Ancient & Modern Jewellers Limited & Anor v The Commissioners For HMRC

This is an appeal against three decisions issued by HM Revenue & Customs (HMRC):

In this judgment A&M and ZC together will be referred to as the Appellants.

A&M has appealed the Assessments and Penalties. In summary the grounds of appeal are:

On the basis that it is contended that the errors giving rise to the Penalties were not deliberate ZC contends that the conditions for paragraph 19 Sch 24 FA07 are not met, and the PLN should be set aside.

In correspondence prior to the lodging of the appeals the Appellants raised several complaints regarding HMRC’s conduct in the investigation and concerning what could be legitimately expected in terms of the remediation of errors in returns considering previous HMRC visits. The parties were agreed that we have no jurisdiction to consider the terms of these complaints or questions of legitimate expectation save to the extent that the conduct was sufficiently egregious that it provided evidence that HMRC had failed to act to their best judgment (as to the relevant test see paragraphs 11 to 13 below).

For the reasons set out in detail below we have determined that the appeals should be dismissed. We have concluded on the evidence before us that:

Whilst we have the power pursuant to section 84(5) VATA to increase assessments made which, in our view, understate the VAT liability of A&M HMRC did not with any vigour, invite us to exercise this power. We have therefore determined to limit our consideration of the amount due from A&M to the amounts assessed by HMRC.

There was little or no disagreement between the parties as to the legal principles to be applied when determining these appeals and it is appropriate to set them out before considering the evidence.

Section 73 VATA provides that where it appears to HMRC that a taxpayer has rendered returns which are incomplete or incorrect they may assess the amount of VAT due from him to the best of their judgment.

The exercise of best judgment was described by Woolf J in Van Boeckel v CEC [1981] STC 290 as:

“The very use of the word ‘judgement’ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgement on the material which is before them.

Clearly, they must perform that function honestly and bona fide. It would be a misuse of that power if the commissioners were to decide on a figure that they knew was, or thought was, in excess of the amount which could possibly be payable, and then leave it to the taxpayer to seek, on appeal, to reduce that assessment.

Secondly there must be some material before the commissioners on which they can base their judgement. If there is no material at all it would be impossible to form a judgement as to what tax is due.

Thirdly it should be recognised, particularly bearing in mind the primary obligation, of the taxpayer to make the return himself, that the commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgement, is due. In the very nature of things frequently the relevant information will be readily available to the taxpayer, but it will be very difficult for the commissioners to obtain that information without carrying out exhaustive investigations. In my view, the use of the words ‘best of their judgement’ does not envisage the burden being placed upon the commissioners of carrying out exhaustive investigations.

What the words ‘best of their judgement’ envisage, in my view, is that the commissioners will fairly consider all material before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act, then they are not required to carry out investigations which may or may not result in further material being placed before them.”

That statement has been restated and narrated many times. A taxpayer who seeks to bring a challenge to the exercise of best judgment faces a high bar to jump. In Rahman t/a Khayam Restaurant v CEC [1998] STC 826, Carnwath J confirmed that an assessment will have been made in exercise of best judgment unless it “has been reached ‘dishonestly or vindictively or capriciously’; or is a ‘spurious estimate or guess in which all elements of judgment are missing’; or ‘is wholly unreasonable’.”

In Pegasus Birds Ltd v CEC [2004] EWCA Civ 1015 the Court of Appeal offered us the following guidance:

“38(i) The Tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer. in all but very exceptional cases, that should be the focus of the hearing, and the Tribunal should not allow it to be diverted into an attack on the Commissioners’ exercise of judgement at the time of the assessment.”

The parties were agreed that no question of public law jurisdiction arose in this appeal by reference to HMRC’s alleged conduct in relation to previous visits or through the investigation. If we were satisfied that the process giving rise to the Assessments does not meet the standard expected to meet the Van Boeckel and associated case law test the appeal will succeed in full. If not, we are to determine the correct amount of tax due on the evidence.

The second-hand margin scheme is provided for under Articles 311 - 315 Principal VAT Directive (PVD) which, consistently with Recital 51 PVD, provides a scheme for the taxation of goods which re-enter a commercial transaction chain and which have already been subject to tax on their full price at the point at which they enter into consumption. So far as relevant to these proceedings, it provides for tax to be charged on the margin achieved by a taxable business where that business has purchased goods from a non-taxable person. The provisions of PVD were bought into domestic law by section 50A VATA, Value Added Tax (Special Provisions) Order 1995 and certain paragraphs of Notice 718 which have force of law. Use of the margin scheme is optional and subject to strict and precise compliance obligations. Where those obligations are not met VAT is required to be accounted for on the full selling price paid to the taxable reseller of the goods.

The detailed compliance rules reflecting the primary/secondary law and/or having force of law set out in Notice 718 relevantly require:

Section 97 and Sch 24 FA 07 provide for penalties for errors made by taxpayers in rendering, inter alia, VAT returns. To be liable to a penalty the taxpayer must have rendered an inaccurate return and the inaccuracy must have arisen carelessly or deliberately.

As confirmed in HMRC v Tooth [2021] UKSC 17 at paragraph [43] deliberate behaviour will usually require that the taxpayer know that the return contains an inaccuracy and that the taxpayer must have intended to mislead HMRC by that inaccuracy. However, the Upper Tribunal in CPR Commercials Ltd v HMRC [2023] UKUT 61 has extended the meaning of a deliberate act to include “blind eye knowledge” of the inaccuracy. In that latter case the Upper Tribunal held:

“23.

In our view, where a taxpayer suspects that a document contained an inaccuracy but deliberately and without good reason chooses not to confirm the true position before submitting the document to HMRC then the inaccuracy is deliberate on the part of the taxpayer. If it were otherwise then a person who believed there was a high probability that their return contained errors but chose not to investigate would never be subject to a deliberate penalty. However, the suspicion must be more than merely fanciful. Lord Scott of Foscote urged caution in this context in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2001] UKHL 1 at [116]:

“In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. But a warning should be sounded. Suspicion is a word that can be used to describe a state-of-mind that may, at one extreme, be no more than a vague feeling of unease and, at the other extreme, reflect a firm belief in the existence of the relevant facts. In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity.”

24.

Although the concepts of blind-eye knowledge and recklessness as to the truth or falsity of a statement may intersect, they are clearly not identical. As we have already stated, HMRC did not ask us to consider whether an inaccuracy is deliberate where a taxpayer is reckless as to whether the document contains any errors. In the absence of any argument on the point from HMRC, and because it is not necessary for the purposes of this decision, we do not consider whether recklessness is a sufficient basis for determining that an inaccuracy is deliberate further in this decision, and make no comment either way.”

Where a penalty arises for deliberate conduct which was not concealed but disclosure of the inaccuracy was prompted by HMRC the penalty range is 35-70% of the potential lost revenue (i.e. the assessable/assessed tax). HMRC, or the Tribunal on appeal, can mitigate from the highest end of the range to the lowest end where the taxpayer co-operates with HMRC with reductions given for telling, helping and giving.

Sch 24 FA 07 (paragraph 19) provides that an officer of the company may be notified that they are personally liable for the company penalty where the penalty is a deliberate penalty and the deliberate inaccuracy is attributable to the officer of the company, HMRC may only recover the penalty from either the company or the officer to whom the PLN has been issued.

We were referred to the body of case law pursuant to which it may be determined that a party in a supply chain may become liable for VAT fraudulently lost in the supply chain above or below the assessed party. In essence liability to tax will fall on a non-fraudulent party where fraudulent loss has been established and the assessed party knew or should have known of the fraud. Traders acting in good faith, taking every step which could be reasonably expected to be taken to satisfy themselves that the transaction to which they are party does not contribute to the relevant fraud, will not be liable to assessment.

Assessments are usually raised under these principles in supply chain fraud by way of refusal of input tax recovery on purchases of goods or services in respect of which there has been a demonstrated tax loss somewhere in the supply chain. However, in accordance with the judgment of the Court of Justice of the European Union in UAB Litdana v Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos (C-624/15) at paragraph [48] the principles are similarly appropriate where tax is lost through the fraudulent use of the margin scheme.

Of importance in all these cases is that the primary responsibility for preventing fraud rests with the tax authorities. Whilst taxpayers are required to do what might be reasonably expected to prevent themselves being caught up in a fraudulent supply chain the tax authorities cannot expect taxpayers to do more than is reasonable in the circumstances and otherwise to act in good faith. Taxpayers who have taken the necessary precautionary steps are entitled to rely on documentation received at face value.

We do not set out further detail of the approach we would have to follow and the matters on which we would need to be satisfied as provided for in this line of cases because, in the end, as indicated above, the principles were not relevant to our determination of these appeals.

The documentary evidence made available to us was extensive. We had three bundles of documents exceeding 15,000 pages together with 8 very large spreadsheets.

Witness statements were provided by ZC, Mr Aaron Hunter-Cooke (AHC) (A&M’s accountant) Mrs Elizabeth Penny (EP) (A&M’s bookkeeper at the relevant time) Mr Andrew Clinton Payne (AP) (expert appointed by the Appellants) and Mr Riyaz Patel (RP) (HMRC’s investigating and assessing officer). All witnesses gave sworn oral testimony and were subject to cross examination and re-examination.

Given the volume of evidence made available to us this judgment is, necessarily, only a summary. We have carefully considered all documents from the bundle to which we were specifically referred by the parties or to which we have referred to below. In doing so we are satisfied that we have acted in accordance with the overriding objective and cognisant of the guidance provided by the Upper Tribunal in Adelekun v HMRC [2020] UKUT 244 (TCC) in which it was stated:

We have not excluded from our consideration any document to which we were referred unless so indicated in our consideration of the evidence. However, we do not refer to every document, rather we refer to those on which we rely to have formed our view and, as necessary, deal with all conflicts of evidence which we needed to resolve in order to reach our conclusion.

In the sections concerning the evidence of the individual witnesses we set out the salient points of evidence, as appropriate by reference to and with relevant quotations from exhibited documents. As the hearing before us lasted 4.5 days our recitation of the oral evidence is also a summary.

As indicated above we have not found it necessary to consider, or conclude, whether within the supply chains in which A&M participated there is an established fraudulent tax loss or that A&M knew or should have known of any loss were that loss to have arisen fraudulently. Had we considered it necessary to do so the burden would have been on HMRC to establish the relevant facts justifying such a conclusion.

However, HMRC bore the burden of establishing that the amounts of tax determined to be payable were not correctly declared by A&M in consequence of the deliberate conduct of ZC.

It was for A&M to satisfy us, on the balance of probabilities, that the Assessments were either not made to HMRC’s best judgment or, in the alternative, that they were excessive and that we should have reduced the quantum.

The documentary evidence provided to us, and on which our decision depends, broadly fell into the following categories:

It is appropriate to start with a summary of RP’s evidence as it provides a narrative to the investigation and an explanation of the Assessments and Penalties. Included within this summary is the evidence relating to RP and HMRC’s concerns that A&M was a participant that knew or should have known that there was a fraudulent tax loss in certain of the supply chains. However, and as set out below because we have upheld the assessments for other reasons our findings of fact in this regard are limited.

In the main we found RP to be a credible witness. There were, however, matters and issues on which RP was reluctant to accept obvious propositions put to him by Mr Kazakos. We were therefore unable to accept all RP’s evidence; where we do not accept his evidence, we say so in our findings of fact.

RP is a Higher Officer and has been employed by HMRC since 2005. Since 2012 he has been part of the Specialist Investigations Office renamed Fraud Investigations Service. His focus is on supply chain fraud and the team to which he is allocated is the missing trader intra-community fraud (MTIC) team.

RP narrates the registration history and business activities of A&M by refence to the relevant registration documents: A&M was first registered for VAT with effect from 1 September 2007. A&M’s predominant business activity is of a watch dealer with almost de minimis involvement in the retail sale of other jewellery and watch/jewellery repairs. It operates from retail premises open by appointment only and through a website iconicwatches.co.uk. The business has storage facilities separate to the retail premises and it is those storage facilities which are its registered place of business. The business is registered for PAYE with 6 employees. The business was previously carried on by the Coles family but not through a limited company. None of this evidence was controversial.

HMRC’s contact with A&M is set out in RP’s statement and the associated visit reports are annexed to the statement. The history of the relationship was considered important by RP in his assessment of A&M’s conduct when raising the Penalties and issuing the PLN. As regards the visits made to the Appellant prior to RP’s involvement we were provided with the following evidence:

The present investigation began following receipt of a SCAC request from the Italian tax authorities concerning supplies received by A&M from Piccinini Srl (Piccinini). The initial contact was by telephone on 1 September 2017.

We were provided with a copy of the SCAC request and telephone attendance note which RP also summarised in his statement. The SCAC request identified that watches had been sent by Piccinini directly to A&M but that the invoices for supply of the relevant watches had been issued to other companies including Credit Foncier, UAB Credit Fiduclaire Europe, Timepiece Group, Montecarlo Trade et Finance and others. The request identified that the watches sold by Piccinini were new and that A&M sold them on their website. The Italian authorities sought answers to the following questions: “1.Why [A&M] received the watches? 2. To whom they were resold?” and indicated that they suspected A&M to be involved in “tax fraud (including MTIC VAT Fraud)”.

The attendance note of the call records that ZC confirmed that he had dealt with Piccinini both directly and via intermediaries who may have purchased large quantities of stock from Piccinini. That Piccinini continued to hold the stock purchased by the intermediaries such that when A&M purchased via the intermediary supplier the watches would be delivered directly from Piccinini but were invoiced by the intermediary who A&M paid for the goods. ZC identified the intermediaries with whom he dealt as Credit Foncier and Timepiece Group. The note records that ZC said that Credit Foncier “used to be called UAB Credit”. Mr Kazakos cross examined on the note; such cross examination was limited to confirming that ZC had “volunteered” the information regarding Credit Foncier and UAB Credit. RP confirmed that appeared to be the case as identified in the note.

After the call there was a visit on 13 September 2017. Again we were provided with the meeting note, a schedule of transactions with intermediaries who had supplied watches then delivered by Piccinini and RP’s summary of the meeting. The note records that ZC, and his mother Gayle Coles (GC) were present. They confirmed that they purchased watches from Piccinini but not directly. They explained that the watches purchased from Piccinini were purchased via an intermediary introduced through an individual named Mariana. The note records that HMRC were told that discounts could be obtained through Mariana. The note also records that GC stated that she visited all suppliers to do their own vetting and perform due diligence checks and that Mariana also did her own checks; it was stated that detectives were employed if necessary. A&M are recorded as having confirmed that UAB C and Credit Foncier together with a company Cortlin were Mariana companies. As with the previous telephone note Mr Kazakos cross examined RP to elicit confirmation that ZC had volunteered the relationship with Cortlin. We do not have a record of any question in cross examination about the volunteering of Mariana’s name. We also note that in his witness statement ZC makes no mention of employing detectives in order to provide due diligence on suppliers or that it was his mother who carried out any checks. Neither point was put to ZC in cross examination.

We understand that A&M were asked to provide details of transactions with the intermediaries who had supplied watches from Piccinini stock. Following this meeting EP provided a spreadsheet and some apparently associated purchase and resale documentation for watches that had been delivered by Piccinini. The spreadsheet refers to the following intermediaries: Sarle France Montres, First Electronic Commerce, Timepiece Group, Montecarlo Trade et Finance, Delta West Finance. The spreadsheet identified that there had been three watches also supplied directly by Piccinini.

The emails sent with the spreadsheet purport to provide the purchase and sales documentation in respect of the watches identified on the spreadsheet. However, we note that none of the purchase invoices appear to be from the intermediaries identified in the spreadsheet provided. We list below a summary of the purchase invoices sent to accompany the spreadsheet:

The carbon copy sales invoices describe all watches included in the schedule said to have been delivered by Piccinini as “unworn” and they have been sold under the margin scheme.

Shortly thereafter EP provided documentation demonstrating payment of the various purchase invoices. The documents demonstrate that payments were made on A&M’s behalf by Afex in Euros and Afex was paid through A&M’s bank account with Barclays. The documents enable the payments to be traced.

A&M also provided sales analysis sheets for August in each year 2013 – 2015. These illustrate that in August 2013 of a total value of transactions of £806,025.91, £795,495.43 (i.e. 98.69% were under the second-hand margin scheme) and a further 4.94% under the global margin scheme. The comparative figures are 92.34% second hand margin scheme in August 2014 and 96.27% for 2015 (though we note that the dates listed in each of the spreadsheets all say 2013).

We understand that following the provision of this information HMRC responded to the SCAC request, but we do not know on what date, and we were appropriately not provided with a copy of the response.

Before proceeding to consider the detail of the documents introduced and explained by RP, we address the general challenge that ran throughout cross examination as to RP’s mindset when undertaking visits and when raising the Assessments.

Mr Kazakos cross examined RP extensively as to RP’s mindset and whether the monitoring visits were MTIC focussed with repeated lines of questioning which asserted that RP’s judgment was clouded by a view that A&M and ZC were associated with fraudulent activities rather than being open minded. Mr Kazakos put to RP that there must have been an MTIC focus because: 1) the decision to monitor A&M had been taken following the Italian SCAC request; 2) the team to which RP was attached was an MTIC team; 3) the opening letter informed A&M of HMRC’s MTIC concerns; 4) each of the monitoring visits was recorded on a visit template headed “post registration – summary of MTIC assurance activity”; 5) VAT Notice 726 was issued and 6) many of the questions put to A&M in the various monitoring meetings appeared to indicate that HMRC were investigating A&M as potential MTIC fraudsters.

RP resisted all such propositions. RP consistently maintained that he was open minded and that the assessments were raised on the basis of all of the evidence available to HMRC at the time the Assessments were raised, and that further evidence had been considered as presented by A&M. RP also readily accepted that it was for HMRC to establish, as necessary, whether there was fraudulent activity, and it was not for a taxpayer to prove that there was no fraud in the chain.

Mr Kazakos also cross-examined RP about a visit to the shop by RP prior to the investigation. We understand from the cross examination and responses that the visit was whilst RP was a child and was with a family member who wanted to purchase a watch. Mr Kazakos put to RP that he had said, at some point (we are not clear whether it was alleged to have been when he visited as an adolescent (aged 12 – 15) or in the monitoring visits), that the watches could be sourced more cheaply in the middle east. RP confirmed that he had visited the shop but could recollect little of it; he did not accept that he had said that the stock could have been purchased more cheaply.

Following the September 2017 meeting A&M was put on trader monitoring which resulted in monthly visits from HMRC. RP’s involvement commenced at this point. A letter dated 15 December 2017 was sent. The letter appeared to be a standard opening letter and referenced the risk of MTIC fraud. RP stated that despite the terms of the letter the monitoring was part of a supply chain concern generally and not MTIC specific.

We were provided with and have reviewed the meeting notes of each of the trader monitoring meetings. RP confirmed that the meeting notes had not been shared with A&M prior to the present litigation. Mr Kazakos cross examined RP extensively on these meeting notes. We make the following observations as to their contents and by reference to the answers given in cross examination (we also, where relevant refer to cross examination of ZC on these meeting notes).

A&M were informed that HMRC proposed to trace deals from start to finish.

ZC confirmed that he was a buyer for the business and completed the stock book, EP was the bookkeeper and AHC the accountant who prepared the VAT returns.

EP provided a supplier spreadsheet and ZC explained that he met suppliers through attendance at exhibitions and networking but had been in the industry a long time. It was explained that he would seek to source specific watches requested by buyers who often purchase them for investment purposes.

The note records that the stock mix at that time was 50:50 new/unworn:used and that there was a discussion regarding the meaning of unworn and new which reflects the correct VAT position i.e. that an unworn watch may be the subject of a margin scheme transaction if it has previously gone into consumption. What represents a new verses an unworn watch was also the subject of cross examination. RP confirmed that a watch which was unworn and held as an investment, but which had entered the chain of consumption, was eligible to be traded under the margin scheme. However, he also confirmed that the age of a watch would not necessarily determine whether it had entered the chain of consumption.

However, the note also records that ZC had stated that if the watch had been purchased from a dealer abroad it was treated as used. That section of the note was not put to ZC and RP was not challenged on it.

ZC is said to have confirmed that he understood the margin scheme and terms of Notice 718 having discussed it with his accountant over 2-3 days. Again this section was not the subject of cross examination and, unlike other matters in the visit reports, ZC did not claim that he had been mis-recorded. We record below the terms of ZCs response to questions put to him regarding his understanding of Notice 718.

There is a record of a discussion concerning verification of suppliers which indicates that ZC would only deal with long established traders and would not deal with traders of which he was not sure. The note then records that “he always checked VIES”.

The relationship with Mariana is recorded to have been explained by ZC. It is noted that Mariana is used to acquire specific stock for customer orders and not for stock generally. The benefits of using her are described as her access to more rural small businesses and because she obtains good discounts. The note records that ZC had spoken to her only once. In cross examination ZC denied that this is what he told HMRC (see paragraphs 123 to 127 below for a summary of his position on communications with Mariana).

At the meeting HMRC are recorded as raising their concerns about suppliers established in one country but with bank accounts in another. The meeting note records that RP described such a situation as “iffy”. When cross examined on whether he had ever described the arrangements as iffy RP did not consider that he had but accepted that the note recorded it.

The concluding risk assessment of the visit, as further explained by RP, confirmed that no MTIC awareness letter was required to be issued because one had previously been issued and that there was no basis, at that time, to set a repayment inhibit, block the VAT number or deregister A&M.

Records for VAT period 11/17 were requested.

ZC, GC, EP and AHC were in attendance on behalf of A&M. A memory stick onto which A&Ms records for period 11/17 were saved was provided to HMRC.

The visit report records that EP informed HMRC that there was no set way for sales to be described, she explained that the purchase invoice usually showed a product code and serial number. EP explained that where there was no sum of VAT charged by the invoice, then the margin scheme was used.

RP sought to understand whether due diligence procedures had been improved since the last monitoring visit. Rather than indicate what enhanced due diligence would be undertaken ZC merely indicated that there had been no new suppliers in the month. ZC confirmed that he also visited all his suppliers and would not continue to deal with them if he had concerns. The note records that ZC said that he undertook companies house searches and background checks on his suppliers and purchasers but retained no records to support that assertion.

At the meeting HMRC established that, at least, Wonderful Invest OU, Maiko Trade OU, Veranika Kavaliova, Luxury International Fze Ltd, Anisenka Anastasiya and Ibercaja International Trade Ltd were companies acting through Mariana. We note that some of these companies were not recognised by ZC when cross examined.

The records provided at this meeting were included in the hearing bundle. Examination of the carbon copy sales invoices identified that each invoice was handwritten. The invoices identified the name of the purchaser, full details of the watch purchased including its serial number. The watches were almost invariably described as “unworn”. The price was entered as “total second hand” and no VAT was shown. In the main, each sales invoice was also accompanied by a post-it note in which was written the serial number of the watch and a brief description. The purchase price of the watch was not recorded on the post-it. However, also shown on most of them were four other items of information three of which were later confirmed both to RP and to us as:

The visit report records that RP asked A&M whether there had been any changes to the business model or practices. The meaning of the question was challenged by GC and RP confirmed that it related to the period since the previous visit and concerned due diligence practices. In light of the clarification, it was confirmed that no changes had been made. Mr Kazakos sought to understand why this question had been asked. RP explained it was a routine question.

Payment arrangements are shown as having been discussed. RP questioned why some banking records showed bulk payments without reference to particular invoices. ZC explained that multiple invoices from one supplier might be settled in one payment without that being recorded on the banking record but that it was then recorded in the A&Ms books.

The markup of the business and the basis on which prices were determined was recorded as having been discussed. Mr Kazakos put to RP that the questions were asked in order to establish whether the markup and/or selling prices were pre-ordained as would be expected in an MTIC deal chain. The inference derived from what was a reasonably extensive line of questioning was that despite there being no evidence of MTIC (in the sense that A&M traded in physical goods which were factually received and supplied on to identified consumers) at the previous two monitoring visits RP continued to pursue a “mission” to establish that A&M participated in deal chains resulting in a loss of VAT with a clouded mindset. RP was clear that they were questions to better understand the business.

At this visit HMRC asked for contact details for Mariana. These were subsequently provided by email. It was established in cross examination that HMRC had not made any attempt to contact Mariana.

A particularly contentious part of the note records that RP “asked what percentage of watches were unworn new and what were pre-owned worn”. The answer is recorded as “ZC said and discussions with [EP] approx. 80% new and 20% used.” Both RP and ZC were cross examined on this aspect of the note. RP did not recollect that part of the conversation ZC denied that he had said that 80% were new. EP was not asked.

A&M were informed that HMRC intended to issue SCAC requests of other tax authorities.

As with the other meeting notes the stencil template used is for “Post registration – summary of MTIC activity”. As regards this visit report Mr Kazakos sought to establish that its use indicated that RP continued to pursue a line of enquiry to confirm RP’s view that A&M were engaged in MTIC fraud. RP explained that the template was standard for post registration VAT visits.

The visit report records that questions like those asked on previous occasions concerning changes to the business structure and operation were asked together with questions concerning markup and pricing. The relevance of these questions at this meeting were not the subject of specific cross examination in the way that they were in respect of the April visit, but we see nothing in that.

There was discussion about the business generally and changes to trade over time. ZC indicated that Brexit, a general downturn in the market for luxury goods and the effect of exchange rate movements had caused a £5m reduction in turnover as compared to 2016.

A&M’s dealing with Maiko Trade OU (Maiko) are shown as having been discussed. RP is recorded as having indicated that there was no valid VAT number on the invoice such that the watches to which it related should not have been sold using the margin scheme. ZC and EP are recorded as having agreed that there was no VAT number, and promised to make enquiries of Mariana. Mr Kazakos was interested to understand whether correspondence from the Estonian VAT authorities dated 7 May 2018 (see discussion below in respect of communications with other tax authorities) had prompted RP to investigate this invoice. RP could not recall whether he had seen the Estonian correspondence prior to the meeting (even though it predated the meeting) but indicated that whether, or not, there was any concern with the deal chain leading to the issue of the Maiko invoices A&M should not have used the margin scheme because there was no evidence that Maiko were a VAT registered business. RP again resisted Mr Kazakos’s assertion that the line of questions concerning Maiko was further evidence of a MTIC mindset.

Mr Kazakos sought to establish with RP whether A&M had been advised by HMRC that the margin scheme could have been used for Maiko purchases if A&M had issued their own self-billing invoices. RP confirmed that where the purchase was made from an unregistered trader A&M were entitled to issue their own invoice to substantiate accounting for VAT under the margin scheme but that he had not offered the option to A&M. Two explanations were given: 1) the goods might have been new and 2) the deficiencies in the Maiko invoice. Mr Kazakos correctly pointed out that the first reason could not be sustained by refence to the terms of the invoice as supported by the information from the Estonian authorities (see paragraph 94(1) below) and that the second reason could not preclude the issue of an A&M purchase invoice because it was the very reason for it. In response to these points RP refused to accept that he did not offer the facility to issue a purchase invoice because he believed A&M to be engaged in fraudulent activities but did not provide any further explanation as to why he did not advise that purchase invoices could be issued. In re-examination RP articulated that the principal reason that A&M were not invited to issue purchase invoices was the sheer number that would have been required given the volume of trade with intermediaries who were not VAT registered.

The meeting note records the examination of further invoices from other suppliers either showing no VAT number or demonstrating that the supplies were acquisitions. These aspects of the note were not subject to cross examination despite having also been summarised in RP’s witness statement. Nor was the section in which RP recorded that he had serious concerns regarding A&M’s use of the margin scheme.

It appears that warranties were first raised at this meeting; RP identifying that it appeared that warranties for watches sold as second hand appeared to start co-terminously with, or very shortly before, and in some instances after, the onward sale of the watch by A&M. There is no record of any explanation provided by ZC.

RP requested that a newly received parcel containing a watch be opened by ZC. The watch in question included a warranty from 2017 showing an individual’s name. By cross examination Mr Kazakos sought to ascertain whether RP had requested that the parcel be opened in an attempt to prove that ZC was in fact selling new watches. RP’s response was that the request was part of the visit and concerned the assets of the business.

The meeting note also records that in response to indications that more due diligence in relation to both the goods and suppliers was required ZC had indicated that if that was the way it had to be it would be the end of the business and that GC could retire. Again, there was no cross examination or denial from ZC regarding this part of the note.

This meeting is reported in the same way as the previous monitoring meetings but was promoted by a complaint having been made by A&M. Rather than being at A&M’s premises it was held at HMRC offices.

We observe that in response to a question concerning the preparation of sales invoices ZC was noted as saying that he and GC prepared them. No mention is noted of other sales staff though it is apparent from the considerable number of sales invoices we saw comparatively few were prepared by ZC or GC.

In response to what was forming a common opening series of questions about the business ZC confirmed that there had been no changes to suppliers. ZC confirmed that due diligence processes would be followed in respect of any new supplier. However, the note identifies that watches had recently been purchased from Oriamo Ventures Ltd (Oriamo)for what was apparently the first time. There was apparently no due diligence by reference to which the integrity of the transaction for VAT purposes could be ascertained despite the absence of a VAT number on the invoice. Further issues with any identified due diligence are noted with transactions with PLD Managed Services Limited (PLD), another apparently new supplier of watches (again without a VAT number on the invoice), the due diligence for which appeared to be limited to ZC knowing the director historically.

Concerns were raised again concerning Maiko’s changed bank accounts. ZC is recorded as having no concerns on the basis that bank accounts may be moved to take advantage of free banking but also that he was not particularly aware of the issue because he paid through Afex.

In one contentious part of the note it is recorded that GC would have been happy to pay for a handbag purchased from Debenhams where payment was made to a country other than where the shop was located, and the invoice came from a third. We acknowledge that the example is an unnecessary and unrealistic one the response cannot therefore fairly represent any basis for a decision to assess. We deal below with our factual findings on the asserted reliance on this response.

The report also notes that various invoices were put to ZC and GC. In particular an invoice from deBling, a UK supplier which had added VAT to the invoice at 20%. The VAT had been reclaimed by A&M, but the onward supply had been taxed under the margin scheme. ZC accepted that had been in error.

We next consider the various correspondence with European VAT authorities and RP’s evidence in respect of them. Before doing so we set out our understanding of the SCAC system in order to set the context and relevance of the evidence. We understand that pursuant to Articles 7, 15, 16 and 25 – 7 Council Regulation 904/10 concerning administrative cooperation and combating fraud in the field of value added tax the various tax authorities within the EU (at the time the including the UK which remained part of the EU) HMRC could ask or be asked to provide information regarding traders and transactions in their own states. We were provided with SCAC reports both received and issued by HMRC. In total we were provided with seventeen SCAC reports. Mr Kazakos cross examined in respect of nine of them and we set out in more detail the relevant contents of those reports and the matters on which RP was cross examined.

The remaining reports were summarised in RP’s statement. By way of brief summary these reports demonstrate that:

Where there was cross examination on the reports, we deal with each in more detail and in the order in which Mr Kazakos cross examined on them rather than in chronological order. We note that RP was not named as the requestor in any of the SCACs issued by HMRC.

In addition to the SCAC requests HMRC undertook additional verification in respect of other suppliers:

Not all suppliers were verified individually. However, RP also considered VIES information in respect of all suppliers and identified that in excess of £20.5m of intracommunity supplies had been declared as made to A&M in the period 1 April 2014 to 30 September 2018 but had not been correctly accounted for by A&M. Mr Kazakos sought to establish through cross examination that the value of VIES data was dependent on the accuracy of the declarations made by the suppliers concerned. Whilst RP accepted the theoretical premise of the question, he maintained that VIES was a reliable source of data.

At the trader monitoring visits in March (for 11/17), April (for 02/18) and September (for 05/18) HMRC uplifted the VAT records of A&M. These records were analysed before being returned at the next visit.

Those for period 11/17 revealed that all sales in that period had been accounted for under the margin scheme. There were no acquisitions declared. This was so despite examination of the underlying purchase invoices showing that a significant proportion of supplies had been zero rated as intercommunity supplies.

Consideration of the sales invoices and the accompanying post-it notes caused RP to be concerned that the description of a watch as “unworn” did not support a conclusion that the watch in question was preowned. RP considered the warranty information provided on the post-it notes and identified that the warranty for many watches either had not previously been activated or was activated during the period in which A&M owned the goods. RP also identified that there had been several imports on which VAT had been claimed but for which VAT had been declared under the margin scheme on the subsequent sale of the watch.

In cross examination RP was asked whether he had undertaken any exercise to establish the age of the watches and/or the position on the warranties. He was taken to a specific set of documents concerning the purchase and sale of a specific Rolex watch with a serial prefix C. Mr Kazakos put to RP that the prefix C indicated that the watch was manufactured in 1992. No evidence was produced to confirm the information put in that question. RP was asked if he had undertaken any checks of serial numbers to confirm the age of watches sold by A&M and he confirmed that he had not. Similarly, he confirmed that he had not investigated how and when warranties were activated. RP did, however, indicate that he understood that A&M may have issued top up warranties but was not able to provide any further detail in this regard.

RP’s analysis of the information shown on the sales invoices identified that 10.58% by value of total sales in the 11/17 period were shown as preowned as distinct from unworn.

A similar exercise was undertaken for each of the VAT periods 02/18 and 05/18. The same pattern was identified with no VAT accounted for on acquisitions, the second-hand margin scheme used for the overwhelming volume of sales (with limited use of the global margin scheme). The proportion of sales by value shown as “preowned” were 9.16% for 02/18 and 10.81% for 05/18.

By reference to the investigations undertaken RP established to his satisfaction the following regarding each of the suppliers to A&M in the periods 11/17 – 05/18:

RP compared the annual accounts to the declared turnover for A&M and identified the following discrepancies:

On the evidence gathered through the various visits, supplier verifications undertaken and analysis of prime records, it appeared to RP that there had been significant failures in VAT accounting:

Considering these specific concerns and more generally RP determined to assess VAT for the period from 08/14 to 08/18. The assessment was raised on 19 November 2018 and as such the earliest period assessable under normal time limits was 08/14. In cross examination RP stated that he had assessed for the whole period as there was nothing to indicate that the nature and pattern of trade and VAT accounting had changed over that period.

The Assessments were calculated allowing 11% of sales by value to be taxed under the second-hand margin scheme, 11% being the highest percentage identified in the three analysed periods. That percentage was applied to the annual turnover as declared in the annual accounts. The total assessment for each year was allocated to quarters on a straight-line basis.

Mr Kazakos sought to establish by way of cross examination why RP had limited his analysis to the final three quarters of the full period covered by the Assessments particularly as the annual accounts showed that there had been some considerable variation in turnover across the four years of assessment, with the final year also being significantly lower than in other years. RP responded that he considered that there had been a consistency in the nature of the trade despite the fluctuation in annual turnover and that over the period there was nothing to demonstrate any relevant or significant change, certainly no change had been raised by ZC or GC either in the monitoring visits. We note that although RP limited his answers to the monitoring visits a review of the 2011 and 2014 visit report outline the trade carried on and provide a sense of the business over the period from 2011 to 2018 when taken with the more detailed monitoring visit reports.

RP was also cross examined on the reasonableness of his failure to have offered a facility to A&M to issue their own purchase invoices for all the purchases made from traders who were unregistered for VAT. RP maintained that given the volume of transactions for which such invoices would have been required it was not, in his view, necessary to make the offer. ZC had said in visits he was familiar with the terms of Notice 718 which provided that a trader must issue purchase invoices in those circumstances. We also note that A&M did make purchases from individuals and, in those situations, made out purchase invoices themselves. That occurred in circa 9.5-11% of situations by value in the three periods examined and so appears to have been a procedure familiar to A&M.

Following the issue of the Assessments A&M submitted a detailed report challenging the basis of them. The main arguments presented in that report addressed A&M’s concern in relation to HMRC’s conduct in the investigation and a claim that, by refence to the conclusion of previous visits, A&M had a legitimate expectation limiting any recovery action HMRC were entitled to take. As indicated, we have no jurisdiction to consider these allegations and they do not form part of this appeal.

The report provided analysis of the VAT quarter 05/15 by reference to which it was contended that in that quarter 48% of sales by value had legitimately been treated as margin scheme supplies. A&M accepted that the margin scheme had been incorrectly used for all purchases treated by the supplier as an intracommunity supply and where import VAT had been declared and claimed.

An explanation was provided for the discrepancy between the annual accounts and the VAT turnover figures: incorrect VAT coding had been used within the sage accounting software such that the sales price was taken as the margin and not the actual price agreed with the customer.

Following receipt of the report RP undertook a comprehensive review of the 05/15 VAT records applying the same principles that he applied in respect of periods 11/17 – 05/18. And calculated the correct margin scheme rate became 8.25% (rather than 48%). RP determined to leave the allowable percentage at 11% as originally assessed.

The Assessments were then subject to a formal review. The substance and rationale of them was upheld but a comparatively minor calculation error was identified which led to a reduction in the Assessments as identified in paragraph 1(1) above.

Subsequently, and as part of these proceedings, a further analysis was undertaken on behalf of A&M of the 05/15 period by AP acting as expert appointed on behalf of A&M in these proceedings. Following receipt of AP’s report RP examined every purchase and sales invoice in the period. He was able to trace 660 purchase invoices (58%) and 1061 (92%) of the sales invoices (together with the associated post-it notes) to the stock book for the period and thereby to AP’s report.

He identified that save in one specific but significant regard his analysis coincided with the view formed in AP’s report. The difference concerned the resale of watches purchased from Credit Foncier and A’bance. RP noted that in the stock book all purchases from these companies were shown as having been purchased from “cf”. RP considered that as, in 11/15 no VAT number was quoted on the invoices and/or that the company was not registered for VAT, A&M were not entitled to account for VAT on the relevant resale of watches under the margin scheme. Having carried out this more forensic exercise the percentage of sales correctly taxed under the margin scheme fell to below 5%.

The decision was taken to penalise A&M on the basis that the errors were deliberate and prompted and subsequently to issue a PLN on the basis that such conduct was attributable to ZC. RP explained that the substantive basis of that conclusion was that A&M (and ZC) were aware of the terms of operation of the second-hand margin scheme. RP considered that A&M had wilfully misused the scheme in several regards. He considered that the acceptance that the scheme had been incorrectly used for goods purchased by way of intracommunity supplies on its own demonstrated deliberate behaviour. Particularly so given that in the period prior to 2011 acquisitions had been declared and following the visit in 2014 where the issue had been flagged and in circumstances in which the accounting support provided to A&M had been consistent throughout the period from 2011 – 2018.

Similarly for goods which had been imported though, in RP’s view, perhaps an even clearer example of deliberate misuse of the scheme as A&M was claiming input tax on the imports and then including them in the margin scheme.

RP’s statement addressed his concern that A&M through the auspices of ZC wilfully failed to carry out due diligence on its suppliers; in particular, those with whom Mariana was associated. We address below ZC’s evidence on what due diligence he undertook. RP’s view of its adequacy and the implications for A&M’s liability to a penalty are now of little relevance. RP was particularly concerned regarding the connection evident between a number of traders with whom A&M dealt through Mariana.

We found much of ZC’s evidence to have been self-serving and, in parts, evasive. Following lines of cross examination through many of his final responses can only be described as incredible given his earlier responses and thereby unbelievable. In the main, we were unable to accept his evidence as reflecting his true knowledge or understanding of the circumstances in which the margin scheme was actually used by A&M. Plainly, however we did not disbelieve everything he said.

At the outset we record, because of its central importance to the case, that ZC was asked whether he had read Notice 718 concerning the operation of the margin scheme. ZC confirmed that he had read it and was aware of its terms. He had been making sales using the margin scheme since 1994/5. He accepted that he was aware that it was an optional scheme and that to make supplies under the margin scheme its terms had to be complied with and, absent compliance, normal VAT accounting rules would apply. He specifically confirmed that he was aware:

ZC confirmed he was the only person who made entries into the stock book. The stock book had various columns including those for date of sale, watch detail including a description model and serial number, selling price, name of purchaser from A&M, name of supplier to A&M, selling price and margin.

ZC’s statement provides an explanation of the Appellants’ relationship with Mariana who he describes as a person well known in the industry. In cross examination ZC stated that he had first become aware of her through James Peter Coop one of the original shareholders in the corporate entity owning and developing the iconicwatches.com website. ZC explained that Mr Coop met with her and established that she assisted other traders in the UK many of whom spoke well of her. That included a business in Bishop Stortford the owner of which was known to ZC who had confirmed that Mariana did what she said she would do. ZC considered that her ability to speak many languages and her network of connections was particularly valuable to A&M. He explained that personal relationships are very important in the watch trade and accessing new relationships through personal contacts was critical.

There is a conflict of evidence regarding his personal contact with Mariana. In his statement it is recorded that: “personally, I did not have any contact with Mariana”. The meeting note referred to in paragraph 62 recorded that he had spoken to her once, but he denied the accuracy of that note and in cross examination he was adamant that he had spoken with her by phone on three occasions. ZC could provide no explanation for these discrepancies.

ZC stated that Mariana operated an “open book” business model. That phrase was not explained in the statement but in re-examination ZC stated that such a business model means that Mariana applied a fixed percentage mark up to the watches supplied through the introductions she made. He accepted that she did not herself buy the watches and supply them to A&M she merely identified sellers able to meet A&M’s requirements for particular watches who then supplied them directly. From this evidence we understand that A&M paid Mariana a fixed commission in addition to the price agreed with the supplier. However, we were provided with no evidence regarding these commission payments.

ZC explained that even in respect of companies with which A&M had direct dealings they would not have cut Mariana out even where she effected a transaction with a supplier A&M dealt with directly as the trade in watches relies on trust and to do so would be a breach of trust with significant reputational issues. We were told that Mariana acted in this capacity between A&M and a group of different companies but in cross examination ZC could not name the companies with whom A&M dealt through her.

The statement confirms that payments were made to the suppliers introduced by Mariana (and others) via Afex and that ZC understood that Afex undertook thorough anti money laundering and other checks on the recipients of funds routed through them. It is at least inferred from the statement that ZC therefore considered he could rely on Afex’s willingness to process payments to these supplies as some verification as to their integrity.

ZC narrates his relationship and dealings with the following suppliers in his statement and as supplemented by oral evidence:

Throughout the statement ZC repeatedly asserted that they did not generally deal in “new” watches and that the business “dealt with a mix of unworn and used” watches only. He denied that he had ever said (as per the visit report for 2 February 2018) that the new:used split of sales was 50:50 or (as per the visit report for 17 April 2018 that the split was 80:20.

When asked how he verified that goods purchased were, as a matter of fact, second hand ZC stated that he essentially relied on the description on the purchase invoices. Where those invoices stated that the goods were preowned, he accepted that to be the case. No further checks were undertaken. However, when the watches were received ZC stated that he examined them, if there was any sign of wear, he would reject them or seek a discount to cover the cost of repairs.

A brief explanation of warranties is given in the statement. ZC explains that warranties are often left blank and that fraudulent warranty cards could easily be purchased. In cross examination ZC was, at best sketchy and at worst evasive, on how A&M dealt with warranties. ZC said that there was no company policy on completion of warranty cards. He provided no adequate explanation at all for the dates entered where those dates were after receipt of the watches by A&M. In response to most of the examples he was presented with where there was a warranty activation during the period it was in A&M’s possession he stated that he had not “witnessed” the date being added to the post-it note and could not comment. He volunteered no evidence regarding top-up warranties and was not cross examined on the availability or procedures concerning top-up warranties. However, he accepted in response to a question put to him by me that for the date to be during the period between purchase and sale it must have been completed by A&M staff.

Ms Vicary systematically took ZC through invoices issued by the majority of suppliers. Where invoices were not in English ZC stated that he had been unable to read them. He confirmed that he had not sought to translate their terms. Where relevant Ms Vicary pointed out that the majority of the EU suppliers issued invoices showing VAT at 0% and referred to Article 138 PVD. Despite these references ZC maintained that he understood and believed at the time he completed the stock book that all the invoices received supported entitlement to use the margin scheme. He indicated that he expected AHC to have checked the invoices and to have confirmed that he was correctly maintaining the stock book.

With regard to invoices from suppliers based outside the EU, ZC claimed that he was unaware that he could not use the margin scheme for imported goods; this was so despite having confirmed that he had previously read and understood the importance of Notice 718 which, at paragraph 8.1 confirmed that the margin scheme was not available for imports. However, he did accept that he was aware that the margin scheme could not be used where input tax had been claimed on the purchase and that import VAT had been claimed as input tax by A&M in connection with imported watches.

ZC’s statement is explicit that “virtually all potential and actual suppliers were visited by a member of the A&M team” and that there were “scores” of suppliers with whom A&M were not prepared to transact because they considered that “ethically” or pragmatically” they were not businesses with which A&M wanted to deal.

Ms Vicary asked ZC what due diligence A&M undertook over the lifecycle of a relationship with suppliers and in respect of frequent bank account changes, common addresses between suppliers etc. ZC’s response was that he either did not notice or if he did, did not question such issues. He posited that companies may have been changing bank accounts to take advantage of free banking offered for an initial period.

ZC stated in cross examination that he did not perform VIES checks and relied on AHC who always did them. ZC claimed that AHC had told him as much. He indicated that had AHC informed him that any supplier had not been VAT registered he would only continue to trade with the business if he knew the supplier personally.

In his statement and when put to him in cross examination ZC denied that A&M had deliberately rendered inaccurate VAT returns or abused the margin scheme to gain a commercial advantage. He objected to any assertion that A&M had not taken instruction or guidance from HMRC at previous visits to adapt to become compliant. In his view, at the visit in 2014, HMRC had confirmed that the business was compliant. However, under cross examination he accepted that HMRC will rely on VAT returns rendered and that it is important to ensure that returns are accurate.

Ms Vicary explored with ZC how the business was operated on a day-to-day basis. ZC explained that he was the principal buyer and ran the business. A&M employed six staff who attended to customers whether online or in person at the retail premises by appointment. He confirmed that the staff were all trained on the process of receiving watches including the information to be transcribed onto the post-it notes, storage of the boxes on shelving and securing the watches themselves, completion of sales invoices. However, he also stated that it was not him who trained them.

ZC confirmed that he had retained AHC as the company’s accountant throughout the period covered by the assessment and from 2010. He accepted that he had seen and signed the VAT returns and authorised the annual accounts. However, he stated that he accepted what was shown in them relying on AHC as a professional to prepare them accurately. He confirmed that he did not verify the accuracy of the return and simply authorised the payment the return indicated required to be made to HMRC.

When it was put to him that up to period 05/11 A&M had been accounting for VAT on acquisitions but then stopped, he could provide no explanation and invited Ms Vicary to take the point up with AHC (see below paragraph 150 for AHC’s response when Ms Vicary did so).

We found EP to be a straightforward and honest witness. Having left her employment with A&M in 2018 her recollection was, at times, entirely expectedly, unclear. However, we accept that she answered all questions put to her to the best of her recollection and refused to “fill any gaps” where she was unsure.

EP was A&M’s bookkeeper for approximately 6 years and throughout the period 2014 – 2018. In that capacity she would calculate the margin on sales of watches and maintain the VAT account on the SAGE accounting software from which AHC would prepare the VAT returns. She would also assist in the shop and regularly completed sales invoices; we saw a number of invoices bearing her name. She also, on occasion, would complete the post-it notes. She explained that the post-it note would be written on receipt of the watch and by reference to the purchase invoice and information included in the watch package; the post-its were attached to the watch boxes which were stored on shelving with the watches being put in a safe. The description and serial number together with warranty details, supplier names and date of receipt would be recorded on the post-it. She informed us that she had been trained on how to complete the post-it notes and had been told to record that the watches were “unworn”. My handwritten note of her evidence records that Ms Brown asked her what she meant by “unworn” and her response (as recorded in my note) was “can’t remember always unworn”.

When completing sales invoices EP confirmed that where the post-it indicated that the watch was unworn the sales invoice was prepared on the basis that the sale was under the margin scheme.

EP was asked about warranties. She candidly stated that she knew the basics on how warranties worked but no more; the post-it notes were completed on instruction reflecting the warranty information provided with the watch in question.

Similarly, EP indicated that she did not know much about the details of VAT accounting under the margin scheme and largely followed the process of bookkeeping that she was instructed to follow. She did not know what Article 138 of PVD was. She was referred to an email she had sent to a contact at ARipa in which ARipa was asked to adopt a model of invoicing similar to of a Spanish supplier. EP had no recollection of sending the email but the chain to which it belongs indicated that ZC and AHC had asked her to contact ARipa (then a new supplier) and ask them if they were prepared to follow a particular invoicing rubric. It is not clear from the bundle what invoice was sent to ARipa (the image scan in the body of the email is almost unreadable but the invoice included in the same section of the bundle is demonstrably not the one in the scanned image). However, and in any event, as we note above the ARipa invoices all referenced Article 138 PVD and Article 41 of the Italian legislation; they were not margin scheme invoices.

In her statement she confirmed that she had never performed any due diligence checks on suppliers; in oral evidence she confirmed that ZC undertook all due diligence on suppliers. However, she did communicate by email with Mariana. The communications were professional but friendly. They principally concerned shipping and tracking of watches. There was nothing which caused EP to question Mariana’s integrity.

We found AHC to be a credible and honest witness. He has been A&M’s accountant since 2010. Originally, he serviced them as an employee of Alexander Gow (Blackburn) Ltd but in 2013 when he left that employment and set up his own business A&M followed him. He was responsible for completion of the VAT returns and preparation of the annual accounts throughout the period. The returns and accounts were (and continue) to be prepared from source records provided to him by A&M. He explained that the VAT returns are principally prepared from the information contained in the stock book, purchase invoices (for purchases other than of watches) and records of Afex payments/bank statements.

In his statement AHC states that at the second monitoring visit he “stated that the VEIS [sic] system was used to check suppliers and valid VAT numbers”. It also states: “I was under the impression that when a supplier was verified by A&M the client would check the supplier in several ways. Either Companies House, VEIS [sic] for VAT numbers ([EP] did this or asked me to do it over email), checking with other people in the industry that they have heard or dealt with the suppliers until they were satisfied that they were a genuine business and there wasn’t any cause for concern with the supplier.” The statement also indicates that periodically A&M would seek ad hoc advice from AHC regarding individual supplier invoices. When cross examined by Ms Vicary he confirmed that he had only rarely been asked to undertake a VIES check and not in the period post his departure from Alexander Gow.

The explanation noted above at paragraphs 112 regarding the discrepancy between the annual accounts and turnover as declared on the VAT returns was reiterated by AHC in his statement and was further explained when cross examined.

Under cross examination AHC accepted that when preparing the VAT returns, he worked from the stock book such that if the book noted a transaction as within the margin scheme that was the basis on which it was reported in the VAT return. This was the explanation for why, from 2011, and even post the visit in which the issue was raised in 2014, acquisitions continued to be accounted for as margin scheme supplies. With no indication in the stock book that the purchases were intracommunity supplies there was no reason for AHC to report the purchase as an acquisition or to exclude the onward sale outside the margin scheme.

We note that AHC’s witness statement referred to his view that A&M had never traded as a pawn broker. Ms Vicary did not cross examine on that part of the statement. Mr Kazakos sought to re-examine in relation to it asking AHC to comment on the terms in which it was raised by HMRC during the monitoring visits. Ms Vicary objected as the question did not arise from any matter explored in cross examination. I upheld the objection for the reason expressed by Ms Vicary, also expressing concern that the question put sought to establish RP’s “tone” when the issues was said to have been discussed. I considered the tone of the question to be irrelevant to the issues we needed to determine and was concerned as to the motivation of the question. Mr Kazakos assured me there was not negative motivation to the question which I accepted however, the question was not relevant to an issue we had to decide and did not arise from cross examination.

AP was appointed as an expert on behalf of A&M. His statement was prepared broadly in accordance with the provisions of Part 35 Civil Procedure Rules. We say broadly as there was no disclosure of the instructions sent to AP. Indeed it was not even clear from whom the instructions had been provided but he confirmed that he had never been provided with a copy of counsel’s opinion. AP openly informed us that he had never previously given evidence as an expert witness and that this inexperience may be reflected in his witness statement. He informed us that he had previously been a witness of fact for HMRC in relation to other appeals and when preparing such statements he had been guided by his superiors and Solicitor’s Office; he had no such similar assistance in the preparation of his expert statement. His experience and expertise was gained over 31 years with HMRC as a visiting officer. He confirmed he had no particular expertise in the second-hand margin scheme. He stated that he had some experience visiting traders operating the scheme but indicated all those visited operated the second hand card scheme which applies to second hand card rather than the wider scheme applicable to other goods. He understood that his overriding duty was to this Tribunal and not to A&M. We consider that AP met that duty; it was clear on occasions that he did not have deep experience or expertise in some of the finer aspects of the operations of the margin scheme and had to be led to them by Ms Brown, but he had a familiarity with it generally.

AP was asked by A&M to reconstruct the margin scheme calculations and associated VAT declarations for period 11/15. He created a spreadsheet from A&M’s stock book and then traced a sample of 317 (28% of the total) purchase and sale invoices. He told us that the sample size was determined by cost constraints. The 317 selected were those that he could trace in a cost-effective way so were random only in that sense. Of the sample traced he was satisfied that 41% of sales had correctly been taxed under the margin scheme.

It was explained that on examination of purchase invoices AP would accept that the margin scheme applied if the invoice showed a margin scheme declaration and otherwise complied on its face with the requirements of the scheme. He confirmed that where the invoice referred to zero rating, Article 138 PVD (or the relevant domestic implementing provision) confirming an intracommunity supply he had excluded it as ineligible for the margin scheme.

Concerning the sales invoices, AP confirmed that where he had looked at them, he accepted each at face value and ZC’s explanation that unworn meant preowned but kept for investment value. He admitted that he only looked at sales invoices where he could not trace the sample watch transaction from the purchase invoice to the stock book and on to the sales invoice. His primary source of reference in determining whether a particular watch was preowned was therefore the purchase invoice.

However, AP also indicated that he had some awareness of the post-it notes which accompanied the sales invoices. He accepted that he understood that the post-its included the date the warranty had been activated. He readily accepted the proposition that where the post-it indicated that a warranty had been activated whilst in the ownership of A&M it was likely that the watch was not simply unworn but rather that the watch in question was new. He was taken to a purchase invoice from A’bance which was described as a particular Omega watch as preowned and then to the associated sales invoice and post-it which described the watch as unworn but for which the warranty commenced after receipt by A&M. He conceded that had he looked at or considered the whole suite of documents relating to that watch he would have concluded it was in fact a new watch not eligible under the margin scheme. He thereby acknowledged that the working assumption that the purchase invoices were a reliable basis on which to determine eligibility under the margin scheme was not an adequate foundation for the analysis he had undertaken and, on that basis, that his calculation of the correct VAT due in period 11/15 was likely to be under stated.

When calculating the tax due in the period 08/14 – 08/18 as compared to the Assessments AP extrapolated on a uniform basis.

AP also rebuilt the records for VAT periods 11/17 – 05/18. His statement did not describe the exercise he undertook but stated that the tracing exercise in these quarters as “impossible” where there was no individual value or serial number recorded on the purchase invoice. In oral testimony he explained that he had examined all purchase invoices in this period but traced only 167 watches through the stock book. He then assumed that if the traced watch had been correctly treated as second hand, all purchases from the same supplier would also have been correctly treated. Based on this exercise he formed the view that of the order of 20% of sales should properly be treated as margin scheme supplies over the period 11/17 – 05/18.

AP was shown the relevant pages of the stock book and asked what he understood the entry “cf” to mean in the supplier name column. He explained that it was a shorthand entry and may mean any one of a number of companies from whom A&M purchased stock. He understood that all “cf” entries would be stock purchased using a contact known as Mariana and would include, in the 11/15 period, Credit Foncier and A’bance and in the later periods also included Maiko. He accepted that it also included other companies across the full period under consideration. He confirmed that the global use of “cf” to represent a wider group of companies than simply Credit Foncier failed to meet the specific requirements of Notice 718 which had force of law. He indicated as a VAT inspector he might have invited the taxpayer to rectify the stock book but accepted that there was no statutory or other legal basis to do so. He accepted that for any entry in the stock book that showed the supplier as “cf” which was not in fact Credit Foncier there was no legal right for the onward supply to be taxed under the margin scheme.

When asked whether he had been aware that Credit Foncier had been deregistered for VAT in Cyprus he confirmed that he had not known that at the time he undertook his analysis but that in the periods he analysed he had also not seen any Credit Foncier invoices.

Critically, AP accepted that in light of the challenges put to him in cross examination his analysis for period 11/15 had incorrectly treated the supplies of watches purchased from A’bance as eligible under the margin scheme. This was on the basis that the stock book was wrong, and it could not reliably be said that the goods were preowned. Following this concession, in re-examination, AP indicated that, in his view as an ex-HMRC officer, A&M might reasonably have relied on the purchase invoice declaration as to the margin scheme and that as a VAT officer he may have allowed them to correct the stock book rather than assess.

The essence of the dispute in this case centred on the interpretation of the evidence. It is therefore appropriate to set out the submissions of the parties prior to setting out our factual findings. We are grateful to all Counsel for their clear skeletons, submissions, and willingness to engage with our questions. We set out below our summary of those submissions. The parties however, should be assured that when preparing this judgment the terms of the skeletons were reread and the full handwritten notes fully reviewed. Because we do not deal specifically with any point does not mean that it was not considered in the round when reaching our decision.