Kidnapped businessmen win HMRC penalty appeal over carousel fraud

Two businessmen who claimed to have been unwittingly involved as middle men in a VAT ‘carousel’ fraud over sales of industrial hose to the Middle East, and who found themselves kidnapped by criminal associates of the fraudsters, have won their appeals against penalties for dishonesty imposed by HMRC.

The cases involving John Wood [Wood [2014] TC 03659 [2014] UKFTT 532 (TC)] and David Langhorne [Langhorne [2014] TC 03660 [2014] UKFTT 533 (TC)] were heard at separate First Tier Tribunals (FTTs), although they are linked.

Both men are polymer experts. John Wood was a director of Asgard UK Ltd and Davd Langhorne of Formel E Ltd. The two FTTs heard that Asgard and Formel each bought a large quantity of irrigation hose manufactured by a company called VPS Ltd which was registered for VAT. VPS, which was set up by a Mr Thompson, and according to Thompson alone, a man called Volker Kappler (who it transpired was a convicted criminal).

HMRC claimed that Asgard’s and Formel’s main business was the purchase and export of the hose which was all purchased from VPS and sold to a business called Tazar Industries in the United Arab Emirates (UAE) which was also owned by Thompson.

Therefore, HMRC argued that Thompson was selling the hose to his own company, so the use of Asgard and Formel as a third party made no sense in commercial terms and was a device so that Wood and Langhorne could claim VAT credits to which their company was not entitled.

One difference between the two cases is that Langhorne had had previous dealings with Thompson, setting up another company which never traded and acting as the company secretary of VPS for a 14 day period. The FTT heard that the paperwork involved with these activities included forgeries of Langhorne’s signature, probably supplied by Thompson.

In both the FTT cases, HMRC alleged that the hose was sold to Asgard and Formel at an inflated price. Under their terms of business with VPS and Tazar, they were not required to pay VPS until seven days after it had been paid by Tazar, and Tazar was not required to pay Asgard or Formel until 60 days after the hose had been installed in the ground.

Under the normal rules for crediting input tax, Asgard and Formel would therefore be able to claim a repayment from HMRC well before they were required to pay a tax inclusive price to VPS. HMRC claimed the input tax claim was artificially high because of the over valuation of the hose and that the setting up of Asgard and Formel was merely a sham to claim input tax.

These matters came to light after Wood and Langhorne were kidnapped by associates of Kappler, dressed as uniformed customs officers. They were beaten, threatened with guns and demands for money were made. They were released and Kappler phoned a customs officer to tell her about the ‘hose scam’.

HMRC argued at the FTTs that the deals between VPS and the two companies were unnecessary, based on suspiciously favourable terms, and did not require either company to add value to the hose, so they were receiving a profit for very little effort.

In their evidence, both Langhorne and  Wood said they was unaware of the extent to which Tazar was connected with Thompson, and that Thompson had reported previous problems in dealings with the UAE which meant he needed intermediaries.

In addition, when there were apparent issues with the quality of the hose Wood had gone to the UAE representing both Asgard and Formel in an attempt to deal with them, and Langhorne had subsequently visited UAE in an attempt to solve the quality issue and to look for alternative customers.    

The FTT accepted that these interventions were further evidence that neither was involved with a VAT fraud, while the judges were also swayed by Wood’s evident outrage over the turn of events and the view that while Langhorne may have been naïve, he was not knowingly involved with sham transactions. In both cases, the FTT held the men’s behaviour did not amount to dishonesty and their appeal was granted.  

Michael Steed, contributing tax writer, CCH, said: These cases show that tribunals are not afraid to reject HMRC penalties when the taxpayer convincingly stands his ground. There was no direct evidence of dishonesty, only circumstantial evidence and Wood’s genuine sense of grievance and Langhorne’s steadfast stand under a long cross-examination won the day.’

Langhorne’s FTT case is here: http://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03660.html

Wood’s FTT case is here:  http://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03659.html

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