TC09617 - [2025] UKFTT 01018 (TC)

In the spring of 2021 Deos started purchasing, wholesale, small electronic consumer goods (like Apple AirPods) from Thames Distribution Ltd (“Thames”) and on-selling them, in short order, to companies in the EU. Mr Smith ran this side of Deos’ business.

It was a contact at R&M Electrical Group Ltd, a longtime customer of Deos’ core business, that put Mr Smith in contact with Thames; Mr Smith’s understanding was that Thames had itself been selling electronic consumer goods, wholesale, to customers in the EU; but due to a downturn in Thames’ business (and, in particular, a deterioration in its cashflow), it now wished to sell through a UK intermediary with healthy cashflow.

The connection between “healthy cashflow” and “selling to EU customers”, was as follows: an exporter of goods to the EU needed to ‘finance’ the cost of the input tax incurred on buying the goods, over the time period between incurring the input tax (on acquiring them), and recovering it from HMRC (this was because the ‘export’ was zero-rated i.e. no VAT was collected from the EU customer); this ‘financing’ role required a company with a healthy cashflow; this was why, per Mr Smith’s understanding at the time, Thames could no longer carry on that line of business.

Mr Smith understood that Thames had initially approached R&M to see if it had the cashflow to support an “export of goods to the EU” business; R&M declined (for what Mr Smith understood to be good business reasons) but, due to the good relationship it had with Deos, R&M suggested Deos as an alternative business partner for Thames. This was around April 2021. Mr Collins of Thames met with Mr Smith and took him through the business model: Thames would supply Deos; Deos would ‘export’ to the EU customer; the goods were held in a freight forwarder, Unicorn Shipping Ltd (“Unicorn”); the goods changed hands via ‘allocation’ and ‘release’ within Unicorn; the margins were low (1.5% to 3%) – but the risk of non-payment by the customer was minimal as Unicorn would hold the stock for Deos until Deos said to release it to its customer; and Thames would introduce Deos to Unicorn and to its customers in the EU. In oral evidence, Mr Smith said that Mr Collins had also explained that customers wanted serial numbers of the goods, due to the risk of carousel fraud.

As to why there were these wholesale dealings in electronic consumer goods of global manufacturers like Apple, Mr Smith identified this as a “grey market”, in which authorised distributors may wish, for various commercial reasons, to sell stock to (unauthorised) wholesalers. Mr Smith did not have a detailed understanding of why exactly there might be demand from EU wholesalers to buy from UK counterparts in this “grey market”.

An essential aspect of Deos’ role in the business model described by Mr Collins, was to finance the cost of the input tax, as just described. Mr Smith understood that Thames was prepared to “share” the profit it made on the transactions, with Deos, on account of its playing this role.

In Mr Smith’s view at the time, the business model seemed straightforward; the margins were normal for wholesale trade in the electronics industry and commensurate with the fact that Deos took minimal risk of non-payment by the its customer.

Mr Smith carried out basic checks, via readily-available sources of information like ‘Creditsafe’ and Companies House, on Thames, and on the EU customers that Thames told Deos about.