“[1] This is yet a further case of so-called missing trader or “MTIC” fraud on the system of VAT. The decision of the First-tier Tribunal (“FTT”) conveniently describes the nature of a typical MTIC fraud as follows: “5 … goods (almost always small but valuable items such as mobile phones and computer chips) are acquired by a registered trader in the United Kingdom from a trader in another member State, and sold to a second UK-registered trader. The goods then usually change hands several times within the UK before they are sold to an overseas trader which, if it is located in a member State of the European Union, is registered for VAT in that member State. Commonly the transactions all occur within a few days of the entry of the goods into the UK, sometimes even on the same day, so that goods enter the UK in the morning, pass through the hands of several UK traders during the day, and are exported again in the afternoon. 6. The first UK vendor, the acquirer from overseas, charges VAT on the consideration paid by his purchaser, but fails to account to the respondent Commissioners for that tax, and disappears. Such documentation as he may have had—if any—relating to his acquisition is never produced to the Commissioners. For the scheme to work he must be a VAT-registered trader who provides the purchaser with a genuine VAT invoice, on the strength of which the purchaser claims an input tax credit. The purchaser’s own sale, and those of the other UK traders save the last in the sequence, usually generate a small profit and, consequently, a small net VAT liability, for which those traders account. The last trader, selling overseas, claims credit for the input tax he has incurred, but has no output tax liability since the sale is zero-rated. Usually this trader makes a significant profit, though that is not invariably the case; occasionally one of the antecedent traders can be shown to have made the greatest profit of all those in the chain. All of these sales and purchases, including the sale to the overseas buyer, are almost always properly documented. [2] In the jargon that has developed to describe the various participants in such chains, the initial importer of the goods who fails to account for the output tax he has charged to his purchaser and disappears, is known as the “defaulter” or “missing trader.”
“9 A contra-trader, a broker in one chain of transactions—again adopting the commonly used jargon, a “dirty” chain—in which a default has occurred, buys goods from a supplier in another member State, and sells them to a UK customer; after one or more further sales and purchases they are sold to a customer in another member State. The contra-trader and, usually, all the other traders in this chain account correctly for their VAT liabilities; taken by itself it is a “clean” chain. The acquirer in the clean chain has incurred a liability for output tax which (because the values are engineered to achieve this result) matches the input tax credit due to him (or ostensibly due to him) as the broker in the dirty chain. He does not need to make a large repayment claim, attracting the Commissioners’ attention, but instead makes a modest payment, or a minimal repayment claim. The same result may be achieved by undertaking a number of transactions generating an aggregate input tax credit matching the broker’s output tax liability for the relevant accounting period. It is then the broker in the clean chain who has an input tax claim which, unless they can establish a link between the clean and dirty chains, the Commissioners must meet since the goods in the clean chain have not themselves been used for fraudulent purposes.”” 5. Kittel v Belgium, Belgium v Recolta Recycling SPRL (C-439/04 and C-440/04) [2006] ECR 1-6161 (“Kittel”) provided the legal basis for the denial of the right to deduct in certain circumstances: “55. 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 … 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... 56. In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods. 57. That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice. 58. In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them. 59. Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’. 60. It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void – by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller – causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud. 61. By contrast, 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.” 6. The Kittel test was further clarified by Moses LJ in Mobilx Ltd and The Commissioners for Her Majesty’s Revenue and Customs, The Commissioners for Her Majesty’s Revenue and Customs and Blue Sphere Global Ltd, Calltel Telecom Ltd & another and The Commissioners for Her Majesty’s Revenue and Customs[2010] EWCA Civ 517 (“ Mobilx ”) at [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 [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.” 7. As to the issue of connection, in Blue Sphere Global Ltd and The Commissioners for HM Revenue and Customs[2009] EWHC 1150 (Ch) the Chancellor stated (at paragraphs 42 – 45): “ …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.” 8. On the issue of knowledge, Moses LJ in Mobilx provided the following guidance: “4. Two essential questions arise: firstly, what the ECJ meant by “should have known” and secondly, as to the extent of the knowledge which it must be established that the taxpayer had or ought to have had: is it sufficient that the taxpayer knew or should have known that it was more likely than not that his purchase was connected to fraud or must it be established that he knew or should have known that the transactions in which he was involved were connected to fraud? 52. If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises… 53. Perhaps of greater weight is the challenge based, in Mobilx and BSG, on HMRC’s denial of the right to deduct on the grounds that the trader knew or should have known that it was more likely than not that transactions were connected to fraud. The question arises in those appeals as to whether that is sufficient or whether, as the Chancellor concluded in BSG, the right to deduct input tax may only be denied where the trader knows or should have known that the transaction was connected to fraud (see judgment, § 52). In short, does a trader lose his entitlement to deduct if he knew or should have known of a risk that his transaction was connected to fraudulent evasion of VAT? HMRC contends that the right to deduct may be denied if the trader merely knew or should have known that it was more likely than not that by his purchase he was participating in such a transaction. It contends that if it was necessary to show more than appreciation of a risk then the Court’s decision in Kittel would not represent a development of the law and would fail to achieve the objective, _ecognized in the Sixth Directive, to which the Court referred at § 54… 56. It must be remembered that the approach of the court in Kittel was to enlarge the category of participants. A trader who should have known that he was running the risk that by his purchase he might be taking part in a transaction connected with fraudulent evasion of VAT, cannot be regarded as a participant in that fraud. The highest it could be put is that he was running the risk that he might be a participant. That is not the approach of the Court in Kittel, nor is it the language it used. In those circumstances, I am of the view that it must be established that the trader knew or should have known that by his purchase he was taking part in such a transaction, as the Chancellor concluded in his judgment in BSG:- “The relevant knowledge is that BSG ought to have known by its purchases it was participating in transactions which were connected with a fraudulent evasion of VAT; that such transactions might be so connected is not enough.” (§ 52)… 58. As I have endeavoured to emphasise, the essence of the approach of the court in Kittel was to provide a means of depriving those who participate in a transaction connected with fraudulent evasion of VAT by extending the category of participants and, thus, of those whose transactions do not meet the objective criteria which determine the scope of the right to deduct. The court preserved the principle of legal certainty; it did not trump it. 59. The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who “should have known”
“I t is plain that if HMRC wishes to assert that a trader ’s state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion. ” 86. Our approach to the appeals was to recognise that, while we must consider the merits of the individual transactions, we should not view the transactions in isolation as to do so would be an artificial exercise. We were conscious to ensure that in considering the knowledge of the Appellant, through Miss Lin and Mr Tsai, we only took account of information known during the relevant period and we ignored any opinions expressed by the witnesses for HMRC. Issues 87. The main issue in this appeal was whether the Appellant knew or should have known that its transactions were connected to fraud. However Mr Holland also challenged the tracing and alleged tax losses in respect of some of the transactions and we will address those matters before turning to the principal issue of knowledge. Undisputed Background Facts 88. The Appellant was incorporated on27 July 1990 . Enta is wholly owned by Enta UK Limited. Mr Jason Tsai is the managing director of Enta and held the position of Company Secretary between27 July 1991 and15 July 2002 . 89. Ding Yuan Tsai held the position of Company Secretary between15 July 2002 and1 November 2006 . John Yaw Jong Tsai was appointed Company Secretary on1 November 2006 . 90. Mr Jason Tsai also held the following appointments: · Managing Director of Enta UK Limited; · Director of Entanet International Limited; · Company Secretary of Entamedia Limited; · Company Secretary of A Standard Limited. 91. Mr Albert Yeo was the group accountant and Miss Sally Lin was the buyer for the Appellant. 92. The following companies are based at the same address as Enta: · Entacall Telecommunications Limited; · Bluechip Services Incorporated Limited; and · DCM MIS Solutions Limited. Transactions connected to fraudulent tax losses 93. This appeal covers a number of VAT periods and we shall deal with each in turn. 07/06 94. HMRC Officer Leslie Pitt was responsible for the extended verification of returns in periods 07/06 and 08/06. In period 07/06 seven deals carried out by the Appellant were linked to fraudulent tax losses. 95. The relevant deals were as follows: Deal 1 Deal 2 Deal 3 Deal 4 Deal 5 Deal Deal 8 Date 26/07/06 28/07/06 31/07/06 24/07/06 17/07/06 10/07/06 23/06/06 Goods 3,300 Giga CPUs 11,025 Intel CPUs 1,000 P4 CPUs 2,00 SL7ZB CPUs 9,450 SL7Z9 CPUs 9,450 SL7Z9 CPUs 9,450 SL7Z9 CPUs Supplier Supreme Distribution Supreme Syskal Distribution NVR Logistics Supreme Supreme Supreme Purchaser Taurus SA Munch Marketing Wink Netherlands All World Trading Munch Munch Munch Tax loss trader 4A Jeck Link Services Kaymore Export Ltd Cirex Corp Ltd Visionsoft UK Ltd Visionsoft UK Ltd Heathrow Business Solutions 96. Mr Pitt highlighted the following factors as evidence that the deal chains were contrived. He noted the lengths of the deal chains; in 07/06 the highest number of traders is 10 and in 08/06 the highest number is 9. Mr Pitt agreed that there is no evidence to demonstrate that the Appellant knew of the number of traders in the chains. However he queried, in support of contrivance, why so many traders featured without a manufacturer or end customer in the chain. 97. Mr Pitt highlighted that the sellers matched the exact quantity of goods required by the customers and that the deals were carried out on a back to back basis with none of the traders taking physical possession of the goods. Mr Pitt also noted that in a number of deals the traders in the chains were consistent and that the Appellant, as broker, made a much larger mark-up than the buffers. 98. Prior to the hearing the Appellant accepted the tracing of the chains and fraudulent tax losses in the majority of chains. The issues were further narrowed during the hearing at which stage Mr Holland set out the issues in respect of the deal chains challenged. 99. It was accepted on behalf of the Appellant that 4A Developments was a fraudulent defaulting trader and in those circumstances we will only set out a limited summary of 4A’s trading. 100. Officer Graham Taylor gave evidence regarding 4A which was incorporated on22 July 2005 and registered for VAT with effect from the same date. Mr Robert Morton was the sole director from the date of incorporation. The business activities declared on the VAT 1 were “Building development (alterations and extensions of domestic buildings); E-bay sales, wholesale and retail of used motor vehicles, and other wholesale.” 101. HMRC concluded that 4A was knowingly acting as a contra trader in a scheme contrived to defraud the Revenue. In reaching this conclusion officer Taylor took into account, inter alia, the unrealistic increase in turnover from22 July 2005 to18 October 2006 during which turnover increased from£600,000 per month in August and September 2005 to£84,000,000 per month in April, May and June 2006 and£45,000,000 per month from July to September 2006. 4A had only one full time employee; Mr Morton who was also a director of Spearmint which funded 4A’s transactions and was suspected by HMRC of involvement in MTIC fraud. The enquiries into 4A’s transactions involving CPUs showed that it offset output tax due on acquisition deals against input tax claimed on despatch deals which commenced with tax losses from defaulting traders namely DTM Provisions Ltd and Woodworks. 102. HMRC Officer Emma Raglan gave evidence relating to defaulting trader DTM Provisions Ltd (“DTM”) which was incorporated on27 October 2005 , registered for VAT with effect from1 March 2006 and de-registered on28 June 2006 . At the time of its VAT registration application DTM declared its trading activities as “supply of catering supplies” however HMRC did not encounter any evidence to indicate that the company ever traded in that sector and the only evidence obtained involved DTM wholesaling mobile phones and electronic goods. 103. In the five months between the EDR and the compulsory de-registration the company’s VAT declaration should have been£23,604,443 based on information received from other traders which gave DTM a turnover for 12 months trading in the region of£56,560,663.20 . DTM failed to render returns to HMRC and no annual accounts were filed with Companies House. 104. From June 2006 onwards HMRC were unable to contact a company official in order to discuss DTM’s trading activities. Assessments totally£23,634,490.50 were subsequently raised on the basis that the company had gone missing and defaulted on its VAT liability; the assessments remain unpaid and were not appealed. 105. HMRC officer Pabari gave evidence regarding Woodworks (Sheffield) Limited (“Woodworks”) which was incorporated on23 May 2003 trading as a flooring distribution business. It was registered for VAT with effect from1 February 2004 with a trade class of “floor and wall coverings”. 106. In August and September 2005 the company notified HMRC of a new director, a change of trading address and a change of trade classification to “general trading”
“Monday1/03/2010 Mr Lal did not turn up for the meeting, however, he did send someone with the records. From these it would appear that unless he is selling his last 2 purchases to the EU he will owe over£56k in tax to HMRC.” 265. In 2010 Mr Lal advised that the business activities were the wholesale of electrical goods, games consoles and mobile phones. In February 2011 HMRC advised Mr Lal that a company called Elect Commerce Ltd had advised HMRC that Lite was its sole supplier of soft drinks, soap and batteries. Mr Lal stated that he had only ever traded in electronic goods and that someone had used his name to open two companies the previous year. At that point Lite’s VRN was de-registered on the basis it had been hijacked and a new one issued. 266. As a result of information received from freight forwarders Officer Saul compiled a best judgment assessment for purchases made by Citi Law from Lite in deals where The Mobile Team acted as a fraudulent contra trader. The assessment totalled£2,808,711.50 and was issued to the TPPTB Lite Services Ltd. Findings on whether the tax loss was fraudulent and whether the Appellant’s transactions connected with fraudulent VAT losses? 267. We considered the evidence in respect of the defaulting traders, contra-trader and transaction chains carefully and we should make clear that we did not simply accept the opinions expressed by the officers which we disregarded. Given that there were different issues raised by the Appellant we set out our findings on each below. Period 07/06 268. In respect of 4A Developments we were satisfied that during the relevant period it knowingly acted as a contra trader as part of a scheme designed to defraud the Revenue. We were satisfied that 4A itself acted as a defaulting trader. We were satisfied that HMRC had accurately traced the chains of transactions in the “clean” and “dirty” chains and that the latter traced back to fraudulent defaulting traders DTM and Woodworks thereby connecting the Appellant’s relevant transactions (in this and other periods) to a fraudulent tax loss. 269. As regards the deals involving Jeck Link we were satisfied that HMRC had accurately traced the Appellant’s chains of transactions. The issue raised was whether Jeck Link acted fraudulently. We accepted the evidence that documents obtained contradicted the company’s assertion that it never traded and we concluded that the only reasonable conclusion for its failure to declare its sales and the output tax on those sales was that it was acting fraudulently. The fact that the assessments raised remain unpaid and Jeck Link is a missing trader strengthened our conclusion that these were not the acts of a legitimate business and in those circumstances we concluded that HMRC had established a connection to a fraudulent tax loss. 270. The Appellant did not challenge the evidence of connection to fraudulent tax losses in respect of Kaymore, Cirex, VSUK and HBS and, having reviewed the evidence we were satisfied that in each case the chains had been accurately traced to a fraudulent tax loss. Period 08/06 271. There was no issue taken regarding the evidence relating to Only Quality and Jet Set Go and we were wholly satisfied that HMRC had discharged the burden of proof in respect of these transactions. We have already set out our findings on Kaymore, and 4A above and we will not repeat them. In respect of Zenith we were satisfied that the dates and quantities of goods traded through the chains had been accurately traced by HMRC. 272. The issue in respect of Devella was whether HMRC had established fraud. We were satisfied that the director’s lack of experience in wholesale trading taken together with his reluctance to show HMRC the business premises, the fact he could not recall the name of his accountants and that which he eventually gave did not appear to exist and the fact that he failed to provide HMRC with business records all led us to conclude that these were not the acts of a legitimate businessman. Although we noted the point that the company was dissolved prior to the assessment being raised the fact remains that Devella did not properly declare, provide records or account for its liability and that the only reasonable conclusion was that the company was part of a scheme to defraud the Revenue. The fact that an allegation of fraud was not put to the director does not mean that the company was not acting fraudulently at the relevant time but rather it indicates that HMRC was unaware of that fact. On the basis that there has been no contact from the company despite an assessment being raised and the lack of payment of the liability we were satisfied that fraud had been established. 273. As regards Wade Tech we were satisfied that transactions had been carried out in the company’s name which were not declared or accounted for to HMRC. We accepted HMRC’s evidence that the VRN had been hijacked and we inferred from the act of hijacking that the acts of those involved had been fraudulent. 274. The Appellant initially challenged the tracing in respect of the chain involving EMS although did not appear to us to be pursued following the evidence. Nevertheless, we considered the information before us and we were satisfied that the goods, payments and dates of transactions had been accurately traced by HMRC to defaulting trader EMS. Periods 06/07 and 09/07 275. There was no issue as to the tracing of these chains leading back to TTPPTB Inspired Clothing. We were satisfied that the chains had been accurately traced. As to the issue of fraud we were wholly satisfied that we could properly infer from the evidence regarding Mr Patel having been approached in suspicious circumstances by Intascope, to which Inspired purportedly sold, added to the taking of Mr Patel’s business documents such as the company registration and HMRC’s obtaining of invoices purporting to be from Inspired that the company’s documents had been used in undeclared sales. We concluded that the use of such documents and hijack of Inspired’s VRN was undoubtedly fraudulent and we were therefore satisfied that the Appellant’s transactions had been shown to be connected to the fraudulent evasion of VAT by TTPPTB Inspired Clothing Ltd. Period 12/07 276. We were satisfied that the chains of supply had been accurately traced and connected the Appellant’s transactions to the fraudulent evasion of VAT by Semi-Circle. We considered the two transactions which could not be fully traced due to lack of documents however we noted that the same members feature in these chains in same order as the remaining seven in this period and we were satisfied that on the balance of probabilities the chains, if fully traced, would lead back to the same defaulter. Period 03/08 277. There was no real challenge to the tracing of the chains in this period and we were satisfied that all were accurately traced back to a fraudulent tax loss by Intascope. Periods 06/08 – 06/09 278. We were satisfied that HMRC had accurately traced the chains of transactions to defaulting trader Concours and that the connection between the Appellant’s transactions and a fraudulent tax loss had been established. In the one chain that could not be fully traced which followed the same pattern in terms of members we were satisfied that on the balance of probabilities and looking at the context of the transactions in this period as a whole, the chains if fully traced would lead back to the same defaulter. Period 09/09 279. We were satisfied that HMRC had accurately traced the chains of transactions to defaulting trader KHEL and that the connection between the Appellant’s transactions and a fraudulent tax loss had been established. Period 12/09 280. We were satisfied that HMRC had accurately traced the chains of transactions to hijacked trader Span Media and defaulting trader UN Consultant Services Ltd and that the connection between the Appellant’s transactions and a fraudulent tax loss had been established. Period 03/10 281. We were satisfied that HMRC had accurately traced the chains of transactions to hijacked trader BES and that the connection between the Appellant’s transactions and a fraudulent tax loss had been established. Period 06/10, 09/10 and 12/10 282. We were satisfied that HMRC had accurately traced the chains of transactions to The Mobile Team which had knowingly acted as a contra trader as part of a scheme to defraud the Revenue. We also accepted the evidence regarding the tracing of The Mobile Team’s tax loss chains to defaulters TTPPTB Easy Furniture, Citi Law and Lite Services which established the connection between the Appellant’s transactions and fraudulent tax losses. Appellant’s general submissions 283. The Appellant made a number of submissions generally in respect of the issue of connection to fraudulent tax losses. In essence these were two-fold; the “proportionality” argument and the “ Fonecomp ” argument. Dealing with the latter first Mr Holland sensibly noted that we may decide to await the outcome of Fonecomp[2015] EWCA Civ 39 . That decision has now been released and does not assist the Appellant. The principles set out by the Court of Appeal are well known but the salient points in respect of this appeal can be summarized as follows: · Kittel itself is expressed in terms sufficiently wide to cover contra-trading although it was not itself a case of contra-trading. The CJEU authorities do not affect the position where allegations of contra-trading are involved: “there is no reason why the chain of supply should not be connected through a branch. It is the existence of the requisite connection between the transactions involved which makes the relationship between the transactions a chain” (see[24] – [28]); · Mobilx[2010] EWCA Civ 517 remains good law (see [33]); · The question of connection is to be determined on the facts (see [43]); · The trader does not need to know how the fraud that occurred took place only that it has occurred or will occur at some point in some transaction to which his transaction is connected (see [51]). 284. We consider that in reaching our decision on connection we have applied the guidance set out by the Court in Fonecomp . We will address the issue of knowledge more fully in due course. 285. Mr Holland’s second submission was described as “proportionality”
“Q. So you knew that there was a risk by going into that market that you could be involved in those sort of chains and you wanted to avoid it you told the officers. A.Yes Q. But you knew that was a risk? A. Every commercial activity is a risk. Q. No, answer the question please. You knew that by going into the wholesale deals in CPUs there was a risk of becoming involved in chains where there featured misers and defaulting traders? A. Yes. Q. You knew that A. Yes… Q. And you knew it was not just a risk of buying from somebody who was going to go missing or not pay their VAT because they could be further along in the chain of supply, could they not? A. Yes Q. Because we see the reference to chains there. So what did you know about MTIC fraud, missing trader intra community fraud, at that stage? A. We didn’t know much because our activities always, our sales and marketing activities always try to get the best suppliers and best customers. So we think we can do the same to any trade, any business. That was the only reason we enter into this and we are not aware the problems could be that much at the time. Q. But you knew that there was a problem by going into that market. A. Yes, as I said, every business activity has a risk involved and we tried to minimise the risk… Q. Notice 726…did you read it, Mr Tsai? A. We were given, yes, we have read it but we didn’t fully understand at the time. Q. No doubt you would have asked if you did not understand anything. You had lots of visits from Customs after this, did you not? A. Yes, we did , yes Q. And no doubt anything that was not clear to you, you would have raised with them. A. As I explained, this is very new at the time to us…we may understand in English but we probably didn’t know why there is missing traders because we always pay VAT. Our suppliers pay VAT. Our customers pay VAT. Then where is going to be a loss? Q. You have already referred in the visit report to the risk of becoming involved in chains where there are missing traders and defaulting traders, so you knew it might not be with your supplier but may be your supplier’s supplier or their supplier, did you not? A. Yes, I understood but at the time we were very vague at what can happen…” (Transcript27 November 2014 page30 – 34) Staff 300. Mr Tsai explained that he is the founder and chairman of the Enta group which comprises a company and a number of other businesses. The Enta Group employs approximately 220 people. Mr Tsai stated that by the time of setting up the company in 1990 he had gained over 15 years experience in the IT industry. Having spotted an opportunity in the UK market for affordable computer components he started by distributing computer casings from his garage in Telford. The company grew and is now one of the UK’s leading IT distributors. The company is one of only five authorised UK distributors for Microsoft. 301. It was at the meeting with HMRC on10 March 2010 that Mr Tsai introduced his niece Miss Sally Lin to Mr Soleman as an employee of the Appellant. He stated she was leaving the company at the end of March 2010 but explained that she had been given the responsibility of the deals which are the subject of this appeal. Mr Tsai described Miss Lin as the purchasing manager and stated that she was not required to confirm with him prior to completing deals with Munch but he would examine the deals after completion. In his written evidence Mr Tsai explained that Miss Lin conducted all negotiations and made her own decisions regarding buying and selling; she then reported to Mr Tsai on a weekly or monthly basis. 302. In cross-examination Mr Soleman was referred to a letter from Simmons Gainsford LLP dated14 June 2010 : “ Q. If you go forward to page 232, this is a letter from Simmons Gainsford LLP dated14th June 2010 . A. Yes. Q. If I take you to the last paragraph of that letter at page 232, because this paragraph deals with the meeting and the meeting notes and the annotations to the meeting notes. “I understand that HMRC have met with my client on a number of occasions. However, it is only in respect of the meetings on 10th and 18th March that notes have been exchanged and provided to my client. In arriving at the reasons for denying the input tax claimed and now assessed as detailed above, HMRC have placed considerable reliance upon information provided by Mrs Lin at the meeting on 10th March. The notes of that meeting were commented upon and annotated and corrected by Mr Jason Tsai and returned to HMRC at the meeting on 18th March. Mr Gemmell raises the issue in his letter of 1st April. Whilst it is appreciated that HMRC were authorised to discuss matters with Mr Yeo and Miss Lin, the inclusion in the authorisation letter requested by HMRC of Mr Tsai, unrepresented at this point, that I should agree with their answers cannot reasonably be relied upon. HMRC should be aware that Miss Lin had resigned her position with ETL at the time of the meeting on 10th March. Miss Lin was leaving to be married and emigrated to Sweden. It is the policy of ETL that long-serving employees are not required to work out their notice period typically three months being effectively placed on garden leave for the duration but they are required during that notice period to attend the office if requested. Miss Lin had been specifically requested to attend the meeting, flying in from Sweden to do so. Mr Tsai should have been able to rely upon the responses of Miss Lin who was at that point still employed by ETL but it is clear from the responses to HMRC enquiries that she was distracted by her imminent wedding and anxious to ensure that she connected with a flight back to her new home.”
“A. In the review of business we don’t mention names. We mention general strategy and business review, etc. Q. Okay, let’s talk about your wholesale business that Sally carried out then, because that doesn’t get a mention here does it? A. (No reply) Q. That was a big part of your business in 2010 wasn’t it? A. Yes Q. Millions of pounds every quarter, a very significant part. Why doesn’t it get a mention here? A. The review of the business is a general aspect…we don’t or we never mention particular trades or particular activities… Q. Tradestar was very important to your business wasn’t it? A. Yes, it is Q. It was then, yes? It was your biggest supplier wasn’t it? A. Yes, you’re right Q. Bigger even than Microsoft in terms of value? Yes? A. Yes Q. You talk about Microsoft here yet you don’t talk about your wholesale business. A. Yes, I explained to you that this director report is only in the strategy and this trading with Trdaestar continued from 2006 and is not our standard activity which we didn’t do before, so it’s the same as before. So there’s nothing special. That’s the reason we didn’t mention it and also they are an OEM manufacturer and supplier. Q. Tradestar aren’t an OEM. They are a broker… A. For writing this director report we tried to highlight the strength of the company so we tend to mention world famous companies and the (inaudible) we are doing. So Tradestar is not in this category so we didn’t mention purposely… Q. You do not advertise it either, do you, your wholesale trade with OEM CPUs? It is not advertised anywhere, is it? A. As I explained previously…this trading, no need to be advertised…because this is a different marketing strategy required… Q. …What was your marketing strategy for the wholesale side of the business in OEM stock, CPUs and flash drives, the deals that have been denied in this case?... A. The strategy is to maximise the profit to the company. Q. Marketing strategy A. Yes Q. What is your marketing strategy? A. Yes, the marketing strategy, the sales strategy, they are all related to the…ultimate goal is to make profit. A. Yes, how did you do that. How did you market that business, that side of the business? A. We do not need to market or advertise in public. A. Why not? A. Because this would not do any benefit to the trade…” (Transcript27 November 2014 page 19 - 22) 320. We were provided with unchallenged evidence from HMRC officer Michael Clarke who was the case officer for Operation Tangelo 1, a criminal investigation into the activities of the Universal Mercantile Building Society (“UMBS”) online banking facility. He set out that UMBS existed through three entities: · UMBS Ekonomisk Forening (“UMBS EF”) registered as an Economic Association on24 February 2006 in Sweden; · UMBS S.A which owned 100% of the shareholding in UMBS Online Limited registered in Panama on3 March 2006 ; and · UMBS Online Limited (“UMBS OL”) which is a New Zealand offshore company incorporated on27 November 2006 . 321. On25 March 2011 UMBS OL was found guilty at Southwark Crown Court of failing to disclose knowledge or suspicion of money laundering. Two of UMBS’ directors, Michael Owen McGrath and Douglas Michael Wyatt were acquitted of the counts they faced. Officer Clarke analysed the lists of transactions which showed transfers of money by customer account numbers and provided a schedule to Officer Ball for the purpose of his enquiries. 322. HMRC Officer Ball explained that the Appellant did not have an FCIB account however 40 companies out of 61 in the chains of supply analysed for periods 07/06 and 08/06 did have FCIB accounts. Seven out of nine of the Appellant’s invoices in 07/06 were broker deals. The Appellant purchased from Supreme, Syskal Distribution Ltd and NVR. 12 out of 16 of the Appellant’s August 2006 invoices were broker deals in which the Appellant purchased from Supreme, MNR Global Ltd, Nu-Life, Silverstar Components Ltd, NVR, Express Computers UK Ltd and XEL Multicomponent Ltd. 323. In cross-examination Mr Ball confirmed that in 9 of the 23 deals covering periods 07/06 and 08/06 which were analysed he found circularity of payments. He concluded that the existence of so many traders involved in the money flows demonstrates that each trader knew that the deals were contrived. In many of the transactions the FCIB statements showed third party payment made to a non UK company. 324. HMRC officer John Hawkins provided evidence regarding UMBS. He analysed data from the UMBS specific to the Appellant. His analysis focussed on money movements pertaining to 34 of the Appellant’s transactions for periods1 November 2006 to1 March 2007 . Mr Hawkins provided a detailed and comprehensive analysis of money movements. In summary the analysis showed that in 18 of the deals there was circularity of payment. 32 of the deals were back to back with the Appellant being supplied by Supreme (9 deals), iForce (11 deals) and Tradestar (12 deals). The remaining 2 deals were payments made from the Appellant’s UMBS account into UK banks (Lloyds TSB and RBS). It was the case for HMRC that Mr Hawkins’ evidence demonstrates that in the deals traced through the UMBS the funds which apparently include the VAT have either been retained by the defaulting trader or passed overseas. In many of the deals in which circularity of payment was found the same traders appeared in the same positions in the deal chain. 325. As regards the use of the ECS bank in Sweden Mr Tsai stated that it had been recommended by Munch. The bank offered online banking which eliminated delays in making electronic payments. FCIB, money flows and diaries 326. Officer Bradshaw gave evidence regarding notes seized during the course of criminal investigation Operation Apparel which began in 2005. A number of documents consisting of diaries, notebooks and loose leaf papers (collectively referred to as “the diaries”) were seized from premises in Oldham and Manchester. These were analysed and found to contain handwritten “transaction chains” involving the wholesale trade of CPUs and other goods associated with MTIC fraud. The diaries were broken down by Officer Downer into 14 bundles covering August 2005 to August 2006. Officer Bradshaw analysed seven diary entries in which the Appellant was not named but in which it featured as a broker. Mr Bradshaw set out in detail his analysis as to the identities and roles of the traders in the chains and compared this to the deal chains involving the Appellant. In summary he concluded that in all but two deals the details of the traders, the order of traders, dates, goods and buying and selling prices matched those in the Appellant’s chains. In the remaining two deals some of the documentation from deals packs were missing and the gaps in the chains were filled by the diary entries and the dates of the transactions did not match those set out in the diaries but the participants and goods did match. 327. Officer Bradshaw also exhibited transcripts of covert audio recordings. We should note that these were not recordings of the Appellant but others identified as part of MTIC transactions chains which formed part of the evidence in Operation Apparel. In cross examination Mr Bradshaw confirmed that the Appellant’s name does not appear in the diary entries for the seven deals analysed. He explained that the information he had reviewed came from HMRC officer Downer who had set out the materials seized into a spread sheet. Mr Bradshaw accepted that his conclusion in respect of one deal differed from that of Mr Downer in that Mr Downer identified the Appellant’s customer as Wink and Mr Bradshaw identified the customer as Square Trading. 328. HMRC officer Terence Mendes gave evidence regarding his tracing of FCIB money chains. The Appellant did not hold an FCIB account and therefore his analysis does not include evidence of funds being received or paid by it. However he analysed the diary entries reviewed by Mr Bradshaw to demonstrate that the diary entries correspond with the flow of funds through the FCIB. 329. In cross-examination Mr Mendes explained that there were two transactions that are subject to this appeal which involve the Appellant and in which the banking details agree with the invoices raised and reflect the accuracy of the diaries. Contracts 330. Having noted that Microsoft and Tradestar were the biggest suppliers in value to the Appellant in 06/08 and 09/09, Tradestar having made purchases worth over£86,000,000 in total between 06/07 and 12/09, Mr Soleman highlighted the absence of a detailed written contract between Tradestar and the Appellant. On10 March 2010 Miss Lin confirmed to HMRC that no official written contracts existed between the Appellant and Tradestar. Mr Soleman noted that after HMRC issued letters denying input tax relating to periods 06/07, 09/07 and 12/07 the Appellant produced an A4 sheet containing ‘Terms and Conditions’ with Tradestar. In comparison Mr Soleman noted the Appellant’s agreements with Microsoft and Ingram Micro (UK) Ltd were far more detailed and comprehensive, for instance covering issues such as customer insolvency, export restrictions, warranties and liability. 331. Mr Soleman also noted that there were no official written contracts with Munch, which simply signed the Appellant’s trade application agreeing to the terms and conditions including making payment to the Appellant before the goods were released. Mr Soleman noted that in period 09/09 the Appellant supplied Amazon EU Sarl with approximately£775,000 worth of goods and the Appellant had signed Amazon’s terms and conditions. In the same period the Appellant’s supplies to Munch were£8,512,950 ; Mr Soleman queried why given the apparent strength of Munch’s negotiating position it had simply signed the Appellant’s trade application. 332. Mr Tsai exhibited the Appellant’s standard terms and condition of sale and purchase. He highlighted that a clause was contained which states that the Appellant’s terms and conditions have precedence over any of the Seller’s printed conditions. 333. Mr Soleman drew the distinction between the Appellant’s use of TNT and City-Link to transport the goods relating to its day-to-day activities as compared with its use of freight forwarders such as I.D. UK Ltd and AIFFL for the transactions under appeal. At a visit on5 July 2007 Mr Yeo is recorded as telling officers that the deals under extended verification were a different business with a different customer base. 334. HMRC relied on a similar distinction drawn in respect of freight forwarders; Miss Lin confirmed that there were no formal written contracts in place with those used in the deals under appeal. Although the Appellant did not produce the agreements with TNT and City-Link which it used in the day to day trading Mr Soleman noted that the terms and conditions of those freight forwarders are comprehensively set out on their respective websites. Commercial Checks 335. Ms Lin and Mr Yeo told HMRC officers on18 July 2007 that the Appellant did not release the goods or pay its supplier until payment was received from the customer. Mr Yeo added that “there was no risk as ETL were getting their money up front.”
“When we received the letter…we of course need to check on procedures if we are exercising the right procedures to avoid this kind of problem. Q. But you need to do more than check, Mr Tsai, don’t you? You need to get out of that business. Wasn’t that something you thought about? A. At that time, yes. She has the full power to do the right for the company, so --- Q. Yes, but isn’t the right thing for the company to get out of this business? A. At that time you can see from the letter they didn’t point out that Sally has dome anything wrong or she has been involved explicitly, so she was not aware she is actually in this kind of problem… Q. Well, you know that there is a risk of other traders in the chain going missing, not paying the VAT. You knew that right at the start, didn’t you? A. Not in that aspect. We didn’t know who – because the VAT, we didn’t think in the commercial world anybody who will receive VAT would pay it back to the officer. Q. Well, let’s look at your attitude to Customs when they told you about these in 2007..This is a letter of11 July 2007 … ‘We would like to reiterate that we have taken all reasonable steps to verify the integrity of our supply chain…We cannot be held responsible for transactions in the supply chain beyond our immediate suppliers and customers…’ A. As I said earlier, this kind of thing, we only realised in 2010. At the time nobody was envisaging this kind of problem” (Transcript27 November 2014 page 115 - 119) 338. Mr Tsai went on to state, in respect of the deals which were carried out with Tradestar and Munch the day after being advised that deals with the same customer and supplier had been traced to tax losses, that: “The deal has been fixed prior to the visit. So you have got to do it…I didn’t see the reason to pull out at the time. Q. There were tax losses. Surely that was a good reason. A. Tax losses mentioned by them. There is no proof, no evidence…we need some more explicit evidence at the time… Q. You did not ask for evidence when they were sending you tax loss letters in 2007 and 2008, did you? A. We had the feeling that the letter was merely symbolic at the time. Q. Symbolic? What do you mean symbolic? A. It means that there’s no details, no explanations. Q. Why did you not ask for some if you wanted detail? A. I didn’t think we can ask. What can we expect? We are not aware. What can we ask?” (Transcript27 November 2014 page 150) 339. He stated that CPU box numbers were kept as “Sally Lin was very cautious…she doesn’t want to trade any boxes has been traded. So she kept every record of the box” (Transcript27 November 2014 page 38). Mr Tsai said that he heard from Miss Lin that she kept a note of the box numbers in her notebook but that there was no computer system to make it 100%. He was asked how the checks were made to guard against circularity: “I heard from Sally that she would go through her notebook to see if any number’s been repeated manually… Q. And where is that in the exhibits? You have not produced it as an exhibit, have you? A. Never been asked to do that.” (Transcript27 November 2014 page 40) 340. Mr Tsai was asked in cross-examination about deal 5 in 07/06 in which the box numbers of the goods were set out on the Appellant’s invoice to and purchase order from Munch dated11 July 2006 yet the dates on the documents in the chain prior to the Appellant’s sale were dated17 July 2006 : “Q. So, the question is: how did Enta know the box numbers on the 11 th of July that we see detailed…If you did not have an inspection report until the 17 th of July and Supreme did not release the goods and detail the numbers of the boxes until the 17 th of July, how could your company know of them on the 11 th of July? A.It is very obvious from this. Before you’re given the purchase order, you have to have the box numbers. So there must be a correspondence between the supplier and Sally Lin, the buyer. Q. Do you mean there is some document relating to this transaction which has not been produced to the Customs? A. Could be, either by phone or by fax… Q. Why did you release the goods before they had been inspected? A. I would say this is part of the process, to inform the customers and to release goods to them, that all the other documents will follow. That’s my understanding.” (Transcript27 November 2014 page 53 – 55) 341. As regards release of goods prior to payment, in cross examination Mr Pitt stated: “Q. In the transactions that you looked at, the vast majority of those transactions, Enta did not release goods to customers until the customers had paid for those goods, did it? A. I think I did some analysis on them as regards to release dates and payments and that within the body of my statement, and I think there are some discrepancies. That was what they led me to believe, but the analysis showed something different.” (Transcript18 November 2014 page 62) 342. Five occasions on which goods were released prior to payment being received by the Appellant were put to Mr Tsai in cross-examination. He was unable to explain why Miss Lin had done this, but speculated: “I can only imagine that they may have good commercial relationship and a trust, that kind of thing and making her violating my instructions…but that’s a small part of her transactions.” (Transcript27 November 2014 page 94) 343. Mr Pitt noted that the Appellant applied different criteria to its other trading activities whereby it took out credit insurance in general unless dealing with a known company or establish that the company has substantial funds to cover the debt. A further difference was evident in that the transactions under appeal the Appellant did not apply any minimal time that the customer must have traded prior to dealing with them. However in the remainder of its trading the Appellant had, for instance, refused to offer credit to Bluecore Solutions Limited (a retailer/provider of goods) until it had been trading for one year. 344. A due diligence pack on Supreme was provided by the Appellant which contained the company’s VAT registration certificate, certificate of incorporation, letter of introduction from Supreme, bank details and a Graydon credit check. 345. Mr Pitt noted that the Graydon credit rating report obtained for Supreme put the trader above the normal risk category and was dated21 September 2006 , two months after the July deals took place. An Experian report on Supreme dated9 October 2007 gave a Delphi score of 6 out of 100 “maximum risk”
“I believe it should. They’re dealing in computer or IT products. Bearing in mind the market they are in and the trading environment they have gone into, the pre-warnings, the issues that have been addressed within HMRC…I feel that straightaway they should have looked at that and wondered…what does that mean.” (Transcript18 November 2014 page 101) 346. Miss Lin stated she had visited the trader but was unable to provide a date of the visit nor any photos. She recollected the name of the contact as “Katy” although the details were recorded on her laptop as “K. D. Singh.”
“Sally 1. To buy from them only commodity items CPU memory with manufacturers warranty. 2. 2. Do not pay them until goods received inspected and released to customer” 348. Mr Tsai exhibited highlighted extracts from his diary in 2005 and 2006 showing the dates he met representatives from various trading partners however no details of the meetings were provided, for instance what was discussed or the purpose of the meeting, the notes, by way of example, simply stated “visit supreme distribution : K D Singh North Wembley.” 349. Mr Pitt queried why the report containing written instructions had not been provided to HMRC. He added in oral evidence that diary excerpts exhibited with Mr Tsai’s witness statement had not been provided to him: “A. I mean, the one question I would ask, if I was given this at the time of my extended verification, because it would have been a live document then, the emphasis was during the visits pre the extended verification, 2004, 2005, due diligence, keeping records, whatever else you can. And I also was going through meetings with Sally Lin and Mr Yeo asking for dates of visits to sort of get some idea if they had contacted, been visiting, the photographs, whatever, and I would have expected this document, if it is pre-extended verification, I would have expected to be given a copy of this diary so I could use it as support, so I could have had all the information available to me on which to make my decision. Q. And if you had had this information at the time of making your decision, do you think it would have made any difference? A. It would, yes, because I would have gone and spoken to Mr Tsai and gone through the details of what his visits were about, what he did, who he spoke to, contents of it. But at no time did Sally Lin or Mr Yeo mention that ... or even Mr Tsai who was at the premises on occasions, that came forward: I have got a diary with all these entries. Q. Because it would have been important to establish the --- A. It was an important document to the extended verification.” 350. The due diligence provided in respect of Munch contained a document from the Danish Commerce and Company Agency which detailed the Objects of the company as follows: “The objects of the company are primarily to carry out consultancy work in the fields of marketing, financial products and property renovation. Secondarily, the company undertakes consultancy work in other business areas including property management. Furthermore, the Company provides light contractor work including ventilation.” 351. The letter of introduction does not specifically state that Munch dealt in the wholesale of IT goods. At a meeting with HMRC on12 February 2008 Miss Lin stated that she had visited Munch in 2007. She produced a photograph of a male in what appeared to HMRC officers to be a public house or restaurant. Miss Lin stated she would provide other photographs but failed to do so. 352. The Graydon report on Munch dated26 June 2006 gave it a very high risk class which covers businesses with “very poor operating results” and which are not creditworthy. Despite this, Mr Pitt noted that the Appellant engaged in four deals with Munch to the values of£778,365 ,£642,600 ,£642,600 and£736,155 . 353. Graydon reports on the Appellant’s suppliers NVR Logistics, Datec Electronic Holdings and Taurus also highlighted risks yet the Appellant continued to trade with the companies. 354. The documents provided to Mr Soleman relating to periods 06/07, 09/07 and 12/07 included documents on non-headed A4 paper entitled ‘Company Details’ which was not dated but contained a handwritten comment that they were the updated details. The documents included the address of the business and stated the nature of it was “Trading various health care products supplement, and electrical equipment etc.”
“…in my visit on 10 th March 2010 one of the things I asked for is any expenses relating to petty cash that may have gone through Enta Technology’s books, so any evidence to show or suggest that definitely went to Munch Marketing, but I haven’t received any flight tickets or hotel tickets or even a visit report to show what had been established was a visit had taken place.” (Transcript20 November 2014 page 56) 357. Mr Soleman concluded that the denial of input tax letter issued on14 April 2010 which related to periods 06/07, 09/07 and 12/07 stated that the Appellant did not adequately insure the deals and that the Appellant had added the comments to satisfy HMRC. 358. In cross examination Mr Tsai was asked about a visit by HMRC in 2006 at which Mr Yeo and Miss Lin were present. Miss Lin was recorded as stating that Munch had been introduced by friends in Taiwan. The visit report noted ‘Despite checks and indications that you should not deal, SL carried out four deals. SL said she relied on the integrity of a friend…asked what the use of doing these reports was if SL was not going to take any notice of them’ . Mr Tsai stated that Graydon reports which provides a reference if the Appellant wants to give credit. If the report indicates a poor credit rating “that means that all the money needs to be received before giving the products” (Transcript27 November 2014 page 120). 359. Mr Soleman considered the due diligence documents provided in respect of Tradestar which included a ‘New Supplier Assessment Form’ containing the details of Tradestar and the fact it had only two employees. The form stated that the Appellant required Tradestar to bar code all products with the relevant product part numbers/serial numbers; Miss Lin stated that such reports were kept but none were produced to HMRC. The company’s introduction letter made no mention of it supplying USB Flash Drives nor were the trade references named contacted. Tradestar’s profit and loss showed a substantial increase in income from£1,325,075 in period 08/05 to£125,260,633 between September 2005 and August 2006. Mr Soleman noted that this had not been queried by the Appellant despite Tradestar having only 2 employees. Tradestar’s terms and conditions of sale was unsigned by the Appellant and amounted to a single A4 sheet. Mr Soleman noted that although Tradestar allowed the Appellant 90 days credit, the Appellant paid immediately after it received payment from Munch irrespective of when this was. 360. Mr Soleman also reviewed a Graydon report dated12 December 2006 which placed the company at above normal risk. Handwritten noted on the report read “Sally its ok to buy from them only goods which have small defect rate e.g. memory sticks, dram etc.”
“I think it’s for the same reason, many copies flying round, you know, in the office” (Transcript27 November 2014 page 183). He could not explain why there were two sets of company details for Munch which were similar but not identical and how the one exhibited by Mr Tsai which gave the company’s bank details as ECS was purportedly dated one month before the ECS bank was even registered. 363. Mr Hancox responded to Mr Tsai’s assertion that he had visited Tradestar’s office in Oxford on three occasions by noting that the company’s address was in Berkshire until at least 2011. He therefore queried who Mr Tsai had visited. 364. Mr Hancox also received information from Seagate Technology International regarding Maxtor Hard Drives which were traded in 12/10 which stated that the largest value sold by the manufacturer was£171,250 365. Mr Tsai explained that Maxtor and Seagate hard drives were mainly produced in the Far East and they were the biggest manufacturer in the world with an annual turnover of ten billion pounds. He did not accept the evidence of Mr Hancox based on information from Seagate Technology International regarding Maxtor Hard Drives that the largest value sold by the manufacturer in 2010 was£171,250 . 366. Mr Pitt commented on the due diligence documents exhibited with Mr Tsai’s witness statement. He noted that in respect of Silverstar Components Ltd the documents provided by the Appellant on25 October 2007 comprised 5 pages yet the documents exhibited by Mr Tsai with his witness statement amounted to 42 pages. He explained that the Appellant had provided due diligence documents on4 December 2006 and25 October 2007 yet there were documents contained in the additional due diligence annexed to Mr Tsai’s statement which were dated25 January 2006 (a Graydon report) and1 August 2006 (a trade application form) and he queried why these had not been provided earlier. 367. Mr Pitt and Mr Soleman reviewed the due diligence provided in respect of the remainder of the Appellant’s suppliers, customers and freight forwarders. The documents largely included those such as VAT registration certificates, certificates of incorporation and letters of introduction. Mr Pitt noted that documents provided in respect of Wink and ICC contained some in German and Austrian which did not appear to have been translated. Mr Soleman concluded that the checks carried out would not provide adequate assurances that the deals were not linked to fraudulent tax losses. 368. Mr Pitt also noted that there were differences in the documents provided to him and those exhibited with Mr Tsai’s witness statement. By way of example the trade application for Nu Life IT.Com exhibited by Mr Tsai contained handwritten notes that had not been on the same document provided to Mr Pitt. Mr Pitt highlighted that the notes were purported to have been made by Mr Tsai on5 January 2006 which predated the date on which the same document without the notes was provided to Mr Pitt on4 December 2006 . In respect of MNR Global Ltd the Appellant had provided Mr Pitt with a five page due diligence pack however Mr Tsai subsequently exhibited 25 pages of due diligence. Again, the documents exhibited by Mr Tsai contained handwritten notes which were not seen on the same document provided to Mr Pitt. He noted that additional documents with which he had not been provided contained trading instructions and a trade application form and Mr Pitt queried why such important documents had been absent from those given to HMRC. Similar anomalies and queries were highlighted by Mr Pitt in respect of documents exhibited by Mr Tsai for Syskal Distribution Ltd, NVR Logistics Ltd, All Trading Worldwide BV, Multi Components Ltd, ICC, Alcosto SRL, Wink, Tradius GmbH (Germany) and Tradius BV (Netherlands) and Express Computers UK Ltd. 369. Mr Tsai explained that Graydon reports were not obtained to look at credit ratings but rather, in the case of Tradestar, to check if the company was still trading as a reputable company. He explained that he met Mr James Burgess of Tradestar at the CTS computer fair on3 September 2006 . He tended to visit the company every two or three months and Mr Tsai stated in his written evidence that he visited Mr Burgess’ Oxford office twice in 2008 and once in 2009. He stated that it appeared from his visits that Tradestar had a number of staff – perhaps more than 20. Mr Tsai reiterated that the Appellant did not give credit to any of its customers; payment had to be made upfront, usually before goods had been delivered, and before the Appellant paid its supplier. He explained that this meant there was minimal risk to the Appellant if a customer did not pay for stock. 370. In respect of iForce Mr Tsai stated that he had dealt with the director, Sanjay Patel since 1992 and continues to buy stock from him. 371. As to HMRC’s reliance on the fact that I.D. (UK) Ltd was said to be a retailer of textiles at Companies House, Mr Tsai stated that in his experience Companies House checks provide information which the company being checked provided when it first registered. If the company does not update Companies House then the information provided will be out of date. 372. Mr Hancox did not agree with Mr Tsai’s assertion that reasonable checks had been carried out on I.D.(UK) Ltd; in support he highlighted the time limitations shown in a letter from the Appellant to I.D. (UK) Ltd which stated: “If it’s possible, I would like to open a new account. I have stock coming tomorrow to your warehouse.” 373. On the issue of due diligence Mr Tsai exhibited a number of documents. He explained that the notes contained on the documents were his instructions to Miss Lin. He stated that over the years documents had been lost and HMRC had removed the original documents; later reports produced were “a top up” or updated versions. Insurance 374. On5 February 2008 Mr Yeo produced Marine Cargo Insurance policy documents covering1 October 2006 to30 September 2007 . No documents have been produced for period prior to this although when asked, Mr Yeo stated that the policy contents remain the same. Mr Pitt noted that the maximum cover for international or domestic cargo was£150,000 per conveyance and that the value of the goods in a number of the Appellant’s transactions far exceeded the insured amount. 375. In cross-examination Mr Soleman stated: “ A. Yes, I do, yes. What I would say about the insurance is: to me, having looked at the transport, who arranges the transport, for example, the Enta Technologies who contacts a transport company to move the goods. I couldn’t understand why the customer would be insuring goods for movement of goods that Enta had arranged. What I would have liked to have seen is, rather than just this email, more evidence to show Munch Marketing does have some sort of agreement to evidence the fact that it is actually insuring the movement of the goods. The (inaudible) says Munch Marketing doesn’t insure the goods.” (Transcript20 November 2014 page 69) 376. Miss Lin was asked about insurance on18 October 2007 ; she stated that most of the goods were shipped to a UK location and that if cover could not be obtained the customer would be asked to obtain insurance. HMRC highlighted at a meeting on27 March 2008 the fact that the deal values far exceeded the insurance cover; Miss Lin stated that she thought the deals were covered and that she had been reassured by Mr Tsai that they were. Miss Lin went on to state that when the goods were at the freight forwarders the Appellant assumed that the freight forwarder had insurance to cover the goods. On12 February 2008 Miss Lin told HMRC officers that she had not checked the insurance position with the freight forwarders as she “ had no experience” and did not know she had to ask “so many questions”
“so to complete a deal she may spend many, many weeks to get the product quantity right, specification right” (transcript27 November 2014 page 144). He said he had been told by Miss Lin that negotiations mainly took place over the telephone. Mr Tsai exhibited emails showing stock offers, for instance dated23 June 2011 from iForce which offered USB pen drives and Maxtor drives. Inspections and deal anomalies 379. Mr Pitt set out in detail his review of the inspection reports for each transaction. We will not simply repeat the contents of his witness statement, but in essence he highlighted a number of anomalies and discrepancies. One such feature was the confusion that arose in respect of deal 1 in 07/06 in which Mr Pitt noted that there was a period of 6 days between handover and receipt during which it was unclear where the goods were. Furthermore Mr Pitt noted that the Appellant was paid for the goods on21 July 2006 which was five days before the purported deal date and 6 days before the inspection took place. When asked about the time gap between release and transport Miss Lin could not provide an explanation, stating that as far as she was concerned once the goods were released that was the end of the Appellant’s involvement. 380. In deal 3 in 07/06 Mr Pitt noted that there were two inspection reports, one dated21 July 2006 (10 days before the deal took place) and the other dated26 July 2006 (five days before the deal). The first report related to the examination of 300 of the 1000 units. Mr Pitt noted that the report detailed, inter alia, damage to the boxes and the condition of the goods as “fair”
“we received the money, that’s the most important” (Transcript27 November 2014 page 63). Where goods had been released before payment Mr Tsai was unsure about the details and stated that he had not checked the documents before however it could be due to human error. 387. As regards inspection reports Mr Soleman noted that those produced from I.D. UK Ltd and AIFFL, the freight forwarders, provided very basic details of the condition of the boxes, which was said to be “good”