Neegum Sheth & Anor v The Commissioners for HMRC

The Appellants appeal against two decisions of the Respondents (“HMRC”) dated 4 August 2017 issuing a Personal Liability Notice (“PLN”) under Paragraph 19 of Schedule 24 to the Finance Act 2007 (“FA07”) to each Appellant in the sum of £880,373.60. The PLNs were issued following the denial by HMRC in a decision dated 2 November 2015 of zero-rating of supplies made by Aircall International Ltd (“AIL”), applying what are referred to as the "Mecsek-Gabona” principles. Mr Sheth was director of and Mr Ghazi was a manager of AIL. The denial of zero-rating had been followed by an assessment on AIL for the amount of £2,959,239.00, after which AIL had been placed into voluntary liquidation. AIL’s assessment was initially appealed, but the appeal was subsequently withdrawn.

HMRC challenged the ability of the Appellants to address the underlying assessment of AIL where the appeal by AIL had been withdrawn. For the reasons we explain we decided that the underlying assessment of AIL should be addressed by us.

Having heard and considered the evidence, we have concluded that HMRC has not discharged the burden of proof on them to show that the conditions for the application of the Kittel/ Mecsek-Gabona principles to AIL’s zero-rating of supplies made by it had been met. In particular, the evidence did not show the existence of tax losses or connection of AIL’s supplies to fraudulent transactions.

With the consent of the parties, the form of the hearing was V (video) using the Tribunal’s remote platform.

Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such, the hearing was held in public.

On 2 November 2015 HMRC notified AIL of its decision to deny AIL’s claim to zero- rating of 28 dispatches of mobile telephones to Tisca in VAT periods 02/13, 3/13, 04/13 and 05/13 on the basis that the transactions were part of a tax fraud committed by AIL’s customer; AIL knew or should have known of that fraud; and AIL had not taken every reasonable step within its power to prevent its own participation in the fraud.

On the same date HMRC notified AIL of a total assessment of output VAT under Section 73 of the Value-Added Taxes Act 1994 (“VATA”) in the sum of £2,959,239 plus interest.

On 3 November 2015 AIL entered creditors’ voluntary liquidation.

On 2 December 2015 the Khan Partnership submitted the Notice of Appeal of the denial and assessment of AIL on the instructions of the liquidator of AIL. (This is shown by a letter of 19 April 2016 from HMRC.)

On 9 August 2016 AIL, via its representatives, the Khan Partnership, withdrew its appeal against the assessment citing lack of funds.

On 4 July 2017 HMRC issued a penalty calculation summary to AIL showing a penalty of £1,760,747.19 and this was followed by a penalty assessment on 4 August 2017 for the same amount. The assessment notified the liability of the company’s officers (i.e. the Appellants) to pay the penalty and the appealed PLNs were issued on that day.

The liquidator of AIL wrote to HMRC on a date which we take to be 7 September 2017 (not 2016 as printed) to say that the penalty assessment issued to AIL had not been received by him.

In preparation for this appeal HMRC identified exchange rate errors and a typographical error which have resulted in corrections to the assessed amount of VAT. As a result the total assessment should be £2,950,997.88.

A deduction for disclosure has been made which has resulted in a penalty of £1,755,843.74, with the result that the amount claimed from each Appellant as a consequence of the PLNs is £877,921.87.

The grounds of appeal set out in the Notices of Appeal can be summarised as follows:

We start by addressing the preliminary application made by HMRC for that part of the Appellants’ case addressing the underlying assessment imposed on AIL to be struck out.

Having concluded, for the reasons we explain below, that the Appellants’ case addressing the underlying assessment imposed on AIL should not be struck out, we then proceed to address the substantive issues connected with that assessment and set out our conclusion allowing the appeals.

We then record our decisions made in relation to a series of procedural issues which arose during the hearing.

For ease of reading we have set out the names of companies referred to in this decision in full in the Appendix.

HMRC applied in Ms Rao’s written opening submissions for that part of the Appellants’ case addressing the underlying assessments imposed on AIL to be struck out (“the Application”).

Ms Rao’s submissions can be summarised as follows.

Ms Rao submitted that the Appellants, as the director and “operations director”, had the opportunity to challenge the denial and assessment issued to AIL. Indeed, such proceedings began but were then withdrawn. For the Appellants to re-litigate the liability for these matters, is an abuse of the Tribunal’s process which should not be permitted.

Reliance was placed on HMRC v Kishore [2021] EWCA Civ 1565 and Littlewoods v HMRC [2014] EWHC 866 (Ch), together with Judge Mosedale’s summary of the law in Foneshops Ltd v The Commissioners for Her Majesty’s Revenue & Customs [2015] UKFTT 0410 (TC) and her comment that abuse of process prevents previously litigated issues being re-tried. The doctrine of abuse of process applies both where a party has declined to proceed with a case and accepts that it must be dismissed but then seeks to re-litigate the matter, and where the matters sought to be litigated could and should have been litigated in earlier proceedings (SCF Finance v Masri (No. 3) [1987] QB 1028).

The doctrine also applies where the first set of proceedings involved a corporate body as a party and the second involves instead the individual of whom that corporate body was the embodiment, as confirmed by Lord Bingham in HMRC v Kishore [2021] EWCA Civ 1565.

It was recognised that the doctrine of abuse of process should not operate so as to result in an injustice by denying a party the right to have the merits of his case determined without good cause (Nayif v The High Commission of Brunei Darussalam [2014] EWCA Civ 1521). In line with that principle, the Tribunal has also decided that in cases where a liquidator has withdrawn a company’s appeal or failed to appeal on its behalf, such that the decision was out of the hands of the director against whom a PLN is later issued, that withdrawal or failure to appeal does not bind the director (see Hackett v Revenue & Customs [2016] UKFTT 781 (TC), Jason Andrew v HMRC [2016] UKFTT 295 (TC) and Bell & Anor v Revenue and Customs [2018] UKFTT 225 (TC).

However, in this case AIL was already in liquidation when it decided to begin the appeal process. The liquidators ought to have made the decision to appeal and to withdraw it. However, the withdrawal letter was written by The Khan Partnership acting for the company AIL, not the liquidator. The inference is that the Appellants, as director and operations manager, made the decision to withdraw the appeal. They have consistently acted together in their control of AIL’s activities and transactions and, absent evidence to the contrary, are bound by their decision not to continue AIL’s appeal of assessments and penalties against it. The letter from the liquidator to HMRC dated 7 September 2017 shows that the liquidator was not aware of the penalties assessed on AIL.

A lack of funds is not, of itself, a sufficient cause to permit re-opening of the issues at a later date under the guise of a new appeal Lighthouse Technologies Ltd v Revenue & Customs [2010] UKFTT 374 (TC) and London Cellular Accessories Ltd v Revenue & Customs [2012] UKFTT 583 (TC).

In addition, the Grounds of Appeal do not challenge the assessment and penalty issued to AIL. Although, the Appellants purported to challenge the existence of many of the transaction chains, the existence of any fraudulent scheme, and the connection to tax losses in their List of Issues dated 27 September 2019, no application to amend the Grounds of Appeal was made.

Overall, a broad merits-based approach should be applied in line with Kishore in determining the Application.

If the Tribunal concludes that the Appellants seek to advance arguments that are not part of their Grounds of Appeal, or seek to re-litigate matters that were the proper province of an appeal by AIL against the assessment and penalty notified to it, and therefore amount to an abuse of process, then the Tribunal may strike them out as having no prospect of success under Rule 8(3)(c) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (S.I. 2009/273 (L.1)) (“the Rules”).

Mr Sherratt’s submissions can be summarised as follows.

Mr Sherratt submitted that the Application was raised too late and was misconceived. HMRC only raised the argument that it would be an abuse for the Appellant to contest the underlying substantive issues relating to the assessment in Ms Rao’s opening submissions. If HMRC wanted to make such an argument it was incumbent upon them to set it out in their statement of case, as required by rule 25 of the Rules, and have not done so. The application undermines the entire basis upon which the appeals have been prepared by both parties and the Tribunal. There is no evidence addressed to this issue because it was not raised.

It was procedurally impossible for the Appellants to appeal the decisions issued against the company. However, they stated clearly in the Grounds of Appeal that they did not accept the alleged fraudulent evasion of VAT which had therefore been in their pleadings from the start of the litigation.

HMRC’s decision denying AIL’s zero rating was dated 2 November 2015. AIL went into liquidation on 3 November 2015 (before it was even aware of HMRC’s decision). The effect of the liquidation was that, thereafter, power to take decisions in relation to the company rested with the liquidator, not the Appellants (see Insolvency Act 1986, s.103 as it stood at the time). The inference made by HMRC that the withdrawal of AIL’s appeal by the Khan Partnership showed that it was effectively a withdrawal made by the Appellants, failed to engage with the fact that the company remained a party to the litigation/appeal and took any decision in relation to that litigation under the control of the liquidator.

There is no substance to the allegation of abuse. Reliance is placed upon the decision in Hackett.

Mr Sherratt also relied upon Kishore to submit that the suggestion that the Appellants should be denied the opportunity to properly challenge criminal penalties totalling £1.7m because an insolvent company initially made, but could not afford to pursue, challenges to related decisions is totally without merit. He agrees with Ms Rao that a broad merits-based approach is required by Kishore.

Mr Sherratt submitted that key issues in this case include whether there was fraud in Poland and the state of the Appellants’ knowledge. The case of Johnson v. Gore Wood & Co [2003] All ER (D) 58 identifies that relitigation should be avoided and there is a public interest in the use of court resources; but in this case there would be no economy if HMRC’s application succeeded as it would still be necessary to traverse the same issues in order to address the Appellants’ knowledge for determining whether any inaccuracies were deliberate. Regard should be had to the fact that the penalties which HMRC seeks to impose on the Appellants are criminal in nature for the purposes of Article 6 of the European Convention on Human Rights (“ECHR”).

Our decision to refuse the Application was delivered orally at the hearing and we record below the basis for it.

We considered that there were two inter-related issues raised by the Application: one addressing the fairness of the Application in the context of the Appellants’ previous pleadings; and another considering whether the Appellants were estopped from challenging the basis of the AIL assessments, or such a challenge would give rise to an abuse of process.

The first issue concerns the extent to which the Appellants’ pleadings identified that they challenged the underlying basis of the assessments on AIL.

We are satisfied that HMRC were put on notice by the Grounds of Appeal submitted for each of the Appellants that the basis of the underlying denial of the zero-rating was challenged. In each case the grounds of appeal stated:

“The Appellant does not accept, and put HMRC to proof of, the alleged fraudulent evasion of VAT”.

Furthermore, on 4 February 2019 Judge Poole issued directions in which it was stated that:

“the Appellants shall specify in writing to HMRC and the Tribunal whether, in relation to each of its impugned sales of goods to Atheus and Tisca, the Appellants accept that AIL was participating in VAT evasion (but without making any admission as to whether it knew or ought to have known that such was the case).

On 27 September 2019 a list of issues was prepared on behalf of the Appellants in response to the directions. That list of issues clarified that the sale of goods to Atheus was not in fact challenged (as HMRC acknowledges); and. more importantly. in relation to the sales of goods to Tisca, the list challenges the evidence of the alleged transaction chains stating that:

Therefore these matters have been clearly identified in the Appellants’ pleadings for at least two years before the hearing. As a result we consider that as a matter of procedural fairness it was incumbent on HMRC to identify, and make, its strike out application explicitly (rather than within opening submissions prepared for the hearing); and in any event more than 2 weeks before the start of the hearing.

The parties agreed that a broad merits-based approach should be applied by us in considering the Application in line with the principles set out in Kishore. At paragraph 27 of that case Lord Justice Newey set out the following principles:

Kishore also concerned an appellant who was appealing personal VAT penalties, but in that case the appellant was also the same person who was denied input tax by HMRC on the basis of Kittel principles. His appeal of the underlying denials was struck out by the tribunal and HMRC applied to strike out grounds of his penalty appeal on the basis that it would be an abuse of process for him to be permitted to litigate the Kittel issues in the penalty appeals. The Court of Appeal rejected arguments urging it to apply the narrower approach, described in Arbuthnot Lathan Bank Ltd v Trafalgar Holdings Ltd [1998], that a court should start with the assumption that if a party has had one action struck out for abuse of process, some special reason has to be identified to justify a second action being allowed to proceed. In particular, in the context of tax penalties, Lord Newry commented that the stricter Arbuthnot type approach “must be no more than limited significance in the context of appeals against tax penalties” (at para 30). It was noted that it might be in point if a person brought a second appeal against a penalty where a previous appeal against the same penalty had been struck out. Penalty appeals which concern punitive measures are particularly appropriate for a broad merits-based approach rather than an Arbuthnot test.

An example of the broad merits-based approach (albeit before the description of the principles in Kishore) is provided by Judge Berner’s decision in the case of Hackett, which is also of particular relevance to this case as the appellant there was appealing a personal liability notice imposed following the denial of input tax to the appellant’s company applying Kittel principles.

Judge Berner distinguished Foneshops on the basis that in that case the penalty appeal was brought by the same party as had been the appellant in prior MTIC proceedings. By contrast, (as in this case) the penalty appeal was by a different person - the director of the company which had previously appealed MTIC assessments. He noted that this did not prevent the Johnson v Gore Wood principles applying, but commented that the abuse of process principle enunciated therein “is no more than a procedural rule based on the need to protect the process of the court from abuse and the defendant from oppression” (at para 45).

Judge Berner distinguished appeals whether had been a previous determination of facts and issues by the tribunal, where he considered it would be an abuse of process for those to be effectively relitigated, albeit by a different appellant. In the case before Judge Berner, one appeal had been heard by the tribunal, but two further appeals had been withdrawn. He therefore concluded that it would be an abuse of process for the appellant to dispute the facts and issues only insofar as determined by the tribunal in the first appeal.

The approach adopted in Hackett was therefore consistent with the principles set out by the Court of Appeal in Kishore and we have decided not only to follow the Kishore principles which bind us, but also to adopt the approach taken in Hackett.

Turning to the situation in this case, the following factual circumstances are therefore particularly relevant:

Furthermore, as Mr Sherratt submitted, it is intrinsic to our consideration of whether the Appellants’ knowledge was sufficient for them to be found to have acted deliberately for us to address of what their alleged knowledge was about. Without consideration of the underlying substantive issues we saw little basis on which the overriding objective of acting in the interests of fairness and justice could be applied. A deliberate inaccuracy penalty is, by definition, reliant upon there being an inaccuracy; and is intrinsically reliant upon the knowledge of the person on whom the penalties imposed. If we conclude that HMRC has not shown that the requirements for denying the zero-rating are satisfied, there cannot be an inaccuracy and the Appellants cannot have the required level of knowledge to be found to have made deliberate inaccuracies in the returns of AIL.

We therefore decided for all of these reasons that HMRC’s application should be rejected. The basis of the AIL assessments should be considered by us.

The application was made by HMRC at the start of the hearing. In fact, having heard and considered all of the evidence, we have concluded that the evidence is inadequate to show that the requirements of Kittel/Mecsek-Gabona were met for the reasons we explain below. It therefore became clear that it had, indeed, been vital to consider the AIL assessments. However, this was not, of course, a matter which we were in a position to know when HMRC’s application was made.

Both parties have provided extensive submissions in their Statement of Case and submissions. This part of the decision sets out the submissions in relation to the application of Mecsek-Gabona in some detail, given that this is the focus of our decision; but records only the key elements of the submissions on the other key issues which would have arisen if we had concluded that AIL’s transactions had been shown to be connected to fraud. These additional points are noted in particular so that readers other than the parties are aware of the arguments raised.

In essence, HMRC’s case is that the Appellants are liable for deliberate inaccuracies in AIL’s VAT returns as a result of treating supplies made by AIL as zero-rated when the application of the principles in Kittel and Mecsek-Gabona mean that the zero-rating should be denied.

Following our decision to reject HMRC’s strike-out application, Ms Rao submitted that the following approach should be adopted in our decision in relation to the matters in dispute (recognising that no point is taken by the Appellants in relation to, for example, the validity of the PLNs):

Ms Rao submitted that AIL’s challenged transactions, in which it sold mobile telephones to Tisca, were part of a vast multi-country web of fraud which has been investigated under arrangements entered into with other EU Member States. AIL’s transactions in VAT periods 06/12 – 02/13, in which it sold goods to the value of £53.8 million to Atheus, formed part of an antecedent version of the same highly complex orchestrated scheme to defraud the Polish Revenue.

HMRC are not obliged to identify each and every participant in the fraudulent scheme. HMRC rely upon a series of facts and circumstances to show that there was an overall scheme to defraud.

HMRC say that AIL’s sales of telephones to Tisca were part of a highly complex orchestrated scheme to defraud the Polish revenue. AIL sold telephones to Tisca, which invoiced a Bulgaria trader for an onward sale, but its bank accounts show that money was in fact received from a Polish trader. HMRC say that Tisca issued false invoices to Bulgarian companies in an attempt to disguise the presence of fraudulent defaulting Polish traders in the transaction chains, the aim of which was to create VAT defaults at the bottom of the transaction chains in Poland, with VAT reclaims being made by the traders at the top of the chains who made intra-Community supplies.

In this case the nature of the fraud is such that the entire chains of transactions cannot be identified by HMRC. Even though HMRC cannot identify a specific tax loss incurred by a specific trader in Poland in relation to the goods sold by AIL, on the balance of probabilities there must have been such a tax loss as that was the very purpose of the scheme to defraud the Polish revenue.

Three other UK companies made zero-rated sales to Atheus and Tisca, the appeals for two of whom were struck out or withdrawn. In the case of the third, Prizeflex, the company lost an MTIC appeal before the Tribunal and that decision was upheld by the Upper Tribunal. Further activity had led to the company being denied its claim to zero- rate supplies of phones to Tisca.

HMRC allege that Tisca was a fraudulent enterprise. Its declared business activity did not include the wholesale trading of mobile telephones and similar electronics. The Cypriot authorities confirmed that the goods never entered Cyprus. From a standing start, in the period of 22 January-28 June 2013 Tisca made total gross sales of €241.9 million. This was not commercially credible. Such turnover could only be achieved as part of contrived trading, the aim of which was a facilitation of VAT fraud.

Tisca’s three largest customers in the period 22 January-28 June 2013 were three Bulgarian registered companies: Kameya, Elit and Sigma who purchased 92% of Tisca sales. However, Tisca did not receive any money from those companies. The Polish authorities had no record of the three companies in the freight forwarding documents associated with the transaction chains. Each of them therefore either had its details hijacked by fraudsters or was itself a fraudulent entity. None of them had any ostensible business wholesaling mobile telephones and none of them declared any intra-community acquisitions or sales. All of Tisca’s invoices issued to the Bulgarian traders were therefore false and fraudulent and their only purpose was to disguise the transaction chains featuring the fraudulent defaulting traders in Poland. Almost all of the goods that Tisca purported to sell to the Bulgarian traders were purportedly delivered to one of two Polish freight forwarders: Dor-Cel and Cargo Services.

The vast majority of Tisca’s receipts were from Polish traders who were buffers in tax loss transaction chains. The following Polish companies were identified as such: Jacobin, Lineks, Jaystone Trading and Nikopol. Only €1.8 million of an amount in excess of €290 million credited to Tisca’s bank accounts came from other customers. In paying Tisca the four traders paid away VAT due to the Polish revenue.

As the majority of monies that can be traced through Tisca’s bank accounts were connected to the fraudulent evasion of VAT in Poland, on the balance of probabilities any transactions involving Tisca were connected with the fraudulent evasion of VAT.

Three further Polish traders - Limo, Roxa and Norfolk - also made third or fourth party payments to Tisca as part of the fraud on the Polish revenue. Tisca’s purchases for the period from 7 January - 9 June 2013 totalled €231.5 million. Therefore Tisca should have made a profit of €10.3 million on its transactions in the period. However, Tisca also cumulatively overpaid its suppliers by more than €40 million.

The only explanation for Tisca’s bank payment pattern is a facilitation of VAT fraud on industrial scale.

Jacobin, Lineks, Jaystone and Nikopol all acted as buffers, but also caused fraudulent tax losses. Details of the way in which each company was set up and operated are relied on to assert that they should be viewed as “buffers” and/or caused fraudulent tax losses. Similar matters are relied on in relation to a series of other Polish companies which are also said to have operated as “buffers”.

In Ms Rao’s opening submissions she says that the Polish fraudulent defaulting traders are: Fonset, Benox, Flatop, Ron Poland, Multistrada, Havana and Nectel.

In the context of transactions involving Nikopol the fraudulent defaulting traders, Fonset and Benox are said to be again found at the bottom of the chains. Fonset did not carry out any business activities but just issued invoices without supplying any goods. Benox and Flatop did not receive any payments for the invoices that it issued.

The failure to conduct any meaningful due diligence can only mean that the Appellants knew that Atheus’, and then Tisca’s, activities were connected with a fraudulent evasion of VAT.

AIL, through the Appellants, had actual knowledge that its sales to Atheus and Tisca were part of a VAT fraud being committed in the transaction chains, as shown by the inference which arises from cumulative circumstantial evidence.

AIL had not taken every reasonable step within its power to prevent its own participation in the fraud. AIL’s due diligence in relation to Atheus and Tisca was inadequate for AIL to conclude that they were not engaged in MTIC fraud and had the financial wherewithal to enter into transactions in the values at which they were carried out.

It is beyond coincidence that, just as in the transactions subject to the denial of input tax in 2006 (which was the subject of a dismissed appeal in this tribunal), the Appellants have again engaged in transactions that are connected with the fraudulent evasion of VAT. Their previous involvement in such transactions suggests that they knew that the purpose of the impugned transactions was to facilitate VAT fraud. If they did not so know, their previous experience in relation to the circumstances surrounding transactions connected with the fraudulent evasion of VAT should have alerted them when the transactions which are the subject of this appeal occurred. The only reasonable explanation for the transactions was the facilitation of fraud.

If there was an overall scheme to defraud, it is more probable than not that, for the said scheme to have worked, the key parties to the transaction chains must have been told: from whom to purchase, what goods to trade, when to trade, at what prices, whom to pay and when.

The proper inference to be drawn from the existence and operation of the overall scheme to defraud the Polish revenue is that AIL knew that its transactions, that formed part of the scheme, were connected with the fraudulent evasion of VAT.

HMRC also rely upon a series of factors to show that AIL had actual knowledge that its sales were connected to the fraudulent evasion of VAT including: AIL’s knowledge of MTIC activity, the fact that previous transactions had been linked to fraudulent transactions, its change from supplying Atheus to Tisca once the Cypriot authorities began to investigate Atheus, the supply of UK specification goods to Cypriot companies, the lack of evidence of negotiation of deals, the ease with which a large turnover was achieved with Atheus and Tisca and the ease of making profits on those sales, AIL’s due diligence, AIL’s commercial documentation (or the lack thereof), the lack of records about rejected counterparties and the lack of evidence of adequate insurance and inspection of goods. In addition, HMRC relied on claimed inconsistencies in the Appellants’ evidence regarding matters such as payments made by Tisca to AIL. The Appellants themselves have recognised that their due diligence had been inadequate.

The VAT inaccuracies were deliberate. Claiming zero-rating that a taxable person knows is not due because he knows that the relevant transactions are connected with the fraudulent evasion of VAT, is deliberate behaviour, as is claiming zero-rating in circumstances where the only reasonable explanation for them is fraud.

HMRC do not plead recklessness. They plead actual knowledge which includes ‘Nelsonian’ blind eye knowledge. This means that, if the maker of the statement was wilfully blind as to the inaccuracy of the statement, the test in Tooth v. HMRC [2021] UKSC 17 would be satisfied (relying upon Clynes v HMRC [2016] UKFTT 369 (TC) and Chohan v HMRC [2021] UKFTT 096 (TC)).

In relation to the Appellants’ argument regarding the treatment of the charges imposed by the Polish authorities under what is referred to as “Article 108”, Ms Rao submits that the argument misses the core features of MTIC transactions: the Polish companies issued invoices whereby they purported to handle goods, even though they did not in fact do so, in order to disguise the presence of a fraud. In addition, the Tribunal cannot properly make a finding on the interpretation and effect of Polish law without an adequately evidenced translation thereof and legal opinion being made available to it.

Mr Sheth’s liability is derived from his role as director and by his oversight of AIL’s activities as well as the fact that he actively took part in the business of the company including managing its cash flow and was responsible for the accuracy of its VAT returns, even if he delegated this task to an accountant.

Mr Ghazi’s liability is predicated upon his integral role within AIL. Mr Ghazi was the person who knew the most about AIL’s trading behaviour, customers, suppliers, transaction decisions, due diligence, defaulters in the supply chain, and overall conduct of its business. It is plain that the directors relied upon Mr Ghazi in making any decisions in relation to AIL. He was responsible for ensuring that every reasonable step was taken to avoid entering into transactions that were connected with a fraud. If he allowed such transactions to go ahead, knowing that VAT returns would be submitted on behalf of AIL claiming zero-rating on those transactions, the inaccuracy is properly attributable to him.

The Appellants sought for the first time in the proceedings at the hearing to suggest that persons other than themselves made decisions in relation to the company. That suggestion, coming so late and with no support from the individuals named as responsible, was wholly unbelievable; although once the evidence is closely analysed it is clear that, in fact, despite the purported claims, the other individuals had no real part in the decision-making.

There are no special circumstances in this case.

Although this was not entirely apparent from the written opening submissions, it was clarified during the hearing that HMRC do not allege dishonesty.

HMRC do not allege that there was any VAT loss in Bulgaria or Cyprus.

Mr Sherratt submitted that the Appellants’ case starts from the submission that even if HMRC prove everything that they propose to prove regarding the connection of AIL’s transactions to fraud, their case will still fail as a matter of law because they have not proven a deliberate inaccuracy in the VAT returns. In order for the inaccuracy in the VAT return to be “deliberate”, it was necessary for AIL to know that the VAT return contained that inaccuracy; and to have intended to mislead HMRC as to the truth of the inaccurate statement, applying Tooth. This means that it must be shown that AIL intentionally declared the relevant deals as zero-rated and intended, thereby, to make an inaccurate statement. AIL cannot have intended to mislead HMRC in respect of the truth of applying zero-rating if it did not know that zero-rating was unavailable.

Mr Sherratt submitted that there are two types of knowledge involved in this case:

He submits that a person can have the first knowledge without the second. If AIL did not know the Kittel test could lead to denial of zero-rating, it cannot have provided the relevant information, intending it to mislead (irrespective of any consideration of the broader conduct). There may be other consequences of the Kittel test being satisfied that no one is presently aware of, but which the CJEU later identifies. There can be no deliberate inaccuracy until there is such awareness. The declaratory effect of EU law is not relevant. It may well be the case that as a matter of law zero-rating should always have been denied for transactions where the Kittel test is satisfied. That does not mean, however, that persons who zero-rated transactions where the Kittel test was met, in ignorance of this legal principle, were causing deliberate inaccuracies. As far as AIL was concerned the reality was that all HMRC ever required to see to authorise zero-rating was the material stipulated by Notice 725, and that was the total of both the Appellants’ and Officer Patterson’s knowledge at the time.

HMRC have not pleaded or submitted a case that the alleged inaccuracy was deliberate because AIL knew it was not entitled to zero-rate the transactions in the relevant VAT returns. There is no allegation that any inaccuracy was attributable to either of Mr Sheth or Mr Ghazi because they actually knew that there was an inaccuracy in the VAT return.

HMRC rely on an allegation of wilful blindness to try and establish knowledge of connection to fraud, but they do not rely on it to establish knowledge that it was inaccurate to apply zero-rating in the VAT return (if it was inaccurate). It would only be the latter that is relevant to an allegation of deliberate inaccuracy.

In relation to the question as to whether there was an inaccuracy in the tax returns, Mr Sherratt submitted that the evidence of fraudulent tax loss and connection is inadequate. It consists entirely of translations of decision letters sent to companies in Poland. The evidence, on its own terms, does not establish a fraudulent tax loss or a connection between AIL’s transactions and a fraudulent tax loss. It has not been proven that these goods were in any transaction chain leading to tax losses in Poland.

HMRC had pleaded that various identified Polish companies were the defaulting traders, but their closing submissions appeared to have abandoned this line of argument, or changed their case to arguing that the companies who directly paid Tisca were the defaulting traders. If the latter, this change from their stated case should not be permitted given that no application had been made to make the change. However, even if those companies were considered the same fundamental problems with the evidence in relation to them applies as it does to the companies originally identified. Sending goods to Poland does not in itself establish fraudulent VAT default.

Mr Sherratt submitted that the weight given to the reports from the Polish tax authorities should be reduced given the lack of primary documentation and the lack of Polish tax authority witnesses who could be cross-examined on the contents of the letters. The Polish letters are, in large part, comment and opinion. He relies upon Mungavin v. HMRC [2020] UKUT 11 (TCC), in which Nugee J said in the context of a revenue officer’s evidence:

“He could not prove the primary facts as he had no more knowledge of them than anyone else: either they could be proved from the documents and other matters he referred to (in which case his evidence was not needed) or they could not (in which case his evidence would not assist). And as to what inferences could be drawn from those facts, again his evidence was not strictly evidence of facts he could speak to of his own knowledge, but amounted to a series of submissions.”

However, to the extent that the Polish reports are relied upon, they in fact prove that AIL’s transactions were not connected with supplies by alleged fraudulent defaulters. Each of the alleged fraudulent defaulters identified by HMRC was described by the Polish authorities as a fictitious company that did not handle or supply goods or incur any VAT liabilities. All they did was issue “blank invoices”. Logically therefore those companies could not be found to have fraudulently defaulted on VAT liabilities.

There is considerable irony in HMRC asking the Tribunal to accept the Polish letters as proof of the existence of a fraudulent tax loss in Poland under Polish law but, at the same time, asserting that the Tribunal cannot rely on what those documents say about the nature of the sums charged against the Polish companies. However, in any event in the absence of satisfactory evidence of foreign law, the Tribunal should assume that the foreign law is the same as English law relying upon Iranian Offshore Engineering and Construction Company v. Dean Investment Holdings SA [2018] EWHC 2759 (Comm).

The result of the inadequacies in HMRC’s case is that no tax loss has been proven and AIL’s supplies cannot be connected to any defaults by Polish companies.

In considering the requisite knowledge of any fraudulent scheme, the Tribunal must be wary of relying unduly upon the quality of the taxpayer’s due diligence, particularly where it is necessary to conclude that AIL/the Appellants knew, rather than should have known, of a fraudulent scheme.

HMRC’s reliance on factors such as lack of insurance and lack of contractual documentation should not be taken as indicators of knowledge of fraud given that AIL applied the same practices to the many transactions which were not challenged.

There is no evidence as to the price at which the mobile phones were sold after Tisca’s supply. The ultimate price of disposal of the mobile phones logically must dictate pricing throughout the chains, if they are contrived. The evidence does not disclose where the ultimate supply of the goods took place after they arrived at the Polish freight forwarders.

The Appellants had adequately explained the payments made by AIL to Tisca as refunds and the invoiced supplies by AIL to Tisca reconciled with total payments made by Tisca less total payments by AIL. Refunds from AIL to Tisca do not become more likely if there is an orchestrated fraud, they become less likely. The fact that deals fell through and refunds had to be made is not just the best explanation, but the only explanation for these payments that is before the Tribunal and there is no sensible reason to doubt that explanation.

Mr Sheth as director accepted that ultimately, responsibility for transactions undertaken by the company rested with him. But that does not mean that he had detailed knowledge of all relevant details which led to the Tisca trade. HMRC have not proved that he did have detailed knowledge of the relevant detail in respect of the Tisca trades.

Mr Ghazi plainly had important input in discussions as to the decision whether to trade with a particular customer. The evidence does not support the inference that Mr Ghazi made the final decision, or ran AIL on a day-to-day basis, or was a ‘controlling mind’ as asserted. The ultimate decisions on trades rested with Mr Sheth. He was not responsible for making VAT returns. HMRC have not asserted or proved any case on motive for Mr Ghazi. It is not at all apparent what motive he would have to cause or permit AIL to deal with customers where he knew deals would be connected with fraud.

If a taxable person has incurred input tax that is properly allowable, he is entitled to set it against his output tax liability and, if the input tax credit due to him exceeds the output tax liability, receive a repayment (Regulation 29 of the VAT Regulations 1995).

However, the European Court of Justice (“the ECJ”), in its judgment dated 6 July 2006 in the joined cases Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL [2008] STC 1537 (“Kittel”), confirmed that, in the context of MTIC fraud, traders who “knew or should have known”, that the transactions in which they were engaging were connected to such frauds would not be entitled to reclaim any input tax incurred. However, the starting point was stated at paragraph 55 of the ECJ judgment:

“Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively…”

This case does not concern denial of input tax but denial of zero-rating.

In relation to the dispatch of goods to another Member State, the relevant provisions of the 2006 Directive state:

This is reflected in domestic legislation by s.30 VATA 1994 and Regulation 134 of the VAT Regulations:

“Section 30 VATA Zero-rating

(1)

Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section-

(a)

no VAT shall be charged on the supply: but

(b)

it shall in all other respects be treated as a taxable supply; and accordingly the rate at which VAT is treated as charged on the supply shall be nil.

…

(8)

Regulations may provide for the zero-rating of supplies of goods, or of such goods as may be specified in the regulations, in cases where-

(a)

the Commissioners are satisfied that the goods have been or are to be exported to a place outside the member States or that the supply in question involves both-

(i)

the removal of the goods from the United Kingdom; and

(ii)

their acquisition in another member State by a person who is liable for

VAT on the acquisition in accordance with provisions of the law of that member State corresponding, in relation to that member State, to the provisions of section 10; and

(b)

such other conditions, if any, as may be specified in the regulations or the Commissioners may impose are fulfilled.

Regulation 134 provides:

“134 Supplies to persons taxable in another member State

Where the Commissioners are satisfied that-

(a)

a supply of goods by a taxable person involves their removal from the United Kingdom,

(b)

the supply is to a person in another member State,

(c)

the goods have been removed to another member State, and

(d)

the goods are not goods in relation to whose supply the taxable person has opted, pursuant to section 50A of the Act, for VAT to be charged by reference to the profit margin on the supply,

The supply, subject to such conditions as they may impose, shall be zero-rated.”

In Mecsek-Gabona Kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága (Case C-273/11) the CJEU extended the Kittel principles to situations of zero-rated intra-Community transactions as follows:

We adopt the summary of this by Judge Poole in Turkswood Limited v HMRC [2021] UKFTT 0166 (TC) where he stated:

“In short, if it is “established, in the light of objective evidence, that [the vendor] knew or should have known that the transaction which it carried out was part of a tax fraud committed by the purchaser, and that it had not taken every reasonable step within its power to prevent its own participation in that fraud”, then the zero-rating of an intra-Community supply could be denied.”

The principles were explained further in Staatssecretaris van Financiën v Schoenimport ‘Italmoda’ Mariano Previti vof (C 131/13) where the CJEU said:

We have noted in the underlined words in the extract from the Mecsek-Gabona decision that the denial of zero-rating requires a purchaser to have committed tax fraud. As made clear by Italmoda that does not have to be the direct customer of the taxpayer, but VAT fraud must take place in the chain of supplies. That is consistent with the starting point expressed in Kittel.

The courts have considered the application of the Kittel principles on numerous occasions. There was no dispute in this case that principles set out in that context could (where not limited to specific issues concerning the denial of input tax) be extended to Mecsek-Gabona cases.

Consistent with the conclusion that HMRC must identify the alleged tax fraud, is the following description of the burden of proof in Red 12 Trading v R & C Comrs (Christopher Clarke J):

“In Calltell Telecom Ltd v Revenue and Customs Comrs; Opto Telelinks(Europe) Ltd v Revenue and Customs Comrs (2007) VAT Decision 20266 the tribunal considered the burden of proof in the following terms:

‘67. Mr Cunningham made the point that it was for a trader seeking to exercise the right to deduct to show that he was entitled to do so:[Rompelman v Minister van Financiën (Case 268/83) [1985] ECR 655, [1985]2 CMLR 202]. He did not concede that, in a case such as this, the burden shifted to the Commissioners; rather, he said, the rule remained as it had been since the decision of the High Court in [Tynewydd Labour Working Men’s Club and Institute Ltd v Customs and Excise Comrs [1979] STC 570] that, save in prescribed cases of which this was not one, the burden of proof before this tribunal lay with the appellant. Nevertheless, he accepted that it was for the Commissioners to establish the chain of transactions, the relevant default and the fraudulent purpose of the default. So much was decided by the tribunal in Bond House and that allocation of the burden has been generally accepted, including by the Commissioners themselves—see, for example, paragraph 82 of the decision in Dragon Futures.

The result has been that the tribunal and other courts have sought to encapsulate the relevant questions in the following way as accepted to be correct by the High Court in Blue Sphere Global Ltd v Commissioners for Her Majesty's Revenue and Customs [2009]EWHC 1150 (Ch):

No reason to deviate from this approach in this case applying Mecsek-Gabona has been identified by HMRC other than, as accepted by both parties, the addition of one more step which is to identify whether the taxpayer had taken every reasonable step within its power to prevent its own participation in that fraud.

The courts have made clear that consideration of the overall circumstances of a taxpayer’s transactions is required when assessing the taxpayer’s knowledge or what the taxpayer should have known. So, in Mobilx, Blue Sphere Global and Calltel v HMRC[2010] STC 1436 (“Mobilx”), the Court of Appeal (Moses LJ giving judgment) formulated the following test and approach for the purposes of the application of the principle in Kittel in paragraph 59:

“59.

The test in Kittel is simple and should not be over-refined. It embraces not only those who knew of the connection [with fraudulent evasion of VAT] but those who 'should have known'. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.”

The Court of Appeal endorsed the following description of the approach to be applied by Charles J in Red 12 Trading Ltd v Revenue and Customs Comrs[2009] EWHC 2563 (Ch) at [109]–[111]:

Further,Lewison J in the decision of the Upper Tribunal in Brayfal Ltd v HMRC [2011] UKUT 99 (TCC) said:

“In answering the factual question, Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focusing 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 Court of Appeal’s and Upper Tribunal’s directions to consider the surrounding circumstances are to determine the evidence of a fraudulent scheme and a taxpayer’s knowledge or the expectations concerning their knowledge thereof. It does not go so far as to say that surrounding circumstances are sufficient to conclude that “there must have been VAT losses somewhere connected to the challenged transactions”. This is made clear by the reference in the Court of Appeal’s judgement to the assumed first step of tracing of transactions to tax losses.

However, if HMRC shows that a taxpayer’s transactions were connected to fraudulent VAT losses, it is not necessary to show that the taxpayer knew the specific details of the fraud: Fonecomp Limited v HMRC [2015] EWCA Civ 39 per Arden LJ (with whom McFarlane and Burnett LJJ agreed) said, at [51].

The result of these cases is that if fraudulent evasion of VAT in Poland (or another EU Member State) by those participating in AIL’s transaction chains by purchasing directly or indirectly from AIL’s customer is established, and AIL knew or should have known that by its supplies of the mobile phones in question to its customers it was participating in that fraudulent evasion, then the zero-rating of its supplies should be denied, unless it is shown that AIL had taken every reasonable step within its power to prevent its own participation in that fraud.

It is not disputed that the burden lies on HMRC to show that the relevant VAT frauds have taken place and that AIL’s transactions were connected to those frauds.

If HMRC discharges the burden on it to show that those inaccuracies existed, the question is then whether the provisions in Schedule 24 FA 2007 apply so that the Appellants are liable for the PLNs issued to them.

Schedule 24 FA07 stated at the material time, in as far as is relevant:

“Schedule 24 Penalties for errors

1 Error in taxpayer’s document

(1)

A penalty is payable by a person (P) where -

(a)

P gives HMRC a document of a kind listed in the Table below, and

(b)

Conditions 1 and 2 are satisfied.

(2)

Condition 1 is that the document contains an inaccuracy which amounts to, or leads to –

(a)

an understatement of a liability to tax,

(b)

a false or inflated statement of a loss, or

(c)

a false or inflated claim to repayment of tax.

(3)

Condition 2 is that the inaccuracy was careless (within the meaning of paragraph 3) or deliberate on P’s part.

…

19 Companies: officers’ liability

(1)

Where a penalty under paragraph 1 is payable by a company for a

deliberate inaccuracy which was attributable to an officer of the company, the officer is liable to pay such portion of the penalty (which may be 100%) as HMRC may specify by written notice to the officer…

…(3) In the application of sub-paragraph (1) to a body corporate other than a limited liability partnership “officer” means–

(a)

a director (including a shadow director within the meaning of section 251 of the Companies Act 2006 (c. 46)),

(aa) a manager, and

(b)

a secretary.

These provisions therefore give rise to the following issues:

In deciding the second of these questions the leading authority, as recognised by both parties, is the Supreme Court decision in HMRC v Tooth [2019] EWCA Civ 826 where Lords Briggs and Sales said at paragraphs 42-43 and 47:

“[regarding] the true construction in this very different context of the phrase “deliberate inaccuracy” in section 118(7). The question is whether it means

(i)

a deliberate statement which is (in fact) inaccurate or (ii) a statement which, when made, was deliberately inaccurate. If (ii) is correct, it would need to be shown that the maker of the statement knew it to be inaccurate or (perhaps) that he was reckless rather than merely careless or mistaken as to its accuracy.

43.

We have no hesitation in concluding that the second of those interpretations is to be preferred, for the following reasons. First, it is the natural meaning of the phrase “deliberate inaccuracy”. Deliberate is an adjective which attaches a requirement of intentionality to the whole of that which it describes, namely “inaccuracy”. An inaccuracy in a document is a statement which is inaccurate. Thus the required intentionality is attached both to the making of the statement and to its being inaccurate…

… 47 It may be convenient to encapsulate this conclusion by stating that, for there to be a deliberate inaccuracy in a document within the meaning of section 118(7) there will have to be demonstrated an intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so.”

As explained in setting out the parties’ cases, there is a dispute, in essence, as to whether it needs to be found that the Appellants knew that there sales to Tisca were connected to fraudulent tax evasion, or whether it is also necessary to conclude that they were aware of the results of the Mecsek-Gabona case. We say no more on this matter given the conclusions regarding the existence of inaccuracies in the first place.

However, we would note that in the context of the PLNs relying upon deliberate inaccuracies in the tax returns, the effect of the amalgamation of the Tooth principles and the MTIC principles is accepted by HMRC to mean that it is necessary for HMRC to show that the Appellants knew that the transactions were connected with a fraudulent evasion of VAT (and not simply that they should have known that this was the case).

We have used MTIC terminology in this decision such as “buffers”. We have not set out the caselaw describing those terms which have been amply described in other contexts, but refer, in particular, to Christopher Clarke J in Red 12 Trading Ltd v HMRC[2009] EWHC 2563(Ch).

The evidence provided by HMRC in reports from the Polish tax authorities makes frequent reference to provisions in Polish law and, in particular, to a provision referred to as “Art 108”. The approach to that provision was the subject of extensive oral submissions by Mr Sherratt and Ms Rao.

The Upper Tribunal made clear in the case ofCS and Others (Proof of Foreign Law) India [2017] UKUT 00199 (IAC) thatthe content of any material foreign law is a question of fact, normally determined on the basis of expert evidence. (Although that is a decision made in the context of the Immigration and Asylum Chamber, a relevant decision of the Upper Tribunal is binding on this Tribunal regardless of the chamber to which the appeal relates.)

The Upper Tribunal said (at paragraph 16):

“The burden of proof rests on the party relying upon the relevant foreign law. Any question of foreign law is one of fact. Judicial notice of foreign law is rarely appropriate. The general principles are rehearsed in Halsbury’s Laws of England (2015), Volume 12 (2015) at [746].”

In referring to Halsburys Law we note that the description therein (now contained in Volume 12 at 740) states:

We consider that as the Upper Tribunal expressly referred to Halsburys we should read the judgement as referring to and incorporating the principles stated therein.

We note that overall this is consistent with the description set out by Andrew Baker J in Iranian Offshore Engineering and Construction Company v. Dean Investment Holdings SA [2018] EWHC 2759 (Comm) (and relied upon by Mr Sherratt) where he stated:

“[2] Dicey Rule 25 is in the following, familiar terms:

(1)

In any case to which foreign law applies, that law must be pleaded and proved as a fact to the satisfaction of the judge by expert evidence or sometimes by certain other means.

(2)

In the absence of satisfactory evidence of foreign law, the court will apply English law to such a case”.

The standard of proof is the normal civil standard of proof i.e. the balance of probabilities and the parties accept that the burden of proof rests with HMRC.

We have been provided with 4644 pages of evidence in the bundle and heard evidence from the Appellants and Mr Barry Patterson, Mr Simon Marsh and Mr Jon Peet of HMRC.

Mr Marsh has been the officer at the heart of HMRC’s investigations into alleged empty transactions involving companies located in other European jurisdictions and, in particular Poland. He was particularly involved in an investigation into another UK trader called EP Consultants UK Ltd (“EP”), as a result of which HMRC placed EP into liquidation. A substantial amount of his Witness Statement relates to the case against EP. However, that is of limited relevance to this case. Mr Marsh has also set out a diagram for the alleged transactions, but, as we identified at the hearing with him, the diagram starts with EP, not AIL. Overall, we would have expected Mr Marsh’s Witness Statement to have been more tailored to this case.

At the hearing we found Mr Marsh’ oral evidence somewhat confused. He said that there would have been VAT losses at the first Polish trader, but when seeking to understand the basis of this statement he also told us that the Polish tax authority letters explained that the companies played the role of buffers. The companies may have played both of those roles in different transaction chains, but Mr Marsh’s evidence does not identify the roles in AIL transaction chains and, in particular, the basis of the allegation that there were VAT losses at the first Polish trader. As our findings later show, this evidence is missing.

Similarly, when working through one of the Polish tax authorities’ letters with Mr Marsh, he identified in the context of the company, Jacobin, that Jacobin had dealt with a supplier called Gallent which he said was a missing defaulting trader, but he recognised that there is no evidence showing that Jacobin and Gallent were together involved in the AIL transactions.

Mr Marsh explains he reviewed the data which he had obtained from other EU member states to identify any further potential supply chains involving UK companies. He asked the Polish authorities to trace the supply chains forwards and backwards. From the information received he identified AIL as a participant in the orchestrated scheme. However, he has provided little to show how AIL was so identified. He notes that a large amount of data was obtained but it was sometimes fragmented because some traders were missing traders with no documentation available. The Polish authorities have provided very detailed letters explaining the role of various Polish companies and often the supply chains involving the Polish companies are set out. However, none of those supply chains show AIL. Much of the focus is on the involvement with EP. Only one Polish letter mentions AIL and the reference is not in the context of transactions which can be connected to those challenged by HMRC. Ultimately the identification of AIL appears from the evidence overall to have been on the basis that it was a supplier to Tisca.

Mr Marsh has provided evidence in his Witness Statement regarding other companies against whom action was taken as a result of the investigations, one of which withdrew its appeal against resulting assessments and one of which was based into liquidation. The fact that other companies have had assessments raised on the basis of the investigations has little bearing on the position of AIL.

Mr Marsh relies on an affidavit which was prepared for action taken by HMRC against EP in the High Court. The affidavit runs to 362 pages, most of which has little bearing on the case against the Appellants. There is no reference to AIL or the Appellants in it. Most of the exhibits referred to in the affidavit have not been produced, including potentially relevant ones for this case; such as, the evidence showing that the Bulgarian companies said to have purchased the goods from Tisca were missing traders, had failed to declare any trading on their VAT returns, lacked trading activity or simply did not engage with Tisca as described by Mr Marsh; and evidence that Polish companies, which are said to be relevant to the case against the Appellants, should be treated as a defaulter or missing trader.

Mr Peet provided evidence which was based upon his review of, and adoption of, an affidavit produced by a retired HMRC officer, Mr Porteous. However Mr Porteous’ affidavit was prepared in the context of the EP litigation and is therefore addressing EP transactions. Although he has provided tables showing, for example, the percentage of sale made by Tisca to various customers, we have not been provided with the underlying documents or data. We do however, make reference to Mr Porteous affidavit, supported by bank statement evidence, in addressing the evidence of monies received by Tisca as explained later.

Similarly, Officer Peet’s Witness Statement addressed sales made by EP to Tisca. Apart from the front page to his Witness Statement Setting out Mr Sheth’s name, Officer Peet does not mention AIL or the Appellants once throughout his Statement. Much effort was put into providing us with an updated and annotated version of the Witness Statement correcting numerous figures therein, but it still failed to mention AIL or the Appellants, or identify links between the transactions described and AIL. It considers Tisca in some detail, but with reference to its deals with EP.

We would note that this is not a helpful way of presenting the case. The Tribunal has been provided with an extremely large volume of material and it is unhelpful to provide copies of affidavits used in other proceedings with no proper indication of which parts (if any) are relied upon in this case.

HMRC have relied upon cases presented in relation to other companies where their appeals have been struck out or withdrawn. However, those cases had not been judicially tested and we find reference to them to be of little assistance to HMRC’s case.

In relation to one UK company called Prizeflex Limited, HMRC relies upon an MTIC decision dismissing that company’s appeal. However, the decision in Prixeflex’s appeal did not relate to Polish transactions. The circumstances do not relate to the circumstances in this appeal beyond the fact that in both cases mobile phones were involved. HMRC say that they have denied zero-rating on seven supplies of mobile phones made on four invoices to Tisca in the VAT period 06/13 on the same basis as AIL’s denial. The fact that HMRC has taken such action is again of no relevance this case: HMRC may be wrong in both cases, right in both cases, or right in one case.

This Tribunal is first and foremost a fact-finding tribunal and simple assertions made in Witness Statements which have not been accepted as evidence by the other party provide little assistance to the Tribunal in its role. In the absence of primary source documents, there is little basis for us to assess the basis on which statements are made. Furthermore, the lack of underlying documents means that the Appellants are limited in the challenges which can be made to the evidence. To make findings based simply on assertions made in Witness Statements would therefore be wrong in law and would be procedurally unfair. We give little weight to evidence prepared for other cases with no stated linkage to the AIL deals.

In relation to the opinion evidence, which is a major component of HMRC’s witnesses’ Witness Statements, we adopt the approach set out in Megantic Services Limited v HMRC [2013] UKFTT 492, at [15], that such evidence:

“… is not a matter of fact but a matter of opinion. It is merely a view of a witness on a matter on which the tribunal itself must reach its own conclusion, and as such is of no value as evidence. Such evidence may rightly be excluded on that basis. In most cases, however, we would not see it as necessary, or indeed proportionate, for a forensic exercise to be undertaken, either by the parties or by the tribunal, to identify any such matters in each witness statement and for the tribunal formally to direct that they be excluded.

Generally speaking, we think that the parties can rely upon the good sense of the tribunal to disregard purported evidence that represents conclusions that the tribunal itself must reach. That can usually conveniently be the matter of submission at the substantive hearing, rather than a formal application to exclude.”

Officer Patterson’s evidence has the advantage of being more directly related to AIL. However, his evidence was notably inconsistent on several matters to which HMRC are seeking to place significance, such as the following:

Officer Patterson’s evidence in his Witness Statement frequently strayed into the realms of opinion or unsupported assertion. For example, he says that the bank statements produced by Tisca at the request of the Cypriot authorities confirmed the fraud because they showed payments being received from Poland. Quite clearly the fact that Tisca received payment from Poland does not in itself evidence fraud.

In relation to the alleged transaction chains Officer Patterson sets out chains including AIL’s supplier, Tisca and one of the Bulgarian companies. However the underlying documentation referred to and exhibited for each deal does not provide evidence of the transactions between Tisca and one of the Bulgarian companies. Similarly, he lists the de-registration dates in respect of a number of EU customers, but provides no evidence to support the list.

HMRC have also referred to the fact that a related company to AIL (AEL) had an MTIC appeal dismissed. While elements of that case may be relevant in the context of, for example, in relation to evidence of Mr Ghazi’s involvement and management of the business and to show knowledge and awareness of MTIC issues, the fact that the related company’s appeal was dismissed should not colour our conclusions in this case,. Our duty is to reach a decision based on the evidence placed before us (Djebbar v SSHD [2004] EWCA Civ 804).

Mr Sherratt made comprehensive submissions in writing and orally regarding the weight which should be given to HMRC’s evidence and, in particular, the evidence in the letters from the Polish revenue authorities given that there was no witness who could be cross-examined on the contents. We consider that Mr Sherratt raised valid concerns. In particular, there are problems relying on the translations of the Polish revenue authorities’ letters given that the translations themselves are at times very unclear and potential inconsistencies are apparent. Those inconsistencies could not be put to any witness (see, for example, our comments in relation to the findings regarding Nikopol below). We can see no good reason why HMRC did not seek to call a Polish tax inspector to give evidence in just the same way as HMRC would call a responsible officer to explain the evidence about actions taken in relation to UK companies in the context of UK-based MTIC appeals.

In this context we are also somewhat confused by HMRC’s position regarding the Polish reports. On the one hand they have sought to rely on them extensively, but on the other hand Ms Rao submitted that the Tribunal cannot properly make any finding on the interpretation and effect of Polish law without an adequate evidenced translation thereof and legal opinion. Yet the letters are almost universally based on the application of Polish law and, in particular, one particular provision referred to as “Art 108”. (We explain our approach to Art 108 and our findings later in this decision.)

We have decided, however, that a full assessment of the varying weight to be given to the evidence relied upon by HMRC would be otiose in this case. That is because even when HMRC’s evidence is considered at its highest, HMRC has not discharged the burden of proof upon it for the reasons we explain later. This means that we have set out, in our findings, various conclusions derived from the evidence in letters from the Cypriot and Polish tax authorities, despite the issues regarding the Polish evidence in particular, so that our conclusions regarding the position taking HMRC’s evidence at its highest can be explained.

However, we note that our conclusion, explained later in this decision, that HMRC has failed to show that the AIL transactions were connected to fraudulent tax losses, is one which we have taken despite significant reservations regarding the evidence provided by the Appellants. As a result of our conclusions regarding the connection to fraudulent tax losses it has not been necessary to consider further elements of the case where the Appellants’ evidence and the extent to which it rebuts HMRC’s evidence and inferences therefrom would be of particular relevance. We note, however, that we identified several issues with the Appellants’ evidence; in particular:

This means that overall we did not find Mr Sheth or Mr Ghazi to be reliable witnesses and we reduced the weight given to their evidence. This would have had particular implications, for example, in the context of weighing up the conclusions to be drawn from inferences from the conduct of AIL’s trade compared to the denial of knowledge provided by the Appellants.

Atheus Invest Ltd (“Atheus”)

Benox Sp. z o.o. (“Benox”)

Elit MMM EOOD (“Elit”)

Flatop Sp. z o.o. (“Flatop”)

Fonset Sp. Z o.o. (“Fonset”)

GallentSp. z o.o (‘Gallent’)

Havana Sp. z o.o. (“Havana”)

Jacobin Sp. z o.o (‘Jacobin’)

Jaystone Trading Sp. z o.o

Kameya OOD (‘Kameya’) 

LimoSp. z o.o (’Limo’)

LineksSp. z o.o (‘Lineks’)

Multistrada Enterprise Sp z o.o. (“Multistrada”),

NectelSp. z o.o (‘Nectel’)

Nikopol Enterprises Spz (‘Nikopol’)

NorfolkSp. z o.o (‘Norfolk’)

Ron Poland Sp. z o.o. (“Ron”)

RoxaSp. z o.o (‘Roxa’)

Sigma Treyd OOD (‘Sigma’)

Tisca Ltd (‘Tisca’)