The issue was whether the appellant knew, or ought to have known, that in the course of its trading it was involved in Missing Trader Intra-Community (MTIC) fraud. The first disputed decision of the commissioners related to a ‘straight’ chain of supply starting with a defaulting importer and ending with an export by the appellant, and the second decision concerned alleged contra-trading in which a person exporting goods in other ‘dirty’ chains entered import transactions in which goods were sold to the appellant.

The appellant was incorporated in 2000 and carried on business as a dealer in mobile telephones. In 2007, the commissioners refused input tax claims by the appellant totalling £1,618,473 on the basis that phones traded by the appellant had been previously recorded on the commissioners’ Nemesis database, which maintained a record of international mobile equipment identity (IMEI) numbers, and in the knowledge that the phones were the subject of fraudulent transactions. It was clear that fraud had been carried on and, on the evidence available, the tribunal concluded that fraud was proved in relation to nine specific traders involved in the transaction chains.

The first question for the tribunal was whether the appellant ought to have known about the fraud being perpetrated in the ‘straight’ chains. The appellant contended that it knew about the possibility of fraud but had taken reasonable precautions, such as IMEI scans and physical inspection of all goods. It pointed out that the commissioners had been previously satisfied with the steps taken had approved earlier refunds of VAT when the parties and trading pattern had been similar.

The commissioners argued that the appellant's evidence was not credible. They submitted that the transactions bore the hallmarks of fraudulent trading: all the deals were quick and for exact quantities in thousands; no stock was held; mark-ups were in whole pounds; same-day back-to-back deals were common with no losses made; most suppliers and customers banked with First Curaçcao International Bank, which was the subject of a criminal investigation in relation to money laundering; some purchasers wanted the goods delivering to warehouses in different countries; and the appellant's directors were young men running their first company with a turnover of £80m with no financial risk. In the commissioners’ view, the facts pointed to knowledge by the appellant of the fraudulent transactions.

Having considered all the evidence, the tribunal concluded that the appellant's director was, due to his inexperience, somewhat näive and gullible. He was the ideal person for a ‘puppet master’ to involve in a fraud without his knowledge. On balance, a person with his limited experience would not have known that there was fraud in the deal chains. Accordingly, it could not be said that the appellant ought to have known about the fraud in the chains. Further, the tribunal found that there was insufficient evidence to prove that the deals relied on by the commissioners in relation to alleged contra-trading were fraudulent. It followed that the question of whether the appellant ought to have known did not arise.

The tribunal allowed the company's appeal.

1. In relation to the ‘straight’ deals, it could not be said that the appellant ought to have known of fraud in the transaction chains.
2. The question of whether the appellant ought to have known about fraud being carried on in relation to contra-trading did not arise