Appeal Number: LON/2008/0335

[2010] UKFTT 470 (TC)

TC00732

Appeal number: LON/2008/0335

INPUT TAX – MTIC fraud – whether the Appellant knew or ought to have known of the connection to fraud – yes in relation to ought to have known, and the same with actual knowledge if blind-eye knowledge suffices – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

TELEMENT LIMITEDAppellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

TRIBUNAL: JOHN F AVERY JONES CBE (TRIBUNAL JUDGE) SONIA GABLE

Sitting in public at 45 Bedford Square, London WC1 on 13 to 17 September 2006

Simon Livingstone, counsel, for the Appellant

Simon Baker, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

1

DECISION

1.This is an appeal by Telement Limited against the Respondent’s (“HMRC”) refusal to repay £71,487.50 of the input tax for the period 03/06 on the basis that the Appellant knew or ought have known of the connection of a particular transaction in mobile phones entered into by the Appellant to MTIC fraud. The Appellant was represented by Mr Simon Livingstone, and HMRC was represented by Mr Simon Baker.

2.The only issue in this appeal is whether the Appellant knew or ought to have known about the connection of the particular transaction with MTIC fraud. The transaction in question (“the Transaction”) consisted of the purchase on 31 March 2006 of 1,900 Nokia N 70 mobile phones from Crotek Limited for £215.00 per phone, total £408,500 plus VAT £71487.50=£479,875, and their sale on the same day to La Parisienne du Commerce Sarl (“LPDC”) for £228.00 per phone, total £433,200. Since it is conceded that there was a VAT fraud and that the Transaction was connected with it, it is unnecessary for us to spell out the details of the fraud. It is sufficient to say that the Transaction forms part of a “dirty” chain with a missing trader.

3.We had 8 bundles of documents and heard evidence from Mr Mickey Opacic, director of the Appellant, officer Jerimiah Scanlon, officer Narinder Hunjan, officer Matthew Snoding, Mr Roderick Stone (at the time HMRC MTIC Deputy National Coordinator and senior policy advisor), and Mr John Fletcher (KPMG). Witness statements of officers Hew Lloyd Griffiths, Michael Phipps, Clive White and Nigel Saunders were admitted unopposed, We find the following facts (where we attribute a statement to a particular person we are accepting this as a fact unless the contrary is clear from the context):

(1)The Appellant was established in 201. Its director, Mr Mickey Opacic had previously had 8 years’ experience of the mobile telecoms industry having been an Account Manager at Motorola, Business Development Director at PMC Telecom, Marketing Director at Fone Range plc, and Managing Director at Kondor Limited.

(2)The Appellant had an established business dealing in mobile phone accessories. Occasionally they deal in mobile phones. Two of HMRC’s witnesses gave evidence that they had been told that the Appellant did not deal in mobile phones. Mr Snoding’s witness statement said that at a visit on 4 June 2004 Mr Opacic said that the Appellant had no intention of dealing in mobile phones, but his handwritten notes recorded “Hasn’t bought & sold mobile phones themselves (last January ’03). Had a call from Eurosystems but isn’t doing any phones.” Mr Hunjan recorded in the Appellant’s electronic folder on 11 January 2006 “Trader claimed that over the last 18 months they have been in a repayment situation and has not dealth (sic) in mobile phones or CPUs. The only products trader deals in are Nokia LCD, accessories etc.” If the 18 months also related to dealing on mobile phones this is untrue because we saw an invoice dated 21 November 2005 for a deal in mobile phones. Mr Opacic said that he had always occasionally dealt in mobile phones and would not have committed himself not to deal in them in the future. We consider that the explanation of the different perceptions is likely to be that Mr Opacic wanted to give the officers the impression that the Appellant was not likely to be dealing in mobile phones but without expressly saying that he was not intending to do so and perhaps while playing down the occasions on which it had dealt in them in the past. The reference to 18 months in Mr Hunjan’s note could have been restricted to the period during which it was a repayment trader without the statement being untrue. We do not therefore consider that Mr Opacic was being untruthful when speaking to the officers but he was probably trying to create an impression that would lead HMRC to take less interest in the Appellant’s business. Since HMRC had investigated the Appellant’s transactions on a number of occasions andhad not found any connection with MTIC fraud he would not have had any dishonest reason to reduce HMRC’s interest at the time the statements were made, regardless of his knowledge relating to the Transaction. Warnings about MTIC fraud had been given at visits on 3 January 2003, 6 February 2003, a letter of 4 May 2004, a visit on 4 June 2004, a letter of 7 June 2004, a copy of Notice 726 sent on 23 February 2005, and a letter of 6 May 2005.

(3)The full deal chain of which the Transaction was part as identified by HMRC was as follows. All transactions relate to 1,900 Nokia N 70 mobile phones (“the phones”) held at a warehouse owned by AFI Logistics UK (“AFI”) in Southall, Middlesex (until they were shipped to AFI’s associated company’s warehouse in France as mentioned in (g) below).

(a)Destonia General Trading (Cyprus). They invoiced CHP Distribution Limited on 31 March 2006; unit price £213.20; mark-up and date of payment unknown. They informed AFI that the phones would be arriving 31 March 2006 faxed at 2.31 pm (here and elsewhere we give the time on the fax header which we assume to be correct while recognising that the time may not have been altered for summer time etc). The phones were released to V2(UK) Limited [note not CHP] faxed 31 March 2006 at 1700 hours.

(b)CHP Distribution Limited (UK, missing trader). They invoiced V2 (UK) Limited on 31 March 2006, description “Nokia N70”; unit price £213.45; mark-up £0.25 (£475) 0.12%; paid 12 April 2006 by First Curacao International Bank NV (“FCIB”) intra account transfer.

(c)V2 (UK) Limited (UK, buffer). Purchase order issued to CHP at £213.45 per unit 31 March 2006. It invoiced South Wales Electrical Goods Limited (“SWEG”) T/A Mobile Phones World on 31 March 2006; unit price £213.70; mark-up £0.25 (£475) 0.12%. It issued an Allocation Note dated 31 March 2006 to AFI to allocate the phones to SWEG and ship on hold, which was faxed 30 March 2006 [the day before the invoice] at 2.12 pm. It also issued a Release note to AFI to release the phones to SWEG on 31 March 2006 which was also faxed on 30 March 2006 at 2.12 pm. It was paid on 12 April 2006 by FCIB intra account transfer.

(d)SWEG (UK, buffer). Purchase order issued to V2 (UK) Limited at £213.70 per unit on 31 March 2006. It invoiced Raptor CommerceLimited on 31 March 2006; unit price £214.20; mark-up £0.50 (£950) 0.23%. It issued an undated instruction to AFI to “allocate/release” the phones to Raptor which was faxed on 30 March 2006 [the day before the invoice] at 2353 hours.It was paid 12 April 2006 by FCIB intra account transfer.

(e)Raptor Commerce Limited (UK, buffer). Purchase order issued to SWEG at £214.20 per unit on 31 March 2006; description “Nokia N70, Euro Spec, Sim Free.” It issued a pro-forma invoice to Crotek Limited on 31 March 2006;unit price £214.50; mark-up £0.30 (£570) 0.14%. It also issued an Invoiceto Crotek Limited on 31 March 2006 with title retention provision. It allocated and shipped on hold the phones toCrotek Limited on 31 March 2006. It was paid on 12 April 2006 by FCIB intra account transfer.

(f)Crotek Limited (UK, buffer). Purchase order issued to Raptor at £214.50 on 31 March 2006. Order confirmation and Invoice tothe Appellant on 31 March 2006,description “Nokia N 70 Sim Free Handset” with a title retention provision stated on the invoice (and also in their terms and conditions which were supplied to the Appellant); unit price £215.00; mark-up £0.50 (£950) 0.23%. It was paid on 11April 2006 from the Appellant’s Lloyds TSB account, and received at Crotek’s FCIB account on 11 April 2006 (value date 12 April 2006). Crotek issued amended [we did not see an un-amended version] “Allocation Instructions” to AFI 31 March 2006 stating “please allow the following customer [the Appellant] to carry out an inspection of the goods” and ending in bold capitals “please release the goods to the customer.”

(g) The Appellant (UK, broker). Pro-forma invoice issued to LPDC on31 March 2006 with title retention provision describing the phones as “Nokia N70 new. SIM free. Euro spec. retail box pack.” It invoiced LPDC on 31 March 2006 (with no reference to title retention) describing the phones as “Nokia N70 Sim Free”; unit price £228.00; mark-up £13.00 (£24,700) 6.05%. Payment from LPDC was received in the Appellant’s account with Lloyds Bank on 6 April 2006. The phones were shipped on hold on 31 March 2006 to AFI Logistique France Sarl, Roissy, France. The Appellant authorised AFI to release the phones on 7 April 2006.

(h)LPDC (France). Purchase order (bon de commande) to the Appellant on 31 March 2006 at £228. It invoicedInfortec 300 SLon 31 March 2006; unit price £230.00 (this is stated in sterling); mark-up £2.00 (£3,800) 0.88%. It was paid on 6 April 2006 by FCIB intra account transfer.

(i)Infortec 300 SL (Spain). Paid LPDC by FCIB intra account transfer on 6 April 2006. There is no information about further transactions.

(4)There are some strange features of this chain, such as V2’s separate allocation and release documents faxed the day before the invoice date, SWEG’s instruction to allocate/release also the day before the invoice date, and Crotek’s Allocation Instruction of 31 March 2006 which ends up releasing the phones (which since it is stated to be an amended document one might have expected to be corrected if this was not intended). The effect of the title retention provisions by Raptor (paid 12 April 2006), Crotek (paid 12 April 2006) and the Appellant (paid 6 April 2006) on the Appellant’s release of the goods on 7 April 2006 is unclear. If the transactions are to be taken at face value (although it is agreed that some part of the chain is fraudulent) we assume that each party in the chain took title subject to the previous parties being paid, so that LPDC (and Infortec) did not in fact take a clean title until Raptor was paid on 12 April 2006 but once the goods had left the warehouse as a result of the Appellant’s release on 7 April 2006 it may have been impossible for the title retention to be enforced.

(5)The Appellant’s due diligence contains the following:

Crotek

(a)Undated letter of introduction stating that Crotek are distributors and wholesalers of electronic equipment, and stating that “Crotek Limited import and export from a large database of Domestic, European and Non-European Distributors, you can be assured that our products will be priced competitively.”

(b)Crotek provided terms and conditions for purchases and (a different set) for sales

(c)As already mentioned, the Appellant completed Crotek’s trade credit application form on “7-11-2006” giving Unique Distribution and Elite Mobile as trade references. Mr Opacic said that the referees were telephoned but there is no record of this and we are unable to find this as a fact.

(d)Amended VAT registration certificate dated 8 February 2006 with effective date 8 September 2005, trade classification “51860 Other electronic and equipment.”

(e)Incorporation certificate on change of name dated 23 June 2005

(f)Bank account details with FCIB

(g)There is no evidence of credit rating or other checks. Mr Opacic said that his accounts department routinely checked credit ratings but in the absence of any evidence we are unable to find this as a fact. There is a later Experian Limited report on Crotek (see paragraph 4(1) below) containing information that the Appellant could have found out at the time but did not.

LPDC

(h)Letter of introduction faxed 30 March 2006 at 1317 hours stating that it is an import/export company dealing across Europe dealing in all major mobile phone brands.

(i)French VAT certificate dated 24 February 2004 stating that it had been registered since 1 January 2004.

(j)Copy of the register of commerce registration showing registration on 22 January 2004 with a capital of Euros 8,000. Its activity is stated as achat et vente en gros et au detail negoce de produits en tous genres intermediaires et commissionnaires importation et exportation de tous produits non reglementes (this is in block capitals and so omits any accents, which we have not attempted to add). The gérant is given as M. RAFIQ Rizvan.

(k)FCIB and BNP Paribas bank details.

(l)(Not included with the faxed documents as it does not have a fax header) LPDC apparently completed the Appellant’s trade credit application giving FCIB as a bank reference but no trade references and the document is undated.

AFI

(m)Certificate of incorporation dated 18 June 2004

(n)VAT registration certificate issued on 9 August 2004 with effective date of 18 June 2004

(o)Price list (see paragraph 4(3) above)

4.This paragraph is, unless stated otherwise, restricted to facts that would be known to the Appellant in entering into the Transaction.

(1)Mr Opacic had known the director of Crotek for 3 or 4 years having met at trade fairs. They had discussed prospective deals but this was the first one that they entered into together. The Appellant faxed HMRC on 3 April 2006 at 1354 hours (the Monday after the Transaction which was on a Friday) for verification of Crotek’s VAT number. While Mr Opacic said that the fax was not sent on Friday 31 March 2006 because he could not get through, the fact that it was not sent until 1345 hours on the Monday does not suggest the Appellant was giving this priority and we are unable to find as a fact that the Appellant tried unsuccessfully to send it earlier. The reply on 4 April said “The information provided by you concerning (see below) [this is Crotek Limited and its VAT registration number] differs from that held by Customs and at this time I am not able to confirm that this is a valid registration.” Mr Stokes explained that it was likely to be other information that did not correspond to that held by HMRC. But on 5 April 2006 HMRC verified Crotek’s VAT registration. The Appellant completed Crotek’s “Trade Credit Application” on a form that is in identical format to the one completed by LPDC for the Appellant (except for the names and logo—the logo on Crotek’s form says Crotek Systems, whereas other Crotek documents have a logo with Crotek Limited) dated “7-11-2006” giving Lloyds TSB as its bank reference and Unique Distribution and Elite Mobile as trade references. No explanation was given for the date of this document. We saw an Experian Limited report on Crotek dated 8 August 2006 (about 4 months after the Transaction) that showed that the then last accounting date the company had current assets of £100 and current liabilities of £469 and which suggested that it was not trading. The report suggested a credit limit of £100 as “There is insufficient basis upon which to assign a firm credit rating.” The details showed its SIC codes to relate to “department stores and mail order retailing” (1980 codes) or “other retail non-specialised stores, other business activities” (1992 codes). This report is an exhibit to Mr Scanlon’s witness statement and so we assume was not obtained by the Appellant, or if it was it was obtained after the Transaction, but it contains information that the Appellant could have obtained at the time of the Transaction. What is clear is that Crotek’s business of “import and export from a large database of Domestic, European and Non-European Distributors” (to quote from their letter of introduction, see paragraph 3(5)(a) above) must have started after its last accounting date of 31 July 2005(and probably at the time of the effective date of 8 September 2005 on the amended VAT registration certificate) and so no accounts of its trading could have been made up by the time of the Transaction. Mr Opacic said that he had done an online check on Crotek using Creditsafe which showed a credit limit of £5,000, but did not keep a print-out of it. Even if he did this (which we doubt), it could not have revealed any accounts since it started trading and so we do not accept that it would have showed a credit limit of £5,000. Mr Opacic assumed that Crotek was using an offshore bank account because its suppler was overseas.

(2)The Appellant had not previously dealt with LPDC but had met its director at trade fairs. No application was made to HMRC for verification of LPDC’s VAT number. Mr Opacic said that he did not know that Redhill could do this, which we do not accept. In any case their current VAT registration could have been checked on the Europa website. The Appellant’s trade credit application completed with FCIB as a bank reference but without including any trade references. The document is undated and does not have a fax header, which raises suspicions that it was completed later. Since no trade references were given the Appellant cannot have made any such checks. Mr Opacic said that he did not know that it was possible to carry out trade checks abroad but we do not accept that as an experienced businessman he thought this.

(3)The Appellant had not previously dealt with AFI. It opened an account with AFI on 31 March 2006, the account opening application giving bank details and Unique Distribution and European Telecom (Mr Opacic said that this was a trading name of Global Telecom Distribution plc, not European Telecom plc)as trade references. The Appellant’s instruction to AFI faxed at 1813 hours on 31 March 2006 “further to our telephone conversation” states “Agreed rate £tba, Insurance £tba (required), IMEI & Inspection report (required).” Mr Stone explained that because of the EU Insurance Mediation Directive which took effect in February 2005 AFI would not have been able to provide insurance (unless they registered with the FSA, which no freight forwarder did) and would have had to give details of who the Appellant could contact to arrange insurance. In evidence Mr Opacic maintained that there was insurance for the phones and that he paid almost treble the normal cost for shipping on account of insurance. However the amount the Appellant paid to AFI (as shown by AFI’s invoice produced during the hearing) was 90p per phone for freight and 20p per phone for IMEI and inspection charges which is the same figure as shown on AFI’s price list headed “Mobile phone road export charges (excluding insurance charges),” the 90p per unit figure being for shipping to Paris. If Mr Opacic had, as stated in the fax, spoken on the telephone to AFI he would surely have been quoted the cost of the freight because he was charged the amount shown on AFI’s price list and so there cannot have been any negotiation, and that he had to go elsewhere for insurance. This suggests that they had not spoken on the telephone. We find that the phones were not insured while in AFI’s warehouse or during their transfer, and Mr Opacic must have known this (or would have appreciated this if he had thought about it). As most of the Appellant’s transactions were export ones (as stated, it was trying to go onto monthly returns in January 2006 on the basis that it had been a repayment trader for 18 months) Mr Opacic must surely have known about how to obtain freight insurance and that freight forwarders could not provide it as agents. The limit of liability under the CMR Convention is about £7 per kilo, and the weight declared on the CMR dated 31 March 2006 was 1,646 kilos, which means that the carrier’s liability was limited to about £11,500. The CMR gives the carrier as Mr D Morris 9484 DYW. AFI issued a shipping certificate on 3 April 2006 confirming that they were shipped on 31 March 2006. Eurotunnel details showed that vehicle 9484 DWY (the different order of the letters could be a transposition error by Eurotunnel) travelled on 1 April 2006 with check-in time 0958 departure at 0950.