UK Computer Supplies Limited v The Commissioners for HMRC

UKCSL’s VAT return history from period 09/14 to period 05/16 is set out in the Table below (all figures other than VAT periods in £):

UKCSL was incorporated on 15 December 2009. It applied to register for VAT on 1 February 2010, declaring its business activity to be “reseller of IT equipment and services to businesses”. Its director and majority shareholder since incorporation is Mr Gary Watson (“GW”).

At the time of the disputed deals, UKCSL operated from Northampton (38 staff), London (8 staff) and Leeds (6 staff). London and Leeds were purely sales based. The denied deals all took place out of the London office.

Jaime O’Beirne (“JOB”), UKCSL Financial Controller, was appointed in April 2015 and based in Northampton.

Julie O’Malley (“JOM”), UKCSL London Sales Manager, was appointed in July 2015. GW had identified her as a possible recruit though a search on LinkedIn. She oversaw the sales staff who dealt directly with customers and suppliers. JOM had previously been a sales manager at another large IT reseller. Her employment was terminated by UKSCL in February 2016.

Stevie Clift (“SC”) was a sales account manager in the London sales team.

Rochelle Lucey (“RL”) was an account manager in the London sales team. Her previous employment was at Novus IT Ltd (an IT reseller).

The supplier or broker in all of the disputed deals was Product Placement Sales and Marketing Consultants Limited (“PPSM”), a company based in Sutton Coldfield. Its director at the time of the disputed transactions (and since incorporation) was Peter Alan Wildman (“PW”). PPSM was wound up on 31 October 2018.

The customer or purchaser in all but two of the deals was GECX Group (“GECX”), registered for VAT in Greece. The company website www.gecxgroup.com states that “GECX is an Al Rajhi Group owned company”. An article dated 22 June 2011, posted on the GECX website from ‘Metal Bulletin’ further states that GECX is “wholly owned by the Saudia Arabia-based Al Rajhi Group” and that the chairman is “Abdulkarim Al-Rajhi, the son of one of the four brothers who founded the Al Rajhi Bank, one of the largest banks in the Middle East. The GECX chairman's father set up the Al Rajhi Group.” Officer Gavin Stock could find no verifiable link between GECX and the Al Rajhi Group apart from the assertion of that connection on the GECX website.

The customer in the remaining two deals was Sky City Universal Trading Aps (“Sky”), a Danish company. Its director at material times was Claus Dalsfaard Jessen (“CDJ”).

The law we are required to apply in determining these appeals is uncontroversial and can be comparatively simply stated:

The right to deduct is enshrined in Articles 167 and 168 of the Council Directive 2006/112/EC of 28 November 2006, entered into force domestically by virtue of sections 24, 25 and 26 of the Value Added Tax Act 1994 (“VATA”).

In CJEU in its judgment dated 6 July 2006 in Axel Kittel v Belgian State (C-439/04) and Belgian State v Recolta Recycling SPRL (C-440/04) (“Kittel”) stated at [56] that:

“… a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with the fraudulent evasion of VAT must, for the purpose of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods”.

At [59] and [61] of the judgment, the CJEU concluded that when determining whether a taxable person knew or should have known that, by their purchase, they were participating in a transaction connected with fraudulent evasion of VAT, the national court is to have regard to “objective factors”.

The Court of Appeal considered the “objective factors” in the context of the ‘should have known’ aspect of Kittel in Mobilix Limited (in Liquidation) v HMRC [2010] EWCA Civ 517 (“Mobilix”). At [52], Moses, LJ said:

“[52] If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.”

At [82], Moses, LJ, stated that the “should have known” aspect of the test is satisfied if the ‘only reasonable explanation’ standard is met:

“[82] But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the BSG appeal, tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.”

At [83], Moses, LJ. adopted the passage from [110] of Red 12 Trading v HMRC [2009] EWHC 2563 in which Christopher Clarke J highlighted the following:

The Tribunal is to consider the totality of evidence before turning to consider whether the ‘only reasonable explanation’ standard is met; per Arden, LJ (as she then was) in Davis & Dann Ltd & Anor v HM Revenue and Customs [2016] EWCA Civ 142 (“Davis & Dann”) at [60]:

“… In my judgment, the UT's treatment of the respondents' repayment position provides a clear example of over compartmentalisation of the factors rather than a consideration of the totality of the evidence. The UT accepted Mr Scorey's submission, also made to us on this appeal, that the respondents' abnormally large repayment position was just a consequence of the Transactions (UT decision, para 50). But that is to leave out of consideration the role of this factor as a factor which is capable of supporting knowledge to the no other reasonable explanation standard. The UT did not consider its relevance in this way and its failure to do so was an error of law. When a factor is considered in that way it may be that there is an explanation which means that the knowledge does not meet the required standard. At that stage, the factor, while relevant, ceases to be probative. The example which I have given is repeated in relation to the other factors which the UT considered. Moreover, although, in paragraph 55 of its decision, the UT stated that the no other reasonable explanation standard was not met “ whether the factors were looked at individually or as a whole ”, it did not elucidate why that was so. I give that statement little weight in the light of the general tenor of the decision, which was to look at factors in isolation” .

HMRC do not have to prove that UKSCL knew or should have known either the details of the fraud or the identities of the fraudulent defaulters (Megtian Ltd (In Administration) v The Commissioners for Her Majesty’s Revenue & Customs [2010] EWHC 18 (Ch) at [37-38] per Briggs

HMRC do not have to allege nor have to prove, that those at UKCSL who undertook or supervised the transactions were dishonest (The Commissioners for Her Majesty's Revenue and Customs v Citibank NA, E Buyer UK Limited [2017] EWCA 1416 (Civ) at [90] per The Chancellor).

The Appellant did not require the following HMRC witnesses to be called (the company the officer reported on is shown in brackets):

We heard oral evidence from the following witnesses in the following order:

SH is the case officer and has been an officer of HMRC and its predecessor, HM Customs and Excise, since 1997 and is currently a member of the MTIC fraud team. As part of her duties, she undertook a risk based programme of visits to VAT registered traders. SH’s two witness statements (with over 500 extensive exhibits) and her answers in cross-examination set out the factors relied upon by HMRC which are relevant to the fraudulent tax losses and the knowledge and means of knowledge limbs of Kittel. The Tribunal accepted her evidence as credible and that she was attempting to assist the tribunal on matters of fact. We noted that much of her evidence in response to cross-examination was opinion on various matters put to her, rather than factual evidence of which she had knowledge.

JM was the visit officer and has been an officer of HMRC and its predecessor, HM Customs and Excise, for 35 years and is currently a part of the Fraud Investigation Team. Her duties involve visiting and monitoring the trading activities of wholesale traders. She adopted the witness statement and exhibits of Judith Elemer dated 12 October 2020 in respect of a visit to UKCSL premises that she and JE conducted on 12 October 2020. JE retired from HMRC in December 2020. JM’s witness statement confirmed that the visit was her only interaction with UKCSL and she had little or no recollection of the visit even after reading the visit report. We accepted her evidence as credible but of limited assistance.

JOB’s written evidence addressed the awareness of MTIC in the IT industry and UKCSL, the industry norms, the due diligence undertaken by UKCSL and the assistance offered by HMRC. We found him to be conscientious in his role as financial controller but naïve and/or too trusting of fellow employees. He clearly understood there was a requirement to gather paperwork in respect of the Disputed Deals but viewed this as a purely administrative task without context.

GW’s first two witness statements provided the background and context to UKCSL’s role as a Reseller in the IT sales industry, the recruitment of JOM, awareness of MTIC, the Denied Deals and UKCSL’s internal processes. His third witness statement responded to a point in HMRC’s skeleton argument that he fabricated a VIES document. It was accepted that he had referred to the incorrect date and we have not considered the point any further. We found GW to be willing and helpful as a witness but he frequently sought to explain the circumstances around deals with which he had no personal involvement and without reference to documents or any other evidence. To this extent, his evidence was unreliable.

SH, in two witness statements, set out the factors on which HMRC rely and/or which are relevant to: the tax losses were fraudulent and to the knew or should have known limbs of Kittel:

JM and Officer Judith Elmer visited UKCSL on 12 August 2014. This was HMRC’s first visit to UKCSL. Officer Elmer retired from HMRC in December 2020 and JM adopted Officer Elmer’s witness statement dated 12 October 2020. She was unable to locate notebooks from that visit to assist in refreshing her memory. These would have been destroyed in line with HMRC’s six year retention policy. Her evidence included the following:

JOB’s witness statement and answers in cross-examination included the following:

GW’s three witness statements and answers in cross-examination included the following points:

We were taken to PPSM’s standard terms and conditions. PPSM’s terms relevantly provided:

As UKCSL did not take possession of the goods and were not involved in the delivery of goods this would create uncertainty as to when the risk in the goods passed to them. No inspection of the goods was ever undertaken by UKCSL despite Clause 30.

We were taken to some examples of the CMRs in the hearing bundle. The CMRs were all largely illegible, incomplete, did not contain a description of the goods and confirmed that the goods had been received by a freight forwarder, Y&O Freight in the Netherlands rather than Greece where GECX was located. Two of the five CMRs did not have UKCSL’s details as consignee but rather PPSM’s details.

We were taken to the sales documentation in Deal 1. We noted that the purchase orders, pro-forma invoices and invoices were all issued in Euros despite PPSM and UKCSL being based in the UK. The timeline for the sales documentation in Deal 1 is frequently at variance with the order in which the transactions are stated to have taken place. GECX’s purchase order dated 21 October 2015 pre-dates the sales invoice from PPSM dated 23 October 2015, UKCSL receives payment from GECX before the sales invoice from PPSM on 22 October 2015. We consider it unusual that in a commercial transaction UKCSL would be able to agree a price for the goods with GECX before sourcing the goods from a supplier. The purchase orders for Deal 1 provides the delivery address as D&D Trading Sp X O.O, Fordonska 393, Poland whereas the CMR confirms that the goods were delivered to a freight forwarder Y&O Freight Logistics B.V. in the Netherlands.

Following an ADR meeting at the offices of Mishcon de Reya on 24 January 2018, an exit agreement was agreed and signed by GW on behalf of UKCSL and SH on behalf of HMRC. The exit agreement confirmed that it could be disclosed outside of the ADR process to resolve the tax position:

On 22 July 2014, JM and Officer Judith Elmer visited UKCSL. The reason for the visit was that UKCSL were associated with another company, Spire Technology, who had been sent an MTIC awareness letter. The visit would assure HMRC that UKCSL existed and had not been hijacked. The report confirms that GW and Parad Patel (Finance Director) were present. The type of commodities recorded were “Office supplies incl computer hardware, TV’s, Toners”. The Purpose of the visit section had “Y” against the heading of “New Player identified by Wigan Validation Unit”. All the other purposes had a “N” against the purpose of visit headings. The content of the Visit Comments were disputed and we have set out in full the Visit Comments:

On 9 March 2016, HMRC wrote to UKCSL saying that it was checking UKCSL’s VAT return for period 02/16 and required various documents and information by 22 March 2016. On 15 March 2016, JOB replied to HMRC by e-mail with an attached letter. The letter provided answers to HMRC’s questions and confirmed the following:

On 21 March, JOB sent an e-mail to Officer Neil Pleasance (who was processing the 02/16 repayment) stating that two of the transactions were still awaiting their CMRs and attaching the remainder. On 18 March 2018, JOB sent another e-mail to Officer Pleasance stating “Apologies as you can see the customer responded in record time (probably because they want to buy more stock!). This is the CMR for 107945 and 108169”

On 27 April 2014, LW and SH attended UKCSL premises. In attendance from UKCSL was GW,, JOB and Jody Hager (UKCSL Management Accountant). The HMRC meeting record refers to the types of commodities as Apple Watches and Samsung SSD Hard Drives for the periods December 2015 to March 2016. The narrative under the heading “Visit Comments states:

On 20 June 2016, LW e-mailed GW stating:

On 20 July 2016, LW e-mailed to GW tax loss notification for the VAT periods 12/15 to 02/16 inclusive.

On 26 July 2016, GW replied to LW stating:

“As you’re holding 900k of our money can you please tell me where the tax losses have been made?

- How far down the chain are they from our supplier PPSM?

- The name of the missing trader/traders

- Were they VAT registered

- Have these suppliers been investigated in the past?

- Have any other companies in the chain had money withheld

- What evidence to do you have to show that we didn’t do are due diligence?”

LW replied to GW stating:

GW replied to LH:

LW replied to GW to confirm that it had been established that the identified transactions were connected with fraudulent VAT default and all the identified PPSM invoices traced to fraudulent VAT loss. GW was referred to Notice 726 paragraph 2 which confirmed that all the parties in the supply chain may be held liable for the net tax unpaid. Confirmation was given that all of UKCSL’s purchases from PPSM had been traced to fraudulent VAT losses.

The same day, GW replied to LH:

LW replied to GW:

On the same day GW replied to LH with contact details for Misco and LinkedIn profiles for JOM and SC. In a second e-mail of the same day, GW confirmed that JOM was the sales manager in the London office and that JOM introduced GECX and Sky to UKCSL. GW further confirmed that SC also worked in the London office was the day to day account manager for GECX and Sky. that as HMRC was holding £900K

HMRC’s submissions are summarised as follows.

The Denied Deals (attached to this decision at Appendix 1) formed part of an overall scheme to defraud HMRC. The Appellant’s role and the level and nature of the orchestration were probative of the Appellant’s state of knowledge of the scheme. UKCSL was at the hub of a highly sophisticated and well planned scheme. This scheme depended on each entity understanding its role so that goods and money flowed in a circle.

UKCSL accepts the accuracy of the deal sheets and there is therefore no issue as to connection per se. Attached to this decision at Appendix 2 are HMRC’s submissions as to the fraudulent nature of the VAT loss created by the contra-trader’s operation and by the direct defaulting trader. The witness evidence in relation to the contra-trader Askos is contained in the unchallenged witness statement and exhibits of George Beaddie. The fraudulent defaulters in Askos’s acquisition chains were:

In each case UKCSL purchased from the UK company, PPSM, and sold to either a Greek registered company GECX (17 deals) or a Danish registered trader called Sky. In Deals 1-18 the transactions traced to Askos, the contra-trader, and in Deal 19 LP to SHE. The length of the chains and the level of markup makes no commercial sense.

HMRC rely upon the general red flags of fraud identified by SH in her evidence relating to UKCSL.

HMRC’s primary case is that UKCSL had actual knowledge of the connection between its transactions and the fraudulent evasion of VAT for the following reasons:

In the alternative, UKCSL should have known of the connection between its transactions and the fraudulent evasion of VAT. The cumulative circumstances presented to it, as summarised below, permitted no explanation other than fraud:

HMRC’s understanding of the UKCSL’s evidence is that it was JOM who undertook or was responsible for the Denied Deals along with Rochelle Lucey and Stevie Clift. Their state of knowledge is attributable to UKCSL by the ordinary principles of attribution (see HMRC v Greener Solutions [2012] UKUT 19 (TCC) at [16] – [20], [47]). HMRC assert that JOM, RL and SC knew that the Denied Deals were connected with the fraudulent evasion of VAT, and in the alternative that they should have known. Similarly, GW and JOB (UKCSL’s director and financial controller respectively) should have known that the Denied Deals were connected with the fraudulent evasion of VAT because there was no other reasonable explanation for them. Their state of knowledge is similarly attributable to UKCSL by the ordinary principles of attribution.

There are inconsistencies and gaps in evidence produced by UKCSL evidencing how the trading relationships came into being and how the transactions occurred. The lack of contemporaneous documentary corroboration for parts of UKCSL’s witness evidence creates a difficulty. In Wetton v Ahmed [2011] EWCA Civ 610, the Court of Appeal stated that the trial judge was entitled to assess the credibility of a witness’s oral evidence by reference not only to contemporaneous documents but also by reference to the absence of those documents, see Arden, LJ (as she then was) said at [14]. The observations of Leggatt, J in Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm) at [15] – [22] are also applicable, in particular the conclusion at [22].

The Tribunal is invited to draw an adverse inference from UKCSL’s failure to call the three individuals (JOM, RL and SC) who were central to the Disputed Deals. HMRC cannot call the three individuals only to impugn their evidence.

The Appellant’s submissions are summarised as follows.

HMRC have failed to discharge the burden of proving that the tax losses were fraudulent such that the appeal ought to succeed, let alone that the transactions took place as part of an “orchestrated fraud” as alleged. The evidence relied upon in SH’s witness statement does not support HMRC’s contention that GECX, CPX and SHE were fraudulent. Officer George Beaddie’s witness statement deals with the VAT affairs of Askos Wolt; HMRC’s attempt to evidence Askos Wolt being a fraudulent default trader has fallen woefully short of what is required by Kittel. Officer Beaddie alludes to three of Askos Wolt’s suppliers engaging in fraudulent activity in an attempt to implicate Askos Wolt, again, the evidence falls woefully short of what is required by Kittel.

Should the Tribunal accept that the tax losses were fraudulent, UKCSL submits that it did not know nor should have known that the tax losses were fraudulent having regard to the totality of objective factors and thereafter an assessment of “only reasonable explanation”.

HMRC’s reliance upon turnover in isolation from the wider context of the profits generated serves to distort the true commercial realities of the UKCSL’s financial performance. GW’s evidence confirms that the increase in turnover during the VAT periods 12/15 – 03/16 is agreed and (ii) reflects UKCSL’s considered commercial decision to enter into the transactions which were high volume (i.e. turnover) low profit margin. HMRC’s reliance on turnover alone as opposed is overly compartmentalised and does not serve to provide a contextualised and accurate full picture of what occurred during the relevant period. The table at GW’s second witness statement records a decrease by 3.9% of gross profits during the relevant period when compared to the nine months before the commencement of the Relevant Period. The considerably lower profit margins of the relevant transactions when compared against other orders for the period October 2015 – March 2016. The average profit margin for the relevant transactions was only 5% (October 2015 – March 2016). Despite this, the GECX and Sky City orders accounted for 15% of the total profit during this period owing to the UKCSL’s decision to deal in volume. Despite the significant increase in turnover for the VAT period 12/15 to 03/16, the costs during this period served to reduce its profits. These included London salaries and rental payments for a 15-man London office space.

The Denied Deals were not a new trade as prior to the Relevant Period, UKCSL had traded with European distributors, wholesale deals accounted for 25% of UKCSL’s business in 2018, The total amount traded with non-end users prior to the Relevant Period was approximately £8m and UKCSL had sold similar products to those traded in the relevant transactions.

The Denied Deals were not non-commercial. Third parties did not set UKCSL’s pricing structure and the prices were not pre-ordained. The evidence relied upon by HMRC does not support that conclusion. The absence of documented negotiations does not exclude the possibility of price margins being negotiated orally over the phone such that the documentation is not conspicuous by its absence such that any inference is to be drawn against the Appellant: Wetton v Ahmed [2011] EWCA Civ 610, per Arden, LJ (as she then was) at [14] applied. Evidence is before the Tribunal of negotiations on price between UKCSL and PPSM and UKCSL offering PPSM first refusal on future orders rather than guaranteeing them as expected in an orchestrated fraud.

The evidence is clear that UKCSL was not making money by doing next to nothing but was an IT value added reseller. UKCSL brought value to the transactions including sourcing products from its established network, raising orders on its system and, at its own expense, providing customer service, credit control and account staff to run the back office of the business.

It was entirely legitimate for UKCSL and in accordance with industry practice of drop shipping to demand payment upfront to mitigate the risk of default thereby negating the need for credit checks. This was UKCSL’s default practice dated back to August 2011.

It was in accordance with the practice of drop shipping for UKCSL’s suppliers to be notified of the delivery address for its customers. It was only after the Relevant Period that PW informed GW that he had not dealt directly with GECX in the first instance as PPSM could not fund the VAT and GW considered it commercially astute to enter into a non-disclosure agreement (“NDA”) with PPSM which the parties duly did.

It was not, as HMRC submitted, suspicious that UKCSL offered products below the RRP. Such suspicion demonstrates lack of understanding of the Reseller industry where such practice is common. It was common practice to research the market price for a product but not industry standard to typically document such searches.

Whilst HMRC assert that UKCSL always made the largest mark-up. UKCSL did not know nor have the means of knowing the mark-up for other participants in the chains nor the length of the chains.

The available documentation does not support the conclusion that the only reasonable explanation for the transactions is a connection to fraud. The e-mail from LW to GW dated 20 June 2016 confirmed that there was sufficient documentation to support zero-rating.

No evidence has been produced by HMRC that supports the contention that JOM, RL and SC knew or should have known the transactions were connected with the fraudulent evasion of VAT such that their state of knowledge could be imputed to the Appellant. HMRC are put to strict proof that JOM came to UKCSL with anything other than an unblemished professional background. In any event, UKCSL had adequate governance procedures in place to monitor its staff during the Relevant Period.

HMRC invited us to draw adverse inferences in respect of JOM, RL and SC who were not called to give evidence on UKCSL’s behalf in line with the ordinary principles for so doing which are set out in Lord Sumption’s speech in the Supreme Court in Prest v Prest [2013] 2 AC 415 at [44], and in Wisniewski v Central Manchester Health Authority [1998] PIQR P324 by Brooke, LJ. The principles were conveniently summarised by Morgan, J in British Airways PLC v Airways Pension Scheme Trustee Ltd [2017] EWHC 1191 (Ch) (“British Airways”) at [141-143]. We note that Lord Leggatt in Royal Mail Group Ltd v Efobi [2021] UKSC 33, Lord Leggatt at [41] stated:

As is apparent from the above cases, we are entitled to draw an adverse inference from the absence of evidence (including the attendance of a witness) which might have been expected to be material to an issue to be decided and we should take a common sense approach when determining whether an adverse inference may be drawn. An adverse inference serves to strengthen evidence of the party against whom the evidence was relevant or weaken the evidence of the party who could have adduced it. However, in order to draw an adverse inference there must be some evidence as to the primary issue and a case to answer. Where the reason for a failure to adduce the evidence is accepted by the court or Tribunal no adverse inference should be drawn. A credible but incomplete explanation for absence of the evidence is likely to impact the strength of any adverse inference to be drawn. We accept that HMRC have referenced JOM having been interviewed by KPMG as a suspected fraudulent co-conspirator in March 2017 but that is not probative of whether she knew or ought to have known at that time that the transactions in question were connected with the fraudulent evasions of VAT. The reason given for not calling the witnesses was that GW did not think he was in a position to ask them to give evidence. He considered informing HMRC of their contact details via LinkedIn and current employers was a better way to go about it. In cross-examination he said that he thought it would be futile to ask as he did not anticipate that they would want to come and give evidence on behalf of UKCSL. Having considered GW’s explanation and his notification to HMRC of JOM’s, RL’s and SC’s location and current employers we decline to draw an adverse inference.

It is appropriate to consider issue (i) at this point before proceeding to make our findings of fact and determination in respect of issue (ii). UKCSL does not concede this point but puts HMRC to proof. UKCSL, in its response dated 18 February 2021 to the Tribunal’s Fairford-type directions dated 8 July 2019, stated at paragraph 2:

“(2)

While the Appellant accepts that there is evidence presented by the Respondents of tax losses, it does not accept that there was fraudulent evasion of VAT in the Denied Deal chains. Consequently, the Appellant does not accept that:

•

the Denied Deals were part of an orchestrated fraud; or

•

the alleged contra trader, Askos Wolt LLP's, transactions were connected to a fraudulent tax loss.

The Respondents have presented only circumstantial evidence of fraud, such that they have not discharged their burden of showing fraudulent evasion of VAT in the chain under the first limb of the leading authority of Kittel. For instance, the Respondents predominantly rely upon unsubstantiated hearsay statements from various overseas tax authorities, claiming that others featuring in the Denied Deal chains were engaged in tax fraud, to evidence fraudulent evasion of VAT.”

This is not a Mecsek type case, here HMRC have to prove on the balance of probabilities that the VAT losses were created by the contra-trader’s (Askos Wolt) operation and by the direct defaulting trader (SHE). Mr Armstrong submitted that there is no evidence of fraudulent tax losses at all before the Tribunal and that the appeal ought to succeed on that basis alone as HMRC have failed to discharge the burden of proof. Mr Watkinson submitted that was an extremely bold submission as in evidence before the Tribunal were the unchallenged witness statements of the HMRC officers for the contra-trader, Askos Wolt, the fraudulent defaulters in the Askos acquisition chains and the direct defaulter, SHE.

It was submitted by Mr Armstrong that Officer Beaddie (Askos Wolt ) was mistaken in his evidence but had not required Officer Beaddie to be called for cross-examination. Similarly, in his skeleton argument, Mr Armstrong, submitted that the analysis of SHE provided by SH in her witness statement at paragraphs 318-330 does not mention, fraud, suspected or asserted towards SHE. Mr Armstrong had every opportunity in cross-examination spread over two days to put those points to SH but did not do so. We agree with Mr Watkinson that is not open to UKCSL to contradict unchallenged evidence but it was not constrained from arguing that HMRC had not discharged the burden of proof which lay upon it. Repeated reference was made by Mr Armstrong to the absence of documents in support of HMRC’s case that the VAT losses were created by the Askos Wolt and SHE. We do not agree. Appended to HMRC’s Opening Submissions were three appendices: Appendix 1 - Deal Overview in respect of the 19 trades; Appendix 2 – Submissions on Buffer, Defaulter, Contra-Defaulter and Contra Traders cross-referenced to the relevant witness statements of the HMRC Officers; and Appendix 3 – Contra-Trading Scheme Chart. Contained within the three appendices were cross-references to the documents that HMRC relied upon and which were all in the hearing bundles.

In respect of UKCSL’s submission that HMRC have only presented circumstantial evidence it is well established that circumstantial evidence is still an admissible class of evidence, of evidential value and weight, and, as evidence, needs to be considered as a whole. In considering this evidence, we should take care not to restrict ourselves to considering each piece of evidence alone and in isolation from the others. This is because circumstantial evidence is not a chain, where a break in one link breaks the chain, but is a cord: one strand of the cord might be insufficient to sustain the weight, but three stranded together might be sufficient: see R v Exall (1866) 4 F&F 922, per Pollock CB, approved by the Upper Tribunal in HMRC v CCA Distribution Ltd [2015] UKUT 513 at Para [91]. The whole can end up stronger than the individual parts. We have proceeded to consider whether the undisputed evidence relied upon by HMRC was sufficient to establish that the tax losses were all fraudulent by setting out our findings of fact and our analysis as to whether HMRC have discharged their burden of proof.

We have no hesitation in finding on the balance of probabilities that the undisputed evidence referred to below is sufficient to establish that the tax losses alleged were fraudulent:

The issue we are required to determine is whether UKCSL knew or should have known that the Transactions were connected to the fraudulent evasion of VAT. In determining that issue, we must consider whether there was a reasonable explanation of the Denied Deals other than those transactions being connected with the fraudulent evasion of VAT when viewed against the totality of the evidence. When determining that issue we have at the forefront of our mind what was said in Mobilx at [60]:

“60.

The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

In order to address the issue of whether UKCSL knew or should have known that the relevant transactions were connected to fraudulent evasion of VAT or whether there was a reasonable explanation for them other than such connection we have first set out the details of Deal 1. Deal 1 records UKCSL’s initial interaction with PPMS and GECX and is representative of all the Disputed Deals. We have then proceeded to make findings of fact based upon the written, oral and documentary evidence before the Tribunal.

Deal 1 is representative of the 19 Denied Deals and provides detail of the initial contact by UKCSL with PPSM and GECX.

No explanation is given in the e-mail how RL had obtained GECX’s details nor why she, as a sale representative for an “IT hardware and software supplier” was contacting an integrated commodities trading company whose core focus is on metals and soft commodities.

The forms attached were an account opening form and UKCSL’s standard terms and conditions.

On 20 October 2015 the following e-mail exchanges and actions took place:

PPSM raised a Purchase Order dated 20 October 2015 to 3ADL Dist Ltd, London. The product description was 4000 Samsung SSD Evo 250GB with a unit price of €69.04 with the ship to address as PPSM Ltd, c/o On-Logistics, Fazeley. The Purchase Order was raised before the onward sale had been confirmed.

The GECX documents were a pdf document providing details of GECX and an original document in Greek with a translation. The document providing details of GECX was headed with “GECX Group” and logo and at the bottom of the page was the contact details with an address in Thessaloniki with telephone number, e-mail address and website address. The document was unsigned and undated. The document stated:

The translation of the Greek document indicated that GECX was “recorded in the General Commercial Registry”. The document was headed “Certificate”, dated 5 July 2013 and certified as true translation on 20 September 2013 by a Greek attorney-at-law. The Certificate confirmed and stated that a company with the name “GECX (Global Energy & Commodities Exchange) Group Greece Single Member Private Company” with the “distinctive title” of “GECX Group Greece” was established on 28 May 2013 as a private company in Thessaloniki, Greece. No contact details or the names of its directors were provided. The objects were stated to be: “Carrying on the broker’s business in purchases and sales of petroleum products and metals and any kind of cargoes. Mediations in sale and purchase transactions on raw/direct materials. Commercial operations and Agent’s activities.”

GECX created the payment to UKCSL on 21 October 2015 in the sum of €296,240 with an execution and value date of 22 October 2015 with customer reference of “4k ssd 250” . There is no e-mail in evidence providing UKCSL’s bank details to GECX.

GECX’s final invoice to Occtanis, Poland was issued on 21 October 2015. The product details were stated as “Samsung SSD 250 GB. The payment instructions for payment to be made to GECX Group Greece P.C.C at a UK based Barclays Bank account as confirmed by the IBAN beginning GB59BAR.

GECX’s issued its Purchase Order to UKCSL. The delivery instructions for stock stated: D&D Trading sp. Z O.O. Fordonska 393 85-090 Bydgoszcz Poland and a Polish telephone number given.

Paragraph 35 of GW’s second witness statement states “In an email to colleagues dated 23 October 2015, RL advised “This customer has paid into our Euro account so no [need] to be credit checked.” [the e-mail was not in evidence]

It is unclear how RL at 10.23 was able to confirm that “This will be regular business” and of a similar quantity when this was the first ever order with GECX.

GECX was set up as a new account on UKCSL’s system.

PPSM issued its invoice to UKCSL. The invoice was dated 23 October 2015, the terms were “pre-pay”, Shipped Via was marked as “N/A” and Prepaid or Collected was marked as “Pre-paid”. The box titled “Shipped to:” stated “TBA”. The goods were described as “Samsung SDD EVO 250 Gb Part Code: MZ-75E250B/EU”. A Barcode number was provided: 8806086522977.

GECX’s Proforma Invoice to Occtanis is dated 29 October 2015. It contains the same details as the Invoice issued on 21 October 2015.

UKCSL issued a pro-forma invoice to GECX with delivery to D&D Trading SP x O.O, Fordonska, Poland

UKCSL issued its invoice to GECX. The delivery address was stated to be Fordonska 393, Poland.

The goods were stamped as received at Y&O, Freight Forwarders, Schillingweg 56, Netherlands.

Sky was the customer in the two transactions where GECX was not the customer. The initial contact with Sky was as follows.

12.45 Claus Jessen e-mailed JOM with the subject “looking for” saying:

We are satisfied that UKCSL was made aware of VAT fraud when Notice 726 and How to Spot Missing Trader Fraud was handed to GW on 22 July 2014. SH was not challenged on her evidence that that she gave GW a copy of Notice 726 with Mr Armstrong stating “I’m not suggesting it wasn’t given, please don’t get me wrong.” GW acknowledged in cross-examination that “When it comes to the 726, I’m saying they definitely probably did give me the 726, or point me in that direction.” We accept SH’s evidence that she would have drawn GW’s attention to paragraph 6 of Notice 726 which is headed “Dealing with other businesses, how to make sure the integrity of your supply chain. We would have found it odd if SH had not done so as the main reason for the visit was that a known MTIC trader, Spire Technology, had sought to verify UKCSL’s VAT number. We accepted the evidence that UKCSL had previously traded in goods that were the same or similar to those traded in the Denied Deals. In our judgment, we find it implausible that a Director of an IT Reseller trading in the very goods identified in Notice 726 and with his extensive experience in the IT industry would not have been aware of MTIC fraud. Paragraph 6.1 of Notice 726 sets out examples of indicators that could alert a taxpayer to the risk that VAT would go unpaid and of a connection with MTIC. Several of the indicators identified are present in this case and are considered below.

We find that JOB, was unaware of the contents of Notice 726 or about MTIC fraud until 10 March 2016. The wording of an e-mail by his colleague Andy Stafford, Purchasing Manager, to SC dated 10 March 2016 (copied to JOB) in respect of mobile phone and watch deal for Evelex via CD Europe mirrored the wording used in Notice 726:

That e-mail confirms that, at least from that date, JOB was aware of MTIC fraud. JOB accepted (4/13/10-16) that as at 10 March 2016 he was aware of the risk of MTIC fraud in UKCSL’s transactions. We did not accept GW’s unsupported assertion that JOB was mistaken and that he had been provided with a copy of Notice 726 on 23 March 2016 (5/127-132). We find that despite JOB being made aware of MTIC fraud on 10 March 2016 no additional checks were carried out on PPSM, GECX and Sky nor any questions asked. In addition, no questions were asked of JOM, RL or SC about the transactions and their relationships with PPSM, GECX and Sky.

We remind ourselves that we should take account of, but not focus unduly, on the question of whether the trader has acted with due diligence, Moses LJ in Mobilx at [82]. We find the due diligence undertaken by UKCSL woefully inadequate for the following reasons. JOB had no previous experience of zero-rating of exports to the EU prior to Deal 1. He was responsible for due diligence on customers and suppliers but was unaware of Notice 726 or the risks around MTIC fraud. He did not appear to understand the broader context to due diligence but rather saw his main responsibility as being to protect UKCSL from bad debts – “I am assessing the risk to UKCSL of being left – you know, funding goods or with bad debt. Payment upfront means I don’t have a bad debt from the customer. Julie giving me the assurance and, you know, seeing Peter Wildman, LinkedIn and all the rest of it, her assurance these deals have been done before elsewhere and he is trustworthy, is enough for me not to be concerned about the transactions.” (4/87/9-18).

Complete reliance was placed by GW and JOB on the supposed previous contact and/or dealings of JOM with PPSM and GECX in her previous employment and/or that of RL or SC with customers and suppliers with no further research or verification carried out by UKCSL (4/36/20-24, 4/55/25-56/1, 4/70/15-20 and 5/156/19-157/2). We do not consider it reasonable for GW and JOB to take everything at face value. We accept that even if UKCSL had carried out enhanced due diligence, it would not have been in a position to identify suppliers two down the chain whose details were not known to them nor the ultimate customers. RL provided JOB with PPSM’s due diligence documentation and details of GECX on 21 October 2015 at 15.04. The PPSM VAT certificate gave PPSM’s trade classification as “other personal service activities” and PPSM’s address as 5-11 Tower St, Birmingham. PPSM’s invoice for Deal 1 and business card gave its address as 5 Tudor Way, Sutton Coldfield (a residential address). There is no evidence of any questions having been asked by JOB about the apparent discrepancies. JOB’s explanation was that no questions were asked as:

“PPSM were already known to our sales staff. That has significant bearing on our willingness to deal with them. So if you had been vetted, essentially, by a member of staff, through them using you at a previous supplier, then that is a -- you know, a big green flag, as it were. I also wouldn't expect Peter and PPSM to be operating a warehouse. I knew that Peter was basically a one man outfit, using his connections in the industry to be able to source products and so I wouldn't have expected him to be working out of a commercial premises, with a little warehouse attached to it, like UK Computer Supplies. He is leveraging, he is contacting the industry to facilitate deals. So no, I would not be overly concerned about Peter.” (4/36/18-37/8).

In cross-examination, JOB set out his reasoning for why he did not see any red flags when looking at PPSM and PW. That reasoning largely consisted of PW “looking old enough and experienced enough” in his LinkedIn profile photograph:

“If it looked like a high risk business. Peter, when you look at him on LinkedIn -- and, you know, my contact with Peter was a few short phone calls. I have not met the guy. When you look at him on LinkedIn, he looks old enough and experienced enough to have industry contacts, to be doing the type of work that he is doing. He is -- there is nothing about him in the pictures that I have seen of him on LinkedIn, in the documentation that I'm looking at here, that says: there is a risk here. There is a bit that says, you know, maybe make sure your addresses match but UK Computer Supplies were in the same situation, for good reason. So, no, there isn't anything on here that raises a red flag. Particularly, you know, given what we are looking for, which is that the goods exist and they are actually going to be shipped, I am predominantly reliant on the supplier already being known and recommended by somebody in the company. Then what I'm looking for here is I'm looking for, you know -- in all this due diligence, I suppose I'm looking for the red flags and the things that jump out at me. I'm not looking for -- I'm not looking for kind of minor admin errors, I'm looking for risk indicators and I don't see them. (4/41/3-25).”

The remainder of UKCSL’s due diligence on PPSM consisted of a VIES check dated 27 July 2016, a Companies House Certificate dated 3 June 2016, a LinkedIn entry for PW which is understood to have been printed in August 2016, an Experian report on PPSM dated 27 July 2016 giving a credit limit of £8,500 and a credit rating of £3,400. All of these documents post-dated the Relevant Period. A Risk Disk check was carried out by UKCSL on PPSM on 13 November 2015, the search results were not in evidence just confirmation that the check had been carried out. The Experian report on PPSM dated 27 July 2016 provided a history of PPSM’s credit rating and it could be seen from its credit rating in November 2015 that its score was far worse that the credit rating in July 2016. Despite that very low credit rating and the stated importance of UKCSL carrying out credit checks as part of its due diligence, the low credit rating was dismissed as “not relevant” for the purpose of trading with PPSM (4/43/23-45/17).

The due diligence provided to UKCSL by GECX consisted of a certificate from the Chamber of Commerce and Industry Thessaloniki dated 5 July 2013 which did not mention trading wholesale in electronic goods but the purchase and sale of petroleum, metals and any kind of cargoes. The pdf document headed “GECX Group” stated it was a leading industrial conglomerate based in Saudi Arabia and had built a strong reputation as an integrated commodities trading company, offering services in the areas of commodities trading, brokerage, logistics, and finance with a core focus on metals (base metals, bulk ore and steel/ Ferro-alloys) and soft commodities (fertilizer, palm oil, sugar and wheat), as well as coal and LPG. One of its stated growth strategies was to enter the telecommunication market with the aim of becoming a leading name in the mobile phone trading business. A cursory glance at this document should have raised red flags as none of GECX’s stated activities and its stated aim to enter the telecommunications market corresponded with the goods purchased in the Denied Deals.

UKCSL’s due diligence on Sky consisted of a VAT validation that took place after the first transaction. No trade references were requested by UKCSL in respect of PPSM, GECX or Sky. JOB’s explanation for not requesting trade references was that as they are provided by the companies themselves they are self-selected and therefore of no value. We do not consider that to be a credible reason for not requesting trade references especially when UKCSL was about to commence trading with a new party.

We find that UKCSL did not take all reasonable steps to verify its customers or suppliers by carrying out commercial checks and due diligence. Reliance was placed upon LH’s e-mail to GW dated 20 June 2016 (at paragraph 47) by UKCSL in which she confirmed that there is sufficient evidence to support the zero-rating of sales. SH was not cross-examined directly on that point but was clear in her answers to cross-examination and her witness statement that she did not consider that the CMRs provided sufficient evidence to support the zero-rating as they were illegible and incomplete (2/53/3-7, 2/61/5-25 and paragraphs 221-226 witness statement). We accept SH’s evidence.

We consider it of note that GECX did not require trade references or any financial details/references from UKCSL before commencing the trades nor at any subsequent point. The way in which the deals were structured required GECX to assume a significant financial risk as it would pay UKCSL upfront for the goods with delivery only being effected some weeks later. It is clear that UKCSL did not consider whether there was any commercial rationale for the structure of the transactions with PPSM and GECX. An explanation was provided by GW that PW had told him after the Relevant Period that he could not fund the purchases himself hence his need to partner with UKCSL to effect the transactions. SH’s evidence, as recorded in the 27 April 2016 visit report, was that “GW stated Peter (director of PPSM) had said that he could not fund that VAT involved in making these sales to the EU and that was where UCS came in.” We find on the balance of probabilities it more likely that not that the visit note accurately recorded what GW had said. UKCSL were aware from the outset that the customer would know who UKCSL’s supplier was as the goods were collected from PPSM and there was always the risk that PPSM could cut out UKCSL from the transaction and deal direct with GECX, the knowledge that PW could not afford to fund the transactions himself provided sufficient comfort for UKCSL to enter into the transactions. We consider that this knowledge of itself should have set alarm bells ringing. No questions or queries were raised as to why a supposedly large and reputable company like GECX would enter such high-risk transactions nor any consideration given to what was the commercial logic behind GECX’s willingness to proceed under such terms.

During the Relevant Period the turnover of UKCSL turnover increased significantly and then dropped back again after that period. The deals were high value, low margin so gross profit did not change significantly. GW’s explanation was that UKCSL had set up a London office to bring in more business and this was not inconsistent with changes in stock deals in or taking lower margins on higher volumes of goods. When this office closed, the former pattern of higher margins resumed. GW’s evidence was repeatedly that “turnover was vanity, profit was sanity” and that during the Relevant Period, the profit levels went down.

GW relied upon a table used by SH at paragraph 349 of her witness statement to show the relevant gross profit for context.

We find that there was a significant increase in turnover for UKCSL in the 6 month period when compared to the nine month VAT periods 3/15-09/15 that preceded it. It is clear that the turnover increase from £9.5m to £19.1m and then in the 8 months spanning VAT periods 4/16-11/16 returned to the a figure comparable to the period before the Transactions, £9.7m. We accept that UKCSL had increased costs during the six months as it had the additional costs of salaries and rent of its newly opened London sales office. However, that explanation ignores totally some €450,000 profit that UKCSL made on the Denied Deals and treats different length time periods as comparable. Accordingly, we find that UKCSL’s profits significantly increased in the Relevant Period.

We find that the Denied Deals represented a significant change in UKCSL’s business as it was now making high volume, low margin trades. We accept that UKCSL had, from as early as 2010, engaged in wholesale transactions and, from as early as 2013, traded with European Infotheek Groep N.V and Travion IT Distribution B.V but those transactions are not comparable to the volume, frequency and value of the goods in the Denied Deals, the previous trades were individually of significantly lower value, spread over a longer period of time and were priced in sterling not euros. The examples of previous trades where customers had paid in advance of delivery were, relative to the Denied Deals, low value (under £10,000). JOB’s evidence was that the Denied Deals were a “massive pain”, required lots of work and paperwork for very little reward, required the introduction of a new internal deal sheet to calculate commission for the sales team and profit margin and put pressure on UKCSL’s cash flow yet UKCSL persisted with the transactions (4/70/20-71/6).

UKCSL case was that its role in the Denied Deals was to provide added value as it “sourced and advised on the products as a value-added reseller, drawing on its established supplier network and experienced sales team”. There is no evidence before the Tribunal of UKCSL carrying on that role in the Denied Deals and it is clear from Deal 1 onwards that it was not drawing on its established supplier network but a new supplier who was unknown to UKCSL and nor was any advice given on the products sourced. We find that UKCSL did not provide any added-value to the transactions.

Conflicting evidence has been given as to the origin of the trade between UKCSL and PPSM, GECX and Sky. We would have expected UKCSL’s evidence on this point to be clear and unambiguous as it placed great reliance on JOM’s previous dealings with PPSM, GECX and Sky such that they were a “green flag” and amounted to PPSM, GECX and Sky having been “vetted”. GW’s e-mail to LW dated 2 September 2016 confirmed that “Julie was our Sales Manager in the London Office, she introduced the customers GECX and Sky City to UK Computers, she used to deal with them at her previous employer Zones UK.” The initial e-mail from Sky to JOM dated 26 November 2015 makes no mention of any previous contact/knowledge of each other and states “We came across your e-mail from a mass emailed list that was send [sic] to us !”. GW, in his second witness statement at paragraph 187 stated that he agreed with paragraph 93 of SH’s witness statement that “GECX was “found” by the London Sales Manager Stevie Clift at a trade conference” which was the same explanation given at the HMRC visit on 27 April 2016 but in his first witness statement GW states at paragraph 60 “With respect of GECX, JOM had dealings with them at her previous company and came across them again on LinkedIn. She then assigned the lead to Rochelle from the sales team to contact them”. RL, in her initial e-mail to GECX at paragraph 9091, makes no mention of SC meeting GECX at a LinkedIn trade conference or of JOM having had come across GECX again on LinkedIn and made contact via LinkedIn. On the evidence before us, we find it more likely than not that JOM was responsible for initiating UKCSL’s contact with PPSM, GECX and Sky.

Having carefully considered the evidence, we find that there is very limited evidence of price negotiations with PPSM and no negotiations on price with its customer, GECX. In our judgement, we find this demonstrates a lack of commerciality and that the prices were pre-ordained. The negotiations documented consist of a request for a price with the price requested being agreed or the final price being very close to the initial requested price. No reference is made as to whether the price included transportation of the goods. No mention is made in any of the correspondence of UKCSL having obtained quotes from Broker Bin or other sources to support the price requested nor any reference made to telephone discussions. We do not accept UKCSL’s submission that that absence of documents evidencing pricing negotiations confirms that the majority of all price negotiations were conducted by telephone. That submission is contradicted by GW’s own evidence.

GW exhibited to his third witness statement a call log which confirmed no calls to GECX or Sky and nine calls to PPSM over a two month period totalling ten minutes. When this was put to him in cross-examination, GW’s explanation was that “they could have been using their mobile phone to make a call, or they could have been calling a mobile.Secondly, price negotiation - as I said, ten minutes is a long time on a telephone call, if you break it down. On price negotiation, once the initial order has been agreed on price, it pretty much sets the price moving forward, with only small fluctuations, moving forward.”. When it was pointed out to him that the call log did show calls to mobile telephone numbers his evidence then became for the first time “These are salespeople in this age. They use all sorts of communications. They use their mobile phones, they use WhatsApp, they use all sorts of communication. This is sales, this is industry.” We did not find this evidence credible.

PPSM’s standard terms provided at Clause 20 “You must make payment even if delivery has not taken place and/or that the title in the goods has not passed to you”. Clause 39 stated “The risk in the Goods will pass to you on completion of delivery. However, Clause 40 states “Title to the goods will not pass to you until we have received payment in full…”. As UKCSL did not take possession of the goods and were not involved in the delivery of goods this created considerable uncertainty as to when the risk and title to the goods passed to them. No inspection of the goods was ever undertaken by UKCSL despite Clause 30 providing “You must inspect the goods on delivery or collection”.

We find that there is no evidence to show that the goods were insured either by UKCSL or its customers whilst in transit from the UK to the EU. Reference was made by JOB to PW stating that “he would ensure that goods are insured” and that was “probably proof enough though a certificate would be nice” (paragraph 103 at 11.44); no proof of insurance was ever provided by PPSM to UKCSL. If the goods were damaged in transit or failed to turn up, UKCSL would be unable to claim for the loss and would be liable for any loss or damage. GW’s evidence was that UKCSL did not require transport insurance as they were not transporting the goods and the supplier’s insurance covered the goods up to the point they were delivered. That evidence ignores the fact that UKCSL did not inspect the goods before they were shipped and had no means of confirming quantities, condition of the goods or identification/serial numbers of the goods. Without that information, UKCSL would be unable to make a claim on their own transit insurance nor disprove any claim that the goods delivered did not match the order details.

We find that UKCSL was repeatedly able to source the exact goods and specification required, in the exact quantity, at an acceptable price all from a single supplier in all of the Denied Deals. Such trading ensured that UKCSL was never left with any surplus stock that it was required to store and insure. We consider it highly improbable that this would have happened if the Denied Deals were commercial transactions,

We find that UKCSL did not contact any other supplier/source of stock to fulfil the orders in the Denied Deals. There was no evidence of any other source being contacted to obtain the goods in the Denied Deals despite it being UKCSL’s standard practice to contact existing suppliers for pricing and availability.

We find that there was no credible explanation for the Denied Deals being transacted in Euros. All the Denied Deals were transacted in Euros and this caused significant difficulties for UKCSL in calculating profit margins because of the currency fluctuations. UKCSL was not set-up to handle transaction in Euros. The explanation given by PW for quoting in Euros was that “Matt” (UKCSL sales staff member) had told him that the customer was European and for that reason the price quoted was in Euros. GW’s evidence was that it was PPSM that had requested that UKCSL pay in Euros. GW’s evidence is not supported by the documents in evidence and we do not accept it. We consider it of note that the two transactions with Sky continued to be priced in Euros despite Sky being a Danish company based in Denmark, a country whose currency is the Danish Krone and not the Euro. No credible explanation or commercial reason has been provided for the goods being priced in Euros by a UK based supplier selling goods to a UK based company.

We find that it is clear from the documentary evidence provided in respect of the Denied Deals that PPSM and GECX were known to each other and were aware of each other’s prices in their transactions with UKCSL (RL’s e-mail dated 11 December 2015 to PPSM requesting “packing details for the SSDs order for Skycity”, RL’s e-mail to JOB dated 25 January 2016 said that GECX had contacted PPSM in relation to pricing as they had been overcharged – “They contacted PPSM, who own the customer relationship with this one, or we will lose out on future orders”) . The risk of disintermediation did not concern UKCSL and was explained as part and parcel of the industry standard Drop Shipping. We do not accept that the Denied Deals conformed to the industry standard of Drop Shipping as UKCSL had no control over the supply chain and did not know the ultimate destination of the goods. Furthermore, when it was pointed out to JOB and GW that the customer collected the goods from PPSM’s freight forwarder, On Logistics, their oral evidence was that drop shipping included collection by the customer from the supplier (4/63/24-64/18, 4/80/23-81/18, 5/138/16- 139/17).

The transactions documents confirm a lack of clarity around delivery/collection of stock, delivery destination, when delivery would be effected, who was responsible for insurance and who bore transportation costs. Invoices stated that goods were to be delivered to customers, but the evidence showed customers collected them contrary to what was stated on the purchase order or invoices. There were instances when PPSM issued a purchase order before UKCSL had even quoted a price to its customers: PPSM raised a purchase order to 3ADL for the goods in Deal 1 on the same day that UKCSL make an enquiry and before the trade had even been agreed.

We find that the transaction documents, e-mails and transaction timelines together with the issue of invoices and purchase orders before a price and the deal had been agreed are all suggestive of the deals being pre-arranged.

It was not disputed that UKCSL always received the largest mark-up in the transaction chain and, apart from Deal 1, was always fifth in the transaction chain. Having carefully considered the oral and written evidence, we find that there is no evidence to suggest that JOB or GW were aware of the length of the transaction chain, UKCSL’s place in that chain and were not aware of the percentage mark-up it received relative to the other parties in the chain.

HMRC’s primary case is that UKCSL had actual knowledge that the Denied Deals were connected to the fraudulent evasion of VAT for the reasons set out at paragraph 62 above. By reference to our findings of fact we do not consider that HMRC have discharged the burden of proof that UKCSL had actual knowledge. We declined to draw an adverse inference of UKCSL’s failure to call JOM, RL and SC and have similarly declined to draw an adverse inference from JOM’s alleged behaviour after the Relevant Period. We have not been provided with any evidence to contradict UKCSL’s claim that JOM arrived at UKCSL with anything but an unblemished reputation and record in IT sales. Nor has any evidence been adduced that supports the contention that UKCSL through GW, JOB or JOM were aware of or knew that the length of the transaction chain was commercially unjustified. It is clear that UKCSL did not undertake appropriate due diligence on its suppliers and customers but as confirmed in Mobilx at [82] “tribunals should not unduly focus on the question of whether the trader has acted with due diligence”. UKCSL did have a process of due diligence, as explained by JOB, and it was clear that the entire focus of the due diligence was to ensure that sufficient documents were obtained to support UKCL’s claim for zero-rating. Trade references were not obtained as JOB saw them as self-serving and, in any event, he did not see the need as UKCSL was paid upfront for the purchases. We do not consider that GW or JOB ignored the red flags because they were complicit in the VAT fraud but rather consider that their focus was on transactions that, in their eyes, presented no risk to UKCSL and were profitable. We consider it of note that the ADR exit agreement dated 24 January 2018 (nearly two years after the Denied Deals) recorded that the parties were agreed that UKCSL did not have actual knowledge that the Denied Deals were connected to the fraudulent evasion of VAT. The exit agreement recorded SH’s view that UKCSL “should have known” that the Denied Deals were connected to the fraudulent evasion of VAT. We are, of course, not bound by that agreement but we agree with that conclusion. Accordingly, we conclude that UKCSL did not have actual knowledge that the Denied Deals were connected with VAT fraud.

By reference to the totality of our findings of fact we have no hesitation in concluding that UKCSL should have known that Denied Deals were connected with the fraudulent evasion of VAT. GW’s state of knowledge is attributable to UKCSL by the ordinary principles of attribution (see HMRC v Greener Solutions [2012] UKUT 19 (TCC) at [16] – [20], [47]). JOB’s state of knowledge from 10 March 2016 is similarly attributable to UKCSL by the ordinary principles of attribution. We have carefully considered the evidence regarding JOM’s, RL’s and SC’s involvement and role in the Denied Deals transactions during the Relevant Period and have concluded that HMRC have not shown that they should have known that the transactions were connected to the fraudulent evasion of VAT.

GW was made aware of Notice 726 and HMRC’s “How to spot missing trader fraud” well in advance of the Denied Deals. GW has extensive experience in the IT Reselling sector and ought reasonably to have been aware of the risks of VAT fraud within that sector. The characteristics of the transactions entered into with PPSM, GECX and Sky exhibited several of the red flags identified in the two HMRC leaflets.

The transactions required UKCSL to transact with a previously unknown supplier and customer contrary to UKCSL’s standard operating practice of using existing suppliers wherever possible. No enquiries were made or questions asked by UKCSL of either PPSM or GECX, we do not consider it reasonable to not to have done so. The transactions were all high volume, high-value goods at profit margins lower than those usually obtained by UKCSL in its other transactions and represented a significant departure from UKCSL’s usual trading activities and patterns. The transactions were all priced in Euros which caused UKCSL difficulty in calculating the profit margins and required UKCSL to put in place procedures to process the transaction payments. UKCSL never questioned why a UK based supplier was pricing its supplies to a UK based company in Euros. No formal contracts for the transactions existed and the transactions required little effort, input or risk from UKCSL. Despite these red flags, GW and JOB were singularly uncurious about the transactions. No due diligence or credit checks were carried out on PPSM, GECX or Sky and a cursory glance at the documents provided by the counterparties would have set off alarm bells. In considering the totality of the 19 transactions undertaken by UKCSL, their inherent characteristics, what UKCSL did or did not do and the surrounding factual matrix, we are satisfied that UKCSL ought to have concluded that the only credible explanation for the Denied Deals was that they were connected with fraudulent evasion of VAT. In reaching that conclusion we have considered UKCSL’s explanation that it “sourced and advised on the products as a value-added reseller, drawing on its established suppler network and experienced sales team” and whether the “only reasonable explanation” standard is met when considered against the full body of evidence before the Tribunal and have concluded that we do not consider that explanation as reasonable or credible.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.