Davis & Dann Ltd & Anor v Revenue & Customs [2012] UKFTT 55 (TC) (17 January 2012)

judgment Moses LJ said at page 1459: “ But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the BSG appeal, tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud." 211. Mr Benson noted that Mr Scorey on behalf of the Appellants argued that HMRC had pleaded that it was Leeming that had evaded VAT and had not expressly pleaded fraud against others in the chain. He noted that the Appellants, in opening, put their case as follows: "… There is nothing wrong with the sale between Bristol Cash and Carry to us, nor us to CEMSA. They are not parties to the fraud." 212. Mr Benson submitted that it was a non sequitur to say that in the absence of an express pleading of fraud as against Bristol and/or CEMSA "there is nothing wrong with" the relevant sale. The Appellants were not entitled to ignore the objective circumstances in which its transactions took place. Mr Benson argued that, quite apart from the knowledge of Bristol and/or CEMSA, the characteristics of the transactions were such that a reasonable trader in the position of the Appellants would have concluded that they were connected with fraud. 213. Mr Benson submitted that it was clear that the Appellants should, from all the circumstances, have known that its transactions in dispute were connected with the fraudulent evasion of VAT. Mr Benson asked that the appeals be dismissed and applied for costs. Submissions on behalf of the Appellants 214. Mr Scorey submitted 67 pages of written closing submissions which were also summarised orally. It is not possible for us fully to summarise Mr Scorey’s careful and detailed submissions, but the main points were as follows. 215. Mr Scorey noted that the only issue in dispute between the parties was whether the Appellants should have concluded that the only reasonable explanation for the transactions was that they were connected with fraud. He submitted that HMRC's evidence fell far short of demonstrating this. HMRC could not prove that a reasonable trader in the Appellants' position would have recognised that the deals in April and May 2006 were in fact connected to a fraud, particularly in circumstances where input tax incurred in respect of identical transactions in February and March 2006 had been repaid. 216. The Appellants were part of an established business that had been trading for some 30 years. The business involved exploiting opportunities in the legitimate grey market for FMCGs. Their success had been recognised by the award of the Queen’s Award for Enterprise (Export) in 1997 and 2002. The Appellants' group were authorised distributors in other jurisdictions. 217. The Appellants purchased “hundreds of thousands” of cases of Gillette razor blades over the years, including over 20,000 cases in 2010 alone. Their experience of large volumes was not confined to razor blades. At one time, Davis & Dann also traded in a quantity of Huggies. In addition, Davis & Dann had also long been a serious player in the markets for Red Bull and Coca-Cola. Against that background, the deals in issue were entirely consistent with the Appellants' experience and understanding of the size of the Gillette market for razor blades. 218. Mr Storey submitted that HMRC had failed to identify the means by which the Appellants could and should have known about the pre-existing fraud in the supply chain. He submitted that nothing of which complaint was made would have alerted a reasonable trader in the position of the Appellants (and with the Appellants’ experience) to the fact that these transactions were connected to a prior fraud. In short, HMRC's case lacked the essential ingredient of causation. 219. Mr Scorey noted that HMRC took until March 2007, with all the resources available to the State, to conclude that repayments should be disallowed. The test employed by HMRC at that stage was a lower evidential requirement than that dictated by Moses LJ in Mobilx i.e. HMRC, at that stage, considered that the transactions "may" have formed part of an overall scheme to defraud the revenue. 220. We were invited by Mr Scorey to conclude that all the witnesses were credible and honest. Moreover, insofar as the evidence concerned the nature of the Appellants' business, trading history and the circumstances of the disputed deals, Mr Scorey submitted that the Appellants' evidence should carry more weight. 221. Mr Scorey relied on the decision of the High Court in Locke v Stuart & Anor [2011] EWHC 399 (QB) (a decision of Mr Andrew Edis QC sitting as a judge of the High Court) at paragraph 39: " Insurers making allegations of the kind which I have found proved in this case must do so with care. Their legal advisers have obligations which require them to advance such allegations only on proper grounds. I consider it to be inappropriate for trial bundles to contain the names and personal details of people with the suggestion that they have been guilty of fraud unless there are proper grounds evidentially for that assertion. " 222. He submitted, therefore, that it was improper of HMRC to suggest fraud on the part of any party other than Leeming in the course of these proceedings. 223. Complaints about due diligence in respect of CEMSA were, in Mr Scorey's submission, irrelevant because no wrongdoing was alleged against CEMSA. Nothing done or undone in relation to CEMSA would have alerted the Appellants to the connection with fraud. Mr Scorey made the same submission in respect of 1st Freight, the freight forwarder. 224. Mr Scorey drew attention, in his submission, to the narrow ambit of the dispute between the parties. This was as follows: (1) Leeming, the importer, fraudulently failed to account for output tax. (2) No allegation of actual knowledge or complicity by the Appellants, Bristol, and CEMSA in respect of MTIC fraud had been advanced by HMRC. (3) The M3 Power razor blades purchased by the Appellants did in fact exist, notwithstanding the fact that they were purchased in high volumes and constituted a large market share (by reference to the retail market, but not by reference to the grey market). (4) There was no allegation that the goods had been "carouselled" or were part of a contrived deal chain. (5) The goods were traded at normal grey market prices, which, of course, were below the white market list price. There was no suggestion that the price must have been artificially depressed by reason of fraud or prior evasion of VAT. 225. The correct legal test in the light of Mobilx was not whether traders, such as the Appellants, exercised reasonable due diligence but whether they should have known that the transaction was in fact connected to a fraudulent evasion of VAT. A helpful way of establishing this, to which Moses LJ repeatedly referred on behalf of a unanimous Court of Appeal, was to ask whether the only reasonable explanation for the circumstances in which the transaction took place was that it was connected to the fraudulent evasion of VAT. It was not enough for HMRC to demonstrate that a trader should have known that its transactions were more likely than not to be connected with fraud. 226. Mr Scorey noted the Tribunal decision in Network Euro v HMRC [2011] UK FTT 255 (TC) . Mr Scorey agreed with HMRC's submission that Mobilx did not limit them to showing means of knowledge by reference to what was the only reasonable explanation for the transaction. But if HMRC did not show that the only reasonable explanation for the transaction was that it was connected to fraud, then in some other way they needed to establish that the Appellants should have known that the transaction was connected with fraud. Mr Scorey noted that HMRC adopted the "only reasonable explanation" test in their skeleton argument and submitted that it was a useful standard by which to judge HMRC's case. 227. Mr Scorey submitted that HMRC had to identify some aspect of the transaction that called for an explanation i.e. the circumstances had to be such that the taxpayer should make enquiries as to whether those circumstances arose from a fraudulent evasion of tax. Mr Storey submitted that HMRC had failed to identify any circumstance which demanded an explanation because of an antecedent fraud. 228. The burden of proof lay upon HMRC. Moses LJ in Mobilx held as follows at paragraph 81: “HMRC raised in writing the question as to where the burden of proof lies. It is plain that if HMRC wishes to assert that a trader's state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion. No sensible argument was advanced to the contrary." 229. Mr Scorey submitted that the logical corollary was that to the extent any aspect of HMRC's case (a) had not either been sufficiently pleaded or particularised or (b) deviated from their pleaded case as amended, it was consistent with the principle of fundamental fairness that HMRC be precluded from running such an unpleaded or unparticularised case. 230. Mr Scorey further noted HMRC's reliance on the dicta of Moses LJ at paragraphs 82 – 83 of Mobilx , where he emphasised that undue focus should not be placed on the question of due diligence but rather Tribunal's should consider "attendant circumstances in context" and the "totality of the deals affected by the taxpayer." He submitted that by directing attention to the "bigger picture", HMRC sought to divert the Tribunal's attention from the lack of causation demonstrated by HMRC in their evidence. 231. Mr Scorey noted that, in contrast to other MTIC appeals, in which HMRC have produced evidence on the grey market for the goods in question, in this appeal HMRC had only brought forward evidence as to the authorised or white market distribution in the UK. Ms Jones, an executive of Proctor & Gamble, had given evidence regarding her lack of expertise in the grey market. She also accepted that her white market knowledge was limited to the UK. She also confirmed that Proctor & Gamble was opposed to grey market trading by confirming that they preferred to reduce the amount of grey market material so that Proctor & Gamble could sell as much as possible at their list price. Mr Scorey therefore submitted that Ms Jones's evidence was of limited assistance. Ms Jones had no knowledge of, or way of finding out about, cross-border grey market activity that did not result in UK supermarket tills sales. 232. Mr Scorey submitted that the failure of HMRC to reduce relevant evidence as to the grey market for Gillette goods contrasted with the compelling evidence given by the Appellants, based on their substantial trading history in grey market commodities over many years. 233. The Appellants had traded in substantial quantities of Coca-Cola, Red Bull and Kimberly-Clark Huggies nappies. The Appellants had traded in razor blades since 1983 since which time they had traded in hundreds of thousands of cases. They had purchased significant volumes from both Gillette directly and in the grey market. 234. The Appellants had continued to trade in large quantities of Gillette razor blades in the grey market since the disputed transactions. Mr Rashmi Chatwani explained that such a grey market source was not uncommon in his experience. 235. Grey market trading by the Appellants was opportunistic and this, therefore, resulted in fluctuating turnover from year to year. 236. A proportion of the M3 Power razor blades were promotional packs which provided an opportunity to win tickets for the 2006 World Cup. As was apparent from the sample of the actual products purchased, the promotion expired on 15 April 2006 (the World Cup occurred in June July 2006), which might explain their presence on the grey market. 237. Mr Scorey submitted that in order to find that the Appellants should have known that the only reasonable explanation for its transactions was that they were connected with fraud, the Tribunal had to be satisfied that: (1) The Appellants had the means, at the time of entering into the transactions, of discovering that the transactions were connected to the specific tax losses attributable to fraud earlier in the supply chains. (2) The Appellants were culpable or at fault and failing to discover the fraud despite having the means to do so. When assessing the means available to the Appellants, the analysis must take into account the subjective characteristics of the Appellants, including the resources available to them. The concepts of reasonableness and proportionality had to be taken into account. 238. Mr Scorey characterised HMRC's case as an invitation to the Tribunal to infer from the evidence that the Appellants should have known telepathically that the transactions were connected to an unspecified, unnamed and unknown VAT fraud. Mr Scorey submitted that the surrounding circumstances did not hint at any possible fraud, nor did the nature of the individual transactions betray any suspicion of a connection to fraud. The transactions entered into by the Appellants were themselves bona fide and materially identical to previous transactions which, he submitted, were untainted by fraud in February and March 2006. 239. Thus, Mr Scorey's primary submission was that HMRC could not prove their case and that, therefore, the appeals must be allowed. 240. Alternatively, the Appellants advanced a positive case that they should not – indeed could not – have known about any connection with Leeming's fraud. The Appellants took reasonable and proportionate steps to guard against becoming an unwitting participant in MTIC fraud. Objectively, there was no reason to suspect that the transactions were connected with fraud. 241. It was important to bear in mind, Mr Scorey submitted, that: (1) the only allegation of fraud was directed at Leeming. (2) No allegation of fraud or wrongdoing was alleged against the Appellants. (3) It was not alleged that the Appellants had any dealings with Leeming. (4) It was not alleged that any member of the supply chain (including Bristol and CEMSA) were party to the fraud perpetrated by Leeming. (5) It was not alleged that any party "manoeuvred" the Appellants into purchasing the goods. (6) No allegations could be made that the Appellants' transactions were other than genuine commercial purchases from, and sales to, legitimate counter-parties. 242. Mr Scorey submitted that HMRC could not advance a logical case on causation in relation to CEMSA (or their third-party distributor, GR Distribution). 243. Mr Scorey also submitted that the issue (of what the Appellants should have known) had to be assessed at the time of entry by the Appellants into the transactions in dispute. Hindsight could not be used. 244. In relation to pleaded allegations made by HMRC, Mr Scorey accepted that the Appellants as experienced and responsible traders were generally aware of MTIC fraud but took steps to avoid it. They also appreciated that MTIC fraud could affect FMCGs 245. Ms Okolo had accepted that HMRC had not notified the Appellants that the Gillette razor blade deals in May and June 2003 had been traced back to a fraudulent tax loss. 246. As regards Bristol, no allegation of fraud was made by HMRC. Mr Tailor's evidence was that Bristol operated a well-resourced cash and carry business dealing in a range of items. The Appellants' evidence was that it was not unusual to be approached by new suppliers. CEMSA did not make contact until several weeks later – not "in quick succession" as alleged by HMRC. The Appellants carried out due diligence on Bristol. Mr Tailor considered that his first-hand knowledge was more current than the generic "Risk Disk" data. He took the reasonable view that where a company was listed as dormant, it could recommence trading at any time. 247. Mr Tailor visited Bristol's premises to verify that the business was legitimate, even though the Appellants were not offering credit. He inspected stock, concluded that it existed and was genuine. He took photographs of the stock. None of this evidence was challenged. He observed significant trading activity notwithstanding that Bristol was a newly formed company. Mr Scorey noted, on the other hand, that Ms Okolo had never visited Bristol's premises. He invited the Tribunal to conclude that Mr Tailor's first-hand knowledge carried greater weight than Ms Okolo's perusal of an out of date company report. 248. The fact that Bristol was substantially a drinks cash and carry was not of concern to the Appellants. This was not surprising, given that Davis & Dann, conversely, specialised in toiletries but had a large volume of grey market trading in soft drinks. 249. As regards the suggestion that the credit terms offered by Bristol called for an explanation, the Appellants’ evidence was that they did not consider it unusual that Bristol might be able to fund 18 of the 20 deals in which credit was provided. 250. In respect of CEMSA, the Appellants spoke with the principal by telephone, verified its VAT registration number, visited its premises in Spain and obtained the necessary company documents (which were translated by Mr Rashmi Chatwani's secretary, a native Spanish speaker). 251. As regards the allegation that it was unusual that CEMSA contacted the Appellants and enquired about the availability of razor blades, Mr Rashmi Chatwani's evidence was that there was nothing odd about this. Moreover, the Appellants did not offer credit to CEMSA and the financing figures contained in the Dunn & Bradstreet report obtained in February 2006 were not particularly relevant. Mr Chatwani also made it clear that the goods had been offered, not just to CEMSA, but also to other potential buyers. 252. Although not pleaded, HMRC had criticised the back-to-back nature of the trades. The Appellants’ evidence was that back-to-back trading was a normal feature of their business. As Mr Tailor explained, "we were not going to buy the goods if we couldn't sell them." This, in Mr Scorey's submission, was commercial common sense. 253. In relation to the fact that the goods were stored at a third-party warehouse (1st Freight), the Appellants had given reasonable explanations as to why the goods were kept at the warehouse. They had satisfied themselves as the security of the warehouse and did not wish to incur the extra risk and expense of moving the goods. 254. As regards the arguments of HMRC in respect of the quantity of M3 Power razor blades that the Appellants were able to source from Bristol, Mr Scorey submitted that the goods in question existed and were the subject of a bona fide sale by Bristol to the Appellants, followed by a bona fide sale to CEMSA. High-volume was a normal feature of grey market trades. 255. Mr Scorey criticised HMRC's evidence in relation to worldwide sales provided by Proctor & Gamble and exhibited to Ms Okolo's witness statement. The document, he said, was obtained from the UK arm of Proctor & Gamble, rather than from any expert grey market source. HMRC did not call the maker of the table to give evidence to explain its significance. The Appellants also noted some minor mathematical errors. Mr Scorey noted that the evidence appeared to be developed by reference to point of sale data for large retailers, rather than by reference to production figures. It was, therefore, a snapshot of monthly sales figures and did not take into account the stock that might be held up in the supply chain. 256. Furthermore, Mr Scorey submitted that the table had only been produced following protracted correspondence between HMRC and Proctor & Gamble. It was not available to the Appellants. Mr Tailor's evidence was that the Appellants regularly dealt in large volumes of Gillette products. He also confirmed that the Appellants had previously bought large quantities of product from suppliers with whom they had never traded before and were new to the marketplace. 257. In relation to the argument put forward by HMRC that the Appellants should have known that the quantities exceeded the likely demand for the M3 Power razor blades, there was no evidence to support this assertion. 258. Mr Scorey described HMRC's case regarding favourable trading terms as an invention of the Commissioners. In addition, there was no antecedent evidence of standard or usual trading terms. In any event, the Appellants confirmed that, by reason of the established nature of their business reputation, they typically benefited from credit terms. 259. In conclusion, in relation to HMRC's pleaded case, Mr Scorey asked: (1) what could/should the Appellants have done differently? (2) What would additional/alternative actions have revealed? (3) Why would such additional/alternative steps have caused the Appellants to realise that the only reasonable explanation for the transactions was fraud? (4) How were HMRC’s allegations sustainable when all the "indices" of fraud which HMRC pointed could just as easily be characterised as the usual incidences of international trade? 260. Mr Scorey submitted that in relation to the "only reasonable explanation" test, the Appellants had met each of the criticisms advance by HMRC with a reasonable explanation. Those explanations lost nothing when considered cumulatively. 261. Mr Scorey criticised the reasons for the denial of input tax given in the decision letters written by Ms Okolo. It was wrong to suggest that the Appellants had received a letter advising them of a hijacked VAT number in relation to the Gillette deals in May/June 2003. In evidence, Ms Okolo accepted that this did not occur. In relation to the CEMSA company documents, Ms Okolo did not enquire whether the Appellants were capable of translating the documents (which they did through Mr Chatwani's secretary). The allegation of lack of formal terms and conditions was erroneous. The Appellants used formal terms and conditions. The allegation in respect of lack of insurance was conceded by Ms Okolo to be a mistake. 262. It was clear from the evidence, that the tax loss issue was resolved by 3 September 2006, when HMRC sent a letter to the Appellants confirming the existence of a fraudulent tax loss attributable to Leeming. Mr Scorey submitted that, at that stage, HMRC were able to form a view of the Appellants' means of knowledge at the time of the transactions. However, they did not do so for another six months. 263. Mr Scorey noted that HMRC had argued that any doubts on the issue of quantity of razor blades could have been resolved by telephone call to Gillette. Mr Scorey submitted that the Appellants had no such "doubt", as they were used to dealing in very high quantities of products. In any event, Mr Rashmi Chatwani had made independent enquiries regarding the products coming onto the grey market with his business contact (the authorised distributor from whom he subsequently made grey market purchases of Gillette products in 2007 and subsequent years). His contact explained that distributors were likely to start selling M3 Powers as the new "Fusion" product was coming onto the market. This was a perfectly rational explanation, which was not challenged in cross examination. Ms Jones had also confirmed that the new "Fusion" product was likely to "cannibalise" the M3 Power market share, which she said was a possible reason why distributors were offloading M3 Power stock onto the grey market. 264. Mr Tailor's evidence had been that it was impractical for grey market traders to verify quantities with Proctor & Gamble. Ms Jones dealt with multinational retailers and national retailers who had grey market divisions themselves. He was not aware of any grey market trader who had ever phoned up a manufacturer to ask for help in relation to purchasing goods on the grey market. Mr Rashmi Chatwani also gave evidence that Proctor & Gamble would not have assisted with such a query. 265. Therefore, in Mr Scorey's submission, any telephone call to Proctor & Gamble requesting verification of market shares and sizes would have been redundant. 266. As regards the fact that the transactions in dispute left the Appellants in a large repayment position – which had previously attracted scrutiny from HMRC – Mr Scorey noted that most of the Appellants' onward sales were exports and therefore did not attract output tax. It was perfectly legitimate for the Appellants to incur input tax and seek a refund on their purchases. The fact that large repayments were previously scrutinised by HMRC could not be relevant, particularly when the Appellants had not been notified that these purchases had been connected to a tax loss. 267. For these reasons, Mr Scorey invited the Tribunal to allow the Appellants' appeals and asked for their costs. Our decision 268. In our view, the Appellants should have known that the transactions in dispute were connected with fraudulent evasion of VAT. 269. In reaching this conclusion we are mindful of the test laid down by the unanimous Court of Appeal in the Mobilx i.e. that HMRC must prove its case and that it is not enough for HMRC to establish merely that the taxpayer should have been aware that its transactions might have been connected to fraudulent evasion. Instead, it was necessary for HMRC to prove that the taxpayer's transactions were connected to fraudulent evasion. The issue had to be determined in the light of the circumstances of which the Appellants were aware or should have been aware at the time the disputed transactions were entered into. It was common ground that the standard of proof was the normal civil standard, viz the balance of probabilities. 270. In our view, the correct test is simply whether the Appellants should have known that its transactions were connected to the fraudulent evasion of VAT. It is not necessary for HMRC to prove that the Appellants should have known the details of the specific fraud or that they should have known that the fraud was carried out by Leeming. 271. We have applied the test repeatedly set out by Moses LJ in Mobilx and summarised by Lewison J in Brayfal and which was referred to in the hearing before us as the "only reasonable explanation" test. As already noted in this decision, Lewison J said: “In answering the factual question, Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focusing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.” 272. In our view, all the circumstances must be considered when applying the Kittel test, as formulated by the Court of Appeal in Mobilx . As Christopher Clarke J said, in his much quoted passage (approved by Moses LJ in Mobilx ) in Red 12 Trading Limited v HMRC [2009] EWHC 2563 (Ch) at paragraphs 109 – 111: "Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and "similar fact" evidence. That is not to alter its character by reference to earlier or later transactions but to discern it. To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands. Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them. " 273. The "only reasonable explanation" test must be, in our view, applied to the totality of the evidence. It is not enough to demonstrate that each characteristic or circumstance, relied on by HMRC to show that the Appellants should have known that the disputed deals were connected to fraud, when viewed in isolation, may have a reasonable explanation. Instead, all the circumstances in which the transactions took place must be considered and the test - the “only reasonable explanation test” - must then be applied in the light of all those circumstances. If it were otherwise, and it was possible to give a potentially reasonable explanation for each allegedly suspicious circumstance viewed in isolation, it would then not be possible to consider the cumulative improbability of all those circumstances combining in relation to the disputed transactions. 274. Moreover, we accepted Mr Benson's submission that the fact that HMRC only alleged fraud in respect of Leeming did not entitle the Appellants to disregard the totality of the circumstances, viewed objectively, in which their transactions took place. 275. Finally, in considering the factual context and circumstances in which the disputed transactions took place, it was necessary to ask, not just (as Mr Scorey put it) what more the Appellants could have done, but it was also necessary to ask what conclusions the Appellants should have drawn from the facts either already known to them or of which they ought to have been aware. 276. We should point out that our conclusions are based on the evidence considered as a whole. Some factors were, in our view, more compelling than others. Some aspects of the evidence were not conclusive by themselves but when viewed in the context of the evidence of the whole, supported our conclusion that the Appellants should have known that their transactions were connected with fraud. 277. We have reached our decision for the following reasons. 278. It was not disputed that the Appellants were aware of MTIC fraud. In May and June 2003 the Appellants had undertaken razor blade deals which had quite plainly caused HMRC considerable concern. The Appellants were aware that MTIC fraud could be conducted through the medium of razor blade deals. They realised that MTIC fraud was not simply confined to the common varieties of goods such as mobile telephones and computer components. Indeed, they were aware that in July 2003 they had unwittingly become involved in transactions in Platinum XXX cards where the deal chains traced back to fraudulent evasion of VAT. 279. For the reasons given earlier in this decision, we are satisfied that the Appellants were warned by Mr Young on 11 June 2006 of certain characteristics ( " quantity, value, the manner of approach by supplier and customer etc") of MTIC transactions which should have helped them identify transactions of which they needed to be wary. 280. The razor blade deals in May and June 2003, left Davis & Dann in an unusually large repayment position. That position was not replicated, for the Appellants, until they undertook the M3 Power razor blade deals in February, March, April and May 2006. The repayment position in April and May was far greater than it had been in any previous period. (See paragraph 85) This, of itself, should have alerted the Appellants that their deals were unusual or, at least, having unusual results which were similar (but even larger in terms of VAT repayments) to those in respect of deals of which they had been warned in 2003 (albeit that they were not told that those deals had actually been traced back to fraudulent evasion). 281. The Appellants failed to read the warning signals in respect of Bristol. First, Bristol was primarily a company trading in drinks. We accept that wholesalers can deal in goods which are different from their main lines of business. Indeed, the Appellants dealt in soft drinks in the grey market even though their main business concerned FMCGs, such as toiletries. Nonetheless, this fact had to be viewed in the light of the other circumstances concerning Bristol and should, in those circumstances, have given rise to concerns. 282. Secondly, Bristol was not an authorised Gillette distributor. The evidence was that a number of other very large purchases of (non-razor blade) products had been made by the Appellants in the grey market, but the Appellants had bought from authorised distributors. Again, we do not say that buying from a non-authorised distributor is an inevitable indication that a purchase was connected to fraud, but it is a factor which must be taken into account along with all the other circumstances. 283. Thirdly, according to the Risk Disk report, Bristol had only been trading for a maximum period of less than 12 months. Nonetheless, this fledgeling business was able to supply huge quantities of premium Gillette razor blades, products which were outside its main line of business, to a customer (the Appellants) who had traded in Gillette products for many years on both the grey and white markets. Mr Tailor, although aware that Bristol could not have been in business for more than 12 months, admitted that he had failed to ask Mr Singh how long Bristol had been trading. This seemed to us, in the circumstances, a notable omission. 284. Fourthly, Bristol made an unsolicited approach to the Appellants. It was not until some time after 23 January 2006 that discussions between Bristol and the Appellants concerned Gillette razor blades. The evidence was that until that date discussions had concerned drinks, or at least had not concerned razor blades. Four days later, on 27 January 2006, CEMSA made an unsolicited approach to the Appellants. These were the type of circumstances of which the Appellants had been warned by Mr Young in 2003. 285. In this context, we accept the Appellants' evidence that they regularly received unsolicited approaches. However, the circumstances surrounding these unsolicited approaches – e.g. the coincidence of timing, the readiness to sell and buy huge quantities of a particular product and the absence of an antecedent trading relationship – should have made the Appellants suspicious. It seems to us that, because the Appellants regularly received unsolicited approaches from trading partners, to say that this constituted a reasonable alternative explanation (as regards the "only reasonable explanation" test) plainly demonstrates the fallacy that undermines Mr Scorey's argument: viz that each suspicious circumstance, viewed in isolation, could be explained away on an innocuous basis. The fact that the Appellants received numerous unsolicited approaches from potential customers and suppliers does not mean that they should not have been alerted to the existence of fraud by unsolicited approaches where the surrounding circumstances meant that they should have had their suspicions aroused. 286. Finally, in relation to the warning signals about Bristol, the Appellants received credit from Bristol in very considerable amounts. No questions appear to have been asked by the Appellants as to how Bristol was either able to fund the provision of credit or had itself obtained goods on credit. Again, buying goods on credit does not of itself point inevitably to the fact that such a transaction is connected to VAT fraud; indeed buying goods on credit will often be a perfectly normal commercial transaction. Buying goods on credit, where the amount of the credit is very substantial indeed, from a business which has only been in operation for less than 12 months, where the credit is extended in respect of goods outside the supplier's normal line of business, from a supplier who has made an unsolicited approach to the Appellants and who had commenced discussions about razor blades days before an unsolicited buyer contacts the Appellants indicating an interest in razor blades, is a rather different proposition. 287. As we have said, the quantity of M3 Power razor blades dealt in by the Appellants was the subject of considerable debate during the hearing. What was not in dispute was the very large value of razor blades bought and sold by the Appellants in the disputed deals. The evidence was that in no other two month period in their trading history did the Appellants buy razor blades of any description amounting to £24,860,766 or indeed anywhere near that value. Certainly, the Appellants never bought razor blades (of one particular type) of that value. The value of the deals – we shall discuss the quantity below – made these deals exceptional. We accept that the Appellants also bought very valuable consignments of other products on the grey market (e.g. Huggies nappies, a deal which was described as being for many millions of dollars, Red Bull and Coca-Cola), but these were purchases of products from authorised distributors of the manufacturer. 288. Between 2007 – 2011, the Appellants bought large quantities of Gillette razor blades and other Proctor & Gamble products on the grey market from an authorised distributor outside Europe. The maximum value of these deals in any one year (2010) was $8,047,269.48. The deals were spread out over an entire year. It will be seen that the value, even in respect of a whole year, fell far short of the value of the Appellants' purchases of them M3 Power razor blades in April and May 2006. 289. As regards the quantity of M3 Power razor blades dealt in by the Appellants in the deals in dispute, only in 2010 did the Appellants deal in a greater number of cases (20,864 cases). The Appellants dealt in 14,449 cases of razorblades in the deals in dispute. But the cases purchased by the Appellants in 2010 were acquired during the course of 12 months and covered a variety of different Gillette razor blades which were of a lower value. As noted above, the value of the razor blade purchases in 2010 was $8,047,269.48. In the period 1983 – 2011 Mr Rashmi Chatwani's evidence concerning the number of razor blades ("probably a few hundred thousand cases") bought by the Appellants was vague. Certainly, the value of razor blades bought directly from Gillette in the period 1998 – 2006 was relatively modest, with a maximum value of £1,987,592.47 in 2000 (because of the special deal offered by Gillette). We accept that the Appellants bought large numbers of Gillette razor blades over the years, but we do not accept that they bought such a large number and value of a particular type of razor blade in such a short period of time as in the disputed deals in April and May 2006. The quantity and value of these deals made them most unusual and, in our view, extraordinary. 290. We accept the evidence of Ms Okolo, which was based on information supplied by Proctor & Gamble, concerning the worldwide and regional sales of M3 Power razor blades. The evidence was that in April 2006 (the first 17 deals) the Appellants bought and sold 17.376 million M3 Power razor blades compared with total global sales of M3 Power razor blades of 10.9 million and 4.8million for Western Europe i.e. 159% of the total global sales and 362% of sales for Western Europe. In April and May 2006 the Appellants bought and sold over 100% (approximately 105%) of the total worldwide sales of M3 Power razor blades, bearing in mind that the Appellants undertook transactions on only three days in May 2006 (to the value of £5.808 million). 291. By any measure, the Appellants purchased a huge quantity and value of razor blades in a very short period of time. They were experienced dealers in Gillette razor blades. They knew from Mr Young's comments in the 11 June 2003 telephone conversation that quantity was one of the factors of which they needed to be aware in relation to MTIC fraud. The scale of these purchases was such that the Appellants should have been on notice that these transactions were exceptionally odd. This is so regardless of the availability of the information in the Worldwide Schedule. The Appellants should have been aware that these circumstances called for extreme caution. 292. We do not accept that the quantity of M3 Power razor blades purchased by the Appellants in the disputed deals could be explained by the possibility that the goods were a special promotion in relation to the World Cup. Mr Tailor's evidence was that only a part of the sample that he retained related to the World Cup promotion. Ms Jones's evidence was that Proctor & Gamble tried to forecast appropriately so that the number of time-expired promotional packs in the distribution chain was limited. In our view, it was more likely than not that the volume of M3 Power razor blades acquired by the Appellants in the disputed deals could not be explained by the approaching expiry of the World Cup promotion. 293. Similarly, we do not consider that the quantity of goods in the disputed deals can be explained by the introduction by Gillette of the Fusion razor blade. Ms Jones accepted that in developed markets the introduction of the Fusion model meant that the M3 Power razor blade was "a product in decline". Although recognising it as a possibility, she did not consider that there was "a huge risk" that dealers would want to offload large quantities of M3 Power blades, because the introduction of Fusion was staggered across jurisdictions. Certainly, we did not consider the introduction of Fusion to be the reason why the Appellants were able to buy such enormous quantities of M3 Power blades. 294. Finally, we consider that the Appellants should have been put on notice that the fact that GR Distributions was registered as "Wholesalers of wood, construction materials and sanitary equipment." On its face, the business of GR Distributions seem to have nothing in common with the products being dealt in and surely called for some explanation or enquiry. 295. For these reasons, notwithstanding the skilful arguments of Mr Scorey, we have concluded that the Appellants should have known that the disputed transactions were connected with the fraudulent evasion of VAT. We dismiss these appeals. 296. The Tribunal has already directed that Rule 29 Value Added Tax Tribunals Rules 1986 shall apply to these appeals and HMRC have applied for costs if the appeals are dismissed. Accordingly, we direct that the Appellants pay the reasonable costs of HMRC, the amount to be assessed by a costs judge, if not agreed. 297. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. GUY BRANNAN TRIBUNAL JUDGE RELEASE DATE: 17 January 2012 Deal Date of Appellants’ Purchase Defaulter Buffer Buffer Buffer Broker EU Customer EU Trader Retail Units Blades Price paid by Appellants (net of VAT) 6 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) FAF (Italy) 36,000 (× 4) 18,000 (× 8) 144,000 144,000 £160,192.80 £148,862.70 7 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) FAF (Italy) 60,000 (× 4) 6000 (× 8) 240,000 48,000 £266,988 £49,620.90 10 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) FAF (Italy) 12,000 (× 4) 30,000 (× 8) 48,000 240,000 £53,391 £248,137.50 11 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) FAF (Italy) 72,000 (× 4) 48,000 (× 8) 288,000 384,000 £320,553.20 £397,022.40 12 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) FAF (Italy) 72,000 (× 4) 36,000 (× 8) 288,000 288,000 £320,356.80 £297,770.40 12 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) FAF (Italy) 216,000 (× 4) 864,000 £960,951.60 18 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) FAF (Italy) 84,000 (× 4) 54,000 (× 8) 336,000 432,000 £373,734.90 £446,669.10 19 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) FAF (Italy) 168,000 (× 4) 60,000 (× 8) 672,000 480,000 £747,469.80 £496,299 20 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) FAF (Italy) 120,000 (× 4) 102,000 (× 8) 480,000 816,000 £533,808 £843,708.30 21 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) 120,000 (× 4) 42,000 (× 8) 480,000 336,000 £533,907 £347,409.30 21 April 2006 Leeming Barato Flaxley Bristol Precis CEMSA (Spain) 96,000 (× 4) 30,000 (× 8) 384,000 240,000 £427,125.60 £248,149.50 24 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) 204,000 (× 8) 1,632,000 £1,687,620.60 24 April 2006 Leeming Barato Flaxley Bristol Precis CEMSA (Spain) FAF (Italy) 360,000 (× 4) 1,440,000 £1,601,910 25 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) 360,000 (× 4) 12,000 (× 8) 1,440,000 96,000 £1,601,910 £99,271.80 25 April 2006 Leeming Barato Flaxley Bristol Precis CEMSA (Spain) FAF (Italy) 198,000 (× 8) 1,584,000 £1,637,984.70 27 April 2006 Leeming Barato Flaxley Bristol Davis & Dann CEMSA (Spain) 132,000 (× 4) 84,000 (× 8) 528,000 672,000 £587,367 £694,902.60 27 April 2006 Leeming Barato Flaxley Bristol Precis CEMSA (Spain) FAF (Italy) 264,000 (× 4) 162,000 (× 8) 1,056,000 1,296,000 £1,174,734 £1,340,169.30 25 May 2006 Leeming Barato Flaxley Bristol Precis CEMSA (Spain) FAF (Italy) 168,000 (× 4) 90,000 (× 8) 672,000 720,000 £746,915.40 £744,084 30 May 2006 Leeming Barato Flaxley Bristol Precis CEMSA (Spain) FAF (Italy) 216,000 (× 4) 180,000 (× 8) 864,000 1,440,000 £960,595.20 £1,488,348 31 May 2006 Leeming Barato Flaxley Bristol Precis CEMSA (Spain) FAF (Italy) 120,000 288,000 960,000 1,152,000 £992,232 £1,280,693.60 Appellants' Totals 4,320,000 23,184,000 £24,860,766 BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII