PPX Metal Management Ltd v The Commissioners for HMRC

Mr Pearce had worked for Ward Recycling in Ilkeston for five years, he had started on the weighbridge and ended up visiting businesses to see if he could arrange for a bin to be dropped off and then collected when it was full. He then saw an opportunity as Ward Recycling was not competitive on certain grades of metal.

He had set up PPX in September 2011. He went to businesses that he knew would produce waste, sourced a company to drop a bin off, and then arranged for it to be collected when full.

Mr Pearce dealt in all metals; it was an early stage so he was offering a high price, getting less than 5% profit. He had funded purchases himself – expenses were a website and business cards. The only assets were a desk, computer, printer, a phone and himself.

Introductions for selling were from Mr Pearce’s contacts from his previous employment with Ward Recycling. For buying, this was cold calling and he had just started to advertise in yellow pages, Thomson and Google.

Deals were mostly done over the phone. Payments (for both customer and supplier) were generally through BACS, with some cheques. He didn’t check ID but did record all transactions. Officer Sidhu advised him to think about ID and advised that she understood the police have had an interest in the metals industry.

Mr Pearce did not do any credit checks on customers or suppliers. Officer Sidhu said he needed to consider this for the future.

He provided bank account details, was asked about third party payments and Officer Sidhu explained what they were. Mr Pearce said he wasn’t aware he had ever done these and wouldn’t do so if asked.

Officer Sidhu explained that the visit had been required as Ward & Sherratt Ltd had requested clearance for PPX through Wigan, where a company can verify if a customer or supplier has a valid VAT number. It is one commercial check to verify if trading partners are legitimate. Mr Pearce said this made sense as Ward & Sherratt were withholding a payment to him and told him they were doing some checks; he asked if they would pay him once the enquiries were closed, and Officer Sidhu advised that HMRC do not tell traders to withhold payment so she couldn’t say.

Officer Sidhu said she would leave leaflets regarding MTIC fraud and Mr Pearce said he had never heard of it. HMRC gave an overview, explaining it had originated in mobile phones and computer chips but had moved into other commodities, one of which was metals. She explained that the leaflets gave background and steps he could consider to help protect himself, and reiterated the need to check out customers and suppliers and use the service offered by Wigan. Officer Sidhu went through the leaflets and handed over “How to Spot Missing Trader Fraud”, Notice 726 and other leaflets. Mr Pearce said he needed to put some checks in place.

Although HMRC may validate a VAT registration, this “does not serve to guarantee the status of suppliers and purchasers. Nor does it absolve traders from undertaking their own enquiries in relation to proposed transactions”. It has always remained a trader’s own commercial decision whether to participate in transactions or not and transactions may still fail to be verified for VAT purposes.

When making a check a trader should submit the potential customer/supplier’s VAT certificate, letter of introduction and certificate of incorporation.

Mr Pearce had explained the background to the establishment of PPX (including his time at Ward Recycling). He explained that one company, PAVIS, had asked him to oversee the sorting of metal before being put in the bins. He took this on, and while sorting metal at the side of the PAVIS premises, people were ringing him for prices. He bought scales and started that service. When the contract ended, he decided to get a site himself.

They sold to Sims, EMR, TME and Long Eaton Alloys.

Their suppliers included those who drove in (eg plumbers), Carwood and Algmet.

Officer Francis asked about checks on suppliers and Mr Pearce said he had used Wigan until he had asked for a check on Zinda Ltd (“Zinda”), and this resulted in Zinda calling him and swearing at him.

Officer Francis explained the purpose of the Wigan facility and stressed it was not the only check to carry out and it was not HMRC giving permission to PPX to trade with the trader. The officer explained MTIC fraud, that the fraud had moved into areas including metals, and that input tax could be denied if transactions were traced to fraud. Mr Pearce was told to put in place as many checks as he could to make a sound commercial decision whether or not to trade.

Mr Pearce said that since Zinda, with new businesses he goes to premises and takes pictures of the goods etc.

Officer Francis issued various leaflets, explaining them, and they included “How to Spot Missing Trader Fraud” and Notice 726.

Mr Pearce gave Officer Francis a tour of the site, including the weighbridge and scales system, how details from customers were processed, explained different grades of metal, differing prices and separation of materials.

When asked where PPX purchased from, Mr Pearce explained that they have skips which are placed at premises, they have a couple of suppliers who they buy from and they have the general public bringing metals to the door.

They operate a computer system called Tornado that raises invoices, accounts for stock, retains ID documents and other items relevant to the police’s interest in metals transactions.

Mr Pearce asked about the issues with fraud and how it would affect someone like PPX if he was doing Wigan checks. Officer Farmer gave Mr Pearce the background to MTIC and how HMRC address tax losses. The Officers explained the importance of due diligence and how HMRC work on a knowledge basis. Officer Farmer said he was aware that PPX had received a tax loss letter, which raises the bar as regards due diligence and that this is particularly relevant if PPX continued to purchase from that same source.

Mr Pearce said that he had experienced delays in receiving a response from Wigan and the Officers explained that this may be due to HMRC making visits to the parties being cleared.

Mr Pearce said that PPX’s only business to business supplier was MayX1.

PPX now had a second site in Bulwell, which they opened in February 2014. There is a little more storage capacity.

13 July 2012 – Ward & Sherratt Recycling Ltd,

26 February 2013 – Ashton Grace Construction Ltd,

10 May 2013 – ALG Resources Ltd,

13 June 2013 – Global Metals Direct Ltd,

14 June 2013 – Comspec Recycling Ltd,

25 July 2013 – Towmasters Metals Ltd t/a Cooper & Cooper,

18 February 2014 – Worksop Scrap Metal & Salvage Ltd, and

6 August 2014 – Ikonic Solutions Ltd.

At the beginning of that visit Officer Lauder handed over a tax loss letter in relation to Carwood Commodities. Mr Pearce expressed concern, said he would not trade with them again and asked what it meant for him and his business.

The Officers referred Mr Pearce back to all the visits from HMRC, the discussions in relation to fraud within the metals trade, and the information notice and leaflets he had been given and advice on checks that he could carry out to mitigate the risk of dealing with traders who may be involved in fraud.

Mr Pearce asked if he was likely to get billed for a portion of the tax loss; Officer Launder advised him not at that time but that could change if there was a change in HMRC policy regarding metals.

Mr Pearce said he was using Spires’ yard in Chesterfield.

Officer Hudson explained that PPX had been placed on the monitoring project due to its involvement in tax loss chains and that it would need to provide sales and purchase information to HMRC monthly, and Officer Hudson would visit the business every quarter.

PPX currently operates from three sites, and the office (with business records) was at Mansfield Woodhouse.

Mr Pearce described pricing policy as a minefield – how you make money is to pay less when you can, eg they can offer less to a one-off member of the public than they can to a business they think they will probably get more trade from. Sims sends a price list every day and they make judgements based on that. The price on the list is not always what they get from Sims, it is all based on what the LME is doing.

The main customers were Sims, EMR, Howarths, Carwood and Hawkswoods.

The suppliers were MayX1 and LPI.

PPX had made third party payments in the past for purchases from Vintro and MayX1, and Mr Pearce had been warned about them during the last visit. He said he will not be making any more.

Mr Pearce thinks he has been to most of his customers’ premises. If he deals with a broker he would always check the goods. Officer Hudson told Mr Pearce about some of the checks he can do to mitigate the risks of trading in goods that originate from tax losses, as in Notice 726.

No stock control is done, as goods are moved on as quickly as possible.

21 November 2014 – Beachers Ltd,

18 December 2014 – MayX1 Ltd, and

18 February 2015 – TME Recycling Ltd.

PPX’s VAT returns for 08/14 and 11/14 had not been submitted. Mr Pearce said the 08/14 return had been submitted half an hour ago and the 11/14 return would be submitted in the next fortnight. He was warned to expect penalties if the net VAT due on the late returns was more than the central assessment already paid.

HMRC had not received any monthly sales and purchase records from PPX as requested after the last visit.

Mr Pearce provided a list of PPX’s employees.

Most of the records Officer Hudson had requested after the last visit had not been provided, and she went through the list. Mr Pearce asked that HMRC email a list of what was needed.

There was a discussion about documentation which had been requested by HMRC which Officer Farmer said had not been provided.

Ms Coles (who worked in the office) said she had started at PPX in October 2014 and she didn’t know about Wigan checks and other due diligence.

There was a wall chart listing current suppliers and customers. Ms Coles asked what other checks she could do, and Officer Farmer explained that due diligence is a commercial consideration for a trader. Mr Pearce had previously been issued with a number of notices which gave suggestions and due diligence had previously been discussed.

Officer Farmer commented he would advise that PPX visit all suppliers, particularly before a first trade, and that they should be able to evidence this and any questions asked. Such questions could include have you put all VAT returns in, paid liabilities, have you received tax loss or veto letters.

Mr Pearce said the admin team had apparently stopped doing Wigan checks. The team had now devised a check list. Officer Farmer stressed that due diligence was intended to protect the company – Mr Pearce should consider the risks, make a commercial decision and act accordingly. PPX needed to do due diligence checks and record the results. He should ask questions, record the answers and then consider his trading position.

HMRC had previously issued due diligence information to Mr Pearce – he should re-read these. Officer Farmer reminded Mr Pearce that a Wigan check could generate an HMRC visit, but with a Europa check that wasn’t going to happen.

Officer Farmer referred to four veto letters that had been issued after looking at the PPX records. Mr Pearce said they were well after the event; the officer explained that this was because without a Wigan check HMRC had no idea PPX had traded with those parties.

Mr Pearce said they were now doing credit checks on all companies.

Mr Pearce said that if they received a tax loss letter, he would stop dealing with the counterparty.

Officer Farmer said serious consideration should be given to veto letters and negative Wigan checks, and that Mr Pearce should look at the type of companies and see if that tells him something. He should consider asking about their trade history, product knowledge and that he should re-read the HMRC handouts.

Mr Pearce said he believed the admin team have come up with a good list.

93 of its purchases from MayX1 in VAT periods 05/14-11/14 totalling £2.6m net had been traced to tax losses of £528k;

43 of its purchases from Fortified in VAT periods 08/14-01/15 totalling £549k net had been traced to tax losses of £110k;

157 of its purchases from LPI in VAT periods 08/14-01/15 totalling £3.5m net had been traced to tax losses of £702k;

44 of its purchases from Spire Recycling Ltd and OIL in VAT periods 05/14-11/14 totalling £248k net had been traced to tax losses of £50k; and

that the tax losses identified to date in PPX’s transaction chains totalled £1.51m.

26 March 2015 – Carwood Commodities Ltd;

11 June 2015 – Spire Recycling Ltd;

11 June 2015 – OIL;

11 June 2015 – Fortified;

11 June 2015 – LPI;

10 July 2015 – Road Runner;

30 July 2015 – Yahya;

6 August 2015 – KRN Holding Ltd; and

27 August 2015 – Zeggo.

There was some discussion about sales to three specified customers. In the context of one of those customers, Officer Hudson asked about how PPX had been introduced to them and who supplied to PPX the nickel that it sold on to them. Mr Pearce explained that lots of nickel was added to a pile, it was not one purchase in and one purchase out; they were essentially amalgamated loads. Nickel was from different sources, it is scrap and can come from anywhere, mainly metal merchants.

Mr Pearce negotiated the wholesale deals, where PPX are selling to customers. This included for deals done from the Chesterfield site. The manager at the Chesterfield site is Lee Burton. There had been thefts from the Bulwell site, and management was up in the air. Mr Pearce listed the staff working at the three sites, and said he tried to get round each site himself every day. Steve Carr was getting into a pricing role, and would probably deal with negotiations for wholesale deals in the future.

The VAT return for 05/15 was overdue, and many of the records (which had been requested by email on 26 June 2015) had not been provided.

They discussed self-billing, where PPX weigh the goods, raise an invoice and give a copy to the supplier. Mr Pearce said they need a self-billing agreement in place for suppliers, but acknowledged they had been slap dash and some had not been done. Officer Farmer referred to Notice 700/62.

There was then a discussion on due diligence:

Mr Carr was described as being involved in the majority of the selling, but not involved much with buying.

HMRC had identified that in the 05/15 records there were 11 credit notes for supplies of copper from MayX1. Mr Pearce explained that this would have been “crap stock or price disagreements”. Credit notes would ideally be raised instantly, but with these ones they had been going through year-end procedures and realised they had not been done. There were five credit notes for supplies from LPI.

HMRC reminded Mr Pearce of the requirements for self-billing invoices.

Mr Pearce had said during the last visit that he had met IHEI and Stembridge at their premises, and had met Zeggo and Yahya. He had said he was intending a number of other visits the next week. Mr Pearce confirmed he didn’t think he had done any other visits.

Mr Pearce confirmed they had received the veto letters.

Officer Hudson asked about the due diligence and transactions with Heritage, Zeggo, IHEI, Yahya and Road Runner.

They discussed how PPX now did due diligence, referring back to the discussion at the last visit. Mr Pearce said they don’t do the questionnaire, Ms Coles goes through the due diligence and emails any questions, they go onto Companies House to check directors, ask questions from the results of the due diligence checks. They keep the answers on file. They do Europa checks once a week, Wigan checks when new, then periodically. Mr Carr said the credit checks they do show ratings and directors. Experian notify daily updates to them so they can see any changes.

HMRC reminded Mr Pearce that they must ensure their suppliers are legitimate. They explained that historically MTIC had involved phones and computer chips but was now more prevalent in metals, and there was a lot in the Sheffield area but it was all over the country.

Officer Farmer said that HMRC have no issue with metals from car boots as these people are not registered for VAT. They are concerned with bulk deals and large trades.

Leon Ford does the majority of buying, Mr Carr deals with sales and Mr Pearce now has a mainly HR role, but it’s a small business and they can each deal with whatever is happening at the time. Mr Carr has the role of checking the LME and sends the updated prices to employees as and when they change, and keeps everyone informed of LME prices all day.

For walk-in sales, some customers come in for a price before bringing in the material; and Mr Carr may get a phone call beforehand if it’s a large amount (ie tonnes not kilos).

Officer Hudson asked about the split between trade off the street and companies. Mr Pearce said the majority is bulk loads, which can be worth £30,000 compared with off the street at £300 for each customer through the doors. Mr Carr said there could be three suppliers for bulk compared with thousands for walk in trade. Mr Pearce said the bulk of trade in terms of numbers is from smaller sources, but in terms of value the bulk of trade is from other companies.

Asked if PPX had always bought in bulk, and particularly before HMRC’s visits, Mr Pearce said no, in 2011 the yard was for door-trade customers. They then hired a grab to get metal off other lorries in 2012-2013, and PPX then started with the vast amounts of bulk dealing.

PPX does now actively seek bulk trade. In the past, it was whatever knocked on the door.

As PPX started to do well, they could then show they were a bigger company and could attract bigger companies as customers. Turnover had grossly increased.

Asked about the purchasing, and when they would pay the supplier, Mr Pearce said this varies dramatically, and they hold off paying as long as possible to get the money in first.

Mr Pearce confirmed he had received the Tax Loss Letters for IHEI and Road Runner. Officer Hudson asked if there had been any changes to due diligence checks since PPX had received these letters. Mr Pearce said they had made changes over time due to meetings with HMRC, but not specifically since these letters.

Mr Pearce accepted that he was responsible for all due diligence conducted by PPX, but he did not do it himself. Due diligence was conducted by the admin team, initially Helen (but she left in late 2014) and then Ms Coles (Mr Pearce’s sister), who was employed by PPX from October 2014 (and had attended one of HMRC’s visits).

Mr Pearce could not recall if he ensured that the admin team had regard to the guidance given to him by HMRC, and he was not aware of any training being given to them. Taking account of Ms Coles’ comments to HMRC at the visit on 24 June 2015, as well as the lack of evidence of any training or explanations having been given, we find that Mr Pearce made no attempt to ensure that the admin team were aware of or followed the guidance given by HMRC.

The admin team not only collected the due diligence but also gave the green light to trade. Mr Pearce did not generally review the results of that exercise.

Mr Pearce’s evidence was that there were occasions where PPX had decided not to trade, giving an example of Stembridge Machinery. Stembridge was on the same site as Carwood, and the yard manager of Carwood was listed as a director of Stembridge.

Mr Pearce described his role in the due diligence exercise during the relevant period as minimal. We agree with that description.

Mr Pearce’s evidence was that:

PPX entered into self-billing agreements with some of its suppliers, pursuant to which PPX would issue self-billed invoices for supplies made to them by the supplier, and agreed that the invoices would record the supplier’s name, address and VAT number, together with all details which constitute a VAT invoice. The tickets issued by the weighbridge manager and given to the accounts team were used both for payment and to enable PPX to issue an invoice based on the actual load which had been received and priced.

Mr Pearce had been told by HMRC in January 2012 to verify VAT numbers with HMRC’s Wigan office – we refer to this as a “Wigan check”. Making a Wigan check informs HMRC whom PPX is trading with, and can sometimes prompt HMRC to visit that trader before confirming the VAT registration number appears to be valid. In this regard:

PPX generally verified VAT numbers by conducting an online check using the European Commission’s VIES service – we refer to this as a “VIES check”, although it is referred to in the visit reports as a Europa check. Mr Pearce’s evidence was that this would have been done before making a payment to a supplier, but PPX may not always have printed a copy for its files (as they had not realised at the time that printed evidence may be expected to be produced years later). We find that the first VIES check which was conducted by PPX on each supplier was that with the earliest date which was printed and filed by PPX. We have reached this conclusion as Mr Pearce was not conducting these checks himself and cannot give direct evidence as to what was being done by the admin team, there is no documentary evidence of earlier checks having been done, or oral evidence of the person conducting the checks to this effect, and the files do contain copies of multiple checks with various dates, demonstrating that it was not the case that the admin team had decided that just keeping a copy of one check for each supplier was sufficient.

On 17 July 2015, Mr Pearce said in relation to Road Runner that:

On 27 October 2015, Mr Pearce said in relation to Road Runner that:

certificate of incorporation dated 27 July 2010; and

copy of Mr Marino’s passport.

Road Runner’s annual return, which lists Carmelo Marino as company director, and majority shareholder. This was a publicly available document, but was not received at Companies House until 3 December 2015; and

Road Runner’s accounts for the year ended 31 July 2014, which were not approved until 6 August 2015. The accounts showed fixed tangible assets of £510, its current assets as debtors (of £207,985) and cash (of £61,043), with creditors of £232,772.

three people came to PPX, Imran, the director, Max Lucas and Kashis Mubarak. Mr Pearce couldn't recall when that was, but MayX1 had offered him just under a tonne of bright wire (copper);

he couldn’t remember what checks he had made before trading but would check if he had any emails;

he didn’t visit MayX1’s premises (which HMRC said were in Stockport) but met them at a Costa in Manchester. They came to PPX on a number of occasions but there were no notes of these meetings;

there were no contracts or written terms and conditions between the two companies;

PPX would never pay for goods without them being on the premises and inspected. The goods from MayX1 were always inspected. MayX1 usually delivered to the Bulwell site; and

they did not receive individual payment instructions for each purchase, MayX1 did change details once, to an individual account.

certificate of incorporation dated 3 June 2011;

MayX1’s VAT certificate, which described its business activity as “non-specialised wholesale trade”, dated 30 May 2014, with an effective date of 3 February 2014;

copy letterhead;

copy of Imran Rashid’s passport;

copy BT bill for £30.88; and

Santander account statement summary. The bank statement, for a one-month period, showed a balance brought forward of £0, £14,913 credits, debits of £69.

annual report and accounts for the year ended 30 June 2012, describing the principal activity as wholesale of general goods, director was Imran Rashid Ahmed, turnover of £584,628;

annual report and accounts for the year ended 30 June 2013, listing three directors, recording that Kashif Mubarak and Adnan Raja resigned during the period (on 24 March 2013 and 17 December 2012 respectively). The turnover had increased to £907,146. The report was approved on 10 February 2014;

annual return received on 18 July 2014;

undated Companies House print-out listing directors, showing Kashif Mubaraq had resigned on 16 January 2013; and

annual report and accounts for the year ended 30 June 2014, approved on 7 August 2014.

The visit report of 6 November 2014 referred to PPX having made third party payments in the past for purchases from Vintro and MayX1, Mr Pearce was warned about such payments during the previous visit and said he will not be making any more third party payments.

There were no transactions with MayX1 after that visit.

The visit report of 17 July 2015 includes a write-up of what was essentially a “Q&A” on various suppliers, one of which was MayX1. When asked if they received individual payment instructions for each purchase, Mr Pearce said no, they were just given the details once. MayX1 did change details once, he thought to an individual account. The officer referred to the due diligence folder containing a Santander company bank statement but said that PPX paid to a third account, which was identified as an HSBC account for World Trade Consultants.

Officer Farmer, who had visited PPX, produced a list of the self-billed invoices issued to MayX1, showing dates, goods and amounts. That schedule specifies the account details for World Trade Consultants Ltd as the account to which payments were made.

There is a ledger of transactions, recording purchase invoices, dates, details (sometimes this being the type of metal, others referring to a purchase payment being made). That ledger refers to BACS payments having been made, but does not specify bank account details to which the payment was made.

There are no documentary payment instructions from MayX1 to PPX providing details of the bank account to which payment was to be made, or bank statements of PPX showing the making of the payments.

Mr Pearce’s oral evidence at the hearing was that this was factoring. This had not been mentioned at any time previously, most notably when he had the detailed discussion with officers during the visit in July 2015.

On 17 July 2015 at HMRC’s visit Mr Pearce said in relation to LPI that:

In his witness statement Mr Pearce set out that he had met Mr Marino of Road Runner and he introduced him to Daniel Anderson of LPI, which redesigned and refitted high end residential and commercial properties in London.

VAT certificate issued on 14 October 2013 with an effective date of 1 April 2013, showing a trade classification of specialised design activities and an address of Unit 17 Greenway Business Centre in Harlow Business Park;

certificate of incorporation dated 28 March 2013;

copy letterhead from LPI; and

barely legible copy passport – name and photo are not clear, but possibly that of Carmelo Marino.

annual return dated 28 March 2015 received by Companies House on 25 April 2015, with a registered office in Rotherham and naming directors as Carmelo Marino and Stanley Wortham. Mr Anderson was not a director, but the shares at the date of the return were held by Daniel Anderson and Carmelo Marino;

accounts for the year ended 31 March 2014, which were filed on 30 December 2014, with a business address on Margate Road in Ramsgate, principal activity of building completion and finishing, showing a turnover of £276,956 and negative net assets; and

Company Check Report, with no information on credit status.

On 17 July 2015 at the PPX visit Mr Pearce said in relation to Fortified that:

In his witness statement Mr Pearce said he believed Andy was a salesperson working at Fortified. In a subsequent witness statement he said he recalled meeting Barrie Myerscough, the director of Fortified, in a queue at Sims Metal Management Ltd in around 2011/2012, and they had exchanged numbers. In 2014 Mr Vajai of Fortified contacted PPX and told him that he and Mr Myerscough were running Fortified together.

certificate of incorporation for Fortified Metal Recycling Ltd dated 16 November 2011 and Companies House change of name documents to Fortified Recycling Ltd dated 22 February 2013;

letter of introduction from Arpad Vajai to PPX dated 24 September 2014, describing it as a three year old scrap metal merchant based in the Sheffield area;

registration certificate from the Environment Agency;

VAT certificate, being an amended certificate which had been issued on 9 September 2014 with an effective date of 6 September 2012. The address was Unit 12, Norwood Industrial Estate in Sheffield, bank account number ending 2032 and trade classification of recovery of sorted materials; and

copy driving licence for Arpad Vajai.

change of registered office address documents filed on:

annual return dated 14 August 2014 filed on 18 August 2014 naming the director as Arpad Vajai and the shareholder as Mr Vajai, also with the information that Barrie Myerscough had been the shareholder (of the same number of shares as now held by Mr Vajai) until 6 August 2014; and

abbreviated accounts for the year ended 30 November 2013, showing nil fixed assets and net current assets of £1,981.

OIL was two Scottish guys, Raymond and Martin, he didn’t know their surnames but did have mobile numbers;

PPX found OIL because the company was around when he was selling nickel;

PPX did not do any other checks and there was no Wigan check because the handover didn’t go well, Ms Coles thought that the Europa check was the VAT check;

he did not visit OIL’s premises, and OIL delivered each time;

he met OIL two to three times when they came to PPX with the loads and he also met them at Ollerton McDonalds once; and

the stock was delivered to PPX’s Chesterfield site.

letter of introduction dated 15 September 2014, with an address on North Street in Scunthorpe;

certificate of incorporation on change of name from Hollingthorpe Property Ltd to OIL, dated 13 November 2000; and

VAT certificate issued on 15 November 2013 with an effective date of 28 October 2013, address at Church Avenue in Grimsby and trade classification of roofing activities.

an annual return filed at Companies House on 5 December 2014, showing the director was Martin Rasay;

abbreviated accounts for the year ended 30 November 2013, which name the director as Keith Collins, balance sheet showing no assets, but with creditors of £777, and notes stating that turnover was from roofing contracting work; and

notice of appointment of Martin Rasay as director on 15 September 2014, filed on 18 September 2014, his date of birth indicating he was 22 years old.

Mr Pearce said during the visit on 17 July 2015 that he had met the director of IHEI at their premises.

During HMRC’s visit to PPX on 27 October 2015 Mr Pearce said:

In his witness statement Mr Pearce said that he seemed to recall that the initial introduction was due to IHEI offering plant and machinery hire and sales. Although PPX did not hire or purchase any of these machines, it did lead to IHEI supplying PPX with materials.

certificate of incorporation dated 9 January 2015 and company’s articles of association;

minutes of the first board meeting, held on 9 January 2015, recording that Karan Singh Mata Nagra was appointed as director; and

copy of Mr Nagra’s driving licence and passport.

annual return for IHEI, which was dated 9 January 2016 and filed on 17 May 2016. The company director is Karan Singh Mata Nagra, born in 1990; and

Company Check Report, which did not show any credit status, cash or net worth figures.

HMRC notified IHEI that it had been registered for VAT with effect from 1 May 2015 on 4 June 2015. The VAT certificate which was issued showed a trade classification of machining.

There was no evidence as to when IHEI first informed PPX of its VAT registration.

The effective date of the VAT registration was later backdated to 1 March 2015 to cover the sales which had been made by IHEI to PPX before 1 May 2015. HMRC had requested this change on 2 August 2016.

We were taken to a purchase invoice dated 2 March 2015 for the first supply which was for a net amount of £24,196 plus VAT. There is a manuscript note stating that £55,421 was paid on 17 August.

Mr Pearce’s evidence was that PPX had initially issued invoices without VAT, but were told by HMRC that IHEI had been VAT-registered, that this covered the transactions with PPX and that PPX needed to re-do the purchase invoices.

There was no documentary evidence of the original invoices, any cancellation or crediting of them, or any instruction from HMRC to re-issue. Furthermore, the VAT registration only had an effective date of 1 May 2015, not 1 March 2015, until August 2016 and the self-billing agreement, which authorised PPX to issue VAT invoices addressed to itself, was dated 1 April 2014.

However, there is a VAT number on the purchase invoice to which we were taken (that dated 2 March 2015) and it is that number which was later issued to IHEI. We therefore accept that this purchase invoice, relating to a supply of materials in March 2015, was not issued until after 4 June 2015, the date on which HMRC informed IHEI that it had been VAT-registered.

he had met Hugh and Rob from Zeggo, Hugh was an old boy, a retired solicitor and it was his business;

Zeggo had knocked on PPX’s door;

he had met Zeggo three or four times, they had had lunch together;

he did not find out what Hugh and Rob’s history in the metals trade was; and

Zeggo delivered the metal to PPX’s Bulwell site.

VAT certificate dated 5 August 2014 with an effective date of registration of 5 August 2014 which showed a trade classification of other retail sales not in stores, stalls or markets and an address of Princes Drive, Colwyn Bay;

certificate of incorporation dated 13 September 2013 and application to register the company at Companies House naming Hugh Roberts as the director and with its articles of association; and

bank details for an account at Barclays Bank.

undated printout from Companies House naming Hugh Roberts as the director;

annual return dated 13 September 2014, filed on 11 October 2014;

Endole report, printed on 16 June 2015, stating no records for cash, assets, or turnover; and

Company Check Report with no financial information.

Mr Pearce said during the visit on 17 July 2015 that he had met Yahya – but he did not suggest that PPX had visited the company.

During the monitoring visit on 27 October 2015 Mr Pearce said:

VAT certificate dated 27 January 2015 with an effective date of registration of 10 January 2015, which showed a business activity of non-specialised wholesale trade;

certificate of incorporation dated 13 September 2013; and

undated and unaddressed letter of introduction which describes the business and states that they work effectively on a large scale and invest heavily into advanced processing equipment, and have a large metal recycling site.

undated Companies House print, naming Ben Goddard, born in 1992, as appointed as a director on 19 January 2015. Mohammed Nakeeb had been appointed as director on 13 September 2013 but resigned on 19 January 2015;

abbreviated accounts for the year ended 30 September 2015, the balance sheet showing net assets of £100 for both 30 September 2015 and 30 September 2014;

Company Check Report on Yahya, which showed that it was a new company, with no financial information filed, no recorded telephone number, email address or contact person and that its business activity was the non-specialised wholesale of food, beverages and tobacco; and

annual return received by Companies House on 8 June 2015.

VAT certificate dated 16 July 2015 with an effective date of 16 July 2015. The certificate showed an address of Perth Road, London. The certificate showed a trade classification of plastering;

certificate of incorporation dated 30 June 2015; and

copy driving licence of Arturas Skliutas, showing an address in Chigwell.

Ms Coles asked Bavalda about the trade classification of plastering in an email of 14 August 2015, the same day that PPX first purchased from Bavalda, and Bavalda said that it had recently changed to demolition and construction.

On 9 September 2015 Ms Coles emailed Bavalda asking for their new documents. She sent the updated VAT certificate she received to HMRC on 15 September 2015.

a Company Check Report on Bavalda, which showed that it was new company, with no financial information filed, no recorded telephone number, email address or contact person and that its registered and trading addresses were the Chigwell address; and

annual return dated 22 July 2015 which was filed on 27 July 2015 showing the Chigwell address, and the director was Arturas Skliutas.

VAT certificate issued on 1 July 2011 with an effective date of 12 February 2001, which showed a trade classification of wholesale of watches and jewellery and an address in Romford, bank account number ending 7401;

certificate of incorporation dated 19 December 2000, and Companies Act certificate dated 26 September 2008, stating company’s registered office in South Woodford;

bank statement issued on 27 April 2015 addressed to the director of Heritage, stating account number ending 7803, with copy driving licence of Peter Shifrin on same page;

utility bill dated 9 July 2015 addressed to Peter Shifrin of Heritage Gold, addressed to Romford;

utility bill dated 11 April 2015 addressed to David Field in Harrow;

“Corporate and Contact Information” document for Heritage showing an address of South Street, Romford, stating that both Mr Field and Mr Shifrin were directors and listing James Buchannon as dealing with trading; and

copy driving licence of David Field.

annual return dated 19 December 2014 filed on 15 January 2015 showing registered office in Woodford Green, Barbara Shifrin was company secretary (service address of South Street in Romford), director Peter Shifrin at same address;

abbreviated accounts for the year ended 31 March 2014 recording Mr Shifrin as director, the registered office in Woodford Green and net current liabilities (of £73k);

Companies House change of address documents recording a new registered office as South Street, Romford on 25 April 2006, a PO Box number in Edgware filed on 25 June 2015, Mill Hill on 10 August 2015;

record of appointment of David Field as director on 6 August 2015, filed on 10 August 2015, stating occupation as accountant; and

record of resignation of Mr Shifrin on 10 August 2015

certificate of incorporation on change of name from Green Deal Initiative Ltd to Green Energy Initiative Ltd dated 20 June 2015, together with notice of relevant resolution;

copy letterhead with bank details;

Gas Safe registration certificate;

Environment Agency certificate dated 29 June 2015;

Green Deal advice certificate issued on 30 June 2015 and other Green Deal/health and safety certificates; and

some photos said to be of GDIL’s premises. Mr Pearce had not visited GDIL’s premises, and he didn’t know if anyone else from PPX had visited them (and thus could have taken the photos). Given the nature of the other documentation which PPX possessed, which appeared to have been provided by GDIL to PPX rather than obtained from other sources, we infer that these photos had been provided to PPX by GDIL.

annual return dated 4 March 2015, filed at Companies House on 20 March 2015, naming Richard Moule as secretary, Robin Clarke, David Holliday and Verity Holliday, Danielle Lowe, Richard Moule as directors;

Companies House print listing the directors;

change of registered office address received by Companies House on 27 June 2016; and

abbreviated accounts for the year ended 31 August 2014 and for the period 1 September 2014 to 31 March 2015. At 31 August 2014, GDIL had net liabilities of £107,705. The notes to those accounts record that its turnover was from the supply and installation of home insulation and energy saving products.

At the visit on 25 February 2015, HMRC said the 08/14 and 11/14 returns had not yet been submitted. Mr Pearce told HMRC that the 08/14 return had been submitted half an hour before the meeting, and the 11/14 return would be submitted in the next fortnight. However, HMRC checked VISION on 2 March and 10 March 2015, and on both dates the returns for 08/14 and 11/14 were not shown as submitted.

At the visit on 17 July 2015, HMRC pointed out that the 05/15 return was overdue.

six boxes of records for 09/13 to 05/14, which were provided to HMRC at the visit on 6 November 2014;

sales and purchase records for 11/14 and 02/15 were provided on 4 June 2015. SAGE records for 11/14 were provided by email on 9 April 2015 and those records for 02/15 were provided on the visit of 12 May 2015;

two boxes of records for 08/15 were provided on 27 October 2015; and

the 11/15 records were provided on 8 February 2016.

At the visit on 25 February 2015 HMRC said they had not received any monthly sales and purchase records from PPX as requested after their last visit; and most of the other records which had been requested after the last visit had not been provided. Some of the records for 08/14 (but not bank statements) were provided at that time.

At the visit on 17 July 2015 many of the records HMRC had requested by email on 26 June 2015 were still outstanding. Those records related to 07/13, 10/13 and 04/14, ie prior to the relevant periods.

HMRC issued a Schedule 36 notice to obtain the 05/15 records on 21 August 2015. PPX then provided most of those records on 21 August 2015, with the SAGE records then being provided by email on 2 September 2015.

The contact between PPX and HMRC, as set out in the visit reports (with PPX having been warned of the risk of fraud since January 2012), the Notices of Deregistration and Tax Loss Letters received by PPX, and the discussions about the need for due diligence on its suppliers.

HMRC’s position was that there was an orchestrated scheme to defraud HMRC, and this had been accepted by PPX. In this context:

HMRC said there were indicia that the transactions were part of an orchestrated scheme to defraud HMRC:

Mr Pearce was experienced in the trade, and it is not credible that he was duped as an innocent party in such a large number of transactions, by 11 suppliers, over a sustained period of time during which a large portion of PPX’s turnover was driven by transactions connected to fraud. Mr Watkinson submitted that Mr Pearce’s evidence was inaccurate or not truthful, and that we should be slow to accept it where it is not supported by documentary evidence.

HMRC relied on the same factors for their case that PPX knew and that it should have known that the Transactions were connected to fraud, and that this was the only reasonable explanation: awareness of the risk of fraud, the need for due diligence, that transactions had previously been connected to fraud, repeated connection with fraud, massive increase in turnover in the period and in gross profits, no financial risk to PPX as it was granted credit by suppliers with no apparent financial wherewithal, slow provision of information to HMRC, minimal due diligence (obtained only after trading started) which had glaringly obvious indicia that suppliers were not commercially credible.

It is not sufficient for HMRC to prove a trader should have known that he was running a risk that he might be taking part in a transaction connected with fraud; it must be established he should have known that he was taking part in such a transaction.

Mr Pearce established PPX (having several years of experience in the trade by this time), and grew the business from his home to one operating over three sites. By the time of the visit by HMRC on 25 November 2013, PPX had its own premises and plant (albeit leased), and Mr Pearce was completely open showing the operation to HMRC, explaining the business and pricing.

There is no challenge to the existence of the scrap metal that was the subject-matter of the Transactions. It was delivered to PPX’s yards and sold by them. There was nothing out of the ordinary in these transactions – there is no evidence that PPX obtained anything other than normal commercial profits, driven by the market. The prices were not inflated. If PPX were involved in the fraud, there is no evidence that PPX profited in any way from the VAT that was not accounted for to HMRC, of £3.57m, being diverted to it. It is absurd to suggest that Mr Pearce would involve PPX in a fraud of this scale, running the risk of input tax denials and criminal prosecutions without reward.

The best form of due diligence is the evidence that a supplier produces the materials they say they have. There was nothing about the loads or the prices to arouse suspicion. Suppliers would turn up to PPX’s premises, with the metal, seeking to agree the deal at the weighbridge. Waiting for checks at that stage would result in losing the business.

HMRC are relying on the purchases by PPX being from traders who defaulted on their VAT liabilities. PPX has provided HMRC with all of its sales invoices, but HMRC has not relied upon them. This may be because, unlike some products (eg phones), particular scrap cannot be identified or traced (eg by serial numbers), but is instead often stored and sold having been amalgamated with other loads.

The acceptance that there was an orchestrated scheme was not probative of knowledge. Mr Kinnear criticised HMRC’s pleadings in respect of orchestrated schemes and contrivance, submitting that they lacked sufficient particularisation, but in any event the “scheme” as set out by HMRC goes no further (backwards or forwards) than PPX’s purchases from the Defaulting Suppliers, and doesn’t involve the same quantity of goods being repeatedly traded. HMRC has not established the source or the destination of the scrap, or the movement of money. The indicia relied upon by HMRC are not made out and in any event do not establish knowledge.

Furthermore, there is no means of knowledge – suppliers were good to their word; and it was in this context that Mr Kinnear focused on the risk that HMRC were seeking to shift the burden of proof – PPX does not need to prove anything. In addition, the Tribunal needs to be mindful that it is required to assess what PPX should have known at the time of the transactions, not what HMRC had power to know or actually knew, and not what PPX could have discovered later. PPX was entitled to take comfort from the fact that HMRC had more information about the traders than PPX, and had not deregistered them.

The facts of the Transactions – supply of metals, pricing, ability to realise a commercial profit – are all consistent with PPX conducting its trade without knowledge of the connection with fraud. HMRC have not pointed to any discernible difference between the Transactions that commenced with a defaulting trader and those that did not.

It is accepted that Mr Pearce had a reasonable level of knowledge of the risk of fraud and the need for due diligence; and also that some of the due diligence could have been better (although it was not accepted that even if it had been better this would have provided means of knowledge).

PPX laid bare its records to HMRC – it is evident from the visit reports that HMRC uplifted boxes of records, including purchase invoices, sales invoices, bank statements, and SAGE records of transactions.

On MTIC fraud, Mr Pearce had not previously been aware of this risk and thought HMRC were telling him that traders who used to commit this fraud in the mobile phone and computer chip sectors had now moved into scrap metals, ie that it was the traders who had moved across, not that there were new players in the market who had established themselves in the scrap metal sector. He had not considered Notice 726 to be relevant to scrap metal merchants.

He had also focused on the “missing” aspect of MTIC fraud, and regarded the focus as being on ensuring that PPX reported all of its transactions to HMRC (and accounted for the right amount of VAT). He was focused on producing documentation to show to HMRC so that HMRC could see that all of the supplies which had been made to PPX were in those suppliers’ VAT returns.

He sought to confirm that the suppliers charging VAT were VAT-registered – with a “live and valid” VAT number – which to him meant they were under the care and management of HMRC. This is what was important.

Mr Pearce admitted that the due diligence documentation generally obtained by PPX – comprising the VAT certificate, letter of introduction, and certificate of incorporation – was poor. However, for him, the fundamental check on suppliers was that they delivered the metals to PPX. He did not see recent incorporation, young directors or recent VAT-registration as a problem. PPX did not conduct credit checks on suppliers – poor credit history would not be an issue, as PPX was not taking credit risk on suppliers.

PPX would only pay the VAT-element of the purchase price once the VAT registration had been checked.

He has built the business of PPX, which now has 20 employees, and would not put it in jeopardy for someone else’s business, and PPX has not itself benefitted from the fraud on HMRC. It sickens him that HMRC say that what they knew about the various traders is irrelevant. HMRC had information they could have given him about their concerns; they had more information than PPX.

The amount of documentation which was held by PPX at a particular date, typically the date that PPX started trading with the Defaulting Suppliers, to which we have already referred (at [88] above);

whether HMRC had informed PPX of enquiries into its VAT returns for certain periods subsequent to the relevant period (05/17 and 08/17) – PPX had been sent (before the dates of Mr Pearce’s witness statements) various Tax Loss Letters in relation to a multitude of transactions in these periods; and

whether PPX’s returns were sent to HMRC on time – which we have addressed at [175] above.

the leaflets which were explained in that meeting are clear – the “How to Spot Missing Trader Fraud” leaflet does not, on its face, only apply to mobile phones, or support the suggestion that the particular traders themselves have moved sectors;

if this was Mr Pearce’s understanding, none of the checks he or the admin team at PPX did were seeking to test whether the traders PPX was dealing with had previously been involved in mobile phones or computer chips. This is not the case for the documents obtained, nor was it Mr Pearce’s evidence that he had asked any of those traders whom he had met; and

that first meeting was followed-up by the MTIC Awareness Letter of 1 February 2012 which sets out the scale of MTIC fraud, pointing out that verifying VAT registration does not guarantee the status of suppliers. The letter is broadly expressed, and we do not accept that anyone reading this letter could have retained a misapprehension that they were being warned to beware of trading with anyone who had moved sectors.

at the visit on 25 November 2013, Mr Pearce was told that the Wigan check was not the only check to carry out, that it did not constitute permission to trade and that MTIC fraud could result in HMRC denying input tax if transactions were traced to fraud; and

at the visit on 9 July 2014, which was shortly before the beginning of the relevant periods, Mr Pearce was told that receiving the Tax Loss Letters raised the bar as regards due diligence, and giving evidence Mr Pearce confirmed that he understood what he was being told about due diligence.

Mr Pearce’s explanations given to HMRC as to how PPX came to meet Road Runner and trade with them have not been clear or consistent. The explanation at the hearing was clear and straightforward, yet this was not previously given to HMRC at the visits in the context of Road Runner (although becomes slightly more apparent when looking also at statements in relation to LPI). We note that when HMRC visited Road Runner on 16 June 2015, Mr Marino confirmed he had traded with PPX and his contact at the company was with a person called Paul, but said he didn’t know his surname and didn’t know his position in the business. He couldn’t confirm if Paul had any official connection to PPX. We do not doubt the accuracy of that visit report, but place no reliance on the fact of Mr Marino having said this – Road Runner is agreed to be a defaulting trader and we did not hear evidence from Mr Marino.

PPX did not obtain a copy of Road Runner’s VAT certificate, nor did it conduct a Wigan check.

The first check on Road Runner’s VAT number was the VIES check on 18 November 2014, after the first three transactions in the relevant periods.

Further due diligence would have revealed:

Mr Pearce said that if he had seen the accounts, he would have assumed that the buses were owned by Olympus. He had seen the buses, with the logo, they did exist and Road Runner did deliver scrap metal to PPX. Whilst the explanation that Road Runner was scrapping buses is plausible on its own, the reality is that they were not selling bus scrap to PPX – Road Runner were selling large volumes of high value metals. Mr Pearce was well aware of this, and there was no explanation as to this disparity.

The first transaction with MayX1 was on 12 May 2014, and at this time PPX had no due diligence information on May X1. It only received the letter of introduction and accompanying documents on 30 May 2014.

The VAT certificate was newly issued, being dated 30 May 2014, and had an effective date of 3 February 2014, just a few months before trading with PPX. The business activity was described as non-specialised wholesale.

The Santander bank account statement showed little evidence of trading.

PPX had not requested a Wigan check until 2 June 2014, and received confirmation of the VAT number on 25 June 2014. No VIES check was conducted until 21 August 2014. There were 20 supplies from MayX1 to PPX from 12 May to 25 June 2014 (although four of these were credited back/rejected loads).

PPX had not visited MayX1’s premises, or taken photos of the goods. HMRC officers had visited MayX1’s premises in December 2014, and discovered it was a business unit and not a scrap yard. The building manager told HMRC that MayX1 had last been seen at the premises in June 2014, did not use the premises to store goods and had been evicted in July 2014. A visit at the beginning of trading would not have revealed all of this information but it would have been apparent that it was not a scrap yard.

PPX made third party payments in respect of supplies received from MayX1, which were identified as a red flag in HMRC’s guidance, and Mr Pearce had told HMRC he would not do this during the visit of 26 January 2012.

LPI had only been incorporated on 28 March 2013. The company’s activity was building completion and finishing, and this was how they had introduced themselves to Mr Pearce. This is consistent with the trade classification of specialised design activities on their VAT certificate, but they were selling specialist metals and large volumes of copper wire, which Mr Pearce accepted was being bought wholesale. The scrap being sold to PPX was not from stripping out buildings.

There was nothing to establish that Mr Anderson had any role with the company – he was not appointed as a director until 19 May 2015 (after LPI had ceased trading with PPX), and PPX did not have any ID for him.

HMRC officers visited LPI’s principal place of business at Unit 17, Greenway Business Centre, on 2 June 2015. The unit had signage for Olympus Coach Travel, and an employee of Olympus told them that LPI had rented a desk from them but that these arrangements had ended a year ago. Thus LPI had vacated that address in June 2014. Mr Pearce’s evidence was that he had met with Mr Marino of Road Runner at their premises, and we infer that it was at this unit. PPX did not start trading with LPI until September 2014, and the fact that LPI only had a rented desk and even this had ceased by this time was information that PPX could have discovered.

LPI gave credit to PPX on the first deal of £63k for several days, although many subsequent invoices were paid on the date of issue or in the day or so thereafter.

There was no Wigan check. The first check on LPI’s VAT number was more than two months after trading began.

PPX was still trading with LPI in the first few months of 2015 and could have obtained its most recent accounts, showing its turnover levels (which were dwarfed by the levels of subsequent trading with PPX) and negative net assets. Those accounts described its activity as building finishing and completion, making no mention of wholesaling scrap metal.

The company had undergone a number of recent changes. It had changed its registered office on several occasions and had recently changed its name. The previous director, Mr Myerscough, had sold the company and resigned as a director on 6 August 2014. Mr Vajai had been appointed on 5 August 2014, just before they started to trade with PPX. It was readily apparent that Mr Myerscough and Mr Vajai were not running the company together.

In a letter dated 30 September 2014, Fortified provided updated bank account details to PPX (account number ending 3435) and asked PPX to make payments to that account, just two weeks after the amended VAT certificate had been issued, showing that Fortified had provided different bank account details to HMRC.

There was no Wigan check, but the first VIES check was on 25 September 2014, the day after the first transaction in the relevant period.

The self-billing agreement had been signed by M Iqbal. Mr Pearce had said the contact was Andy, and it was plausible that these were Monty and Arpad Vajai, noted as the contacts on the self-billing agreement. However, there was no documentary evidence confirming this, or otherwise establishing the named contact’s (ie Andy’s) connection with the company.

Fortified’s most recent accounts showed that it had no fixed assets, and minimal net current assets, yet it was supplying up to £66k of material at a time.

At the visit on 17 July 2015 Mr Pearce had told HMRC that his drivers sometimes collected from Fortified and so he knew the yard was there. However, HMRC had asked him about the principal place of business without specifying an address (or at least none that is recorded in the visit report) so it is not clear which address the drivers had collected from during the period of the transactions. HMRC had tried to visit Fortified at the address on its VAT certificate (Unit 12) on 26 January 2015, but were unable to locate that address – the industrial estate comprised units 1 to 6. Mr Pearce didn’t know where PPX’s drivers had visited. If PPX had tried to visit Fortified at the address on the VAT certificate, then they would also have discovered that this address appeared not to exist.

The VAT certificate showed that the company had been registered for VAT for less than one year, and that its trade classification was roofing activities. This was consistent with the description in its accounts of the turnover, but did not reflect the activity between PPX and OIL.

The letter of introduction misstated the company’s VAT number – this is potentially a straightforward typographical error, but needs to be considered in context.

There was no Wigan check. The VIES check was conducted part-way through the period of trading.

The company had no assets, and there had been a recent change of director, the new director being young with no evidence of his level of experience in the sector.

PPX did not visit OIL’s premises. The letter of introduction had an address in Scunthorpe, whereas the VAT certificate had an address in Grimsby. If PPX had visited the address on the VAT certificate, they would have discovered it was the home address of the former shareholder and director.

IHEI had only been incorporated for two months when it started trading with PPX.

PPX started trading with IHEI at a time when IHEI was not VAT-registered yet supplied PPX with £225k net of materials before IHEI had even applied for VAT registration, an amount which is obviously above the registration threshold.

The self-billing agreement is dated 1 April 2015, yet that authorises PPX to issue VAT invoices to itself at a time at which IHEI was not VAT-registered. We had no evidence from Mr Nagra as to why IHEI would be entering into such an agreement at a time when IHEI had not even applied to be VAT-registered. A further, more significant difficulty, is that the details for IHEI, which were all completed in manuscript and show no indication that they were completed or inserted at different times from each other, also include IHEI’s VAT number, which was not notified to IHEI until June 2015 and cannot have been known at 1 April 2015. We do not know who signed on behalf of PPX; and Mr Pearce didn’t know if the document had been backdated.

The director was 24 years old, and a business consultant. There was no documentary evidence of his having any experience in scrap metal.

As a new company, there was no financial information available that could explain how it granted credit of more than £2 million to PPX.

The VAT certificate showed a trade classification of retail, rather than relating to scrap metal.

PPX did not request a Wigan check at the start of trading with Zeggo. They did make a Wigan check on 6 June 2015 but on 25 June 2015 HMRC said they were unable to verify the VAT number. PPX nevertheless continued to trade with Zeggo – there were deals on 29 June, 2 July, 7 July, 8 July, 10 July and 14 July 2015. Zeggo supplied materials to PPX with a net value of £320k after HMRC had said they couldn’t confirm the VAT registration.

Mr Pearce did not know who “J Wilson” was who had signed the self-billing agreement. Stanley Wortham sent the letter of introduction to PPX, not Hugh or Rob (both of whom had been mentioned by Mr Pearce as his contacts at Zeggo), and Mr Wortham had no known connection to Zeggo (but had been the director of LPI since 1 November 2014).

HMRC confirmed that Zeggo had an office at the registered address (on 4 August 2015), which was being rented at £150 per month. Mr Roberts told HMRC officers that Zeggo had no other premises such as a yard. Whilst Mr Watkinson drew attention to the various addresses shown on the letters accompanying the letter of introduction, we note that these letters are both from HMRC – there can be no concern that Zeggo was hiding these addresses from HMRC.

Hugh Roberts attended HMRC’s office on 19 August 2015, and at that meeting he said he had originally set up the company to trade in antiques, but no trading had been undertaken in antiques or other goods between the date of registration and May 2015. He had no experience in the metals trade sector. Mr Pearce had met Mr Roberts and this information should also have been evident to him.

PPX was being given credit of hundreds of thousands of pounds, yet there was no evidence of Zeggo’s own financial position.

Yahya had only been registered for VAT for a few months at the time PPX started trading with PPX, and the director was newly appointed.

Whilst PPX had conducted a VIES check before trading with Yahya, the Wigan check was not requested until after the final transaction.

The company had net assets of £100, and there was no financial information as to its credit status, yet Yahya was granting credit of a few days on the invoices, which were being paid in full.

PPX did not visit Yahya. HMRC officers had made an unannounced visit to Yahya on 18 March 2015 – it was an industrial unit on an industrial estate. There was no sign of activity at the time. They met with Mr Goddard on 31 March 2015 and described the place of business as a small industrial unit with an office, and there was a small amount of scrap metal in the unit. If PPX had visited these premises, they would have seen that this did not reflect the advanced processing facilities, etc, which were described in the letter of introduction.

The company had only been incorporated in June 2015 and registered for VAT from July 2015. There was no financial history.

Bavalda had initially declared a trade classification of plastering to HMRC (which had been noticed and questioned by PPX), yet within two months were moving into demolition and construction. This explanation of plastering to demolition and construction does not explain how Bavalda would be trading large amounts of copper grains.

PPX requested a Wigan check shortly after they started trading, but twice received a response that HMRC were unable to verify the VAT number. No validation was ever received from HMRC -– Bavalda were deregistered on 13 October 2015. The final deal was on 12 October 2015 (the day before HMRC visited Bavalda and deregistered it with immediate effect) but this deal was subsequently credited back.

The address on the VAT certificate is Perth Road in London, whereas the VIES check shows an address in Chigwell, as do Bavalda’s invoices, and that same address is on the director’s driving licence. This suggests that Bavalda was trading from a residential address. HMRC had visited the Chigwell address on 13 October 2013 – the occupier said her brother worked for Bavalda but did not live at the address (which she was renting). Whilst Mr Pearce pointed out that PPX had stopped trading with Bavalda on 12 October, there is no reason to think that he would not have discovered the same information as HMRC about the address if PPX had visited between August and October 2015.

The Wigan and VIES checks were first conducted in June 2015, several weeks before trading. Heritage then changed director, bank account and address. The Wigan check was not repeated, but there were further VIES checks, eg on 21 September 2015.

The VAT certificate has an address in Romford. That address had no connection to the company, according to the new director.

Mr Field, was a newly appointed director, had no experience in the metals trade and PPX could have discovered this if it had visited. Mr Field had told HMRC on 17 September 2015 that his appointment was a temporary measure, and he was an accountant.

The bank account information differed between the VAT certificate and copy bank statement.

The Corporate and Contact Information sheet lists both Mr Shifrin and Mr Field as directors, even though their appointment had only overlapped for a few days. James Buchannon, listed under the heading of Trading, has no apparent connection with Heritage.

The company had net liabilities, and no apparent credit status.

The VAT certificate was only issued to GDIL on 19 November 2015, by which time GDIL had supplied £2 million of metal to PPX.

There were no VIES or Wigan checks made until after the relevant transactions.

The VAT certificate listed the business activity as electrical installation and the documentation showed its accreditation for green energy, but the metals being supplied were, as acknowledged by Mr Pearce, not electrical offcuts. GDIL was wholesaling this material.

No payments were made until January 2016. GDIL thus provided credit of £3.3 million to PPX for months, and none of the documentation available to PPX explained how GDIL was able to do this.

PPX did not visit GDIL, or make credit checks.

At the visit on 24 June 2015, HMRC were clear in the advice they gave as to due diligence, and recommended visiting suppliers.

The July 2015 Tax Loss Letters set out the scale of tax losses identified in PPX’s transaction chains to date, the numbers of transactions involved (listing the purchase invoices concerned), that they arose in chains from more than one supplier (identifying MayX1, Fortified, LPI and Spire). They are a lengthy set of documents, and make the scale of the issue obvious.

The visit on 17 July 2015 included a detailed discussion on due diligence:

By the end of July 2015, PPX had been sent Notices of Deregistration for MayX1, Fortified, OIL, LPI, Road Runner and Yahya.

At the visit on 25 November 2013 Mr Pearce told the officers that for new businesses he went to the premises and took pictures of the goods, etc. This was before the relevant periods, and at the hearing Mr Pearce confirmed that he had not done this, and that his only concerns had been that the material was delivered and there was a “live and valid” VAT number. We do note that Mr Pearce had visited some of the Defaulting Suppliers (eg Road Runner).

At the visit on 24 June 2015 Mr Pearce told HMRC that PPX were now doing credit checks on all companies. PPX were not doing credit checks, and at the hearing Mr Pearce explained that they were not concerned about the creditworthiness of suppliers as PPX was not taking credit risk on them. This is correct, but shows both that statements made to HMRC were not true and that there was a failure to engage with the need for checks and need to understand how the suppliers were able to conduct business on the terms on which they were contracting with PPX, ie how could GDIL give millions of pounds of credit to PPX. There was no evidence that, say, GDIL had asked PPX about its own creditworthiness.

At the visit on 17 July 2015, Mr Pearce confirmed that PPX now did credit checks and Companies House checks and when asked what PPX would do going forwards he said he was going to visit traders and take photos, do a Wigan check, a questionnaire and a Europa check. This new approach was not implemented – instead, the haphazard approach to VAT checks (both Wigan checks and VIES checks) continued, as set out below.

It was repeatedly made clear to Mr Pearce that a Wigan check was just one of a number of checks that could be made:

Furthermore, PPX’s approach to verifying the VAT numbers was (at the very least) haphazard and on the basis of the evidence we have concluded that PPX did not routinely verify the VAT number of each of the suppliers by making a Wigan check.

A deliberate decision to stop making Wigan checks following PPX’s experience when they requested a check on Zinda. The check on Zinda led to HMRC visiting Zinda and that had resulted in the loss of that supplier. PPX then decided not to make Wigan checks. Mr Pearce explained this to HMRC at the visit on 25 November 2013. They did subsequently re-start following advice from HMRC.

There was, separately, an administrative problem with the handover in the admin team from Helen to Ms Coles, and Ms Coles had not realised that Wigan checks were required and were different to VIES or Europa checks.

Road Runner (supplier to PPX in September 2014 to May 2015) – no VAT certificate, VIES check on 18 November 2014, made first payment on 29 September 2014;

LPI (supplier in September 2014 to April 2015) – VIES check on 18 November 2014, payments made on 5 September 2014;

Fortified (supplier in September 2014 to December 2014) – VIES check on 25 September 2014, the day after the first transaction; and

OIL (supplier September 2014 to November 2014) – VIES check on 31 October 2014.

MayX1 (supplier May to September 2014) – PPX made a Wigan check on 2 June 2014, receiving confirmation of the VAT number from HMRC on 25 June 2014. PPX had been making payments to MayX1 from 18 June 2014, and the first VIES check was on 21 August 2014.

IHEI (supplier March to September 2015) – This company was not initially VAT-registered, and its first VAT certificate was issued on 4 June 2015. PPX conducted a Wigan check on 8 July 2015, and they received the confirmation of validity from HMRC on 22 July 2015. The first VIES check was made on 10 July 2015.

Zeggo (supplier March 2015 to August 2015) – PPX requested a Wigan check on 16 June 2015, HMRC failed to verify the VAT number on 25 June 2015, but PPX continued trading with them. Zeggo then supplied metals to PPX on 29 June, 2 July, 7 July, 8 July, 10 July and 14 July 2015. Zeggo supplied materials to PPX with a net value of £320k after HMRC had said they couldn’t confirm the VAT registration. The first VIES check was made on 4 August 2015.

Yahya (supplier May to June 2015) – PPX requested a Wigan check on 23 June 2015 (after the last transaction), and HMRC confirmed that the VAT registration appeared to be valid on 7 July 2015. PPX had conducted a VIES check on 6 May 2015, before PPX started trading with them.

Bavalda (supplier August to October 2015) – PPX requested a Wigan check on 17 August 2015, which was shortly after they started trading with Bavalda, but HMRC twice said that they were unable to verify the VAT registration. HMRC never verified this company’ s VAT number. PPX did make a VIES check on 14 August 2015.

Heritage (supplier in September 2015) – the Wigan check had been made on 5 June 2015, receiving confirmation of validity from HMRC on 18 June 2015. A VIES check had been made on 4 June 2015. These checks were therefore both completed before PPX traded with Heritage.

GDIL (supplier September to November 2015) – PPX made a Wigan check on 21 December 2015, after the relevant transactions. HMRC were not able to confirm validity until 6 January 2016. PPX did not have a copy of GDIL’s VAT certificate until November 2015. A VIES check was made on the same date the Wigan check had been requested, and no payments were made until after 6 January 2016.

Ms Coles joined PPX in October 2014, and it was at the visit on 24 June 2015 (which she attended along with Mr Pearce) that Ms Coles said she didn’t know about the Wigan checks. It is not clear from those notes, viewed in isolation, whether Ms Coles was recounting that she had not initially been aware, but had since been told about them, or if her lack of awareness had continued until HMRC had requested various documents on 10 June 2015.

PPX had recently requested Wigan checks shortly before that visit – on 5 June 2015 (Heritage), 16 June 2015 (Zeggo), and 23 June 2015 (Yahya) – and, in the case of Heritage and Yahya, there had also been VIES checks made. It is therefore clear that before HMRC had requested the most recent set of documents, the person at PPX making the checks already knew that Wigan checks and VIES checks both existed and were different from each other.

There was no evidence as to when Helen had left PPX, and it is plausible that if Helen had left shortly before Ms Coles joined then this could explain the absence of Wigan checks on the four Defaulting Suppliers (where they were supplying PPX in September 2014). It would not, however, explain the delays in 2015.

The focus of the explanations from HMRC was on PPX making a decision as to whether or not to trade with a counterparty, not on whether or not to pay a particular supplier. This is apparent from, eg:

The timing of the payments for supplies does not support the assertion that PPX generally treated the net price and VAT-element of the price differently, nor that payment was not made until after the VAT number had been verified by a Wigan check, or even by a VIES check. There were some examples of payments being made after the VAT checks, eg payments to GDIL were all made in January 2016, after HMRC confirmed the validity of the VAT number, although this was full payment rather than PPX having paid an amount equal to the net price at an earlier date. There were many examples of payments being made before the VAT number had been verified, eg:

Having been told of the risks, and given advice as to the checks, the due diligence undertaken by PPX was largely confined to verifying the existence of the relevant trader. They were not making all of the checks advised by HMRC.

The information that was obtained raised various warning signs. We recognise that some of these issues are more substantive or potentially concerning than others – changes of directors being more substantive than change of name – but all of the information for each supplier needs to be assessed, particularly in the light of warnings that had been given by HMRC.

Further warning signs would have been revealed if PPX had conducted further due diligence at the time.

There was no attempt by PPX to consider how the Defaulting Suppliers were able to conduct business in this way – supplying large sums of metal that were not consistent with their business activity, providing vast amounts of credit for a period of time that was not clearly agreed up front but varied from days to weeks to months.

The Defaulting Suppliers were not “carefully vetted” by PPX, as set out in Mr Pearce’s witness statements. Mr Pearce did not know how some of the trading relationships had come about (eg Bavalda), and for others where he had met the traders and knew more about their businesses, what he knew about them was not consistent with the nature of the transactions with PPX (eg Road Runner and LPI were not selling bus scrap or scrap from demolished buildings or refurbishments respectively). Mr Watkinson drew attention to the age of some of the newly appointed directors (some being in their early 20s) but we place no weight on this.

PPX was not ensuring that Wigan checks were always conducted, or ceasing to trade with Defaulting Suppliers when HMRC said they were unable to verify a supplier at that time but needed further information.

HMRC’s visit report of 9 July 2014 sets out that Mr Pearce had showed Officer Farmer around the Mansfield site, explaining the different types of scrap and the processes that PPX undertook to separate the incoming product into separate metals. Mr Pearce had explained to HMRC how PPX kept metals in separate bins, and showed the officer how electric cable is stripped using a specialist machine. He had also explained to the officers how they strip the valuable metals out of catalytic converters (the type demonstrated was said to be known as a dalek).

In his first witness statement dated 12 September 2019 Mr Pearce had described PPX’s business as buying various metals from domestic, commercial and industrial suppliers and subjecting it to a recycling process in order to separate, extract and weigh the metal components before onward sale, as well as buying scrap metal wholesale from other licenced waste metal dealers for onward sale.

Giving evidence, Mr Pearce described in general terms the processing of metals, which could include sorting, granulating, and cleaning.

lack of documentary evidence of negotiation of price, eg emails;

lack of commercial documentation, eg written contracts of sale setting out the terms and conditions;

large volumes of goods being supplied to PPX on credit, with no consideration being given to how the Defaulting Suppliers were able to transact on such terms; and

one Defaulting Supplier, MayX1, had instructed PPX to make payments to a third party.

The absence of written documentation means that credit was being advanced on uncertain terms – there was no agreement as to whether suppliers would be paid in, eg, one week or one month. The facts show that credit was being advanced for varying lengths of time (certainly between one day and more than two months), for hundreds of thousands of pounds.

There was no evidence that PPX had considered how suppliers were able to transact on this basis. We have already set out the due diligence information obtained by PPX and this does not provide any basis for concluding that the Defaulting Suppliers had sufficient funding available to them to advance credit to PPX. That PPX was not at risk on these suppliers, ie that it was not providing credit itself, does not answer this point.

We were not satisfied that Mr Pearce’s evidence was entirely credible, and we have not accepted some of his key evidence, eg checking that suppliers were VAT-registered or that PPX did not pay the VAT-element of the purchase price until the VAT registration number had been checked. We have not placed equal weight on all of the inaccuracies identified in his witness statements as, eg, we accept that there was a reasonable explanation for the incorrect lists of due diligence documentation held by PPX.

We have found that Mr Pearce knew of the risk of fraud in the metals sector, and that this was not confined to traders who had moved into the sector from mobile phones or computer chips. He was being told (eg at the visit on 25 November 2013) that input tax could be denied if transactions were traced to fraud. He was repeatedly given comprehensive advice as to the steps that could be taken by PPX to reduce the risk of entering into transactions that were connected with fraud and it would have been clear to him (from HMRC’s visits and the Notices of Deregistration) before the beginning of the relevant period that the steps being taken by PPX were not sufficient to prevent PPX entering into transactions that were connected with fraud.

Against that background, the conducting of minimal due diligence, with little attention being paid to the information obtained, the failure to make checks which would help to assess the commerciality of the suppliers (particularly the provision of credit) and the failure to make Wigan checks on all suppliers are difficult to explain other than as deliberate decisions and possible indicators that PPX knew that full investigation would reveal further evidence that the Defaulting Suppliers were fraudulent.

This factor in (3) above is then exacerbated by the fact that PPX failed to change its approach after the clear, specific warnings it received from HMRC in June and July 2015, illustrated by the minimal due diligence conducted on Bavalda and IHEI.

Whilst the Defaulting Suppliers were just 11 out of more than 4,000 suppliers to PPX over the relevant periods, the Transactions in total represented a significant proportion of PPX’s turnover. There was a dramatic increase in turnover, from £3m, to £10.9m (in the 18 month period, which included two of the VAT periods in issue), and then to £31m (in the period which included three of the VAT periods in issue); that increase then contributed to an increase in PPX’s gross profits. This was in circumstances where some of the Defaulting Suppliers were advancing vast amounts of credit to PPX, with PPX having no information explaining how they were able to do so. PPX cannot have been unaware of any of these elements.

There was a repeated lack of transparency in PPX’s dealings with HMRC:

the pricing of the Transactions (as there was insufficient evidence before us to enable us to reach any conclusions on the commerciality of the pricing);

the role of PPX in the transaction chains (where PPX was buying wholesale quantities of processed metals);

whether PPX was being told who to trade with - although we do accept Mr Watkinson’s submission that the Defaulting Suppliers were attracted to PPX because they knew that PPX would not ask probing questions.

PPX’s awareness of the risk of fraud, and the advice it had received from HMRC as to the steps it could take, yet nevertheless conducting minimal due diligence, not making the checks which HMRC was advising it should make, and failing to consider the information obtained from such due diligence. One important aspect of this failure of due diligence was the failure to ensure Wigan checks were always undertaken.

PPX ignored the very warning signs that it had been told of by HMRC, including by making payments to a third party, dealing with new companies with minimal financial history yet which provided vast amounts of credit (and thus at no financial risk to PPX). The first transactions with IHEI were significantly higher than the amount of the VAT registration threshold, yet PPX traded with them knowing they were not VAT registered at that time.