DECISION

1. 3RD Generation Communications Limited (“3GCL”) appeals against a decision of the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”), contained in a letter dated 12 June 2008, denying it the right to deduct input tax of £394,450 claimed in respect of four transactions in the VAT accounting period to 31 July 2006. HMRC contend that each of these four transactions or deals was connected to the fraudulent evasion of VAT and that 3GCL knew or should have known that the transactions were so connected and that, as such, this is an archetypal case of missing trader intra-community (“MTIC”) fraud.

Absence of the Appellant

2. The substantive hearing of this appeal was listed, with a time estimate of nine days, to commence on Monday 16 August 2010. However, on the first morning, before the hearing commenced, we received a letter, dated 12 August 2010, from Samir Fattah, the director of 3GCL, addressed to “Judge Brook” (sic) in which he wrote “regarding the upcoming trial … which will take place on 16 August and will end on 26 August 2010” explaining that due to the financial difficulties arising as a result of this case 3GCL did not have any legal representation and because of the “technical complexity of the case” he had found himself increasingly out of his depth and this was having an adverse effect on his private and business life. As such, Mr Fattah felt that it would be unwise for him “to attend the court.” The letter concluded with a request that the Tribunal “make a ruling without me there” relying “on your fair judgment of this case given all the evidence you have at your disposal.”

3. Rule 33 of Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 (the “Rules”) provides that if “a party fails to attend a hearing the Tribunal may proceed with the hearing if the Tribunal—

(a) is satisfied that the party has been notified of the hearing or that reasonable steps have been taken to notify the party of the hearing and;

(b) considers it is in the interests of justice to proceed with the hearing.

4. As the letter refers to the dates for which the appeal was listed we were satisfied that 3GCL had been notified of the hearing. Also, having regard to the circumstances, especially as 3GCL had not sought an adjournment but had specifically requested that the hearing should proceed in its absence; that the appeal was against a decision of HMRC made in 2008 over two years previously; and the potential difficulties of the matter being re-listed having to take account of the availability of witnesses and counsel we considered, without seeking submissions on the issue from HMRC, that it was in the interests of justice to proceed with the hearing.

5. Therefore, at the commencement of proceedings we informed those representing HMRC of the contents of Mr Fattah’s letter and, as we were satisfied that the Appellant had been notified of the hearing and considered it was in the interests of justice to do so, that we would hear the appeal in the absence of the Appellant in accordance with Rule 33.

Evidence

6. We heard oral evidence from Kenneth Rhodes, a Higher Officer of HMRC and 3GCL’s case officer, Nigel Saunders, also a Higher Officer of HMRC. In addition we were provided with witness statements from HMRC Officers Ian Henderson and Kirsty Jolliffe. Although both Mr Henderson and Ms Jolliffe were willing to make themselves available to give oral evidence, having read their witness statements and on being informed that 3GCL had indicated that it did not require their attendance to challenge what they said in the statements, we concluded that this was not necessary and that their signed witness statements, both which contain a statement of truth, would stand as their evidence.

7. Although 3GCL did not attend and was not represented at the hearing it had served two witness statements, dated 11 February and 8 July 2009 respectively, both of which were made by Samir Fattah. Counsel for HMRC, in closing submissions, referred to “first principles” of evidence which tend to suggest that in order to rely on the evidence contained in these statements 3GCL ought to have called the witness to give evidence and that as it did not do so there was an argument that the contents of the statements, with which HMRC do not agree, ought not to be admitted in evidence in any form. However, Rule 15(2)(a) of the Rules provides that the Tribunal may “admit evidence whether or not the evidence would be admissible in a civil trial in the United Kingdom”. We therefore consider it appropriate to admit the evidence contained in Mr Fattah’s witness statements as hearsay evidence (i.e. a statement made otherwise than by a person while giving oral evidence in proceedings, which is tendered as evidence of the matters stated) but attach less weight to this evidence than would have been the case had Mr Fattah given oral evidence under oath which could have tested under cross examination.

8. We also received extensive documentary evidence including witness statements from those witnesses who gave oral evidence.

Facts

9. Having considered the evidence we find the following facts.

10. 3GCL was established on 27 September 2000. Its sole director, from 13 November 2000, is Samir Fattah. The Company Secretary, until 13 May 2006, was Mr Fattah’s brother Hassan Fattah who was replaced by another brother, Mohamed Fattah who is the current Company Secretary. It operates from premises, which are also its registered office, in South Kensington, London, trading as ‘Digital Planet’ and was registered for VAT on 1 December 2000. It was originally engaged in retail sales of mobile phones but expanded to include the high volume wholesale mobile phone market from 2004 onwards finding its suppliers and customers through trade fairs and through the use of the International Phone Traders (“IPT”) and GSM exchange websites. It did not have contracts with either its suppliers or customers instead relying on their reputation and credibility in the industry. However, ownership of the goods concerned is, according to Samir Fattah in his witness statement of 11 February 2009, only transferred once 3GCL has received payment.

11. 3GCL’s registered office was also the registered office of two other companies, Esperanza Ltd (“Esperanza”), from February 2003 to September 2005, and Root 89 Ltd, to September 2005. Both companies were engaged in wholesale sales of mobile phones and shared trade information with 3GCL. A letter sent to Esperanza by HMRC on 12 April 2006 which informed Esperanza of the circularity of goods it had exported in December 2005 involving a particular freight forwarder and Swiss warehouse highlighting the probable operation of MTIC fraud provides an example of information sharing between the companies as following receipt of the letter by Esperanza, 3GCL which until then had used the same freight forwarder and Swiss warehouses, conducted no further business with them.

12. Hassan Fattah, 3GCL’s original Company Secretary, was the director of Esperanza from 10 March 2003 to 31 May 2005 when he was replaced as director by Mohamed Fattah, 3GCL’s current Company Secretary.

13. The expansion by 3GCL into the wholesale mobile phone market had a dramatic effect on its turnover as can be seen from the figures taken from its financial accounts filed at Companies House. In the period from 1 October 2003 to 31 October 2004 its turnover was £794,028 whereas in the next 12 months (1 November 2004 to 31 October 2005) this had increased to £9,754,678. Although its turnover grew by 1,128% over the same period 3GCL’s net assets increased from £36,452 to £83,806 (129%) and its overheads from £69,083 to £81,596 (18%).

14. On 4 April 2005 HMRC wrote to 3GCL advising its director of the characteristics and scale of MTIC fraud in the mobile phone trade sector and of the necessity of the company to verify the VAT particulars of potential customers and suppliers through HMRC’s Redhill office. This was followed by an unannounced visit to 3GCL on 6 April 2006 by HMRC Officer Andrew Monk. The reason for the visit was that an internal HMRC verification reference had identified MTIC concerns in relation to a customer of 3GCL. Officer Monk explained the nature of MTIC fraud to Samir Fattah and warned him of the need to carefully check suppliers to ensure their legitimacy as 3GCL could be liable under the “joint and several liability” provisions for any tax loss.

15. On 20 May 2005 3GCL wrote to HMRC requesting that it be allowed to submit its VAT returns on a monthly rather than a quarterly basis to enable it to receive repayments of VAT more frequently. However, this was refused as 3GCL did not meet HMRC’s criteria for allowing a trader to submit monthly returns. The decision was upheld following a review. In giving the reasons for the refusal HMRC, in a letter dated 29 September 2005 to 3GCL, referred to a verification exercise conducted in relation to 3GCL’s VAT periods ending 30 April 2005 and 31 July 2005 in which there had been defaults in payments to HMRC in all transactions by UK traders who had raised invoices charging an amount shown as VAT. The letter continued stating that the writer:

… was concerned that the granting of the monthly facility would expose HMRC to a higher volume of transactions by those persons intending to abuse the VAT system than would otherwise be the case, thereby increasing the loss of revenue.

16. Following the initial request by 3GCL to change to monthly returns the company was allocated an “Assurance Officer” by HMRC who, on 2 June 2005, wrote to 3GCL, with the letter marked for the attention of Samir Fattah, in the following terms:

Following my [telephone] conversation with Mr Hassan Fattah dated 1 June 2005, I confirm in writing as follows:

I told Mr Hassan Fattah about the scale of Missing Trader Intra Community (MTIC) fraud within the United Kingdom. Investigations of MTIC fraud are Customs and Excise’s top VAT fraud priority and the department will continue to tackle the criminality behind this type of fraud. …

As part of the anti fraud measures introduced in the April 2003 Budget to combat MTIC fraud, traders are expected to make reasonable commercial checks in respect of their customers and suppliers. Examples of these checks were included in Notice 726 Joint and Several Liability [which Mr Fattah has confirmed he has read], the statement of practice concerning input tax deductions without a valid invoice and Notice 700/52 – Notice of Requirement to give security to HM Revenue and Customs.

If you are buying and selling any goods you should be able to provide details regarding the goods you are trading such as serial numbers, part number, batch number, product details, quantity, price per unit, what market research you carried out, name of the manufacturer, website address, contact name, name of the authorised distributor etc I clarify that this is just a guideline, not an exhaustive list. Similarly, if you are to trade in services we would like to know who is the service provider, agreement /contract, copyright etc again this is not an exhaustive list. The full details provided by you will help us to verify the transactions from the source i.e. the manufacturer.

Please validate the VAT number of your supplier and customer on a monthly basis at our Redhill office by giving them full details of your deal.

Also, because of the prevalence of VAT fraud in the mobile phone business, payments from/to 3^rd parties are one of the indicators that a carousel fraud may be in progress. It is our view that if people were carrying out business worth millions of pounds they would have a company bank account with a reputable bank. In a case of your supplier, who request you to make a third party payment in relation to your purchases you should refrain from doing so. If you are making a third party payment it would raise serious doubts as to whether you were taking reasonable steps in order to ensure VAT had been paid further down the transaction chain. This would be likely to lead C&E to consider applying the J&S measure. Similarly, if the customer is insistent on paying in this way, get from them, and retain for future reference, why the company itself is not paying, who is paying, name and address, business details and what connection they are with the customer.

In addition, we would like to clarify that if you are planning to export please note that the vague description of, "electrical equipment" on the airway bills or any export evidence is not sufficient for our purposes. The goods must be accurately described and I can't think of any other description than, "mobile phones - Philips manufacturer model no FISIO 120". The Public Notice 703 Exports and removals of goods from the UK - explains this further. The proper description of goods is a requirement, in order for you to continue to zero rate your export sales.

Regarding commercial checks Mr Hassan Fattah told me that you check validity of VAT number via our Redhill office and speak to your supplier or customer and receive their VAT certificate by fax. I must point out to you that to check the VAT certificate is not considered as taking reasonable checks. I would strongly advise you to carry out credit checks for all your suppliers and customers as a matter of routine. Of course it is your commercial decision if you do not wish to burden yourself with credit checks and any other commercial checks that may be available to you, but that means that you may be Jointly and Severally Liable for any loss of revenue from within a transaction chain on which HMRC consider you have not taken all reasonable steps.

I would also advise you to check with your freight forwarder regarding the goods you are to trade before you make any transaction. For example to find out how long the goods have been in their warehouses and how many times they have been traded or how many release notes have been issued with confirmation in writing. This confirmation must be kept as part of your checks against this transaction. If the goods have been there a short time with several release notes issued that only suggests that there is a defaulter or missing trader in the bottom of a transaction chain with this knowledge you can avoid that chain.

I have noted your concerns. It would not be appropriate for us to tell you how to conduct your business. It is up to you to take commercial decisions. You should be able to demonstrate, by obtaining all relevant information, regarding any product that the proposed transactions are bona fide. …

17. 3GCL did implement further ‘due diligence’ measures to obtain information on its suppliers and customers. This was described by Mr Fattah during a telephone conversation with the Assurance Officer as consisting of checking the validity of UK and EU VAT numbers with HMRC’s Redhill office, requesting a trade references, obtaining copies of a current company utility bill and the passports and driving licence of directors, visiting the trading address of suppliers, occasional inspection of bank statements and obtaining copies of the VAT registration and Companies House certificates together with signed declarations of terms of trade.

18. In a letter, dated 28 September 2005, written shortly after that telephone conversation, the Assurance Officer, who had verified repayment claims by 3GCL for the VAT periods ending in April and July 2005, informed the company that tax losses by defaulters had been identified in every one of the 19 transactions completed over the two periods. However, a VAT repayment of £88,275.99, in respect of the later of the periods, was released on a ‘without prejudice’ basis and 3GCL was again warned of the need to conduct enquiries and make independent checks in addition to those taken already by the company as described by Mr Fattah in the telephone conversation preceding the letter were not considered adequate. The letter also noted that the Assurance Officer had been told that 3GCL only pays its suppliers when they release the goods.

19. On 8 February 2006 3GCL was visited by HMRC Officers. The purpose of the visit was to warn 3GCL of the need to guard against risks associated with MTIC fraud as evidence had come to light of the possible circularity of goods in relation to a transaction by Top Telecoms, a supplier of 3GCL. Mr Fattah was told that inspections by HMRC at the Freight Clearance Centre in Dover on 26 January and 1 February 2006 had identified the very same mobile phones being exported from the UK on each occasion. Although, other than state that Top Telecoms were credible and that he did not know the identities of the other companies in the supply chain, Mr Fattah did not comment on the transactions. However, the HMRC Officers noted that 3GCL had no system in place to retain the unique IMEI numbers of mobile phones which meant that it had no control in place to identify the goods and detect or prevent their circular movement.

20. In its VAT return for the quarter to 31 July 2006 3GCL sought a repayment of £395,965.41 from HMRC. As a result of the repayment claim the return was selected for an in-depth or extended verification by Kenneth Rhodes, who gave evidence before us. He found that 3GCL had made four sales in this period, all of which were wholesale exports of mobile phones to customers in other EU member states. After receiving further information from both 3GCL and other sources, including that held by HMRC, Mr Rhodes was able to trace of each of these transactions to UK companies which had acquired the goods from the EU before defaulting on their VAT liability disappearing immediately after invoices were issued resulting in a loss to the Exchequer in excess of £390,000.

21. As a result of his findings Mr Rhodes wrote to 3GCL on 12 June 2008 denying its claim to recover input tax of £394,450 in respect of these four transactions or deals, each of which we set out in greater detail below.

Deal 1

22. 3GCL received a purchase order dated 25 July 2006 from its customer 3G Trade SA (“3G Trade”), a Luxembourg company, for 2,200 Nokia 9300i mobile phones.

23. On the same day (25 July 2006) 3GCL sold 2,200 Nokia 9300i mobile phones to 3G Trade for the total sum of £528,000 (VAT free).

24. It issued shipping instructions to Edge Logistics Ltd (“Edge”), a freight forwarder on 25 July 2006, to deliver the goods to 3G Trade in Luxembourg but not to release them until further instructions. These were subsequently given on 27 July 2006. Edge would also have been given the task of inspecting the goods.

25. A Pro-Forma invoice was issued by 3GCL to 3G Trade on 25 July 2006 bearing the same number as the final sales invoice which had been quoted by 3G Trade on the purchase order indicating that it was issued in advance of purchase order.

26. 3GCL had acquired the 2,200 Nokia 9300i mobile phones on 25 July 2006 from its supplier Top Telecoms at a total net cost of £506,000 (£594,550 including VAT).

27. Top Telecoms had also acquired the same 2,200 Nokia 9300i mobile phones on 25 July 2006 from its supplier The Export Company UK Ltd (“TEC”) at a total net cost of £504,900 (£593,257.50 including VAT).

28. TEC had bought the 2,200 Nokia 9300i mobile phones also on 25 July 2006 from JD Group PLC (“JD Group”) for £503,800 (£591,965 including VAT) which in turn had acquired the same mobile phones from IRE Ltd (“IRE”) at a net cost of £503,470 (£591,577.25 including VAT).

29. The supplier of the Nokia 9300i mobile phones to IRE, at a net cost of £502,370 (£590,284.75 including VAT) on 25 July 2006, was RX-Tech Solutions Ltd (“RX-Tech”).

30. RX Tech had been supplied the Nokia 9300i mobile phones by Pearl Cosmetics Ltd (“Pearl”) for £501,270 (£588,992.25 including VAT) also on 25 July 2006.

31. The same mobile phones had also been acquired by Pearl on the same day, 25 July 2006, from a company based in Belgium, BVBA Koornmarkt (“Koornmarkt”).

32. An analysis of transactions through the First Curacao International Bank (“FCIB”) by Nigel Saunders, who also gave evidence before us, identified the movement of funds, all of which were in UK pounds sterling and inclusive of VAT between the participants in the above transactions as most of these held accounts with FCIB. We have set these out these out in chronological order as follows.

33. On 26 July 2006:

(1) £428,000 from 3G Trade to 3GCL;

(2) £428,000 from 3GCL to Top Telecoms;

(3) £431,000 from Top Telecoms to TEC;

(4) £295,982.50 from TEC to JD Group;

(5) £295,788.62 from JD Group to a Syed Ausaf who is recorded on the ‘FAME’ database as being the Company Secretary of IRE;

(6) £100,000 and £195,000 from Syed Ausaf to Koornmarkt;

(7) £100,000 from Koornmarkt to 3G Trade;

(8) £100,000 from 3G Trade to 3GCL;

(9) £100,000 from 3GCL to Top Telecoms; and

(10) £100,000 from Top Telecoms to TEC (TEC’s bank statement also shows a credit of £62,246.50 which appears to have come from a Top Telecoms bank account outside the FCIB banking system).

34. On 27 July 2006:

(1) £295,982.50 from TEC to JD Group;

(2) £295,788.63 from JD Group to Syed Ausaf

(3) £295,700 from Syed Ausaf to Koornmarkt; and

(4) £295,118 from Koornmarkt to 3G Trade.

35. Although it appears from this list of payments that 3GCL has not paid Top Telecoms in full from its FCIB account, further payments were made to Top Telecoms by 3GCL through its account with Barclays Bank so there was in fact no underpayment in this or the other Deals (set out below) which were the subject matter of this appeal. It is also worth noting that neither Pearl or RX Tech, who do not have appear to have accounts with FCIB, appear in the payment chain.

36. Both IRE and RX-Tech have been identified as ‘missing’ traders and have not provided information to HMRC in respect of this, or other, transactions. Their participation has been ascertained from documents provided by Edge, the freight forwarder.

37. Pearl was incorporated on 2 November 2004 and registered for VAT from 5 November that year with its trade or intended trade described as the “importing of cosmetics items and wholesale distribution.” Although there had been nothing unusual about its trading patterns between March 2006 and January 2007 letters sent to the company by HMRC were being returned undelivered. The director was located in October 2007 and he explained to HMRC that Pearl had been established to acquire a large order of lip gloss to be sold to local retailers. However, the product had been stored at the home of a family member where the heating had caused irreparable damage and no further stock was purchased or trade undertaken. It has taken no part in the transactions described above but its VAT registration number has been ‘hijacked’ and used, without its knowledge, by an unidentified third party to conduct these transactions and evade payment of VAT due to HMRC.

Deal 2

38. As in the previous Deal all transactions, which were identified by invoice documents, took place on 25 July 2006.

39. 3GCL received a purchase order from 3G Trade for 2,200 Nokia 8800 mobile phones. It then issued a Pro Forma invoice to 3G Trade, with the same number as the final invoice which was also quoted on the purchase order. This was followed by a final invoice in the sum of £743,600 for the 2,200 mobile phones.

40. The freight forwarder, Edge, was then instructed by 3GCL to carry out an inspection of the goods, provide insurance and ship the goods on hold to a warehouse in Luxembourg on behalf of 3G Trade.

41. The 2,200 Nokia 8800 mobile phones had been bought by 3GCL from Top Telecoms for £840,125 (including VAT).

42. Top Telecoms had bought the mobile phones on 25 July from TM Global Ltd, which traded as Team Mobile, for the VAT inclusive sum of £837,540.

43. TM Global had acquired the same mobile phones from Fair General Traders for £836,247.50 (including VAT) from Fair General Traders Ltd (“Fair General”).

44. Fair General had acquired 1,846 Nokia 8800 mobile phones from EasyMSI Ltd (“EasyMSI”) at a cost of £700,603.15 (including VAT) and a further 354 of the Nokia 8800 mobile phones from R K Brother Ltd (“RK Brothers”) for £134,351.85 (including VAT) although Release Notes provided to HMRC by Edge, the freight forwarders, identified IRE as the supplier of the 354 mobile phones to Fair General.

45. Easy MSI had bought the 1,846 Nokia phones from RX-Tech at a VAT inclusive cost of £699,518.63.

46. RK Brothers had also acquired the 354 phones from RX Tech at the same cost per unit as Easy MSI resulting in a total cost, including VAT of £134,143.88.

47. RX Tech had in turn acquired all 2,200 Nokia 8800 from Pearl for £832,370 (including VAT) with the sale being split over two sales invoices one for 1,846 phones and the other for 354 phones.

48. As with the previous deal Pearl had acquired the mobile phones from the Belgian company Koornmarkt.

49. The movement of money between the participants in this chain through their FCIB accounts on 26 July 2006 was made in the following order:

(1) 3G Trade paid 3GCL £743,600;

(2) 3GCL then paid £743,125 to Top Telecoms;

(3) On receipt of the funds from 3GCL Top Telecoms paid £740,000 to TM Global. There was also a £97,529 credit in TM Global’s FCIB account which appears to have come from a non FCIB account of Top Telecoms;

(4) TM Global then paid £836,247.50 to Fair General.

(5) Fair General paid Syed Ausaf £911,531.70;

(6) Syed Ausaf then made a payment of £910,000 to Koornmarkt.

(7) Koornmarkt made payments of £215,000, £200,000, £300,000 and £321,882 to 3G Trade.

50. As with Deal 1 neither Pearl or RX Tech appear in the payment chain. It has already been noted that Pearl is a ‘hijacked’ trader (paragraph 37, above) and RX Tech a ‘missing’ trader (paragraph 36, above). Also noted above (at paragraph 35) is the apparent underpayment to Top Telecoms by 3GCL through its FCIB account and the additional payment made by 3GCL to Top Telecoms through its account with Barclays.

Deal 3

51. The transactions described below all took place on 27 July 2006.

52. 3GCL sold 3000 Nokia N80 mobile phones to a French company U.R.T.B. SARL (“URTB”) for £864,000 (VAT free) and issued instructions to Interken Freighters UK Ltd (“Interken”) to deliver the goods to Paris on behalf of URTB.

53. 3GCL had purchased the phones from Top Telecoms for £976,425 (including VAT).

54. Top Telecoms had acquired the phones from TEC at a VAT inclusive cost of £972,900.

55. TEC had, in turn bought the same phones from JD Group at a total cost of £970,256.25.

56. JD Group had paid Topbrandz Ltd (“Topbrandz”) £969,375 (including VAT) for the 3,000 Nokia N80 mobile phones.

57. Topbrandz had purchased the phones from Data Solutions Northern Ltd (“Data Solutions”) for £968,493.75 (including VAT).

58. Release Notes from the freight forwarders, Interken, identify Data Solutions as having acquired the goods from Silus BV, a Dutch company, however, a purchase invoice received by them indicates that Data Solutions bought the same phones from Cirex Corporation Ltd (“Cirex”) at a VAT inclusive cost of £967,788.75.

59. Cirex had, in turn, purchased the phones from ET Phones.Com Ltd (“ET”) at accost, including VAT of £967,083.75.

60. ET has been identified as a ‘missing’ trader that has appeared to have deliberately defaulted on its VAT liability. When it was first registered for VAT its director indicated that its main business activity would be “sales of internet phones and associated technology” and it expected to receive regular VAT repayments. In March 2005 the director wrote to HMRC requesting a change in the principal place of business. In a further letter the director informed HMRC that he was selling the business as a transfer as a going concern. Companies House records indicate that Loqat Ali became the director of the ET on 31 May 2006 and that between 6 July and 10 August 2006 the Company Secretary was Brain (not Brian) Johnson. In August 2006 steps were taken by HMRC to deregister ET in the light of information that had been obtained which suggested that ET was acquiring goods from Latvia and was a missing trader engaged in MTIC trading which has not rendered VAT returns to HMRC.

61. The movement of funds between the participants in these transactions through their FCIB accounts occurred in the order set out below.

62. On 28 July2006:

(1) URTB paid 3GCL £864,000;

(2) 3GCL made a payment to Top Telecoms of £864,000; and

(3) Top Telecoms paid £837,759 to TEC (a further £135,141 was paid by Top Telecoms to TEC through its an account other than its FCIB account).

63. On 1 August 2006:

(1) TEC paid £970,256.25 to JD Group;

(2) JD Group paid £969,375 to Topbrandz;

(3) Topbrandz made a payment of £968,493.75 to Data Solutions;

(4) Data Solutions in turn paid Cirex £967,788.75;

(5) Cirex paid Brain Johnson (the Company Secretary of ET) £967,083.75;

(6) Brain Johnson paid Silus BV £965,1450; and

(7) Silus BV paid £957,375 to Global System Management (“GSM”)

64. Immediately before making payment of £864,000 to 3GCL, the first payment in the chain listed above, URTB had, on 28 July 2006, received £867,000 from a company called Amex which had itself received £871,500 from GSM, also on 28 July 2006 which enabled it to make the payment to URTB.

Deal 4

65. As with the previous Deals the transaction set out below all took place a single day, 27 July 2006. The figures we have quoted, with the exception of the sale by 3GCL to URTB, which is VAT free, are all inclusive of VAT.

66. 3GCL sold 1,000 Sony Ericsson K800i mobile phones to URTB for £210,000 and issued shipping instructions to Interken to deliver the goods to a warehouse in Paris. The stock was release on 30 July with the goods having been shipped on 27 July 2006.

67. The phones had been bought by 3GCL from Top Telecoms for £236,175.

68. Top Telecoms had bought the same phones from TEC for £236,175.

69. TEC had acquired the phones from JD Group for £235,293.75.

70. JD Group had, in turn, bought the phones from Topbrandz for £235,000.

71. The phones had been bought by Topbrandz from Data Solutions for 234,706.25.

72. Although release Notes from Interken identify Silus BV as having sold the phones to Data Solutions the purchase invoices show that Data Solutions acquired these from Cirex at a cost of 234,471.25.

73. Cirex bought the same Sony Ericsson K800i phones from ET phones for £234,235.25.

74. We have already noted (at paragraph 59, above) that ET has been identified as a missing trader engaged in MTIC trading which has not submitted VAT returns to HMRC.

75. The movement of funds between the participants in this chain of transactions occurred in the following order through their FCIB accounts.

76. On 28 July:

(1) URTB paid 3GCL £210,000;

(2) 3GCL paid Top Telecoms of £210,000; and

(3) Top Telecoms paid £236,175 to TEC £864,000.

77. On 31 July 2006:

(1) TEC paid £235,293.75 to JD Group;

(2) JD Group paid Topbrandz £235,000;

(3) Topbrandz paid Data Solutions £234,706.25;

(4) Data Solutions paid Cirex £234,471.25;

(5) Cirex paid Brain Johnson £234,236.25;

(6) Brain Johnson paid £238,590 to Silus; and

(7) Silus made a payment of £231,000 to GSM.

78. Immediately before paying 3GCL £210,000 on 28 July 2006, URTB received a payment of £211,000 from Amex which had itself, also on 28 July 2006, received a payment of £212,500 from GSM.

79. We have already referred (at paragraph 35, above) to what appears to be an underpayment by 3GCL to Top Telecoms and ascertained that this is not the case as payment was made in full by an additional payment to Top Telecoms from 3GCL’s Barclays account.

80. A common feature of all these Deals was that the chargers for all of the mobile phones traded by 3GCL had two pin plugs and were not suitable for use in the UK.

Law

81. The decision of the European Court of Justice (“ECJ”) in Axel Kittel v Belgium; Belgium v Recolta Recycling (C-439/04 and C-440/04) [2006] ECR 1 – 6161 (“Kittel”) provides the legal basis for denying a taxable person the right to deduct input tax where it is ascertained, having regard to objective factors, that the taxable person “knew or should have known” that by his purchase he was participating in a transaction connected with the fraudulent evasion of VAT ( at [61] of that decision).

82. The application of the principles enunciated in Kittel, which have been the subject of many appeals before this Tribunal and the Chancery Division of the High Court was considered by the Court of Appeal in the conjoined appeals of Mobilx Ltd (in Administration) v HMRC; HMRC v Blue Sphere Global Ltd (“BSG”); Calltel Telecom Ltd and another v HMRC [2010] STC 1436 (“Mobilx”).

83. Moses LJ at [45 -49], giving the judgment of the Court of Appeal, dismissed the submission that these principles cannot be applied in UK domestic law in the absence of specific legislation before going on to consider what he had described, at [4], as two essential questions:

“firstly, what the ECJ meant by “should have known” and secondly, as to the extent of the knowledge which it must be established that the taxpayer had or ought to have had: is it sufficient that the taxpayer knew or should have known that it was more likely than not that his purchase was connected to fraud or must it be established that he knew or should have known that the transactions in which he was involved were connected to fraud?”

84. In relation to the first question he concluded, at [52]:

“If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.”

85. With regard to the second question he said, at [53 - 56]:

“Perhaps of greater weight is the challenge based, in Mobilx and BSG, on HMRC's denial of the right to deduct on the grounds that the trader knew or should have known that it was more likely than not that transactions were connected to fraud. The question arises in those appeals as to whether that is sufficient or whether, as the Chancellor concluded in BSG, the right to deduct input tax may only be denied where the trader knows or should have known that the transaction was connected to fraud (see judgment, § 52). In short, does a trader lose his entitlement to deduct if he knew or should have known of a risk that his transaction was connected to fraudulent evasion of VAT? HMRC contends that the right to deduct may be denied if the trader merely knew or should have known that it was more likely than not that by his purchase he was participating in such a transaction. It contends that if it was necessary to show more than appreciation of a risk then the Court's decision in Kittel would not represent a development of the law and would fail to achieve the objective, recognised in the Sixth Directive, to which the Court referred at § 54.

As I have already indicated, the mere existence of that objective and the principle that Community law cannot be relied upon for fraudulent ends (e.g., Fini H § 32) does not provide any justification for a general principle that any transaction connected with fraud is vitiated. Such an approach was rejected in Optigen.

If HMRC was right and it was sufficient to show that the trader should have known that he was running a risk that his purchase was connected with fraud, the principle of legal certainty would, in my view, be infringed. A trader who knows or could have known no more than that there was a risk of fraud will find it difficult to gauge the extent of the risk; nor will he be able to foresee whether the circumstances are such that it will be asserted against him that the risk of fraud was so great that he should not have entered into the transaction. In short, he will not be in a position to know before he enters into the transaction that, if he does so, he will not be entitled to deduct input VAT. The principle of legal certainty will be infringed.

It must be remembered that the approach of the court in Kittel was to enlarge the category of participants. A trader who should have known that he was running the risk that by his purchase he might be taking part in a transaction connected with fraudulent evasion of VAT, cannot be regarded as a participant in that fraud. The highest it could be put is that he was running the risk that he might be a participant. That is not the approach of the Court in Kittel, nor is it the language it used. In those circumstances, I am of the view that it must be established that the trader knew or should have known that by his purchase he was taking part in such a transaction.”

86. He concluded, at [59 -60]:

“The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who "should have known". Thus 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. He may properly be regarded as a participant for the reasons explained in Kittel.

The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

87. Moses LJ also addressed, at [61 -62] an issue raised in previous cases where it had been argued that the Kittel principle may not be applied if the fraudulent default took place after the appellants connected transactions saying:

“A trader who decides to participate in a transaction connected to fraudulent evasion, despite knowledge of that connection, is making an informed choice; he knows where he stands and knows before he enters into the transaction that if found out, he will not be entitled to deduct input tax. The extension of that principle to a taxable person who has the means of knowledge but chooses not to deploy it, similarly, does not infringe that principle. If he has the means of knowledge available and chooses not to deploy it he knows that, if found out, he will not be entitled to deduct. If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct.

The principle of legal certainty provides no warrant for restricting the connection, which must be established, to a fraudulent evasion which immediately precedes a trader's purchase. If the circumstances of that purchase are such that a person knows or should know that his purchase is or will be connected with fraudulent evasion, it cannot matter a jot that that evasion precedes or follows that purchase. That trader's knowledge brings him within the category of participant. He is a participant whatever the stage at which the evasion occurs.”

88. Further guidance of the application of the Kittel test was given later in the decision where Moses LJ said at [82]:

“As I indicated in relation to the BSG appeal, Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.”

89. The questions asked by the Tribunal to determine this issue in the BSG appeal which were approved by the Court of Appeal in Mobilx, at [69], were:

(1) Was there a tax loss?

(2) If so, did this loss result from a fraudulent evasion?

(3) If there was a fraudulent evasion, were the Appellant’s transactions which were the subject of this appeal connected with that evasion? and

(4) If such a connection was established, did the Appellant know or should it have known that its transactions were connected with a fraudulent evasion of VAT?

90. In answering the questions it is clear that the Tribunal is entitled to rely on inferences drawn from the primary facts (Mobile Export 365 v HMRC [2007] EWHC 1737 (Ch) at [20(4)]).

91. The question of where the burden of proof lay in a case such as this was raised by HMRC in Mobilx. In answer Moses LJ said, at [81], “It is plain that if HMRC wishes to assert that a trader's state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion. No sensible argument was advanced to the contrary.”

92. However, as the standard of proof was not considered by the Court of Appeal the prevailing authority is the decision of the House of Lords In Re B [2009] 1 AC 1 which was confirmed by the Supreme Court in Re S-B (Children) [2009] UKSC 17 where Lady Hale giving the judgment of the Court said, at [34]:

“… there is no necessary connection between the seriousness of an allegation and the improbability that it has taken place. The test is the balance of probabilities, nothing more and nothing less.”

Discussion and Conclusion

93. Given their approval by the Court of Appeal in Mobilx, we have adopted the questions asked by the Tribunal in BSG in relation to each of the four deals with which the present appeal is concerned. the first of which is was there a tax loss?

94. Clearly the answer to the first of these questions, namely was there a tax loss, in relation to this case is yes. As we have seen in Deals 1 and 2 the VAT registration number of Pearl had been hijacked and used by an unidentified third party to participate in the transactions without making payment of the VAT due as a result of the transaction. With regard to Deals 3 and 4, ET is a missing trader which has not rendered VAT returns or made payment of its liability in respect of these transactions resulting in a loss of tax to the Revenue.

95. This brings us to the second question; did this loss result from a fraudulent evasion?

96. As Pearl has had its VAT registration number hijacked, i.e. stolen by a third party for the purposes of entering into the transactions without making payment of any VAT due to HMRC we have no hesitation in finding that the loss of tax in Deals 1 and 2 resulted from a fraudulent evasion of VAT. It is interesting to note that in the cases of S & I Electronics plc v HMRC [2009] UKFTT 108 (TC) and Europeans Ltd v HMRC [2009] UKVAT V20883 VAT due in respect of deals featuring Pearl were found to have been fraudulently evaded.

97. Given that ET is a missing trader that has failed to make any VAT returns or meet its VAT liability and after taking account the of circumstances in relation to the transactions with which it was involved we consider that the only reasonable explanation for this is that ET deliberately and fraudulently defaulted on its VAT liability and find that the loss attributable to Deals 3 and 4 also arose from a fraudulent evasion of VAT.

98. In answer to the third question, whether 3GCL’s transactions with which this appeal is concerned connected with that fraudulent evasion, we find that they all were so connected.

99. There is a clear link in each of the four Deals, described above, between 3GCL and the loss of tax which is apparent from both the chain of transactions and movement of funds between the participants in each of the Deals.

100.The answer to the final question, whether 3GCL, through its director, Samir Fattah, knew or should it have known that its transactions with which this appeal is concerned were connected with a fraudulent evasion of VAT, is central to our determination of this appeal.

101.HMRC’s primary case was that 3GCL did have knowledge that its transactions were connected with a fraudulent evasion of VAT but that if we were to find that that there was not such a connection the alternative proposition relied on by HMRC was that 3GCL should have known that this was the case.

102.Mr Fattah in his first witness statement, of 11 February 2009, denies that this is the case saying that all of 3GCL’s immediate trading partners “were valid and subsisting companies” at the time 3GCL traded with them and that he is not in a position on behalf of 3GCL to say whether there has been “any fraud higher or lower down any chain of transactions” in which 3GCL was involved.

103.However, it was submitted on behalf of HMRC that there was compelling evidence that 3GCL did know that its transactions were connected with the fraudulent evasion of VAT. In particular we were referred to the length of the transaction chains; the use of two pin plugs; the level of mark ups; the use by 3GCL and its supplier Top Telecoms of the IPT website; the fact that almost all participants had accounts with FCIB; the circularity of payments; the absence of contracts; the fact no goods were returned; the question of title to the goods; the lack of insurance; and the expeditious growth in 3GCL’s turnover.

104.Alternatively, it was submitted, that 3GCL had the means of knowledge of MTIC fraud having been given specific advice from HMRC during visits and in correspondence and had been warned that its due diligence procedures were not considered sufficient advice which HMRC contend 3GCL persistently ignored.

105.We find that 3GCL did have knowledge and awareness of the prevalence of MTIC fraud in the mobile phone business and of the necessity to take sufficient measures (which it failed to do) to ensure that it only entered into legitimate transactions as a result of the advice it had obtained from HMRC, both in correspondence and during visits by HMRC Officers, and through its connections with other similar businesses. This is confirmed by Mr Fattah in his second statement, of 8 July 2009, in which he says he was:

“… surprised at the negative way which HMRC contend that I had a good general awareness of MTIC fraud. I do not deny that I know about MTIC fraud, the fact that my knowledge about it allowed me to keep away from it..”

106.Having found that 3GCL did have knowledge and was aware of MTIC fraud it is necessary to consider whether it knew that the transactions in which it participated were connected to such fraud.

107.Given the involvement of the same or almost the same participants in the same order in each of the Deals described above, each of which took place over a single day with similar mark ups involving simultaneous movement of goods it would seem highly improbable that these were commercial transactions between unconnected parties. Indeed all of the evidence would suggest that each of the Deals had been pre-arranged, for example, it would seem that 3GCL issued a Pro-forma invoice before it had received a purchase order from 3G Trade as the purchase order refers to the number from the Pro-forma invoice.

108.We consider the circularity of payments through the FCIB accounts of the participants in each of the Deals, which we have set out above, to be compelling evidence of the transactions being contrived and part of pre-planned scheme to defraud the Revenue which must have been entered into with the knowledge of each of the parties, including 3GCL, to ensure that payments were made on time and in the correct order.

109.Also a connection with fraud appears to be the only explanation for 3GCL’s 1,128% growth in turnover in a single year especially when compared with its 18% increase in its overheads in the same year. We do not find Mr Fattah’s explanation, in his first statement, that “[in] every business there is a picking point and this is the nature of the business and I think every successful business started from somewhere” to be credible.

110.Taking all of these factors into account we find that 3GCL did know that its transactions, with which this appeals are concerned, were connected to the fraudulent evasion of VAT and consider this could explain why, although aware that HMRC did not regard its due diligence measures as adequate, 3GCL failed to take any steps and chose not to implement the advice given by HMRC as to how this could be improved.

111. However, even if 3GCL did not have knowledge that its transactions that in each of the four Deals were not so connected we find, for the above reasons, that the only reasonable explanation for the circumstances in which these transactions took place is that they were connected to the fraudulent evasion of VAT and as such 3GCL should have known that they were connected to fraud.

112.We therefore find that HMRC were correct to deny its claim to recover the input tax attributable to these transactions.

Costs

113.The issue of costs in this appeal was the subject of a direction released to the parties on 26 April 2010 by which the Tribunal Judge (Roger Berner) disapplied Rule 10 of the Rules relating to costs having decided, as is clear from his “Reasons For Direction”, that as the proceedings “were set on foot some eight months prior to the commencement” of the Rules they can only “be dealt with fairly and justly if the previous cost rules applicable to VAT proceedings, where the Tribunal had a general costs discretion, are applied to this appeal.”

114.The appeal is therefore dismissed with costs to be paid by 3GCL to HMRC with such costs to be assessed if not agreed.

115.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 Rules. 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.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents