C D (EUROPE) LTD

Paul James Sercombe

January 1974

Disqualified from being a director because of their conduct for the period of

12 Years 0 Month(s)

Disqualification starts from

7 August 2020

Improper conduct which resulted in their disqualification

1. Between 01 July 2016 and 30 September 2016, Mr Paul James Sercombe (“Mr Sercombe”) caused C D (Europe) Ltd (“CDE”) to participate in transactions which were connected with the fraudulent evasion of VAT, such connections being something which Mr Sercombe either knew or should have known about. 2. On CDE’s 09/16 VAT return Mr Sercombe caused CDE to wrongfully to claim input VAT of £1,982,117 from HM Revenue & Customs. Annex 1.1 Mr Sercombe was aware, or ought to have been aware, that VAT fraud was rife in the wholesale trade of electronic goods in which CDE engaged, because: 1.1.1 On 10 January 2012, HMRC issued CDE with an information awareness letter on Missing Trader Intra Community VAT fraud (“MTIC”) which provided information on the financial losses connected to MTIC fraud, drew the reader’s attention to the HMRC Notice 726 entitled “Joint and Several Liability”, provided details of the free validation of VAT registration system that HMRC offered (including details of the required documents) and enclosed a copy of the HMRC leaflet “How to spot VAT fraud” 1.1.2 On 27 August 2013, Mr Sercombe telephoned HMRC and the officer’s notes of that conversation confirm that the following documents had been issued to Mr Sercombe: o How to Spot Missing Trader Fraud o FS1a (which is a compliance checks series factsheet) o Notice 726 (joint and several liability for unpaid VAT) o Human rights factsheet 1.1.3 On 19 December 2013, HMRC officers visited CDE and met with Mr Sercombe, the notes of that visit confirm that Mr Sercombe was verbally informed about various types of MTIC fraud and that CDE was dealing in high risk commodities, the notes also confirm that Mr Sercombe was provided with a copy of Notice 726 and had his attention drawn to the importance of due diligence checks 1.1.4 On 06 March 2015, HMRC officers visited CDE and met with Mr Secombe, the notes of that visit confirm that: o The officers discussed various matters related to MTIC with Mr Sercombe o Mr Sercombe confirmed he had previously been issued with MTIC awareness information o The officers re-issued a copy of ‘How to Spot Missing Trader fraud’ to Mr Sercombe o The officers discussed the facility provided by HMRC’s Bootle Office to check the validity of another entity’s VAT Registration o The officers informed Mr Sercombe of the importance of due diligence checks on suppliers and customers o Despite Mr Sercombe indicating he was hearing of due diligence for the first time he was reminded by the officers that this had been discussed with him when the officers met him in 2013 and issued Notice 726 o The officers re-issued a copy of Notice 726 and highlighted the reference to joint and several liability o The officers informed Mr Sercombe that trading in which CDE had been involved bore hallmarks of MTIC fraud o The officers informed Mr Sercombe that HMRC had evidence that some or all of the transaction chains in which CDE had traded commenced with a fraudulent evasion of VAT o The officers referred Mr Sercombe to the Kittel judgement 1.1.5 On 21 April 2015, HMRC wrote to CDE to inform it that HMRC had concerns that CDE could be involved in supply chains that were connected with fraud which could lead to CDE being unable to recover the VAT it was charged on those purchases 1.1.6 On 06 May 2015, HMRC issued CDE with a further information letter about MTIC fraud which included details of indicators of fraud, information about alternative banking platforms (“ABP”s) and provided details of the free validation of VAT registration system that HMRC offered (including details of the required documents) 1.1.7 On 03 June 2015, HMRC visited CDE and met with Mr Sercombe, the notes of that visit confirm that: o The officers informed Mr Sercombe that CDE was trading in high-risk commodities o The officers informed Mr Sercombe that transactions in which CDE was involved that were discussed at a previous visit bore many of the hallmarks of MTIC fraud o MTIC awareness/education had been the subject of discussions at previous visits to CDE by HMRC officers o The officers re-issued a copy of Notice 726 and ‘How to Spot Missing Trader Fraud’ and highlighted the importance of conducting due diligence checks o The officers informed Mr Sercombe the risks of trading in goods attached to a tax loss, including the denial of input tax and VAT deregistration 1.1.8 On 27 October 2015, HMRC visited CDE and met with Mr Sercombe, the notes of that visit confirm that Mr Sercombe was referred to Notice 726 and the importance of robust due diligence (and of taking action based on the information obtained from that due diligence) 1.1.9 On 09 March 2016, HMRC issued a letter to CDE informing it that eight purchases it had made from Black Cherry Solutions Ltd in the 12/14 VAT period had commenced with a defaulting trader and that this had resulted in a tax loss totalling £265,958 1.1.10 On 24 May 2016, HMRC visited CDE and met with Mr Sercombe, the notes of that visit confirm that: o The tax losses identified in trading chains in the 12/14 VAT period in which CDE had been involved were discussed o The officers reissued a copy of Notice 726 and referred Mr Sercombe to the section dealing with due diligence checks o The officers informed Mr Sercombe that all his transactions where CDE had made purchases from 3A Distribution between periods 09/15 and 03/16 had been traced back to tax losses 1.1.11 On 27 May 2016, HMRC issued a letter to CDE to inform it that: o Purchases made by CDE in the 12/15 VAT period were part of transaction chains connected with a defaulting trader resulting in tax losses totalling £851,439 o CDE ought to be aware the European Court of Justice had confirmed that input tax recovery of VAT should be denied where transactions are connected with the fraudulent evasion of VAT and the person claiming input tax knew or should have known of that fact 1.2 The trading in which CDE was involved had features which put, or should have put, Mr Sercombe on enquiry about the legitimacy thereof, as follows: 1.2.1 CDE’s most recent filed accounts (covering the period up to year end 31 July 2016) indicate that at that date it had net assets totalling £1,758 and yet in the 09/16 VAT period CDE was able to complete supplies in excess of £10,000,000 (net of VAT) due to credit afforded from all four of its suppliers 1.2.2 CDE purchased 58,000 electrical items from four suppliers in the 09/16 VAT period and yet was always able to match a customer’s order with a supplier’s available stock without having to source the stock from more than one supplier 1.2.3 CDE was able to effect sale of this stock at short notice (in 19 instances, involving the purchase of 42,200 units, which were subsequently sold on for £8,510,983 (gross) CDE appears to have been able to carry out this process within 24 hours or less) 1.2.4 All four of CDE’s suppliers in the 09/16 VAT period were UK entities, and yet CDE was being invoiced by them in Euros and making payments to all of them in Euros 1.2.5 Despite the fact that all four of its suppliers were UK entities, in the case of three of its suppliers CDE was lodging its payments with a Latvian Bank and CDE ought to have been concerned that in making payments to these overseas accounts it was transferring the VAT element abroad outside the sight of UK banking regulators. 1.2.6 Both of CDE’s customers in the 09/16 VAT period were UK entities, and yet CDE invoiced them both in Euros and received payments from them both in Euros 1.2.7 For 26 of the sales made by CDE in the 09/16 VAT period, it has been possible to match these to receipts into CDE’s bank account and analysis indicates that CDE received payment in very short order subsequent to sale, in the majority of instances within three days or less 1.2.8 CDE was able to sell on the goods at short notice at a profit in every instance, with its sales receipt always preceding its purchase payment, and from the 27 sales it made in the 09/16 VAT period it was able to generate a profit in excess of £180,000 without any risk and without being required to introduce any capital 1.2.9 CDE had been informed that an indicator of MTIC fraud was an extended supply chain within which a number of companies would buy and sell goods without any indicator of eventual retail supply, and yet in at least 25 instance (via information contained in received purchase orders) CDE would have been aware that there were at least five entities (including CDE itself) within the supply chain for those deals 1.2.10 CDE confirmed to HMRC that it arranged shipments to the EU on behalf of its two immediate customers in the 09/16 period, yet does not appear to have raised any queries as to why the EU recipients of the goods could not source goods cheaper from official distributors in their own countries rather than via an extended supply chain with all the attendant transport costs 1.2.11 The method of trading in wholesale electronic goods contrasted with the trading in personalised wallets and computer cases that CDE was also seeking to enter into, wherein CDE was required to pay full purchase payment prior to shipment to the UK, deal with VAT and duty liabilities and receive the goods prior to effecting any sales – a process requiring an element of financial risk on the part of CDE that was absent from its trade in the wholesale of electronic goods 1.3 Despite being aware of VAT fraud in CDE’s trade sector and engaging in transactions bearing the features of such fraud, Mr Sercombe failed to ensure that CDE carried out effective steps, checks and/or due diligence in respect of its trade and its trading partners as follows: 1.3.1 Due diligence documentation in respect of the commercial checks carried out by CDE on its trading partners was produced to HMRC, this documentation served to confirm the identity of the company director, show that those trading partners actually existed at the time that the due diligence checks were conducted, show that they were located at the principal place of business at the date of the check and confirm that they were VAT registered 1.3.2 The documents obtained by CDE and disclosed to HMRC were not sufficient to provide an assurance that transactions connected with these trading partners would not be connected to the fraudulent evasion of VAT and instead appear to be designed to support CDE’s subsequent input tax claims 1.3.3 There is no evidence in the due diligence documents provided to HMRC by CDE that CDE conducted credit checks on its trading partners to verify their financial status, and no such evidence has been provided in the liquidation 1.3.4 In respect of one supplier, a completed ‘Application for a Business Account’ with CDE is dated the same date as its first sales invoice to CDE and in respect of another supplier the ‘Application for a Business Account’ is dated subsequent to the period in which it made supplies to CDE 1.3.5 Within the limited due diligence paperwork is evidence of three suppliers’ use of overseas bank accounts but there is no evidence that this prompted further enquiry on the part of CDE despite all transactions being between UK entities 1.4 In the transaction chains in which CDE was involved there has been a fraudulent evasion of VAT which has resulted in significant tax losses to HMRC. In the 09/16 VAT period CDE has been involved in 28 wholesale purchases where HMRC have traced back through those chains and identified that: 1.4.1 Two of the transaction chains have traced back directly to a defaulting trader that had incurred tax losses in those transaction chains of £179,441 1.4.2 The remaining 26 transaction chains were all traced back to defaulting traders, via contra traders, with those defaulting traders having incurred significant overall tax losses to HMRC 2 In view of the evident features typical of MTIC trading and the failure to take adequate steps to reduce the risk of CDE’s wholesale transactions being connected to MTIC fraud, CDE was not then entitled to claim the input tax in respect of those transactions and consequently the input tax claim of £1,982,117 made in the 09/16 VAT return was wrongful.