Ashley Charles Trees v The Commissioners for HMRC

Mr Pickup’s written submissions treat the abuse of process as being both the issue of the DLN and the defence of the appeal. He states at paragraph 1 that the Application is, “on the ground that the issue to the Appellant of a Director’s Liability Notice ... and these proceedings are an abuse of the process of the Court.” In the course of oral submissions, however, Mr Pickup was clear in saying that he accepted that HMRC had the power to issue the DLN but that what was abusive was HMRC’s reliance within this appeal upon dishonesty that should have been raised in the CCA Appeal. If a section 60 or section 61 penalty is in prospect, then HMRC should deal with dishonesty at the same time as the Kittel denial. He submitted that no public law issues arise as it was not Mr Trees’ case that HMRC were not entitled to issue the DLN itself.

The case of HMRC v Kishore [2021] EWCA Civ 1565 (“Kishore”) relied upon by HMRC is not binding and is to be distinguished from the present case. It did not involve a dishonesty penalty, the previous appeal in that case had been struck out, and the issue was as to whether HMRC were entitled to issue the penalty.

HMRC could have pleaded and pursued dishonesty in the CCA Appeal. They were repeatedly invited to do so by CCA and yet were steadfast in confirming that they were not relying upon fraud or dishonesty. Mr Pickup relied upon the case of Butt v HMRC [2019] EWCA Civ 554 (“Butt”) as an illustration of Kittel and dishonesty being dealt with at the same time.

HMRC should have brought their whole case within the CCA Appeal. Mr Pickup submitted in his written opening that HMRC, “cannot hold back part of its case, to then be deployed in duplicative litigation, some years later, in which this Tribunal cannot properly examine the underlying factual background, which has been determined by the earlier Tribunal.” HMRC’s allegation in the CCA Appeal was in reality an allegation of dishonesty. However, Mr Trees has been prejudiced as a result of HMRC holding back a formal plea of dishonesty until this appeal. This prejudice includes Mr Trees being denied CPR disclosure in the CCA Appeal, being denied the ability to cross-examine witnesses or present his own evidence as to the surrounding circumstances of the transactions in the context of a plea of dishonesty. Mr Pickup rhetorically asks, “What more can he do?”

Paragraph 114 of the 2020 Decision is effectively a finding of dishonesty which Mr Trees cannot now go behind.

Mr Trees had been denied the finality of the CCA Appeal. The present appeal arises out of exactly the same facts as the CCA Appeal, which is precisely the abuse which the rule in Henderson v Henderson contemplates. This is reinforced by the fact that the only evidence relied upon by HMRC is the 2020 Decision.

The present Tribunal is unable to carry out the exercise required to consider the test for dishonesty in Ivey because at least stage one has already been carried out by Judge Mosedale and Mrs Hunter in the 2020 Decision. In this regard, Mr Pickup submits that the “fact-finding tribunal” referred to at paragraph 74 of Ivey must be the same fact-finding tribunal for both limbs.

The DLN is a criminal charge and so engages Article 6 of the ECHR (“Article 6”). The present appeal is not consistent with Article 6 as there has been an unreasonable delay and, for the reasons set out above, Mr Trees will be denied the ability to cross-examine or present evidence in respect of matters contained within the 2020 Decision despite the fact that at the time of the CCA Appeal dishonesty was expressly not being pursued.

Whilst HMRC could have raised dishonesty within the CCA Appeal, it did not need to and was not required to do so. Importantly, the Penalty and the DLN had not yet been issued.

Kishore is binding upon this Tribunal and is a complete answer to the Application in respect of whether dishonesty should have been raised in the CCA Appeal. In the alternative, even if Kishore can be distinguished, the reasoning in Kishore is equally applicable to the present case.

The legislation anticipates HMRC waiting until the determination of VAT liability before issuing a penalty. This is reinforced by the later iterations of the legislation.

There is no prejudice to Mr Trees. HMRC was not seeking to avoid disclosure in the CCA Appeal. Full disclosure was given in the CCA Appeal notwithstanding the absence of obligation to do so, full disclosure has been given in the present appeal, and Mr Trees can still challenge the evidence on dishonesty. The prejudice which Mr Trees complains of is conflating the arguments in respect of the rule in Henderson v Henderson with the consequences of the 2023 Decision precluding Mr Trees from relitigating findings in the 2020 Decision.

Paragraph 114 of the 2020 Decision expressly does not make any findings as to dishonesty.

Butt is not a helpful illustration as it is in the context of all matters being dealt with in a penalty appeal rather than all matters being dealt with in a Kittel appeal.

This Tribunal is capable of considering and applying the Ivey test for dishonesty.

HMRC does not just rely upon the 2020 Decision, as the underlying evidence is available within the bundles.

The Article 6 arguments fail for the same reasons as for abuse of process.

“[49] Mr McGurk submitted that the imposition of penalties on Mr Kishore amounted to an abuse of process by HMRC. He argued that the penalties depended on the same facts as the refusal of Mr Kishore’s input tax claims and that HMRC ought to have raised the penalty assessments at the same time as they denied the right to deduct input tax. Invoking the rule in Henderson v Henderson, Mr McGurk maintained that HMRC should have sought to impose the penalties earlier if they wished to impose them at all.

[50] I have not been persuaded. Johnson v Gore Wood & Co confirms that the “bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all”. In the present case, however, Mr Kishore is complaining of HMRC’s failure to do something other than make a claim or advance a defence in proceedings, viz. issue penalty assessments. Any proceedings were always going to be initiated by Mr Kishore; HMRC could never have invoked the penalties by way of defence to the Kittel appeals; and the penalties could not have been put in issue before the FTT, whether in conjunction with the Kittel appeals or otherwise, until after they had been raised. In any event, it is “wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive”, as Lord Bingham explained in Johnson v Gore Wood & Co. For a party to be held to be acting abusively, it must be the case that he should have raised a claim or defence in previous proceedings, not just that he could have done so. In this context, paragraph 91 of the UT’s decision is in point. The UT there said this:

[51] I agree with these comments and, in all the circumstances, do not consider that the rule in Henderson v Henderson assists Mr Kishore. For completeness, I should record that section 77(2) of the VATA provides that a penalty assessment “may be made at any time before the expiry of the period of 2 years beginning with the time when the amount of VAT due for the prescribed accounting period concerned has been finally determined”.

“During our checks into the tax affairs of CCA Distribution Limited (in Administration), we found that the company had not declared the right amount of tax. We consider that the actions that led to this happening were dishonest. Because of this we are going to charge the company a civil evasion penalty. We are charging this penalty under Section 60(1) of the VAT Act 1994.

We also consider that you were wholly responsible for the dishonest actions. This is because you, as the director and controlling mind of the Appellant, entered into transactions and sought to deduct £9,874,254 in input tax in relation to deals in April, May and June 2006 for the purpose of evading VAT.

We will therefore recover some of the penalty from you. We are doing this under Section 61 of the VAT Act 1994.”

The repeated nature of the deals.

The patterns of the deals, which required some degree of active involvement.

The pricing being dictated to CCA involved active rather than just passive involvement.

The banking evidence establishes that Mr Trees’ active involvement facilitated the fraud.

Opening the FCIB account again required active involvement.

The turnover and profit meant that Mr Trees was knowingly involved and took a profit from it.

CCA’s due diligence was not to protect CCA but was window dressing and so involved active deception.

The absence or inadequacy of insurance again involved actively facilitating refund claims and putting in train mechanisms to do so.

The failure to provide the IMEI numbers again established active concealment.

CCA’s disinterest in the goods reveals that CCA’s trading was orchestrated and actively facilitated fraud.

Mr Trees’ untruthfulness when giving evidence reinforces the point that Mr Trees was actively pursuing a fraudulent claim for input tax on behalf of CCA.

The risk free, benign trading environment meant that Mr Trees knew the role CCA was playing in the fraud.

It is CCA’s misfortune that it found itself repeatedly involved in fraudulent chains.

It is in the nature of the conduct of sophisticated fraudsters that there was orchestration in the background. The dishonesty of others does not cause Mr Trees to be dishonest.

The finding in the 2020 Decision as to pricing being dictated to CCA was that Mr Trees’ evidence was unreliable. This was conjecture by the tribunal given the references to “we think”. This is different to a finding of dishonesty.

The banking evidence did not show dishonesty by Mr Trees.

The FCIB evidence caused the tribunal to find that there was knowledge of fraud but the findings do not go as far as dishonesty.

The existence of high turnover and profits is not itself dishonest.

Mr Trees was open and frank about his due diligence. This is not dishonest.

CCA did have insurance, but just not appropriate insurance. It is not dishonest to have inadequate insurance.

Mr Trees gave his explanation to Mr D’Razario throughout about the IMEI numbers. Although the tribunal did not accept this evidence, this is not enough for it to give rise to dishonesty.

The disinterest in the goods does point to orchestration by the fraudsters but not evidence that Mr Trees’ involvement was dishonest.

The assessment of Mr Trees’ evidence was in the context of his knowledge, not dishonesty.

The benign trading environment was simply saying that those who were proficient and have good systems in place will make significant profits. This is not dishonest.

“[474] But we do not decide it on that basis. Putting all of that out of our mind, we look at the facts. We have found that CCA did know that its deals were dictated to it (§§304-309) and that its banking was dictated to it (see §299-303 and §§310-324): knowing any one of these matters meant Mr Trees could not have been in any doubt that CCA was participating in transactions orchestrated for the purpose of VAT fraud. He knew CCA was not trading as a free agent in any grey market.

[475] But even if we were to put those findings of fact aside, we would still conclude that Mr Trees knew that CCA’s transactions were connected to fraud. CCA was offered deals far too good to be true: it was offered the opportunity to make phenomenal profits over a short space of time for doing virtually nothing; the deals required no special skill nor utilisation of any carefully cultivated contacts, they involved few costs and no commercial risk. CCA knew that its customers had little interest in the product traded, it knew about the patterns in the trading that had no rational explanation, it knew that its trading environment was uncommercially benign (see §§269-298). The only explanation for all of this was clearly that the transactions were orchestrated for the purpose of fraud; that conclusion is all the more obvious when Mr Trees was well aware that there was VAT fraud taking place in mobile phone trading. From this we would conclude that it was very clear that Mr Trees knew that CCA’s transactions were connected to fraud.

[476] But it is even more certain that he did: he acted as a person who did know of the connection; CCA’s deal documentation was inadequate reflecting that Mr Trees knew that it did not really matter; similarly CCA did not inspect the goods; CCA’s due diligence was inadequate and undertaken to satisfy HMRC; negative indicators were ignored; CCA held inadequate insurance against some risks and none against others despite the high value of the goods; CCA was not willing to cooperate with HMRC over IMEI numbers where such cooperation might have helped reveal circulation of the phones and thus the fraud. Mr Trees had a relationship of trust with Future which was clearly involved in the fraud and this relationship continued long after the suspicions of an innocent trader would have been raised.

[477] None of factors put forward by appellant as indicating Mr Trees did not know actually countered or explained away any of these findings. CCA’s cooperation with HMRC was limited and self-interested; Mr Trees did not rely on Mr D’Rozario’s opinions; HMRC was definitely not better placed to spot the fraud than Mr Trees; while Mr Trees did choose to put his own money at risk, this was at least as consistent with confidence that HMRC would not discover any fraud, as with any innocence; CCA’s prior trading could only have given CCA confidence that HMRC would continue to repay it its input tax claims; its employees were not aware of anything untoward but there was no reason why they would know as it was Mr Trees who exclusively conducted the deals and in any event their evidence was so general it does not exonerate Mr Trees.

[478] We are in no doubt that Mr Trees knew that all of CCA’s transactions in the period in question were connected to fraud. As we have found that they were so connected, CCA’s claim for input tax on the transactions was correctly denied by HMRC on the basis of Kittel. The appeal is DISMISSED.”

“[208] In conclusion there is overwhelming evidence that CCA’s supply chains, both buffer and broker, were contrived. There is no reason to contrive transactions other than fraud and in any event as we have already found all of them did trace back to a fraudulent default, albeit in the case of CCA’s broker transactions, the connection to the fraudulent default was via a contra-trade. The overwhelming likelihood is that all of these transactions were contrived for the purpose of MTIC fraud and so we find.

[209] We find for the reasons given above that all of CCA’s transactions in the period in question, broker and buffer, were contrived by fraudsters; that its broker transactions were with alleged contra-traders, Future, Soul and Infinity, all of whose broker transactions could be traced back to fraudulent default; we also find CCA’s buffer transactions all traced back directly to a fraudulent default.”

“[294] Mr Trees accepted that he knew that the phones CCA traded in were recently imported into UK and he knew CCA was re-exporting them back to the continent; he also accepted he knew the phones would need adapters if they were sold retail in the UK as (mostly) they had 2 pin plugs.

[295] His answer was that traders would buy what was available; in effect he was saying it was rational for a trader to participate in a deal in which it could make a profit, and up to a point we agree. But this was his opportunity to explain why he thought the market CCA was trading in existed; it was his opportunity to explain its commercial rationale. He had been able to explain the rationale for deals made by Appleco (see §§130-132): but he gave no real explanation for the trading CCA took part in. We think this indicates that at the time he knew the deals were connected to fraud.

[296] Similarly, Mr Trees gave no convincing explanation for why it so happened that if CCA bought from Future, Soul or Infinity, it always sold the goods to an EU customer, but if it bought from its 8 other suppliers, it always sold the goods to a UK registered company. Again this is just another indicator of knowledge because such patterns in trading appear commercially irrational and Mr Trees, who must have known of it, had no explanation for it.”

“[304] We move on to consider the margins. We are not dealing with matters in the same order as HMRC as this matter was the one with which Mr Kerr commenced his cross examination. Mr Trees stood by his 2012 evidence that every deal was negotiated individually and appeared to him to be just like any other commercial deal in a highly competitive market. He said he was a keen negotiator and implied that he was out to get the best deal.

[305] Nevertheless, a short time later, when asked to explain why it so happened that CCA got a margin of exactly £1 per phone in 115 out of its 117 buffer deals in the period in question, his answer was that he wasn’t trying to maximise profit but realise a pound per phone. That evidence was not only inconsistent with what he had first said but also with the broker deals, where the profits made per phone were much higher. His explanation for that was that his costs in broker deals were higher (transportation, insurance and being out of the money pending the VAT reclaim). But we find his profit was much more than £1 per phone even once these costs were considered.

[306] We concluded that he was trying to explain what could not really be explained, other than by knowledge of the fraud, which was the consistency in margin on the buffer deals, and the consistently much higher profits on broker deals.

[307] The question of the alleged negotiations was very important because it was CCA’s case that the fraudsters wanted CCA to remain ignorant of the fraud and so would have undertaken negotiations with Mr Trees to make it appear like genuine trading. Yet we found his evidence on negotiations quite unconvincing: it was internally inconsistent for the reasons given above and inconsistent with the documentary evidence which showed that buffer deals always had consistent, round figure margins of nearly always £1, and broker deals had much higher margins. All this suggested Mr Trees did not undertake individual negotiations for each deal.

[308] We take account of Mrs Ryan’s and Mr Gordon’s evidence referred to above. In so far as they heard Mr Trees on the phone during the day, negotiating deals, this tells us nothing. We have no evidence at all about what was actually said and to whom and even how many calls were in respect of Appleco’s or CCA’s business. Therefore, in so far as their evidence is relied upon as showing real negotiations took place on behalf of CCA, it is very weak evidence compared to the evidence which we have seen which indicates that negotiations in any real sense cannot have taken place.

[309] In conclusion, we find Mr Trees’ evidence that there was a rigorous negotiation unreliable. Mr Trees denied he was rung up, like Sander Pielkenrood, and told from whom to buy, to whom to sell, what to buy and sell and at what price. But Mr Trees’ denial is not reliable: we think the evidence shows that that is what happened. As we have said at §194 above we have excluded reliance on Sander’s evidence: but our finding is consistent with that evidence which indicates, that, had we put weight on it, it was reliable evidence.”

“[199] We find that the banking evidence gave a very clear indication that a sophisticated, complicated and very lucrative fraud on the British public was at the root of all the transactions at issue in this appeal. That is the only logical explanation for money circulating in loops. The loops are only consistent with a fraud which involved money being moved between entities to give the appearance of commercial transactions; it was entirely inconsistent with genuine commercial transactions where the ultimate seller would not be the ultimate purchaser.

[200] Moreover, Mr Birchfield was only able to identify these loops because all the entities in the chain banked with FCIB. It would be extremely unlikely that a chain of commercial, independent traders would all choose to bank with the same bank.

[201] The appellant suggested this was not unlikely because UK banks (possibly at the instigation of HMRC) closed accounts for mobile phone traders while FCIB, an off-shore bank, offered modern banking facilities. We do not accept that explanation: it was clear that both CCA and Future were able to hold and use other bank accounts as they did so: Future had a Barclays account and CCA had a Bank of Ireland account. Moreover, the chains involved nonUK companies who would not be affected by the closure of UK bank accounts and so that could not be the explanation as to why they held FCIB accounts. We consider it more likely than not that the reason all the entities banked with FCIB is that it suited the fraudsters that they did so as it enabled the money to move swiftly and that is what they wanted.

[202] We say that it was clear that the fraudsters wanted the money to move swiftly because, firstly, that is what it did, and secondly, it is a logical inference. Some of the loops, involving many entities, took less than 2 hours. It is also clear the same funds were used to circulate many times within the same period of 24 hours.

[203] Mr Birchfield’s evidence which we accept and which was not in any event challenged, was that FCIB only executed transfer instructions in 3 minute batches; it was therefore impossible for any person to transfer money they received in less than 3 minutes. We find that in many instances the recipient of funds must have given instructions to the bank to transfer the funds onwards in three minutes or less of its receipt because there was only 3 minutes between the receipt and the transfer. Such swift receipt and transfer of funds enabled large loops to be completed very quickly, as we have said.

[204] Moreover, when Mr Birchfield looked beyond the loops involving CCA and just followed the money, the evidence showed that the same sum of money might circulate in a loop 10 times within 24 hours: it looked like the money was circulating in loops as many times as possible in as short a time as possible.

[205] The money movements on their face had little to do with commercial transactions as the entities were in most cases passing on very quickly exactly the amount they received. It was like a game of pass the parcel. It did not look commercial: an entity being paid for a commercial transaction might choose to keep the money: it would expect to retain its profit margin in any event and wouldn’t expect its supplier to know that it had been paid so its supplier wouldn’t be looking for payment the moment its customer paid.

[206] The banking evidence did not look consistent with commerce. It was consistent with fraudsters trying to give credence to the orchestrated chain of transactions by setting up chains of payments to show HMRC that money had actually changed hands, while, at the same time being careful not to have their money out of their control for any length of time. It looked like the fraudsters were maximising the use of the money by ensuring as many loops took place within 24 hours as possible.

[207] Only a highly sophisticated and organised MTIC fraud makes sense of the banking evidence and the appellant did not suggest a realistic alternative explanation. We agree with HMRC that this demonstrated very clearly that at the root of the circulation of funds was a fraud as it was entirely inconsistent with a commercial transaction where individuals were free to pay their suppliers at a time of their choosing.”

“[299] Moving on from the uncommercial trading environment, we consider CCA’s use of an FCIB bank account. We found Mr Trees’ evidence about why CCA had an FCIB account unreliable. His answers went round in circles; with an explanation given at one time inconsistent with another explanation he gave earlier or later.

[300] His evidence was that FCIB offered a very flexible, online account and CCA chose to use it as it was quick and convenient. CCA also had a Bank of Ireland account which in the 2012 hearing Mr Trees said was opened because it offered a good rate of interest. Nevertheless, when asked in the same hearing why CCA kept a large balance in its FCIB account, Mr Trees said it was because the interest from the Bank of Ireland account was low. It was also his evidence that he chose not to use the Bank of Ireland account for trading.

[301] Yet when asked in this hearing why he paid its suppliers within minutes of receiving money from his customer he said it was in part because FCIB, every 4 to 6 weeks, locked accounts down for 1 to 2 weeks such that no money could be moved. This evidence had never been given before and was inconsistent with his suggestion that FCIB was a convenient business account.

[302] It seemed to us that Mr Trees gave whatever explanation he thought of at the time in answer to any particular question but was unable to give answers that were, when viewed in the round, consistent. So FCIB was a convenient bank for a business to use when the question was why he happened to have an FCIB bank just the same as all other traders in the MTIC supply chain; but when the question was why he moved the money so swiftly, it was because FCIB might out of the blue lock his account down. There were many other examples of answers which were inconsistent.

[303] We do not accept any of the answers he gave as to why CCA held an FCIB account: his evidence was inconsistent and unreliable. Taking into account that it was clearly convenient, even essential, to the fraudsters that the money circulated within the same bank so that it could move as fast as possible, we think the reason CCA held an FCIB account was because it was told to do so. It was put to Mr Trees that he was told to open an FCIB account but he denied this. We don’t accept the denial as reliable: we think more likely than not that CCA held an FCIB account because he had been told that in order to participate in the transactions CCA needed an FCIB account. And that means Mr Trees knew that the transactions were connected to fraud.”

“[269] One such factor was that CCA had, we find, what appeared to be an extraordinarily successful business, with profits increasing exponentially over time. CCA turned over £9.7m in 03/04, £65m next year and £402 million in the following year to April 2006. Its gross profits in the last 7 months of trading were £1.35 million and its costs were not high (just freight forwarding fees and insurance in the main).

[270] It was put to Mr Trees that this was phenomenal success; he did not accept this. He pointed out that his background in Appleco meant that, on occasion, particularly in the earlier years, he had had some very profitable deals. It was suggested to him that the situations were not comparable as Appleco traded with a large staff whereas CCA’s profits were entirely down to trades negotiated by him alone. His answer was that he was a workaholic.

[271] As HMRC pointed out, after a few years of trading, CCA had a turnover approaching half a billion pounds. At the same time, Appleco, with a large staff with infrastructure, stock and business premises had a turnover some 250 times smaller. It was pointed out to Mr Trees that in 3 months, CCA sold 330,000 mobile phones which amounted to about 10% of the grey market at the time. Mr Trees’ answer was that he was not aware of that and would have been more concerned with his position in the European market.

[272] It was pointed out to him that he made no losses on any deals; he said he had made a loss in 2003 (which was accepted) and that he was not in the market to make a loss.

[273] We found Mr Trees’ evidence on his knowledge that the deals were too good to be true unconvincing. It was obvious that CCA’s success, if this was genuine trading, was staggering. Mr Trees gave no convincing explanation for why at the time he thought this phenomenal success arose from genuine trading. It was ridiculous to suggest, as he did, that one person’s hard work could be a rational explanation for such success: many people are workaholics without realising any profit at all.

Easy deals

[274] All the broker and buffer deals of CCA were ‘back to back’ which meant that the appellant simultaneously bought and sold goods; moreover, it appeared and we find that the deal documentation was all raised in a single day. In other words, what the appellant had to sell was always exactly what his customer wished to purchase. It never had to split up a purchase between a number of customers, nor did it have to purchase from more than one supplier in order to meet a customer’s requirement.

[275] Mr Trees’ answer was that in order to ensure that he met a customer’s demand, sometimes he had to buy less than was on offer. We don’t find this answer reliable as we find other evidence from Mr Trees unreliable. In any event, it was put to him that it was all too easy and we think that it was.

No need to advertise

[276] Another factor is that CCA did not have any difficulty in locating persons from whom to buy stock and to whom to sell stock. Mr Trees accepted that CCA received many uninvited offers from persons wanting to buy and sell to CCA. He accepted that CCA did not need to advertise; while it had a webpage with its contact details, it did not need to advertise any stock for sale. It seems willing suppliers and customers simply materialised.

[277] This was in stark contrast to Appleco which advertised very widely in order to trade.

Very few costs

[278] As we have said, CCA’s business had very few costs. Its turnover increased to an enormous amount in a short space of time without requiring much in the way of effort or costs. Mr Trees’ response, when this was put to him, was to play it down. He did not choose to recognise what was plain to us.

[279] The only staff required by CCA to turnover millions of pounds was Mr Trees, who put together all the deals, with a little part-time help from Appleco’s bookkeeper (Mrs Ryan) on the accounts and another Appleco staff member (Mr Gordon) who did some due diligence paperwork. Mr Trees suggested an ‘enormous’ amount of work was put in on CCA’s behalf, but all it seemed to amount to was the willingness of Appleco staff to pass on messages to Mr Trees, for paperwork to be faxed, and VAT numbers verified.

[280] We agree with HMRC that the ease with which CCA made huge profits should have been obvious to Mr Trees; Appleco employed about 25-30 staff in the labour intensive business of reconditioning and building computers and in 18 months 2004/5 had sales of less than £1million and gross profits of less than £130,000. Mr Trees denied that it was obvious that the comparison with Appleco must have made it clear that CCA’s profits were the result of fraud: Mr Trees denied he knew that but we cannot accept his denial when all the evidence is taken into account.

Very few risks

[281] Mr Trees’ evidence was that his suppliers would take stock back if his customer reneged on a deal. This had in fact happened he said with one deal with Infinity some time earlier in their trading relationship. It was put to him that this was all too good to be true. He denied this: he said that it was normal to be able to go back on a contract if payment had not been made.

[282] We do not agree that it is normal, but it is clear that Mr Trees knew that he was not at risk if a customer let him down. It was put to him that the deals were too easy and stress-free as he described them: his only, and unconvincing, answer was that CCA had made a loss on a deal in 2003.

[283] We consider it was just one more factor which meant that Mr Trees knew at the time that the deals were too good to be true and that the only possible explanation for CCA’s trading was that fraud was at the root of it.”

“[383] Mr Trees’ position seemed to be that the due diligence was undertaken primarily for VAT risks; so, for instance, he accepted that his due diligence on his suppliers was better than on his customers. It seems he did not see due diligence as protecting CCA from commercial risks such as customers who reneged on deals; that is perhaps not surprising bearing in mind, as we have already said, CCA had an uncommercially benign trading environment and Mr Trees knew that.

[384] Moreover, although Mr Trees reverted to saying that he thought the risk of fraud was in the supply chain and not connected to his customers, we have found (see §§346-7 and 350) he was aware that the risk of fraud applied as much to customers as to suppliers. Indeed, in some cases he did carry out a little due diligence on customers.

[385] So the patchiness of the due diligence, the fact that most of it was carried out after many of the deals in this appeal, its lack of thoroughness, and the fact negative indicators were routinely ignored, means we find it was more likely than not that its purpose was not to protect CCA from being involved in MTIC fraud but as window dressing to be shown to HMRC, to bolster CCA’s claim to refund of the input tax.

...

[389] We don’t accept Mr Trees’ evidence that much due diligence was carried out before May/June 2006; apart from visits, there is little evidence of this and we do not consider him a reliable witness. We also think that the due diligence that was actually carried out was carried out to satisfy HMRC: it was clear that CCA was happy to trade before May/June 2006 with the same companies without much due diligence so the purpose of the due diligence was clearly not to protect CCA against trading risks. We do not think Mr Trees really suggested that it was.

[390] Mr Trees implied that CCA did not need due diligence as it traded with companies with which it had an established trading history and it trusted: but it appears CCA was also content to trade with new companies as well with little in the way of due diligence.

[391] And when due diligence was undertaken, negative indicators were ignored. The due diligence was of little real value in any event as Mr Trees did not look at his trading partners’ accounts or obtain professional or banking references; the few trade references obtained appeared to raise questions rather than provide reassurance.

[392] The appellant’s case was that thorough due diligence would not have discovered the fraud and we agree with that. Thorough due diligence might well have made CCA suspicious (eg it should have revealed the connection between Future and Soul) it would not by itself have shown a definite connection to fraud.

[393] But the evidence on due diligence is relevant as it shows, we find, that Mr Trees understood CCA was trading without taking any real commercial risks from which it needed due diligence to protect it. This is yet more evidence that Mr Trees was not worried about the deals going wrong, or being left holding goods and liable to pay for them without having a customer. It also shows that Mr Trees was not looking at the evidence with a view to avoiding a connection to fraud: he was not concerned by the patterns in the due diligence, of odd connections between companies and of consistently poor credit ratings. The purpose of CCA’s due diligence was to satisfy HMRC.

[394] The only explanation for all of this which makes sense is that at the time of the deals CCA knew that they were connected to fraud. It was put to Mr Trees that his due diligence was not consistent with wanting to check the legitimacy of his customers; he denied that but we do not accept his denial as reliable for the reasons given above. It was put to him that his due diligence was ineffective because he didn’t want to find out anything because he knew his deals were connected to fraud; he denied this as well but we do not accept his denial as reliable for the above reasons.”

“[395] CCA was buying and selling what appeared to be very valuable mobile phones. It was responsible for shipping them to its buyers. CCA’s position was that up to the end of 2005 it relied on the insurance held by the freight forwarder to cover them in transit; HMRC did not challenge this. From January 2006, the law changed and it had to carry its own insurance in order to be covered. Mr Trees arrange a marine freight insurance policy through an agent, Mr Tidey. The policy cost CCA £19,200.

[396] HMRC’s case was the policy was ineffective to cover CCA and that it was just window dressing as CCA was not really concerned about the risk of loss in transit.

[397] We consider the policy was inadequate for a number of reasons. Firstly, it listed the countries to which deliveries were covered. They did not include Belgium, when all of CCA’s deliveries were made to Belgium. Mr Trees accepted that this was true: his point was that adding Belgium to the policy would not have increased its price and so it was simply an oversight on his part.

[398] We agree that whether or not the policy was intended as window dressing or genuine insurance, it was clearly an error that Belgium was not specified. Nevertheless, such carelessness indicated a lack of interest in the details on Mr Trees’ part.

[399] The policy covered transit of goods worth £20 million per year. This was clearly inadequate: CCA sent goods worth £18 million in April 2006 alone. Mr Trees’ explanation was that he understood that that was just an estimate which could be revised upwards. Mr Tidey’s evidence was rather different: he considered the estimate had to be a genuine estimate. We find it was not. Even though Mr Trees denied this, we do not accept his evidence as reliable: the insurance was obviously inadequate.

[400] We think it was obvious to Mr Trees that the insurance was inadequate; £20 million a year was clearly a massive underestimate. CCA’s previous year’s carryings were £79 million. There was no suggestion CCA had even attempted to revise the estimate when (by June 2006) they had exceeded it several times over. Mr Trees said he did not think it necessary to do so; he suggested he could pay an additional premium at the end of the year.

[401] We find this was not consistent with Mr Tidey’s evidence nor with good sense if Mr Trees wished to have insurance that was effective.

[402] We also note that the policy had a limit of £750,000 per ship yet the evidence shows that CCA’s shipments exceeded this by many multiples meaning in the event of loss CCA was, for this reason as well, uninsured. Mr Trees accepted he became aware of this but stated it was the fault of Aquarius the freight forwarder and against his instructions; he suggested that he refused to pay them because of this.

[403] CCA’s insurance was inadequate in other ways; the marine cargo policy only covered goods in transit abroad, it did not cover goods in transit or in storage in the UK. Yet CCA owned the goods and was at risk while they were stored and they were stored for days or weeks as CCA did not ship them until the earliest when it was paid. Mr Trees’ explanation was that he relied on insurance held by the freight forwarder (Aquarius); he said he had fallen out with his previous freight forwarder (A1) for not providing a copy of the insurance. He did not agree with Mr Kerr that the freight forwarder made it clear that it was for owners to hold insurance.

[404] The policy also only covered mobile phones; whereas some of the deals included DVD payers, GPS and laptops. Their value was £4 million. Mr Trees’ reply was that CCA selfinsured them although he accepted that meant CCA was uninsured. He said he was happy to take the risk. We note that in the context of his willingness to take risk, it was his unchallenged evidence that he did not insure his home and, having spent a lot of money on securing Appleco’s premises, did not insure them either.

[405] HMRC’s case, which Mr Trees denied, was that he bought the marine cargo policy in order to assist his repayment claims rather than because he wanted any insurance. We note that at this point it was Mr Trees’ evidence that he did not know that HMRC would check CCA held insurance when considering whether to release an input tax reclaim; it was pointed out to him this was inconsistent with what he had said earlier; he then accepted that he had known at the time that Mr D’Rozario was interested in CCA’s insurance position.

[406] We consider that Mr Trees’ evidence was clearly unreliable in some areas (such as his knowledge of HMRC’s interest in insurance policies) and we had to be careful of all he said. We consider that in other spheres (such as Appleco and his home) he was prepared to take the risk of no insurance, but at least in respect of Appleco, it was a calculated risk as he spent significant sums on security. With CCA, we think he was also prepared to trade without insurance; it is more likely than not on the evidence we have that the reason CCA bought the inadequate marine insurance policy which it did was to assist with its VAT refund claims and not because it genuinely wanted insurance to protect itself from risk. This explains the policy’s inadequacy and the error over Belgium.

[407] The question is why it did not want protection from the risk: with Appleco, Mr Trees took a calculated risk as he was able to diminish the risk of theft: CCA’s stock appeared to be many multiples more valuable and yet no steps were taken to diminish CCA’s risk of damage or theft of them, other than the purchase of this obviously inadequate insurance policy. It suggests to us that Mr Trees was not concerned with the risk, which strongly suggests he knew that there was no real risk because he knew the trading was orchestrated and his trading partners not really interested in the goods supposedly the object of it.”

“[408] Mr D’Rozario kept a log of his contact with Mr Trees; he also produced the correspondence between the parties. It was clear from this that starting in 2003, Mr D’Rozario asked Mr Trees to keep records of the IMEI numbers of the phones which he was trading. It was also clear that Mr D’Rozario explained to Mr Trees why it would help HMRC identify fraud: it would help them identify phones which were being repeatedly sold (in other words, the ‘carousel’ element of MTIC fraud). Mr Trees accepted he knew that IMEI numbers would identify circularity.

[409] We find that, from 2003, Mr Trees’ normal reply to Mr D’Rozario was that he would consider providing the numbers to HMRC. It was HMRC’s case that nevertheless he never provided any IMEI numbers to HMRC.

[410] At the start of the hearing before us, it was the appellant’s case that Mr Trees had provided a list of IMEI numbers to HMRC in January 2006. The list was produced: it had not been before the previous hearing as it had only been found more recently. Mr D’Rozario’s logs did not record any receipt of IMEI numbers and Mr D’Rozario himself had no recollection of receiving any.

[411] On closer investigation, as the hearing progressed, it became apparent that the list could not have been sent to HMRC in January 2006. There was a record that the appellant’s freight forwarders had told Mr Trees none could be provided for any period before April 2006; moreover, the list of phones, while it appeared to Mr D’Rozario to contain genuine IMEI numbers, did not clearly relate to any of CCA’s deals because of the mixture of model numbers.

[412] We accept that at some point in early to mid-2006, CCA did obtain a list of some IMEI numbers; we do not accept that they were ever provided to HMRC. We prefer Mr D’Rozario’s evidence; it is consistent with the documents and he was a reliable witness. Mr Trees was not.

[413] The significance of the IMEI numbers is the reason why CCA failed to provide them to HMRC while at the same time kept promising HMRC that it would consider doing so. It was put to Mr Trees that he was stringing HMRC along, and we think that he was.

[414] In the hearing, he gave a number of reasons for not providing the numbers to HMRC. He said it was too expensive (50p per phone he suggested); he also said he believed HMRC would not tell him the results of the check if he provided the numbers to them.

[415] He was also insistent in the hearing, repeating something he said first in his 2018 witness statement, that a computer could not, in a reasonable time, carry out a check as each IMEI number was 15 digits long and there were about 2 million IMEI numbers in HMRC’s Nemesis database. He suggested it would take weeks for any computer to work out if one 15 digit number matched any of the 2 million IMEI numbers held by the computer. We had no expert evidence on this, but we agree with HMRC that we could take judicial notice of the powers of computers in 2006 and this evidence was not credible. In any event, it made no sense: if computers were incapable of making this match, why would HMRC have had the Nemesis database? Moreover, it was clear that Mr Trees knew that the Nemesis database was used by HMRC. We thought this evidence about computer processing inadequacy was a poor attempt by Mr Trees to explain his reluctance to assist HMRC by providing IMEI numbers.

[416] We do not accept that obtaining lists of IMEI numbers was too expensive: it was clear that at some point CCA did obtain some IMEI numbers. We do accept the appellant’s point that HMRC would not necessarily have informed CCA of the outcome of any IMEI number check but we comment that this would not have concerned Mr Trees if, as Mr Trees, said, CCA genuinely wanted to assist HMRC in its fight against MTIC fraud.

[417] We also accept Mr Pickup’s point that there is no allegation or attempt to prove that CCA actually dealt in phones that were being carouselled, any more than HMRC attempted to prove (other than in respect of the Samsung Serenes and P990s) that CCA was dealing in phones that did not exist or did not meet the specification in the invoices. We agree that (other than in respect of the Samsung Serenes and P990s) it is not proved the phones did not exist or did not meet specification or were being carouselled; but the contrary is also not proved.

[418] It seems to us that, as Mr Trees did not obtain the IMEI numbers and did not inspect the goods himself, he could not know that the phones existed, met specification and had not been carouselled. If he was ignorant of connection to fraud, he would have nothing to fear from providing the IMEI numbers to HMRC; but if he did know of the connection, or suspected it, sensibly he would have to be concerned about the risk to CCA if HMRC saw the IMEI numbers of the phones it traded.

[419] We think that Mr Trees did not want to give HMRC IMEI numbers because he was aware that the check might reveal that CCA was dealing in phones that either it or someone else had dealt in before and that the phones were circulating between wholesalers rather than reaching a retailer. If Mr Trees had truly believed that CCA’s transactions were not connected with fraud, he would, we think, have been happy to provide what Mr D’Rozario wanted to satisfy him of CCA’s bona fides.

[420] Having said that, we accept that Mr Trees’ failure to provide the IMEI numbers by itself might indicate nothing more than that he suspected his transactions were connected to fraud: suspicion is not enough to deny input tax. However, when this factor is considered with all the other factors which we have discussed, we think it is just one more element that shows Mr Trees knew CCA’s transactions were connected with fraud.”

“[297] We found Mr Trees reluctant to admit that he knew that his customers did not inspect the goods that they were purchasing and had to pay for before they were transported to them. He did accept, when questioned, that not only was there no evidence that CCA’s customers ever inspected the goods, but that (as they were held to CCA’s order) he would have had to give permission to enable his customers to inspect them. His answer seemed to be that there was some level of trust between the parties and the freight forwarder and that his customers did not need to inspect the goods.

[298] We did not find his evidence on this convincing: he was describing an uncommercially benign trading environment and he must have known that at the time. His customers gave little specificity as to what they wanted and did not inspect the goods before or after they purchased them, and never rejected them after they received them. He knew about this lack of interest in the goods and was not concerned. Again, we think this indicates he had actual knowledge of the connection to fraud.

...

[356] CCA’s deal documentation, such as its invoices and purchase orders, did not contain terms: they did not specify time of payment nor contain any clauses about when title would pass. As the goods changed hands at a time other than the time of payment, we think the question of title would have been quite important, particularly for valuable goods.

[357] Mr Trees’ explanation for this was not particularly convincing: he said terms couldn’t be put down in writing as they would be too long. This was clearly not correct: important terms could be set down quite shortly. It was pointed out to him that some of CCA’s counterparties did specify terms (eg Pielkenrood’s paperwork specified the type of phones it wanted and required despatch within 3 days of payment). He also said that it was unnecessary to specify anything in writing as it was all agreed orally: again this was not a convincing answer as the whole point of writing things down is to record what was verbally agreed.

[358] We consider that he failed to give a sensible reason as to why basic contract terms for contracts involving very large sums of money and what appeared to be very valuable goods were not reduced to writing. At best his answer amounted to saying that everyone trusted each other so terms did not need to be put in writing.

[359] The evidence, however, is that the deals were orchestrated and whether or not Mr Trees knew that, it is clear that every other participant in the supply chains must have known that. They were therefore not interested in the goods or the contractual terms but simply in playing their part in the charade: this is reflected in the lack of contractual terms and specification of the goods. The fact that CCA’s own contracts also lacked such specification and terms suggests that Mr Trees similarly was not interested and for the same reason.”

“[255] We deal with Mr Trees’ evidence as we go through our findings of fact. For the reasons we explain in detail below, we did not find his evidence about what he knew, and why he acted as he did, at the relevant time, to be credible. It was inconsistent and implausible. We also found that he played down certain matters in an attempt to present them as something other than they were.

[256] For instance, in his witness statement he said CCA only occasionally got credit from his suppliers. When it was pointed out to him that CCA did not pay its suppliers until it was in funds from its customers, he said this happened ‘some of the time’. He was challenged and went on to accept it happened in every deal. Mr Trees’ unconvincing explanation was that he thought ‘credit’ meant agreed credit for a set number of days; he also said it was not real credit as the goods were held at all times by the freight forwarder; when challenged, he accepted that the freight forwarder held the goods to CCA’s order. Another instance of this was that his witness statement said his suppliers would take back goods if CCA’s customers reneged on the deal; in evidence, he appeared to retract that to an extent by saying his customers would ‘listen’ if CCA wanted to renege. It seemed to us that Mr Trees was playing down his original evidence on just how benign CCA’s trading environment actually was.

[257] We also found that he avoided giving straight answers. For instance, when it was put to him that CCA’s was a seamless and risk-free business, his answer was that CCA didn’t need staff because it was selling mobile phones and not assembling computers. When asked if was important to CCA if it could return purchased goods to its suppliers if its customer let it down, he talked around the question without giving an answer. These were just examples: it seemed to us that he avoided answering questions to which he had no good answer.

[258] In the main, we deal with why we found his evidence unreliable as we go through our findings of fact so we can deal with them in context. But we mention two further instances of unreliable evidence here because their only relevance is to the reliability of Mr Trees, rather than to our other findings of fact.

[259] The first was in respect of Mr Trees’ evidence with respect to Pielkenrood and in particular that he only dealt with Simon Pielkenrood, the director of the company. He said he never dealt with Sander.

[260] There was some documentary evidence which suggested otherwise: there was a fax from Sander to ‘Dear Ashley’; CCA’s due diligence showed Sander as the contact; Pielkenrood’s trade application form showed Sander as the contact; CCA’s database had Sander down as a contact.

[261] HMRC suggested Mr Trees was trying to distance himself from Sander’s evidence (discussed above at §§189-194). Mr Trees denied this and pointed out that he had always accepted he dealt directly with Raj Gathani at Future even though Mr Gathani had pleaded guilty to fraud. We don’t see the situations as similar; it was always clear that Mr Trees dealt directly with Mr Gathani and in any event there was no suggestion that Mr Gathani’s evidence implicated CCA (indeed he pleaded guilty so presumably gave no evidence). Sander’s evidence, however, directly contradicted a key part of Mr Trees’ evidence.

[262] We agree with HMRC that the documentary evidence does show that it was more likely than not that it was Sander and not Simon who was CCA’s main contact at Pielkenrood. We consider this yet one more reason why we do not consider Mr Trees’ evidence as reliable.

[263] The second instance was that Mr Trees also gave evidence we could not rely on in respect of Soul. There were documents from Soul, stamped with what purported to be CCA’s stamp, which indicated delivery of goods to CCA’s premises. Mr Trees was adamant that goods were not delivered; he was also quite adamant that the stamp was not CCA’s and that CCA did not have a stamp. This was odd because in the previous hearing he had accepted it was CCA’s stamp and then later in this hearing, when confronted with a different stamped document in a different context, did accept that CCA had a stamp.

[264] We consider Mr Trees’ evidence on this unreliable. We consider it more likely than not that CCA did have a stamp and it was used on the Soul documents in question. We think Mr Trees gave unreliable evidence as he had no reasonable explanation for why CCA would have stamped a document to say goods were delivered to CCA when they had not been.”

“Customers and suppliers willing to accept uncommercial terms

[284] Linked with the fact that the deals were too good to be true, there were reasons for finding that the trading environment described by Mr Trees was uncommercially benign and he must have known this. Mr Trees accepted that CCA’s suppliers sold what appeared to be very high value goods to CCA without requiring immediate payment; moreover, even though some had terms which retained title, in practice CCA’s suppliers always released control of the goods to CCA long before CCA paid.

[285] Mr Trees’ evidence was that the terms of credit was that CCA would pay its supplier when it was paid by its customer. He could not give a rational explanation for why his suppliers were so generous. We also note that CCA was not even required to stick to these terms: Mr Trees’ evidence elsewhere was that CCA, when it received funds, used the money to pay its most pressing supplier which would not necessarily be the supplier of the goods for which it had just received the payment. It all goes to show that CCA’s suppliers extended credit to CCA with no set date for repayment and no requirement for interest. This was obviously not commercial behaviour.

[286] Mr Trees also accepted that CCA’s customers were in most cases (35 out of 39) willing to pay for the goods before CCA shipped them. It was put to Mr Trees that its customers were not acting in a commercial fashion: his reply was that they could have checked that the goods existed before paying for them had they wanted to. That was no answer : we find he was unable to give a rational explanation for why a third party customer would pay for goods before receiving them and without checking on their existence and quality. The fact that they did so was a clear indicator to Mr Trees at the time of fraud being at the root of the transactions.

[287] We note that in most cases the delay between payment to CCA and shipment by CCA was normally only a few days, in some cases it was a matter of weeks and in one case a matter of 42 days. Mr Trees said he could not remember why this delay occurred and after 12 years we are not surprised; nevertheless, the impression we had is that CCA’s customers were not clamouring for their goods to be shipped even once they had paid. Mr Trees knew that at the time.

[288] So, CCA never had to pay for the goods before CCA was paid by its customers. CCA’s customers normally paid CCA before CCA shipped the goods, and sometimes a long time before they were shipped. Mr Trees told the Tribunal that he was not concerned that his suppliers extended credit to him on such generous terms with no interest liability and no set date for payment. In so far as his customer’s willingness to pay in advance, he said that this was the way the business operated: the customers would not get the goods until they paid.

[289] But this was clearly not true for CCA which was able to take control of the goods without payment. He was given the chance to explain this but gave no real explanation other than to suggest that it was different when the supply was UK to UK rather than UK to EU because (he said) it was easier for the supplier to get the goods back if the supply was UK to UK. This clearly made no sense whatsoever as a UK supplier giving control of the goods to a UK company had no way of preventing them being exported, and indeed that is exactly what happened. CCA did export them.

[290] Mr Trees appeared to be a rational person and was unable to give to us a rational explanation for why at the time he thought that CCA was able to operate with such very accommodating suppliers and customers. We conclude his evidence was not reliable and that he knew at the time that the reason for this benign trading environment was that it was connected to fraud.

Customers and suppliers materialised without any effort

[291] We have already mentioned that CCA’s customers and suppliers materialised without any effort on CCA’s part: it was put to him that he must have asked himself why he was not being cut out of market: why didn’t his suppliers supply direct to his customers and cut out CCA? His answer was that he had not thought about it at the time and it wasn’t something a businessman would think about.

[292] It was put to him that he knew Future, Soul and Infinity were very large businesses; he accepted he knew that; he was asked why he had not questioned why they sold to CCA rather than directly to customers in the EU? Again his answer was that he had not thought about it, although he did suggest CCA had contacts that they might not have had.

[293] We think, particularly taking into account Mr Trees’ knowledge of how easy CCA’s trading environment was, and how customers materialised with no effort on CCA’s part, and knowledge that there was fraud in the market, he would have considered CCA’s role very odd if he was concerned to avoid deals connected to fraud. It was obviously very strange that CCA was in a position to make very large profits for doing very little, when there was no obvious commercial reason why CCA’s suppliers couldn’t have cut out CCA and realised CCA’s profits for themselves. We do not consider Mr Trees’ answer that he did not think about it reliable. We think he knew why CCA was in the supply chain: he knew CCA was a broker in transactions orchestrated for the purposes of fraud.”