“ [109] Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and “similar fact” evidence. That is not to alter its character by reference to earlier or later transactions but to discern it. [110] To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile phones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands. [111] Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.” 17. In Megtian Limited v HMRC[2010] EWHC 18 (Ch) , Briggs J discussed the test in Kittel and the comments of Moses LJ in Mobilx that the test should not be over-refined. In relation to “clean” and “dirty” chains involved in contra-trading he held that for the Kittel test to be satisfied it was not necessary that the appellant should have actual or imputed knowledge of the details of the fraudulent conduct: “31. The issue addressed by Lewison J in Livewire concerned the nature of the fraud which it was necessary to demonstrate that the broker at the foot of a clean chain knew or ought to have known was connected with his transaction. In a contra-trading case there are, at least in theory, two potentially distinct frauds. The first is that of the missing or defaulting trader at the head of the dirty chain, who intends to abscond without accounting to HMRC for the tax paid to him by his immediate buyer. The second is that of the contra-trader who seeks to use the clean chain involving the broker as a means of dishonest concealment of the first fraud. As Lewison J put it, at paragraph 102: “In my judgment in a case of alleged contra-trading, where the taxable person claiming repayment of input tax is not himself the dishonest co-conspirator, there are two potential frauds: (i) the dishonest failure to account for VAT by a defaulter or missing trader in the dirty chain; and (ii) the dishonest cover-up of that fraud by the contra-trader.”
“Indeed it seems to me that the whole concept of contra-trading (which is HMRC’s own coinage) necessarily assumes that to be so.”
“He says he didn’t know and hadn’t been sure about this himself.” 60. When cross-examined about this, Mr Kalia said that he had not understood this at the time. He claimed did not see it as a warning sign. He added that at that time he had an anti-establishment view towards HMRC which had subsequently changed. 61. Mr Kalia was then asked by Mr Gilley what checks he made of the goods. Mr Kalia said that he made no checks as “it is not his problem.”
“The decision is not a personal one. However the Bank is uncomfortable over the way the sector is going forward and this is the reason behind our decision.”
“Similarly I cannot confirm whether you always carry out reasonable checks as suggested in Notice 726 – Joint and Several Liability. Nevertheless, if you make checks to ascertain the integrity of the supplier and customer and give proper credence to the results, this should prevent you becoming caught in a fraudulent supply chain. Again these are matters known only to you. However I do note that in the past, you have received a number of letters from Customs informing you that you have been buying goods from traders using ‘hijacked’ VAT registrations, from missing traders and also from defaulting traders all of which has resulted in a significant loss of tax. This also resulted in you receiving a warning letter from Customs informing you that if you failed to properly verify your suppliers you may be subject to security action under the budget provisions. This all suggests that in the past you may not have given any proper credence to the results of checks you see you make.” 68. We were not taken to any reply from Atec to Mr Stone’s letter. Nonetheless, in cross-examination Mr Kalia claimed that because he was not aware of the nature of MTIC fraud he paid less attention to his customers than he did his suppliers. 69. HMRC officers visited Atec’s premises on17 May 2004 . The officers explained to Mr Kalia that they were carrying out verifications on transactions that Atec had carried out involving mobile phones and CPUs during September, October and December 2003 and January to April 2004 as part of the process to consider the application of the Joint and Several Liability provisions to those transactions. 70. When dealing with its suppliers, Mr Kalia informed the officers that Atec obtained certificates of incorporation and VAT registration, “sometimes” letters of introduction and bank details. Atec also carried out Redhill checks. The officers noted that Mr Kalia did not obtain trade references, supplier declarations or third-party checks into the background of the companies with which Atec traded. In addition, Mr Kalia did not carry out inspections of the goods nor did he request freight forwarders to do so. 71. Furthermore, the officers noted that all the deals carried out in September and October 2003 were the subject of third-party payments by Atec – notwithstanding the warnings given by Mr Gilley at the meeting on13 May 2003 . The officers warned Mr Kalia about the consequences of making third-party payments – his supplier was not paid enough to make its VAT payments and the remainder of the payment was made outside the UK – but Mr Kalia, according to the note of the meeting, said he “still thought it was okay and that how his supplier paid his VAT was his problem.” 72. Mr Kalia was questioned by the officers about the fairly constant mark-ups that Atec made on these transactions. He replied that he generally worked on a 0.5% to 1% margin and that it was likely to be much the same throughout the chain. Later in the interview, Mr Kalia was asked why, when the prices of the goods fluctuated so much, his mark-up remained the same. Mr Kalia replied that he was “too busy, it was easier just to put 50p or one pound on each item.”
“As explained in Notice 726, where you have genuinely done everything you can to check the integrity of the supply chain, can demonstrate you have done so, have taken heed of any indications that VAT may go unpaid and have no other reason to suspect VAT would go unpaid, the joint and several liability measure will not be applied to you. However, if you knew, or had reasonable grounds to suspect, that VAT would go unpaid then the measure [joint and several liability] can be applied to you. From your records you will be able to ascertain who supplied you with the goods detailed above, and you may wish to consider what appropriate action is needed to ensure that the VAT does not go unpaid in respect of any future transactions.” 82. The suppliers in respect of the transactions in 05/05 period, as we shall see, were Hendon Import and Export (“Hendon”) and another company called Quanteq and in the12/05 period was London Mobile Communications Ltd (“LMC”). 83. In his witness statement Mr Kalia denied having received these letters. Mr Kalia stated: “No such letter was received by ATEC and our track record shows that all HMRC letters of query or otherwise with the exception of repayment confirmation letters were responded to.” 84. In a subsequent witness statement Mr Kalia stated: “The Commissioners allege they notified Atec of tax losses in chains from suppliers London Mobiles and Hendon Import and Export and that Atec took no heed of this. I cannot stress enough my objection to this outrageous accusation.” 85. Atec’s opening submissions also contained the following paragraphs: “2.9 In relation to this appeal, HMRC failed to provide any specific warnings to the [Atec] and have claimed that two specific warning letters were issued on16 March 2006 . [Atec] challenges that they received the letters the respondents have sought to rely upon. … The appellants maintain that the warning letters dated16 March 2006 … were never received. [Atec] had a history of responding to all letters from HMRC and on a balance of probabilities, is unlikely to disregard such an important warning in view of the serious commercial consequences it could not afford to risk at the time.” 86. On24 March 2015 , on the first day of the hearing, Ms Kalia produced a supplementary witness statement producing the documents (mainly emails and correspondence between HMRC and Atec or its advisers) referred to in Appendix 2 to Atec’s opening submissions. Ms Kalia’s witness statement referred to the fact that “the appellant has attached correspondence in full between HMRC and Atec in Appendix 2. This comprises of email chains, letters to and from the parties, between 1 and31 March 2006 .”
“Based on the information we have collated on London Mobile Communications Ltd, we recommend that contact is made with Darren Leitch… to establish what precautionary measures they take to validate their supplier(s).” 89. The letter of28 March 2006 was in the same terms and was obviously a response to the first letter of16 March 2006 . The letter stated that Atec’s suppliers in respect of the 12 invoices in question had been Hendon and Quanteq Ltd. 90. LMC and Hendon were both suppliers of Atec in respect of some of the appealed deals (LMC as regards five deals and Hendon as regards one deal [2] ). 91. The reply letters, like the two warning letters, were omitted from the documents attached to Ms Kalia’s witness statement. 92. Unsurprisingly, Mr Kalia was cross-examined at some length on the warning letters and the reply letters. 93. Mr Kalia accepted that he must have received the two warning letters and that he had sent the reply letters, although he said that he did not remember the two warning letters or the reply letters. At first, Mr Kalia suggested that the two warning letters only referred to his customers, rather than his suppliers but he was then driven to accept that he had identified the suppliers in the reply letters. Next, Mr Kalia suggested that the four letters may have been lost when Atec moved offices. This, he said, might explain why the letters from Mr Wingrove were missing from the file of correspondence from March 2006 which was attached to Ms Kalia’s witness statement. Mr Kalia then said that the reply letters had been sent electronically and would have been on Atec’s computer database. Atec’s server had, however, been uplifted by HMRC and when it was returned was found to be corrupted. Accordingly, Mr Kalia had had to rely on backup tapes. 94. In addition, later in his evidence, Mr Kalia claimed that he was “phasing out”
“63. It was argued for the appellants that without an assessment underSection 73 of the Value Added Tax Act 1994 or the determination of a debt due to the Crown in respect of an invoice under Schedule 11 (paragraph 5) of that Act no recoverable right to VAT is established. In the absence of an assessment, the right to tax had not crystallised in the form of an enforceable debt and only if the debt was recoverable could a lack of recovery amount to a loss to the Revenue. That is an argument which was advanced in the FTT appeal in S&I Electronics v HMRC[2009] UKFTT 108 (TC) and it was comprehensively rejected at paragraphs 61 and 62 which read as follows: “61. We do not agree. The issue is whether there is, in the words of paragraph [59] of Kittel, ‘fraudulent evasion of VAT’. It seems to us that this will be the case where, as the result of fraud, the State does not receive the VAT it ought to have received had the relevant legislation been complied with by the trader. The question of whether or not an assessment has been made is irrelevant. 62. Article 10 of the Sixth Directive indicates that the tax becomes chargeable when the tax authority becomes entitled to claim the tax from the person liable to pay. In that context there is fraudulent evasion where the person who is liable to pay, because of the relevant chargeable event (the delivery of the goods) has occurred, defeats the entitlement of the State by fraudulent means; that entitlement exists not by virtue of administrative action but by reason of the occurrence of the chargeable event. The ECJ said in Société Financiere d'Investissements v Belgium[2000] STC 164 at 23, that Article 10 ‘enables the date on which the tax debt arises to be determined’. What is at stake in our view is fraudulent evasion of the payment of that debt, not of a later assessment.”
“[164]…The tracing of the deal chains through invoice dates is clearly part of the factual matrix on which a tribunal is entitled to base its decision as to connection with fraud. Invoices on the same, or proximate, dates for the same model and quantity of the goods in question, at equivalent prices, are relevant facts in any enquiry of this nature. Indeed, such evidence is far more likely to be material to the tribunal’s determination of the deal chains than payment dates or dates of delivery, which of their nature may lack any congruity with the making of the deal itself…. [165]… The linkage between transactions is not primarily evidenced by the payments; it is evidenced, as we have discussed, through invoices and other documentary material ….” (Emphasis added)
“159. A different tracing exercise applies to the question of connection to fraud in a “dirty” chain by means of contra-trading. There, as we have explained, the connection arises as a result of the direct chain leading from the broker to the contra-trader, and then the contra-trader’s offset of the output tax arising in the “clean” chain by input tax incurred in transactions in one or more different chains, with different goods, but leading back to one or more defaulting and fraudulent traders. As we have said, the nature of contra-trading, which is designed to conceal the connection of the broker’s transactions with fraud, is that there is no neat correlation between the transactions giving rise to output tax in the contra-trader, and those giving rise to the offsetting input tax. 160. This point was raised by Miss Field [for Eyedial] when she referred to the fact that Mr White’s evidence (which was confined to the contra-trading deals) dealt with the netting or matching of input tax claims against output tax and used a sample of the tax loss chains. She argued that if the FTT had analysed the evidence, rather than, as she submitted, simply accepting it at face value, it could not have come to the conclusion that it did. In particular, argued Miss Field, there were no invoices, delivery notes or shipping notes to support any supposed fraudulent chain at the relevant time. 161. We do not accept Miss Field’s submissions in this respect. It is not necessary for the tribunal to verify every transaction of the contra-trader, and every “dirty” chain involving the contra-trader in the relevant period.” 130. HMRC also cited the decision of the Court of Appeal in Fonecomp Ltd v HMRC[2015] EWCA Civ 39 at [34] where Arden LJ endorsed Judge Bishopp’s conclusion in Universal Enterprises (EU) Ltd v HMRC[2014] STC 1515 : “In conclusion, I agree with paragraph 22 of the judgment of Judge Bishopp in Universal Enterprises (EU) Ltd v Revenue and Customs Comrs[2014] STC 1515 , cited by HMRC: "22. The argument that a trader in a clean chain cannot be affected by anything which happens in a dirty chain is in my judgment wholly misconceived. Mr Young argued that there is nothing inherently wrong with contra-trading, a statement which, put in that way, is true: a trader who both imports and exports may legitimately organise his sales and purchases so that, at the end of a VAT period, he has little to pay, or a repayment claim. If he does so for reasons of cash flow, his conduct is unexceptionable. But that is not the reason for the contra-trading seen in cases of this kind. As has been said many times, not least by the then Chancellor in Blue Sphere Global Ltd v Revenue and Customs Commissioners[2009] STC 2239 , its purpose is to conceal the fraud in the dirty chain and to make it harder to combat. The appellants' argument necessarily treats "clean" as synonymous with "innocent", but a clean chain in cases of this kind—that is, one in which each of the traders accounts correctly for VAT—is not innocent; it is an integral part of the fraudulent scheme. Even if I entertained any doubt (which I do not) that as a matter of EU law there is sufficient connection between a trader in the clean chain and the default in the dirty chain, there remains an insuperable connection with the fraudulent purpose of the clean chain."” 131. Therefore, HMRC submitted that, if we concluded that each of the three alleged contra-traders was involved in a dishonest offsetting of its input VAT claimed in broker chains against the output tax liability generated by its acquisition deals, the inevitable conclusion was that Atec’s transactions in the alleged contra-trading deals were connected with fraud, without the need to trace every chain in which the contra-traders were involved. We agree for the reasons given above by Judge Bishopp (and approved by Arden LJ). We have found ( Appendix Part 1) that each of the three contra-traders (A-Z, Jag Tec and Wetherby) were, as fraudulent contra-traders, involved in the dishonest offsetting of inputs and outputs in its broker and acquisition deals respectively. We have also, however, considered the evidence to determine whether Atec’s deals were connected to those three contra-traders – see Appendix Part 2 . 132. At the main hearing of the appeal, only a relatively few points of principle were discussed in relation to the issue of “connection to fraud”
“it seems that after scheduling the deals the paperwork was misplaced within HMRC and has not been located.”
“The records are not available to HMRC.” 134. We have considered Mr Saunders’ further evidence and the further submissions in relation thereto made by Atec at the Tribunal’s invitation. We also offered Atec the opportunity to further cross-examine Mr Saunders in relation to his fifth witness statement, although Atec declined the opportunity to do so. In our view, we consider that we can place weight upon the evidence of Mr Saunders and that the listings referred to above can be treated as evidence of the relevant links in the chain for the purposes of establishing whether Atec’s deals were connected to the fraudulent evasion of VAT. 135. We should observe, however, that we considered that the manner in which HMRC presented this evidence in relation to deal listings, without explanation, was less than satisfactory. Did Atec know, or should it have known, that its transactions were connected with the fraudulent evasion of VAT? 136. HMRC argued that Atec’s transactions were carried out as part of orchestrated schemes to defraud HMRC and that Atec either knew, or should have known, this to be so. 137. HMRC further argued that, if this Tribunal concluded that Atec’s transactions took place as part of a highly orchestrated and efficient fraud, that was relevant to the question of whether Atec knew or should have known that its deals were connected with fraud. 138. In approaching the question whether Atec knew or should have known, we shall consider the various relevant topics individually. We shall, however, in our decision look at all the relevant evidence taken as a whole. Freitex GmbH (“Freitex”) 139. Unless otherwise indicated, the following is taken from the unchallenged evidence of Mr Saunders (including the exhibits to his witness statement), which we accept. 140. Atec dispatched (exported) to Freitex the goods concerned in deals 9-12, 13-15, 17-21, 24-29, 30-33 and 40-52. In other words, in 35 of the 52 deals under appeal Atec’s customer was Freitex. Apart from deals 40 and 52, these deals were supplied to Atec and/or Wireless 5 by four suppliers: Zain, Team Mobile, LMC and Cybacomms. In all of the deals where Atec sold to Freitex, the goods were delivered to Freitex’s transport contractor, MS Kurier. 141. Out of a total of£7 million in dispute in this appeal,£5,672,363.50 of the disputed VAT reclaim relates to the Freitex deals, representing more than 70% of the sums in issue. 142. The German authorities supplied HMRC with the following information. 143. Freitex was established on26 April 2001 . The general manager was Anneliese Gotthal, but according to the German authorities her son, Olaf Gotthal, was the de facto manager. 144. The objects of Freitex’s business were originally to operate launderettes and squash, sauna and fitness centres. 145. A report by Dresdner Bank in relation to suspicious activity noted that the business operated as a dry cleaning business with little or no turnover in February – April 2006. Then, however, approximately€2 million suddenly passed through its account. Mr Gotthal explained to the bank that Freitex was buying and selling left-over stock of mobile phones. 146. Pursuant to enquiries made by the UK, the German authorities discovered that Freitex had, from April 2006 to June 2006, received supplies from various UK firms worth around€100 million . No such intra-community acquisitions or supplies had been declared by Freitex. During a search of Freitex’s premises by the German authorities on11 July 2007 , sales and purchase invoices relating to the trading of mobile phones and navigation equipment were discovered, although it appears no books were maintained for the business. 147. The German authorities stated that, with the exception of two transactions (Freitex’s sales to Silus BV on3 July 2006 invoice number 06-20151 and17 July 2006 invoice number 06-20155), the outgoing CMR documents were stamped with a forged transporter’s stamp and the documents bore forged signatures. 148. Goods purportedly purchased by Freitex from Atec were sold to either International Mobiles SRL (Italy) or Koornmarkt BVBA (Belgium). 149. A further report by the German authorities stated that Freitex’s main customer, International Mobiles SRL (variously referred to as “International Mobiles” or “International Mobile”), did not account for any acquisitions and was not equipped to receive such large quantities of goods. 150. According to the Italian authorities, International Mobiles SRL was a missing trader involved in carousel fraud and was believed to be involved in fictitious wholesale transactions. In a letter dated15 February 2010 the tax Italian authorities stated: “[International Mobile SRL] is a missing trader and has been involved in a carousel fraud that has taken place in 2006, in which participated also several UK traders. Currently our trader is in voluntary liquidation....From an audit carried out and information received by the tax authorities in the United Kingdom, it is believed that International Mobile SRL has been specifically set up to carry out fictitious wholesale transactions of mobile phones with other companies involved in the fraud, with the aim of allowing undue VAT refunds in favour of certain traders in the United Kingdom.” 151. According to the Belgian authorities, Koornmarkt had been registered for the wholesale of books and periodicals and was run from a small and dirty office on an industrial estate. The company was deregistered by the Belgian authorities on15 February 2007 . 152. Mr Kalia told us that he had first met Mr Gotthal through Jurgen Schmitt of Mobile World GmbH (“Mobile World”) at a trade fair in Germany in March 2006. Mr Kalia had previously dealt with Mr Schmitt, who was one of his customers and he understood Mr Gotthal to be Mr Schmitt’s former bank manager. 153. In March 2006, Atec had sold stock worth£7,060,322 to Mobile World. In periods 04/06 to 07/06 there were, however, no recorded sales to Mobile World. Instead, Atec sold stock worth in excess of£33 million to Freitex. 154. Mr Gotthal was interviewed by the German authorities in Munster Prison on 20 and 31 August and6 September 2007 . Mr Gotthal was advised of his right, as an accused person, to refuse to give evidence. He nonetheless gave a statement which we summarise below. 155. Mr Gotthal said that he had been introduced to the mobile telephone business through Mr Schmitt. Mr Schmitt had previously been a client of Commerzbank and, at the time, Mr Gotthal was “looking after” this client’s involvement with the bank. At the time, Mr Schmitt was the managing director of Mobile World in Düsseldorf. At Mr Schmitt’s suggestion Freitex also began trading in the mobile telephone sector in 2006. Mr Gotthal’s statement continued as follows: “Mr Schmitt showed me how the business was done at the firm of Mobile World Limited. This consisted in first of all looking for possible buyers and sellers of mobile phones and then developing the business of buying and selling mobile phones with them. Business payments in Freitex’s case were as a rule made through [FCIB], because this bank could operate the quickest money transfers. The business process was, as stated, very simple. I sought buyers and sellers of mobile phones, clinched the sales then I bought the equipment, and finally I then only had to make sure that I got the CMRs or the export certificates. I can state that I got the client list from Mr Schmitt and then contacted them by telephone at regular intervals. Mr Schmitt did this because he had to share his profit with two other shareholders of the firm of Mobile World GmbH. He did not wish to do this any longer, and he preferred to conduct the business with me alone. Because of this we concluded a contract which gave him 50% of the gross income from buying and selling of mobile phones through Freitex… I can state that the majority of the monies went through the [FCIB]. … My main purchasing contacts were English companies, for example London Mobile, Atec or Cybercomms. When asked why [Freitex]’s operations stopped suddenly in the 3 rd quarter of 2006, I can only state that the English were suddenly unable to supply. I discussed this with Mr Schmitt who told me that the English had suddenly been having supply problems. … Atec was a big supplier of ours. The supply process as a rule meant that Atec supplied Freitex and Freitex generally forwarded to an Italian purchaser. When asked which transport contractor dealt with the Atec transactions, I can state that it was definitely the firm of MS Kurier…. When asked how many transactions went through MS Kurier, I estimate this to be more than 10. The next accusation levelled at Mr Gotthal was that there were 50 to 60 invoices and documents which went through MS Kurier and delivered onto Italy. It was also revealed to him that investigations carried out at the firm of MS Kurier have shown that only in two cases had business gone through MS Kurier. Furthermore all the papers which are in the seas documentation and which show MS Kurier to be the transport firm, are to be classed as fake. In response to this Mr Gotthal stated the following: I cannot explain how this can have happened. I did not falsify the documents. The interview was now interrupted briefly at the request of the defence counsel, who left the interview with Mr Gotthal for a consultation. The interview was terminated when the defence counsel returned.” 156. The interview resumed on31 August 2007 , at Munster Prison with the same attendees. Mr Gotthal stated that he was now prepared to provide further statements – because the previous interview had been terminated at his request. Mr Gotthal described how Freitex’s business was transacted: “The business transactions then took place as follows: in principle Mr Schmitt specified all the tasks which I was to complete on the day. I telephoned Mr Schmitt several times a day about this. In the mornings Mr Schmitt would tell me on the telephone where I could buy which goods and also specified the approximate price for these goods. At the same time he also told me where I could sell the goods onto. I then telephoned the companies and try to transact the business under the conditions specified. This always worked out as well as Mr Schmitt has said it would. At the beginning I tried, for example, to get a better purchase price, as I wanted to distinguish myself. However in the end this failed, because the price margins that Mr Schmitt had specified to me were always also the final possible prices. Mr Schmitt also specified the freight forwarding agents to use. I also then gave this information to the sellers. That is I specified the point of delivery to which the goods were meant to be delivered direct to the firm during the transaction procedures. By what means and through which freight forwarding agents the goods came to Germany was not one of my considerations. This was the seller’s responsibility and they had to select them. Payment for the supply of goods from England to Germany was done by the seller. As a rule my buyers also had to bear the costs of the transport from Germany to their point of delivery. This thereby ensured that I was never burdened with transport costs, either for the purchase or the sale, apart from a few exceptions. Asked about the document processing I can say that I arranged the deals on the telephone and then sent or received a pro forma invoice and purchase order by fax. The actual final invoices or documents relating to these deals were as a rule not sent to me until a few weeks later by post. The freight forwarding agents’ confirmations and statements however were faxed to me by the freight forwarding agent on the same day of the transaction. When asked again what happened with the payments connected with the business transactions, I can state that in 85% of cases the money was already in my account, although the goods had not yet reached my buyer. I then also arranged for my seller to be paid, although the goods were not yet with my freight forwarding firm. So in principle this was purely a cash in advance situation in the majority of cases.” 157. Pausing there, Mr Gotthal, in the first paragraph quoted above, is clearly describing contrived trading. In his third paragraph, Mr Gotthal is saying that Freitex paid for the goods before they were delivered to Freitex’s freight forwarding firm. In other words, Freitex was happy to pay money upfront without receipt of the goods – in which case, there was no obvious reason to “ship on hold”. 158. Mr Gotthal continued by explaining that Mr Schmitt began introducing him to the suppliers in England, in particular in London. Mr Schmitt also introduced Mr Gotthal to the freight forwarding firms. Mr Gotthal then described his dealings with Atec: “… I did get to know representatives from [Atec] personally. The Firm’s representative whom I saw in London was Mr Kahlia [sic]. I had already met Mr Kalia at the CeBIT [digital industry trade show]. I also know his sister, Mrs Renee Kahlia [sic], by telephone. … I… discussed with Mr Schmitt whether we could not also use MS Kurier as a freight forwarding agent. I also went with Mr Schmitt once to meet Mr Schluter at the firm of MS Kurier. It was during the first transaction which was to be conducted through the MS Kurier freight forwarding firm that I found out for the first time that in fact no goods had been delivered to Germany, that is to say to Munster. I had transacted the business in the normal way, as I had done with other transactions, that is to say I bought from the firm of Atec in London and sold to the Italian buyer International Mobile. However, after two or three days I asked MS Kurier whether the goods had in fact arrived. Mr Schluter then told me that no goods had arrived. I then contacted Mr Schmitt and confronted him with the problem. He said that everything was alright. I should not worry if there were no goods. However I did have the problem that money had gone through the account but there was no movement of goods. In addition, I did not of course have any documentation at that time either. It was also clear to me that there could be no freight forwarding documents relating to these deliveries either. Mr Schmitt did however then say to me that we [should] continue to undertake such transactions. And so I subsequently continued to carry out these types of transactions with the sellers and my buyers by telephone. But as a rule the movement of goods did not take place through the firm of MS Kurier in these cases. In initiating and concluding the business transactions I nevertheless did not mention either to my sellers or my buyers that there were in fact no goods. The goods were discussed by telephone, and the deals discussed on the telephone, as if actual goods deliveries were to be expected. I admit that from where we stand this is strange and at the time this seemed strange to me after a while, the business was conducted by telephone as if the transactions were normal transactions, but in fact were not based on any actual movement of goods. I frequently discussed the problem with Mr Schmitt, that there were just not any goods. But he repeatedly told me that I should not worry and everything would be alright. Mr Schmitt also told me that this was a matter of business practice. If we did not conduct this type of business, in principle fictitious transactions, we would be unable to undertake other business dealings with real goods. However Mr Schmitt did not tell me either whether, in the case of these transactions, where no goods went through MS Kurier, any actual goods had been delivered to other freight forwarding firms and other locations. What, therefore, the background to these business dealings was I was unable to ascertain at the time. I then pointed out to Mr Schmitt more and more often, when he specified MS Kurier to me as the forwarding agent, that he should see to it that actual goods were moved. As time went along it got to such a point with me that I said I no longer wished to undertake such fictitious transactions. If I am asked whether these types of fictitious business dealings could have taken place with other freight forwarding firms I can state that at the time there was no other case of a freight forwarding firm telling me that no goods had been presented. From where we stand now I cannot rule out that this had possibly happened with the involvement of other freight forwarding agents. Today I would not put my shirt on any other freight forwarding firm. In the case of the RTR company I am confident that things ran properly with them. … With regard to the fictitious business dealings, I urged Mr Schmitt to straighten things out so that the documentation could be in order. A few weeks after this I received a parcel via the DHL courier which contained the documentation slips for all fictitious business dealings. I then put these papers to one side and did not link them up with the transactions. In July, after a number of fictitious transactions had been made, I then did a transaction with Atec and actually asked, during this transaction, whether any goods were even there or were to be expected. This was then confirmed. I then asked for the name of the freight forwarding firm through which the goods would be moved. I then called a freight forwarding agent in England to which I had been referred and assured myself whether they did indeed have a goods order for me and the MS Kurier firm. They supplied this and there were then two cases in which the actual movement of supplies took place. The goods were then delivered to Munster and forwarded on by us again from there on the next day. My buyer for the supply of goods was not, however, an Italian buyer in this case, but the firm of Kornmarkt [sic] in Belgium. I had a higher margin with both these supply transactions, so that I took over MS Kurier’s delivery costs these transactions. After the last transaction was conducted with the firm of MS Kurier, which was in July, the entire business conducted in the mobile phone sector was virtually nil. As far as I know the movement of goods or transactions in this area came to an end in the middle of August at the latest. After the last transactions had been conducted the business – as I have already stated – was virtually nil.” 159. It will be seen from the second interview that Mister Gotthal confirmed the proposition put to him in the previous interview by the German authorities that an actual movement of goods took place in only two transactions with Atec. 160. In the third interview which took place in Munster prison on6 September 2007 , Mr Gotthal discussed companies with which he had dealt in in 2007. These transactions were not relevant to the current appeals. In the course of his statement, however, Mr Gotthal stated: “[Mr Schmitt] explained to me [Mr Gotthal] on that occasion why the market for mobile phones had collapsed in 2006, namely, because at the time monies from the VAT advance payments, in particular England, had been lost. I then found out in this connection that turnover tax fraud could also be involved with these businesses.” 161. In her supplementary closing submissions, Ms Kalia drew attention to a reference in an exhibit included with the notes of the interviews with Mr Gotthal which explained that the indictment against Mr Gotthal was only approximately€1,385,000 : “which is the ‘true’ financial loss to the revenue in terms of VAT. This is based on the transactions in which the goods were sold on repeatedly within Germany. The additional ‘notional’ tax loss is derived from the fact that Olaf Gotthal did not process the trade operations forming the transactions correctly in his accounts or failed entirely to keep accounting records of these transactions, the result of which is that the legal requirements for the supply is to achieve VAT-free status are not satisfied.” 162. Ms Kalia submitted that this absolved the transactions in the present appeal and contradicted HMRC’s inference that Mr Gotthal was held in prison because of the transactions with Atec. We do not accept this submission. We do not see that the terms of the German indictment “absolved” the transactions in dispute in these appeals. Mr Gotthal was plainly describing to the German authorities the background to the transactions which involved the onward supply in Germany of the goods originally supplied by Atec. Moreover, we did not understand HMRC to be submitting or, indeed, in any way relying on the suggestion that Mr Gotthal was being held in relation to the deals presently appeal to this Tribunal. 163. Mr Gotthal’s statement was plainly hearsay evidence. As such, the statement is admissible but it is a matter for the Tribunal to decide, in all the circumstances, what weight should be attached to it. We shall consider this point later in this decision. 164. Mr Kalia told us that, although he had previously dealt with Mobile World as his customer, he moved his business to Freitex because Freitex was paying Atec in advance. Eventually, in cross-examination, Mr Kalia had to accept that this was not correct. In most cases, Freitex did not always pay Atec in advance and, frequently, Atec gave instructions for the goods to be shipped before receiving any payment or a full payment from Freitex. In fact, in deals 40 and 52, Freitex was allowed time to pay Atec after goods had been shipped to them, effectively extending them credit. 165. Moreover, Mr Kalia was, in our view, unable to give any convincing explanation as to why he switched from dealing with Mobile World to dealing with Freitex. Mr. Kalia explained that Jurgen Schmitt allowed him to deal with Freitex, rather than his own company Mobile World. In our view, Mr Kalia effectively corroborated Mr Gotthal’s account that Mr Schmitt introduced him to those in the UK who were to be his suppliers and that he got to know Mr Kalia at CeBIT. 166. In March 2006, Atec had sold stock worth£7,060,322 to Mobile World (Mr Schmitt’s company). In periods 04/06 to 07/06 there were no recorded sales by Atec to Mobile World, whereas after the introduction by Mr Schmitt of Mr Gotthal to Mr Kalia, Atec sold stock worth in excess of£33 million to Freitex. It was clear, therefore, that after Atec was introduced to Freitex by Mr Schmitt it dealt exclusively with Freitex. 167. A report from the German authorities on Mobile World revealed that International Mobile was one of its customers. When Mobile World sold goods to International Mobile it received payment from Technology Plc. The evidence of Officer Dean in relation to FCIB showed that payments were made to Freitex by Technology Plc and that Freitex was introduced to FCIB by Mobile World. 168. In addition, information provided by the German authorities referred to evidence given by Mr Schluter of MS Kurier, Bernard Schluter Transporte, the company which Atec said had delivered the goods which it claimed to have sold to Freitex. Mr Schluter referred to having carried two transport operations which related to Freitex sales invoice numbers 06-20151 and 06-20155, both made out to Silus BV. The German authorities stated that: “… as regards other supplies [i.e. supplies other than the supplies recorded on the above to invoice numbers], which were supposed to have been made via MS Kurier (purchase invoices of the firms Atec Associates Limited…), in respect of which demonstrably falsified papers we used, no further information is available. It is open to question as to whether there were no goods at the heart of the transactions (i.e. invoices purely bogus) or whether the goods did exist but were supplied by another route. According to an interview of the accused, Olaf Gotthal, no goods existed; on the other hand payments (for purchase and sale) were made via FCIB’s account. However, no forwarding documents or the like are available here.” 169. As we have seen, Mr Gotthal claimed that there were only two transactions (both in July 2006) with Atec where the movement of goods actually took place. In each case, according to Mr Gotthal the onward sale by Freitex was to Koornmarkt in Belgium. Mr Gotthal stated that Freitex had a higher margin with both those supply transactions. In all transactions except two, Freitex’s customer was either International Mobile or Koornmarkt. In the two exceptional transactions, Freitex’s customer was Silus BV. The two Freitex sales invoice numbers which Mr Schluter said represented actual goods (invoice numbers 06-20151 and 06-20155) involved sales to Silus BV not to Koornmarkt. The schedule of information provided by the German tax authorities clearly indicated that those two invoices involved the sale of 1000 units of Apple iPods and corresponded with deals 40 and 52. 170. Furthermore, analysis of a schedule provided by the German tax authorities of all the onward Freitex’s sales in July 2006 which involved where, Atec was Freitex’s supplier, showed that the two deals which attracted the highest gross margin were those sold on invoice numbers 1457 and 1470 (deals 40 and 52) (Freitex’s invoice numbers 06-20151 and 06-20155), both of which were sold on by Freitex to Silus BV. 171. We, therefore, consider that Mr Gotthal was incorrect to state that the two exceptional deals involved sales to Koornmarkt – we consider that the two exceptional deals were goods were actually supplied involved sales by Freitex to Silus BV. Freitex’s supplier was Atec in deals 40 and 52. 172. According to the Netherlands authorities, Silus BV was active from November 2005 and was deregistered for VAT in October 2006 because the business had no proper place of business from which to operate. The company’s address was a mailing address only. No records for the second quarter of 2006 were supplied by the company. The manager of the company was a Mr Nadir Bin Ahmed Manghet, whose address was in Slough, Berkshire. 173. Ms Kalia referred us to Eurotunnel tickets and CMRs (standard form waybills for the international carriage of goods by road) which existed for each of Atec’s transactions with Freitex – these were exhibited to Mr Saunders’ witness statement. The CMRs itemised the number of pallets and type of goods concerned. The CMRs were essential evidence to demonstrate that Atec had exported (dispatched) the goods to an EU trader. 174. The freight forwarder in all but two of the transactions in which Atec sold to Freitex was Globe Distribution (“Globe”). In these transactions Globe shipped the goods to MS Kurier. In two transactions, however, the freight forwarder was Hawk Precision Logistics. These two transactions were deals 40 and 52. We note that in the aborted deal 53 the freight forwarder was also Hawk Precision Logistics. 175. Mr Kalia, in cross-examination, accepted that he did not visit the freight forwarder in respect of any of the appealed deals to inspect the goods. 176. At the time of the 2010 transactions, Atec had an associated company called Atec GmbH. The German tax authorities stated that Atec GmbH’s head of sales was Mr Schmitt. Atec GmbH was said to be trading in electronics. Mr Kalia was a business partner of Mr Schmitt in a company called Atec GmbH. Mr Kalia recalled that he had invested approximately€15,000 -20,000 in Atec GmbH. Mr Schmitt had put in approximately€100,000 . Mr Kalia went into the venture with Mr Schmitt “way after” 2006. Clearly, therefore, Mr Kalia’s relationship with Mr Schmitt – a man who, according to Mr Gotthal’s statement, contrived the appealed 2006 Freitex deals with Atec – continued after the periods under appeal. 177. It was not clear whether criminal charges were eventually brought against Mr Gotthal. The German tax authorities indicated that Mr Gotthal was in pre-trial detention for several weeks but, because of his admissions, he was released subject to a requirement to report periodically. Mr Saunders did not know whether any action had been taken against Mr Schmitt. Patterns in Atec’s trading 178. All of Atec’s deals in April 2006 were transacted between 20-28th day of the month. In May 2006, all of Atec’s deals were carried out between 16-31 May. Similarly, in June 2006 all of Atec’s deals were carried out between 16-28 June. In July 2006 all of Atec’s deals were carried out between 4-5 July. 179. In deals 1-8 and 16 Atec dealt in mobile telephones which had “Central European Software”
“Silus/Star Express/Hendon Import Export/Atec – DXB.”
“This is a theoretical and potential deal.”
“something changed. I can’t remember what it was. It was definitely a new model or something. I can’t remember. I just cannot remember. I will have to read some of the paperwork. There was – there was something that changed, I remember. I just cannot recall.” 260. We did not find Ms Kalia’s evidence credible. This was, as we understood it, the first deal that Wireless 5 FZE did with Atec – the deal fell through but Ms Kalia purportedly could not remember why. We did not consider this to be plausible. Freight Forwarders’ knowledge of deal chains 261. We have already discussed the significance of the freight forwarder’s file sheet in relation to deal 53. There were, however, other instances where freight forwarders’ appeared to have knowledge of deal chains before the deals took place. 262. The exhibits to Mr Saunders’ witness statement contained Paul’s Freight Services files for deal 8, in which the chain was: Blue Star—>Megatek—> Midwest Communications (defaulting trader) —> Data Solutions—> Star Express—> AB International—> Letting Solutions—> Stardex—> Atec. Atec, Megatek, Stardex, Letting Solutions, Star Express, Blue Star and AB International were all mentioned on stock release forms dated22 April 2006 . In one of those stock release forms, Stardex released goods to Atec on22 April 2006 i.e. two days before Stardex’s invoice to Atec. With the exception of Blue Star (the Danish company), Paul’s Freight Services did not receive a document naming anyone else on the chain until24 April 2006 . Nonetheless, the freight forwarder seems to have been aware of a number of participants in the chain two days before the earliest document (dated24 April 2006 ) relating to Atec’s participation in the transactions. 263. When cross-examined, Mr Kalia accepted that Atec’s purchase order and Stardex’s invoices were dated later (i.e.24 April 2006 ) than Pauls Freight Services release note. He said that it worked “on trust”
“Movement: DDU-Inco terms 2000.”
“Insurance for stock is undertaken based on the commercial agreement with customers. For all transactions where insurance was undertaken, it was carried out under Incoterms 2000-DDU (Delivered Duty Unpaid) – this includes the cost of freight and insurance as the risk associated with that stock is ours. Where there is no insurance information and insurance was not carried out, it was done under Incoterms 2000 – CPT (Carriage paid to). Under these terms, the risk ends as soon as the goods leave the UK warehouse and the risk is with the customer.” 305. In deals 1, 4-8 and 16, Atec requested insurance. In addition, in deals 40 and 52 Atec also requested insurance; these were the only deals with Freitex in respect of which Atec requested insurance. 306. Under cover of the letter of19 September 2006 , Atec supplied insurance details in the form of a list of transactions for the quarterly VAT period ending 07/06. This list showed that 32 transactions were undertaken on CPT Incoterms. That information, however, was inconsistent with the terms of Atec’s invoices and pro forma invoices which clearly referred to DDU Incoterms being applicable. 307. In his witness statement, Mr Kalia said he made it clear to HMRC on Atec’s “Intrastat” declarations made to HMRC (a method of compiling information and statistics concerning trade between member states of the EU) that Atec was shipping on “CPT” terms i.e. that the burden of insurance was on Atec’s customers. Mr Kalia said that the discrepancy caused by Atec’s documentation was an error on the part of the company’s administrator at the time, Clare Hemsely. 308. It seemed to us remarkable that so many consignments of high-value goods should be exported without insurance and that any misunderstanding as to whether Atec dealt on CPT or DDU Incoterms should be repeated so many times. It also seems to us remarkable that the only two deals with Freitex in which insurance was requested by Atec were deals 40 and 52. There were two deals in July 2006 where Mr Gotthal said that actual goods moved between the parties. It seems to us that the insurance position in relation to these two deals corroborated Mr Gotthal’s account. Due diligence 309. As we have seen, Atec was warned by Mr Gilley at a meeting on13 May 2005 that it had been dealing with traders using hijacked VAT registration numbers. Moreover, Atec had been served with Notice 726 and Mr Stone, in a letter dated22 April 2004 , had emphasised the importance of Atec verifying its suppliers. (a) EU Customer due diligence 310. Evolution SARL (“Evolution”) (Atec’s customer in deals 38 and 39) – Atec’s due diligence consisted of an undated and unsigned letter of introduction, a French VAT certificate, a copy of an extract from a business register, a copy of a British passport of Alfred Fritz Warner and a copy of his council tax bill for an address in Coventry, a copy of a blank trading application form, copy of Europa VRN validation dated28 June 2006 .We note that Atec carried out no financial checks on Evolution. 311. Phone Connected SARL (“Phone Connected”) (Atec’s customer in deals 2-3) – Atec’s due diligence in relation to Phone Connected comprised an undated letter of introduction apparently faxed on26 October 2005 . The letter claims Phone Connected was contracted to Nokia. The letter attached a client checklist. There was also a French VAT certificate, copy of an extract from the Dunkirk Chamber of Commerce listing, Redhill VRN validations and a copy of the page from a French passport. There was no evidence of Atec having carried out any financial checks on Phone Connected. 312. Freitex GmbH (“Freitex”) (Atec’s customer in deals 9-15, 17-21, 24-23 and 40-52) – As we have seen, Mr Kalia was introduced to Mr Gotthal by Mr Schmitt at a trade fair. Mr Kalia had previously dealt with Mr Schmitt’s company but after this introduction dealt only with Freitex. 313. Atec’s due diligence in respect of Freitex was minimal. It consisted of a letter of introduction faxed on18 April 2006 with banking details. There were details (in German) of what appears to be Freitex’s VRN and a Europa VRN validation dated8 May 2006 (after Atec’s first sale to Freitex on28 April 2006 ). There were no Redhill VRN checks and no financial checks. 314. H & H Import Export SARL (“H & H”) (Atec’s customer in deals 1, 5-6, 22-23 and 34-37 – Atec’s due diligence in relation to H&H comprised an undated letter of introduction which listed generic products in a different typeface from the rest of the letter, a French VAT certificate and translation, Europa VRN validations dated20 April 2006 and24 April 2006 , Redhill clearance of H&H’s VAT number dated2 May 2006 and some documents in French. There were no financial checks. 315. Silus BV (“Silus”) (Atec’s customer in deals 7-8) – Atec’s due diligence comprised an undated letter of introduction which described Silus as a “well-established supplier and distributor of clothing, toys, electrical and electronic equipment, handicrafts and tools, and office furniture, as well as the import and export of these products in all its broadest sense.”