Two businessmen who were kidnapped by criminal associates of those who carried out a carousel fraud have won a case against HMRC penalties relating to two closely linked tribunal cases.
In Langhorne v Revenue & Customs  UKFTT 533 (TC) and Wood v Revenue & Customs  UKFTT 532 (TC) (27 May 2014), John Wood, director of Asgard UK and Langhorne, director of Formel E appealed against penalties as they said they were both unwittingly involved as middle men in a carousel fraud.
The tribunal said the two cases (Wood and Langhorne) contained some of the same evidence but could not have been consolidated.
Both men are polymers experts and claimed they had been "unwittingly" involved in a carousel fraud and were also kidnapped by criminal associates of those who carried out the fraud.
In Langhorne's case, in dispute was £519,437 in penalties, issued on grounds that his company had evaded VAT and was liable to a penalty under section 60 of the act. In Wood's case, he was appealing penalties of more than £1m.
HMRC had alleged that the conduct of the companies, giving rise to the penalties was “in whole or part attributable to the dishonestly" of Langhorne and Wood.
Both companies had claimed VAT credits, but the Revenue argued they weren't entitled to these.
Therefore HMRC imposed penalties, which it said it informed both men of in 2005. All penalties related to sums of input tax claimed, which HMRC said were evaded.
The court heard how the two companies both bought a large quantity of irrigation hose from a company, VPS (UK), which manufactured the hose. The transaction was a taxable supply on which the standard rate of tax was payable.
HMRC said that VPS sold most of the hose it manufactured to either Formel or Asgard.
Revenue Commissioners alleged that Formel’s sole business was the purchase and export of the hose. They said the company bought all its hose from VPS and sold it all to a business called Tazar Industries (Tazar) in the UAE.
In addition, they said the hose was being sold to Formel and Asguard of inflated prices of £1.39 a metre but true value between 10p and 20p - Formel sold on at £1.45 per metre.
VPS was alleged to be a company owned and operated by a man called Thompson and was set up with a man called Volker Kappler, who turned out to be a convicted criminal.
According to the tribunal there was no evidence that Langhorne knew Kappler was involved until after the transactions had occurred and HMRC agree there is no evidence, other than Thompson’s word, that Kappler was involved in VPS.
Langhorne knew Kappler’s companies dealt with Thompson’s companies but didn't know he may have been directly involved in the operations of VPS.
HMRC commissioners alleged that Thompson, through a company called Tazar, was selling hose to his own company and an "interposition of a third party made no sense in ordinary commercial terms"
Formel's terms of business with VPS & Tazar were that it did not need to pay VPS until a week after it had been paid by Tazar. And Tazar not need to pay Formel until 60 days after the hose was put in the ground.
HMRC said the over valuation of hose was a sham to claim input tax and that under rules for crediting this kind of tax, both Formel and Asguard would be able to claim repayment from HMRC before it was required to pay tax inclusive price to VPS.
In a twist, the tribunal heard how the information came to light after Langhorne and Wood were both kidnapped in Durham by Kappler’s associates dressed as uniformed customs officers. They were both threatened with guns and beaten. The kidnappers also made demands for money. After the ordeal, Kappler rang a customs officer and told her information about 'the hose scam'.
HMRC argued in both cases that deals between VPS and the companies were unnecessary, based on favourable terms. It did not need either to add value to hose, so they were getting profit for little effort. The two men also said they were unaware to the extent to which Tazar was connected with Thompson and that he had reported various problems in dealing with the UAE.
HMRC agreed that Thompson was acting dishonestly and the tribunal concluded that it could have been possible he was duping both Wood and Langhorne.
The tribunal accepted that neither were involved with VAT fraud.