Appeal Number:LON/2008/1510

[2010] UKFTT 486 (TC)

TC00746

Appeal number:LON/2008/1510

VAT – MTIC fraud – application of the Kittel test as interpreted in Mobilx & Others v HMRC [2010] STC 1436 – Whether Appellant knew or ought to have known that its transactions were connected with a of fraudulent evasion of VAT – Appeal dismissed

FIRST-TIER TRIBUNAL

TAX

3RDGENERATION COMMUNICATION LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

TRIBUNAL: JOHN BROOKS (TRIBUNAL JUDGE)

ELIZABETHBRIDGE (MEMBER)

Sitting in public at 45 Bedford Square, London WC1 on 16 – 20 and 23 August 2010

The Appellant did not appear and was not represented

Karen Robinson and Fiona Dewar, counsel, instructed by Howes Percival LLP for the Respondents

© CROWN COPYRIGHT 2010

1

DECISION

1.3RD Generation Communications Limited (“3GCL”) appealsagainst a decision of the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”), contained in a letter dated 12 June 2008, denying it the right to deduct input tax of £394,450 claimed in respect of four transactions in the VAT accounting period to 31 July 2006.HMRC contend that each of these four transactions or deals was connected to the fraudulent evasion of VAT and that 3GCL knew or should have known that the transactions were so connected and that, as such, this is an archetypal case of missing trader intra-community (“MTIC”) fraud.

Absence of the Appellant

2.The substantive hearing of this appeal was listed, with a time estimate of nine days, to commence on Monday 16 August 2010. However, on the first morning, before the hearing commenced, we received a letter, dated 12 August 2010,from Samir Fattah, the director of 3GCL, addressed to “Judge Brook” (sic) in which he wrote “regarding the upcoming trial … which will take place on 16 August and will end on 26 August 2010” explaining that due to the financial difficulties arising as a result of this case 3GCL did not have any legal representation and because of the “technical complexity of the case” he had found himself increasingly out of his depthand this was having an adverse effect on his private and business life. As such, Mr Fattahfelt that it would be unwise for him “to attend the court.” The letter concluded with a request that the Tribunal “make a ruling without me there”relying “on your fair judgment of this case given all the evidence you have at your disposal.”

3.Rule 33 of Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 (the “Rules”) provides that if “a party fails to attend a hearing the Tribunal may proceed with the hearing if the Tribunal—

(a)is satisfied that the party has been notified of the hearing or that reasonable steps have been taken to notify the party of the hearing and;

(b)considers it is in the interests of justice to proceed with the hearing.

4.As the letter refers to the dates for which the appeal was listed we were satisfied that 3GCL had been notified of the hearing. Also, having regard to the circumstances, especially as 3GCL had not sought an adjournment but had specifically requested that the hearing should proceed in its absence; that the appeal was against a decision of HMRC made in 2008 over two years previously; and the potential difficulties of the matter being re-listed having to take account of the availability of witnesses and counsel we considered, without seeking submissions on the issue from HMRC, that it was in the interests of justice to proceed with the hearing.

5.Therefore, at the commencement of proceedings we informed those representing HMRC of the contents of Mr Fattah’s letter and,as we were satisfied that the Appellant had been notified of the hearing and considered it was in the interests of justice to do so, that we would hear the appeal in the absence of the Appellant in accordance with Rule 33.

Evidence

6.We heard oral evidence from Kenneth Rhodes, a Higher Officer of HMRC and 3GCL’s case officer, Nigel Saunders, also a Higher Officer of HMRC. In addition wewere provided with witness statements from HMRC Officers Ian Henderson and Kirsty Jolliffe. Although both Mr Henderson and Ms Jolliffe were willing to make themselves available to give oral evidence, having read their witness statements and on being informed that 3GCL had indicated that it did not require their attendance to challenge what they said in the statements, we concluded that this was not necessary and that their signed witness statements, both which contain a statement of truth, would stand as their evidence.

7.Although 3GCL did not attend and was not represented at the hearing it had served two witness statements, dated 11 February and 8 July 2009 respectively, bothof which were made by Samir Fattah. Counsel for HMRC, in closing submissions, referred to “first principles” of evidence whichtend to suggest that in order to rely on the evidence contained in these statements 3GCL ought to have called the witness to give evidence and that as it did not do so there was an argument that the contents of the statements, with which HMRC do not agree, ought not to be admitted in evidence in any form. However, Rule 15(2)(a) of the Rules provides that the Tribunal may “admit evidence whether or not the evidence would be admissible in a civil trial in the United Kingdom”. We therefore consider it appropriate to admit the evidence contained in Mr Fattah’s witness statements as hearsay evidence (i.e. a statement made otherwise than by a person while giving oral evidence in proceedings, which is tendered as evidence of the matters stated)but attach less weight to this evidence than would have been the case had Mr Fattah given oral evidence under oath whichcould have tested under cross examination.

8.We also received extensive documentary evidence including witness statements from those witnesses who gave oral evidence.

Facts

9.Having considered the evidence we find the following facts.

10.3GCL was established on 27 September 2000. Its sole director, from 13 November 2000, is Samir Fattah. The Company Secretary, until 13 May 2006, was Mr Fattah’s brother Hassan Fattah who was replaced by another brother, Mohamed Fattah who is the current Company Secretary. It operates from premises, which are also its registered office, in South Kensington, London, trading as ‘Digital Planet’ and was registered for VAT on1 December 2000. It was originally engaged in retail sales of mobile phones but expanded to include the high volume wholesale mobile phone market from 2004 onwards finding its suppliers and customers through trade fairs and through the use of the International Phone Traders (“IPT”) and GSM exchange websites. It did not have contracts with either its suppliers or customers instead relying on their reputation and credibility in the industry. However, ownership of the goods concerned is, according to Samir Fattah in his witness statement of 11 February 2009, only transferred once 3GCL has received payment.

11.3GCL’s registered office was also the registered office of two other companies, Esperanza Ltd (“Esperanza”),from February 2003 to September 2005, and Root 89 Ltd, to September 2005. Both companies were engaged in wholesale sales of mobile phones and shared trade information with 3GCL. A letter sent to Esperanza by HMRC on 12 April 2006 which informed Esperanza of the circularity of goods it had exported in December 2005 involving a particular freight forwarder and Swiss warehouse highlighting the probable operation of MTIC fraud provides an example of information sharing between the companies as following receipt of the letter by Esperanza, 3GCL which until then had used the same freight forwarder and Swiss warehouses, conducted no further business with them.

12.Hassan Fattah, 3GCL’s original Company Secretary, was the director of Esperanza from 10 March 2003 to 31 May 2005 when he was replaced as director by Mohamed Fattah, 3GCL’s current Company Secretary.

13.The expansion by 3GCL into the wholesale mobile phone market had a dramatic effect on its turnover as can be seen from the figures taken from its financial accounts filed at Companies House. In the period from 1 October 2003to 31 October 2004 its turnover was £794,028 whereas in the next 12 months (1 November 2004to 31 October 2005) this had increased to £9,754,678. Although its turnover grew by 1,128%over the same period 3GCL’s net assets increased from £36,452 to £83,806 (129%) and its overheads from £69,083 to £81,596 (18%).

14.On 4 April 2005HMRC wrote to 3GCL advising its director of the characteristics and scale of MTIC fraud in the mobile phone trade sector and of the necessity of the company to verify the VAT particulars of potential customers and suppliers through HMRC’s Redhill office. This was followed by an unannounced visit to 3GCL on 6 April 2006 by HMRC Officer Andrew Monk. The reason for the visit was that an internal HMRC verification reference had identified MTIC concerns in relation to a customer of 3GCL. Officer Monk explained the nature of MTIC fraud to Samir Fattah and warned him of the need to carefully check suppliers to ensure their legitimacy as 3GCL could be liable under the “joint and several liability” provisions for any tax loss.

15.On 20 May 20053GCL wrote to HMRC requesting that it be allowed to submit its VAT returns on a monthly rather than a quarterly basis to enable it to receive repayments of VAT more frequently. However, this was refused as 3GCL did not meet HMRC’s criteria for allowing a trader to submit monthly returns. The decision was upheld following a review. In giving the reasons for the refusal HMRC, in a letter dated 29 September 2005 to 3GCL, referred to a verification exercise conducted in relation to 3GCL’s VAT periods ending 30 April 2005 and 31 July 2005 in which there had been defaults in payments to HMRCin all transactions by UK traders who had raised invoices charging an amount shown as VAT. The letter continued stating that the writer:

… was concerned that the granting of the monthly facility would expose HMRC to a higher volume of transactions by those persons intending to abuse the VAT system than would otherwise be the case, thereby increasing the loss of revenue.

16.Following the initial request by 3GCL to change to monthly returns the company was allocated an “Assurance Officer” by HMRC who, on 2 June 2005, wrote to 3GCL, with the letter marked for the attention of Samir Fattah, in the following terms:

Following my [telephone] conversation with Mr Hassan Fattah dated 1 June 2005, I confirm in writing as follows:

I told Mr Hassan Fattah about the scale of Missing Trader Intra Community (MTIC) fraud within the United Kingdom. Investigations of MTIC fraud are Customs and Excise’s top VAT fraud priority and the department will continue to tackle the criminality behind this type of fraud. …

As part of the anti fraud measures introduced in the April 2003 Budget to combat MTIC fraud, traders are expected to make reasonable commercial checks in respect of their customers and suppliers. Examples of these checks were included in Notice 726 Joint and Several Liability [which Mr Fattah has confirmed he has read], the statement of practice concerning input tax deductions without a valid invoice and Notice 700/52 – Notice of Requirement to give security to HM Revenue and Customs.

If you are buying and selling any goods you should be able to provide details regarding the goods you are trading such as serial numbers, part number, batch number, product details, quantity, price per unit, what market research you carried out, name of the manufacturer, website address, contact name, name of the authorised distributor etc I clarify that this is just a guideline, not an exhaustive list. Similarly, if you are to trade in services we would like to know who is the service provider, agreement /contract, copyright etc again this is not an exhaustive list. The full details provided by you will help us to verify the transactions from the source i.e. the manufacturer.

Please validate the VAT number of your supplier and customer on a monthly basis at our Redhill office by giving them full details of your deal.

Also, because of the prevalence of VAT fraud in the mobile phone business, payments from/to 3rd parties are one of the indicators that a carousel fraud may be in progress. It is our view that if people were carrying out business worth millions of pounds they would have a company bank account with a reputable bank. In a case of your supplier, who request you to make a third party payment in relation to your purchases you should refrain from doing so. If you are making a third party payment it would raise serious doubts as to whether you were taking reasonable steps in order to ensure VAT had been paid further down the transaction chain. This would be likely to lead C&E to consider applying the J&S measure. Similarly, if the customer is insistent on paying in this way, get from them, and retain for future reference, why the company itself is not paying, who is paying, name and address, business details and what connection they are with the customer.

In addition, we would like to clarify that if you are planning to export please note that the vague description of, "electrical equipment" on the airway bills or any export evidence is not sufficient for our purposes. The goods must be accurately described and I can't think of any other description than, "mobile phones - Philips manufacturer model no FISIO 120". The Public Notice 703 Exports and removals of goods from the UK - explains this further. The proper description of goods is a requirement, in order for you to continue to zero rate your export sales.

Regarding commercial checks Mr Hassan Fattah told me that you check validity of VAT number via our Redhill office and speak to your supplier or customer and receive their VAT certificate by fax. I must point out to you that to check the VAT certificate is not considered as taking reasonable checks. I would strongly advise you to carry out credit checks for all your suppliers and customers as a matter of routine. Of course it is your commercial decision if you do not wish to burden yourself with credit checks and any other commercial checks that may be available to you, but that means that you may be Jointly and Severally Liable for any loss of revenue from within a transaction chain on which HMRC consider you have not taken all reasonable steps.

I would also advise you to check with your freight forwarder regarding the goods you are to trade before you make any transaction. For example to find out how long the goods have been in their warehouses and how many times they have been traded or how many release notes have been issued with confirmation in writing. This confirmation must be kept as part of your checks against this transaction. If the goods have been there a short time with several release notes issued that only suggests that there is a defaulter or missing trader in the bottom of a transaction chain with this knowledge you can avoid that chain.

I have noted your concerns. It would not be appropriate for us to tell you how to conduct your business. It is up to you to take commercial decisions. You should be able to demonstrate, by obtaining all relevant information, regarding any product that the proposed transactions are bona fide. …

17.3GCL did implement further ‘due diligence’ measures to obtain information on its suppliers and customers. This was described by Mr Fattah during a telephone conversation with the Assurance Officer as consisting of checking the validity of UK and EU VAT numbers with HMRC’s Redhill office, requesting a trade references, obtaining copies of a current company utility bill and the passports and driving licence of directors, visiting the trading address of suppliers, occasional inspection of bank statements and obtaining copies of the VAT registration and Companies House certificates together with signed declarations of terms of trade.

18.In a letter, dated 28 September 2005, writtenshortly after that telephone conversation, the Assurance Officer, who had verified repayment claims by 3GCL for the VAT periods ending in April and July 2005, informed the company that tax losses by defaulters had been identified in every one of the 19 transactions completed over the two periods. However,a VAT repayment of £88,275.99, in respect of the later of the periods, was released on a ‘without prejudice’ basis and 3GCL was again warned of the need to conduct enquiries and make independent checks in addition to those taken already by the company as described by Mr Fattah in the telephone conversation preceding the letter were not considered adequate. The letter also noted that the Assurance Officer had been told that 3GCL only pays its suppliers when they release the goods.

19.On 8 February 2006 3GCL was visited by HMRC Officers. The purpose of the visit was to warn 3GCL of the need to guard against risks associated with MTIC fraud as evidence had come to light of the possible circularity of goods in relation to a transaction by Top Telecoms, a supplier of 3GCL. Mr Fattah was told that inspections by HMRC at the Freight Clearance Centre in Dover on 26 January and 1 February 2006had identified the very same mobile phones being exported from the UKon each occasion. Although, other than state that Top Telecoms were credible and that he did not know the identities of the other companies in the supply chain, Mr Fattah did not comment on the transactions. However, the HMRC Officers noted that 3GCL had no system in place to retain the unique IMEI numbers of mobile phones which meant that it had no control in place to identify the goods and detect or prevent their circular movement.