[2011] UKFTT 72 (TC)
TC00950
Appeal number: LON/2008/0357
VAT – alleged MTIC fraud – whether the Appellant knew or ought to have known that its transactions were connected with the fraudulent evasion of VAT- whether HMRC were able to prove that in relation to the relevant transactions there had been a fraudulent evasion of tax
FIRST-TIER TRIBUNAL
TAX
My Secrets LimitedAppellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMSRespondents
TRIBUNAL:MRS S.M.G.RADFORD (TRIBUNAL JUDGE) J.G.ROBINSON
Sitting in public at 45 Bedford Square, London WC1 on 19 to 29 April 2010 and 29 October 2010
Mr Timothy Brown for the Appellant
Mr Mark Bryant–Heron and Mr George Rowell, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2010
1
DECISION
1.The Appellant appealed the decision of HMRC which was communicated by way of a letter dated 28 January 2008 which denied it the entitlement to deduct input tax in the sum of £819,280.00.
2.The decision related to two monthly VAT periods - June 2006 (06/06) during which there was four deals which resulted in an input tax claim in amount of £450,187.50 and July 2006 (07/06) during which there were three deals resulting in a claim for £371,616.35 of input tax.
3.It was claimed for the Appellant that at the material time it was a wholesale trader in mobile phones. It is HMRC’s case that each of the Appellant’s seven deals was connected with fraudulent evasion of VAT and the Appellant either knew or should have known that they were so connected.
4.The Appellant relied on the evidence of Mr Joseph Kemal, the managing director of the Appellant and Mrs Denise Leach, manager of the Appellant.
5.The Respondents relied on the evidence of Ms Vivien Parsons, Ms Erica Nketiah, Mr Roderick Stone, Mr Gordon Smith and Mr Terence Mendes of HMRC and their expert witness, Mr John Fletcher of KPMG.
Background and facts
6.The Appellant was incorporated on 13 December 2002. The director, Mr Joseph Kemal, was appointed on the same date. At the relevant time Mrs Denise Leach was employed as a manager with day to day involvement in trading.
7.The Appellant was registered for VAT as a textile wholesaler with effect from 1 February 2003, with the VAT registration number 805 2456 47 and at all the material times was responsible for submitting monthly VAT returns. The Appellant’s principal place of business was 575, North End Road, Wembley, Middlesex, HA9 0UU. From mid-2003, the Appellant became involved in the purchase and sale of electronic goods.
8.In his witness statement Mr Kemal stated that the Appellant was initially formed with a view to wholesaling textile goods which was an area with which he had previously been involved for many years. In evidence he stated that in this business he had had great success before eventually selling his business to Polly Peck.
9.In evidence he confirmed that as a result of the textile business becoming generally increasingly competitive and profit margins constantly being squeezed he decided to move into another area of business which he believed might be more profitable.
10.Mr Kemal had been involved with Joe Harris, father of Denise Leach for nearly 35 years. Joe Harris was anxious to provide for her and decided to help to finance the new company with a view to the company eventually belonging to her.
11.Although the Appellant originally intended to deal in the nightwear business the floor above its premises was rented to an electronic company called Granville and their salesman, known as Vic, persuaded the Appellant that there was good business in exporting international telephone calling cards. After some discussion with Joe Harris it was agreed that the Appellant would take part. Mr Kemal insisted that the goods should come to the Appellant for checking and that HMRC became involved.
12.HMRC visited the Appellant’s offices and were informed that the company was now trading in the purchase and sale of international calling cards. Mr Kemal was aware that VAT fraud was on the increase and asked for a form to be devised which would be sent to the Appellant’s suppliers for confirmation that VAT would be accounted for on any goods sold to the Appellant.
13.In evidence Mr Kemal stated that he met Ian Tuppen after the fourth or fifth deal that they did with the international calling cards. Ian Tuppen had confirmed to him that with the Olympic Games in Greece there would be a big demand for cheap telephone calls. By then Vic, the salesman, who had been demanding more commission on the sales, had left Granville. Mr Kemal employed Paula Huller to take the place of Vic and to continue with the calling card business.
14.During this time on the advice of the Appellant’s accountant the Appellant’s VAT returns were changed to a monthly basis.
15.After the meeting with Ian Tuppen, whose company Kingswood Trading Services Limited (“Kingswood”) had previously been supplying Granville, it was decided that the Appellant would become involved in the broking of electronic goods and Paula Huller was to experiment by buying and selling a small quantity of computer chips which would be supplied by Kingswood.
16.In 2005 Paula Huller left the company and Denise Leach took over the trading, buying
17. goods in the UK and selling primarily to overseas companies. The Appellant continued to trade using the IPT website and diversified into the purchase and sale of computer software.
18.Ian Tuppen again visited the Appellant and suggested that as the demand for international calling cards had ceased they should consider other exports such as mobile phones. Mr Kemal understood that these would be grey market goods as they would be new models and difficult to obtain.
19.The Appellant was visited by Kingswood’s solicitors, Halliwells who had asked for a meeting to ensure that everything was in order. Following this visit Denise Leach was asked to visit their customers.
20.In September 2006 there was a further visit from HMRC who asked detailed questions concerning the Appellant’s suppliers and purchasers.
The Tax Loss Chains
21.The four deals in June 2006 and the three deals in July 2006 were in each case traced directly back through a chain of buffer traders to an alleged defaulting trader. In each of the deals the trader imported the mobile phones into the UK from a company based elsewhere in the EU. Their purchase was therefore zero-rated for VAT. The traders then sold the mobile phones to another UK based trader, charging VAT output tax on the invoice, for which they then allegedly failed to account. The mobile phones were then sold on to a number of other UK based traders until they were purchased by the Appellant, who in turn exported them from the UK in a sale to another EU based trader. The Appellant’s sale was zero rated for VAT and it sought to reclaim the input tax on its purchase.
The Appellant’s VAT period 06/06 (alleged defaulter: RS Sales Agency Limited)
22.The purchases and onward sales in the VAT period 06/06 took place on the 22, 23 and 28 June 2006. The transactions dealt in Nokia phones on the 22 June(Nokia 7710) and the 28 June(Nokia N80 and N90) and in the LG KG800/Chocolate phone on the 23 June. 9,500 handsets were traded in the deals at a purchase price of £2,572,500.00 and a sale price of £2,624,000.00. All the purchases were from Kingswood and all the sales were to a Belgian company called 2 Trade BVBA (“2 Trade”).The total input tax on these 06/06 deals was £450,187.50.
23.All of the Appellant’s purchases from Kingswood in June 2006 were traced back to an alleged defaulting trader, RS Sales Agency Limited (“RSSA”). RSSA did not pay its VAT liability.
24.Kingswood purchased from three different traders on the four deals, Mobile Heaven (22/6 and 28/6, MNR Global Limited (23/6) and Danum Trading (28/6). All these traders apparently purchased their mobile phones from Highbeam UK Limited (“Highbeam”) which purported to purchase the phones from RSSA, the defaulting trader.
25.On the face of the trading documents a single trader, RSSA supplied all the phones to a single purchaser Highbeam which supplied them to Kingswood who then supplied the Appellant in June 2006.
26.RSSA is a missing trader. Its position in the transaction chain was importer of the goods. RSSA’s director, Rafik Sodawala, registered for VAT as a sole trader on 19 September 2003 with the trading name RS Sales Agency (“the Sole Trader”). Mr Sodawala signed the application and subsequentlyapplied unsuccessfully, through an accountants’ firm, M Iqbal & Company, to transfer the VAT registration number to RSSA on 20 February 2006. The same letter informed HMRC that RSSA’sfuture business activity would be wholesale and retail dealing in mobile phones. Thus at the time of the transaction in issue in the appeal, RSSA was not registered for VAT.
27.On 3 July 2006 HMRC officer Parsons and a colleague made an unannounced visit to the principal place of business of the Sole Trader and RSSA having received information that RSSA was trading with Highbeam. The address, 469A, Cheetham Hill Road, Manchester, M8 9LR was a doorway between two shops with no sign of any business operating from there and with no-one at the address. There had been a previous request to change the principal place of business to another address, which request was subsequently cancelled. The officers also visited this other address at 302, Cheetham Hill Road, Manchester, M8 0PL. This address was a hairdresser’s shop and the occupants had no knowledge of the Sole Trader or RSSA.
28.There was no subsequent contact from Mr Sodawala. Consequently the Sole Trader’s VAT registration was cancelled from 4 July 2006 and Mr Sodawala was informed of this in writing. This prompted a phone call from Mr Iqbal, the Sole Trader’s accountant, on 6 July 2006, whosaid that Mr Sodawala was away. It was requested that Mr. Sodawala contact the officer on his return but he did not do so.
29.The Sole Trader made no VAT returns after October 2005 and no business records were provided. RSSA never filed a VAT return and never provided any business records. From trading documents identified from other traders, the net turnover of RSSA in the six week period from 26 April 2006 to 4 July 2006 was apparently £165,704,862 with an unpaid VAT liability of £28,998,350.90.
30.The four June deals which were sold on ultimately to the Appellant were identified by invoices from the records of Highbeam. RSSA purchased the first three deals from a Portuguese Company called Worldcall LDA (“Worldcall”), making payments to Worldcall from its account at First Curacao International Bank “(FCIB”). The fourth June purchase was from another Portuguese company called Snowrix LDA (“Snowrix”). The information provided to FCIB in respect of Snowrix and Worldcall suggested that they were closely connected and controlled by the same individual.
31.On 14 April 2008, RSSA was assessed for the unpaid VAT which relates to the chains in issue in this appeal. It has made no attempt to pay or appeal against this assessment. RSSA has now been wound up and Mr Sodawala has been disqualified from acting as adirector for 13 years.
The Appellant’s VAT period 07/06 (alleged defaulter: V2 (UK) Limited)
32.The three July 2006 purchases by the Appellant from Kingswood can be traced back to an alleged defaulting trader, V2 (UK) Limited (“V2”). There were three separate deals all on the same day, 27 July 2006, with different models of Nokia handsets and the chain of traders was the same for each deal resulting in trading purchases by the Appellant of £2,478,192.50 inclusive of VAT in one day.
33.The three deals which all consisted of purchases from Kingswood and sales to Allimpex Handelgesellschaft (“Allimpex”), a German firm, were 2,400 Nokia N91 handsets, 1,400 Nokia N72 handsets and 2,300 Nokia N80 handsets. The Appellant made a profit of £84,225 on these transactions.
34.V2 purchased the Nokia phones in each case from a Polish firm called Techbase Consulting (“Techbase”). They were sold on in each case to MNR Global Limited. MNR Global Limited sold on to Kingswood who supplied the phones to the Appellant. The Appellant exported the mobile phones in each case to Allimpex. V2 did not pay HMRC the output tax on these sales.
35.V2 was incorporated on 17 January 2003 and registered for VAT from 3 March 2003. Nadeem Ahmed was initially the company secretary until 21 December 2004 when he became the sole director. The principal business activity of the company was described on the VAT 1 application for registration as being retail sales of clothing and accessories.
36.In February 2006 V2 was selected for an assurance visit by an officer from an MTIC monitoring team. Officer Gordon Smith visited the premises on 21 February 2006. Mr Nadeem Ahmed, the director, informed Smith that he wanted to diversify into wholesale trading in mobile phones because the retailclothing business was not good. He stated that his intention was to trade with UK registered suppliers and customers only. Mr. Ahmed was served with notices relating to trade in MTIC related areas which included the trade in mobile phones and was sent Notice 726 which provided information on joint and several liability for unpaid VAT by other parties in the supply chain.
37.On 7 April 2006, the officer again visited V2’s premises following notification that a Cyprus registered company, Destonia, had released goods to V2. Nadeem Ahmed explained to the officer that V2 in fact purchased these goods from a UK company, CHP Distribution Limited, not Destonia.
38.Officer Gordon Smith gave evidence that in the period from February 2006, V2 traded on a large scale in mobile phones, always buying from traders who claimed to have imported the mobile phones. V2 traded with a series of defaulting traders. The trading with each defaulter was largely consecutive. V2 traded with CHP Distribution Limited from 23 February 2006 until 5 April 2006, with C&B Trading (UK) Limitedfrom 31 March 2006 until 28 April 2006, with RSSA from 26 April 2006 until 4 July 2006 and with Parfums (UK) Limited from 7 July 2006 until 20 July 2006. These companies were all de-registered following default on VAT liability incurred in the course of MTIC trading. The amount of input tax claimed by V2 and ultimately made the subject of an assessment by HMRC on 2 October 2006 was £45,832,419.00. The amount of VAT from RSSA claimed as input tax by V2 was £3,737,650.31. The amount of VAT claimed as input tax in purchases from Parfums Limited was £1,182,247.92.
39.In addition V2 made purchases from Highbeam as part of a chain of transactions in mobile phones, claiming input tax of £3,904,456.59 from that company.
40.V2’s profit on every deal was 50p per unit, irrespective of the quantity or model of phone being traded.
41.On or about 20 July 2006, V2 changed its trading pattern and started to import directly, importing 32 consignments including the three consignments of mobile phones which were ultimately purchased by the Appellant who then exported them. The purchases were from Techbase in Poland. On 29 August 2006, the officer, Gordon Smith, sought information about V2’s trade with Techbase and was provided with the documents which, it was asserted, comprised the due diligencechecks by V2. These documents however appeared to provide no meaningful information about Techbase and a report, referred to in the documents as having been prepared by Express Intelligence UK Limited, was not amongst the documents supplied to the officer. The extent of V2’s trade with Techbase was some £7,513,975.00.
42.On 21 August 2006, HMRC issued a regulation 25 direction which instructed the company to immediately make an early VAT return. This was not complied with but a return was made for the 08/06 quarter declaring a VAT output tax liability of £985,064.70. This included the VAT liability for the July 2006 sales of phones to the Appellant which were the subject of this appeal. This sum remains unpaid.
43.At a meeting between Officer Smith and Nadeem Ahmed on 1 September 2006, Mr Ahmed complained that V2’s FCIB account which had a balance of £1,325,625.61 had been frozen. V2 by this time had also issued credit notes in respect of transactions for which they had not been paid. This resulted in an assessment being raised by HMRC on the basis that in the absence of any indication from other purchasers that they were not pursuing thedebt it was simply an attempt to evade a VAT liability which was due.
44.On cross-examination Mr Smith confirmed that the three deals with which the Appellant was involved were submitted on a single VAT return which showed a VAT liability of £985,064.70. However he could not accept the net liability shown on the return because of the credit notes issued which he believed were intended to artificially reduce the amount of VAT due.
45.He confirmed that on 21 August 2006 he had received a fax from V2’s accountant which stated “My client has asked me to make you aware that funds sufficient to pay the VAT are currently on deposit so that payment can be made as soon as practicable” and it was arranged that he would meet Mr Ahmed on 29 August 2006. Mr Smith confirmed that at that time there were no outstanding VAT debts.