REGALWAY CARE Ltd ((in Liquidation)) and ABDUL MALIK SHILLINGFORD (also known as ABDUL MALIK) and A.v.A.H TRADING Ltd and VICTORIA CLARKE and EBST Ltd and IMAD YACOUB SHOUBAKI (Responndents) and FIRST TOUCH COMMUNICATIONS Ltd and DIRECT COMM
| Jurisdiction | England & Wales |
| Judge | The Hon Mr Justice Blackburne,Mr Justice Blackburne |
| Judgment Date | 25 February 2005 |
| Neutral Citation | [2005] EWHC 261 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC04C03143 |
| Date | 25 February 2005 |
[2005] EWHC 261 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Hon Mr Justice Blackburne
Case No: HC04C03143
George Bompas QC and Peter Shaw (instructed by Moon Beever) for the Claimant
Ruth Holtham (instructed by Bankside Commercial) for First Touch Communications Ltd
Hannah Thornley (instructed by Corren Troen) for Direct Communications UK Ltd
Claire Simpson (instructed by Bark & Co) for Vita Moderna Ltd
Hearing dates: 9 th, 20 th and 21 st December 2004,
th and 31st January, 1st, 2nd and 4th February 2005
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice BlackburneMr Justice Blackburne
Introduction
I have before me applications by three separate companies, each applying as a third party intervener, to vary a freezing order made by me on 6 October last against the defendants to these proceedings. The interveners seek this relief to enable the fourth defendant, EBST Limited ("EBST"), to make various payments totalling £1.35 million. For reasons connected with availability of court hearing time, the hearing of these applications has been spread out over a number of days separated by several weeks. Over the course of the adjournments extra evidence has been filed. During the most recent adjournment, the claimant, Regalway Care Ltd ("Regalway"), issued an application to amend its claim in order (a) to join Kevin John Hellard (a partner in the firm of RSM Robson Rhodes LLP and a licensed insolvency practitioner) as second claimant and (b) to add the three third party interveners as defendants and claim freezing order relief against each of them.
As it turned out Mr Bompas QC, who with Mr Shaw appeared for Regalway, indicated towards the end of his submissions that he was no longer pressing for freezing order relief against the applicants. As regards the application to add the applicants as defendants to the proceedings, I indicated that this should await judgment on the interveners' applications. I can see no reason why Mr Hellard, who is Regalway's liquidator, should not be added as a claimant but this too should await judgment on the other applications.
MTIC fraud
To set the scene for what follows it is appropriate to say something about a particular species of VAT fraud. I begin with the relevant regulatory backdrop.
Under the rules concerned with the charging and collection of VAT, supplies of goods between registered traders in different member states of the European Union are zero-rated provided the seller in one member state obtains the VAT registration number of the customer in another member state and can show that the goods in question were removed from the seller's member state to the other member state. The result of those rules is that where an entity registered for VAT in the United Kingdom imports goods from another member state, it need not make any payment in respect of VAT to the vendor. In due course it will be obliged to account in the United Kingdom for output tax on its sales to customers in the United Kingdom. If the goods are purchased by an entity registered for VAT in the United Kingdom which the entity then sells abroad, that entity will not be entitled to charge output tax on the sale but, conversely, having incurred and paid input tax on its purchase of the goods (assuming the purchase was from somebody registered for VAT in the United Kingdom) will be entitled to recover that input tax from HM Commissioners of Customs and Excise ("HMCE" for short).
It is the opportunities for fraud provided by these rules that have given rise to the kinds of dishonest scheme summarised in the following passage of the judgment of Jacob L.J. in R (on the application of Federation of Technological Industries) v Customs & Excise Commissioners [2004] EWCA Civ.1020 (at paras 17–21):
"17. The simplest form of abuse is what [HMCE] call 'acquisition fraud'. A business in the UK acquires goods from an EU supplier VAT free and sells them on into the United Kingdom market directly or indirectly. When it sells these goods to its U.K. customers it charges VAT but it fails to account to [HMCE] for the VAT it collects. Before [HMCE] catch up with it the trader simply disappears.
18. This kind of abuse is somewhat limited in that the importer who intends to defraud is actually selling the goods into the United Kingdom market. He has to find real customers or his customers do.
19. Much more significant is the second type of abuse which [HMCE] call 'carousel fraud'. Again, there is a UK importer buying from a supplier in another EU state. Again, he pays no VAT on his purchase. He then sells to a 'customer' in the U.K., charging VAT. That 'customer' sells on to another 'customer', himself charging VAT (output tax) and setting that against the tax he paid to his supplier (input tax). This may go through several traders (whom [HMCE] call 'buffers'). The last buffer in the chain does not, however, sell on to ultimate UK customers. He sells back into the EU very often to the original seller. He will have paid input tax on his purchase. This he claims 'back' from [HMCE]. None of this would matter if the original importer, who has charged output tax to the first of the buffers, were around to account to [HMCE] for that tax. But by now he has disappeared.
20. So on each circuit of the 'carousel' 17.5% of the value of the goods is extracted from [HMCE]. The scheme requires high value, low physical size goods—a container full of mobile phones or computer chips is just right for this. A pallet-load arrives at Heathrow, the transactions all take place quickly (perhaps in the same day) and the pallet moves out again.
21. [HMCE] estimate … that the annual cost to the UK in 2002–3 was between £1.65 and £2.64 billion. The problem is, whatever the precise figure, vast. It is not confined to the UK but is EU wide…"
One of the features of carousel fraud is that there is no need to find real end-customers for the goods in the United Kingdom. The overseas customer to whom the goods are exported may or may not be a genuine purchaser of them. It is because the goods may end up with the original supplier that the designation "carousel" is used. Dishonest schemes of this nature have become known as missing trader intra-community fraud, or "MTIC fraud" for short.
The value to those participating in MTIC fraud is the sharing of the VAT extracted from HMCE (effectively the amount of the output tax which the missing importer has charged to his purchaser but failed to pay to HMCE). It is only if the exporter fails to recover the input tax he has paid on his acquisition of the goods that the VAT position is neutral. Since the transactions—certainly those that the evidence before me has explored—can take place (or are said by the parties to them to have taken place) in the space of a single day (with completion of the transactions occurring over, at the most, a few days) and it may be some time before the importer defaults on his obligation to account for the output tax he has charged and been paid, it requires vigilance on the part of HMCE to realise, when a payment claim is made, that it is part of a carousel fraud.
It can happen that one or more of the "buffers" is innocent of any involvement in the fraud: he just happens to have purchased the goods and sold them on. But if the goods end up with an exporter who is involved in the fraud (because, for example, it can be shown that he is the recipient of a commission or the like which has been paid to him by a purchaser/vendor higher up the chain or coincidence cannot satisfactorily account for the number of chains in which that exporter and the same importer are involved) the buffer may find it difficult to resist the inference that he too is involved, particularly if he has sold direct to that exporter or there are other features of his involvement indicating that his purchase and on-sale are other than what one would expect in the case of a genuine arms-length transaction.
Regalway and the defendants
It was (and is) the contention of HMCE that Regalway has been involved in MTIC fraud in its role as importer of goods (mobile phones and computer parts) into the United Kingdom. It led to an application by HMCE for the appointment of a provision liquidator of Regalway. The application came before me on 6 October 2004 when I appointed Mr Hellard as provisional liquidator. I did so on evidence which strongly suggested that Regalway, which had been incorporated as recently as 17 March 2004, had indeed been involved in fraudulent activities of the kind that I have just described. The evidence indicated that it had liabilities to HMCE for unpaid VAT of around £3 million (of which £1.4 million odd had been the subject of an assessment dated 6 September 2004) and that, despite warnings from HMCE, had continued a pattern of trading (very strongly suggestive of its involvement in MTIC fraud) whereby it directed the payment to third parties of monies due to it from its sales so as to disable it from meeting its VAT liability, which was steadily increasing. Mr Hellard's appointment was followed immediately by an application by Regalway, acting now by Mr Hellard as its provisional liquidator, for freezing order relief against the defendants as being involved in the pattern of trading which had knowingly brought about...
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