DECISION

1. The Appellant (“Gillex”) appeals against a decision of the Respondents (“HMRC”) set out in a letter dated 5 June 2007 disallowing an input tax repayment claim made by Gillex in the sum of £904,837.50 in respect of two transactions which took place in the VAT period 04/06. The basis for HMRC’s disallowance was their conclusion that the transactions concerned were connected with the fraudulent evasion of VAT and that Gillex knew, or at the very least, ought to have known, that it was participating in transactions of such a character. HMRC’s view was that the transactions were linked to “missing trader intra-Community fraud” (commonly referred to as “MTIC fraud”).

The factual background

2. The evidence consisted of nine lever-arched files of documents, and a core bundle. Witness statements on behalf of Gillex were provided by Mr Amar Gill, the director of Gillex. For HMRC, witness statements were provided by John McPartlin, a higher officer of HMRC, Fu Sang Lam, an officer of HMRC, Roderick Stone of HMRC’s Serious Civil Investigations Directorate, and by Louise King, an officer of HMRC. Oral evidence was given by Mr Gill, Mr McPartlin and Ms King.

3. From the evidence we find the following background facts. We deal with more detailed facts and matters of disputed evidence later in this decision.

4. Gillex was incorporated on 2 July 2003. Mr Gill was the sole director, and his wife was the company secretary. Gillex did not employ any other staff, and Mr Gill dealt with the day to day running of Gillex. (The annual accounting for Gillex was carried out by an independent accountant.) Gillex’s trading was initially from Mr Gill’s home address, which was referred to as its principal place of business; Gillex took up business premises in February 2006 and then traded from those premises.

5. Gillex was registered for VAT purposes with effect from 1 August 2003. The business activity detailed in the application was “Importer of Watches, Luggage and Gift Items”. The estimated annual turnover was £60,000 and Gillex indicated that it did not anticipate receiving regular repayments of VAT.

6. From 2003 onwards, Gillex traded in a range of commodities, including watches, luggage, soap and perfume. Mr Gill had had extensive experience of wholesale trading, both through Gillex and previously with another family business dating back to 1972. Details of this company, Fortkirk Limited, trading as Gill Enterprises, could not be checked through HMRC’s VAT databases, although it was shown to have been dissolved on 12 December 1991. In his second witness statement made in April 2009, Mr Gill indicated that he had been in business for 36 years.

7. After his period working for the family business, Mr Gill had gone to India for eight years, and subsequently to Dubai for four years before returning to the UK in 2001. His business in India involved dealing solely in that country. There was no specific evidence as to his activities in Dubai.

8. On his return to the UK in 2001, Mr Gill worked for a company called MZB Ltd. Initially he was an employee, but from 11 March 2002 to 15 March 2004 he was a director of that company. Thus this period overlapped the start of Gillex. During the period of his directorship, MZB Ltd submitted nine VAT returns, of which two showed net VAT due, and seven showed net repayments of VAT.

Transactions in other commodities

9. In early 2004, Gillex was involved in transactions in which it purchased phonecards from a trader, Hi Profile Ltd, and sold them on to Vispar Ltd. (We consider the implications of these transactions later in this decision.)

10. During August 2005, Gillex became aware, through a website called Alibaba.com, of a company called HKS Trading Limited (“HKS”). On 2 September 2005 Gillex supplied HKS with some suitcases, MP3 and CD players. Mr Gill was aware that HKS was trading in iPods and mobile phones, but at that stage there was no opportunity to put a deal together involving such goods.

11. Through his involvement in the family business many years before, Mr Gill had dealt with an individual whom he named as Mr Paollo of a company called Tessuflex in Vicenza, Italy. (According to the Dun & Bradstreet search made at some time from mid-2006 onwards by HMRC in the course of their investigations, the actual name of the chief executive was Pierpaolo Pozzi, and the final statement date shown for Tessuflex was 31 December 1990; the company was described as “Out of Business”.) Tessuflex had supplied the previous company in which Mr Gill had been involved with watch cases to the value of £2 million. At some point during March 2006 M/S Monza Trading, a company with an address in Milan, Italy, contacted Mr Gill with a view to trading with Gillex, referring to a recommendation made by Mr Paollo. Monza Trading wished to purchase mobile phones and iPods but did not initially state what quantities would be required.

12. On the basis of the previous contact with HKS, Gillex was able to inform Monza Trading that it would be able to supply such goods. The exact quantities were not discussed or finalised until a later stage.

13. By a purchase order dated 28 April 2006, Gillex requested HKS to supply 6000 Nokia 8800 mobile phones at a unit price of £461.75, giving a net value of £2,770,500. The amount of VAT was shown as £484,837.00. Invoice number INV280406-002 dated 28 April 2006 issued by HKS referred to the supply of the mobile phones at that unit price and net value. However, the VAT was calculated as £484,837.50, giving a total VAT inclusive price of £3,255,337.50.

14. Monza Trading’s purchase order addressed to Gillex and Gillex’s invoice number 674 against Monza Trading were also dated 28 April 2006. The goods referred to as being supplied were 6000 Nokia 8800 mobile phones, Central European specification, at a unit price of 767.04 Euros, converted to sterling at the rate of 1.41, resulting in a unit price of £544. This gave a net value of £3,264,000 (having been converted from 4,602,240 Euros), on which there was no VAT chargeable.

15. By another purchase order dated 28 April 2006, Gillex requested HKS to supply 6000 Apple iPods 60 GB in black, with Apple remote control iSound Max portable speaker system. The unit price was £400, giving a net value of £2,400,000. The VAT amounted to £420,000, giving a total VAT inclusive price of £2,820,000. Invoice number INV280406-001 dated 28 April 2006 issued by HKS showed the corresponding information.

16. Monza Trading’s purchase order addressed to Gillex and Gillex’s invoice number 675 against Monza Trading were also dated 28 April 2006. The goods referred to as being supplied were 6000 Apple 60 GB iPods in black, radio remote, max sound system. The unit price in Euros was 664.11, converted to sterling at 1.41, resulting in a unit price of £471. The total Euro price was 3,984,660. This was converted at 1.41, giving a net sterling value of £2,826,000 on which again there was no VAT chargeable.

17. The total VAT inclusive amount payable by Gillex to HKS pursuant to the latter’s invoices (rather than Gillex’s purchase orders) was therefore £6,075,337.50. The total amount payable by Monza Trading to Gillex was £6,090,000. We consider the mechanics of payment of these amounts at a later point in this decision.

HMRC’s verification process

18. In its return for the period 04/06, Gillex made a substantial repayment claim. Due to the size of that claim, HMRC carried out an extended verification process in respect of the two transactions concerned. A visit to Gillex’s business premises was made by Mr McPartlin and another officer, Kym Richards, on 19 July 2006. Mr Gill agreed to provide various items of information, and correspondence continued for a number of months, with further meetings taking place.

19. The eventual result of the extended verification process was that the two transactions were both traced back to the same defaulting trader, West 1 Facilities Management Ltd (“West 1”). Tax due in respect of the relevant deals was included within a manual assessment for the period from 1 April 2006 to 22 June 2006, the date on which HMRC cancelled West 1’s registration. The amount of this assessment was £60,729,310, part of a total of £125,725,923.99 owing by West 1 to HMRC. As confirmed by the statement of Fu Sang Lam, the assessments remain unpaid; there is no evidence of any challenge to these assessments having been made by West 1.

20. West 1’s supplier was United Traders, a Portuguese company, which we refer to as “UT”. HMRC established by means of a request for information from the Portuguese authorities that UT had no premises and that the address of its head office was a private home provided by a Portuguese national who had nothing to do with UT and who had no documents. The address was being used as an accommodation address. The total figure for supplies made by UT to West 1 was 109,603,832.05 Euros; this had been derived from information provided by HMRC.

21. HMRC established the chain of transactions from Gillex back to West 1. In relation to the mobile phones, Gillex had purchased from HKS, who had purchased from International Investment Services (UK) Ltd (“IIS”) at a unit price of £461.50. IIS had purchased from West 1 at a unit price of £461.25.

22. In relation to the iPods, the chain was the same. Gillex had purchased from HKS, who had purchased from IIS at a unit price of £399.75. IIS had purchased from West 1 at a unit price of £399.50.

23. On 5 June 2007 Mr McPartlin wrote to notify Gillex of HMRC’s decision to deny entitlement to the right to deduct input tax in respect of the transactions in mobile phones and iPods in the month of April 2006 in VAT period 04/06. Gillex responded in a letter dated 17 June 2007, and gave notice of appeal to the Tribunal on 18 June 2007.

Concession for Gillex on the factual element

24. At the beginning of the hearing, Mr Wetton on behalf of Gillex accepted that the deals covered by Gillex’s invoices 674 and 675 to Monza Trading were connected with the fraudulent evasion of VAT (the “factual element”). He confirmed that Gillex was limiting the grounds on which it was pursuing the appeal to the “mental element”, ie whether Gillex knew or should have known that the deals were so connected. On the basis of that concession by Gillex, the evidence provided by HMRC as to the factual element was uncontested. We refer to such evidence to the extent necessary in the context of our consideration of the mental element.

Arguments for HMRC

25. Ms Bevan referred to the judgment of the Court of Appeal in Mobilx Ltd (in Administration) and others v Revenue and Customs Commissioners [2010] EWCA Civ 517, (referred to in this decision as “Mobilx and others (CA)” and to earlier authorities. The following questions had been considered and approved (in cases such as Blue Sphere Global Ltd v Revenue and Customs Commissioners [2009] STC 2239) as the correct questions to be addressed by the Tribunal in an appeal of this nature:

(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 transactions entered into by Gillex which were the subject of the present appeal connected with that evasion?

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

26. The first three questions might usefully be described as the “factual element” of the test, to which the concession made by Gillex amounted to positive answers. There was useful assistance on the issue of privity of contract which derived from Calltel Telecom Ltd and another v Revenue and Customs Commissioners (No 2) [2009] STC 2164 (referred to below as “Calltel (No 2)”. At [81] Floyd J had explained how a person not in privity of contract with the fraudster nevertheless fell foul of the “connected with” requirement set out by the ECJ in 2006 in Kittel v Belgium; Belgium v Recolta Recycling SPRL (reported at [2008] STC 1537 and referred to in this decision as “Kittel”).

27. In relation to question (4) above, the issue of whether or not the trader “knew or should have known” that its transactions were connected with the fraudulent evasion of VAT was a matter of fact for each case, to be determined having regard to objective facts or factors. Ms Bevan referred to Kittel at [59] and to Revenue and Customs Commissioners v Livewire Telecom Ltd; Revenue and Customs Commissioners v Olympia Technology Ltd [2009] STC 643 at [76(x)]. (We refer to this judgment as “Livewire”.)

28. HMRC derived (inter alia) the following principles from the authorities preceding the Court of Appeal judgment in Mobilx and others (CA) which, Ms Bevan submitted, remained relevant and applicable to that fact finding process in MTIC cases:

(1) The test was not one of dishonesty. In Livewire at [84]-[86] Lewison J had expressly rejected the submission of the respondent traders that the test was one of dishonesty.

(2) The “means of knowledge” test involved considering what the ordinarily competent director would have known (Livewire at [123]-[126]).

(3) A trader had to exercise independent judgment in deciding whether to enter into a particular transaction or transactions and could not delegate its judgment to HMRC (Mobilx Ltd (in Administration) [2009] STC 1107 at [87]).

(4) The Tribunal could (and, one might say in cases of this kind, must) use inference in the fact finding process. Ms Bevan cited (but did not take us to) the unreported case Softwarecore Ltd v Pathan [2005] EWHC 1845 (Ch) at [51]-[52].

29. Ms Bevan referred in detail to the judgment of the Court of Appeal in Mobilx and others (CA). (As we deal in detail with this later in our decision, we do not summarise her comments here.) She submitted that a consideration of the latter case and the preceding authorities led to the following principles (among others):

(1) It was for HMRC to establish to the civil standard that Gillex knew or should have known that its transactions were connected with fraud, and that they were in fact connected with the fraudulent evasion of VAT. It was not sufficient to establish that the trader knew or should have known that it was more likely than not that his transactions were so connected. However, 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 turned out that the transaction was connected with fraudulent evasion of VAT, then he should have known of that fact.

(2) It was not necessary to establish that Gillex knew or should have known of the nature or mechanism of the fraud, or the identity of the participants.

(3) In considering whether the Kittel test was satisfied, the Tribunal should look at all the circumstances surrounding the transactions, and should not look at a given transaction in isolation. The Tribunal should not unduly focus on the question whether a trader had acted with all due diligence. Even if a trader had asked appropriate questions, he was not entitled to ignore the circumstances in which his transactions took place if the only reasonable explanation for them was that his transactions had been or would be connected to fraud. Where a trader had not asked all appropriate questions, then the Tribunal should consider what the trader omitted to do, and what it could have done.

30. Ms Bevan made detailed submissions on the facts, which we take into consideration later in this decision. In conclusion, she submitted that the evidence heard enabled the Tribunal to be satisfied to the requisite civil standard of proof that:

(1) The relevant deals formed part of a transaction chain connected with fraud, and

(2) Gillex knew or ought to have known of that fact.

31. Accordingly, HMRC requested that the appeal be dismissed. In the event that the appeal was dismissed, HMRC requested their reasonable costs in responding to this appeal.

Arguments for Gillex

32. In presenting the case on behalf of Gillex, Mr Wetton emphasised that he was acting as liquidator, having been appointed by HMRC in respect of their protective assessment made against Gillex. The estimated liability was £300,000, being £268,036.43 with accrued interest of £22,001.82. The assessment related to the corporation tax on the profit under consideration. Given Mr Wetton’s involvement in this capacity, neither Gillex nor Mr Gill could be regarded as his client.

33. Mr Wetton’s principal arguments for Gillex were on the factual matters connected with the related issues of whether Gillex knew or should have known that the transactions in which it was involved were connected with fraudulent evasion of VAT. As we review these factual matters later in this decision, we do not set out these arguments here.

34. He referred to the discussion in Mobilx and others (CA), and in particular to the question set out in the judgment of Moses LJ at [75]:

“75. The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT.”

35. Mr Wetton contended that this paragraph contained the crux of the Court of Appeal’s decision. The focus in MTIC cases should, following this ruling, be less on a trader’s due diligence procedures and more with the overall features of a transaction. Was a transaction too good to be true, and could the only reasonable explanation for this be that there was a fraud?

36. Mr Wetton submitted that on the facts, Gillex neither knew nor should have known that the relevant transactions were connected to fraudulent evasion of VAT, and that accordingly the appeal should be allowed. If the appeal succeeded, Gillex applied for costs.

Discussion and conclusions – the law

The law – Mobilx and others (CA)

37. As the parties submitted, the relevant European and domestic law had been reviewed in detail in Mobilx and others (CA). Mr Wetton expressed the view that the Court of Appeal had not substantially changed the approach to the law in MTIC cases; however, Ms Bevan referred to a number of respects in which questions raised in previous cases had been addressed by the Court of Appeal. We regard the judgment as guidance on a number of issues in respect of which there has been uncertainty as to the analysis to be applied by tribunals in MTIC cases, and thus as amounting to a shift in emphasis and approach.

38. In his judgment, agreed by the other members of the Court of Appeal, Moses LJ restated the principle set out in Kittel at [61], then reviewed in detail the authorities and foundation for that principle. At [43] he derived the following conclusions, the final sentence being directly in point in the present appeal:

“A person who has no intention of undertaking an economic activity but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person's VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax § 59 and Kittel § 53). A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct.

39. At [52], in considering the meaning of “should have known”, Moses LJ stated:

“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.”

40. On the extent of knowledge, Moses LJ commented at [59]-[60]:

“[59] The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who "should have known". 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.

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

41. In discussing the matters considered by the Tribunal in one of the conjoined appeals, Blue Sphere Global Ltd (referred to in the judgment as “BSG”), Moses LJ drew attention at [72] to a number of questions set out by the Tribunal; he described these as “important questions”. After considering the findings made by that Tribunal, he stated:

“[76] Accordingly, the importance of BSG may be in the Tribunal's recognition of the surrounding uncommercial circumstances which it identified in the questions I have set out above.”

Such questions are therefore pertinent in establishing the extent of the trader’s actual knowledge of the connection with fraud or the extent to which it can be concluded, based on the overall circumstances of which the relevant deals form part, that the trader ought to have known of such connection.

42. In the final sentence of his judgment at [85], Moses LJ referred to warnings given in HMRC’s Public Notice 726, and commented:

“A trader who chooses to ignore circumstances which can only reasonably be explained by virtue of the connection between his transactions and fraudulent evasion of VAT, participates in that fraud and, by his own choice, deprives himself of the right to deduct input tax.”

We see this as a further facet of the Kittel test.

43. On the question of due diligence, Moses LJ emphasised at [74]-[75] that it was inappropriate to focus unduly on whether the trader had exercised due diligence. He continued at [75]:

“The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT.”

Thus the extent of a trader’s enquiries is merely an element of the factual background to be examined in seeking the answer to this ultimate question.

The law – other authorities

44. Ms Bevan’s list of the four questions to be answered derives from the decision of the Tribunal in Blue Sphere Global Ltd v Revenue and Customs Commissioners ((2008) VAT Decision 20901); on appeal ([2009] STC 2239), the Chancellor stated that it was common ground that these were the correct questions. Accordingly, we conclude that they are appropriate in all cases of this nature.

45. We accept Ms Bevan’s submission, based on the judgment of Floyd J in Calltel (No 2), that a person not in privity of contract with the fraudster could nevertheless fall foul of the “connected with” requirement in Kittel. He stated:

“[81] It will be recalled that the rationale in Kittel for refusing repayment where the purchaser knows that he was taking part in a transaction connected with fraudulent evasion of VAT was that he "aids the perpetrators of the fraud and becomes their accomplice". For my part I have no difficulty in seeing how the purchaser who is not in privity of contract with the importer aids the perpetrators of the fraud. He supplies liquidity into the supply chain, both rewarding the perpetrator of the fraud for the specific chain in question, and ensuring that the supply chains remain in place for future transactions. By being ready, despite knowledge of the evasion of VAT, to make purchases, the purchaser makes himself an accomplice in that evasion.”

46. In that connection, the decision of the Tribunal in Blue Sphere Global Ltd was based at least in part on the question whether the supplier, Infinity, was fraudulent; in the light of Floyd J’s comments in Calltel on the subject of privity, and the more general comments of Moses LJ in Mobilx and others (CA) at [62], the Tribunal in Blue Sphere Global Ltd may not have been correct in concentrating a substantial part of its attention on Infinity’s position in testing whether the trader ought to have known that its transactions were connected with fraud.

47. In relation to Ms Bevan’s submissions (at paragraph 28 above) based on authorities before Mobilx and others (CA), we accept the first three in full, and the fourth as to the use of inference in the fact-finding process. We consider that the latter follows in any event from the Court of Appeal judgment. Our reservation as to the fourth point is the reference to the Softwarecore case; although we have not been able to access the judgment itself, it appears from other tribunal decisions which have cited it that it takes into account dishonesty, which as confirmed by Lewison J in Livewire is not the appropriate test.

48. We accept Ms Bevan’s summary of the principles to be derived from the authorities including Mobilx and others (CA), as set out at paragraph 29 above.

49. Of the three conjoined appeals considered by the Court of Appeal in that case, only one, relating to Calltel and Opto, concerned a finding that the traders knew of a connection between the transactions in which they were involved and VAT fraud. Moses LJ did not specify any difference in approach between cases where it is alleged that the trader knew of such a connection and those where it is alleged that the trader should have known of such a connection. It appears to us that in the light of the House of Lords cases cited by the Tribunal in Blue Sphere Global Ltd at paragraphs 107 to 109 of its decision, there is no difference in the standard of proof; in Re B (Children) [2008] UKHL 35 Lord Hoffman said at [13]:

“I think that the time has come to say, once and for all, that there is only one civil standard of proof and that is proof that the fact in issue more probably occurred than not."

50. It is clear that, in order to arrive at a conclusion that a trader knew of a connection between the transactions in which it was involved and the fraudulent evasion of VAT, additional evidence is required beyond that needed to establish that the trader should have known of such a connection. However, we do not consider that this requires the trader to be aware of the details of the fraud. In considering the appeal to the High Court of Blue Sphere Global Ltd, the Chancellor referred at [36] to the view taken by the Tribunal:

“They adopted the view of the tribunal in Honeyfone Ltd v Revenue and Customs Comrs (2008) VAT Decision 20667 and Burton J in R (on the application of Just Fabulous (UK) Ltd) v Revenue and Customs Comrs [2007] EWHC 521 (Admin), [2008] STC 2123 that it is sufficient if the trader should have known that there was some fraud even though he does not have the means of knowing the details of that fraud but preferred to formulate it, as in Kittel, as 'participating in a transaction connected with fraudulent evasion of VAT'.”

51. The question at issue in Blue Sphere Global Ltd was whether the trader should have known of the connection. In the light of the approach taken in Mobilx and others (CA), basing a conclusion on circumstances which could only reasonably be explained by virtue of the connection between the trader’s transactions and fraudulent evasion of VAT, we take the view that it is possible, on the basis of a combination of appropriate circumstances, to arrive at a conclusion of actual knowledge on the trader’s part without specific direct evidence as to the trader’s actual state of mind.

52. In Blue Sphere Global Ltd, the Tribunal referred at paragraph 152 of its decision to consideration of the overall position, and cited the direct tax case Hall (Inspector of Taxes) v Lorimer [1992] STC 599, referring to painting a picture in each individual case. The Tribunal then commented that an accumulation of a whole series of factors which individually might be insufficient to lead to a conclusion as to the trader’s state of knowledge might prove to be of such weight that the only possible conclusion was that the trader should have known of the connection. The Court of Appeal in Mobilx and others (CA) did not specifically comment on the Tribunal’s view, but we consider that the overall approach taken by the Court of Appeal in its various references to the surrounding circumstances supports the “painting a picture” analysis. For the reasons stated in the previous paragraph of this decision, we consider that the same form of analysis is appropriate in cases where the trader is alleged to have had actual knowledge of the connection with VAT fraud.

Application of law to the facts

53. In relation to the first three of the four questions referred to by Ms Bevan at paragraph 25 above, the concession made on behalf of Gillex as to the factual element renders it strictly unnecessary for us to review the evidence submitted by HMRC in support of their contention that all three questions should be answered in the affirmative. However, in the course of cross-examination, Mr Gill raised questions as to the implications of the payment patterns and the diagram showing the participants in the two identical chains; he did not consider himself to be party to what was implied by the circularity described in the diagram and in the other evidence. We therefore think it appropriate to comment in general terms on that evidence submitted by HMRC, but without reviewing it in detail in this decision.

54. On the question whether there was a tax loss, we are satisfied that there is clear evidence to demonstrate this, as shown by the evidence of the relevant investigating officer, Fu Sang Lam.

55. There is also clear evidence provided by the same officer showing that such VAT loss resulted from a fraudulent evasion. In relation to the two deal chains which are the subject of the present appeal, there are other features which support this assertion. The evidence relating to bank payments made through FCIB, the bank used by all the participants in the chains, showed circularity of funds. Four of the parties, including Gillex, obtained references from the same party as part of the process of opening their respective accounts with FCIB. Each party paid its respective supplier in seven separate transactions, these appearing (based on the numbering of the respective transactions and Ms King’s evidence as to the number of transactions likely to be carried out by FCIB in the course of a single day) to occur within a very short space of time; these seven payments combined the amounts payable in respect of the two separate deals for mobile phones and iPods. In both deals the amounts of the total payments made by West 1 to United Refrigeration and Industries (“URI”) in India (and not to the alleged supplier UT in Portugal, which as mentioned above was shown by HMRC’s subsequent enquiries of the Portuguese authorities to be a company without premises, using a head office address which was an accommodation address at a private home) resulted in West 1 being unable to account to HMRC for the VAT liability of £903,787.50 in respect of the two deals. The same individual, Ravender Datta, was director, beneficial owner and signatory of URI and the director and shareholder of UT.

56. In addition, the chains were identical and the mark-ups for all the parties to the transactions prior to Gillex’s stage in the chain were also identical, at 25p per unit, which appears contrived, particularly having regard to the difference in unit value between the mobile phones and the iPods. Further, such low mark-ups on such substantial unit costs are highly implausible from the commerciality point of view. Another element is the much more substantial mark-up achieved by Gillex; as this is relevant to the “mental element”, we do not expand upon it at this point. The parties did not appear to be put in a position where they could have made a loss, and this also seems inconsistent with commercial reality. The amounts of the stock available and supplied were identical for all in the chain, so that at no stage was any party left with surplus stock; the deals were entirely on a back to back basis. (Other factors are relevant to consideration of the mental element, and we cover these later.)

57. On the question whether the transactions which are the subject of this appeal were connected with a fraudulent evasion, the position is free from doubt, following Calltel (No 2); in a simple chain such as those under consideration, not involving contra-trading, there is a clear and obvious connection.

58. Our overall conclusion on the factual element is that there is sufficient evidence to establish affirmative answers to all three of the relevant questions, even if for any reason it were to prove necessary to disregard the concession made on behalf of Gillex.

The mental element

59. HMRC’s case on the mental element was put on two alternative bases. The first was that Gillex knew that the relevant transactions were connected with fraud. We refer to this as the “actual knowledge issue”. The second was whether Gillex should have known that the relevant transactions were connected with fraud. We refer to this as the “constructive knowledge issue”.

60. In relation to both issues, the knowledge to be tested is that of the company, Gillex, as confirmed by Lewison J in Livewire at [125]. As Mr Gill was the sole director, and Gillex had no other employees (Mr Gill having described himself in oral evidence as a “one man show”), we are satisfied that Mr Gill’s state of knowledge is the only relevant knowledge to be tested in establishing whether Gillex knew or should have known of the connection with fraud.

61. In his oral evidence, Mr Gill emphatically denied participating in what he accepted was an “orchestrated fraud”; he argued that he was not part of the circle, but did not seek to dispute the evidence which Louise King had given relating to the circle of funds transfers. In addition he denied that the other parties would have received any money from Gillex out of the reclaimed input tax, which he said would be needed to pay Gillex’s tax and its creditors. The tests as to the mental element must therefore be applied on the basis of the totality of the remaining evidence, rather than by reference to Mr Gill’s own evidence as to his state of mind.

Facts relevant to the mental element

62. In order to consider the mental element, it is necessary to set out further findings as to the history and development of Gillex’s business, putting the two deals into context. (Some of this material has to be covered outside any strict chronological sequence.)

63. On 12 January 2004 (after Gillex had been trading for just over five months) Mr Gill had telephoned HMRC’s National Advice Service Contact Centre to ask whether there were any restrictions on what he could buy and sell. The HMRC “agent” established in the course of the conversation that Mr Gill wanted to buy and sell telephones locally, and advised that he did not need permission from HMRC to do this.

64. On 30 January 2004 Gillex issued an invoice addressed to a company called Vispar Ltd for phonecards of three different types. The price was £38,297.87; the VAT at 17.5 per cent was £6,702.13, giving a total price of £45,000. The supplier to Gillex, Hi-Profile Ltd, issued an invoice dated 2 February 2004. It showed that the face value of the cards was £50,000, and that they were being supplied at a 10 per cent discount. The total price net of VAT was £37,919.49; the VAT was £6,635.11, giving a total price of £44,550.

65. On 2 February 2004 Gillex issued a further invoice to Vispar; this related to two types of phonecards with a face value expressed to be £100,000 in total. The price was £76,595.75; the VAT was £13,404.26, giving a total price of £90,000.01. Hi-Profile Ltd issued an invoice on the same date to Gillex showing that the cards were supplied at a 10 per cent discount. The price was £76,595.75; with VAT of £13,404.25, the total price was £90,000. However, this was expressed to be “less 1% com” of £900, giving a final figure of £89,100. (There was no adjustment to the VAT in respect of what we take to be the commission.)

66. The two phonecard transactions were “back-to-back” deals. In respect of the first, Vispar Ltd paid £14,020 on 27 January and £30,975 on 28 January, totalling £44,995; the evidence does not disclose why Vispar did not pay the full amount of £45,000, although these payments preceded the date of issue shown on the invoice from Gillex. Gillex paid Hi-Profile on 30 January; the sum paid was the full £44,550, and Gillex was charged £20 by the bank for the “Sameday Pymnt”. Thus the net profit to Gillex on the first deal was £425 on turnover of £44,995.

67. In respect of the second deal, Vispar made several payments on different dates. On 3 February the amount was £18,000. On 4 February the amount was £8,040. On 9 February there were two payments, £11,460 and £20,000. On 11 February the amount was £20,000. Meanwhile, on 10 February, Gillex made a payment of £44,550 to Hi-Profile Ltd, and on 13 February another of £35,500. (In respect of these transfers, Gillex’s bank made two charges of £20.) The payments to Hi-Profile Ltd totalled £80,050, leaving a balance outstanding of £9,050. In a letter to HMRC dated 23 June 2004, Mr Gill confirmed that “£9,050 was paid in cash by Vispar Ltd to Hi-Profile on our behalf”.

68. It is not clear from the evidence how the remaining balance due from Vispar to Gillex of £3,450 was paid. On the assumption that it was, Gillex made a profit of £900 less £40, ie £860 on turnover of £90,000, a similar rate to that on the first of the phonecard deals (a percentage rate which would have been identical but for the £5 discrepancy in the amount paid by Vispar in respect of that first deal). HMRC subsequently established that the supplier, Hi Profile Ltd, did not declare and did not pay the relevant amount of tax due in respect of these deals. As the documents relating to these transactions had some similarities to deals tainted by MTIC fraud, Mr McPartlin on HMRC’s behalf considered it highly likely that such deals were part of an overall scheme to defraud. However, this has not been conclusively established by HMRC, despite the strong suspicions to this effect.

69. In March 2004, HMRC attempted to contact Gillex. On 18 March 2004, a seven-day “calling/warning letter” was left by HMRC at Gillex’s principal place of business. This letter detailed possible action, including cancellation of the VAT registration.

70. On 24 March 2004 HMRC wrote to Gillex setting out HMRC’s concerns relating to MTIC fraud in certain trade sectors, with specific reference to computer equipment, mobile phones, ancillary items and other goods. The letter indicated that with immediate effect, requests for verification of the VAT status of new customers and suppliers should be faxed to HMRC’s Redhill office. The letter listed ten items of information which applicants should supply, if known. The letter gave no indication of the time which such VAT status verifications would take.

71. Just under a year later, on 18 March 2005, Narinder Hunjan (an officer of HMRC) visited Gillex’s premises. During the two-hour meeting, he discussed with Mr Gill the business activities of Gillex. The main business activity was described as importing luggage, CD players and watches from China and Hong Kong for sale to UK retailers and wholesalers. Mr Gill described the profit margins as “very attractive”. The officer noted Mr Gill’s comment that he had considered going into the mobile phone business, but when he had approached his bank for an overdraft or loan, the bank had insisted that his account would be closed. In his oral evidence, Mr Gill commented that this statement was incorrect; when he had gone to open the account (which we conclude to have been in 2003, as the earliest statement in evidence dated January 2004 shows a balance brought forward), Barclays had asked him what he wanted to deal in. He had answered that he wanted to deal in watches and luggage, but when he had also mentioned telephones, Barclays had said that it would not open the account. Mr Gill had then asked why not, and said “Forget about telephones”.

72. It is not clear from the evidence whether Mr Gill would have been aware of the underlying reasons for this stance taken by Gillex’s bank, but this must have made him aware of the caution with which other commercial entities approached such transactions. In his second witness statement Mr Gill said that he had mentioned in the course of a discussion with a VAT officer in 2004 that the bank did not seem to be interested in big financial deals; we do not find this evidence persuasive, especially in the light of his oral evidence as to the discussion with Barclays. According to his own oral evidence, he was seeking mobile phone transactions in 2004 and subsequently in 2005, but nothing was available at those stages.

73. Mr Gill first became aware of HKS in about August 2005 through its advertisement on a website called Alibaba.com. The advertisement indicated that HKS was dealing in electrical goods; in evidence, Mr Gill thought that this included computers, but he could not recollect whether the advertisement indicated that HKS was dealing in mobile phones. He accepted that it indicated that HKS’s trade was “up and running”. He made contact with them and subsequently met them; Mr Saif, the director of HKS had come to see Mr Gill when on behalf of HKS Mr Saif had bought MP3 players and watches in September 2005. At this meeting, Mr Saif had indicated to Mr Gill that HKS was going to sell or might be dealing in phones. Mr Gill said in evidence that subsequently, in January 2006 or thereabouts, Mr Saif had said that he was selling a few phones, but at that time Mr Gill had no customers for phones. Subsequently he had gone to see Mr Saif “in April some time” and the latter had handed over documentation showing very substantial turnover (considered below). Mr Gill’s evidence was that HKS’ due diligence documents were provided at that stage; we refer to this later.

74. In relation to the account which Gillex opened with First Curacao International Bank (“FCIB”), Mr Gill’s evidence in his second witness statement was that he used FCIB as a result of noticing from his due diligence check that it was the bank used by HKS and due to FCIB’s willingness to deal in high value transactions. However, in oral evidence he stated that Mr Saif of HKS had said, on the occasion when he bought the luggage, watches and MP3 players, “But if you want to deal in phones you should open an account with this Bank of Curacao”; Mr Gill had subsequently contacted FCIB’s agent, whose name was Chris, and whose company (Transworld Payment Solutions) had given the reference to enable Gillex to open the FCIB account. In cross-examination Mr Gill admitted that his account of the events as set out in his second witness statement was mistaken. He stated that when he met Mr Saif, the latter had said that if Mr Gill wanted to open an account, he could do so with FCIB. He accepted that he had opened the account in September 2005; we find that this was long before he saw the HKS due diligence documents. In his first witness statement he had stated that FCIB was used as it was able to facilitate much quicker transfers than UK high street banks; we find that this was not the real reason for opening the account with FCIB, and that the true reason was to enable Gillex to participate in mobile phone and similar deals if it could succeed in finding such deals. In cross-examination he explained that although he had opened the account in September 2005, it had not been used until the present deals.

75. Although Mr Gill had opened the FCIB account for Gillex at Mr Saif’s suggestion to enable Gillex to deal in phones, the information which Mr Gill provided to FCIB contained no suggestion that dealing in phones was in contemplation. Gillex’s business was described as “Wholesale trade business UK to UK, trading in luggage, watches, CD players (B2B)” [ie “business to business”]. The only additional description of products offered or traded was “other general items”. The pages headed “Special VAT Certification” were struck through with the annotation “N/A”; these pages were for companies “engaged in the computer/telecom business”, and contained various undertakings including those concerning integrity of supplies and suppliers, ensuring the commercial viability of transactions, and ensuring that the goods being purchased/sold did actually exist. We find that Mr Gill deliberately avoided completing these details despite his intention that Gillex should participate in mobile phone deals.

76. Mr Gill stated in cross-examination that Monza Trading had first contacted him by phone about a month before the actual deal date of 28 April. There had been no correspondence at that stage. He could not remember how early Monza Trading had specified the exact quantities of mobile phones and iPods; this had been “a few phone calls later”, but he was unable to say exactly at what stage this had been. The discussion of payment arrangements had been about two weeks before the deal. (We comment below on the nature of Monza Trading’s initial approach.)

77. On 26 April 2004 Gillex applied by fax for verification of VAT status of HKS Trading. Mr Gill phoned HMRC’s Redhill office to obtain its fax number, but did not discuss the application with anyone at Redhill at that stage.

Mechanics of invoicing and payment

78. The invoices as between the respective parties in the chain were dated 28 April 2006. However, with the exception of the initial bank transfer made by UT, the bank transfers as between the respective FCIB accounts were not made until 5 May 2006. We consider this below.

79. We find the circularity of funds transfers striking. Mr Gill’s evidence was that he was unaware of the other elements in the circle, but he did say that he was involved in the funds transfers. A further notable feature of the funds transfers, as confirmed by Ms King’s evidence, was that the payments for the two deals had been combined. HMRC established the following payment flows from the FCIB accounts of the parties concerned, all being in sterling:

(1) The first FCIB transfer from URI’s account was on 3 May 2006 (which was a Wednesday), in the sum of £1,000,100 made to the FCIB account of Monza Trading. All the other transfers made from URI’s account and the FCIB accounts of the other parties were made on 5 May 2006, the Friday of that week.

(2) On that day, five further transfers of £1,000,100 each from URI’s account were made, and a sixth of £89,560. Thus the total transferred from URI’s account to that of Monza Trading was £6,090,160.

(3) Seven transfers were made from Monza Trading’s account to that of Gillex; the first was of £1,000,100, the following five of £1,000,080 each, and the final one of £89,540. The total transferred from Monza Trading’s account to that of Gillex was therefore £6,090,040.

(4) Seven transfers were made from Gillex’s account to that of HKS; six were of £1,000,060 each, and the final one £74,977.50. The total transferred from Gillex’s account to that of HKS was therefore £6,075,337.50.

(5) Seven transfers were made from the account of HKS to that of IIS; six were of £1,000,040 each, and the final one of £71,572.50. Thus the total transferred from the account of HKS to that of IIS was £6,071,812.50.

(6) Seven transfers were made from the account of IIS to that of West 1. The first two were of £1,000,040 each. The following four were of £1,000,020 each. The final one was of £68,187.50. The total transferred from the account of IIS to that of West 1 was accordingly £6,068,327.50.

(7) Seven transfers were made from the account of West 1 to that of URI. The first was of £1,000,020, the following five of £1,000,000 each, and the final one of £64,762.50. The total transferred from the account of West 1 to that of URI was therefore £6,064,782.50.

80. The results of these transfers were:

(1) URI paid out £6,090,160 and received £6,064,782.50, thus making a loss of £25,377.50;

(2) Monza Trading paid out £6,090,040 and received £6,090,160, thus gaining £120;

(3) Gillex paid out £6,075,337.50 and received £6,090,040, thus gaining £14,702.50;

(4) HKS paid out £6,071,812.50 and received £6,075,337.50, thus gaining £3,525;

(5) IIS paid out £6,068,327.50 and received £6,071,812.50, thus gaining £3,485 (which should have been £3,525: see below);

(6) West 1 paid out £6,064,782.50 and received £6,068,327.50, thus being left with £3,545 and no other funds out of which to pay its VAT liability of £903,787.50 in respect of the two deals. (The gross amount, ie including VAT, which should have been paid by IIS to West 1 was £6,068,287.50, ie £40 less than the amount paid);

(7) The total of gains made by all the other parties was exactly equal to the loss made by URI.

81. We find it to be a feature lacking in commerciality that all these transactions, including in particular those relating to non-UK parties, were in sterling.

82. The information discovered by HMRC in relation to invoices was incomplete, in that details of invoices from UT to West 1 were not available and there were no invoices from Monza Trading in respect of any onward supply, but analysis of the remaining invoices shows the following totals:

(1) Invoices from West 1 to IIS; £6,068,287.50. In the absence of invoices from UT, it is not possible to calculate the gross profit made by West 1 on these deals. The amount invoiced was (as indicated above) £40 less than the amount transferred from the FCIB account of IIS to that of West 1;

(2) Invoices from IIS to HKS; £6,071,812.50. The gross profit on these invoices was £3,525;

(3) Invoices from HKS to Gillex; £6,075,337.50. The gross profit on these invoices was £3,525;

(4) Invoices from Gillex to Monza Trading; £6,090,000. The gross profit on these invoices was £14,662.50. The amount invoiced was £40 less than the amount transferred from Monza Trading’s FCIB account to that of Gillex.

On the basis that the supplies had (allegedly) been made by UT, there was no apparent contractual foundation for the payments being made by West 1 to URI rather than to UT.

83. Mr Gill’s evidence was that he was unaware of the other elements in the circle, but he did say that he was involved in the funds transfers. We found his evidence as to such involvement unconvincing; he indicated that he had been following the receipts on the internet and had expected all the money to come together rather than in instalments. He did not explain why he had not expected the money in respect of the two deals to come in separately, even though the same parties were involved. He suggested in oral evidence that the explanation for not transferring the full amount of the first instalment to come in was that the difference might have been due to bank charges. Given the size and importance to Gillex of the amounts due in respect of these two deals, we would have expected him to remember more clearly the process of making the payments and the basis on which they had been calculated.

84. We accept that there are various relatively minor debits shown on the account which could be attributed to bank charges, but the amounts of those debits vary and thus do not amount to a satisfactory explanation for the equal downward adjustments made to the second to fifth amounts paid out as compared with the corresponding amounts paid in, or for the slightly greater difference between the first payment and the first receipt. His explanation for not waiting until all the money had come in from Monza Trading before paying HKS was that Mr Saif of HKS had trusted Mr Gill with the goods so Mr Gill felt that he had to give HKS the money as soon as it came. In the light of the commercial risks involved, we do not find this a satisfactory explanation for falling in with the payment patterns dictated by the other parties’ arrangements with FCIB. We find that Mr Gill was familiar with such payment patterns, given the similar payment pattern in the Vispar phonecard deals.

Gillex’s VAT and financial position

85. Turning to Gillex’s general VAT history, the turnover for its first year of registration commencing on 1 August 2003, which included the transactions with Vispar, was £204,524; for the second it was £221,817, for the third, which included the transactions with Monza, it was £6,343,610, and for the next, to 30 July 2007, it was £5,312,953.

86. In relation to Gillex’s VAT compliance history, HMRC’s VAT records relating to Gillex show that of the 16 VAT returns submitted, five showed net tax due to HMRC, and the remaining 11 showed claims. Of the five showing net tax due, the only one rendered and paid by the due date was that for period 01/04. Its submission of EC sales lists showed no declared EC sales for the period from 1 August 2003 to 31 March 2006, £6,090,000 for the quarter ending 30 June 2006, and a total of £4,231 for the whole of the following calendar year.

87. Analysis of Gillex’s financial position over the three years to 31 July 2006 shows the following. In the first year, it made a gross profit of 4 per cent on sales of £207,979 (after taking account of other income of £2,977). In the second year it made a gross profit of 15 per cent on sales of £248,614. In the third year to 31 July 2006, which included the two deals which are the subject of this appeal, it made a gross profit of 11 per cent on sales of £6,319,335. However, if the two deals are excluded from the calculations, the sales within Gillex’s “usual” trading activity amounted to £229,335; the opening stock was £35,241, purchases were £549,688 and the closing stock was £92,196. Taking these figures into account, the cost of sales was £457,492, resulting in a “gross profit” figure of minus £228,157, representing a loss on sales of 99 per cent. As we put this to Mr Gill in our questions to him, this suggested that for every £1 worth of goods which Gillex sold in that year, it actually cost Gillex £2.

88. Mr Gill was able to explain £78,000 of the additional cost. His supplier had over-shipped ten containers of luggage, but would not release them to Gillex until each was paid for out of sales proceeds from the preceding one. The additional cost was attributable to demurrage, ie storage charges pending release of each container. In addition, Gillex had had to clear some of the stock at below cost, and the supplier had insisted on Gillex taking a lease of a warehouse from the supplier (or possibly an associate of the supplier) and investing in that company. However, Mr Gill was not able to provide an explanation for the majority of the additional cost giving rise to the loss. Mr Wetton informed us that there was a creditor shown in the accounts that had not been paid but had been included in the purchases; as at the date of liquidation, Gillex had owed approximately £230,000 to creditors, mainly the one supplier. Mr Gill explained in oral evidence that Gillex had paid £36,000 rent for its premises to its landlord; it was not clear to us whether this was Marketmakers Investments Ltd or Marketmakers International, nor was the timing in respect of the liability to these additional amounts clear. We find that a substantial part of the additional costs incurred by Gillex during the relevant period remains unexplained.

89. The accounts also showed a bad debt figure of £633,203. Mr Gill was unable to explain why this was the amount shown, rather than the amount of the input VAT denied by HMRC in respect of the two deals, namely £904,837.50; he had relied upon the firm which prepared the accounts to produce what was required for Companies House. He accepted, in answer to Mr Wetton’s question, that he was not very good with accounts. He had had to put about £120,000 into Gillex from 2005 to 2006, and some in 2007.

90. Mr Gill denied in cross-examination that the financial pressure on Gillex following the arrival of the containers from the supplier and the need to pay demurrage costs was the reason for entering into the deals involving Monza Trading and HKS. He maintained that he had been in touch with “these people” long before the date in March when the demurrage costs began to be incurred. We do not accept the latter statement; although he had had contact with Mr Saif of HKS in August and September 2005, he accepted that at the time there had been no prospect of a deal. Similarly, his evidence was that he had been contacted by Monza Trading about a month before the deal and that he had subsequently (about two week before the deals) had telephone conversations with Monza in which it had finalised the amounts of goods required. We find that the financial pressure on Gillex in March 2006 was a relevant factor in Mr Gill’s decision to participate in the deals.

91. By way of background to that finding, although Mr Gill was described as an experienced businessman, the basis on which Gillex had been managed since commencement of its trade could not be described as resulting in financial success. The first year produced an operating loss of one per cent, the second an operating profit of four per cent, and the third less than one per cent despite the substantial sales of over £6.3 million net of VAT, including the deals with Monza Trading. Mr Gill accepted in oral evidence that he was not a very good (ie successful) businessman; he said that he tried his best, but accepted that Gillex had not made much money, although he pointed out that it had made the money in question in the appeal.

Prior knowledge of MTIC fraud

92. We are satisfied that Gillex, through Mr Gill, was aware of the existence of MTIC fraud and the risks to any party involved in any way in deals which proved to be connected to such fraud. Following its participation in the phonecard deals purchased from Hi-Profile Ltd, HMRC had approached Gillex and set out the concerns in the letter of 24 March 2004. Mr Gill indicated in his oral evidence that he was aware that the need for verification of VAT numbers arose because of the fraud concerns referred to in that letter. When HMRC visited Gillex on 18 March 2005, Mr Gill referred to the concerns which had been expressed by Barclays Bank about involvement in mobile phone trading.

Commerciality issues

Extent and nature of due diligence

93. Mr Gill agreed in cross-examination that he would be particularly cautious when dealing with new customers. However, in relation to these deals involving products in which Gillex had not previously dealt, with high values out of all proportion to Gillex’s previous trading pattern, Mr Gill did not exercise that degree of caution. His evidence was that he had been contacted by Monza Trading about a month before the deal date of 28 April. Thus there was adequate time for Gillex to carry out extensive and rigorous checks on Monza Trading in advance of the actual deals. However, he received nothing on paper until immediately before the deal date. Mr Gill admitted in evidence that he contemplated going out to Italy to meet Mr Mensan, the director of Monza Trading, but that he had not gone. The fax headers on some of the documents relating to the due diligence on Monza Trading give the date as “27 Apr 06”, the day immediately before the invoice date and the shipping of the phones and the subsequent shipping of the iPods on the Sunday. Various other (largely) similar documents carry the fax date “26 May 06”, long after the deals had gone through; we find that the only purpose of such subsequent documentation was a “box ticking exercise”, designed to demonstrate to HMRC that the relevant formalities had been carried through, rather than providing Gillex with the necessary commercial assurances in advance of the deals.

94. The nature of the approach by Monza Trading to Gillex should have put Mr Gill on further enquiry. The last dealings between Tessuflex and Mr Gill’s family must have been at least 15 years before the beginning of 2006, as Tessuflex had ceased business in 1990. Mr Gill was not contacted by Mr Paollo, nor did Mr Gill attempt to contact Mr Paollo to verify the recommendation or even to thank Mr Paollo for it. The commercial context in which there had been dealings between Tessuflex and Mr Gill’s family business had been that of watches, very different from that of mobile phones and iPods; why would Mr Paollo have been recommending Gillex to Monza Trading? In particular, if Monza Trading was claiming in its introductory documentation that it was a large and well-established trader in that sector, why would it be going outside its usual contacts and marketplace to obtain Nokia phones and iPods? An ordinarily competent director in Mr Gill’s position could have been expected to raise detailed enquiries as to Monza Trading’s approach, but he did not.

95. A further question which arises is why, if no information about Monza Trading had been received until the day before the deals even though Mr Gill’s evidence was that there had been telephone calls a month before and about two weeks before the deal date, Mr Gill did not seek further information about Monza Trading before getting to the stage of being committed to the deals. The introductory documentation appears to have been received too late for any commercial decision to be made by Gillex to withdraw from the deals on the basis that it had received insufficient commercial assurances as to Monza Trading’s status. We consider that an ordinarily competent director would have made efforts well in advance of that stage to find out more about a party which was seeking goods of such substantial value from Gillex, and would have become anxious that nothing on paper had been provided to satisfy Gillex that it was dealing with a genuine trader.

96. Gillex did not verify the VAT registration number of its supplier HKS before the deals were carried out. Gillex made a Europa website check on 19 May 2006, about three weeks after the deal date. The response to this was dated 1 August 2006. Mr Gill maintained that he had made an earlier check, but that he had lost it and therefore he had made another to keep Gillex’s records in order. As Mr Gill did manage to keep most of Gillex’s due diligence materials, we find this evidence unconvincing; we find that he did not make an earlier check, and that, to the extent that he relied on anything, he relied on other information as to the VAT position of HKS.

97. Mr Gill acknowledged that he had been aware of the contents of HMRC’s letter to Gillex dated 24 March 2004. This had stated that the information to be provided to HMRC when requesting verification of a trader’s VAT number should, if known, include the following:

(1) The name of the new or potential customer/supplier;

(2) Their VAT registration number;

(3) Their contact numbers (including telephone number, fax number, e-mail address and mobile numbers if known);

(4) The Directors and/or responsible members;

(5) Whether they are buying or selling goods;

(6) The nature of the goods;

(7) The quantities of the goods;

(8) The value of the goods;

(9) Their bank sort code and account number;

(10) HMRC indicated that it would also ask the applicant trader to continue forwarding, on a monthly basis, a purchase and sales listing with the identifying VAT registration numbers against the suppliers/customers to Redhill VAT Office.

98. In Gillex’s letter faxed to HMRC’s Redhill office on 26 April 2006 requesting VAT verification of HKS, the only details which Mr Gill provided about that company were its VAT registration number and its company number. HMRC did not respond immediately, so Gillex did not have a VAT verification of HKS before the deals had taken place. For some unexplained reason, (which we presume to have been to make sure that Gillex’s due diligence documentation would appear to be in order in the event of a subsequent inspection) Gillex sent a further copy of this fax on 23 May 2006. HMRC’s Redhill office did not respond until very much later, 25 September 2006, when a copy of the May version of the fax was returned with an official stamp showing that date, and an annotation:

“Please provide copy of:

Letter of introduction

VAT Certificate

Certificate of Incorporation

This response relates to document received in April 2006 and May 2006.”

99. Mr Wetton argued that HMRC’s request for the additional information (in its annotation on the returned copy of Gillex’s faxed letter) amounted to a change in the rules; however, the information provided in Gillex’s original request fell very far short of that suggested in HMRC’s letter of 24 March 2004, so we find Mr Wetton’s criticism of HMRC unjustified. It is clear that Mr Gill went ahead without obtaining verification from HMRC. If he had genuinely been anxious from the point of view of providing commercial protection to Gillex by obtaining the verification before it was committed to the deals, he might have been expected to “chase” HMRC for a response. However, his evidence was that he did not telephone the Redhill office other than to obtain its fax number (which had been set out in HMRC’s letter of 24 March 2004, so that he does not appear to have looked at the requirements in that letter before sending in the verification request). We find that his only purpose in seeking this VAT verification from HMRC was to include it in Gillex’s due diligence records to be shown to HMRC if required, rather than looking for commercial reassurance that Gillex would be dealing with a company with a valid VAT registration.

100. It is clear that the points set out in HMRC’s letter of 24 March 2004 relate only to VAT verification and do not amount to a recommended checklist for traders in evaluating potential deals, and that it was up to the trader concerned to satisfy itself in all relevant respects both as to the commercial desirability of dealing with that other party and as to the security of the commercial position. As confirmed in Mobilx and others (CA) at [87], a trader must exercise its own independent judgment in deciding whether to enter into a particular transaction, and cannot delegate that judgment to HMRC. We accept Mr Gill’s evidence that he had not received a copy of VAT Notice 726 until after the deals, as the note of Mr McPartlin’s visit on 19 July 2006 indicated that a copy was given to him during that visit, so at the time of the deals he had not been aware of the points set out in that Notice.

101. Mr Gill was unable to remember whether HKS had handed to him or faxed to him the due diligence documentation relating to HKS. He confirmed that he had received them at about the time when he was considering entering into the transaction with HKS. As this could not have been before the approach from Monza, we find that this was within the last month before the deals took place. There is no fax header on the copy documents to assist in verifying the date, nor are the documents dated. The documents showed that HKS had been incorporated in 2004, but had not been VAT registered until 13 January 2006, three and a half months before the deals. Thus HKS had not been registered for VAT at the time when Mr Gill had first met Mr Saif and supplied him with a small quantity of goods, although Mr Saif had told Mr Gill at that stage in September 2005 that HKS was dealing in mobile phones. Mr Gill did not enquire into this apparent discrepancy. Nor did he appear to be concerned by HKS’ different descriptions of itself as “a well established company dealing in a variety of different commodities” (in an introductory letter dated 27 April 2006, the day before the deals) and as “a new and very unique company specialising in communications” (in a different and undated introductory letter contained in the otherwise identical set of due diligence documentation relating to HKS as exhibited to Mr Gill’s witness statement).

102. Mr Gill accepted in cross-examination that he was “amazed” by the scale of HKS’ turnover (£60 million for the relevant quarter) as shown on the copy VAT return supplied to him by HKS. Despite this, he did not make any further enquiries before proceeding with the deals. Mr Gill indicated that he saw this as a basis for confidence in HKS. He did not ask why such a level of turnover had been achieved so soon after HKS’ recent registration, nor why, on a turnover of such a high level, the net VAT due had been as low as £6,021. We find that his failure to enquire further shows an uncommercial lack of concern in the context of the largest deals in which Gillex had ever considered participating.

103. Although Gillex sought a report on HKS’ credit rating from creditsafe.com (the report carries no date to indicate when it was obtained, so we assume in Gillex’s favour that it was obtained before the deals took place), no such rating was available as financial statements had not been filed. This should have raised concerns in Mr Gill’s mind, as the recent high turnover, coupled with the absence of any financial information, called into question how a company which had only recently started to trade sufficiently to become VAT registered could have financed itself in order to achieve that turnover and to participate in the deals with Gillex amounting to over £6 million. Again, his reliance on the VAT return turnover figure as some form of reassurance ignored the commercial concerns which an ordinarily competent director should have been expected to display.

104. Mr Gill did visit the premises of HKS. However, he appears to have ignored a number of factors which ought to have been seen as warning signs. The premises, of which he took photographs, did not look like those of a company with a turnover of £60 million in one quarter. There were no employees at the company at the time of the visit other than Mr Saif. Mr Gill assumed from the presence of a number of computers that the rest of the staff were simply not there. He was unable to remember what day of the week his visit had taken place, or the time of day. Other than the photographs (as to which there was no evidence of the date when they had been taken), he had kept no records of his visit, as might have been expected to be the case as a matter of ordinary commercial prudence. Mr Saif of HKS was presenting his company as a wholesaler, yet Mr Gill did not ask to see HKS’ warehouse, nor did Mr Saif invite him to do so.

105. The due diligence carried out by HKS on Gillex was very limited. Mr Gill provided Mr Saif with Gillex’s certificate of incorporation and VAT number. Mr Gill indicated in oral evidence that he also gave Mr Saif “some trade references”; he was able to remember only one, a local firm, in respect of Gillex’s trade in watches and luggage, but this did not relate to trading in mobile phones and iPods. He pointed out that Mr Saif knew that Gillex was dealing with MP3 players, but acknowledged that Mr Saif would have been aware that Gillex was not dealing in such items on a large scale, although Mr Gill stressed his connections in business. He accepted that such connections did not extend to the mobile phone industry.

106. Mr Gill did not find it surprising that Mr Saif of HKS was prepared to provide Gillex with goods worth £6 million without some much firmer indication that it was “good for the money”; his explanation was that Mr Saif trusted him. Mr Gill did not accept that in effect HKS had granted Gillex £6 million worth of credit. We consider the contractual implications below, so do not comment on his view at this stage. We find that the absence of any significant due diligence carried out by HKS should itself have raised questions in Mr Gill’s mind as to the reasons why he was being invited to commit Gillex to participate in transactions on such advantageous terms, and why Mr Saif should have been putting such a degree of trust in him.

107. The due diligence which Mr Gill carried out in respect of Monza Trading was comparable in the degree of its inadequacy to that in respect of HKS. The version of Monza Trading’s introductory letter attached to Mr Gill’s statement carried no date. Mr Gill indicated in evidence that the due diligence documentation from Monza Trading was only faxed to him two days before the deal. He said that he had been telling Monza Trading to send it to him as soon as possible. Another of the versions of that letter contained in the trial bundle (which, as we consider below, had certain differences) was also undated but carried the fax header date 27 April 2006, the day before the deals rather than two days before. A further point arising from the letter is that the bank details set out at the foot of the letter (in a box which should not have been difficult to understand even if the reader did not speak Italian) showed that value was to be dealt with in Sterling. There is no evidence that Mr Gill did anything to enquire why an Italian company, trading within the Euro zone, would be expecting to be paid in sterling rather than in Euros.

108. There is no evidence that Gillex carried out anything by way of due diligence on Monza Trading other than to rely on the materials which that company provided. A significant part of that documentation was in Italian. Mr Gill confirmed that he did not speak Italian, and that a particular document had meant nothing to him when he received it. His evidence was that he had phoned Monza Trading when he received it to ask them what it was and that he had written it down on the document as “Memorandum of Association”. However, the only copy in the trial bundle of that document carrying that annotation carries the fax header “26 May 06”; the version exhibited to his statement and the other copies in the trial bundle carry no such annotation, so we find that Mr Gill cannot have had that conversation with Monza in advance of the deal date. A similar annotation was made on another document, “Certificate of Incorporation and V.A.T.”, and again the relevant version carries the fax header date of 26 May 06. Other versions of this document appeared respectively in the trial bundle and as an exhibit to Mr Gill’s statement, but his identification leading to the annotation must have been after the deal date. Apart from being in Italian without an accompanying translation, the copies of each document are of poor quality and not easily legible even to a speaker of Italian. We find that the absence of any further enquiry in advance of the deals shows a complete lack of commercial concern despite their size and the nature of the commitments which Gillex was about to enter into (if it had not already bound itself to the transactions by oral agreement in advance).

109. The version of Monza Trading’s “Due Diligence Questionnaire” carrying the header date 27 April 06 contained a trade reference, being a company in Poland. Mr Gill indicated in evidence that he did not normally take trade references, but acknowledged that this might be appropriate in circumstances where credit was being offered to a trader, in order to know more about who the trader was and whether it could pay, particularly where there was a danger of fraud. He did not take up the reference offered by Monza Trading, although by the stage he received this questionnaire, it may have been too late for him to attempt to do so. His evidence was that “I just did not think of it at the time”. Mr Gill believed that he was protected by means of the goods being released on “ship and hold” terms, but was unable to give a satisfactory explanation of what would have happened if, for example, the goods had been destroyed by fire or if Monza Trading had taken possession of the goods and refused to make payment.

110. Although HMRC (in its former persona HM Customs and Excise) had referred in its letter dated 24 March 2004 to the need to verify the VAT status of customers as well as suppliers, there is no evidence that Gillex took any steps to do so in relation to Monza. At minimum, a Europa website check could have been carried out, but was not. Even though Mr Gill did not receive the papers until 27 April, there would have been time to access that website before the deals were finally carried out.

111. The information included in the questionnaire provided to Gillex on 27 April 2006 showed that Monza Trading had been incorporated on 24 January 2005 and registered for VAT from 10 February 2005, not much more than a year before the date of the two deals. In evidence, Mr Gill said that he had the documents and knew that Monza Trading had a turnover of 415 million Euros. His explanation for this level of turnover so soon after first registration was that for a company dealing in mobile phones the turnover could increase drastically. He agreed that this level was “astronomical”, but could not satisfactorily explain why a company with this apparent level of turnover would be approaching a company of Gillex’s size.

112. Despite the alleged recommendation by Mr Paollo of Tessuflex, in respect of which there was no documentary evidence, the lack of any contact between Mr Paollo and Gillex meant that Mr Gill received no form of assurance as to Monza Trading’s standing in the market in which it claimed to be engaged or as to whether it was a bona fide company.

113. In the version of its “due diligence questionnaire” faxed to Gillex on 27 April 2006, Monza Trading listed, under the heading “due diligence undertaken”, the following: “Site visits, meetings with Directors, EC VAT number verification, creditcheck and cross-referencing introductory company documentation”. Mr Gill’s evidence was that he sent Monza Trading “my documents”; he explained that these were Gillex’s certificate of incorporation and his VAT number, and nothing more. He did not state at what stage he had provided these details. However, we find that the limited scope of Monza Trading’s checking of Gillex’s status should have raised concerns in the mind of an ordinarily competent director in the light of the value of the proposed deals. Mr Gill thought that Monza Trading was satisfied with Mr Paollo telling it that “reliable people” were involved in Gillex.

114. Even though three versions of Monza Trading’s introductory letter were included in the evidence, it is not clear when Gillex first received a copy of this letter. If the first occasion was 27 April 2006, as indicated by the fax header on one version, this would have given Mr Gill very little time to act on it. In particular, he would not have had time to visit Monza Trading, despite his evidence that he had contemplated doing so. If he had made such a visit, the cost of which would have been justifiable in the context of such a large deal, he would have been able to discover what HMRC established from their subsequent enquiries of the Italian authorities, namely that the director was merely a “frontman” and that in February 2006 (before these deals were in contemplation) he had made a declaration to the authorities that his involvement in the activities of the company was as a figurehead, that he had no transport or similar documents, that the company did not have a real operating office, and its correspondence was dealt with through an accommodation address. Thus Mr Gill would have been able to establish that Monza Trading’s purported operations were a sham.

115. Mr Gill confirmed in evidence that he had not carried out any due diligence on Stolz Transport, which he confirmed was acting as agent for Monza Trading and not for Gillex. His contention was that the goods had been sent on a ship and hold basis, relying on a letter to ASC Worldwide Ltd (“ASC”, the freight forwarding company referred to below) dated 28 April 2006 relating to both consignments. However, two copy letters of that date from Gillex which were obtained by HMRC from ASC showed that Gillex had issued simple instructions to ASC to release, respectively, the iPods and the Nokia phones to Monza Trading c/o Stolz Transport, without any reference to a “hold” basis. Thus Gillex was relying on Stolz Transport to safeguard Gillex’s interests despite the lack of any contractual link and the total absence of any check by Gillex of the standing of Stolz Transport. We find that the omission of such a check displayed a complete lack of the commercial concern which could be expected from a party which was at risk to the tune of £6 million.

116. Mr Gill admitted in evidence that he did not carry out any due diligence either in respect of ASC, the company which was to act as freight forwarders for Gillex (as well as for HKS, Gillex’s supplier) and which was also to carry out the inspection of the mobile phones and the iPods, or in respect of DMC Express Ltd (“DMC”), which was to take responsibility for movement of the goods, actually through sub-contractors. He stated that according to Mr Saif of HKS, the goods were in ASC’s warehouse a week before the deal date of 28 April. Although Mr Gill described ASC as being based in Hounslow, the address shown on its letterhead is at Heathrow. The address for DMC is in Feltham, Middlesex, close to Heathrow. Mr Gill admitted that the premises were not far from those of Gillex, so that it would have been possible for him to go down and look at the goods, but that he had not done so. As ASC and DMC were to take responsibility for their respective functions in respect of goods to the total value of over £6 million, we would have expected an ordinarily competent director in the circumstances to have made appropriate checks on both these companies.

117. If Mr Gill had attempted to visit ASC’s premises, he would have discovered (as subsequently shown by HMRC’s officer Fu Sang Lam, the “broker officer” for West 1, the defaulter) that ASC had no premises of its own and no vehicles, so it used DMC as a sub-contractor, which in turn subcontracted the work to other hauliers.

118. ASC was appointed to carry out inspections of the goods following a recommendation by HKS. The use of the same company as that being used by HKS, Gillex’s supplier, should have raised in Mr Gill’s mind the question whether the inspection on behalf of Gillex would be impartial and independent, and in particular would form an appropriate basis for Gillex to feel justified in proceeding with the transactions.

119. The inspection reports themselves raise a series of questions. The first is why there were two versions of each report for, respectively, the mobile phone inspection and the iPods inspection; although broadly the same, it is clear from the signatures that there were separate versions. The second, broader question is how ASC would have been in a position to carry out a full inspection of the goods in the time available.

120. The description of the inspections indicates that they involved a manual full count, full inspection; no check was carried out on IMEI numbers (which was a serious omission, especially as Gillex kept no record of such numbers), but a check was said to have been carried out on the contents of each box. The outer seal was described as “new”, and the condition of box “unmarked”. Although Mr Gill said that the goods were in ASC’s warehouse (whereas in fact they could only have been at DMC’s premises) about a week before the 28 April deal date, there would have been no contractual basis to entitle Gillex to arrange for inspection before the goods were in Gillex’s possession. At most, ignoring the mechanics of payment for the goods, they can only be regarded as having been available to Gillex on the invoice date of 28 April. We do not accept that it would have been physically possible for ASC to carry out full manual inspections of all the 12,000 boxes in the course of a single day, whether or not the whole of that day was available for that purpose (and leaving aside the fact that ASC was also supposed to be carrying out an inspection on behalf of HKS once the goods were available to it through the invoicing arrangements between it and its own supplier). Further, the results of the inspection, if they had been adverse, would have come through much too late for the purposes of any decision by Gillex to withdraw from the deals.

121. To sum up, Gillex’s due diligence was, at best, perfunctory. We find that it was completely inadequate and could not be described as providing Gillex with the necessary commercial assurances required when entering into high value transactions. Much of it was carried out after the event and thus too late to assist any decision whether Gillex should become involved in these deals. Despite the limited nature of this due diligence, Mr Gill did discover a number of negative indicators, yet he chose to go ahead with the deals without making any further enquiries. It was clear from his oral evidence that he did not view the purpose of due diligence as being to establish whether participation in the deal was an appropriate commercial course to follow, but instead saw it as some form of formal record-keeping process, probably purely for the purpose of showing such records to HMRC after the event. This approach to due diligence is part of the “bigger picture” which we consider below.

Lack of insurance

122. Despite the very substantial values involved, Gillex did not take out any insurance on either consignment of goods. Mr Gill accepted that he had not paid adequate attention to the question of insurance and had relied on the agent, namely ASC Worldwide, and its subcontractors. Following commencement of HMRC’s verification process, he obtained insurance details relating to DMC, one of the two sub-contractor transport companies used by ASC. He did not obtain details relating to the other sub-contractor. The insurance confirmation relating to DMC indicated that there were overall indemnity limits of £500,000 for any one claim in respect of warehousing and £250,000 in respect of haulage. In the light of the values of the consignments, approximately £3 million each, and the risks involved if the goods had been stolen or destroyed while in Gillex’s ownership, we consider that Mr Gill’s attitude to the question of insurance demonstrates a complete lack of commerciality. (We comment below on the comparison with the approach taken in respect of Gillex’s other trading.) Given the substantial risks involved, the absence of insurance is a persuasive indication that Mr Gill did not consider his company really to be at risk, because the orchestrated nature of the deals meant that the normal commercial risks had been eliminated.

Lack of formal contractual documentation

123. The absence of any formal contractual documentation to cover these two deals is another factor indicating lack of commerciality. The values were very substantial. We accept that in various commercial contexts substantial transactions are carried out with comparatively little contractual documentation, but in those contexts trading and contractual conventions have generally been evolved to govern the basis on which the transactions proceed. In relation to these two deals, there were specific questions needing to be resolved. When would title pass? On what basis could the goods be released? On which party did liability rest at any particular stage in the sequence of transactions, and therefore what insurance cover was required to protect against such liability? On what basis were the goods to be held pending payment as between the respective parties in the chain?

124. On the question just posed, there was an element of conflict in the evidence. Mr Gill referred to a letter from Gillex dated 28 April 2006 and addressed to ASC Worldwide. This instructed ASC to ship to Stolz Transport in Lahr, Germany, and to ship and hold the goods (both consignments), to be released to Monza Trading, release date to be advised. However, there was also a letter of the same date from Gillex to ASC instructing it to ship the iPods to Monza Trading, agents Stolz Transport, which made no mention of ship and hold. Another letter from Gillex to ASC, also referring only to the iPods, instructed ASC to ship the goods to Monza Trading, setting out the latter’s address in Italy; the standard of English used in that letter, which differed from that in the earlier “non ship and hold” one, was poor. The text was as follows:

“With reference to the 6000pcs Apple I Pod 60GB in black, Apple Remote control I sound Max speaker system. With you held for us.

Please ship to M/S Monza Trading SRL Via Monte Di Pieta 21, 21021 Milano, Italy. You can contact them regarding there clearing agents contract.”

125. A further letter from Gillex to ASC, also dated 28 April 2006, referred to an earlier telephone conversation and instructed ASC to release the 6000 Nokia mobile phones to Monza Trading, care of Stolz Transport, referring to the latter’s address in Germany. On 5 May 2006, Gillex sent instructions to Stolz Transport requesting it to release the goods, ie both consignments, to Monza Trading.

126. We find that this documentation makes no commercial sense. Even if, as Mr Gill contended, the goods were sent on a ship and hold basis, the reason would have been to delay release of the goods to Monza Trading until Gillex was satisfied that full payment for both consignments had been received. As we have already indicated, the payments made through the chain of parties involved in these deals started with a single payment made by URI on 3 May 2006, and the rest of the payments were not made until 5 May 2006. Although Gillex’s letter to Stolz Transport was dated 5 May, there is no basis to justify a conclusion that Gillex was in any contractual relationship with Stolz Transport, which was described as Monza Trading’s agent rather than an agent acting on behalf of Gillex. In the same way as Gillex’s release letters, those from all the other parties in the chain were dated 28 April 2006, a week before the payments were made as between the respective parties’ accounts with FCIB.

127. Another matter left unexplained as a result of the lack of contractual documentation is the basis, or “trigger”, for payment. The invoice date, 28 April 2006, was a Friday. The documentation relating to the movement of one of the consignments of goods, namely the iPods, was dated 30 April, which was a Sunday. The explanation for the delay in transporting this consignment was that there were restrictions on movements of lorries through Germany over the weekend. However, for the Nokia phones, the Eurotunnel documentation shows the travel time as 23.26 on 28 April. Whatever the reason for the discrepancy between these two consignments, there is no indication of the reason for the payment flows to have been delayed until a week after the invoice date, by which stage both consignments could have been expected to have been received and retained by Stolz Transport for at least a couple of days if not more.

Poor standard of documentation

128. Such small amount of documentation as existed was produced to a poor standard in terms of presentation and English, as in the extract set out above. Some other examples of this are:

(1) Gillex’s own letters showed its address as “Cumberland Bussines Park”, and referred to its “Company Reigistration Number”.

(2) Previously Gillex had produced handwritten invoices, with a properly spelt address; as an example, the invoice to HKS for the MP3 players and other items showed the printed home address from which Gillex had been operating at that time, but all the other details were handwritten. In his oral evidence, Mr Gill said that the reason for using typed invoices was that as the goods were being exported, the typed invoices could be more easily read.

(3) There is a close resemblance between the font size and appearance used in Gillex’s letters and that appearing in some of the correspondence from HKS.

(4) In Gillex’s introduction letter to Monza Trading dated 27 April 2006, the third paragraph begins: “Please let us know when you will be visiting the England.” On the basis of Mr Gill’s oral evidence, we do not consider it at all likely that he would have expressed himself in this way.

(5) Gillex’s invoices to Monza Trading numbered 674 and 770 give the latter’s address split up inappropriately.

(6) One version of the introduction letter from Monza Trading carries a fax header of “27 Apr 06” There is also a copy without a fax header; neither is dated by the sender. The email address as shown in the plain copy does not precisely match that in the faxed copy, as the former shows it as “monzamaxF tiscali.it” with a space and no “@” symbol. The faxed copy gives no separate email address for the company, but the plain version shows this as “monzatradingF tiscali.it”. A further copy, with fax header 26 May 2006, largely matches the details in the plain copy, but does not include the company’s email address. In all the copies Mr Djoussu Kossi Mensan (whom Mr Gill knew as “Max”) was shown as “Dirretor” rather than “Dirretore”.

(7) By its letter dated 2 May 2006 Gillex requested purchase orders from Monza as Gillex had misplaced the previous orders. In these purchase orders the word given for England is “Inglaterra” and not “Inghilterra”.

(8) It is notable that few if any of the letters were signed by the relevant parties (although this may possibly be explained by the use of fax transmission).

We consider these defects, taken together with the existence of a range of conflicting documentation, such as the shipping letters referring either to a simple shipping arrangement or to a ship on hold basis, to be a factor consistent with a conclusion that the transactions were orchestrated by one party. As the payment cycle commenced with URI, and Ravender Datta was the individual controlling both URI and UT, we consider it more likely than not that he was the orchestrator and controller of both these deals.

Contrast with Gillex’s other trading

129. We accept Ms Bevan’s submission that there was a marked difference between the way in which Gillex carried out its other business activities and the operation of its business in relation to these two deals:

(1) Banking for these deals was through FCIB, but for all other trading Gillex used its Barclays account, and Mr Gill was aware of the concerns which Barclays had expressed in relation to phone transactions;

(2) Other than for the goods covered by these deals, storage of goods was in Gillex’s own warehouse. In Mr McPartlin’s view, based on his visit on 19 July 2006, there would have been sufficient space for the mobile phones and iPods to be stored in that warehouse rather than that of ASC Worldwide, the freight forwarders (or in fact that of DMC, ASC’s sub-contractor);

(3) Gillex did pay insurance premiums to cover the goods in its own warehouse, ie watches and luggage. As explained above, Mr Gill did not consider insuring the mobile phones or the iPods. He did explain in oral evidence that he relied on the insurance of the hauliers in relation to goods delivered by container, but the value involved per container was much lower, at £12,000;

(4) Other than the Vispar deal, Gillex’s transactions were not carried out on a back to back basis, whereas the two deals with Monza Trading were. Invoicing details for Gillex’s other business demonstrated that invoices for sales and purchases were dealt with separately, and that same day invoicing of sales and purchases did not occur in that other business. Stocks were maintained, and purchases frequently made without any particular customer in mind for the whole consignment;

(5) Payment patterns within that other business were far more variable, with debts outstanding, in contrast to the payment arrangements for the deals under appeal. Mr Gill indicated in cross-examination that he had expected the whole sum due from HKS to come in one instalment, but had transferred funds as they came in (subject to minor adjustments) because HKS had trusted him with the goods so he had to give HKS the money as soon as it came. We accept Ms Bevan’s submission that this was somewhat out of character with the basis on which the rest of Gillex’s trade was carried on;

(6) As demonstrated by Mr McPartlin’s calculations, mark-ups and margins appear to have been far more varied across Gillex’s other business than in relation to the two deals.

Improbable features of the deals

130. There were various elements of the mobile phone and iPod deals which, if Mr Gill had tested them in the light of what he maintained to be a long experience in business, could not have made commercial sense to him. Thus, as Ms Bevan submitted, there were various factors which ought to have driven Gillex to the conclusion that the transactions were connected to fraud, being “too good to be true”:

(1) HKS had agreed to forward the goods to Gillex prior to payment, thus in effect granting it credit amounting to £6 million, even though Gillex had no credit rating and had no previous substantial trading history with HKS, and even though HKS had not carried out any major due diligence checks on Gillex. It could not have been commercially justifiable for Mr Gill to consider these terms as capable of explanation by the back to back nature of the deals or an existing business relationship founded on a single small value earlier trading transaction;

(2) Against the background of Gillex’s other business, the absence of any commercial risk, and the absence of any need for funding to be provided by Gillex, must have appeared completely extraordinary to Mr Gill;

(3) We find that the opportunity to achieve such a substantial profit in a short time, without Gillex being required to do anything to add any value to the transactions, would have led an ordinarily competent director to the conclusion that those transactions must be connected to fraud. As already indicated, Mr Gill had accepted that Gillex had not been a particularly profitable operation. He also agreed in cross-examination that the making of substantial profit would generally involve the addition of some kind of substantial value, as had been done in the family business in the 1980s when it imported £2 million pounds worth of watch cases from Tessuflex and put watches together.

131. In evidence, Mr Gill accepted that the deals under appeal, intended to produce a profit of about £900,000 without any risk to Gillex, were “utterly extraordinary”. The only explanation which he could offer for deriving such a substantial profit was that it was as a result of his contacts; he acknowledged that he did not have that much knowledge about mobile phones, but knew more about iPods. (He commented that all Nokia phones had been in demand at the time, in particular the 8800.) As Ms Bevan submitted, the only contacts which Gillex had, having been approached by Monza on the alleged recommendation by Mr Paollo of Tessuflex, were HKS, found by Gillex through Alibaba.com, and Vispar. As Monza could equally have found HKS through that website, this does not amount to a sensible commercial explanation for the enormous financial advantage conferred on Gillex simply for its participation in the deal chains. There is no apparent commercial justification for the conferring of this level of profit on Gillex, particularly when the profit margins of all other participants in the chains are examined and compared with that derived by Gillex.

132. In cross-examination, Mr Gill stated that the deal “was too good to be true but could have been true”. Ms Bevan contended that this concession was made “rather contradictorily”. We consider below this statement by Mr Gill in the context of the tests of Gillex’s knowledge or constructive knowledge.

133. A further way of testing the improbable features of the deals is to adapt the questions considered by the Tribunal in Blue Sphere Global which were approved by the Court of Appeal in Mobilx and others (CA);

(1) Why was Gillex, a relatively small company with comparatively little history of dealing with mobile phones, approached with offers to buy and sell very substantial quantities of such phones?

(2) How likely in ordinary commercial circumstances would it be for a company in Gillex’s position to be requested to supply large quantities of a particular type of mobile phone and identical quantities of iPods with speakers and be able to find without difficulty a supplier able to provide exactly the respective types and quantities of such goods?

(3) Was HKS already making supplies to other EC countries (and if not, why not?) If it was, Gillex could have asked why HKS was not making supplies direct, rather than selling to traders who in turn would sell to such other countries. A further connected question is why HKS, a UK supplier, was supplying to Gillex, another UK trader, mobile phones of Central European specification which in the light of safety regulations were not suited to use in the UK without an appropriate fitted adapter and must therefore be expected to be exported at some stage.

(4) Why were Monza and HKS encouraging Gillex to become involved in these transactions? What benefit might they be deriving by persuading Gillex to do so? Why should they be inviting Gillex to join in when they could have done so instead and taken for themselves the substantial profit which Gillex was expecting to derive from the two deals?

134. On the last of these questions, Mr Gill stated in cross-examination that it had occurred to him that Monza Trading could have gone on to the Alibaba website to source the goods which it was seeking, and he accepted that he had met Gillex’s own supplier, HKS, through that site. His explanation for Monza Trading coming to Gillex was that Monza had wanted somebody of trust. We do not consider this to be a satisfactory or adequate explanation, and we find that an ordinarily competent director would have made further enquiries and would have sought a great deal of further information before considering further such a proposition. Mr Gill accepted in cross-examination that the deal was “utterly extraordinary”. At a subsequent stage he defended putting his supplier and customer in the Vispar deal in touch with each other in order for the latter to make a direct (“third party”) payment to the former on the basis that the amount of profit involved in that deal was very small, but did not explain why he did not consider it risky from the commercial point of view for a trader to put a supplier and a customer directly in touch with one another.

135. We find that no satisfactory answers can be given to the above four questions which would be sufficient to persuade us that an ordinarily competent director acting on behalf of Gillex could have accepted them at face value without concluding that Gillex’s involvement in the proposed deals must be connected to fraud. We consider this further in the context of our general conclusions below.

136. There are two separate and specific questions which need to be considered in the light of the facts found in the present case. The first is: if Gillex was an unknowing party to the underlying objective of the deals, why would the other parties have taken part in the chains in circumstances where their profit margins were so minimal, yet enabled Gillex to take such a large share of the profit? Can it have been a pure coincidence that the profit elements for all parties in the chain, measured purely on the basis of the amounts transferred rather than on the mark-ups, were minimal (or, in one case, negative) for all parties in the chains, including Gillex (although we acknowledge that Gillex’s net benefit on the transfers was greater than that of the other parties), and that significant profit could only be achieved if Gillex’s input tax claim were to be successful in order to provide Gillex with the mark-up that had been agreed? As fraud was clearly involved within the deal chains, how could the parties expecting to benefit from the fraud be sure that Gillex would act in the way necessary to enable the fraudulent objective to be attained if Gillex was a truly innocent and unknowing party?

137. The second question is: why did Gillex follow the pattern of seven split instalments combining the two deals? Mr Gill’s evidence was that he had “thought all the money would come together”. It is not clear why he should have expected the proceeds from two deals to come together in one sum, but the important question is why he did not appear to be concerned that the money did not all come through at once but was coming through in instalments. A possible explanation is his familiarity with such payment patterns as a result of Gillex having participated in the Vispar deals. A party in Gillex’s position would normally, as a matter of commercial prudence, wait until the whole of the purchase price had been received from Monza Trading before being prepared to release any funds to HKS, yet Mr Gill was prepared to engage in the payment arrangements on the basis of paying out almost the whole of each amount received without any assurance that the whole of the remaining sales proceeds would come through to Gillex’s FCIB account.

138. The payment pattern appears to have been carefully orchestrated, and suggests direction by a single individual, whether or not in collusion with FCIB. There is not sufficient evidence to establish such collusion. We find that the payment patterns were dictated by URI, the originator of the funds, through its director, beneficial owner and signatory Ravender Datta (who was also the shareholder and manager of United Traders Portugal), but that there is not sufficient evidence to establish whether he controlled all the payment flows through the other parties’ FCIB accounts. We find unconvincing Mr Gill’s evidence that he was following the payments on the internet and then making transfers to HKS’ account, particularly in the light of the adjustments made as between the amounts of each instalment received and each instalment transferred to the account of HKS; the pattern of payments is such that the person organising them must have been aware of the precise amounts to be, respectively, retained and passed on by Gillex, in the same way as for the other participants in the two chains for which the payments were being combined. It is not clear why the first transfer made by URI was on 3 May 2006, but all the other transfers by URI and the other parties were made on 5 May 2006.

Overall conclusions

139.In Mobilx and others (CA) at [82] Moses LJ emphasised that Tribunals should not unduly focus on the question whether a trader has acted with due diligence. He continued:

“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.”

140. As we have indicated, we are not satisfied that Mr Gill did ask all the questions which would have been appropriate, nor did he follow up matters which would have been expected to raise further questions in the mind of an ordinarily competent director. We consider this relevant both to the actual knowledge issue and to the constructive knowledge issue, as part of the “bigger picture”.

Actual knowledge?

141. We have expressed above our conclusion that in the context of actual knowledge it is not necessary for the trader to know the details of the fraud, if the only reasonable explanation of the deal is that it relates back to fraud of some nature involving evasion of VAT. We are led by the combination of the following factors to the conclusion that Gillex did, on that basis, have actual knowledge of the fraud:

(1) the improbable nature of the deals, appearing to be at no risk to Gillex and producing a profit in excess of £900,000 for a trading exercise carried out within one day and paid for within a week, with Gillex adding nothing to the deals other than its mere participation, yet appearing to take the “lion’s share” of the profit produced by the deal chains when the benefit to each of the other parties seems to have been minimal;

(2) the experience which Mr Gill had had of deals of this general nature through his experience with Vispar and Hi-Profile Ltd;

(3) the carefully choreographed payment arrangements combining the payments in respect of the two deals and meaning that the real profit to be derived from the fraud could only be realised through Gillex’s input tax claim;

(4) the adverse financial circumstances of Gillex in March 2006 at the point when the deals were being put together, providing an incentive to Gillex to participate without taking appropriate precautions against participating in deals explicable only on the basis that fraud was involved in the deal chains.

Constructive knowledge?

142. On the basis of our finding as to actual knowledge, a finding in respect of constructive knowledge is not strictly necessary to determine the appeal. However, in case our finding that Gillex had actual knowledge is not upheld, we find that Gillex did have constructive knowledge. We are satisfied for the following reasons that if Gillex did not know, it should have known that by these two deals it was participating in a fraud:

(1) in particular, the four reasons set out above in the context of actual knowledge, and especially the first of those reasons;

(2) the questionable basis for the initial approach from Monza Trading;

(3) the questions as to HKS and its history which were “staring Mr Gill in the face”, but which he ignored;

(4) Gillex’s failure to use due diligence for its commercial protection, with Mr Gill disregarding a range of negative indicators and thus failing to follow up matters which should have raised questions in the mind of an ordinarily competent director;

(5) the lack of insurance in respect of high value goods, indicating that all the parties involved saw the deals as risk-free;

(6) the limited and poor documentation, the effect of at least some of which was unclear;

(7) the very distinct differences between the way in which Gillex’s other trade was carried out and the way in which these deals were to be effected.

Result of the appeal

143. Accordingly we dismiss Gillex’s appeal against HMRC’s refusal of its input tax claim in respect of £904,837.50 for the period 04/06 on the grounds that Gillex knew or should have known that the transactions concerned were connected with the fraudulent evasion of VAT.

Did the goods exist?

144. Some of the evidence leads us to question whether the goods actually existed and therefore whether any export actually took place. First, as we have indicated, there are multiple versions of various documents relating to the deals. Secondly, the alleged telephone conversations between Gillex and Mr “Max” Djoussu Kossi Mensan were said to have taken place at a time when Mr Mensan had already given a statement to the Italian authorities that he was merely the figurehead for Monza Trading. This casts considerable doubt on whether conversations about further potential deals were likely to have occurred after he had given that statement. Taken together with the general picture painted by the rest of the evidence, these parts of the evidence suggest to us that the documentation was simply a “paper trail” designed to give the impression that deals had been carried through and goods had been exported in a way enabling an input tax recovery claim to be made.

145. Although at one stage of their investigations HMRC suggested that the goods might not have been exported, they subsequently decided not to pursue this; Mr McPartlin wrote to Gillex on 25 September 2006 to confirm that, based on currently available information, he would “exceptionally” not be pursuing the matter of the removal of the goods from the UK at present. If HMRC had so argued and had proved the case, there would have been no supplies and therefore no basis for input tax deductions, and the questions as to actual or constructive knowledge would not have been relevant. We think that in appropriate circumstances, HMRC should consider whether to challenge input tax claims on the basis of non-supply rather than on the basis of actual or constructive knowledge.

Costs

146. Ms Bevan applied for costs in the event that Gillex’s appeal was unsuccessful. As the appeal was lodged before 1 April 2009, the position is governed by paragraph 7(7) of Schedule 3 to The Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 (SI 2009 No. 56). As this is a case where (on the assumptions set out in paragraph 7(7)) an order for costs could have been made before the commencement date, it is open to us to make such an award. We grant an order for HMRC’s costs on the standard basis, to be agreed between the parties, or in default of such agreement to be determined by a Costs Judge.

Other matters

147. We would like to thank Mr Wetton and his firm for supplying us at the end of the hearing with USB drives containing, within a searchable database, scanned copies of most of the documentation produced for this appeal. He explained to us that his firm is a “paperless office”, and that all documents are scanned. Together with the hard copy version of the documentation, it has been a substantial benefit to us to be able to refer to and search the documentation in electronic form. We consider that this approach could be useful in future Tribunal cases, particularly where, as here, it is necessary to consider substantial amounts of documentation.

148. 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.

First-tier Tribunal (Tax)

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents