Pacfic Computers Limited v The Commissioners for HMRC [2026] UKFTT 603 (TC)

[2026] UKFTT 00603 (TC)

Case No TC 09851

FIRST-TIER TRIBUNAL

TAX CHAMBER

Hearing Heard on: 31 October -21 November 2024

Date Judgment date: 17 April 2026

Appeal reference: LON/2008/0429

VAT – MTIC fraud – case remitted from Upper Tribunal - whether appellant should have known or knew that its transactions were connected to fraudulent evasion of VAT - appeal dismissed

Before

TRIBUNAL JUDGE BOWLER

MS GILL HUNTER

Between

PACFIC COMPUTERS LIMITEDAppellant

THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondent

Mr David Lewis KC and Michael Firth KC, instructed by Morr & Co LLP for Appellant

Mr Christopher Foulkes and Mr Howard Watkinson of Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for Respondents

DECISION

Introduction

[1]This appeal was originally heard by a differently constituted First-tier Tribunal in 2014 after which that tribunal allowed the appeal in a decision issued in January 2015. HMRC successfully appealed to the Upper Tribunal who decided in 2016 that the case should be remitted to a differently constituted First-tier Tribunal for a fresh hearing.

[2]The case concerns missing trader intra-community fraud (“MTIC”). The basis for HMRC’s decision to deny PCL recovery of input VAT was that, so HMRC asserted, PCL’s transactions in computer processing units (“CPUs”) and iPods in the relevant period formed part of an overall scheme to defraud the Revenue, and that PCL knew or should have known that was the case.

The decision under appeal

[3]PCL has accepted (and indeed had accepted before the previous FTT hearing) that HMRC had proved that in respect of each relevant transaction there had been a VAT loss, that such a loss had been fraudulent and that each of PCL’s relevant transactions was connected with the fraudulent evasion of VAT. Accordingly, the core issue before us is whether HMRC has proved that PCL either knew, or alternatively should have known, of the connection to fraud. In essence, PCL’s case is that those involved were innocent dupes who were inveigled into unknowingly participating in the transactions; and the circumstances were not such that, as reasonable businessmen, they should have known that their transactions were connected to fraud. The decision under appeal In a decision letter dated 13 February 2008 HMRC denied the deduction of £428,525.74 of input tax for the period 09/06.

[4]HMRC also consider that the transactions in the period 06/06 were connected with fraudulent evasion of VAT and took place as part of an orchestrated scheme to defraud the Revenue. However, HMRC did not deny input tax recovery on those deals and consequently there is no disputed decision relating thereto. HMRC do maintain though that the transactions in that period are relevant context for the dispute before us given the alleged connection to fraud of those deals as well as the ones which are the subject of the dispute.

Burden of Proof

[5]The burden of proof lies with HMRC. The ordinary civil standard of the balance of probabilities applies. Although what HMRC must show has been described as a “high hurdle” there is only one civil standard and that standard of the balance of probabilities applies.

Evidence

[6]The written evidence was contained in hearing bundles running to more than 9600 pages. That written evidence included witness statements from PCL’s witnesses dated in 2011 and 2014. In addition, we had witness statements written in 2018 from Mr Roach, Mr Hall and Mr Donaldson addressing specific points which arose in the previous First-tier Tribunal hearing. Each witness swore to the correctness of their witness statements, subject to certain expressly identified changes. That evidence stood as their evidence in chief.

[7]We heard oral evidence from:(1) Mr Richard Donaldson, director of PCL at the relevant time and now;

(2) Mr Andrew Hall, who was Finance Director of PCL in 2006 but left the company in 2021;

(3) Mr Marc Roach, director of PCL who conducted all of the contested deals;

(4) Mr Birtchnell, who was the logistics manager of PCL in 2006. He had been in that position since 2004. He became Managing Director in 2017;

(5) Dr Findlay who was HMRC’s expert witness giving evidence about the operation of the grey market at the time; and

(6) Officer Victor Cumberbatch, the HMRC officer who issued the original decision denying the VAT repayment to PCL.

[8]The HMRC witnesses providing evidence as to the underlying VAT losses arising from the transactions with which the deals were connected and the deal chains were not called as PCL did not challenge that evidence.

The approach to evidence where so much time has elapsed

[9]Both Mr Foulkes and Mr Lewis relied upon the Gestmin SGPS SA v Credit Suisse (UK) Ltd

[2013] EWHC 3560 (Comm)

principles given the long time since the relevant events took place in 2006. We recognise and apply those principles.

[10]In particular, the oft-quoted principles stated by Legatt LJ in Gestmin (at paras 15-22) identify that:

“Memory is especially unreliable when it comes to recalling past beliefs. Our memories of past beliefs are revised to make them more consistent with our present beliefs… Considerable interference with memory is also introduced in civil litigation by the procedure of preparing for trial… …[So that] “it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.”

[11]However, as the Court of Appeal made clear in Kogan v Martin & Ors (Rev 1)

[2019] EWCA Civ 1645

(at para 88), the Gestmin guidance does not prevent reliance upon witness statements. “A proper awareness of the fallibility of memory does not relieve judges of the task of making findings of fact based upon all of the evidence.”

[12]The same emphasis on the duty to consider all of the evidence and determining the weight to be given to it was stated in BXB v Watch Tower and Bible Tract Society of Pennsylvania and Trustees of the Barry Congregation of Jehovah’s Witnesses

[2020] EWHC 156 (QB)

although the fallibility of memory should be recognised.

[13]We have identified on numerous occasions, where we are facing inconsistent evidence, the basis on which we have decided to which should be given greater weight. In relation to the passage of time and its effect, as a general matter, where a witness’ oral evidence before us is significantly different to that in their witness statement produced in 2011, or documents from 2006 or 2007, we have given greater weight to the earlier evidence unless we are satisfied that the earlier evidence has been shown to be wrong.

Evidence from the first hearing

[14]It is agreed by the parties that the transcript of the first hearing is admissible as evidence of what was said on the last occasion and could be particularly helpful to assist the witnesses given the passage of time. However, at the start of the hearing the Tribunal directed that, where HMRC wished to rely upon inconsistencies between the evidence from the first hearing and that before us, HMRC must identify the inconsistencies to the relevant witness. That occurred on numerous occasions.

[15]Particularly given the passage of time, it was frequently helpful and appropriate to remind a witness of what was said before. In addition, HMRC frequently took the witnesses to the transcript from the first hearing to put to them that their evidence had changed. That was entirely appropriate where HMRC was seeking to rely on inconsistencies and in line with the Tribunal’s direction. We have specifically disregarded any inconsistencies between the first tribunal transcript and the evidence before us on which HMRC seeks to rely where they were not put to witnesses.

Officer Cumberbatch

[16]Mr Lewis cross-examined Officer Cumberbatch at length, frequently asking for his opinion. While that process cast into doubt statements made by Officer Cumberbatch in his Witness Statement, much of the evidence of Officer Cumberbatch is disregarded by us as it is no more than his opinion. Although Officer Cumberbatch said that various elements relied upon by him in his decision letter should be withdrawn as relevant factors both in that letter and in HMRC’s Statement of Case, we are not satisfied that Officer Cumberbatch had the authority to amend HMRC’s case in such a way. In any event, an application would be needed for HMRC’s Statement of Case to be amended. Moreover, in essence, Officer Cumberbatch was changing his opinion as to what was relevant or not; and that is not a matter to be taken into account by us as the fact-finding tribunal.

[17]Indeed, Mr Lewis recognised in closing that his assertion that Officer Cumberbatch did not apply the correct test when deciding to deny PCL input tax does not resolve the issues in this appeal.

Expert evidence of Dr Findlay

[18]In this part of our decision we address the assertions made by PCL at the hearing calling into question Dr Findlay’s qualifications as an expert and more generally what weight we give his evidence. Issues taken by PCL on specific points made in that expert evidence are addressed in context later.

[19]In relation to Doctor Findlay’s qualifications we refer to the EdgeskillLtd v Revenue and Customs Commissioners

[2014] STC 1174

decision at paras 179-181 where it is made clear that previous experience in analysing a market is not to be discouraged or thought invalid.

[20]Dr Findlay worked as an independent consultant and director at PricewaterhouseCoopers LLP and was then an independent technology markets consultant. While at PricewaterhouseCoopers his role was to examine the strategy, operations and general business prospects of technology businesses for the benefit of prospective investors and conducted electronics, semiconductor components and IT market studies as well as commercial due diligence. We are satisfied that on this basis he can properly give evidence as an “expert”.

[21]We note that on several occasions PCL has relied on evidence provided by Dr Findlay. PCL did not seek to rely on expert evidence of its own. PCL has sought to rely on a KPMG report to argue that the size of the grey market was much greater than Dr Findlay estimated. However, as Dr Findlay explained, the KPMG report looks at a broader market than CPUs. We therefore consider that Dr Findlay’s evidence has greater relevance to this case.

[22]PCL has called into question the fact that Dr Findlay says that he based some of his expert opinion on discussions with market participants, in particular in relation to the grey market. However, there was no suggestion that the conversations did not take place and it appears to be accepted that, as Dr Findlay explains, there is no measurement of the grey market in the public domain, although the statistics required to estimate the size of that market are publicly available. We do not find that the fact that elements of Dr Findlay’s evidence based on conversations he held undermines that evidence. Indeed, as HMRC have argued, if PCL considered that the elements of his opinion based on conversations (that distributors estimated that 6% of their revenue derived from the grey market), PCL could have spoken to distributors themselves to provide contrary evidence.

[23]However, we note here that Dr Findlay’s evidence as to the size of the grey market is only relied upon by HMRC (as made clear in Mr Foulkes’ closing submissions) to prove that PCL’s transactions did not take place in a legitimate market. HMRC does not allege that PCL knew the size of the grey market.

[24]Given that PCL accepts its contested deals were part of fraudulent chains it is implicitly accepted that the deals did not take place in the legitimate market.

[25]Of potentially greater relevance is Dr Findlay’s evidence about chain length and what a trader could be expected to realise in the context of the deals. We turn to more detailed consideration of this evidence later in the decision.

What was put to the witnesses

[26]PCL says that the previous transcript cannot be relied upon to discharge HMRC’s duty to put their case to the witnesses. We agree. It was incumbent on HMRC to put their case to the witnesses in the hearing before us.

[27]In addition, Mr Lewis submits that it was incumbent upon HMRC to put their case fairly and squarely to PCL’s witnesses on each of the material points upon which HMRC relied, particularly where HMRC were intending to invite the Tribunal to disbelieve evidence given by that witness.

[28]Mr Lewis relies upon the decision of Lord Hodge in TUI UK Ltd v. Griffiths

[2023] UKSC 48

[29]Mr Foulkes submits that the matter is fundamentally one of fairness. It would not be consistent with the overriding objective to act in the interests of fairness and justice to put every single point on which HMRC rely to the witnesses in cross examination. It was put to each of Mr Roach and Mr Donaldson whether they knew that the transactions were connected to fraud.

[30]Mr Foulkes submits that it was not necessary to put each point to each of the witnesses. Where a witness does not address a matter in their witness statement it would not be appropriate to cross examine them on that matter.

[31]Our decision is rooted in the following principles.

Lord Hodge in Tui provided this guidance:

"[70] In conclusion, the status and application of the rule in Browne v Dunn and the other cases which I have discussed can be summarised in the following propositions: (i) The general rule in civil cases, as stated in Phipson, 20th ed, para 12-12, is that a party is required to challenge by cross-examination the evidence of any witness of the opposing party on a material point which he or she wishes to submit to the court should not be accepted. That rule extends to both witnesses as to fact and expert witnesses. (ii) In an adversarial system of justice, the purpose of the rule is to make sure that the trial is fair. (iii) The rationale of the rule, i.e. preserving the fairness of the trial, includes fairness to the party who has adduced the evidence of the impugned witness. (iv) Maintaining the fairness of the trial includes fairness to the witness whose evidence is being impugned, whether on the basis of dishonesty, inaccuracy or other inadequacy. An expert witness, in particular, may have a strong professional interest in maintaining his or her reputation from a challenge of inaccuracy or inadequacy as well as from a challenge to the expert’s honesty. (v) Maintaining such fairness also includes enabling the judge to make a proper assessment of all the evidence to achieve justice in the cause. The rule is directed to the integrity of the court process itself. (vi) Cross-examination gives the witness the opportunity to explain or clarify his or her evidence. That opportunity is particularly important when the opposing party intends to accuse the witness of dishonesty, but there is no principled basis for confining the rule to cases of dishonesty. (vii) The rule should not be applied rigidly. It is not an inflexible rule and there is bound to be some relaxation of the rule, as the current edition of Phipson recognises in para 12.12 in sub-paragraphs which follow those which I have quoted in para 42 above. Its application depends upon the circumstances of the case as the criterion is the overall fairness of the trial. Thus, where it would be disproportionate to cross-examine at length or where, as in Chen v Ng, the trial judge has set a limit on the time for cross-examination, those circumstances would be relevant considerations in the court’s decision on the application of the rule. (viii) There are also circumstances in which the rule may not apply: see paras 61-68 above for examples of such circumstances."

[33]This is primarily rooted in the notions of fairness which must be the foundation of hearings, in accordance with the overriding objective. As Lord Hodge said:

“Its application depends upon the circumstances of the case as the criterion is the overall fairness of the trial.”

An example of this approach in the context of an MTIC hearing is found in the case of Edgeskill to which Mr Foulkes referred us.

[34]Furthermore, in Edgeskill it was confirmed (at para 142) that the principle in Re Yarn Spinners' Agreement

[1959] 1 All ER 299

at 309 per Devlin J means that a party’s case may be put to any of the witnesses who deal with the matter in chief and it can then be relied upon by that party in argument.

[35]It is clear that allegations of wrongdoing should be pleaded fairly and squarely and put to accused witnesses. There can be little doubt that on multiple occasions through the protracted litigation HMRC has pleaded the allegations of wrongdoing.

[36]Furthermore, in this case Mr Roach (the person who carried out all of the deals) and Mr Hall (the Finance Director) were cross examined in considerable detail over the course of two days each. They, along with the other PCL witnesses, have filed numerous witness statements addressing HMRC’s case. There can be no doubt that PCL was fully aware that HMRC were saying that PCL knew about the fraud connected to their deals and that PCL was being directed as to whom to buy from and sell to.

[37]We are clear that PCL knew what overall case was being asserted by HMRC. In particular, both of the Directors were directly asked about their knowledge of fraud in the transaction chains. It was specifically put to Mr Roach that this was a contrived series of transactions designed to defraud the Revenue of VAT, and Mr Roach knew who to buy from, who to sell to, and at what price. Being the person who conducted all the deals he was clearly the correct person to address this allegation to.

[38]PCL submits that HMRC failed to put its case in relation to certain particular aspects of the deals. We agree with Mr Foulkes that it would be disproportionate to put every point relied upon by HMRC to the witnesses and this is a potential limitation recognised by Lord Hodge in Tui.

[39]We address certain specific points regarding which PCL says the case was insufficiently put as they arise later in this decision. Not every point relied upon by HMRC is taken into account by us in our decision making. We have therefore only addressed points relied upon by HMRC which PCL says have not been adequately put to the witnesses or otherwise made clear in HMRC’s case.

[40]At this stage however, we record the high level matters put to the PCL witnesses.

[41]It was put to Mr Hall that:(1) various due diligence steps and checklists were window dressing;

(2) deals were proceeding regardless of any price verification;

(3) that making profit took precedence over taking care about the deals in a market known to be rife with fraud.

[42]He was asked if he knew that the deals were connected to MTIC fraud.

[43]He was asked about the financial position of PCL in 2006 and was specifically told that this was in the context of the evidence adduced by HMRC and PCL on that matter. That was referring to the fact that HMRC and PCL have taken different figures for their analysis of profit.

[44]It was put to Mr Roach that:(1) the evidence that Plazadome negotiated hard on deals was inconsistent with Plazadome taking a loss in order for a deal to proceed (deal 27);

(2) his evidence was inconsistent with that of other witnesses or documentary evidence e.g. his evidence about how Mr Miles came to provide the names of Plazadome and Taran to PCL;

(3) his evidence was inconsistent with what he said in the previous hearing e.g. his evidence about what he knew about MTICs at various times;

(4) that as the parties accepted orchestration of the challenged deals another deal (deal 27 where PCL sold to another UK company) must also have been orchestrated given that the evidence now shows that Plazadome made a loss on that deal;

(5) that he knew more about MTICs and carousel fraud than he admitted and that it was incumbent on him to assess if it was safe to carry out transactions;

(6) the transactions were not negotiated arm's length deals;

(7) this was a contrived series of transactions designed to defraud HMRC of VAT, and Mr Roach knew who to buy from, who to sell to, and at what price;

(8) Andrew Miles had been involved in MTIC trading chains before; he knew all about getting decent returns on deals for little effort, and he introduced Mr Roach to them as such;

(9) the contact at the main customer, Ms Ching, was said to have been a longstanding person in the business who should therefore have been expected to be able to source goods from other people; and

(10) that a reasonable trader would ask whether the transactions made sense and would query the trades given that PCL added no value.

[45]Inconsistencies in his evidence between the first hearing and that before us were put to Mr Donaldson; for example, in relation to whether he would expect there to be notes of visits to suppliers and in particular Plazadome. He was directly asked if he knew that the transactions were connected with fraud when they were conducted.

[46]Mr Lewis referred to the Upper Tribunal decision in Danapal v HMRC

[2023] UKUT 00086 (TCC)

where the Upper Tribunal decided that failure to put an allegation of deliberate behaviour to a taxpayer in cross examination meant that the taxpayer should not be found to have deliberately omitted fee income from his returns and where it was wrong for the First-tier Tribunal to find a professional firm dishonest when that firm had no opportunity to address the allegation.

[47]That case was addressing an entirely different situation in which the core component, “deliberate behaviour”, had not been put to the taxpayer at any point by HMRC and yet the First-tier Tribunal made a decision concluding the taxpayer had acted deliberately. In contrast, the core components of knowledge of the fraud and direction from others have been clearly put to PCL’s witnesses in the hearing before us.

Mr Miles

[48]Various linked points have arisen in this case concerning Mr Miles whom PCL say introduced them to their supplier, Plazadome, for the deals.

[49]HMRC submit that only two men know the truth of how it came to pass that PCL began trading with Plazadome, Marc Roach and Andrew Miles. HMRC maintain that although shortly before the first hearing PCL conceded that, from the later evidence served by HMRC, it now had real concerns about his bona fides, it is of note that, during the preceding years over which this appeal has been pursued, no attempt was made to provide evidence from Mr Miles.

[50]Mr Lewis submitted in his closing before us that HMRC could not allege that Mr Miles was a fraudster as this had not been pleaded. In any event, PCL were not aware of any suggestions that Mr Miles was involved in fraud and so they would not consider it to be the explanation for why Mr Miles was introducing them to Plazadome.

[51]We find that PCL’s position regarding Mr Miles is somewhat contradictory. In closing submissions Mr Lewis says that it has never been alleged (let alone proven) against Mr Miles/Taran that they were involved in VAT fraud and knew or should have known of that. The supposition that Mr Miles was a fraudster, seeking to involve others in fraud, is, therefore not made out.

[52]However:(1) in his 2018 Witness Statement Mr Roach says that Mr Miles appears to have been significantly responsible for the position PCL finds itself in;

(2) in closing at the previous hearing PCL submitted that it was absurd to suggest that Mr Miles should be called to give evidence as he was one of the very people whom PCL say inveigled them into taking part in the deals. Were they supposed to ask him to admit to his criminal activities in the hearing?

(3) Mr Foulkes took us to an exchange of correspondence in 2018 which showed that PCL was maintaining that Mr Miles and his company, Taran, were involved in criminal activities and targeting PCL as part thereof.

[53]Furthermore, it was made clear in Mr Foulkes’ opening that HMRC assert that Mr Miles’ company was on their radar as an MTIC trader.

[54]We are therefore clear that there can be no doubt that Mr Miles and his company have been alleged to be involved in MTIC trading by HMRC.

[55]It is also clear that, given that PCL say that they were innocent dupes pulled into the transactions, they were not going to call Mr Miles to give evidence as he was the person who introduced the supplier to them and participated in duping them. We therefore do not consider that any adverse conclusion should result from failing to call Mr Miles. findings of fact Background

findings of fact

[56]PCL was founded in 1996 by Mr Roach and Mr Donaldson and started trading in 1997.

[57]Mr Roach has a background in broking in the IT sector. Prior to incorporating Pacific, he worked as a broker for a computer hardware company which sold various computer components such as hard drives, CPUs, memory and motherboards. He met his cofounder Mr Donaldson and they moved to another company at which Mr Roach predominantly engaged as a broker and Mr Donaldson was responsible for creating and managing client relationships.

[58]During this time they first met Mr Andrew Miles, owner of Taran Microsystems Limited (“Taran”), whose principal business was a combination of wholesale and distribution of computer components.

[59]Mr Roach and Mr Donaldson decided to set up their own business and in exchange for 30% of the shares in PCL being allotted to him and 30% to his brother, Mr Miles agreed Taran would provide office space, warehousing, technical department support, access to a supplier base, accounting services and use of Taran’s credit lines.

[60]Mr Roach, Mr Donaldson, Mr Miles and Mr Miles’ brother were initially appointed directors, although Mr Miles and his brother ceased to be so on 31 October 2000.

[61]Mr Miles’ brother sold his shares in PCL back to PCL in 2011. Mr Miles entered into an agreement in 2011 to sell his shares back to PCL in 2013.

[62]Mr Roach was the Managing Director and is now CEO. Mr Donaldson is and was Sales and Marketing Director and was Company Secretary until 2019. Mr Andrew Hall (“Mr Hall”) was head of finance from 2000 to 2005 and was appointed Pacific’s Finance Director in 2005. He retired in September 2021.

[63]PCL started trading in May 1997, initially focusing on the assembly and sale of bespoke computing systems and the sale of hard drives, CPUs, memory and motherboards to the medium to large corporate sector and components to known trade customers. The initial arrangement was that Pacific could place orders with Taran’s suppliers whereupon Taran would cross charge the cost of those orders plus a small percentage surcharge by way of service charge.Mr Roach confirmed to us that PCL used Taran’s purchase ledger (i.e. its supplier base) but did not use Taran’s customers. When PCL made sales at this time it did so through Taran, PCL invoiced Taran for the profit it made and Taran charged PCL a commission of 2% of the purchase price of the components.

[64]By 2000 Pacific’s turnover had increased to c.£3.5 million, and Pacific had significantly broken away from Taran, moved into new premises and decreased Taran’s involvement. Mr Roach and Mr Donaldson started to buy out Mr Miles’ brother’s shareholding.

[65]From 2002 PCL stopped using Taran’s suppliers.Mr Roach took care not to use any unauthorised distributors on Taran’s purchase ledger because he did not want to upset Mr Miles, who knew PCL’s whole sales ledger. Indeed, he confirmed that PCL only used authorised distributors for assembly work. He could not remember the details of authorised distributors on Taran’s list.

[66]By 2001 the volume of trade between Pacific and Taran accounted for only 1.14% of Pacific’s turnover; by 2002, 0.77%, and by 2006 0.05%.

[67]Pacific developed a wide spread of medium to large size customers, including Geac, Lilly, Howdens, Moneysupermarket, Merlin Entertainment, Barclays Bank, Fortis Insurance, and Galiform PLC (previously known as MFI Limited) – who was one of Pacific’s largest customers between 1999 and 2009.

[68]By 2006 Pacific’s staff complement had grown from three to 18. It has continued to prosper and had a turnover of £15.8m and gross profit of £4.6m in the year ended March 2022.

Taran

[69]At a visit to Taran on 10 March 2003 Mr Miles told HMRC that CPU brokerage accounted for around 60% of the company’s gross profits and his export customers were mainly systems manufacturers. Taran was then regularly visited by HMRC.

[70]On 14 November 2003 HMRC officers executed a search warrant at Taran’s premises as part of a criminal investigation into CPU based MTIC fraud.

[71]There is no evidence that action was taken against Taran or Mr Miles in relation to VAT fraud.

PCL’s profitability when it started CPU trading in 2006

[72]Considerable attention has been given in this dispute to the state of PCL’s business before entering into the CPU trading business in March 2006 and its impact on PCL’s profitability.

[73]PCL started the CPU brokerage business with which we are concerned in April 2006. The first deals which took place in the 06/06 VAT period were not challenged. It is only the deals which took place in the 09/06 quarter which have been challenged by HMRC. However, the start of the business is a relevant context in various respects, including the impact on PCL’s profitability.

[74]The accounts for the year ended 31 December 2005 show profit before tax of £9,772 compared to profit for the previous year of £122,805. Mr Lewis referred us to the gross profit figures (before overheads and interest payments) for the two years of £1,039,328 in 2005 compared to £1,219,890 in 2004 as showing that the business was continuing to prosper in 2005, but we consider that the profit before tax taking into account overheads and interest payments is a more indicative figure to show the health of the business.

[75]Indeed, the downturn in the business was recognised in the 2005 accounts in which it was stated that the reason for the decline in turnover and profits was principally due to the absence of Mr Roach from the business between May and September 2005 to oversee the rebuild of his house, due to the problems experienced with a building firm.

[76]HMRC has focussed on the difference between outputs and inputs on the VAT returns as indicators of the profitability of PCL. By the end of the 03/06 period, some 6 months after Mr Roach’s return, PCL’s outputs per quarter had fallen to £1.2 million from outputs of £2.02 million in the 12/04 period. The difference between its outputs and inputs was £333,146 in the 12/04 period, and £71,429 in the 03/06 quarter. Mr Hall’s evidence shows that the gross profit on the core business was nearly £275,000 in the first three months of 2006 compared to just over £314,000 in the first three months of 2005.

[77]We conclude that these figures indicate that the downturn in profitability continued into early 2006.

[78]PCL’s period 06/06 VAT return showed a significant increase in outputs from £1.2 million in 03/06 to £4.01 million and an increase in the difference between inputs and outputs from £71,429 to £397,059. PCL’s CPU brokerage accounted for 50% of its £2.04 million turnover. In that period PCL had purchased from just one supplier, Plazadome, and sold to just one customer, Zaanstrait (Netherlands).

[79]PCL’s 09/06 VAT return (the period subject to this appeal) showed a further increase in outputs to £4.37 million and an increase in gross profits to £801,183, nearly double the figure achieved by the company in any other quarter from 1997 onwards. In this quarter PCL added the dispatch of iPods to its CPU trade. By reference to PCL’s 09/06 VAT quarter CPU deals summary, the company’s trade in iPods and CPUs accounted for almost 60% of its sales in the period and provided it with gross profits of £104,636.68.

[80]Consistent with the VAT returns, turnover dramatically increased in 2006 (£11.3m in 2006 compared with £5.7m in 2005). More than £4.6m of the turnover was generated by the brokerage business.

[81]Mr Hall produced an analysis of the profitability of PCL’s core business and the challenged CPU/iPod business which shows that the profit margin on the CPU/iPod sales was around 4% whereas the core business profit margin was generally around 20%. Therefore, the brokerage business generated a significantly lower profit margin than the core business of PCL. The brokerage business was a high volume/low margin business when compared to PCL’s core business and this was reflected in the higher turnover figures as well as the increase I outputs and inputs in the VAT returns.

[82]As a result of these findings and the evidence overall we also make the following secondary findings:(1) we find that there had been a clear and significant downturn in the profitability of the business before the start of the CPU trading;

(2) HMRC went further in its submissions saying that this was a good reason to enter into a series of contrived transactions with an easy and predictable reward. However, that was not put to any of PCL’s witnesses. Although there was some exploration of the figures with Mr Hall with particular reference to the outputs declared it was not put to him or any of the others that PCL had a motive to start entering into the CPU trading derived from its downturn. We therefore do not go beyond the factual findings regarding the business. We do not reach secondary findings about the existence of any motivation of the individual directors;

(3) the CPU/iPod brokerage contributed just under 12% of PCL’s gross profits for the 2006 year even though the margin on that business was substantially less than the margin generated by its core business;

(4) the core business continued in 2006 and indeed bounced back during the year given that PCL’s profit before taxation for 2006 was £138,440; and

(5) unlike the core business, PCL’s profit on the brokerage business was dependant on obtaining the VAT repayment.

Start of the brokerage business

[83]Some CPUs were sold to Irish customers in 2000. PCL supplied computer hardware and software to various dealers in Ireland, totalling £591,965. In each case the CPUs were on sold by PCL’s purchaser to retail customers. None of those transactions were challenged by HMRC.

[84]Mr Roach described “dabbling” in deals thereafter which amounted to:(1) 2002 - PCL brokered a deal to supply MFI with 1,405 pieces of memory, buying each piece for £28.10 and selling for £133.00;

(2) September 2005 – PCL brokered a deal for the sale of Apple iPods to Procurement International Ltd;

(3) September 2005 - PCL brokered a deal to supply Quantum Microponents Ltd 648 iPods.

[85]In both of the 2005 deals PCL could not source all the goods requested by the customer.

[86]In the case of the deal in September 2005 we make the following findings noting that PCL have relied on this as an example of how they conducted such business:(1) the salesperson contacted by the customer started by making enquiries of Apple distributors;

(2) a credit check was obtained from Graydon before the trading took place. The credit figure of £3750 was specifically considered. With PCL’s credit insurance this enabled a credit limit of £10,000;

(3) the deal was handed to Mr Roach as lead negotiator as it was a low margin deal. Mr Roach contacted a known Apple distributor which offered better pricing based on a special price that company agreed with Apple;

(4) as a result of the credit limit Mr Roach told the customer it would have to pay the balance up front with the order;

(5) the margin was only 2.8%; and

(6) the monies paid upfront were received and PCL obtained a bankers’ draft to pay its supplier. On collecting the goods and having checked that they were as expected the bankers’ draft was handed over.

[87]We find that the deal was as we would expect for this type of brokerage. However, it stands in contrast to the way in which the 2006 brokerage business was conducted as we now explain.

Contact by Ms Ching

[88]Mr Donaldson told us that in February 2006 he received an enquiry for the supply of SCSI boards and other items from Ms Ching in her capacity as a representative of a company called Tradius BV (“Tradius”). We note that HMRC challenge this account as there was no reference to such contact from the company Tradius in Mr Donaldson’s witness statements and HMRC allege that Mr Donaldson made up the reference to deal with the fact that a meeting note we address later referred to the company. However, it was not put to Mr Donaldson that he had made up this reference and we therefore accept Mr Donaldson’s evidence on this matter.

[89]Mr Donaldson had first met Ms Ching at an IT trade conference in Monaco in 1999 and she had contacted him in October 2005 to update him about where she was, offering to sell, as well as buy, computer hardware. Prior to the CPU transactions with which we are concerned the only trading with Ms Ching had involved Mr Donaldson buying computer related items (primarily printers Mr Donaldson said) from her.

[90]He told Ms Ching that he could not source the goods at the right price and the deal did not proceed. Neither he nor Mr Roach explained why he (who did not usually do deals such as this) failed to hand the enquiry to Mr Roach who was the lead salesperson and negotiator.

[91]In March 2006 Ms Ching also asked to buy CPUs through what she apparently described as “her own company”, Zaanstrait BV (“Zaanstrait”).

[92]Mr Donaldson has described Ms Ching’s CPU enquiry as coming out of the blue. It was a request to do something - the wholesaling of CPUs - outside PCL’s core business albeit that there had been a small amount of such business historically. However, according to Mr Roach, Mr Donaldson did not mention the matter to him initially despite Mr Roach being the senior negotiator and salesman and this being effectively a new line of business.

[93]PCL claims that there were numerous failed deals at this time, but that claim is not consistently supported by the evidence. Mr Donaldson, who had the initial contact with Ms Ching, makes no reference to numerous failed deals in his Witness Statement. Mr Roach does say in his first Witness Statement that there were numerous enquiries from Ms Ching to Mr Donaldson, but we give greater weight to the evidence of Mr Donaldson who was the person in actual contact. He only refers to the one about which he was contacted in February 2006.

[94]We therefore conclude that PCL simply received a query from Ms Ching to supply CPUs in February 2006.

[95]In a document dated 7 December 2006, sent to HMRC, Mr Roach stated that he and Mr Donaldson had known Theresa Ching of Zaanstrait for many years and that there had been various occasions in the past when she had approached PCL to see if it could supply computer components to her. However, the evidence overall and our consequent findings show that this letter was somewhat exaggerating the extent to which Ms Ching had sought to buy components.

[96]The way in which the Zaanstrait business transferred to Mr Roach is not clear, although it is clear that Mr Roach was the lead salesman at the time. He became involved. According to their evidence neither of them thought to query the fact that Ms Ching was conducting business through a new company at the same time as still working for the first and was now seeking to purchase goods when previously she had been a supplier.

Finding a supplier - Plazadome

[97]PCL maintains that it was unable to supply Ms Ching because it could not find a supplier willing to sell at the right price.

[98]Mr Donaldson described contacting various suppliers including ones who were in the grey market with none able to supply at the right price. He also contacted Mr Miles’ company, Taran, who similarly could not supply at the right price.

[99]Then the name of the supplier, Plazadome, was provided by Mr Miles, along with another supplier, Techcomp, with whom no deals were in fact done. HMRC assert, and we agree, that PCL needs to explain why Mr. Miles would provide them with commercially valuable information in the form of two suppliers who could ostensibly supply CPUs in volumes and at prices that no one else in the market could when Mr Miles’ company Taran was a competitor. On this matter we have been provided with a variety of evidence. We set out some key examples of the inconsistencies below.

[100]Mr Roach told us that Mr Miles had come to visit and asked that PCL should stop pestering his salesman who could not obtain the prices needed by PCL. In contrast, Mr Donaldson was surprised by this account saying that the Taran salesman was not troubled by contact and in fact was contacting PCL as much as he was contacted by PCL. A note sent by PCL to HMRC in December 2006 which Mr Roach signed and confirmed to us that he would have read, described him talking to Mr Miles and explaining that PCL was losing out on business. It was said that this prompted Mr Miles to give the names of Plazadome and Techcomp. No reference was made to the salesman’s complaints.

[103]A different light was cast on the relationship with Mr Miles in Mr Roach’s Witness Statement from 2014. There he says that Mr Miles retained shares in PCL in 2006 and could expect the value of his shareholding to go up with increased profits at PCL. Accordingly, it did not seem strange to him, at the time, that Mr Miles should be prepared to give him the name of a potential supplier.

[104]However, before us Mr Roach and Mr Donaldson described bad relations with Mr Miles. They said that they did not generally trust Mr Miles who had been charging PCL more than had been agreed and who had taken money out of PCL as shareholder when it was needed in the company in order to obtain credit limits.

[105]This evidence of poor relations is in contrast to what was recorded by Officers Cumberbatch and Toynbee when they visited PCL on 9th November 2006 and met with Messrs Roach and Hall. Officer Cumberbatch’s notebook records the following explanation in relation to the provision of Plazadome:

“Because poor margin to Pacific (Mr Roach) – Mr Miles offered Plazadome as a contact.”

[106]Officer Toynbee’s notes used to draft the visit report went further and said:

“Mr Andrew Miles is a shareholder of Pacific and old friend…. [Mr Roach] spoke to Mr Andrew Miles of Taran, who is also an old friend, and Mr Miles gave Mr Roach Plazadome’s name as a contact.”

[107]Although PCL challenged some matters recorded by Officer Toynbee, the description of Mr Miles as an old friend was not one of those.

[108]Furthermore, in 2006 Taran was described as a sister company to HSBC when making an overdraft application and, in 2007, the same relationship was described in a letter to HMRC. In the hearing before us Mr Roach said he would not have used such a description, but it was used in two separate documents signed by him. This would bolster a conclusion that, in fact, there was a good ongoing relationship with Mr Miles at the time.

[109]In his second witness statement dated 20th November 2011 Mr Roach said that Mr Miles was not a friend of his but was a business acquaintance to whom he had sold and delivered processors. Mr Roach continued to say that, after the start-up, PCL moved away from Taran, because Mr Donaldson and he were concerned that Taran was effectively a competitor and that by growing the business they did not want to give away commercial contacts by remaining close to Taran. There is no recognition of the fact that Mr Miles was also a shareholder. One might ask why the competitor described by Mr Roach would give away the names of two suppliers, particularly ones who could supply at a price which no one else could match.

[110]Mr Hall said that the salesman at Taran had made enquiries to supply Ms Ching’s potential order but had been unable to do so and as a result Mr Miles had said that PCL should deal directly with two of Taran’s suppliers and then pricing would not include Taran’s margin. This is consistent with a note about Zaanstrait provided by Mr Roach and Mr Hall in December 2006 to HMRC where it was made clear that PCL could only offer the right price to Zaanstrait if the Taran margin was eliminated. That is extraordinary behaviour for a competitor in what we were repeatedly told was an extremely competitive market. Indeed, when it was put to Mr Donaldson in cross-examination as to whether he could identify any commercial reason why Mr Miles would jeopardise giving away the identity of a supplier who was able to supply the sought-after goods at the right price when no one else could, Mr Donaldson simply did not know. There was no suggestion that Mr Miles’ interest as shareholder was the answer.

[111]The inconsistencies on such a significant element of PCL’s case are marked. The litigation process over many years cannot properly explain the extent thereof.

[112]PCL submits that HMRC cannot rely on the inconsistent evidence and, in particular, cannot say that Mr Roach changed his account of the interaction with Mr Miles because his previous account was closer to the truth without putting this to Mr Roach.

[113]HMRC have set out in some detail the extent of inconsistencies in the evidence about the interaction with Mr Miles. It is incumbent on us to recognise that the evidence has been inconsistent. We do so with regard to the evidence before us, including letters and witness statements, not to the evidence of the previous hearing given that the witnesses were not taken to those inconsistencies. However, they were taken to other inconsistencies in their evidence and it is right that we address those.

[114]Having recognised that the evidence on the relationship with, and basis of the referral by, Mr Miles is inconsistent, we move on to make the following findings:(1) Mr Miles gave PCL the details of Plazadome – a supplier which was so good at providing stock for the deals that it became PCL’s only supplier;

(2) Plazadome and Techcomp were unauthorised distributors. PCL believed that Taran only dealt with authorised distributors, but did not query this;

(3) Mr Miles’ business at Taran was a direct competitor to the CPU business PCL was looking to develop. The directors were aware of the competition between the two businesses and had acted in response to it in the past. Mr Miles’ shareholding had not undermined the sense of competition;

(4) in providing Plazadome to PCL Taran would be cut out of the deals as a potential supplier.

[101]Whether Mr Miles provided the details to PCL to stop his salesman being badgered or not is of less significance. More important is the fact that a competitor provided a supplier which could supply where others could not and in so doing cut his own business out of deals. Mr Foulkes put to Mr Roach that questions about this referral should have struck Mr Roach. He said they did not, but we find that it would have been reasonable to expect such questions, especially in the context of the knowledge of MTICs, which we find later PCL soon had. Mr Miles being a minority shareholder was insufficient reason in the context not to ask more about the referral.

Initial market price checking

[102]Mr Roach told us that the market was buoyant and that PCL had to act fast to secure stock as they had experienced getting quotes only to find the stock not available. The particular CPU sought by Ms Ching was described by him as the “sweetspot” processor, i.e. the one which system builders sought because it was cheaper but with the features of more expensive ones.

[103]After the discussion with Mr Miles giving the Plazadome and Techcomp details to Mr Roach, he became more involved with the Ms Ching’s order request and says that he spoke to two authorised distributors, C2000 and West Coast, for an idea of market pricing. He says that showed him that the authorised price was generally £10-£15 per unit higher when compared to the price offered by Plazadome. His evidence was that authorised distributors would be more expensive than unauthorised distributors (although we have evidence of at least one deal previously for Apple iPods where the authorised dealer offered a price sufficiently low for PCL to be left with a margin); and that they often had limited quantity of stock. It was therefore a price comparison of very limited use. Furthermore, those price checks were never noted on any deal papers, not even in deal 2 where a Techcomp price was noted.

[104]Mr Roach said that he had no database of unauthorised distributors, but Mr Donaldson told us that PCL did have contacts with unauthorised distributors. Furthermore, Mr Donaldson contacted different suppliers to the two names given by Mr Roach when initially approached by Ms Ching. This could not be put to Mr Roach who had given evidence before Mr Donaldson and therefore we did not hear any explanation from Mr Roach as to why he did not contact those whom Mr Donladson had contacted and why he said he had no unauthorised distributor contacts when Mr Donaldson said that PCL had.

[105]Mr Roach referred to Mr Donaldson having checked prices with Taran as a basis for establishing market price. However, we find that pricing could not be relied upon as establishing market prices for the deals which then took place as Taran was unable to supply the quantity needed and we were told that this was a very volatile market so old pricing cannot have been reliable for the deals which later went through.

[106]Mr Roach said that he was too busy to look for other grey market brokers to check Plazadome’s pricing - but his failure to do so meant that he had no way of assessing whether Plazadome was indeed unique in being able to offer the goods in the necessary quantity and the right price. At most it appears that he may have contacted Techcomp on occasion.

[107]Even taking Mr Roach’s evidence at its highest however, simply checking with, at most, two traders whose names were given by Mr Miles was hardly indicative of what the grey market price and availability generally was at the time.

Initial warnings of fraud in the market and Notice 726

[108]Plazadome sent PCL a new customer form which asked whether the company was aware of HMRC’s statement of practice on joint and several liability and whether it had ever procured goods from a supplier which had been involved in an MTIC. The form was signed by both Mr Roach and Mr Donaldson on 21 March 2006.

[109]In Mr Hall’s witness statements from 2011 he denies understanding much at all about MTIC fraud until PCL was visited in November 2006 by HMRC. However, before us in cross examination Mr Foulkes referred him to his evidence at the previous hearing and Mr Hall confirmed that, as said previously, he looked up what the issues were concerning MTICs and joint and several liability and was relied upon by the rest of the team to brief them. He read Notice 726 and compiled a checklist from information/templates found on the internet. He said that he told Mr Roach and Mr Donaldson about the issues and his evidence to us was that he may also have given them a printout of Notice 726 given the importance of protecting the business.

[110]Mr Roach and Mr Donaldson denied any such discussions with Mr Hall took place. Mr Donaldson denied knowing much at all about MTICs. Mr Roach said that Mr Hall had told him that checks were needed to keep the business “safe” but Mr Hall did not show him Notice 726, did not give him any idea of the size of MTIC fraud or what the fraud issue was. When it was put to him in cross examination that he had previously said he was aware of more details of the extent of fraud in the market his response failed to clarify his position. However, when pressed in cross examination, Mr Roach accepted that he would have known about HMRC concerns in the area and need for due diligence as a result of the Plazadome letter.

[111]Mr Hall also confirmed in cross examination that an HMRC letter of 29 March 2006 (dealt with further below) focussed his mind further and motivated him to take steps to make sure that PCL was very careful.

[112]We give greater weight to the evidence of Mr Hall before us in cross examination which is in line with what we would expect of a prudent financial controller. It is consistent with Mr Hall’s deal check sheet, addressed below, having been produced and with the fact that Mr Roach and Mr Donaldson signed the Plazadome application form with reference to joint and several liability and MTICs. As a result we find that Mr Hall researched Notice 726 and briefed Mr Roach and Mr Donaldson about MTIC risks and as a result of the HMRC letter of 29 March 2006 in particular, the size of the problem, in the proposed new area of business before any trades took place.

[113]Notice 726 explains that a person may be held liable where the person knew, or had reasonable grounds to suspect, that the VAT on the supply to them of specified goods would go unpaid to HMRC. MTIC fraud is explained as involving a fraudster and in particular it is stated that the fraud relies heavily on the ability of fraudulent businesses to undertake trade in goods with other businesses that may be either complicit in the fraud, turn a blind eye or are not sufficiently circumspect. It is noted that a person is presumed to have reasonable grounds for suspecting that the VAT on a supply would go unpaid if the specified goods were purchased for less than the lowest open market value of the goods or the price payable for them by any previous supplier. Businesses are encouraged to consider checks to establish the integrity of the supply chain, aspects of payment arrangements and conditions and details of the movement of goods involved. Further details are provided of checks that can be undertaken; in particular considering whether normal commercial practices have been adopted in negotiating prices and considering whether it is commercially viable for the price of the goods to increase within the short duration of the supply chain. Checking goods to ensure that they have not previously been supplied, are in good condition and not damaged is encouraged.

[114]The goods specified by Notice 726 are “computers and any other equipment, including parts, accessories and software, made or adapted for use in connection with computers or computer systems; and telephones and any other equipment, including parts and accessories, made or adapted for use in connection with telephones or telecommunications. Parts and accessories are specifically noted as those made or adapted for use in connection with computers, computer systems, telephones or communications such as computer chips, telephone charges and memory cards.

[115]There has been some dispute as to whether it was reasonable for PCL to consider that the specified goods included iPods in which PCL later traded. Mr Hall produced a deal check sheet for use by the business which had a specific line for iPods. Whether or not one could argue as to whether iPods are accessories “made or adapted for use in connection with computers” (and for the avoidance of doubt we agree with HMRC that they were given that they were dependent on a computer for day to day use for both syncing music and media and for managing content), it is clear that the person who had originally prepared the checklist which Mr Hall found online considered that iPods were within this category and that in itself should have been a warning to PCL.

[116]Mr Hall said that he understood from Notice 726 that he would have been on high alert to do all that he reasonably could to avoid getting caught up in fraud. He recognised that Notice 726 referred to consideration of the supply chain. Whilst the Notice did not say that it expected a trader to know the identity of its supplier’s supplier, it did explain that it would expect a trader to make a judgment on the integrity of the supply chain.

Plazadome due diligence

[117]On 21 March 2006, a Graydon Credit Rating report for Plazadome was obtained by PCL. Mr Hall told us that it was not usual for such due diligence to take place in relation to suppliers but had been done because it was listed as a recommended check in Notice 726. That in itself showed that Mr Hall was aware that there were added risks connected with the CPU trading. It would have been extraordinary for him to have kept such information to himself.

[118]The Graydon report showed:(1) Plazadome was given a rating of 4D with financial strength of £1m-5m based on net worth plus net current assets/liabilities;

(2) it had two court judgements against it one of which was satisfied. Mr Hall told us that he took comfort from the fact that the county court judgement had been satisfied as showing that the company could pay, but a small county court judgement of just over £3000 was still outstanding and the very fact of there being judgements against the company did not appear to raise any questions for PCL; and

(3) a monthly credit guide of £20,000 was recommended and Plazadome was described as “above normal risk”.

[119]None of the witnesses adequately addressed the above normal risk categorisation. Mr Lewis made much of the fact that PCL was not giving Plazadome credit. However, the credit guide was an indicator of financial strength. Furthermore, for the reasons we explain later, the credit guide did not sit well with the way in which PCL traded with Plazadome.

[120]Mr Roach referred to the Graydon report showing that Plazadome was owed £2million and owed £1million, but there was no consideration of how this fitted with the monthly credit guide of £20,000 or the above normal risk category.

[121]PCL says that it visited Plazadome before trading with the company commenced. The evidence concerning the visit raises various questions:(1) Mr Roach told us about visiting Plazadome and meeting Mr Mukhtar before he visited Ms Ching, although he struggled to explain why that was done saying that suppliers were not normally visited. Given that this was an extraordinary visit to a supplier one might expect that the recollection would be clearer (even after all this time) and that there would have been some note of the meeting. If the meeting occurred it would have been for some good reason – presumably as a result of the concerns derived from Notice 726 which would encourage more careful records of the meeting, yet none exist;

(2) Mr Roach said that he asked Mr Mukhtar about CPUs and about where the goods were stored given that none were visible in the shop. He said that Mr Mukhtar’s refusal to answer did not surprise him as Mr Roach would not disclose such information. This somewhat begs the question why he asked, particularly as he was not linking the visit to caution about MTIC fraud. He told us that Mr Mukhtar told him he was able to get the goods because he was good at what he did and Mr Roach would not expect any further details. However, when Mr Foulkes drew attention to the fact that an HSBC questionnaire (addressed by us later) stated that there would be inspection sheets received from the independent freight forwarder, Mr Roach confirmed that at that point PCL knew that Plazadome held the goods at Forward Logistics. This was barely days after the claimed meeting with Mr Mukhtar in relation to which we were told that it was inconceivable that the supplier would say where their goods were kept;

(3) Mr Hall was unable to remember what was discussed at this visit or any of the claimed subsequent ones to Plazadome. He is a man who had clearly identified issues in the trading as a result of looking at Notice 726 and HMRC’s letter and said that he had briefed the directors of PCL about what to look out for. He had drawn up a checklist and had written questions for Ms Ching. There was at least a basic note of the meeting with Ms Ching and he said that he would normally keep a note of a meeting. Yet there is no note of any meeting with Plazadome even though Mr Hall and Mr Roach have said in the past that they visited Plazadome on more than one occasion;

(4) Mr Donaldson was vague as to the reason for visiting Plazadome, saying that PCL did not normally visit suppliers.

[122]We find that in the context of the trading that PCL was entering into, the warnings from HMRC in Notice 726 and the answers given in the HSBC questionnaire it was entirely reasonable to get some sense at least of where the stock being traded was kept, yet at least as far as Plazadome was concerned that was never properly asked.

[123]We also find that the results of the due diligence carried out were given very limited attention. PCL did not await HMRC verification of Plazadome. Overall, we conclude that again the evidence shows more concern to deal with Plazadome than to consider with whom PCL was really dealing.

[124]PCL obtained a copy of the passport of Mr Mukhtar (the director with whom they were dealing), Plazadome’s VAT registration documents and Company Registration certificate. Those were sent to the Redhill verification unit on 3 April 2006, two days before the first deal. The verification was provided by HMRC on 2 May 2006 for Plazadome and Techcomp, almost a month after the first deal and after three more deals were undertaken, all of which had therefore proceeded without verification. The letter made clear that this did not authorise transactions with the companies.

[125]A supplier declaration form was sent to Plazadome by PCL. Mr Hall told us that it had been generated by him from a template provided to him by Techcomp. It says that the Plazadome form confirms that it is selling the goods at the current market price although it is not clear what that was thought to mean. It also includes various confirmations from Plazadome such as that the existence of the goods had been verified, that the HMRC statement on Joint and Several Liability was adhered to by Plazadome and that Plazadome had no grounds to suspect that VAT had not been paid or would not be paid. However, we find that it was given scant attention by PCL for the following reasons. The form includes a list of documents and enquiries. Plazadome was supposed to tick each one that had been reviewed in order to confirm reasonable due diligence had been carried out by it. None was ticked and Mr Hall told us that the only important thing was that the document was signed. He would not have checked the list. HMRC put to Mr Hall that shows more concern to deal with Plazadome than to implement anti-fraud measures and we agree.

Monthly VAT return request

[126]On 22 March 2006 Mr Hall telephoned HMRC. The Contact Centre enquiry records Mr Hall as saying:

“we will be exporting goods and therefore in repayment situation soon and we want to go onto monthly returns”

. That was before any deals had gone through and despite the claimed repeated failure to carry out deals. It was the day after Mr Roach and Mr Donaldson had signed the Plazadome application form.

[127]We agree with HMRC that, if finding a supplier had proven to be so difficult, it is notable that PCL was able to be so confident before any deals had been carried out that it would be in a repayment situation going forward and would be so sufficiently reliably to move onto monthly returns. Monthly returns are not a matter to be entered into lightly for a business. They take considerable amounts of resource which will only be justified where sufficient repayments will make them worthwhile. Yet PCL asked to move onto them before a single deal had taken place and with no basis about which we were told to be able at that point to expect a stream of deals.

[128]HMRC responded to the request to say that it was necessary to provide an explanation of the reason for the request and that it may be necessary to be in a repayment situation for several months before monthly returns would be authorised. PCL took no further steps in this regard. Instead, it used an overdraft to deal with the cash flow problems of quarterly returns.

HSBC overdraft to fund the VAT cashflow

[129]PCL had cash of more than £280,000 in its bank accounts but it used an overdraft facility from HSBC to fund nearly all of the VAT element of the transactions which arose on paying VAT to Plazadome but charging none on the export to its Dutch customer. Mr Hall and Mr Roach both told us that PCL did not want to use the savings needed for cashflow in the core business for this purpose.

[130]On 27 March 2006, again before a single deal had taken place, Mr Hall e-mailed a P&L and cashflow forecast for PCL’s anticipated CPU trade to HSBC. The figure for sales by cumulative value was 100.9% of the figure forecast with the purchase by value figure being 101.2% of the figure forecast. HMRC say that this was remarkably accurate. While PCL has given a plausible explanation that it only traded up to the amount of the overdraft, it has not explained on what basis it considered that there would be sufficient volume of transactions as at 27 March 2006 that an overdraft was required. There would be limited need to access its cash savings unless PCL was engaging in a significant volume of transactions. The first deal concluded on 5 April 2006 gave rise to VAT of just under £14,000, yet as at 27 March 2006, before any deal had taken place, Mr Hall forecast the need to fund nearly £340,000 of VAT. Before any deals were done it was expected that there would be nearly £2 million worth of purchases and a corresponding value of sales completed within just three months and that all of those would involve sales to the EU, such that the company would be in a net repayment situation.

[131]Furthermore, the basis of the forecast is somewhat unclear. Mr Hall looked to Mr Roach to describe the expected volume of sales. Mr Roach’s evidence is that he would have told Mr Hall to assume between 2000 and 3000 units (CPUs) with a £4 margin per unit per week. That was in line with the evidence we heard about Ms Ching’s estimate of what she would want to purchase. Yet Mr Hall produced the figures on the basis of 1750 units per week. Mr Roach told us that he only cared about the overall figure of the projected shortfall resulting from the VAT, such that he did not want to go beyond that, plus about £47,000 of PCL’s cash (although in fact PCL had to resort to some £56,000 of its own cash to supplement the overdraft). If Mr Roach was so concerned and was expecting to sell between 2000 and 3000 units per week, PCL would have used up its overdraft much quicker or needed more borrowing/use of cash reserves. One would expect that he would have made sure he understood the numbers and checked that the basis of his estimated 2000-3000 units per week was reflected. In fact, PCL traded at a slower rate than Mr Roach says he had told Mr Hall. The three months’ trading was more in line with Mr Hall’s estimate and did not use up the overdraft until the middle of June 2006.

[132]Mr Roach maintained that there were many potential deals with Plazadome which failed. There is no other evidence to support this and, if it was correct, then the £247,000 limit Mr Roach said he worked to would have run out much quicker, albeit that it would have been more in line with Mr Roach’s estimate.

[133]The HSBC overdraft documents stated that: "In practice, the new regulations make it very unattractive to carry out this type of business and we have a very limited appetite to provide banking facilities to customers operating in these sectors.”

[134]This was therefore a further clear warning to PCL about the risks involved in this area and Mr Hall confirmed that those concerns of HSBC were made clear in a meeting with the bank about the overdraft.

[135]On 28 March 2006 Mr Hall and Mr Roach met with HSBC to discuss the overdraft. Mr Roach sought again in the hearing before us to minimise the extent of his knowledge of MTICs and fraud around this time. He acknowledged that he knew Mr Hall had expressed “reservations”, that he understood some checks were needed to do with something connected to fraud and that HSBC would probably have discussed their concerns at the meeting; but said that as PCL obtained the overdraft they must have made the bank comfortable. However, as we now explain, PCL made HSBC comfortable on the basis of answers which were in various respects incorrect or misleading.

[136]On 31 March 2006 HSBC provided a questionnaire for the business which included asking: “Has the price of the goods increased within the short duration of the supply chain?” and “How do you measure the price against the lowest open market value of the goods, or the price payable for them by the previous supplier?”.

[137]On the basis of Mr Hall’s evidence we find that Mr Roach helped Mr Hall answer the questions. The form was signed by Mr Roach and Mr Donaldson on 3 April 2006. The answers included saying that:(1) CPUs would be bought to be resold to system builders in both the UK and Europe even though Ms Ching had made it clear that she was not a systems builder;

(2) new suppliers were as a result of personal introductions from a director of a sister company, clearly indicating a sense of connection to that director, Mr Miles as noted earlier;

(3) the forwarder would open each box, inspect and report so that the customer would pay in advance of goods being shipped to them. Mr Hall sought to explain that PCL used the word “shipping” to mean releasing the goods to the customer, not the earlier step of shipping. However, as we explain later, even releasing happened before payment on numerous occasions;

(4) PCL would initiate each transaction – which it did not in fact do on any occasion. Mr Hall could give us no explanation of this statement;

(5) the market was very buoyant;

(6) it was assumed that the supplier to PCL had made a margin;

(7) PCL kept close contact with suppliers so that it knew from day to day what the market price was. In fact, we have found that PCL nearly always relied just on Plazadome’s pricing for the grey market price; and

(8) prices would be negotiated by calling each of the suppliers whereas we find that with little, if any, exception only Plazadome was called.

[138]Mr Roach sought to distance himself from some of these answers saying that, for example, the reference to close contact with all suppliers meant all of the business’ suppliers – yet, as Mr Foulkes pointed out, the questionnaire was very clearly about the new brokerage business and that was reflected in other answers provided. The answers made no sense by reference to suppliers generally.

[139]Mr Roach also said that he would not have given the answers much thought, but he did sign the document and confirmed that he would have read it. Mr Donaldson denied any knowledge of MTIC fraud at the time and maintained he just signed when Mr Hall told him it was alright to do so without even reading the form. We find that seeking to distance themselves from the answers is another example of both Mr Roach and Mr Donaldson seeking to distance themselves from knowledge of MTIC fraud at the time. We have found earlier that Mr Hall would have briefed them on the risks, particularly in the light of the HMRC warning letter (addressed further below).

[140]We also find that the questionnaire was completed to paint as good a picture as possible for HSBC, recognising that the bank had concerns about the business and seeking to embellish the position in order to obtain the overdraft.

[141]The PCL answers also gloss over the very pertinent facts as to the likely minimum chain length. By suggesting that PCL was supplying systems builders it was eliminating one crucial participant – the supplier to the systems builders. PCL was also saying that it would initiate the transactions whereas it initiated none of them. One can justifiably ask why those answers were given if those completing and signing this form were as lacking in understanding about MTICs as they claim. In addition, there is little reason to provide this incorrect information as well as the other market price references other than to cover up the risk which was known would otherwise be identified.

HMRC fraud warning

[142]On 29 March 2006 HMRC wrote to PCL saying that HMRC were still experiencing problems with businesses in their trade sector offering commodities regularly involved in MTIC VAT fraud. “MTIC fraud may involve all types of VAT standard rated goods and· services including computer equipment, mobile phones and ancillary items. The current estimate of the VAT loss from this type of fraud in the UK alone is between £1.06 and £1.73 billion per annum.” HMRC enclosed a copy of Notice 726.

[143]We find that PCL was put on notice in the letter that, while HMRC may verify VAT registration details of potential customers and suppliers, that did not guarantee the status of such persons, it did not absolve traders from undertaking their own enquiries and transactions may still fall to be verified for VAT purposes.

[144]Mr Hall accepted in cross examination that the HMRC letter and the description of the massive amount of fraud “focused his mind”. He maintained that he showed Mr Roach and Mr Donaldson the letter and said that they were especially surprised at the amount of fraud. Mr Hall accepted that the business had been put on notice to check that deals made sense and we find that it very clearly was. By this stage, if not before, all those involved would have been clearly aware of the risk of VAT fraud connected with the sort of transactions they were contemplating.

Techcomp

[145]Techcomp was another supplier whose details were given by Mr Miles to PCL.

[146]A Graydon credit report was obtained on 26 March 2006 showing:(1) a credit rating of 6 described as low normal; and

(2) a monthly credit guide of £30,000.

[147]On 27 March 2006 Techcomp had written to Mr Roach asking for a visit to carry out due diligence checks required by HMRC and asking for various information including an analysis of PCL’s trading patterns. A meeting with Techcomp took place and Mr Hall used the Techcomp supplier declaration as a precedent to produce one for PCL.

[148]We have been provided one price check sheet showing that a price was obtained from Techcomp which was lower than that offered by Plazadome. Mr Roach said that Techcomp was not then used because they did not have the stock.

Zaanstrait due diligence

[149]On 31 March 2006 Mr Donaldson and Mr Roach flew to Holland to meet Ms Ching and her colleague, Mr Bugden, the next day. Mr Donaldson told us that the visit was entirely standard for a new customer and required for compliance with their trade standard.

[150]He maintained that there had been no discussions about MTICs and the fraud warnings, yet at the same time both he and Mr Roach told us that a list of questions, which is in the evidence before us, was provided by Mr Hall. Although Mr Donaldson says in his Witness Statement that when they returned to the office there was a discussion because Mr Hall had received Notice 726, at the hearing he sought to minimise this and said that Mr Hall had simply mentioned in passing that the Notice had been received. He said that he had no knowledge of MTICs and fraud until an HMRC visit in November 2006 (which is consistent with Mr Hall’s Witness Statement but not his evidence in cross examination before us or at the previous hearing). He says that he signed the HSBC overdraft document purely on the basis that Mr Hall was happy with it and without reading it.

[151]Mr Roach again in his oral evidence sought to distance himself from knowledge of MTIC fraud in the context of the visit to Zaanstrait saying it was standard practice for a new customer. Mr Donaldson told us that he understood the documents requested by Mr Hall were simply because this was export business. He did not explain why export business should be so different.

[152]We find that it makes no sense that Mr Hall produced a set of questions for this customer which Mr Roach and Mr Donaldson took without any query as to its purpose, simply assuming no more than the checks were because of export. More particularly, as noted above, their evidence is inconsistent with the evidence of Mr Hall who had taken steps, after reading Notice 726 and HMRC’s warning letter of 29 March 2006, to put processes in place to protect the company. Mr Roach had attended the meeting with HSBC and the HSBC questionnaire had been completed. Again, Mr Roach and Mr Donaldson have sought to distance themselves from knowledge of MTIC fraud in ways that are inconsistent with the facts.

[153]We therefore find that Mr Roach and Mr Donaldson went to visit Zaanstrait equipped with knowledge about the risk of fraud in the sector and with Mr Hall’s questions designed to elicit relevant information.

[154]The question sheet and answers, together with the evidence we heard at the hearing, paint a confused picture:(1) Mr Roach confirmed that Mr Donaldson had completed Mr Hall’s list of questions but he had put 27 March 2006 at the top even though the visit took place on 1 April 2006. We accept this may be a simple oversight;

(2) there is a list of matters to be checked which includes “company structure” which was not answered; and

(3) Ms Ching initially contacted Mr Donaldson in February 2006 as a Tradius representative. Her contact in March 2006 when she first started looking to buy CPUs was then for Zaanstrait. The checklist answers are a combination of answers relating to Tradius and Zaanstrait. In particular, the checklist states that Tradius wants an inspection report and HP products to be imported. Mr Donaldson explained that this was because Ms Ching and Mr Bugden were looking to buy HP products for Tradius, while at the same time Ms Ching and Mr Bugden, who we were told only worked for Zaanstrait, were supposedly meeting Mr Donaldson and Mr Roach as a new customer, Zaanstrait. Although no trading in fact took place with Tradius, clearly it was contemplated on 1 April 2006, but we have seen no evidence of any due diligence carried out in relation to Tradius. (Tradius is another company implicated in MTIC transactions. It was a Dutch company that was incorporated on 1st November 2004 and dissolved on 11th March 2010. The German authorities suspected that Tradius was involved in “VAT fraud by means of carousel transactions” and it appears in Officer Dean’s circularity analysis for transactions in this case as well as others.)

[155]Mr Roach says that there were no discussions with Ms Ching or Mr Mukhtar about their experience of navigating the issues of fraud in the sector despite the fact that would be potentially relevant to both Zaanstrait and Plazadome.

[156]Mr Donaldson says that when they asked about where stock would be kept, they were taken to a warehouse operated by Mitt. The fact that they asked and were told where the stock was kept contradicts Mr Roach’s evidence in the context of the claimed visit to Plazadome regarding which he told us that he “wouldn’t even enter into a conversation about where I kept our stock…I would not tell anyone where I held my stock, just simply wouldn't do it. I don't know anyone who would, to be honest.”

[157]On the basis of Mr Donaldson’s evidence we find that PCL then opened an account with Mitt, paying £1000 to do so in order that they could “release any goods held to Zaanstrait once payment had been received”. We were told that PCL was recommended at that time to use the freight forwarder, Forward Logistics. However, Mr Donaldson says in his Witness Statement that he was in contact with Forward Logistics the week before the visit to Holland. In cross-examination he could not explain why he had been in contact.

[158]On 3 April 2006 Mr Hall carried out a Creditline check on Zaanstrait. That showed a credit guide of £50,000.

[159]On 3 April 2006 PCL obtained copies of Ms Ching’s and Mr Budgen’s passports, a copy of Zaanstrait’s VRN Company Registration certificate, company introduction document, bank details and company details. Several of these were documents which, according to the list of questions and answers completed by Mr Donaldson, had already been faxed or emailed. (Mr Donaldson drew a distinction in that list between items emailed or faxed and those “to be emailed”).

[160]On 4 April Pacific submitted the credit report and Zaanstrait’s copy documents to HMRC’s Verification Dept. HMRC asked for the company’s VAT details on 2 May 2006 but these were not provided until 2 June 2006. There was therefore no sense of needing to get the verification checked before transacting with Zaanstrait or to respond to HMRC’s query as soon as possible.

[161]It was not until 7 April 2006 – after the first deal with the company on 5 April 2006 – that PCL obtained a Graydon report on Zaanstrait which showed:(1) Credit Rating 5” “Low Risk” (which was the lowest possible risk rating);

(2) the company had existed for 6 years;

(3) it had one employee;

(4) it was described as a wholesale trader of office machinery and equipment;

(5) turnover for 2005 was 585,900 euros; and

(6) the maximum monthly credit guide was 6000 euros.

[162]We find that neither the credit opinion nor the Graydon report were seriously considered by PCL. The Graydon report was obtained after trading with the company started and, as Mr Foulkes addressed with Mr Hall in cross examination, the monthly credit guide and annual turnover did not support the company having the financial position to do the deals. Similarly, the business gave scant regard to the verification exercise. We were repeatedly told that the business relied upon having known Ms Ching for some years and this was also said to be the reason why there was no rush to get the Graydon report before the first deal. However, PCL’s contact with Ms Ching had been for purchasing printers not supplying CPUs. We find that PCL had little real knowledge of Ms Ching beyond knowing that she had operated in the industry for some years.

[163]Zaanstrait’s web pages dated 2 April 2006 have been provided in evidence and Mr Hall confirmed that he would have read them. They said that Zaanstrait worked with major manufacturers and white assemblers; and assisted large assemblers and distributors to sell off excess inventory. In cross examination Mr Hall could give little explanation why, if the website was correct, Zaanstrait would need to transact with PCL as it did in the grey market. Again the web pages were not given real consideration.

Simpletech

[164]PCL first dealt with Simpletech on 7 September 2006 (deal 22).

[165]Mr Roach describes first being contacted by Simpletech in May 2006 but was unable to find sufficient stock. He says he was contacted again in June 2006 and again could not find stock, clarifying in cross examination that he only contacted Plazadome and Techcomp. Steps were taken to visit Simpletech because Mr Roach liked to “put a face to a name” with people he did business with. The meeting was cancelled due to Mr Roach being away after his partner suffered a miscarriage. It was entirely understandable that Mr Roach would be away but, given the evidence we heard otherwise of the recognition by Mr Hall of the need to carry out better due diligence for MTIC checks and the requirement described by Mr Donaldson for the industry standard of visiting customers, it is notable that no one else made the trip. When asked whether the trip could have been arranged later once Mr Roach replied that there would be no one to run the office for a couple of days. This answer was lacking plausibility given that he could visit Zaanstrait. He was also able to be away from the office for holidays.

[166]Mr Roach says that Simpletech asked to buy iPods again around 23 August 2006 and PCL decided then to get documents from the company. It is unclear why no one thought that was a prudent step to take previously. It took until 31 August 2006 for Simpletech to fax a letter of introduction and company details sheet to PCL. The letter of introduction stated: “We deal with new computer components worldwide” and made no mention of trading in iPods. However, the first sale to Simpletech, was a deal for 620 iPods. The certificate of incorporation showed the company was only one year old.

[167]PCL says that it did not interpret Notice 726 as applying to iPods as it only refers to computer parts/components. However, it took the description of PCL’s business dealing in computer components as sufficient without more to engage in iPod transactions. We find the approach to the business and the claimed position regarding iPods and MTIC risk to be inconsistent.

[168]PCL was sent a copy of the contact’s passport and the company VAT registration certificate. The certificate showed its place of business as Valetta in Malta. Despite that stated place of business Simpletech gave its contacts details as a Rotterdam number. The information sent to PCL therefore showed that it was a company incorporated in Malta although PCL’s contact in the company who had sought the iPods was based in Rotterdam. PCL did not query this. Indeed Mr Roach said that it would not have occurred to him to ask about it. No thought was given to asking about the inconsistency between the company’s stated place of business in Malta and the Rotterdam operation.

[169]A Creditline Investigation Request was not made until 6 December 2006, some months after the challenged deals were entered into. Mr Hall said this was an oversight as he was busy on other matters. He spotted the omissions in early September and he did a deal verification check which he hoped would be turned around more quickly. The wording of the deal verification provided from HMRC does no more than confirm that the company had a valid VAT registration. It expressly warns that it should not be relied upon as authorisation to do the deal.

[170]When PCL started trading with Simpletech it had no information about its financial position. Mr Hall could not explain how he would have satisfied himself about this new customer given that there was no visit to it and a lack of financial information. Yet this is a person who told us how seriously he took the warnings about fraud in the area. At best we find that the lack of scrutiny of Simpletech showed that PCL yet again gave very little attention to due diligence.

[171]Mr Roach told us that Simpletech said that it would be selling to other re-sellers. Therefore there were more links in the chains. It was clear from Mr Roach’s evidence that he gave this no thought. Even considering the parties of whom he was aware there would be at least six parties in the chain.

[172]Simpletech was a company which had contacted PCL. There was no historic connection even to the level of the connection to Ms Ching. Yet despite the knowledge of MTIC fraud at the time remarkably little consideration was given to the new customer. PCL did inspect the goods it first sold to its new customer but otherwise the behaviour shows very little care. A potential financial exposure to this unknown customer was allowed to develop immediately as follows:(1) PCL instructed the shipping of the first deal with Simpletech, deal 22, on 7 September 2006. Payment was not made for deal 22 until 18 September 2006 although PCL had paid Plazadome on 7 September 2006. PCL was therefore exposed in relation to its payment of £75,784. Before any payment was received from Simpletech PCL shipped deal 24 on 12 September 2006 at 10:02. The two deals were for a value of £341,159;

(2) a UMBS bank document was faxed to PCL on 12 September 2006 at 18:48, more than 8 hours after PCL had already instructed that the goods for the second deal should be shipped. That showed the payment type as “immediate” although it in fact took another 6 days for payment to reach PCL;

(3) PCL released deals 22 and 24 on 13 September 2006 at 13:26 five days before it received the complete funds on 18 September 2006. It would have been clear to Mr Hall who emailed the release instruction that the “immediate” payment had not reached PCL’s bank account if he had checked. Instead, PCL released both deals before full payment was made for the first; and

(4) even recognising the potential confusion by the “immediate” description by UMBS this episode was extraordinarily trusting of PCL in dealing with a new customer about which it knew very little. It had fully paid Plazadome without receiving any payment from the new and unknown Simpletech. It is in stark contrast to the situation described by Mr Hall in his Witness Statement dated 18 January 2011 where he explains that in 2005 when dealing with a new customer and where that company had been incorporated since 1979, PCL had been unable to obtain sufficient insurance to do the deal on credit and had therefore obtained a large proportion of the deal value up front (approximately £39,000 out of £50,000). It is also inconsistent with a more general description of how PCL dealt with new customers provided by Mr Hall in the same Witness Statement describing the use of cash and/or credit cards where credit insurance could not be obtained and a detailed assessment of the company’s financial information. Finally it is inconsistent with Mr Roach’s evidence that he never paid his supplier until he was paid by his customer.

[173]On 20 April 2007 the Maltese authorities informed HMRC that Simpletech was suspected of being a conduit company that had failed to submit all but one of its VAT returns. According to the list of the company’s transactions provided by the Maltese authorities, it only began trading on 6 September 2006.

Overview of the 2006 brokerage business

[174]On 5 April 2006 the first transaction with Plazadome and Zaanstrait took place.

[175]It is notable that, despite being told that this was a very buoyant and fast-moving market, it took from 21 March 2006 to 5 April 2006 before the trading started and yet Plazadome was still the company which could supply at the right price.

[176]PCL made four purchases from Plazadome in April 2006, six in May 2006 and three in June 2006. In each case the goods were sold to Zaanstrait. Deduction of input VAT on those transactions has not been denied by HMRC although they maintain in the case before us that they were likely to have been part of fraudulent chains given that 429 of 431 transaction chains involving Plazadome in April and May 2006 traced to tax losses.

[177]We agree that, given the consistency of participants in the chains with those in the challenged deals and the evidence regarding the extent of Plazadome’s participation in fraud that, on the balance of probabilities, PCL’s 06/06 deals were also connected to the fraudulent evasion of VAT.

[178]PCL has accepted that its challenged transactions in the 09/06 quarter were connected to the fraudulent evasion of VAT.

[179]In the 09/06 quarter, PCL entered into 14 transactions (the deals are numbered 15-28), of which 13 were “broker” deals and one was a deal (deal 27) where the goods were sold to another UK company, Quantum. That deal failed as Quantum went into liquidation and PCL had to claim on its insurance. The transactions involved PCL purchasing and selling CPUs and iPods.

[180]In each of the challenged transactions PCL’s supplier was Plazadome. Apart from the sale to Quantum the other sales were all to one of the two Dutch companies, Zaanstrait and Simpletech.

[181]The transactions involved PCL purchasing goods on a total of 19 invoices from its supplier and selling goods on 15 invoices. In deals 18, 21, 23 and 24 PCL purchased goods on two invoices but sold them on a single invoice. In deal 28 PCL purchased goods on two invoices and sold them on two invoices. In 11 of the transactions PCL purchased and sold one type of goods e.g. a specific type of iPod. In five of the transactions (deals 16, 17, 18, 22 & 28) PCL purchased and sold more than one type of goods. The table below shows the breakdown of PCL’s deals relating to iPods and CPUs for VAT period 09/06.

[182]Breakdown of PCL sales for VAT period 09/06 Deal Date Net sale(£) units Goods Purchaser 15 04/08/06 95.040 1440 AMD Athlon CPU Zaanstrait 16 08/08/06 141,607.50 1192 iPod Nano Zaanstrait 17 10/08/06 202,644.30 1261 iPod various Zaanstrait 18 15/08/06 328,732.80 2406 iPod various Zaanstrait 19 18/08/06 214,565.48 1957 iPod Nano Zaanstrait 20 25/08/06 243,191.75 2155 iPod Nano Zaanstrait 21 31/08/06 288,738.45 3465 iPod Nano Zaanstrait 22 07/09/06 67,319.60 445 iPod Nano Simpletech 23 08/09/06 247,665.60 2835 Intel SL7Z9 CPU Zaanstrait 24 12/09/06 273,840 6720 AMD Athlon CPU Simpletech 25 18/09/06 141,041.25 1575 Intel SL7Z9 CPU Simpletech 26 20/09/06 139,403.25 1575 Intel SL7Z9 CPU Simpletech 27 22/09/06 45,248 505 Intel D945 CPU Quantum (UK) and deal failed 28 25/09/06 80,160 1000 Intel D930 CPU Simpletech

[183]Total sales in the 09/06 quarter amounted to £2,594,558.03.

[184]None of the goods were ever rejected by PCL’s customers despite the packaging showing potential issues and some being sold loose.

[185]In each case the deals were back-to-back. HMRC have relied upon this element. We do not consider that back-to-back deals are themselves an issue though. We recognise that traders may act to ensure that they are not left holding stock. However, what is more notable is that PCL always obtained the stock from just one supplier and always sold to one customer. It was not the case that it sourced the goods from more than one supplier at times or that it sold the supplies to more than one customer. Findings regarding the chains involving the contested deals.

[186]Each of PCL’s 13 broker transactions traced to a fraudulent tax loss occasioned by one of two defaulting traders: JM Technical Systems Ltd (“JMT”) (deals 15 & 17-28) and Grange Solutions Ltd/Wade Tech Ltd (“Grange”) (deal 16). The defaulting trader sold the CPUs or iPods to another UK based trader (1st buffer), charging output tax on the invoice, for which it then failed to account. The goods were then sold on through a chain of UK buffers ending with PCL (the broker), who in turn dispatched them from the UK in a sale to one of two traders based in the EC, Zaanstrait (Netherlands) (deals 15-21, 23) and Simpletech (Malta) (deals 22, 24-26 and 28). PCL’s sale was zero rated for VAT and it has sought to reclaim the input tax paid on its purchase.

[187]The same company appears at both ends of the PCL transaction chain in deals 17-22, 25, 26 and 28. These transactions were therefore carousels. The carousels involved both CPUs and iPods.

[188]In five of PCL’s deals (deals 15, 19-21 and 25) the goods originated with the logistics provider Mitt at Amsterdam airport and were returned to the same location by PCL shortly thereafter, sometimes on the same day. For example, in deal 20, the goods entered the UK transaction chain on 25 August 2006 when goods located at a UK freight forwarder were allocated by a Danish company called All Blast ApS to Doktor Ring. The goods were bought and sold by PCL on the same day (the goods having passed through the hands of Plazadome and three other companies) being sent to the Mitt warehouse at Amsterdam airport for its sale to Zaanstrait by PCL. On 28 August 2006 the same goods were sent back to the same UK freight forwarder as had held them on 25 August 2006;

[189]In respect of each relevant transaction PCL accepts that there was a VAT loss, such a loss was fraudulent and each of PCL’s relevant transactions was connected with the fraudulent evasion of VAT.

[190]PCL also accepts that the background evidence of the chains in which the relevant transactions took place demonstrates a level of coordination. PCL submits though that does not mean that the transactions were “highly orchestrated”. By the use of “highly orchestrated” PCL means a situation where nothing is left to chance. That is consistent with the fact that PCL maintains that it was an innocent party in the transactions; i.e. there was coordination in the deals but not so much coordination that it extended to controlling PCL’s involvement.

[191]We briefly address the evidence regarding the co-ordination/orchestration.

[192]HMRC has provided unchallenged evidence that:(1) Doktor-Ring Telecom GmbH, Masterpiece Technology Ltd and Plazadome were all companies involved in the PCL chains. Plazadome was in each one as supplier. The other two were in most of the chains. HMRC found evidence relating to fraudulent transaction chains in 2005 involving these three companies. That evidence included documentation necessary for the fraud to operate including corporate documentation, purchase orders, invoices, payment instructions and release notes;

(2) Plazadome submitted very large repayment claims to HMRC totalling more than £5 million for the VAT periods 04/06 and 05/06 which were denied. 429 transaction chains out of 431 were traced to tax losses caused by defaulting traders. Plazadome appealed the denial of the right to deduct input VAT but its appeal was struck out;

(3) Masterpiece was once denied the right to deduct £1.5 million in input VAT claimed on the purchase of CPUs in VAT period 04/06;

(4) the German authorities have explained that the company had no place of business by the end of 2005/start of 2006, it had not filed any VAT returns after 2004 and insolvency proceedings could not be commenced in relation to the company because it had insufficient assets;

(5) in deals 15, 17-21 and 23 the supplier to the chains was a Dutch company and the goods were sold by PCL to another Dutch company, Zaanstrait. Given that a Dutch company was selling the relevant goods one would expect that Zaanstrait would have been able to purchase them locally at a cheaper price. The Dutch supplier to the chains was deregistered by the Dutch authorities from VAT on 4 September 2006 due to involvement with carousel fraud;

(6) in most of the transaction chains there were 10 participants. The chains were therefore long;

(7) PCL always made the largest, or second-largest margin, of any party in the transaction chains;

(8) PCL’s transactions were carried out on a back-to-back basis. In particular, Plazadome always supplied the exact amount PCL’s customer wanted to buy. We recognise that PCL did not want to hold stock and we recognise that a trader may well trade in that sense on a back-to-back basis; i.e. matching supply to demand. Indeed, as PCL identifies, Doctor Findlay commented that such behaviour is typical of successful distributors of offloaded stock. However, it is notable that it was always Plazadome which could supply the exact amount. PCL never had to amalgamate supplies from more than one supplier. It is entirely unsurprising that a business receiving requests to supply goods seeks a supplier to match that request where possible, but to be able to do so every time with one supplier, particularly when the evidence from PCL was that it tried others without success, is an indicator of co-ordination at least;

(9) PCL’s transaction chains were very similar to those of other brokers in challenged chains purchasing from Plazadome and selling to Zaanstrait;

(10) in February 2006 Plazadome sold £1.4 million of goods directly to Zaanstrait. On the same day as PCL’s first sale to Zaanstrait Plazadome made seven sales directly to the Dutch company. Plazadome also made sales of £1.9 million to Simpletech’s parent company. We agree with HMRC that there appears to have been no commercial reason why either Zaanstrait or Simpletech did not approach Plazadome with whom they already dealt thereby removing the PCL link and saving money;

(11) in VAT period 06/06 PCL purchased 69 boxes of CPUs from Plazadome which it sold to Zaanstrait. 48 box numbers were recorded by PCL and 41 of those have been identified by HMRC as having been sold or would be sold or both, by at least one other UK broker. In VAT period 09/06 PCL recorded the box numbers of 19 boxes out of the goods it sold. Seven of those boxes have been identified as having been sold or to be sold or both by at least one other UK broker. HMRC has provided further CPU analysis showing parties in the transaction chains repeatedly dealing in the same boxes;

(12) the goods were passing through numerous hands quickly. For example, four of the boxes sold by PCL to Simpletech in deal 25 had been sold by another UK company to Zaanstrait just four days before;

(13) various of the companies identified in the transaction chains have been shown by HMRC to be linked for example by common directors or shareholders;

(14) none of the transaction chains include any manufacturer, retailer or end user.

[193]HMRC have also adduced expert evidence from Dr Findlay regarding the grey market and, in particular, its size at the relevant time. To be clear, HMRC have not alleged that PCL was aware of the size of the grey market at the time of its deals. The expert evidence is relied upon by HMRC to show that PCL’s deals did not take place in a legitimate market. To an extent, at least, PCL has accepted this by virtue of accepting the coordination of the transaction chains and the fraud arising in relation thereto.

[194]However, PCL has made detailed submissions regarding the extent to which the expert evidence on the size of the grey market should be relied upon. We find that the elements identified above are more than sufficient to lead to a conclusion that the deals were contrived as part of an overall scheme to defraud HMRC. We therefore do not engage in a detailed analysis of the arguments for and against Dr Findlay’s conclusions as to the grey market size.

[195]We turn to the question of whether the co-ordination extended to full orchestration of the chains including PCL’s deals at the end of the decision. That can only be decided in the context of all of the evidence. We therefore now turn to more detailed findings regarding the conduct of the CPU and iPod business.

Use of Mr Hall’s deal check sheet

[196]Mr Hall produced a checklist for the trading. It was produced after he had looked at Notice 726 and had become aware of the MTIC fraud risk.

[197]Mr Hall’s check sheet asks for details of the buyer and seller, goods and price and then lists various “paperwork to be completed” including dates of purchase order and invoice, market price verification, inspection report, shipping notice to forwarder, receive payment and make payment. There is a separate market price verification form.

[198]It became clear from the evidence at the hearing before us that the deal check sheet was given remarkably little real attention. Various lines on the sheet, such as “confirm allocation to forwarder” were never used. Mr Hall said that the check sheet was a reminder of things to do. His evidence shows that it had been generated in response to the information about the risks of trading in this area and was therefore meant to provide some form of paper trail/evidence to support PCL’s trading. However, we find that:(1) even for the first deal the market price verification line and the line stating that “market price form completed” were not completed. In cross examination Mr Hall’s response was that some things on the list were done but not recorded even though this was supposed to be the paper trail and a reminder of actions to take. We give little weight to the vague assertion that steps took place but were not recorded. When pressed about the market price verification omission Mr Hall simply said that the price reflected the agreed £4 per unit margin and that any check would be done verbally so not written down. Of course that undermines the value of the checklist;

(2) Mr Hall prepared a form which was described as a “market price verification form”. It was completed for deal 2 but it raises more questions because it shows that the price quoted by Techcomp was £2 less per unit than that quoted by Plazadome. The form was dated 11 April 2006, the same day as the deal with Plazadome was done. Mr Hall said Mr Roach asked him to do the verification. Mr Hall does not seem the obvious person to do so given the existence of a sales team and given the fact that we heard that Mr Donaldson had various grey market contacts;

(3) furthermore, we were given inconsistent evidence about Mr Hall’s involvement in the verification exercises. Initially he told us that Mr Roach asked him to do the check when he saw the form as Mr Roach did not like paperwork. We were later told that Mr Hall thought it most likely he would carry out the checks when Mr Roach was not around. Mr Roach said that he was not even aware of the price verification sheet;

(4) notably, the verification had little value given that we were told that the deal did not proceed with Techcomp as that company could not provide sufficient stock. A price verification for insufficient stock is somewhat redundant particularly where PCL did not buy even the smaller amount available at the reduced price;

(5) overall we find that the form’s description as “market price verification” was not reflected in practise;

(6) some lines in the deal check sheet were simply copied from a template even though they had no relevance, such as a line “send insurance request to forwarder” as PCL had its own insurance;

(7) Mr Hall could not explain in cross examination why some entries would show “N/A”; for example in deal 2 he could not explain why it was marked “N/A” for “confirm allocation of stock with forwarder”;

(8) Mr Hall confirmed that at times he simply copied entries across from one form to the next, so much so that on one occasion the checklist was not amended to refer to the correct goods and on others the wrong date remained at the top of the checklist;

(9) on some occasions (e.g. deal 16 which was the first for a new product, iPods) the checklist did not reflect the other paperwork. In particular, in deals 16 and 17, the checklist says inspection report requested on the day of the deal whereas the documents from Forward Logistics show that inspection took place the previous day; and

(10) after various issues with the check sheet were addressed in cross examination Mr Hall recognised that it was often not filled out or little care was taken when it was completed. He sought to say that the form was an aide memoire of steps to take so that as long as they were it was not necessary to record those steps, but that is still not consistent with the fact that certain of the steps, such as the market price verification form, were rarely done.

[199]As a result of these findings we conclude that the business did not seriously engage with the deal check sheets.

[200]In relation to market price verification, Mr Roach and Mr Hall wrote to HMRC in December 2006 describing Techcomp and saying that they often used Techcomp as an alternative source of pricing which was usually very similar to Plazadome’s but “they very rarely had stock available on the day it was needed”. No deal was ever done with Techcomp so one might query whether “very rarely” should be never. If Techcomp was often used for price comparison why was a note of this made only once for Deal 2 and if Techcomp repeatedly was unable to supply why did PCL not ask how Plazadome (at the same price level) always could?

[201]Mr Roach has described seeking prices from two authorised distributors initially even though on his own evidence it would have been very unusual for them to offer a competitive price. He repeatedly maintained in cross examination that he had no contact with unauthorised distributors. Yet, as we have noted earlier, Mr Donaldson said PCL did have such contacts and said that authorised distributors sometimes bought dumped stock so that they may also be able to offer competitive pricing (in contrast to Mr Roach’s evidence that this almost never happened).

[202]Even when dealing in a new product there is no real evidence of market price verification. For example, in deal 15 when AMD chips were first dealt in, and after the break in trading of more than six weeks which occurred while awaiting the VAT repayment for quarter 06/06, there appears to have been no real checking of price despite what was described as a volatile market.

[203]Mr Roach maintained that he always checked the price but, taking his evidence at its highest, that would only have been with Techcomp and two authorised distributors. He did not interrogate pricing any further by his own admission. It did not occur to him to consider why the price of what he described as the “sweetspot” processor dropped below 30% less than the list price for deals 12 and 14.

[204]In Mr Foulkes’ skeleton argument it was specifically said that, given the warnings in Notice 726, (as well as the description of interaction with suppliers given to HSBC when applying for an overdraft, thereby acknowledging the need for price checking) one would expect to see some “commercial evidence” of the price checks even in the form of telephone bills to show calls were made.

[205]Notice 726 states: “3.1 How am I to ascertain the lowest open market value of the goods? …If a company trades within a suspicious supply chain and holds commercial evidence to demonstrate that the price it paid for the goods was reasonable in the circumstances then we will take this into consideration.” (underlining added)

[206]Nothing has been provided beyond assertion by Mr Roach.

[207]Overall, we find in the context of the evidence generally, that very little, if any, price checking took place once the business was under way. In deal 2 a lower price was quoted by Techcomp, but that company was not then used as supplier even for a smaller amount of the goods. Instead, and repeatedly, Mr Roach simply used Plazadome as supplier even when the product changed from one type of CPU to another and even when an entirely different product – iPods – was being dealt in.

[208]Mr Roach told us that he followed the same procedures for the CPU and iPod trading not because of MTIC concerns but because in both cases PCL was exporting. Yet that is against the background we have found earlier of Mr Hall briefing Mr Roach on the fraud risks.

Timing of transaction steps

[209]Mr Lewis took Mr Roach to the transcript of the first hearing which set out how the business initially developed with Ms Ching and Plazadome. In essence, he described Ms Ching giving him ballpark quantities of goods sought and an idea of the price she would pay. He said that, initially, he had no idea of how often she would want to trade or even if it would be more than one occasion. Plazadome would then give him an idea of price and availability. He then went back to Ms Ching and asked for an idea of how many she actually wanted to buy and how frequently. She said she would buy two or three thousand per week depending on how it went. On that basis he then spoke to Mr Hall about cashflow. This evidence was relied on as a correction to what was said by Mr Roach is his Witness Statements including, in particular, one dated in 2011 where it was written that Ms Ching did not ever request a particular number but simply bought what she could get from PCL.

[210]Mr Foulkes asked Mr Roach in some detail about this amendment given that Mr Roach’s Witness Statement from 2011 provided a full description of the initial interaction with Ms Ching which was called into doubt at the last hearing in cross examination. We were not provided with any reason for the error in 2011.

[211]In a letter dated 18th July 2007 PCL’s accountants stated that the transactions progressed as follows:(1) An inspection report was prepared for Plazadome and then sent to PCL;

(2) PCL faxed the inspection report to its customer to show that the goods were available;

(3) a price was negotiated for the goods;

(4) PCL would await a purchase order from its customer and then submit a purchase order to Plazadome;

(5) at that time title to the goods passed to PCL who then authorised the release of the goods to a driver from Mitt who collected the goods;

(6) on receipt of the goods in Holland Mitt would produce an inspection report that was sent to PCL; and

(7) on receipt of cleared funds in its bank account PCL would authorise Mitt to release the goods to its customer.

[212]Our findings regarding the contractual terms of the business and the timing of payments against release of the goods show that the accountants’ letter does not reflect what happened in practice.

[213]The inspection reports to which the accountants refer were reports from Forward Logistics.

[214]In all of the contested deals the goods were shipped some days in advance of payment by the customer; i.e., the goods were released to a Mitt driver for transport to Holland. Mr Hall explained that shipping was not the same as release. However, in deals 15, 16, 17, 23, 26 and 28, PCL released the goods to its customer prior to receiving either full payment for the relevant goods or any confirmation that full payment was being processed by its customer’s bank.

[215]For example, Mr Hall’s evidence shows that in the case of deal 15 the goods were released before any payment was made. In deal 16 the goods were released against a deposit of £30,000 on 11 August 2006 where more than £110,000 was owed and was not paid until 18 August 2006; and in deal 17 nearly £173,000 was outstanding and only £30,000 received when PCL released the goods.

[216]In contrast, in deal 19, the documentation was completed on 18 August 2006 and the goods were shipped on that date but were not released for another 18 days when payment was received. In deal 20, agreed on 25 August 2006, the goods were not released until payment was received on 5 September 2006.

[217]Payment was routinely made to Plazadome some days after delivery to PCL, once payment had been made by PCL’s customer. On occasions where PCL was paid by its customer in tranches PCL also paid Plazadome in tranches after the receipts.

Forward Logistics

[218]Forward Logistics is not a company impugned by HMRC. It was approved by PCL’s insurer and its letterhead showed it to be a member of a professional accreditation scheme.

[219]However, HMRC has challenged PCL’s lack of questions for Forward Logistics. PCL accepts that it did not ask Forward Logistics questions such as whether it was aware of goods transferring hands rapidly, whether they had come across the problem of MTICs, whether it had affected anyone using their premises, what they could do to help PCL avoid the fraud, how long the goods had been stored there, whether there had been a rapid exchange of the goods between a number of traders, whether there was a facility at Forward Logistics to determine whether they had seen the box numbers for CPUs traded by PCL before, whether the goods had come from abroad when they entered the Forward Logistics warehouse and whether Forward Logistics could record iPod serial numbers for PCL’s transactions.

[220]Mr Hall’s evidence before us was that to ask these questions would have been “ridiculous”. In particular, Forward Logistics could not have been expected to divulge customer names. However, these questions do not require revealing customer names or details. Most notably his evidence before us was in stark contrast to that in the previous hearing (as put to him by Mr Foulkes) where he had broadly accepted the validity of such questions.

[221]We find that PCL did not ask Forward Logistics any pertinent questions which may have assisted in their due diligence. We recognise however that HMRC needs to identify what such questions would have shown and we are not satisfied that questions would have added much to the existing knowledge that this was a line of business where care to avoid fraud was needed.

Basis of offering credit to customers

[222]Mr Hall says in his Witness Statement that, where new customers wished to trade on credit terms, attempts would be made to obtain credit insurance limits for them. Where PCL could not get the insurance, alternatives such as cash or credit card payments would be used, or PCL would work with the customer and insurance company to assess recent financial information which might allow an increase in the insured limit. The customer would be required to complete an application form agreeing to PCL’s terms and conditions. This did not happen in the cases where credit was in fact offered to PCL’s customers in the course of the 2006 brokerage business. Mr Hall said in the first hearing that this was because the deals were not supposed to be credit deals, but we find that this implies a surprising lack of rigour in relation to the business where the fact that a cash deal became a credit deal did not trigger the normal protections in place for PCL. It stands in stark contrast to the process used in 2005 for the one-off brokerage business conducted then and described earlier.

Insurance

[223]PCL’s terms on the back of its invoices stated that risk passed to the customer when the goods left PCL and that it was the customer’s duty to insure them. However, PCL insured the goods to varying extents as we now explain.

[224]PCL’s marine cargo transit insurance policy, renewed and commencing on 29th June 2005 for one year, specifically excluded “microchips and the like.” We agree with HMRC that this exclusion included CPUs.

[225]A marine cargo endorsement, dated 5th July 2006, renewed the previous policy from 1st July 2006 stating:

“All other terms and conditions remain unaltered.”

A further endorsement dated 5th July 2006 stated that, with effect from 24th April 2006, the policy was amended such that it did now include microchips, microprocessors and components.

[226]Mr Foulkes sought to take issue with an endorsement, dated 5 July 2006, altering, with effect from 24 April 2006, but we find no basis to reduce the weight of the endorsement document.

[227]The endorsement from July 2006 also stated that there was a limit of £250,000 per vehicle and the goods were only covered while in transit for 72 hours. When the goods were with Mitt they were in transit for these purposes. In deals 18-21 the goods were at Mitt’s premises for between 5-18 days. PCL’s deals 18, 21 and 24 were for a value above the limit for a single vehicle. Deal 18, the largest by value, was for an invoice value of £328,732.80. Mr Hall’s evidence was that he did not consider these issues.

[228]We find that the insurance arrangements were another area of the transactions given scant attention by PCL beyond obtaining the endorsement to cover CPUs. However, even that endorsement was not obtained until July 2006, albeit back-dated at that point. If, as PCL seemed to believe, the risk was with them and not the customer as said in their terms, then PCL was left exposed for the first 3 months of trading. Even after the endorsement the insurance was inadequate.

Terms of trade

[229]PCL’s terms of trade were printed on the back of its invoices. Key provisions for this case are:(1) the price should be paid within 30 days of the invoice date or if later the date on which the goods are ready for delivery or collection by the customer;

(2) the goods were at the customer’s risk from the moment when they left PCL’s premises; and

(3) if the customer on-sold the goods before PCL had received full payment the on-sale proceeds would be placed in a separate bank account for the benefit of PCL.

[230]However, it is clear that those terms were inconsistent with how PCL conducted itself in these deals. For example:(1) HSBC was told that the basis of the transactions was cash paid in advance to PCL by its customers whereas the terms and conditions that PCL sent to its customers reflected credit transactions as the customers had 30 days in which to pay;

(2) PCL insured the goods for transit after leaving their premises; and

(3) the on-sale provisions were never applied.

[231]In his first witness Statement Mr Roach said that the invoice terms were the terms of the CPU trading deals. However, by the time of the hearing before us he was saying that the terms were agreed as he did the deals.

[232]Mr Hall, in cross examination before us, agreed that terms and conditions of the trading were important but, when pressed on how the terms and conditions did not reflect what appears to have happened in practice, recognised that the stated terms and conditions were not in fact applied, saying that terms were agreed by Mr Roach as he did each deal. He said that the terms on the invoices were not for this business but for PCL’s core business.

[233]The evidence that terms and conditions were negotiated deal by deal somewhat begs the question as to why standard terms were left on the invoices with no amendment or note in relation thereto. While businessmen are not lawyers, in our experience, they are concerned to be clear on certain fundamental matters such as who has the risk if goods are stolen in transit. We would expect some record of what was agreed by Mr Roach with his counterparties. Given that PCL was dealing with one customer, at least initially, it would have been relatively easy to note down the special terms agreed with Zaanstrait.

[234]Taking the PCL witnesses’ evidence at its highest would show that PCL had little concern about risk in the deals as it took no steps to agree terms to protect itself and, indeed, sent out invoices with what Mr Hall described as the wrong terms.

[235]The documents in deal 1 illustrate the problems this approach to terms produced. Plazadome’s terms required payment in advance of delivery by telegraphic transfer, whilst PCL’s terms on its invoice would allow its customer 30 days’ credit from the date of delivery. On the face of it that is a mismatch with which a business would not ordinarily wish to engage.

[236]Plazadome’s terms stated that the goods sold by it remained its property until paid in full. However, PCL on-sold the goods and generally only paid Plazadome once it had received the monies from its customer. PCL was dealing with Plazadome on much better terms than its customers agreed with it. Mr Hall put this down to skill in negotiating, but it was clear to us that, in fact, little, if any, thought was given to the terms of the trading. No consideration was given to the fact that Plazadome was operating on a generous basis letting PCL have the goods (to on-sell) before payment.

[237]Mr Roach’s evidence before us showed that he accepted that he had not read Plazadome’s very limited terms and conditions which only said that “All goods remain the property of Plazadome Ltd until paid in full” on the front of the invoices. Accordingly, in reality, Mr Roach gave no thought to how limited the terms and conditions of trading were. Although payment was made on the same day that PCL collected the goods in deal 1, after that either the date of collection (where there is no release note) or the release document are at least a day before payment is made by PCL. PCL cannot rely (as it sought to imply before us) on an established practice of payment enabling Plazadome to relax its terms.

[238]Plazadome was therefore exposed to the risk of non-payment. Mr Roach insisted that it was a deal breaker for him to be able to inspect the goods before payment, but inspection of the goods stopped after the first quarter, save for deals 22 and 27. Even if PCL insisted on the inspection before payment that does not explain payment which was frequently some days after inspection. Notice 726 specifically notes that one matter to consider is whether a supplier is offering deals to you which carry no commercial risk, for example because you do not have to pay until payment is received from your customer.

[239]Overall, we find that scant regard was paid to the terms on which the trading took place. We find that no agreement was made with Plazadome to amend to its terms. We also find that, judged by reference to normal business behaviour, Plazadome was very clearly and consistently exposing itself to risk of non-payment from PCL. PCL gave this no thought.

[240]Furthermore, as Mr Foulkes explored with Mr Hall in cross examination, the mismatch in trading terms had further implications if thought through. In order for Plazadome to be in a position to sell (assuming terms involving payment before receipt) then Plazadome must either have paid for the goods itself, or be operating on terms under which it secured credit with its supplier, yet Plazadome’s Graydon report showed a credit rating of only £20,000 per month in the context of PCL’s trades alone being for multiples of that amount at a time. Plazadome was routinely releasing the goods to PCL before payment was made by PCL. We are not satisfied that this can be viewed as a matter of trust between established trading partners given the speed with which it happened. It raises the question identified by HMRC as to how Plazadome was managing to do this, particularly given that it was accepted by Mr Hall that they would have assumed that Plazadome was not just transacting with PCL. We recognise that Plazadome was shown in the summary accounts in the Graydon report as owing £1 million and being owed £2 million. However, that in itself does not answer Graydon’s own credit guide of £20,000.

[241]It was clear from the evidence of Mr Hall that this was not given any thought by PCL. While we recognise that this may not be a normal line of enquiry in ordinary business dealings, these transactions were taking place amidst the known risk of VAT fraud. As Notice 726 says, traders must consider the integrity of their supply chain and this would be one element thereof.

[242]In his first witness statement Mr Roach said that Zaanstrait had initially maintained that any goods sold to them would have to be shipped to Mitt and then payment for those goods would be sent as and when Zaanstrait sold them on. However, Mr Roach explained that was unacceptable to PCL and PCL insisted that any goods sold would be shipped to Pacific’s account at Mitt and released to Zaanstrait when (and only when) payment for the goods had been received by PCL.

[243]That “unacceptable” practice is exactly what happened in several of the deals. For example, in Deal 5 on 5 May 2006, PCL asked Forward Logistics to release the goods for Mitt to collect on Zaanstrait’s behalf on 5 May 2006 at 14.51. ABN Amro had only provided confirmation to Zaanstrait of partial payment to PCL at 16:20 on that day and that payment was only £108,000 of an invoice for £166,131. PCL had released the goods to Zaanstrait before confirmation of any payment being made was provided and where only partial payment was made. (We note that Plazadome was not paid at all until full payment had been received on 8 May 2006 as to which practice we have made findings above.)

Inspection

[244]PCL brought the CPUs back to its warehouse to inspect in every deal in the 06/06 quarter except deal 1.

[245]Of the 14 deals in VAT period 09/06 PCL only brought the goods back to their premises on 2 occasions (one of which was the UK deal, deal 27, and for deal 22). We were told that for deal 22 it was because Simpletech was a new customer.

[246]In deal 21 however there was no inspection report and no on-site inspection. The deal involved loose CPUs to the value of more than £325,000.

[247]The CPUs were packed in one of three ways, described as ‘retail boxed’, ‘boxed tray’, and ‘open tray’. Mr Roach describes these in more detail in his first Witness Statement:(1) boxed tray comprised CPUs in trays packed in a manufacturer’s box. One box would accommodate 315 individual units. Serial numbers for the CPUs were not marked on the outside of the boxes.

(2) retail boxed are Intel branded sealed individual boxed CPUs containing a heat sink and fan, mainly for use in retail markets. There are no unique identifiers or serial numbers on the outside of a retail boxed product. To open the sealed boxes would significantly devalue the product. Therefore PCL did not transport and store those products at their warehouse, but transported directly to/held at Forward Logistics.

(3) loose / open tray comprised CPUs stacked in trays which were wrapped in cardboard and taped but not packed in boxes, made up of the same model number but the CPUs may originate from various countries.

[248]Mr Roach goes on to explain that box tray consignments were transported to the warehouse and box numbers recorded for CPUs, and cross referenced against previously supplied boxes. The boxes were opened to check that pieces of glass had not been substituted for the CPUs. In the case of open tray consignments, the serial numbers were too small to read with the naked eye. He says that they would need to be powered up to obtain the numbers which would be unrealistic as it would take 8 to 10 minutes per CPU.

[249]Mr Birtchnell explained that inspection sheets were introduced specifically for the CPU and iPod deals by Mr Hall. Mr Birtchnell was warned to check that the goods were not counterfeit/fraud. He said the warehouse team was asked to look at whether items were genuinely what they were meant to be and to mark down the identifying features and box numbers, for PCL to compare against its list. He noted down the condition of labels and boxes. We are satisfied that he was primarily focussing on making sure that the goods were genuine and not damaged.

[250]Mr Birtchnell considered that removal of labels was consistent with vendors not disclosing their suppliers, but he was not thinking about the MTIC implications identified in Notice 726. Mr Hall was aware that repeated re-opening of a box might be an indicator of multiple people trading in the items, but he did not follow up on the inspection reports.

[251]The PCL inspection reports show comments such as “reopened several times, tape removed, trays damaged in corners” (deal 2 and 3 ); “Not in Intel boxes – no boxes” (deals 5, 6 and 8) . Sometimes the items were just in trays and not in boxes. We take into account that Mr Birtchnell said that the goods were in similar condition to those he had seen in relation to the business of a systems builder. However, these inspections were supposed to be alive to fraud issues whereas, as noted, we find that Mr Birtchnell’s focus was on ensuring the goods were genuine.

[252]However, PCL only inspected the goods for two of the deals in the 09/06 period. Otherwise it relied upon the inspection sheets prepared by Forward Logistics for Plazadome. Forward Logistics sent those inspection reports to PCL. Issues such as damaged boxes, lack of manufacturer labels, loose pieces did not generate any response by PCL.

[253]The answers given to HSBC included confirmation that PCL would note down box and serial numbers so that it could identify if items had been traded previously. However, Mr Roach and Mr Hall wrote in a letter of 23rd March 2007 to HMRC that PCL did not record the serial numbers of all the iPods that it traded and only recorded the serial numbers for one deal “as a random check”. PCL’s own “Schedule of Box Numbers” fails to record the box numbers for 29 of the 99 boxes of Intel tray-based CPUs that it sold because it is said that the CPUs traded were “loose”.

[254]In relation to both the iPods and CPUs without record of serial numbers PCL would not know whether it was later to deal in the same items or whether, in the event of return of the products, those products had actually been sold by it. Mr Roach says the failure rate for CPUs is very low however and this has not been challenged. He does not address the failure rate for iPods. Failures aside, the lack of serial numbers for unboxed items meant that PCL could not identify repeated sales of the same items.

[255]The evidence of Mr Hall shows that PCL were aware that inspection was important to indicate whether goods were passing through numerous hands although the evidence overall also shows that scant regard was given to the inspection reports from Forward Logistics, or even PCL’s own reports at least in relation to the MTIC risks. Mr Hall maintained throughout that all that was important was knowing their supplier and customer.

Deal 13

[256]Deal 13 is a deal about which we heard considerable argument. It is not one of the disputed deals, but HMRC say that it shows orchestration while PCL maintains that it destroys HMRC’s argument on orchestration.

[257]It was a deal involving CPUs. A deal checklist was produced for a deal selling to a new customer, Granada ICT Trading BV, on 16 June 2006. No deal with Granada proceeded and at some stage Deal 13 became a deal with Zaanstrait.

[258]A purchase order had been sent to Plazadome for 1260 CPUs and a customer purchase order was shown as having been received at 10am. The only purchase order on that date before us is from Zaanstrait. At 11:05am Mr Hall emailed Forward Logistics saying that Mr Donaldson would be collecting the goods released by Plazadome. An “outstanding orders” form, which Mr Hall says he would have compiled, showed the purchase price outstanding from Ms Ching and to Plazadome. At some point thereafter, before Mr Donaldson collected the goods, the deal was cancelled.

[259]HMRC’s submissions on this deal proceed as follows. There is no document in the deal pack explaining why deal 13 was cancelled. All the transaction documents had been raised and the goods had been released to PCL. It is quite a coincidence that the only cancelled deal had a different customer named on the Deal Check Sheet. It suggests that the identity of the customer is relevant to the cancellation of the transaction. Those orchestrating the fraud were, on the evidence, directing certain shipments of goods to go to certain customers in Europe. It appears that, for what was supposed to be a Granada deal, PCL and Zaanstrait had raised the wrong documents for the deal, and it was therefore cancelled, including PCL raising a credit note. Thereafter, had PCL simply redone the transaction documents to change the customer to Granada it would have been clear from the cancelled deal documents that PCL’s trading was in fact being directed. That explains why there was then no onward sale to Granada to replace the documents that had been wrongly raised.

[260]We find that Mr Roach was contacted by Granada in May 2006. On 29 May 2006 Mr Herman of Granda wrote to Mr Roach asking if Mr Roach had received paperwork the previous week and that, if PCL had stock to offer, Mr Roach should let him know. On 1 June 2006 Mitt Warehouse contact details were provided by Granada to Mr Hall. On 12 June 2006 Mr Hall carried out a Graydon check on Granada which was classified as “unclassified”. That meant risk unknown because, for example, a company is new. It was clear from the report that the company was indeed very new.

[261]Mr Roach maintained that he could not remember Granada at all. As Mr Foulkes noted to Mr Roach in cross examination, in the previous hearing Mr Roach said that he had never heard of Granada but, in fact, the evidence in the bundle shows that Mr Roach signed the verification letter sent to HMRC and was contacted by Granada in May 2006.

[262]None of the witnesses could give us any reason why Granada was on the deal checklist and the deal then took place with Zaanstrait, or for the cancellation of deal 13. It is the only deal with Zaanstrait and Plazadome which was cancelled. We were repeatedly told that Ms Ching wanted as much of the CPUs as PCL could supply, yet it was said by Mr Roach to be she that cancelled. We would therefore expect that it would have been fairly memorable.

[263]We find that the documentary evidence shows that PCL planned to deal with Granada around the end of May/early June. Indeed, the email from Granada contacting Mr Roach was titled “Granada ICT trading bv – offers of 23 May 2006 – company details (attached)” which supports this conclusion.

[264]PCL say that HMRCs argument regarding Deal 27 is one of the most egregious examples of HMRC failing to put its case. We therefore set out in some detail what was put to the witnesses.

[265]Mr Hall was asked about the deal but could remember nothing about it or Granada. Mr Roach was taken to the deal documents by Mr Foulkes. He was asked if he could remember why it was cancelled and he could not. He agreed that it was well underway when cancelled. He was asked why Granada’s name was on the deal check sheet and he could not say. He said that he did not remember Granada at all. He was taken to the transcript from the first hearing where Mr Roach said that he had never heard of Granada. Mr Roach was taken to the email with Granada and a verification request sent to HMRC which he had signed. He was taken to an email sent by him to Mr Hall forwarding an exchange with Granada including company details and where Mr Herman asked for Mr Roach to let him know if he had stock. Mr Roach still maintained that he had no recollection of Granada. Mr Foulkes drew attention to the fact that this appears to be another trader conversing with Mr Roach when he was only dealing with one customer until then and he had even sent in the verification request. Mr Roach continued to say that he could remember nothing about the company.

[266]Mr Roach speculated that the reason for Granada on the check sheet was simply an administrative error by Mr Hall. Mr Roach was not asked if he was told to change the customer from Granada to Zaanstrait. However, it was put to Mr Roach as a general matter that he/PCL was told from whom to buy and to whom to sell.

[267]We consider that it was not then also necessary to put the alleged direction on each deal to PCL. The allegation that PCL was told who to buy from and sell to was not made just in relation to specific deals. It was made clearly in relation to all of the deals. Mr Foulkes gave Mr Roach every opportunity to address the communications with Granada and the verification request but Mr Roach maintained that he could remember nothing.

[268]We therefore accept that HMRC may make submissions regarding the inability of Mr Roach to remember Granada, that PCL was in fact dealing with Granada in deal 13, raised the wrong documents and then had to cancel the deal.

[269]That does not mean that we accept those submissions. The extent to which deal 13 was directed or it was simply, as Mr Roach suggested, Mr Hall putting the wrong name on the deal check sheet, is for us to decide when we determine whether PCL was directed in these transactions.

[270]One finding we do make at this point though is the fact that, despite emails being exchanged with Mr Roach, a verification letter being signed by him and the very limited pool of customers and suppliers with whom he was dealing in this business, Mr Roach denied all knowledge of Granada. At best it is consistent with the attitude of giving this line of business very little thought.

Particular points arising in relation to the Disputed Deals

[271]HMRC has identified numerous points about the deals to which PCL has robustly responded. We agree that errors take place in documentation in the ordinary course of business and consequently we have been careful to focus on what we consider to be the main points arising in relation to specific deals.

[272]Only Mr Roach carried out the challenged transactions. None of the other 14 salespeople ever carried them out.

[273]Mr Roach confirmed that he was never asked for any goods in unsuccessful negotiations other than the specification of goods PCL in fact traded.

[274]The deals were back-to-back, but we accept that traders conducting such business would want to avoid holding stock where possible. However, the goods were always bought by one customer and supplied by one supplier. In deal 9 the consignment was split in that Ms Ching asked that some of the goods should be sent to Spain, but it was still a deal with one customer for PCL.

Deal 15

[275]This was the first involving AMD CPUs rather than the Intel previously traded. It was also the first deal after the break in trading whilst awaiting the VAT repayment from the first quarter of trading.

[276]The check sheet shows no market price verification took place.

[277]A purchase order was faxed to Plazadome on 4 August 2006 some 2½ hours before Zaanstrait sent a purchase order to PCL. PCL provided no explanation for this.

Deal 16

[278]This was the first involving iPods.

[279]Mr Hall price checked by looking on Amazon on 8 August 2008 even though the prices there were retail prices. The price on Amazon was £146 (including VAT) which compared to the price of £114 paid to Plazadome. PCL did not even attempt to get another grey market price even though this was the first iPod deal. The Amazon price check was carried out after an inspection report was sent to Ms Ching but before Ms Ching emailed to confirm the order.

[280]This very limited price check stands in contrast to PCL’s own evidence of what it did in relation to another potential iPod deal. PCL has described a deal in September 2005 where price enquiries were made with “a number of Apple distributors”. It became clear that the deal would produce a very low margin, but further enquiries were made of another known Apple distributor which offered better pricing because of a special price agreed with Apple UK.

[281]Mr Roach’s evidence before us was vague regarding checking the price offered by Plazadome. He could not remember whom he would have contacted (in contrast to his identification of others for the CPU deals). He sought to maintain that any checks were done because this was a cash deal and not because of MTIC risk as he did not remember iPods being covered by Notice 726, although he also could not remember talking to the obvious person on this topic – Mr Hall. He recognised that he gave no thought to how Plazadome could again supply the iPods cheaper and legitimately given that these were complete products and therefore there was no source of offloading by systems builders as there was for CPUs.

[282]We find that there was little or no real price checking for any of the iPod deals.

Deals 18 and 19

[283]These took place on 15 and 18 August 2006 and were for iPods. There are iPod inspection sheets from Forward Logistics dated 14 and 15 August 2006. Some, at least, of the iPods sold in deal 19 were therefore available to sell in deal 18.

[284]In deal 18 there was delay in Zaanstrait making payment. It was the first time it used the bank UMBS which we address further below. The order was placed on 15 August 2006 but payment (apart from a minimal amount of £10,000 out of more than £370,000) was not made by Zaanstrait until 25 August 2006. The goods had been released to Zaanstrait on 15 August 2006 despite the lack of payment. Mr Hall wrote on a fax dated 25 August 2006 to Plazadome showing payment on that day made by PCL to Plazadome “At last!!”.

Deal 21

[285]This was for Intel CPUs on 31 August 2006. There is no indication in the check sheet or other papers that market price verification took place and we find that none did even though this was the first Intel CPU deal since 22 June 2006.

[286]From deal 21 until deal 27 (inclusive) Plazadome made a loss on each deal.

Deal 22

[287]This was the first deal with the new customer Simpletech.

[288]Mr Hall was given the details of the deal for iPods on 6 September 2006 although the Forward Logistics inspection reports were dated 4 September 2006 and the purchase orders from Simpletech and to Plazadome were not sent until 7 September 2006.

[289]Mr Roach’s evidence is that the iPod market moves particularly quickly. It is therefore important to get deals concluded quickly. That evidence is not consistent with the timings in deal 22.

Deal 27

[290]This was a sale to a UK company called Quantum. PCL made a significantly higher margin than on other deals, £8.60 per unit compared to £4 or less. However, PCL ultimately made a loss on the deal as Quantum became insolvent.

[291]Deal 27 was one of the shortest deal chains with only 6 participants before the sales by Quantum to other traders. However, the participants, other than Quantum, are consistently the same as in the other deals where fraud arose. HMRC have accepted that Quantum was a legitimate customer with whom PCL had dealt previously. It was the company to whom PCL had sold iPods in 2005.

[292]Plazadome made a loss of £3 per unit on its sale to PCL in contrast to PCL’s high margin. This begs the question as to why Plazadome sold to PCL on these terms. PCL says that deal 27 explodes HMRC’s case on orchestration. PCL argues that it makes no sense for the fraudsters to “allow” PCL to make a higher profit where there was less VAT risk compared to deals where it was at the end of the UK chain; and the higher margin points to PCL being innocent of knowledge. Yet the fraudsters did allow the deal to take place even though Plazadome realised a loss. PCL argues that this was because it was an innocent dupe who found a legitimate deal with Quantum. HMRC argues that the fact that Plazadome was willing to permit PCL to make a profit at its expense, even where the transaction did not form part of a carousel, and even where PCL was not acting as a broker, points more clearly towards PCL being a knowing participant, which was being rewarded by being permitted to conduct this transaction. Otherwise, HMRC maintains, that there is no discernible reason why Plazadome sold the goods at a loss. PCL asks why the fraudsters would “allow” it to make a higher profit in a deal where it took less risk than in deals where it did take the greatest risk-yet that is exactly what happened and in the context where Plazadome made a loss.

[293]We note that Mr Foulkes asked Mr Roach whether the deal with Quantum was discussed with Plazadome and whether PCL was permitted to deal with Quantum by Plazadome. Mr Roach answered no to both questions.

[294]We consider that it would be wrong to address the implications for each side’s case of this deal in isolation. We are satisfied that deal 27 in itself is inconclusive as to the dispute before us. It gives rise to a set of facts which need to be considered in the context of the overall evidence of the deals. We do not think it is appropriate to reach conclusions about what a fraudster would or would not prefer in the absence of consideration of the evidence as a whole.

Deal 28b

[295]This deal was just three days later and PCL made a much smaller mark-up of 4.1% rather than the 10.6% in deal 27.

Profit from the transactions

[296]Deals 14 to 28 generated c. £100,000 in gross profit, and less in net profit, against a potential (and thus far actual) financial risk of the VAT loss of £428,525.74. However, by the time PCL entered into these deals it had received the previous quarter’s VAT repayment. It must therefore have thought that its VAT risk was minimised as it was continuing to deal with the same supplier.

[297]We have set out earlier more detailed financial results for PCL in 2006. Those results show that the CPU/iPod trading was a significant element of the 2006 trading with what we find to be little work being required of PCL compared to its core business given that: the supplier was constant; the purchasers were very limited in number (two main customers with one exceptional other sale) and always approached PCL such that it did not need to seek business; and the evidence shows very little, if any, shopping around for other suppliers took place. All PCL needed to do was buy the items from the supplier as needed to fulfil the purchaser orders. In comparison, in the core business PCL’s income was derived from the assembly and sale of bespoke computing systems, requiring the sourcing of various computer components at the best price possible and the installation of what Mr Roach describes as “challenging” audio visual systems.

[298]Mr Roach said that the trading took far more work than the core business with a far greater margin in the core business. This somewhat begs the question if this is the case - why did Mr Roach devote the time he did to the CPU business rather than focus on the more lucrative core business?

[299]We find little basis to conclude that the trading business took more work than the core business. PCL used one supplier; it never looked for customers and added no value to the goods in the transactions. We find that it was a much easier business for PCL.

[300]However, as noted, the potential profit had to be set against the risk of non-repayment of the VAT. That was a risk which PCL clearly recognised and took on for the relatively small margin given its knowledge of the risk we have identified earlier, the fact that it paused trading awaiting the VAT repayment for the 06/06 quarter and the ring-fencing of its cashflow used for the core business by using the HSBC overdraft.

Break in trading

[301]There was a break in trading for more than 6 weeks while PCL awaited the VAT repayment for the 06/06 quarter. As soon as the repayment was received PCL continued trading with Zaanstrait and Plazadome as before. It was clear that, given the break in trading while awaiting the processing of the 06/06 VAT return, PCL knew that there was a risk that its claim for repayment of input tax would be denied.

[302]No explanation was given for why it was supposed that Zaanstrait had not found another supplier in that time.

[303]However, the VAT repayment was made without any qualification. It was not stated to be “without prejudice”. PCL would therefore have taken comfort from the fact of the repayment.

Banking

[304]All parties to the transaction chains except Plazadome and PCL used accounts at The Universal Mercantile Building Society (“UMBS”) in Sweden, a Swedish “Building Society”, to make and receive payments for the transactions in PCL’s broker transaction chains.

[305]On 6 September 2006 PCL downloaded the proof of posting form for a UMBS account to be opened. On 7 September 2006 PCL made a corporate resolution to open an account with UMBS and signed the account opening documentation. The documentation showed that UMBS was based in Sweden. On the same day Messrs Roach, Donaldson and Hall had their identification documents certified by a local solicitor for the UMBS form. Mr Hall emailed UMBS that day to make two enquiries, one in relation to the security of telephone banking and one in relation to a reference to existing mandates with UMBS. UMBS confirmed that PCL’s account had been opened on 10 October 2006. That was after the final payments for the transactions had been made.

[306]Mr Hall told us that he started the process to open an account with UMBS because of delays in payments to PCL. That would, of course, only assist for payments made by a customer using UMBS.

[307]Zaanstrait used ABN Amro to make payments until Deal 18 on 15 August 2006 when it then started using UMBS. Goods were released by PCL on 18 August 2006 even though the UMBS payments did not arrive until 25 August 2006 and PCL did not pay Plazadome until 25 August 2006.

[308]Zaanstrait continued to use UMBS from then on. However, in deals 19, 20 and 21 (18 August 2006, 25 August 2006 and 31 August 2006) goods were not released until Zaanstrait’s money had been received from UMBS and Plazadome was not paid until funds had been received.

[309]Problems with delayed payments from Simpletech only started after 7 September 2006. Therefore this cannot have been the reason for contacting UMBS on 6 September 2006.

[310]Yet the evidence of Mr Hall on this matter was flawed and evasive. Within the bundle there is a detailed spreadsheet attached to one of his Witness Statements in which he sets out the timing of payments for each deal and the bank used by customers for payment. That is the evidence we have relied upon to make the findings in this section about the timing and derivation of payments. However, before us he:(1) challenged whether Zaanstrait had a UMBS account, saying that he would not know as he had never made payments to that company;

(2) when asked whether he had asked the new customer Simpletech to use a bank other than UMBS with which he had encountered problems, said he had not because they were using UMBS despite the fact that the due diligence material for Simpletech showed them as having an HSBC account. While steps had been taken to open a UMBS account at the time of the first Simpletech deal, clearly it would not have assisted with the deal struck on 7 September 2006 given that those steps only started at about the same time;

(3) when asked whether it had occurred to him as odd that both customers were using this unheard-of bank, UMBS, Mr Hall pushed back, again saying he would not have known which bank they used, when clearly from his own documents he did. Furthermore, it is his evidence that he started the steps to open a UMBS account because of delays in payments from his customers from that bank so he was clearly aware of their use of it.

[311]The obvious steps of asking Zaanstrait to go back to using ABN Amro and Simpletech to use HSBC were never taken but we were provided with no coherent explanation of why. It is a somewhat surprising step for a business to open an account with a bank where it perceives payment problems rather than ask its customers to use other tried and tested accounts.

[312]Mr Hall’s evidence showed that no due diligence was carried out to find out more regarding this previously unheard-of bank or to ask why the two customers were now both using this rather than other bank accounts they held.

[313]In the end PCL did not proceed to use the UMBS account as Mr Hall was not satisfied with their security procedures.

[314]However, we find that the reasons given for opening this account make little sense and the evidence before us fails to address the fundamental question as to why it was opened.

Chain length

[315]Mr Roach told us that he understood that Plazadome would be buying stock from systems builders who had offloaded excess stock, or possibly from another broker who had bought from systems builders. His understanding and experience was that dealing with authorised distributors was slow and often they did not have the stock.

[316]Yet, as was put to him by Mr Foulkes, Ms Ching was telling PCL that she was supplying customers in Hong Kong and the USA. Mr Roach told us he gave no consideration to whether it was odd that his customer was looking to buy from a UK supplier who had itself bought from another UK supplier rather than seek to source the CPUs locally in Hong Kong. No question was asked of Ms Ching.

[317]Similarly, no consideration was given to the fact that the inspection reports showed that goods had originated in China, Costa Rica or Mexico and had come to the UK only to be exported via Rotterdam back to the Far East or the USA. While Mr Roach said that the chips were not manufactured in Europe, that does not engage with the question as to why chips were being transported to the UK and then Europe only to go back to the originating area; or more particularly whether PCL had ever given this some thought in order to interrogate the transactions better. Examples given by Mr Roach of buying components from all over the world to satisfy customers in overseas locations such as Dubai also do not engage with the issue explored by Mr Foulkes as the nature of the system building business is entirely different to the brokerage where no value was added by PCL.

[318]When it was put to Mr Roach that Ms Ching could have presumably gone straight to an authorised distributor or systems builder offloading stock he said that her business was new and it took years to establish contacts. Yet the PCL evidence is that Ms Ching was an established name in the industry whom they had known for many years. We agree with HMRC that Mr Roach’s answer about at least thinking about why Ms Ching was not going straight to others was not consistent with other evidence.

[319]The deals had to involve the following participants at least: Manufacturer – Authorised Distributor or systems builder offloading stock – Plazadome – PCL – PCL’s customer – systems builder. Mr Roach said that he did not consider six in a chain to be unreasonable. In relation to Simpletech deals Mr Roach was told that Simpletech would on-sell to other re-sellers. Therefore there would be at least seven in the chain. He gave no thought to how this could work with each participant earning a margin.

[320]Dr Findlay accepts that the grey market delivers efficiency and that authorised distributors would at times source goods from the grey market. He also agreed that most distributors and assemblers would use the grey market to offload surplus stock.

[321]However, Dr. Findlay’s evidence was that there was an incentive to minimise the length of any deal chain to keep it as short as possible because the more participants in the chain the more people there were taking the profit. Albeit that exceptions could occur, long deal chains were unlikely. He said that someone who had acquired these goods at a discount would expect to be able to find an assembler or authorised distributor to purchase them. The most likely thing for a company to do if it has acquired stock at 40% below list price is to try to sell it for the highest price possible.

[322]PCL argues that Dr Findlay’s evidence regarding deal chain lengths is idealised. It says that the evidence depends upon perfect information as to who is looking to buy and who is looking to sell. The flaws in this analysis are illustrated by deal 27 where PCL sold to another UK company who in turn sold to UK assemblers. It disproves the theory that legitimate customers always go to the supplier closest to the source: the UK customer would have known that PCL was not an authorised distributor but still sought to buy from them. While we recognise that in deal 27 PCL sold to another UK broker such that the deal length was extended, Dr Findlay was making a more generic comment that whenever a broker was able to buy stock at less than the list price, one would expect it to seek to sell at, or as close as possible to, list price to maximise its profits. That in itself exerts pressure on deal lengths. It is notable that at no point did PCL look to sell stock which it was finding it could repeatedly source from Plazadome to customers prepared to pay closer to list price.

[323]We agree with HMRC that it makes sense that sellers will seek to maximise their profits particularly in a market where participants are known to each other. As a general matter, market forces would drive traders to identify cheaper deals and cut out middlemen.

[324]We were told by Mr Roach that Mr Mukhtar of Plazadome knew a lot about CPUs when Mr Roach visited him. Plazadome was apparently able to access the sweetspot processor when others could not and must therefore have good contacts to do so. Why was Plazadome not looking to sell at a higher price and cut PCL and maybe even Zaanstrait out of the chain?

[325]Similarly, PCL never looked to sell this reliable supply of CPUs to systems builders or others willing to pay more than Zaanstrait itself.

[326]Overall, we find that no thought was given by PCL to deal chain length or where products were moving from and to. Instead PCL could profit from a ready buyer and seller with little extra work involved. While the profit was not huge, it was fairly easy money and did not involve going out to find other customers. The one risk was the VAT repayment but once that was approved for 06/06, it was no doubt considered to have significantly reduced.

The law

[327]The starting point for any MTIC decision is the principles derived from Axel Kittel v Belgium; Belgium v Recolta Recycling (C-439-04 and C-440/04) [2006] ECR 1-6161 and Mobilx Ltd v The Commissioners for HMRC

[2010] EWCA Civ 517

. Those principles are accepted by the parties. They have been amply described in numerous decisions and we will not repeat them here.

[328]The issue before us is whether PCL knew or should have known that, in relation to the contested deals, it was taking part in transactions connected with fraud.

[329]The Court of Appeal in Mobilx at [83] approved what was said in Red 12

[2009] EWHC 2563

about how knowledge/means of knowledge should be ascertained:

“… in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.”

[330]The Court of Appeal in Mobilx specifically approved, the Tribunal drawing inferences from circumstantial evidence; Moses LJ concluded by saying: Such circumstantial evidence… will often indicate that a trader has chosen to ignore the obvious explanation as to why he was presented with the opportunity to reap a large and predictable reward over a short space of time.

[331]The parties agreed at the hearing that the decision of Synectiv Ltd v HMRC

[2018] UKFTT 92 (TC)

correctly set out the law applicable to whether PCL should have known about the connection to fraud. In that decision the Tribunal set out the principles derived from previous authorities, including in particular, the decision of Moses J in Mobilx at paragraphs 20-28. Those paragraphs can be summarised as follows:(1) the issue before us is whether PCL knew or should have known that in relation to the contested deals it was taking part in transactions connected with fraud. It is not enough for HMRC to show that PCL knew that it was running a risk or even that it was more likely than not that the transactions were connected with fraud;

(2) 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;

(3) it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact;

(4) 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;

(5) tribunals are warned not to focus unduly on the question of whether the trader has acted with due diligence, because that may deflect the tribunal from the essential question of whether the trader “should have known”;

(6) it is important to consider individual transactions in their context, including drawing inferences from a pattern of transactions. The tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them;

(7) important questions which may often need to be asked included: (a) why a company with comparatively little history of dealing, in that case in mobile phones, was approached with offers to buy and sell very substantial quantities; (b) how likely it was in ordinary commercial circumstances that a company in the trader’s position will be requested to supply large quantities of particular types of phone and to be able to find without difficulty a supplier able to provide exactly that type and quantity; (c) whether the supplier was already making supplies direct to other EC countries (in which case the trader could have asked why the supplier was not making supplies direct); (d) why the trader was being encouraged to become involved in these transactions, and what benefit might those doing the encouraging derive when they could instead take the profit for themselves.

(8) to these features can be added features referred to by Christopher Clarke J, in Red 12 Trading Ltd v HMRC

[2010] STC 589

including whether there are a number of transactions with identical percentage mark ups, made by a trader with virtually no capital, as part of a huge turnover with no leftover stock, and mirrored by numerous other chains in which the taxpayer has participated and in each of which there has been a defaulting trader;

(9) such circumstantial knowledge “will often indicate that a trader has chosen to ignore the obvious explanation as to why he was presented with the opportunity to reap a large and predictable reward over a short space of time” (Moses J in Mobilx);

(10) overall has HMRC shown that the only reasonable explanation for the transactions was that they were connected with fraud?;

(11) the tribunal must guard against over compartmentalisation of the factors, rather than the consideration of the totality of the evidence. There may be an explanation for an individual factor which means that knowledge does not meet the required standard. That factor then ceases to be probative but it is still relevant. It is not the correct approach to consider individual pieces of evidence and determine whether each piece proves that the taxpayer “knew or should have known” on the balance of probabilities. That test must be applied to the totality of the evidence. In essence, the Tribunal must stand back and look at all the circumstances;

(12) the “only reasonable explanation” formulation of what is entailed in the “should have known” test is one way of showing the test is satisfied but it is not the only way;

(13) it is not necessary for HMRC to devote time and resources to considering and identifying any other possible reasonable explanations and then putting forward evidence and argument to counter them even where the taxpayer has not sought to rely on such explanations. However, any explanation actually put forward by the taxpayer should be considered, and if that occurs it may be necessary for HMRC to show that the only reasonable explanation was fraud;

(14) the “should have known” test does not mean that the trader has to have the means of knowing how the fraud actually occurred, but simply that fraud has occurred or will occur at some point in a transaction to which its transaction is connected;

(15) it is important to avoid the benefit of hindsight in assessing what the appellant should have known;

(16) turning a “blind eye” can be used as a descriptor of some circumstances where the test is met by a trader who chooses to ignore clear indicators of fraud, but it is no more than that. It is not a replacement of the concept of “should have known”;

(17) the question of what a prudent businessman would have done is not itself determinative, at least where it would not have allowed the fraud to be discovered. However, in Megtian it was made clear that “there are likely to be many cases in which facts about the transaction known to the broker are sufficient to enable it to be said that the broker ought to have known that this transaction was connected with the tax fraud, without it having to be, or even being possible for it to be, demonstrated precisely which aspects of a sophisticated multifaceted fraud he would have discovered, had he made reasonable enquiries.”

[332]As made clear in CCA the fraudster could instead simply identify an independent, VAT registered entity, probably one already in business with a good VAT compliance record, which was willing, and had sufficient funds, to buy the goods acquired by the defaulter and sell them into continental EU. In this type of MTIC fraud, with an independent broker, the fraudster would control to some extent every entity in the supply chain, such as the defaulter, the broker’s supplier and the broker’s customer, but would not control the broker. Therefore, the broker, although a crucial part of any MTIC fraud, did not necessarily have to know anything about the fraud: the broker simply had to be someone willing and financially able to buy and sell the goods. The broker might be under the impression it was trading on a genuine market. It might be an established company which was simply duped into participating in an engineered supply chain. It is this scenario which is invoked by PCL. This is the argument relied upon by PCL: in other words that it was duped into participating as a broker in MTIC supply chains.

Discussion

[333]We were provided with more than 400 pages of submissions amplified with oral submissions. We have considered the submissions in full, but it would be unwieldy to set them all out here. Some of the submissions have been addressed already. Otherwise, we have limited reference to submissions to those which relate to the particular elements of this case pulled together in our overall assessment.

[334]We recognise that there has been a very significant passage of time in which, as noted in Gestmin, the litigation process will have had an effect on the witnesses. We are left however, to assess the evidence overall. We have noted the inconsistencies in the context of our findings and reached conclusions having weighed all of the evidence. The fact of inconsistencies in themselves does not lead to any particular conclusion. That would be the wrong approach. We must consider all of the evidence as a whole and the findings which result therefrom.

[335]In line with the Synectiv approach we have first addressed the individual features of PCL’s trading at the relevant time. We consider that approach to be the correct one when considering both actual knowledge and whether PCL should have known of fraud connected to its transactions. We therefore now pull the different aspects together in an overall assessment.

[336]First though we recap with a brief summary of our findings:(1) before the CPU dealing with which we are concerned PCL had dabbled in a few CPU sales but otherwise it had an established core business of building and supplying computer systems;

(2) by the time of the CPU transactions starting in April 2006 PCL’s profits had significantly reduced. The reduction had started in 2005 and continued into early 2006. Its core business picked up later in the year though; PCL was contacted in late 2005 and early 2006 by someone, Ms Ching, with whom they had done relatively little business before and who had previously supplied goods (principally printers) to PCL. Ms Ching contacted PCL in March 2006 seeking a specific type of Intel CPUs for her own Dutch company Zaanstrait. She had been in contact the previous autumn seeking to buy some goods for another company, Tradius, but otherwise the CPU contact was essentially out of the blue;

(3) however, PCL struggled to find a supplier initially to sell the “sweetspot” CPUs Ms Ching sought until the minority shareholder (Mr Miles) with whom PCL had a long-established trading relationship through a separate company (Taran) gave them the details of two suppliers: Plazadome and Techcomp. Evidence regarding this provision of supplier names has been markedly inconsistent. However, Mr Miles’ company, Taran, was a competitor. None of the PCL witnesses could put forward any consistent reason why Mr Miles would hand a competitor a very valuable contact in what we were told was a highly competitive market where companies would actively try to discover others’ suppliers;

(4) although both parties rely on saying that Mr Miles is now considered to be one of the fraudsters, Taran has not had any action taken by HMRC against it directly;

(5) unknown to PCL, Taran continued to trade with Plazadome. However, as Plazadome was an existing supplier of Taran’s this is hardly surprising;

(6) on or before 21 March 2006 Plazadome sent PCL a new customer form which alerted Mr Hall to MTIC fraud issues. He researched Notice 726 and discussed the issues with Mr Roach and Mr Donaldson. When a letter was received from HMRC explaining the extent of MTIC fraud this focussed Mr Hall’s mind further and he shared the information with the two PCL directors. By the time of starting the CPU deals in April 2006 the PCL directors were aware of Notice 726 and the risks and prevalence of MTIC fraud in the sector;

(7) a Graydon credit report was obtained for Plazadome but the implications of categorisation such as “above normal risk” were given little consideration by PCL;

(8) PCL says that it visited Plazadome initially and indeed subsequently but much of the evidence on this matter is vague and at times inconsistent;

(9) PCL sought HMRC verification of Plazadome before the first deal but did not await the result which was provided a month later;

(10) a supplier declaration form was sent by PCL to Plazadome but its answers were given scant attention;

(11) on 22 March 2006, the day after receving the Plazadome new customer form and some two weeks before the first deal was concluded, PCL contacted HMRC to request monthly VAT reporting. When that was unsuccessful PCL approached its bank, HSBC, for an overdraft to fund the quarterly VAT cashflow;

(12) a cashflow forecast was provided to HSBC on 27 March 2006, four days before visiting the one initial customer, Ms Ching, and more than a week before any deals were concluded;

(13) despite what was described as a volatile market where PCL had struggled to find a supplier, it was now in a position to forecast sales to the EU of nearly £2 million within the next three months even though not one deal had been struck. The first deal struck on 5 April 2006 gave rise to VAT of just under £14,000 yet PCL was forecasting that more than £200,000 of VAT cost would need funding in the next three months;

(14) HSBC provided further warnings of fraud in the sector. It directed consideration of pricing in the supply chain and the price quoted by a supplier against the open market price;

(15) HSBC’s questionnaire for the overdraft was signed by both directors. Several of the answers given were incorrect and/or misleading. They were written to paint as good a picture as possible, recognising the bank’s concerns about the type of trading envisaged;

(16) Mr Roach became the sole person conducting the CPU and then iPod trades;

(17) Mr Roach and Mr Donaldson went to visit Ms Ching and Zaanstrait in Holland on 31 March 2006, armed with knowledge of MTIC fraud in the sector and taking a set of questions prepared by Mr Hall. Visiting a new customer was required under PCL’s industry standards. A meeting note shows the meeting, with Ms Ching and her colleague also dealt with potential sales to Tradius. No such sales took place but it is another company implicated in MTIC transactions;

(18) PCL carried out a Creditline check on Zaanstrait showing a credit guide of £50,000. The implications of this were given no further thought. On several occasions PCL released the goods to Zaanstrait where more than £50,000 was owed to PCL. A Graydon report was obtained for Zaanstrait on 7 April 2006 which showed a credit guide of 6000 euros. That similarly was not given further consideration by PCL in its dealing with Zaanstrait;

(19) on 4 April PCL sought HMRC’s verification of Zaanstrait. That was not provided until 2 June 2006 but the first deal with Zaanstrait and Plazadome was struck on 5 April 2006;

(20) overall, the due diligence on Zaanstrait was given little attention by PCL and we have not accepted that the limited contact with Ms Ching historically was sufficient to displace ordinary business prudence. Such prudence was the norm for PCL in other transactions but not for these;

(21) Mr Hall produced a deal check sheet. However, its list of steps was given scant attention and the business did not seriously engage with it. A market price verification form was only completed on one occasion and it shows that Techcomp was offering a lower price than Plazadome. The supply was still entirely sourced from Plazadome. We have found that little if any market price verification took place. This is despite the fact that PCL had contacts in the grey market and at authorised distributors. It is at odds with what it did in the context of sourcing goods to sell to a customer in Ireland previously. In the context of later iPod deals the verification involved no more than looking at Amazon retail prices on one occasion;

(22) the way in which the 2006 brokerage business was conducted is notably different to the way in which a 2005 supply of goods was conducted in relation to the sourcing of a supplier, price checking, timing of payment and release of goods and credit risk;

(23) Simpletech first contacted Mr Roach in May 2006 but no deal ensued until September 2006. That was at least in part due to the break in trading after the end of June 2006 awaiting the VAT repayment for the first quarter;

(24) although Mr Roach could not visit Simpletech in the early stages of dealing with it, for understandable personal reasons, no one else visited it and no visit took place later even though we were told customer visits were part of the industry standard requirements for the business;

(25) Simpletech said it would be selling to resellers but was no consideration was given to the implications of this;

(26) when PCL started trading with Simpletech in September 2006 it had no information about its financial information and there was no historic personal connection. PCL inspected the goods first sold to Simpletech but otherwise took little care about due diligence regarding the new customer. A financial exposure was allowed to develop with the new customer on the very first deal, releasing the goods to Simpletech before it had been fully paid, in circumstances where PCL had paid Plazadome. The approach taken to Simpletech was contrary to PCL’s previous practice in dealing with customers and was consistent with little or no consideration being given to financial risk;

(27) Simpletech was suspected by the Maltese authorities of being a conduit company that had failed to submit all but one of its VAT returns. It only started trading on 6 September 2006;

(28) Plazadome was the supplier for all of the trading in CPUs, both Intel and AMD, and for iPod trading which started later. Little, if any, price checking took place even when the new products were dealt in and even after a break in trading of some 6 weeks awaiting the repayment of the first quarter’s VAT;

(29) in five of the 13 contested deals PCL released the goods before full payment was received from the customer. It failed to apply its own procedures regarding the giving of credit to customers and ignored the credit guide its due diligence had indicated for Zaanstrait. In the case of sales to Simpletech it released goods with no financial information about the company. In fact, Simpletech had not traded before its deals with PCL;

(30) PCL took steps to make sure that its insurance covered the CPUs only after its trading in them started. However, even then, in four of the disputed deals, the insurance did not protect PCL properly. Insurance was given limited attention by the business.

(31) the terms on which Plazadome and PCL ostensibly traded were mismatched; for example, Plazadome specifying payment in advance of delivery and PCL’s terms allowing its customers 30 days’ credit. In fact, Plazadome released goods before payment and was therefore potentially at risk of non-payment. Notice 726 specifically notes that such a situation is one to look out for. Overall, no real consideration was given to terms of business or how Plazadome could manage to operate in such a way that it was purchasing goods and then on-selling without immediate payment or payment immediately on delivery;

(32) PCL brought the goods back to inspect in each of the non-disputed deals in the first quarter, except Deal 1. By the second quarter this had stopped, with the exception of the first Simpletech deal and the Quantum deal;

(33) inspection focussed on the goods being genuine and in line with what had been bought. The inspections were not focussing on MTIC warning signs. Litte consideration was given to inspection reports of PCL’s warehouse staff or Forward Logistics even where those reports showed that there were issues such as damaged boxes, lack of manufacturer labels, or loose pieces. Little record keeping of serial numbers or box numbers took place and therefore it was not possible to know, for instance, whether goods had been traded before;

(34) none of the goods was ever rejected by PCL’s customers despite the packaging showing potential issues and some being sold loose;

(35) Deal 13 (the one in which the check sheet showed the customer as Granada) was cancelled. We have been given no reason why and Mr Roach denies knowledge of Granada despite emails between him and someone from the company, signing a verification letter in relation to the company and it being another potential customer in a very small pool;

(36) the break in trading while awaiting VAT repayment shows that the trades were thought to be at risk of being challenged as illegitimate. As soon as the repayment was received PCL was able to take up trading again with the same supplier and customer. PCL gave no consideration to the fact that Zaanstrait had not found another suppler in the interim;

(37) Deal 27 involved a sale to another UK company which is not impugned but which went into liquidation after the sale was agreed. Plazadome made a loss on the deal and PCL made a higher margin than on other deals. Plazadome therefore agreed to sell despite making a loss on the price. PCL says that Plazadome negotiated hard with PCL such that at times PCL could not conclude a deal. If that was so, one must ask why did Plazadome not walk away from the loss? Three days later PCL made its usual 4.1% margin on the same goods rather than the 10.6% margin on Deal 27;

(38) PCL took steps to open a bank account with UMBS which was used by all others in the chains except Plazadome. However, the circumstances of it doing so made little sense. The account was never used though;

(39) no thought was given to chain length by PCL;

(40) the disputed deals generated about £100,000 in gross profit against a financial risk of the VAT loss of £428,525.74;

(41) time and time again PCL entered into deals where it was paying more in cash than it received, relying upon the VAT repayment. It was therefore engaging in unusual business for it given its core business;

(42) the trading business contributed about 12% of the gross profit for the 2006 year. However, the trading business was an easier business than the core business with few costs (transportation, inspection and freight) where PCL added no value but profited by repeatedly buying from the same supplier and selling to customers who came to it. PCL never had to look for customers;

[337]The core of PCL’s case is that, while it accepts that there was co-ordination of all the other parts of the transaction chains in which their disputed deals sat, it maintains that PCL was inveigled by others and was itself an innocent dupe.

[338]We recognise that PCL and its individuals operated in the IT goods sector and had a long history of sourcing and supplying IT products and components. It had built up a reputation over some years which was valuable and was at risk if it engaged in fraudulent transactions. There are therefore good reasons why this company/these individuals would not knowingly involve themselves in VAT fraud, in particular, the severe reputational and financial risks especially when the limited level of profit on the transactions is considered.

[339]Mr Lewis submits that there is no apparent reason why this company/these individuals would knowingly involve themselves in VAT fraud. We recognise that the financial position was not put to the witnesses as a motive for entering into the transactions, but it is apparent that there was a downturn in the profitability of the business at the end of 2005/start of 2006. The core business substantially recovered during 2006 but after PCL started the trading transactions. In any event, even if we ignore the 2005 downturn, the trading transactions were much easier money than the core business.

[340]Mr Lewis submits that there is no direct evidence that PCL was knowingly involved and PCL’s conduct is inconsistent with such knowledge. He submits that PCL took reasonable steps, in light of its understanding of MTIC fraud and what could be done to avoid involvement, to reduce the risk of becoming involved; for instance, drawing up a business plan (which we take to mean the cashflow forecast and HSBC questionnaire), approaching its bankers to finance that business plan, following that business plan, bringing the goods to its premises for checking and being unable to source goods for all requests. Moreover, he submits that conduct is inconsistent with knowing involvement in an orchestrated fraud.

[341]However, we have found that PCL did not adhere to the answers given in the HSBC questionnaire in certain important respects and the evidence of being unable to source goods has not been sufficient to make such a finding. We have found that little if any price checking took place and the manner of the trading contrasts with the way in which similar business in 2005 was conducted. These elements are consistent – albeit not determinative on their own – with knowing involvement in an orchestrated fraud.

[342]Mr Lewis submits that the facts of which PCL was aware, or could reasonably be expected to have been aware, did not/would not have given it knowledge that its transactions were connected to fraud. There is an alternative, reasonable explanation, which was ordinary, commercial trading. However, we do not accept this submission. PCL knew that it had been approached, effectively out of the blue, to repeatedly supply CPUs to someone with no track record of such activity based in Holland and, at around the same time, was provided details of two UK suppliers one of whom was able to consistently and repeatedly supply not only the original CPUs, but another version, and then an entirely different product, on a basis that no one else could match (if the witnesses’ evidence is accepted), or where no real checking about price or availability took place. That one supplier always provided the amount required by the customer with perfect matching of the supply and purchase repeatedly. We find those circumstances do not sit comfortably with ordinary commercial trading. They do not sit well with PCL’s previous trading.

[343]Mr Lewis says that there was no need for PCL to have sought other suppliers or customers having a reliable supplier and having built a relationship with Zaanstrait. However, simply using one supplier with whom there was a relationship with little other thought is not what we were told by the witnesses. Even if we were to accept though that Mr Roach called others that would surely make it even more extraordinary that Plazadome could supply when others could not. Why was no thought apparently given to how Plazadome could supply initially when no one else could and how it repeatedly could do so even when the product changed, particularly in the context of PCL’s knowledge of MTIC risk?

[344]PCL was not generally a wholesaler, but a systems builder. When it had previously “dabbled” as Mr Roach described it, in supplying CPUs and iPods, the checking of pricing and sourcing of supplies was entirely different and more consistent with what we would expect.

[345]PCL did not go out and seek other business having discovered this area was generating profit for relatively little effort. In fact, all its business found it. In particular, PCL did not look to trade in the UK where it would not have had the VAT cashflow issues. Just one deal was to a UK customer – Quantum.

[346]Mr Lewis says in relation to the “sweet spot” description of the first CPU traded, and HMRC’s submissions that this made it less likely that one supplier would so easily supply, that Mr Roach said that system builders get discounts when ordering in bulk and therefore will order more than they need. That would remain the case for a popular processor and excess inventory would then make its way into the grey market. We recognise this argument, but the point of concern is that the only supplier of that excess inventory able to provide at the right price was consistently and repeatedly Plazadome.

[347]As Mr Lewis submits, there are notable delays in releasing the goods on a couple of occasions, but we have found that on more occasions goods are released before payment, or at least full payment, is received from the customer. This is particularly notable in the context of the first Simpletech deal (Deal 22) where minimal due diligence had taken place and PCL had no financial information, but still proceeded to release the goods before payment was received from a new customer who had approached it.

[348]Mr Lewis submits that delays in the deals caused by the inspections do not sit well with orchestration of the deals and PCL being aware of the orchestration. He submits that the evidence in a fax dated 25 August 2006 to Plazadome showing payment on that day made by PCL to Plazadome where Mr Hall wrote “At last!!” is also inconsistent with knowledge of fraud. However, we know that the deal chains were co-ordinated. We know therefore that the fraudsters accepted the delays caused by PCL’s inspections. Whether that was to encourage the innocent dupe or because the inspections were window dressing can only be decided in the context of our overall assessment. Likewise, we consider that the “At last!!” comment adds little – it could as easily be written by someone knowing the chain is fraudulent and the speed of money transfers had been slow as by someone with no knowledge.

[349]Mr Lewis asks that in relation to deal 13, if the reason for cancellation was to do with the concern about the fraud being detected, why would PCL provide the supposedly incriminating documents to HMRC? However, we are not prepared to engage in speculation as to whether PCL would fail to comply with its disclosure obligations. What is relevant for us is that PCL has given no explanation for why this one deal was cancelled.

[350]In relation to deal 27 Mr Lewis submits that HMRC’s attempt to “concoct an explanation” to the effect that Plazadome was willing to permit PCL to make a profit at its expense renders the argument of orchestration meaningless. Again we consider the motivation for why Plazadome supplied in circumstances where it was making a loss cannot be determined by us. Plazadome clearly allowed the deal to proceed and, given the conclusions about coordination between the other parties in the chains, it would have known that the goods were not being supplied to a chain participant, but to another UK company. It therefore sold the goods to PCL and in so doing permitted the deal to proceed. It therefore does not render the orchestration argument meaningless.

[351]Mr Lewis submits that bringing the goods back to PCL’s premises for inspection involved significant effort on the part of PCL as well as the risks involved in transportation and storage of valuable goods. He submits that if PCL was knowingly involved there is no reason for it to take these steps and HMRC have not addressed this point.

[352]We consider that the inspection of the goods at PCL’s warehouse in the first quarter and for Deals 22 and 27 is one of the strongest facts against finding that PCL knew of orchestration. However, it is not determinative in itself. HMRC have addressed the matter of inspection. Mr Foulkes’ submits that the inspections were no more than window dressing given the fact that issues thrown up in the inspections were not addressed.

[353]We have found that little consideration was given to inspection reports and that PCL repeatedly took the risk that, without a record of serial numbers,, it would not know whether it was later to deal in the same items or, in the event of return of the iPods in particular, those products had actually been sold by it. We have recognised that there are no unique identifiers or serial numbers on the outside of a retail boxed product and that to open the sealed boxes would significantly devalue the product. However, those were not ones which were transported to PCL’s warehouse. We have also recognised the evidence about the size of serial numbers on CPUs. The risks of not recording the serial numbers remained though.

[354]We do not accept Mr Lewis’ argument that inadequate documentation is inconsistent with high orchestration. We agree with Mr Foulkes that where parties consider there is no real risk they will be less concerned about documentation. No real explanation was given for why Plazadome was content to wait so long after supplying the goods for payment to be made. Mr Roach said that he insisted on taking delivery before payment, but the delays extended beyond delivery to the time when the customers paid PCL. Plazadome allowed PCL to ship the goods to a third-party warehouse without payment or written terms of credit. At times PCL’s customers took notable risk in paying for goods before they had been released, without provisions governing risk and title.

[355]Every other participant in the supply chains must have known that the deals were orchestrated and they were therefore not interested in the contractual terms. The fact that PCL also traded without specifying terms of trade in what has been found to be a surprisingly uncommercial environment has been given no other reason.

[356]Mr Lewis asks who would take the VAT risk for a 4% gross margin if they know that the transactions were part of a fraud. However, PCL knew that the VAT was at risk; hence the pause in trading awaiting the repayment from the first quarter. It therefore took the VAT risk for a 4% margin as a matter of fact. PCL ring-fenced the obvious VAT risk by the specific HSBC overdraft rather than use cash savings needed to support the core business. Furthermore, we have found that the profit was more easily obtained than in PCL’s core business.

[357]In relation to evidence of negotiation Mr Lewis submits that Notice 726 does not identify the need to keep evidence of negotiation. However, Notice 726 notes that commercial evidence regarding the price will be taken into consideration. In addition, there is a separate evidential point being relied upon by HMRC. PCL has not responded to Mr Foulkes’ contention that evidence such as telephone bills has not been provided.

[358]HMRC point to PCL’s attempt to move to monthly VAT returns before a single deal was completed. We agree that this raises the obvious question as to the basis of doing so. Mr Lewis submits that it would have taken little for PCL to move to being in a net repayment position referring to the figures for 06/05 to 03/06 where an average of only just over £35,500 was needed.

[359]We recognise that it would take few transactions to move to a net repayment position as the average value of the deals in the first quarter was £176,801.80. The main point here though is that when the contact with HMRC was made not one deal had occurred (it was two weeks before the first deal) and we were told it had been difficult to get the pricing in a volatile market. The first deal produced VAT of just under £14,000. Even in the context of the reduced core business at the start of 2006 resulting in a reduction of VAT payment to £18,111 in the 03/06 quarter, (compared to more than £41,000 in the previous quarter) the first deal alone would have been insufficient to tip PCL into a net VAT repayment. Given the evidence before us of a volatile market and problems sourcing the goods, how was PCL so confident two weeks before a single deal had been struck?

[360]In relation to the HSBC overdraft, Mr Lewis submits that the forecast had to justify the facility requested and therefore the figures had to show a need for £200,000. However, the point remains that even recognising the evidence that Mr Roach only traded to the limit of the overdraft and an additional amount of around £50,000 of PCL’s own cash, his trading was notably able to spread through almost the whole quarter much as forecast despite the issues with the basis of the calculations we identified earlier.

[361]Mr Lewis submits that, moreover, the banking facility meant that PCL was risking banking for its core business if it knowingly entered into fraud where the bank had issued clear warnings. However, we have found that the answers to the HSBC questionnaire were at times incorrect and misleading. That in itself shows that PCL was less concerned about risks to its banking relationship than Mr Lewis submits and less concerned about those risks than obtaining the overdraft.

[362]In relation to insurance Mr Lewis submits that the risk of damage or loss is the same whether the goods are part of a fraud or not. We agree, but the real issue with the insurance is the fact that it was paid little attention, consistent with the little attention we have found the company paid to due diligence enquiries regarding Plazadome, Zaanstrait and Simpletech, as well as Mr Hall’s deal check sheet and its requirements such as market price verification. We agree with Mr Foulkes that, in the light of Notice 726 and PCL’s general awareness of MTIC fraud in the trade sector in which it operated, the checks undertaken by the PCL were, overall, casual and lax. The overall picture painted by the evidence before us is of a company going through the motions but not paying real attention to the processes.

[363]The nonchalant attitude to contractual terms we have described above, as well as repeated releases of valuable consignments when the customer had not fully paid, or in the case of Simpletech in Deal 22 had not paid at all, points to a business which for some reason considers that it has no real risk to protect against. It was an uncommercially benign trading environment.

[364]We recognise that the PCL witnesses, and in particular Mr Roach, denied knowledge of fraud in connection with the transactions. However, the weight we give to such oral evidence has to be assessed in the context of the inconsistencies on very significant matters (including the way in which Plazadome was introduced) and the evidence overall.

Conclusion as to knowledge

[365]Mr Lewis submitted that the deals were co-ordinated but not orchestrated as PCL was an innocent dupe.

[366]Our overall assessment having regard to all of the findings we have made leads us to the conclusion that PCL through its directors and, in particular, Mr Roach who was the person through whom all the trading ran, knew that PCL’s deals were connected to fraud. The new, relatively easy, business found PCL. A minority shareholder, but more importantly competitor in the brokerage business, offered what was an invaluable supplier in circumstances described in varying inconsistent ways. Weeks before a single deal was done, in what was supposed to be a tough volatile market where a supplier was said to have been impossible to find previously, PCL was suddenly confident enough to seek monthly VAT returns and then, as an alternative, a cashflow funding overdraft. That overdraft was obtained on the basis of incorrect and misleading information, indicating that those who provided the answers knew that a description of the real position would make the application unsuccessful. PCL’s longstanding reputation had not held it back from taking such an approach to its banking relationship. Despite it being a new area, and despite his knowledge of MTIC fraud from before the first deal, Mr Roach was extraordinarily disinterested in the uncommercial terms of trading or in gauging the credit worthiness or financial stability of those with whom he dealt. The conduct of trading and in particular the risks taken on release before payment, alongside Plazadome awaiting payment from customers, stands in stark contrast to that which took place just the previous year in a supply of iPods. Unlike that earlier trading credit limits were given no thought. Ms Ching had been known to Mr Donaldson for some years, but contact was limited. PCL knew very little about her new company and had not developed a relationship selling to her. PCL never thought to ask why she was ready to pick up dealing after the pause for the first quarter’s VAT repayment and had not found another supplier or even Plazadome directly in that time. Mr Roach is an experienced businessman and yet there were so few questions asked about whether the repeated deals and their conduct with Plazadome and Dutch customers made sense. For the reasons we have explained, neither Deal 13 nor Deal 27 undermines the strong factors pointing to knowledge. While inspection of the goods is potentially in PCL’s favour, it was limited and little more than window dressing.

[367]The conduct of the business in the way we have found therefore leads to the conclusion that PCL knew that the challenged transactions were connected to the fraudulent evasion of VAT. PCL was not an innocent dupe. The transactions were orchestrated for the purpose of fraud and PCL knew that.

[368]We are also satisfied that, had PCL not known of the fraud, it ought to have known of it for substantially the same reasons. In summary, there are numerous factors that ought to have made PCL pause and suspect that fraud was involved such that when considered in combination, a reasonable businessman would realise that the only reasonable explanation for them was that the transactions were all orchestrated for the purpose of fraud.

[369]PCL was approached out of the blue to conduct a business which was easier than the core business and, despite Mr Roach’s assertions otherwise, we have found involved very little work by him or his colleagues certainly when compared to the core business. No one had to look for customers and a supplier was served up by someone who, while a minority shareholder, was also running a competitor business. While PCL was exposed to the tax risk of non-repayment of VAT, it was never exposed to any real commercial risk in its dealings with its supplier, paying Plazadome after its customers had paid it. This was specifically identified in Notice 726 of which the business, including Mr Roach, was aware as a red flag. PCL knew that its customers were on-selling and, in the case of Simpletech, on selling in the grey market which should have made PCL at least think about how the length of chains could repeatedly operate in a commercial environment. The only explanation for all of this was clearly that the transactions were orchestrated for the purpose of fraud, particularly as PCL was aware that there was VAT fraud on a huge scale taking place in this sector. From this we would conclude that it was very clear that PCL, and in particular Mr Roach, ought to have known that PCL’s transactions were connected to fraud.

Conclusion

[370]PCL’s appeal is dismissed for the reasons we have set out.

Right to apply for permission to appeal

[371]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: 17 April 2026