“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.” (Emphasis added)
“These primary rules of attribution are obviously not enough to enable a company to go out into the world and do business. Not every act on behalf of the company could be expected to be the subject of a resolution of the board or a unanimous decision of the shareholders. The company therefore builds upon the primary rules of attribution by using general rules of attribution which are equally available to natural persons, namely, the principles of agency . It will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company ….” ( Emphasis added ) 208. Ms Goldring relied upon Bilta [191] where the Supreme Court stated (albeit in the context of attributing the state of mind of an individual to a company) that the relevance of the context in which the question was asked was not limited to Lord Hoffman’s third category. Bowstead and Reynolds on Agency was quoted; “Before imputation occurs there needs to be some purpose for deeming the principal to know what the agent knows.”
“Origin and scope of the right to deduct 1 The right to deduct shall arise at the time when the deductible tax becomes chargeable. 2 In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax, which he is liable to pay: (a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person;…..” 234. Articles 167 and 168(a) of Council Directive 2006/112/EC of28 November 2006 on the common system of VAT (the Principal VAT Directive) provide: “167 – A right of deduction shall arise at the time the deductible tax becomes charged. 168 – In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT, which he is liable to pay: (a) the VAT due or paid in that member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person.” 235. Sections 24, 25 and 26 of theValue Added Tax Act 1994 (“VATA”), in so far as relevant, provide: “24.- (1) Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say- VAT on the supply to him of any goods or services; VAT on the acquisition by him from another member State of any goods; and VAT paid or payable by him on the importation of any goods from a place outside the member States, Being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him. (2)... (6) Regulations may provide- (a) for VAT on the supply of goods or services to a taxable person, VAT on the acquisition of goods by a taxable person from other member States and VAT paid or payable by a taxable person on the importation of goods from places outside the member States to be treated as his input tax only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases; 25.- (1) A taxable person shall- (a) in respect of supplies made by him, and (b) in respect of the acquisition by him from other member states of any goods, account for and pay VAT by reference to such periods (in this Act referred to as “prescribed accounting periods”) at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances. (2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him. 26.- (1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below. (2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business— (a) taxable supplies;...” 236. Regulation 29 of theValue Added Tax Regulations 1995 (SI 1995/2518) provides: “29.- (1) Subject to paragraph (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax undersection 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable. (2) At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of- (a) a supply from another taxable person, hold the document, which is required to be provided under regulation 13;… provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold, instead of the document or invoice (as the case may require) specified in subparagraph (a)…above, such other documentary evidence of the charge to VAT as the Commissioners may direct.” 237. Thus, if a taxable person has incurred input tax that is properly allowable, he is entitled to set it against his output tax liability and, if the input tax credit due to him exceeds the output tax liability, receive a payment. Loss of entitlement 238. However, the European Court of Justice (“the ECJ”), in its judgment dated6th July 2006 in the joined cases of Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C-439/04 & 440/04) (“ Kittel ”) has confirmed that taxable persons who “knew or should have known” that the purchases in which input tax was incurred were connected with fraudulent evasion of VAT will not be entitled to deduct that input. Specifically: 239. At paragraph 56 of Kittel , the ECJ stated: “ …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.” 240. Conversely, the ECJ had stated at paragraph 51 that “…traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud…must be able to rely on the legality of these transactions”. 241. The rationale for the above approach was set out by the ECJ at paragraphs 57 and 58 of the judgment: “ That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.” (Paragraph 57); and “In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them” (paragraph 58). 242. At paragraph 59, the ECJ therefore concluded: “... it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity.’” 243. At paragraph 61, the ECJ reiterated: “...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.” 244. In Mobilx Limited (in Liquidation) v HMRC[2010] EWCA Civ 517 (“ Mobilx ”), the Court of Appeal considered Kittel. At paragraph 52, Moses LJ stated: “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.” 245. At paragraph 59 of Mobilx , Moses LJ went on to state in relation to the “should have known” aspect of the test: “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.” 247. Before, at paragraph 82, warning: “...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...” 248. Moses LJ also gave guidance as to the sort of circumstances that might be relevant to the “should have known” question: (i) In paragraph 72 of Mobilx , Moses LJ cited, and in paragraph 83 commended, a number of questions posed by the Tribunal including, “(1) Why was [the Appellant], a relatively small company with comparatively little history of dealing in mobile phones, approached with offers to buy and sell very substantial quantities of such phones?” “(2) How likely in ordinary commercial circumstances would it be for a company in [the Appellant’s] position to be requested to supply large quantities of particular types of mobile phone and to be able to find without difficulty a supplier able to provide exactly that type and quantity of phone.” “(3) Was [the Appellant’s supplier] already making supplies direct to other EC countries? If so, he could have asked why [the Appellant’s supplier] was not making supplies direct, rather than selling to UK traders who in turn would sell to such other countries.” “(4) Why are various people encouraging [the Appellant] to become involved in these transactions? What benefit might they be deriving by persuading [the Appellant] to do so? Why should they be inviting [the Appellant] to join in when they could do so instead and take the profit for themselves?” (ii) In paragraph 79, Moses LJ drew attention to the significance of the fact that Mobilx , aware that the CPU business in which it was engaged was “rife with fraud”, nevertheless chose to ignore HMRC’s warnings that its own transactions had, upon extended verification, been shown to trace back to fraud. (iii) In paragraph 83 of Mobilx , Moses LJ adopted the passage from paragraph 110 of Red12 v HMRC[2009] EWHC 2563 in which Christopher Clarke J highlighted the following: (a) “compelling similarities between one transaction and another.” (b) “pattern[s] of transactions.” (c) “transactions all of which have identical percentage mark ups ...” (d) “... made by a trader who has practically no capital ...” (e) “... as part of a huge and unexplained turnover ...” (f) “... with no left over stock.” (g) “A tribunal could legitimately think it unlikely that the fact that all 46 transactions in issue can be traced to tax losses by HMRC is a result of innocent coincidence.” (iv) In paragraph 84 of Mobilx the Court of Appeal commended as significant the fact that: “... 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.”
“50 The traders contend that mere failure to take reasonable care should not lead to the conclusion that a trader is a participant in the fraud. In particular, counsel on behalf of Mobilx contends that Floyd J and the Tribunal misconstrue § 51 of Kittel. Whilst traders who take every precaution reasonably required of them to ensure that their transactions are not connected with fraud cannot be deprived of their right to deduct input tax, it is contended that the converse does not follow. It does not follow, they argue, that a trader who does not take every reasonable precaution must be regarded as a participant in fraud. 51 Once it is appreciated how closely Kittel follows the approach the court had taken six months before in Optigen, it is not difficult to understand what it meant when it said that a taxable person “knew or should have known” that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT. In Optigen the Court ruled that despite the fact that another prior or subsequent transaction was vitiated by VAT fraud in the chain of supply, of which the impugned transaction formed part, the objective criteria, which determined the scope of VAT and of the right to deduct, were met. But they limited that principle to circumstances where the taxable person had “no knowledge and no means of knowledge” (§ 55). The Court must have intended Kittel to be a development of the principle in Optigen. Kittel is the obverse of Optigen. The Court must have intended the phrase “knew or should have known” which it employs in §§ 59 and 61 in Kittel to have the same meaning as the phrase “knowing or having any means of knowing ” which it used in Optigen (§ 55). 52 If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel . A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises. …………………………………………. 75 The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT. The Tribunal might have concluded that Mr Peters should have known that the transactions into which he entered were connected with fraud, by reference to the unconventional nature of those circumstances (a finding it came close to making at § 228). But it was not the only decision within the bounds of reasonable conclusion. …………………………………………… 82 But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the BSG appeal, 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 to fraud. The danger in focussing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.” ( Emphasis added ) 251. The judgment of Lewison J in the Commissioners for Her Majesty's Revenue & Customs v Livewire Telecom Limited[2009] EWHC 15 (Ch) (“ Livewire ”) is also of assistance: ‘86. In so far as a domestic analogy is appropriate, I agree with Mr Anderson that the appropriate analogy is that of constructive knowledge or constructive notice . This was described by Denning J in Nelson v Larholt[1948] 1 KB 339 , 343 as follows: “He must, I think, be taken to have known what a reasonable man would have known. If, therefore, he knew or is to be taken to have known of the want of authority, as, for instance, if the circumstances were such as to put a reasonable man on inquiry, and he made none, or if he was put off by an answer that would not have satisfied a reasonable man, or, in other words, if he was negligent in not perceiving the want of authority, then he is taken to have notice of it.” 87. The taking of every reasonable precaution has sometimes been referred to as a “positive duty”
‘16. What did the ECJ mean when it said in Kittel at paragraphs 56 & 59 that it is clear that a taxpayer who “should have known” his purchase was connected with the fraudulent evasion of VAT “must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud” and in these circumstances lose his right to deduct his input tax on that purchase? Does the phrase “should have known” impose on the taxpayer a duty to make enquiries? 17. Mr Beal's view is that “means of knowledge” is equivalent to Nelsonian blindness or blind eye knowledge or recklessness: the Appellant has the information but fails to make the obvious inferences from it. He does not consider it extends so far as to put on the Appellant a duty to take precautions (although it was also his case that his client did take reasonable and proportionate precautions and the results of these did not put Pars on notice that its chains were connected to fraud). 18. Mr Beal said that if “means of knowledge” was a negligence test it falls fouls of the legal certainty and equivalence tests and for these reasons would not have been endorsed by the ECJ. He says it falls foul of the legal certainty test as traders would not have known of it in 2006 and it falls foul of equivalence tests because it treats traders despatching goods less favourably than those undertaking purely domestic transactions. 19. On the contrary, HMRC's view is that blind eye knowledge (choosing to ignore what you ought to know or failing to ask the obvious questions) is a type of actual knowledge. Mr Cunningham's point is that the Court of Appeal in Mobilx concluded that the ECJ intended the phrase “knew or should have known” in Kittel to have the same meaning as the phrase “knowing or having any means of knowing” which they used in Optigen . Blind eye knowledge, says Mr Cunningham, is more than merely having the means of knowledge. 20. There is certainly some support for Mr Beal's view that “means of knowledge” equates with Nelsonian blindness in the Court of Appeal decision Mobilx at paragraph 61 where it is said: “If he [the taxable person] has the means of knowledge available and chooses not to deploy it he knows that, if found out he will not be entitled to deduct. If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct.” 21. Mr Cunningham said that here “chooses” should be read as “fails to”: a passive failure rather than necessarily a positive decision because the ECJ do not refer to a choice by the taxpayer in Optigen or Kittel . He points at that at paragraph 52 of the same judgment the Judge states that a “taxpayer [who] 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 … ” and also that “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 ”. HMRC do consider that a duty to take precautions arises and thus that the test is one of negligence. 22. We agree with HMRC, although as can be seen from our conclusions on the facts this is not strictly necessary to our decision. We think the ECJ does expect a taxpayer to take reasonable precautions and to make further enquiries where there are negative indicators. We also consider that such a test would not breach equivalence (fiscal neutrality) or legal certainty. The ECJ in stating its test in Kittel was declaring what the law has always been and not making new law: in any event a person who ought to have known of the fraud and desisted from trading ought not to be surprised to lose their input tax. We think the right to recover input tax is matched by an objective duty to take reasonable precautions.’ 253. Therefore, on the basis of the above guidance in Mobilx, Livewire and Pars, the Tribunal is not limited to what Mr and Mrs Sandham were actually aware of but what they should reasonably have been aware of and assessing what they should have known if they had taken reasonable precautions and deployed the means at their disposal available to them. An appropriate analogy is constructive knowledge or constructive notice. 254. The Tribunal is entitled to consider if the Sandhams failed to deploy the means of knowledge available to them. It can consider whether they had the means at their disposal to know that they were participating in fraud. This would include what material would have been available to them had they asked appropriate questions. However as §82 of Mobilx states, it is not simply a case of whether they “ asked appropriate questions ” or deployed the means of knowledge available to them (which HMRC submit they clearly did not). Even if a trader had asked appropriate questions, he would not be 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 to fraud. 255. The Tribunal therefore will consider what information was collectively available to the partnership when considering whether the partnership “should have known,” that the transactions were connected to the fraudulent evasion of VAT. 256. The Tribunal is satisfied that the policy behind Kittel and the Principal VAT Directive dictates that the Tribunal is entitled to consider what information was collectively available to Mr and Mrs Sandham in determining whether the partnership “should have known” the transactions were connected with VAT fraud. 257. To do otherwise would mean that a partnership could avoid liability for means of knowledge by hiving off separate functions to different partners and forbidding them to communicate. Equally it would discriminate in favour of larger businesses where distinct functions are dealt with by individual departments (e.g. compliance/trading/money laundering/banking). If the means of knowledge of those individual departments could not be combined to demonstrate constructive knowledge it would prove difficult if not impossible to implement the policy objective behind Kittel. 258. Support for this approach can be found in the decision of Citibank NA v The Commissioners for Her Majesty's Revenue & Customs[2014] UKFTT 1063 (TC) . This decision was overruled on the issue of dishonesty in the Court of Appeal but the specific paragraphs referred to below, [81]-[88], were not: ‘81. Four persons employed by the appellant are named in the SOC (§77). No allegations are made in the SOC against any of them and the appellant's Request asks if HMRC is making any allegation that any of them knew or ought to have known of the (alleged) connection to fraud. 82. HMRC's response is that they do not have the information to form an opinion whether any particular individual working at Citibank knew or ought to have known of the connection to fraud. Their position is (as I understand it) that they would not have to prove that to succeed in the appeal. 83. Nevertheless, they do allege that Citibank as an entity had actual knowledge of the fraud. I have ruled that that is in effect an allegation of dishonesty and that HMRC must make this explicit or withdraw the allegation (see §40). Assuming HMRC does make the allegation explicit, it must be an allegation that they have proper grounds to make. 84. Mr Kinnear accepted in the hearing that to prove actual knowledge against Citibank would require them to prove actual knowledge against an individual whose knowledge could be vicariously attributed to the bank. Yet they do not (so far) seek to prove actual knowledge against any named individual. Would the individual whose (alleged) knowledge they seek to vicariously attribute to the bank have to be identified by them to make good the allegation of knowledge by the bank? Because if so, HMRC should not make that allegation against the appellant without identifying such an individual. 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. 86. So I consider that HMRC can (if they have proper grounds in the evidence) make an allegation of knowledge against a corporate entity, such as the appellant, even if they are unable to identify any particular individual whose knowledge should be vicariously attributed to the bank. 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. 88. Therefore, I agree that it is proper (subject to having the evidence) that HMRC can make allegations of knowledge and means of knowledge against the bank without making any allegations of dishonesty or even constructive knowledge against any of the named individuals. Therefore, HMRC should not be required to answer Request 63 or 2(a)(i): the answer is in the existing SOC. HMRC do not (yet) allege that any particular individual knew or ought to have known of the connection to fraud.’ ( Emphasis added ) 259. Albeit dealing with the acts of the partnership as opposed to the question of knowledge there is some further support for “a collective approach” insection 5 of the Partnership Act 1890 which states: 5. Power of partner to bind the firm . Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner. Burden and standard of proof 260. As noted, the burden of proving each of the limbs required in Kittel including knowledge or means of knowledge rests upon HMRC: Mobilx Ltd (in admin) v HMRC[2010] STC 1436 , at [81]. 261. In terms of what HMRC must prove: (1) The threshold they must cross is high - Davis & Dann Ltd and another v HMRC[2016] STC 1236 , at [4]. (2) They must demonstrate either: (a) that the taxpayer actually knew that he was participating in a transaction connected with fraudulent evasion of VAT; or (b) that the taxpayer had the means at his disposal of knowing that he was participating in such a transaction: see Mobilx , at [52]. It is now accepted that this requires HMRC to show that the taxpayer ought to have known that the only reasonable explanation for the transactions was that they were connected to a VAT fraud: see Mobilx , at [59] and [75]; and Davis & Dann Ltd , at [4]. (3) It is thus not sufficient for HMRC to show that the taxpayer knew or should have known that he was running the risk that by his purchase he might be taking part in a transaction connected with fraudulent evasion of VAT: Mobilx , at [56]. (4) Nor is it sufficient for HMRC to show that a taxpayer knew or should have known that such transactions might be connected with fraudulent evasion, or even that it was more likely than not (i.e. probable) that his transaction was so connected: see Mobilx , at [56] and [60]. (5) It follows from the nature of what HMRC must prove that the focus is on only what the taxpayer actually knew at the time of the relevant transaction and/or the means of knowledge he had at his disposal at that time. Whilst that can include obvious inferences from the facts and circumstances in which he has been trading ( Mobilx , at [61]), it cannot, by definition, include information not known to him if he had no means at his disposal of knowing during the relevant period or matters known only with the benefit of hindsight: see Aria Technology Ltd v HMRC[2016] UKFTT 98 (TC) , at [13]. (6) Nor is it sufficient for HMRC to show that a reasonable explanation for the relevant transaction was that it was connected with fraudulent evasion of VAT. It must be the only reasonable explanation. Contra-trading 262. The Court of Appeal in Mobilx drew no distinction between the principles to be applied in cases of contra-trading to those in other cases of MTIC fraud, notwithstanding that the appeals of Blue Sphere Global Limited and Calltel Telecom Ltd & Opto Telelinks (Europe) Ltd , which were two of the other cases before the Court of Appeal, were themselves cases that involved contra-trading. 263. In the appeal of Fonecomp Ltd v HMRC[2015] EWCA Civ 39 , the Court of Appeal addressed and dismissed the argument raised by Fonecomp Ltd that the case of Bonik Case C – 285/11 suggested that the Kittel principle did not apply to contra-trading. A VAT recovery assessment 264. There is no dispute in this case that if HMRC’s denial of input tax upon the transactions is upheld, they were entitled to raise an assessment for the recovery of VAT pursuant tosection 73 of the Value Added Tax Act 1994 (“VATA”). There was no issue raised by the Appellant that the assessment issued was not raised within the statutory time limits. 265. Section 73(2) & (6) of VATA provides as follows: ‘73 ………….. (2) In any case where, for any prescribed accounting period, there has been paid or credited to any person— (a) as being a repayment or refund of VAT, or (b) as being due to him as a VAT credit, an amount which ought not to have been so paid or credited, or which would not have been so paid or credited had the facts been known or been as they later turn out to be, the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly. …….. (6) An assessment under sub-section (1), (2) or 3) above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in Section 77 and shall not be made after the later of the following – (a) 2 years after the end of the prescribed accounting period; or (b) one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge, but (subject to that section) where further such evidence comes to the Commissioners’ knowledge after the making of an assessment under sub-section (1), (2) or (3) above, another assessment may be made under that sub-section, in addition to any earlier assessment.’ 266.Section 77 VATA provides, in as far as is relevant: ‘(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,….’
‘43.A person who has no intention of undertaking an economic activity but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person's VAT identity ,does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax § 59 and Kittel § 53). A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct. 421. In other words, Mr Bott QC submitted that the test attempts define a person who has ‘no intention of undertaking an economic activity but pretends to do so.’
‘ After ceasing to be supplied by JKL, CFB bought copper from Premier Metals, a partnership … ’ (para 118). (x) Mr France brought 4 members of staff to Premier Metals. Premier Metals agreed to pay their wages. They acted upon instructions given by Mr France, creating invoices and making payments at his direction. (xi) Mohammed Urfan was unknown to the partnership before Mr France’s involvement. So were Starkeys, the supposed carriers of the goods. (xii) Unlike Mr France, and many others whose trading entities feature in MTIC chains, there is no sensible suggestion that Mr or Mrs Sandham have had any previous involvement in fraudulent transactions. On the contrary, their previous trading history and personal reputations are impeccable. (xiii) Since the partnership registered for VAT in 2007, it received only one visit from officers of HMRC (in March 2012). The partners had very little awareness of the existence or nature of MTIC fraud in the primary metals trade at the relevant time. The Tribunal accepts that the partners had very little understanding of what MTIC fraud was or involved at the relevant time. (xiv) The transactions in question occurred in a period of 50 days in February and March 2013. According to Mr and Mrs Sandham, which the Tribunal accepts, the transactions began only a day after Mr France first told them he was proposing to conduct the transactions through the partnership. This is to be contrasted with the much longer period of the Company’s trading between April and August 2013 during which the partnership transferred its business to the Company and engaged in a far larger volume of trade. The Tribunal is not concerned with Mr and Mrs Sandham’s knowledge or means of knowledge during the trade of the Company. (xv) It is accepted that Mr France had actual knowledge that the relevant transactions were connected to the fraudulent evasion of VAT. 432. The Tribunal is satisfied that Mr France, a professional fraudster with a plausible personality and long history of deceit, took the opportunity to continue MTIC fraud transactions through the partnership. 433. Although he offered a 50 per cent return on the profit margins to the partnership (some incentive was necessary), the arithmetic is likely to have been ‘massaged’ or altered by the payment of a secondary commission to Mr Urfan. 434. Participants in fraudulent missing trader chains may personally profit in a number of different ways. Some traders may simply take the margin on contrived transactions; others may take an equity share in the tax which is diverted through the missing trader. It seems likely that a player of Mr France’s sophistication would have profited in some way from the total amount of the fraud. 435. The Tribunal is satisfied that Mr and Mrs Sandham were deceived by Mr France and took him – as many others did – at face value. All the available evidence supports this conclusion. 436. The Tribunal formed its own view of Mr and Mrs Sandham after hearing them give evidence and gives answers in cross examination. It is satisfied on the balance of probabilities that they were honest witnesses and, for the most part, their evidence was reliable and credible. They had every reason to believe what Mr France said. 437. Mr Sandham gave largely consistent evidence, admitted where he had made failings and made reasonable concessions during cross examination even when this was potentially adverse to his case. He was willing to accept that he did not know why he had given answers to HMRC officers that were unhelpful to his case, rather than attempting to deny that he made the statements or attempting to invent alternative explanations. 438. The Tribunal accepts that Mr Sandham, lacked sophistication and did not fully understand or appreciate the nature of the trade Mr France was involving the partnership in. 439. Mrs Sandham had far less involvement in the relevant transactions, her witness statement was simply corroborative of Mr Sandham and the Tribunal is of the view that her evidence was likewise credible and reliable. 440. There is no suggestion that others with experience of Mr France’s business in the past - including his former employees - warned them about him. There is no reasonable inference that Mr France explained to Mr or Mrs Sandham his intentions or knowledge about the fraudulent primary metals trade he was engaging in or any previous fraudulent activity. There is no evidence he had shared any of his previous criminal activity or fraudulent behaviour with the Sandhams or that they were aware of it. The Tribunal is satisfied that they had misplaced trust in Mr France and he tricked them, relying on confidence, charisma and their longstanding personal relationship. 441. The Tribunal also gives weight to the fact that Mr Sandham – the more active partner in a husband and wife team - was not particularly good with paperwork and lacked relevant IT skills at the time. He lacked a formal education and a level of sophistication. 442. For all of these reasons, HMRC have not proved that either Mr or Mrs Sandham knew that the relevant transactions were connected to the fraudulent evasion of VAT. There is no evidentially safe or probable route to the conclusion that either partner knew that these transactions were connected to the fraudulent evasion of VAT. Should have known – means of knowledge 443. The Tribunal turns to consider whether HMRC have proved that either of or both Mr and Mrs Sandham should have known (had means of knowledge) that the transactions were connected to the fraudulent evasion of VAT. Addressing HMRC’s submissions 444. HMRC submitted that Mr Sandham’s evidence was unsatisfactory, and extremely telling. The Tribunal has rejected this submission for the reasons set out above. It found him to be, for the most part, a credible and reliable witness. 445. However, the Tribunal is satisfied that must accept some responsibility for the fraudulent transactions that were conducted in his partnership’s name. 446. Mr Sandham appears to have had limited control over the partnership’s primary metals business which he accepted he virtually left to Mr France to conduct. The Tribunal is satisfied that Mr Sandham failed to take reasonable care in allowing Mr France to arrange and conduct the relevant transactions on behalf of the partnership. 447. Mr Sandham, as partner, failed to supervise Mr France adequately given that he was conducting millions of pounds worth of business on behalf of the partnership. Mr Sandham failed to ensure that adequate due diligence was conducted in relation to suppliers and customers in the primary metals business and failed to ask Mr France sufficient questions as to the nature and purpose of the transactions which he was conducting. The Tribunal gives its reasons for these conclusions below. 448. The Tribunal is also satisfied that the reason that Mr Sandham failed to take reasonable care and supervise the transactions for which the partnership was responsible was because he placed undue trust in Mr France. He was deceived by Mr France based on their longstanding personal relationship and Mr Sandham was overly impressed by Mr France’s apparent business acumen. The Tribunal is not satisfied that Mr Sandham conspired with Mr France or turned a blind eye to Mr France knowing or suspecting that Mr France was committing fraud. 449. HMRC submitted that there are two scenarios: - A – Mr Sandham knew the transactions were connected with VAT fraud B - he should have known the transactions were connected with VAT fraud. 450. In Scenario A, HMRC submitted that Mr Sandham deliberately closed his eyes to the obvious because he knew that the transactions were connected with fraud/or he knew they were connected with fraud due to his lengthy (25 years) and close connection with Jonathan France. The Tribunal rejects this submission for the reasons set out above. 451. In Scenario B, HMRC submitted that the Tribunal is entitled to take into account the fact that Mr Sandham failed to deploy the means of knowledge available to him (as did Mrs Sandham). HMRC submit that Mr Sandham had the means at his disposal to know that the partnership was participating in fraudulent transactions. This would include material which would have been available to him had he asked appropriate questions/made further enquiries. 452. The Tribunal considers below whether Mr and Mrs Sandham had the means of knowledge at their disposal such that either or both should have known that the only reasonable explanation for the transactions was the fraudulent evasion of VAT. Asking probing questions 453. Given the earlier warnings from HMRC and Patrick Knowles in 2012, HMRC submitted that Mr and Mrs Sandham should have asked some basic regarding the primary metals trade conducted by Mr France on behalf of the partnership. By way of example: · Why were no questions asked as the partnership’s turnover went through the roof and the Sandhams’ earned 50% of the profits for doing nothing? · Why did the Sandhams not question the level of turnover and profit in comparison to their previous trade? · Why not question the reason that Mr France had come to them given the fact they could offer nothing in terms of primary metals experience/contacts? · Why not question why Mr France required their business as a conduit through which he could run this trade? · Why were no questions asked regarding 1 million US dollar payments abroad to accounts in different company names? · Why were UK companies asking that payments be sent abroad? · Why were no questions asked about the payment of amounts totalling£60,000 in cash to a man they did not know? · Why were no questions about the complete absence of any due diligence? · Why were the partnership’s suppliers in primary metals willing to take the risk of extending large amounts of credit? · Why were there no contracts given the value of the goods involved? · Where were insurance policies not requested? · Why were no checks conducted on Messrs France/Urfan or JKL Wakefield given the circumstances and the level of trade and sums involved? 454. It is true that the Sandhams might have asked all these questions with the benefit of hindsight and that they failed to take reasonable care in allowing Mr France to conduct the transactions on behalf of the partnership without asking these types of questions. They either mistakenly relied on the explanation given to them by Mr France as to the nature and purpose of the trade or asked inadequate questions of Mr France or satisfied themselves based on only a superficial understanding of the trade that was being conducted. The reason the Sandhams failed to ask appropriate questions is as set out above – they were convinced by Mr France and placed undue trust in the explanations they gave him. 455. However, any finding of means of knowledge is not dependent upon whether Mr and Mrs Sandham should have asked further questions and probed Mr France and the transactions. The question to determine is whether t he partners should have known that the transactions were connected with fraud because the surrounding circumstances (when taken cumulatively) permitted of no other reasonable explanation than VAT fraud. 456. HMRC submitted that the following factors set out below were probative of both the Sandhams’ knowledge or means of knowledge. The Tribunal considers these factors individually and cumulatively. Mr Sandham’s experience as a businessman 457. The Tribunal accepts HMRC’s submission that Mr and Mrs Sandham lacked adequate control over the partnership’s primary metals business conducted by Mr France. The Tribunal accepts Mr Sandham’s evidence as to what was going on day to day within the business and his failure to maintain sufficient control and supervision were due to his naivety/simplicity and undue trust placed in Mr France. 458. The Tribunal accepts that there was an unreasonable willingness by the partners to cede control to Jonathan France but rejects HMRC’s submission that Mr Sandham’s lack of control occurred because of a willingness to turn a blind eye to fraudulent activity and not ask questions. 459. The Tribunal accepts that Mr Sandham is not a naïve “babe in arms,” lacking in business experience. Mr Sandham accepted that he was a “good businessman” and had run a profitable scrap business and been in business since the age of 16, working for himself from the age of 30. He had sold a business in 2007 for£290,000 , found a buyer and negotiated a price. He had also built up a successful buy to let business with 13 rental properties. He had spotted a niche in the scrap market and also improved his product. He accepted that he knew what questions to ask when a business opportunity presented itself. H e was also assisted by Mrs Sandham, who was quite capable of dealing with paperwork and VAT and banking transactions. They were a team. 460. However, this must be weighed up against the fact that Mr Sandham had limited formal education, no IT skills and little business experience outside scrap metal and the property rental market. He was clearly impressed by what he perceived to be Mr France’s superior business acumen and experience. Mr Sandham’s answers in cross examination did not reveal a deep understanding of business nor VAT nor the ability to invent or create explanations to excuse the obvious failing to control the partnership’s business. 461. The Tribunal also accepts Mr Sandham’s evidence that he was not making considerable money out of the primary metals trade – indeed the partnership borrowed money to cover their VAT outlay. The profits during the partnership period in question were limited and were believed to amount to approximately 0.375% of the transactions (50% of 0.75 profit on each deal). The Sandhams received no sudden influx of cash during the relevant period although their business became more profitable. The Tribunal has already accepted that the Sandhams did not know the transactions conducted on behalf of the partnership were connected with the fraudulent evasion of VAT. Awareness of fraud and MTIC fraud in the primary metals trade 462. Mr Sandham accepted that when Officers Johnson and Carter visited his home on8 March 2012 , they had left a business card with “Special Investigations Unit” written on it. In response to the question “Did that worry you?” he stated, “It did.” Mrs Sandham also agreed it was a matter of some concern. The Tribunal is of the view that this was the evidence of witnesses who made reasonable concessions and did not seek to avoid giving answers that were unfavourable to their case. 463. Mr Sandham also accepted that he had received a warning from Patrick Knowles regarding trade in the primary metals market, the importance of due diligence and specifically the risks associated with trading in copper cathode prior to the visit from HMRC on23 March 2012 . He also accepted that if he was going to trade in primary metals as opposed to scrap that he needed to be careful. He had the warning from Patrick Knowles in his head before he went into business with Jonathan France. 464. However, this needs to be balanced against the fact that he had previously refused to accept an offer to trade when he believed it to be suspicious but had good reason to trust Mr France initially due to their longstanding association and experience of doing business with Mr France and his existing clients. 465. During the visit from HMRC on23 March 2012 the partners were warned about MTIC fraud and provided with an MTIC awareness leaflet. In his evidence in chief, Mr Sandham suggested that the leaflets were left on his kitchen table. He then gave the following evidence: “Q. Did you realise that one of those contained a strong and specific generalised warning about MTIC trade and how it worked? A. No, sir.” 466. The partners’ knowledge of awareness and understanding of MTIC fraud was limited. Although Mr Sandham’s evidence was that this was the first visit from HMRC and he was concerned by the fact that Officers came from Special Investigations, when material was left for the Appellant’s express consideration, he and his wife failed to examine this leaflet. While with hindsight, the partners might have taken reasonable care in so doing, it is not surprising they believed they had little to be concerned about in March 2012 (some ten months before the trade in question and before they were involved in the primary metals trade). 467. In re-examination, Mr Sandham was asked to clarify the nature of the call which he had previously about copper cathode (where he refused to do the deal) and why it was different from the transactions which Jonathan France was proposing. His response was that he believed these were all existing customers whom he had been aware of for a number of years. This was a credible answer and consistent with what he had said at paragraph 78 of his witness statement: “78 Paragraph 48d of Mr Chisman's statement is incorrect. It quotes from the visit report, and the visit report is wrong. I did not say that Jonathan France said he wanted to come to work for Premier Metals so he could do commodities trading. As stated above, when Jonathan France came to us he came as a consultant to generate new business, and to bring former JKL (Wakefield) Ltd customers with him. Those customers were all known to me. I hadn't worked for them directly but I had done haulage to their premises. It was not until the end of January 2013, when JKL (Wakefield) Limited went bust, that Jonathan France first suggested that we should do primary metals trading. He did say that working at Premier Metals would be better because it wasn't as far from his home as C&C Metals was. C&C Metals was not a customer or supplier of Premier Metals until after Jonathan France became a consultant.” 468. Therefore, the type of questions Mr Sandham asked himself in relation to the previous offer made out of the blue in 2012 were not necessarily also applicable to the later transactions with Jonathan France. 469. In 2012 he wondered why the caller had contacted him rather than other scrap yards. Similarly, he could have asked why Jonathan France came to him when there were other persons dealing in copper when he had no such experience? In 2012, he was concerned that he did not know the person making the call “from Adam.” The difference in relation to Mr France was that he knew him well and trusted him. 470. Mr Sandham also referred to the issue of funding the deal at the time of the phone call. This was also something he considered when Mr France approached him, and which ought to have prompted him to question further why he was being extended such large credit. The Tribunal accepts that with the benefit of hindsight there are more parallels than differences not least because the product was the one he had been warned about, namely copper. 471. The Tribunal also accepts HMRC’s submission that Mr Sandham should have asked more questions about the involvement of Mohammed Urfan, who was the finder for his main supplier. He knew nothing about Mr Urfan or Recycling Solutions who supplied him with£9 million worth of goods. However, the Tribunal accepts Mr Sandham’s evidence at paragraphs 53 and 77 of his witness statement on this issue: “ 53.At some point in (I think) late February or early March 2013 Jonathan France informed me that he was using a commercial agent called Mohammed Urfan to source some of the commodities deals, and that he would be paid a commission of somewhere around 1% for each deal he was able to source. This was a cost to be deducted before the profits were shared 50/50. I did not know Mr Urfan. He was a contact of Jonathan France's. He wanted to be paid in cash, which is not unheard of in the scrap metal industry. That is not to say it was "cash in hand" or anything illegal — it all went through the business's bank account and was properly accounted for — and he provided invoices (example at pages 65 and 66 of "NDS1"). … 77. Paragraph 47 of Mr Chisman's statement is correct in saying that Jonathan France ran the primary metals side of the business, and that he had decided to buy metal from Recycling Solutions (UK) Limited ("RSUKL"). It is not correct to say that Mohammed Urfan introduced RSUKL to Premier Metals, though it is true that I said that at the meeting on12 August 2013 (it is mentioned at page 5 of he visit report at AMC20). I just assumed that, because Urfan was the finder (sales agent) Jonathan France was using to source business i.e. materials (and for which he was being paid a commission of around 1%, referred to above), he must be the person who introduced RSUKL to Premier Metals. Urfan was never employed by Premier Metals, either the partnership or Premier Metals (Leeds) Limited.” 472. Therefore, the Tribunal is satisfied that HMRC place too much reliance on the previous refusal to engage in a deal in 2012 – which is to Mr Sandham’s credit – and HMRC’s March 2012 visit from officers when assessing the Sandhams’ awareness of MTIC fraud. The Tribunal observes that: (i) It lacks any first-hand evidence from HMRC as to what emphasis was put on MTIC fraud or how detailed any explanations were. (ii) The summary of the visit report shows that it was a relatively short visit at which any general discussion of MTIC fraud was ‘described briefly’. (iii) Much of the visit was devoted to generalised questioning of the partners, the purpose of which was not apparent to them at the time. (iv) HMRC was specifically trying to establish whether the partnership had traded with AM Trading. (v) They had not. (vi) It became clear they had not. (vii) The partners co-operated fully and handed all documentation to the officers. (viii) HMRC concluded that ‘PML are an MTIC low risk.” (ix) There were no further visits by HMRC during the currency of the partnership until the Company was visited in June 2013, well after the relevant transactions had been completed. 473. The partners’ awareness of MTIC fraud prior to the relevant trade was minimal and is in marked contrast with other cases. It is common for traders in high risk areas to be the subject of regular and sceptical attention from HMRC in the period before and during suspect trading activity. This pattern of contact between the revenue and the trader – often intensive – can support or reinforce the conclusion that the ‘means of knowledge’ of VAT fraud was available. The decision of the partners to enter into the primary metals trade 474. In response to questions from the Judge, Mr Sandham stated that when he and his wife discussed whether they should go into the primary metals business with Jonathan France that Mr Sandham mentioned the discussion they had with HMRC officers when the they first visited. The Tribunal is satisfied that this was a reasonable approach to take. 475. HMRC assert that despite the warnings from HMRC and Patrick Knowles, and an appreciation that they should consider these before entering into the primary metals trading, the Appellants simply did not care and were blinkered by the substantial profits which they could make. 476. HMRC submitted that it was too good to be true, and that is because it was. The partners ignored these earlier warnings and carried on trading for 7 weeks. The complete absence of due diligence referred to below should be viewed through the prism of these warnings. 477. The Tribunal does not accept this for the reasons set out above. Further, there were no substantial profits received by the partners in relation to the 7 weeks of trade the partnership was involved in, certainly none that there were ‘too good to be true’
“ Q. And so if we look again at paragraph 41 of your witness statement, Jonathan France comes to you, says there's good money to be made, and you query the cash flow side of things. He says: "It's all arranged so the customer pays for the load before you have to pay for it." And you query that, don't you? A. Yes, sir. Q. Now, why do you query that? A. I query it because obviously to buy primary metals you need to have the finances to actually pay for the metals. Q. Yes. And so you query, don't you, why a supplier would in effect extend you that credit? It's in your witness statement, why would the supplier trust anyone with a valuable load without getting paid first? A. Yes, sir. Q. And why did you query that? A. I queried it because, like I said, you need the money in place to actually purchase the scrap. Q. Yes. A. Yes. Q. But the point about the supplier, why did you -- why would the supplier trust anyone? Why did you say that? A. Because it's a lot of money, isn't it, to -- it's a lot of money for somebody to, like, lend you, if you like. Q. Yes, exactly it doesn't happen very often, does it? A. No, no, sir. Q. And in a business context, based on your past experience, you considered this was something unusual? A. Yes, sir. (Pause).” 479. Mr Sandham made a reasonable concession in his evidence. Despite the obvious concern that Mr Sandham had about why substantial sums of credit were being extended to the business, he failed to place sufficient weight on this as a warning indicator and permitted the business to enter into substantial transactions on this basis. Mr Sandham was asked about the paperwork in a specific deal which demonstrated that the goods had been delivered to his customer prior to him even paying his supplier and agreed that this was “risky in the extreme” for his supplier. With the benefit of hindsight these were indicators to the business that something was wrong, a matter that Mr Sandham acknowledged in cross examination. Mr Sandham dealt with the matter this way in his witness statement: “90. Paragraph 79 of Mr Chisman's statement does not take account of how (as I understood it) Jonathan France did all of the primary metals trades. His method was to find a buyer for a load, and get their commitment to take it, before he agreed to purchase the load in the first place. The customer would pay for it, and that would provide the funds for us to pay the supplier for the load. As I explained above, Jonathan France told me when he first described his business model that he had been doing this for a long time, it was a tried and tested business model, which he used to trade with a number of trusted customers and suppliers. Their deals were based on trust. The fact that the quantities were exact is not odd or difficult to understand. The deals were based on specific loads that were offered for sale, and so of course the customer would pay for the exact amount of the load.” 480. While there were adverse indicators at the time and Mr Sandham failed to take reasonable care to explore them, the Tribunal is not satisfied that it means that he should have known that the only reasonable explanation for the trade was the fraudulent evasion of VAT. No contracts/No insurance 481. In his evidence Mr Sandham accepted he had no contracts with supplier and customer companies. He stated that he was led to believe that the goods were insured and that this would deal with any issue with the goods being lost or damaged. He was unclear as to when he owned the goods and he never asked to see any insurance policies from either Starkeys or his counterparties. This demonstrates a reasonable lack of care given the value of the primary metals being transacted and should have been reason to suspect non-commerciality. 482. However, it has to be weighed up against the other evidence available to Mr Sandham as he set out in his witness statement and which the Tribunal accepts as reliable and credible: “91. Mr Chisman says in paragraph 80 and 81 of his statement that there were no formal contracts between Premier Metals and its suppliers and customers, and that title to the goods could never pass. This is misleading. According to the deal logs at exhibit AMC46, all of the transactions appear to be supported by invoices and delivery notes. I do not understand what other contracts Mr Chisman may be referring to. Certainly in the scrap metal business there is never anything more than an invoice and perhaps a consignment note or something like that. In relation to the primary metals trade, as far as I am aware the documents which Mr Chisman has produced in AMC46 are sufficient to prove what transactions took place. I do not regard the retention of title clauses as being relevant to anything. Jonathan France was doing the primary metals deals with people he trusted, he assured me. He negotiated all the prices, which to the best of my knowledge were proper commercial prices. I am not aware of any legal disputes in relation to any of the deals in AMC46, which is not surprising because, as I understood to be the case, all prices were agreed by Jonathan France and all loads were inspected by someone from Premier Metals and weights were checked. It is not correct to say the goods were not inspected. …………….. 93. In response to paragraph 83 of Mr Chisman's statement, I agree that we did not insure the goods. I understood it to be the case that Starkeys insured the goods whilst in their possession, and the hauliers insured them whilst they were in transit. That is how Jonathan France said it worked. I believed him.”
“95. Regarding paragraphs 85 and 86 of Mr Chisman's statement, I reiterate what I said above about Jonathan France saying we needed to have a dollar account. I took his word for it. Payments were made in accordance with the agreements which Jonathan France made. His handwriting appears on a number of the documents which Mr Chisman has included in the deal log (AMC46).” 485. Again, even without the benefit of hindsight this was a risk factor and one that Mr Sandham should have explored more fully. It should have made Mr Sandham suspicious that his trade may not be commercial but the Tribunal is not satisfied that in itself or coupled with the other adverse indicators, it meant Mr Sandham should have known the trade was connected to the fraudulent evasion of VAT. 486. Mr Sandham’s means of knowledge is not merely assessed against the adverse indicators available but also against Mr Sandham’s subjective understanding and the explanations which he received from Mr France, which at the time appeared reasonable and he had insufficient reason to ignore. Primary metals trade/Scrap Metals from the outset 487. Mr Sandham accepted in his evidence that Jonathan France was a friend who he would occasionally socialise with. He said that there was no discussion about Jonathan France bringing suppliers or trading in the primary metals industry at the outset of him joining the business. He maintained that initial discussions focused solely on scrap metal customers. It appears that this assertion was perhaps to make the apparent move into primary metals appear less stark and more incremental – see paragraph 78 of Mr Sandham’s witness statement set out above. 488. HMRC suggest the visit report of12 August 2013 records Mr Sandham telling HMRC Officers that Jonathan France had expressly stated that he wanted to do commodities (primary metals) trading at the outset of involvement in the partnership. In reply to this Mr Sandham, suggested that Officer Chisman’s visit report was incorrect. If one reads the visit report carefully (internal page 5, EX1-93) it does not record Mr Sandham (NS) suggesting Mr France (JF) raised commodities (ie. primary metals) trading at the outset, rather it supports the incremental approach: “NS stated that he received a phone call in December 2012 and that they had met in private on the site of Premier Metals (Lees) Ltd in January 2013. NS stated that JF had offered to bring customers to NS on a scrap for commission basis. …….. NS stated that JF was in the Premier Metal (Leeds) Ltd office when JF receive a phone call to state that JKL had gone into receivership. ………JF asked NS if he wanted to start trading in commodities” 489. Mr Sandham in his evidence had more difficulty explaining the Director’s Report prepared by him which was prepared for the Creditor’s meeting on11 November 2013 . The report stated that “ In December 2012, the Partners were approached by a consultant with a proposal whereby the consultant would work for the partnership with a view to introducing new customers and suppliers thereby diversifying the Partnership’s business into the dealing of commodities .”
“Q. No. So did it not cross your mind why on earth this man would offer you 50 per cent of all of this business? A. I -- I knew with the previous -- with the previous -- what we'd seen previous and what was happening now with the trades, I did know obviously -- I didn't realise that the profit's quite as much as what your colleague's mentioned. ………… Q Why do you get 50 per cent? A. Because when -- when he came to -- when he -- when he first mentioned it, I'd seen the operations already - already working so, like I've said, I realised with that kind of metals that obviously the profit margin would be –" 501. Mr Sandham was not able to give a helpful answer to what should have been a relatively easy question. HMRC submit the difficulty with which Mr Sandham had answering it is demonstrative of the fact that there was no credible answer that could be given. 502. An alternative explanation is that Mr Sandham is not sophisticated enough to give answers comfortably when questioned on the spot. In fact, the answer he appears to have given in cross examination – that he did not expect much profit because the profit margin was small is consistent with his witness statement. He gave an explanation at paragraph 49 of his witness statement – see the factual findings above within the First Issue – that he only expected a small profit when he agreed the 50/50 split with Mr France: “ With the primary metals deals Jonathan France said the profit from each deal was 0.75% and we would share that 50/50 too. I thought this seemed fair because it was a small profit, although the turnover was big. I didn't suspect anything was untoward with this .” 503. The Tribunal therefore is of the view that while Mr Sandham was not able always to give clear, coherent or easy answers to questions this was not through an attempt to deceive or because there was no credible answer to give. 504. Mrs Sandham did not question why they were receiving 50 per of the profit for doing nothing and bringing very little to the table (although as far as Mr France was concerned the partnership did bring a valid VAT registration number and a legitimate business name and premises) but she stated that it was only obvious with hindsight that there was something wrong. The Tribunal accepts her explanation as being a true reflection of her understanding and beliefs. “Q. So did you when you saw that the turnover in one month was 7.9 million have a conversation with Mr Sandham, your husband, about it? A. No, I didn't. Q. Did you ever have a conversation as to why it was Jonathan France was willing to give you 50 per cent of these profits? A. I didn't, no. Q. Because on the face of it you had no experience in primary metals, did you? A. No. Q. Neither did your husband? A. No. Q. He didn't have to do anything? A. Not really, no. Q. He brought all the contacts in. He did the majority of paperwork. A. Yes, for the deals, yes. Q. And so did it not occur to you that this was a rather strange arrangement, that you would get to keep 50 per cent of the profits? A. It didn't, no. …………………… A. Well, you know, you can sit here with hindsight and think "Isn't it obvious this is what you have done?" But at the moment, at that time, everything seemed to be fine because we were dealing with somebody that we viewed as a friend, good businessman, who had explained where the metals were going to, that they were going to end-users. There didn't seem to be any issue with it so far as we could see. My husband had seen him doing it for years previously, so taking all that into consideration for us at that time, no, everything seemed -- Q. Everything seemed fine. A. – fine.” 505. The Tribunal accepts that Mrs Sandham’s is credible as to her understanding and beliefs at the time in question and is careful not to apply the benefit of hindsight. 506. The Tribunal is satisfied that HMRC’s criticism is fair – Mr and Mrs Sandham should have asked more questions regarding the profit share. After the initial trading it should have become obvious that the profits were greater than they were expecting. However, while this should have been a warning signal that something may be untoward with the trading it had to be balanced against their trust in Mr France. During the seven weeks in question, the Tribunal is not satisfied that this factor, in isolation or in conjunction with the other factors relied upon by HMRC, meant that Mr and Mrs Sandham should have known that the only reasonable explanation for the trading was that it was connected with the fraudulent evasion of VAT. 507. As Mr Sandham set out in his witness statement at paragraph 50, the partners did not receive a sudden windfall in profits and in fact had to invest in the business during this time: “50. We didn't take any money out of the partnership during this period. In fact during January and February 2013 we put in£50,000 from our life savings for cash flow. This was on top of£15,000 we had put in during November and December 2012 so that stood us to£65,000 the business owed us, which we wouldn't be able to take until there was some surplus in the account. We continued to live modestly as we always have done, our lives didn't change in any way, we just lived on the same amount of money we had always done, going out a couple of times a week for a meal, that sort of thing. We didn't start going to fancy restaurants or buying expensive jewellery. We never aspired to that kind of life. We are just ordinary people.”
“Q. But you had access to the Internet banking because presumably you were the main signatory along with Mrs Sandham? A. I never -- I never did any banking. Q. But you saw what was going in and out of the bank account, didn't you? A. I didn't -- I didn't actually -- I would notice when I come into the office the amounts, if I was in the office.” 510. Despite this having been his starting point, in response to cross-examination Mr Sandham accepted that he had undertaken some of the banking, including the actual authorising of the third-party payments to the overseas banks. 511. He was taken to the CHAPS transfers and accepted that his signature appeared on the documents. He agreed that it was pretty odd that the money was being sent abroad to a different account name when the company was supplying him from the UK. Again, this was a reasonable concession to make. 512. On the basis of his evidence during the hearing, it appeared that Mr Sandham failed to ask any questions about why, despite the trading partners being based in the United Kingdom, such substantial sums of money were being transferred to overseas jurisdictions. With the benefit of hindsight Mr Sandham was able to identify that there were warning signals. 513. In Mr Sandham’s later cross examination he was asked to look at invoices requiring him to make payment to companies in Poland, Lichenstein and Hong Kong that he thought that the goods were actually being supplied by these companies and it was for that reason he was transferring money to accounts in those countries. He said he fully trusted Jonathan France . 514. Mrs Sandham was asked where she thought the goods were coming from given her husband’s answers and stated that she did not have that thought process. “ Q. Did you think you were getting -- your husband said he thought that the goods were coming from Liechtenstein, where did you think they were coming from? A. I didn't -- I didn't have that -- as I say I didn't have that thought process. Because Jonathan was dealing with it and I trusted that what he was doing was correct, that if he was making a payment to this person or this bank, then that is where it was supposed to go to.” 515. Mr and Mrs Sandham’s answers display an undeniable failure to take reasonable care as to the nature of the trade the partnership was conducting. This is all the more so given that Mrs Sandham must have seen the invoices in order to complete the VAT returns. Even if she did not examine them in close detail it should have been obvious the goods were coming from another UK company as opposed to from outside of the UK and the VAT returns were completed accordingly. 516. In cross-examination Mr Sandham was also referred back to his previous day’s evidence where he had initially stated that he did not make payment to suppliers and stated that he had forgotten this. He was also referred back to his witness statement in which he stated that he was unaware of payments to foreign bank accounts. He again maintained that he had forgotten the bank transfers: “ Q. Could you turn in your witness statement, please, to witness statement page 168, paragraph 89. (Pause). Now, you've just told us that you were aware that money was going to foreign bank accounts. Why in your witness statement do you say: "I did not do the banking and was completely unaware that payments were being made to foreign bank accounts." That's completely different to what you've told us today. (Pause). A. I had forgotten about these invoices in question.” 517. Mr Sandham was questioned as to whether it would have an effect upon his VAT position if the goods were obtained from Poland, Lichtenstein and Hong Kong as opposed to from the UK and he stated that he did not know: “ Q. If you were obtaining the goods from Poland, Liechtenstein and Hong Kong, as opposed to from UK companies, wouldn't this have an effect on your VAT position? A. I'm not too sure, sir. Q. Are you seriously answering that -- you don't know? A. Are you saying that goods what come in -- Q. Well, if the goods are coming in from outside of the UK, do they not come in zero-rated? A. I did not know that at the time, sir.” 518. As Mr Sandham confirmed in response to questions from the Judge, he had traded in scrap metal all his life which was subject to VAT. He also confirmed an awareness of the VAT threshold and the VAT percentage on goods. Nonetheless, the reality is that Mr Sandham knew little about VAT and gave little thought to the nature of the trade that Mr France was conducting on behalf of the partnership. Mr Sandham did not appraise himself of the VAT position if he really thought the goods were coming from outside of the UK. 519. Mr Sandham was questioned about an account given by Elaine Frost in HMRC’s visit to the Company on12 August 2013 as to the partnership’s EU trade where she stated in response to questions from Officers that there had been 2 transactions with Holland. If Mr Sandham genuinely thought that the goods were coming from Poland amongst other countries, why did he fail to correct her? There was no answer to this. Mr Sandham’s memory was unclear. 520. Mr Sandham’s lack of attention to detail demonstrates an unreasonable abnegation of responsibility and proper oversight in respect of the transactions going through his business and his VAT returns. If he genuinely thought that goods were coming from outside of the UK why was his business claiming input tax on the basis that they were supplied by UK companies? The Tribunal is satisfied that Mr Sandham gave little thought to where his goods were coming from and placed undue trust in Mr France. 521. This is demonstrated by the passage of cross-examination set out below: “ Q. Now, this is a transaction where you've sent£440,000 to Eurowire in Poland, haven't you? A. Yes, sir. Q. And you've told us that you believed the goods were coming from Eurowire in Poland? A. Yes, sir. Q. Your partnership has claimed input tax, if you go back to page 370, on the basis that those goods came not from Poland but they came from a UK company called Recycling. A. Yes, sir. Q. Input tax some 73,000 on that invoice. What do you say about that? A. I'd -- I had not seen this invoice. Q. No. These were submitted on behalf of your partnership, weren't they? A. Yes, sir. Q. For a large number of deals. This is just one example. A. Yes, sir. Q. Does that not cause you some concern that you thought the goods were coming from Poland and yet you're submitting invoices which suggest they come from the UK? A. It does now, sir. (Pause).” 522. The Tribunal accepts that Mr Sandham was being honest in his answers – the fact is he did not think about relevant matters at the time. 523. He also stated that he had failed to spot within his company paperwork (submitted by the Appellant to HMRC) a number of transportation documents (CMRs) which suggest that the goods came not from the countries whom he stated he believed were supplying the Partnership but from different countries again, including Cyprus and Holland. When asked if he noticed it at the time, he said he had not. He agreed if he had noticed it, this would have led to some basic questions. This again demonstrates his failure to take reasonable care. “Q. So did you notice that at the time? A. No, sir. Q. You accept that you handed all these documents over to Mr Chisman on behalf of your partnership, don't you? A. Yes, sir. Q. If you had noticed it, what would it have made you think? A. If I'd have had it pointed out to me, I'd have thought that different companies were getting paid -- ………. A. That's fine. If I'd have realised -- if it had been pointed out to me, I would have realised that goods was coming in from different companies and -- to what it was saying on the invoice. Q: And how would that have made you feel? (Pause). A. I'd have probably asked questions if it were -- Q. What kind of questions? A. How come -- how are we paying this company when it's -- when the invoice is to Recycling Solutions? Q. I mean, basic questions; yes? A. Yes, sir.” 524. Mrs Sandham dealt with the VAT returns and accepted in evidence that she would have seen the invoices from Recycling Solutions Limited but “it was literally just a case of getting it in the book” as she was also at home looking after her young son. She accepted that she had probably made one of the substantial transfers to Lichtenstein or Hong Kong and was shown examples of sums of just under 1 million US dollars. She did not think to question this. 525. The above evidence demonstrates a complete lack of oversight and care about the transactions conducted in the name of the partnership, other than the fact that profits were being made. Mr and Mrs Sandham should reasonably have asked many more questions regarding the transactions, but at the time they placed undue trust in Mr France. Due diligence 526. When asked about Recycling Solutions Limited, Mr Sandham said that he did not know much about the company or Mohammed Urfan. Mr Sandham said that he may have looked in the due diligence folder about the trader but that he did not know much. 527. The Tribunal is satisfied that there was a serious failure at the partnership in respect of its due diligence processes. Premier Metals did not undertake any meaningful checks, having outsourced their function to Mr France, and then failed to have any meaningful oversight of his due diligence. 528. Mr Sandham was questioned in detail about the extent to which he examined the due diligence undertaken by Mr France. He maintained that he did occasionally look at the file. He stated that an account recorded in the visit report prepared at the creditors meeting11 November 2013 that he did not look at the due diligence and just took Mr France’s word was untrue and he was not sure why he had said that at the meeting. 529. Mr Sandham’s account as to Jonathan France’s behaviour is inconsistent. On the one hand Mr Sandham questioned whether he was being manipulated with the due diligence folder deliberately left open. On the other hand, Mr France was “a closed book” and secretive about the diary recording the deals, behaviour which appears contradictory. Mr Sandham said he did want to see what was in the diary, but the horse had bolted. He did not ask to look in it beforehand because he left it all to Jonathan France. 530. It appears that from Mr Sandham’s perspective the reason for due diligence was not to ascertain that the counterparties were VAT registered, creditworthy etc. but as Mr Sandham stated, to ensure the paperwork was up to date. This appears to be an extremely lax attitude to what Mr Sandham stated in his witness statement about his preconditions to entering into the primary metals trade, namely a purported to desire to ensure everything was above board. At §42 he stated, “it would be up to Jonathan France to make sure everything was done properly and that he did proper due diligence.”
“Q. When do you say you became aware that France could not be a director of a company? A. I think it was when it had all started kicking off. Q. What date would that have been? A. It would have been August -- August. Q. Of when? A. 2013. ………………. Q. You knew before 2016, didn't you? A. Yes. Q. Yes. A. Yes. Q. So that answer's not right, is it, on Friday? A. I am looking at page 71. Q. Yes. A. Paragraph 70 -- question 17 to 19. Q. Mr Bott says: "This is about a letter of15 April 2016 . Presumably even at this stage you didn't realise he'd actually been disqualified for almost the maximum period. Did you know that? “Answer: No, sir." You did know by 2016, didn't you? A. Yes, sir. Q. And when do you say you found out in 2013? A. I'm not sure if it was when -- in August or at the insolvency meeting. Q. So August 2013. The insolvency meeting's November 2013. Can you remember how you found out? I mean, it must have been something which came as quite a shock to you. A. I don't know if it was one of Jonathan France's colleagues. Q. So you don't remember at all how you found out? A. Not properly, no. Q. But this was a man who you'd, on your evidence, trusted, allowed to conduct millions of pounds' worth of transactions and all of a sudden you find out the shocking news that he's a disqualified director. A. Yes, sir. Q. And you don't remember how or when? A. There was a lot going on at the time and I'm not sure if it was during the August visit or if it was actually in the insolvency meeting. …. Q…..But at that meeting there you are saying that you did know when France joined the company he could not be a director. What I'd like you to help us with is whether you were referring to the partnership there or the company? A. If I could just make you aware what the situation was at the creditors' meetings, I was totally like a duck out of water and a lot of things had gone wrong – were going wrong and questions were coming thick and fast, and when -- when Jonathan France left the company I knew he was not a director at his company, but I did not know that Jonathan France was a disqualified director. Q. So when you said he did know that he could not be a director, why did you say that? (Pause). A. I don't know, sir.” 552. The Tribunal does find Mr Sandham’s inconsistent evidence to be unsatisfactory. It is unlikely that Mr Sandham would not be able to recall when he discovered Mr France was a disqualified director. This would have been fairly shocking given his intimate involvement in the partnership and then the Company. If Mr Sandham had let Mr France work for the business despite knowing he was a disqualified director this would suggest Mr Sandham should have known that there was a real risk that Mr France’s trade was untoward or fraudulent and that Mr Sandham may have been assisting Mr France in committing criminal offences. 553. The context of these inconsistent accounts is that Mr Sandham and Mr France had known each other 25 years. The only reason for Mr France to bring all of his contacts and business to Mr Sandham once Mr France had left JKL and that Mr France and Sandham were existing associates in related metals businesses. 554. If Mr Sandham had asked more questions of Mr France or conducted investigations as to why Mr France did not simply start up his own business or go to an existing trader in primary metals, he may have discovered the fact that Mr France was a disqualified director and a bankrupt and needed a conduit for the transactions. Mr Sandham should have asked some basic questions as to why he was being offered 50% of the profits from Mr France’s lucrative trade. In addition, investigations or searches should have revealed the truth about Mr France. 555. Nonetheless, the Tribunal has to weigh up this evidence carefully. Mr Sandham was giving evidence about events that had occurred five a half years before and concerning the collapse of his business which was emotionally distressing. 556. On balance, the Tribunal cautiously accepts Mr Sandham’s evidence that he only discovered about Mr France’s disqualification in August 2013 after the Company’s trade was disrupted, it ceased trading in primary metals and Mr France left. The Tribunal accepts that the reason he told the creditors otherwise in November 2013 was that he was confused and he was not party to dishonest conduct in allowing Mr France to operate from the partnership and lying to the creditors meeting about his knowledge of Mr France’s disqualification. However, the Tribunal is bound to find that Mr Sandham failed to take reasonable care and placed undue trust in Mr France. Mr Sandham’s admissions in evidence 557. HMRC submit that Mr Sandham, made admissions which were damaging to his case during the course of his evidence as to his conduct being reckless and of the type that no sensible business person should engage in. Mr Sandham stated in response to cross-examination as follows: “Q. It's quite obvious, isn't it, you had absolutely no control over what was going on, on your own account? A. That's correct, sir. Q. And as a sensible and prudent businessman, do you not accept that was reckless in the extreme? A. I -- yes, sir. Q. And you should have known what was going on, shouldn't you? Any sensible businessman should have known what was going on. All you needed to do was to ask a few questions, didn't you? A. Yes, sir. Q. So you accept that? A. I -- all I can say is because previous I'd seen it going on for such a long time at JKL for seven years I just -- and Jonathan France was running the companies for seven years, he was doing all the deals, I presumed or I thought when he came across to Premier that -- Q. It would just continue. I mean, you had no expertise in primary metals, did you? A. I had none at all, sir. Q. You could bring nothing to the table, could you? A. No, sir. Q. You were out there on the lorry dealing with the scrap side of things. A. That's correct, sir. Q. You gave nothing to Jonathan France, did you? You brought nothing to the primary metals table, if I can put it that way. A. No, no. Q. No. So did it not cross your mind why on earth this man would offer you 50 per cent of all of this business? A. I -- I knew with the previous -- with the previous -- what we'd seen previous and what was happening now with the trades, I did know obviously -- I didn't realise that the profit's quite as much as what your colleague's mentioned.” 558. The Tribunal accepts that this passage of evidence was a clear admission by Mr Sandham that he acted negligently in allowing Mr France to take control over the primary metals business of the partnership and conduct the relevant fraudulent transactions. 559. However, it does support Mr Sandham’s credibility that he was ready to make reasonable concessions. It is also based on the hindsight that Mr Sandham was armed with five and a half years after the events in question with full knowledge of Mr France’s criminal activities. The reason for Mr Sandham placing undue trust in Mr France was consistent throughout – Mr Sandham’s long association and knowledge of Mr France and Mr France’s conduct of primary metals trading while at JKL. 560. Ms Goldring, on behalf of HMRC, submits that this was an admission that Mr Sandham should have known that the transactions were connected with the fraudulent evasion of VAT. 561. The Tribunal does not go so far as to accept this. It was an admission that with the benefit of hindsight Mr Sandham should not have let Mr France take over the primary metals part of his business and that Mr Sandham should have known there was something untoward going on with this part of the business. However, the Tribunal is not satisfied it was a full admission of means of knowledge of VAT fraud nor that Mr Sandham believed he had means of knowledge at the time, as distinct to his means of knowledge years after the event. Factors militating against the Sandhams having means of knowledge 562. HMRC submit that, the cumulative evidence referred to above proves that either or both of the partners should have known that the transactions were connected with the fraudulent evasion of VAT, whether Mr France’s knowledge is attributed to the partnership or not. 563. The Tribunal is satisfied that there were more than reasonable grounds at the time to suspect that the transactions were connected to the fraudulent evasion of VAT and that the partners should have known that the transactions were more likely than not connected to VAT fraud. 564. However, for all the reasons set out above and below, the Tribunal is not satisfied HMRC have proved to the requisite standard that the partners should have known that the transactions were connected to the fraudulent evasion of VAT. 565. The Tribunal is satisfied the partners failed to take reasonable care in relation to the primary metals trade of the partnership in a number of ways already set out above. The Tribunal is satisfied that Mr and Mrs Sandham failed to supervise and control the primary metals business conducted by Mr France on behalf of their partnership. They failed to ask basic questions and conduct investigations into Mr France’s background, the nature of the supplies, the invoices, the due diligence, the profit margins and the division of the profits. They were partly motivated by their association with Mr France and partly motivated by the increase in profits. They should have been far more sceptical about Mr France and the trade generally. 566. The Tribunal relies on all of its findings above in coming to this conclusion, in particular its findings at paragraphs 430-442 above as to why the partners did not have actual knowledge. 567. Mr France took charge of the transactions. The exhibits of Officer Chisman show his complete control of the process and are strongly confirmatory of the Sandhams’ evidence. Mr Sandham had never seen anything like this before. The material at the disposal of the partners was being filtered by Mr France and their view of it was wholly determined by his dishonest explanations. This is a long way from the usual position. 568. The correct application of the ‘knows or should have known’ test is set out at para 59 and 60 of Mobilx in terms that are themselves well known: “59. The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who “should have known”