19727
INPUT TAX Whether there was a genuine trade in golf clubs Whether Appellant knowingly involved in sham transactions Whether single event unequivocally indicating fraud necessary for finding trade a sham
INVOICES Whether invoices comply with requirements of Reg. 29 of VAT Regulations 1995 and/or Article 22(3)(b) of the Sixth Directive Appeal dismissed
LONDON TRIBUNAL CENTRE
SENERGY (UK) LIMITED Appellant
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: MISS J C GORT (Chairman)
MR K S GODDARD MBE
Sitting in public in London on 20-31 March, 31 May and 1 June 2006
Mr Robin Mathew QC and Mr James Brightwell of counsel, instructed by Hodsons, for the Appellant
Mr A O'Connor of counsel, instructed by the Solicitor's office, for the Respondents
© CROWN COPYRIGHT 2006
DECISION
- This is an appeal against a decision of the Commissioners of HM Revenue & Customs ("HMRC") contained in a letter dated 7 January 2005 not to pay input tax claimed in the VAT return for the period 03/04 in the amount of £1,197,684.15. In a statement of case dated 21 April 2005 it was stated that the claim for input tax was refused on the grounds that there were no supplies made by the Appellant ("Senergy") and as such, the input tax did not come within the definition of input tax in section 24(1)(a) of the Value Added Tax Act 1994 ("VATA"). Furthermore, the purported sales made by Senergy were not supplies made in the course of its business and as such, no entitlement to input tax attributable to making such supplies arises under section 26 VATA.
- Further to a direction of the Tribunal of 6 September 2005 an amended statement of case dated October 2005 was served. Subsequently a draft re-amended statement of case dated March 2006 was served in which it was stated that:
"The claim for input tax credit was refused on the grounds that the Commissioners were not satisfied that the Appellant had either received or traded on the supplies described on the relevant VAT invoices."
- The appeal was against only £536,656.65 of the total amount claimed as input tax. This was because the input tax was originally claimed in respect of six consignments of golf equipment, but subsequently three of those consignments were not sold on and therefore the claim for input tax in respect of those consignments was not pursued.
- The principal ground of appeal is that the relevant goods were exported, and that all obligations in terms of VAT were met. It was further claimed that the reasons adduced by HMRC for not paying the input tax were insupportable, having no, or a quite insufficient, evidential basis. It was also alleged that HMRC had conducted their enquiry in an unfair and disproportionate manner.
Background
- Senergy was incorporated on 25 March 2003 and was registered for VAT with effect from 1 September 2003. Its intended business activity on its application for registration was "the sale of specialist electrical goods e.g. radio controlled planes toys and niche products including giftware."
- Senergy was set up by a Mr James Isaacs who was the majority shareholder. James Isaacs resigned as a director on 31 March 2004, having, in December 2003, transferred the majority of his shareholding to a Mr Laurence Flynn, Mr Phillip Clark and Phillip Clark's son. Laurence Flynn and Phillip Clark thereby became majority shareholders and, as the evidence set out below will show, effectively controlled Senergy from December 2003.
- Laurence Flynn was a director and shareholder of a company called Interactive Sport UK Ltd ("Interactive"), a company which bought and sold golf equipment. Phillip Clark was the owner and a director of a company called Inter-Sporting Leisure SL (Inter-Sporting"), which operated in Spain.
- A Mr Peter McAughey was the company secretary for Senergy and had been so since December 2003. He was also the company's financial controller but was not a director of the company.
- Senergy's first VAT return was for the period 10/03 and was a nil return. In its second return, for the period 01/04, Senergy declared a turnover of £5.9m and reclaimed VAT of £963,342. This return was accepted by HMRC and the input tax claim was allowed. In its return for the period 03/04 (a shortened period having been allowed following a request by Senergy to go to monthly returns) Senergy declared a turnover of £7.3m and input tax of £1,205,586. This return related solely to high volume and high value sales of golf clubs purchased from Interactive and sold to Inter-Sporting, as had been the situation in respect of the return for 01/04. HMRC disallowed the input tax incurred on this occasion, and it is the subject of the present appeal. HMRC also raised an assessment retrospectively disallowing £958,709.50 of the input tax that had been claimed by Senergy in respect of the period 01/04. This, however, is not a subject of this appeal.
- HMRC investigated the return for the period 03/04 and subsequently disallowed it for reasons which were set out in a letter dated 7 January 2005 as follows:
"These amounts [i.e. the amount that had been disallowed] relate to input tax in respect of 6 purchases of what was purported to be quantities of high value golf clubs from a UK company which were, according to the paperwork you have provided, sold on to a company in Spain.
In relation to these supplies enquiries have led to the conclusion that no supply in accordance with the claimed invoice arrangements occurred. Though something may have left the UK, available evidence in relation to the stated weights, inspection reports produced and information relating to the normal market for this product amongst other things indicate that on the balance of probabilities it was not as stated.
As no supply in accordance with the claimed invoice arrangements has occurred, Senergy (UK) Ltd have not received supplies used or to be used for the purposes of any business carried on or to be carried on by it. Therefore any amounts on account of purported VAT which it has paid in respect of these purchases are not input tax within section 24(1) VATA 1994, and furthermore, the related sales are not supplies made in the course of a business for purposes of VAT. As they are not supplies for VAT purposes, no entitlement to claim input tax attributable to the making of these sales arises under section 26 VATA 1994. Your account at the VAT Central Unit at Southend will be adjusted accordingly."
- In the interim Senergy had rendered a return for period 04/04 declaring three similar transactions and claiming a VAT repayment in the amount of £447,818. HMRC disallowed the input tax on these transactions in a further letter, also dated 7 January 2005. Following the issue of the decision set out above, Senergy claimed that three of the six transactions in respect of which input tax credits had been claimed in the 03/04 return, and three such transactions in respect of which similar claims had been made in the 04/04 return, had not in fact taken place. On 31 January 2005, Senergy issued debit notes to its supplier which resulted in a large VAT liability declared on the Appellant's return for the period 01/05, which offset entirely the claim made in respect of period 04/04, and partially offset the claim made in respect of period 03/04. As a consequence there are only three transactions in the 03/04 period, the period relevant to this appeal, as to which the claims for input tax remain in dispute.
The legislation
- Section 24 VATA 1994 provides:
(1) Subject to the following provisions of this section, "input tax", in relation to a taxable person, means that the following tax, that is to say
(a) VAT on the supply to him of any goods or services
(b)
(c)
being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.
(6) Regulations may provide
(a) The VAT on the supply of goods
to a taxable person
to be treated as his input tax only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents or other information as may be specified in the regulations or the commissioners may direct either generally or in particular cases or classes of cases.
- Section 25 VATA 1994 provides:
(2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.
(3) If either no output tax is due at the end of the period, or the amount of the credit exceeds that of the output tax, then, subject to subsections (4) and (5) below, the amount of the credit or, as the case may be, the amount of the excess shall be paid to the taxable person by the commissioners; and an amount which is due under this subsection is referred to in this Act as a "VAT credit".
(6) A deduction under subsection (2) above and payment of a VAT credit shall not be made or paid except on a claim made in such manner and at such time as may be determined by or under regulations.
.
- Section 26 provides:
(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies, acquisitions and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.
(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business
(a) taxable supplies;
(b) supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom.
- Regulation 13 of the VAT Regulations 1995 requires a person making a taxable supply to provide a VAT invoice in respect of that supply and regulation 14 requires that certain particulars be stated on any such invoice, including (regulation 14(g)) "a description sufficient to identify the goods or services supplied" and (regulation 14(h)) "for each description, the quantity of the goods
".
- Regulation 29 of the VAT Regulations 1995 provides:
"(1) Subject to paragraphs (1A) and (2) below, and save as the Commissioners may otherwise allow or direct either generally or specially, a person claiming deduction of input tax under section 25(2) of the Act shall do so on a return made by him for the prescribed accounting period in which the VAT became chargeable.
(1A)
(2) At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of (a) a supply from another taxable person, hold the document which is required to be provided under regulation 13;
provided that where the Commissioners so direct either generally or in relation to particular cases or classes of cases a claimant shall hold or provide such other evidence of the charge to VAT as the Commissioners may direct."
- The foregoing provisions implement, and are to be interpreted consistently with, the Sixth Council Directive of 17 May 1977 on harmonisation of the laws of the Member States relating to turnover taxes common system of value added tax: uniform basis of assessment ("the Sixth Directive") and, in particular (but without prejudice to the generality of the foregoing), the following articles.
- Article 2 provides, so far as material:
The following shall be subject to value added tax:
(1) The supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such.
Article 5(1) provides:
Supply of goods
(1) "Supply of goods" shall mean the transfer of the right to dispose of tangible property as owner.
Article 17 provides, so far as material:
Origin and scope of the right to deduct
(1) The right to deduct shall arise at the time when the deductible tax becomes chargeable.
(2) Insofar as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:
(a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person.
Article 18(1)(a) of the Sixth Directive provides:
Rules governing the exercise of the right to deduct
(1) To exercise his right of deduction, a taxable person must:
(a) in respect of the deductions pursuant to article 17(2)(a), hold an invoice drawn up in accordance with article 22(3).
Article 22(3)(a) provides:
(3)(a) Every taxable person shall issue an invoice, or other documents serving as invoice, in respect of goods and services which he has supplied or rendered to another taxable person or to a non-taxable legal person
a taxable person shall keep a copy of every document issued.
Article 22(3)(b) provides (so far as material):
Without prejudice to the specific arrangements laid down by this Directive, only the following details are required for VAT purpose on invoices issued under the first, second and third subparagraphs of (a);
- the quantity and nature of the goods supplied
The evidence
- Agreed bundles of documents were provided to the Tribunal. We heard oral evidence from the following witnesses on behalf of HMRC:
Gordon Arthur Young, officer of Revenue and Customs;
John Renton Waits, the company secretary and a director of Taylormade Ltd;
Tracy Michelle Poole, officer of Revenue and Customs;
Jayne Eleanor Meek, officer of Revenue and Customs;
Andrew Nicholas Charles, officer of Revenue and Customs;
Robin Newbery, the financial director of Acushnet Europe Ltd.
The witness statements of Eleanor Mary Walker, Joseph Edwin Harris officers of Revenue and Customs, and of Douglas Richmond, of Doug Richmond Computer Services, on behalf of the Appellant, were read. The Tribunal heard oral evidence from the following witnesses on behalf of Senergy:
Peter John McAughey, chartered accountant;
Phillip Clark, a director of Inter-Sporting and a director of Senergy since October 2004 and currently managing director of Senergy;
Mohammed Ezzat Fouad Tabbah, of ICE in Dubai,
Laurence William Flynn, a director of Interactive, currently a director of Senergy and company secretary of Champions Gate Property Ltd.
- The Tribunal had directed in September 2005 (chairman Mr T Wallace) that, because there was an allegation by HMRC that the transactions were a sham, HMRC should present their evidence before Senergy presented its evidence. It was accepted on behalf of Senergy that the burden of proof was upon Senergy to demonstrate it was entitled to the input tax repayment, but that there was an evidential burden, because of the allegation of fraud, upon HMRC to provide more convincing and more cogent evidence than that which would be required to prove a less serious allegation. The Tribunal accepted that that was the proper basis on which to proceed.
The facts
- In its application for registration Senergy had stated that the expected value of its taxable supplies in its first twelve months trading would be £500,000. It did not state that it intended making any supplies to other EU Member States. By a letter dated 16 December 2003 HMRC were notified by Senergy of a subsequent change to the nature of the business, in that they additionally intended to source golf equipment and windsurfing equipment, but were not notified of any increase in its taxable supplies, nor that it intended making supplies to the EU.
- James Isaacs, who did not give evidence before us, had been appointed a director of Senergy with effect from 25 March 2003, and resigned in March 2004. He had been appointed company secretary on 25 November 2003 and resigned from that office on 13 April 2004. A Jeffrey Hewett, who also did not give evidence to us, was appointed director on 28 November 2003. Laurence Flynn had been appointed a director of Senergy on 12 December 2003, Phillip Clark was appointed a director on 20 October 2004. A schedule supplied by Peter McAughey to HMRC shows that on 17 December 2003 James Isaacs transferred 54 shares to Laurence Flynn, to Phillip Clark and to Christopher Clark, Phillip Clark's son in the ratio 30:18:6. On 12 March 2004 he transferred his remaining six shares to his own wife, which she then appears to have transferred to Phillip Clark. On the same date Laurence Flynn transferred six shares to his wife, Desirιe Finn. The transfers by James Isaacs on 12 March are curious in that on 15 March 2004 dividends were paid to the shareholders, and also to the six people who had injected loan capital into the company and therefore by making the transfer when he did, James Isaacs had relinquished his entitlement to a dividend of £9,000 in exchange for £8,000 paid by Phillip Clark for the shares. On 15 April and 15 May advance commissions were paid to Laurence Flynn and Phillip Clark. The six people who had injected loan capital into the company in early December 2003 were two brothers, Andrew and Stephen Hughes, and two married couples Mr and Mrs Hewett and Mr and Mrs Toffolo. These people were all connected by marriage or otherwise to Phillip Clark. Mr Toffolo is Phillip Clark's ex-father-in-law. The Hughes brothers were previously business partners of Mr Toffolo. Nicola Hewett is Mr Toffolo's daughter, and Phillip Clark's ex-sister-in-law. The total money put up by the investors was £750,000. It subsequently emerged in the evidence of Laurence Flynn that he was holding 18 of his 24 remaining shares on behalf of Phillip Clark, although neither Peter McAughey nor Phillip Clark had made mention of this.
- From some time in 2001-2002 Phillip Clark had been involved in business discussions with James Isaacs about various projects, none of which appear to have taken root. It was Laurence Flynn's evidence that he had started working with James Isaacs during 2003 because Phillip Clark was spending a lot of time in Spain. Laurence Flynn claimed that, together with James Isaacs, he had identified the potential to launch the importation of golf products for resale. Phillip Clark had been involved in a project to produce a mini radio-controlled aeroplane for use as an executive toy, but it was ultimately decided the project was not viable. Phillip Clark's evidence was that there were discussions about the possibility of importing golf equipment from the Far East, and it was he, Phillip Clark, who had considered that this would provide a good opportunity for Senergy, and therefore Laurence Flynn was "brought into the picture". According to Phillip Clark, it was only once the possibility of importing golf equipment had been discussed that James Isaacs and Laurence Flynn were put in touch with one another. We do not find it necessary to resolve this particular conflict of evidence. It was not disputed that Laurence Flynn and James Isaacs between them had identified a market for surplus golf equipment, and at this stage Phillip Clark had introduced investors into the company because Senergy needed working capital.
- Laurence Flynn has a background in sales and marketing and had run a sports agency in the UK recruiting professional and semi-professional sportsmen from all over the world. From mid-2001 he had become involved in the golf industry. Laurence Flynn's company, Interactive, owned the European distributions rights for Longdog J.R. Golf ("Longdog"), a supplier of junior golf equipment based in Kentucky, USA. The manufacturers of Longdog were based in China, and Laurence Flynn was authorised to purchase products directly from the manufacturers in China. After 2001 Interactive traded as "Team Longdog", and Laurence Flynn was its sales director. At some time after January 2005 Senergy acquired the rights to become the official UK distributors of Team Longdog, and Interactive ceased trading. Senergy is still trading.
- In September/October 2002, and again in September/October 2003, Laurence Flynn had attended as an exhibitor at a golfing fair in Munich. On the first occasion he had met a Tom Gilmour, a former car salesman, and previous acquaintance of Laurence Flynn, who expressed interest in acquiring Team Longdog distribution rights in Germany. On the second occasion Tom Gilmour told Laurence Flynn that he could obtain stocks of surplus golfing equipment. According to Laurence Flynn, the source of this surplus equipment was not disclosed to him. This surplus equipment would be sold on a parallel importing basis. 'Parallel importing' is the trading in genuine (as opposed to counterfeit) goods which are not licensed by the manufacturer for sale, either by the particular trader, or in the particular market
- Laurence Flynn's evidence was that, he suggested to James Isaacs in about November 2003 that Senergy acquire several consignments of surplus golf equipment from Tom Gilmour, who was trading as UKCC Ltd. Research was done by Laurence Flynn into well known brands of drivers and irons. Good quality drivers were at the time retailing at between £399 and £899 each, and a set of irons was retailing at between £699 and £899. It was decided that top of the range products, such as "Taylormade" and "Titleist" would be the best products to deal in. At about this time, Laurence Flynn was appointed a director of Senergy. It appears that at some earlier stage when, and in what circumstances is not known James Isaacs had met Tom Gilmour.
- In his witness statement Laurence Flynn at paragraph 13, states:
"
In about November 2003 Senergy made the decision, at my suggestion, to acquire several consignments of surplus golf equipment from Tom Gilmour
"
This is not consistent with the fact that on behalf of Senergy it is said that Senergy did not know Interactive's (i.e. Laurence Flynn's) source. The documents show that Senergy made its purchases from Interactive and Interactive made its purchases from UKCC Ltd who in turn had made purchases from a company called Skytec (spelled 'Skytech' in some of the documents) Leisure Ltd, ("Skytec"). In his witness statement at paragraph 15 Laurence Flynn continues:
"The Claimant (Senergy) had arranged for six consignments to be purchased from UKCC, being those the subject matter of the March 2004 VAT return, and for three further consignments as well. The consignments were to be sold to Inter Sporting Leisure SL ("Inter Sporting")
"
Some time in 2003 Phillip Clark had purchased Inter-Sporting, a company incorporated under Spanish law. Phillip Clark became the sole director. Inter-Sporting was registered for IVA (Spanish VAT) on 17 September 2003. It appears that Inter- Sporting was de-registered for VAT on 3 March 2004, and subsequently re-registered on 9 June 2005, although the exact circumstances of its deregistration were not clear from the evidence, and, initially, Phillip Clark had disputed the fact of its having been deregistered.
- Phillip Clark had at some stage become aware of a company called I.C.E., which operated from Dubai importing sports equipment, inter alia. Phillip Clark met Ezzat Tabbah, a director of I.C.E, in 2003 and put propositions to him about the purchase of high value golf equipment. Ezzat Tabbah claimed interest in the project, and in late 2003 the first of a series of eight deals apparently took place. Whilst the Tribunal is only concerned with deals numbered 6, 7 and 8, the other deals are relevant to show Senergy's intentions and method of trading.
- We were told that the pricing of the goods was arranged by Senergy (although who it was who was acting on Senergy's behalf in the negotiations was not clear to us) and Laurence Flynn, acting for Interactive. Phillip Clark then communicated with his client, I.C.E., and negotiated a deal accordingly. I.C.E. sold the goods on to a company called Euro Technology Ltd ("Eurotec"), which was based in the West Indies but had an office in Switzerland. Phillip Clark's only concern appears to have been that Inter-Sporting made a worthwhile profit on the deal. He did not appear to be interested in the precise specifications on the invoices, his only interest being that Inter-Sporting should have been invoiced at the price agreed, and that his margin was guaranteed. He would check the invoices to see that they were dated correctly, and that Inter-Sporting could receive and make payment on the agreed terms, because he was dependent on cashflow. He claimed that it was necessary also to ensure that his client was satisfied with the transactions in order that payment to Inter-Sporting could be guaranteed.
- The arrangement in principle was said to be that Senergy would order the goods from Interactive, who would order the goods from UKCC, who in turn ordered them from Skytec. The existence of Skytec was said not to be known at the time to Interactive, Senergy or Inter-Sporting. However, there was evidence that James Isaacs knew Tom Gilmour, and Tom Gilmour had met Ian Barton of Skytec at the Munich Golf Fair in October 2003 on the same occasion that Laurence Flynn had met Tom Gilmour. The documents show that Skytec purchased the goods from a Portuguese company called Aragon Electronics Lda ("Aragon"). Skytec did no other business than the purchase and sale to UKCC of the golf clubs involved in Senergy's transactions. Skytec itself became a defaulting trader i.e. it did not account to the Commissioners for the VAT rendered to it, and, having been registered for VAT with effect from 15 December 2003, on 29 April 2004 it was deregistered as a missing trader.
- We now set out the evidence relating to the various deals, including some of the deals which are not the subject of this appeal, because they show the pattern of trading.
- Deal 1
(a) The first document in time is an invoice from Aragon, dated 8 December 2003 made out to Skytec in the sum of £1,069,340 (there being no VAT on this invoice) for an assortment of Taylor Made irons. The second document is the purchase order from Skytec made out to Aragon in similar terms. The irons are here described as "Taylor Made MR 580 XD's". We do not have the documents relevant to Skytec's onward sale to UKCC in respect of this deal, nor UKCC's documents relevant to its onward sale to Interactive, which did carry VAT at 17½ %. The next two documents in time which we do have are the purchase order from Inter-Sporting to Senergy which is dated 9 December 2003 and the Senergy invoice to Inter-Sporting similarly dated 9 December 2003. These two documents are in the total sum of £1,187,450, VAT being at the zero-rate. There the clubs are similarly described as "Taylor Made MR 580". Mr Waits' evidence was that Taylor Made had never produced such a club, although they had produced one called "R 580". He considered it improbable that quantities of the club R 580 would be available to the parallel market because they were manufactured on a one by one basis, and delivered as individual orders. The terms and conditions of the invoice from Aragon are that all goods remain the property of Aragon until payment is received in full. The Skytec invoice states that £630,000 of the invoice is payable on order, the balance payable on sight of goods in the United Kingdom. The terms and conditions of the Senergy order are: 50% payable on order and 50% payable on sight of goods at the nominated freight forwarder. The Senergy invoice also states that the goods are to be shipped to Cyclone Logistics in Barcelona. The Inter-Sporting purchase order states that the terms of payment are 50% upon order and the balance upon sight at Cyclone Logistics.
(b) The following two documents, both of which are dated 16 December 2003, are the purchase order from I.C.E. made out to Inter-Sporting Leisure in the total sum of £1,196,340. The terms and conditions are that £598,170 is payable on order, the balance of £598,170 is payable on sight of the goods at freight forwarder. This document also states that the goods are to be shipped to Cyclone Logistics in Barcelona, Spain. The other document is the Inter-Sporting sales invoice made out to I.C.E., with VAT at the zero-rate, which again sets out the terms and conditions as 50% payable on order and 50% payable on sight of goods at nominated freight forwarder.
(c) The next relevant documents are the shipping documents which show that on 17 December 2003 a company called Aviette UK Ltd shipped the goods, which had a total weight of 2,223 kilogrammes, from Warrington to Barcelona. There is also an inspection certificate made out by Aviette and dated 17 December for the attention of James Isaacs which says that all the goods are present and in good condition.
(d) There is an invoice from Interactive to Senergy which appears to be dated either 15 or 18 December 2003 (the date is not clear). This invoice is in the sum of £1,286,319.50 and is in respect of various quantities of "Taylor Made R 580 XD's" It is the only document in the chain which so describes the goods. This invoice states that a deposit of £643,000.50 (the exact sum is not entirely legible) was received on 8 December 2003, balance payable on sight, the goods to remain the property of Interactive until paid in full. This invoice is VAT inclusive.
(e) Despite the terms and conditions expressed on the various documents, Senergy's bank statement shows that, whilst it did indeed pay the sum of £643,680.50 on 8 December, this was before it had received the purchase order from Inter-Sporting, which in its turn was before Inter-Sporting had received a purchase order from I.C.E., and before Senergy had been invoiced by Interactive, which took place either on 15 or 18 December. The payment made on 8 December was only a few days after funds had been deposited by its investors on 1 and 3 December. In the case of all the transactions the first payment was due on confirmation of order, and therefore Senergy should have waited until it had received payment from Inter-Sporting before it made payment to Interactive. Instead it had used its investors' money to fund the first payment of the first deal.
- Deal 2
The first documents by date in relation to Deal 2 are Interactive's invoice to Senergy which is dated 24 December 2003 and Skytec's invoice to UKCC, also dated 24 December 2003. Strangely, Skytec's purchase order is dated 29 December 2003 and the spelling of 'Skytec' has changed from 'Skytech' to 'Skytec'. We have not been provided with Senergy's purchase order in respect of this deal, but, given the date of Interactive's invoice to Senergy, it is reasonable to conclude that it was issued prior to 24 December 2003. We do not propose to set out the full details regarding this second deal, but we note that Senergy did not make its first payment until 6 January 2004, despite the fact that both Interactive's invoice to Senergy and Skytec's invoice to UKCC were dated 24 December 2003, and the terms were that half the money was payable on order. We note that in respect of this order Senergy, by a letter dated 13 January 2004, instructed a company called Stanza Freight Ltd to carry out an inspection of the goods, and the goods were to be shipped onwards to Cyclone Logistics subject to a satisfactory report. It is curious that they would have paid for these goods before having had them inspected. The inspection certificate itself is undated.
- Deal 3
(a) With regard to Deal 3, Skytec's invoice to UKCC was dated 9 January 2004, and Interactive's invoice to Senergy was dated 14 January 2004, and yet Senergy did not make its first payment until 21 January 2004, whereas the invoices again stipulated half of the payment of the invoice was to be on order.
(b) We do not propose to go into detail with regard to the other documents related to this and to the other deals which are not the subject of this particular appeal. Their relevance is chiefly in terms of the order in which invoices were issued and payments made, and the curious description of the clubs and the inspections which we will refer to later in the context of other evidence.
- Deal 6
(a) This is the first of the deals which are the subject of this appeal, and, as does Deal 8, it concerns Taylor Made clubs. The descriptions of the clubs vary significantly from one invoices to the next in this deal, and, when the goods are the same, the prices on Senergy's invoice vary. The first document by date order in respect of this deal is an invoice dated 20 February 2004 from Inter-Sporting to I.C.E. for, inter alia, 560 Taylor Made irons with the description "LT Forged Steel/Regular/Stiff". There are also said to be 400 Taylor Made irons which are described as "combo steel/graphite/stiff/Reg". The Inter-Sporting invoice refers to the irons as being 3-PW, which means that there will be a set of eight irons from the number 3 iron upwards, including a pitching wedge. Other orders in respect of different deals are for sets of irons described as 3-SW, which indicates seven irons, a pitching wedge and a sand wedge. The I.C.E. invoice does not refer to '3-PW' or '3-SW', and therefore it is unclear how many irons are being ordered by them. These descriptions will be considered in the context of the evidence of John Waits of Taylor Made. The purchase order from I.C.E. to Inter-Sporting, also dated 20 February 2004, in relation to the 400 "Combo" refers only to "Stiff/Graphite/Regular", there is no reference to "Steel". The UKCC invoice to Interactive dated 22 February 2004, in respect of the final five of the eight lots gives no specific description such as "OS" or "LT", which appear on the first six of the eight lots of the documents of 20 February, and where the final four lots are described respectively as "LT", "LT Forged", "Combo" and "CGB". It is unclear how UKCC knew precisely what was required. The I.C.E. invoice to Eurotec does drop the word "Regular" in respect of the final five lots, and drops the word "Steel" from the final two lots. It is interesting in regard to Deal 6 that the first and fourth lot, all of which deal with 720 clubs described simply as "OS" in Senergy's invoice, are sold respectively at the unit price of £350.50 and £360.50, although there is no difference in the description of these particular two items. Similarly lots 3 and 6 are both described simply as "LT Forged" and are sold respectively at £385.50 and £430.50 per unit. However, in the I.C.E. invoice to Eurotec there is a difference in the descriptions of these items in that lots 1 and 4 are described as "OS Steel Regular/Stiff" and "OS Stiff Graphite", and lots 3 and 6 are described as "TP Forged Steel Regular/Stiff and "TP Forged Stiff Graphite" respectively.
(b) Senergy's sales invoice to Inter-Sporting gives the date of supply as 23 February 2004, but the inspection certificate in respect of these items was requested by Senergy on 19 March and is dated 22 March 2004 when there was stated to be a 100% inspection by Stanza. The 560 Taylor Made irons, which are described as "lt forged steel regular stiff", are ticked as having been inspected, whereas from the evidence of John Waits we learned that such clubs were never made. Similarly an inspection was carried out by Cyclone Logistics SL on 25 March 2004 in Spain and the inspector there apparently saw 560 "Taylor Made TP Forged Steel Shaft" clubs and a further 560 "Taylor Made TP Forged Graphite Shaft Stiff" clubs, when the accompanying documents stated that they were LT Forged clubs.
(c) Mr O'Connor produced an analysis of the total profit made by the individual companies concerned in all the transactions in Deal 6 which were as follows:
Company Total Profit Per set of clubs
Skytec-UKCC unknown
UKCC-Interactive £ 7,191 £ 1.93
Interactive-Senergy £ 14,382 £ 3.86
Senergy-Inter-Sporting £106,080 £28.52
Inter-Sporting-I.C.E. £ 12,240 £ 3.29
In all the deals Senergy made a substantial profit compared with Interactive and Inter-Sporting.
(d) It was Phillip Clark's evidence that the irons in Deal 6 (32,640 irons contained in 344 boxes) were packed three to a pallet and three high, and there were therefore nine boxes per pallet, which would require 38 pallets. However, Philip Clark never saw any of the loads. The warehouse documents show that there were only some 15 pallets. The total number of sets of irons said to have been sold in Deal 6 was 4,080. From the evidence of John Waits we learn that the weight of such a consignment, not taking into consideration the packaging, as given by the manufacturer would be 13,056 kilogrammes. The International Consignment note ("CMR") shows that 15 pallets were sent and the weight shown on the CMR is 2,200 kilogrammes, which Mr Waits did not regard as realistic for the number of clubs alleged to have been transported. We accept Mr O'Connor's submission that the weights shown on the CMRs of the various deals are broadly correct, because of the importance to the shipping company of knowing the total weight of any load being carried for safety purposes. No credible evidence to dispute the weight on the CMRs was put before us.
- Deal 7
(a) Deal 7 concerns Titleist 983K drivers. There were said to be 8 lots of such drivers, the earliest invoices are dated 26 February 2004 and are UKCC's invoice to Interactive and Interactive's invoice to Senergy. Both these documents refer to "12 (or 12") Launch Stiff Shaft", and lots 3 and 4 are described as 800 "8.5 Launch Stiff Shaft". All the subsequent documents also refer to the items in the same terms, save the invoice from I.C.E. to Eurotec, which is dated 28 February 2004, and which refers to the first two items as "11.5 Launch Stiff Shaft" and "11.5 Launch Regular Shaft". This document was produced to us by Ezzat Tabbah during the course of the hearing, and was not one of the original documents provided to the Commissioners by or on behalf of Senergy. This is relevant because Robin Newbery, who is the Group Financial Director of Acushnet Europe Ltd, which is the European manufacturer and supplier of Titleist, Cobra and Foot Joy products, gave evidence that Titleist never manufactured a 12 Launch Stiff or Regular Shaft driver. The Appellant's explanation was that there had simply been an error in writing "12" caused by the tendency of the particular computer programme used by Interactive to round up decimal places and that this had been copied through the documents. However, we do not accept that explanation, in part because the UKCC invoice to Interactive describes them as "12" " and this must be the document from which any copying was made, being the earliest in time. We note that the Stanza inspection certificate describes the items apparently seen as "12 Launch", and the only other document which describes them as "11.5"" is the inspection certificate from Cyclone Logistics SL, which was produced at, and not prior to, the hearing. Ezzat Tabbah who produced the document, claimed in evidence that he had had to make a rectification because he had been given the specification over the telephone that the clubs coming were "12 Launch". Knowing this was wrong, he had called the client (being Inter-Sporting) and spoken to Phillip Clark's son, and told him that the correct description should be "11.5". We do not accept Mr Tabbah's evidence as to this, for reasons which we set out later, and also because of his failure to request further information with regard to the specification (see sub-paragraph (b) below).
(b) It was the evidence of Robin Newbery that the omission from the specification of the co-efficient of restitution ("COR"), which was a measure of the trampoline effect from the description of these clubs was very significant indeed. The 983 K driver spanned the introduction of a rule which laid down that the trampoline effect should be limited. This was particularly important for the 983 K driver which was made in a high COR version which could not be used for professional competition, and a 0.83 version which could be. The value of the different versions could vary as much as 100%. Therefore the omission of the COR information from the invoice means that a purchaser could not tell if he was paying a good price or a poor price for the goods.
(c) Another curiosity about Deal 7 is that it consisted of 6,000 drivers, which, according to the evidence of Mr Newbery, would have occupied 13 pallets, whereas the CMRs show that there were in fact only 11 pallets associated with this shipment. The weight of this consignment, as given by him, would be 1,986 kilogrammes, whereas the weight shown on the CMR is 1,648 kilogrammes.
(d) A CMR also shows that 11 pallets of sporting equipment with a gross weight of 1,648 kilogrammes went from Cyclone to Stanza and back again to Cyclone, by lorry registration NY51 HBE, driven by a Pete Keppel, on 31 March 2004.
- Deal 8
(a) Deal 8 is, like Deal 6, concerned with sets of Taylor Made irons. The earliest documents by date are the Inter-Sporting invoice to I.C.E. and its purchase order to Senergy. These documents refer inter alia to two separate lots of 400 "LT Forged Steel/Regular/Stiff" and 400 "LT Forged Stiff/Graphite/Reg". It was John Waits' evidence that no such clubs were ever made. This error is repeated in the I.C.E. purchase order, but in its sales invoice to Euro Technology (again a document produced at a later date by Ezzat Tabbah), wherever "LT" appeared on the earlier documents it appears in the later ones as "TP". We find it strange that Mr Tabbah should have issued an incorrect description of the club in his purchase order, and yet gave a description consistent with a club which is in fact made when issuing an invoice.
(b) Another curious aspect about Deal 8 is that Stanza show, at the head of the inspection certificate, that 10,000 goods were to be inspected and that 10,000 goods were inspected. However the description of the goods to be inspected, which is set out lower down on the document shows, as per the invoice from Senergy to Inter-Sporting, only 2,800 in total, including the above-mentioned "LT Forged" irons, and the inspection report specifically lists only 1,000 goods as being seen, including 100 "LT Forged" irons. This casts grave doubt on the validity of Stanza's inspections.
(c) The weight of 2,800 sets of irons as per the manufacturer would be 3,200 kilogrammes without packing. The weight shown on the Stanza freight document (there was no CMR available) is 18,900 kilogrammes on 16 pallets. We accept that 18,900 was a typing error, and that the proper figure should be 1,890 kilogrammes, but this nonetheless is considerably underweight. This weight is however consistent with the CMR from Cyclone Logistics to I.C.E. a document which shows that the intended destination of the goods is Eurotec in Geneva, but the delivery address is one in Amsterdam in the Netherlands, a matter we return to later.
- Deals 9 to 15
(a) These deals are not the subject of this appeal, but some aspects of them shed light on the case, and in particular on the evidence of Laurence Flynn, Phillip Clark and Ezzat Tabbah. These deals concern in some cases Titleist drivers, in some cases Taylor Made irons, and Deal 15 concerned Nike clubs. We consider it significant that, despite Ezzat Tabbah's evidence in respect of Deal 7 that he was aware that there were no 12 Launch drivers, and that he had told Phillip Clark's son at Inter-Sporting at the time that this was the case, nonetheless Inter-Sporting's purchase orders in respect of Deals 9, 11 and 13 are all in respect of "12 Launch" clubs. Similarly, with regard to the Taylor Made irons, the same mistakes as set out above are repeated, and in particular there are references in Deal 12 and 14 to "LT Forged
" clubs, which again Ezzat Tabbah had said he knew should be "TP" clubs, and he had informed Phillip Clark's son of this. Deal No.11 concerns new Titleist 983K drivers. Apart from the mistake over the "12 Launch" which is set out above, it was the evidence of Robin Newbery (set out in more detail below) that it was not credible that the 6,000 Titleist 983K drivers said to have been the subject of Deal 7, could have been available in February 2004, and the same argument applies to Deal 11, which took place at the end of March 2004, and concerns a total of 5,800 983K drivers.
(b) Exactly how Deals 9 to 15 came to be cancelled was never made clear to us in evidence, and again it is something we will deal with below. However, the credit notes in respect of these deals, all of which took place between 19 March 2004 and 23 April 2004, were not issued until, in the case of Deal 9, the 17 September 2004 and in respect of all the others on the same date, 28 September 2004. The relevant debit notes were not issued until January 2005, after HMRC had refused Senergy's claim for input tax. The credit notes that we have available are from Interactive to Senergy in respect of Deals 9, 11 and 12. The UKCC invoices to Interactive have written on them by hand "No action taken, no payment received". We do not have similar documents in respect of the other deals.
- Trade evidence
John Waits, before doing his present job as company secretary of Taylor Made, had been responsible for developing trade with the rest of the world for Taylor Made. He had considerable experience of parallel importing. In his experience parallel importing of Taylor Made products from outside Europe on a scale of 4,000 sets of clubs as here, had never been encountered before. Taylor Made had the ability to trace each set of clubs to the point where it was last delivered from the Taylor Made organisation anywhere in the world. It was his opinion that the quantity and value of the clubs represented on the invoices seen by him (which did not include the later, cancelled, deals) as to the quantity and the value of the clubs represented was incompatible with the size of the European market. Between 1 January 2003 and 31 December 2004 Taylor Made's record showed that they sold 7,805 sets of RAC irons 3-PW of all descriptions across the European Economic Area ("EEA") (representing 7,531 individual transactions) whereas one shipment alone from Senergy purported to be of 4,080 sets in one month. The largest single consignment that Taylor Made itself sold in that period was for 160 sets of RAC MB/CB 3-PW with a regular shaft.
- The golfing retail community was described as being very close-knit and John Waits claimed that he usually learned about any unusual transactions that took place. With regard to the total number of sets in which Senergy had attempted to deal in the period late December to late April, there were over 10,000 sets of irons, which compared with 7,800 of the same clubs which Taylor Made had sold over a two-year period. No word of such large scale parallel importing had reached Taylor Made.
- In the period 2003 to 2004 Taylor Made had a large number of sets of irons which they had offered to retailers at prices considerably lower than the prices on Senergy's invoices. At that time there had been a big marketing drive to persuade people to buy Taylor Made's products and they had been made especially attractive by an offer of 180 days credit and lower prices. Any trader who dealt in Taylor Made products in the parallel market, i.e not purchased through Taylor Made itself, would lose its ability in future to deal with Taylor Made, which was clearly a disincentive.
- Taylor Made clubs came already boxed in Taylor Made wrappers with head covers on, and in terms of time, John Waits did not consider it feasible economically to take them out of those boxes, to mix them up and then to re-box as was said to have happened in this case. He accepted that packaging was a significant element in the cost of the clubs. The clubs were moved in bulk by Taylor Made, not in sets, so they were not accompanied by invoicing to identify them by sets. They only became identifiable as a set once they were packaged in a box. They were shipped in bulk from the factory in China to the distribution warehouse in the Netherlands where sets were formed and packaged. The packaging and transport accounted for approximately one-third of the cost, therefore it did not make any sense to ship the clubs to Spain if they were not to be sold there.
- Between 2002 and 2003 the dollar was weak which had led to a period of substantial parallel importation, but when the dollar stabilised towards the end of 2003, parallel importing decreased. It was accepted by Mr Waits that there was a substantial trade in parallel imports of Taylor Made products, but in his experience there were never large shipments of clubs such as represented by the invoices here. Parallel trading existed because of the way that Taylor Made, which was a United States corporation, handled the distribution of its products around the world. It had a number of affiliated companies, for all of whom Adidas-Salomon AG was the ultimate holding company, and Taylor Made Golf Company Inc also had the same ultimate holding company. Each of the affiliates was granted an exclusive licence to distribute Taylor Made branded products in a defined territory. For Salomon Taylor Made Ltd, the company with which Mr Waits was concerned, the defined territory was the EEA plus several countries adjacent to the EEA. A licence was only for that territory, and the licence agreements specifically excluded sale of the products covered by the licence outside the territory. Goods that were the subject of parallel imports were genuine goods which were not licensed to be sold in the EEA, and were often goods that were surplus to requirements in the trading area in which they were licensed, and which were then exported (in breach of licence or sales agreements) to a different trading area where demand remained high because of the lower prices at which they could be offered than goods obtained from a licensed distributor. The vast majority of Taylor Made parallel imports into the EEA was also from the USA, at a time when importers took advantage of the low US dollar to make a profit. The basis of the trade was to undercut the retail prices of licensed goods, typically by 30%-40%. In the present case, the golf clubs sold by Senergy were being traded at a higher price than that which Taylor Made would have been able to offer for such large consignments of clubs; Mr Waits had never come across parallel imported clubs offered for sale at prices close to Taylor Made's own prices, let alone at prices higher than theirs. Mr Waits described as incorrect Laurence Flynn's statement in his second witness statement that the purchasers of parallel goods were able to continue to use the manufacturer's warranty; In this regard we prefer the evidence of Mr Waits.
- Mr Waits pointed to errors in the documentation with regard to Deal 6. The term "Combo Steel/Graphite" was used on both I.C.E's and on Inter-Sporting's purchase invoices. A golf club shaft could only be made out of steel or graphite, and there were no golf club shafts made out of a combination of steel and graphite. Both Interactive's and Senergy's invoices refer to Taylor made "Combo Irons', as well as 'LT forged'. All Taylor Made irons were moulded and not forged.
- In relation to documents produced on behalf of the Appellant which had been taken off the Internet showing quantities of Taylor Made R 580 XD drivers and other products for sale, Mr Waits accepted that these clubs were available, but his evidence was that they were not freely available, and that what was not available were custom-built clubs, of which there was no great stock available for a parallel importer. He accepted that the shaft could reasonably easily be fitted, but he said that Laurence Flynn was incorrect in his second witness statement to say that Senergy had bought clubs with UST 65 shafts already fitted at the time when they did, because very few shafts were fitted to the clubs after 2002. It was possible however that they were fitted in late 2003, but he considered that extremely unlikely. Mr Waits considered Laurence Flynn knew very little about the Taylor Made product because he described the UST 65 shaft as far superior to any shaft produced by Taylor Made, whereas Taylor Made do not produce any shafts. The UST 65 shafts were made by an independent company who specialised in shafts, and Taylor Made bought all its shafts from them. All the shafts used by Taylor Made were also branded Taylor Made, and personalised to the product, so it was nonsense to say that professionals used Taylor Made club heads with different shafts.
- With regard to Deals 6 and 8, whilst the head of a club could be forged, no golf club itself was forged in the sense that it was made in a forge. It therefore would not make sense, as shown on Senergy's sales invoice to Inter-Sporting dated 17 March 2004 (Deal 8) to substitute `Graphite' for `Forged' in respect of two of the products represented in that invoice as Lawrence Flynn had suggested. There was also a price difference between steel and graphite shafts, graphite being more expensive, therefore it would not make sense to have them as alternatives on the same product.
- Robin Newbery, the finance director of Acushnet, which owns Titleist, gave evidence which was much in line with that of John Waits, namely that the descriptions of the clubs said to have been sold by Senergy were frequently incorrect, and did not properly describe Titleist clubs. The descriptions given would in many instances not be adequate for a purchaser to know what he was buying. In particular, on the invoices there was a description of shafts as either `regular' or `stiff' which would be insufficient for a customer to know what he was purchasing. With regard to the drivers with an 8.5 degree launch with regular shafts, the company sales records showed that they sold 49 such drivers to customers in the UK and to their distributors (including their Spanish distributor) during the whole of 2003, whereas Senergy was apparently selling 800 such clubs. There were no commercial sales of this driver model prior to 2003. The 8.5 degree product was generally fitted with a stiff shaft, and the ratio would be of around 95% to 5% of 8.5 degree drivers with a stiff shaft to those with a regular shaft. However, Senergy's invoice showed an equal quantity of stiff and regular shafts for that product. He considered it unfeasible that some 800 8.5 degree launch regular shafts could have been sold as described. The total sales of 8.5 degree 983 K drivers with stiff shafts from the UK company were 1,923 for the whole of 2003. A single shipment of 800 clubs would therefore represent over 40% of a full year's sales. We have referred in paragraph 36(b) above to the issue of the importance of stipulating the COR of these clubs.
- With regard to Deal No.3, which concerns 5,800 Cobra 427 drivers, the standard line of products offered for sale in Europe did not include the Cobra 427 CC driver which was sold only in the US market, therefore any shipment of those drivers would have had to come from the United States. The Cobra 427 was not a particularly popular club, and was a stop-gap between two different ones. There was a limited run to keep the United States market active, and it was always planned to be superseded. Mr Newbery would normally expect the clubs to be described as 9.0 degree loft, he had never seen the "loft" described as "pitch" before, as was the case here. Sales of Cobra drivers, including sales to the distributors had never included a shipment of 5,800 drivers to a single customer. Acushnet's largest single customer shipment to date had been under 3,000.
- Titleist clubs in general were only appropriate for very good golfers. Mr Newbery considered 6,000 (the quantity involved here) to be an extremely large quantity of clubs, especially of the 983 K driver, which had been very successfully launched not long before. In February 2004 the company had been unable to meet all the demand from its own customers, and therefore it was very very unlikely that 6,000 983 K drivers would be available as a parallel import.
- Acushnet operated by giving every distributor in the world a quota, which was set in relation to the number of golfers and courses in the country where it operated. Without written authority no distributor would be allowed more than its allocated quota. In February 2004 the quota to the distributors was lower than normal.
- There were disincentives to the distributors to sell to the parallel market in that as part of the trade terms and conditions every account holder had to agree not to sell on to others. In addition to selling clubs, Titleist was the premier supplier of golf balls, having 70% of the total market share, and, on the professional tour, 85% of the players used Titleist balls. It was therefore a "must have" product for a golf retailer, who would not risk losing an account of the status of Acushnet. In order to enforce the controls, the distributors were visited at least every month, and a relationship was built up with the account holders and suppliers. Whilst Mr Newbery acknowledged that there was a parallel market, he considered that, as a whole, this operated more often in the mid-price range, rather than in specialist clubs. Whilst it was difficult to quantify the size of the parallel market, he considered it to be around 10% of the total market. There were fewer parallel import in relation to Titleist products than Taylor Made, in particular because his company placed a great deal of emphasis on controls to ensure that such trade was limited.
- Mr Newbery himself had spent some time visiting the factory in South West China which supplied the Titleist worldwide demand for titanium and iron driver heads. The factory only made Titleist clubs. There were twelve full-time employees of Titleist there, at what was a first class modern facility with cutting-edge technology. There were no other manufacturers present. The club heads would leave the factory as completed units, after which they would go directly either to the Titleist assembling facility in California, or St Ives in the United Kingdom or to Australia or to Canada. In St Ives they were checked for quantity and quality and then stock was stored prior to issue. In St Ives there was an assembly line which assembled the head, the shaft, the grip and the hosel (which connects the head to the shaft). Other than the head, the items were sourced from around the world. Whilst the assemblage was not a very skilled process, it needed a degree of precision. Mr Newbery had never heard of any overruns in respect of the Titleist foundry, although he was aware that it may be the case with other foundries dealing with other products.
- Golf is generally a seasonal game, and the largest markets for golf clubs are the USA, Japan and the United Kingdom. Whilst the sun-belt areas of the United States play all the year, there is only very short season in the northern United States. It is Titleist policy to launch a new product globally. 98% of golfers were members of some form of club. Titleist does not sell directly to players, but only to professionals' shops on golf courses or to multiple retailers off-course. Whilst its clubs were on the whole made for better players, and it trained its customers to sell the clubs which were the most appropriate to the particular customer. One-third of its products were custom-made, two-thirds were sold to the better players who did not have their clubs custom-made. Only a very small proportion went to inexperienced players.
- Titleist gave its customers a good profit margin. It did not have a policy to offer discounts, but suggested retail prices, and had fixed wholesale prices. There were however volume-related discounted prices, but the standard wholesale price never varied. The only time there was a discount was at the end of a product's cycle, but it was even then more normal to give rather than to sell the product to the retailer. In respect of the 983K, there was at no time a discount anywhere in the world. With regard to the Cobra however, there was a wholesale discount, and some retailers chose to drop their prices whereas others took the extra margin. If a retailer sold on to another retailer or dealer that would be breaking its terms with Titleist, and it would be a matter which would be taken very seriously. The company's aim was to make sure that golfers purchased the right equipment, brand image being all important to the company.
- The Commissioners' evidence
Gordon Young is an officer of HMRC attached to the Central Coordination Team in London whose role is the collation of intelligence in respect of Missing Trader Intra Community (MTIC) fraud and the departmental strategy in respect of combating this fraud. MTIC fraud is a VAT fraud which exploits the fact that within the European Union (EU) Single Market a VAT registered trader in one member state can purchase goods or services from another VAT-registered trader in a different member state without the payment of VAT on that purchase. The format generally is that a business in the UK will make an initial zero-rated purchase from another trader elsewhere in the EU and will make an onward sale of goods in the United Kingdom ("UK"), but will fail to account for the VAT (output tax) which it charges on that sale. In MTIC fraud the business making the initial zero-rated purchase and failing to account for its liability to output tax will usually either be a "missing trader", the user of a hijacked VAT registration number or a defaulting trader.
- Gordon Young set out in detail the various forms of fraud, we do not propose to set these out in full here. It is, however, the case that in MTIC fraud cases the goods sold on by the first UK business making the purchase from the EU trader are usually sold on through a number of UK businesses (buffer traders) until they are finally exported from the UK by a broker trader. The broker trader will have paid VAT on his purchase of the goods (input tax) and will be supplying the goods to an EU VAT-registered trader (possibly the EU supplier who initially supplied the goods to the UK) without charging output tax VAT on that sale. The broker will then be entitled to reclaim the input tax charged on his purchase invoice and will have no output tax liability against which this is offset. HMRC will therefore be in the position of making a repayment to the broker trader at the export end of the chain but will not receive the VAT charged by the UK defaulter, missing trader or user of the hijacked VAT registration number. This process may be repeated many times over. In Gordon Young's experience a single chain of MTIC transactions from importation in the UK to ultimate exportation by a broker trader may occur within a single day. More commonly, however, the tax loss at the start of an MTIC chain will be a 'defaulting trader'. This is a VAT-registered trader with a valid VAT number, but in these cases the trader will charge output tax but will not collect that tax. Instead it will make or pass on third party payment instructions asking its customer to pay either its supplier or often someone else seemingly unconnected with the deal. The defaulting trader will receive a miniscule amount compared to its output tax liability and often will receive nothing at all, as the purpose of the third party payment is to put the tax charged beyond the easy reach of the UK authorities. It is much harder for HMRC to tackle defaulting traders as they cannot simply be deregistered for VAT purposes and therefore those they trade with cannot be vetoed in respect of further trade.
- Having investigated Senergy's repayment claims, Gordon Young wrote the initial decision letter in the terms set out above. He was aware that Skytec had registered for VAT with effect from 15 December 2003 and was deregistered as a missing trader on 29 April 2004. Ian Barton, a director of Skytec, had signed a VAT 1 (the form completed by a trader wishing to register for VAT) dated 18 December 2003 indicating a projected annual turnover of £300,000. By this time Skytec had already done a deal for over £1m on the 8 December 2003. Ian Barton had not mentioned any intended EU acquisitions although his purchases had been from two traders in Portugal.
- Gordon Young's role was also to collate intelligence in respect of detections by officers of Revenue & Customs of MTIC-type consignments at ports and airports. Consequently he was familiar with the main MTIC freight-forwarders and he drew a clear distinction between them and mainstream freight-forwarders, and, in his experience MTIC fraudsters overwhelmingly used the same freight-forwarders. Stanza had been known to him for several years as an MTIC freight-forwarder, as also was Aviette Ltd. After having seen Phillip Clark's witness statement of 8 July 2005, to which he had exhibited copies of the CMRs for the onward movement of goods from Inter-Sporting to I.C.E., and having seen from the CMR for deal 8 that the goods were on that occasion shipped at the behest of I.C.E. to the Netherlands from Barcelona by Cyclone Logistics, Gordon Young carried out some further research into that particular shipment. He formally requested the Dutch authorities to conduct a visit to the address in Amsterdam of RTIC, that being the entity to which the goods were consigned. The subsequent report from the Dutch authorities stated that the address in question was of a small residential apartment and that a Kevin Brugman had been spoken to. We do not propose to set out the report from the Dutch authorities because Gordon Young did not investigate the matter any further himself, and we did not hear any evidence from Kevin Brugman. However, it is notable that Kevin Brugman stated that the invoices for the consignment were to be sent to Eurotec in Switzerland, which is also shown on the CMR as being the intended destination. Gordon Young found no evidence that the goods had been removed from the territory of the EU, and therefore considered that Inter-Sporting would be liable for output tax at the standard rate in Spain.
- As part of his investigation into Senergy's affairs he had also investigated Inter-Sporting and had learned that it had been de-registered for VAT with effect from 3 April 2004 and had rendered nil VAT returns in Spain. Mr Mathew criticised Gordon Young for not investigating further the circumstances in Holland, nor finding out precisely Inter-Sporting's position with regard to its registration for VAT. Gordon Young however had investigated a statement by Laurence Flynn that a shipment of 10 extra boxes of "demonstration golf equipment" with the brand "MD Golf" were added to a shipment of Titleist clubs and were part of a shipment on 5 April 2004, in respect of which it was said to have been reported to Laurence Flynn by Stanza that a Customs official had picked up a club and made a practice swing. Gordon Young found the record of the consignment departing from Dover to Calais on 6 April 2004, but there was no record of an inspection being carried out of the load on the vehicle. This meant it was unlikely that any examination had taken place. He had also made enquiries of the officers on duty at that time, to no avail.
- Gordon Young had also investigated the movements of vehicle registration NX 51 HBE which is the subject of an HMRC report and which Phillip Clark had claimed bore no resemblance to any vehicle used in the transportation of Senergy's goods. We are satisfied from the details given by Gordon Young that that vehicle, which was a van not a lorry, was used for transporting the goods the subject of Deal 7, in particular because of the contents of the CMR for the shipment by Stanza of 5 April 2004 (see paragraph 36(d) above). This document was found amongst others at Stanza.
- Gordon Young was further criticized by Mr Mathew for never having visited either Stanza or Skytec. We do not consider this to be a valid criticism, given that other officers had done so. Gordon Young did accept in cross-examination that, had Skytec not been a defaulting trader, he would not without more have investigated Senergy on the basis of the errors in the descriptions and the discrepancies in the weights of the consignments because there would have been no apparent tax loss. But it was nevertheless his view that in the present case there was a strong inference of a carousel fraud, and that none of the parties involved was an innocent dupe.
- Jayne Meek of HMRC had visited Stanza on 16 March 2004 to check whether they had received any consignments of golf clubs in recent months. She was shown around and at some stage she spoke to Terence Broad, a director of Stanza, who said he knew nothing about any such recent consignments. Ms Meek returned later on that day with documents retrieved from Skytec. Terence Broad was shown copies of the Skytec documents referring to golf clubs, and at this point he said that he remembered receiving some golf clubs, but could not remember the details. He then produced various documents relating to the Senergy deals. No golf clubs or sporting equipment were observed on the premises at this time, nor had the officer seen any during her visits to Stanza between November 2003 and 4 May 2005.
- Mr Andrew Childs, a senior officer with HM Customs and Excise, had visited Skytec on 10 March 2004 making enquiries about the purchase of golf clubs, and the manner in which the large deals that the company had entered into were financed. He was told by Mr Ian Barton, a director of Skytec, that his customer (UKCC) made a payment up front, the goods were then released to the customer and a balancing payment was made to Skytec. Upon receipt of the balancing payments Skytec paid its supplier for the purchase of the goods. This balancing payment was said to include the VAT liability. The business' bank statement indicated that on 8 January 2004 there was only £63 in the bank account, but the current VAT liability was in the region of £90,000. According to Mr Barton, the business had used accumulated funds in order to make a pre-payment for stock which had not yet materialised. Mr Childs took away the business records, and on 18 March 2004 he returned to the principal place of business to find that nobody was there. Mr Childs produced a schedule of Skytec's trading. A subsequent visit was paid by other officers, and again nobody was there. Skytec was subsequently removed from the VAT register, and no VAT payments were ever received from it.
- Evidence on behalf of the Appellant
At the time of his initial involvement with Senergy Laurence Flynn's company, Interactive, was having a problem with cashflow, and, having met Phillip Clark through a mutual friend, Laurence Flynn sought his advice. He was told by Phillip Clark that he had available investors for a particular business, but not for Laurence Flynn's business because of its large liabilities. Phillip Clark proposed a joint venture in Senergy. It was decided between them that the best route was through parallel importing. It was Laurence Flynn's long term goal to sell his company to Senergy.
- Laurence Flynn records in his first witness statement that he knew there would be a ready market for such goods, and in about November 2003 Senergy made the decision at his suggestion to acquire several consignments of surplus golf equipment from Tom Gilmour who was then trading as UKCC Ltd. Laurence Flynn claimed that Tom Gilmour's source of the clubs was never disclosed to him, therefore any evidence Laurence Flynn gave us about the likely source of the clubs being China or anywhere else, is entirely speculative. Tom Gilmour told him that he had large quantities of stock. Laurence Flynn stated:
"James Isaacs and I consulted the list of golf clubs available and we researched the general state of the UK golf industry, seeking those products that were well known and were in the middle of their life cycle. We were in search of products that would have a quick `sale through' and a good profit margin."
We find it surprising that it was the UK market which was researched, given the fact that Senergy sold the clubs on to Inter-Sporting in Spain, and it was claimed before us that the ultimate market was worldwide, although Laurence Flynn also claimed to have no knowledge of where the clubs would eventually be sold. Having apparently done this research, Interactive told UKCC that it would be interested in buying Taylor Made, Titleist, Nike and other top of the range products. We find it curious that their research did not apparently reveal to them various matters such as that it would be very difficult to sell large numbers of 8.5 degree clubs, the importance of the COR with regard to the 983 K driver and that the prices they agreed to pay were in almost all cases above the price at which Taylor Made and Titleist's customers could purchase the stock. Laurence Flynn believed that the parallel market sold to the "green grass" market, i.e. to the shops run by professionals on the golf courses. In his second witness statement he stated:
"Some retailers who buy golf clubs direct from manufacturers such as Taylor Made will also often buy parallel imported clubs without telling Taylor Made. They do this because they can buy the parallel goods far cheaper, and it also enables them to continue to use the manufacturer's warranty."
As stated above, John Waits was adamant that the manufacturers' warranty would not be available in those circumstances.
- It was apparently Phillip Clark's idea that Laurence Flynn should have an income available to him, and therefore the clubs were purchased by Interactive from UKCC and sold on to Senergy at a small profit. Senergy itself would put up the money for the purchases, but Laurence Flynn had no say in how much money would be invested in Senergy. At the time of the first deal he was merely a consultant to Senergy, and not a director. When Laurence Flynn became a director of Senergy on 12 December he started working closely with Phillip Clark. At the time of the appeal he was still on the board of Senergy, but was not taking a salary.
- Senergy had an office in Exeter, there was also an office/showroom in Coventry. Prior to dropping out of Senergy, James Isaacs had been responsible for insuring the goods and seeing that the funds were processed, and the transport was arranged. Senergy was unable to store stock in Exeter. The women in Senergy's office drew up the Senergy invoices, but Laurence Flynn's wife typed up all the invoices for him. He himself gave her the particulars such as the quantities, and the pricing. He wrote these out by hand and checked the total on the calculator because he believed that the Excel programme which was used for the invoices sometimes made mistakes.
- With regard to the first few deals, according to Laurence Flynn they were done in writing, but later on, when there was more trust between the parties, the deals were more frequently done by telephone. This is completely at odds with the fact that on the first deal Senergy paid Interactive before it had received Inter-Sporting's purchase order. The fact of Senergy's paying at that stage is also at odds with Laurence Flynn's evidence at a different stage that the deals were structured so that they were paid for by funds from the end purchaser, and the goods were only procured once the funds were received. It therefore appears that the documents were ignored insofar as the terms of trade are concerned. He subsequently specifically contradicted his evidence that the first few deals were done in writing when asked how it had come about that Inter-Sporting's order to Senergy only arrived the day after the funds had been paid out, by saying that the deal was arranged by telephone, and that it was a business decision to take a chance at the time. He also said that two of the investors were directors, and it was their money which was being used. With regard to deal 6, where the invoice which was dated 23 February 2004 was not paid until 15 March, i.e. some three weeks late, this was explained as there being a rapport between the parties and the clients understanding the delay. All the later deals were said to have been done on trust. This however does not explain how Senergy were able ultimately to cancel all the later deals apparently without any financial consequences.
- Laurence Flynn claimed that he did not consider the specific descriptions on the invoices were important, and he was not interested in whether the shafts were stiff or regular, or the degree of angle of the club. He considered that the descriptions of the goods were only important insofar as they were needed to identify the make and the model. This is at odds with the evidence of John Waits and Robin Newbery. His explanation for the inconsistencies, the lack of particularity or uncertainty in the invoices was that either errors made by Tom Gilmour were simply copied on, or his wife misunderstood his instructions to her. Where shafts are described as being 'stiff/regular' or other combinations, he claimed that the intention was to strike out whichever word did not apply. None of the documents we have seen show any striking out as having been done. In respect of the first deal where Skytec and UKCC described the goods as "Taylor Made MR 580", yet Interactive's invoice did not include the mistake of including the M before the R (the club should be correctly called "Taylor Made R580"), whereas the same mistake of including the 'M' appeared in both Senergy's and Inter-Sporting's documents, Laurence Flynn's explanation was that Tom Gilmour had made a random mistake, as had Senergy and Inter Sporting. There was a common office to which the documents from UKCC came, and he suggested that it was possible that a secretary in Senergy could have looked at the supplier's invoice and thought that Laurence Flynn himself had made the mistake. Where some of the documents referred to clubs as "LT Forged", which it was accepted should have been "TP Forged", Laurence Flynn said that he had not had access to all the papers before, which we found to be unlikely. He further suggested that the price would indicate to a prospective purchaser that the clubs were in fact TP. On another occasion his explanation was that they should be described as 'LT Graphite', and it was a clerk's error. Stanza had duplicated the error, he considered, because, whilst the description would be on the box, it would not be obvious from the appearance of the club. Nonetheless, Cyclone had apparently inspected and found TP clubs. Laurence Flynn's explanation for this was that it would be because the clubs would have a sticker saying 'TP' on them. We find that there is an inherent contradiction in the two explanations.
- Laurence Flynn's account of how there was so much stock available (and he claimed that there was far more stock available than they were able to purchase) was that it was due to the state of the overseas market, and the fact that Americans would buy-in large quantities at the beginning of the season, which left plenty available at the end, and, in addition, the dollar was low at the time. He made reference to the fact that the factories in China would produce over-runs and sell on large quantities of stock to the parallel market.
- With regard to the inspections, Laurence Flynn claimed that he had not disturbed the boxes because it would have been a major issue to repack them, and, in addition, there had never been any complaint from the purchaser so he had no reason to inspect them, and he had been satisfied with the inspection documents. Despite his signature on a letter dated 26 April 2004 to Stanza requesting an inspection, the letter being sent from Senergy, Laurence Flynn claimed that he had never personally sent a request. Whilst he agreed that he had signed the letter, he claimed not to have put it in the post or sent it by fax. It was his view that a director would be given things which he would sign whilst having no idea as to their contents. We find that this was very typical of Laurence Flynn's attitude to business, in that he was not behaving in a commercially responsible way as a director should.
- With regard to the packaging, Laurence Flynn was unable to explain why there was no reference to the make and model of the clubs in the letter sent by Senergy to Stanza Freight requesting an inspection of the goods involved in Deal 7, when he had previously said that the make and model were the only important and relevant things in any of the consignments. Initially he said he would expect the make and the model to be on the box, but when it was pointed out that the inspection report itself made no reference to any make or model, he was unable to answer. He had no explanation as to why the weights were so very different from those that might be expected, other than to say that it must be assumed that the weights were inaccurate, and that Stanza made many mistakes on the documents.
- With regard to the cancelled transactions, Laurence Flynn's attitude was that the fact that the goods had been ordered but not paid for had meant that they were not Senergy's. He claimed not to know what happened in respect of those goods. His account was that Tom Gilmour telephoned him to say he had been advised by Customs and Excise not to trade with Skytec. Laurence Flynn then spoke to Phillip Clark who ordered him to stop trading with UKCC immediately. The orders were then cancelled. He disagreed with Peter McAughey's evidence that the deals were placed in limbo. He also claimed that Customs and Excise told Interactive not to deal with UKCC's suppliers. This was denied by the Commissioners. Laurence Flynn's evidence again conflicts with that of Phillip Clark, who had thought that the deals might go ahead. Subsequently Laurence Flynn changed his evidence to agree that the deals were in limbo.
- Phillip Clark's evidence about the invoices was that he was not concerned with the intricate details, and would not scrutinise them, he was only interested in whether they were dated correctly and whether Inter-Sporting could pay on the agreed terms, which depended on cashflow. He also wanted to ensure his client was satisfied with the transaction. According to Phillip Clark, I.C.E. never commented on the invoices or the descriptions of the goods. This is in contra-distinction to the evidence of Ezzat Tabbah set out below.
- It became clear in the course of the hearing that Inter-Sporting had had its VAT registration suspended in Spain in March 2004, a fact of which Phillip Clark appeared unaware. Inter-Sporting was not paying VAT (IVA) in Spain in respect of these clubs, despite the fact that the documents show that the clubs did not go out of the EU and therefore there would have been a liability, in particular the documents in respect of Deal 8 show that while I.C.E. sold the goods to Eurotec, they were to be delivered to the Netherlands, and in respect of deal 7, they went from Spain back to Stanza in the UK, and then to Spain again.
- Phillip Clark felt unable to say why Senergy had paid out in respect of the first deal before it received a purchase order from Inter-Sporting, saying only that he was not the managing director of Senergy at that time, and he doubted that he would have been aware of the fact. Phillip Clark also speculated that Senergy were aware that the funds had previously been despatched from I.C.E. in Dubai, but, because of bank closing days in Dubai, the money had not been received.
- With regard to the mistakes in the document as to the descriptions of the clubs, Phillip Clark claimed to have been surprised that Laurence Flynn had made such errors. He accepted that in respect of Deal 6, it was not indicated whether there were eight irons involved (3-PW) or nine irons (3-SW). He suggested that he may have spoken to I.C.E. on the telephone about this, and that Inter-Sporting's purchasing order showed that they were aware that the clubs involved were 3-PW. He did not agree that he knew that I.C.E. would pay whatever had been put on the documents. He did not agree that his client would have been satisfied whatever the situation. Curiously, Phillip Clark claimed that he had thought the goods they were selling were surplus goods, and also claimed to be unaware that the goods were unlicensed. This evidence, which he gave orally, conflicts with his evidence in his first witness statement where he describes parallel importing as involving obtaining trademarked goods "in order to sell them on in other countries where they would otherwise be more expensive, and in order to undercut the licensed distributors". It was also surprising that Phillip Clark claimed not to have been aware that the prices they were charging were in excess of the prices charged for licensed goods, and that he had not made enquiries into the prices.
- With regard to Deal 7, where goods went to Barcelona on 8 April, having left Stanza on 5 April 2004, which appear to be the same goods as those which had previously left Barcelona on 31 March, Phillip Clark said he would be surprised if they were the same goods. He had visited Stanza because he was concerned about the matter, but Stanza had not wanted to talk about it. He himself had never checked the goods, but his client had never complained and that was sufficient for him. This is a curious attitude since he would not have been able to prove at what stage any damage or loss occurred, if it had, since he had not had any inspection carried out. He was unable to answer how Stanza could have carried out an inspection of "LT" clubs, since they never existed.
- Phillip Clark had never made enquiries about the discrepancies in the weights, but he understood that these were sometimes estimated. He was unable to comment on the discrepancy in the number of pallets used, and those that would have been required given the number of irons involved. He claimed that at the time of these deals his interest was in Inter-Sporting and not Senergy. He was aware that the goods were covered by Senergy's insurance to the point of delivery to Cyclone, and the total cost of the goods included that insurance cover.
- With regard to the cancelled deals, Phillip Clark believed Laurence Flynn had been told by the Revenue that there was an issue which would take time to resolve. The deals were left pending, and he had a discussion with Laurence Flynn about this in May 2004 at the solicitors. He claimed that his own client was happy to wait to see whether the supply could continue. He referred to there having been a number of heated telephone calls between Laurence Flynn and his suppliers. This was not said in evidence by Laurence Flynn.
- Peter McAughey was a sole practitioner as a chartered accountant. He was responsible for preparing Senergy's year end file and the draft accounts. He was appointed company secretary of Senergy on 17 December 2003 and since then had acted as the company's financial controller. His main contact in Senergy was initially James Isaacs, but when James Isaacs became ill, his main contact was then Laurence Flynn.
- Peter McAughey claimed that he was always keen to see a paper trail, and, given the high value of the transactions, he wanted to be sure that everything was in order. This expressed attitude did not accord with the evidence that shows that the inspection reports were completely inadequate, both in the description of the clubs and as to the quantity, and that the various documents regularly inadequately described the clubs in question. He claimed to have had third party confirmation that the golf clubs of the quantity stated on the invoice had been inspected. What that third party confirmation was, was never made clear. He claimed not to remember seeing the inspection report which referred to there being 10,000 clubs inspected, when in fact there were only 4080 recorded on the documents for that consignment.
- With regard to the fact that the insurance document limited the liability to £1.25 million per shipment, whereas the value of Deal 6 without VAT was £1,447,160, and with VAT was £1,700,413, both of which sums exceeded the insurance limit, his explanation was that he personally had limited time in terms of hours available, and that James Isaacs took responsibility for the administration. In respect of Deal 7, where the insurance limit was breached if the VAT element was included, he claimed to have taken comfort from the arrangements with the insurance company and the fact that there were third party inspection reports on file.
- With regard to Deal 9, which in the event never proceeded, Peter McAughey said that he had been informed there was a hold on the deal which may not go ahead. At the time of the VAT return which was signed on 2 April 2004 he would have been satisfied that the goods in question were to be imminently despatched, and had been given no indication that there was a long term issue. The VAT return had not been rectified until January 2005 because of legal advice. He had no proper explanation as to why the credit note was issued in September, but claimed that he would have suggested the credit notes should have been raised at the end of June, and at that time he would have been taking instructions from Phillip Clark.
- I.C.E. was described as a marketing office in Dubai which bought and sold large volume goods on the parallel market. Ezzat Tabbah had started with I.C.E. in 2003, and in his witness statement he described himself simply as being "of I.C.E. Consultancy FZ LLC". He appeared to be unaware of the tax requirements when trading with the EU. At the time he commenced trading with Inter-Sporting he was also unfamiliar with the golf market. Like Phillip Clark, he claimed that his only concern was whether Eurotec, his client, would buy goods from him at the right price. Eurotec, according to Mohammed Tabbah, was a reputable Swiss company who would not have continued to trade with I.C.E. if they had any complaints about any of the deals.
- Ezzat Tabbah had four bank accounts with HSBC: one for GB pounds, one for dollars, one for Euros and one for the local currency. He opened a local account wherever he was working, and did not pay taxes at all in Dubai. At the time of the hearing he was continuing to do business with Inter-Sporting. He produced a bank statement from HSBC for the period 30 November 2003 to 23 October 2005. This showed inter alia that on 20 December 2003, which was a Saturday, Eurotec had paid £620,000 into the account, and on 22 December 2003, a Monday, £593,725 had been paid out to Senergy. He referred to the difficulty of the fact that the banks were closed on a Friday in Dubai, and closed in Europe on Saturday and Sunday. He could not remember why, given the terms and conditions on the first deal, that money had not been paid on order. He suggested that Eurotec had delayed its payment which in turn had caused him to delay. He further said:
"It is not a binding contract. Sometimes I pay late, sometimes earlier.
It is not a bible. I try to bind myself with them as much as I can.
"
He also claimed to trust Eurotec to send the money.
- Ezzat Tabbah accepted that he was buying goods domestically in Spain, and when asked why there was no value added tax on the Inter-Sporting invoice to I.C.E., his reply was:
"I am not aware at all in my area. So I do not concern myself at all. We don't deal with this in Dubai. I am Arab not European. I do not deal in Europe/Europe. I deal in Europe/Middle East or Europe/America."
He further said:
"I presume if outside Europe, do not pay VAT. If in Europe I pay VAT and get it back."
- He claimed to be unaware of the possible involvement of Mr Brugman in Holland. The bank statement shows that on 24 August 2005 a payment of £20,000 was made to a company called Accedex. Ezzat Tabbah claimed to be unable to remember what this related to. He was shown the account of the interview in Holland with Mr Brugman in which it is stated that Mr Brugman's customer "appeared to be Accedex". Ezzat Tabbah claimed to know nothing about that.
- With respect to the deal involving the alleged 12 launch clubs, Ezzat Tabbah's account was that Eurotec told him there was no such club. He had not sent a revised purchase order because the goods had already moved from Inter-Sporting. This was despite the fact that this conversation had apparently been held on or before 28 February, but the goods in question were not delivered until early April. When this was put to Ezzat Tabbah he said it did not make any difference for him to adjust the purchase order, it had been an honest mistake by Inter-Sporting and he had rectified it by a telephone call to Phillip Clark, it was only when told by counsel that Phillip Clark had said there had been no such rectification, Ezzat Tabbah said he had made a telephone call on 28 February to Phillip Clark's son.
- Ezzat Tabbah had no explanation for why in respect of Deal 6 no make had been identified, other than to say that the make would have been stated over the telephone. His explanation for the change from "LT" to "TP" in respect of Deal 6 was similarly that the client had told him that no LT club existed and had asked him to put `TP' on the invoice. He claimed to have made a telephone call to Inter-Sporting on 23 February about this. He claimed not to discuss details on the telephone with Eurotec nor to think that they mattered.
- In re-examination Ezzat Tabbah claimed that the inspection report which he had produced at the hearing was sent to him by fax, however we note that there was no fax number on the documents. At the conclusion of his evidence he was asked to obtain further documents about Accedex, and this was agreed, however no further documents were ever produced.
- Evidence was produced on behalf of Senergy from a Mr Douglas Richmond, a man with knowledge of computer systems. He produced a series of computer-aided design drawings to show the maximum number of boxes of a specific size that could fit into a twenty-foot standard shipping container when packed on a varying number of standard shipping pallets. This evidence was referred to by Phillip Clark in his second witness statement to refute the suggestion of Gordon Young that it was unlikely that the clubs would have fitted in the space available in a twenty-foot box van. Phillip Clark stated that he had arranged for a consignment of golf clubs of the same size as one particular consignment to be packed and loaded in the same way as that consignment would have been loaded. However, as stated above, neither Phillip Clark, nor anyone else who gave evidence on behalf of Senergy, ever saw any of the consignments, and therefore there is no evidence before us as to how these clubs were packaged.
The Respondents' case
- Mr O'Connor's principal contention was that the transactions were sham transactions, by which they meant that the supplies between Interactive and Senergy were, to the knowledge of Senergy (by one or more of its directors) not what, on their face, they purported to be. It was submitted that this required the Tribunal to address the following issues:
(a) Whether there was a genuine trade in high-specification golf clubs or precisely, whether the consignments of goods that were moved between Stanza and Cyclone warehouses contained the goods described on the relevant paperwork (it was not disputed that some loads did actually travel).
(b) If the consignments did not contain such goods, whether Laurence Flynn (as a director of both Interactive and Senergy) caused or allowed the documents to be created at a time when he had the requisite knowledge of this fact. In this regard it was submitted that "Nelsonian blindness" was sufficient.
- Secondly it was HMRC's case that goods of the description and/or the quantity stated on each of Interactive's three relevant VAT invoices were never in fact received by, or traded on, by Senergy. As a result, the invoices produced by Senergy in support of its claim for input tax did not meet the requirements of regulations 13 and 14 of the VAT Regulations 1995 and it followed that the claims for input tax did not meet the requirements of regulation 29(2).
- With regard to the law on sham, the Tribunal was referred to the description given by Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, in which he stated at page 802C:
"As regards the contention of the plaintiff that the transactions between himself, Alto Finance and the defendants were a "sham", it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities
, that for acts or documents to be a "sham", with whatever legal consequences follow from this, all parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a "sham" affects the rights of a party whom he deceived."
- Mr O'Connor referred also to the case of McNicholas Construction Co Ltd v CCE [2000] STC 553 in which Dyson J held that sham arrangements in what would otherwise amount to a taxable supply precluded a taxpayer from recovering input tax. Dyson J at paragraph 34 of his judgment referred to the definition of sham given by Diplock J above, and at paragraph 50 added:
"The Act is concerned with genuine supplies, not sham transactions under the guise of which fictitious supplies are purported to be made. The clear policy of the Act would be undermined if input relief could be claimed in respect of supplies purportedly made pursuant to sham transactions made by employees of a company in the course of their employment. The fact that the employees are aware of the true nature of the arrangements, but that those who are responsible for managing the affairs of the company as a whole and those involved in its VAT affairs are not, should not, in my judgment, be something of which the company ought to be allowed to take advantage."
- Finally in this regard the Tribunal was referred to the case of Richmond Cars Ltd v CCE [2000] V&DR 388, in which the learned President of the Tribunal concluded that documented but unreal transactions were shams and were to be given no significance for VAT purposes. At paragraph 18 the tribunal held that:
"Sham transactions
i.e. transactions that "are not what on their face, they purport to be", will never form the basis of a liability to or relief from tax. That is so even if the sham were constructed with the most bona fide commercial objectives in view. The existence of a commercial or business purpose (apart from the avoidance of a liability to tax) will be relevant to the applicability of the Ramsey principle. That principle requires the court to ignore or excise otherwise genuine transactions creating genuine rights and obligations where those transactions formed part of a pre-ordained series of transactions but had no commercial business purpose other than the avoidance of a liability to tax. The Ramsey principle does not, however, come into play here because documented transactions (i.e. the sale by the Irish dealer to the private individual followed by the individual's sale of the imported motor cars to Richmond) are not genuine transactions."
- It was HMRC's assessment that the supplies described on the purchase order as invoices passing between Interactive and Senergy were fictitious in that the goods described on the documents were never actually supplied by one party to the other. Whilst it was accepted that large consignments of some goods or other (quite possibly including some golf clubs) were sent by sea and road from the UK to Spain, they did not contain the goods shown on the documents. The transactions were shams because, at the time the documents were sent, Laurence Flynn knew that the goods described on them would not be supplied.
- HMRC concluded that Phillip Clark and Ezzat Tabbah were also knowingly mis-describing the goods and the transactions were part of a larger carousel/acquisition-type fraud. Whilst these later transactions were not a necessary part of the assessment under challenge, they formed the context for some of the factual inferences that HMRC asked the Tribunal to draw against Laurence Flynn.
- In support of their contention that the goods described on the invoices were not present in the consignments, HMRC relied particularly on the following: the trade evidence from John Waits and Robin Newbery, the evidence as to the recorded weight of the goods themselves, the evidence as to the number of the pallets and finally the unreliability of the inspection reports. With regard to the inspection reports and associated warehouse documentation, the Commissioners' primary submission was that the mistakes and the discrepancies in the documents were so glaring that they amounted to evidence that the goods were not present in the consignment, but rather that false documentation was being deliberately created. At the very lowest, it was submitted that the documentation was neutral on the issue of whether or not the goods described were in the consignments. The unexplained discrepancies in the documents meant that they could not be relied on at all to suggest that the goods were in fact there. The failure to call anyone to explain the discrepancies was similar to the situation in the case of Grunwick Processing Laboratories Ltd v CEC [1986] STC 441, where it was held that where an assessment had been properly made, the onus of showing, on the balance of probabilities that the assessment should be reduced, lay throughout on the taxpayer. Thus it was for the taxpayer company to show that some of the purchase notes did not relate to its sales of silver and the taxpayer company had failed to discharge that burden, which was upheld by the Court of Appeal subsequently.
- With regard to the question of Laurence Flynn's knowledge that the goods described on the invoices were not present in the consignments, HMRC relied both on the evidence of Laurence Flynn himself (and on discrepancies and inconsistencies in that evidence), and on the evidence suggesting his collusion with Phillip Clark and Ezzat Tabbah, who similarly knew that the goods described were not in the consignments, in fraudulent trading. In this regard HMRC relied on the following: general doubts about Senergy's trading situation, failure of Senergy to act in accordance with commercial risk, the evidence of non-commerciality relating to the other companies in the chain, and the discrepancies in the evidence of Senergy's witnesses. They pointed to the fact that in attempting to explain the transactions, Laurence Flynn and others gave explanations or produced documents that were inconsistent with each other and inconsistent with their own witness statements; the evidence was highly consistent with the transactions having been manufactured for a fraudulent purpose and with the goods not having existed.
- In respect of the doubts about Senergy's trading situation, Mr O'Connor invited the Tribunal to speculate about a range of matters, which we do not propose to repeat here. Suffice it to say we do not propose to draw conclusions as to either how Senergy became involved in the particular trade, or as to James Isaacs' reasons for leaving Senergy, or as to the nature of Laurence Flynn's shareholding. Mr O'Connor referred us to the differing accounts given as to the role that Phillip Clark played in managing Senergy in that he had stated he had very little involvement, and that the investors dealt with James Isaacs who was responsible for running the company, whereas Laurence Flynn had suggested that Phillip Clark had a greater role, and that he, Laurence Flynn, took instructions from Phillip Clark.
- With regard to Senergy's failure to act in accordance with commercial risk, the Commissioners pointed to the following:
(a) Each single transaction had a very high value therefore the effect of not being able to sell on even a single transaction would have been very great.
(b) The products were of a specialised commodity finding an alternative customer could not have been assured had Inter Sporting/I.C.E. not accepted the goods.
(c) The trade in "grey market" goods was inherently more unstable than trading in licensed goods.
(d) Both Senergy and Inter-Sporting were dealing with overseas customers.
(e) Senergy had not previously dealt with Inter-Sporting and Inter-Sporting had not previously dealt with I.C.E.
(f) The fact that Senergy was using investors' capital in connection with these deals would have made the company even more risk-averse.
- It was submitted by Mr O'Connor that Phillip Clark and Laurence Flynn had broadly assented to the above propositions, and to what followed from them, namely that in order to avoid being left with stock, Senergy and Inter-Sporting should have adopted the following approach: that they should not have committed to a deal until the customer had committed to it and they should have been sure to purchase from the supplier exactly what the customer had wanted to purchase. In the light of this, the circumstances of Deal 1, which, it was submitted, was the riskiest deal, was progressed in an extraordinary way. Senergy had used its investors' money to fund the first payment of Deal 1. Senergy had therefore paid out some £640,000 of its investors' capital on the very first deal before any of the contractual paperwork had been put in place, and without taking advantage of any contractual requirement that its customer make a payment on confirmation of its order. This was wholly inconsistent with the commercial risks as set out above. It was submitted however that this was consistent with this chain of trading being part of a carousel fraud, which required an initial injection of capital.
- Laurence Flynn's position was that he had personally been involved in requesting and receiving the inspection reports from Stanza, and yet he had taken no action when the inspection reports revealed obvious flaws. The inspection reports were of particular significance given that no one at Senergy had ever seen the goods in question. The lack of regard paid to inspection reports suggested a lack of any normal regard to commercial risk. Peter McAughey had given evidence that the existence of insurance cover and the inspection reports gave him comfort with regard to the deals. On analysis the inspection reports were deeply flawed and the insurance was seriously insufficient. The evidence generally revealed that Senergy and its trading partners were venturing into risky business dealings whilst demonstrating very little regard to the risk of their undertakings. It was the Commissioners' assessment that the explanation for this was that there was no risk because the transactions were not genuine, and the supplies were shams.
- The evidence of non-commerciality relied on by the Commissioners was that the situation in which three closely-related companies traded with each other whilst taking a profit in the manner in which they did was suggestive of a lack of commercial reality. Fraudulent activity could be inferred if this is taken together with the fact that Senergy and UKCC had a pre-existing relationship, UKCC having been negotiating with Senergy for the purchase of remote-controlled plane in the summer of 2003. Laurence Flynn had suggested that his connection with Tom Gilmore of UKCC was an independent connection and that Tom Gilmour was his contact. Phillip Clark had given evidence that he had been advising James Isaacs from the development of the remote-controlled plane venture, but denied that he had any knowledge that UKCC was a potential customer, and it was only in April 2004 that he became aware that UKCC was Interactive's supplier. The evidence showed a link between Laurence Flynn, Tom Gilmour and Ian Barton of Skytec. Furthermore all the deals involved exactly the same trading companies, whereas, particularly where the deals involved a commodity where there was keen pricing to undercut licensed traders, it was unlikely that the deals would have continued to have been made between exactly the same parties without the parties at the top and/or bottom of the chain trying to cut the middle parties out. Mr O'Connor also pointed to Phillip Clark's repeated emphasis on the ability to make a commercial profit being his sole guiding criterion. This was at odds with the fact that he had never offered the goods to any party other than I.C.E., nor offered the consignments that I.C.E. had refused to other parties.
- HMRC relied on the fact that Inter-Sporting had failed to account for VAT on its Spanish transactions, and that it was deregistered for VAT for the period 3 March 2004 to 9 June 2005. It was a surprising fact that Phillip Clark did not consider it necessary to have the goods inspected on their arrival in Barcelona prior to completing the sale to I.C.E. With regard to the cancelled deals, in respect of which the evidence was inconsistent, it had to be asked why I.C.E. and (presumably) Eurotec were prepared to wait for so long while the situation remained unresolved. Lastly in this regard the Commissioners relied on the fact that Skytec was a defaulting trader, the evidence relating to Mr Brugman, and the evidence that the consignment in Deal 7 made an almost non-stop round-trip from Cyclone to Stanza and back to Cyclone.
- In respect of regulations 13 and 14 of the VAT Regulations, it was HMRC's case that the goods described in the three Interactive invoices did not in fact exist, and the goods that were in fact exported did not match the description shown on the invoices. HMRC relied principally on these matters, but also on the fact that the right to deduct input tax which was asserted by Senergy was not an absolute right. In order to exercise his right of deduction, a taxpayer must hold a valid VAT invoice in respect of the deduction claimed at the time of making the claim to deduct. For this proposition the Tribunal was referred to Case C-338/96 EC Commission v Kingdom of the Netherlands (United Kingdom intervening) [2003] STC 1506 and Case C-152/02 Terra Baubedarf-Handel GmbH v Finanzamt Osterholz-Scharmbeck [2005] STC 525.
- It was submitted that in the present case the invoices held by Senergy in support of its claim for input tax deduction were not valid VAT invoices for the purpose of the VATA or the VAT Regulations. They did not give a "description sufficient to identify the goods
supplied", as required by regulation 14(1)(g) and/or the quantity of those goods, as required by regulation 14(1)(h). Likewise the invoices did not contain details of "the quantity and nature of the goods supplied" as required by Article 22(3)(b) of the Sixth Directive. The goods (if any) supplied by the Appellant did not match the description of the goods contained in the VAT invoices held by the Appellant. In this regard it was submitted that it was not necessary to allege fraud against Senergy, even though there may be fraud in the surrounding circumstances. There was a burden on HMRC to say why the goods did not match the invoiced descriptions, and, in this particular case, the goods could not do so because there were no such things as "LT Forged irons" or "12 degree launch" 983 K Titleist drivers. HMRC did not rely solely on those two matters, but also on the fact that the evidence showed that there was nothing resembling either the goods or the quantity of the goods on the invoices, for which they relied on the evidence of John Waits and Robin Newbery, and the evidence with regard to the weight of the consignments.
- Insofar as there was a difference between the domestic and the European legislation, it was submitted that this was not a determinative factor in the present case. HMRC did not rely on any narrow technical mis-description, and submitted that the test in the domestic legislation was whether the invoice was sufficient to identify the goods, whereas the Sixth Directive only required that the invoices should identify "the quantity and nature of the goods supplied". On the facts of the present case it was not possible that a number of irons/drivers could have been in the consignments, in which case neither the United Kingdom requirements nor those of the Sixth Directive were met. It was, however, accepted on behalf of the Commissioners that if the invoices were accurate save for the matter of the "LT" and "12 MR 580" drivers, then it was accepted that both tests were met. In this regard it was submitted that the Appellant bore the burden of proof, and that the Commissioners had discharged the evidential burden upon it to put the Appellant to proof that the goods on the invoices were in fact present.
The Appellant's case
- Senergy's case in principle was that the supplies of golf clubs shown in the invoices were genuine transactions, and that the invoices provided a "description sufficient to identify the goods supplied", as required by regulation 14(1)(g)(h) of the VAT Regulations 1995, and did in fact so describe them. It was accepted by Senergy that the burden of proof was upon it to show that it was entitled to the repayment of input tax, but contended that it had done so by the production of the purchase orders, invoices, insurance and inspection documents and the paperwork showing the transfers of payments from one party to another. As part of the evidential burden upon HMRC it was essential that the fraud alleged was properly defined. On the facts of the case, the only acquisition fraud possible was the one carried out by Skytec. It was said to have purchased the golf clubs from one of two Portuguese companies and then had disappeared without accounting for the VAT due on the onward sale of these clubs to Interactive.
- It was submitted by Mr Mathew that there was no direct piece of evidence from which a fundamental adverse inference could be drawn, and upon which circumstantial evidence could supply the necessary supporting inferences. In this regard the Tribunal was referred to the cases of Les Croupiers Casino Club v Pattinson (HM Inspector of Taxes) 60 TC 460 196 and also to the case of Grunwick (supra). Mr Mathew accepted that there was no principle of law which required this to be the case, but submitted that it was the common method of approaching the question of whether the evidential burden had been discharged, and the cases illustrated the high standard of evidence required and the necessary care. North LJ in Les Croupiers Casino Club 222/223 said:
"
the standard of proof in civil proceedings, which is always proof on the balance of probabilities, is nevertheless flexible, being higher or lower according to the nature and gravity of that which has to be proved. This principle has recently been re-affirmed by the House of Lords in R v Secretary of State for The Home Office ex parte Khawaja [1984] AC 74
Another and I think preferable way of stating this principle is to say that the more grave the act or omission to be proved, the more convincing must be the evidence which is required to tip the balance of probability. I would state the test in this way. An inference of fact drawn by the [appeal] commissioners can only be displaced by the Court if it cannot be justified by the primary facts. But before an inference which involves fraud or other criminal conduct can be justified, the primary facts must have a probative value which weighs up to the gravity of the offence."
Lord Nicholls of Birkenhead in the case of In re H [1996] AC 563 at page 586 had said:
"Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is high. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established. Ungoed-Thomas J expressed this neatly in Re Delow's Will Trusts [1964] 1 WLR 451 at 455:
"The more serious the allegation the more cogent is the evidence required to overcome the unlikelihood of what is alleged and thus to prove it."
- It was submitted that, once Skytec was out of the picture, because there was no necessary connection between it and Senergy, what was left to HMRC was secondary evidence of little probative weight in the circumstances. The errors made were those of others, not Senergy: for example the weights on the CMRs and the inspection reports by Stanza, and some inaccuracies which could not have misled anybody, in the invoices. Such inaccuracies were insufficient to render the invoices deficient on a technical basis and it was therefore unlikely they could have any probative weight for fraud.
- The fraud alleged was that a series of false invoices had been brought into existence to deceive HMRC as to the nature of the relevant transactions. The evidence as to this was insubstantive. Mr Mathew submitted that it would only be possible to found a case of fraud if it could be shown that Laurence Flynn had knowledge of the fraud, and there had to be a specific piece of evidence from which such a conclusion could be drawn. There was no such evidence here. Not only must HMRC identify the fraud alleged, but they must also identify the perpetrators. In this case the Commissioners were relying on a number of circumstantial events, which could be due to carelessness or incompetence, there had been no necessary precursor finding. The description of the clubs was only relevant at the point of sale, it was not relevant to the wholesalers.
- With regard to the goods in Deal 7 which were shipped from Cyclone Logistics to Stanza Freight before returning to Spain, it was accepted that there was an obvious element of circularity, but it was submitted that this was not evidence of a carousel fraud. There was no suggestion that the goods were returned to the same parties who previously owned them, and this factor would only tend to indicate an MTIC fraud if there was a collaboration between the Appellant and those who had owned the goods before they were shipped to the UK.
- With regard to the suggestion by Gordon Young and Andrew Charles that there was some unspecified connection between Senergy and the two Portuguese companies, Aragon and Amberley, there was no primary evidence from which any arrangement of a carousel type could reasonably be inferred, nor was it shown in cross-examination. No enquiries had been carried out into those companies in order to substantiate the allegation of their involvement in a carousel fraud. There had been no investigation whatsoever into Eurotec, the stated consignee of the invoices. There was no full investigation by the Commissioners into the VAT position of Inter- Sporting, nor into the position in Holland following the obtaining of statement from Kevin Brugman.
- With regard to the Commissioners' allegation that the documentation was lacking in the detailed information that would have been essential at this level of trade, it was submitted that this was an unjustified assertion. Whilst the invoices had some inaccuracies, the details were quite sufficient for the Commissioners to seek a detailed analysis of the goods described from individuals employed in the industry. The assertion as to the level of detail required showed a mis-understanding of the nature of the market, and no basis for it had been demonstrated. Laurence Flynn's evidence was that the value of the club was in the head, not in the shaft, and that the value of the consignment as a whole would not be diminished by there being more or fewer stiff as opposed to regular, shafts, and also that it was easy enough for the retailer to swap the shafts over if required. It had been accepted by Robin Newbery that the fitting of the club head was not a particularly skilled operation, and as a matter of competence rather than of skill. As to the assertion that the sheer number of clubs made it wholly improbable the trade could have been genuine, there was evidence from John Waits that the parallel market in Taylor Made golf clubs was substantial, it was also accepted by Robin Newbery that there was a parallel market in Titleist products. Their evidence was deficient in that comparative and extra-European volumes were not cogently described or at all addressed in material respects. With regard to the size of the total market, Robin Newbery had accepted Laurence Flynn's evidence as to this, and it had been Laurence Flynn's evidence that as far as Taylor Made products were concerned, the Japanese and Australasian markets dwarfed that in the EEA. Furthermore Senergy's case was that the consignments would have ultimately been broken up and sold to different end consumers, not necessarily in the EEA. The evidence given as to the total number of a particular type of golf clubs sold in the UK in the period 2003 to 2004 can, accordingly, not be given much weight when considering the issue of whether there was an available market worldwide for the golf clubs concerned.
- It was submitted that the opinions of John Waits and Robin Newbery were not in themselves evidence. Furthermore there was a difference in the evidence given by them as to the nature of the trade in parallel imported golf clubs. John Waits had said that this market was "not very different" from the licensed trade in the goods, seeking to imply that parallel importers operated in the same way as Taylor Made. Robin Newbery, on the other hand, said that the way in which Titleist operated was somewhat different from parallel importers, in the context of a discussion of the way in which Titleist is marketed and the products are known to the retailers by Acushnet.
- It was submitted by Mr Mathew that an essential ingredient in HMRC's case was that there is to be found by implication from the primary facts a hidden or undisclosed connection between Senergy and at least one or more of the other parties outside of Inter-Sporting and Interactive, but irregularities in invoicing paperwork completed by third parties were simply not enough to substantiate such a serious allegation. The cogency of the evidence must be commensurate with the misconduct alleged. This was especially so when it was contrasted with the position of Senergy which (i) has at all times continued to trade in golf clubs and other items; (ii) prepared statutory accounts and drafts for the relevant period by an outside reputable auditor; (iii) expanded its business by purchasing brands and stock from Interactive; and (iv) continued to render VAT returns.
- In order to succeed in the allegation of sham, HMRC must satisfy the Tribunal that fraud was being perpetrated by somebody. Their primary case must, as a matter of logic, be that such fraud was known to Senergy and their secondary case that Senergy was complicit in the fraud. It is inconceivable that the goods traded were wholly unlike those described in the documentation, in entirely innocent circumstances. If such a major discrepancy existed, then it must have been deliberately created by somebody in order to defraud either the VAT authorities, or one, or more, purchasers in the chain. This had not been demonstrated.
- With regard to the issue of whether the invoices met the technical requirements in order to found a claim to repayment of input tax, Mr Mathew pointed to the difference between the requirements of the VAT Regulations and those of the Sixth Directive. The distinction was between a requirement that the "nature" of the goods be provided and that there be a description "sufficient to identify the goods". Where there is a discrepancy between the wording of the Sixth Directive, and implementing legislation, the national rules must be interpreted by concentrating on the Directive: see Century Life Plc v Customs and Excise Commissioners [2001] STC 30. This was consistent with the principle of EU law that national courts are required to interpret national legislation, so far as possible, in accordance with the wording and purpose of the Directive; see Marleasing SA v La Commercial Internacionale de Alimentacion SA [1990] ECR I-4135.
- European case law on the nature and purpose of invoices themselves shows that one of the primary purposes is to prevent fraud on the revenue: Finanzamt Osnabruck-Land v Langhorst [1997] STC 1357. Member States must also exercise the power given to them by the Sixth Directive consistently with the aim of ensuring that VAT is levied and collected under the supervision of the tax authorities. The Sixth Directive contains no definition of the terms "invoice" and "document serving as an invoice".
- Mr Mathew submitted that regulation 14(1) itself provided an exception to its strict terms, by saying that its provisions may be varied such "as the Commissioners may otherwise allow". The Tribunal was referred to HMCR's Customs and Excise manuals. These state inter alia as follows:
"8.11 Alternative evidence
In the UK, under regulation 29 of the Value Added Tax Regulations 1995, the commissioners have discretion to allow claims that are not supported by the evidence normally required by the regulation (VAT Invoice, Import VAT certificate, etc). Where claims are not supported by the proper evidence (including claims supported by invalid VAT invoices) officers must always exercise this discretion and consider whether or not satisfactory alternative evidence is available to justify a deduction. If officers simply reject claims without having fairly and reasonably considered all the circumstances, the assessments will not be upheld by the courts.
8.11.1 Invalid invoices
The legal requirements for a valid VAT invoice are set out in regulation 14(1) of the Value Added Tax Regulations 1995. Strictly, any missing information makes an invoice invalid, but officers are not to treat invoices as invalid if the error is of a minor nature see paragraph 8.7 above.
"
It was submitted that it was only in the exercise of a discretion that the practice of the UK Customs authorities could conceivably be said to be consistent with the words of the Directive. In the present case it was clear from the decision letter and the evidence of Gordon Young, that it was not mis-descriptions of the golf clubs per se which led to the refusal of the repayment of input tax to Senergy. Despite the presence of this discretion, however, the Regulations must be interpreted consistently with article 22 of the Sixth Directive. The Tribunal was referred to the word "nature" as defined by the shorter Oxford English Dictionary as "the inherent or essential quality or constitution of a thing;
". The words "descriptions sufficient to identify the goods" should be interpreted as meaning "descriptions sufficient to identify the inherent or essential quality of the goods". The inherent or essential quality of the products bought and traded by Senergy was that of being golf clubs. None of the mistakes found on the invoices could be said to be mistakes going to the essential quality of the clubs. The strict interpretation of regulation 14(1) contended for by the Commissioners was not only at odds with the Directive, but with their own view of their discretion, such discretion clearly being in accordance with the purposes of the legislation as affirmed by the European Court. Furthermore, no Customs officer in the present case had addressed his mind to the question of whether, if the golf clubs described on the invoices were received and traded by Senergy, the mistakes (such as the reference to a 12 degree launch rather than an 11.5 degree launch) were "of a minor nature".
Reasons for Decision
- Whilst we accept Mr Mathew's submission that there is no one event which is unequivocally an indicator of fraud from which a fundamental adverse inference could be drawn, we do not accept that there is any authority that states that it is a legal requirement that there should be one, nor are we persuaded that the authorities cited by him (supra) require us to adopt this approach. We have set out in paragraph 20 above the relevant burden of proof, and would add that the fraud which the HMRC allege is that Senergy, through its officers Laurence Flynn and Phillip Clark, were either aware that there were no clubs of the type or in the numbers allegedly being traded, or were turning a blind eye to that possibility. We accept that the law on sham is as was submitted by Mr O'Connor; Mr Mathew did not contend otherwise.
- There were many contradictions and inconsistencies in the evidence of Laurence Flynn and Phillip Clark, both internally and as between each other. The most striking inconsistency which we found was that Laurence Flynn clearly stated in his evidence to us that the initial dealings had been conducted in writing, and that later, when trust had been built up, the deals were made over the telephone. Yet when the first deal is analysed, as above at paragraph 31 (a)-(e), it is apparent that not only was it not clear from the paperwork what items were being purchased, but also that the terms and conditions were not being complied with, and it was the money from Senergy's investors which had been used for the initial payment which had enabled the whole chain of transactions to take place. We find this quite incompatible with a genuine trading pattern where the supplier of the goods (UKCC) is not a company with which any of the parties have previously traded, and where, according to Laurence Flynn, the main contact with that company has little experience of golf equipment.
- We found neither Laurence Flynn nor Phillip Clark to be credible witnesses, and in all instances where there was a difference we prefer the evidence of John Waits and Robin Newbery to theirs. This is of particular importance with regard to the descriptions, the weights and the quantities of the various clubs alleged to have been traded, which have been set out fully above. Since neither Laurence Flynn nor Phillip Clark, nor anyone else connected with this case, apparently ever saw the contents of any of the consignments, they can only speculate as to what was intended in those instances where clubs which have never been manufactured are alleged to have been traded. The discrepancies and inaccuracies in the descriptions of the clubs are not such that we can ignore or that can be explained as being typing errors, as Laurence Flynn attempted to do. We have stated above that we do not accept Ezzat Tabbah's evidence, and the reasons for that. We heard evidence that golfers are very particular about the clubs they use, and more especially so those golfers who buy the more expensive clubs, such as are alleged to have been traded here. We do not find it credible that any retailer, and retailers were said to be the ultimate (trade) purchasers of the clubs in question, whether golf professionals or stores, would agree to purchase clubs without knowing exactly what he was purchasing. Here in many instances it would not have been at all clear. We find it highly unlikely that there would be a market for clubs in the quantities and at the prices of the ones in question here, insofar as we can be at all certain as to what the clubs in question are. We bear in mind that John Waits' evidence as to the price attached to the clubs, namely that it was high, was that at which Senergy was selling them, and did not take account of the further onward sales by Inter-Sporting, I.C.E and Eurotec, each of which had a profit margin attached, although, in the case of Eurotec, this is something which we assume.
- We do not believe that Stanza ever carried out any inspections and find their reports to be totally unreliable. We find that any reasonably conscientious businessman would have been alerted by the gross discrepancies that exist in the report of 26 April 2004 with regard to Deal 8, where the quantity of goods is shown as 10,000, the goods inspected are shown to be 10,000, and yet when the quantity of goods listed is added up it comes to 2,080, and the itemised total of goods comes to only 1,000. This is apart from the fact that no such clubs as LT Forged Taylor Made RAC Irons ever existed, yet they are listed as having been inspected. Peter McAughey claimed to have taken comfort from the fact that the goods were inspected, and yet he, too, apparently overlooked the glaring discrepancies in this report.
- We accept that, in this case, the trade was wholesale, but wholesalers must have in mind whoever will be the ultimate purchaser of his goods. It was Laurence Flynn's evidence that the purchasers of parallel imported goods were golf professionals or stores, and so we do not accept Mr Mathew's submission that the description of the particular clubs would be irrelevant as the goods were being sold to wholesalers who would not be interested in them. He submitted that the mis-descriptions "could not have misled anybody". We reject that submission: not only are the descriptions misleading, but they could not have led any prospective purchaser to a certain conclusion as to what he was purchasing. We do not accept that the nature of the goods would have been a matter of indifference even to a wholesaler, and, albeit we do not accept his evidence as to this, by stating that he amended the description in some cases, Ezzat Tabbah showed that it was a matter of concern to him.
- We accept Mr Mathew's submission that the circularity of the goods involved in Deal 7 is not sufficient to constitute clear evidence of a carousel fraud taking place, however it is undoubtedly a very strange part of this case which has not been properly explained by either Laurence Flynn or Phillip Clark. Both of these men had dealings with Stanza in their capacity as directors of Senergy, and Phillip Clark had dealings with Cyclone. It would have been possible for either or both of them to have made further enquiries, which they did not. We do not accept that there was a burden on HMRC to investigate this aspect of the matter further. With regard to the discrepancy in the weights in Deal 6, evidence was given on behalf of Senergy that the clubs were not packed either individually or in sets in the way that Taylor Made would pack them in order to save the cost of packaging. However, since nobody from Senergy had ever seen the products, nor seen the way in which they were packaged, and nobody who had seen them has given evidence to the Tribunal, this evidence must be mere speculation. We do accept the evidence given that it would have been possible to pack the clubs in a different way from that employed by Taylor Made, and thus save on the packaging, nonetheless, we do not accept that the discrepancies in the weights of the various consignments can be accounted for solely by any reduction in the amount of packaging material used.
- Mr Mathews referred us to Laurence Flynn's evidence as to the ease of swapping the shafts over, whilst we accept that evidence as it stands, we do not accept that it would be feasible or easy to swap shafts on the huge volume of clubs involved in these transactions, given the time it would take to do so which would render it an entirely uneconomic activity. No purchaser would know from the descriptions on the various documents whether it was going to be necessary to swap shafts or not because he could not be certain as to the nature of the shafts he was purchasing.
- We consider that the manner in which subsequent deals were cancelled without there being any penalty to Senergy or any other party, and without there apparently being any concern to enforce the relevant terms and conditions indicates that there was no bona fide trade between Interactive, Senergy and Inter-Sporting, or indeed the other parties in the chain. We do not find it credible that anybody conducting a genuine business could fail to pay attention to the number of mis-descriptions and inconsistencies in the documents and, in that Laurence Flynn was a director of Senergy and professed to have the relevant knowledge of the golfing market, Senergy is fixed with his knowledge. We find that I.C.E. was a party to the sham, as evidenced in particular by Ezzat Tabbeh's late production of documents purporting to show correct descriptions of the clubs traded, his willingness to take no action with regard to the cancelled deals despite the terms of the purchase orders which had been placed, his lack of awareness of I.C.E.'s liability to VAT and his general lack of credibility. For these reasons and for all the reasons set out above we find that Senergy is not entitled to input tax credit as claimed, the supplies between Interactive and Senergy being, to the knowledge of Senergy, not what, on their face, they purported to be. If we are wrong as to this, we find that Senergy was wilfully turning a blind eye to the possibility of the transactions being sham.
- We are satisfied on the balance of probabilities, the burden here being on Senergy, that none of the invoices which it holds in support of its claim for input tax deduction were valid VAT invoices for the purposes of the VATA or the VAT regulations. We do not find that they give a "description sufficient to identify the goods
supplied" as required by regulation 14(1)(g) and/or the quantity of those goods, as required by regulation 14(1)(h). The invoices go into great detail in all three of the relevant transactions as to the purported nature of the goods supplied. Since there are no such things as "LT Forged irons" or "12 degree launch" 983 K Titleist drivers, the description in these cases is clearly not sufficient to identify the goods supplied. Nor was it merely a matter of the impossibility of goods resembling the description being supplied, but the quantities given on the invoices have not been shown by Senergy to have been matched by the quantities of goods supplied, as evidenced by the weight of the consignments. In respect of all three relevant invoices we have set out in detail at paragraphs 35, 36 and 37 respectively evidence of the mis-descriptions and the inconsistent evidence of the weights of the goods in the consignments. We have taken all of this evidence into account.
- Article 22(3)(b) of the Sixth Directive requires that the invoices contain details of the "quantity and nature of the goods supplied". In addition to the evidence regarding the inconsistent descriptions of the goods and the weights of the consignments, we do not accept that the number of irons or drivers alleged to have been in the consignments could have been present, given the evidence of John Waits and Robin Newbery. For these reasons we find that neither the requirements of the domestic legislation, nor the European legislation were met.
- For the above reasons Senergy fails on both counts and the appeal is dismissed. HMRC are entitled to their reasonable costs of and relating to this appeal, such costs to be agreed or, in the absence of agreement to be determined by the Tribunal.
MISS J C GORT
CHAIRMAN
RELEASED: 23 August 2006
(Paragraph 28 amended 16 August 2007)
LON/05/131
