UK Computer Supplies Limited v The Commissioners for HMRC [2025] UKFTT 851 (TC)

[2025] UKFTT 00851 (TC)Case No TC09573
FIRST-TIER TRIBUNAL
TAX CHAMBER
Hearing Heard on: 7 to 17 November 2023Date Judgment date: 7 July 2025
Taylor House and remote video link
Appeal reference: TC/2017/07395
VAT – input tax denial – MTIC – whether tax losses connected with fraud - whether appellant
knew or should have known that transactions were connected with fraud
Before
TRIBUNAL JUDGE GERAINT WILLIAMSJANE SHILLAKER
Between
UK COMPUTER SUPPLIES LIMITEDAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentDean Armstrong KC and Rachael Muldoon, instructed by UK Computer Supplies Limited for AppellantHoward Watkinson and Joshua Carey of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for RespondentsDECISION

Introduction

[1]These appeals concern the decisions of HMRC dated 16 June 2017 to refuse the Appellant, UK Computer Supplies Limited (“UKCSL”), the right to deduct input tax totalling £1,306,789.00 on 19 purchases of SSD cards, headphones and Apple watches in the VAT periods 12/15, 01/16, 02/16 and 03/16 (“the Relevant Period”) and to assess on Kittel principles.[2]HMRC’s grounds for the input tax denial and assessment were that these 19 transactions on which input tax was incurred were connected with the fraudulent evasion of VAT (missing trader intra-community (“MTIC”) fraud) and that UKCSL knew, or should have known, of the same.

Issues to be determined

[3]The test for the Tribunal to apply is in 4 parts:(i) Was there a VAT loss?(ii) If so, was it occasioned by fraud?(iii) If so, were UKCSL’s transactions connected with such a fraudulent VAT loss? and(iv) If so, did UKCSL know, or should it have known, of such a connection?[4]In UKCSL’s response to the Fairford directions dated 18 February 2021, it accepted both the accuracy of each of the transaction chains identified by HMRC (i.e. each of the participants in the chain are as HMRC allege in the deal sheets), and that there were VAT losses. However, UKCSL does not accept that HMRC have demonstrated that the tax losses were fraudulent, that the transactions were part of an overall scheme to defraud the Revenue, or that it either knew, or should have known that its transactions were connected with the fraudulent evasion of VAT.[5]Therefore, the primary matters in issue before the Tribunal are whether HMRC have proved that:(i) The tax losses alleged were fraudulent; and(ii) That UKCSL knew, or should have known, that its transactions were connected with the fraudulent evasion of VAT.[6]HMRC bears the burden on all those issues. It is for HMRC to satisfy us, to the appropriate standard (namely, the balance of probabilities) as to each issue.

Transactions

[7]HMRC disputed 19 transactions undertaken by UKCSL in the four VAT periods from 12/15 to 03/16 (“Denied Deals”). There was no dispute between the parties as to the transactions involved and we find the following as fact. DEAL 1 4,000 Samsung SSD cards 250GB Tibizon Company ZP Z.o.o. (Poland) -› Saikona UAB (Lithuania) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Octanis Sp Z.o.o. (Poland) Invoiced 9/11/15 Customer paid UKCSL 22/10/15; UKCSL paid supplier 27/10/15 DEAL 2 950 Bose QC Noise Cancelling headphones Tibizon Company ZP Z.o.o. (Poland) -› Saikona UAB (Lithuania) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 26/11/15 Customer paid UKCSL 12/11/15; UKCSL paid supplier 13/11/15 DEAL 3 1,000 Apple watches Tibizon Company ZP Z.o.o. (Poland) -› Saikona UAB (Lithuania) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 9/12/15 Customer paid UKCSL 25/11/15; UKCSL paid supplier 26/11/15 DEAL 4 5,000 Samsung SSD cards 850GB Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› Sky City Universal Trading Aps (Denmark) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 14/12/15 Customer paid UKCSL 3/12/15; UKCSL paid supplier 7/12/15 DEAL 5 1,000 Apple watches; 2,000 Samsung SSD cards 250GB Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 15/12/15 Customer paid UKCSL 17/12/15; UKCSL paid supplier 18/12/15 DEAL 6 2,000 Apple watches Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 21/1/16 Customer paid UKCSL 11/1/16; UKCSL paid supplier 12/1/16 DEAL 7 3,000 Beats Solo 2 wireless headphones Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› Sky City Universal Trading Aps (Denmark) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 26/1/16 Customer paid UKCSL 6/1/16; UKCSL paid supplier 7/1/16 DEAL 8 3,500 Samsung SSD cards 500GB Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 21/1/16 Customer paid UKCSL 21/1/16; UKCSL paid supplier 22/1/16 DEAL 9 3,500 Samsung SSD cards 500GB Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 3/2/16 Customer paid UKCSL 2/2/16; UKCSL paid supplier 4/2/16 DEAL 10 2,000 Beats Solo 2 wireless headphones Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 26/2/16 Customer paid UKCSL 10/2/16; UKCSL paid supplier 12/2/16 DEAL 11 2,000 Beats Solo 2 wireless headphones Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 26/2/16 Customer paid UKCSL 16/2/16; UKCSL paid supplier 17/2/16 DEAL 12 4,000 Samsung SSD cards 500GB Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 26/2/16 Customer paid UKCSL 23/2/16; UKCSL paid supplier 23/2/16 DEAL 13 3,700 Samsung SSD cards 500GB Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 29/2/16 Customer paid UKCSL 25/2/16; UKCSL paid supplier 26/2/16 DEAL 14 1,000 Beats Solo 2 wireless headphones; 1,000 Samsung SSD cards 500GB; 1,000 Samsung SSD cards 250GB Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 14/3/16 Customer paid UKCSL 7/3/16; UKCSL paid supplier 7/3/16 DEAL 15 1,000 Beats Solo 2 headphones; 1,000 Samsung SSD cards 500GB; 1,000 Samsung SSD cards 250GB Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 14/3/16 Customer paid UKCSL 9/3/16; UKCSL paid supplier 9/3/16 DEAL 16 850 Beats Solo 2 headphones; 900 Samsung SSD cards 500GB Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 14/3/16 Customer paid UKCSL 8/3/16; UKCSL paid supplier 9/3/16 DEAL 17 3,000 Samsung SSD cards 500GB; 1,500 Samsung SSD cards 250GB Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 31/3/16 Customer paid UKCSL 21/3/16; UKCSL paid supplier 21/3/16 DEAL 18 1,500 Apple watches Techno Trade Baltia (Estonia) -› Askos Wolt LLP -› 3A Distribution Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 31/3/16 Customer paid UKCSL 22/3/16; UKCSL paid supplier 22/3/16 DEAL 19 1,500 Apple watches SH (Europe) Ltd -› CPX Gateway Ltd -› CD Europe Ltd -› PPSM Ltd -› UKCSL -› GECX Group (Greece) -› Tibizon Company ZP Z.o.o. (Poland) Invoiced 31/3/16 Customer paid UKCSL 23/3/16; UKCSL paid supplier 23/3/16[8]HMRC asserted that Askos Wolt LLP (“Askos”) is a “contra trader”. It appears in the first 18 deals. A contra trader by means of chains of transactions evades the extended verification by HMRC; here by effectively moving the point of reclaim of input VAT to UKCSL. Elsewhere in the chain a liability to output VAT is created which is never accounted for or paid, creating a tax loss. SH (Europe) Ltd (“SHE”) which appears in deal 19 is a fraudulent defaulter. It failed to account for output VAT charged. It is HMRC’s case that all Denied Deals were part of an overall scheme to defraud the Revenue. UKSCL’S VAT return history 9. UKCSL’s VAT return history from period 09/14 to period 05/16 is set out in the Table below (all figures other than VAT periods in £): VAT PERIOD INPUTS OUTPUTS INPUT TAX OUTPUT TAX NET TAX EC SUPPLIES 09/14 1,671,460 2,278,587 326,784.18 462,334.78 135,550.60 35,925 12/14 1,502,510 2,222,136 303,598.72 454,810.65 151,211.93 3,543 03/15 2,342,320 2,981,372 435,266.81 589,712.53 154,445.72 79,535 06/15 2,479,627 3,085,478 495,499.17 640,365.30 144,866.13 14,636 09/15 2,836,634 3,459,936 541,770.94 698,519.20 156,748.26 21,871 12/15 3,529,866 6,624,869 689,986.99 776,920.28 86,933.29 1,364,560 01/16 1,586,023 4,222,178 314,721.76 232,978.74 81,743.02 (CR) 1,530,462 02/16 3,945,681 5,092,121 485,254.93 238,520.41 246,735.52 (CR)(1) 1,951,135 03/16 2,971,317 3,193,574 186,505.38 229,688.39 43,183.01 (CR)(2) 2,124,655 04/16 969,380 1,292,980 192,345.64 251,516.11 59,170.47 2,652 05/16 757,364 992,953 150,713.36 197,938.67 47,225.31 802(1) Originally a credit of £545,057.29 before correction.(2) Originally a credit of £363,694.21 before correction. Dramatis personae

UKSCL’S VAT return history

[9]UKCSL was incorporated on 15 December 2009. It applied to register for VAT on 1 February 2010, declaring its business activity to be “reseller of IT equipment and services to businesses”. Its director and majority shareholder since incorporation is Mr Gary Watson (“GW”).[10]At the time of the disputed deals, UKCSL operated from Northampton (38 staff), London (8 staff) and Leeds (6 staff). London and Leeds were purely sales based. The denied deals all took place out of the London office.[11]Jaime O’Beirne (“JOB”), UKCSL Financial Controller, was appointed in April 2015 and based in Northampton.[12]Julie O’Malley (“JOM”), UKCSL London Sales Manager, was appointed in July 2015. GW had identified her as a possible recruit though a search on LinkedIn. She oversaw the sales staff who dealt directly with customers and suppliers. JOM had previously been a sales manager at another large IT reseller. Her employment was terminated by UKSCL in February 2016.[13]Stevie Clift (“SC”) was a sales account manager in the London sales team.[14]Rochelle Lucey (“RL”) was an account manager in the London sales team. Her previous employment was at Novus IT Ltd (an IT reseller).[15]The supplier or broker in all of the disputed deals was Product Placement Sales and Marketing Consultants Limited (“PPSM”), a company based in Sutton Coldfield. Its director at the time of the disputed transactions (and since incorporation) was Peter Alan Wildman (“PW”). PPSM was wound up on 31 October 2018.[16]The customer or purchaser in all but two of the deals was GECX Group (“GECX”), registered for VAT in Greece. The company website www.gecxgroup.com states that “GECX is an Al Rajhi Group owned company”. An article dated 22 June 2011, posted on the GECX website from ‘Metal Bulletin’ further states that GECX is “wholly owned by the Saudia Arabia-based Al Rajhi Group” and that the chairman is “Abdulkarim Al-Rajhi, the son of one of the four brothers who founded the Al Rajhi Bank, one of the largest banks in the Middle East. The GECX chairman's father set up the Al Rajhi Group.” Officer Gavin Stock could find no verifiable link between GECX and the Al Rajhi Group apart from the assertion of that connection on the GECX website.[17]The customer in the remaining two deals was Sky City Universal Trading Aps (“Sky”), a Danish company. Its director at material times was Claus Dalsfaard Jessen (“CDJ”).

Relevant law

[18]The law we are required to apply in determining these appeals is uncontroversial and can be comparatively simply stated:[19]The right to deduct is enshrined in Articles 167 and 168 of the Council Directive 2006/112/EC of 28 November 2006, entered into force domestically by virtue of sections 24, 25 and 26 of the Value Added Tax Act 1994 (“VATA”).[20]In CJEU in its judgment dated 6 July 2006 in Axel Kittel v Belgian State (C-439/04) and Belgian State v Recolta Recycling SPRL (C-440/04) (“Kittel”) stated at [56] that: “… a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with the fraudulent evasion of VAT must, for the purpose 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”.[21]At [59] and [61] of the judgment, the CJEU concluded that when determining whether a taxable person knew or should have known that, by their purchase, they were participating in a transaction connected with fraudulent evasion of VAT, the national court is to have regard to “objective factors”.[22]The Court of Appeal considered the “objective factors” in the context of the ‘should have known’ aspect of Kittel in Mobilix Limited (in Liquidation) v HMRC [2010] EWCA Civ 517 (“Mobilix”). At [52], Moses, LJ said:
“[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.”
[23]At [82], Moses, LJ, stated that the “should have known” aspect of the test is satisfied if the ‘only reasonable explanation’ standard is met:
“[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.”
[24]At [83], Moses, LJ. adopted the passage from [110] of Red 12 Trading v HMRC [2009] EWHC 2563 in which Christopher Clarke J highlighted the following:(i) “compelling similarities between one transaction and another.”(ii) “pattern[s] of transactions.”(iii) “transactions all of which have identical percentage mark ups ...”(iv) “... made by a trader who has practically no capital ...”(v) “... as part of a huge and unexplained turnover ...”(vi) “... with no left over stock.”(vii) “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.”[25]The Tribunal is to consider the totality of evidence before turning to consider whether the ‘only reasonable explanation’ standard is met; per Arden, LJ (as she then was) in Davis & Dann Ltd & Anor v HM Revenue and Customs [2016] EWCA Civ 142 (“Davis & Dann”) at [60]: “… In my judgment, the UT's treatment of the respondents' repayment position provides a clear example of over compartmentalisation of the factors rather than a consideration of the totality of the evidence. The UT accepted Mr Scorey's submission, also made to us on this appeal, that the respondents' abnormally large repayment position was just a consequence of the Transactions (UT decision, para 50). But that is to leave out of consideration the role of this factor as a factor which is capable of supporting knowledge to the no other reasonable explanation standard. The UT did not consider its relevance in this way and its failure to do so was an error of law. When a factor is considered in that way it may be that there is an explanation which means that the knowledge does not meet the required standard. At that stage, the factor, while relevant, ceases to be probative. The example which I have given is repeated in relation to the other factors which the UT considered. Moreover, although, in paragraph 55 of its decision, the UT stated that the no other reasonable explanation standard was not met “ whether the factors were looked at individually or as a whole ”, it did not elucidate why that was so. I give that statement little weight in the light of the general tenor of the decision, which was to look at factors in isolation” .[26]HMRC do not have to prove that UKSCL knew or should have known either the details of the fraud or the identities of the fraudulent defaulters (Megtian Ltd (In Administration) v The Commissioners for Her Majesty’s Revenue & Customs [2010] EWHC 18 (Ch) at [37-38] per Briggs[27]HMRC do not have to allege nor have to prove, that those at UKCSL who undertook or supervised the transactions were dishonest (The Commissioners for Her Majesty's Revenue and Customs v Citibank NA, E Buyer UK Limited [2017] EWCA 1416 (Civ) at [90] per The Chancellor). Evidence We were provided with a core bundle comprised of 675 pages, a witness statement bundle comprised of 706 pages and seven supplementary bundles comprised of 12,464 pages. Due to the significant volume of evidence before us, we have not referred to each and every aspect of the evidence but rather we have focussed on those aspects of the evidence which were relied on by the parties and highlighted to us. The hearing was transcribed and we were provided with a transcript at the end of each day.

Evidence

(s) WITNESS EVIDENCE

[28]The Appellant did not require the following HMRC witnesses to be called (the company the officer reported on is shown in brackets):(1) George Beaddie (Askos Wolt LLP);(2) Jeanette Lucas (CCS Media Limited);(3) Gemma Lowth (ATFX Systems Limited);(4) Julian Cook (CD Europe Limited);(5) Jan Balthruschat (CPX Gateway Ltd);(6) Olabanji Olufemi (Fair Services (UK) Limited);(7) Gavin Stock (Presence Networks Limited and GECX);(8) Daniel Grogan (Fast Away Services Limited);(9) Stefan Tosta (Global SFX Limited);(10) Mukesh Bhundia (Jensa Limited);(11) Louise Walkinshaw (SH Europe Limited);(12) Martyn Guest (Shark Partners Limited); and(13) Shaikh Malique (3A Distribution Ltd).[29]We heard oral evidence from the following witnesses in the following[30]SH is the case officer and has been an officer of HMRC and its predecessor, HM Customs and Excise, since 1997 and is currently a member of the MTIC fraud team. As part of her duties, she undertook a risk based programme of visits to VAT registered traders. SH’s two witness statements (with over 500 extensive exhibits) and her answers in cross-examination set out the factors relied upon by HMRC which are relevant to the fraudulent tax losses and the knowledge and means of knowledge limbs of Kittel. The Tribunal accepted her evidence as credible and that she was attempting to assist the tribunal on matters of fact. We noted that much of her evidence in response to cross-examination was opinion on various matters put to her, rather than factual evidence of which she had knowledge.[31]JM was the visit officer and has been an officer of HMRC and its predecessor, HM Customs and Excise, for 35 years and is currently a part of the Fraud Investigation Team. Her duties involve visiting and monitoring the trading activities of wholesale traders. She adopted the witness statement and exhibits of Judith Elemer dated 12 October 2020 in respect of a visit to UKCSL premises that she and JE conducted on 12 October 2020. JE retired from HMRC in December 2020. JM’s witness statement confirmed that the visit was her only interaction with UKCSL and she had little or no recollection of the visit even after reading the visit report. We accepted her evidence as credible but of limited assistance.[32]JOB’s written evidence addressed the awareness of MTIC in the IT industry and UKCSL, the industry norms, the due diligence undertaken by UKCSL and the assistance offered by HMRC. We found him to be conscientious in his role as financial controller but naïve and/or too trusting of fellow employees. He clearly understood there was a requirement to gather paperwork in respect of the Disputed Deals but viewed this as a purely administrative task without context.[33]GW’s first two witness statements provided the background and context to UKCSL’s role as a Reseller in the IT sales industry, the recruitment of JOM, awareness of MTIC, the Denied Deals and UKCSL’s internal processes. His third witness statement responded to a point in HMRC’s skeleton argument that he fabricated a VIES document. It was accepted that he had referred to the incorrect date and we have not considered the point any further. We found GW to be willing and helpful as a witness but he frequently sought to explain the circumstances around deals with which he had no personal involvement and without reference to documents or any other evidence. To this extent, his evidence was unreliable.

Evidence of Susan Hirons

[34]SH, in two witness statements, set out the factors on which HMRC rely and/or which are relevant to: the tax losses were fraudulent and to the knew or should have known limbs of Kittel:(1) On 10 July 2014, Spire Technology Limited (“Spire”) made a request to HMRC to verify the VAT number of UKCSL. As the verification request was made by known MTIC trader/trader that has been issued with an awareness letter a visit was arranged.(2) On 22 July 2014, Officers Jude Elmer and Julie Marshall visited UKCSL at their premises and met with GW and Prad Patel (Finance Manager). GW confirmed that the trading activities of UKSCL is telesales to end users. Stock is purchased from mainline distributors with very little held on hand. There were no wholesale transactions. The sales staff were on a bonus scheme with set targets. All suppliers were sourced by the director and sales manager. Staff were not able to source their own suppliers. Customers were risk addressed through Risk Disk with a credit rating which was rarely overridden as UKCSL factored their invoices. GW was given Public Notice 726 with Section 6 “Dealing with other businesses, how to make sure the integrity of your supply chain” brought to his attention along with the leaflet ‘How to Spot Missing Trader VAT Fraud’. GW advised that UKCSL had made losses in the past due to a “bad sale” and that because of that only certain individuals can authorise credit limits. GW confirmed that UKCSL had dealt with Spire, the Officers concluded UKCSL was not conducting wholesale back-to back transactions and a Wigan letter was not required at this time.(3) UKCSL’s VAT period 02/16 (monthly) was received on 1 March 2016 and on 9 March 2016 UKSCL notified that 02/16 was being checked and that more information was needed. On 15 March 2016 , JOB provided the requested information. The purchase invoices indicated that UKSCL had become a wholesaler and potentially involved in MTIC fraud and tax loss deals. JOB’s reply confirmed that UKSCL had always been a repayment trader but in Q4 2015 the London sales manager opened an account in Greece and the customer has spent £3m since October 2015. JOB confirmed that the business is done for the most part through a single customer (GECX) and through a single supplier (PPSM Ltd.). The customer pays upfront due to the high value of the orders and UKCSL then pays PPSM on pro-forma. It was confirmed that the VAT position and day to day cash flow requirements that are not covered by existing profits held at the bank are funded by Aldermore Invoice Finance.(4) In September 2016 SH took over responsibility for verifying transactions by UKCSL in relation to their VAT returns for the periods 12/15, 01/16, 02/16 and 03/16.Prior to this she had visited UKCSL with Officer Leah Warner on 27 April 2016. In an email of 25 April 2016, Officer Warner had advised UKCSL’s accountants Mazars that the company had been placed on monitoring and that the periods 02/16 and 03/16 were to be subject to extended verification. At that point in time, an officer had yet to be allocated for the extended verification.(5) The meeting on 27 April 2016 was held at UKCSL’s Northampton office. Present were GW, JOB and Jody Hager, UKSCL’s management accountant. The purpose of the April meeting was for HMRC to understand the business now that UKCSL was to be subject to extended verification. Prior to the transactions at issue, UKCSL had always been a payment trader. After these transactions, it reverted to being a payment trader. Thus, when it became a repayment trader, HMRC wanted to understand what products were being dealt in that resulted in this change. UKCSL explained that they had moved into selling Samsung hard drives, Apple watches and Beats headphones. These are products known by HMRC to be involved with MTIC fraud. SH accepted that HMRC did not explicitly share that general information with GW at the meeting in April 2016.(6) The officers were advised that PPSM (the supplier in all 19 deals) arranged the release and removal of goods sold to UKCSL from the UK, using On Logistics who held the goods. PPSM would therefore have been aware of to whom the goods would be released. It was not clear to SH who was paying On Logistics as no evidence was produced by either UKCSL or PPSM. Other officers from HMRC who subsequently visited On Logistics in February 2017 reported that its director had not heard of UKCSL.(7) SH accepted in cross-examination that the parties recollection of the meeting on 27 April 2016 differed but her recollection was that GW said that Mr Wildman, PPSM’s director, had said he could not fund the VAT in making sales to the EU which was where UKCSL came in. No correspondence has been provided of the genesis of the trade between the companies.(8) UKSCL’s customers organised and facilitated all transport to its customers which did not cause UKSCL any concern.(9) There was rapid increase in turnover. In the period 12/15 the outputs declaration was £6.6m, double that declared on the 09/15 return. On the monthly returns of 01/16, 02/16 and 03/16 the outputs figures were £4.2m, £5m and £3.1m respectively. UKSCL has returned to being a payment trader just as it was before the MTIC transactions.(10) There was no commercial rationale for the transactions as PPSM was aware of the customer, GECX, and could cut UKSCL out of the transaction (particularly given UKSCL’s mark-up). Similarly, UKSCL’s other customer, SkyCity, was aware of the supplier, CDEL, and could cut UKSCL out of the transaction.(11) The transaction chains in the deal sheets are extensive and consistent in their composition. Deals 1-18 all contain the same parties. The consistency suggests orchestration and UKSCL must have been aware that the chain was of considerable length. It is not plausible that GECX repeatedly found it cheaper to purchase goods from a chain that would have at a minimum three businesses involved, each with their own mark-up and the added expense of transport, rather than purchase the goods from the official distributors in Greece.(12) The speed of the transactions between all of the parties is another indicator that the transactions formed part of an orchestrated scheme. The goods are bought and sold repeatedly by numerous companies within a matter of days.(13) UKCSL has been trading since 2009 in IT and related sectors and retained professional advisers, it is inconceivable that it was not aware of MTIC fraud. GW was given a copy of VAT Notice 726 on 22 July 2014.(14) No evidence has been provided of UKCSL conducted any market research or price checks on the products being traded nor any contracts with its counterparties. There was no meaningful involvement by UKCSL in the arrangements for removal and delivery of the goods from its supplier to its customer.(15) There is an absence of any meaningful negotiations with UKCSL’s suppliers. The evidence provided does not relate to any particular deal nor show any negotiation of mark-ups. UKSCL was always able to achieve a significant mark-up of between 4% and 6%. No consideration was given to why it was able to achieve such a mark-up nor why its supplier did not go direct to the customer to achieve the mark-up.(16) There was no understanding about who had title to the goods at any particular stage in the transaction and the description of the goods were generic and absent any serial numbers or other unique identification. No inspection of the goods ever took place.(17) The Denied Deals were generally undertaken on a back-to-back basis as UKCSL was repeatedly able to source the exact goods of the specification required in the required amount for an acceptable price from a single supplier. UKCSL was never left with stock as their purchases always matched the amount ordered.(18) The transaction chains have been traced in all the 19 deals and are as set out at paragraph 6 above. All 19 transactions have either been traced back to tax losses in supply chains that form part of a contra scheme where Askos has been identified as the contra trader (Deals 1-18) or a direct tax loss (Deal 19). In all of these transactions Product Placement Sales and Marketing Consultants Limited (“PPSM”) is the supplier to UKCSL who in turn has supplied EU traders GECX Group Greece Pcc (“GECX”) (17 Deals) or Skycity Universal Trading Aps (“Skycity”). In deals 2 and 3 circularity has been identified. The trader Tibizon can be seen at the top of the chains as the first EU supplier and again at the bottom of the chains as the EU customer of GECX. As the goods were already in Europe when these chains begin it makes no commercial sense to go to the added expense of bringing the goods into the UK only for them to then be returned to the EU. Despite this added expense and the goods passing through a number of UK traders everyone involved in the deal chains make a profit with the largest being made by UKCSL.(19) The due diligence carried out by UKCSL fell well short of that expected of a bona fide and reasonable trader and could not establish the bona fides of its trading partners and the integrity of its deal chains. UKCSL failed to: check its suppliers credit score, check VAT registrations with HMRC, undertake site visits, requested or checked company account information or requested trade references.(20) No insurance covering transport or lost or damaged goods was taken out by UKCSL. Suppliers were never paid before UKCSL was paid by its customer which meant that, in many cases, the goods were being supplied on credit and released without the benefit of contracts, insurance or detailed knowledge of the counterparties. No credible explanation has been given why UKCSL used a Euro account to pay its UK based suppliers.(21) SH was cross examined on the ADR meeting held on 24 January 2018 between HMRC and UKCSL, specifically the exit document prepared by the ADR officer (not herself). In this agreement, HMRC and UKCSL agreed that UKCSL did not know and was not complicit in any fraudulent evasion of VAT. At the time this agreement was signed, SH was of the opinion that the evidence she held supported a “should have known” argument as she had not yet spoken to anyone within UKCSL directly involved with the disputed deals.(22) SH did not meet JOM, RL or SC, the staff at UKCSL identified as involved in these transactions. She visited UKCSL at its Northampton office and not its London premises where JOM was based. She was not made aware of JOM being the person who conducted the transactions. SH confirmed in cross-examination that she did not have JOM, RL or SC’s surnames. SH was taken to emails between GW and Officer Leah Warner dated 2 September 2016. GW stated in these that JOM had left UKCSL to work for a company called Misco in their Watford office. SC had left to work for a company called Galtec. GW suggested HMRC should contact these companies as “[i]t just shows that these fraudsters are targeting IT resellers”. SH explained that HMRC could not follow this up as it has no right allowing it to go to former employees of UKCSL to seek information about UKCSL without the explicit consent of GW to discuss tax matters with them. SH was not party to the e-mails between GW and LW in which those details were provided. Her recollection was that she was informed about JOM by the officer looking after Misco (the company that JOM had worked at after UKCSL).

Witness Evidence of Officer Julie Marshall

[35]JM and Officer Judith Elmer visited UKCSL on 12 August 2014. This was HMRC’s first visit to UKCSL. Officer Elmer retired from HMRC in December 2020 and JM adopted Officer Elmer’s witness statement dated 12 October 2020. She was unable to locate notebooks from that visit to assist in refreshing her memory. These would have been destroyed in line with HMRC’s six year retention policy. Her evidence included the following:(1) The reason for the visit was that UKCSL were associated with another company, Spire Technology, who had been sent an MTIC awareness letter. The visit would assure HMRC that UKCSL existed and had not been hijacked.(2) The officers met Prad Patel (shown as Finance Director on their meeting record) and GW. GW left the meeting after initial introductions then returned when requested so as to briefly discuss UKCSL’s activities. The meeting record prepared by HMRC stated that GW, in describing his business activity, said there were no wholesale transactions. GW and his sales manager found all the suppliers and staff worked on a bonus system.(3) HMRC’s meeting record stated that Public Notice 726 “how to spot missing trader fraud” was given to GW and section 6 “dealing with other businesses, how to make sure of the integrity of your supply chain” drawn to his attention. Officer Marshall stated that a visit pack containing Notice 726 was taken on every visit and it was given to every business HMRC visited.(4) There were no concerns immediately after that visit that UKCSL were involved in MTIC fraud. Had there been concerns, the box would have been ticked on the records to send out an MTIC awareness letter. There was no reason to believe at the time that UKCSL was “doing wholesale and we have brought their attention to what checks they should do, should they enter that wholesale market”.

Witness Evidence of Jaime O’Beirne

[36]JOB’s witness statement and answers in cross-examination included the following:(1) JOB worked as Financial Controller for UKCSL for 14 months, from April 2015 until the role was made redundant in June 2016.(2) During the relevant period, JOB carried out VAT and Experian checks on UKCSL’s suppliers and customers.(3) He was unaware of MTIC fraud at the relevant time and had never heard of the acronym. He did not recall MTIC fraud being discussed internally nor any suppliers, distributors or customers notifying UKCSL of their concerns or otherwise with regards to MTIC fraud in their or our supply chains.(4) He was responsible for the day-to-day management of members of UKCSL’s Purchasing Team, he was not involved in UKCSL’s purchasing strategy.(5) When Deal 1 took place, he searched HMRC’s website for guidance on accounting for zero-rating of output sales from the UK to Greece, as this was a new area for him. This did not produce specific references to MTIC. He only became aware of MTIC fraud around the time of the meeting with HMRC in April 2016. Therefore, he was not aware of MTIC fraud at the time UKCSL started to do business with GECX and Sky City, although he was aware of the need for due diligence and to collect paperwork to be sure of getting VAT back.(6) His involvement in the Denied Deals was limited to (i) ensuring in the first instance that the requisite due diligence was undertaken (ii) settling invoices to suppliers (iii) tracking if rebates were received and (iv) managing credit limits with them. Ordinarily, with regards to (i), he would not be involved in supplier due diligence, however, the question of VAT treatment meant that he was in the case of the Denied Deals. He had no involvement in introducing suppliers or customers or recruiting sales team members.(7) During the period of the Denied Deals, he devoted more and more time to ensuring that accounting was correct and explaining cashflow to GW. Unlike UK-based deals, the Denied Deals required that UKCSL finance the VAT while waiting for the reclaim, causing pressure on UKCSL’s cashflow, he was instructed by GW to seek increased funding limits from UKCSL factoring company, Aldemore.(8) UKCSL had no visibility of the length of chain of transactions and, as is standard in the IT reselling industry, UKCSL was only ever aware of who it bought from and sold to.(9) Both PPSM and GECX had been introduced to UKCSL by JOM, therefore UKCSL had knowledge of them within the company. Additional checks were done on Evelex and CDEL as they were not known to UKCSL. UKCSL was happy with the situation with GECX as it knew they existed and the goods had been removed from the UK. Reading the guidance in Notice 726 did not mean they saw big gaps in what they had been doing but it did mean they saw there were additional risks hence the additional checks on Evelex and CD Europe.(10) JOB sought guidance from Mazars on VAT zero-rating procedures and getting the right paperwork in place. He sought documentation from the haulage companies but could not remember exactly what it was. His memory was that they would ask how many pallets etc. and assemble the packs of documents required by HMRC to validate the zero-rating. He understood this was required because UKCSL was not shipping the goods itself. He accepted in cross-examination that Mazars were not asked to consider or advise upon VAT fraud.(11) Where the customer would arrange collection or the supplier would drop ship, he would be only seek evidence that the stock existed and did look at shipping arrangements.(12) Initially with deal 1, JOB issued an invoice to GECX charging VAT. He was told GECX did not pay VAT as they were based in Greece. This was when he read VAT guidance around zero-rating.(13) He did not accept that GECX was effectively PPSM’s customer nor that an external pricing structure was being imposed on these transactions, they were aware of each other because of the shipping arrangements.(14) JOB introduced a deal sheet as of 19 February 2016 to resolve the challenges faced in calculating the profitability (in sterling) of deals done in euros. Commission to staff was based on euros. The deal sheets required a lot of detail but then GW, HMRC and the sales staff would, in his words, be happy.(15) It was put to him that the deals JOM was bringing were great business. JOB accepted the deals JOM was bringing were great business which was the point of opening a London office but that they required a lot of paperwork. Other deals done by UKCSL had a higher margin and involved less of a paperwork burden. The Disputed Deals were far from being the best or easiest deals UKCSL had done.(16) During his 14 months at UKCSL, JOB did not visit the London office. He met JOM occasionally when she visited Northampton. He did meet SC but could not remember whether or not he met RL.

Gary Watson

[37]GW’s three witness statements and answers in cross-examination included the following points:(1) UKCSL was an IT value added reseller (“Reseller”). A Reseller does everything with regard to sourcing and selling products. Typically the chain would be manufacturer, authorised distributor, reseller and end customer. At times there might be other links in the chain. It was standard for the distributor to drop ship (physically deliver) directly to the reseller’s customer.(2) In this analysis, PPSM was a broker. Brokers can obtain stock from a distributor for a reseller. He was unaware from whom PPSM purchased but it would have been either from authorised distribution or from another broker. Such a broker would buy stock at a good price in bulk then hold this stock (not necessarily in their own warehouse) ready to sell to distributors when they run out of stock.(3) GECX was another broker to whom a reseller such as UKCSL would sell. They would then sell on to the end user. With regard to GECX and Sky, resellers and brokers buy and sell from and even to each other. There could be multiple brokers in any channel; what he had outlined was the simplest form.(4) The disputed deals were arranged by JOM and managed by RL and SC. His own role was more supervisory. JOM was brought in to build-up the London office. JOM came to UKCSL with PPSM as a contact. He would expect PPSM to have contacts in the industry that would mean they could acquire products.(5) GW’s focus was always on profit. He accepted that the Transactions were larger turnover transactions but they had sold that type of product before and had sold overseas before.Since UKCSL started in 2010, its turnover had increased significantly year on year. Every year turnover increased, although at varying rates.(6) UKCSL entered into much larger deals prior to and after the Transactions. GW did not accept that the Transactions were materially different in size or type of products. He did not accept that UKCSL should have queried why any part of these deals was in euros rather than sterling.(7) He did not like to take low margin orders. A sales person would have had to seek their line manager’s approval for any deal with a margin of less than 10%. However, there was still a profit to be made because the turnover was high, so the deals went ahead.(8) His focus is always on profit. He accepted that the Transactions were larger turnover transactions but they had previously sold that type of product and had sold overseas.(9) He did not like to take low margin orders. A sales person would have had to seek their line manager’s approval for any deal with a margin of less than 10%. However, there was still a profit to be made because the turnover was high, so the deals went ahead.(10) GW explained how pricing checks could be done by sales staff using price comparison sites such as BrokerBin and Stock in the Channel. He accepted that there was no evidence of contemporaneous price checks. He accepted that there was evidence for the first 4 deals that PPSM’s price was the most expensive but suggested PPSM got the deals because they had the stock the customer wanted.(11) GW did not consider suppliers terms and conditions as determinative as, whilst suppliers like to have them, they are often superseded by how companies actually do business with each other.(12) GW did not accept that the Disputed Deals, which formed about a quarter of UKCSL’s gross profit for the periods in question, were plainly of significance to UKCSL: what mattered was the net profit, taking into account the costs of staff, office spare and so on.(13) GW did not accept that the deals in question were “far too good to be true”, requiring little effort. UKCSL took an order from GECX or Sky and asked PPSM to provide the goods and payments followed. For this UKCSL took about €450k. GW said that the same comment could be made about a lot of their orders. That is the Reseller industry.(14) GW was taken to HMRC’s record of the meeting on 22 July 2014 when UKCSL was given a copy of Notice 726. This meeting was attended by GW and Prad Patel (JOB’s predecessor) on behalf of the company. GW explained that he did not get involved in setting up suppliers for due diligence or with the invoicing so even if he had been directed to Notice 726 then, he would have passed this on to Prad Patel as being his job. It was 15 months before the disputed transactions. He was not aware of MTIC or other VAT fraud otherwise at this time. HMRC were asking about a missing VAT return and a company called Spire Technology. It was likely he only spent a short time in the meeting.(15) UKCSL sought advice from Mazars on zero rating and Mazars too did not flag up MTIC fraud as a risk. By his reckoning, it would have been on 23 March 2016 that HMRC gave UKCSL Notice 726 again.(16) GW did not meet anyone from PPSM or GECX until after the transactions had taken place. Generally he did not meet customers or suppliers but, as HMRC were withholding £1.3m, he was keen to meet both supplier and customer. He deferred entirely to JOB on due diligence matters as JOB did the actual due diligence. JOM brought the deals to UKCSL and she had extensive industry experience.(17) When GW met PW, PW stated he would take the deals direct once he had funds to finance the VAT. GW got an NDA drafted for PW to sign to say PPSM could not deal with the customer moving forward. He rejected the suggestion that staff at UKCSL carrying out the deals were well aware that PPSM and GECX were known to each other, although he did then accept that they would have to know each other for the purposes of shipping the goods. He did not see the fact they knew each other as a red flag but sought the NDA to avoid the risk of UKCSL losing business going forward.(18) The tax loss letter having been issued on 20 July 2016, GW was asked why he still asked PW of PPSM to sign an NDA on 28 July 2016. His reply was that HMRC were doing an investigation but had not indicated to them that it was VAT fraud or they were in a fraudulent VAT chain. It was another 15 months before they finally withheld the VAT. Should HMRC have come back and refunded the VAT (because PPSM although suspected did not turn out to be an MTIC trader) then UKCSL might have wanted to continue to trade.(19) He did not get involved in due diligence and he relied upon JOB. It was put to him that UKCSL knew it should collect IMEIs of goods. GW explained he was not involved in due diligence.(20) It was put to GW that JOM had not in fact known GECX from her previous employment but that SC had made contact with them at a trade conference. He said JOM had always been understood to have brought the deals to UKCSL and she probably passed them on to SC.(21) When taken specifically to the due diligence on PPSM or GECX, GW stated again this was not his role and he relied on JOB.(22) GW was taken through Deal 1 in detail. It was put to GW following this detailed walk through of Deal 1 that JOM, RL and SC knew or, at the very least, should have known, that these transactions were connected with fraud. GW completely disagreed. All three were experienced sales people with no question of or history of fraud or MTIC fraud.(23) It was put to GW that he could have called JM, RL, SC, Andy Stafford, PW of PPSM, Mr Jessen of Sky and/or Mr Totolis of GECX to give evidence. His response was that he did not feel he was in a position to ask them and felt informing HMRC was a better way to go about it. He thought to approach them to give evidence on behalf of UKCSL would be futile. Documentary evidence Supplier terms

Documentary evidence

[38]We were taken to PPSM’s standard terms and conditions. PPSM’s terms relevantly provided:(1) Clause 20 “You must make payment even if delivery has not taken place and/or that the title in the goods has not passed to you”.(2) Clause 30 “You must inspect the goods on delivery or collection”.(3) Clause 39 “The risk in the Goods will pass to you on completion of delivery.(4) Clause 40 “Title to the goods will not pass to you until we have received payment in full”.[39]As UKCSL did not take possession of the goods and were not involved in the delivery of goods this would create uncertainty as to when the risk in the goods passed to them. No inspection of the goods was ever undertaken by UKCSL despite Clause 30.

CMRs

[40]We were taken to some examples of the CMRs in the hearing bundle. The CMRs were all largely illegible, incomplete, did not contain a description of the goods and confirmed that the goods had been received by a freight forwarder, Y&O Freight in the Netherlands rather than Greece where GECX was located. Two of the five CMRs did not have UKCSL’s details as consignee but rather PPSM’s details.

Sales Documentation

[41]We were taken to the sales documentation in Deal 1. We noted that the purchase orders, pro-forma invoices and invoices were all issued in Euros despite PPSM and UKCSL being based in the UK. The timeline for the sales documentation in Deal 1 is frequently at variance with the order in which the transactions are stated to have taken place. GECX’s purchase order dated 21 October 2015 pre-dates the sales invoice from PPSM dated 23 October 2015, UKCSL receives payment from GECX before the sales invoice from PPSM on 22 October 2015. We consider it unusual that in a commercial transaction UKCSL would be able to agree a price for the goods with GECX before sourcing the goods from a supplier. The purchase orders for Deal 1 provides the delivery address as D&D Trading Sp X O.O, Fordonska 393, Poland whereas the CMR confirms that the goods were delivered to a freight forwarder Y&O Freight Logistics B.V. in the Netherlands.

ADR exit agreement

[42]Following an ADR meeting at the offices of Mishcon de Reya on 24 January 2018, an exit agreement was agreed and signed by GW on behalf of UKCSL and SH on behalf of HMRC. The exit agreement confirmed that it could be disclosed outside of the ADR process to resolve the tax position:(1) Both parties are in agreement that the company did not know and was not complicit in any fraudulent evasion of VAT.(2) Following discussion during the ADR meeting HMRC are still of the opinion that UKCS "should have known" as per the Kittle [sic] test.(3) HMRC accept that due diligence was undertaken by UKCS but are of the opinion that it was not robust enough to pass the kittle [sic]test.(4) The ADR meeting today provided UKCS with an opportunity to explain how the transactions with PPSM came about. The Parties agree that their recollections of the previous explanations differ on what was said at the meeting of 27/04/2016.

HMRC visit 22 July 2014

[43]On 22 July 2014, JM and Officer Judith Elmer visited UKCSL. The reason for the visit was that UKCSL were associated with another company, Spire Technology, who had been sent an MTIC awareness letter. The visit would assure HMRC that UKCSL existed and had not been hijacked. The report confirms that GW and Parad Patel (Finance Director) were present. The type of commodities recorded were “Office supplies incl computer hardware, TV’s, Toners”. The Purpose of the visit section had “Y” against the heading of “New Player identified by Wigan Validation Unit”. All the other purposes had a “N” against the purpose of visit headings. The content of the Visit Comments were disputed and we have set out in full the Visit Comments: Reason for Visit & Visit Details – The trader has come to our attention via a referral by MTIC OSU Wigan as they are being verified by a known MTIC trader ot [sic] Trader that has been issued with an Awareness Letter. – Co Verifying - Spire Technology Limited - 541 8952 25 VISION/VIES - A slight unusual increase in business transactions from pd 08/12 Last pd return in 05/14 was an assessment return. Debt on file - £ 49,061.28 Trader is involved in single market trade Prep Reviewed EF no new information. Visit Visited under the powers of DMB to discuss and collect missing VAT return. Will discuss business records etc only if trader permits, Attended address on file – 6 Darnell Way, Moulton Park, Northampton – premises unoccupied with not on door saying – “Moved to 27 Chartergate,Quarry Park close, Moulton Business Park NN3 6QB” Located address which is less than 5 minutes drive – Large signage over business supporting the fact that UK Computer Supplies were operating from there. Again an office block JE rang intercom and identified ourselves to reception – asked if we could speak with the Director Gary Watson. Mr Watson duly arrived at the front door. JE identified herself to him and notified him as to our reasons for being there was due to the missing VAT return and the lack of change in address, he invited us into the building without us prompting him and offered us refreshments. Which were duly accepted. Shown into meeting room and introduced to the finance manager Prad Patel. Mr Watson then left the room. The Officers again explained their reasons for being there. PP advised us that he had changed the VAT period recently and the certificate suggested that it would be a 4 month period that he need to do. JE showed him the VAT RN print which should that the 05/14 was still required and the 06/14 would have been a 1 month return. The payment that had been sent was actually for RTI sent in error by the Director. No transfer action required as they paid a 2nd amount over to RTI. PP confirmed that there were 39 staff on payroll. JE asked when he had requested the changes – according to the print it was 21/5/14. JE explained that this was too late to change the 05/14. PP showed us a copy letter which he had written in respect of the default surcharge This shows the new address. JE asked how long they had been at this address – PP enquired with the other staff and it would appear since December 2012! PP has only been with the Co 3 months so was unable to talk about the running of the business. We asked if we could speak with Mr Watson again to talk about the business. Prior to leaving we confirmed with PP that he will file the 05/14 return by Monday 28th July and the 06/14 by 7/8. Agreed that we will change the address to that on the letter to appealing against DS. JE enquired with Mr Watson if he had time to discuss briefly the business activities, he indicated he was more than happy. JE reviewed the business details and how the business operated in the way of due diligence. In essence the company telesales to end users. Sources stock from mainline distributors such as Datech and holds very little in the way of stock on hand (also confirmed by PP) No wholesale transactions. EU sales all supported by VRN’s . Some importation of stock (supported by way of C79 certificates) Discussed procedures with sales – All staff are on a bonus scheme with set targets. All suppliers are sourced by the Director and sales manager Alan. Staff are not able to source their own suppliers. Customers are all risk addressed through Risk Disk with a credit rating – the credit rating is very rarely over ridden as the Co also factor out their invoices. Notice 726 and How to spot missing trader fraud leaflets given to GW with section 6 drawn to the Directors attention as this covers the DD which HMRC suggest could be carried out but recognises that at the end of the day it is a commercial decision that only the Company can make. GW advised us that they had in past lost money due to a bad sale and hence only certain individuals can authorise credit limits. Confirmed with GW that the business premises are leased and business occupies both floors. Confirmed with GW that he has dealt with the Co Spire Technology Ltd Thanked GW for both his & PP time recognising that he had made time in his day for us.

HMRC letter dated 9 March 2016

[44]On 9 March 2016, HMRC wrote to UKCSL saying that it was checking UKCSL’s VAT return for period 02/16 and required various documents and information by 22 March 2016. On 15 March 2016, JOB replied to HMRC by e-mail with an attached letter. The letter provided answers to HMRC’s questions and confirmed the following: UK Computer Supplies Ltd. is an IT reseller. We operate a team of around 40 telesales staff and around 15 support staff. We buy from IT Distributors who normally ship direct to our customers. We do purchase and hold stock occasionally for customers on a call off basis - customers pay upfront for this service and have deliveries as and when they need the goods e.g. printer toner. … the business has always been a payment trader as historically our business was almost exclusively based on buying from UK distributors or suppliers (paying standard rate input tax) and selling to UK based businesses at a profit (charging standard rate output tax). Since I started with the company in April 2015 we have been a payment trader paying across ca. £150k a quarter dependent on sales. In Q4 2015 our London Sales Manager opened an account based in Greece. This customer has spent over £3m with us since Oct 2015 and is not charged output VAT. The margin on the sale is only ever around 5-6% and the goods are purchased from the UK. Therefore we have paid a significant amount of input tax on purchases without the output tax on sales to offset it. … This change in customer base led to a lower payment return for Q4, a ca. £80k repayment in Jan and now a £545k repayment in Feb. The repayment in Feb is higher than the average will be moving forward due to a catch up in receiving VAT invoices from the supplier. The business is done for the most part through a single customer (GECX) and through a single supplier (PPSM Ltd.). The customer pays upfront due to the high value of the orders and UK Computer Supplies Ltd. then pays PPSM on pro-forma. … Based on current order volume we are likely to remain a repayment trader … The VAT position and day to day cash flow requirements that are not covered by existing profits held at the bank are funded by Aldermore Invoice Finance … In essence if the business continues to come in from our EU customers then VAT will be in a repayment position at each month end. If we lose the customer we are likely to return to quarterly returns that are always payment returns”.[45]On 21 March, JOB sent an e-mail to Officer Neil Pleasance (who was processing the 02/16 repayment) stating that two of the transactions were still awaiting their CMRs and attaching the remainder. On 18 March 2018, JOB sent another e-mail to Officer Pleasance stating “Apologies as you can see the customer responded in record time (probably because they want to buy more stock!). This is the CMR for 107945 and 108169”

HMRC visit 27 April 2016

[46]On 27 April 2014, LW and SH attended UKCSL premises. In attendance from UKCSL was GW,, JOB and Jody Hager (UKCSL Management Accountant). The HMRC meeting record refers to the types of commodities as Apple Watches and Samsung SSD Hard Drives for the periods December 2015 to March 2016. The narrative under the heading “Visit Comments states: Reason for Visit & Visit Details - Officers arrived at the PPOB address and pressed the intercom button for the reception desk. The lady who answered was informed by Officer Leah Warner (LW) she had an appointment with Gary Watson (GW) the director. Officers were buzzed in and were escorted upstairs by the receptionist and met GW at the top of the stairs. He then went to find two other members of staff who were to join us in the meeting. GW introduced officers to Jamie O'Beirne (JO) who led us back down the stairs and into the conference room on the left of the front door. After a little awhile GW came into the room with a lady who introduced herself as Jody Hager (Management Accountant). LW began the meeting by explaining there had been a reorganisation of the work within HMRC and this had caused a delay in anyone coming out to visit UK Computer Supplies Ltd (UCS). She continued by saying Officer Neil Pleasance had sent her a copy of the email sent by JO which had a number of documents attached some of which were CMRs. LW asked if it was possible to have sight of the original CMRs as the writing on the copies she held was to faint to see. JO stated that would be no trouble and he would provide them to us before we left today. LW now began to explain that the reason for today's visit was to explain what happens under the monthly monitoring and that presently no case officer had been allocated to undertake this work. This allocation would be done once this visit had been completed and Leah able to assess what the business was doing and why it had moved from being a payment trader to a repayment. At this point GW asked if the repayments would be included in the monitoring and LW replied "Yes". However before we were able to begin asking what the business activities of the company were and the reasons for the repayments GW began to ask how long it would take before the money would be repaid to them as they had had to close and make staff redundant from two satellite offices one in London the other in Leeds. LW explained that the VAT returns would be subject to extended verification as HMRC undertook the task of tracing the deal chain both forward and back with a view to establishing if a tax loss had occurred in the UK. She continued by saying this process can take between 18 months and two years as enquiries have to be made of both UK and EU traders. GW stated that the company cannot wait that long as they are currently being funded by Aldermore Invoice Finance who have been happy to help out in the short term. It is unlikely this arrangement would be extended for an 18 to 24 month period. LW explained there was another avenue that could be considered whilst the repayments were being verified and that was. If the bank would make a security .payment to HMRC to the value of the repayments then they could be released and should any tax losses and denial of Input tax issued the amount of VAT involved would be covered. GW stated this would be unlikely to be a viable solution to the situation we were in at the moment and he could not understand why it would take 18 to 24 months to establish the deal chain. In fact tie could tell us the length of the chain right now and proceeded to draw it. Manufacturer - Sony, Samsung & Apple Authorised Distributor Supplier - Product Placement Sales and Marketing Consultants Ltd GB 916 9679 68 (Contact Peter Wildman) Customer - UK Computer Supplies Ltd GB 982 7860 66 Customer - GECX Group EL800495424 (Greece) GW stated that Pete Wildman had informed him that he had contacts with the distributors for Sony, Samsung & Apple and therefore UK Computers were certain their goods had come direct from the manufacturer after the distributor and PPSM. At this point I knew this was not the case as the monitoring officer for Devi Communications Ltd GB 616 6370 40 I knew they had supplied PPSM with Sony PlayStations in October 2015 and they are not an authorised distributor. Devi is a known MTIC trader and has been involved in tax loss deal chains and lost their denial of Input tax appeal at Tribunal. Having spoken to the monitoring officer (Tracey Griffiths) for PPSM she has also established their suppliers are not authorised distributors. GW also explained that the goods they sell do not come to their premises before leaving the UK and going to the EU they are in fact held at PPSM's distribution warehouse. When we were told the name On Logistics Limited it became apparent the goods were being held at a freight forwarders with PPSM controlling the release and removal from the UK. I do not believe UK Computers are aware this is an independent concern expecting to be paid for their services and taking instruction from their supplier PPSM. LW asked what the business activity of UCS was. GW stated they were IT Resellers. LW asked what products were sold on those VAT returns that had become repayments. GW stated Samsung SSD Hard Drives, Apple Watches and Beats Headphones. LW asked who arranges for the removal of the goods from the UK them or their customer GECX. GW stated the customer. I asked what evidence they held to support their claim the goods had left the UK. JO stated CMRs and the fact they had received payment for the goods from GECX. I asked had they discussed with GECX what evidence they were going to supply to UCS before undertaking these transactions. JO stated they had not but he had been in consultation with their accountants Meadows and a larger firm called Mazars. He went onto say that the accountants had looked at the CMRs and they had advised him they were satisfactory and there should be no reason why HMRC would not accept them LW stated she had in deed received copies of a number of CMRs from Officer Neil Pleasance but had been unable to read any of the details thereon. JO stated he could show us the CMRs he had received and if required print off another copy. Much of the meeting after this was a general discussion and explanation of how MTIC works and the indicators a trader should look out for before making a business decision to trade or not. GECX GW explained the company was very big and owned by a Saudi Arabian group of companies and went onto say they had a global market presence and a greater purchasing power with years of trading. He stated they dealt in Metals, Commodities and Electronics and were looking for a supplier of electronics when they made contact with UCS. GECX was "found" by UCS London Sales Manager Stevie Clift at a trade conference where they struck up a conversation and discussed the possibility of trading together. The first sales took place in the 12/15 quarter and were of a low value, this was so each of them could see how the deals went through and how prompt the goods were delivered and payments made. GW stated the margins on the deals that have been completed are between 5-6% and the goods are purchased from only one UK supplier PPSM. GW stated GECX arranges for the collection of the goods from a distribution centre Peter Wildman at PPSM runs. UCS do not inspect the goods prior to despatch into the EU and they are reliant on GECX providing them with the documentary evidence the goods have in deed left the United Kingdom. GW has also stated GECX pay for the goods up front because of the high value then UCS pays their supplier on pro-forma invoice(s). UCS are able to keep financing the ever increasing value of the transactions from funding provided by Aldermore Invoice Finance. I asked what evidence GECX are providing UCS that the goods have left. JO stated they have received copy CMRs and have received payment from GECX. I asked if there was anything else. JO replied "No". I asked had he read Public Notice 725 to see what basket of evidence documents HMRC would be expecting UCS to hold in support of their zero-rating the supplies made to GECX. JO said he had read a number of notices and could not remember if PN725 was one of them. I explained that as their customer was arranging for the removal of the goods from the UK then the standard of evidence required to substantiate VAT zero-rating is high. I asked if they had discussed with GECX what evidence they were going to provide UCS. The overall response was no. I did state that PN725 also states a trader should consider taking a payment equivalent to the amount of VAT that HMRC would expect UCS to pay if they failed to hold satisfactory evidence of removal. GW stated if that was the case then he would charge VAT on those transactions he currently had orders for and would return it to GECX once the evidence had been provided. Doing this would then mean UCS could continue to trade whilst waiting for HMRC to repay the 02/16 & 03/16 VAT returns. I replied that this instruction in PN725 was not to be used as a long term method of trading and should be considered whilst establishing what evidence was to be produced in support of the claim the goods had left the UK. This option should have been considered at the beginning of the trading relationship with GECX. UCS should have been fully aware of what GECX was going to provide them and could have asked their accountants for advice as to whether these documents would then be satisfactory for HMRC purposes. I asked where the goods were stored before removal from the UK. GW stated they were collected from PPSM's distribution centre. I pointed out that meant PPSM knew who UCS's customer was and what stopped them from going directly to GECX and cutting them out of the deal chain. GW stated Peter (director of PPSM) had said he could not fund the VAT involved in making these sales to the EU and that was where UCS came in. Peter had stated he had contacts within the authorised distribution dealers who were willing to supply him and he in turn would then supply UCS and until his company had the finance to do so he would not trade directly with GECX. However that could change any minute should the money become available he would have no hesitation in making contact and dealing direct. I asked where the goods were delivered to Greece or some other EU country. JO stated currently they were going to The Netherlands. Looking at the CMRs it would appear it is another freight forwarder Y&O Freight Logistics BV. I explained that this was one of the indicators of MTIC as the goods were not delivered directly to the customer for what we would then believe was home country consumption but sent to another freight forwarder in a different EU country. It was explained that in MTIC deal chains the goods are brought into a freight forwarder in the UK from the EU then sold through a number of UK traders called buffers before traders like UCS who then sell them to an EU customer who asks for the goods to be delivered to another freight forwarder in another EU member state. Another indicator and which can be seen in these transactions is there is no mention of an end user namely general public. Everyone in the deal chain is making a profit whilst adding nothing to the product. At some time the price increase has to stop or else the price that the general public pays will be too high and the goods will not sell. What is the reason for these goods to pass through so many traders before getting to the retail market having come from the EU into the UK and back to the EU? GW asked what other indicators they could have possibly picked up. I explained that the movement of monies was another in that the customer is paying UCS first who in turn then pays PPSM their supplier and so on back up the deal chain. Everyone in the deal chain releases the goods before they receive payment and are reliant on UCS receiving payment from its customer. However in this case it has been explained that GECX are paying for the goods upfront before there is any consideration of removing the goods from the UK with the payment sent back up the chain so only UCS are reliant on the VAT repayments to continue to trade. The fact that the goods are held in freight forwarders whilst they are bought and sold by a number of traders within the UK and most probably the same thing in the EU, a member state not the home of the customer with no indication as to who supplies the end user. There is also the naivety of GW who believes the deal chain is very short and consists of the manufacturer, authorised distributor, PPSM, UCS and GECX. This indicates UCS have most likely not undertaken any checks on PPSM beyond talking to the director Peter Wildman and him persuading them he has contacts directly with the authorised distributors and has his own distribution centre. This will need to be taken up with the monitoring officer for PPSM to confirm where the goods are stored and what the procedure is for releasing/collecting/removing the goods. PPSM Not a lot of information was provided on this trader beyond the fact they contacted UCS via their London office with the director Peter Wildman stating he has contacts inside the authorised distributors for Sony, Samsung & Apple. What this means he's able to get a better price when purchasing from them something UCS could not get if they tried to trade with them direct. PPSM has stated they have their own distribution centre and UCS's stock is held there before being collected and taken to The Netherlands. UCS are unaware if the goods are inspected by PPSM who control the removal of the goods from On Logistics Limited. CMRs The CMRs provided by UCS to HMRC as evidence of removal make no mention of either UCS or GECX whilst having numerous references to other entities. Sender - This box has PPSM Ltd at the following address 5-11 Tower Street, Birmingham, B19 3UY. A search on the internet did reveal this address associated with PPSM with Street View revealing a boarded up derelict looking building, a place not suitable for storing or even collecting goods from. This needs to be taken up with Peter Wildman and questions asked about this address and its connection to UCS's goods. Another address and names shown in this box are Unit13, Drayton Manor Business Park, Fazeley, Birmingham, B78 3XN which appears to be On Logistics trading address and associated to CD Europe 912 3157 55. This is a company UCS considered using as a supplier but after making checks on them chose not to trade with them. Place of Delivery - UCS have stated this is the delivery address GECX have provided Y & 0 BV in The Netherlands NL813733790801. Description - The majority of the CM Rs do not state what the goods are on the various collected pallets. However three do say S.J.I Spalleffa Apple Watches and have UK Computers name in the Sender box. Transport - There are a number of stamps relating to various EU carriers taking these pallets to The Netherlands. It would be interesting to find out who these traders take instruction from and who pays them: G.B.A Services Europe Sp z o.o. - Poland · F.U.H Tomasz Matecki - Poland Caris Express - Romania Heijboer Transport B.V. - Holland - NL810896266B01 The CMRs relating to the Apple watches it is not possible to read the name of the carrier. It is clear these CMRs are not satisfactory evidence to support UCS's claim they have removed goods from the UK. This is something they need to take up with both GECX and PPSM as they appear to be the driving force behind the movement of the goods. Conclusion / Credibility: From the CMRs and some knowledge of where PPSM are sourcing their stock from namely a known MTIC trader Devi Communications there are indicators there may be tax losses in the UCS deal chains. Until the complete deal packs from both UCS and PPSM have been provided and we have a better idea of how the goods are removed from the UK the VAT returns for UCS should be considered for extended verification. e-mails between gw and lw 20 June 2016

e-mails between gw and lw

[47]On 20 June 2016, LW e-mailed GW stating: As advised I am now happy that there is sufficient evidence to support the zero-rating of sales. I am still however waiting for the hard copy documents from Jamie. Examination of the documents sent by PPSM shows that there are issues with some of the transactions being traced back to tax losses. Once I have had time to fully review these deal chains I will notify you of my findings. Due to the issues encountered I have also rquested [sic] that Jamoe [sic] send me the paperwork relating to the earlier (Oct 15 onwards) transactions [sic] involving PPSM & GEcX. I am unable to give you an immediate response as yours is not the only matter I am dealing with at present. 20 July 2016[48]On 20 July 2016, LW e-mailed to GW tax loss notification for the VAT periods 12/15 to 02/16 inclusive. 26 July 2016[49]On 26 July 2016, GW replied to LW stating: “As you’re holding 900k of our money can you please tell me where the tax losses have been made? - How far down the chain are they from our supplier PPSM? - The name of the missing trader/traders - Were they VAT registered - Have these suppliers been investigated in the past? - Have any other companies in the chain had money withheld - What evidence to do you have to show that we didn’t do are due diligence?” 27 July 2016[50]LW replied to GW stating: The tax loss has occurred two down from your supplier. Unfortunately I am unable to supply any information regarding other companies involved in the deal chains. This is due to Data Protection Legislation. During our meeting on 27/04/16 you advised me that you had no concerns over goods purchased from PPSM because they used a manufacturers authorised distributor. I have to advise you that I have not traced an authorised distributor within the deal chains. You may therefore wish to discuss this matter with PPSM. Do you hold any documentation, from PPSM, regarding their use of Authorised Distributors to source supplies? I can confirm that the due diligence supplied by Jamie was limited:• Sales persons knowledge of the company;• VAT Registration check (but not evidence);• Experian Check on changes to directors, changes in credit worthiness, change in name and address. Checks to ensure the company was compliant with Company House responsibilities (filing of annual returns) and that declared activities and length of trade is consistent what was known of the company (but not evidenced);• Experian Check of director to ensure no obvious flags (but not evidenced)• Experience credit limits are of no concern as you have advised that your limit is low compared to your turnover. Do you hold any written contract with PPSM showing Terms and Conditions etc? 30 August 2016[51]GW replied to LH: I’m sorry but can you give me a bit more information on this tax loss, I’m still not convinced this is carousel fraud: - Can you confirm that the tax loss is definitely MTIC activity/carousel fraud? - Did all of the orders we did with PPSM end up going through this supplier? - Why are PPSM not being penalised in any way, when it is common knowledge that the company at the end of the chain (us) who are due the refund never knows about the fraud and is the victim? The fraudsters know this company gets hit with the financial loss so that is why this part of the chain are oblivious to the fraud. - Are the rest of the chain being fined? - Why can’t we know the name of the supplier? Do we have to blindly trust the HMRC that the loss has occurred without the ability to check or confirm? 1 September 2016[52]LW replied to GW to confirm that it had been established that the identified transactions were connected with fraudulent VAT default and all the identified PPSM invoices traced to fraudulent VAT loss. GW was referred to Notice 726 paragraph 2 which confirmed that all the parties in the supply chain may be held liable for the net tax unpaid. Confirmation was given that all of UKCSL’s purchases from PPSM had been traced to fraudulent VAT losses.[53]The same day, GW replied to LH: Thank you for this information. Might I ask if someone from HMRC has contacted CCS Media or Misco regarding PPSM, I don’t know for certain that they are using them but I’ve heard rumours that they are dealing with GECX so it might be worth warning these other resellers. I also had a call from a company called Galtec (reseller based in Leeds) one of our ex-employees that used to deal with GECX was trying to do orders for them and also getting prices from PPSM. It just shows that these fraudsters are targeting IT Resellers and I would hate for other innocent businesses like ourselves to have to go through the same ordeal as us. 2 September 2016[54]LW replied to GW: Thanks for the information . I can confirm that I have already passed on your information in relation to CCS Media. However, would require further information regarding Misco. If you can supply me with their address I will be able to trace the company and make a referral. Would you be willing to supply the name of the ex-employee and what position they have with Galtec. Are they an employee of Galtec or a self-employed consultant etc?[55]On the same day GW replied to LH with contact details for Misco and LinkedIn profiles for JOM and SC. In a second e-mail of the same day, GW confirmed that JOM was the sales manager in the London office and that JOM introduced GECX and Sky to UKCSL. GW further confirmed that SC also worked in the London office was the day to day account manager for GECX and Sky. that as HMRC was holding £900K

Parties submissions

[56]HMRC’s submissions are summarised as follows.[57]The Denied Deals (attached to this decision at Appendix 1) formed part of an overall scheme to defraud HMRC. The Appellant’s role and the level and nature of the orchestration were probative of the Appellant’s state of knowledge of the scheme. UKCSL was at the hub of a highly sophisticated and well planned scheme. This scheme depended on each entity understanding its role so that goods and money flowed in a circle.[58]UKCSL accepts the accuracy of the deal sheets and there is therefore no issue as to connection per se. Attached to this decision at Appendix 2 are HMRC’s submissions as to the fraudulent nature of the VAT loss created by the contra-trader’s operation and by the direct defaulting trader. The witness evidence in relation to the contra-trader Askos is contained in the unchallenged witness statement and exhibits of George Beaddie. The fraudulent defaulters in Askos’s acquisition chains were:(1) Shark Partners Ltd (witness statement and exhibits of Martyn Guest ). The Tribunal has also concluded that Shark was a fraudulent defaulter in Revive Corporation Ltd v Revenue & Customs [2019] UKFTT 519 (TC) at [78], and Beigebell Ltd v Revenue & Customs [2019] UKFTT 335 (TC) at [162];(2) ATFX Systems Ltd (witness statement and exhibits of Gemma Lowth ),(3) Fair Services Ltd (witness statement and exhibits of Olabanji Olufemi ),(4) Jensa Ltd (witness statement and exhibits of Mukesh Bhundia ); and(5) Fast Away Services Ltd (a previous supplier to Shark Partners Ltd – witness statement and exhibits of Daniel Grogan ]); and(6) SH Europe Ltd (“SHE”) (also a direct defaulter in UKCSL Deal 19 - witness statement and exhibits of Louise Walkinshaw [Supp.E.1386]).[59]In each case UKCSL purchased from the UK company, PPSM, and sold to either a Greek registered company GECX (17 deals) or a Danish registered trader called Sky. In Deals 1-18 the transactions traced to Askos, the contra-trader, and in Deal 19 LP to SHE. The length of the chains and the level of markup makes no commercial sense.[60]HMRC rely upon the general red flags of fraud identified by SH in her evidence relating to UKCSL.[61]HMRC’s primary case is that UKCSL had actual knowledge of the connection between its transactions and the fraudulent evasion of VAT for the following reasons:(1) JOM’s repeated creation of broker transactions across three UK companies that traced to fraudulent tax losses;(2) UKCSL’s role in the 19 Denied Deals were orchestrated as part of a well-oiled scheme, to defraud the Revenue, were of commercially unjustifiable length, two of these were carousels and the remainder of which make no sense by reference to the participants;(3) UKCSL took the largest share of the profits from the transaction chains;(4) The Denied Deals were too good to be true, UKCSL did little more than email the supplier and customers whilst being at no commercial risk;(5) The correspondence and documentation in relation to Deal 1 is riddled with indicia of non-commerciality;(6) The existence of an external pricing structure in deals where the supplier and customer were aware of each other, no attempts were made to keep ordinary commercial confidences, there is scant evidence of negotiation and similarly scant evidence of interest in the market prices of the goods;(7) UKCSL’s failure properly to assess the commercial viability of its counterparties and failure to ask the most obvious questions about the transactions themselves;(8) UKCSL’s failure to provide a consistent account in relation to how the counterparties were introduced;(9) UKCSL’s failure to inspect the goods;(10) The fact of inconsistencies between the transaction document and the terms they were supposed to take place on and the shambolic nature of the removal evidence;(11) UKCSL’s failure to call a host of relevant witnesses in support of its case; and(12) UKCSL’s attempt to rewrite the history of the transactions at the outset of the HMRC investigation;[62]In the alternative, UKCSL should have known of the connection between its transactions and the fraudulent evasion of VAT. The cumulative circumstances presented to it, as summarised below, permitted no explanation other than fraud:(1) UKCSL was well aware of the risk of fraud, and the indicia of such fraud;(2) The transaction structure where the supplier and customers knew each other and there was an external pricing structure was commercially inexplicable in the circumstances;(3) The deal documentation from its suppliers was inconsistent with the reality of the transactions and there was no proper audit trail for the goods;(4) The payment structure, and reward, were far too good to be true;(5) It failed to properly assess the commercial viability of its counterparties; and(6) It failed to ask the most basic questions as to why it was invited to participate in the transactions.[63]HMRC’s understanding of the UKCSL’s evidence is that it was JOM who undertook or was responsible for the Denied Deals along with Rochelle Lucey and Stevie Clift. Their state of knowledge is attributable to UKCSL by the ordinary principles of attribution (see HMRC v Greener Solutions [2012] UKUT 19 (TCC) at [16] – [20], [47]). HMRC assert that JOM, RL and SC knew that the Denied Deals were connected with the fraudulent evasion of VAT, and in the alternative that they should have known. Similarly, GW and JOB (UKCSL’s director and financial controller respectively) should have known that the Denied Deals were connected with the fraudulent evasion of VAT because there was no other reasonable explanation for them. Their state of knowledge is similarly attributable to UKCSL by the ordinary principles of attribution.[64]There are inconsistencies and gaps in evidence produced by UKCSL evidencing how the trading relationships came into being and how the transactions occurred. The lack of contemporaneous documentary corroboration for parts of UKCSL’s witness evidence creates a difficulty. In Wetton v Ahmed [2011] EWCA Civ 610, the Court of Appeal stated that the trial judge was entitled to assess the credibility of a witness’s oral evidence by reference not only to contemporaneous documents but also by reference to the absence of those documents, see Arden, LJ (as she then was) said at [14]. The observations of Leggatt, J in Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm) at [15] – [22] are also applicable, in particular the conclusion at [22].[65]The Tribunal is invited to draw an adverse inference from UKCSL’s failure to call the three individuals (JOM, RL and SC) who were central to the Disputed Deals. HMRC cannot call the three individuals only to impugn their evidence.[66]The Appellant’s submissions are summarised as follows.[67]HMRC have failed to discharge the burden of proving that the tax losses were fraudulent such that the appeal ought to succeed, let alone that the transactions took place as part of an “orchestrated fraud” as alleged. The evidence relied upon in SH’s witness statement does not support HMRC’s contention that GECX, CPX and SHE were fraudulent. Officer George Beaddie’s witness statement deals with the VAT affairs of Askos Wolt; HMRC’s attempt to evidence Askos Wolt being a fraudulent default trader has fallen woefully short of what is required by Kittel. Officer Beaddie alludes to three of Askos Wolt’s suppliers engaging in fraudulent activity in an attempt to implicate Askos Wolt, again, the evidence falls woefully short of what is required by Kittel.[68]Should the Tribunal accept that the tax losses were fraudulent, UKCSL submits that it did not know nor should have known that the tax losses were fraudulent having regard to the totality of objective factors and thereafter an assessment of “only reasonable explanation”.[69]HMRC’s reliance upon turnover in isolation from the wider context of the profits generated serves to distort the true commercial realities of the UKCSL’s financial performance. GW’s evidence confirms that the increase in turnover during the VAT periods 12/15 – 03/16 is agreed and (ii) reflects UKCSL’s considered commercial decision to enter into the transactions which were high volume (i.e. turnover) low profit margin. HMRC’s reliance on turnover alone as opposed is overly compartmentalised and does not serve to provide a contextualised and accurate full picture of what occurred during the relevant period. The table at GW’s second witness statement records a decrease by 3.9% of gross profits during the relevant period when compared to the nine months before the commencement of the Relevant Period. The considerably lower profit margins of the relevant transactions when compared against other orders for the period October 2015 – March 2016. The average profit margin for the relevant transactions was only 5% (October 2015 – March 2016). Despite this, the GECX and Sky City orders accounted for 15% of the total profit during this period owing to the UKCSL’s decision to deal in volume. Despite the significant increase in turnover for the VAT period 12/15 to 03/16, the costs during this period served to reduce its profits. These included London salaries and rental payments for a 15-man London office space.[70]The Denied Deals were not a new trade as prior to the Relevant Period, UKCSL had traded with European distributors, wholesale deals accounted for 25% of UKCSL’s business in 2018, The total amount traded with non-end users prior to the Relevant Period was approximately £8m and UKCSL had sold similar products to those traded in the relevant transactions.[71]The Denied Deals were not non-commercial. Third parties did not set UKCSL’s pricing structure and the prices were not pre-ordained. The evidence relied upon by HMRC does not support that conclusion. The absence of documented negotiations does not exclude the possibility of price margins being negotiated orally over the phone such that the documentation is not conspicuous by its absence such that any inference is to be drawn against the Appellant: Wetton v Ahmed [2011] EWCA Civ 610, per Arden, LJ (as she then was) at [14] applied. Evidence is before the Tribunal of negotiations on price between UKCSL and PPSM and UKCSL offering PPSM first refusal on future orders rather than guaranteeing them as expected in an orchestrated fraud.[72]The evidence is clear that UKCSL was not making money by doing next to nothing but was an IT value added reseller. UKCSL brought value to the transactions including sourcing products from its established network, raising orders on its system and, at its own expense, providing customer service, credit control and account staff to run the back office of the business.[73]It was entirely legitimate for UKCSL and in accordance with industry practice of drop shipping to demand payment upfront to mitigate the risk of default thereby negating the need for credit checks. This was UKCSL’s default practice dated back to August 2011.[74]It was in accordance with the practice of drop shipping for UKCSL’s suppliers to be notified of the delivery address for its customers. It was only after the Relevant Period that PW informed GW that he had not dealt directly with GECX in the first instance as PPSM could not fund the VAT and GW considered it commercially astute to enter into a non-disclosure agreement (“NDA”) with PPSM which the parties duly did.[75]It was not, as HMRC submitted, suspicious that UKCSL offered products below the RRP. Such suspicion demonstrates lack of understanding of the Reseller industry where such practice is common. It was common practice to research the market price for a product but not industry standard to typically document such searches.[76]Whilst HMRC assert that UKCSL always made the largest mark-up. UKCSL did not know nor have the means of knowing the mark-up for other participants in the chains nor the length of the chains.[77]The available documentation does not support the conclusion that the only reasonable explanation for the transactions is a connection to fraud. The e-mail from LW to GW dated 20 June 2016 confirmed that there was sufficient documentation to support zero-rating.[78]No evidence has been produced by HMRC that supports the contention that JOM, RL and SC knew or should have known the transactions were connected with the fraudulent evasion of VAT such that their state of knowledge could be imputed to the Appellant. HMRC are put to strict proof that JOM came to UKCSL with anything other than an unblemished professional background. In any event, UKCSL had adequate governance procedures in place to monitor its staff during the Relevant Period.

Adverse inference

[79]HMRC invited us to draw adverse inferences in respect of JOM, RL and SC who were not called to give evidence on UKCSL’s behalf in line with the ordinary principles for so doing which are set out in Lord Sumption’s speech in the Supreme Court in Prest v Prest [2013] 2 AC 415 at [44], and in Wisniewski v Central Manchester Health Authority [1998] PIQR P324 by Brooke, LJ. The principles were conveniently summarised by Morgan, J in British Airways PLC v Airways Pension Scheme Trustee Ltd [2017] EWHC 1191 (Ch) (“British Airways”) at [141-143]. We note that Lord Leggatt in Royal Mail Group Ltd v Efobi [2021] UKSC 33, Lord Leggatt at [41] stated:
"41. The question whether an adverse inference may be drawn from the absence of a witness is sometimes treated as a matter governed by legal criteria, for which the decision of the Court of Appeal in Wisniewski v Central Manchester Health Authority [1998] PIQR P324 is often cited as authority. Without intending to disparage the sensible statements made in that case, I think there is a risk of making overly legal and technical what really is or ought to be just a matter of ordinary rationality. So far as possible, tribunals should be free to draw, or to decline to draw, inferences from the facts of the case before them using their common sense without the need to consult law books when doing so. Whether any positive significance should be attached to the fact that a person has not given evidence depends entirely on the context and particular circumstances. Relevant considerations will naturally include such matters as whether the witness was available to give evidence, what relevant evidence it is reasonable to expect that the witness would have been able to give, what other relevant evidence there was bearing on the point(s) on which the witness could potentially have given relevant evidence, and the significance of those points in the context of the case as a whole. All these matters are inter-related and how these and any other relevant considerations should be assessed cannot be encapsulated in a set of legal rules."
[80]As is apparent from the above cases, we are entitled to draw an adverse inference from the absence of evidence (including the attendance of a witness) which might have been expected to be material to an issue to be decided and we should take a common sense approach when determining whether an adverse inference may be drawn. An adverse inference serves to strengthen evidence of the party against whom the evidence was relevant or weaken the evidence of the party who could have adduced it. However, in order to draw an adverse inference there must be some evidence as to the primary issue and a case to answer. Where the reason for a failure to adduce the evidence is accepted by the court or Tribunal no adverse inference should be drawn. A credible but incomplete explanation for absence of the evidence is likely to impact the strength of any adverse inference to be drawn. We accept that HMRC have referenced JOM having been interviewed by KPMG as a suspected fraudulent co-conspirator in March 2017 but that is not probative of whether she knew or ought to have known at that time that the transactions in question were connected with the fraudulent evasions of VAT. The reason given for not calling the witnesses was that GW did not think he was in a position to ask them to give evidence. He considered informing HMRC of their contact details via LinkedIn and current employers was a better way to go about it. In cross-examination he said that he thought it would be futile to ask as he did not anticipate that they would want to come and give evidence on behalf of UKCSL. Having considered GW’s explanation and his notification to HMRC of JOM’s, RL’s and SC’s location and current employers we decline to draw an adverse inference.

The tax losses alleged were fraudulent

[81]It is appropriate to consider issue (i) at this point before proceeding to make our findings of fact and determination in respect of issue (ii). UKCSL does not concede this point but puts HMRC to proof. UKCSL, in its response dated 18 February 2021 to the Tribunal’s Fairford-type directions dated 8 July 2019, stated at paragraph 2: “(2) While the Appellant accepts that there is evidence presented by the Respondents of tax losses, it does not accept that there was fraudulent evasion of VAT in the Denied Deal chains. Consequently, the Appellant does not accept that:• the Denied Deals were part of an orchestrated fraud; or• the alleged contra trader, Askos Wolt LLP's, transactions were connected to a fraudulent tax loss. The Respondents have presented only circumstantial evidence of fraud, such that they have not discharged their burden of showing fraudulent evasion of VAT in the chain under the first limb of the leading authority of Kittel. For instance, the Respondents predominantly rely upon unsubstantiated hearsay statements from various overseas tax authorities, claiming that others featuring in the Denied Deal chains were engaged in tax fraud, to evidence fraudulent evasion of VAT.”• the Denied Deals were part of an orchestrated fraud; or• the alleged contra trader, Askos Wolt LLP's, transactions were connected to a fraudulent tax loss.[82]This is not a Mecsek type case, here HMRC have to prove on the balance of probabilities that the VAT losses were created by the contra-trader’s (Askos Wolt) operation and by the direct defaulting trader (SHE). Mr Armstrong submitted that there is no evidence of fraudulent tax losses at all before the Tribunal and that the appeal ought to succeed on that basis alone as HMRC have failed to discharge the burden of proof. Mr Watkinson submitted that was an extremely bold submission as in evidence before the Tribunal were the unchallenged witness statements of the HMRC officers for the contra-trader, Askos Wolt, the fraudulent defaulters in the Askos acquisition chains and the direct defaulter, SHE.[83]It was submitted by Mr Armstrong that Officer Beaddie (Askos Wolt ) was mistaken in his evidence but had not required Officer Beaddie to be called for cross-examination. Similarly, in his skeleton argument, Mr Armstrong, submitted that the analysis of SHE provided by SH in her witness statement at paragraphs 318-330 does not mention, fraud, suspected or asserted towards SHE. Mr Armstrong had every opportunity in cross-examination spread over two days to put those points to SH but did not do so. We agree with Mr Watkinson that is not open to UKCSL to contradict unchallenged evidence but it was not constrained from arguing that HMRC had not discharged the burden of proof which lay upon it. Repeated reference was made by Mr Armstrong to the absence of documents in support of HMRC’s case that the VAT losses were created by the Askos Wolt and SHE. We do not agree. Appended to HMRC’s Opening Submissions were three appendices: Appendix 1 - Deal Overview in respect of the 19 trades; Appendix 2 – Submissions on Buffer, Defaulter, Contra-Defaulter and Contra Traders cross-referenced to the relevant witness statements of the HMRC Officers; and Appendix 3 – Contra-Trading Scheme Chart. Contained within the three appendices were cross-references to the documents that HMRC relied upon and which were all in the hearing bundles.[84]In respect of UKCSL’s submission that HMRC have only presented circumstantial evidence it is well established that circumstantial evidence is still an admissible class of evidence, of evidential value and weight, and, as evidence, needs to be considered as a whole. In considering this evidence, we should take care not to restrict ourselves to considering each piece of evidence alone and in isolation from the others. This is because circumstantial evidence is not a chain, where a break in one link breaks the chain, but is a cord: one strand of the cord might be insufficient to sustain the weight, but three stranded together might be sufficient: see R v Exall (1866) 4 F&F 922, per Pollock CB, approved by the Upper Tribunal in HMRC v CCA Distribution Ltd [2015] UKUT 513 at Para [91]. The whole can end up stronger than the individual parts. We have proceeded to consider whether the undisputed evidence relied upon by HMRC was sufficient to establish that the tax losses were all fraudulent by setting out our findings of fact and our analysis as to whether HMRC have discharged their burden of proof.[85]We have no hesitation in finding on the balance of probabilities that the undisputed evidence referred to below is sufficient to establish that the tax losses alleged were fraudulent:(1) Askos Witness statement and exhibits of George Beaddie dated 26 February 2019(2) Shark Partners Witness statement and exhibits of Martyn Guest dated 26 February 2019(3) ATF Systems Ltd Witness statement and exhibits of Gemma Lowth dated 26 February 2019(4) Fair Services Ltd Witness statement and exhibits of Olabanji Oulfemi dated 28 February 2019(5) Jensa Ltd Witness statement and exhibits of Mukesh Bhundia dated 28 February 2019(6) Fast Away Services Witness statement and exhibits of Daniel Grogan dated 26 February 2019(7) SHE Witness statement and exhibits of Louise Walkinshaw dated 28 February 2019(8) Witness statement and exhibits of SH dated 20 April 2019

Consideration of the issues

[86]The issue we are required to determine is whether UKCSL knew or should have known that the Transactions were connected to the fraudulent evasion of VAT. In determining that issue, we must consider whether there was a reasonable explanation of the Denied Deals other than those transactions being connected with the fraudulent evasion of VAT when viewed against the totality of the evidence. When determining that issue we have at the forefront of our mind what was said in Mobilx at [60]: “60. The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

facts

[87]In order to address the issue of whether UKCSL knew or should have known that the relevant transactions were connected to fraudulent evasion of VAT or whether there was a reasonable explanation for them other than such connection we have first set out the details of Deal 1. Deal 1 records UKCSL’s initial interaction with PPMS and GECX and is representative of all the Disputed Deals. We have then proceeded to make findings of fact based upon the written, oral and documentary evidence before the Tribunal.

Deal 1

[88]Deal 1 is representative of the 19 Denied Deals and provides detail of the initial contact by UKCSL with PPSM and GECX.90. The first email between the UKCSL and GECX is from RL to info.greece@gecxgroup.com:91. Good Afternoon Vassilis92. I want to introduce myself, my name is Rochelle and I work for a company called UK Computer Supplies. We are and [sic] IT hardware and software supplier and I would love to help you source any stock and fullfill [sic] any orders in the UK and around Europe93. Here is a link to our website to see what we do here– http://www.ukcomputersupplies.co.uk/94. Please let me know if it is anything to help with at the moment.95. Kindest Regards96. Rochelle[89]No explanation is given in the e-mail how RL had obtained GECX’s details nor why she, as a sale representative for an “IT hardware and software supplier” was contacting an integrated commodities trading company whose core focus is on metals and soft commodities. 15.09 Mr Vassilis Totolis (“VT”) of GECX replied: Good afternoon Rochelle, Thank you very much for your kind email. I just went through your website and I am very glad to see that you can supply a wide range of goods. Since we are in the market for various of the goods that you are supplying I am pretty sure we can do business together! For your convenience I’m attaching our KYC documentation and kindly asking you to revert with yours. Let’s speak from Monday and start trading activities! Thank you in advance. Have a lovely weekend! Vassilis Totolis Director 9.51. RL replied:99. Good Morning Vassilis,100. Thank you for this, I’m looking forward to working with you..101. Please see our forms attached and let me know if you need anything else!102. Is there anything I can help you with the day?103. I hope you have a nice weekend J104. Rochelle[90]The forms attached were an account opening form and UKCSL’s standard terms and conditions. 13.53 RL sent an internal email to Naomi Ram (“NR”) and Natasha Mathews with the subject heading “New Supplier set up” to have PPSM set up on its system: Can we set up PPSM Ltd on our system… 😊 Peter Wildman PPSM Ltd Director Tel No: +44 121 XXX XX88 I have the VAT no and other info attached but if you need anything else please let me know.. 13.55 NR replied asking “What are we buying from them? What’s the cost of the order and the profit?” 13.57 RL replied saying that “ is just for future orders to come but they need to be set up first.. if that’s ok.. or do you need a first PO to set them up?” 14.04 The reply to RL stated “Need the first order really as Andy doesn’t like setting up just anyone if we can get the stock from people we already use, Do you know if they will give us a credit account?” 15.34 RL e-mailed NR asking to be sent “ a little email when that supplier is all set up just so I can get them started..”. 15.36 NR replied to RL saying “I’m confused why would we not need a credit account with them? We encourage all suppliers to give us a credit account.” 15.41 RL replied to NR saying “I just spoke to Julie, she said it is because of it trading in euros..They don’t require any credit facility as the customer will pay us and we will use those euros to pay the supplier.. I know it is a different sort of way of doing it but Julie and Jaime have gone through it and they said that this should work..”. 15.44 NR replied to RL saying that it was fine as she had just spoken to Jaime and the account was set up. 20 October 2015[91]On 20 October 2015 the following e-mail exchanges and actions took place: 11.23 RL e-mailed VT asking “Can I help with any requirements today?” 12.23 VT replied saying that he was travelling and had only just seen RL’s e-mail and that “Today we are searching for 4000 pieces of Samsung SSD250 GB. If you have the above availability I would be really happy to do this as our first deal! Please advise your price as well”. 14.16, RL e-mailed PW at PPSM asking “Can you help me with the below request.. 4000 x Samsung SSD 250GB – price and availability.”[92]PPSM raised a Purchase Order dated 20 October 2015 to 3ADL Dist Ltd, London. The product description was 4000 Samsung SSD Evo 250GB with a unit price of €69.04 with the ship to address as PPSM Ltd, c/o On-Logistics, Fazeley. The Purchase Order was raised before the onward sale had been confirmed. 10.13. PW emailed RL confirming 4,000 x Samsung SSD Cards 250Gb at €72.60. 13.07. RL e-mailed PW saying “To make this deal work I need these to be €71.50- if you can do this I should be able to get the PO today.. I have had another customer looking for a similar quantity and price so if you can do this we might get a bit more business going 😊” 13.26. PW replied to RL to say that he could “get to 71.90 euro’s but will include transport costs within this price”. 14.15. RL replied to PW saying “If we get this deal can you tell me what the VAT situations with this deal as it is in Euros?” 14.27. PW replied to RL saying “Matt told me that your customer was European hence why I quoted in Euros….” 15.06. RL e-mailed JOB to confirm that “GECX group is the customer and their details are attached. PPSM Ltd are the Supplier .. please see images of their documentation” The PPSM VAT certificate confirmed PPSM’s trade classification as “other personal service activities” and its address as 5-11 Tower St, Birmingham.[93]The GECX documents were a pdf document providing details of GECX and an original document in Greek with a translation. The document providing details of GECX was headed with “GECX Group” and logo and at the bottom of the page was the contact details with an address in Thessaloniki with telephone number, e-mail address and website address. The document was unsigned and undated. The document stated: Who we are? GECX Group is part of the Al Rajhi Group, a leading industrial conglomerate based in Saudi Arabia. Head quartered in Switzerland since 2008, GECX has built a strong reputation as an integrated commodities trading company, offering services in the areas of commodities trading, brokerage, logistics, and finance. The core focus is on metals (base metals, bulk ore and steel/ Ferro-alloys) and soft commodities (fertilizer, palm oil, sugar and wheat), as well as coal and LPG. What we aim to do? Today, as one of our growth strategies we are entering the telecommunication market with the aim of becoming a leading name in the mobile phone trading business. By leveraging the company’s global market presence, the expertise of our trading teams and the benefits in terms of excellent supply contacts in the Middle East and wider global market that GECX enjoys as a member of the Al Rajhi Group, GECX aims to create the reputation of the most reliable worldwide mobile phone distributor. Finally, underpinning all of our strengths is our experienced and motivated management team and committed owners who’s [sic] goal does not only include the growth of their own company, but delivering value to their partners and future clients which will result in their progress and success.[94]The translation of the Greek document indicated that GECX was “recorded in the General Commercial Registry”. The document was headed “Certificate”, dated 5 July 2013 and certified as true translation on 20 September 2013 by a Greek attorney-at-law. The Certificate confirmed and stated that a company with the name “GECX (Global Energy & Commodities Exchange) Group Greece Single Member Private Company” with the “distinctive title” of “GECX Group Greece” was established on 28 May 2013 as a private company in Thessaloniki, Greece. No contact details or the names of its directors were provided. The objects were stated to be:
“Carrying on the broker’s business in purchases and sales of petroleum products and metals and any kind of cargoes. Mediations in sale and purchase transactions on raw/direct materials. Commercial operations and Agent’s activities.” 16.12 RL e-mailed VT at GECX with a quote for the Samsung SSD 250GB and asked if he wanted her to hold them for him or if he wanted to send the PO to order the goods. 14.42 Stelina Glastra (“SG”), Sales Manager GECX, replied to RL [It is understood that the discrepancy in the time stated in the e-mails is because of the two hour time difference between the UK and Greece] saying “We confirm that we are willing to buy promptly this stock. Please send us your company s [sic] Bank details in order to proceed further and I will revert ASAP with the P.O”. 16.57 RL replied to SG with account details and asking “Do you pay VAT? As I have not added this to the quote”. 15.43 SG replied to RL at 15.43 saying “Unfortunately your company’s VAT is not payable for our company. GECX GROUP Greece is not a UK based company”. 17.45 RL replied to VT saying that she had just wanted to make sure there was no confusion and requested that the PO be sent to process the order. 16.05 SG replied to RL attaching “the P.O for our fist [sic] trade Kindly revert with the Proforma Invoice in order to proceed with the payment.” 16.52 SG asked RL for UKCSL’s Account number, IBAN number and Swift Code and for confirmation that the account currency is in euro. 16.55 RL forwarded the query to JOB 17.00 JOB replied to RL stating “I can but I don’t want them to pay us until we are sure what we are doing with the VAT issue…”
[95]GECX created the payment to UKCSL on 21 October 2015 in the sum of €296,240 with an execution and value date of 22 October 2015 with customer reference of “4k ssd 250” . There is no e-mail in evidence providing UKCSL’s bank details to GECX.[96]GECX’s final invoice to Occtanis, Poland was issued on 21 October 2015. The product details were stated as “Samsung SSD 250 GB. The payment instructions for payment to be made to GECX Group Greece P.C.C at a UK based Barclays Bank account as confirmed by the IBAN beginning GB59BAR.[97]GECX’s issued its Purchase Order to UKCSL. The delivery instructions for stock stated: D&D Trading sp. Z O.O. Fordonska 393 85-090 Bydgoszcz Poland and a Polish telephone number given. 23 October 2016[98]Paragraph 35 of GW’s second witness statement states “In an email to colleagues dated 23 October 2015, RL advised “This customer has paid into our Euro account so no [need] to be credit checked.” [the e-mail was not in evidence] 9.35 RL e-mailed PW saying: Really sorry but our customer had got cheaper pricing at 70.10 euros per unit They won’t place the order unless we match I need this price? 9.42 PW replied to say that he had already come down in price but would see what he could do and said “To confirm you need 70.10 euro’s surely not your customer?” 9.49 RL replied confirming “Yes we need that price and it has to include shipping to them”. 10.15 PW replied to ask is this was to be a one-off order or something on a regular basis. 10.23 RL replied saying “This will be regular business, I can’t promise exactly what but when they order the Qty is very similar, and you will be given first refusal when they come in…” 10.46 PW replied saying “Based upon your comments I have adjusted your pricing to allow you to confirm the order.” A pro-forma invoice was attached so that UKCSL could send a purchase order. PW confirmed that he was looking forward to meeting RL on Wednesday of next week and would call on Monday to confirm. 14.22 Andy Stafford (UKCSL Purchasing Manager)(“AS”) e-mailed PW UKCSL, copied to accounts, requesting the order be send direct to the customer and that confirmation that the order has been shipped or an ETA as soon as possible.[99]It is unclear how RL at 10.23 was able to confirm that “This will be regular business” and of a similar quantity when this was the first ever order with GECX.[100]GECX was set up as a new account on UKCSL’s system.[101]PPSM issued its invoice to UKCSL. The invoice was dated 23 October 2015, the terms were “pre-pay”, Shipped Via was marked as “N/A” and Prepaid or Collected was marked as “Pre-paid”. The box titled “Shipped to:” stated “TBA”. The goods were described as “Samsung SDD EVO 250 Gb Part Code: MZ-75E250B/EU”. A Barcode number was provided: 8806086522977. 9.13. RL e-mailed PW stating the accounts did not get the chance to make payment on Friday and requested an IBAN number, Swift codes and a pro-forma invoice and requested confirmation of shipping and that the goods would be insured by PPSM until received by the customer. 11.27. PW replied to confirm that IBAN and Swift details were not required for a UK Euro account but provided the details although they related to a sterling account. He confirmed that he would takes pictures of the stock along with the finished palletised bulk stock and would ensure that the goods are insured but “to do that I will need a delivery address. Please be sure that I will never contact your account directly” 11.35. RL forwarded PW’s e-mail to JOM without any comment or text. 11.39. JOM forwarded the e-mail from RL to JOB and confirmed that she had asked for photo’s of the stock and a copy of the insurance documents. She asked “Do we need anything else?” 11.44. JOB replied saying that it all seemed fine stating: 128. HMRC tell you we need the following but in all honesty this sort of paperwork will be generated naturally by the transaction taking place, its only the same sort of paperwork we would get for a domestic order, its not up to PPSM to supply all of these but things like the consignment notes, invoices from hauliers etc. will come via him. 129. The fact that he has emailed to say he has taken care of the insurance is probably proof enough though a certificate would be nice. Essentially what we are trying to avoid is it arriving in Greece and us being held liable for some problem with the order rather than him. 130. [Cut and pasted below this text was the following taken from HMRC guidance] 131. To account for the VAT on zero-rated sales to another EU country, include the value of the goods and services in your VAT Return. 132. Your ‘evidence of removal’ will include a number of things like: 133.• customer orders 134.• correspondence with customers 135.• sales invoices 136.• packing lists 137.• invoices from hauliers 138.• bank statements 139.• consignment notes showing the goods have been received in another EU country 140. and must show: 141.• your business details 142.• your customer’s details 143.• a detailed description of the goods and their value 144.• the method of transport and route 145.• where the goods are going to 14.39. RL e-mailed PW the Purchase Invoice dated 23 October 2015. The invoice under the heading of “description” recorded both the purchase price and sale price. The delivery address was D&D Trading Sp x O.O Stelina, Poland. 29 October 2015[102]GECX’s Proforma Invoice to Occtanis is dated 29 October 2015. It contains the same details as the Invoice issued on 21 October 2015. 10.27. AS chased PW for a response to his e-mail dated 23 October 2015 saying “Can you please advise if the goods have shipped?” 9.04. AS e-mailed PW saying “Can you please come back to me on this!” 10.08. PW replied saying that he had been keeping both JOM and RL updated with the order, delivery would be to him today/tomorrow and would be shipped out the same day. The delay in payment from UKCSL was the reason by delivery to him was delayed but it should not happen again as UKCSL’s accounts were now happy with the process. 3 November 2015[103]UKCSL issued a pro-forma invoice to GECX with delivery to D&D Trading SP x O.O, Fordonska, Poland 9.50. AS e-mailed PW asking if the order had gone out. 10.06. PW replied saying the order will be ready to go tomorrow 15.33. RL e-mailed JOM with the subject “GECX potential next order” 10.21. AS e-mailed PW asking “has this now gone”. 10.03. AS emailed PW, copied to RL, asking “Please advise?” 10.22. PW replied, copied to RL, saying that due to delayed payment from UKCSL he had still not received all the relevant stock and “Plus it is your customer that is picking-up the stock from my warehouse” and attached photos of the majority of the stock. He confirmed that the balance of the stock should arrive on Monday and he would confirm weights, dims [dimensional weight] and pallet number. 10.34. RL forwarded PW’s e-mail to JOM 9 November 2015[104]UKCSL issued its invoice to GECX. The delivery address was stated to be Fordonska 393, Poland. 10 November 2015[105]The goods were stamped as received at Y&O, Freight Forwarders, Schillingweg 56, Netherlands.

Sky

[106]Sky was the customer in the two transactions where GECX was not the customer. The initial contact with Sky was as follows. 26 November 2016[107]12.45 Claus Jessen e-mailed JOM with the subject “looking for” saying: We came across your email from a mass emailed list that was send to us ! We are a company based in Denmark and have been operating since 2007. We are always looking for new supplier of below consumer goods for our existing and new customers. BUSINESS AREA: GAME CONSOLES - SONY, NINTENDO, MICROSOFT VIDEO GAMES - All publishers ACCESSORIES FOR ALL CONSOLES MOBIL [sic] PHONE ACCESSORIES CONSUMER ELECTRONICS DISTRIBUTION: SCANDINAVIA, EUROPE AND MIDDLE EAST Pls let us have your offers for above mentioned products. We hope to hear from you and hopefully start cooperation soon. Findings of fact Awareness of VAT fraud and Notice 726

Findings of fact

[108]We are satisfied that UKCSL was made aware of VAT fraud when Notice 726 and How to Spot Missing Trader Fraud was handed to GW on 22 July 2014. SH was not challenged on her evidence that that she gave GW a copy of Notice 726 with Mr Armstrong stating “I’m not suggesting it wasn’t given, please don’t get me wrong.” GW acknowledged in cross-examination that “When it comes to the 726, I’m saying they definitely probably did give me the 726, or point me in that direction.” We accept SH’s evidence that she would have drawn GW’s attention to paragraph 6 of Notice 726 which is headed “Dealing with other businesses, how to make sure the integrity of your supply chain. We would have found it odd if SH had not done so as the main reason for the visit was that a known MTIC trader, Spire Technology, had sought to verify UKCSL’s VAT number. We accepted the evidence that UKCSL had previously traded in goods that were the same or similar to those traded in the Denied Deals. In our judgment, we find it implausible that a Director of an IT Reseller trading in the very goods identified in Notice 726 and with his extensive experience in the IT industry would not have been aware of MTIC fraud. Paragraph 6.1 of Notice 726 sets out examples of indicators that could alert a taxpayer to the risk that VAT would go unpaid and of a connection with MTIC. Several of the indicators identified are present in this case and are considered below.

JOB’s awareness of VAT Fraud and inadequate due diligence

[109]We find that JOB, was unaware of the contents of Notice 726 or about MTIC fraud until 10 March 2016. The wording of an e-mail by his colleague Andy Stafford, Purchasing Manager, to SC dated 10 March 2016 (copied to JOB) in respect of mobile phone and watch deal for Evelex via CD Europe mirrored the wording used in Notice 726: On your Mobile phone and Watch deal for Evelex via CD Europe we are going to need to perform extra checks due to the size of the order and nature of the goods to satisfy HMRC. Can you please take a look at the below ad advise ASAP please.• Meeting the customers and suppliers and/or visiting their premises Have you been out to visit both the customer and supplier at the Office address?• Challenging 'too good to be true’ prices from suppliers Have you checked the pricing against CED Europe with other people. I know that matt looked at main line disti and they are much more expensive. But have we checked other source, especially PPSM on the Watches as we know they are above board, so if these guys are again cheaper by a considerable amount it will raise a red flag.”[110]That e-mail confirms that, at least from that date, JOB was aware of MTIC fraud. JOB accepted (4/13/10-16) that as at 10 March 2016 he was aware of the risk of MTIC fraud in UKCSL’s transactions. We did not accept GW’s unsupported assertion that JOB was mistaken and that he had been provided with a copy of Notice 726 on 23 March 2016 (5/127-132). We find that despite JOB being made aware of MTIC fraud on 10 March 2016 no additional checks were carried out on PPSM, GECX and Sky nor any questions asked. In addition, no questions were asked of JOM, RL or SC about the transactions and their relationships with PPSM, GECX and Sky.

Due diligence

[111]We remind ourselves that we should take account of, but not focus unduly, on the question of whether the trader has acted with due diligence, Moses LJ in Mobilx at [82]. We find the due diligence undertaken by UKCSL woefully inadequate for the following reasons. JOB had no previous experience of zero-rating of exports to the EU prior to Deal 1. He was responsible for due diligence on customers and suppliers but was unaware of Notice 726 or the risks around MTIC fraud. He did not appear to understand the broader context to due diligence but rather saw his main responsibility as being to protect UKCSL from bad debts – “I am assessing the risk to UKCSL of being left – you know, funding goods or with bad debt. Payment upfront means I don’t have a bad debt from the customer. Julie giving me the assurance and, you know, seeing Peter Wildman, LinkedIn and all the rest of it, her assurance these deals have been done before elsewhere and he is trustworthy, is enough for me not to be concerned about the transactions.” (4/87/9-18).[112]Complete reliance was placed by GW and JOB on the supposed previous contact and/or dealings of JOM with PPSM and GECX in her previous employment and/or that of RL or SC with customers and suppliers with no further research or verification carried out by UKCSL (4/36/20-24, 4/55/25-56/1, 4/70/15-20 and 5/156/19-157/2). We do not consider it reasonable for GW and JOB to take everything at face value. We accept that even if UKCSL had carried out enhanced due diligence, it would not have been in a position to identify suppliers two down the chain whose details were not known to them nor the ultimate customers. RL provided JOB with PPSM’s due diligence documentation and details of GECX on 21 October 2015 at 15.04. The PPSM VAT certificate gave PPSM’s trade classification as “other personal service activities” and PPSM’s address as 5-11 Tower St, Birmingham. PPSM’s invoice for Deal 1 and business card gave its address as 5 Tudor Way, Sutton Coldfield (a residential address). There is no evidence of any questions having been asked by JOB about the apparent discrepancies. JOB’s explanation was that no questions were asked as: “PPSM were already known to our sales staff. That has significant bearing on our willingness to deal with them. So if you had been vetted, essentially, by a member of staff, through them using you at a previous supplier, then that is a -- you know, a big green flag, as it were. I also wouldn't expect Peter and PPSM to be operating a warehouse. I knew that Peter was basically a one man outfit, using his connections in the industry to be able to source products and so I wouldn't have expected him to be working out of a commercial premises, with a little warehouse attached to it, like UK Computer Supplies. He is leveraging, he is contacting the industry to facilitate deals. So no, I would not be overly concerned about Peter.” (4/36/18-37/8).[113]In cross-examination, JOB set out his reasoning for why he did not see any red flags when looking at PPSM and PW. That reasoning largely consisted of PW “looking old enough and experienced enough” in his LinkedIn profile photograph:
“If it looked like a high risk business. Peter, when you look at him on LinkedIn -- and, you know, my contact with Peter was a few short phone calls. I have not met the guy. When you look at him on LinkedIn, he looks old enough and experienced enough to have industry contacts, to be doing the type of work that he is doing. He is -- there is nothing about him in the pictures that I have seen of him on LinkedIn, in the documentation that I'm looking at here, that says: there is a risk here. There is a bit that says, you know, maybe make sure your addresses match but UK Computer Supplies were in the same situation, for good reason. So, no, there isn't anything on here that raises a red flag. Particularly, you know, given what we are looking for, which is that the goods exist and they are actually going to be shipped, I am predominantly reliant on the supplier already being known and recommended by somebody in the company. Then what I'm looking for here is I'm looking for, you know -- in all this due diligence, I suppose I'm looking for the red flags and the things that jump out at me. I'm not looking for -- I'm not looking for kind of minor admin errors, I'm looking for risk indicators and I don't see them. (4/41/3-25).”
[114]The remainder of UKCSL’s due diligence on PPSM consisted of a VIES check dated 27 July 2016, a Companies House Certificate dated 3 June 2016, a LinkedIn entry for PW which is understood to have been printed in August 2016, an Experian report on PPSM dated 27 July 2016 giving a credit limit of £8,500 and a credit rating of £3,400. All of these documents post-dated the Relevant Period. A Risk Disk check was carried out by UKCSL on PPSM on 13 November 2015, the search results were not in evidence just confirmation that the check had been carried out. The Experian report on PPSM dated 27 July 2016 provided a history of PPSM’s credit rating and it could be seen from its credit rating in November 2015 that its score was far worse that the credit rating in July 2016. Despite that very low credit rating and the stated importance of UKCSL carrying out credit checks as part of its due diligence, the low credit rating was dismissed as “not relevant” for the purpose of trading with PPSM (4/43/23-45/17).[115]The due diligence provided to UKCSL by GECX consisted of a certificate from the Chamber of Commerce and Industry Thessaloniki dated 5 July 2013 which did not mention trading wholesale in electronic goods but the purchase and sale of petroleum, metals and any kind of cargoes. The pdf document headed “GECX Group” stated it was a leading industrial conglomerate based in Saudi Arabia and had built a strong reputation as an integrated commodities trading company, offering services in the areas of commodities trading, brokerage, logistics, and finance with a core focus on metals (base metals, bulk ore and steel/ Ferro-alloys) and soft commodities (fertilizer, palm oil, sugar and wheat), as well as coal and LPG. One of its stated growth strategies was to enter the telecommunication market with the aim of becoming a leading name in the mobile phone trading business. A cursory glance at this document should have raised red flags as none of GECX’s stated activities and its stated aim to enter the telecommunications market corresponded with the goods purchased in the Denied Deals.[116]UKCSL’s due diligence on Sky consisted of a VAT validation that took place after the first transaction. No trade references were requested by UKCSL in respect of PPSM, GECX or Sky. JOB’s explanation for not requesting trade references was that as they are provided by the companies themselves they are self-selected and therefore of no value. We do not consider that to be a credible reason for not requesting trade references especially when UKCSL was about to commence trading with a new party.[117]We find that UKCSL did not take all reasonable steps to verify its customers or suppliers by carrying out commercial checks and due diligence. Reliance was placed upon LH’s e-mail to GW dated 20 June 2016 (at paragraph 47) by UKCSL in which she confirmed that there is sufficient evidence to support the zero-rating of sales. SH was not cross-examined directly on that point but was clear in her answers to cross-examination and her witness statement that she did not consider that the CMRs provided sufficient evidence to support the zero-rating as they were illegible and incomplete (2/53/3-7, 2/61/5-25 and paragraphs 221-226 witness statement). We accept SH’s evidence.[118]We consider it of note that GECX did not require trade references or any financial details/references from UKCSL before commencing the trades nor at any subsequent point. The way in which the deals were structured required GECX to assume a significant financial risk as it would pay UKCSL upfront for the goods with delivery only being effected some weeks later. It is clear that UKCSL did not consider whether there was any commercial rationale for the structure of the transactions with PPSM and GECX. An explanation was provided by GW that PW had told him after the Relevant Period that he could not fund the purchases himself hence his need to partner with UKCSL to effect the transactions. SH’s evidence, as recorded in the 27 April 2016 visit report, was that “GW stated Peter (director of PPSM) had said that he could not fund that VAT involved in making these sales to the EU and that was where UCS came in.” We find on the balance of probabilities it more likely that not that the visit note accurately recorded what GW had said. UKCSL were aware from the outset that the customer would know who UKCSL’s supplier was as the goods were collected from PPSM and there was always the risk that PPSM could cut out UKCSL from the transaction and deal direct with GECX, the knowledge that PW could not afford to fund the transactions himself provided sufficient comfort for UKCSL to enter into the transactions. We consider that this knowledge of itself should have set alarm bells ringing. No questions or queries were raised as to why a supposedly large and reputable company like GECX would enter such high-risk transactions nor any consideration given to what was the commercial logic behind GECX’s willingness to proceed under such terms.

Turnover

[119]During the Relevant Period the turnover of UKCSL turnover increased significantly and then dropped back again after that period. The deals were high value, low margin so gross profit did not change significantly. GW’s explanation was that UKCSL had set up a London office to bring in more business and this was not inconsistent with changes in stock deals in or taking lower margins on higher volumes of goods. When this office closed, the former pattern of higher margins resumed. GW’s evidence was repeatedly that “turnover was vanity, profit was sanity” and that during the Relevant Period, the profit levels went down.[120]GW relied upon a table used by SH at paragraph 349 of her witness statement to show the relevant gross profit for context. Trading Period IT Reseller only 9 months IT Reseller & MTIC 6 months IT Reseller Only 8 months VAT Returns 3/15 to 9/15 12/15 to 03/16 4/16 to 11/16 Outputs £9,526,786.00 £19,132,742.00 £9,783,680.00 Gross Profit £2,194,136.02 £2,107,015.63 £2,349,725.04[121]We find that there was a significant increase in turnover for UKCSL in the 6 month period when compared to the nine month VAT periods 3/15-09/15 that preceded it. It is clear that the turnover increase from £9.5m to £19.1m and then in the 8 months spanning VAT periods 4/16-11/16 returned to the a figure comparable to the period before the Transactions, £9.7m. We accept that UKCSL had increased costs during the six months as it had the additional costs of salaries and rent of its newly opened London sales office. However, that explanation ignores totally some €450,000 profit that UKCSL made on the Denied Deals and treats different length time periods as comparable. Accordingly, we find that UKCSL’s profits significantly increased in the Relevant Period.

Change to business

[122]We find that the Denied Deals represented a significant change in UKCSL’s business as it was now making high volume, low margin trades. We accept that UKCSL had, from as early as 2010, engaged in wholesale transactions and, from as early as 2013, traded with European Infotheek Groep N.V and Travion IT Distribution B.V but those transactions are not comparable to the volume, frequency and value of the goods in the Denied Deals, the previous trades were individually of significantly lower value, spread over a longer period of time and were priced in sterling not euros. The examples of previous trades where customers had paid in advance of delivery were, relative to the Denied Deals, low value (under £10,000). JOB’s evidence was that the Denied Deals were a “massive pain”, required lots of work and paperwork for very little reward, required the introduction of a new internal deal sheet to calculate commission for the sales team and profit margin and put pressure on UKCSL’s cash flow yet UKCSL persisted with the transactions (4/70/20-71/6).

Added value

[123]UKCSL case was that its role in the Denied Deals was to provide added value as it “sourced and advised on the products as a value-added reseller, drawing on its established supplier network and experienced sales team”. There is no evidence before the Tribunal of UKCSL carrying on that role in the Denied Deals and it is clear from Deal 1 onwards that it was not drawing on its established supplier network but a new supplier who was unknown to UKCSL and nor was any advice given on the products sourced. We find that UKCSL did not provide any added-value to the transactions.

Origin of trade

[124]Conflicting evidence has been given as to the origin of the trade between UKCSL and PPSM, GECX and Sky. We would have expected UKCSL’s evidence on this point to be clear and unambiguous as it placed great reliance on JOM’s previous dealings with PPSM, GECX and Sky such that they were a “green flag” and amounted to PPSM, GECX and Sky having been “vetted”. GW’s e-mail to LW dated 2 September 2016 confirmed that “Julie was our Sales Manager in the London Office, she introduced the customers GECX and Sky City to UK Computers, she used to deal with them at her previous employer Zones UK.” The initial e-mail from Sky to JOM dated 26 November 2015 makes no mention of any previous contact/knowledge of each other and states “We came across your e-mail from a mass emailed list that was send [sic] to us !”. GW, in his second witness statement at paragraph 187 stated that he agreed with paragraph 93 of SH’s witness statement that “GECX was “found” by the London Sales Manager Stevie Clift at a trade conference” which was the same explanation given at the HMRC visit on 27 April 2016 but in his first witness statement GW states at paragraph 60 “With respect of GECX, JOM had dealings with them at her previous company and came across them again on LinkedIn. She then assigned the lead to Rochelle from the sales team to contact them”. RL, in her initial e-mail to GECX at paragraph 9091, makes no mention of SC meeting GECX at a LinkedIn trade conference or of JOM having had come across GECX again on LinkedIn and made contact via LinkedIn. On the evidence before us, we find it more likely than not that JOM was responsible for initiating UKCSL’s contact with PPSM, GECX and Sky.

Price negotiations

[125]Having carefully considered the evidence, we find that there is very limited evidence of price negotiations with PPSM and no negotiations on price with its customer, GECX. In our judgement, we find this demonstrates a lack of commerciality and that the prices were pre-ordained. The negotiations documented consist of a request for a price with the price requested being agreed or the final price being very close to the initial requested price. No reference is made as to whether the price included transportation of the goods. No mention is made in any of the correspondence of UKCSL having obtained quotes from Broker Bin or other sources to support the price requested nor any reference made to telephone discussions. We do not accept UKCSL’s submission that that absence of documents evidencing pricing negotiations confirms that the majority of all price negotiations were conducted by telephone. That submission is contradicted by GW’s own evidence.[126]GW exhibited to his third witness statement a call log which confirmed no calls to GECX or Sky and nine calls to PPSM over a two month period totalling ten minutes. When this was put to him in cross-examination, GW’s explanation was that “they could have been using their mobile phone to make a call, or they could have been calling a mobile.Secondly, price negotiation - as I said, ten minutes is a long time on a telephone call, if you break it down. On price negotiation, once the initial order has been agreed on price, it pretty much sets the price moving forward, with only small fluctuations, moving forward.”. When it was pointed out to him that the call log did show calls to mobile telephone numbers his evidence then became for the first time “These are salespeople in this age. They use all sorts of communications. They use their mobile phones, they use WhatsApp, they use all sorts of communication. This is sales, this is industry.” We did not find this evidence credible.

Terms

[127]PPSM’s standard terms provided at Clause 20 “You must make payment even if delivery has not taken place and/or that the title in the goods has not passed to you”. Clause 39 stated “The risk in the Goods will pass to you on completion of delivery. However, Clause 40 states “Title to the goods will not pass to you until we have received payment in full…”. As UKCSL did not take possession of the goods and were not involved in the delivery of goods this created considerable uncertainty as to when the risk and title to the goods passed to them. No inspection of the goods was ever undertaken by UKCSL despite Clause 30 providing “You must inspect the goods on delivery or collection”.

Insurance

[128]We find that there is no evidence to show that the goods were insured either by UKCSL or its customers whilst in transit from the UK to the EU. Reference was made by JOB to PW stating that “he would ensure that goods are insured” and that was “probably proof enough though a certificate would be nice” (paragraph 103 at 11.44); no proof of insurance was ever provided by PPSM to UKCSL. If the goods were damaged in transit or failed to turn up, UKCSL would be unable to claim for the loss and would be liable for any loss or damage. GW’s evidence was that UKCSL did not require transport insurance as they were not transporting the goods and the supplier’s insurance covered the goods up to the point they were delivered. That evidence ignores the fact that UKCSL did not inspect the goods before they were shipped and had no means of confirming quantities, condition of the goods or identification/serial numbers of the goods. Without that information, UKCSL would be unable to make a claim on their own transit insurance nor disprove any claim that the goods delivered did not match the order details.

Exact Stock

[129]We find that UKCSL was repeatedly able to source the exact goods and specification required, in the exact quantity, at an acceptable price all from a single supplier in all of the Denied Deals. Such trading ensured that UKCSL was never left with any surplus stock that it was required to store and insure. We consider it highly improbable that this would have happened if the Denied Deals were commercial transactions,

Single source

[130]We find that UKCSL did not contact any other supplier/source of stock to fulfil the orders in the Denied Deals. There was no evidence of any other source being contacted to obtain the goods in the Denied Deals despite it being UKCSL’s standard practice to contact existing suppliers for pricing and availability.

Euros

[131]We find that there was no credible explanation for the Denied Deals being transacted in Euros. All the Denied Deals were transacted in Euros and this caused significant difficulties for UKCSL in calculating profit margins because of the currency fluctuations. UKCSL was not set-up to handle transaction in Euros. The explanation given by PW for quoting in Euros was that “Matt” (UKCSL sales staff member) had told him that the customer was European and for that reason the price quoted was in Euros. GW’s evidence was that it was PPSM that had requested that UKCSL pay in Euros. GW’s evidence is not supported by the documents in evidence and we do not accept it. We consider it of note that the two transactions with Sky continued to be priced in Euros despite Sky being a Danish company based in Denmark, a country whose currency is the Danish Krone and not the Euro. No credible explanation or commercial reason has been provided for the goods being priced in Euros by a UK based supplier selling goods to a UK based company.

Known to each other

[132]We find that it is clear from the documentary evidence provided in respect of the Denied Deals that PPSM and GECX were known to each other and were aware of each other’s prices in their transactions with UKCSL (RL’s e-mail dated 11 December 2015 to PPSM requesting “packing details for the SSDs order for Skycity”, RL’s e-mail to JOB dated 25 January 2016 said that GECX had contacted PPSM in relation to pricing as they had been overcharged – “They contacted PPSM, who own the customer relationship with this one, or we will lose out on future orders”) . The risk of disintermediation did not concern UKCSL and was explained as part and parcel of the industry standard Drop Shipping. We do not accept that the Denied Deals conformed to the industry standard of Drop Shipping as UKCSL had no control over the supply chain and did not know the ultimate destination of the goods. Furthermore, when it was pointed out to JOB and GW that the customer collected the goods from PPSM’s freight forwarder, On Logistics, their oral evidence was that drop shipping included collection by the customer from the supplier (4/63/24-64/18, 4/80/23-81/18, 5/138/16- 139/17).

Documents

[133]The transactions documents confirm a lack of clarity around delivery/collection of stock, delivery destination, when delivery would be effected, who was responsible for insurance and who bore transportation costs. Invoices stated that goods were to be delivered to customers, but the evidence showed customers collected them contrary to what was stated on the purchase order or invoices. There were instances when PPSM issued a purchase order before UKCSL had even quoted a price to its customers: PPSM raised a purchase order to 3ADL for the goods in Deal 1 on the same day that UKCSL make an enquiry and before the trade had even been agreed.[134]We find that the transaction documents, e-mails and transaction timelines together with the issue of invoices and purchase orders before a price and the deal had been agreed are all suggestive of the deals being pre-arranged.

Mark up

[135]It was not disputed that UKCSL always received the largest mark-up in the transaction chain and, apart from Deal 1, was always fifth in the transaction chain. Having carefully considered the oral and written evidence, we find that there is no evidence to suggest that JOB or GW were aware of the length of the transaction chain, UKCSL’s place in that chain and were not aware of the percentage mark-up it received relative to the other parties in the chain.

Actual knowledge

[136]HMRC’s primary case is that UKCSL had actual knowledge that the Denied Deals were connected to the fraudulent evasion of VAT for the reasons set out at paragraph 62 above. By reference to our findings of fact we do not consider that HMRC have discharged the burden of proof that UKCSL had actual knowledge. We declined to draw an adverse inference of UKCSL’s failure to call JOM, RL and SC and have similarly declined to draw an adverse inference from JOM’s alleged behaviour after the Relevant Period. We have not been provided with any evidence to contradict UKCSL’s claim that JOM arrived at UKCSL with anything but an unblemished reputation and record in IT sales. Nor has any evidence been adduced that supports the contention that UKCSL through GW, JOB or JOM were aware of or knew that the length of the transaction chain was commercially unjustified. It is clear that UKCSL did not undertake appropriate due diligence on its suppliers and customers but as confirmed in Mobilx at [82] “tribunals should not unduly focus on the question of whether the trader has acted with due diligence”. UKCSL did have a process of due diligence, as explained by JOB, and it was clear that the entire focus of the due diligence was to ensure that sufficient documents were obtained to support UKCL’s claim for zero-rating. Trade references were not obtained as JOB saw them as self-serving and, in any event, he did not see the need as UKCSL was paid upfront for the purchases. We do not consider that GW or JOB ignored the red flags because they were complicit in the VAT fraud but rather consider that their focus was on transactions that, in their eyes, presented no risk to UKCSL and were profitable. We consider it of note that the ADR exit agreement dated 24 January 2018 (nearly two years after the Denied Deals) recorded that the parties were agreed that UKCSL did not have actual knowledge that the Denied Deals were connected to the fraudulent evasion of VAT. The exit agreement recorded SH’s view that UKCSL “should have known” that the Denied Deals were connected to the fraudulent evasion of VAT. We are, of course, not bound by that agreement but we agree with that conclusion. Accordingly, we conclude that UKCSL did not have actual knowledge that the Denied Deals were connected with VAT fraud.

Should have known

[137]By reference to the totality of our findings of fact we have no hesitation in concluding that UKCSL should have known that Denied Deals were connected with the fraudulent evasion of VAT. GW’s state of knowledge is attributable to UKCSL by the ordinary principles of attribution (see HMRC v Greener Solutions [2012] UKUT 19 (TCC) at [16] – [20], [47]). JOB’s state of knowledge from 10 March 2016 is similarly attributable to UKCSL by the ordinary principles of attribution. We have carefully considered the evidence regarding JOM’s, RL’s and SC’s involvement and role in the Denied Deals transactions during the Relevant Period and have concluded that HMRC have not shown that they should have known that the transactions were connected to the fraudulent evasion of VAT.[138]GW was made aware of Notice 726 and HMRC’s “How to spot missing trader fraud” well in advance of the Denied Deals. GW has extensive experience in the IT Reselling sector and ought reasonably to have been aware of the risks of VAT fraud within that sector. The characteristics of the transactions entered into with PPSM, GECX and Sky exhibited several of the red flags identified in the two HMRC leaflets.[139]The transactions required UKCSL to transact with a previously unknown supplier and customer contrary to UKCSL’s standard operating practice of using existing suppliers wherever possible. No enquiries were made or questions asked by UKCSL of either PPSM or GECX, we do not consider it reasonable to not to have done so. The transactions were all high volume, high-value goods at profit margins lower than those usually obtained by UKCSL in its other transactions and represented a significant departure from UKCSL’s usual trading activities and patterns. The transactions were all priced in Euros which caused UKCSL difficulty in calculating the profit margins and required UKCSL to put in place procedures to process the transaction payments. UKCSL never questioned why a UK based supplier was pricing its supplies to a UK based company in Euros. No formal contracts for the transactions existed and the transactions required little effort, input or risk from UKCSL. Despite these red flags, GW and JOB were singularly uncurious about the transactions. No due diligence or credit checks were carried out on PPSM, GECX or Sky and a cursory glance at the documents provided by the counterparties would have set off alarm bells. In considering the totality of the 19 transactions undertaken by UKCSL, their inherent characteristics, what UKCSL did or did not do and the surrounding factual matrix, we are satisfied that UKCSL ought to have concluded that the only credible explanation for the Denied Deals was that they were connected with fraudulent evasion of VAT. In reaching that conclusion we have considered UKCSL’s explanation that it “sourced and advised on the products as a value-added reseller, drawing on its established suppler network and experienced sales team” and whether the “only reasonable explanation” standard is met when considered against the full body of evidence before the Tribunal and have concluded that we do not consider that explanation as reasonable or credible. Conclusion In view of our findings above, the appeal is DISMISSED. Right to apply for permission to appeal

Conclusion

[140]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 07th JULY 2025

order

(1) Officer Susan Hirons (“SH”)(2) Officer Julie Marshall (“JM”)(3) Jaime O’Beirne (“JOB”)(4) Gary Watson (“GW”)