of a penalty: “It must also be borne in mind that a finding of abusive practice must not lead to a penalty, for which a clear and unambiguous legal basis would be necessary, but rather to an obligation to repay, simply as a consequence of that finding, which rendered undue all or part of the deductions of input VAT…” (xii) Submissions on the evidence 248. In essence, the Appellant submitted that the witnesses called by HMRC to give evidence were unreliable, institutionally biased and lacking in the necessary expertise or commercial acumen to give evidence. All of the evidence of the witnesses was based on analysis and interpretation of work by others who were not called to give evidence. It was submitted that when the evidence is unravelled, all of the witnesses had effectively shared the same information, however HMRC had chosen to call numerous witnesses rather than just one in an attempt to make the evidence seem more compelling. None of the witnesses for HMRC had ever worked in the mobile phone industry and as such they were not suitably placed to make assumptions as to what would constitute “commercial transactions.” 249. The Appellant highlighted Mr Lyon’s evidence that much of the information he had obtained in this case came from Mr Mody. It was submitted that Mr Lyon’s evidence was contradictory in that he initially stated that Mr Mody played a significant part in his decision making process yet he later went on to say that he and Mr Mody had not discussed his decision making process. Furthermore Mr Lyon was unable to recall the part played by the various documents he had reviewed in his decision making or what documents he had considered in producing reports forming the background to the decision. Mr Lyon did not consider whether or not a civil evasion penalty could be imposed, only whether there had been dishonest conduct. He did not consider whether completion of the repayment claim had been dishonest. 250. The Appellant did not accept that Mr Stone had the expertise to explain how MTIC fraud worked and the fact that he gave his opinion on a number of matters was highlighted by the Appellant to demonstrate his lack of impartiality. The Appellant relied on Butkevicius v Lithuania (Application number 48297/99) which held that: “ The Court recalls that the presumption of innocence enshrined in Article 6 § 2 of the Convention is one of the elements of a fair criminal trial guaranteed by Article 6 § 1. It will be violated if a statement of a public official concerning a person charged with a criminal offence reflects an opinion that he is guilty before he has been proved so according to law. It suffices, even in the absence of any formal finding, that there is some reasoning to suggest that the official regards the accused as guilty. Moreover, the presumption of innocence may be infringed not only by a judge or court but also by other public authorities (Daktaras v. Lithuania, no. 42095/98, §§ 41-42, ECHR 2000-X). In the above mentioned Daktaras case the Court emphasised the importance of the choice of words by public officials in their statements before a person has been tried and found guilty of an offence. Nevertheless, whether a statement of a public official is in breach of the presumption of innocence must be determined in the context of the particular circumstances in which the impugned statement was made (ibid.).” 251. The Appellant submitted that as Mr Stone is a public official and the Appellant has been charged with a criminal offence for Article 6 purposes, Mr Stone’s statement was a clear violation of the presumption of innocence. The evidence of Mr Stone was also affected by a lack of disclosure that undermined the Appellant’s ability to effectively cross-examine the witness. 252. It was submitted that Ms Sharkey’s analysis of Waterfire’s transaction chains was biased as demonstrated by her statement which was made “in support” of HMRC’s case. Furthermore Ms Sharkey’s analysis was fundamentally flawed. Although the Appellant accepted that there was circularity of funds in Waterfire’s transaction chains the method used by Ms Sharkey is not accepted. Lengthy submissions were made by the Appellant as to Ms Sharkey’s qualifications which can be summarised as follows: Ms Sharkey has no relevant qualifications or experience to carry out the analysis which required a forensic accountant. Ms Sharkey’s evidence should therefore be treated with caution and little weight given to it. 253. Additionally Ms Sharkey’s sampling method was flawed which renders the conclusions unsafe; the method was unscientific and biased towards determining that Waterfire was always involved in circular transactions. Ms Sharkey could not say what percentage of acquisition transactions she had sampled nor had she considered the correct statistical method to apply in order to achieve a fair sample. Finally, Ms Sharkey reached conclusions in which she gave opinion evidence. In cross-examination Ms Sharkey accepted that her conclusions were limited in so far as they applied specifically to Waterfire, for instance she agreed that it had not shared an IP address with other traders in the chains. 254. Mr Milroy accepted that his knowledge and experience related to criminal matters and his involvement in the Appellant’s case was limited because the case was rejected by his team as unsuitable for criminal proceedings. It was submitted that Mr Milroy’s evidence was irrelevant to the issues to be determined, particularly as he accepted that he had not considered whether a section 60 or 61 penalty could be validly imposed. 255. Mr Mody accepted that he had no direct experience of the commercial mobile phone market and that his experience came from reviewing cases that had been identified by others as suspicious. 256. Mr Humphries accepted he had never worked in a commercial context or in the mobile phone market. 257. Mr Fletcher, who purported to give evidence as an expert, accepted that he had not considered how the operation of a market deeply affected by fraud might affect his analysis and agreed that his analysis was flawed as a result. There was also a lack of disclosure in relation to his evidence; this undermined the Appellant’s ability to challenge the evidence. 258. Taking into account the general bias displayed by HMRC’s witnesses to traders in the mobile phone industry the Tribunal should attach little or no weight to their evidence. 259. The Tribunal must also concede a lack of expertise in data analysis and awareness of normal commercial practices and therefore without assistance of expert evidence cannot reach conclusions on the evidence. (xiii) Right to silence 260. In reliance on Article 6 ECHR the Appellant need not give evidence and need not do anything that is likely to incriminate him. 261. It is accepted by the Appellant that by maintaining his right to silence, the issue arises as to whether the Tribunal can or should draw adverse inferences. The Appellant does not contend that a “great deal of weight” should be given to the Appellant’s witness statement in the absence of its contents being confirmed on oath and tested in cross-examination, although the Tribunal was invited to note that the statement is consistent with earlier statements made by him. However the Appellant submitted that even if little weight is attached to the statement, HMRC still fail to prove their case. 262. As to the issue of adverse inferences the Appellant, relying on Proudman J in HMRC v Sunico [2013] EWHC 941 (Ch) , submitted that the Tribunal should not draw any such inferences for the following reasons: (a) To do so would infringe the Appellant’s rights under Article 6 of the ECHR; (b) Even if adverse inferences are drawn, HMRC have not made out their case; (c) Any adverse inferences to be drawn do not support HMRC’s contentions; (d) Little weight should be attached to any adverse inferences drawn because HMRC have adduced little or no evidence upon which the Appellant can comment. 263. The Appellant submitted that the standard in civil proceedings is not relevant to the standard to be applied in this appeal due to the criminal nature of the penalty and the engagement of the Appellant’s Article 6 rights. 264. The Appellant drew the Tribunal’s attention to Adetoro v UK [2010] ECHR 46834/06 at [47] – [49]: “ The Court recalls at the outset that the right to silence is not an absolute right (see John Murray, cited above, § 47; Condron, cited above, § 56; and Beckles, cited above, § 57). The fact that a trial judge leaves a jury with the option of drawing an adverse inference from an accused's silence during police interview cannot of itself be considered incompatible with the requirements of a fair trial. However, as the Court has previously emphasised, the right to silence lies at the heart of the notion of a fair procedure under Article 6 and particular caution is required before a domestic court can invoke an accused's silence against him (see Beckles, cited above, § 58; and Condron, cited above, § 56). It would be incompatible with the right to silence to base a conviction solely or mainly on the accused's silence or on a refusal to answer questions. However, it is obvious that the right cannot and should not prevent that the accused's silence, in situations which clearly call for an explanation from him, be taken into account in assessing the persuasiveness of the evidence adduced by the prosecution (see Condron, cited above, § 56; and Beckles, cited above, § 58). Whether the drawing of adverse inferences from an accused's silence infringes Article 6 is a matter to be determined in the light of all the circumstances of the case, having regard to the situations where inferences may be drawn, the weight attached to them by the national courts in their assessment of the evidence and the degree of compulsion inherent in the situation (John Murray, cited above, § 47; and Condron, cited above, § 56). In practice, adequate safeguards must be in place to ensure that any adverse inferences do not go beyond what is permitted under Article 6 § 1 of the Convention. Of particular relevance are the terms of the trial judge's direction to the jury on the issue of adverse inferences (see Beckles, cited above, § 59).” 265. In summary, it was submitted that the Tribunal should apply the following criteria: (a) The Appellant’s silence can only be invoked against him where particular caution has been applied; (b) Safeguards must be in place to protect the right to a fair trial; (c) A decision of the Tribunal in HMRC’s favour cannot be based mainly on one or more adverse inferences drawn from the Appellant’s silence as HMRC have failed to show that the Appellant had the requisite knowledge, or should have had the requisite knowledge; (d) There is no evidence in this case which requires an explanation from the Appellant; (e) The Tribunal must consider the weight to be given to any such inference. 266. As regards infringement of the Appellant’s Article 6 rights by drawing adverse inferences, the Appellant submitted that “in cases that are also criminal under national law the identification of appropriate safeguards is more straightforward than in this case” citing police cautions and directions to a jury by way of example. It was submitted that the normal criminal protections do not apply in this case and there are no similar safeguards in the procedural law governing the First-tier Tribunal. 267. The Appellant submitted that prior to accepting the Appellant’s decision not to give evidence the Tribunal should have considered what safeguards needed to be put in place to protect his Article 6 rights. The Tribunal should also have heard submissions on the point in advance in order to advise the Appellant how it proposed to deal with his decision not to give evidence. 268. The Appellant submitted that Waterfire’s transaction chains are “nothing more than a prejudicial sideshow” and have no bearing on the central issue as to whether the claim itself was dishonest. In those circumstances there was no need for the Appellant to give evidence. 269. HMRC’s evidence is almost wholly aimed at establishing that there was a general scheme of fraud around Waterfire’s transactions. There is no compelling evidence in relation to the central question, namely was Waterfire dishonest in making its claim for input tax. 270. HMRC’s evidence is weak and circumstantial and the Tribunal should reject HMRC’s invitation to draw unspecified adverse inferences. Furthermore HMRC’s case as to the Appellant’s dishonesty is ill defined and the Appellant was therefore naturally reluctant to put himself in an unfamiliar and potentially damaging situation. HMRC’s submissions 271. HMRC submitted that the Appellant had misunderstood the basis for the decision under appeal; this was not that Waterfire was denied its entitlement to claim input tax credit in respect of transactions conducted in period 04/06 in accordance with Kittel principles. The basis of the decision was the fulfilment of the statutory requirements of section 61(1) VATA 1994: · The transactions in respect of which Waterfire claimed (and was denied) an input tax credit in VAT period 04/06 were connected with the fraudulent evasion of VAT; · By entering into those transactions which it knew (through the Appellant, Mr Tahir or either of them) to be connected with fraud and/or making VAT returns on the basis of those transactions, Waterfire had done an act/acts for the purpose of evading VAT; · Waterfire, through the Appellant, knew that the transactions it entered into were connected with fraud and that the VAT returns submitted were based upon transactions so connected, such that Waterfire’s conduct was dishonest; · Waterfire was liable to a penalty under section 60 of VATA 1994 in respect of the VAT sought to be evaded, namely the amount of the input tax credit claimed by it in its VAT return for period 04/06 (£6,972,184); · The conduct giving rise to Waterfire’s liability to a penalty was in whole or in part attributable to the Appellant and Mr Tahir or either of them. 272. HMRC submitted that the penalty does not rely upon an interaction of the statutory penalties and MTIC case law; rather it relies on the Tribunal being satisfied to the requisite standard that the statutory criteria set out in sections 60 and 61 VATA 1994 have been fulfilled. 273. The provisions of Section 60(2) are not restricted as suggested by the Appellant. The observations of the Court of Appeal in Dealy , relied upon by the Appellant, are of limited assistance for the present purposes as in Dealy the Court was asked to provide a definition of the word “evasion” as it appeared in Section 39 of VATA 1994 in a particular factual context. The question asked of the Court of Appeal was: “Does the word “evasion” in section 39(1) of the Value Added Tax Act 1994 mean (a) a deliberate non-payment when a payment is due, or (b) a deliberate non-payment when a payment is due with intent to make permanent default in whole or in part of that existing liability.”

“on my interpretation of the principle in Kittel, there is no question of penalising the traders…” and at [65]: “The Kittel principle is not concerned with penalty…the principle is concerned with identifying the objective criteria which must be met before the right to deduct arises. Those criteria are not met, as I have emphasised, where the trader is regarded as a participant in the fraud. No penalty is imposed; his transaction falls outwith the scope of VAT and, accordingly, he is denied the right to deduct input tax by reason of his participation.” (b) At [45] of Mahagében the CJEU described the right to deduct as a benefit: “…a taxable person can be refused the benefit of the right to deduct only on the basis of the case-law resulting from paragraphs 56 to 61 of Kittel and Ricolta Recycling, according to which it must be established on the basis of objective factors, that the taxable person to whom were supplied the goods or services which served as the basis on which to substantiate the right to deduct, knew, or ought to have known, that that transaction was connected with fraud previously committed by the supplier or another trader at an earlier stage in the transaction.” 276. HMRC submitted that the use of the term “penalty” at [47] of Mahagében may be termed a misnomer in those circumstances. 277. It has always been open to the tax authorities to claim repayment of the deducted sums retroactively. Similarly the tax authorities have – pre- Kittel – been permitted to refuse to allow the right to deduct where it established that that right was relied on for fraudulent ends. HMRC submitted that in Kittel, the CJEU developed an already long-established principle, namely that the objective criteria for identifying supply of goods or services and economic activity are not met where tax is evaded or sought to be evaded. 278. The development in Kittel related only to the issue of constructive knowledge of the taxable person with regard to transactions other than his own. In Optigen the CJEU rejected the contention that the transactions of innocent parties could not be regarded as economic activities if they formed part of a series of transactions with a fraudulent objective. The CJEU distinguished between transactions into which the innocent parties had entered from those transactions “vitiated by fraud”

“ …the familiar four principles summarised by Brooke LJ in Wisniewski v Central Manchester Health Authority ( [1998] PIQR 324 , at p 340: “(1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action. (2) If a court is willing to draw such inferences, they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness. (3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue. (4) If the reason for the witness's absence or silence satisfies the court then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.”… What is true, however, is that the question of whether there is a case to answer does depend on the individual case and the allegations in question. If the court is to draw adverse inferences, they cannot simply be of a general nature; they must be specific inferences in relation to specific pleaded issues. I am mindful that this is a case where very serious allegations of fraud have been made against the Defendants and, whilst this does not affect the standard of proof, it does have some bearing on my approach to the evidence and the burden on HMRC to prove its claim.” 288. In applying the principles enunciated in Sunico, HMRC made the following submissions: (a) HMRC have shown a prima facie case to answer that Waterfire, through the Appellant, knew that the transactions it entered into were connected with fraud and that the VAT returns submitted were based upon transactions so connected, such that Waterfire’s conduct was dishonest; (b) HMRC’s prima facie case is supported by evidence; (c) The Appellant, as one of the two directors of Waterfire, was a witness who might properly be expected to have material evidence to give on matters in issue in these proceedings; (d) No explanation was advanced by or on behalf of the Appellant to explain his failure to give evidence, such that there is no basis for the Tribunal to reduce the potentially detrimental effect of his silence; (e) The Tribunal is entitled to, and should properly, draw inferences from the failure of the Appellant to give evidence in answer to HMRC’s prima facie case; (f) Those adverse inferences go to strengthen the evidence adduced by HMRC on the matters in issue in these proceedings. 289. HMRC submitted although the penalty is a “criminal charge” for the purposes of Article 6 of the ECHR, it does not follow from that determination in Han and Yau that the rules applicable in a criminal court apply to proceedings before a Tribunal. Furthermore the right to silence is not an absolute right. In Murray (John) V UK (1996) 22 EHRR 29 the European Court of Human Rights stated: “Whether the drawing of adverse inferences from an accused’s silence infringes Article 6 is a matter to be determined in the light of all the circumstances of the case, having particular regard to situations where inferences may be drawn, the weight to be attached to them by national courts in their assessment of the evidence and the degree of compulsion inherent in the situation.” 290. HMRC noted, by way of analogy, that Section 35 of the Criminal Justice and Public Order Act 1994, which permits a jury in certain circumstances to draw an inference from a defendant’s failure to testify at trial, has been found to be Article 6 compliant. The European Court of Human Rights made clear in Condron v UK (35718/97) (2001) 31 EHRR 1 that it is the judge’s direction to the jury on the drawing of inferences which is of particular importance. HMRC submitted that the following steps, tailored and adopted for the purposes of this appeal, can properly be considered as “adequate safeguards”: (a) the judge must tell the jury that the burden of proof remains in the prosecution throughout and must advise the jury of the required standard; (b) the judge must make clear to the jury that the defendant has the right to remain silent; (c) an inference from a failure to give evidence cannot on its own prove guilt; (d) the jury must be satisfied that the prosecution have established a case to answer before drawing inferences from silence; (e) if, having considered the defence case, the jury concludes that the silence can only sensibly be attributed to the defendant’s having no answer or none that would stand up to cross-examination, they may draw an adverse inference. 291. HMRC submitted that Waterfire, through the Appellant as director, knowingly acted as a contra trader in VAT period 04/06 as part of a scheme intended to defraud the Revenue. In particular HMRC rely on its conduct on entering into the following transactions and submitting a VAT return signed by Mr Butt on 15 May 2006 seeking a repayment of VAT: · 32 broker transactions; · 6 buffer transactions; and · 47 acquisition transactions. 292. HMRC also relied upon the nature of Waterfire’s dealings in 07/06, which it submitted are indicative of an overall scheme to defraud the Revenue. In particular HMRC submitted that Waterfire knowingly entered into the following transactions as part of a fraudulent scheme: · 14 broker transactions; · 0 buffer transactions; and · 17 acquisition transactions. 293. HMRC noted that the Appellant has not challenged HMRC’s case that the loss of VAT was attributable to fraud in the chains traced back to defaulters in 04/06 and 07/06 or in the 5 distinct chains (the Epinx transactions) where Waterfire purchased from a contra trader. 294. HMRC submitted that the following features of the transactions demonstrate that they formed part of an orchestrated and contrived scheme to defraud the Revenue and of which Waterfire, through its directors, knowingly participated: (a) Waterfire’s VAT declarations during its effective period of trade (7 October 2004 to 28 July 2006) reveal that its turnover increased nine-fold between 2005 and 2006: · Year end 31 July 2005 £17,130,164 · Year end 31 July 2006 £168,843,683 · Year end 31 July 2007 £1,395 (b) There is a significant inconsistency between the turnover declared by Waterfire in its VAT returns and the turnover declared by Waterfire in its annual accounts; the company declared a turnover of £185,976,637 on its VAT returns during the period in question yet it declared £17,514,662 for the corresponding period in its annual accounts; (c) Waterfire achieved a near-perfect balancing of its VAT liabilities over a six month period, despite a turnover of £102,000,000; (d) Each of Waterfire’s broker and buffer deals in periods 04/06 and 07/06 can be linked to fraudulent tax losses, either directly or via a contra trader; (e) The deal chains involved no manufacturers, authorized distributors, retailers or end users; (f) Waterfire did not add value to the deals chains; a trader adds value for example by (i) breaking down bulk; (ii) accumulating stock; (iii) holding and storing stock; (iv) sourcing scarce products from unique personal contacts; and (v) providing finance. None of these examples apply to Waterfire and the Appellant had provided no explanation as to how his company added value to the deal chain; (g) The transaction chains in respect of Waterfire’s acquisition chains were relatively short, generally involving only one other UK company which acted as broker. In contrast, the transaction chains in respect of Waterfire’s broker chains features 6 or 7 UK participants; (h) According to the sales and purchase invoices provided by Waterfire, the company tended to trade during the last 10 days of each month (80% of deals in 04/06 and 07/06); (i) Waterfire never made a loss on any transaction; (j) Waterfire increasingly achieved high profit margins on both its EU purchases and its EU sales as compared to those transaction where it purchased and sold to UK traders; (k) Consistent mark-ups were made by traders in the deal chains; (l) The transaction chains display non-commercial features such as the appearance of particular traders occupying the same position in transaction chains in deal chains purported to be unconnected, documentation includes inadequate and/or inconsistent information, there is a lack of underlying paperwork to evidence transactions and the terms of dealing are confused with no clarity as to matters such as legal title, date of delivery, date of payment or redress; (m) The six buffer deals in 04/06 involved sales to three different but connected companies which each sold to EU customers already known to Waterfire with Waterfire, therefore, foregoing a much larger profit by not selling to the EU. There was no need for Waterfire to import goods in its acquisition deals or sell to UK traders; the goods could have been sold to Waterfire’s existing EU contacts at a greater profit. The only reason for goods to enter the UK was to bring them into the UK VAT regime, creating an output tax charge by the contra trader and a subsequent VAT repayment claim by the broker; (n) Every transaction within the analysed chains in periods 04/06 and 07/06 invoiced in Sterling irrespective of whether the goods were being acquired from the EU or sold to the EU; (o) Analysis of the FCIB material demonstrates that money flows were circular and involved similar patterns of traders and third party payments outside the UK without any reasonable commercial explanation; (p) Analysis of the FCIB material demonstrates the participation within a single deal chain of more than one company run by the same director; (q) Analysis of the FCIB material demonstrates that common IP addresses were used to make payments for companies in geographically diverse locations and the making of third party payments by other companies in the overwhelming majority of Waterfire’s supply chains; (r) The deals with Epinx enabled the Epinx to balance its VAT account and to generate a significant repayment claim by Waterfire which would not trace directly to a tax loss; (s) In each of the 14 broker transactions in 07/06 the goods were despatched to the same warehouse in France (Entrepots Surete France SARL) notwithstanding that Waterfire had 6 different customers based in 6 different locations. In at least 10 of the 17 acquisition deals in 07/06 the ultimate broker also despatched the goods to Entrepots. 295. HMRC submitted that had Waterfire bought from and sold to the EU in the same transaction chain its profit margin would have increased by avoiding transport costs (which were borne by Waterfire when it acted as both acquirer and dispatcher) and it would have avoided any liability to VAT. HMRC also highlighted that Waterfire had the trading relationships to trade in this way. For instance it had bought from and sold to FAF International on a number of occasions yet on no occasion when FAF was the ultimate customer in Waterfire’s acquisition deals did the two companies find each other: In deal 183 Waterfire purchased from FAF; in deals 186 and 187 FAF purchased from Totel Ltd which had purchased from Waterfire. All three transactions took place on the same day, 26 April 2006. 296. HMRC submitted that the following features indicate that Waterfire, through the Appellant and Mr Tahir, knew that the transactions formed part of an overall scheme to defraud the Revenue: (a) The Appellant’s awareness of the risks and prevalence of MTIC fraud in the mobile phone sector; (b) The nature and content of the VAT1 signed by the Appellant demonstrated an intention to deceive HMRC as to the true nature of the business in that the business activities were described as “wholesale of fancy goods, wholesale and retail of electrical equipment and white goods and consumer electronics.”

“From mid 2006 until my resignation in 2009 the company did no trading…When we ceased trading the only assets the company had, were old desks and PCs that were sold for a few hundred pounds.” 303. HMRC drew our attention to Phillipou (1989) 89 Cr App R 290 (approved by the House of Lords in Gomez (1993) 96 Cr. App. R 359) in which the Court held that a director who owned shares in a company could still be convicted of theft from that company. HMRC drew the comparison with the actions of the Appellant in appropriating property belonging to Waterfire with the intention of permanently depriving the company of that property which constitutes theft. 304. Waterfire failed to pay or account for corporation tax; its return for the year to 30 April 2006 was submitted but not paid. The return declared a turnover of approximately £152,000,000 and a profit of approximately £401,000. The net profit for that period according to the records based on purchases of £151,767,634.20 and sales revenue of £153,762,964.75 was £1,995,330.55. HMRC submitted that given the directors did not receive wages, only dividends, and the full time employee Mr Sharif only received £17,083 wages in the tax year 05/06, it can be concluded that the profits were under-declared. For the following year to 30 April 2007 no corporation tax was submitted nor any tax paid. 305. HMRC noted that the Appellant was a director of Waterfire from 16 June 2004 to 26 June 2009. Mr Phil Royle was appointed a director on 11 October 2008. The accounts for the year ending 30 April 2006 are inaccurate; they were signed off by Mr Royle on 13 April 2009 however HMRC highlighted the fact that the Appellant was, at that point, still a director with responsibility for the accuracy of the accounts. In the alternative, HMRC submitted that the Appellant had a duty prior to the sale of the company to produce accounts up to the time the company ceased trading. It was submitted by HMRC that the Appellant failed to do so in order to hide his theft from the company and avoid corporation tax. 306. HMRC highlighted further financial anomalies relating to the Appellant, including failure to declare rental income on properties and a transaction undertaken in 01/06 by Waterfire (UK) Ltd, which was not registered for VAT, in which it had purchased goods from outside the UK and sold to Waterfire. Waterfire claimed the deduction of input tax however Waterfire (UK) Ltd did not account for or pay the output tax to HMRC thereby causing a loss to the Revenue of £247,298.63. 307. As regards HMRC’s witnesses, it was submitted that the test for the Tribunal to apply is whether or not on the evidence presented to the Tribunal by HMRC has proved on the balance of probabilities that the statutory criteria in section 61 VATA 1994 is satisfied. Whether the witnesses had considered all information or based their conclusions on hearsay is irrelevant. The Tribunal can disregard non-expert opinion evidence. Furthermore, HMRC submitted that much of the opinion evidence given was elicited in cross-examination by the Appellant’s representatives despite the Tribunal having stated prior to the proceedings that it would disregard any such evidence. 308. As regards the evidence of Ms Sharkey HMRC submitted that her task had been to trace the money flows; any inferences to be drawn from that factual evidence is a matter for the Tribunal. Ms Sharkey was not challenged as to the accuracy of her tracing exercise and the core material underlying the analysis was provided to the Appellant. Similarly, Mr Humphries described patterns of trading found from available documents. There was no challenge to his factual analysis and again, any inferences to be drawn are a matter for the Tribunal. HMRC accepted that despite Mr Stone’s significant experience of MTIC fraud, his opinion was irrelevant. 309. As to the VAT sought to be evaded HMRC submitted that this was the amount of input tax credit claimed by Waterfire in its VAT return for period 04/06, namely £6,972,184. 310. On the issue of quantum of the penalty, HMRC relied on Han and others in which the Court of Appeal highlighted the deterrent nature of civil penalties (see [48]) 311. Finally, it was submitted by HMRC that if the allegations are proved, the penalty is proportionate and there is no reason for the Tribunal to reduce it. Discussion and decision 312. We will address each of the parties’ legal submissions, our conclusions in respect of which set the basis for the test we have applied, before we turn to our findings on the evidence and whether HMRC has discharged the burden of proof. Construction of legal principles and legislation 313. We agreed that the 04/06 VAT return submitted by the Appellant was arithmetically correct and accurately represented the taxable supplies which were made during the relevant period. Indeed, this was not a point that was challenged by HMRC. However we did not agree that at the relevant time there was no legal provision or authority by virtue of which the Appellant’s entitlement to input tax could be refused. 314. We were satisfied that VATA 1994 provides sufficient justification for HMRC to refuse input tax credit in circumstances where a trader enters into a transaction which he knows or should have known is connected with fraud, per Moses LJ at [47] of Mobilx : “… the objective criteria which form the basis of concepts used in the Sixth Directive form the basis of the concepts which limit the scope of VAT and the right to deduct under ss. 1, 4 and 24 of the 1994 Act. Applying the principle in Kittel, the objective criteria are not met where a taxable person knew or should have known that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT. That principle merely requires consideration of whether the objective criteria relevant to those provisions of the VAT Act 1994 are met. It does not require the introduction of any further domestic legislation.” 315. We were taken through the evolution of cases involving HMRC’s decisions in respect of economic activity and subsequent “MTIC cases”

“‘Evasion’ is a word which can be put in a number of different ways and has been. Dodging a requirement is one method of looking at it. Avoiding payment is another method of looking at it…” 330. In our judgment the statute does not import the restrictions urged on us by the Appellant. Instead Section 60 (2) VATA 1994 includes the obtaining of a VAT credit “ in circumstances where the person concerned is not entitled to that sum.”

“It by no means follows from a conclusion that Article 6 applies that civil penalty proceedings are, for other domestic purposes, to be regarded as criminal and, therefore, subject to those provision of PACE and/or the Codes produced thereunder, which relate to the investigation of crime and the conduct of criminal proceedings as defined by English law. Any argument as to whether and how far that Act and the Codes apply is one which will have to be separately considered if and when it is advanced. In this context, however, the specific provisions of s 60(4) VATA are plainly of considerable importance. I would merely add my view that, if matters are made clear to the taxpayer on the lines indicated in para 77 above at the time when the nature and effect of the inducement procedure are also made clear to him (whether by VAT Notice 730 or otherwise), it is difficult to see that there would be any breach of Article 6. It also seems to me that, even if PACE were applicable, it is most unlikely that a court or tribunal would rule inadmissible under s 76 or s 78 any statements made or documents produced as a result, at any rate in the absence of exceptional circumstances. On the other hand, it follows from this decision that a person made subject to a civil penalty under s 60(1) will be entitled to the minimum rights specifically provided for in Article 6(3).” 338. At [21] to [23] of Han and Others the court set out the “minimum rights” provided by Article 6: “ Thus, a finding that the imposition of a penalty gives rise to a criminal charge is the threshold condition for application of the substantive provisions of Article 6 to the civil penalty procedures under s 60 of VATA and s 8 of FA 94. If applicable, there are implicit in the fair trial provisions of Article 6(1) rights which include a right to silence and a privilege against self-incrimination. Article 6(2) enshrines the presumption of innocence in criminal matters as follows: “2. Everyone charged with a criminal offence shall be presumed innocent until proven guilty according to law.”

“It is important to bear in mind, although the phrase "knew or ought to have known" slips easily off the tongue, that when applied for the purpose of identifying the state of mind of a person who has participated in a transaction which is in fact connected with a fraud, it encompasses two very different states of mind. A person who knows that a transaction in which he participates is connected with fraudulent tax evasion is a participant in that fraud. That person has a dishonest state of mind. By contrast, a person who merely ought to have known of the relevant connection is not dishonest, but has a state of mind broadly equivalent to negligence.” 390. We noted the inconsistencies and anomalies in the financial information provided by the Appellant regarding loans and payments. No response was received to HMRC’s request for further details and we were left without any explanation as to why it would appear that the Appellant lied to HMRC, for instance having told HMRC on 21 June 2006 that the company had no outstanding loans a payment is shown from Waterfire’s HSBC account on 10 August 2006 in the sum of £200,000 which is described as “Return of Loan – Umaad Butt”

“…The function of civil penalties is not compensatory. They are imposed in addition to the assessed liability for tax and the interest recoverable therein…the function of the penalties is one of punishment and deterrence vis the individual and general deterrence so far as taxpayers at large are concerned.”