Alpha Sim Communications Ltd (in Compulsory Liquidation) and Others v CAZ Distribution Services Ltd and Others
| Jurisdiction | England & Wales |
| Judge | David Donaldson |
| Judgment Date | 26 February 2014 |
| Neutral Citation | [2014] EWHC 207 (Ch) |
| Docket Number | No HC11CO2185 |
| Court | Chancery Division |
| Date | 26 February 2014 |
[2014] EWHC 207 (Ch)
David Donaldson Q.C. sitting as a Deputy High Court Judge
No HC11CO2185
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MTIC trading
This case concerns so-called Missing Trader Intra-Community ("MTIC") fraud, which revolves around the import, repeated resale, and ultimate re-export of large quantities of high-value low-bulk products such as mobile telephones or computer chips, and the associated accounting for VAT. Though I use the present tense, I understand such frauds to have effectively ceased in the second half of the last decade, as the result mainly of a change in 2007 in the manner in which VAT was levied on successive trading in these items. The claims in the present proceedings date from (a) August/September 2004 and (b) March/April 2006, but were not commenced until 30 June 2011. Their age is in itself a complicating factor, as is the way in which they find themselves being advanced so belatedly in this action.
Courts and tribunals have had to deal with MTIC frauds on, by now, numerous occasions and have had occasion to refer to its principal features. A most helpful summary, culled from a judgment of Blackburne J in Regalway v. Shillingford [2005] EWHC 261 (Ch), was provided by Proudman J in HMRC v Sunico A/S [2013] EWHC 941 (Ch) at paragraph 64:
"• A VAT registered trader in one EU member state sells taxable goods to a VAT registered trader in another member state (such as the UK). The overall effect is that the importer does not suffer VAT on its import.
• The UK importer, known in MTIC parlance as a "missing trader", "hijacked trader" or "Defaulter", sells the goods to another UK trader, known as a "Buffer". When the Defaulter sells to the Buffer, it charges VAT on the supply. As the Defaulter only incurs output VAT on its supply, but has no input VAT on its own purchase from the EU supplier, it is liable to account to HMRC for the full VAT element on its sale.
• The Defaulter then fails to file a return or account for the VAT to HMRC. Sometimes it will simply go missing, meaning HMRC is unable to pursue a claim for the VAT it is owed. Alternatively, the Defaulter will direct the Buffer to pay some or all of the purchase price to a third party or third parties ("Third Party Recipients"), thereby rendering the Defaulter unable to discharge its VAT liability. Such third party payments are central to the present case.
• The first Buffer trader, or "First-line Buffer" will sell the goods on in the UK to another Buffer (a "Second-line Buffer") and may either receive payment from the Second-line Buffer and make payments up the chain of supply itself, or the First-line Buffer may direct the Second-line Buffer to make third-party payments up the chain.
• There may be a number of sales to Buffers, in order to extend the paper trail and obfuscate the underlying fraud.
• Eventually, a Buffer will sell to an exporter of the goods (the "Broker"). The Buffer may account to HMRC for VAT in the usual way, netting off the input tax on its purchase against the output tax on its sales. The amount of the VAT payable to HMRC by the final Buffer in the chain will represent the VAT on the Buffer's profit or commission.
• The Broker will then sell the goods to a purchaser in another EU member state. It will suffer no effective output tax on the export, but it will have an input tax credit in respect of its purchase from the final Buffer.
• The Broker will then submit a (frequently very large) VAT refund claim to HMRC in respect of the input tax from its purchase from the final Buffer.
• Quite often the same goods exported by the Broker will then be re-imported to the UK and the whole sequence will be repeated again. Hence the name "carousel fraud".
• It may be some time before the importer defaults on his obligation to account for the input tax he has charged and been paid. In order to avoid detection the transactions are usually effected, or said to have been effected, extremely quickly, often within the space of one day. More often than not, the transactions involve substantial sums of money passing down the chain.
• Overall, if the fraud depends upon the use of third party payments to put the money beyond the reach of HMRC, the Third Party Recipients (usually overseas companies) will receive virtually the entirety of the purchase price for the goods, including the VAT element, although each party to the fraud creams off a small percentage of the VAT as it passes on the goods."
While the carousel may revolve more than once, this is not a necessity. Since the value of any consignment is generally in the hundreds of thousands of pounds, the VAT element creamed off is proportionately high, even on a single revolution. If the carousel does proceed to a subsequent turn, it may be fuelled by the same or by a different consignment, which in the latter case may or may not have been acquired with the proceeds of sale at the end of a previous line, and it is not necessary that all the participants remain the same.
The chain of sales and resales from the original purchase of the goods in Europe to their export back to Europe is commonly referred to as a "line". The claims in the present action found on a large number of such chains. The role of the participants also has a conventional terminology, which I will adopt in this judgment, with some brief prior explanation.
(a) A chain starts 1 with the acquisition of the goods abroad by a company incorporated in a European state, termed either "the Strong European" or "the catcher".
(b) The catcher sells the goods to "the under", an abbreviation of "the underinvoicer", also a European company, which re-sells to a UK importer, a sale which attracts no VAT. It does so at a price significantly less than that agreed with the catcher. The function of this price drop is to create room for margin on the resales which will take place in the UK before the ultimate re-export of the goods.
(c) The importer, often referred to as the "number 1", resells to a "number 2", and the goods proceed through a number of resales, each with similar numbering by reference to their place in the UK portion of the line up to as many as five, before reaching an exporter or "broker". The companies between the importer and the exporter are referred to as "buffers", the first buffer equating to the number 2 and so on thereafter.
(d) Throughout this process, VAT invoices are issued, enabling each of the buffers to set off downstream VAT against its upstream liabilities. Since the margins are small, the resulting net VAT position is close to nominal. At the end of the line, since no VAT is chargeable on an export, the exporter can reclaim the whole of its downstream VAT from HMRC.
The fraud is engineered by the importer directing its purchaser, the number 2 or first buffer, to pay the entirety of the resale price including the VAT to one or more overseas entities 2. Instead of making the payment itself the first buffer typically instructs the second buffer to pay its purchase price plus VAT abroad. At the end of the VAT quarter when a large number of lines, amounting to millions of pounds, have passed through the importer, it fails to account for the VAT on its downstream sales, and its management disappears, leaving the importer in default and without assets to satisfy the claims of HMRC. The only function of the buffers would appear to be to obscure the nexus between the reclaim of VAT and the upstream VAT-free acquisition on importation, which would not then be visible without considerable investigation of the intermediary links.
The successive trades within each line can be both set up and then consummated with minimal delay between them, and the line may be operated several times in a day. Many participants were clients of the same bank, permitting rapid money transfers, and allocation and transfers of goods in the possession of forwarding agents could be effected electronically, or perhaps by fax or even by telephone. It was therefore unnecessary for any of the intermediary participants to have any significant capital, and typically they had none. The only real money required was that for the initial acquisition of the goods, which could be recovered rapidly on their re-export. The 17.5% could be used to cover the small mark-ups in the United Kingdom sales, a commission to the under, a profit margin for the catcher, and a substantial remainder for the provider of the working capital.
The transactions underlying this action
The transactions on which the claimants rely as the basis of their causes of action are tabulated in Schedules 1 to 6 attached to the Particulars of Claim, reproduced as similarly numbered Schedules in the Appendix to this judgment 3 and compiled by the claimants as a summary of the available documentary material.
Between 17 March 2006 and 23 March 2006 the First Claimant ("Alpha") made sales of mobile phones totalling around £12.1 million. They are included in Schedules 1,2 and 5 to the Particulars of Claim in this action 4, reproduced as similarly numbered Schedules to this judgment, which set out the...
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