Unistar Group Ltd and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 February 2013 |
| Neutral Citation | [2013] UKFTT 344 (TC) |
| Date | 19 February 2013 |
| Court | First-tier Tribunal (Tax Chamber) |
[2013] UKFTT 344 (TC)
Judge David S Porter, Alban Holden.
Mr Ian Bridge, of counsel, instructed by Barringtons Chartered Accountants, appeared for the Appellants
Mr Vinesh Mandalia, of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs appeared for the Respondents
Value added tax - Missing trader intra-community ("MTIC") - sale of mobile phones and CPUs - appellants' three repayment claims by Unistar Group Limited for the periods April 2006, May 2006 in the sums of £391,628.65, £937,723.15 and in relation to period May 2006 in the sum of £126,781.20 and in relation to Unistar Trading Limited for the period April 2006 in the sums of £604,939,14 and £328,514.91 - allowed on grounds that the appellants neither knew nor ought to have known that the transactions were part of an MTIC fraud - appeal allowed.
The First-tier Tribunal allowed the taxpayer companies' appeal against HMRC's refusal to repay input tax in respect of their sale of mobile phones for the relevant periods. The taxpayers' managing director had no reason to believe that the traders he dealt with were less than honest and commercially viable. Some of the traders were still in the mobile trade business even after HMRC's introduction of the reverse charge to stop MTIC fraud cases. The taxpayers asked for details of international mobile station equipment identity ("IMEI") numbers before the transactions were entered into so that they could check that the phones existed and whether they had dealt with the phones before. The taxpayers had not released any of the goods until they had been paid. As the payments were all made through the UK banks, even where they originated from a foreign bank account, it would not have been possible for the taxpayers' accounts to have been manipulated by a third party. Thus, the taxpayers neither knew nor ought to have known, through their managing director, that the transactions that they entered into were connected with the fraudulent evasion of VAT.
The taxpayers were engaged in the import and distribution of mobile phones. They claimed for repayment of VAT for the periods April 2006 and May 2006. An HMRC officer wrote to the taxpayers refusing to make the repayment. In his opinion, the taxpayers either knew or ought to have known that the deals in which they were involved were connected with the evasion of VAT.
The taxpayers contended that none of the deals were contrived. All of the deals were negotiated either in transactions in the UK or in Europe. Most of the deals were brokerage deals involving the onward sale of goods purchased specifically for the taxpayers. The taxpayers' managing director ("Mr S") regularly checked the VAT details of the suppliers before he engaged to trade with them. The taxpayers sent monthly returns to HMRC together with a spreadsheet relating to previous trading periods. Mr S and the other director ("Mr H") visited the premises of the taxpayers' suppliers. The taxpayers only used one freight forwarder ("Hawk"). The products that the taxpayers purchased were individually inspected and the IMEI numbers verified. Before an inspection took place, Hawk was asked to send ten specimen IMEI numbers so that the taxpayers could check that they were in order. The taxpayers had checked all the IMEI numbers in each of the deals, downloaded the information from the computer at Hawk and made them available to HMRC. The results had been e-mailed to HMRC during the preparation for the appeal.
HMRC contended that all of the taxpayers' deals were contrived because they took place on the same day. None of the chains could be traced to a manufacturer or even to an authorised distributor. The supply chains lacked any commercial reality. The goods were acquired from a trader in a European country and passed through several buffers in the UK before being exported to another trader in another European country by the taxpayers. The membership of the supply chains showed a remarkable degree of consistency; sometimes several chains contained precisely the same members in precisely the same order. The chances of that occurring in a genuine market were infinitesimally remote.
The Tribunal held that at the time of the relevant deals, the taxpayers had a good working relationship with HMRC. They had provided HMRC with details of their deals throughout the period that they had been operating. The taxpayers had not made due diligence enquiries both with regard to their suppliers and customers because Mr S had been working with all his customers and suppliers for many years and he knew them well. He had followed HMRC's advice in their warnings with regard to MTIC fraud that the taxpayers should not deal with many traders. He had no reason to believe that the traders he dealt with were less than honest and commercially viable. Significantly, some of the taxpayers' suppliers were still in the mobile trade business even after the introduction of the reverse charge. Whilst some of the documentation of the deal packs relating to the relevant transactions was incomplete, the Tribunal was satisfied that Mr S believed the transactions to be genuine. He had a very thorough knowledge of all the deals. He had been able to explain discrepancies where they had arisen. In any event, much of the documentation had cross-references to earlier deals to explain such discrepancies.
At the front of each deal pack, the invoices carried a "tick box" identifying the export sales. The boxes required Mr S, Mr H and the other members of the staff to tick the appropriate box to confirm compliance as the transaction progressed. It was clear from the evidence that such checks had been made. It was unlikely that the members of the staff would be parties to the fraud as they were going about their usual business. Appropriate insurance cover was taken out for each of the deals. There was evidence that the taxpayers asked for details of IMEI numbers before the transactions were entered into so that they could check that the phones existed and whether they had dealt with the phones before.
The HMRC officer's evidence in respect of the taxpayers' connection to fraud was unsatisfactory. He was not entirely familiar with the matters that he had been asked to consider. He appeared to have been given the packs by other officers at HMRC. Mr S produced evidence of standard documentation that he always provided to Hawk. Most of those documents produced to the Tribunal did not relate to the deals subject of this appeal. However, from the evidence Mr S had produced, and his concern to ensure that the taxpayers were not dealing with transactions that might be involved with fraud, the Tribunal was satisfied that similar documentation was used in the appeal deals. The evidence showed that the taxpayers had not released any of the goods until they had been paid.
The Tribunal accepted that as the payments were all made through the UK banks, even where they originated from a foreign bank account, it would not have been possible for the taxpayers' accounts to have been manipulated by a third party. Furthermore, if the banks were prepared to accept payments from the traders without question, it would be unreasonable to expect Mr S to be put on enquiry. Although several payments did suggest circularity of the movement of the funds, those payments also indicated that other transactions were taking place at the same time. Even more telling was that all those transactions passed through the taxpayers' UK bank account. If the fraudsters were concerned that they should receive a return of the money that they had introduced, they were severely at risk in allowing the same to pass through an independent UK bank account. If either of the taxpayers were at their overdraft limit, there would have been every chance that the money would not have been returned to the fraudsters. Anxious to avoid any risk of becoming involved in MTIC fraud, Mr S rightly insisted that all payments should pass through the taxpayers' bank accounts.
Even though some of the evidence was unsatisfactory, the Tribunal was satisfied from the evidence that the taxpayers, through Mr S, neither knew or ought to have known that the transactions that they entered into were connected with the fraudulent evasion of VAT.
The decision has emphasised the importance of diligence on the part of the taxpayers or their officers in dealing with their suppliers to ensure that they will not be involved in fraudulent trades. The steps undertaken by the taxpayers' managing director in this case exemplify the kind of diligence expected from traders. For commentary on liability for carousel fraud/MTIC, see CCH VAT Reporter at 60-620.
[1]Mr Ruarri Spurgeon (Mr Spurgeon), Managing Director of both companies, appeals on behalf of Unistar Group Limited (Group) and Unistar Trading Limited (Trading) (together referred to as the Companies) against the decisions of the Respondents (HMRC) contained in three letters two dated 7 December 2007 and one dated 24 January 2008, refusing to repay VAT. Mr Spurgeon says that the VAT repayments are due to the Group for periods 04/06 and 05/06 amounting to £391,628.65, £937,723.15 and £126,781.20 and due to Trading for the period 04/06 and 05/06 amounting to £604,939.14 and £328,514.91 respectively. He says that he has been trading in mobile phones since May 2001 and that he neither knew nor ought to have known on behalf of the Companies that the transactions in which the Companies were involved were connected with fraud. HMRC say that in light of the Companies poor due diligence and the fact that many of the transactions were connected with fraud Mr Spurgeon must have known, or ought to have known, on behalf of the Companies that the transactions were connected with fraud.
[2]Mr Vinesh Mandalia, of counsel, appeared for HMRC and produced 37 bundles of evidence...
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