Greener Solutions Ltd

JurisdictionUK Non-devolved
Judgment Date26 August 2010
Neutral Citation[2010] UKFTT 412 (TC)
Date26 August 2010
CourtFirst Tier Tribunal (Tax Chamber)

[2011] TC 00682

[2010] UKFTT 412 (TC)

John F Avery Jones (Tribunal Judge) (Chairman); T Marsh (Member)

Greener Solutions Ltd

Colin Wells, counsel, instructed by Aegis Tax LLP, for the Appellant

Christopher Foulkes, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

Input tax - MTIC fraud - Mobile phones - Whether appellant knew or should have known of existence of fraud - The appellant had been involved in the recycling of mobile phones but decided to expand into dealing in the new mobile phone market - The transaction in question involved the purchase of 3,800 phones in the UK and their resale to a Spanish company for delivery to France - The commissioners demonstrated that the transaction was connected with fraud and contended that the appellant should have known this - The appellant argued that it neither had knowledge of the fraud nor could it have had such knowledge - Held, that, the tribunal was required to follow the test established by the Court of Appeal that the true principle to be derived from Kittel v Belgium (Case C-439/04) [2008] BVC 559 did 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 the judgment of the tribunal, this test had a high threshold which the commissioners had failed to satisfy on the balance of probabilities - Appeal allowed.

DECISION

1. Greener Solutions Limited appeals against the decision of 25 February 2008 by the Respondents ("HMRC") not to repay £176,346.10 input tax for the period 11/06 on the basis that the Appellant's transaction in mobile phones were connected to MTIC fraud. The Appellant was represented by Mr Colin Wells, and HMRC by Mr Christopher Foulkes.

2. The only issue in this appeal is whether the Appellant knew or ought to have known about the connection of a particular transaction with MTIC fraud. Since it is conceded that there was a VAT fraud and that the Appellant's transaction was connected with it, it is unnecessary for us to spell out the details of the fraud. Suffice it to say that it involved contra-trading by a company called Jag-Tec Limited with the Appellant company being the exporter in the "clean chain" which involved Jag Tec paying output tax on the acquisition of goods in the clean chain in order to disguise the fact of the repayment due in the "dirty chain."

Facts

3. We had oral evidence from officer Richard Stokes and from Mr Christopher Bruce-Payne, at the relevant time a director of the Appellant and Miss Camille Sexton, financial controller of the Appellant. Witness statements by officer Ian Simmons, officer Lydia Ndoinjeh, officer Peter Morehead, officer Graham McGuinness, Mr John Fletcher of KPMG, Mr Roderick Stone, HMRC policy adviser on MTIC fraud, were accepted by the Appellants. We had 16 ring binders of documents. We find the following facts (where we attribute a statement to a particular person we are accepting this as a fact unless the contrary is clear from the context):

  1. (2) Mr Bruce-Payne and an army friend of his started the Appellant as a "green" company recycling mobile phones. Its business consists of making arrangements with companies like Tesco to collect unwanted mobile phones in their stores for which the customer receives club card points, a charity nominated by Tesco receives a donation and the Appellant gets the phone. This is checked at its depot, the data is removed and the phone is sold to Dubai or Hong Kong where it is ultimately sold on to India, Africa and South East Asia. In addition the Appellant purchases phones from retailers (including network operators such as Vodafone) that have been rejected by the customer during the 14 day cooling-off period. These cannot be resold as new and are also exported. The Appellant also purchases donated second-hand phones from charities. The Appellant has an established business with around 12 staff. The Respondents investigated repayment claims in March 2004 and October 2004 before the transaction in question and were satisfied that the Appellant's activities had nothing to do with MTIC fraud. In that connection the officers discussed MTIC fraud with the Appellant and they were aware of Notice 726.

  2. (3) The Appellant was interested in expanding into the new mobile phone market and had been approached by Orange and Motorola (which is likely to have occurred according to Mr Fletcher's evidence when they are dumping excess stock). The Appellant has always refused such offers on the basis that they could not find a buyer but they were still interested in the higher profit margins that were available in the new phone market.

  3. (4) The opportunity to participate in the new mobile phones market presented itself when one of the directors (Mr Erik Mhitarian) introduced Mr Ollie Murray, the sole director of MBG Associates Limited. Mr Mhitarian was the principal financier of the Appellant and was looking for higher returns for the Appellant at a time when the second-hand market was sluggish. Mr Murray was introduced as having a successful company that was experienced in dealing in new mobile phones wholesale but he did not have the capital to build up the business. An informal arrangement was made that the Appellant would finance a trial transaction, Mr Mhitarian's company, First Quantum Property Developments, making a loan of £136,000 for up to six months with interest at 5% pa above Barclays Bank base rate, and Mr Murray would receive a share of profits of 25% (according to Mr Bruce-Payne's witness statement; or 30% as he earlier informed HMRC). If the first transaction was successful Mr Bruce-Payne expected to enter into a permanent arrangement under which Mr Murray might become an employee in charge of this side of the business, although Miss Sexton thought that Mr Murray was trying to build up funds to expand his own business rather than entering into a continuing arrangement. This difference of view suggests that the parties had not made any decision about the future. Because the introduction came from Mr Mhitarian the Appellant did not check out either Mr Murray, although they met him, or MBG and it relied on Mr Murray's knowledge in entering into the transaction. In particular it relied on MBG to identify the buyer and seller, conduct due diligence on them and deal with all aspects of the transaction, keeping the Appellant informed and ultimately putting forward the transaction for the Appellant to sign the final deal. Since the Appellant had not previously entered into a wholesale transaction involving new phones it relied on MBG's expertise in relation to the transaction.

  4. (5) The transaction is question ("the Transaction") entered into by the Appellant was the purchase from NEX Trading Limited ("NEX") of three types of Nokia phones (1,100 Nokia 8800 at £301.34 per phone, 1,500 Nokia N80 at £227.34, and 1,200 Nokia N91 at £279.34) for £1,007,692 plus VAT and their resale for a total of £1,048,160 (at £313.15, £235.85, and £291.60 per phone respectively) to Complementos de Exportacion Multifuncionales SA ("CEMSA"), a Spanish company, for delivery to a warehouse in Calais. The Transaction proceeded with Mr Murray on behalf of MBG doing all the detailed work in connection with the Transaction and keeping the Appellant informed of progress and documents, although he did not show everything to the Appellant. If MBG's profit share was in fact 30% the net profit (before interest on the loan, the amount of which depended on how quickly the Appellant received the VAT repayment) from the Transaction would have been £36,508, of which MBG would have received £10,952.

  5. (6) The full deal chain (a "clean chain"; the missing trader is in a "dirty" chain involving Jag-Tec) as discovered by HMRC of which the Transaction forms part was at all stages for the same quantities of phones (apart from one difference noted at paragraph 4(2) below, that was corrected on the same day by a credit note) was as follows:

    1. (a) MS Enterprise Eurl (France) [EU supplier]: invoiced its customer on 30 August 2006, released the phones on 27 September 2006 (the day the warehouse in the UK run by 1st Freight Limited shows the goods as arriving), margin unknown.

    2. (b) Jag-Tec Limited [UK acquirer and contra-trader]: invoiced 30 August 2006, released 27 September 2006, margin £1 per phone.

    3. (c) Stardex (UK) Limited [buffer]: invoiced 30 August 2006, released 27 September 2006, margin £2 per phone.

    4. (d) NEX [buffer]: purchaser order received 7 September 2006 (and again on 15 November 2006), invoiced 7 September 2006 (and again on 15 November 2006), allocated the phones on 27 September 2006, released them on 15 November 2006, margin £7.34 per phone. NEX received £1,184,038.10 from the Appellant on 16 November 2006.

    5. (e) The Appellant: purchase order received 26 September 2006, invoiced 28 September 2006, released 15 November 2006 and (as to 500 Nokia 8800s, see paragraph 4(8) for the reason) 19 February 2007, margin £11.81 (Nokia 8800), £8.51 (Nokia N80), £12.26 (Nokia N91) per phone. The Appellant received from CEMSA £196,446.36 on 6 November 2006, £841,238.01 on 15 November 2006 and £10,475 on 25 January 2007.

    6. (f) CEMSA: invoiced 3 November 2006, released 18 December 2006 and (as to 500 Nokia 8800s) 19 February 2007, margin £1.57 (Nokia 880), £0.47 (Nokia N80), £0.58 (Nokia N91) per phone.

    7. (g) Vundera SIA (Latvia) (no information about further transactions).

(7) It will be seen that the deal chain started with invoices on 30 August 2006 and releases on 27 September 2006 by the first three parties; then with NEX receiving a purchase order from the...

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