Martem Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 October 2011 |
| Neutral Citation | [2011] UKFTT 641 (TC) |
| Date | 04 October 2011 |
| Court | First Tier Tribunal (Tax Chamber) |
[2011] UKFTT 641 (TC)
S.M.G.Radford (Tribunal Judge) (Chairman); M. Templeman
Geoffrey Cox QC instructed by DASS solicitors for the Appellant
Jonathan Kinnear and Amy Manion, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Input Tax - MTIC fraud - Whether appellant's transactions connected with fraud - Whether appellant knew or should have known of connection - The appeal was against the commissioners' decision to refuse claims for input tax in the sum of £2,966,530 relating to 17 deals in mobile phones between February and May 2006 - It was the commissioners' case that each of the deals could be traced back to a loss of VAT connected with fraud and that the appellant either knew or should have known that that the deals were so connected - The commissioners contended that the deals were part of a larger contra-trading scheme, the sole purpose of which was to cheat the revenue - Contra-traders were used in an attempt to disguise or shift the apparent point of the tax loss, so as to frustrate the commissioners' anti-fraud measures - The commissioners pointed out that in all of the deals the goods started with the same dealer and finished with the same dealer yet, in between, the appellant bought from three different sources - This, they submitted, was no coincidence but rather a reflection of the contrived nature of the trade - The commissioners maintained that the appellant's evidence was untruthful and unsatisfactory and that the tribunal could decide if this was due to its desire to conceal knowledge of the connection with fraud - The commissioners argued that the appellant's business lacked the normal attributes of a bona fide trading business and its structure bore no comparison to that of legitimate traders - There was no active marketing or deal making of the type one would expect in legitimate grey market trading and the company had no website and carried on no advertising - Yet it managed to turnover in excess of £78m, with only one active member of staff, no capital, a small office and no vehicles - This turnover would have placed the appellant as one of the largest distributors of phones in the UK - The commissioners submitted that it was clear a fraud had taken place and it was clear that the appellant's supplier and customer were involved knowingly in that fraud - The question for the tribunal was simply whether it was probable, having regard to all the circumstances, that the appellant knew of the fraud - Alternatively, if the appellant did not know, the question was whether it should have known - Held, that, considering all the features of the transactions, they should not have been regarded by a reasonable person in the appellant's position as compatible with legitimate arm's length trading - It was more probable than not that the appellant knew of the fraud - The appellant traded with new entities, used offshore bank accounts and arranged for the goods to be delivered to countries other than the customer's country of origin - A legitimate trader would not have risked millions of pounds on the basis of trust in individuals of whom it had scant knowledge - In the judgment of the tribunal, the appellant ought to have known, and on the balance of probabilities did know, that all of its deals were connected with fraud - Appeal dismissed.
1.This is an appeal against the refusal by HMRC of the claim by the Appellant to deduct input tax in the sum of £2,966,530.16. This was communicated by way of two letters from HMRC dated 14th March 2008 and 24th November 2008 (subsequently amended by letter dated 22nd March 2010).
2.The refusal related to seventeen deals over four monthly VAT periods:
(i) February 2006 (02/06) - 4 deals - £534,882.25;
(ii) March 2006 (03/06) - 4 deals - £705,775.00;
(iii) April 2006 (04/06) - 5 deals - £800,419.81;
(iv) May 2006 (05/06) - 4 deals - £925,453.10.
3.It is HMRC's case that each of the seventeen deals carried out by the Appellant, in the four periods, can be traced back to a loss of VAT which is connected with fraud and that the Appellant either knew or should have known that that they were so connected.
4.It is HMRC's case that the seventeen deals purportedly carried out by the Appellant in the four VAT periods were part of a larger contra-trading scheme, the sole purpose of which was to cheat HMRC. These contra-trades utilised a number of contra-traders in an attempt to disguise or shift the apparent point of the tax loss, so as to frustrate HMRC's anti-fraud measures. The contra-traders took part in two series of fraudulent transactions, the combination of which was designed to cause and disguise a tax loss.
5.The three contra-traders were Digikom Limited ("Digikom"), Casa Communications Limited ("Casa 1") and Casa Commodities Limited ("Casa 2").
6.In the first series of transactions Digikom's, and a number of the transactions involving Casa 1 and Casa 2, have been traced back, sometimes directly and sometimes through a chain of UK companies, to defaulting traders who had purported to import the goods from the EU in zero-rated transactions. The defaulting trader's purported onward sale created a liability to account for output tax. The defaulting trader never accounted for this output tax. Digikom, Casa 1 and Casa 2 then purported to export the goods outside the UK. These transactions were zero-rated for VAT and as a result, in normal circumstances, they would have been entitled to reclaim their input tax.
7.A second series of transactions was inserted to shift the repayment away from the exporting companies at the end of the chains (i.e. Digikom, Casa 1 and Casa 2) containing the defaulting trader, to a number of exporting companies in a second series of transactions, that in this case included the Appellant.
8.In the second series of transactions the contra-traders (Casa 1, Casa 2 and Digikom) purported to purchase goods from a Portuguese based trader, Dunas and Pinheiros ("Dunas"). These purported transactions were zero rated for VAT. All three contra traders then purported to sell the goods to a number of other UK based traders (including the Appellant), charging output tax, which they were obliged to account for on their VAT return. However, this output tax, payable on their second series of transactions, was offset against the input tax reclaimable on their first series of transactions. As a result the contra-traders were left in a, broadly, tax neutral position.
9.The Appellant and the other traders then exported the goods from the UK to a trader based in Cyprus, Phista Trading ("Phista"), in a purported sale that was zero rated for VAT and the Appellant has sought a repayment of the input tax that they had paid to their UK based suppliers (Digikom, Casa 1 and Casa 2).
10.The contra-trading scheme therefore involved a default in the payment of output tax at the beginning of the first series of transactions and the claim for the repayment of input tax at the end of the second series of transactions. It was this combination of events that caused the tax loss to HMRC.
11.In an extension of the fraudulent scheme the contra traders, Casa 1 and Casa 2, utilised the larger tax loss in the Digikom chains, by purchasing goods from Digikom and then exporting them to Phista, again creating a deduction in respect of their input tax. They were acting as second line double contra traders.
12.HMRC's case is that the two series of transactions were part of an overall contrived and fraudulent scheme and that each party involved in the scheme, including the Appellant, either knew or should have known that they were contrived and fraudulent. The whole purpose of the scheme was to cheat HMRC. The scheme involved a large number of trading entities playing a pre-ordained role to ensure that the goods were always sold to the right person, at the right time for the right price. The payments for purported purchase and sale of the goods were often circular, with the money starting and ending with the same trading entity.
13.The Appellant) was incorporated on 20 March 2002. The directors, appointed on 4 April 2002, are Martyn Thackwell and Emrys Matthews. Mr Thackwell was primarily responsible for the Appellant's trading, being largely responsible for carrying out the purported purchases and sales of the goods which are the subject matter of this appeal.
14.The Appellant was registered for VAT with effect from 14 April 2002, as an "Electrical Wholesaler". The VAT 1 application for registration was signed by Mr Thackwell. At all material times the Appellant was responsible for submitting monthly VAT returns.
15.In all seventeen deals that are the subject of these appeals the Appellant purchased the goods from one of three contra traders, Casa 1, Digikom or Casa 2. The evidence concerning the three contra traders and their connection with tax losses was contained in a series of witness statements from the relevant officers of HMRC. With the exception of Mr Charles who gave evidence concerning Casa 2, Mr Cox QC, counsel for the Appellant declined to cross-examine any of these witnesses indicating that their evidence was accepted by the Appellant.
16.At the outset of the hearing, Mr Cox indicated that the Appellant accepted that there was a fraudulent conspiracy involving Casa 1, Digicom and Casa 2 together with their supplier, Dunas, and the customer of all seventeen deals, Phista. The Appellant however denied being a knowing participant.
17.All the participants in the chains had accounts with the First Curacao International Bank (FCIB) and the Dutch authorities gave access to the records of the FCIB to other governments following its closure in October 2006.
18.During this period, the Appellant purported to conduct four wholesale deals. Each of these deals shared significant similarities. Each chain of transactions...
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Asylum Distributions Ltd
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