Tower Bridge GP Ltd v Revenue & Customs (VAT - INPUT TAX : Other) [2019] UKFTT 176 (TCC)

“49. Nevertheless, this principle cannot be applied in isolation, and in particular does not in my judgment override the requirement for a person exercising the right of deduction to produce a VAT invoice evidencing payment of the relevant VAT by the supplier. I will return to this point in my consideration of the second main issue on the appeal.”

“108. At first sight, the decision in Barlis may appear to provide some support for Zipvit’s case. But the facts could hardly have been more different. The only defects in the relevant invoices were that they did not provide a proper description of the legal services which had been supplied, and thus did not comply with Article 226(6) and (7) which required details of “the extent and nature of the services rendered” and the date on which the supply had been made or completed. There was no reason to doubt that the corresponding output tax had been paid by the lawyers, nor was there any doubt about its chargeable rate and amount. In the present case, by contrast, the original invoices issued by Royal Mail to Zipvit described the supplies as exempt, and Zipvit has been wholly unable to provide any evidence that tax on the supplies was paid or accounted for by Royal Mail when it became clear that the supplies were in fact standard rated. Zipvit is therefore claiming to be entitled to exercise its right to deduct without being able to produce either a compliant VAT invoice, or supplementary information which shows that the conditions of Article 226(9) and (10) are satisfied, that is to say details of “the VAT rate applied” and “the VAT amount payable”, coupled with evidence of payment of that amount by Royal Mail.”

‘Cases like Barlis show that some of the requirements relating to invoices in art 226 must be dispensed with, if the tax authorities are supplied with the information necessary to establish that the substantive requirements of the right to deduct are satisfied. But the Court was careful in Barlis to confine its discussion to the requirements in art 6 226(6) and (7), and I do not think its reasoning can be extended to cover a failure to comply with the fundamental requirements relating to payment of the relevant tax in art 226(9) and (10). Provision of an invoice which complies with those requirements is essential to the proper performance by HMRC of their monitoring functions in relation to VAT, and is needed as evidence that the supplier has duly paid or accounted for the tax to HMRC.’

“[w]hether a taxable person in possession of an invalid VAT invoice can provide any evidence that the supplier of that invoice has paid any of the VAT on that invoice to HMRC is relevant to the question of whether the conditions for the right to deduct to arise are met”

‘It needs to be remembered in this context that the amounts for which Zipvit is claiming a deduction have not been paid by Zipvit in response to a request by Royal Mail for payment once the taxable status of the supplies had been established. In that situation, Royal Mail would have rendered an invoice showing the VAT due, and would then have been liable to account for it to HMRC as output tax in the usual way. In those circumstances, there would have been no difficulty about Zipvit deducting the amount shown on the new invoice as input tax. All that has actually happened, however, is that Zipvit now wishes to treat the payments which it originally made to Royal Mail, on the common understanding that the supplies were exempt, as comprising an element of VAT, and to obtain a deduction for that element on the strength of nothing more than the original payment.’

‘In terms of the exercise of HMRC’s discretion to allow an input tax deduction in the absence of a valid VAT invoice and where there is no evidence that the supplier has paid the output VAT charged, it is now tolerably clear from Zipvit at [116] that there will no grounds upon which HMRC could properly conclude that the such deduction could be permitted.’

‘Even if it is open to Zipvit to recharacterise the original payment in this way (which at this stage of the argument must be assumed in Zipvit's favour), there would be an obvious detriment to HMRC and the public purse if Zipvit were able to obtain such a deduction without first showing that the tax in question had been paid by Royal Mail. The normal way of fulfilling that obligation is by production of a fully compliant VAT invoice. Since Zipvit is unable to produce such an invoice, I am unable to see any grounds upon which HMRC could properly conclude that Zipvit should nevertheless be allowed the deductions claimed, to the detriment of the general body of taxpayers.’

“…whether Articles 167, 168(a), 178(a), 220(1) and 226 of Directive 2006/112 must be interpreted as precluding a national practice whereby the tax authority refuses a taxable person the right to deduct from the VAT which he is liable to pay the VAT due or paid in respect of services supplied to him on the ground that the issuer of the invoice relating to those services, or one of his suppliers, acted improperly, without that authority establishing that the taxable person concerned was aware of that improper conduct or colluded in that conduct himself.”

“44 Moreover, it is apparent from the order for reference that the questions referred are based on the premises, first, that the transaction relied on as a basis for the right to deduct was carried out, as is to be inferred from the corresponding invoice, and, second, that that invoice includes all the information required by Directive 2006/112, with the result that the substantive and formal conditions provided for by that directive for the creation and exercise of the right to deduct are fulfilled. It is necessary to point out, in particular, that the order for reference does not indicate that the applicant in the main proceedings himself acted unlawfully by, for instance, filing false returns or issuing improper invoices.”

“45. In those circumstances, a taxable person can be refused the benefit of the right to deduct only on the basis of the case-law resulting from paragraphs 56 to 61 of Kittel and Recolta Recycling, according to which it must be established, on the basis of objective factors, that the taxable person to whom were supplied the goods or services which served as the basis on which to substantiate the right to deduct, knew, or ought to have known, that that transaction was connected with fraud previously committed by the supplier or another trader at an earlier stage in the transaction.”

“52 In that regard, it is apparent from the order for reference and, in particular, the first question, that the questions referred in Case C-80/11 are, like those referred in Case C-142/11, based on the premise that the substantive and formal conditions provided for by Directive 2006/112 for the exercise of the right to deduct are fulfilled, in particular the condition which requires the taxable person to be in possession of an invoice which confirms that the goods were actually supplied and which complies with the requirements of that directive. Accordingly, in the light of the response given in paragraph 50 of the present judgment, which also applies in the case of the supply of goods, the right to deduct can be refused only where it is established, on the basis of objective evidence, that the taxable person concerned knew, or ought to have known, that the transaction relied on as a basis for the right to deduct was connected with fraud committed by the issuer of the invoice or by another trader acting earlier in the chain of supply.”

“60. It is true that, when there are indications pointing to an infringement or fraud, a reasonable trader could, depending on the circumstances of the case, be obliged to make enquiries about another trader from whom he intends to purchase goods or services in order to ascertain the latter's trustworthiness. 61. However, the tax authority cannot, as a general rule, require the taxable person wishing to exercise the right to deduct VAT, first, to ensure that the issuer of the invoice relating to the goods and services in respect of which the exercise of that right to deduct is sought has the capacity of a taxable person, that he was in possession of the goods at issue and was in a position to supply them and that he has satisfied his obligations as regards declaration and payment of VAT, in order to be satisfied that there are no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction or, second, to be in possession of documents in that regard.”

“66. In the light of the foregoing considerations, the answer to the questions referred in Case C-80/11 is that Articles 167, 168(a), 178(a) and 273 of Directive 2006/112 must be interpreted as precluding a national practice whereby the tax authority refuses the right to deduct on the ground that the taxable person did not satisfy himself that the issuer of the invoice relating to the goods in respect of which the exercise of the right to deduct is sought had the status of a taxable person, that he was in possession of the goods in question and was in a position to supply them, and that he had satisfied his obligations as regards declaration and payment of VAT, or on the ground that, in addition to that invoice, that taxable person is not in possession of other documents capable of demonstrating that those conditions were fulfilled, although the substantive and formal conditions laid down by Directive 2006/112 for exercising the right to deduct were fulfilled and the taxable person is not in possession of any material justifying the suspicion that irregularities or fraud have been committed within that invoice issuer's sphere of activity.”

“..(i) the rule, as a matter of both EU and UK VAT law, is that without a valid VAT invoice there can be no input tax deduction; (ii) the use of the discretion in regulation 29(2) involves creating an exception to that rule; and (iii) it is therefore entirely reasonable for the Commissioners to insist on strict adherence to that rule unless and until the taxpayer can demonstrate that why an exception to it should be made.”

“Without prejudice to the particular provisions laid down in this Directive, only the following details are required for VAT purposes on invoices issued pursuant to Articles 220 and 221: … (3) the VAT identification number referred to in Article 214 under which the taxable person supplied the goods or services; … (5) the full name and address of the taxable person and of the customer; …”

“(1) Subject to paragraph (2) below and regulation 16 and save as the Commissioners may otherwise allow, a registered person providing a VAT invoice in accordance with regulation 13 shall state thereon the following particulars – … (d) the name, address and registration number of the supplier, (e) the name and address of the person to whom the goods or services are supplied, ….”

“…It would, I think, be offensive to most people’s sense of fiscal justice if a mechanical accounting exercise of this nature were permitted to generate a very substantial input tax credit, in circumstances where (for whatever reason) none of the tax in question has been paid by the supplier.”

“3. Regulations 13(1) of the VAT Act 1994 requires taxable persons to have a valid VAT invoice in order to reclaim input tax on taxable supplies. The contents of a VAT Invoice are set out in Regulation 14(1). You do not have a valid VAT invoice for a number of transactions on which you seeking to claim input tax as detailed below. 4…….. As you can see above Regulation 14(1)(d) requires the VAT invoices to have a valid VAT number. 5. On 18 th May 2009, CO2e received an invoice for Stratex Ltd. The invoice from Stratex bore no VAT Registration Number, however Stratex Ltd charged CO2e VAT, which CO2e paid to Stratex on or about 19 th May 2009. Payment would have been processed by the accounting department and the input tax posted to the VAT account. As Stratex was not registered for VAT none of their invoices could have had a valid VAT registration number. 6. Under regulation 14(1)(d) CO2e did not have a valid VAT Invoice on which to recover VAT and therefore it has no right to claim input tax on these particular transactions. 7.Any recovery of input tax in these circumstances is subject to HMRC’s discretion under VAT regulation 29(2). However, given the low level of commercial checks, particularly in light of what FSA, FATF & JMLSG guidelines recommend, undertaken by CO2e in relation to these transactions (see para14(ii) below) I have decided to deny CO2e’s claim to input tax. This is on the basis that it does not have a valid VAT invoice, Stratex was not registered for VAT at the time of the transactions, the transactions were connected with VAT fraud and CO2e did not carry out a reasonable level of due diligence and therefore we would decline to apply our discretion to allow the input tax.”

“416. The copy of Stratex’s invoice sent to us by CFE shows that Stratex’s banker was Marfin Popolare Bank Cyprus. The invoice does not show a UK VAT number although VAT is included on the invoice. 417. On the basis of the information received CFE has made very few third-party checks such as financial checks from Dunn & Bradstreet or similar organisations. 418. CFE has not provided any: annual accounts, independent references, banking references, checks on Stratex’s director and his background and experience. 419. Despite having no financial information about the company between 18 th May – 3 rd June 2009 CFE did 17 trades totalling €48,882,969. There is no evidence that CFE sought to check with HMRC whether Stratex was registered for VAT. 420. Stratex had only been incorporated on 6 th October 2008 and therefore had no or very little track record. CFE state the business was “no risk” as they did not pay Stratex Limited until they had received the EUAs. On this basis Stratex would have received credit facilities from the trader who sold the EUAs to them. In the case of the trades mentioned above on 28 th May 2009 Stratex would have needed credit of about €13,139,440. 421. Had CFE applies its KYC checks and risk management systems properly and taken notice of the available information it would have been able to identify the fact that Stratex had no financial or trading history, that the director Avi Alkobi was unknown in the field of environmental trading and that Stratex had no permanent premises in the UK, instead relying upon a third party to provide office services. In addition, Stratex were not registered for VAT in the UK, but were charging VAT. CFE also failed to take into account that Stratex could purchase large volumes of carbon EUAs at a price less than CFE could purchase and the payments made by CFE, including the amounts due as VAT to HMRC were to an account at Marfin Popular bank in Cyprus. 422.The 17 invoices that CFE provided from Stratex were invalid because they did not show any VAT registration number on them and could not, because Stratex were not registered for VAT and had never been registered for VAT. Despite the fact that the invoices were invalid under Regulation 14 of the Value Added Tax Regulations 1995 for the reason set out above I nonetheless had the discretion to accept other evidence of the charge to VAT as evidence of the supplies in question having been made and to permit an input tax deduction on that basis. 423. The only documentation that CFE provided me with in relation to the Stratex transactions were the invalid invoices themselves and the due diligence documents listed above. No proof of payment to Stratex was provided by CFE. As set out in my letter of 6 th December 2012 to CFE I declined to exercise my discretion in favour of allowing the input tax deduction because: CFE’s due diligence checks into Stratex were inadequate especially in the light of what the FSA, FATF and JMLSG guidelines recommend. The transactions were also connected with fraud.”

“I have examined a sample of the invoices for all the suppliers in question and (……) the invoices are invalid in that they are deficient in one of the requirements for a Tax Invoice detailed in Regulation 14(1)(d). ………… Officer Ball was then required to exercise his discretion as to whether to allow deduction of input tax based on alternative evidence. Officer Ball has considered allowing deduction based on alternative evidence and decided to refuse deduction (his reasoning is given in paragraphs 7 and 9 of his letter to Tower Bridge GB Ltd of the 6 th December 2012). The invalid invoices issued by Stratex Alliance Ltd are in a different category to the other invalid invoices for which input tax has been denied in that the trader was not registered for VAT. Officer Ball has decided that in this case discretion does not apply and he therefore has not exercised it. Following Policy advice I agree with this approach (but see under the section on MOK as the fact that the Stratex Invoices are Invalid will form part of the evidence available to determine the appellant’s knowledge of the connection to fraud under the section on MOK). In relation to the remaining invalid invoices I have considered the alternative evidence available to Officer Ball and some additional evidence of payment supplied by Tower Bridge following my meeting with representatives of the company and their legal advisors of the 14 th March 2013 and I have concluded that: ………………… Conclusion Officer Ball has correctly denied the input tax in relation to the Stratex Alliance invoices and has correctly exercised his discretion to refuse deduction based on alternative evidence. This element of the invalid invoice assessment will be upheld. The input tax denied is: Period 06/09 £5,605,117.74 Towerbridge has satisfactory alternative evidence to support deduction for that part of the input tax denial based on the fact the invoices are invalid solely on their technical deficiencies (even where they can be shown to be connected to a fraud) and that part of the decision will be withdrawn. The input tax denied solely on invalid invoices was: ……………..”

“Appendix 2 Questions* to determine whether there is a right to deduct in the absence of a valid VAT invoice 1. Do you have alternative documentary evidence other than an invoice (e.g. supplier statement)? 2. Do you have evidence of receipt of a taxable supply on which VAT has been charged? 3. Do you have evidence of payment? 4. Do you have evidence of how the goods/services have been consumed within your business or their onward supply? 5. How did you know that the supplier existed? 6. How was your relationship with the supplier established? For example: • How was contact made? • Do you know where the supplier operates from (have you been there)? • How do you contact them? • How do you know they can supply the goods or services? • If goods, how do you know the goods are not stolen? • How do you return faulty supplies? *This list is not exhaustive and additional questions may be asked in individual circumstances”

“43. In appeals of this kind, the First-tier tribunal should address only the decision which is before it, namely HMRC's decision that, in the absence of the VAT receipts, they were not prepared to exercise their discretion to accept the alternative evidence provided by the taxpayer as to whether there had been a taxable supply. The test that the First-tier tribunal applies in reviewing that decision is the test set out in Kohanzad.”

“120. The respondents say that the appellant’s failure to carry out any meaningful due diligence or commercial checks in a market affected by fraud is a factor in the exercise of its discretion to accept alternative evidence of the charge to VAT. We accept that submission. In such a market we would expect the appellant to have made considerably more effort than it did to satisfy itself as to the identity and legitimacy of persons it was dealing with. The absence of reliable evidence as to the identity and status of the suppliers arises because of the appellant’s failure to carry out any meaningful checks. 121. We bear in mind that the alternative evidence referred to in regulation 29(2) is of the charge to VAT. The questions in Appendix 2 of the statement of practice must therefore be read in the context that they are seeking to establish that there has been a taxable supply to the appellant by a taxable person for which payment has been made. It is evidence to establish the following matters which will be particularly relevant: (1) The identity of the supplier, (2) The nature and extent of the goods and services being supplied, (3) The use to which the goods and services were put in the appellant’s business, (4) Payment for the goods and services. 122. We also consider that the alternative evidence required is evidence to the same level of detail as that which would be contained in a valid invoice, the absence of which gives rise to the discretion.”

“….it is quite unacceptable …to proceed from ‘wrong’ to ‘unreasonable’…History is replete with genuine accusations of unreasonableness when all that is involved is disagreement, perhaps passionate, between reasonable people:”; “’unreasonably’ is a very strong word indeed, the strength of which may easily fail to be recognized.”

“Two reasonable [persons] can perfectly reasonably come to opposite conclusions on the same set of facts without forfeiting their title to be regarded as reasonable…Not every reasonable exercise of judgment is right, and not every mistaken exercise of judgment is unreasonable.”

“We are sure we need take little time describing the conventional Wednesbury test of public law error. Very shortly, the court would ask itself whether the decision in question was so unreasonable that no reasonable public decision maker could have arrived at it. As is well known the test was re-stated by Lord Diplock in the GCHQ case [19] as condemning "irrational" decisions. However precisely stated, the test imposed on the decision maker a duty to make his decision in good faith, to have regard to all and only relevant considerations, and to bring a rational mind to bear on whatever was the issue. This approach informed a judicial review jurisdiction which was largely remote from the merits of the decision under review. The judge might violently disagree with the merits decision; but applying the Wednesbury test he could only strike it down if he were satisfied that it failed to meet the test's relatively undemanding standards.”

“The court must not allow the tests proposed in Associated Provincial Picture Houses Ltd. v. Wednesbury Corporation [1948] 1 KB 223 to be erected into immutable propositions of law. Take as an example the proposition that the decision must take into account relevant considerations and leave out of account irrelevant considerations. In a decision involving the weighing of many complex factors it will always be possible to point to some factors which should arguably have been taken into account or left out of account; even if they should have been, the court should not intervene unless it is convinced that this would have resulted in the decision going the other way. The same applies to an error of law on the face of the record; if the error is fundamental to the decision the court should intervene: but certiorari is a discretionary remedy and not every error of law will justify quashing the decision.”

‘In my judgment CREEDNZ (via the decision in Findlay) does not only support the proposition that where a statute conferring discretionary power provides no lexicon of the matters to be treated as relevant by the decision-maker, then it is for the decision-maker and not the court to conclude what is relevant subject only to Wednesbury review. By extension it gives authority also for a different but closely related proposition, namely that it is for the decision-maker and not the court, subject again to Wednesbury review, to decide upon the manner and intensity of enquiry to be undertaken into any relevant factor accepted or demonstrated as such. This view is I think supported by the judgment of Schiemann J as he then was in Ex p. Costello, to which Mr Luba referred us. That case concerned the degree of inquiry which an authority was obliged to undertake into issues of priority need and intentional homelessness. At p.309 Schiemann J said: "In my view the court should establish what material was before the authority and should only strike down a decision by the authority not to make further enquiries if no reasonable council possessed of that material could suppose that the inquiries they had made were sufficient." This approach is lent authoritative support by the decision of this court in R v Royal Borough of Kensington and Chelsea ex p. Bayani [9], which was concerned with the authority's duty of inquiry in a homelessness case. Neill LJ said at 415: " The court should not intervene merely because it considers that further inquiries would have been sensible or desirable. It should intervene only if no reasonable housing authority could have been satisfied on the basis of the inquiries made."’

“The general law as regards the duty of a public decision-maker to take relevant considerations into account is well-known. (1) If the operative statute provides a lexicon of relevant considerations to which attention is to be paid, then obviously the decision-maker must follow the lexicon. (2) If however the statute provides no such lexicon, or at least no exhaustive lexicon, then the decision-maker must decide for himself what he will take into account. In doing so he must obviously be guided by the policy and objects of the governing statute, but his decision as to what he will consider and what he will not consider is itself only to be reviewed on the conventional Wednesbury principle…”

“HMRC were wrong to refuse to allow the input tax in respect of the invoices which were invalid because they did not include a VAT registration number and discretion should have been exercised in accordance with the Statement of Practice so as to allow recovery.”

“Officer Ball has decided that in this case discretion does not apply and he therefore has not exercised it. Following Policy advice I agree with this approach (but see under the section on MOK as the fact that the Stratex Invoices are Invalid will form part of the evidence available to determine the appellant’s knowledge of the connection to fraud under the section on MOK). ………………… Conclusion Officer Ball has correctly denied the input tax in relation to the Stratex Alliance invoices and has correctly exercised his discretion to refuse deduction based on alternative evidence.”

“51. We have been able to decide this appeal by reference primarily to evidence dealing with the background to Officer Ames’s original decision. However, it does seem to us that, by virtue of s16(1A) of FA 1994, the right of appeal is against a relevant decision , not against a particular decision letter . Moreover, the effect of s15F(5) of FA 1994 is that, following a review, there is not a fresh “decision”, but rather the original “decision” is upheld, varied or cancelled. Therefore, we consider that in principle, where an HMRC decision is upheld following a review under sections 15A to F of FA 1994, the Tribunal is entitled to have regard to the way in which the review decision is reached as the appellant’s appeal is against the “decision” as it stands following completion of the review process. 52. Support for this view can be found in s16(1C) of FA 1994. As we have noted at [43], this provides that where HMRC are required to undertake a review in accordance with s15C of FA 1994, a taxpayer is not able to appeal to the Tribunal until the outcome of that review has been communicated. This can only be because Parliament regards the outcome of the review as being relevant to the Tribunal’s assessment of the “reasonableness” of the “relevant decision” as a whole. That, moreover, is consistent with common sense since if, following a review, a decision to refuse approval is varied so as to become a decision to grant approval but subject to conditions, a taxpayer should be entitled to challenge the “reasonableness” of the decision to impose conditions. 53. Of course, common-sense will have to prevail. If it is clear in all the circumstances that the review has simply resulted in the original decision being upheld for precisely the same reasons, it may well be that detailed evidence on the review is not necessary. However, there will be cases in which the process by which the review decision is reached is relevant.”

“17. For supplies of goods not listed at Appendix 3, claimants will need to be able to answer most of the questions at Appendix 2 satisfactorily. In most cases, this will be little more than providing alternative evidence to show that the supply of goods or services has been made (this has always been HMRC's policy). ………. 19. As long as the claimant can provide satisfactory answers to the questions at Appendix 2 and to any additional questions that may be asked, input tax deduction will be permitted.”

“ 19. Furthermore, counsel submitted….The FTT had failed to take into account the fact that there was a real and obvious risk of fraud in that the VAT invoices made out to the Named Purchasers could be used in order to make duplicate claims for the recovery of the VAT shown on them. That risk distinguished this case from one where no VAT invoice had been issued at all. ……………… 22. Finally counsel submitted that, in addition to the real and obvious risk of fraud mentioned above, the FTT had failed to keep in mind when assessing the Commissioners’ decision that: (i) the rule, as a matter of both EU and UK VAT law, is that without a valid VAT invoice there can be no input tax deduction; (ii) the use of the discretion in regulation 29(2) involves creating an exception to that rule; and (iii) it is therefore entirely reasonable for the Commissioners to insist on strict adherence to that rule unless and until the taxpayer can demonstrate that why an exception to it should be made…… 23. In my judgment the FTT erred in law in reaching its conclusion for all of the reasons given by counsel for HMRC…… ”

“120. The respondents say that the appellant’s failure to carry out any meaningful due diligence or commercial checks in a market affected by fraud is a factor in the exercise of its discretion to accept alternative evidence of the charge to VAT. We accept that submission.”

"The guidance does not apply to situations where HMRC may deny recovery of input tax for other reasons such as abuse of the right to deduct."

“EUA transactions in 2009 reached US$118.5 billion (€88.7 billion), making the EU ETS the largest existing carbon credit market. Over 6.3 billion tons of CO2e changed hands in 2009 through spot, futures and options contracts. A substantial portion of the growth came from the spot market, which totalled 1.4 billion tons, an increase of 450% over 2008. Over 70% of spot transactions occurred during the first half of the year… Spot volumes in the first half of 2009 increased 75-fold over the year-earlier period…”

“72. The European VAT authorities first became aware of the fact that VAT carousel fraud was being committed in relation to CO2 allowances in May 2009. VAT carousel fraud was particularly pronounced in France and the UK during the summer and both countries therefore chose in different ways to abolish VAT on allowance trading without prior approval by the EU. 73. On 30 August 2009 SKAT recommended to the Minister for Taxation that Denmark requested the EU to approve an amendment of the Danish VAT rules to eliminate the risk of VAT carousel fraud in Denmark.”

“4 VAT fraud in carbon trading Extremely large scale fraud Between the third quarter of 2008 and June 2009, VAT fraud in the carbon trading market developed in France, undoubtedly involving the highest amounts ever detected by tax authorities. The Cour des Comptes estimates the tax loss to the state from this fraud as €1.6 billion. The scam was halted only after the administration issued a tax instruction on 11 June 2009 exempting carbon quotas from VAT.”

“( 1) identifying the customer and verifying his identity; (2) identifying the beneficial owner, where relevant, and verifying his identity; and (3) obtaining information on the purpose and intended nature of the business relationship. The JMLSG Guidance recognised that in some situations this may be self-evident: see para.5.3.21 of the Guidance .”

“(1) full name; (2) registered number; (3) registered office in country of incorporation; and (4) business address. For private or unlisted companies the following additional evidence is required: (5) names of all directors (and equivalent); and (6) names of individuals who own or control over 25% of the company's share capital or voting rights .”

“Until now CantorCO2e has operated as an execution only broker. As such it has only been able to match buyers and sellers that have a pre-existing legal relationship with each other. This has limited the scope of CantorCO2e to expand its client base as it has been unable to offer a service to the many infrequent users of the market (non-professional compliance traders). These infrequent users of the market currently have very limited access to the market. Their only route to market presently is either via their bank or their energy provider, and they are being offered very uncompetitive prices but have no choice because of the compliance nature of the market. Cantor CO2e will seek to capture this untapped potential of the market by evolving its business model from execution only to a matched principal business. The matched principal business will be channelled through Cantor Fitzgerald Europe (primarily because of their FSA status that allows them to hold client money and assets but also because of their superior balance sheet which provides comfort to clients…. By virtue of Cantor Fitzgerald operating as a matched principal in future, the parties to any trade will all be matched with Cantor Fitzgerald rather than with each other. This removes the requirement for the buyer and seller to be contractually related with anyone other than Cantor Fitzgerald. By deploying this methodology CantorCO2e will be opening the doors of the market to all those companies that were unable to access in directly in the past. This ought to provide CantorCO2e with liquidity that is not being seen by any of its competitors.”

“7. Mr Drummond had equity in CantorCO2e, LLC and he wanted to use this to raise money to fund the purchase of the house, but there was little value in the equity because the company had sustained significant losses over a number of years and it was envisaged that this would continue over the short to medium term.” “19. …I did not expect CantorCo2e, LLC to do well in the short term…” “28. I recall that I did have some high level discussions with Mr Rose about a potential new compensation structure for the CantorCO2e group business. I believe this was in the early part of 2008. The business had been suffering from significant losses and was not covering its costs. Mr Rose came to me to discuss possible options for restructuring compensation in a way that would help motivate the employees to produce revenue….”

“As agreed on the phone we confirm our interest to buy or sell EUA allowances on the spot market so please can you give me the procedure to trade with you and also your delivery your commissions…”

“I understand that March ties into some sort of EUA higher volume month. So although this is great it’s not necessarily a permanent thing?”

“Nice, huh? I have never run a non-profitable desk… Problem for the last 3 years at Cantor, I wasn’t really running the desk or allowed to use my initiative. I hope Howard does the right thing. It’s in his interest to keep us motivated …”

“’BlueNext and the Vat Scammers’ … It IS a title for a discussion on the recent flurry of trading activity that has many suspicious elements, but no one can quite put their finger on it. And the only ones that seem to be interested in it are a bunch of financial regulatory Frenchmen with the investigative power of Inspector Clouseau from the Pink Panther Movies. However, I do not expect the ending will be amusingly happy as in the Pink Panther movies, with culprits behind bars and the imbecile/hero getting the lovely girl at the end. Rather, I am worried that the integrity of the EUA market in the whole of the EU will decline suddenly and become a market full of money laundering menaces, devoid of even the most basic controls: a breeding-den for corruption that will cost the European union billions of Euros. So what am I referring to? First let’s look at the EUA… … And nowadays, in France, this seems to make it ripe for a further level of abuse: VAT scams. VAT scams work like this: if an invoice is issued in one EU? Country, the payer in the same country has to pay the invoice with the additional 10 to 20 percent for VAT. But if the paying party is in a different country, there is a double taxation clause which means they are exempt from paying VAT. And if you are able to do false invoices from country to country, in some connected ring, then there is a chance that one link will fall away and the 10 to 20% will never be seen again by the collective states of the EU ever again. A few years ago this was used for real factory orders. Now, it is believed that the transactions will be used with EUA movements. But are all these transactions originated by real purchases of EUAs?...I think not. It could also be a function of money laundering. The movement of the EUA is actually done within minutes by a simple internet website transaction… But what is the proof you ask? All I have seen thus far is anecdotal evidence and I am hoping to provoke the real investigators into action after they read these: 1. Recent volume on Bluenext has increased significantly, and it was thought that it was the reaction of selling compliance companies looking to cash in on surplus sales as the market decreased in value since December 2008 (a valid argument) or even perhaps the tightened credit lines that have affected all areas of finances have also constrained forward trading lines and even cash deposits for futures trading, making more transactions move to the spot market (also a valid point). 2. And a recent drop in fees for BlueNext to draw in more business (very, very low costs). This isn’t a factor that is suspicious, but shows that the procedural costs to scams also dropped a lot. But these don’t answer all the curiosities. 3. Recently a spate of Frenchmen have been opening new and newer accounts, seemingly replicating themselves. This is similar to some poorly regulated IPO market seekers that wanted better allocations. But why would a large bunch of Frenchmen open accounts with an inept Dutch trading house with no regulatory control, or with starved-for-business English brokers, only to trade BACK into the French exchange? 4. A few investigations have arisen lately regarding some specific deals in the market, asking the brokers if they had the correct KYC (Know Your Client) Documents. KYC is basically due diligence that hopefully avoids money laundering and perhaps even terrorist money, as well as making it more difficult for tax avoidance. 5. The administrators of BlueNext have been unusually tight lipped lately, when asked about volumes and procedures. As a trader with 20 years of experience in a wide range of securities, my instinct says they are hiding something: the response claiming confidentiality and ‘anonymity’ rang hollow in my opinion. I believe that they are undergoing some sort of internal and external investigation and are well scared of the result. … A final thought, should efforts be made to delve further into the origin of this surge in activity, I suspect we could see precipitous drop in volume on the BlueNext. Note to self: Look further into compliance activities and oversight of the exchange and trades of carbon credits.”

“…it provided further confirmation to me that the increase in trading volumes experienced by the EU Carbon Desk was consistent with the wider market .”

“ Spot euas is a great business...easy and huge mkt .”

“AL: I just wanted to tell you that about the VAT number I don’t have it yet but promise to you I will send it to you as soon as possible. EW: Yes, no problem at all. AL: And I wanted to tell you that as you are a UK company we are too a UK company I think it’s not a problem if I don’t have it just now, but I promise you I will send it as soon as I have it, okay? EW: Okay that’s absolutely fine…”

“It is very important that you provide us with your VAT number, otherwise we won’t be able to pay you tomorrow. This is because CantorCO2e includes 15% tax in the payment and then CantorCO2e reclaims this tax from the U.K Government. Please try to get hold of the number as soon as possible. It was good to do the first trade with you!”

“…This is because we do not have your VAT number and so CantorCO2e cannot send out the 15% of VAT without any guarantee of being repaid. This is in fact not a problem for two reasons: - If you have a VAT number, you would need to send that 15% VAT to the U.K. government in any case. Therefore Axle Ltd is not losing anything if we send you the above sum of money. - When you do provide CantorCO2e with a VAT number we will be able to pay you the accrued VAT…”

“As requested our vat number is 915 7270 21, please proceed with paiement now and send me copy of the swift so I can send you more allowance for trade today. Also I ask my back office to go ahead with adding the vat number in all the invoices did to you. Finally for your information my back office confirm to me that sales within the same country do no need vat number for invoicing and collecting the taxes…Anyway were following your policy.”

“Caller wished to verify a VRN – 915 7270 21 [Epicure] – valid number – name and address incorrect 893 9840 57 [Adduco] – valid number – name correct – address not provided. Also advised called on invoicing prior to receiving VRN but after EDR. Caller also wished to verify a further 12 VRNs. Spoke to Tech who advised to pass as a call-back. Caller said he will ring back to verify numbers later today.”

“Thank you for the VAT number that you sent. However it appears to be incomplete. A VAT number has two letters at the beginning…Please send me a complete VAT number for Westis Ltd. Also, may I correct your back office who seem to have misadvised you. As a matter of law, if you are invoicing for VAT then the invoice must also contain a VAT number. If there is no VAT number on the invoice then we cannot pay you VAT and you will need to send us a new invoice without the VAT element included. Since the invoices that you have sent us to date do not have a VAT number on them, we should not have paid you VAT on those invoices. As a result, the current situation is that we have overpaid you on past invoices and will need to make an adjustment in relation to the amount that is outstanding today. If however, you are able to amend and resend all of the past invoices to include your complete VAT number then no adjustment will be made. Please confirm how you would like us to proceed.”

“Sorry GB 915 7270 21 Ok I will send you all the invoices again but please in the mean time process with paiement due. I try to send all invoices corrected with the vat number within 3 hours.”

“There is a problem with these invoices. The VAT number that they contain is not registered to Westis Limited. Either the VAT number is wrong or else the invoice needs to be made in the name of the company that has that registration number. Please amend and resend accordingly.”

“Dear james, As discuss please find all set of document of Epicure business solutions limited owner of the vat number GB 915727021. I will send you all amend invoices in the next 30 mns, please start proceeding in order for us to have the paiement made today.”

“It has been claimed by Westis that the VAT number they supplied was a group number for Epicure Business Solutions Limited with themselves being part of the group. There is no available evidence to link Westis with Epicure, as Franck Stork is sole shareholder of Westis. Also there is no mention of Franck Stork or Westis in the available company information.”

“On 3/6/2009, James Emanuel, a CantorCo2e Limited manager, forwarded an internet blog concerning spot EUA trading on the Bluenext market and a VAT fraud. Further investigation by the Legal and Tax department raised suspicions about a number of CantorCo2e clients, Westis Limited being one of them. It was found that Westis Limited had supplied a UK VAT number for another entity (Epicure) claiming that this was their parent company. No evidence could be found for this. AT 8/6/09, €2,781,133 VAT had been paid to Westis, although €3,987,165 was still being held on account by Cantor leaving Westis owed €1,206,031 by Cantor. The account has been frozen pending further legal and regulatory reports.”

“IMPORTANT please make NO payments today from our blotter until we give you the green light to do so.”

“There is no documentation in this information pack that states that Westis Ltd is part of a group owned by Epicure as you told me earlier. Please provide me with evidence of the group if my understanding is correct. If not, due to money laundering legislation, we cannot retrospectively change past trades into the name of Epicure Ltd when payment has been made to a bank account of Westis Ltd when there is no evidence of a relationship between the two companies. One possible solution is that we approve Epicure as a client (subject to due diligence, etc) and then book these trades in the name of Epicure then we will need to make payment on those trades direct to Epicure. As such, Westis will have to return all money that we have paid to it to date, we will cancel the trade booked to Westis and we will then pay that same money to Epicure. Please confirm that this is agreeable to you and I will seek the necessary internal approvals for this to happen.”

“please find attached the share certificate that is evidence that Westis belongs to Epicure Business Solutions, you will also find attached minutes and form j30. Also my agent would like to speak to you in order to arrange agreement with the 3 parties for resolving right now the problem and for you to be able to pay those 2 invoices immediately in a legal way.”

“I am seeking approval to make payment of money without VAT as you suggested. … This issue has taken up my whole day so far and as a result of having paid you VAT when I shouldn’t have paid you VAT I am also fighting to keep my job. I am sorry if this is not happening quickly enough for you, but honestly this problem was created by you claiming VAT when you were not registered to do so. As a result you will have to allow us to sort out the mess that has been caused and that will take as long as it takes. Hopefully it will be resolved on Monday.”

“Find attached draft made by my agent, apparently you didn’t find the time to call me. I sent you the evidence that you asked me and I tried to reach you all day, I will appreciate that you call me ASAP, also our lawyer ask me how you clear companies that don’t have vat number and paid them the vat, so apparently we are not the only one that made mistakes, hopefully I believe that we can find a solution together with the help of the holding so take a quick decision on my paiement, without answer from you we will understand that you don’t wanna pay and that you are trying to keep money that on one side is states money and on the other side is our client money and we will proceed and react on it.”

“…I think that you want easily put the fault on our side, cantor is one of the biggest finance company and is not my fault if your clearance department never asked us vat information, as you can notice, as soon as you realise YOUR mistake we immediately react and sent to you required information. You are the one hiding from the phone and the responsibility, I would like you to phone me to know the position of cantor before us to take any decision, we are not worry about scandal as we are not publicly known but we are worry about not paying our client for 3 days. The draft agreement sent to you before is a legal way for you to be covered and to pay us our due.”

“Where a company has purchased any goods or services in good faith from an unconnected business, and holds a tax invoice from the supplier showing a valid UK VAT registration number, there should in principle be no problem in covering the VAT on your return, even if it is subsequently discovered that the supplier did not pay the VAT over to HMRC. If you checked that the VAT number on the invoice is genuine I can confirm that you would not normally be expected to carry out further checks in order to prove (for example) that the VAT number quoted on the invoice belongs to the person or organisation to which the payment was made; indeed, there is no easy way for any taxpayer to do so. … … Optigen – Case C-354/03) considered the position of an innocent party in a supply chain where MTIC fraud took place. In Optigen the court ruled that “the right to deduct input VAT of a taxable person who carries out such transactions cannot be affected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is vitiated by value added tax fraud, without that taxable person knowing or having any means of knowing.”

“I had several conversations with CantorCO2e during the following weeks and my primary contacts were Steve Treanor and Mark Cooper, the General Counsel for Europe and Asia. My recollection of these conversations is that the business was aware that they were dealing with new entrants to the EUA market. However, they were unable to tell whether the anomalies on VAT invoices which they had discovered had arisen from a lack of business sophistication and back office functions or whether their counterparties might be in fact involved in VAT fraud. The suppliers were saying that their main concern and driver for their threats of legal action was the effect on their cash flow - if CFE withheld the VAT they would be unable to pay their own suppliers and would be placed in financial difficulty, for which they would blame CFE. Until there was clearer evidence of fraud, there was no assumption that CantorCO2e’s supply chains might be tainted by VAT fraud. As a result, the principal focus of my advice was on the requirement to obtain a valid VAT invoice in order for CantorCO2e to recover its input VAT and, subsequently, on the question of whether HMRC might exercise their discretion in favour of CantorCO2e’s claim for recovery if the suppliers were unable to rectify their invoices.”

“28. Following checks carried out by CO2e by the end of Friday 5 June 2009, the counterparties appeared to break down into a number of separate groups at this stage: (a) There were those who appeared to be validly VAT registered, whose VAT registration numbers had been checked. These were: - GW Deals; - AH Marketing; - Northumberland Consultants; - ADE International Limited (“ADE”); - Mettec; and - Duntai. (b) There were four businesses who had not supplied any VAT information on their invoices, meaning that it was not possible to confirm whether they were validly VAT registered. These were: - Stratex; - Axle Limited (“Axle”); - BMC; and - Aristo Partners Limited (“Aristo”). Of these four, Cantor CO2e was potentially financially exposed to Stratex and Axle. However CantorCO2e held sufficient funds on account to cover any potential liabilities in respect of trades with BMC and Aristo. Of the remaining counterparties, Adduco had provided an invalid VAT number on their invoice. Westis Limited (“Westis”) had provided a VAT number which belonged to another entity, Epicure Business Solutions Limited, which Westis had stated was its parent company…”

“BlueNext – the biggest exchange for spot carbon transactions, said it halted European Union emissions permit trading in Paris today. The exchange plans to make a statement to members shortly,…”

“Dear John, Find attach the 5 invoices that haven’t been paid, please provide copy of the swift this morning so I can send you 300k that we will have to sell today. Also my accounting department asked me to re-do all the past invoices with our vat number on it, so I will send them to you in 5 minutes, please replace the old ones with them in your files.”

“I am glad that I had spoken with you, this morning and that you found the solution of the problem, please confirm to me per return if the 2 unpaid invoices will finally be paid on westis or epicure business solutions for to forward your mail to my back office. Also don’t hesitate to contact me if you need any help from our agent to make agreement or paperwork for your accounting, and please let us know which will be the 26 invoices that you will keep in files for us to keep the same in our declaration of taxes.”

“Dear john, find attached all the invoices where we ad vat number on it, please replace with existing one, also please send me copy of the swift of Friday deals. …”

“There is a risk of VAT carousel fraud so as a preventative measure, we are changing the VAT regime on (emissions exchange) BlueNext’s transactions… There has been no evidence of VAT fraud. It is only a rumour…but it could have potentially hurt BlueNext’s ability to compete, so we had to react.”

“Through carousel fraud, also called missing trader fraud, fraudsters import goods VAT-free from other countries, then sell the goods to domestic buyers, charging them VAT. The sellers then disappear without paying the collected tax to the government collection agency. Emissions traders said rumours were circulating that a recent surge in volumes in European Union emissions permits traded over BlueNext, Europe’s main exchange for spot permit trading, were suspicious. “Part of this volume was sound, coming from the market expanding and new players entering, but a share of it might be hard to explain,” said one emissions analyst. …”

“I have been investigating the issue of your payment today. It seems that the delay has been caused today because we have surprisingly received a new set of invoices from you today in respect of prior deals. We now need to compare details of all invoices with all records on our files in order to ensure that we have reconciliation with prior invoices and with out [sic] systems…”

“As hinted at in my earlier post, there seems to be a real VAT problem in France. I did not claim to have all the details, but it seems that VAT is a factor. And if I am correct, the main victim was the Le Ministere du Budget. … But to what extent are they victims? It is thought that the last leg of the VAT scam would be when the last player in the chain claims the money back from the government. And going by the amounts traded over the last few months (daily 4 to 8 million, and one day over 19 m) it can be assumed that there is now a very big snafu in the Budget Ministry. But as I say, I am not sure of these details and would APPRECIATE any emails with theories. I must add that my peers simply have a contemptuous view of Bluenext on normal days, and this would only compound the contempt. Also, it seems that reporting on this has been taboo. Methinks I must be more prudent before levelling accusations. In the end, however, it is hoped by many that the carbon trading will rise above these manipulations and become a bit more transparent.”

“I understand we may pay out BMC today (14mUSD). Howard [Lutnick] has asked for us to confirm directly to him that there is no risk in doing so. Please can you double check VAT registrations with HMRC, invoices etc. Also I would like written advice that paying out to someone who checks out ok but subsequently does not pay HMRC does not expose us to a claim from HMRC. We are on notice that there may be an issue in the market and these are big numbers.”

“JB: Yes, I’m alright. So how’s things, are you looking to do some trading with us today? Are you going to send me loads of allowances? EA: I don’t think to be honest with you (Inaudible) I don’t think. JB: Why’s that? … EA: No problem to do this because the new law, because of the new – I have to search everything with my (inaudible). So for one month we don’t send. JB: Okay …”

“… On 3/6/2009, James Emmanuel, a CantorCo2e Limited manager, forwarded an internet blog concerning spot EUA trading on the Bluenext market and a VAT fraud. Further investigation by the Legal and Tax department raised suspicions about a number of CantorC02e clients, Adduco Consulting being one of them. It was found that Adduco Consulting had supplied an invalid UK VAT number after trading. At 8/6/09, €6,075,931 VAT had been paid to Adduco exposing Cantor group as this could not be claimed back. The account has been frozen pending further legal and regulatory reports.”

“Please see the attached invoices that you have sent to us. Please would you explain what they relate to. We did not execute these deals for ADE International Ltd.”

“Dear Emmanuel, sorry this was a mistaken invoice that we sent you with all invoices but that was not trade, please disregard them. …”

“FW: Business Management Consulting Ltd” and simply states “I will call you to discuss. ”

“Will you please re-issue these invoices with the words CANCELLED across them. They appear to be Westis trades. Could you please explain how ADE International are related to Westis Ltd? Would you please disclose any other companies in the carbon market to whom you are affiliated?”

“It is curious that you say you are not affiliated to any other company working with us because your invoices are exactly the same, with the same spelling errors as four other companies. The only difference is the company logo at the top. How would you explain this?”

“Dear james, what do you mean by affiliates companies, we have no lien with those companies, I am ADE international limited and that s’it, I am worry just about ADE and my paiements in order to be able to pay my clients and maybe be able to keep working with you if you assure me that this kind of problem will not happen any more.”

“JB:…Don’t send those allowances at the moment, I’ll call you back. Something’s going on at the moment, I’ll call you straight back, all right? ME: Problems? JB: Yes, there’s problems, okay. I’ll call you back in a short while but don’t send me allowances at the moment okay? …”

“ We have not chosen to determine whether the VAT number is valid to Northumberland Consulting Ltd as the concern is that if it isn’t then we are on notice and would have to account for the overpayment . WHAT IF ANYTHING ARE WE DOING WITH GW DEALS LTD AH MARKETING?”

“JE:…I mean, the issue for our guys is this, we’re obviously paying out VAT to you. MA: Of course, and we’re paying it out as well, yeah I know. JE: You’re paying it out the other side and you’ve got to account for it to HMRC. Now if for whatever reason that chain breaks down then there’s a chance that HMRC come to us and say, “Right, you know, you’ve got the VAT liability.”

“Following this email we are not doing any matched principal trades until we receive explicit instructions to do so. My feeling is we get comfortable with our process first and settle all outstanding trades before entering into new ones. We have already refused to accept allowances to sell from two clients: GW Deals and Mettec.”

“Laurence, I spoke to Avi at Stratex at approximately 09.25 this morning. He assured me he would be sending me his VAT application today, and also that he was very happy as he had signed contracts for three million tonnes of spot EUA’s which he would be bringing to the market in a week to ten days”

“For the record I took the liberty of checking the ADE situation with our external adviser Martin Sharratt. Considering all the circumstances, as discussed concerning the company address and so on, he agreed that there was no technical tax reason why the company should not be paid.”

“Please don’t make any payments to Aristo Partners or Axel or Westis before speaking to me” saying: “I don’t believe that we have the green light to pay any of these yet anyway. However, if the green light is given, we need first to offset past overpayments against money currently owed. The blotter doesn’t reflect that so we need to speak before payment is made to any of these companies.”

“I apologise for the inconvenience of the last few days, but from a legal and regulatory perspective it was unavoidable. We are now back to business as usual and as a gesture of goodwill we would like to offer you the ability to use CantorCO2e today FREE of brokerage charges.”

“James you do not have authority to approve any release of payments or emissions units to external clients, the procedure, which should have been made crystal clear over the last 48 hours is thus: 1) Outstanding settlements/Obligations Customer Wire transfers must be approved by:- Finance and reconciled by Financial Control, Blotter vs Client invoice and sign off Tax – Check all data vs HMRC web site or phone call and validate format and authenticity of invoice from client and sign off Legal – Double check all of the above and sign off Operations – check all data and approve wire or registry release and sign off All authentication data to be held by Mark Morris 2) New Trades 1 – Laurence Rose must approve Client and Trade 2 – Wayne Buchan or delegate must approve any free of payment or Emission transfer instruction 3 – Tax validate invoice 4 – Operations release Cash or Units We must have a meeting today to close out these procedures I have a draft Operations check point which I will distribute we need a new AML/KYC/Onboarding procedure from Compliance/Credit/Tax before any new customers can trade. Operations Management I must sign all CO2e payments do not release anything without my approval respond to this mail as confirmation of this.”

“Things looking fairly positive mate we’ve paid out to bmc/duntai/ade stratex claim they are sending VAT application docs today, and we have hmrc on tape telling us adducos VAT number was ok. Stratex also claim to have 3 mio tonnes to do in the next 10 days, so fingers crossed….”

“We could get through this after all, if we do lets go pound some beers. If we sign off on all these guys, will we be paid out?”

“Haven’t thought it appropriate to ask about bonio at the moment !!! but I absolutely believe we should be if we get through this with money intact, and then lets go pound some beers.”

“EW: Right, okay, that’s one thing. So were you aware that – do you remember, like, the discussion we had last week about the VAT number and whether we can invoice you? Okay, so what’s happened us in the last week – I don’t know if you are aware that with Blue Next – and there’d been these VAT issues in France and all this stuff and Blue Next closed for a few days. AL: Yes. EW: What’s happened is that our back office has – well, we obviously spoke to the back office to let them know about it and they’ve just been looking through, well people’s VAT status and things and they’ve become a bit more strict. What happened last week is they said, “Well, if you promise that you’re going to give us the VAT number in the future we can then invoice you with the full amounts”, but because there are now these issues they’ve become very strict. So what we have to do, I’m afraid – and we can’t change our position on this – is to do what we originally agreed which is that we can now only charge you less VAT until you provide us with a VAT number. AL: Oh. So it means that you cannot send me the totality but just less the VAT because you don’t have the VAT number? EW: Yes, because this is such a new market the spot market and, you know, traditionally we’ve dealt with let’s say bigger, bigger companies that I guess the whole procedure has been a bit more relaxed but in the last week because – and therefore historically we might have been able to, I guess, give some sort of leeway, some sort of benefit of the doubt, you know as we did last week. Because of this whole thing has changed, you know, with Blue Next closing down for a few days this week …”

“To confirm HMRC checks today AH Marketing and GW Deals checked exactly the name, number and address per their invoices. Northumberland – VAT number checks against the company name but not against the address on the invoice nor the address on Companies House I suggest that we therefore need to validate further who/where they are. …”

“ADE International already told us voluntarily that they are in the same offices as Westis when they wanted their money and asserted that they knew that we were holding the money of others too. They used the same incorporation agent and share an office infrastructure apparently in the same way that many UK trading houses provide a trading environment for individual proprietary traders. This explains the common invoice style.”

“If a SAR is made no further action should be taken on the account including the receiving of additional credits without informed consent. This would extend to accepting further credits for the affected accounts as we may be caught by s329 of POCA.”

“ Findings All the UK accounts have only recently been opened with CFE. Most of companies comprising one individual who is the shareholder of the company and in many cases the individuals are resident in France. Westis Ltd, Stratex Alliance Ltd and Aristo Partners Ltd are operating from the same premises. Separately Adduco Consulting Ltd, Business Management Consulting Ltd and Northumberland Consultants Ltd also operate out of the same premises. Several clients have bank accounts in Marfin Popular Bank Co Ltd, a listed registered bank in Cyprus (Westis and Adduco). Volumes traded are on context albeit at the upper end. These firms are often set up by sole traders and therefore the trading activity being undertaken which of itself is not suspicious.”

“ INVALID VAT NUMBER SUPPLIED Adduco Consulting Limited Became invalid around time of trading was dormant company [written in Mr Taylor’s handwriting next to the name of the company]. …. Sole director and beneficial owner is a French national, Mr Eric Agnard…The company is registered to the same address as Axle Ltd and Northumberland Consultants Ltd. … Company filed dormant accounts: 31/10/2007… ….The client is insistent that the VAT number provided was valid and expressed surprise when told that HMRC had indicated otherwise. On the 11 June client stated he was going look into the matter and respond. When we first spoke to HMRC about the validity of the VAT number on 3 June they confirmed that it was a valid number assigned to Adduco Consulting Ltd. However, when HMRC was again contact(ed) on 4 June they stated it was invalid. It would appear that there is a delay with the HMRC computer records being updated and accordingly it was possible that the VAT number was valid on 3 June but not on 4 June. We understand that if quarterly returns are not filed with HMRC the VAT number becomes automatically invalid. We are aware that Adduco was dormant for a while and this might be a logical explanation for the confusion.”

“ VALID VAT NO. SUPPLIED BUT FOR PARENT COMPANY Westis Ltd … Sole director and beneficial owner was a French national, Mr Franck Stork. Westis. The company is registered to the same address as Stratex Alliance Ltd and Aristo Partners Ltd. We received invoices including the VAT consideration but without any VAT number. On speaking to the client he stated that he had a valid VAT number and come back with the details. We investigated the details and HMRC confirmed it was valid but not against Westis Ltd. We consulted the client who stated that it was the number of his parent company Epicure Solutions Limited which had bout Westis Ltd on the 9 May 2009. Client submitted Tax certificate of Epicure Solutions and resubmitted the invoices in that name… JE is uneasy about this client.”

“ NOT (sic) VAT INFORMATION SUPPLIED Stratex Alliance Ltd …Registered to the same address as Aristo Partners Ltd and Westis Ltd. Owner of the company is Frank Stork resident in France. We have paid VAT to the amount of €6,376,039 but the client is not VAT registered. We called the client on 10 June asking for his VAT number and the client said he would call back which he didn’t. We again called the client and he stated that the VAT application was currently with HMRC. Client seemed nervous when discussing his VAT status. We phoned the client again to discuss business and the client volunteered a discussion on his VAT status reminding himself that he still owed us a document. Client stated that he was in the process of concluding several deals in Romania implying that there would be a number of credits for us to sell on his behalf.”

“…Registered to the same office as Adduco Consulting Ltd and Northumberland Consultants Ltd. Company owner Maxime Arlani, a French national…Company has only being trading with us since 3 June. … As the first day of trading was also the day we received the blog the invoices were scrutinised in more detail and it appeared that the invoices contained no VAT number despite including the VAT consideration. The client stated that he was registered but subsequently came back to the broking desk and confirmed that he had made a mistake and that the VAT application had been made. However we had already paid the invoices. …”

“…Registered to the same address as Stratex Alliance Ltd and Westis Ltd. Owner of the company is Anthoiny Muthot resident in France….Business consider client incompetent. The invoices received contained no VAT number and we became more conscious of the VAT situation once the blog was issued on 3 June 2009. The client indicated that they had a VAT number and would look into it which they did stating that a VAT application had been made…”

“ VALID VAT NUMBER BUT NOT CONFIRMED WHETHER IT IS ASSIGNED TO CLIENT Northumberland Consultants Ltd We haven’t confirmed [in Mr Taylor’s handwriting next to the company name] …The company is registered to the same address as Adduco Consulting Ltd and Business Management Consulting Ltd. Owner is a French national Yamina Berrehill. We have paid a total VAT consideration €3,431,994. Client has a valid VAT number but we are unable to confirm whether it belongs to the client. Legal advice has stated that the VAT invoices don’t strictly contain the correct information (for example should show a currency conversion where relevant in order that the VAT consideration is show in sterling. We have not chosen to determine whether the VAT number is valid to Northumberland Consulting Ltd as the concern is that if it isn’t then we are on notice and would have to account to the HMRC for the over payment. WHAT IF ANYTHING ARE WE DOING WITH GW DEALS LTD AH MARKETING?”

“ Proposal [Based on the information gathered and taking into account the reporting obligations, I believe that there is sufficient foundation to submit a suspicious activity report in respect of [ ]. Informed consent will be requested to continue to accept credits for trading and in the case of [ ] also to release the net surplus funds.] Recommendations Enhanced Customer Due Diligence is recommended for the business on the basis that carbon emissions credits are subject to VAT and the fact that credits are in bearer form. Further given the nature on many of these clients involve one trading companies it would be appropriate to apply the same requirements imposed on applicants from individuals. It is also recommended that the client take on process be formalised for the CO2e business. Changes to the confirmation and disclaimer language have been made to provide clarity on the roles of CFE and CO2e. New rules around permissioned trading of Spot credits have been introduced to ensure that we are either always flat or have a net VAT surplus from the matched principal activity.”

“I have spoken tonight with MC [Mark Cooper] to bring him up to speed with my thoughts on whether we have to report anything to SOCA. He told me there were further updates from the work you have been doing today which may well alter the situation for me. Please can we catch up tomorrow?”

“1) Westis Ltd is wholly owned by Epicure Business Solutions Ltd. 2) Epicure Business Solutions Ltd as per the agreements in place can invoice on behalf of Westis Ltd. 3) Westis Ltd is entitled to use the Group Vat registration of the Group which currently Epicure Business Solutions Ltd is the responsible member. 4) Epicure Business Solutions Ltd VAT number is 915 2720 21.”

“Just keeps things cloudy. No clarity.”

“HMRC will use the questions set out in the guidance as a starting point to their enquiries, in particular those questions dealing with how the client relationship came into existence and what checks were carried out before setting them up as a client and/or before paying them large sums of money. I would therefore advise that before contacting HMRC we ensure that the facts are clear and we have the answers to the questions listed .”

“Hi Wayne. I would like your group to do credit checks on the attached list of CO2e clients [which contained all of the impugned suppliers]. Until I hear back from you on this, I will not be approving trading for these clients (with a few exceptions). …”

“I would like to meet with you in the morning to discuss strategy going forward. In the interim, please do not execute any matched principal EUA transactions (except in the unlikely case that we receive orders for any of the 3 clients with exposures – you may transact that business).”

“ Anything happening? Aducco, stratex, numberland? Wholesale? ”

“ AH wanted to send us more to sell We told them that our systems were down for maintenance and couldn’t do anything more today Aducco and Stratex same story… you never called and made a note of the Israeli number Northumberland said that they may have something to do on Monday.”

“ I am not comfortable with them yet. Were you able to get them to send over updated financials? We need to put them through a proper credit check to ensure we are not dealing with insolvent or nominee companies. Also, why are they only selling through us?”

“ …Like any good broker he [James Emanuel] was keen to do deals but in light of the rumours within the market I was not willing to sign off on further trading until more information was obtained from AH Marketing & Distribution. …”

“ I wonder if the private investigators or anyone that we know in Israel is able to trace the owners of these numbers. It could be that they people aren’t as smart as they thought they were…perhaps it didn’t occur to them that if they didn’t answer the London forwarding number that it would divert to their Israeli voicemail. It has to be worth a try.”

“The business reviewed some of their suppliers for carbon emissions trading they invited HMRC in as they wanted to bring some invoices to the attention of HMRC as the next return was due. They noticed an upward spike in their trends of their emission trading as a result they reviewed some of their suppliers and compiled a list of 12 companies. They noticed that these businesses were independently run but had poor controls with regards to running a business. Eg vat not translated into sterling. The last 3 businesses on the list were highlighted – Westis Ltd/Aristor Partners and Axle. To regulate the VAT position Cantors withheld some of the Vat in respect of some of these companies. IE explained the process of MTIC fraud to the business. - Vat registration numbers are needed for the 12 companies - A sample of invoices should be provided - Need to consider tax point issues for the last 3 businesses - Registration. Mark Cooper agreed to keep HMRC updated. …”

“…Mark [Cooper] highlighted the suspension of the BlueNext Exchange and the rumours of MTIC fraud in the market. He also explained the actions which CantorCO2e had taken. In particular this had included revisiting some of the invoices received from their counterparties and the anti-money laundering (AML) due diligence which had been undertaken. As I recall, Mark Cooper provided a clear message to HMRC that he wished to draw their attention to the problem and alert them to the possible risks in this market.”

‘I am not sure whether it is strictly accurate to say that “…there is no evidence that CO2e queried this anomaly or investigated it further”.’ ‘I visited Cantor Fitzgerald’s office on 25 June 2009 at the meeting, Mark Cooper explained that an internal VAT review exercise had been carried out, prompted by news that the Blue Net [sic] trading exchange in France had been suspended on 4 June 2009 as a reaction to unusual patterns of CO2 emission trading. He showed me a list of 12 suppliers which he said had warranted a more detailed review based on the quality of their invoicing paperwork. One of these was Westis. He said that Cantor’s [sic] engaged with the 12 businesses to help them regularise their invoices, which he said was necessary because some of their invoices lacked the necessary information required on tax invoices. This included in some cases not displaying VAT registration numbers and/or not showing the VAT amounts in sterling. He said that Cantor’s had decided to withhold VAT payments from Westis as a precaution until they had obtained satisfactory VAT invoices. Westis did subsequently obtain its own VAT registration number at the end of June 2009.’ ‘So, there was some activity to get a valid VAT registration for Westis at the end of June 2009, which infers that CO2e were querying an anomaly and investigating it further (albeit after the event). Also, by then HMRC did have some awareness that there had been a problem with (at least some of) Westis’ invoices.’

“ I can see why LR etc. want to be vigilant against unsavoury customers. However this seems over the top, we will not have any customers if bona fide clients are asked to jump through this many hoops, why would they bother when other brokerage houses and banks are offering a similar service and only asking them for documents to pass the KYC and AML checks. We should be doing KYC and AML checks as were are required to by law – Not putting it on ourselves to investigate farther than is reasonable to do so. I was talking to Barclays yesterday – they are still trading direct with these companies as the have passed their KYC checks and AML checks. We are not the Knights of the carbon market – it is not our job to police it. I agree we should be vigilant – have a compliance team who carry out KYC and AML checks. Have a VAT department that knows what a VAT invoice should look like. This New Account Process looks to me like it has the propensity to encourage the market to shy away from Cantor CO2e and hand the bona fide lucrative sport market Trade elsewhere.”

“…Either we want this lucrative business and find a way to make it work while ensuring that our business is legally and economically secure, or else we don’t want it. This is a decision that I feel you now need to make. ”

“At the meeting, I outlined what actions we understood the French had taken to head off a significant fraud threat involving carbon credits. The UK is not in the same position but as part of our planning we were considering policy options should a problem emerge. The early identification of fraud was important in an effective response and I accordingly invited you to consider sharing with HM Revenue and Customs (HMRC) what you might consider to be indications of changes in trade in carbon credits that might not be driven by market forces, along with any information on unusual trading patterns or out of the ordinary activity.”

“JB: have you thought any more about the bonus, or talking to LR? HL: not yet will send an email to james JB: well get a grip then! HL: did you get an email back from Stratex JB: funnily enough…..no.”

“ I spoke to Laurence tonight. This overhaul to our business has been dragging on for too long. While the company want to introduce many new hoops for clients to jump through before we are able to deal with them, we fear that such procedures may inhibit our business. Rather than try to fine tune the procedure to something that we are all happy with, an exercise that may take weeks contrary to our wishes to resume spot business ASAP, we have agreed the following. We will implement a revised version of the procedures wanted by the company from tomorrow (Wednesday). Laurence will send you an email with the new protocol. If the clients comply, then everyone is happy. If not, then the company will have to re-think and dilute the new client procedures that it is presently introducing. …”

“VAT Status Verification Facility For New Carbon Credit Suppliers/Customers Please be aware that HM Revenue & Customs are experiencing problems with Missing Trader Intra Community (MTIC) VAT fraud involving businesses that are trading in carbon credits. MTIC fraud may involve all types of VAT standard rated goods and services including carbon credits….For information purposes please find enclosed the leaflet “How to spot VAT Fraud.” … Although the Commissioners may validate VAT registration details, it does not serve to guarantee the status of suppliers and purchasers. Nor does it absolve traders from undertaking their own enquiries in relation to proposed transactions. It has always remained a trader’s own commercial decision whether to participate in transactions or not and transactions may still fall to be verified for VAT purposes. For your information I also enclose a copy of our Notice 726 – “Joint and Several Liability” which may also be viewed on our website www.hmrc.gov.uk…”

“…I do hope that once this matter is behind us we will be able to resume business once again in the successful manner than we dealt with each other in the past.”

“ Thanks!! I will call you in half an hour to discuss about trade today.”

‘Q. An email from James Emanuel to Laurence Rose. 28 July: "Gentlemen ..." He outlines that Westis have received the payment made by Cantor, that Westis are willing to trade again. The middle paragraph: "On the basis that they were able to provide all the requisite documentation for us to be comfortable to release payment to them of the retained money, are we clear to resume trading with them? If we present them with a questionnaire and further document request package, I fear they will lose their patience and we will never see them again. This is not a decision I am authorised to make." Did you authorise Mr Emanuel to go ahead without the new procedures that you had put in place? A. I don't recall whether I gave him those instructions or approved trading with Westis. I recall in and around this time, I believe Mark Cooper was dealing with some of the elements of Westis, and I believe, I am happy to be corrected, that we got information from HMRC that said that Westis was approved, or they gave us the okay to release a payment. There was something I am recalling. Q. Right. Because of that, you didn't require documentation that Mr Emanuel is alluding to here, the questionnaire and document request? A. I don't recall whether I required it from him or not. I was certainly seeking it.’

“ OK, so it seems we cannot approve them yet as they are waiting on a response from HMRC for a new valid VAT number as the company director has changed. This is likely because this is a new corporate arrangement for the purposes of transacting in EUA spot markets. This accounting firm is the same as used by Westis and others. I think we need to get more info about the accountant and the firm. James, I would like to discuss this with you on our next call.”

“6.38 On 28 July, Ben Pink of Kaplan chased up their account opening application. They had provided this two weeks previously. The matter was investigated and Laurence Rose confirmed that they had not been approved by him for KYC checks as they had not provided a valid VAT number. Laurence Rose also noted that Kaplan used the same accounting firm as Westis and wanted more information on the accountant.” “6.39 On 28 July, Franck Stork expressed his disappointment at the delayed payment, but offered to trade again. James Emanuel emailed Laurence Rose to say he thought the relationship with Westis was damaged but could be repaired and asked for permission to trade given the requisite paperwork had been received. Two trades were undertaken with Westis later that day. The buyer on the other side of the trade was Citibank.” “ 6.40 On 29 July, Mark Cooper emailed lan Edgson at HMRC noting that Ian's colleague, Andrew Milner had said he did not foresee any problems with releasing the monies to Westis on the basis that they had been registered retrospectively. Compliance emailed James Emanuel saying they could not pay the invoice raised by Westis for the 28 July trades without seeing the "checklist etc." Later that day, James Emanuel asked Westis to provide written confirmation that the registry account used for the 28 July trades was an account managed by Westis. A letter on Westis headed paper was provided, confirming that the registry number DK-121-9395-0 was an account managed by Westis.”

“If client is selling units we must print or download from the Registry the status reflecting the credit position in our account and confirm that the Transferor matches the clients standing instructions on the Client Details tab of the blotter.”

“ I see they came in with some big volume at the end of the day. Please can you fill in the new client form and questionnaire on them and email to me in your morning, so that I can review in my morning and then we can discuss? What is their business? How/where are they getting the allowances? Please don’t tell me it doesn’t matter – I want to know, or at least try and find out.”

“n.b. The “Westis” invoice used by A G Kakouris in order to get the VAT registration is almost identical to the invoices from Epicure Business Solutions. Also the schedule of transactions – Duntai to Westis to Cantor Fitzgerald that appears at sheet 17 of the VAT 1 pack shows 24 sales amounting to 12,820,000 tonnes of CO2 between 11th May and 2nd June 2009. None of the unit prices shown for the Westis sales agree with the figures that appear on the sales invoices, all of the sales invoice prices being 5p/tonne more than on this schedule. This schedule also shows the purchases from Duntai. The unit price for these sales are all 5p less than the Westis sale price to Cantor regardless of the size of the package of CO2 allowances being sold. This is indicative of fraud as in any free market there would not be this uniformity or conformity of mark-up.”

“Laurence and I have a call with Howard next week in which Howard wants to know about the future of this business…I have no clue what to tell him. To be honest the business is in a mess.”

“ …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.”

“...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.”

“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 then 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.”

“ 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”

“If it is established that a trader should have known that by his purchase there was no reasonable explanation for the circumstances in which the transaction was undertaken other than that it was connected with fraud then such a trader was directly and knowingly involved in fraudulent evasion of VAT.”

“..Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected with fraudulent evasion of VAT...”

“... a trader has chosen to ignore the obvious explanation as to why he was presented with the opportunity to reap a large and predictable reward over a short space of time.”

“In such a case the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose, intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.”

“In the case of a corporate security holder, what rule should be implied as to the person whose knowledge for this purpose is to count as the knowledge of the company? Surely the person who, with the authority of the company, acquired the relevant interest. Otherwise the policy of the Act would be defeated. Companies would be able to allow employees to acquire interests on their behalf which made them substantial security holders but would not have to report them until the board or someone else in senior management got to know about it. This would put a premium on the board paying as little attention as possible to what investment managers were doing. Their Lordships would therefore hold that upon the true construction of section 20(4)(e), the company knows that it has become a substantial security holder when it is known to that person who had authority to do the deal. It is then obliged to give notice under section 20(3). The fact that Koo did the deal for a corrupt purpose and did not give such notice because he did not want his employers to find out cannot in their Lordships’ view affect the attribution of knowledge and the consequent duty to notify.”

“ 48. In my view, the Tribunal were correct in attributing the acts and knowledge of the site agents to MC. I start with section 60(1) and 77(4) simply because the Tribunal's reasoning in paragraph 24 is directed to those provisions. The policy of those provisions is to discourage the dishonest evasion of VAT, and to give the Commissioners an extended period in which to make assessments where VAT has been lost as a result of the dishonest evasion of VAT. That policy would be frustrated if the acts and knowledge of all those employees who have a part to play in the making and receiving of supplies were not to be attributed to the company for the purposes of section 60(1) and 77(4). If the only persons whose acts and knowledge may be attributed to a company are those who are responsible for running the affairs of the company as a whole, and those involved in its VAT activities, then the policy to which I have referred would be seriously undermined. As Mr Parker points out, it would encourage those prepared to engage in fraud or turn a blind eye to fraud to set up separate VAT accounts departments for that purpose. Moreover, it would discriminate against small companies that do not have separate accounts departments insulated from what happens on site or in contracts departments. 49. I would hold, therefore, that the acts and knowledge of all those employees of a company who have a part to play in the making and receiving of supplies, as well as those involved in its VAT arrangements, are to be attributed to the employing company for the purposes of section 60(1) and 77(4).”

“When one considers these factors in the present case, we are of the clear opinion, for the reasons we have given, that this is plainly an appropriate case for attribution. Mr Samant had a very senior position in BoI, he brought the transactions to BoI, he was given a free hand to negotiate them, they were plainly suspicious, there was no questioning, save in relation to the first transaction, and Mr Samant’s unconvincing answer was too readily accepted by the board. Further the fact that it was not a “one-off” transaction but a series serves to underline the point.”

“The taxable person was Olympia (the company). The question therefore for the Tribunal was not what a director of Olympia knew or ought to have known, but what the company itself knew or ought to have known. The knowledge of a director of the company may, to be sure, be attributed to a company, but there may be other knowledge (for example that of a senior employee) which, on the facts ought also to be attributed to the company: Meridian Global Funds Management Asia Ltd v Securities Commission [1985] AC 500.”

“I agree also with Mr Foulkes’ observations about the context of the substantive rule which gives rise to the issue: it is the objective of combating fraud within the context of the VAT legislation. A parallel objective was to be found in Bank of India which led the Court of Appeal, in agreement with Patten J at first instance, to conclude that the application of section 213 required a special rule of attribution in order to make the policy effective. The purpose, or at least a major purpose, of the Kittel principle is to combat fraud. The Tribunal’s decision would make a serious in-road into that principle: in cases where there were innocent shareholders or directors who had been deceived by a fraudulent employee or director, the company might be able to escape liability notwithstanding that it was able to profit considerably from the transactions conducted on its behalf.”

“ Rules of attribution are as relevant to individuals as to companies. An individual may himself or herself do the relevant act or possess the relevant state of mind. Equally there are many contexts in which an individual will be attributed with the actions or state of mind of another, whether an agent or in some circumstances an independent contractor. But in relation to companies there is the particular problem that a company is an artificial construct and can only act through natural persons .”

“30. In Greener Solutions, the FtT held that the principle it should apply was as follows: The principle we derive from these authorities is that the Hampshire Land principle is of general application and applies to prevent the knowledge of the agent in breach of his duty to the company being attributed to a company where the company is a victim of his fraud. In determining whether there is a fraud against the company “one should consider the effect of the acts themselves, and not what the position would be if those acts eventually prove to be ineffective.”

“85. But I do not think identification would be required: otherwise a corporate entity could avoid allegations of actual knowledge by simply refusing to cooperate with HMRC’s enquiry or call any witnesses, making it impossible to identify which particular person had actual knowledge. If the circumstantial evidence was sufficient to justify it, I think a Tribunal could draw the inference that at least one person, albeit unidentified, acting on behalf of the bank had actual knowledge.”

“87. I agree with HMRC that to prove merely constructive knowledge they would only have to prove that various persons individually had separate elements of knowledge, which, when collectively attributed to Citibank, would mean that Citibank as an entity had constructive knowledge of the connection to fraud.”

“ I should have thought, moreover, that, in the circumstances of the present case, the evidence given by Mr Humphries [overall contra-trading scheme] and Mr Mendes [FCIB circularity] (as to which, see paragraphs 17-31 above) would of itself have sufficed to entitle the Tribunal to make a finding of actual knowledge. As already mentioned, the Tribunal considered (with justification, in my judgment) that that evidence indicated that Regent knew to whom it was supposed to sell. ”

“[ 51] However, in my judgment, the holding of Moses LJ does not mean that the trader has to have the means of knowing how the fraud that actually took place occurred. He has simply to know, or have the means of knowing, that fraud has occurred, or will occur, at some point in some transaction to which his transaction is connected. The participant does not need to know how the fraud was carried out in order to have this knowledge. This is apparent from paras 56 and 61 of Kittel cited above. Paragraph 61 of Kittel formulates the requirement of knowledge as knowledge on the part of the trader that ‘by his purchase he was participating in a transaction connected with fraudulent evasion of VAT’. It follows that the trader does not need to know the specific details of the fraud .”

“…that the FTT treated the evidence in relation to the overall scheme to defraud as incapable of being probative of PCL’s state of knowledge as to the impugned transactions. In doing so, HMRC submit that the FTT erred in law…”

“ 49. Although HMRC point to numerous examples within the FTT’s decision where they submit the FTT failed to have regard to the evidence, the overriding submission is that the FTT failed to have proper regard to the evidence of contrivance in the deal chains, including through the fraudulent conduct of participants in the chains, the circularity of fund flows and carouselling of products, and the control which HMRC argued the orchestrators of the fraud would need to have exerted over all the transactions in the deal chains. The FTT, say HMRC, either refused to place any or any proper weight on certain of the evidence or discounted it as relevant only to the facts of fraud and connection to fraud, which were accepted by PCL, and did not have regard to that relevant evidence when assessing the evidence of PCL, including the credibility of its witnesses .”

“78 . From a review of the case as put by HMRC in their written closing submissions to the FTT, we are satisfied that the FTT was wrong to describe HMRC’s case in this way. The FTT went on, at [225], to say that the carousel argument did not assist in considering whether the only reasonable explanation for PCL’s transactions was fraud “when PCL has accepted that there was fraud in the chain which caused a tax loss”

“ 80. The FTT failed to appreciate, and thus failed to address, the link that HMRC was seeking to make between the evidence of fraudulent behaviour on the part of the three companies through the submission that the deal chains in which PCL’s transactions had been orchestrated by fraudsters to the submission that all companies involved, including PCL, must have been instructed so as to facilitate the fraud, and PCL must therefore have known, or should have known, of the connection to fraud. It did not connect the evidence and submissions in relation to the three companies with the question of PCL’s knowledge that it had to address. It simply considered whether PCL had been aware of the involvement of the three companies in the 2005 fraud. It said, at [218], that that involvement did not go to PCL’s actual knowledge or that the only reasonable explanation for PCL’s transactions was fraud; and at [219] it remarked, rather caustically, that “whilst this may be interesting information we do not see that it helps us answer the question was the only reasonable explanation for the transactions PCL took part in fraud? It does not go to what PCL did or did not know.” 81. It is regrettable that the FTT failed to appreciate the inferences which HMRC was inviting the FTT to make from the orchestrated and contrived nature of the fraud and the presence of fraudulent companies within the deal chains at issue in the appeal. The FTT was keenly aware, it appears, of the need to consider whether inferences could be drawn from the evidence. But in the FTT’s decision that awareness manifests itself, not in a proper consideration of whether inferences could be drawn, weighing the evidence on both sides and reaching a reasoned conclusion, but in a number of statements by the FTT of a general nature that there was no evidence on which to found any inference . 82. Although, as for example at [140], when describing its conclusion that PCL had no actual knowledge of fraud in the chains, the FTT stated that it had carefully considered all the evidence before it in reaching that conclusion, and that it had done so “because there was no evidence before us to show otherwise and no evidence laying a foundation from which such an inference could be drawn”, it is evident from how the FTT later addressed the question of orchestration and contrivance that it did not consider, or did not properly address, the evidence before it. Where there is evidence, and it is evidence from which the tribunal is invited to make an inference, the tribunal must address that question and explain its reasons either for drawing an inference or refusing to do so. It is not sufficient simply to say that there was no evidence. The failure by the FTT properly to address the submissions of HMRC by reference to the available evidence was an error of law .”

‘ 83. The questions posed in BSG (quoted here at § 72) by the Tribunal were important questions which may often need to be asked in relation to the issue of the trader’s state of knowledge. I can do no better than repeat the words of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563 :- “109 Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and “similar fact” evidence. That is not to alter its character by reference to earlier or later transactions but to discern it. 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 telephones 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. ”’

“ 141. The consideration which a court should give to the fact that a potentially relevant witness has not been called is well established. I can take the principles from the judgment of Brooke LJ in Wisniewski v Central Manchester Health Authority [1998] PIQR P324 at P340 where, having reviewed the authorities, he said: “From this line of authority I derive the following principles in the context of the present case: (1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action. (2) If a court is willing to draw such inferences, they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness. (3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue. (4) If the reason for the witness's absence or silence satisfies the court, then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.” 142. This statement of principle is in accordance with the earlier decisions of the House of Lords in R v IRC ex p. T C Coombs & Co [1991] 2 AC 283 and Murray v DPP [1994] 1 WLR 1 and the comments of Lord Sumption in the Supreme Court in Prest v Prest [2013] 2 AC 415 at [44]. 143. These principles mean that before I draw an inference and made a finding of fact adverse to a witness who was not called, I need to ask myself: - is there some evidence, however weak, to support the suggested inference or finding on the matter in issue? - has the Defendant given a reason for the witness’s absence from the hearing? - if a reason for the absence is given but it is not wholly satisfactory, is that reason “some credible explanation” so that the potentially detrimental effect of the absence of the witness is reduced or nullified? - am I willing to draw an adverse inference in relation to the absent witness? - what inference should I draw ?”

“ Mr Grime accepted that there is a line of authority which shows that if a party does not call a witness who is not known to be unavailable and/or who has no good reason for not attending, and if the other side has adduced some evidence on a relevant matter, then in the absence of that witness a judge is entitled to draw an inference adverse to that party and to find that matter proved .”

“ If a prima facie case is made out, capable of being displaced, and if the party against whom it is established might by calling particular witnesses and producing particular evidence displace that prima facie case, and he omits to adduce that evidence, then the inference fairly arises, as a matter of inference for the jury and not a matter of legal presumption, that the absence of that evidence is to be accounted for by the fact that even if it were adduced, it would not displace the prima facie case. But that always presupposes that a prima facie case has been established; and unless we can see our way clearly to the conclusion that a prima facie case has been established, the omission to call witnesses who might have been called on the part of the defendant amounts to nothing .”

“ Looking at the authorities from Blatch v. Archer (1774) 1 Cowp. 63 right up to Earle v. Eastbourne District Community Hospital [1974] V.R. 722 , it may be accepted that the effect of a party failing to call a witness who would be expected to be available to such a party to give evidence for such party and who in the circumstances would have a close knowledge of the facts on a particular issue, would be to increase the weight of the proofs given on such issue by the other party and to reduce the value of the proofs on such issue given by the party failing to call the witness .”

“ In Jones v Dunkel , (1959) 101 CLR at p. 320; [1959] ALR at p. 381; Windeyer, J, cited Wigmore on Evidence, 3rd. ed. (1940), vol. 2 s285, p. 162, which reads as follows: "The consciousness indicated by conduct may be, not an indefinite one affecting the weakness of the cause at large, but a specific one concerning the defects of a particular element in the cause. The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanations by circumstances which make some other hypothesis a more natural one than the party's fear of exposure. But the propriety of such an inference in general is not doubted .”

“In our legal system generally, the silence of one party in face of the other party's evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence. Thus, depending on the circumstances, a prima facie case may become a strong or even an overwhelming case. But, if the silent party's failure to give evidence (or to give the necessary evidence) can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party may be either reduced or nullified .”

“- is there some evidence, however weak, to support the suggested inference or finding on the matter in issue? - has the Defendant given a reason for the witness’s absence from the hearing? - if a reason for the absence is given but it is not wholly satisfactory, is that reason “some credible explanation” so that the potentially detrimental effect of the absence of the witness is reduced or nullified? - am I willing to draw an adverse inference in relation to the absent witness? - what inference should I draw?”

‘ I do not believe this is accurate and refer to an email from James Emanuel to me of 12 June 2009…..This indicated that Steve Treanor had confirmed that the VAT registration numbers of GW Deals and AH Marketing were valid. The VAT registration number for Northumberland Consultants was also valid, but the recorded address did not match the address we held. Steve Treanor proposed that we should carry out further enquiries to determine where Northumberland Consultants’ principal place of business was located. James Emanuel suggested instead that we should wait for Northumberland consultants to trade with us again before asking these questions….. ’

“Recent volume on Bluenext has increased significantly, and it was thought that it was the reaction of selling compliance companies looking to cash in on surplus sales as the market decreased in value since December 2008 (a valid argument) or even perhaps the tightened credit lines that have affected all areas of finances have also constrained forward trading lines and even cash deposits for futures trading, making more transactions move to the spot market (also a valid point).”

“In June 2009, following press commentary on carousel fraud in the spot emissions market, CFE suspected that it had been the victim of VAT fraud. Although nothing was proven policy and procedures were reviewed around the types of clients with whom such activity would be undertaken. As a consequence more stringent KYC requirements were implemented and the level of ALM/CFE/Sanctions checks was increased.”

“72. The European VAT authorities first became aware of the fact that VAT carousel fraud was being committed in relation to CO2 allowances in May 2009. VAT carousel fraud was particularly pronounced in France and the UK during the summer and both countries therefore chose in different ways to abolish VAT on allowance trading without prior approval by the EU. 73. On 30 August 2009 SKAT recommended to the Minister for Taxation that Denmark requested the EU to approve an amendment of the Danish VAT rules to eliminate the risk of VAT carousel fraud in Denmark.”

“4 VAT fraud in carbon trading Extremely large scale fraud 93 Between the third quarter of 2008 and June 2009, VAT fraud in the carbon trading market developed in France, undoubtedly involving the highest amounts ever detected by tax authorities. The Cour des Comptes estimates the tax loss to the state from this fraud as €1.6 billion. The scam was halted only after the administration issued a tax instruction on 11 June 2009 exempting carbon quotas from VAT.”

“Issue (4): was there (a) an overall scheme to defraud (b) to which the Appellant was knowingly party? 55. The two parts of the fourth, final and most important question are inter-related; but they were, quite correctly, dealt with in turn by the FTT in its Decision, since the question whether the Appellant participated in an overall scheme to defraud informs, but does not answer, the question whether the Appellant knew or should have known that it was participating in such a scheme.”

“…it’s accepted by the Revenue that the appellant neither knew nor should have known that the transactions were connected with fraud.”

“ 83. The questions posed in BSG (quoted here at § 72) by the Tribunal were important questions which may often need to be asked in relation to the issue of the trader’s state of knowledge. I can do no better than repeat the words of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563 :- [109]-[111] …. [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 .”

“13. Each registry administrator shall display and update the information in paragraph 14 in respect of its registry on the secure area of that registry's web site, in accordance with the specified timing. 14.

“(a) account identification code of the transferring account: the code assigned to the account comprising the elements set out in Annex VI; (b) account identification code of the acquiring account: the code assigned to the account comprising the elements set out in Annex VI; (c) account holder name of the transferring account: the holder of the account (person, operator, Commission, Member State); (d) account holder name of the acquiring account: the holder of the account (person, operator, Commission, Member State); (e) allowances or Kyoto units involved in the transaction by unit identification code comprising the elements set out in Annex VI; (f) transaction identification code: the code assigned to the transaction comprising the elements set out in Annex VI; (g) date and time at which the transaction was completed (in Greenwich Mean Time); (h) process type: the categorisation of a process comprising the elements set out in Annex VII.”

“…it provided further confirmation to me that the increase in trading volumes experienced by the EU Carbon Desk was consistent with the wider market.”

“…that the counterparties were businesses set up as environmental consultants acting for small and medium sized emitters in various different European Countries. The consultants would give advice to the emitters on matter such as their carbon footprint projections, use of green energy and compliance requirements. The consultants may have been paid by the emitter in EUAs. The consultants would also provide a liquidity service selling excess allowances on behalf of these small and medium sized emitters who would otherwise not have necessarily been able to access the market easily…Mr Emanuel’s suggestion that there were a huge number of EUAs in the market which the counterparties were aggregating seemed credible to me.”

“The counterparties were understood to be akin to brokers and aggregators who sold excess allowances provided as payment for consultancy services or on trust by emitters who would not have otherwise been able to access the market directly.”

“It was a common school of thought at the time that what was probably going on here was a bunch of traders coming out of banks, things like that, who have set up their own trading operation…Or wherever they had come, from financial institutions, that were trying to make a go of things on their own, day traders, things like that.”

“ I had several conversations with CantorCO2e during the following weeks and my primary contacts were Steve Treanor and Mark Cooper, the General Counsel for Europe and Asia. My recollection of these conversations is that the business was aware that they were dealing with new entrants to the EUA market. However, they were unable to tell whether the anomalies on VAT invoices which they had discovered had arisen from a lack of business sophistication and back office functions or whether their counterparties might be in fact involved in VAT fraud. The suppliers were saying that their main concern and driver for their threats of legal action was the effect on their cash flow - if CFE withheld the VAT they would be unable to pay their own suppliers and would be placed in financial difficulty, for which they would blame CFE. Until there was clearer evidence of fraud, there was no assumption that CantorCO2e’s supply chains might be tainted by VAT fraud. As a result, the principal focus of my advice was on the requirement to obtain a valid VAT invoice in order for CantorCO2e to recover its input VAT and, subsequently, on the question of whether HMRC might exercise their discretion in favour of CantorCO2e’s claim for recovery if the suppliers were unable to rectify their invoices.”

“…our thinking at the time was that we did not know whether we were dealing with fraudsters or people who were simply badly organised, had poor administration, which is very typical in a lot of small traders.”

“Laurence would have no input into a decision to submit a SAR at all.”

“If a SAR is made no further action should be taken on the account including the receiving of additional credits without informed consent. This would extend to accepting further credits for the affected accounts as we may be caught by s329 of POCA.”

“ Findings All the UK accounts have only recently been opened with CFE. Most of companies comprising one individual who is the shareholder of the company and in many cases the individuals are resident in France. Westis Ltd, Stratex Alliance Ltd and Aristo Partners Ltd are operating from the same premises. Separately Adduco Consulting Ltd, Business Management Consulting Ltd and Northumberland Consultants Ltd also operate out of the same premises. Several clients have bank accounts in Marfin Popular Bank Co Ltd, a listed registered bank in Cyprus (Westis and Adduco). Volumes traded are on context albeit at the upper end. These firms are often set up by sole traders and therefore the trading activity being undertaken which of itself is not suspicious.”

“Invalid VAT Number Supplied. Became invalid around time of trading was dormant company. …. Sole director and beneficial owner is a French national, Mr Eric Agnard…The company is registered to the same address as Axle Ltd and Northumberland Consultants Ltd. … Company filed dormant accounts: 31/10/2007…”

“… Sole director and beneficial owner was a French national, Mr Franck Stork. Westis. The company is registered to the same address as Stratex Alliance Ltd and Aristo Partners Ltd. We received invoices including the VAT consideration but without any VAT number. On speaking to the client he stated that he had a valid VAT number and come back with the details. We investigated the details and HMRC confirmed it was valid but not against Westis Ltd. We consulted the client who stated that it was the number of his parent company Epicure Solutions Limited which had bout Westis Ltd on the 9 May 2009. Client submitted Tax certificate of Epicure Solutions and resubmitted the invoices in that name… JE is uneasy about this client.”

“…Registered to the same address as Aristo Partners Ltd and Westis Ltd. Owner of the company is Frank Stork resident in France. We have paid VAT to the amount of €6,376,039 but the client is not VAT registered. We called the client on 10 June asking for his VAT number and the client said he would call back which he didn’t. We again called the client and he stated that the VAT application was currently with HMRC. Client seemed nervous when discussing his VAT status. We phoned the client again to discuss business and the client volunteered a discussion on his VAT status reminding himself that he still owed us a document. Client stated that he was in the process of concluding several deals in Romania implying that there would be a number of credits for us to sell on his behalf.”

“…Registered to the same office as Adduco Consulting Ltd and Northumberland Consultants Ltd. Company owner Maxime Arlani, a French national…Company has only being trading with us since 3 June. … As the first day of trading was also the day we received the blog the invoices were scrutinised in more detail and it appeared that the invoices contained no VAT number despite including the VAT consideration. The client stated that he was registered but subsequently came back to the broking desk and confirmed that he had made a mistake and that the VAT application had been made. However we had already paid the invoices. …”

“ …Registered to the same address as Stratex Alliance Ltd and Westis Ltd. Owner of the company is Anthoiny Muthot resident in France….Business consider client incompetent. The invoices received contained no VAT number and we became more conscious of the VAT situation once the blog was issued on 3 June 2009. The client indicated that they had a VAT number and would look into I which they did stating that a VAT application had been made…”

“…The company is registered to the same address as Adduco Consulting Ltd and Business Management Consulting Ltd. Owner is a French national Yamina Berrehill. We have paid a total VAT consideration €3,431,994. Client has a valid VAT number but we are unable to confirm whether it belongs to the client. Legal advice has stated that the VAT invoices don’t strictly contain the correct information (for example should show a currency conversion where relevant in order that the VAT consideration is show in sterling. We have not chosen to determine whether the VAT number is valid to Northumberland Consulting Ltd as the concern is that if it isn’t then we are on notice and would have to account to the HMRC for the over payment. WHAT IF ANYTHING ARE WE DOING WITH GW DEALS LTD AH MARKETING.?”

“ Proposal [Based on the information gathered and taking into account the reporting obligations, I believe that there is sufficient foundation to submit a suspicious activity report in respect of [ ]. Informed consent will be requested to continue to accept credits for trading and in the case of [ ] also to release the net surplus funds.] Recommendations Enhanced Customer Due Diligence is recommended for the business on the basis that carbon emissions credits are subject to VAT and the fact that credits are in bearer form. Further given the nature on many of these clients involve one trading companies it would be appropriate to apply the same requirements imposed on applicants from individuals. It is also recommended that the client take on process be formalised for the CO2e business. Changes to the confirmation and disclaimer language have been made to provide clarity on the roles of CFE and CO2e. New rules around permissioned trading of Spot credits have been introduced to ensure that we are either always flat or have a net VAT surplus from the matched principal activity.”

“I have spoken tonight with MC to bring him up to speed with my thoughts on whether we have to report anything to SOCA. He told me there were further updates from the work you have been doing today which may well alter the situation for me. Please can we catch up tomorrow?”

“If the nominated officer decides not to make a report to SOCA, the reasons for not doing so should be clearly documented or recorded electronically and retained with the internal suspicion report.” and that: “In order to provide a defence against future prosecution for failing to report, the reasons for any conscious decision not to report should be documented or recorded electronically.”

“In June 2009 following press commentary on carousel fraud in the spot emissions market CFE suspected it had been the victim of VAT fraud.”

“I think that’s a careless form of words…”

“- is there some evidence, however weak, to support the suggested inference or finding on the matter in issue? - has the Defendant given a reason for the witness’s absence from the hearing? - if a reason for the absence is given but it is not wholly satisfactory, is that reason “some credible explanation” so that the potentially detrimental effect of the absence of the witness is reduced or nullified? - am I willing to draw an adverse inference in relation to the absent witness? - what inference should I draw?”

“I would have thought at the time, the feeling was that given the events that we were dealing with, it would be unhelpful for an employee with whom we were about to sever relations to be muddying the waters.”

“In the light of these considerations, the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses' recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.”

“30. Mr Puzey highlighted the wording of section 83(1)(p) which provides for a right of appeal to the Tribunal against “an assessment…or the amount of an assessment.”

“We have been referred to two cases before the value added tax tribunal, one of some antiquity—the case of Bell v Customs and Excise Comrs [1979] VATTR 115 , a decision of the London tribunal, with Mr D A Shirley as chairman. In the report there appears this passage (at 120): 'In our judgment, the Notice of Assessment should define precisely the period of time to which it relates. It is the formal document by which the Commissioners notify the amount of tax due from the person whose returns are said to be wrong or incomplete. We do not consider that the schedules sent (in this case but by no means invariably) with the Notice of Assessment are themselves a Notice of Assessment so much as working papers of the Commissioners leading up to the assessment contained in the Notice of Assessment. The schedules, moreover, contain references to two different periods, and want that certainty to which the Manchester Tribunal alluded in [ Scott v Customs and Excise Comrs (1978) VAT Decision 517 ]. We see no reason why a taxpayer should have to read through a number of schedules in order to detect the precise claim against him or attempt to reconcile a formal document (form VAT 191) which is or may be inconsistent with schedules sent therewith or at a later date.' Now, I think there are several problems which that particular passage throws up. First, it gives to the document entitled notice of assessment, whether it be in form VAT 191, which was the form used in the Rififi case, or in form VAT 655, which was the form used in this case, an importance which it cannot properly bear. As I have said, neither form is prescribed either by the 1983 Act or regulations. All that the 1983 Act provides is that the taxpayer should be notified, and, for the reasons I have already given, it seems to me that that was what had happened in this case. Whether, on the facts of the Bell case, there was adequate notification, I need not here consider. Also, it seems to me that that passage indicates a mistake, or mistaken view, which, at the time, was understandable, where it is said that the assessment is contained in the notice of assessment. As I attempted to explain in my judgment in the Rififi case (at 106–107) by reference to Grunwick Processing Laboratories Ltd v Customs and Excise Comrs [1986] STC 441 at 442 and Don Pasquale ( a firm ) v Customs and Excise Comrs [1990] STC 556 at 562 , the assessment of the amount of tax considered to be due and the notification to the taxpayer are separate operations. That in itself is sufficient to indicate that the judgment in Bell was made under a misapprehension as to the proper effect of the law.” 35. In Bassimeh the Court of Appeal reiterated the distinction between an assessment and notification of the assessment made stating: “Thirdly, the same and other authorities have considered what may be involved in defining and distinguishing between 'assessment' and, on the other hand, 'notification' of the assessment made. It has come to be accepted that this is a three-stage process; the decision to assess, followed by the assessment, then by the notice given (see in particular Don Pasquale ( a firm ) v Customs and Excise Comrs [1990] STC 556 at 562 per Dillon LJ, and the decision of His Honour Stephen Oliver QC the value added tax tribunal chairman in Georgalakis Partnership v Customs and Excise Comrs (1993) VAT Decision 10083 ). The position is complicated by the fact that where there is no evidence of the internal processes of VAT offices or of the assessment in fact carried out, the terms of the notice must be relied upon to indicate what the assessment was. This has led to the suggestion that the assessment is contained in the notice of assessment, but that analysis is wrong (see Sir John Balcombe in House ( trading as P & J Autos ) v Customs and Excise Comrs [1996] STC 154 at 162 , where he said that 'the assessment of the amount of tax considered to be due and the notification to the taxpayer are separate operations').” 36. In Courts Jonathan Parker LJ stated (at [107]) on the issue of existence of an assessment: “ Mr Parker submits that the issue in the instant case is not so much as to the precise point in time at which an assessment is made (i.e. is complete); rather, it is as to the existence or otherwise of an assessment in December 1999. In one sense, this is a distinction without a difference since an assessment only 'exists' when it is made, and the point in time at which an assessment is made is the relevant point in time for the purposes of the s 73(6) time limits. On the other hand, I agree with Mr Parker that the issue in the instant case falls to be resolved on the basis of the particular facts of the case. In my judgment, given that the making of an assessment is an internal matter for the commissioners, in respect of which there is no prescribed statutory procedure, it is simply not possible to arrive at a formula which will determine in every case whether or not an assessment has been made. The commissioners may, for example, decide to treat certain cases as special or exceptional cases, to which their normal internal processes should not apply. Indeed, the instant case is an example of that (I return to this below). Accordingly, I am unable to go as far as the judge when (in para 57 of his judgment) he advanced the seemingly absolute proposition that 'an assessment is made when [the VAT 641] has been completed and signed off'. In the majority of cases, that may well be so; but there can in my judgment be no absolute rule to that effect. In my judgment the position in this respect is correctly reflected in the internal guidance issued in October 1997 (quoted in para 13 above).”

“44. We found the remainder of the authorities supported the following propositions: · The “making” of an assessment refers to the determination that an amount is due; · There is no set formula by which an assessment must be made; · The processes of assessing and notification of that assessment are separate; · The assessment process involves a decision that tax is due and a calculation of that amount; · Notification can take any form so long as the terms are clear to the taxpayer. 45. We agreed with the comments of Jonathan Parker LJ in Courts which we concluded are applicable in this case (emphasis added): “ Mr Parker submits that the issue in the instant case is not so much as to the precise point in time at which an assessment is made (ie is complete); rather, it is as to the existence or otherwise of an assessment in December 1999. In one sense, this is a distinction without a difference since an assessment only 'exists' when it is made, and the point in time at which an assessment is made is the relevant point in time for the purposes of the s 73(6) time limits. 46. Accordingly, we concluded from the authorities that this tribunal has jurisdiction to decide whether an assessment exists.”

“Details of the transaction on which input tax has been denied due to CO2e having an invalid invoice are outlined in Annex A. The amount assessed in the following periods is as follows…..VAT period 06/09 - £16,698,317.64.”

“This makes the total VAT disallowed in period 06/09 £6,408,012.18 (not £5,804,009.98 as notified)……The supplementary assessment is therefore: Period 06/09 £604,002.20 The basis of the denial of the assessed tax and the evidence to support it is unchanged.”

“It is in general a legal act on the part of the Commissioners constituting their determination of the amount of VAT, interest, penalty or surcharge that is due.”

" In the present case the letters did not purport to be assessments and Mr Chapman did not seek to establish the respondent's case on the basis that they were. We do not think that they were assessments. They reflect a conclusion that no assessment is required or should be made because no net amount of VAT is sought. Even allowing for Lady Justice Arden's comments in BUPA as an administrative act, we consider that the Commissioners of the assessing body must believe that they are making an assessment. We do not think that they can assess, so to speak, by accident."

‘ When is an assessment made? [106] "An assessment is made when you have finished calculating the amount upon which the assessment is to be based and a final decision to assess that amount has been taken."’

"If a repayment return reverts to a payment return [precisely what has happened here], we disallow the credit under section 25 and make an assessment."

“ 184. We do not consider that the Upper Tribunal’s decision in Benridge Care Homes Ltd establishes that the subjective views of a particular HMRC officer on the legal question whether he or she has made an assessment are determinative. In Benridge, the taxpayer made a claim for repayment of VAT. HMRC decided that the repayment was not due as the taxpayer had overstated input tax claims and understated output tax due and they decided to refuse the claim for repayment. Therefore, the Upper Tribunal’s conclusion in the passage quoted was that the “administrative act” which HMRC thought that they were performing, and which they were performing, was a straightforward refusal to pay the taxpayer the sum claimed. That was clearly very different from an “assessment” which involved a decision that the taxpayer was liable to pay HMRC a sum of money. 185.Mr Firth also referred us to Pill LJ’s statement in Courts plc v Customs & Excise Commissioners [2005] STC 27 at [119]: What this case has highlighted is the importance of officers of the respondents being clear in their own minds what they are doing at each stage; whether they are making an assessment or a decision to assess or some other exercise.”

“(1) Subject to the following provisions of this section, an assessment under section 73, 75 or 76, shall not be made– (a) more than 4 years after the end of the prescribed accounting period or importation or acquisition concerned,…”

“1. The Commissioners’ opinion referred to in Section 73(6)(b) is an opinion as to whether they have evidence of facts sufficient to justify making the assessment. Evidence is the means by which the facts are proved. 2. The evidence in question must be sufficient to justify the making of the assessment in question. C & E Commissioners –v- Post Office [1995] STC 749, 754G. 3. The knowledge referred to in Section 73(6)(b) is actual, and not constructive knowledge: C & E Commissioners –v- Post Office at p.755D. In this context, I understand constructive knowledge to mean knowledge of evidence which the Commissioners do not in fact have, but which they could and would have if they had taken the necessary steps to acquire it. 4. The correct approach for a Tribunal to adopt is (i) to decide what were the facts which, in the opinion of the officer making the assessment on behalf of the Commissioners, justified the making of the assessment, and (ii) to determine when the last piece of evidence of these facts of sufficient weight to justify making the assessment was communicated to the Commissioners. The period of one year runs from the date in (ii): Heyfordian Travel Ltd. –v- C & E Commissioners [1979] VATTR 139, 151: and Classicmoor Ltd. –v- C & E Commissioners [1995] V & DR 1, 10.1.27. 5. An officer’s decision that the evidence of which he has knowledge is insufficient to justify making an assessment, and accordingly, his failure to make an earlier assessment, can only be challenged on Wednesbury principles, or principles analogous to Wednesbury: Classicmoor paras. 27 to 29; and more generally John Dee Ltd. –v- C & E Commissioners [1995] STC 941 , 952D-H. 6. The burden is on the taxpayer to show that the assessment was made outside the time limit specified in Section 73(6)(b) of VATA.”

‘Since August 2009 I have requested information and documentation from CFE on numerous occasions to enable me to come to a decision as to whether the relevant input VAT should be denied and if so on what bases. In particular on 30 th January 2012 I sent an email to CFE asking various questions which followed up on a series of previous requests to which I had no had answer…I raised further enquiries with CFE in a letter dated 24 th May 2012….I was told by CFE that my questions which had been outstanding for some period of time, would be answered in a report to be produced by CFE’s representatives Pinsent Masons. As the officer carrying out the extended verification I was of the opinion that until I had received the answers to those questions I did not have evidence of facts sufficient to make assessments against CFE, since the questions concerned not only the alternative evidence provided by CFE in ration to the invalid invoices from Stratex but also evidence about what CFE knew or should have known in relation to the transactions….I received a copy of the report on 21 September 2012….’

“I’m concerned about the defaulter Westis which hadn’t registered for VAT during the period under review and was using the VRN of Epicure Business Solutions, What was Cantor told when it attempted to verify its VRN? Westis was registered following the intervention of LBS [Large Business Service] but what did Cantor say to LBS? Somebody within HMRC told Cantor it couldn’t foresee any problems with paying VAT to Westis, but who said this? You’ll agree this set of circumstances is irregular so we’ll need a full audit trail of who did what, why and when.”

“It is accepted that the world wide recession that existed in 2009 led to a significant drop in the price of EUAs and the recession also offered by certain emissions traders as an explanation for the creation and significant increase in volume on the secondary market (OTC)…. Consequently, to maximise a profit, a business should have bought OTC from the cheapest source and sold on a futures contact. The cheapest source would have been direct from an operator or from an exchange. However to trade futures requires long term investment. The only firm that chose to buy OTC and sell on as a futures contract was Standard Bank who were not at the relevant time a member of the Bluenext exchange.”

‘ Q. We get that at the very end of this 151-page report. JUDGE RUPERT JONES: Sorry, 5 September of which year? MS SHAW: 2011. A. Yes. Q. Now, the purpose of this submission is to set out the basis for your conclusion that the input tax incurred by the appellant in the first two periods 03/09 and 06/09 should be disallowed under the Kittel principle, isn't it? A. That is correct. Q. So you were of the opinion by this stage that you had evidence of facts sufficient to deny the input tax on a Kittel basis -- A. I think what occurred, I was requested to do this form and put it in place with my findings as at that time. Q. Yes. But the purpose of it as you've just confirmed is to set out the basis for your conclusion that the input tax for those periods -- A. Yes. Q. -- should be denied under the Kittel principle? A. Yes. Q. So with the exception of the July Westis transactions, all of the facts referred to in the December 2012 letter and the May 2012 letter that we've been looking at are referred to in this submission, aren't they? A. They should have been. Q. And indeed much of your first witness statement is cut and pasted from this submission, isn't it? A. I wouldn't be 100 per cent sure on that but it would form a basis.’ and: ‘Q……….So by 5 September [2011] you were plainly of the opinion that you had evidence of the facts sufficient to justify denying the input tax for 03/09 and 06/09, weren't you? A. This was purely -- this is documents that was put to the relevant area asking for my findings as at that time and that's what I did. All the -- Q. Yes, it's your submission setting out the basis for your conclusion -- A. Yes, that is correct. Q. -- that input tax should be denied – A. That is correct. Q. -- for those periods under the Kittel principle, isn't it? A. That is correct. Q. Now this submission doesn't deal with the Westis July transactions. If we go to page 14477 in this volume. You say here: "I am awaiting information from Cantor on carbon credits purchased in July 2009 that I only found out about from DG Environment information. However, witness statement and means of knowledge would not change to any extent, only the increase in possible denial and further background." So what you are saying here is that you had already decided that the July transactions would be denied on a Kittel basis; all that was going to change is the size of the denial by including the July transactions within your decision. A. That would be -- appear what it says. Q. Now this opinion, that you were going to deny input tax under the Kittel principle, was not something which had formed overnight, was it? It had been forming over many months beforehand; that's right, isn't it? A. I don't think you can form it overnight as I -- you have to form it over a period of time. ’

“Cantor are a long established brokerage and a lot of the normal indicators of contrivance simply do not apply as they are considered the norm in this trade Back to back No added value No losses No insurance Financing The main evidence of contrivance comes from 2 sources, The first being the data registry information which has found the following • Circularity of block numbers of EUAs purchased • Price dropping in chains These two items have been discussed with the strategy team and in their view they are significant The similarities found with the defaulting traders • Same PPOB [principal place of business] in a couple of case [sic] • Marfin popular bank in Cyprus used for several defaulters • False TOGCs to get a vat registration • Recent changes in Director • Foreign national directors • Common accountant”